The Phoenix Companies, Inc. (NYSE:PNX) today reported second quarter 2012 operating income, a non-GAAP measure, of $1.0 million, or $0.01 per diluted share, compared with second quarter 2011 operating income of $7.9 million, or $0.07 per diluted share. The decline from the prior year was primarily driven by lower fee income and the weak equity market. Operating income before taxes for the second quarter of 2012 of $7.9 million, or $0.07 per diluted share, reflects a quarter with good mortality experience and positive persistency trends and investment performance. Second quarter 2011 operating income before taxes was $24.1 million, or $0.20 per diluted share. Phoenix reported a second quarter 2012 net loss of $13.2 million, or $0.11 per share, driven by realized losses primarily related to fixed indexed annuity hedges, a charge in the company’s discontinued group accident and health reinsurance business and an elevated GAAP tax rate due to strong taxable income. Second quarter 2011 net income was $15.2 million, or $0.13 per diluted share. Given the significant volatility in the company’s GAAP tax provision, operating comparisons are provided on both a pre-tax and after-tax basis. Beginning in the second quarter of 2012, operating income includes certain adjustments related to fixed indexed annuity derivatives in order to better reflect the economics of this line of business. Periods prior to the first quarter of 2012 have not been revised as adjustments for those periods were not significant. See “Other Items” below for additional detail. “It was a mixed quarter for Phoenix, but we continued to make progress in key areas of the business,” said James D. Wehr, president and chief executive officer. “This quarter, fundamentals, especially investment performance, mortality and persistency, remained solid as demonstrated by the strength of our statutory earnings and continued capital generation. At the same time, lower fee income, the weak equity market and a continued high tax provision drove down operating income,” he said. “We significantly reduced exposure to the discontinued group accident and health reinsurance block, resulting in a modest charge that further affected net income.
“While second quarter fixed indexed annuity sales were down sequentially, they are up year-over-year. Additionally, second quarter sales generated more embedded value than any prior quarter’s sales. The initial reception for our latest product offerings is very positive, and we believe we are competitively positioned in the marketplace,” Mr. Wehr concluded.
|SECOND QUARTER EARNINGS SUMMARY|
|($ in millions)||SecondQuarter2012||FirstQuarter2012||SecondQuarter2011|
|Net Income (Loss)||$(13.2)||$(8.1)||$15.2|
|Net Realized Investment Gains (Losses)1||(5.5)||(14.1)||8.0|
|Fixed Indexed Annuity Derivatives2||(2.4)||0.7||--|
|Operating Income 4||$1.0||$5.8||$7.9|
|Applicable Income Tax Expense||6.9||15.1||16.2|
|Operating Income Before Taxes4||$7.9||$20.9||$24.1|
|Earnings Per Share Summary|
|Net Income (Loss) Per Share|
|Operating Income Per Share|
|Operating Income Before Taxes Per Share|
|Weighted Average Shares Outstanding(in millions)|
|SELECTED COMPONENTS OF EARNINGS|
|($ in millions)||SecondQuarter2012||FirstQuarter2012||SecondQuarter2011|
|Net Investment Income||$218.2||$209.8||$211.2|
|Other Operating Expenses||$60.8||$62.4||$59.6|
- Second quarter 2012 operating income before taxes of $7.9 million, compared with operating income before taxes of $24.1 million for the second quarter of 2011, was driven primarily by lower fee income and higher amortization of deferred acquisition costs resulting from the weak equity market, partially offset by good mortality experience.
- Second quarter 2012 revenues were $451.5 million, compared with $478.2 million for the second quarter of 2011. The change was due primarily to lower fee income driven by lower cost of insurance charges, surrender charges and asset-based fees, as well as decreased premium revenue from closed block policies (sold before the 2001 demutualization), which is consistent with expectations for this block.
- Net investment income was $218.2 million for the second quarter of 2012, up 3% from $211.2 million for the second quarter of 2011. The increase was driven largely by higher alternative investment returns, which occurred primarily in the closed block, and higher investment balances.
- Total individual life surrenders were at an annualized rate of 5.4% for the second quarter of 2012, compared with 6.4% for the first quarter of 2012 and 6.1% for the second quarter of 2011. The closed block’s annualized surrender rate was 5.3% for the second quarter of 2012, compared with 5.6% for the first quarter of 2012 and 5.7% for the second quarter of 2011.
- Annuity surrenders for the second quarter of 2012 were at an annualized rate of 11.9%, compared with 12.1% for the first quarter of 2012 and 11.6% for the second quarter of 2011.
- Gross mortality experience for the second quarter of 2012 was favorable compared with expectations. After changes in benefit reserves, deferred acquisition costs and the impact of the policyholder dividend obligation, mortality experience was modestly favorable.
- Second quarter 2012 total other operating expenses were $60.8 million, compared with $59.6 million for the second quarter of 2011. The increase was driven by higher employee benefit and legal expenses. Core operating expenses before deferrals were $52.5 million for the second quarter of 2012, compared with $49.4 million for the second quarter of 2011. Core operating expenses before deferrals represent total other operating expenses excluding premium taxes, reinsurance allowances, commissions, sales incentives and any unusual expenses.
- The company recorded a $6.9 million tax expense in operating income for the second quarter of 2012, including $4.9 million of alternative minimum tax driven by strong taxable income.
- Annuity deposits were $196.4 million for the second quarter of 2012, compared with $227.3 million for the first quarter of 2012 and $191.3 million for the second quarter of 2011. The decline from the first quarter was driven primarily by the continued effect of pricing changes implemented earlier in the year. The company estimates that the current quarter’s sales generated more embedded value than any prior quarter’s sales. Embedded value represents the present value of expected future profits from these sales. The company continues to expect to finish the year near the low end of its target range for annuity deposits, or approximately $1 billion.
- Net annuity flows (deposits less surrenders) were $53.0 million for the second quarter of 2012, compared with net annuity flows of $66.3 million for the second quarter of 2011. Annuity funds under management increased 9% year-over-year to $4.8 billion at June 30, 2012.
- Life insurance annualized premium was $1.0 million for the second quarter of 2012, compared with $0.3 million for the first quarter of 2012 and $0.7 million for the second quarter of 2011. Gross life insurance in-force at June 30, 2012 was $119.0 billion, an 8% decrease from June 30, 2011.
- Saybrus Partners had $0.1 million of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), including inter-company revenues, for the second quarter of 2012, compared with $0.7 million of EBITDA for the first quarter of 2012 and an EBITDA loss of $0.3 million for the second quarter of 2011. Saybrus revenues were $5.0 million for the second quarter of 2012, compared with $5.1 million for the first quarter of 2012 and $4.2 million for the second quarter of 2011. Third-party revenues for the second quarter of 2012 grew sequentially and year-over-year.
|Realized Investment Gains and Losses($ in millions)||SecondQuarter2012||FirstQuarter2012||SecondQuarter2011|
|Net Other-Than-Temporary Impairment Losses Recognized in Earnings||$(5.1)||$(6.2)||$(3.0)|
|Derivative Gains (Losses)|
|Results of Variable Annuity Hedge Program|
|-- GMWB/GMAB Derivatives||(5.3)||(1.9)||(1.2)|
|-- Non-performance Risk Factor1||5.9||(15.1)||2.6|
|Fixed Indexed Annuity Options||(7.0)||8.1||(0.6)|
|Other Derivatives, Net||(0.7)||1.3||0.4|
|Fair Value Option Securities||(1.1)||1.9||1.4|
|Total Net Realized Investment Gains (Losses)||$ (8.2)||$(15.6)||$3.1|
|Related PDO, DAC, Tax and Other Offsets, Net||2.7||1.5||4.9|
|Net Realized Investment Gains (Losses)||$ (5.5)||$ (14.1)||$8.0|
BALANCE SHEET AND LIQUIDITYAt June 30, 2012, cash and securities at the holding company were $118.8 million, compared with $119.7 million at March 31, 2012, after Phoenix Life Insurance Company paid a $15.0 million dividend during the second quarter of 2012. Holding company interest and operating expenses are estimated to be $26 million for full-year 2012. The quality of the portfolio remained strong in the second quarter of 2012 with the proportion of below investment grade bonds at 8.4% at June 30, 2012, unchanged from March 31, 2012. The company made $39 million of new below investment grade bond purchases during the second quarter of 2012. Debt-to-total-capital was 28.5% at June 30, 2012. Phoenix has no debt maturities until 2032.
|Balance Sheet($ in millions)||June 30,2012||December 31,2011||Change|
|Total Stockholders’ Equity||$946.6||$958.0||$(11.4)|
|Total Stockholders’ Equity excluding Accumulated OCI||$1,071.5||$1,092.8||$(21.3)|
|Debt to Total Capital 1||28.5%||28.1%||0.4%|
- Statutory net gain from operations for Phoenix Life Insurance Company was $25.7 million for the second quarter of 2012, compared with $47.4 million for the second quarter of 2011, and statutory net income was $24.3 million for the second quarter of 2012, compared with $46.1 million for the second quarter of 2011.
- Statutory surplus and asset valuation reserve increased 13% from year-end 2011 to $958.8 million at June 30, 2012, net of the $39.0 million in dividends paid to the holding company during the first half of the year. Statutory surplus and asset valuation reserve was $845.7 million at December 31, 2011.
- At June 30, 2012, Phoenix Life’s estimated risk-based capital ratio was 395%, compared with 363% at December 31, 2011.
- Because the company’s fixed indexed annuity block is growing significantly, the definition of operating income was changed beginning in the second quarter of 2012 to adjust for certain items related to fixed indexed annuities. The new definition excludes the change in fair value of embedded derivatives (adjusted for current period interest credits) that are reflected within net income. Additional adjustments to operating income are for the amortization of premium paid to purchase options to fund the annual index credits and proceeds received upon these options expiring. Consistent with prior period presentation, net realized gains and losses on investments (including fixed indexed annuity options) have been excluded from operating income. See details of these adjustments in the table below.
|Fixed Indexed Annuity Adjustments($ in millions)|
|Subtractions from Policyholder Benefits:|
|Change in Fair Value of Embedded Derivatives,Net of Current Period Interest Credits||$6.9||$0.6||--|
|Additions to Policyholder Benefits:|
|Amortization of Option Premium||(3.8)||(3.6)||--|
|Proceeds from Options Expiring||1.7||1.7||--|
|Total Additions to (Subtractions from) PolicyholderBenefits||$4.8||$(1.3)||--|
|Related DAC Amortization and Tax Offsets||$(2.4)||$0.6||--|
|Net Adjustment for Fixed Indexed Annuity Derivatives||$2.4||$(0.7)||--|
|Other Subtractions from Net Income:|
|Net Realized Investment (Gains) Losses onFixed Indexed Annuity Options||$7.0||$(8.1)||$0.6|
|Related DAC Amortization and Tax Offsets||(2.4)||3.3||--|
|Total Additions to (Subtractions from) Net Income||$7.0||$(5.5)||$0.6|
- The company took a $7.0 million charge in its discontinued group accident and health reinsurance business in the quarter as a result of commuting approximately half of its remaining exposure.
- Phoenix launched several new annuity products toward the end of the second quarter, including:
- Phoenix Personal Protection Choice Annuity, a single premium fixed indexed annuity that allows the annuity holder, for an additional fee, to combine up to three different benefits (including lifetime income, chronic care and an enhanced death benefit). It is available through independent distributors working with Saybrus Partners.
- Protected Solutions Annuity, a single premium fixed indexed annuity that is the newest offering developed through its strategic alliance with The AltiSure Group.
- A series of enhancements to the Premier LifeStyle Annuity and Secure LifeStyle Bonus Annuity, which are available exclusively through The AltiSure Group.
|Consolidated Balance Sheet|
|June 30, 2012 (Unaudited and Preliminary) and December 31, 2011|
|($ in millions)|
|June 30,||December 31,|
|Available-for-sale debt securities, at fair value (amortized cost of $11,588.9 and $11,351.8)||$||12,335.3||$||11,890.0|
|Available-for-sale equity securities, at fair value (cost of $34.4 and $29.5)||42.1||35.7|
|Limited partnerships and other investments||618.5||601.3|
|Policy loans, at unpaid principal balances||2,362.4||2,379.3|
|Fair value option investments||87.0||86.6|
|Cash and cash equivalents||248.9||194.3|
|Accrued investment income||186.6||175.6|
|Deferred policy acquisition costs||1,076.0||1,162.8|
|Deferred income taxes||91.7||118.2|
|Discontinued operations assets||43.6||69.2|
|Separate account assets||3,336.8||3,817.6|
|Policy liabilities and accruals||$||13,040.1||$||12,981.1|
|Policyholder deposit funds||2,767.1||2,429.4|
|Discontinued operations liabilities||34.6||58.3|
|Separate account liabilities||3,336.8||3,817.6|
|Common stock, $.01 par value: 116.0 million and 116.3 million shares outstanding||1.3||1.3|
|Additional paid-in capital||2,631.0||2,630.5|
|Accumulated other comprehensive loss||(124.9||)||(134.8||)|
|Treasury stock, at cost: 11.7 million and 11.3 million shares||(180.0||)||(179.5||)|
|Total stockholders’ equity||946.6||958.0|
|Total liabilities and stockholders’ equity||$||21,194.8||$||21,285.1|
|Consolidated Statement of Income (Unaudited and Preliminary)|
|Three and Six Months Ended June 30, 2012 and 2011|
|($ in millions)|
|Three Months||Six Months|
|Net investment income||218.2||211.2||428.1||412.6|
|Net realized investment gains (losses):|
|Total other-than-temporary impairment (“OTTI”) losses||(15.0||)||(6.6||)||(26.7||)||(14.0||)|
|Portion of OTTI losses recognized inother comprehensive income||9.9||3.6||15.4||5.3|
|Net OTTI losses recognized in earnings||(5.1||)||(3.0||)||(11.3||)||(8.7||)|
|Net realized investment gains (losses),excluding OTTI losses||(3.1||)||6.1||(12.5||)||(4.4||)|
|Net realized investment gains (losses)||(8.2||)||3.1||(23.8||)||(13.1||)|
|BENEFITS AND EXPENSES:|
|Policy benefits, excluding policyholder dividends||259.0||270.8||513.1||531.2|
|Policy acquisition cost amortization||41.8||42.8||92.0||94.1|
|Interest expense on indebtedness||7.9||7.9||15.9||15.9|
|Other operating expenses||60.8||59.6||123.2||119.8|
|Total benefits and expenses||453.8||454.7||893.5||898.2|
|Income (loss) from continuing operationsbefore income taxes||(2.3||)||23.5||(1.0||)||30.0|
|Income tax expense||4.6||7.6||13.5||9.0|
|Income (loss) from continuing operations||(6.9||)||15.9||(14.5||)||21.0|
|Loss from discontinued operations,net of income taxes||(6.3||)||(0.7||)||(6.8||)||(2.2||)|
|Net income (loss)||$||(13.2||)||$||15.2||$||(21.3||)||$||18.8|