The Phoenix Companies CEO Discusses Q2 Results - Earnings Transcript

Start Time: 10:00

End Time: 10:52

The Phoenix Companies, Inc. (PNX)

Q2 2012 Earnings Conference Call

August 1, 2012 10:00 AM ET

Executives

Jim Wehr – President and CEO

Peter Hofmann – Chief Financial Officer

Chris Wilkos – Chief Investment Officer

Phil Polkinghorn – Senior Executive Vice President for Business Development

David Pellerin – Chief Accounting Officer.

Naomi Kleinman – Head of Investor Relations

Analysts

Bob Glasspiegel – Langen McAlenney

Randy Binner – FBR Capital Markets & Co.

Steven Schwartz – Raymond James

Presentation

Operator

Welcome to the Phoenix Second Quarter Earnings Conference Call. Thank you for standing by. All participants will be in a listen-only mode until the question-and-answer session. (Operator Instructions) Today’s call is being recorded. If you have any objections, you may disconnect at this time.

I will now like to turn the call over to the Head of Phoenix Investor Relations, Naomi Kleinman. You may begin.

Naomi Kleinman

Good morning and thank you for joining us. I’m going to start with the required disclosures and then turn it over to Jim Wehr, our President and CEO, for an overview of the quarter.

After that, Peter Hofmann, our Chief Financial Officer, will provide a financial review and Chris Wilkos, our Chief Investment Officer will comment on the investment portfolio. Also joining us on the call are, Phil Polkinghorn, Senior EVP for Business Development and Doug Miller, Chief Accounting Officer.

Our second quarter earnings release, our quarterly financial supplement and the second quarter earnings review presentation are available on our website at phoenixwm.com.

Slide 2 of the presentation contains the important disclosures. We may make forward-looking statements on this call that are subject to certain risks and uncertainties. These risks and uncertainties (inaudible) we use non-GAAP financial measures to evaluate our financial results. Reconciliations of these non-GAAP financial measures to the applicable (inaudible) GAAP measures are included in our press release and financial supplement.

Now, I’ll turn the call over to Jim.

Jim Wehr

Good morning everyone and thanks, Naomi. We appreciate you taking the time to join us on our second quarter 2012 earnings call. I’d like to begin by welcoming, Doug Miller, our new Chief Accounting Officer to the team. It’s has been a little over a month since Doug started and it’s has been great to have him here.

Now let me share some thoughts and comments on the quarter. To summarize, our results were mixed. On the one hand, operating income was lower than recent quarters. We had a $13 million net loss partially driven by a charge in discontinued operations. And fixed index annuity sales were down sequentially.

On the other hand, we delivered some fairly strong results demonstrating continued progress in key areas of the business. I’ll start with the positives and then work my way back to the full picture for the quarter.

Looking first at the balance sheet, we continue to improve our statutory capital position with surplus at $959 million, up 13% since year-end. Similarly, RBC has increased to an estimated 395%. Strong statutory earnings and appreciation in our alternative investments contributed to both of these increases.

Mortality experience was modestly favorable this quarter particularly in the close block. Investment income increased 3% year-over-year and our portfolio generated favorable credit results. Persistency improved across the board. Life surrenders were at an annualized rate of 5.4% for the second quarter compared with 6.4% for the first quarter. Annuity surrenders showed modest improvement as well.

We’ve maintained pre-financial crisis persistency levels for the last several quarters and expect to maintain them going forward. So, with all of these positives in our fundamentals, why the weaker GAAP results, a few reasons.

First, fee income was lower and the weak equity market also played a role, most notably by causing us to accelerate DAC amortization in our variable products.

Second, although we saw a growth in net investment income sustained low interest rates, produced some headwinds. And much of the income from alternative investments benefited closed block policy holders, but was not reflected in GAAP earnings. Expenses were up honestly in the quarter, as we are still making investments that will ultimately enable significant expense reductions in 2013. We remain committed to lowering expenses by $20 million by the end of next year and of course their taxes.

We believe we returned to a normal tax situation soon and Peter will take you through the details. But for this quarter, the effective tax rate on operating earnings was 87%.

Finally, there is the charge in our discontinued group accident and health reinsurance business. While this block has been a challenge for more than a decade, the actions we took in the second quarter significantly reduced future exposure to this business.

Now, let’s move to growth and to annuities, where our pace of growth slowed from the first quarter. We’ve consistently said we’ll be prudent in how we grow the business, balancing sales volume with profitability. And this quarter is an excellent example of that approach as second quarter fixed index annuity sales generated more embedded value than any prior quarter sales, (inaudible) quarter knowing that it could impact sales at least in the short-terms. But by applying disciplines with this product line, we improved profitability.

At the same time, we’re expanding and enhancing our product suite to stay competitive and ultimately accelerate sales. The most recent product launches were in June and we are pleased with the initial reception in the marketplace. We now have over $4.8 billion in total annuity funds under management with $1.5 billion of fixed index annuities.

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