The Phoenix Companies, Inc.
One American Row
Hartford, Connecticut 06115
September 11, 2006
Mr. Jim Rosenberg
Senior Assistant Chief Accountant
United States Securities and Exchange Commission
Mail Stop 6010
450 Fifth Street
Washington, D.C. 20549
Re:
The Phoenix Companies, Inc.
Form 10-K for the fiscal year ended December 31, 2005
File No. 1-16517
Dear Mr. Rosenberg:
This letter sets forth our responses for The Phoenix Companies, Inc. (the “Company”) to the comments contained in your letter dated August 25, 2006 relating to our Form 10-K for the fiscal year ended December 31, 2005 and our Form 10-Q for the three months ended March 31, 2006 (File No. 1-16517).
Form 10-K for the year ended December 31, 2005
Management’s Discussion and Analysis
Critical Accounting Estimates, page 35
1.
As a result of a second quarter unlocking of assumptions primarily related to DAC, you increased 2005 pretax income by $23.8 million. You stipulated that the unlocking reflected favorable mortality experience offset by interest rate and spread adjustments for annuities. Given the significance of this amount to operating results, your disclosure surrounding management’s critical accounting estimate should provide investors with a fuller understanding of the uncertainties in applying your estimate and the likelihood that materially different amounts would be reported under different conditions or using different assumptions. It should include quantification of the related variability in operating results that you expect to be reasonably likely to occur. Please provide in disclosure-type format an expanded discussion and quantification of the uncertainties in applying this accounting estimate, the effect that changes in the estimate have had on your financial statements for each period presented, and the effect that reasonably likely changes in the key assumptions underlying this estimate as of the latest balance sheet may have on your financial statements.
Response to Comment:
We have attached Exhibit A, which is representative of the DAC disclosure we intend to present in our future filings commencing with our Quarterly Report on Form 10-Q for the third quarter of 2006. As requested, this disclosure provides an expanded discussion and quantification of the uncertainties in applying this accounting estimate.
Mr. Jim Rosenberg
United States Securities and Exchange Commission
September 11, 2006
Page 2 of 9
Executive Overview and Outlook, page 40
2.
You discuss “segment income” on a consolidated basis, which we believe is a non-GAAP measure that must comply with Item 10 of Regulation S-K. Also, you express “segment income” on an EPS basis, which we believe to be an inappropriate use of per share information. Please discontinue your narrative disclosure of consolidated “segment income” and your use of the related per share measure or explain how this presentation complies with ASR No. 142 and Item 10(e) of Regulation S-K.
Response to Comment:
Beginning with our Quarterly Report on Form 10-Q for the third quarter of 2006, we will discontinue our narrative disclosure of consolidated “segment income” and our use of the related per share measure in our periodic reports.
Liquidity and Capital Resources
Contractual Obligations and Commercial Commitments, page 78
3.
Regarding “Other long-term liabilities” and your disclosure in footnote 4, you state that policyholder contractual obligations represent estimated benefit payments, net of reinsurance and offset by expected future deposits and premiums on in force contracts. Please provide us a revised table and footnotes presenting the “Other long-term liabilities” obligation gross of reinsurance and without offset from expected future deposits and premiums on in force contracts as the purpose of the table is to present your contractual obligations. Please also revise your explanation that the difference between the contractual obligation and policyholder liabilities on your December 31, 2005 balance sheet is due to “future investment earnings” as there will appear to be other differences after revising the table.
Response to Comment:
For all applicable future filings, commencing with our 2006 Annual Report on Form 10-K, we will provide a revised table and footnotes presenting the “Other long-term liabilities” obligation gross of reinsurance and without the offset from expected future deposits and premiums on in force contracts. We will also revise our explanation of the difference between contractual obligations and policyholders liabilities on the balance sheet.
Attached is Exhibit B showing the revised table as of December 31, 2005, gross of reinsurance and without the offset from expected future deposits and premiums on in force contracts including the revised explanation, which is consistent with the approach we intend to follow in future filings.
Mr. Jim Rosenberg
United States Securities and Exchange Commission
September 11, 2006
Page 3 of 9
Form 10-Q for Quarterly Period Ended March 31, 2006
Notes to Unaudited Interim Condensed Financial Statements
Accounting Changes, page 8
4.
You adopted SFAS 123R as of January 1, 2006, disclosing that it had no material impact on your financial statements. However, it appears you omitted the minimum required information to meet the disclosure requirements of paragraph 64 of SFAS 123R. Please refer to paragraphs A240 and A241 of SFAS 123R. Please provide this information in a disclosure-type format or explain why you concluded that these disclosures were not necessary.
Response to Comment:
We concluded that certain SFAS 123R disclosures were not necessary, as they were not material to the Quarterly Report on Form 10-Q for the first quarter of 2006. Attached is Exhibit C, which is representative of the revised disclosure that we will make in our future filings, if material. We have underlined the new information that would be added to the disclosure in future filings, if material.
*****
The Company acknowledges that:
·
the Company is responsible for the adequacy and accuracy of the disclosure in the filings;
·
staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and
·
the Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
*****
If I may be of further assistance in the Staff’s review of our responses above, please call me at
(860) 403-5835.
Sincerely,
/s/ Michael E. Haylon
Michael E. Haylon
Chief Financial Officer
Mr. Jim Rosenberg
United States Securities and Exchange Commission
September 11, 2006
Page 4 of 9
Exhibit A
Deferred Policy Acquisition Costs (“DAC”) and Present Value of Future Profits (“PVFP”)
The costs of acquiring new business, principally commissions, underwriting, distribution and policy issue expenses, all of which vary with and are primarily related to production of new business, are deferred. In connection with our 1997 acquisition of the Confederation Life business, we recognized an asset for the PVFP representing the present value of estimated net cash flows embedded in the existing contracts acquired. This asset is included in DAC.
We amortize DAC and PVFP based on the related policy’s classification. For individual participating life insurance policies, DAC and PVFP are amortized in proportion to estimated gross margins. For universal life, variable universal life and accumulation annuities, DAC and PVFP are amortized in proportion to estimated gross profits (“EGPs”). Policies may be surrendered for value or exchanged for a different one of our products (internal replacement). The DAC balance associated with the replaced or surrendered policies is amortized to reflect these surrenders.
Each year, we develop future EGPs for the products sold during that year. The EGPs for products sold in a particular year are aggregated into cohorts. Future EGPs are projected and reflect the estimated lives of the contracts. The amortization of DAC and PVFP requires the use of various assumptions, estimates and judgments about the future. The assumptions, in the aggregate, are considered important in the projections of EGPs. The assumptions developed as part of our annual process are based on our current best estimates of future events, which are likely to be different for each year’s cohort. Assumptions considered to be significant in the development of EGPs include separate account fund performance, surrender and lapse rates, interest margin, mortality, premium persistency and expenses. These assumptions are reviewed on a regular basis and are generally based on our past experience, industry studies, regulatory requirements and estimates about the future.
To determine the reasonableness of the prior assumptions used and their impact on previously projected account values and the related EGPs, we evaluate, on a quarterly basis, our previously projected EGPs. Our process to assess the reasonableness of EGPs involves the use of internally developed models, together with studies and actual experience. Incorporated in each scenario are our current best estimate assumptions with respect to separate account returns, surrender and lapse rates, interest margin, mortality, premium persistency and expenses.
Underlying assumptions for future periods of EGPs are not altered unless experience deviates significantly from original assumptions. In the event that we were to revise assumptions used for prior year cohorts, thereby changing our estimate of projected account value, and the related EGPs in the DAC amortization model, the cumulative DAC amortization would be adjusted to reflect such changes in the applicable period. This process is known as “unlocking”. Continued favorable experience on key assumptions, which could include increasing separate account fund return performance, decreasing lapses or decreasing mortality could result in an unlocking which would result in a decrease to DAC amortization and an increase in the DAC asset.
Mr. Jim Rosenberg
United States Securities and Exchange Commission
September 11, 2006
Page 5 of 9
Finally, an analysis is performed periodically to assess whether there are sufficient gross margins or gross profits to amortize the remaining DAC balances.
The separate account fund performance assumption is critical to the development of the EGPs related to our variable annuity and variable and life insurance businesses. The average long-term rate of assumed separate account fund performance used in estimating gross profits was 6.0% (after fund fees and mortality and expense charges) for the variable annuity business and 6.9% (after fund fees and mortality and expense charges) for the variable life business at December 31, 2005.
We also perform analysis with respect to the sensitivity of a change in this critical assumption. To illustrate the effects of this analysis, assume we had concluded that a revision to previously projected account returns and related EGPs was required as of December 31, 2005. For example, if we had used a 1% lower separate account return assumption (after fund fees and mortality and expense charges) for both the variable annuity and the variable life businesses and used our current best estimate assumptions for all other assumptions to project account values forward from the current value to reproject EGPs, the estimated decrease to amortization and increase to net income would be approximately $4.9 million, after-tax.
If instead we had used a 1% higher separate account return assumption (after fund fees and mortality and expense charges) for both the variable annuity and variable life businesses and used our current best estimate assumptions for all other assumptions to project account values forward from the current value to reproject EGPs, the estimated increase to amortization and decrease to net income would be approximately $4.2 million, after-tax.
Mr. Jim Rosenberg
United States Securities and Exchange Commission
September 11, 2006
Page 6 of 9
Exhibit B
Contractual Obligations and Commercial Commitments
Contractual Obligations and | ||||||||||||||
Commercial Commitments: | As of December 31, 2005 | |||||||||||||
($ in millions) | Total | 2006 | 2007 – 2008 | 2009 – 2010 | Thereafter | |||||||||
Contractual Obligations Due |
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Indebtedness(1) | $ | 751.0 | $ | 40.1 | $ | 235.9 | $ | — | $ | 475.0 | ||||
Operating lease obligations | 50.9 | 13.9 | 21.7 | 9.8 | 5.5 | |||||||||
Other purchase liabilities (2)(3) | 137.3 | 30.3 | 73.1 | 33.9 | — | |||||||||
Total fixed contractual obligations | 939.2 | 84.3 | 330.7 | 43.7 | 480.5 | |||||||||
Other long-term liabilities(4) | 61,918.1 | 3,147.8 | 5,158.0 | 4,848.3 | 48,764.0 | |||||||||
Subtotal | $ | 62,857.3 | $ | 3,232.1 | $ | 5,488.7 | $ | 4,892.0 | $ | 49,244.5 | ||||
Non-recourse collateralized obligations(5) | 371.2 | — | — | — | 371.2 | |||||||||
Total contractual obligations | $ | 63,228.5 | $ | 3,232.1 | $ | 5,488.7 | $ | 4,892.0 | $ | 49,615.7 | ||||
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Commercial Commitment Expirations |
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Standby letters of credit(6) | $ | 9.2 | $ | 9.2 | $ | — | $ | — | $ | — | ||||
Other commercial commitments (3)(7) | 166.3 | 64.8 | 10.4 | 49.3 | 41.8 | |||||||||
Total commercial commitments | $ | 175.5 | $ | 74.0 | $ | 10.4 | $ | 49.3 | $ | 41.8 | ||||
(1)
Indebtedness amounts include principal only.
(2)
Other purchase liabilities relate to open purchase orders, required pension funding and other contractual obligations.
(3)
Commitments related to recent business combinations are not included in amounts presented in this table. See the discussion on the following pages.
(4)
Policyholder contractual obligations represent estimated benefits from life insurance and annuity contracts issued by our life insurance subsidiaries. Policyholder contractual obligations also include separate account liabilities, which are contractual obligations of the separate account assets established under applicable state insurance laws and are legally insulated from our general account assets.
Future obligations are based on our estimate of future investment earnings, mortality, surrenders and applicable policyholder dividends. Included in the amounts above are policyholder dividends generated by estimated favorable future investment and mortality, in excess of guaranteed amounts for our closed block. Actual obligations in any single year, or ultimate total obligations, may vary materially from these estimates as actual experience emerges. As described in Note 3 to our consolidated financial statements in the 2005 Form 10-K, policy liabilities and accruals are recorded on the balance sheet in amounts adequate to meet the estimated future obligations of the policies in force, and do not reflect future investment earnings or future premiums and deposits on those policies. As a result, the policyholder obligations reflected in the table above exceed the policy liabilities, policyholder deposit fund liabilities, and separate account liabilities reported on the December 31, 2005 Consolidated Balance Sheet. Separate account obligations will be funded by the cash flows from separate account assets, while the remaining obligations will be funded by cash flows from investment earnings on general account assets and premiums and deposits on contracts in force.
(5)
Non-recourse obligations are not direct liabilities of ours, as they will be repaid from investments pledged as collateral recorded on our consolidated balance sheet. See Note 8 to our consolidated financial statements in this Form 10-K for additional information.
(6)
Our standby letters of credit automatically renew on an annual basis.
(7)
Other commercial commitments relate to venture capital partnerships ($105.1 million) and private placements ($61.2 million). The venture capital commitments can be drawn down by private equity funds as necessary to fund their portfolio investments through the end of the funding period as stated in each agreement. The obligations related to private placements are all due to be funded during 2006.
Mr. Jim Rosenberg
United States Securities and Exchange Commission
September 11, 2006
Page 7 of 9
Exhibit C
Share-based compensation
We provide share-based compensation to certain of our employees and non-employee directors, as further described below. The compensation cost that has been charged against income for these plans is summarized in the following table:
Share-based compensation plans: | Three Months | Year to Date | |||||||||
2006 | 2005 | 2006 | 2005 | ||||||||
Compensation cost charged to income | $ | xxx | $ | xx.xx | $ | xxx | $ | xx.xx | |||
Income tax benefit | $ | xxx | $ | xx.xx | $ | xxx | $ | xx.xx | |||
Stock options
We have stock option plans under which we grant options for a fixed number of common shares to employees and non-employee directors. Our options have an exercise price equal to the market value of the shares at the date of grant and generally have a 10-year contractual term. Each option, once vested, entitles the holder to purchase one share of our common stock. The employees’ options vest over a three-year period while the directors’ options vest immediately. Once vested, options become exercisable. For stock options awarded, we recognize expense over the vesting period equal to their fair value at issuance. We calculate the fair value of options using the Black-Scholes option valuation model. The Stock Incentive Plan authorizes the issuance to officers and employees of up to that number of options equal to 5% of the total number of common stock shares outstanding immediately after the initial public offering in June 2001, or approximately 5,250,000 shares, plus an additional 1%, or approximately 1,050,000 shares, for PXP officers and employees, less the number of share options issuable under the Directors’ Stock Plan. The Directors’ Stock Plan authorizes the issuance to non-employee directors of up to that number of options equal to 0.5%, or approximately 525,000 shares, of the total number of common stock shares outstanding immediately after the initial public offering in June 2001, plus 500,000 shares, bringing the total to approximately 1,025,000 shares.
Key Assumptions Used in Option Valuation: | Three Months | Year to Date | ||||||||
2006 | 2005 | 2006 | 2005 | |||||||
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Weighted-average expected volatility | % | % | % | % | ||||||
Weighted-average interest rate | % | % | % | % | ||||||
Weighted-average common share dividend yield | % | % | % | % | ||||||
Expected term | years | years | years | years | ||||||
Mr. Jim Rosenberg
United States Securities and Exchange Commission
September 11, 2006
Page 8 of 9
Total Stock Option Activity: | Three Months | Year to Date | |||||||||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||||||||
Number | Weighted- | Number | Weighted- | Number | Weighted- | Number | Weighted- | ||||||||||||
Of | Average | of | Average | of | Average | Of | Average | ||||||||||||
Common | Exercise | Common | Exercise | Common | Exercise | Common | Exercise | ||||||||||||
Shares | Price | Shares | Price | Shares | Price | Shares | Price | ||||||||||||
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Outstanding, | xxx | $ | xx.xx | xxx | $ | xx.xx | xxx | $ | xx.xx | xxx | $ | xx.xx | |||||||
Granted | xxx | xx.xx | xxx | xx.xx | xxx | xx.xx | xxx | xx.xx | |||||||||||
Exercised | (xxx) | xx.xx | (xxx) | xx.xx | (xxx) | xx.xx | (xxx) | xx.xx | |||||||||||
Canceled/Expired | (xxx) | xx.xx | (xxx) | xx.xx | (xxx) | xx.xx | (xxx) | xx.xx | |||||||||||
Outstanding, | xxx | $ | xx.xx | xxx | $ | xx.xx | xxx | $ | xx.xx | xxx | $ | xx.xx | |||||||
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Weighted-average remaining | x.x years | x.x years | |||||||||||||||||
During the three months ended xxx xx, 2006, we granted xx stock options which vest over three years. These options had a weighted-average fair value of $x.xx per option ($x.x million aggregate) which we are expensing over their three-year vesting periods. During the three months ended xxx xx, 2005, we granted xxx stock options which vest over three years. These options had a fair value of $x.xx per option ($x.x million aggregate) which we are expensing over their three-year vesting period.
During the year-to-date period ended xxx xx, 2006, we granted xx stock options which vest over three years. These options had a weighted-average fair value of $x.xx per option ($x.x million aggregate) which we are expensing over their three-year vesting periods. During the year-to-date period ended xxx xx, 2005, we granted xxx stock options which vest over three years. These options had a fair value of $x.xx per option ($x.x million aggregate) which we are expensing over their three-year vesting period.
The aggregate intrinsic value of options outstanding at xxx xx, 2006 was $x.x million, of which $x.x million related to options that were vested and exercisable. The total intrinsic value of options exercised during each of the three-month periods ended xxx xx, 2006 and 2005 was $x.x million and $x.x million, respectively. The total intrinsic value of options exercised during each of the year-to-date periods ended xxx xx, 2006 and 2005 was $x.x million and $x.x million, respectively.
At xxx xx, 2006, x.x million of outstanding stock options werevested andexercisable, with a weighted-average exercise price of $xx.xx. At xxx xx, 2006, the weighted-average remaining contractual life for all options outstanding was x.x years. The total fair value of options vested during each of the three-month periods ended xxx xx, 2006 and 2005 was $x.x million and $x.x million, respectively. The total fair value of options vested during each of the year-to-date periods ended xxx xx, 2006 and 2005 was $x.x million and $x.x million, respectively.
Mr. Jim Rosenberg
United States Securities and Exchange Commission
September 11, 2006
Page 9 of 9
Cash received from option exercises for the three-month periods ended xxx xx, 2006 and 2005 was $x.x million and $x.x million, respectively. Cash received from option exercises for the year-to-date periods ended xxx xx, 2006 and 2005 was $x.x million and $x.x million, respectively. We issue new shares to satisfy option exercises.
As of xxx xx, 2006, there was $x.x million of total unrecognized compensation cost related to non-vested stock options granted by us. That cost is expected to be recognized over 3 years.
Restricted stock units
We have restricted stock unit (RSU) plans under which we grant RSUs to employees and non-employee directors. Each RSU, once vested, entitles the holder to one share of our common stock when the restriction expires. We recognize compensation expense over the vesting period of the RSUs,which is generally three years for each award.
Total RSU Activity at | Three Months | Year to Date | |||||||||||||||||
Weighted-Average | 2006 | 2005 | 2006 | 2005 | |||||||||||||||
Grant Price: | RSUs | Price | RSUs | Price | RSUs | Price | RSUs | Price | |||||||||||
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Outstanding, | xxx | $ | xx.xx | xxx | $ | xx.xx | xxx | $ | xx.xx | xxx | $ | xx.xx | |||||||
Awarded | xxx | xx.xx | xxx | xx.xx | xxx | xx.xx | xxx | xx.xx | |||||||||||
Converted to common | (xxx) | xx.xx | — | — | (xxx) | xx.xx | — | — | |||||||||||
Canceled | (xxx) | xx.xx | (xxx) | xx.xx | (xxx) | xx.xx | (xxx) | xx.xx | |||||||||||
Outstanding, | xxx | $ | xx.xx | xxx | $ | xx.xx | xxx | $ | xx.xx | xxx | $ | xx.xx | |||||||
Generally, the shares underlying these awards will be issued upon vesting unless the participant elects to defer receipt. Deferred awards will be issued on each employee’s and each director’s respective termination or retirement. We issue new shares to satisfy RSU conversions.
The total fair value of RSUs vested during each of the three-month periods ended xxx xx, 2006 and 2005 was $x.x million and $x.x million, respectively. The total fair value of RSUs vested during each of the year-to-date periods ended xxx xx, 2006 and 2005 was $x.x million and $x.x million, respectively.
As of xxx xx, 2006, there was $x.x million of total unrecognized compensation cost related to non-vested RSUs granted by us. That cost is expected to be recognized over 3 years.
In addition to the RSU activity above, x.x million RSUs, with a grant date fair value of $x.x million, are subject to future issuance based on the achievement of performance criteria established under certain of our incentive plans. The performance contingencies for these RSUs will be resolved no later than December 31, 2008.
