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PNX > SEC Filings for PNX > Form 8-K on 17-Jan-2014All Recent SEC Filings

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Form 8-K for PHOENIX COMPANIES INC/DE


17-Jan-2014

Results of Operations and Financial Condition, Notice of Delisting or Fa


Item 2.02 Results of Operations and Financial Condition

On January 17, 2014, The Phoenix Companies, Inc. (the "Company") issued a news release regarding the unaudited estimated pre-tax impact of its restatement of historical financial statements prepared in accordance with Accounting Principles Generally Accepted in the United States ("U.S. GAAP"), the expected filing date for the Annual Report on Form 10-K for the year ended December 31, 2012 (the "2012 Form 10-K"), and additional updates relating to the restatement and the Company's liquidity. The news release is furnished as Exhibit 99.1 hereto.

The information in Item 2.02 of this Current Report on Form 8-K, including, without limitation, Exhibit 99.1 attached hereto, shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.



Item 3.01 Failure to Satisfy a Continued Listing Rule or Standard

As disclosed in the Company's Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission (the "SEC") on April 5, 2013, the Company was notified by the New York Stock Exchange ("NYSE") that, as a result of its failure to timely file the 2012 Form 10-K with the SEC, it was subject to the procedures specified in Section 802.01E (SEC Annual Report Timely Filing Criteria) of the Listed Company Manual of the NYSE.

As disclosed in the Company's Current Report on Form 8-K filed with the SEC on September 27, 2013, pursuant to Section 802.01E, the Company made a request to the NYSE that its shares be permitted to continue to trade on the NYSE while the Company completes its restatement of financial statements for prior periods and prepares the 2012 Form 10-K. On September 27, 2013 via letter dated September 26, 2013, the NYSE notified the Company that its shares may continue to trade on the NYSE until January 31, 2014, subject to reassessment on an ongoing basis. The letter further provided that in the event that the Company is unable to file the 2012 Form 10-K on or prior to January 31, 2014, the Company may request that the NYSE permit its securities to continue to trade on the NYSE until April 3, 2014.

On January 14, 2014, the Company made an additional extension request to the NYSE that its shares be permitted to continue to trade until April 3, 2014, noting that the Company is targeting March 31, 2014 as the date for filing with the SEC the 2012 Form 10-K. In the event that the Company receives the extension and is unable to file the 2012 Form 10-K prior to April 3, 2014, the NYSE will move forward with the initiation of suspension and delisting procedures.



Item 7.01 Regulation FD Disclosure

In connection with the news release referred to in Item 2.02 above, the Company is furnishing the following disclosure with regard to drivers of the restatement and control deficiencies.

Drivers of the Restatement

The Company has preliminarily classified the identified errors that are to be corrected by the restatement into nine major categories described below. In addition to these categories, there are certain items which primarily relate to the recording of previously identified out-of-period errors that were previously determined not to be material individually or in the aggregate.


1. Correction of Errors in the Consolidated Statement of Cash Flows

The Company identified errors within its previously issued consolidated statement of cash flows and cash which primarily consisted of: (i) the incorrect classification of deposits and withdrawals of universal life and variable universal life products as cash flows used for continuing operations; (ii) the incorrect classification of capitalized interest on policy loans as an investing activity; and (iii) certain other classification errors within cash flows from investing activities.

In addition, the Company intends to make certain changes in presentation to enhance disclosure of certain cash activity. Most significantly, interest credited to policyholder accounts will be separately disclosed within cash flows used for continuing operations. Also, deposits into and withdrawals from separate accounts have been presented gross, rather than net, within cash flows provided by financing activities. These changes in presentation are not expected to have any impact on total cash flows.

The Company also expects to make corrections to cash and cash equivalents on the consolidated balance sheets. Certain amounts are expected to be reclassified from other liabilities to cash and cash equivalents to appropriately reflect the legal right of offset. Cash held as collateral by a third party related to the Company's derivative transactions that was restricted but incorrectly included in cash and cash equivalents with other unrestricted amounts is now expected to be included in restricted cash within other assets.

2. Other Invested Assets

The Company did not have an adequate process to properly evaluate the accounting framework for new purchases of limited partnerships and other alternative investments. This resulted in errors associated with the application of the equity, cost or fair value method of accounting and conclusions reached regarding consolidation of certain variable interest entities. In addition, the Company did not have an adequate process to properly monitor existing holdings and ongoing transactions. This resulted in errors in both the application of the appropriate accounting framework for, and valuation of, existing holdings.

3. Private Placement Investments

Errors were identified related to inaccurate inputs for the models used to value private placement debt and inappropriate models were used to calculate the valuation of private placement debt.

In the course of correcting these valuation errors, the Company also reassessed the presentation of the fair value hierarchy. This will result in the change in classification of certain private placement securities from Level 2 to Level 3 in the fair value hierarchy. This change in classification between Level 2 and Level 3 had no impact on the fair value of these securities.

4. Derivative Valuation

The Company did not appropriately apply U.S. GAAP accounting standards to recognize and measure the counterparty non-performance risk in the valuation of its non-collateralized derivative assets.

5. Actuarial Valuation

The Company determined that there were errors related to actuarial valuation of insurance liabilities and the deferred policy acquisition costs. Errors were identified related to data, assumptions and valuation methodologies in the sub-categories detailed below.


? Accounting for Reserves for Certain Universal Life Products. Certain of the Company's Universal Life ("UL") products have benefit features or have experience that produce profits in earlier periods followed by losses in later periods. Under U.S. GAAP accounting, the Company is required to establish reserves for benefit features that result in future benefits that exceed the projected contract value. In addition, the Company should periodically assess the GAAP liability for a line of business to ensure it is sufficient when compared to future margins and evaluate whether the line of business is expected to produce profits in earlier years followed by losses in later years. The Company misapplied U.S. GAAP in defining and evaluating benefit features and did not assess the line of business for the profits followed by losses condition. Accordingly, the Company corrected the resulting errors and recorded additional reserves over the restatement period to cover expected GAAP losses that otherwise would have been recorded in future periods. These errors were not a result of any changes in assumptions or errors in data or modeling. In addition, the ultimate experience of the line of business is reflected in the statutory reserves and the errors did not impact the previously reported statutory financial results.

? Loss Recognition: Under U.S. GAAP accounting, the Company must periodically assess the net GAAP liability (net of deferred policy acquisition costs) to ensure it is sufficient when compared to a gross premium valuation in a process known as loss recognition testing. Upon analysis, the Company determined that the "locked-in" historical estimates used to calculate the policyholder liabilities were insufficient prior to and also as a result of entering into a new reinsurance treaty (as discussed within the "Reinsurance Accounting" section below) and the interest rate environment. Established U.S. GAAP compliant methods require that upon identification of loss recognition events, the Company reduce its deferred policy acquisition cost asset and establish additional liabilities to rectify the insufficiency identified for certain blocks of business.

? Reinsurance Modeling: The Company used approximations of reinsurance treaty provisions that when aggregated did not properly reflect the underlying reinsurance treaty provisions within its valuation models for deferred policy acquisition costs and policyholder liabilities.

? Shadow Accounting: Under U.S. GAAP accounting, intangible assets and liabilities that are backed by a portfolio of assets classified as available for sale are required to reflect the amount of unrealized gains or unrealized losses "as if the amounts were realized." The Company failed to recognize all of the relationships between the available-for-sale assets and the supported intangible assets and liabilities in calculating amounts necessary for this shadow accounting. During the restatement, the shadow accounting valuation process is being enhanced to ensure all interrelated intangible assets and liabilities including reinsurance and long duration liabilities is being properly evaluated and to ensure that the impacts of these unrealized gains or losses are properly recorded.

? Traditional Product Revenue Recognition: The Company did not properly recognize the timing of revenue related to traditional participating life insurance contracts. In conjunction with correcting this error, the Company revised the projected income from inception of the closed block to properly capture the revised timing of revenue recognition. The correction of these errors is expected to have no material impact on annual net income or stockholders' equity, as the cumulative impact of the error is expected to be substantially offset by the policyholder dividend obligation included within policy liabilities and accruals on the consolidated balance sheets.


? Liability for the Future Cost of a Settlement Agreement: The Company did not properly record the incremental liability for the future costs related to a settlement in the class action Michels, et al. v. Phoenix Home Life Mutual Insurance Company (Sup. Ct Albany Co. Index No. 5318-95), which was reached in August, 1996, prior to demutualization for its participating business. The Company was required to reimburse certain customers for supplemental premium payments. However, no liability was initially established for these future reimbursements within the consolidated financial statements. The calculation of liability involves estimates of future policy lapses and policyholder mortality that are consistent with the assumptions used to estimate other policy liabilities.

? Fixed Indexed Annuities: During the Company's analysis of the equity index valuation process, errors associated with the actuarial modeling of the product features used to calculate policyholder liabilities for the fixed indexed annuity product were identified. These errors included incomplete or inaccurate data and inappropriate approximations of product features, which resulted in the incorrect calculation for the policyholder liabilities and embedded derivative associated with guaranteed minimum withdrawal benefits. Further review and testing identified additional errors related to programmed assumptions and census inputs.

? Other Actuarial Errors: Out-of-period errors that were previously determined not to be material individually, or in the aggregate, were recorded to the appropriate reporting period. In addition, this sub-category includes other immaterial adjustments, which were identified in conjunction with management's comprehensive balance sheet review relating to the Company's actuarial assumptions, approximations and valuation methods/models for its life and annuity businesses.

6. Reinsurance Accounting

? In 2008, the Company entered into a complex reinsurance agreement with one of its reinsurers. In accordance with its original accounting policy, the Company calculated the estimated net cost of reinsurance, which resulted in a day one loss and recognized this loss immediately in net income rather than deferring and amortizing the loss over the life of the underlying business.

? Upon review of the reinsurance transaction, the Company also determined that loss recognition had been triggered for a portion of the underlying block of business both prior to and subsequent to entering into the reinsurance agreement. The impact of the loss recognition prior to the reinsurance then indirectly impacted the amount of losses deferred at day one.

? In addition, certain errors were identified related to the Company's presentation of direct and ceded reinsurance liabilities on its consolidated balance sheets. As a result, ceded policy liabilities are expected to be reclassified from policy liabilities and accruals to receivables within the consolidated balance sheets to correct the error and reflect the proper gross presentation required under U.S. GAAP.


7. Pension Valuation

The Company identified errors in the pension account balances related to the valuation of its defined benefit plans and post retirement liabilities as a result of incorrect census data and assumption changes. The majority of these errors relate to census data, which were previously identified and determined not to be material individually, or in the aggregate, to the financial statements. In addition to these previously identified errors, the Company also identified certain additional census data errors and assumption changes for the defined benefit plans and post retirement liabilities, which were corrected and incorporated into its process.

8. Other Invested Asset ("OIA") Taxable Income Reporting

The Company identified an error related to the completeness and accuracy of taxable income related to its OIA portfolio. This resulted in the exclusion of material taxable income reported from partnerships during the period from 2008 through 2012.

9. Corrections to Classifications

The Company will make certain corrections to reflect direct and ceded reinsurance liabilities gross in the consolidated balance sheet and reclassify its sales inducement asset. These corrections are expected to have no impact on net income or total stockholders' equity.

. . .



Item 9.01 Financial Statements and Exhibits

(a) Not applicable

(b) Not applicable

(c) Not applicable

(d) Exhibits

The following exhibit is furnished herewith:

99.1 News Release of The Phoenix Companies, Inc. dated January 17, 2014.


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