(Source: Business Wire)
The Phoenix Companies, Inc. (NYSE: PNX) today reported a net loss of $74.8 million, or $0.65 per share, and an operating loss of $117.8 million, or $1.02 per share, for the first quarter of 2009. The operating loss includes a $115.9 million, or $1.00 per share, non-cash charge related to an increase to the valuation allowance on the company's net deferred tax asset. It also reflects $9.0 million, or $0.08 per share, of severance costs and non-deferred sales-related costs that the company is eliminating as part of its expense reduction initiative. Excluding these items, operating income was $7.1 million, or $0.06 per share.
"As we look at the first quarter's challenging results, we nevertheless see a company that has the capitalization, liquidity and financial flexibility to continue weathering severe economic conditions, despite new challenges presented by rating downgrades and the resulting suspension of sales by major distribution partners. From an earnings perspective, improvements from the fourth quarter were partially obscured by the magnitude of the increase to the tax valuation allowance, which can, ultimately, reverse as we work our way out of the current conditions," said James D. Wehr, president and chief executive officer.
"Mortality in the quarter was consistent with expectations, surrenders were elevated but manageable, and the closed block continued to produce steady profits. In keeping with our announced expense initiative, we began a series of significant actions in the quarter, including workforce reductions, that will begin to emerge in our results in the second half of 2009. These reductions started in areas most directly affected by the anticipated drop in business volume," he said.
"The financial markets continued to have an adverse impact on investment performance, but we are seeing some signs of a turn. Net investment income outside the closed block remained depressed but increased modestly from the fourth quarter. We also benefited from improvement in our unrealized loss position at the end of the quarter and moderating credit impairments compared to the last two quarters," Mr. Wehr said.
Mr. Wehr, who became president and CEO on April 15, noted, "the events of the quarter confirmed the importance of our ongoing efforts to preserve our financial strength and our plans to pursue different growth opportunities." He said Phoenix's strategy is built on four pillars that will return the company to a position from which to grow and build shareholder value:
1. Commitment to maintaining a healthy balance sheet with adequate capital and liquidity in order to successfully navigate through these uncertain times.
2. Commitment to policyholder security, ensuring that customers receive full value from their contracts and have all the facts to give them confidence in Phoenix's ability to pay claims.
3. Commitment to reducing expenses across the board to align our expense structure with current business volume and our evolving business model.
4. Commitment to a sustainable, profitable growth strategy that shifts the focus of new business development to areas that are less capital intensive, less ratings sensitive and not dependent on particular distribution partners.
FIRST QUARTER 2009 FINANCIAL HIGHLIGHTS Earnings Summary ($ in millions) First Quarter 2009 FourthQuarter2008 First Quarter 2008 Revenues $516.4 $562.6 $575.4 Benefits & Reserves (318.8) (371.5) (335.8) Policyholder Dividends (50.3) (74.1) (89.2) Operating Expenses (80.2) (66.5) (79.3) Policy Acquisition Cost Amortization (66.2) (257.7) (46.0) Interest Expense (8.5) (8.9) (10.2) Operating Income (Loss) Before Taxes $(7.6) $(216.1) $14.9 Income Tax Benefit (Expense) 5.7 98.7 (5.8) Tax Valuation Allowance Increase (115.9) - - Operating Income (Loss)1 $(117.8) $(117.4) $9.1 Realized Gains/Losses 44.8 (48.3) (14.6) Consolidated CDOs - (1.2) 0.8 Discontinued Operations (1.8) (211.4) (9.7) Net Loss $(74.8) $(378.3) $(14.4) Earnings Per Share Summary Net Loss Per Share Basic $(0.65) $(3.31) $(0.13) Diluted $(0.65) $(3.31) $(0.13) Operating Income (Loss) Per Share Basic $(1.02) $(1.04) $0.08 Diluted $(1.02) $(1.04) $0.08 Weighted Average Shares Outstanding (in millions) Basic 115.6 114.4 114.3 Diluted 115.6 114.4 114.3 -------------------------------------------------------------------------------
1 Operating income, as well as components of and financial measures derived from operating income, are non-GAAP financial measures. Please see "Financial Highlights" below for more information.
FIRST QUARTER 2009 OPERATING HIGHLIGHTS
Revenues declined from the year-ago quarter largely due to lower net investment income as a result of lower asset balances and losses from alternative asset classes, including a $23.0 million decline in net investment income outside of the closed block.
Operating expenses in the quarter included $8.6 million ($5.6 million after tax) of sales-related costs that the company did not defer and expects to eliminate as part of its expense reduction initiatives. Also included are approximately $5.3 million ($3.4 million after tax) of severance costs associated with the first phase of the previously announced workforce reduction. The company has eliminated approximately 170 positions through April and anticipates further reductions in the second quarter.
Policy acquisition cost amortization was $20.2 million higher than in the first quarter of 2008, in part due to the first quarter decline in the equity market and higher policy surrenders.
The increase in the tax valuation allowance of $115.9 million was recorded in accordance with GAAP accounting requirements. Nevertheless the company will actively pursue opportunities to realize these benefits prior to their expiry between 2011 and 2028.
Life surrenders were at an annualized rate of 8.2 percent for the quarter compared to a range of 4.8 percent to 7.2 percent over the previous eight quarters, and annuity surrenders were at an annualized rate of 20.0 percent compared to a range of 10.3 percent to 26.7 percent over the previous eight quarters. The current rate reflects the economic environment and customers' needs for cash as well as the company's rating downgrades. The company is managing surrenders through enhanced outreach to producers and policyholders and by maintaining a higher level of cash and liquid assets.
INVESTMENT GAINS AND LOSSES
Net unrealized losses decreased by $70.5 million during the quarter to $1,574.7 million at March 31, 2009. The total value of fixed income securities improved slightly due to spread tightening in several sectors and the adoption of FSP FAS 157-4, which allows the company to estimate fair value for assets where the volume and level of market activity have significantly decreased. At quarter end, 70 percent of the unrealized loss was concentrated in investment-grade debt, and the company expects securities with unrealized losses will continue to pay their contractual principal and interest.
Realized Investment Gains and Losses ($ in millions) First Quarter 2009 FourthQuarter2008 First Quarter 2008 Gross impairments $(38.3) $(137.8) $(40.5) Offsets (DAC, policyholder dividend obligation, taxes) 23.4 90.0 26.5 Impairments, net of offsets (14.9) (47.8) (14.0) Gain on deconsolidation of CDOs 57.0 - - Other realized investment gains 2.7 (0.5) (0.6) Net realized investment gains after offsets $44.8 $(48.3) $(14.6) Adoption of FSP FAS 115-2 Non-Credit Portion of Impairments Cumulative effect as of January 1, 2009 before offsets(1) $(36.0) Three months ended March 31, 2009 (19.3) -------------------------------------------------------------------------------
1 Cumulative effect as of January 1, 2009 recognized as a decrease to Accumulated Deficit and an increase to Accumulated Other Comprehensive Loss.
The company had net realized investment gains after offsets of $44.8 million in the first quarter of 2009, compared with $14.6 million in net realized investment losses in the prior-year period and $48.3 million in net realized losses in the prior quarter. The realized gains this quarter were due primarily to a one-time gain from the deconsolidation of two collateralized debt obligations in the portfolio.
Gross impairments resulting in realized losses in the first quarter were $38.3 million, compared with $40.5 million in the prior-year period and $137.8 million in the prior quarter. Net of offsets for taxes, deferred acquisition costs and policyholder dividend obligation, they were $14.9 million in the first quarter of 2009, compared with $14.0 million in the prior-year period and $47.8 million in the prior quarter.
The company adopted new guidance issued by the FASB, FSP FAS 115-2 and FAS 124-2, in the first quarter of 2009 that allows companies to separate impairments into a credit portion, recognized in earnings, and a non-credit portion, recognized in other comprehensive income. The adoption resulted in a cumulative effect adjustment before offsets for taxes, deferred acquisition costs and policyholder dividend obligation of $36.0 million as of January 1, 2009 for the non-credit portion of impairments recognized in prior periods. Net of offsets, the cumulative effect adjustment resulted in a $20.3 million increase to shareholders' equity, consisting of reduction to accumulated deficit of $11.7 million and a reduction to accumulated other comprehensive loss of $8.6 million. The non-credit portion of impairments in the first quarter of 2009 was $19.3 million, which was recognized in other comprehensive loss.
