THE PHOENIX COMPANIES, INC.
Consolidated Interim Unaudited Statements of Changes in Stockholders’ Equity
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|
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|
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Three Months Ended
March 31,
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($ in millions)
|
2016
|
|
2015
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COMMON STOCK:
|
|
|
|
Balance, beginning of period
|
$
|
0.1
|
|
|
$
|
0.1
|
|
Balance, end of period
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
|
|
|
ADDITIONAL PAID-IN CAPITAL:
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|
|
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Balance, beginning of period
|
$
|
2,632.9
|
|
|
$
|
2,632.8
|
|
Issuance of shares and compensation expense on stock compensation awards
|
0.1
|
|
|
—
|
|
Balance, end of period
|
$
|
2,633.0
|
|
|
$
|
2,632.8
|
|
|
|
|
|
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
|
|
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Balance, beginning of period
|
$
|
(266.2
|
)
|
|
$
|
(234.4
|
)
|
Other comprehensive income (loss)
|
5.2
|
|
|
(2.2
|
)
|
Balance, end of period
|
$
|
(261.0
|
)
|
|
$
|
(236.6
|
)
|
|
|
|
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RETAINED EARNINGS (ACCUMULATED DEFICIT):
|
|
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Balance, beginning of period
|
$
|
(2,022.7
|
)
|
|
$
|
(1,889.0
|
)
|
Net income (loss)
|
(42.8
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)
|
|
(74.0
|
)
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Balance, end of period
|
$
|
(2,065.5
|
)
|
|
$
|
(1,963.0
|
)
|
|
|
|
|
TREASURY STOCK, AT COST:
|
|
|
|
Balance, beginning of period
|
$
|
(182.9
|
)
|
|
$
|
(182.9
|
)
|
Treasury shares purchased
|
—
|
|
|
—
|
|
Balance, end of period
|
$
|
(182.9
|
)
|
|
$
|
(182.9
|
)
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|
|
|
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TOTAL STOCKHOLDERS’ EQUITY ATTRIBUTABLE TO
THE PHOENIX COMPANIES, INC.:
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|
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Balance, beginning of period
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$
|
161.2
|
|
|
$
|
326.6
|
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Change in stockholders’ equity attributable to The Phoenix Companies, Inc.
|
(37.5
|
)
|
|
(76.2
|
)
|
Balance, end of period
|
$
|
123.7
|
|
|
$
|
250.4
|
|
|
|
|
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NONCONTROLLING INTERESTS:
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Balance, beginning of period
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$
|
12.6
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|
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$
|
20.0
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Net income (loss) attributable to noncontrolling interests
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(0.4
|
)
|
|
1.0
|
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Change in equity of noncontrolling interests
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0.1
|
|
|
1.2
|
|
Impact of deconsolidation of variable interest entities
|
(5.7
|
)
|
|
—
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Balance, end of period
|
$
|
6.6
|
|
|
$
|
22.2
|
|
|
|
|
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TOTAL STOCKHOLDERS’ EQUITY:
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|
|
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Balance, beginning of period
|
$
|
173.8
|
|
|
$
|
346.6
|
|
Change in stockholders’ equity
|
(43.5
|
)
|
|
(74.0
|
)
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Balance, end of period
|
$
|
130.3
|
|
|
$
|
272.6
|
|
The accompanying unaudited notes are an integral part of these financial statements.
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THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements
Three Months Ended March 31, 2016 and 2015
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1. Organization and Description of Business
The Phoenix Companies, Inc. is a holding company for its insurance and financial services subsidiaries, principally Phoenix Life Insurance Company (“Phoenix Life”) and PHL Variable Insurance Company (“PHL Variable”), that provide life insurance and annuity products to both affluent and middle market consumers. Phoenix Life and PHL Variable, collectively with Phoenix Life and Annuity Company (“PLAC”) and American Phoenix Life and Reassurance Company (“APLAR”), are our Life Companies (collectively, with the holding company, “we,” “our,” “us,” the “Company,” “PNX” or “Phoenix”). Our products are distributed through independent agents and financial advisors. Most of our life insurance in force is permanent life insurance insuring one or more lives and our annuity products include fixed and variable annuities with a variety of death benefit and guaranteed living benefit options.
We operate
two
businesses segments: Life and Annuity and Saybrus Partners, Inc. (“Saybrus”). The Life and Annuity segment includes individual life insurance and annuity products, including our closed block. Saybrus provides dedicated life insurance and other consulting services to financial advisors in partner companies, as well as support for sales of Phoenix’s product line through independent distribution organizations.
As a result of discussions with its regulators related to the execution of an intercompany reinsurance treaty between Phoenix Life and PHL Variable during the second quarter of 2015, Phoenix de-stacked its insurance company subsidiaries making PHL Variable, PLAC and APLAR direct subsidiaries of the holding company.
On September 29, 2015, the Company announced the signing of a definitive agreement in which Nassau Reinsurance Group Holdings L.P. (“Nassau”) has agreed to acquire the Company for
$37.50
per share in cash, representing an aggregate purchase price of
$217.2 million
. Founded in April 2015, Nassau is a privately held insurance and reinsurance business focused on acquiring and operating entities in the life, annuity and long-term care sectors. On December 17, 2015, the merger was approved by Phoenix shareholders and, on May 5, 2016, the merger was approved by the Connecticut Insurance Department. The transaction remains subject to other regulatory approvals and the satisfaction of other closing conditions. After completion of the transaction, Nassau will contribute
$100 million
in new equity capital into the Company. After completion of the transaction, Phoenix will be a privately held, wholly-owned subsidiary of Nassau.
2. Basis of Presentation and Significant Accounting Policies
We have prepared these consolidated interim unaudited financial statements in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), which differs materially from the accounting practices prescribed by various insurance regulatory authorities. Our consolidated interim unaudited financial statements include the accounts of the Company and its subsidiaries. Intercompany balances and transactions have been eliminated in consolidating these consolidated interim unaudited financial statements.
These consolidated interim unaudited financial statements include all adjustments (consisting primarily of accruals) considered necessary for the fair statement of the consolidated balance sheets, consolidated statements of operations and comprehensive income, consolidated statements of cash flows and consolidated statements of changes in stockholders’ equity for the interim periods. Certain financial information that is not required for interim reporting has been omitted. Financial results for the three months ended
March 31, 2016
are not necessarily indicative of full year results. These consolidated interim unaudited financial statements should be read in conjunction with the consolidated financial statements for the year ended
December 31, 2015
contained in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2015
(the “
2015
Form 10-K”).
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THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
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2. Basis of Presentation and Significant Accounting Policies (continued)
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Use of estimates
In preparing these consolidated interim unaudited financial statements in conformity with U.S. GAAP, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated interim unaudited financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions are made in the determination of estimated gross profits (“EGPs”) and estimated gross margins (“EGMs”) used in the valuation and amortization of assets and liabilities associated with universal life and annuity contracts; policyholder liabilities and accruals; valuation of investments in debt and equity securities; limited partnerships and other investments; valuation of deferred tax assets; pension and other post-employment benefits liabilities; and accruals for contingent liabilities. Certain of these estimates are particularly sensitive to market conditions and/or volatility in the debt or equity markets which could have a material impact on the consolidated interim unaudited financial statements. Actual results could differ from these estimates.
Holding company liquidity
The Phoenix Companies, Inc. serves as the holding company for our insurance subsidiaries and does not have any significant operations of its own. As of
March 31, 2016
and
December 31, 2015
, liquidity (cash, short-term investments, available-for-sale debt securities and other near-cash assets, net of contributions payable to subsidiaries) totaled
$55.0 million
and
$65.8 million
, respectively.
In addition to existing cash and securities, the holding company’s primary source of liquidity consists of dividends from Phoenix Life. Dividends from Phoenix Life are limited under the insurance company laws of New York. During the
three
months ended
March 31, 2016
, Phoenix Life paid
$20.0 million
in dividends. As a result of the execution of an intercompany reinsurance treaty between Phoenix Life and PHL Variable during the second quarter of 2015, Phoenix agreed it will not use any future dividends paid by Phoenix Life to meet the operating needs of PHL Variable, including
$50.0 million
of dividends declared subsequent to June 30, 2015. In
2016
, Phoenix Life is permitted to pay dividends of
$37.2 million
. PHL Variable does not have any dividend capacity in
2016
.
Our principal needs at the holding company level are debt service, income taxes and certain operating expenses.
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•
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Interest paid on senior unsecured bonds for the
three
months ended
March 31, 2016
and
2015
was
$5.0 million
and
$5.0 million
, respectively. As of
March 31, 2016
, future minimum annual principal payments on senior unsecured bonds are
$268.6 million
due in 2032. See Note 8 to these consolidated interim unaudited financial statements for additional information.
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•
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The holding company and its subsidiaries have a tax sharing agreement whereby the subsidiaries reimburse the holding company for tax payments made on their behalf. As part of the agreement, the holding company is required to hold funds in escrow for the benefit of Phoenix Life in the event Phoenix Life incurs future taxable losses. As of
March 31, 2016
, the Company held
$76.2 million
in escrow consisting of treasury stock, a surplus note issued by PHL Variable and
$23.8 million
of cash from the holding company.
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|
•
|
Holding company operating expenses for the
three
months ended
March 31, 2016
and
2015
were
$4.1 million
and
$10.1 million
, respectively.
|
The holding company also provides capital support to its operating subsidiaries. Management targets a minimum Company Action Level risk-based capital (“RBC”) ratio of
200%
(Authorized Control Level ratio of
400%
) at PHL Variable. As of
March 31, 2016
, PHL Variable had an estimated RBC ratio of
200%
, compared with
200%
as of
December 31, 2015
. As a result of the de-stacking, an existing commitment by Phoenix Life to keep the PHL Variable’s capital and surplus at
250%
of Authorized Control Level RBC (
125%
Company Action Level) was extinguished. PHL Variable’s statutory capital and surplus reflects the benefit of
$19.0 million
and
$33.1 million
of capital contributions in
2016
and
2015
, respectively, and Phoenix may need to make additional capital contributions in the future.
The need for significant additional capital contributions to operating subsidiaries or an inability to reduce expenses at the holding company could constrain the ability of the holding company to meet its debt obligations. Based on management’s review of the holding company’s liquidity position, we believe it can continue to meet its liquidity obligations in the holding company through
2016
and beyond.
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THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
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2. Basis of Presentation and Significant Accounting Policies (continued)
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Adoption of new accounting standards
Fair Value Measurement: Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent)
In May 2015, the FASB issued guidance for investments measured at net asset value (“NAV”), as a practical expedient for fair value, to be excluded from the fair value hierarchy. The new guidance requires reporting entities to reconcile the fair value hierarchy disclosure to the balance sheet by disclosing the amount of investments measured using the practical expedient and to make certain disclosures about the nature and risks of those investments. If the NAV is actually at fair value, then a reporting entity would continue to include the investment in the fair value hierarchy and make all required fair value disclosures. For public business entities, the guidance is effective for annual reporting periods beginning after December 31, 2015, including interim reporting periods within the annual reporting period. The new guidance is retrospective to all periods presented and early adoption is permitted. This new guidance did not have a material impact on the Company’s consolidated financial position, results of operations or financial statement disclosures.
Interest - Imputation of Interest (Simplifying the Presentation of Debt Issuance Costs)
In April 2015, the FASB issued guidance that changes the presentation of debt issuance costs in financial statements. Under the new guidance, a company would present debt issuance costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. The recognition and measurement of debt issuance costs is not affected by the new guidance. For revolving debt arrangements, this guidance allows an entity to continue deferring and presenting such costs as an asset and subsequently amortizing them ratably over the term of the revolving debt arrangement.
Previously, capitalized debt issuance costs were classified as an asset. The new guidance is effective January 1, 2016, with early adoption permitted. The Company adopted the new guidance as of January 1, 2016 and reclassified debt issuance costs from “other assets” to “indebtedness” in the consolidated balance sheets. As a result of the adoption, the amount of debt issuance costs reclassified as of
March 31, 2016
and
December 31, 2015
was
$7.1 million
and
$7.2 million
, respectively.
Amendments to Consolidation Guidance
In February 2015, the FASB issued updated consolidation guidance. The amendments revise existing guidance for when to consolidate variable interest entities (“VIEs”) and general partners’ investments in limited partnerships, end the deferral granted for applying the VIE guidance to certain investment companies, and reduce the number of circumstances where a decision maker’s or service provider’s fee arrangement is deemed to be a variable interest in an entity. The updates also modify consolidation guidance for determining whether limited partnerships are VIEs or voting interest entities. This guidance is effective for years beginning after December 31, 2015, and may be applied fully retrospectively or through a cumulative effect adjustment to retain earnings as of the beginning of the year of adoption. Adoption of this new guidance resulted in the deconsolidation of several previously consolidated investment company structures, which resulted in a reclassification primarily out of fair value investments and into limited partnerships and other investments of approximately
$70 million
. There was no impact to income or stockholders’ equity attributable to The Phoenix Companies, Inc., but total assets and equity decreased by
$5.7 million
reflecting the deconsolidation of noncontrolling interests in those entities.
Accounting standards not yet adopted
For information regarding additional accounting standards that the Company has not yet adopted, see the “Accounting Standards Not Yet Adopted” section of Note 2 of Notes to the Consolidated Financial Statements in the Company’s
2015
Form 10-K. There have been no changes other than as noted below.
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing
In April 2016, the FASB issued guidance that will affect entities within the scope of the revenue recognition guidance. The amendments do not change the core principle of the new revenue recognition guidance but do clarify two aspects of revenue recognition: identifying performance obligations and the licensing implementation guidance.
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THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
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2. Basis of Presentation and Significant Accounting Policies (continued)
|
The amendments in this guidance are effective with the new revenue recognition guidance. For public business entities, the guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within the annual reporting periods. The Company is currently assessing the impact of the guidance on its consolidated financial position, results of operations or financial statement disclosures.
Compensation - Stock Compensation Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued guidance to simplify several aspects of the accounting for employee share-based payment transactions. These simplifications include the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows.
For public business entities, the new guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. The Company is currently assessing the impact of the guidance on its consolidated financial position, results of operations or financial statement disclosures.
Revenue from Contracts with Customers: Principal versus Agent Considerations
In March 2016, the FASB issued guidance which amends the principal versus agent in the new revenue recognition. The new guidance addresses determining the appropriate unit of account under the revenue standard’s principal versus agent guidance and applying the indicators of whether an entity is a principal or an agent in accordance with the revenue standard’s control principle.
The amendments in this guidance are effective with the new revenue recognition guidance. For public business entities, the guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within the annual reporting periods. The Company is currently assessing the impact of the guidance on its consolidated financial position, results of operations or financial statement disclosures.
Investments - Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting
In March 2016, the FASB issued guidance which eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. The equity method of accounting should be applied prospectively from the date significant influence is obtained. Investors should add the cost of acquiring the additional interests in the investee (if any) to the current basis of their previously held interest.
For public business entities, the new guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. Early adoption is permitted. The Company is currently assessing the impact of the guidance on its consolidated financial position, results of operations or financial statement disclosures.
Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments
In March 2016, the FASB issued guidance which simplifies the embedded derivative analysis for debt instruments containing call or put options. The new guidance clarifies that an exercise contingency does not need to be evaluated to determine whether it relates to interest rates or credit risk in an embedded derivative analysis. In other words, a contingent put or call option embedded in a debt instrument would be evaluated for possible separate accounting as a derivative instrument without regards to the nature of the exercise contingency.
For public business entities, the new guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. Early adoption is permitted, including adoption in an interim period. The new guidance is required to be applied on a modified retrospective basis to all existing and future debt instruments. The Company is currently assessing the impact of the guidance on its consolidated financial position, results of operations or financial statement disclosures.
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THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
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2. Basis of Presentation and Significant Accounting Policies (continued)
|
Significant accounting policies
Our significant accounting policies are presented in the notes to our consolidated financial statements for the year ended
December 31, 2015
contained in the
2015
Form 10-K.
3. Reinsurance
Reinsurance recoverable includes balances due from reinsurers for paid and unpaid losses and is presented net of an allowance for uncollectable reinsurance. The reinsurance recoverable balance is
$677.7 million
and
$590.7 million
as of
March 31, 2016
and
December 31, 2015
, respectively. Other reinsurance activity is shown below.
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|
|
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Direct Business and Reinsurance in Continuing Operations:
|
Three Months Ended
March 31,
|
($ in millions)
|
2016
|
|
2015
|
|
|
|
|
Direct premiums
|
$
|
106.7
|
|
|
$
|
111.0
|
|
Premiums assumed
|
1.6
|
|
|
1.8
|
|
Premiums ceded [1]
|
(24.5
|
)
|
|
(34.4
|
)
|
Premiums
|
$
|
83.8
|
|
|
$
|
78.4
|
|
Percentage of amount assumed to net premiums
|
1.9%
|
|
2.3%
|
|
|
|
|
Direct policy benefits incurred
|
$
|
377.9
|
|
|
$
|
327.3
|
|
Policy benefits assumed
|
23.9
|
|
|
1.6
|
|
Policy benefits ceded
|
(136.1
|
)
|
|
(88.5
|
)
|
Premiums paid [2]
|
22.2
|
|
|
22.6
|
|
Policy benefits [3]
|
$
|
287.9
|
|
|
$
|
263.0
|
|
———————
|
|
[1]
|
Primarily represents premiums ceded to reinsurers related to traditional whole life and term insurance policies.
|
|
|
[2]
|
For universal life and variable universal life contracts, premiums paid to reinsurers are reflected within policy benefits. See Note 2 to these consolidated interim unaudited financial statements for additional information regarding significant accounting policies.
|
|
|
[3]
|
Policy benefit amounts above exclude changes in reserves, interest credited to policyholders and other items, which total
$36.2 million
and
$29.0 million
, net of reinsurance, for the three months ended
March 31, 2016
and
2015
.
|
We remain liable to the extent that reinsuring companies may not be able to meet their obligations under reinsurance agreements in effect. Failure of the reinsurers to honor their obligations could result in losses to the Company. Since we bear the risk of nonpayment, on a quarterly basis we evaluate the financial condition of our reinsurers and monitor concentrations of credit risk. Based on our review of their financial statements, reputation in the reinsurance marketplace and other relevant information, we believe that we have no material exposure to uncollectible life reinsurance. At
March 31, 2016
,
five
major reinsurance companies account for approximately
70%
of the reinsurance recoverable.
4. Demutualization and Closed Block
In 1999, we began the process of reorganizing and demutualizing our then principal operating company, Phoenix Home Life. We completed the process in June 2001, when all policyholder membership interests in this mutual company were extinguished and eligible policyholders of the mutual company received shares of PNX common stock, together with cash and policy credits, as compensation. To protect the future dividends of these policyholders, we also established a closed block for their existing policies.
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|
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THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
4. Demutualization and Closed Block (continued)
|
Because closed block liabilities exceed closed block assets, we have a net closed block liability at
March 31, 2016
and
December 31, 2015
, respectively. This net liability represents the maximum future earnings contribution to be recognized from the closed block and the change in this net liability each period is in the earnings contribution recognized from the closed block for the period. To the extent that actual cash flows differ from amounts anticipated, we may adjust policyholder dividends. If the closed block has excess funds, those funds will be available only to the closed block policyholders. However, if the closed block has insufficient funds to make policy benefit payments that are guaranteed, the payments will be made from assets outside of the closed block.
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed Block Assets and Liabilities as of:
($ in millions)
|
March 31,
2016
|
|
December 31, 2015
|
|
Inception
|
|
|
|
|
|
|
Available-for-sale debt securities
|
$
|
5,539.5
|
|
|
$
|
5,285.4
|
|
|
$
|
4,773.1
|
|
Available-for-sale equity securities
|
89.6
|
|
|
90.1
|
|
|
—
|
|
Short-term investments
|
25.0
|
|
|
25.0
|
|
|
—
|
|
Limited partnerships and other investments
|
399.1
|
|
|
352.7
|
|
|
399.0
|
|
Policy loans
|
1,119.4
|
|
|
1,121.0
|
|
|
1,380.0
|
|
Fair value investments
|
9.5
|
|
|
53.1
|
|
|
—
|
|
Total closed block investments
|
7,182.1
|
|
|
6,927.3
|
|
|
6,552.1
|
|
Cash and cash equivalents
|
219.7
|
|
|
290.8
|
|
|
—
|
|
Accrued investment income
|
76.2
|
|
|
75.5
|
|
|
106.8
|
|
Reinsurance recoverable
|
28.8
|
|
|
30.0
|
|
|
—
|
|
Deferred income taxes, net
|
279.0
|
|
|
278.7
|
|
|
389.4
|
|
Other closed block assets
|
47.8
|
|
|
53.7
|
|
|
41.4
|
|
Total closed block assets
|
7,833.6
|
|
|
7,656.0
|
|
|
7,089.7
|
|
Policy liabilities and accruals
|
7,773.9
|
|
|
7,816.5
|
|
|
8,301.7
|
|
Policyholder dividends payable
|
189.7
|
|
|
191.1
|
|
|
325.1
|
|
Policy dividend obligation
|
648.8
|
|
|
525.5
|
|
|
—
|
|
Other closed block liabilities
|
144.0
|
|
|
46.6
|
|
|
12.3
|
|
Total closed block liabilities
|
8,756.4
|
|
|
8,579.7
|
|
|
8,639.1
|
|
Excess of closed block liabilities over closed block assets [1]
|
922.8
|
|
|
923.7
|
|
|
$
|
1,549.4
|
|
Less: Excess of closed block assets over closed block liabilities
attributable to noncontrolling interests
|
(3.0
|
)
|
|
(8.1
|
)
|
|
|
Excess of closed block liabilities over closed block assets attributable to
The Phoenix Companies, Inc.
|
$
|
925.8
|
|
|
$
|
931.8
|
|
|
|
———————
|
|
[1]
|
The maximum future earnings summary to inure to the benefit of the stockholders is represented by the excess of closed block liabilities over closed block assets. All unrealized investment gains (losses), net of income tax, have been allocated to the policyholder dividend obligation.
|
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
4. Demutualization and Closed Block (continued)
|
|
|
|
|
|
|
|
|
|
Closed Block Revenues and Expenses and
Changes in
Policyholder Dividend Obligations:
|
Three Months Ended
March 31,
|
($ in millions)
|
2016
|
|
2015
|
Closed block revenues
|
|
|
|
Premiums
|
$
|
73.6
|
|
|
$
|
70.2
|
|
Net investment income
|
94.9
|
|
|
100.2
|
|
Net realized gains (losses)
|
(5.0
|
)
|
|
(4.6
|
)
|
Total revenues
|
163.5
|
|
|
165.8
|
|
Policy benefits
|
114.4
|
|
|
115.5
|
|
Other operating expenses
|
0.4
|
|
|
0.1
|
|
Total benefits and expenses
|
114.8
|
|
|
115.6
|
|
Closed block contribution to income before dividends
and income taxes
|
48.7
|
|
|
50.2
|
|
Policyholder dividends
|
(39.2
|
)
|
|
(40.1
|
)
|
Closed block contribution to income before income taxes
|
9.5
|
|
|
10.1
|
|
Applicable income tax expense
|
3.4
|
|
|
3.5
|
|
Closed block contribution to income
|
6.1
|
|
|
6.6
|
|
Less: Closed block contribution to income attributable to
noncontrolling interests
|
(0.2
|
)
|
|
0.5
|
|
Closed block contribution to income attributable to
The Phoenix Companies, Inc.
|
$
|
6.3
|
|
|
$
|
6.1
|
|
|
|
|
|
|
|
|
|
|
Closed Block Policyholder Dividend Obligation as of:
|
Three Months Ended
March 31,
|
($ in millions)
|
2016
|
|
2015
|
Policyholder dividend obligation
|
|
|
|
Policyholder dividends recorded through earnings
|
$
|
39.2
|
|
|
$
|
40.1
|
|
Policyholder dividends recorded through OCI
|
120.8
|
|
|
62.7
|
|
Additions to (reductions of) policyholder dividend liabilities
|
160.0
|
|
|
102.8
|
|
Policyholder dividends paid
|
(38.1
|
)
|
|
(42.5
|
)
|
Increase (decrease) in policyholder dividend liabilities
|
121.9
|
|
|
60.3
|
|
Policyholder dividend liabilities, beginning of period
|
716.6
|
|
|
916.7
|
|
Policyholder dividend liabilities, end of period
|
838.5
|
|
|
977.0
|
|
Policyholder dividends payable, end of period
|
(189.7
|
)
|
|
(201.0
|
)
|
Policyholder dividend obligation, end of period
|
$
|
648.8
|
|
|
$
|
776.0
|
|
The policyholder dividend obligation includes approximately
$331.5 million
and
$329.3 million
, respectively, for cumulative closed block earnings in excess of expected amounts calculated at the date of demutualization as of
March 31, 2016
and
December 31, 2015
, respectively. These closed block earnings will not inure to stockholders, but will result in additional future dividends to closed block policyholders unless otherwise offset by future performance of the closed block that is less favorable than expected. If actual cumulative performance is less favorable than expected, only actual earnings will be recognized in net income. As of
March 31, 2016
and
December 31, 2015
, the policyholder dividend obligation also includes
$317.3 million
and
$196.2 million
, respectively, of net unrealized gains on investments supporting the closed block liabilities.
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
|
5. Deferred Policy Acquisition Costs
The balances of and changes in deferred policy acquisition costs (“DAC”) as of and for the periods ended
March 31, 2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
Changes in Deferred Policy Acquisition Costs:
|
Three Months Ended
March 31,
|
($ in millions)
|
2016
|
|
2015
|
|
|
|
|
Balance, beginning of period
|
$
|
941.1
|
|
|
$
|
848.6
|
|
Policy acquisition costs deferred
|
12.6
|
|
|
21.8
|
|
Costs amortized to expenses:
|
|
|
|
Recurring costs
|
(33.9
|
)
|
|
(15.1
|
)
|
Assumption unlocking
|
—
|
|
|
(6.6
|
)
|
Realized investment gains (losses)
|
1.9
|
|
|
4.6
|
|
Offsets to net unrealized investment gains or losses
included in AOCI
|
(47.7
|
)
|
|
(16.8
|
)
|
Balance, end of period
|
$
|
874.0
|
|
|
$
|
836.5
|
|
6. Sales Inducements
The balances of and changes in sales inducements as of and for the periods ended
March 31, 2016
and
2015
are as follows:
|
|
|
|
|
|
|
|
|
Changes in Deferred Sales Inducement Activity:
|
Three Months Ended
March 31,
|
($ in millions)
|
2016
|
|
2015
|
|
|
|
|
Balance, beginning of period
|
$
|
91.1
|
|
|
$
|
79.4
|
|
Sales inducements deferred
|
0.9
|
|
|
5.3
|
|
Amortization charged to income
|
(1.8
|
)
|
|
(1.9
|
)
|
Offsets to net unrealized investment gains or losses
included in AOCI
|
(5.6
|
)
|
|
(3.6
|
)
|
Balance, end of period
|
$
|
84.6
|
|
|
$
|
79.2
|
|
7. Investing Activities
Debt and equity securities
The following tables present the debt and equity securities available-for-sale by sector held at
March 31, 2016
and
December 31, 2015
, respectively. The unrealized loss amounts presented below include the non-credit loss component of OTTI losses. We classify these investments into various sectors in line with industry conventions.
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
7. Investing Activities (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value and Cost of Securities:
|
March 31, 2016
|
($ in millions)
|
Amortized
Cost
|
|
Gross
Unrealized
Gains [1]
|
|
Gross
Unrealized
Losses [1]
|
|
Fair
Value
|
|
OTTI
Recognized
in AOCI [2]
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency
|
$
|
572.3
|
|
|
$
|
61.4
|
|
|
$
|
—
|
|
|
$
|
633.7
|
|
|
$
|
—
|
|
State and political subdivision
|
607.1
|
|
|
54.9
|
|
|
(2.0
|
)
|
|
660.0
|
|
|
(1.1
|
)
|
Foreign government
|
238.6
|
|
|
25.5
|
|
|
(0.5
|
)
|
|
263.6
|
|
|
—
|
|
Corporate
|
8,443.4
|
|
|
471.2
|
|
|
(191.5
|
)
|
|
8,723.1
|
|
|
(5.3
|
)
|
Commercial mortgage-backed (“CMBS”)
|
621.1
|
|
|
37.8
|
|
|
(2.8
|
)
|
|
656.1
|
|
|
—
|
|
Residential mortgage-backed (“RMBS”)
|
1,262.4
|
|
|
52.9
|
|
|
(8.0
|
)
|
|
1,307.3
|
|
|
(25.4
|
)
|
Collateralized debt obligations (“CDO”) /
collateralized loan obligations (“CLO”)
|
329.3
|
|
|
1.6
|
|
|
(8.9
|
)
|
|
322.0
|
|
|
(0.9
|
)
|
Other asset-backed (“ABS”)
|
231.9
|
|
|
7.2
|
|
|
(5.5
|
)
|
|
233.6
|
|
|
(0.6
|
)
|
Available-for-sale debt securities
|
$
|
12,306.1
|
|
|
$
|
712.5
|
|
|
$
|
(219.2
|
)
|
|
$
|
12,799.4
|
|
|
$
|
(33.3
|
)
|
Amounts applicable to the closed block
|
$
|
5,233.1
|
|
|
$
|
382.0
|
|
|
$
|
(75.6
|
)
|
|
$
|
5,539.5
|
|
|
$
|
(6.9
|
)
|
Available-for-sale equity securities
|
$
|
163.6
|
|
|
$
|
25.9
|
|
|
$
|
(2.0
|
)
|
|
$
|
187.5
|
|
|
$
|
—
|
|
Amounts applicable to the closed block
|
$
|
78.7
|
|
|
$
|
11.8
|
|
|
$
|
(0.9
|
)
|
|
$
|
89.6
|
|
|
$
|
—
|
|
———————
|
|
[1]
|
Net unrealized investment gains and losses on securities classified as available-for-sale and certain other assets are included in our consolidated balance sheets as a component of AOCI.
|
|
|
[2]
|
Represents the amount of non-credit OTTI losses recognized in AOCI excluding net unrealized gains or losses subsequent to the date of impairment. The table above presents the special category of AOCI for debt securities that are other-than-temporarily impaired when the impairment loss has been split between the credit loss component (in earnings) and the non-credit component (separate category of AOCI).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value and Cost of Securities:
|
December 31, 2015
|
($ in millions)
|
Amortized
Cost
|
|
Gross
Unrealized
Gains [1]
|
|
Gross
Unrealized
Losses [1]
|
|
Fair
Value
|
|
OTTI
Recognized
in AOCI [2]
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency
|
$
|
542.0
|
|
|
$
|
48.2
|
|
|
$
|
(0.6
|
)
|
|
$
|
589.6
|
|
|
$
|
—
|
|
State and political subdivision
|
510.4
|
|
|
33.7
|
|
|
(6.7
|
)
|
|
537.4
|
|
|
(1.1
|
)
|
Foreign government
|
224.0
|
|
|
20.8
|
|
|
(1.9
|
)
|
|
242.9
|
|
|
—
|
|
Corporate
|
8,295.0
|
|
|
311.3
|
|
|
(264.1
|
)
|
|
8,342.2
|
|
|
(6.3
|
)
|
CMBS
|
656.6
|
|
|
30.4
|
|
|
(2.9
|
)
|
|
684.1
|
|
|
—
|
|
RMBS
|
1,213.8
|
|
|
45.1
|
|
|
(12.7
|
)
|
|
1,246.2
|
|
|
(25.4
|
)
|
CDO/CLO
|
316.3
|
|
|
1.3
|
|
|
(8.1
|
)
|
|
309.5
|
|
|
(4.5
|
)
|
Other ABS
|
235.5
|
|
|
7.7
|
|
|
(4.4
|
)
|
|
238.8
|
|
|
(0.6
|
)
|
Available-for-sale debt securities
|
$
|
11,993.6
|
|
|
$
|
498.5
|
|
|
$
|
(301.4
|
)
|
|
$
|
12,190.7
|
|
|
$
|
(37.9
|
)
|
Amounts applicable to the closed block
|
$
|
5,102.1
|
|
|
$
|
293.4
|
|
|
$
|
(110.1
|
)
|
|
$
|
5,285.4
|
|
|
$
|
(8.8
|
)
|
Available-for-sale equity securities
|
$
|
154.6
|
|
|
$
|
28.5
|
|
|
$
|
(1.1
|
)
|
|
$
|
182.0
|
|
|
$
|
—
|
|
Amounts applicable to the closed block
|
$
|
77.2
|
|
|
$
|
13.6
|
|
|
$
|
(0.7
|
)
|
|
$
|
90.1
|
|
|
$
|
—
|
|
———————
|
|
[1]
|
Net unrealized investment gains and losses on securities classified as available-for-sale and certain other assets are included in our consolidated balance sheets as a component of AOCI.
|
|
|
[2]
|
Represents the amount of non-credit OTTI losses recognized in AOCI excluding net unrealized gains or losses subsequent to the date of impairment. The table above presents the special category of AOCI for debt securities that are other-than-temporarily impaired when the impairment loss has been split between the credit loss component (in earnings) and the non-credit component (separate category of AOCI).
|
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
7. Investing Activities (continued)
|
|
|
|
|
|
|
|
|
|
Maturities of Debt Securities:
|
March 31, 2016
|
($ in millions)
|
Amortized
Cost
|
|
Fair
Value
|
|
|
|
|
Due in one year or less
|
$
|
438.3
|
|
|
$
|
444.5
|
|
Due after one year through five years
|
1,967.3
|
|
|
2,044.5
|
|
Due after five years through ten years
|
3,673.7
|
|
|
3,747.9
|
|
Due after ten years
|
3,782.1
|
|
|
4,043.5
|
|
CMBS/RMBS/ABS/CDO/CLO [1]
|
2,444.7
|
|
|
2,519.0
|
|
Total
|
$
|
12,306.1
|
|
|
$
|
12,799.4
|
|
———————
|
|
[1]
|
CMBS, RMBS, ABS, CDO and CLO are not listed separately in the table as each security does not have a single fixed maturity.
|
The maturities of debt securities, as of
March 31, 2016
, are summarized in the table above by contractual maturity. Actual maturities may differ from contractual maturities as certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties, and we have the right to put or sell certain obligations back to the issuers.
The following table depicts the sources of available-for-sale investment proceeds and related investment gains (losses).
|
|
|
|
|
|
|
|
|
Sales of Available-for-Sale Securities:
($ in millions)
|
Three Months Ended
March 31,
|
|
2016
|
|
2015
|
Debt securities, available-for-sale
|
|
|
|
Proceeds from sales
|
$
|
69.3
|
|
|
$
|
155.6
|
|
Proceeds from maturities/repayments
|
324.2
|
|
|
243.9
|
|
Gross investment gains from sales, prepayments and maturities
|
3.4
|
|
|
8.5
|
|
Gross investment losses from sales and maturities
|
(0.2
|
)
|
|
(0.9
|
)
|
|
|
|
|
Equity securities, available-for-sale
|
|
|
|
Proceeds from sales
|
$
|
0.1
|
|
|
$
|
1.7
|
|
Gross investment gains from sales
|
—
|
|
|
—
|
|
Gross investment losses from sales
|
—
|
|
|
—
|
|
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
7. Investing Activities (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aging of Temporarily Impaired Securities:
|
March 31, 2016
|
($ in millions)
|
Less than 12 months
|
|
Greater than 12 months
|
|
Total
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
Debt Securities
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency
|
$
|
50.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
50.1
|
|
|
$
|
—
|
|
State and political subdivision
|
6.7
|
|
|
—
|
|
|
29.5
|
|
|
(2.0
|
)
|
|
36.2
|
|
|
(2.0
|
)
|
Foreign government
|
11.5
|
|
|
(0.5
|
)
|
|
—
|
|
|
—
|
|
|
11.5
|
|
|
(0.5
|
)
|
Corporate
|
1,067.0
|
|
|
(57.4
|
)
|
|
622.0
|
|
|
(134.1
|
)
|
|
1,689.0
|
|
|
(191.5
|
)
|
CMBS
|
48.7
|
|
|
(2.8
|
)
|
|
2.0
|
|
|
—
|
|
|
50.7
|
|
|
(2.8
|
)
|
RMBS
|
51.4
|
|
|
(0.8
|
)
|
|
167.0
|
|
|
(7.2
|
)
|
|
218.4
|
|
|
(8.0
|
)
|
CDO/CLO
|
188.6
|
|
|
(5.0
|
)
|
|
77.1
|
|
|
(3.9
|
)
|
|
265.7
|
|
|
(8.9
|
)
|
Other ABS
|
24.8
|
|
|
(0.6
|
)
|
|
7.7
|
|
|
(4.9
|
)
|
|
32.5
|
|
|
(5.5
|
)
|
Debt securities
|
1,448.8
|
|
|
(67.1
|
)
|
|
905.3
|
|
|
(152.1
|
)
|
|
2,354.1
|
|
|
(219.2
|
)
|
Equity securities
|
10.5
|
|
|
(1.6
|
)
|
|
—
|
|
|
(0.4
|
)
|
|
10.5
|
|
|
(2.0
|
)
|
Total temporarily impaired securities
|
$
|
1,459.3
|
|
|
$
|
(68.7
|
)
|
|
$
|
905.3
|
|
|
$
|
(152.5
|
)
|
|
$
|
2,364.6
|
|
|
$
|
(221.2
|
)
|
Amounts inside the closed block
|
$
|
464.0
|
|
|
$
|
(24.9
|
)
|
|
$
|
327.3
|
|
|
$
|
(51.6
|
)
|
|
$
|
791.3
|
|
|
$
|
(76.5
|
)
|
Amounts outside the closed block
|
$
|
995.3
|
|
|
$
|
(43.8
|
)
|
|
$
|
578.0
|
|
|
$
|
(100.9
|
)
|
|
$
|
1,573.3
|
|
|
$
|
(144.7
|
)
|
Debt securities outside the closed block
that are below investment grade
|
$
|
104.1
|
|
|
$
|
(12.0
|
)
|
|
$
|
123.0
|
|
|
$
|
(39.1
|
)
|
|
$
|
227.1
|
|
|
$
|
(51.1
|
)
|
Number of securities
|
|
|
306
|
|
|
|
|
185
|
|
|
|
|
491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aging of Temporarily Impaired Securities:
|
December 31, 2015
|
($ in millions)
|
Less than 12 months
|
|
Greater than 12 months
|
|
Total
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
Debt Securities
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency
|
$
|
73.8
|
|
|
$
|
(0.6
|
)
|
|
$
|
0.9
|
|
|
$
|
—
|
|
|
$
|
74.7
|
|
|
$
|
(0.6
|
)
|
State and political subdivision
|
62.1
|
|
|
(4.1
|
)
|
|
36.5
|
|
|
(2.6
|
)
|
|
98.6
|
|
|
(6.7
|
)
|
Foreign government
|
26.0
|
|
|
(1.9
|
)
|
|
—
|
|
|
—
|
|
|
26.0
|
|
|
(1.9
|
)
|
Corporate
|
2,499.3
|
|
|
(135.5
|
)
|
|
545.2
|
|
|
(128.6
|
)
|
|
3,044.5
|
|
|
(264.1
|
)
|
CMBS
|
131.7
|
|
|
(2.9
|
)
|
|
2.3
|
|
|
—
|
|
|
134.0
|
|
|
(2.9
|
)
|
RMBS
|
138.0
|
|
|
(1.6
|
)
|
|
174.2
|
|
|
(11.1
|
)
|
|
312.2
|
|
|
(12.7
|
)
|
CDO/CLO
|
207.4
|
|
|
(4.4
|
)
|
|
80.7
|
|
|
(3.7
|
)
|
|
288.1
|
|
|
(8.1
|
)
|
Other ABS
|
39.0
|
|
|
(0.2
|
)
|
|
7.2
|
|
|
(4.2
|
)
|
|
46.2
|
|
|
(4.4
|
)
|
Debt securities
|
3,177.3
|
|
|
(151.2
|
)
|
|
847.0
|
|
|
(150.2
|
)
|
|
4,024.3
|
|
|
(301.4
|
)
|
Equity securities
|
4.1
|
|
|
(1.1
|
)
|
|
2.6
|
|
|
—
|
|
|
6.7
|
|
|
(1.1
|
)
|
Total temporarily impaired securities
|
$
|
3,181.4
|
|
|
$
|
(152.3
|
)
|
|
$
|
849.6
|
|
|
$
|
(150.2
|
)
|
|
$
|
4,031.0
|
|
|
$
|
(302.5
|
)
|
Amounts inside the closed block
|
$
|
963.9
|
|
|
$
|
(54.1
|
)
|
|
$
|
321.6
|
|
|
$
|
(56.7
|
)
|
|
$
|
1,285.5
|
|
|
$
|
(110.8
|
)
|
Amounts outside the closed block
|
$
|
2,217.5
|
|
|
$
|
(98.2
|
)
|
|
$
|
528.0
|
|
|
$
|
(93.5
|
)
|
|
$
|
2,745.5
|
|
|
$
|
(191.7
|
)
|
Debt securities outside the closed block
that are below investment grade
|
$
|
120.5
|
|
|
$
|
(14.6
|
)
|
|
$
|
77.3
|
|
|
$
|
(21.8
|
)
|
|
$
|
197.8
|
|
|
$
|
(36.4
|
)
|
Number of securities
|
|
|
627
|
|
|
|
|
178
|
|
|
|
|
805
|
|
Unrealized losses on debt securities outside the closed block and inside the closed block with a fair value depressed by more than
20%
of amortized cost totaled
$74.7 million
and
$34.0 million
, respectively, at
March 31, 2016
, of which
$31.8 million
and
$1.6 million
, respectively, were depressed by more than
20%
of amortized cost for more than 12 months.
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
7. Investing Activities (continued)
|
As of
March 31, 2016
, available-for-sale securities in an unrealized loss position were depressed primarily due to an increase in interest rates and/or widening of credit spreads since the securities were purchased. Securities in an unrealized loss position for over 12 months consisted of
178
debt securities and
7
equity securities. These debt securities primarily relate to corporate securities, which have depressed values due primarily to an increase in interest rates and credit spreads since the purchase of these securities. Unrealized losses were not recognized in earnings on these debt securities since the Company neither intends to sell the securities nor do we believe that it is more likely than not that it will be required to sell these securities before recovery of their amortized cost basis. Additionally, based on a security-by-security analysis, we expect to recover the entire amortized cost basis of these securities. In our evaluation of each security, management considers the actual recovery periods for these securities in previous periods of broad market declines. For securities with significant declines, individual security level analysis was performed, which considered any credit enhancements, expectations of defaults on underlying collateral and other available market data, including industry analyst reports and forecasts. Similarly, for equity securities in an unrealized loss position for greater than 12 months, management performed an analysis on a security-by-security basis. Although there may be sustained losses for greater than 12 months on these securities, additional information was obtained related to company performance which did not indicate that the additional losses were other-than-temporary.
Evaluating temporarily impaired available-for-sale securities
In management’s evaluation of temporarily impaired securities, many factors about individual issuers of securities, as well as our best judgment in determining the cause of a decline in the estimated fair value, are considered in the assessment of potential near-term recovery in the security’s value. Some of those considerations include, but are not limited to: (i) duration of time and extent to which the estimated fair value has been below cost or amortized cost; (ii) for debt securities, if the Company has the intent to sell or will more likely than not be required to sell a particular security before the decline in estimated fair value below amortized cost recovers; (iii) whether the issuer is experiencing significant financial difficulties and the potential for impairments of that issuer’s securities; (iv) pervasive issues across an entire industry sector/sub-sector; and (v) for structured securities, assessing any changes in the forecasted cash flows, the quality of underlying collateral, expectations of prepayment speeds, loss severity and payment priority of tranches held.
Other-than-temporary impairments
Management assessed all securities in an unrealized loss position in determining whether impairments were temporary or other-than-temporary. In reaching its conclusions, management exercised significant judgment and used a number of issuer-specific quantitative indicators and qualitative judgments to assess the probability of receiving a given security’s contractual cash flows. This included the issue’s implied yield to maturity, cumulative default rate based on rating, comparisons of issue-specific spreads to industry or sector spreads, specific trading activity in the issue and other market data such as recent debt tenders and upcoming refinancing requirements. Management also reviewed fundamentals such as issuer credit and liquidity metrics, business outlook and industry conditions. Management maintains a watch list of securities that is reviewed for impairments. Each security on the watch list was evaluated, analyzed and discussed, with the positive and negative factors weighed, in the ultimate determination of whether or not the security was other-than-temporarily impaired. For securities for which no OTTI was ultimately indicated at
March 31, 2016
, management does not have the intention to sell, nor does it expect to be required to sell, these securities prior to their recovery.
OTTIs recorded for available-for-sale debt and equity securities for the three months ended
March 31, 2016
and
2015
totaled
$12.5 million
and
$8.4 million
, respectively. For the three months ended
March 31, 2016
, debt impairments of
$12.5 million
related primarily to issuers exposed to credit deterioration in the energy sector and several private issuers experiencing specific business set-backs.
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
7. Investing Activities (continued)
|
The following table presents a roll-forward of pre-tax credit losses recognized in earnings related to available-for-sale debt securities for which a portion of the OTTI was recognized in OCI.
|
|
|
|
|
|
|
|
|
Credit Losses Recognized in Earnings on Available-for-Sale Debt
Securities for which a Portion of the OTTI Loss was Recognized in OCI:
|
Three Months Ended
March 31,
|
($ in millions)
|
2016
|
|
2015
|
|
|
|
|
Balance, beginning of period
|
$
|
(45.6
|
)
|
|
$
|
(52.4
|
)
|
Add: Credit losses on securities not previously impaired [1]
|
—
|
|
|
—
|
|
Add: Credit losses on securities previously impaired [1]
|
—
|
|
|
—
|
|
Less: Credit losses on securities impaired due to intent to sell
|
—
|
|
|
—
|
|
Less: Credit losses on securities sold
|
3.4
|
|
|
3.2
|
|
Less: Increases in cash flows expected on
previously impaired securities
|
—
|
|
|
—
|
|
Balance, end of period
|
$
|
(42.2
|
)
|
|
$
|
(49.2
|
)
|
———————
|
|
[1]
|
Additional credit losses on securities for which a portion of the OTTI loss was recognized in AOCI are included within net OTTI losses recognized in earnings on the consolidated statements of operations and comprehensive income.
|
Limited partnerships and other investments
|
|
|
|
|
|
|
|
|
Limited Partnerships and Other Investments:
($ in millions)
|
March 31,
2016
|
|
December 31, 2015
|
Limited partnerships
|
|
|
|
Private equity funds
|
$
|
285.3
|
|
|
$
|
257.0
|
|
Mezzanine funds
|
166.1
|
|
|
159.6
|
|
Infrastructure funds
|
36.5
|
|
|
35.8
|
|
Hedge funds
|
9.8
|
|
|
9.9
|
|
Mortgage and real estate funds
|
2.6
|
|
|
4.6
|
|
Leveraged leases
|
3.9
|
|
|
4.7
|
|
Direct equity investments
|
92.4
|
|
|
44.9
|
|
Other alternative assets
|
2.2
|
|
|
2.2
|
|
Limited partnerships and other investments
|
$
|
598.8
|
|
|
$
|
518.7
|
|
Amounts applicable to the closed block
|
$
|
399.1
|
|
|
$
|
352.7
|
|
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
7. Investing Activities (continued)
|
Net investment income
Net investment income is comprised primarily of interest income, including amortization of premiums and accretion of discounts, based on yields which are changed due to expectations in projected cash flows, dividend income from common and preferred stock, gains and losses on securities measured at fair value and earnings from investments accounted for under equity method accounting.
|
|
|
|
|
|
|
|
|
Sources of Net Investment Income:
|
Three Months Ended
March 31,
|
($ in millions)
|
2016
|
|
2015
|
|
|
|
|
Debt securities [1]
|
$
|
144.2
|
|
|
$
|
148.8
|
|
Equity securities
|
2.6
|
|
|
1.9
|
|
Limited partnerships and other investments
|
22.3
|
|
|
13.2
|
|
Policy loans
|
42.4
|
|
|
41.7
|
|
Fair value investments
|
(1.2
|
)
|
|
11.1
|
|
Total investment income
|
210.3
|
|
|
216.7
|
|
Less: Discontinued operations
|
0.3
|
|
|
0.3
|
|
Less: Investment expenses
|
5.0
|
|
|
7.1
|
|
Net investment income
|
$
|
205.0
|
|
|
$
|
209.3
|
|
Amounts applicable to the closed block
|
$
|
94.9
|
|
|
$
|
100.2
|
|
———————
|
|
[1]
|
Includes net investment income on short-term investments.
|
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
7. Investing Activities (continued)
|
Net realized gains (losses)
|
|
|
|
|
|
|
|
|
Sources and Types of
Net Realized Gains (Losses):
|
Three Months Ended
March 31,
|
($ in millions)
|
2016
|
|
2015
|
|
|
|
|
Total other-than-temporary debt impairments
|
$
|
(12.5
|
)
|
|
$
|
(0.1
|
)
|
Portion of losses recognized in OCI
|
—
|
|
|
(1.4
|
)
|
Net debt impairments recognized in earnings
|
$
|
(12.5
|
)
|
|
$
|
(1.5
|
)
|
Debt security impairments:
|
|
|
|
U.S. government and agency
|
$
|
—
|
|
|
$
|
—
|
|
State and political subdivision
|
(3.0
|
)
|
|
—
|
|
Foreign government
|
—
|
|
|
—
|
|
Corporate
|
(9.5
|
)
|
|
(1.3
|
)
|
CMBS
|
—
|
|
|
—
|
|
RMBS
|
—
|
|
|
(0.2
|
)
|
CDO/CLO
|
—
|
|
|
—
|
|
Other ABS
|
—
|
|
|
—
|
|
Net debt security impairments
|
(12.5
|
)
|
|
(1.5
|
)
|
Equity security impairments
|
—
|
|
|
(6.9
|
)
|
Limited partnerships and other investment impairments
|
—
|
|
|
—
|
|
Impairment losses
|
(12.5
|
)
|
|
(8.4
|
)
|
Debt security transaction gains
|
3.4
|
|
|
8.5
|
|
Debt security transaction losses
|
(0.2
|
)
|
|
(0.9
|
)
|
Equity security transaction gains
|
—
|
|
|
—
|
|
Equity security transaction losses
|
—
|
|
|
—
|
|
Limited partnerships and other investment transaction gains
|
—
|
|
|
—
|
|
Limited partnerships and other investment transaction losses
|
—
|
|
|
—
|
|
Net transaction gains (losses)
|
3.2
|
|
|
7.6
|
|
Derivative instruments
|
1.4
|
|
|
(2.3
|
)
|
Embedded derivatives [1]
|
(8.4
|
)
|
|
(10.3
|
)
|
Assets valued at fair value
|
0.8
|
|
|
(2.7
|
)
|
Net realized gains (losses),
excluding impairment losses
|
(3.0
|
)
|
|
(7.7
|
)
|
Net realized gains (losses),
including impairment losses
|
$
|
(15.5
|
)
|
|
$
|
(16.1
|
)
|
———————
|
|
[1]
|
Includes the change in fair value of embedded derivatives associated with fixed index annuity indexed crediting feature and variable annuity riders. See Note 10 to these consolidated interim unaudited financial statements for additional disclosures.
|
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
7. Investing Activities (continued)
|
Unrealized gains (losses)
|
|
|
|
|
|
|
|
|
Sources of Changes in
Net Unrealized Gains (Losses):
|
Three Months Ended
March 31,
|
($ in millions)
|
2016
|
|
2015
|
|
|
|
|
Debt securities
|
$
|
296.2
|
|
|
$
|
143.9
|
|
Equity securities
|
(3.5
|
)
|
|
(2.5
|
)
|
Other investments
|
(0.5
|
)
|
|
(0.2
|
)
|
Net unrealized investment gains (losses)
|
$
|
292.2
|
|
|
$
|
141.2
|
|
|
|
|
|
Net unrealized investment gains (losses)
|
$
|
292.2
|
|
|
$
|
141.2
|
|
Applicable to closed block policyholder dividend obligation
|
120.8
|
|
|
62.7
|
|
Applicable to DAC
|
47.7
|
|
|
16.8
|
|
Applicable to other actuarial offsets
|
73.5
|
|
|
58.3
|
|
Applicable to deferred income tax expense (benefit)
|
47.8
|
|
|
7.0
|
|
Offsets to net unrealized investment gains (losses)
|
289.8
|
|
|
144.8
|
|
Net unrealized gains (losses) included in OCI
|
$
|
2.4
|
|
|
$
|
(3.6
|
)
|
Consolidated variable interest entities
The Company regularly invests in private equity type fund structures which are VIEs. Entities which do not have sufficient equity at risk to allow the entity to finance its activities without additional financial support or in which the equity investors, as a group, do not have the characteristic of a controlling financial interest are referred to as VIEs. We perform ongoing assessments of our investments in VIEs to determine if we are the primary beneficiary. When we are the primary beneficiary of the entity we consolidate the VIE. The consolidated entities are all investment company-like structures which follow specialized investment company accounting and record underlying investments at fair value. The nature of the consolidated VIEs’ operations and purpose are private equity investment companies similar to private equity funds and may be structured as partnerships or limited liability companies (“LLCs”). We consolidate these VIEs using the most recent financial information received from the entities. Recognition of operating results is generally on a three-month delay due to the timing of the related financial statements.
The updated consolidation guidance adopted during the first quarter of 2016 resulted in the deconsolidation of
six
previously consolidated VIEs as the Company is not the primary beneficiary under the updated standard. Also as a result of the adoption, the Company determined that four investment funds, that were previously identified as consolidated VIEs and for which the Company has significant contractual power over the operations, are voting interest entities under the new consolidation guidance. The Company still owns a majority interest in the investment funds and the funds are still consolidated on these consolidated interim unaudited financial statements; however, as of
March 31, 2016
, these investment funds are not included as VIEs in the table below.
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
7. Investing Activities (continued)
|
The following table presents the total assets and total liabilities relating to consolidated VIEs at
March 31, 2016
and
December 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value of Assets and Liabilities for
Consolidated Variable Interest Entities:
|
March 31, 2016
|
|
December 31, 2015
|
($ in millions)
|
Assets
|
|
Liabilities
|
|
Maximum
Exposure
to Loss
[
1]
|
|
Assets
|
|
Liabilities
|
|
Maximum
Exposure
to Loss
[
1]
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities, at fair value [2]
|
$
|
7.7
|
|
|
$
|
—
|
|
|
$
|
4.0
|
|
|
$
|
14.7
|
|
|
$
|
—
|
|
|
$
|
10.4
|
|
Equity securities, at fair value [2]
|
3.6
|
|
|
—
|
|
|
2.9
|
|
|
63.0
|
|
|
—
|
|
|
56.9
|
|
Cash and cash equivalents
|
0.3
|
|
|
—
|
|
|
0.2
|
|
|
6.9
|
|
|
—
|
|
|
6.7
|
|
Investment in partnership interests [2]
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Investment in single asset LLCs [2]
|
1.1
|
|
|
—
|
|
|
0.8
|
|
|
3.9
|
|
|
—
|
|
|
2.8
|
|
Other assets
|
7.2
|
|
|
—
|
|
|
5.4
|
|
|
5.4
|
|
|
—
|
|
|
4.3
|
|
Total assets of consolidated VIEs
|
$
|
19.9
|
|
|
$
|
—
|
|
|
$
|
13.3
|
|
|
$
|
93.9
|
|
|
$
|
—
|
|
|
$
|
81.1
|
|
Total liabilities of consolidated VIEs
|
$
|
—
|
|
|
$
|
0.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.1
|
|
|
$
|
—
|
|
———————
|
|
[1]
|
Creditors or beneficial interest holders of the consolidated VIEs have no recourse to our general credit. Our obligation to the VIEs is limited to the amount of our committed investment. We have not provided material financial or other support that was not contractually required to these VIEs. The maximum exposure to loss above at
March 31, 2016
and
December 31, 2015
excludes unfunded commitments of
$0
and
$6.5 million
, respectively.
|
|
|
[2]
|
Included in fair value investments on the consolidated balance sheets.
|
Non-consolidated variable interest entities
The carrying value of our investments in non-consolidated VIEs (based upon sponsor values and financial statements of the individual entities) for which we are not the primary beneficiary was
$567.3 million
and
$97.2 million
as of
March 31, 2016
and
December 31, 2015
, respectively. The maximum exposure to loss is equal to the carrying amounts plus any unfunded commitments of the Company. Such a maximum loss would be expected to occur only upon bankruptcy of the issuer or investee. The Company has not provided nor intends to provide material financial support to these entities unless contractually required. We do not have the contractual option to redeem these limited partnership interests but receive distributions based on the liquidation of the underlying assets. The Company must generally request general partner consent to transfer or sell its interests. The Company performs ongoing qualitative analysis of its involvement with VIEs to determine if consolidation is required.
The updated consolidation guidance adopted during the first quarter of 2016 resulted in a significant increase in entities determined to be VIEs due to the revision of existing accounting guidance related to general partners’ investments in limited partnerships.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value of Assets and Liabilities
and Maximum Exposure Loss Relating
to Variable Interest Entities:
|
March 31, 2016
|
|
December 31, 2015
|
($ in millions)
|
Assets
|
|
Liabilities
|
|
Maximum
Exposure
to Loss
[
1]
|
|
Assets
|
|
Liabilities
|
|
Maximum
Exposure
to Loss
[
1]
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partnerships
|
$
|
485.1
|
|
|
$
|
—
|
|
|
$
|
737.9
|
|
|
$
|
83.8
|
|
|
$
|
—
|
|
|
$
|
132.0
|
|
LLCs
|
82.2
|
|
|
—
|
|
|
87.9
|
|
|
13.4
|
|
|
—
|
|
|
13.4
|
|
Total
|
$
|
567.3
|
|
|
$
|
—
|
|
|
$
|
825.8
|
|
|
$
|
97.2
|
|
|
$
|
—
|
|
|
$
|
145.4
|
|
———————
|
|
[1]
|
Creditors or beneficial interest holders of the VIEs have no recourse to our general credit. Our obligation to the VIEs is limited to the amount of our committed investment. We have not provided material financial or other support that was not contractually required to these VIEs.
|
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
7. Investing Activities (continued)
|
In addition, the Company makes passive investments in structured securities issued by VIEs, for which the Company is not the manager, which are included in CMBS, RMBS, CDO/CLO and other ABS within available-for-sale debt securities, and in fair value investments, in the consolidated balance sheets. The Company has not provided financial or other support with respect to these investments other than its original investment. For these investments, the Company determined it is not the primary beneficiary due to the size of our investment relative to the structured securities issued by the VIE, the level of credit subordination which reduces the Company’s obligation to absorb losses or right to receive benefits, and the Company’s lack of power over the activities that most significantly impact the economic performance of the VIEs. The Company’s maximum exposure to loss on these investments is limited to the amount of our investment.
Issuer and counterparty credit exposure
Credit exposure related to issuers and derivatives counterparties is inherent in investments and derivative contracts with positive fair value or asset balances. We manage credit risk through the analysis of the underlying obligors, issuers and transaction structures. We review our debt security portfolio regularly to monitor the performance of obligors and assess the stability of their credit ratings. We also manage credit risk through industry and issuer diversification and asset allocation. We classify debt securities into investment grade and below-investment-grade securities based on ratings prescribed by the National Association of Insurance Commissioners (“NAIC”). In a majority of cases, these classifications will coincide with ratings assigned by one or more Nationally Recognized Statistical Rating Organizations (“NRSROs”); however, for certain structured securities, the NAIC designations may differ from NRSRO designations based on the amortized cost of the securities in our portfolio. Included in fixed maturities are below-investment-grade assets totaling
$914.5 million
and
$798.2 million
at
March 31, 2016
and
December 31, 2015
, respectively. Maximum exposure to an issuer or derivative counterparty is defined by quality ratings, with higher quality issuers having larger exposure limits. As of
March 31, 2016
, we were exposed to the credit concentration risk of
257
issuers each representing exposure greater than
10%
of stockholders’ equity other than U.S. government and government agencies backed by the faith and credit of the U.S. government. The top five largest exposures were Bank of America Corp, General Electric Company, Berkshire Hathaway Inc., JPMorgan Chase Bank and Republic of Poland. We monitor credit exposures by actively monitoring dollar limits on transactions with specific counterparties. We have an overall limit on below-investment-grade rated issuer exposure. Additionally, the creditworthiness of counterparties is reviewed periodically. We use ISDA Master Agreements with derivative counterparties which include Credit Support Annexes with collateral provisions to reduce counterparty credit exposures. To further mitigate the risk of loss on derivatives, we only enter into contracts in which the counterparty is a financial institution with a rating of A or higher from at least one NRSRO.
As of
March 31, 2016
, we held derivative assets, net of liabilities, with a fair value of
$59.2 million
. Derivative credit exposure was diversified with
10
different counterparties. We also had investments in these issuers with a fair value of
$198.2 million
as of
March 31, 2016
. Our maximum amount of loss due to credit risk with these issuers was
$257.4 million
as of
March 31, 2016
. See Note 11 to these consolidated interim unaudited financial statements for additional information regarding derivatives.
8. Financing Activities
Indebtedness
The carrying value of our debt was as follows:
|
|
|
|
|
|
|
|
|
Indebtedness at Carrying Value:
($ in millions)
|
March 31,
2016
|
|
December 31, 2015
|
|
|
|
|
7.15% surplus notes, due 2034 [1]
|
$
|
124.8
|
|
|
$
|
124.7
|
|
7.45% senior unsecured bonds, due 2032 [2]
|
247.0
|
|
|
247.0
|
|
Total indebtedness
|
$
|
371.8
|
|
|
$
|
371.7
|
|
———————
|
|
[1]
|
Includes remaining unamortized debt issuance costs of
$1.4 million
and
$1.5 million
as of
March 31, 2016
and
December 31, 2015
in accordance with new accounting guidance described within Note 2.
|
|
|
[2]
|
Includes remaining unamortized debt issuance costs of
$5.7 million
and
$5.7 million
as of
March 31, 2016
and
December 31, 2015
in accordance with new accounting guidance described within Note 2.
|
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
8. Financing Activities (continued)
|
We incurred interest expense of
$7.1 million
and
$7.1 million
for the three months ended
March 31, 2016
and
2015
, respectively.
7.15% surplus notes
Our
7.15%
surplus notes are an obligation of Phoenix Life. Interest payments are at an annual rate of
7.15%
, require the prior approval of the New York Department of Financial Services (“NYDFS”) and may be made only out of surplus funds which the NYDFS determines to be available for such payments under New York Insurance Law. New York Insurance Law provides that the notes are not part of the legal liabilities of Phoenix Life.
7.45% senior unsecured bonds
During the three months ended
March 31, 2016
, in connection with the Company’s previously announced agreement to be acquired by Nassau and become its privately held, wholly-owned subsidiary, and following a successful bondholder consent solicitation, the Company executed a fourth supplemental indenture governing its
7.45%
senior unsecured bonds. During and related to the bondholder solicitation, a putative class action complaint was filed in New York Supreme Court against the Company and the bond indenture trustee. The parties to the litigation subsequently entered into a memorandum of understanding providing for the settlement of the litigation, subject to court approval, among other things. See Note 19 to these consolidated financial statements for a more detailed discussion regarding the consent solicitation litigation.
9. Common Stock and Stock Repurchase Program
We have authorization for the issuance of
50 million
shares of our common stock.
Through
March 31, 2016
, we have issued
6.4 million
common shares (
2.8 million
shares to our policyholders in exchange for their interests in the mutual company and
3.6 million
shares in sales to the public and to settle share-based compensation awards). As of
March 31, 2016
, shares issued and outstanding include
0.1 million
shares held in a Rabbi Trust to fund equity awards on which recipients are allowed to vote their shares. As of
March 31, 2016
, we also had
0.3 million
shares reserved for issuance under our stock option plans and
0.1 million
shares reserved for issuance under our restricted stock unit (“RSU”) plans.
The Company is authorized to repurchase up to an aggregate amount of
$25.0 million
(not including fees and expenses) of the Company’s outstanding shares of common stock. Under the stock repurchase program, purchases may be made from time to time in the open market, in accelerated stock buyback arrangements, in privately negotiated transactions or otherwise, subject to market prices and other conditions. There is no time limit placed on the duration of the program, which may be modified, extended or terminated by the Board of Directors at any time. As of
March 31, 2016
,
no
shares have been repurchased under this authorization.
State Farm Mutual Automobile Insurance Company (“State Farm”)
no
longer owns any of our outstanding common stock, however at
March 31, 2015
they owned
5.2%
of our outstanding common stock. In the
three
months ended
March 31, 2015
, we incurred
$0.7 million
in compensation costs for the sale of our insurance and annuity products by entities that were either subsidiaries of State Farm or owned by State Farm agents.
Morgan Stanley currently owns of record approximately
6.0%
of our outstanding common stock. In the
three
months ended
March 31, 2016
and
2015
, we incurred
$0.9 million
and
$0
, respectively, for fees associated with a bondholder solicitation seeking consent to amend the indenture governing our
7.45%
senior unsecured bonds. See Note 8 to these consolidated interim unaudited financial statements for additional information.
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
|
10. Separate Accounts, Death Benefits and Other Insurance Benefit Features and Embedded Product Derivatives
Separate accounts
Separate account products are those for which a separate investment and liability account is maintained on behalf of the policyholder. Investment objectives for these separate accounts vary by fund account type, as outlined in the applicable fund prospectus or separate account plan of operations. We have variable annuity and variable life insurance contracts that are classified as separate account products. The assets supporting these contracts are carried at fair value and are reported as separate account assets with an equivalent amount reported as separate account liabilities. Amounts assessed against the policyholder for mortality, administration and other services are included within revenue in fee income.
Assets with fair value and carrying value of
$2.9 billion
and
$2.8 billion
at
March 31, 2016
and
December 31, 2015
, respectively, supporting fixed indexed annuities are maintained in accounts that are legally segregated from the other assets of the Company, but policyholders do not direct the investment of those assets and the investment performance does not pass through to the policyholders. These assets supporting fixed indexed annuity contracts are reported within the respective investment line items on the consolidated balance sheets.
|
|
|
|
|
|
|
|
|
Separate Account Investments of Account Balances of Variable Annuity Contracts
with Insurance Guarantees:
|
March 31,
2016
|
|
December 31, 2015
|
($ in millions)
|
|
|
|
Debt securities
|
$
|
428.0
|
|
|
$
|
300.5
|
|
Equity funds
|
1,122.2
|
|
|
1,325.6
|
|
Other
|
43.1
|
|
|
43.7
|
|
Total
|
$
|
1,593.3
|
|
|
$
|
1,669.8
|
|
Death benefits and other insurance benefit features
Variable annuity guaranteed benefits
We establish policy benefit liabilities for minimum death and income benefit guarantees relating to certain annuity policies as follows:
|
|
•
|
Liabilities associated with the guaranteed minimum death benefit (“GMDB”) are determined by estimating the expected value of death benefits in excess of the projected account balance and recognizing the excess ratably over the expected life of the contract based on total expected assessments. The assumptions used for calculating the liabilities are generally consistent with those used for amortizing DAC.
|
|
|
•
|
Liabilities associated with the guaranteed minimum income benefit (“GMIB”) are determined by estimating the expected value of the income benefits in excess of the projected account balance at the date of annuitization and recognizing the excess ratably over the accumulation period based on total expected assessments. The assumptions used for calculating such guaranteed income benefit liabilities are generally consistent with those used for amortizing DAC.
|
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
10. Separate Accounts, Death Benefits and Other Insurance Benefit Features and Embedded Product Derivatives (continued)
|
For variable annuities with GMDB and GMIB, reserves for these guarantees are calculated and recorded in policy liabilities and accruals on our consolidated balance sheets. Changes in the liability are recorded in policy benefits on our consolidated statements of operations and comprehensive income. We regularly evaluate estimates used and adjust the additional liability balances, with a related charge or credit to benefit expense if actual experience or other evidence suggests that earlier assumptions should be revised.
|
|
|
|
|
|
|
|
|
Changes in Guaranteed Insurance Benefit
Liability Balances:
|
Three Months Ended
March 31, 2016
|
($ in millions)
|
Annuity
GMDB
|
|
Annuity
GMIB
|
|
|
|
|
Balance, beginning of period
|
$
|
20.2
|
|
|
$
|
8.9
|
|
Incurred
|
1.1
|
|
|
1.4
|
|
Paid
|
(1.3
|
)
|
|
(0.1
|
)
|
Assumption unlocking
|
—
|
|
|
—
|
|
Change due to net unrealized gains or losses included in AOCI
|
0.1
|
|
|
—
|
|
Balance, end of period
|
$
|
20.1
|
|
|
$
|
10.2
|
|
|
|
|
|
|
|
|
|
|
Changes in Guaranteed Insurance Benefit
Liability Balances:
|
Three Months Ended
March 31, 2015
|
($ in millions)
|
Annuity
GMDB
|
|
Annuity
GMIB
|
|
|
|
|
Balance, beginning of period
|
$
|
21.4
|
|
|
$
|
17.1
|
|
Incurred
|
(0.6
|
)
|
|
(2.5
|
)
|
Paid
|
(0.6
|
)
|
|
—
|
|
Assumption unlocking
|
0.4
|
|
|
—
|
|
Change due to net unrealized gains or losses included in AOCI
|
0.1
|
|
|
—
|
|
Balance, end of period
|
$
|
20.7
|
|
|
$
|
14.6
|
|
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
10. Separate Accounts, Death Benefits and Other Insurance Benefit Features and Embedded Product Derivatives (continued)
|
For those guarantees of benefits that are payable in the event of death, the net amount at risk (“NAR”) is generally defined as the benefit payable in excess of the current account balance at our balance sheet date. We have entered into reinsurance agreements to reduce the net amount of risk on certain death benefits. Following are the major types of death benefits currently in force as defined in Note 10 to our consolidated financial statements in the
2015
Form 10-K:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMDB and GMIB Benefits by Type:
|
March 31, 2016
|
($ in millions)
|
Account
Value
|
|
NAR
before
Reinsurance
|
|
NAR
after
Reinsurance
|
|
Average
Attained Age
of Annuitant
|
|
|
|
|
|
|
|
|
GMDB return of premium
|
$
|
499.6
|
|
|
$
|
1.6
|
|
|
$
|
1.6
|
|
|
64
|
GMDB step up
|
1,406.2
|
|
|
146.9
|
|
|
47.5
|
|
|
65
|
GMDB earnings enhancement benefit (“EEB”)
|
23.0
|
|
|
2.4
|
|
|
2.4
|
|
|
65
|
GMDB greater of annual step up and roll up
|
19.3
|
|
|
6.3
|
|
|
6.3
|
|
|
70
|
Total GMDB at March 31, 2016
|
1,948.1
|
|
|
$
|
157.2
|
|
|
$
|
57.8
|
|
|
|
Less: General account value with GMDB
|
360.4
|
|
|
|
|
|
|
|
Subtotal separate account liabilities with GMDB
|
1,587.7
|
|
|
|
|
|
|
|
Separate account liabilities without GMDB
|
825.9
|
|
|
|
|
|
|
|
Total separate account liabilities
|
$
|
2,413.6
|
|
|
|
|
|
|
|
GMIB [1] at March 31, 2016
|
$
|
242.1
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
|
GMDB and GMIB Benefits by Type:
|
December 31, 2015
|
($ in millions)
|
Account
Value
|
|
NAR
before
Reinsurance
|
|
NAR
after
Reinsurance
|
|
Average
Attained Age
of Annuitant
|
|
|
|
|
|
|
|
|
GMDB return of premium
|
$
|
527.5
|
|
|
$
|
1.7
|
|
|
$
|
1.7
|
|
|
64
|
GMDB step up
|
1,453.7
|
|
|
146.5
|
|
|
47.7
|
|
|
65
|
GMDB earnings enhancement benefit (“EEB”)
|
24.0
|
|
|
2.6
|
|
|
2.6
|
|
|
65
|
GMDB greater of annual step up and roll up
|
19.6
|
|
|
6.1
|
|
|
6.1
|
|
|
70
|
Total GMDB at December 31, 2015
|
2,024.8
|
|
|
$
|
156.9
|
|
|
$
|
58.1
|
|
|
|
Less: General account value with GMDB
|
360.8
|
|
|
|
|
|
|
|
Subtotal separate account liabilities with GMDB
|
1,664.0
|
|
|
|
|
|
|
|
Separate account liabilities without GMDB
|
872.4
|
|
|
|
|
|
|
|
Total separate account liabilities
|
$
|
2,536.4
|
|
|
|
|
|
|
|
GMIB [1] at December 31, 2015
|
$
|
253.8
|
|
|
|
|
|
|
66
|
———————
|
|
[1]
|
Policies with a GMIB also have a GMDB, however these benefits are not additive. When a policy terminates due to death, any NAR related to GMIB is released. Similarly, when a policy goes into benefit status on a GMIB, its GMDB NAR is released.
|
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
10. Separate Accounts, Death Benefits and Other Insurance Benefit Features and Embedded Product Derivatives (continued)
|
Fixed indexed annuity guaranteed benefits
Many of our fixed indexed annuities contain guaranteed benefits. We establish policy benefit liabilities for minimum death and minimum withdrawal benefit guarantees relating to these policies as follows:
|
|
•
|
Liabilities associated with the guaranteed minimum withdrawal benefit (“GMWB”) and Chronic Care guarantees are determined by estimating the value of the withdrawal benefits expected to be paid after the projected account value depletes and recognizing the value ratably over the accumulation period based on total expected assessments. Liabilities associated with the GMWB for the fixed indexed annuities differ from those contained on variable annuities in that the GMWB feature and the underlying contract, exclusive of the equity index crediting option, are fixed income instruments.
|
|
|
•
|
Liabilities associated with the GMDB are determined by estimating the expected value of death benefits in excess of the projected account balance and recognizing the excess ratably over the expected life of the contract based on total expected assessments.
|
The assumptions used for calculating GMWB, GMDB and Chronic Care guarantees are generally consistent with those used for amortizing DAC. We regularly evaluate estimates used and adjust the additional liability balances, with a related charge or credit to benefit expense if actual experience or other evidence suggests that earlier assumptions should be revised. The GMWB, GMDB and Chronic Care guarantees on fixed indexed annuities are recorded in policy liabilities and accruals on our consolidated balance sheets.
|
|
|
|
|
|
|
|
|
Changes in Guaranteed
Liability Balances:
|
Fixed Indexed Annuity
GMWB and GMDB
|
($ in millions)
|
Three Months Ended
March 31,
|
|
2016
|
|
2015
|
|
|
|
|
Balance, beginning of period
|
$
|
152.8
|
|
|
$
|
147.0
|
|
Incurred
|
15.2
|
|
|
10.5
|
|
Paid
|
(0.2
|
)
|
|
(0.1
|
)
|
Assumption unlocking
|
—
|
|
|
—
|
|
Change due to net unrealized gains or losses included in AOCI
|
37.9
|
|
|
13.9
|
|
Balance, end of period
|
$
|
205.7
|
|
|
$
|
171.3
|
|
Universal life
Liabilities for universal life contracts in excess of the account balance, some of which contain secondary guarantees, are generally determined by estimating the expected value of benefits and expenses when claims are triggered and recognizing those benefits and expenses over the accumulation period based on total expected assessments. The assumptions used in estimating these liabilities are generally consistent with those used for amortizing DAC.
|
|
|
|
|
|
|
|
|
Changes in Guaranteed
Liability Balances:
|
Universal Life
Secondary Guarantees
|
($ in millions)
|
Three Months Ended
March 31,
|
|
2016
|
|
2015
|
|
|
|
|
Balance, beginning of period
|
$
|
210.1
|
|
|
$
|
195.8
|
|
Incurred
|
8.6
|
|
|
10.1
|
|
Paid
|
(4.7
|
)
|
|
(6.4
|
)
|
Assumption unlocking
|
—
|
|
|
—
|
|
Change due to net unrealized gains or losses included in AOCI
|
2.6
|
|
|
1.4
|
|
Balance, end of period
|
$
|
216.6
|
|
|
$
|
200.9
|
|
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
10. Separate Accounts, Death Benefits and Other Insurance Benefit Features and Embedded Product Derivatives (continued)
|
In addition, the universal life block of business has experience which produces profits in earlier periods followed by losses in later periods for which additional reserves are required to be held above the account value liability. These reserves are accrued ratably over historical and anticipated positive income to offset the future anticipated losses. The assumptions used in estimating these liabilities are generally consistent with those used for amortizing DAC.
|
|
|
|
|
|
|
|
|
Changes in Additional
Liability Balances:
|
Universal Life
Profits Followed by Losses
|
($ in millions)
|
Three Months Ended
March 31,
|
|
2016
|
|
2015
|
|
|
|
|
Balance, beginning of period
|
$
|
390.6
|
|
|
$
|
351.5
|
|
Change in reserve
|
11.5
|
|
|
16.7
|
|
Assumption unlocking
|
—
|
|
|
(6.8
|
)
|
Change due to net unrealized gains or losses included in AOCI
|
21.8
|
|
|
26.3
|
|
Balance, end of period
|
$
|
423.9
|
|
|
$
|
387.7
|
|
Embedded derivatives
Variable annuity embedded derivatives
Certain separate account variable products may contain a GMWB, guaranteed minimum accumulation benefit (“GMAB”) and/or combination (“COMBO”) rider as defined in Note 10 to our consolidated financial statements in the
2015
Form 10-K. These features are accounted for as embedded derivatives as described below.
|
|
|
|
|
|
|
Embedded Derivatives Non-Insurance Guaranteed Product Features:
|
March 31, 2016
|
($ in millions)
|
Account
Value
|
|
Average
Attained Age
of Annuitant
|
|
|
|
|
GMWB
|
$
|
368.4
|
|
|
66
|
GMAB
|
199.2
|
|
|
60
|
COMBO
|
4.6
|
|
|
66
|
Balance, end of period
|
$
|
572.2
|
|
|
|
|
|
|
|
Embedded Derivatives Non-Insurance Guaranteed Product Features:
|
December 31, 2015
|
($ in millions)
|
Account
Value
|
|
Average
Attained Age
of Annuitant
|
|
|
|
|
GMWB
|
$
|
385.1
|
|
|
66
|
GMAB
|
223.5
|
|
|
60
|
COMBO
|
4.9
|
|
|
65
|
Balance, end of period
|
$
|
613.5
|
|
|
|
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
10. Separate Accounts, Death Benefits and Other Insurance Benefit Features and Embedded Product Derivatives (continued)
|
The GMWB, GMAB and COMBO features represent embedded derivative liabilities in the variable annuity contracts that are required to be reported separately from the host variable annuity contract. These liabilities are recorded at fair value within policyholder deposit funds on the consolidated balance sheets with changes in fair value recorded in realized investment gains on the consolidated statements of operations and comprehensive income. The fair value of the GMWB, GMAB and COMBO obligation is calculated based on actuarial and capital market assumptions related to the projected cash flows, including benefits and related contract charges, over the lives of the contracts, incorporating expectations concerning policyholder behavior. As markets change, contracts mature and actual policyholder behavior emerges, these assumptions are continually evaluated and may from time to time be adjusted. Embedded derivative liabilities for GMWB, GMAB and COMBO are shown in the table below.
|
|
|
|
|
|
|
|
|
Embedded Derivative Liabilities:
($ in millions)
|
March 31,
2016
|
|
December 31, 2015
|
|
|
|
|
GMWB
|
$
|
14.9
|
|
|
$
|
9.0
|
|
GMAB
|
0.3
|
|
|
0.2
|
|
COMBO
|
(0.1
|
)
|
|
(0.1
|
)
|
Total variable annuity embedded derivative liabilities
|
$
|
15.1
|
|
|
$
|
9.1
|
|
There were no benefit payments made for the GMWB and GMAB in the
three
months ended
March 31, 2016
and
2015
. We have established a risk management strategy under which we hedge our GMAB, GMWB and COMBO exposure using equity index options, equity index futures, equity index variance swaps, interest rate swaps and swaptions.
Fixed indexed annuity embedded derivatives
Fixed indexed annuities may also contain a variety of index-crediting options: policy credits that are calculated based on the performance of an outside equity market or other index over a specified term. These index options are embedded derivative liabilities that are required to be reported separately from the host contract. These index options are accounted for at fair value and recorded in policyholder deposit funds within the consolidated balance sheets with changes in fair value recorded in realized investment gains, in the consolidated statements of operations and comprehensive income. The fair value of these index options is calculated using the budget method. See Note 12 to these consolidated interim unaudited financial statements for additional information. Several additional inputs reflect our internally developed assumptions related to lapse rates and other policyholder behavior. The fair value of these embedded derivatives was
$155.4 million
and
$156.8 million
as of
March 31, 2016
and
December 31, 2015
, respectively. In order to manage the risk associated with these equity indexed-crediting features, we hedge using equity index options. See Note 11 to these consolidated interim unaudited financial statements for additional information.
Embedded derivatives realized gains and losses
Changes in the fair value of embedded derivatives associated with variable annuity and fixed indexed annuity contracts are recorded as realized investment gains and losses within the consolidated statements of operations and comprehensive income. Embedded derivatives gains and (losses) recognized in earnings for the three months ended
March 31, 2016
and
2015
are
$(8.4) million
and
$(10.3) million
, respectively.
11. Derivative Instruments
We use derivative financial instruments, including options, futures and swaps as a means of hedging exposure to interest rate, equity price change, equity volatility and foreign currency risk. This includes surplus hedging as well as hedging of our fixed indexed annuity (“FIA”) exposure. From time to time, the Company uses forward starting swaps to lock-in interest rates on future bond purchases. We also use derivative instruments to economically hedge our exposure on living benefits offered on certain of our variable annuity products as well as index credits on our FIA products.
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
11. Derivative Instruments (continued)
|
The Company seeks to enter into over-the-counter (“OTC”) derivative transactions pursuant to master agreements that provide for a netting of payments and receipts by counterparty. Counterparties or central clearinghouses may require cash to be posted as collateral or margin. As of
March 31, 2016
and
December 31, 2015
,
$18.1 million
and
$20.6 million
, respectively, of cash and cash equivalents were held as collateral or margin by a third party related to our derivative transactions. As of
March 31, 2016
the Company held
$6.0 million
of collateral pledged by third parties related to derivative transactions. The Company held
no
collateral as of
December 31, 2015
.
Our derivatives are not designated as hedges for accounting purposes.
The following tables summarize the balance sheet classification of the Company’s gross derivative asset and liability fair value amounts. The notional amount of derivative contracts represents the basis upon which paid or received amounts are calculated and is presented in the tables below to quantify the volume of the Company’s derivative activity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments:
|
Maturity
|
|
Notional
Amount
|
|
Fair Value as of
March 31, 2016
|
($ in millions)
|
|
|
Assets
|
|
Liabilities [1]
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
2018 - 2035
|
|
$
|
189.0
|
|
|
$
|
7.0
|
|
|
$
|
1.0
|
|
Variance swaps
|
2016 - 2017
|
|
0.7
|
|
|
—
|
|
|
6.7
|
|
Swaptions
|
2016
|
|
2,790.0
|
|
|
17.7
|
|
|
9.3
|
|
Put options
|
2016 - 2022
|
|
800.4
|
|
|
28.8
|
|
|
3.7
|
|
Call options [2]
|
2016 - 2020
|
|
2,418.6
|
|
|
64.0
|
|
|
37.9
|
|
Cross currency swaps
|
2016
|
|
10.0
|
|
|
1.0
|
|
|
—
|
|
Equity futures
|
2016
|
|
39.7
|
|
|
—
|
|
|
0.7
|
|
Total derivative instruments
|
|
|
$
|
6,248.4
|
|
|
$
|
118.5
|
|
|
$
|
59.3
|
|
———————
|
|
[1]
|
Derivative liabilities are included in other liabilities on the consolidated balance sheets.
|
|
|
[2]
|
Includes a contingent receivable of
$0.5 million
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments:
|
Maturity
|
|
Notional
Amount
|
|
Fair Value as of
December 31, 2015
|
($ in millions)
|
|
|
Assets
|
|
Liabilities [1]
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
2018 - 2035
|
|
$
|
159.0
|
|
|
$
|
2.8
|
|
|
$
|
0.5
|
|
Variance swaps
|
2016 - 2017
|
|
0.7
|
|
|
—
|
|
|
6.5
|
|
Swaptions
|
2016
|
|
2,790.0
|
|
|
10.4
|
|
|
3.6
|
|
Put options
|
2016 - 2022
|
|
800.4
|
|
|
31.3
|
|
|
6.0
|
|
Call options [2]
|
2016 - 2020
|
|
2,502.1
|
|
|
57.5
|
|
|
32.3
|
|
Cross currency swaps
|
2016
|
|
10.0
|
|
|
1.5
|
|
|
—
|
|
Equity futures
|
2016
|
|
31.8
|
|
|
—
|
|
|
0.4
|
|
Total derivative instruments
|
|
|
$
|
6,294.0
|
|
|
$
|
103.5
|
|
|
$
|
49.3
|
|
———————
|
|
[1]
|
Derivative liabilities are included in other liabilities on the consolidated balance sheets.
|
|
|
[2]
|
Includes a contingent receivable of
$1.5 million
.
|
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
11. Derivative Instruments (continued)
|
|
|
|
|
|
|
|
|
|
Derivative Instrument Gains (Losses) Recognized in
Realized Investment Gains (Losses):
|
Three Months Ended
March 31,
|
($ in millions)
|
2016
|
|
2015
|
|
|
|
|
Interest rate swaps
|
$
|
7.3
|
|
|
$
|
2.7
|
|
Variance swaps
|
(0.2
|
)
|
|
(0.4
|
)
|
Swaptions
|
1.7
|
|
|
(0.1
|
)
|
Put options
|
(0.3
|
)
|
|
(4.2
|
)
|
Call options
|
(5.6
|
)
|
|
(1.5
|
)
|
Cross currency swaps
|
(0.5
|
)
|
|
1.0
|
|
Equity futures
|
(1.0
|
)
|
|
0.2
|
|
Embedded derivatives
|
(8.4
|
)
|
|
(10.3
|
)
|
Total derivative instrument gains (losses) recognized in
realized investment gains (losses)
|
$
|
(7.0
|
)
|
|
$
|
(12.6
|
)
|
Offsetting of Derivative Assets/Liabilities
The Company may enter into netting agreements with counterparties that permit the Company to offset receivables and payables with such counterparties. The following tables present the gross fair value amounts, the amounts offset and net position of derivative instruments eligible for offset in the Company’s consolidated balance sheets that are subject to an enforceable master netting arrangement upon certain termination events, irrespective of whether they are offset in the balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting of
Derivative Assets/Liabilities:
|
March 31, 2016
|
($ in millions)
|
Gross
amounts
recognized [1]
|
|
Gross
amounts
offset in the
balance sheet
|
|
Net amounts
presented
in the
balance sheet
|
|
Gross amounts not offset
in the balance sheet
|
|
Net amount
|
|
|
|
|
Financial
instruments
|
|
Cash collateral
pledged/(received)
[2][3]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative assets
|
$
|
118.5
|
|
|
$
|
—
|
|
|
$
|
118.5
|
|
|
$
|
(57.7
|
)
|
|
$
|
(6.0
|
)
|
|
$
|
54.8
|
|
Total derivative liabilities
|
$
|
(59.3
|
)
|
|
$
|
—
|
|
|
$
|
(59.3
|
)
|
|
$
|
57.7
|
|
|
$
|
1.6
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting of
Derivative Assets/Liabilities:
|
December 31, 2015
|
($ in millions)
|
Gross
amounts
recognized [1]
|
|
Gross
amounts
offset in the
balance sheet
|
|
Net amounts
presented
in the
balance sheet
|
|
Gross amounts not offset
in the balance sheet
|
|
Net amount
|
|
|
|
|
Financial
instruments
|
|
Cash collateral
pledged/(received)
[2][3]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative assets
|
$
|
103.5
|
|
|
$
|
—
|
|
|
$
|
103.5
|
|
|
$
|
(47.4
|
)
|
|
$
|
—
|
|
|
$
|
56.1
|
|
Total derivative liabilities
|
$
|
(49.3
|
)
|
|
$
|
—
|
|
|
$
|
(49.3
|
)
|
|
$
|
47.4
|
|
|
$
|
1.9
|
|
|
$
|
—
|
|
———————
|
|
[1]
|
Amounts include all derivative instruments, irrespective of whether there is a legally enforceable master netting arrangement in place.
|
|
|
[2]
|
Cash collateral pledged with derivative counterparties is recorded within other assets on the consolidated balance sheets. The Company pledges cash collateral to offset certain individual derivative liability positions with certain counterparties. Cash collateral of
$16.5 million
and
$18.7 million
as of
March 31, 2016
and
December 31, 2015
, respectively, that exceeds the net liability resulting from the aggregate derivative positions with a corresponding counterparty is excluded.
|
|
|
[3]
|
Cash collateral held from derivative counterparties is recorded within other liabilities on the consolidated balance sheet. The Company held
$6.0 million
of collateral pledged by third parties related to derivative transactions as of
March 31, 2016
. The Company held
no
collateral as of
December 31, 2015
.
|
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
11. Derivative Instruments (continued)
|
Contingent features
Derivative counterparty agreements may contain certain provisions that require our insurance companies’ financial strength rating to be above a certain threshold. If our financial strength ratings were to fall below a specified rating threshold, certain derivative counterparties could request immediate payment or demand immediate and ongoing full collateralization on derivative instruments in net liability positions, or trigger a termination of existing derivatives and/or future derivative transactions.
In certain derivative counterparty agreements, our financial strength ratings are below the specified threshold levels. However, the Company held no derivative instruments as of
March 31, 2016
in a net aggregate liability position payable to any counterparty (i.e., such derivative instruments have fair values in a net asset position payable to the Company if such holdings were liquidated).
12. Fair Value of Financial Instruments
U.S. GAAP defines and establishes the framework for measuring fair value. The framework is based on inputs that are used in the valuation and a fair value hierarchy based on the quality of those inputs. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The input levels are defined as follows:
|
|
•
|
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 1 securities include highly liquid government bonds and exchange-traded equities.
|
|
|
•
|
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Examples of such instruments include government-backed mortgage products, certain collateralized mortgage and debt obligations and certain high-yield debt securities.
|
|
|
•
|
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. Unobservable inputs reflect management’s own assumptions about inputs in which market participants would use in pricing these types of assets or liabilities. Level 3 financial instruments include values which are determined using pricing models and third-party evaluation. Additionally, the determination of some fair value estimates utilizes significant management judgments or best estimates.
|
The following tables present the financial instruments carried at fair value on a recurring basis by ASC 820-10 valuation hierarchy (as described above).
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
12. Fair Value of Financial Instruments (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of Financial Instruments by Level:
|
March 31, 2016
|
($ in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
Available-for-sale debt securities
|
|
|
|
|
|
|
|
U.S. government and agency [1]
|
$
|
—
|
|
|
$
|
167.2
|
|
|
$
|
466.5
|
|
|
$
|
633.7
|
|
State and political subdivision
|
—
|
|
|
390.7
|
|
|
269.3
|
|
|
660.0
|
|
Foreign government
|
—
|
|
|
255.3
|
|
|
8.3
|
|
|
263.6
|
|
Corporate
|
—
|
|
|
5,102.1
|
|
|
3,621.0
|
|
|
8,723.1
|
|
CMBS
|
—
|
|
|
651.1
|
|
|
5.0
|
|
|
656.1
|
|
RMBS
|
—
|
|
|
1,283.2
|
|
|
24.1
|
|
|
1,307.3
|
|
CDO/CLO
|
—
|
|
|
311.5
|
|
|
10.5
|
|
|
322.0
|
|
Other ABS
|
—
|
|
|
165.4
|
|
|
68.2
|
|
|
233.6
|
|
Total available-for-sale debt securities
|
—
|
|
|
8,326.5
|
|
|
4,472.9
|
|
|
12,799.4
|
|
Available-for-sale equity securities
|
—
|
|
|
101.9
|
|
|
85.6
|
|
|
187.5
|
|
Short-term investments
|
—
|
|
|
49.9
|
|
|
5.1
|
|
|
55.0
|
|
Derivative assets
|
—
|
|
|
118.5
|
|
|
—
|
|
|
118.5
|
|
Fair value investments [2]
|
18.4
|
|
|
40.2
|
|
|
19.0
|
|
|
77.6
|
|
Separate account assets
|
2,413.6
|
|
|
—
|
|
|
—
|
|
|
2,413.6
|
|
Total assets
|
$
|
2,432.0
|
|
|
$
|
8,637.0
|
|
|
$
|
4,582.6
|
|
|
$
|
15,651.6
|
|
Liabilities
|
|
|
|
|
|
|
|
Derivative liabilities
|
$
|
0.7
|
|
|
$
|
58.6
|
|
|
$
|
—
|
|
|
$
|
59.3
|
|
Embedded derivatives
|
—
|
|
|
—
|
|
|
170.5
|
|
|
170.5
|
|
Total liabilities
|
$
|
0.7
|
|
|
$
|
58.6
|
|
|
$
|
170.5
|
|
|
$
|
229.8
|
|
———————
|
|
[1]
|
Level 3 includes securities whose underlying collateral is an obligation of a U.S. government entity.
|
|
|
[2]
|
Fair value investments at
March 31, 2016
include
$46.8 million
of debt securities recorded at fair value. In addition, we have also elected the fair value option for equity securities backing our deferred compensation liabilities at
$18.4 million
as of
March 31, 2016
. Changes in the fair value of these assets are recorded through net investment income. Additionally,
$12.4 million
of assets relate to investment holdings of consolidated VIEs held at fair value.
|
There were no transfers of assets between Level 1 and Level 2 during the
three
months ended
March 31, 2016
.
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
12. Fair Value of Financial Instruments (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of Financial Instruments by Level:
|
December 31, 2015
|
($ in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
Available-for-sale debt securities
|
|
|
|
|
|
|
|
U.S. government and agency [1]
|
$
|
—
|
|
|
$
|
128.7
|
|
|
$
|
460.9
|
|
|
$
|
589.6
|
|
State and political subdivision
|
—
|
|
|
357.5
|
|
|
179.9
|
|
|
537.4
|
|
Foreign government
|
—
|
|
|
234.5
|
|
|
8.4
|
|
|
242.9
|
|
Corporate
|
—
|
|
|
4,933.6
|
|
|
3,408.6
|
|
|
8,342.2
|
|
CMBS
|
—
|
|
|
662.1
|
|
|
22.0
|
|
|
684.1
|
|
RMBS
|
—
|
|
|
1,223.9
|
|
|
22.3
|
|
|
1,246.2
|
|
CDO/CLO
|
—
|
|
|
308.3
|
|
|
1.2
|
|
|
309.5
|
|
Other ABS
|
—
|
|
|
161.5
|
|
|
77.3
|
|
|
238.8
|
|
Total available-for-sale debt securities
|
—
|
|
|
8,010.1
|
|
|
4,180.6
|
|
|
12,190.7
|
|
Available-for-sale equity securities
|
—
|
|
|
97.2
|
|
|
84.8
|
|
|
182.0
|
|
Short-term investments
|
—
|
|
|
159.8
|
|
|
5.0
|
|
|
164.8
|
|
Derivative assets
|
—
|
|
|
103.5
|
|
|
—
|
|
|
103.5
|
|
Fair value investments [2]
|
18.8
|
|
|
57.9
|
|
|
88.3
|
|
|
165.0
|
|
Separate account assets
|
2,536.4
|
|
|
—
|
|
|
—
|
|
|
2,536.4
|
|
Total assets
|
$
|
2,555.2
|
|
|
$
|
8,428.5
|
|
|
$
|
4,358.7
|
|
|
$
|
15,342.4
|
|
Liabilities
|
|
|
|
|
|
|
|
Derivative liabilities
|
$
|
0.4
|
|
|
$
|
48.9
|
|
|
$
|
—
|
|
|
$
|
49.3
|
|
Embedded derivatives
|
—
|
|
|
—
|
|
|
165.9
|
|
|
165.9
|
|
Total liabilities
|
$
|
0.4
|
|
|
$
|
48.9
|
|
|
$
|
165.9
|
|
|
$
|
215.2
|
|
———————
|
|
[1]
|
Level 3 includes securities whose underlying collateral is an obligation of a U.S. government entity.
|
|
|
[2]
|
Fair value investments at
December 31, 2015
include
$59.0 million
of debt securities recorded at fair value. In addition, we have also elected the fair value option for equity securities backing our deferred compensation liabilities at
$18.8 million
as of
December 31, 2015
. Changes in the fair value of these assets are recorded through net investment income. Additionally,
$87.2 million
of assets relate to investment holdings of consolidated VIEs held at fair value.
|
There were no transfers of assets between Level 1 and Level 2 during the
three
months ended
March 31, 2015
.
Available-for-sale debt securities as of
March 31, 2016
and
December 31, 2015
, respectively, are reported net of
$24.3 million
and
$28.2 million
of Level 2 investments included in discontinued operations assets on the consolidated balance sheets related to discontinued reinsurance operations.
The following tables present corporates carried at fair value and on a recurring basis by sector.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of Corporates by Level and Sector:
|
March 31, 2016
|
($ in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Corporates
|
|
|
|
|
|
|
|
Consumer
|
$
|
—
|
|
|
$
|
915.2
|
|
|
$
|
1,332.4
|
|
|
$
|
2,247.6
|
|
Energy
|
—
|
|
|
624.3
|
|
|
278.6
|
|
|
902.9
|
|
Financial services
|
—
|
|
|
1,802.0
|
|
|
394.0
|
|
|
2,196.0
|
|
Capital goods
|
—
|
|
|
603.1
|
|
|
292.5
|
|
|
895.6
|
|
Transportation
|
—
|
|
|
171.9
|
|
|
298.2
|
|
|
470.1
|
|
Utilities
|
—
|
|
|
448.9
|
|
|
744.1
|
|
|
1,193.0
|
|
Other
|
—
|
|
|
536.7
|
|
|
281.2
|
|
|
817.9
|
|
Total corporates
|
$
|
—
|
|
|
$
|
5,102.1
|
|
|
$
|
3,621.0
|
|
|
$
|
8,723.1
|
|
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
12. Fair Value of Financial Instruments (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of Corporates by Level and Sector:
|
December 31, 2015
|
($ in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Corporates
|
|
|
|
|
|
|
|
Consumer
|
$
|
—
|
|
|
$
|
895.6
|
|
|
$
|
1,249.6
|
|
|
$
|
2,145.2
|
|
Energy
|
—
|
|
|
636.4
|
|
|
293.2
|
|
|
929.6
|
|
Financial services
|
—
|
|
|
1,773.8
|
|
|
354.0
|
|
|
2,127.8
|
|
Capital goods
|
—
|
|
|
521.2
|
|
|
262.8
|
|
|
784.0
|
|
Transportation
|
—
|
|
|
175.9
|
|
|
284.5
|
|
|
460.4
|
|
Utilities
|
—
|
|
|
417.5
|
|
|
700.1
|
|
|
1,117.6
|
|
Other
|
—
|
|
|
513.2
|
|
|
264.4
|
|
|
777.6
|
|
Total corporates
|
$
|
—
|
|
|
$
|
4,933.6
|
|
|
$
|
3,408.6
|
|
|
$
|
8,342.2
|
|
There were
no
financial instruments carried at fair value on a non-recurring basis as of
March 31, 2016
and
December 31, 2015
.
Level 3 financial assets and liabilities
The following tables set forth a summary of changes in the fair value of our Level 3 financial assets and liabilities. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Transfers in and out of Level 3 occur at the beginning of each period. The securities which were transferred into Level 3 were due to decreased market observability of similar assets and/or changes to significant inputs. Transfers out of Level 3 were due to increased market activity for comparable instruments or observability of inputs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Financial Assets:
|
Three Months Ended March 31, 2016
|
($ in millions)
|
Balance,
beginning
of period
|
|
Purchases
|
|
Sales
|
|
Transfers
into
Level 3
|
|
Transfers
out of
Level 3
|
|
Realized
and
unrealized
gains
(losses)
included in
income [1]
|
|
Unrealized
gains
(losses)
included
in OCI
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency [2]
|
$
|
460.9
|
|
|
$
|
59.1
|
|
|
$
|
(20.2
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3.3
|
|
|
$
|
(36.6
|
)
|
|
$
|
466.5
|
|
State and political subdivision
|
179.9
|
|
|
26.8
|
|
|
(1.4
|
)
|
|
—
|
|
|
—
|
|
|
(3.1
|
)
|
|
67.1
|
|
|
269.3
|
|
Foreign government
|
8.4
|
|
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
8.3
|
|
Corporate
|
3,408.6
|
|
|
171.5
|
|
|
(64.7
|
)
|
|
7.3
|
|
|
(1.7
|
)
|
|
(5.3
|
)
|
|
105.3
|
|
|
3,621.0
|
|
CMBS
|
22.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7.7
|
)
|
|
—
|
|
|
(9.3
|
)
|
|
5.0
|
|
RMBS
|
22.3
|
|
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
1.8
|
|
|
24.1
|
|
CDO/CLO
|
1.2
|
|
|
9.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10.5
|
|
Other ABS
|
77.3
|
|
|
—
|
|
|
(0.8
|
)
|
|
5.3
|
|
|
(12.4
|
)
|
|
(0.2
|
)
|
|
(1.0
|
)
|
|
68.2
|
|
Total available-for-sale
debt securities
|
4,180.6
|
|
|
266.7
|
|
|
(87.4
|
)
|
|
12.6
|
|
|
(21.8
|
)
|
|
(5.2
|
)
|
|
127.4
|
|
|
4,472.9
|
|
Available-for-sale equity securities
|
84.8
|
|
|
1.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.9
|
)
|
|
85.6
|
|
Short-term investments
|
5.0
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5.1
|
|
Fair value investments
|
88.3
|
|
|
19.4
|
|
|
(0.7
|
)
|
|
—
|
|
|
(60.0
|
)
|
|
(28.0
|
)
|
|
—
|
|
|
19.0
|
|
Total assets
|
$
|
4,358.7
|
|
|
$
|
287.9
|
|
|
$
|
(88.1
|
)
|
|
$
|
12.6
|
|
|
$
|
(81.8
|
)
|
|
$
|
(33.2
|
)
|
|
$
|
126.5
|
|
|
$
|
4,582.6
|
|
———————
|
|
[1]
|
Reflected in realized investment gains and losses for all assets except fair value investments which are included in net investment income.
|
|
|
[2]
|
Includes securities whose underlying collateral is an obligation of a U.S. government entity.
|
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
12. Fair Value of Financial Instruments (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Financial Assets:
|
Three Months Ended March 31, 2015
|
($ in millions)
|
Balance,
beginning
of period
|
|
Purchases
|
|
Sales
|
|
Transfers
into
Level 3
|
|
Transfers
out of
Level 3
|
|
Realized
and
unrealized
gains
(losses)
included in
income [1]
|
|
Unrealized
gains
(losses)
included
in OCI
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency [2]
|
$
|
362.2
|
|
|
$
|
—
|
|
|
$
|
(2.1
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6.3
|
|
|
$
|
366.4
|
|
State and political subdivision
|
400.2
|
|
|
13.6
|
|
|
(2.2
|
)
|
|
—
|
|
|
(14.0
|
)
|
|
—
|
|
|
7.8
|
|
|
405.4
|
|
Foreign government
|
53.6
|
|
|
—
|
|
|
(0.2
|
)
|
|
4.2
|
|
|
(26.7
|
)
|
|
—
|
|
|
1.5
|
|
|
32.4
|
|
Corporate
|
4,403.9
|
|
|
220.3
|
|
|
(113.0
|
)
|
|
62.3
|
|
|
(285.2
|
)
|
|
2.1
|
|
|
63.7
|
|
|
4,354.1
|
|
CMBS
|
152.8
|
|
|
—
|
|
|
(0.1
|
)
|
|
8.5
|
|
|
(126.1
|
)
|
|
—
|
|
|
0.1
|
|
|
35.2
|
|
RMBS
|
470.3
|
|
|
0.3
|
|
|
(17.6
|
)
|
|
29.2
|
|
|
—
|
|
|
(0.2
|
)
|
|
(0.4
|
)
|
|
481.6
|
|
CDO/CLO
|
196.9
|
|
|
24.5
|
|
|
(18.4
|
)
|
|
—
|
|
|
—
|
|
|
0.5
|
|
|
2.0
|
|
|
205.5
|
|
Other ABS
|
245.1
|
|
|
—
|
|
|
(7.0
|
)
|
|
—
|
|
|
(29.2
|
)
|
|
(0.4
|
)
|
|
0.4
|
|
|
208.9
|
|
Total available-for-sale
debt securities
|
6,285.0
|
|
|
258.7
|
|
|
(160.6
|
)
|
|
104.2
|
|
|
(481.2
|
)
|
|
2.0
|
|
|
81.4
|
|
|
6,089.5
|
|
Available-for-sale equity securities
|
179.5
|
|
|
7.2
|
|
|
(1.7
|
)
|
|
—
|
|
|
—
|
|
|
(6.2
|
)
|
|
(3.3
|
)
|
|
175.5
|
|
Short-term investments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Fair value investments
|
190.0
|
|
|
0.4
|
|
|
(1.9
|
)
|
|
—
|
|
|
—
|
|
|
16.4
|
|
|
—
|
|
|
204.9
|
|
Total assets
|
$
|
6,654.5
|
|
|
$
|
266.3
|
|
|
$
|
(164.2
|
)
|
|
$
|
104.2
|
|
|
$
|
(481.2
|
)
|
|
$
|
12.2
|
|
|
$
|
78.1
|
|
|
$
|
6,469.9
|
|
———————
|
|
[1]
|
Reflected in realized investment gains and losses for all assets except fair value investments which are included in net investment income.
|
|
|
[2]
|
Includes securities whose underlying collateral is an obligation of a U.S. government entity.
|
|
|
|
|
|
|
|
|
|
Level 3 Financial Liabilities:
|
Embedded Derivative Liabilities
|
($ in millions)
|
Three Months Ended
March 31,
|
|
2016
|
|
2015
|
|
|
|
|
Balance, beginning of period
|
$
|
165.9
|
|
|
$
|
160.7
|
|
Net purchases / settlements
|
(3.8
|
)
|
|
4.6
|
|
Transfers into Level 3
|
—
|
|
|
—
|
|
Transfers out of Level 3
|
—
|
|
|
—
|
|
Realized (gains) losses
|
8.4
|
|
|
10.3
|
|
Balance, end of period
|
$
|
170.5
|
|
|
$
|
175.6
|
|
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
12. Fair Value of Financial Instruments (continued)
|
Significant unobservable inputs used in the fair value measurement of Level 3 assets are yield, prepayment rate, default rate and recovery rate. Keeping other inputs unchanged, an increase in yield, default rate or prepayment rate would decrease the fair value of the asset while an increase in recovery rate would result in an increase to the fair value of the asset. Yields are a function of the underlying U.S. Treasury rates and asset spreads, and changes in default and recovery rates are dependent on overall market conditions.
The following tables present quantitative estimates about unobservable inputs used in the fair value measurement of significant categories of internally priced assets.
|
|
|
|
|
|
|
|
|
|
|
Level 3 Assets: [1]
|
March 31, 2016
|
($ in millions)
|
Fair
Value
|
|
Valuation
Technique(s)
|
|
Unobservable
Input
|
|
Range
(Weighted Average)
|
|
|
|
|
|
|
|
|
U.S. government and agency
|
$
|
466.5
|
|
|
Discounted cash flow
|
|
Yield
|
|
1.29% - 4.57% (3.04%)
|
State and political subdivision
|
$
|
227.2
|
|
|
Discounted cash flow
|
|
Yield
|
|
1.62% - 4.44% (3.17%)
|
Foreign government
|
$
|
3.9
|
|
|
Discounted cash flow
|
|
Yield
|
|
1.67%
|
Corporate
|
$
|
3,324.8
|
|
|
Discounted cash flow
|
|
Yield
|
|
1.08% - 13.87% (3.26%)
|
Other ABS
|
$
|
33.2
|
|
|
Discounted cash flow
|
|
Yield
|
|
0.68% - 2.62% (1.87%)
|
Fair value investments
|
$
|
6.6
|
|
|
Discounted cash flow
|
|
Default rate
|
|
0.30%
|
|
|
|
|
|
Recovery rate
|
|
42.00%
|
———————
|
|
[1]
|
Excludes Level 3 assets which are valued based upon non-binding independent third-party valuations or third-party price information for which unobservable inputs are not reasonably available to us.
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Assets: [1]
|
December 31, 2015
|
($ in millions)
|
Fair
Value
|
|
Valuation
Technique(s)
|
|
Unobservable
Input
|
|
Range
(Weighted Average)
|
|
|
|
|
|
|
|
|
U.S. government and agency
|
$
|
459.9
|
|
|
Discounted cash flow
|
|
Yield
|
|
1.44% - 4.83% (3.52%)
|
State and political subdivision
|
$
|
179.9
|
|
|
Discounted cash flow
|
|
Yield
|
|
2.04% - 14.79% (4.14%)
|
Foreign government
|
$
|
4.1
|
|
|
Discounted cash flow
|
|
Yield
|
|
2.06%
|
Corporate
|
$
|
3,135.8
|
|
|
Discounted cash flow
|
|
Yield
|
|
1.11% - 11.20% (3.75%)
|
Other ABS
|
$
|
34.4
|
|
|
Discounted cash flow
|
|
Yield
|
|
1.07% - 3.20% (2.14%)
|
Fair value investments
|
$
|
6.6
|
|
|
Discounted cash flow
|
|
Default rate
|
|
0.15%
|
|
|
|
|
|
Recovery rate
|
|
43.00%
|
———————
|
|
[1]
|
Excludes Level 3 assets which are valued based upon non-binding independent third-party valuations or third-party price information for which unobservable inputs are not reasonably available to us.
|
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
12. Fair Value of Financial Instruments (continued)
|
Significant unobservable inputs used in the fair value measurement of variable annuity (“VA”) GMAB and GMWB type liabilities are equity volatility, swap curve, mortality and lapse rates and an adjustment for non-performance risk. Keeping other inputs unchanged, an increase in the equity volatility would increase the fair value of the liability while an increase in the swap curve or credit standing adjustment (“CSA”) would result in a decrease to the fair value of the liability. The impact of changes in mortality and lapse rates are dependent on overall market conditions. The fair value of fixed indexed annuity and indexed universal life embedded derivative related to index credits is calculated using the swap curve, future option budget, mortality and lapse rates, as well as an adjustment for non-performance risk. Keeping other inputs unchanged, an increase in swap rates and the adjustment for non-performance risk would result in a decrease in the embedded derivative liability, and an increase in the option budget, lapse rates, or mortality will generally result in an increase in the embedded derivative liability.
The following tables present quantitative estimates about unobservable inputs used in the fair value measurement of internally priced liabilities.
|
|
|
|
|
|
|
|
|
|
|
Level 3 Liabilities:
|
March 31, 2016
|
($ in millions)
|
Fair
Value
|
|
Valuation
Technique(s)
|
|
Unobservable
Input
|
|
Range
|
|
|
|
|
|
|
|
|
Embedded derivatives (FIA)
|
$
|
155.4
|
|
|
Budget method
|
|
Swap curve
|
|
0.37% - 1.94
|
|
|
|
|
|
Mortality rate
|
|
100% or 90 % 2012 IAM basic table
with scale G2
|
|
|
|
|
|
Lapse rate
|
|
0.50% - 32.50%
|
|
|
|
|
|
CSA
|
|
4.53%
|
Embedded derivatives
(GMAB / GMWB / COMBO)
|
$
|
15.1
|
|
|
Risk neutral stochastic
valuation methodology
|
|
Volatility surface
|
|
2.98% - 66.82%
|
|
|
|
|
|
Swap curve
|
|
0.32% - 2.20%
|
|
|
|
|
|
Mortality rate
|
|
110% 2012 IAM basic table
with scale G2
|
|
|
|
|
|
Lapse rate
|
|
0.00% - 53.00%
|
|
|
|
|
|
CSA
|
|
4.53%
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Liabilities:
|
December 31, 2015
|
($ in millions)
|
Fair
Value
|
|
Valuation
Technique(s)
|
|
Unobservable
Input
|
|
Range
|
|
|
|
|
|
|
|
|
Embedded derivatives (FIA)
|
$
|
156.8
|
|
|
Budget method
|
|
Swap curve
|
|
0.55% - 2.46%
|
|
|
|
|
|
Mortality rate
|
|
100% or 90% 2012 IAM basic table
with scale G2
|
|
|
|
|
|
Lapse rate
|
|
0.50% - 32.50%
|
|
|
|
|
|
CSA
|
|
4.45%
|
Embedded derivatives
(GMAB / GMWB / COMBO)
|
$
|
9.1
|
|
|
Risk neutral stochastic
valuation methodology
|
|
Volatility surface
|
|
4.80% - 72.02%
|
|
|
|
|
|
Swap curve
|
|
0.57% - 2.68%
|
|
|
|
|
|
Mortality rate
|
|
110% 2012 IAM basic table
with scale G2
|
|
|
|
|
|
Lapse rate
|
|
0.00% - 53.00%
|
|
|
|
|
|
CSA
|
|
4.45%
|
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
12. Fair Value of Financial Instruments (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Assets and Liabilities by Pricing Source:
|
March 31, 2016
|
($ in millions)
|
Internal [1]
|
|
External [2]
|
|
Total
|
Assets
|
|
|
|
|
|
Available-for-sale debt securities
|
|
|
|
|
|
U.S. government and agency [3]
|
$
|
466.5
|
|
|
$
|
—
|
|
|
$
|
466.5
|
|
State and political subdivision
|
227.2
|
|
|
42.1
|
|
|
269.3
|
|
Foreign government
|
3.9
|
|
|
4.4
|
|
|
8.3
|
|
Corporate
|
3,324.8
|
|
|
296.2
|
|
|
3,621.0
|
|
CMBS
|
—
|
|
|
5.0
|
|
|
5.0
|
|
RMBS
|
—
|
|
|
24.1
|
|
|
24.1
|
|
CDO/CLO
|
—
|
|
|
10.5
|
|
|
10.5
|
|
Other ABS
|
33.2
|
|
|
35.0
|
|
|
68.2
|
|
Total available-for-sale debt securities
|
4,055.6
|
|
|
417.3
|
|
|
4,472.9
|
|
Available-for-sale equity securities
|
—
|
|
|
85.6
|
|
|
85.6
|
|
Short-term investments
|
—
|
|
|
5.1
|
|
|
5.1
|
|
Fair value investments
|
6.6
|
|
|
12.4
|
|
|
19.0
|
|
Total assets
|
$
|
4,062.2
|
|
|
$
|
520.4
|
|
|
$
|
4,582.6
|
|
Liabilities
|
|
|
|
|
|
Embedded derivatives
|
$
|
170.5
|
|
|
$
|
—
|
|
|
$
|
170.5
|
|
Total liabilities
|
$
|
170.5
|
|
|
$
|
—
|
|
|
$
|
170.5
|
|
———————
|
|
[1]
|
Represents valuations reflecting both internally-derived and market inputs, as well as third-party information or quotes.
|
|
|
[2]
|
Represents unadjusted prices from independent pricing services, third-party financial statements and independent indicative broker quotes where pricing inputs are not readily available.
|
|
|
[3]
|
Includes securities whose underlying collateral is an obligation of a U.S. government entity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Assets and Liabilities by Pricing Source:
|
December 31, 2015
|
($ in millions)
|
Internal [1]
|
|
External [2]
|
|
Total
|
Assets
|
|
|
|
|
|
Available-for-sale debt securities
|
|
|
|
|
|
U.S. government and agency [3]
|
$
|
459.9
|
|
|
$
|
1.0
|
|
|
$
|
460.9
|
|
State and political subdivision
|
179.9
|
|
|
—
|
|
|
179.9
|
|
Foreign government
|
4.1
|
|
|
4.3
|
|
|
8.4
|
|
Corporate
|
3,135.8
|
|
|
272.8
|
|
|
3,408.6
|
|
CMBS
|
—
|
|
|
22.0
|
|
|
22.0
|
|
RMBS
|
—
|
|
|
22.3
|
|
|
22.3
|
|
CDO/CLO
|
—
|
|
|
1.2
|
|
|
1.2
|
|
Other ABS
|
34.4
|
|
|
42.9
|
|
|
77.3
|
|
Total available-for-sale debt securities
|
3,814.1
|
|
|
366.5
|
|
|
4,180.6
|
|
Available-for-sale equity securities
|
—
|
|
|
84.8
|
|
|
84.8
|
|
Short-term investments
|
—
|
|
|
5.0
|
|
|
5.0
|
|
Fair value investments
|
6.6
|
|
|
81.7
|
|
|
88.3
|
|
Total assets
|
$
|
3,820.7
|
|
|
$
|
538.0
|
|
|
$
|
4,358.7
|
|
Liabilities
|
|
|
|
|
|
Embedded derivatives
|
$
|
165.9
|
|
|
$
|
—
|
|
|
$
|
165.9
|
|
Total liabilities
|
$
|
165.9
|
|
|
$
|
—
|
|
|
$
|
165.9
|
|
———————
|
|
[1]
|
Represents valuations reflecting both internally-derived and market inputs, as well as third-party information or quotes.
|
|
|
[2]
|
Represents unadjusted prices from independent pricing services, third-party financial statements and independent indicative broker quotes where pricing inputs are not readily available.
|
|
|
[3]
|
Includes securities whose underlying collateral is an obligation of a U.S. government entity.
|
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
12. Fair Value of Financial Instruments (continued)
|
Financial instruments not carried at fair value
The Company is required by U.S. GAAP to disclose the fair value of certain financial instruments including those that are not carried at fair value. The following table discloses the Company’s financial instruments where the carrying amounts and fair values differ:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amounts and Fair Values
of Financial Instruments:
|
Fair Value
Hierarchy
Level
|
|
March 31, 2016
|
|
December 31, 2015
|
($ in millions)
|
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
Policy loans
|
Level 3
|
|
$
|
2,390.7
|
|
|
$
|
2,376.8
|
|
|
$
|
2,382.5
|
|
|
$
|
2,368.7
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
Investment contracts
|
Level 3
|
|
$
|
4,335.9
|
|
|
$
|
4,331.1
|
|
|
$
|
4,333.2
|
|
|
$
|
4,334.6
|
|
7.15 % Surplus notes
|
Level 3
|
|
$
|
124.8
|
|
|
$
|
80.9
|
|
|
$
|
124.7
|
|
|
$
|
91.4
|
|
7.45% Senior unsecured bonds
|
Level 2
|
|
$
|
247.0
|
|
|
$
|
182.7
|
|
|
$
|
247.0
|
|
|
$
|
206.1
|
|
13. Income Taxes
It is our general policy to estimate taxes for interim periods based on estimated annual effective tax rates which are derived, in part, from expected annual pre-tax income. However, the change in the deferred income tax asset balances, income tax benefit and expense and related valuation allowance for the three months ended
March 31, 2016
have been computed based on the first
three
months of
2016
as a discrete period.
The tax benefit of
$18.6 million
for the three months ended
March 31, 2016
is comprised of a
$0.2 million
current tax expense and a
$18.8 million
deferred tax benefit. The deferred tax benefit results from the application of the intraperiod tax allocation rules that allow for the benefitting of a current year loss in continuing operations when an increase in the valuation allowance is avoided due to the existence of current year income reported elsewhere in the financial statements (e.g., discontinued operations, other comprehensive income).
We recorded a deferred tax asset, net of deferred tax liabilities and valuation allowances, of
$76.6 million
as of
March 31, 2016
. Consistent with prior periods, we have recorded a full valuation allowance against all categories of net deferred tax assets other than gross unrealized losses on available-for-sale debt securities, due to the significant negative evidence of historical cumulative U.S. GAAP losses and the uncertainty of consistent future U.S. GAAP earnings.
We have concluded that a valuation allowance on the deferred tax assets attributable to available-for-sale debt securities with gross unrealized losses was not required due to our ability and intent to hold these securities until recovery of fair value or contractual maturity, thereby avoiding realization of taxable capital losses. This conclusion is also consistent with prior periods.
Consistent with the above, for the three months ended
March 31, 2016
, we recognized a net increase in the valuation allowance of
$27.3 million
. In accordance with the intraperiod tax allocation rules, the change in the valuation allowance has been allocated to various financial statement components of income or loss. The net deferred tax assets decreased by
$29.0 million
for the three months ended
March 31, 2016
, which was attributable to available-for-sale debt securities with gross unrealized losses.
The Company and its subsidiaries file consolidated, combined, unitary or separate income tax returns in the U.S. federal, various state and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2013.
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
13. Income Taxes (continued)
|
Based upon the timing and status of our current examinations by taxing authorities, we do not believe that it is reasonably possible that any changes to the balance of unrecognized tax benefits occurring within the next 12 months will result in a significant change to the results of operations, financial condition or liquidity. In addition, we do not anticipate that there will be additional payments made or refunds received within the next 12 months with respect to the years under audit. We do not anticipate any increases to the existing unrecognized tax benefits that would have a significant impact on the financial position of the Company.
As part of the intercompany tax sharing agreement, the holding company is required to hold funds in escrow for the benefit of Phoenix Life in the event Phoenix Life incurs future taxable losses. In accordance with its regulatory obligation, as of
March 31, 2016
, the holding company held
$76.2 million
in escrow consisting of treasury stock, a surplus note issued by PHL Variable and
$23.8 million
of cash from the holding company. The escrow amount is primarily attributable to cash due to the holding company for losses utilized and benefited in the 2013 tax return.
14. Accumulated Other Comprehensive Income (Loss)
Changes in each component of AOCI attributable to the Company for the periods ended
March 31, 2016
and
2015
are as follows below (net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss)
Attributable to The Phoenix Companies, Inc.:
($ in millions)
|
Net
Unrealized
Gains / (Losses)
on Investments
where
Credit-related
OTTI was
Recognized [1]
|
|
Net
Unrealized
Gains / (Losses)
on All Other
Investments [1]
|
|
Net
Pension
Liability
Adjustments
|
|
Total
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2015
|
$
|
4.3
|
|
|
$
|
24.0
|
|
|
$
|
(294.5
|
)
|
|
$
|
(266.2
|
)
|
Change in component during the period before reclassifications
|
(8.9
|
)
|
|
5.2
|
|
|
1.1
|
|
|
(2.6
|
)
|
Amounts reclassified from AOCI
|
8.1
|
|
|
(2.0
|
)
|
|
1.7
|
|
|
7.8
|
|
Balance as of March 31, 2016
|
$
|
3.5
|
|
|
$
|
27.2
|
|
|
$
|
(291.7
|
)
|
|
$
|
(261.0
|
)
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2014
|
$
|
9.9
|
|
|
$
|
54.8
|
|
|
$
|
(299.1
|
)
|
|
$
|
(234.4
|
)
|
Change in component during the period before reclassifications
|
(0.5
|
)
|
|
(3.6
|
)
|
|
—
|
|
|
(4.1
|
)
|
Amounts reclassified from AOCI
|
(1.2
|
)
|
|
1.7
|
|
|
1.4
|
|
|
1.9
|
|
Balance as of March 31, 2015
|
$
|
8.2
|
|
|
$
|
52.9
|
|
|
$
|
(297.7
|
)
|
|
$
|
(236.6
|
)
|
———————
|
|
[1]
|
See Note 7 to these consolidated interim unaudited financial statements for additional information regarding offsets to net unrealized investment gains and losses which include policyholder dividend obligation, DAC and other actuarial offsets, and deferred income tax expense (benefit).
|
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
14. Accumulated Other Comprehensive Income (Loss) (continued)
|
Reclassifications from AOCI consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
AOCI
|
|
Amounts Reclassified
from AOCI
|
|
Affected Line Item in the
Consolidated Statements of Operations
and Comprehensive Income
|
($ in millions)
|
|
Three Months Ended
March 31,
|
|
|
|
|
2016
|
|
2015
|
|
|
Net unrealized gains / (losses) on
investments where credit-related
OTTI was recognized:
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
(12.4
|
)
|
|
$
|
1.9
|
|
|
Net realized capital gains (losses)
|
|
|
(12.4
|
)
|
|
1.9
|
|
|
Total before income taxes
|
|
|
(4.3
|
)
|
|
0.7
|
|
|
Income tax expense (benefit)
|
|
|
$
|
(8.1
|
)
|
|
$
|
1.2
|
|
|
Net income (loss)
|
Net unrealized gains / (losses) on
all other investments:
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
3.1
|
|
|
$
|
(2.7
|
)
|
|
Net realized capital gains (losses)
|
|
|
3.1
|
|
|
(2.7
|
)
|
|
Total before income taxes
|
|
|
1.1
|
|
|
(1.0
|
)
|
|
Income tax expense (benefit)
|
|
|
$
|
2.0
|
|
|
$
|
(1.7
|
)
|
|
Net income (loss)
|
Net pension liability adjustments:
|
|
|
|
|
|
|
Amortization of actuarial gains (losses)
|
|
$
|
(2.7
|
)
|
|
$
|
(2.4
|
)
|
|
Other operating expense
|
Amortization of prior service costs
|
|
0.1
|
|
|
0.3
|
|
|
Other operating expense
|
|
|
(2.6
|
)
|
|
(2.1
|
)
|
|
Total before income taxes
|
|
|
(0.9
|
)
|
|
(0.7
|
)
|
|
Income tax expense (benefit)
|
|
|
$
|
(1.7
|
)
|
|
$
|
(1.4
|
)
|
|
Net income (loss)
|
|
|
|
|
|
|
|
Total amounts reclassified from AOCI
|
|
$
|
(7.8
|
)
|
|
$
|
(1.9
|
)
|
|
Net income (loss)
|
15. Employee Benefit Plans and Employment Agreements
Pension and other post-employment benefits
We provide our employees with post-employment benefits that include retirement benefits, through pension and savings plans, and other benefits, including health care and life insurance. The components of employee pension plan, supplemental plans and other post-employment benefit costs follow:
|
|
|
|
|
|
|
|
|
Components of Employee Pension Plan and Supplemental Plans Benefit Expense:
|
Three Months Ended
March 31,
|
($ in millions)
|
2016
|
|
2015
|
|
|
|
|
Service cost
|
$
|
0.9
|
|
|
$
|
0.8
|
|
Interest cost
|
8.9
|
|
|
8.6
|
|
Expected return on plan assets
|
(8.8
|
)
|
|
(10.0
|
)
|
Net loss amortization
|
2.8
|
|
|
2.5
|
|
Net periodic benefit costs
|
$
|
3.8
|
|
|
$
|
1.9
|
|
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
15. Employee Benefit Plans and Employment Agreements (continued)
|
|
|
|
|
|
|
|
|
|
Components of Other Post-Employment Benefit Expense:
|
Three Months Ended
March 31,
|
($ in millions)
|
2016
|
|
2015
|
|
|
|
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
0.2
|
|
|
0.4
|
|
Net gain amortization
|
(0.1
|
)
|
|
(0.1
|
)
|
Prior service cost amortization
|
(0.1
|
)
|
|
(0.3
|
)
|
Net periodic benefit costs
|
$
|
—
|
|
|
$
|
—
|
|
For the three months ended
March 31, 2016
, other comprehensive loss included net unrealized gains of
$1.8 million
, net of taxes, relating to the amortization of net prior service costs and net actuarial gains/losses. Effective March 31, 2010, all benefit accruals under all of our funded and unfunded defined benefit plans were frozen.
On August 8, 2014, the Highway and Transportation Funding Act of 2014 was enacted into law. The law extended certain pension funding provisions originally included in the Moving Ahead for Progress in the 21st Century Act (MAP-21). The Company took advantage of this through the
first
quarter of
2016
and does not expect to make any contributions for the remainder of the year.
Savings plans
During the three months ended
March 31, 2016
and
2015
, we incurred costs of
$1.5 million
and
$1.5 million
, respectively, for contributions to our savings plans.
16. Earnings Per Share
The following table presents a reconciliation of shares used in calculating basic earnings (loss) per common share to those used in calculating diluted earnings (loss) per common share.
|
|
|
|
|
|
|
Shares Used in Calculation of Earnings Per Share:
|
Three Months Ended
March 31,
|
(shares in thousands)
|
2016
|
|
2015
|
|
|
|
|
Weighted-average common shares outstanding
|
5,751
|
|
|
5,751
|
|
Weighted-average effect of dilutive potential common shares:
|
|
|
|
Restricted stock units
|
40
|
|
|
—
|
|
Employee stock options
|
—
|
|
|
—
|
|
Potential common shares
|
40
|
|
|
—
|
|
Less: Potential common shares excluded from
calculation due to net losses
|
40
|
|
|
—
|
|
Dilutive potential common shares
|
—
|
|
|
—
|
|
Weighted-average common shares outstanding,
including
dilutive potential common shares
|
5,751
|
|
|
5,751
|
|
As a result of the net loss from continuing operations for the three months ended
March 31, 2016
and
2015
, we are required to use basic weighted-average common shares outstanding in the calculation of diluted earnings per share for those periods, since the inclusion of shares of RSUs and options would have been anti-dilutive to the earnings per share calculation.
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
|
17. Segment Information
Life and Annuity derives revenue from premiums, fee income and cost of insurance (“COI”) charges, net investment income and realized gains (losses). Saybrus derives revenue primarily from fees collected for advisory and distribution services.
|
|
|
|
|
|
|
|
|
Segment Information
on Revenues:
|
Three Months Ended
March 31,
|
($ in millions)
|
2016
|
|
2015
|
|
|
|
|
Life and Annuity
|
$
|
400.3
|
|
|
$
|
399.8
|
|
Saybrus Partners [1]
|
11.5
|
|
|
9.0
|
|
Less: Intercompany revenues [2]
|
1.7
|
|
|
3.4
|
|
Total revenues
|
$
|
410.1
|
|
|
$
|
405.4
|
|
———————
|
|
[1]
|
Includes intercompany commission revenue of
$1.7 million
and
$3.4 million
for the three months ended
March 31, 2016
and
2015
, respectively.
|
|
|
[2]
|
All intercompany balances are eliminated in consolidating the financial statements.
|
Operating income is a non-U.S. GAAP financial measure. Management believes that these measures provide additional insight into the underlying trends in our operations; however, our non-U.S. GAAP financial measures should not be considered as substitutes for net income or measures that are derived from or incorporate net income and may be different from similarly titled measures of other companies. Investors should evaluate both U.S. GAAP and non-U.S. GAAP financial measures when reviewing our performance. Operating income is calculated by excluding realized investment gains (losses) as their amount and timing may be subject to management’s investment decisions.
|
|
|
|
|
|
|
|
|
Results of Operations by Segment as Reconciled to
Consolidated Net Income (Loss):
|
Three Months Ended
March 31,
|
($ in millions)
|
2016
|
|
2015
|
|
|
|
|
Life and Annuity operating income (loss)
|
$
|
(46.9
|
)
|
|
$
|
(59.4
|
)
|
Saybrus Partners operating income (loss)
|
0.1
|
|
|
0.8
|
|
Less: Applicable income tax expense (benefit)
|
(18.6
|
)
|
|
(2.2
|
)
|
Income (loss) from discontinued operations, net of income taxes
|
0.5
|
|
|
(0.5
|
)
|
Net realized gains (losses)
|
(15.5
|
)
|
|
(16.1
|
)
|
Less: Net income (loss) attributable to noncontrolling interests
|
(0.4
|
)
|
|
1.0
|
|
Net income (loss)
|
$
|
(42.8
|
)
|
|
$
|
(74.0
|
)
|
We have not provided asset information for the segments. The assets attributable to Saybrus are not significant relative to the assets of our consolidated balance sheets and are not utilized by the chief operating decision maker. All third-party interest revenue and interest expense of the Company reside within the Life and Annuity segment.
18. Discontinued Operations
Discontinued Reinsurance Operations
In 1999, we discontinued our reinsurance operations through a combination of sale, reinsurance and placement of certain retained group accident and health reinsurance business into run-off. We adopted a formal plan to stop writing new contracts covering these risks and to end the existing contracts as soon as those contracts would permit. However, we remain liable for claims under contracts which have not been commuted.
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
18. Discontinued Operations (continued)
|
We have established reserves for claims and related expenses that we expect to pay on our discontinued group accident and health reinsurance business. These reserves are 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 we believe we will collect from our retrocessionaires and the likely legal and administrative costs of winding down the business. Our total policy liabilities and accruals were
$33.6 million
and
$35.9 million
as of
March 31, 2016
and
December 31, 2015
, respectively. Our total amounts recoverable from retrocessionaires related to paid losses were
$0.7 million
and
$0.7 million
as of
March 31, 2016
and
December 31, 2015
, respectively. Gains of
$0.7 million
and losses of
$0.5 million
were recognized during the three months ended
March 31, 2016
and
2015
, respectively, primarily due to normal run-off activity.
19. Contingent Liabilities
Litigation and arbitration
The Company is regularly involved in litigation and arbitration, both as a defendant and as a plaintiff. The litigation and arbitration naming the Company as a defendant ordinarily involves our activities as an insurer, employer, investor, investment advisor or taxpayer.
It is not feasible to predict or determine the ultimate outcome of all legal or arbitration proceedings or to provide reasonable ranges of potential losses. Management of the Company believes that the ultimate outcome of our litigation and arbitration matters are not likely, either individually or in the aggregate, to have a material adverse effect on the financial condition of the Company beyond the amounts already reported in these financial statements. However, given the large or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation and arbitration, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on the results of operations or cash flows in particular quarterly or annual periods.
Securities and Exchange Commission (“SEC”) Cease-and-Desist Order
Phoenix and PHL Variable are subject to an SEC Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order ,which was approved by the SEC in March 2014 (the “March 2014 Order”) and was subsequently amended by an amended SEC administrative order approved by the SEC in August 2014 (the March 2014 Order, as amended, the “Amended Order”). The Amended Order and the March 2014 Order (collectively, the “Orders”), directed Phoenix and PHL Variable to cease and desist from committing or causing any violations and any future violations of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder and Section 15(d) of the Exchange Act and Rules 15d-1 and 15d-13 thereunder. Phoenix and PHL Variable remain subject to these obligations. Pursuant to the Orders, Phoenix and PHL Variable were required to file certain periodic SEC reports in accordance with the timetables set forth in the Orders. All of such filings have been made. Phoenix and PHL Variable paid civil monetary penalties to the SEC in the aggregate amount of
$1.1 million
pursuant to the terms of the Orders in 2014.
Cases Brought by Policy Investors
On August 2, 2012, Lima LS PLC filed a complaint against Phoenix, Phoenix Life, PHL Variable, James D. Wehr, Philip K. Polkinghorn, Edward W. Cassidy, Dona D. Young and other unnamed defendants in the United States District Court for the District of Connecticut (Case No. CV12-01122). On July 1, 2013, the defendants’ motion to dismiss the complaint was granted in part and denied in part. Thereafter, on July 31, 2013, the plaintiff served an amended complaint against the same defendants, with the exception that Mr. Cassidy was dropped as a defendant. The plaintiffs allege that Phoenix Life and PHL Variable promoted certain policy sales knowing that the policies would ultimately be owned by investors and then challenging the validity of these policies or denying claims submitted on these policies. Plaintiffs are seeking damages, including punitive and treble damages, attorneys’ fees and a declaratory judgment. We believe we have meritorious defenses against this lawsuit and we intend to vigorously defend against these claims. The outcome of this litigation and any potential losses are uncertain.
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
19. Contingent Liabilities (continued)
|
Cost of Insurance Cases
On November 18, 2011, Martin Fleisher and another plaintiff (the “Fleisher Litigation”), on behalf of themselves and others similarly situated, filed suit against Phoenix Life in the United States District Court for the Southern District of New York (C.A. No. 1:11-cv-08405-CM-JCF (U.S. Dist. Ct; S.D.N.Y.)) challenging cost of insurance (“COI”) rate adjustments implemented by Phoenix Life in 2010 and 2011 in certain universal life insurance policies. The complaint sought damages for breach of contract. The class certified by the court was limited to holders of Phoenix Life policies issued in New York subject to New York law and subject to Phoenix Life’s 2011 COI rate adjustment.
PHL Variable has been named as a defendant in
six
actions challenging its COI rate adjustments in certain universal life insurance policies implemented concurrently with the Phoenix Life adjustments. Phoenix Life and PHL Variable are referred to as the “Phoenix Life Companies.”
Five
cases have been brought against PHL Variable, while
one
case has been brought against both PHL Variable and Phoenix Life. These
six
cases, only one of which is styled as a class action, have been brought by (1) Tiger Capital LLC (C.A. No. 1:12-cv- 02939-CM-JCF; U.S. Dist. Ct; S.D.N.Y., complaint filed on March 14, 2012; the “Tiger Capital Litigation”); (2-5) U.S. Bank National Association, as securities intermediary for Lima Acquisition LP ((2: C.A. No. 1:12-cv-06811-CM-JCF; U.S. Dist. Ct; S.D.N.Y., complaint filed on November 16, 2011; 3: C.A. No. 1:13-cv-01580-CM-JCF; U.S. Dist. Ct; S.D.N.Y., complaint filed on March 8, 2013; collectively, the “U.S. Bank N.Y. Litigations”); (4: C.A. No. 3:14-cv-00555-WWE; U.S. Dist. Ct; D. Conn., complaint originally filed on March 6, 2013, in the District of Delaware and transferred by order dated April 22, 2014, to the District of Connecticut; and 5: C.A. No. 3:14-cv-01398-WWE, U.S. Dist. Ct; D. Conn., complaint filed on September 23, 2014, and amended on October 16, 2014, to add Phoenix Life as a defendant, and consolidated with No. 3:14-cv-00555-WWE (collectively the “U.S. Bank Conn. Litigations”)); and (6) SPRR LLC (C.A. No. 1:14-cv-8714-CM; U.S. Dist. Ct.; S.D.N.Y., complaint filed on October 31, 2014; the “SPRR Litigation”). SPRR LLC filed suit against PHL Variable, on behalf of itself and others similarly situated, challenging COI rate adjustments implemented by PHL Variable in 2011.
The Tiger Capital Litigation, the
two
U.S. Bank N.Y. Litigations and the SPRR Litigation were assigned or reassigned to the same judge as the Fleisher Litigation. The plaintiff in the Tiger Capital Litigation sought damages for breach of contract and declaratory relief. The plaintiff in the U.S. Bank N.Y. Litigations and U.S. Bank Conn. Litigations sought damages and attorneys’ fees for breach of contract and other common law and statutory claims. The plaintiff in the SPRR Litigation sought damages for breach of contract for a nationwide class of policyholders.
The Phoenix Life Companies reached an agreement as of April 30, 2015, memorialized in a formal settlement agreement executed on May 29, 2015, with SPRR, LLC, Martin Fleisher, as trustee of the Michael Moss Irrevocable Life Insurance Trust II, and Jonathan Berck, as trustee of the John L. Loeb, Jr. Insurance Trust (collectively, the SPRR Litigation and the Fleisher Litigation plaintiffs referred to as the “Plaintiffs”), to resolve the Fleisher Litigation and SPRR Litigation (the “Settlement”). A motion for preliminary approval of the Settlement was filed with the United States District Court for the Southern District of New York on May 29, 2015 and on June 3, 2015, the court granted preliminary approval of the Settlement and ordered notice be given to class members. The proposed Settlement class consists of all policyholders that were subject to the 2010 and 2011 COI rate adjustments (collectively, the “Settlement Class”), including the policies within the above-named COI cases. The Phoenix Life Companies agreed to pay a total of
$48.5 million
, as reduced for any opt-outs, in connection with the Settlement. The Phoenix Life Companies agreed not to impose additional increases to COI rates on policies participating in the Settlement Class through the end of 2020, and not to challenge the validity of policies participating in the Settlement Class for lack of insurable interest or misrepresentations in the policy applications. Under the Settlement, policyholders who are members of the Settlement Class, including those which have filed individual actions relating to COI rate adjustments, were eligible to opt out of the Settlement and separately litigate their claims. The opt-out period expired on July 17, 2015 and opt-out notices have been received by the Phoenix Life Companies, including from U.S. Bank, a party to
four
COI cases. On September 9, 2015, the judge in the Fleisher and SPRR Litigations entered an order approving of the Settlement and final judgment was entered on December 9, 2015.
On June 3, 2015, the parties to the Tiger Capital Litigation advised the court of a settlement of the Tiger Capital Litigation, which includes Tiger Capital, LLC’s participation in the class Settlement. The settlement of the Tiger Capital Litigation was on a basis that will not have a material impact on the Company’s financial statements. The Tiger Capital Litigation was closed by the court on October 21, 2015
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
19. Contingent Liabilities (continued)
|
On September 28, 2015, the Plaintiff in the U.S. Bank N.Y. Litigations and PHL Variable filed a joint stipulation of dismissal of the U.S. Bank N.Y. Litigations with prejudice pursuant to an agreement to settle. The U.S. Bank Conn. Litigations are proceeding, and the Plaintiff seeks damages and attorney’s fees for breach of contract and other common law and statutory claims.
During the third quarter, the Company recorded additional litigation charges related to these matters. In addition, the Company has adjusted its actuarial reserves to reflect the estimated impact on future revenues of these settlement activities.
Complaints to state insurance departments regarding PHL Variable’s COI rate adjustments have also prompted regulatory inquiries or investigations in several states, with
two
of such states (California and Wisconsin) issuing letters directing PHL Variable to take remedial action in response to complaints by a single policyholder. PHL Variable disagrees with both states’ positions. On March 23, 2015, an Administrative Law Judge (“ALJ”) in Wisconsin ordered PHL Variable to pay restitution to current and former owners of
seven
policies and imposed a fine on PHL Variable which, in a total amount, does not have a material impact on PHL Variable’s financial position (Office of the Commissioner of Insurance Case No. 13- C35362). PHL Variable disagrees with the ALJ’s determination and has appealed the order.
For any cases or regulatory directives not resolved by the Settlement, Phoenix Life and PHL Variable believe that they have meritorious defenses against all of these lawsuits and regulatory directives and intend to vigorously defend against them, including by appeal if necessary. For any matters not resolved by the Settlement, the outcome is uncertain and any potential losses cannot be reasonably estimated.
Cases Brought by Policyholders
On October 30, 2009, Brian S. Shevlin, Keith P. Shevlin, and Erin Taylor (the “Shevlins” or “Plaintiffs”) brought a purported class action suit against Phoenix Life and Phoenix (collectively “Defendants”) in the Superior Court of New Jersey, Mercer County, Brian S. Shevlin at al. v. Phoenix Life Insurance et al., Docket No. MER-L-2792-09. The Shevlins, on behalf of themselves and a class of owners of closed block policies established upon the demutualization of Phoenix Life in 2001, challenged the reduction of dividends on those policies following 2006 and 2009 dividend scale changes. Defendants removed the suit to the United States District Court for the District of New Jersey (Case No. 09-cv-06323). On August 24, 2010, the District Court partially granted and partially denied Defendants’ motion to dismiss, and shortly thereafter Plaintiffs filed a Second Amended Complaint. Plaintiffs allege that the reduction of dividends breached the terms of their policies with Phoenix Life, and unjustly enriched Phoenix. On June 30, 2014, the court denied Phoenix’s motion for summary judgment, and instructed the parties to proceed to brief class certification. On February 9, 2016, the court denied the pending motion for class certification without prejudice to renew it if a planned mediation was unsuccessful in resolving the action. Following a mediation session that did not resolve the action, the plaintiffs refiled their motion for class certification. The Company believes that it has meritorious defenses to the plaintiffs’ claims and intends to defend this matter vigorously. The outcome of this litigation and any potential award of damages are uncertain.
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
19. Contingent Liabilities (continued)
|
Shareholder Litigation
On September 28, 2015, Phoenix entered into a definitive merger agreement to be acquired by Nassau. On October 26, 2015, a putative class action lawsuit was filed by a purported shareholder of Phoenix in the Superior Court of the State of Connecticut challenging the proposed merger transaction. The lawsuit alleges that the individual members of Phoenix’s Board of Directors breached their fiduciary duties to the Phoenix shareholders by agreeing to the proposed merger transaction for inadequate consideration and through an allegedly flawed sales process, and that the defendant companies – Phoenix, Nassau and Davero Merger Sub Corp. (a wholly owned subsidiary of Nassau) – aided and abetted such alleged breaches. The plaintiff in the action, which was styled Thomas White v. The Phoenix Companies, Inc., et. al., No. HHD-CV15--6063180-S (Conn. Super. Ct., Hartford), sought, among other things, an order enjoining the merger and, in the event the merger is completed, rescission and/or damages as a result of the alleged violations of law, as well as fees and costs. From late November to early December 2015, Phoenix and the plaintiff engaged in arm’s-length negotiations for the expedited production of certain documents. On December 10, 2015, Phoenix and the other defendants executed a Memorandum of Understanding (“MOU”) with the plaintiff providing for settlement of the suit based on certain supplemental disclosures to be released to Phoenix shareholders in advance of the December 17, 2015 shareholder vote. The settlement reflected in the MOU is subject to certain confirmatory discovery by the plaintiffs in the litigation and subject to the approval of the Court, among other things. The defendants have vigorously denied, and continue vigorously to deny, that they have committed any violation of law or engaged in any of the wrongful acts that were alleged in the litigation. The MOU outlines the terms of the agreement in principle to settle and release all claims which were or could have been asserted in the litigation. The parties to the MOU will seek to enter into a stipulation of settlement that will be presented to the Court for final approval. The stipulation of settlement will be subject to customary conditions, including approval by the Court, which will consider the fairness, reasonableness and adequacy of the settlement. The stipulation of settlement will provide for, among other things, the conditional certification of the Litigation as a non opt-out class action. The stipulation of settlement will provide for the release of any and all claims arising from the merger, subject to approval by the Court. The release will not become effective until the stipulation of settlement is approved by the Court. In connection with the settlement, subject to the ultimate determination of the Court, counsel for plaintiff may receive an award of reasonable fees. Neither this payment nor the settlement will affect the consideration to be received by Phoenix stockholders in the merger or the timing of the anticipated closing of the merger. There can be no assurance that the settling parties will ultimately enter into a stipulation of settlement or that the Court will approve the settlement even if the settling parties were to enter into the stipulation. In such event, or if the merger is not consummated for any reason, the proposed settlement will be null and void and of no force and effect. In January 2016, named-plaintiff, Thomas White, and non-party, Stephen Bushansky, a member of the putative class, moved to substitute Stephen Bushansky as plaintiff, which motion was granted.
Consent Solicitation Litigation
On February 8, 2016, plaintiff Kenneth Roth filed a putative class action complaint (“Complaint”) in New York Supreme Court (New York County) (the “Court”) against The Phoenix Companies, Inc. (“Phoenix”) and U.S. Bank National Association in its capacity as indenture trustee (the “Trustee”), Index No. 650634/2016 (the “Litigation”), relating to a January 7, 2016 consent solicitation launched by Phoenix in connection with its
7.45%
Quarterly Interest Bonds due 2032 (the “Consent Solicitation”).
The Complaint asserts claims against Phoenix for breach of contract, breach of the covenant of good faith and fair dealing, negligent misrepresentation, a temporary restraining order, a preliminary and permanent injunction, and a declaratory judgment. In addition to damages, costs, and attorneys’ fees, the Complaint asks the Court to temporarily restrain, and preliminarily and permanently enjoin the Consent Solicitation or, alternatively, declare that the proposed supplemental indenture is null and void. The Complaint further alleges that the Trustee breached its fiduciary duty to bondholders by,
inter alia
, allowing the Consent Solicitation to be issued.
Phoenix believes that the lawsuit is without merit and that no additional or amended disclosure is required to supplement the Consent Solicitation, and that no changes to the proposed supplemental indenture are required, under applicable laws; however, to eliminate the burden, expense and uncertainties inherent in such litigation, and without admitting any liability or wrongdoing, Phoenix agreed, pursuant to the terms of a MOU, to: (a) revise the proposed Fourth Supplemental Indenture to make available to bondholders certain information in connection with Phoenix’s reporting obligations under Section 704, as amended by the Fourth Supplemental Indenture, (b) make available financial statements and related information of Phoenix not only to current bondholders but also to prospective bondholders, securities analysts and market makers, as detailed in the supplemental disclosures to the Consent Solicitation, and (c) make certain other supplemental disclosures to the Consent Solicitation.
|
|
|
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
|
|
19. Contingent Liabilities (continued)
|
On February 24, 2016, the parties to the Litigation (the “Settling Parties”) entered into the MOU providing for the settlement of the Litigation, subject to the approval of the Court, among other things. The defendants have vigorously denied, and continue vigorously to deny, that they have committed any violation of law or engaged in any of the wrongful acts that were alleged in the Litigation. The MOU outlines the terms of the Settling Parties’ agreement in principle to settle and release all claims which were or could have been asserted in the Litigation. The parties to the MOU will seek to enter into a stipulation of settlement that will be presented to the Court for final approval. The stipulation of settlement will be subject to customary conditions, including approval by the Court, which will consider the fairness, reasonableness and adequacy of the settlement. The stipulation of settlement will provide for, among other things, the release of any and all claims arising from or relating to the Consent Solicitation, subject to approval by the Court. The release will not become effective until the stipulation of settlement is approved by the Court. In connection with the settlement, subject to the ultimate determination of the Court, counsel for plaintiff may receive an award of reasonable fees. Neither this payment nor the settlement will affect the consent fee to be received by consenting Phoenix bondholders in the Consent Solicitation. There can be no assurance that the Settling Parties will ultimately enter into a stipulation of settlement or that the Court will approve the settlement even if the Settling Parties were to enter into the stipulation. In such event the proposed settlement will be null and void and of no force and effect.
Regulatory matters
State regulatory bodies, the SEC, the Financial Industry Regulatory Authority (“FINRA”), the Internal Revenue Service (“IRS”) and other regulatory bodies regularly make inquiries of us and, from time to time, conduct examinations or investigations concerning our compliance with laws and regulations related to, among other things, our insurance and broker-dealer subsidiaries, securities offerings and registered products. We endeavor to respond to such inquiries in an appropriate way and to take corrective action if warranted. Further, the Company is providing to the SEC certain information and documentation regarding the restatements of its prior period financial statements and the staff of the SEC has indicated to the Company that the matter remains subject to further investigation and potential further regulatory action. We cannot predict the outcome of any of such investigations or actions related to these or other matters.
Regulatory actions may be difficult to assess or quantify. The nature and magnitude of their outcomes may remain unknown for substantial periods of time. It is not feasible to predict or determine the ultimate outcome of all pending inquiries, investigations, legal proceedings and other regulatory actions, or to provide reasonable ranges of potential losses. Based on current information, we believe that the outcomes of our regulatory matters are not likely, either individually or in the aggregate, to have a material adverse effect on our consolidated financial condition. However, given the inherent unpredictability of regulatory matters, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on our consolidated financial statements in particular quarterly or annual periods.
20. Other Commitments
We have an agreement with HP Enterprise Services related to the management of our infrastructure services which expires in 2018. As of
March 31, 2016
, the remaining commitments totaled
$35.0 million
comprised of
$9.4 million
for the remainder of
2016
,
$12.9 million
in
2017
and
$12.7 million
in
2018
.
As part of its normal investment activities, the Company enters into agreements to fund limited partnerships and other investments that make debt and equity investments. As of
March 31, 2016
, the Company had unfunded commitments of
$308.3 million
under such agreements, of which
$51.4 million
is expected to be funded by
December 31, 2016
. See Note 7 to these consolidated interim unaudited financial statements for additional information on VIEs.
On January 5, 2015, the Company committed to purchase
$100.0 million
in investment grade rated infrastructure bonds through an outside investment advisor. These purchases are expected to be made over
24
months. The arrangement may be terminated prior to funding the committed amount at the discretion of the Company subject to certain standard provisions for notice and immaterial fees. The debt will be held as available-for-sale debt securities on the consolidated balance sheets. As of
March 31, 2016
,
$13.5 million
has been funded.
In addition, the Company enters into agreements to purchase private placement investments. At
March 31, 2016
, the Company had open commitments of
$87.2 million
under such agreements which are expected to be funded by
August 15, 2017
.
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THE PHOENIX COMPANIES, INC.
Notes to Consolidated Interim Unaudited Financial Statements (continued)
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21. Subsequent Events
Capital Contributions
On May 5, 2016, PHL Variable received approval from the Connecticut Insurance Department to admit
$19.0 million
of receivables from the Company as an additional capital contribution on its balance sheet as of
March 31, 2016
. On May 6, 2016, the Company made a capital contribution of
$19.0 million
to PHL Variable.