The Phoenix Companies' CEO Discusses Q3 2012 Results - Earnings Call Transcript

Nov.20.12 | About: The Phoenix (PNX)

The Phoenix Companies, Inc. (NYSE:PNX)

Q3 2012 Earnings Call

November 20, 2012, 01:00 pm ET

Executives

Naomi Kleinman - Head, IR

Jim Wehr - President & CEO

Peter Hofmann - EVP, Strategy & Business Development

Chris Wilkos - EVP & CIO

Analysts

Randy Binner - FBR

Don Destino - Harvest Capital

Steven Schwartz - Raymond James & Associates

Rich Todaro - Kennedy

Operator

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

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

Naomi Kleinman

Good afternoon and thank you for joining us. I am 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, who served as our Chief Financial Officer throughout the third quarter of 2012 will provide a financial review. Also joining us on the call is Chris Wilkos, our Chief Investment Officer and Doug Miller, our Chief Accounting Officer.

Our estimated third quarter earnings release and our estimated third quarter earnings review presentation are available on our website at phoenixwm.com. Please note that we just issued a revised estimate for third quarter results which reflect incremental year-to-date tax effects from the restatement that needs to be recorded in the current period. The adjustment to income taxes was $3.3 million and also impact net loss, operating loss and total stockholders equity.

In addition, slide two of the presentation contains important disclosures. We may make forward-looking statements on this call that are subject to certain risks and uncertainties. These risks and uncertainties are discussed in detail in our estimated third quarter earnings release and our latest SEC filings. Our actual results may differ materially from such forward-looking statements. We assume no obligation to update these statements.

In addition to Generally Accepted Accounting Principles, we use non-GAAP financial measures to evaluate our financial results. Reconciliation with these non-GAAP financial measures to the applicable GAAP measures, are included in our press release.

Finally, on November 8th we announced that we are restating our annual financial statements for 2009, 2010 and 2011 as well as the quarterly statements for 2011 and the first two quarters of 2012. This means these financial statements can no longer be relied upon. As a result, we will be unable to compare estimated third quarter 2012 results to prior periods.

Now I’ll turn the call over to Jim.

Jim Wehr

Thanks Naomi and good afternoon everyone. We appreciate you taking the time to join us today. The format of our call will be a little different today with Peter including investment performance in his remarks and Chris Wilkos being available for any questions you may have. I want to begin by addressing our recent announcement about our GAAP restatement, before I turn to the results of the quarter, capital management and the progress we have made in the business.

As we said previously, the restatement driver is a classification issue within our cash flow statement. This should not affect our income statement or balance sheet. Clearly, we have made a decision to provide today’s estimated results acknowledging that they are estimated and being very clear that there is real potential for them to change as evidenced by the $3.3 million increase in taxes for the quarter we have just reported and Naomi referred to at the beginning of the call.

In spite of the risk of numbers changing, we felt it was important to provide as much transparency and context around our results as possible. That said, the restatement process will not distract us from the business or the real progress we’ve made over the past three years.

Clearly, from a GAAP earnings perspective, it was a tough quarter. And while the headline loss might grab attention, when you look beyond it, you see, once again we delivered performance in key areas. We also took a number of positive steps in the quarter to enhance our financial position and support profitable growth.

Here are several examples. It was a solid quarter from a statutory perspective. Investment performance remained strong. We saw improved profitability in the fixed index annuities and Saybrus continues to be profitable with healthy third-party revenues. We began deploying capital to reduce debt and enhance our financial position.

For Life Company, we purchased surplus notes on favorable terms and we announced a share repurchase program. We successfully executed a 1 for 20 reverse split and offered shareholders odd lot program. And just last month, we announced the reorganization of the management team to focus on enhanced execution of our business.

I will cover the quarter’s GAAP and statutory results first and then focus on capital management strategy. Starting with our GAAP financial results for the quarter, we had a $45.8 million net loss, including an $80.7 million pretax operating loss. Two items drove the operating loss; our annual accounting assumption review and adverse mortality. The review accounted for $63.4 million of the loss and mortality for another $23 million.

Let me take a moment to explain each item. The actuarial review is a significant negative this year largely the result of incorporating the assumption of sustained low interest rates into our analysis. Our residual segment which carries the DAC associated with the closed block or the bond. Peter will take you through the details and revised assumptions, but I want to emphasize that this was a thorough bottoms up refresh of our assumptions across the business.

While mortality is the other big negative in the quarter, our results should be considered upon a longer term perspective. We have had several recent quarters with favorable results, including very favorable experience in last year’s third quarter. It’s inevitable we will see a bad mortality quarter from time-to-time, but our historical mortality results remain favorable to expectations and we are comfortable with current assumption.

Looking at some of the other earnings drivers, net investment income included strong income on debt securities, a modest but alternative asset returns driven by the weak equity markets in the second quarter. Persistency has returned to historically normal levels with annualized life surrenders at 5.2% for the third quarter. The closed block was slightly better at 5%. The updated fixed index annuity products we introduced in June are gaining traction. However, it’s at a sales pace that is slower than projected, so we are lowering our sales guidance for the year to $850 million. While sales will be lower, this is an intended and favorable trade off between volume and profitability.

We also continue to see positive developments at Saybrus Partners. Third party revenues were highest ever and it produced $700,000 of EBITDA. Additionally, Saybrus added a couple of new clients that have the potential of contribute significantly in the future.

Statutory results were strong with the $17.5 million net gain from operations. Surplus was resilient, even in the quarter with poor mortality, our surplus now repurchased and a $15 million dividend for the holding company, estimated RBC was 391% at the end of the quarter.

Additionally, I want to comment on some misinformation circulated recently in the life settlement industry press regarding a litigation settlement of two related cases in California. The cases involved 32 Phoenix policies with about $277 million in debt benefits. The articles implied that this was a significant settlement that favors other investors who may own Phoenix policies.

We strongly disagree; the facts are that the court order mediation after three years of litigation and while a confidentiality agreement precludes us from discussing settlement terms, we are pleased with the outcome.

Turning to capital management, we repurchased $48 million par amount of surplus notes in September at $0.75 on the dollar which will reduce annual interest expense by $3.5 million. And we announced a planned share repurchase of up to $25 million which we plan to commence after the restatement is completed. Together, we expect these actions to improve earnings and ROE while lowering leverage and increasing interest coverage. We still have significant capital in the holding company to provide a cushion for adverse events and to grow the business.

Additionally during the quarter, we executed a 1 for 20 reverse stock split which will lower expenses. Last month we announced a reorganization of the management team. I would like to explain these changes. Over the past three years, we've stabilized the company by rebuilding the balance sheet and serving existing business and cutting expenses. At the same time, we've become what is essentially a start up business in the middle market focused primarily on fixed index annuities.

While we've made considerable progress, we need to do more. To address these challenges several members of my management team are taking on new responsibilities. Most notably Peter Hofmann is taking on business development and strategic planning in addition to capital management. Tom Buckingham is broadening his responsibilities by adding product development and other new business initiatives, while Ed Cassidy is taking on an extended role in developing distribution capability for Phoenix’s products in addition to running Saybrus. And Bonnie Malley is our new CFO.

We are fortunate to have a capable and versatile team and believe these changes will sharpen our focus on strategic business development, better support our core priorities and improve our ability to execute. In addition, we've engaged [Dan Hickey] a senior insurance executive as an independent advisor to assist the board as they evaluate our strategy and to provide guidance to both management and the board. That outside perspective is particularly useful as we intensify our focus on business development and profitable growth.

We are entering the next phase of the job we began at 2009, the task of rebuilding a great company and establishing a clear trajectory for growth. Of course it’s never a straight line and this quarter is a prime example. Looking at the results, you can see we've accomplished a lot and we intend to keep delivering.

With that, I will turn it over to Peter.

Peter Hofmann

Thanks Jim. Let me start on slide three by providing a bit of additional detail around the restatements and our plans to complete that work. As we've said the trigger for the restatement was a long standing cash flow classification issue. While beginning and ending cash are not affected the magnitude of the reclassification is driving the need for restatement. The periods we expect to restate are those that are included in the 2011 10-K and the most recent 10-Qs.

Under current SEC guidance when the financial statements are opened up for restatement, there's a requirement to correct any known errors material or not as part of the restatement. The items that we corrected in any period that related to prior periods now need to be booked in the correct period and reaudit it when necessary. It is this process that caused us to update our estimate of year-to-date taxes and issue a corrected release a short while ago.

From an internal control perspective, any time there's a restatement that there is a presumption that a material weakness exist. So it is likely that we will conclude in our restated SEC filings that one or more material weaknesses exist.

The restatement and control assessment process will take some time. We're committed to working as quickly as possible without sacrificing accuracy. We're targeting completion of the restatement by the time we file our 2012 10-K.

Turning to slide four, let me review the GAAP numbers in a bit more detail. I should point out again that these results are estimated and unaudited, that final results will not be reported until their restatement is complete. As Jim mentioned, the biggest driver of our pretax operating loss of $14.16 per share was our annual actuarial assumption review.

I will go over some of the key assumptions in a moment. In addition, we estimate that the negative mortality impact to pretax earnings was approximately $23 million or $4.04 per share. The open block ratio of GAAP net tax benefits and reserve changes divided by cost of insurance charges was 106% versus an expected ratio of approximately 75%. The driver of the mortality was a higher number, the larger average size of the claims in our Universal Life and older blocks, with lower than historical assets for DAC, reserves and reinsurance.

Mortality in the closed block was favorable in the third quarter but as you know, this has no impact on our GAAP results due to the policy holder dividend obligation. The closed block PDO as of September 30, remained healthy at about $150 million. The after-tax operating loss of $10.98 per share reflects a tax benefit due to the intraperiod allocation rules under GAAP. We remain an alternative minimum tax payer because of our strong statutory results.

We reported an estimated net loss of $45.8 million relative to the operating loss, this reflects realized gains of $37.3 million including a gain of $11.8 million from our surplus note repurchase and it includes $9.1 million of positive unlocking related to fixed index annuity embedded derivatives which was driven by low rates.

Slide five summarizes some of the key aspects of our actuarial assumption review. By far the biggest impact came from resetting our interest rate assumptions in light of the continuing low interest rate environment. The total negative impact related to revised interest rate assumptions was $57.1 million, the largest component of this was a DAC unlock and our closed block residual assets, the profits of which are used to amortize DAC associated with the closed block. The Universal Life block was also affected and we had a modest lose recognition in our small block of payout annuities.

Our approach to setting this assumption was to use the average of the last four quarters end forward curves and apply those to the existing asset portfolios. The chart on the right shows (inaudible) and the assumed portfolio yield for the residual asset segment. These yields are net of expenses defaults. To give you a sense for the market level of rates, we have reflected in these assumptions the new money rate embedded in that 2012 yield assumption was 3.8% for 2012, 4.7% by 2016, ultimately leveling out at 5.6% in the out years.

Other than the impact of the yield assumptions, we saw a modest negative impact from a change in some of the insurance recapture assumptions. We left our mortality assumption unchanged. Our current assumption continues to be supportable by our long-term experience. On the equity side, due to the spank of the market over the last few years but that remains very supportable. There is no significant impact on saying just to our policy order behavior assumptions.

Let me move onto statutory capital generation which is shown on slide six. Statutory surplus was $944.4 million as of September 30 and the estimated RBC was 391%, 67 percentages point of the year-to-date improvement in RBC same from core life insurance and annuity results as well as from strong alternative asset return.

Phoenix Life paid $54 million in dividends with the holding company year-to-date including $15 million in the third quarter. We also used $36.2 million to repurchase the surplus notes. Together, these two actions accounted for 30 percentage point declined in the ratio. But in another way without these uses of capital, RBC would have been around 420%. An estimated increase in the interest rate risk lowered the ratio by approximately 6 percentage point. We have remaining regulatory dividend capacity of approximately $18 million for 2012.

Finally, a few quick highlights from our investment results in the quarter which are shown on slide 7. Chris Wilkos is here to respond to any questions in more detail. Investment income was solid this quarter and unrealized fixed income gains increased because credit spreads declined during the quarter. Credit impairments were modest $6.5 million and remained below our long term pricing assumptions for credit losses, driven by solid corporate credit fundamentals and stabilization in the US housing market. Below investment grade bonds totaled 8% of the portfolio as of September 30. We had modest purchases of high yield bonds during the quarter, as high yield spreads remain attractive relative to other bond market sectors. With that let me turn it back to Jim.

Jim Wehr

Thanks Peter. As Naomi pointed out in our opening comments we are limited and what we can say about the restatement, prior periods and trends. But we will provide as much context as we can about the process and our current view of the quarter. So Jaclyn let's open up the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) our first question comes from Randy Binner, FBR. Your line is open.

Randy Binner - FBR

Just on capital deployment it sounds like that's on hold until the restatement is complete, and that would be you said around the 10-K time so we should think of that as kind of March typically. Is that right and just further on the capital deployment, does that plan kind of sit on the shelf until then. Should we still think about it as a potential or should that really be kind of pulled off the shelf.

Chris Wilkos

So the timing is right. And we've committed to it Randy as we should have this concluded by that date. There's certainly the possibility it could be done sooner, but this is one of those processes that is very time consuming and complicated. We have to go through, our auditors need to revisit the numbers, and we are going to be very thorough and make sure that everything is done correctly. So it could take as long as till early March and as a result the share repurchase program is anticipated to be on hold until then.

Randy Binner - FBR

Well, there's two questions I have on the restatement, one is, I think that Peter said there's like a long standing issue so was this something you had debated with the auditor for a while, is that what you meant by long standing, and then just to get a little more color if we can, I mean when you talk about a comprehensive review of the book, how comprehensive is that, because everything that's been described sounds like a fairly isolated cash flow item. Is it really a bright line you pass or you have to review everything; just looking for more color on those times.

Chris Wilkos

Randy I'm going to let Peter and then Peter may ask Doug to weigh in as well, but I'm going to let Peter start off.

Peter Hofmann

The item was never a subject of debate with the auditors. It was identified during the third quarter close process and its long standing in the sense that it’s been in the books for a long time, but not any way known prior to the third quarter. So we need to go back in to all those periods that we described too to make the correction. In terms of the restatement, I think what we're trying to point out is that it was just a matter of fixing the cash flow statement, it would not take as much time as we're indicating. But it is the other aspect of what I discussed which is the need to make adjustments for any other known error over the course of all those periods that and basically make sure that they are recorded in the appropriate period that is time consuming and that is going to be subject to review by the auditors as well as by us.

Randy Binner - FBR

Just want to follow up and I'll drop back from the queue. But I guess you are saying that you would have to address no one here. So should we take it from that that there is some expectations that there is issues that need to be dealt with?

Peter Hofmann

There has been over the years and these have been disclosed in the 10-Qs items that were recorded in a given period that were deemed not material at the time, but that related to prior periods. And now we need to go back and report in the appropriate prior period. There are also other items that in the current period that we're going through there are the assessment that may relate to prior periods that will also be corrected as part of this that have been reflected in the estimated results as we see them today.

Operator

Our next question comes from Don Destino from Harvest Capital. Your line is open.

Don Destino - Harvest Capital

Jim you mentioned somebody mentioned the $18 million dividend able, that’s the word. Are you planning on doing that?

Jim Wehr

So we have been doing that for the last several quarters, and we are making it clear that it is available. Our thinking at this point is that it’s highly likely that will be dividended in the fourth quarter.

Don Destino - Harvest Capital

I think if you dividend that up that’s about a 120 or whatever that’s a $142 million of cash as the holding company. You’ve got a market cap of about significantly less than that. At what point do we decide that what we are doing isn’t working and there is a better strategic or in the best interest of shareholders, there is something else we should be doing with this balance sheet. Is there a financial buyer out there that this would make a lot more sense and you could get rid of all of this public company stocks and we could just wind this down in best or friendly way?

Jim Wehr

There’s a couple of different aspects woven into that question, but let me start with the capital piece. You are right the capital position has been growing and we have been clear that we are going to use capital of both the operating and holding companies in a way that we think is in the best interest of the company including shareholders that is what is behind the recent decision to repurchased surplus notes. It is behind the announced plan to repurchased equity, once we get through the restatement, and its capital that we have also used to investment in new business.

So I think we have been very clear that, we have been accumulating the capital and we intend to use it very thoughtfully. Part of the benefit of having that capital is also to provide some cushion against unforeseen events, but clearly we have shown we are not on willing to put it to work in what would be considered capital management activities.

Regarding a potential transaction sale of the company; that is something that we don't have control over. We believe that in spite of the recent share performance that many of the activities that we have taken on and the results that go along with those over the last years in terms of increasing our capital by almost 70% turning from a company that’s been loosing money to making money suggest that many of the things we are doing are working. That being said, we are a public company and our Board has the responsibility to consider any serious offers for the company and that has always been our stance and will continue to be our stance.

Operator

Thank you. Our next question comes from Steven Schwartz of Raymond James & Associates. Your line is open sir.

Steven Schwartz - Raymond James & Associates

A few here, first, I guess maybe Jim you can give us a run down of any recent discussions you’ve had surrounding these accounting issues with the rating agencies in particular A.M. Best?

Jim Wehr

Sure. So as you would expect as we became aware of this, we had conversations with all three of the rating agencies and the regulators, both the Connecticut and New York Insurance Department. We were proactive. We initiated those conversations. We were very thorough in terms of walking them through what was involved, what the implications were and frankly what we are seeing, based on what we are seeing at this point in time what they weren't and namely that they weren't anticipated to be balance sheet affecting events nor income statement affecting events.

I would say those conversations all went quite well. The outreach was appreciated and we were satisfied and I think without speaking for the rating agencies and the regulators, I think they were satisfied. I think part of the satisfaction was evidenced by the fact that all three of the rating agencies put out statements after our conversation that said they did not anticipate the restatement to have an affect on our credit metrics. So I think that's a pretty clear statement and a very transparent statement of their view of what's going on here.

Steven Schwartz - Raymond James & Associates

Okay. And then if I may continue, I want to ask question with regard to the closed block and the actuarial assumption changes. I guess we don't have an income statement or supplementary like that, so I'm just trying to understand here; I gather the loss of the charge if you will, its so great that its beyond what can be absorbed by the dividend, is that a correct way of thinking about this?

Peter Hofmann

Not exactly Steven. The regulatory closed block and the dividend, the policy holders really is entirely independent of the GAAP backed process and the assumptions. The DAC is asset, it’s not a part of the closed block and it has to be amortized not with profits from the closed block itself, but with profits from the residual assets that back the liabilities of the closed block that are in excess of the closed block assets. And it’s the yield on those residual assets that we’re illustrating on the slide that I should point to that is really affecting and causing the writedown into DAC asset.

Steven Schwartz - Raymond James & Associates

I was going to say was I guess, what I'm understanding here is that there are assets associated with these policies that are not in the closed block and that's what you are talking about when you say residual assets?

Peter Hofmann

Yes.

Steven Schwartz - Raymond James & Associates

Okay. And then a couple more if I may. Mortality, it sounded like it was both frequency and severity, was there anything with regards to, I don't know, the age of the insured, the vintages or anything like that that you saw?

Peter Hofmann

So it was, you are right, it was less on the frequency side I would say than on severity. And in addition to severity and frequency, it was also the offsets from back and reinsurance that were less than they have been in prior periods. So in some sense the incidence of claims was in cohort set less reinsurance.

In terms of patterns, we are not talking about very large numbers of claims when it comes to these large claims, we look at them; we look at them overtime. There isn’t a pattern that we have determined. It's really much more of an incidence and a timing issue to some degree. Again going back longer-term, looking over multiple quarters, we’ve had favorable results in five or six of the last quarters. We have had an occasional adverse quarter and we would expect that from this block. We would expect that in the future, but we have not seen anything that would cause us to change our long-term mortality assumption.

Jim Wehr

Just to put into context, we had a quarter just a year ago, the third quarter of 2011, where we had favorable mortality to the tune of about $25 million. So in this quarter, we just had unfavorable, a very significant magnitude of $23 million. So it is not unusual to have, as Peter pointed out, to have some volatility and swing in those results and at some point they do there is some reversion right, it’s not like not something you can continually beat expectations on.

Operator

Our next question comes from Rich Todaro, Kennedy. Your line is open.

Rich Todaro - Kennedy

As you know I am still new to the space but if rates stay where they are at today and the thought process then gets pushed out another year on the interest rate assumptions, could we then expect a similar charge next year in this quarter or how do we think about that?

Jim Wehr

I am going to let Peter respond to that. Peter.

Peter Hofmann

Yes, so if we did change, we would make fairly meaningful change if you look at those yields. The expectation is that that’s built in as that’s the forward yield curve plays out or less the way it is. If that proves to be wrong and we find ourselves a year later with may be a similar shape yield curve but the short end being equally low as today, we would likely record an incremental charge but it would be nowhere near the magnitude of the adjustment that was recorded in this quarter, if you look at just those relative yields on that slide.

Jim Wehr

Yes, Rich I guess just may be settle a little bit differently the magnitude of the change from last year to this year is unlikely to be repeated, I think your question assumed if rate stay where they are, and if rate stay where they are, we are not going to see an interest rate charge or anywhere near the order of magnitude that we saw in this period, it was really driven by pretty significant change year-over-year.

Rich Todaro - Kennedy

Yeah, I guess I was assuming that maybe the recovery and the out years would affect and didn't happening, you pushed down to something by another year a sort of impact that would have on the financials that?

Jim Wehr

And Rich, what the chart shows is that we made a pretty significant downward adjustments both in our near-term assumptions and our longer-term assumptions and a lot of that frankly has to do with statements coming out as I said, about their commitment to keep rates slow for an extended period of time. So the forward curves have responded to that as you will expect.

Rich Todaro - Kennedy

As you guys run through these numbers because its some of the reflect box for me, I just don't know at what point or what starts to trigger any sort of serious issues to the financials for the company, what has happened for interest rate for how long or how much lower and what can you do about it if anything?

Jim Wehr

Do you want to lead up, maybe?

Peter Hofmann

So clearly the interest rate environment is one of the major headwinds for us and the rest of the industry. The core capitalization and claims paying ability of the company is less driven by the GAAP results and statutory results. And however, as on this quarter, if we do have significant adverse deviation from the assumptions that we currently have built and those could come from interest rates or mortality assumptions than we will have write downs to the tangible back assets. I think the more permanent challenge for the company is in a low interest rate environment is to address the reinvestment challenge and maybe Chris I don't know if you want to address.

From a reinvestment standpoint again we are not altering our strategy at all to deal with the low interest rate environment by either changing our duration parameters or our credit parameters. So we are continuing to invest as we have in the past as we've described and looking to make some incremental changes by adding additional private placement holdings or perhaps mezzanine holdings but certainly we are going to continue to do what we do and deal with the environment through that mechanism. We are not going to change our investment strategy or attempt to do anything that longer-term could impair our performance or our future yields.

Rich Todaro - Kennedy

But do you guys understand what I'm asking, is there what kind of starts to break the model where you are like no, reinvestment rate at 3% there's just nothing we can do, we are just underwater for too long. Or whatever the, I don't know what the assumption might be that could break the model for you guys but what's the big red flag as you guys are looking at it?

Peter Hofmann

It’s been much more of a gradual impact. If you look at our liabilities, a lot of our liabilities have the ability to adjust crediting rates to policy holders, the biggest one is the closed block where we have the dividend scaled that can offset some of the [funds] has offset the declines in interest rates. The universal life block has had some flexibility and has less flexibility so that is beginning to see some spread compression which will affect net investment income but its not, the interest rate scenario is not a cliff sort of a scenario, its more of an increasing headwind or increasing slope sort of scenario. Not one day you wake up and there's a quantum.

Jim Wehr

To be clear and everyone knows this; this is not a brand new phenomenon. This is something we've been dealing with and the industry has been dealing with for a while and Peter characterized it correctly I think its more of an earnings erosion than, we get to a point and earnings drop off dramatically and the model is unsustainable and the last point I would reiterate is there's a lot embedded in that answer. There are a number of levers that we can and have been pulling right. We can adjust credit rates on a large portion of the business, long duration nature of our investments need it takes quite a while to flow through, some of the segments we invest in are less rate sensitive, particularly alternatives, but including private placements, the closed block we have the ability to adjust our dividend scale so there are a lot of different levers we can pull to offset or to counter that headwind or that erosion that we referred to.

Rich Todaro - Kennedy

I know that you talked about that you couldn’t buy back stock until the restatement, can you buyback the notes?

Jim Wehr

That is an interesting question that to be clear there is the potential to do negotiated transaction with institutional investor. We would have to look at the circumstances case by case. We had an offering that we bought in the context of our current capital, and where the balance were offered that looked attractive. So I can’t give us definitive yes or now. We could evaluate a transaction and make a determination based on a number of factors including where the bonds are offered, what our capital position was and what disclosure or legal requirements we might be dealing with going through the restatement process.

Rich Todaro - Kennedy

I just need to clarify one last point. Did you guys say you bought back $40 million worth of notes at $0.75 on a $1, was that the number?

Jim Wehr

It was 48 million and $0.75 on the $1. So the proceeds were approximately 36 million.

Rich Todaro - Kennedy

So now the surplus notes in total face value is 80 or something? How much?

Jim Wehr

124 and forward, down from 170.

Operator

Our next question comes from Scott [Frost] of Merrill Lynch. Your line is open.

Unidentified Analyst

I just want to make sure I understand the classification issues. When you say you don’t expect the income statement to change, do you mean that net income won't change or that all of the items on the P&L will be unaffected?

Peter Hofmann

So let me contrast that the cash flow issue which is not an income statement issue or a balance sheet issue. The issue there is that we classified for GAAP purposes certain premium deposits as operating cash flow when they should have been classified as finance and cash flow. And that is error that gave rise to the statement. It is the other aspect that I described earlier of opening the books and making those adjustments that was previously recorded better that can affect income and balance sheet items at various period.

Unidentified Analyst

Okay, well let me make sure I get this because you K I think said, the classification of deposits as cash flows and continuing operations. When I look at your cash flow statement 2011, I have got minus 157 cash flow from continuing operations and then discontinued. It seems like you are saying that that actually goes, that the change would go down would affect the financing activities. I am not talking about the fees interest charges, but I am trying to figure out if you are reclassifying anything discontinued versus continued, if that’s the case you are saying that wouldn’t affect the P&L and can you just sort of may be give us an idea of what may be this is the better way to ask, what’s going to be overstated in or understated in the reclassification for the.

Peter Hofmann

What you will see is the cash used for operations, the number that you are looking at will increase. So the negative cash is for operation will increase significantly and likewise the cash provided by financing operations will increase and that impact will be zero.

Unidentified Analyst

Okay, and the dividend capacity you said $18 million, is that where that begins the ordinary dividend?

Peter Hofmann

That is the capacity under the New York regulations which limit dividends to lesser of 10% of prior year surplus or gain from operations and within that regulatory capacity.

Jim Wehr

It would be confident with dividends paid from the life company up to the holding company over the last several quarters.

Unidentified Analyst

Okay, but I am asking that it’s an extraordinary dividend or ordinary dividend, I guess?

Peter Hofmann

Not extraordinary.

Unidentified Analyst

Last question on surplus notes. After the restatement would you be more disposed to share buybacks or surplus notes or how would you characterize your preference and do you have any indications on where the surplus note levels are now?

Jim Wehr

So I tried to answer to that question that it would be very fact and circumstances specific in terms of whether we had more interest in doing more of that repurchased surplus note repurchased and I don't really want to get into that on the phone in terms of how much we might do and where we might do it for probably for obvious reason of things.

Unidentified Analyst

Do you have any indication on where you think the surplus notes are trading now?

Jim Wehr

I do not.

Let me conclude today's call with three important summary points from our perspective. First, we are working diligently to complete the restatement process, but we are committed as we said to take the time to do it and get it right. Second, based on what we know at this point and as we've said several times, it is not expected to have material impact on either our earnings or capital, and finally I think most importantly its clear we want to and we continue to make progress strengthening and growing the business. And as I said I think that of all the three points is the one that I would encourage everybody to focus on most intently. So thanks again for everybody’s time and attention today.

Operator

Thank you for participating in the Phoenix Third Quarter Earnings Conference Call. You may now disconnect at this time. Have a wonderful day.

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