The Phoenix Companies, Inc. (NYSE:PNX)
Annual Meeting of Shareholders Call
May 15, 2012 10:00 am ET
Tom Johnson - Chairman
John Mulrain - Corporate Secretary, EVP and General Counsel
Jim Wehr - President and CEO
[Technical Difficulty] …Sam and Hartford and in accordance with the notice of the meeting, I now call it to order.
Before we begin, I would like to ask anyone with a Blackberry or iPhone or similar device to please turn them off. The wireless microphone in this room pickup the signals from these devices and will create interference which would be unpleasant. Thank you.
An agenda is on each chair and it includes procedures on the back. My job today is conduct the meeting so that we can cover all the legal requirements and also ensure that management has time to communicate important information about Phoenix and that all of you have time to ask any questions and share any comments on topics important to you as the owners of this company. That is why for each of the proposals presented in Shareholder Access, we have set aside time for you to ask questions and make comments. We also have time for questions and discussion after that.
Let me go through some of the formalities on disclosures right now. I don’t expect you to be able to read this, but the entire presentation is posted on the Investor Relations section of our website. The point of the slide is that our presentations today may contain forward-looking statements within the meaning of federal securities laws and actual results may differ materially from those suggested by forward-looking statements. Please refer to the Safe Harbor disclosures contained in our 2011 annual report on Form 10-K and other SEC filings.
Let me make a few introductions starting with my fellow Independent Board Members. I ask that each director stand and face the shareholders as I call your name. Martin Baily, Senior Fellow at the Brookings Institution; Arthur Byrne, Operating Partner of J.W. Childs Associates; Sanford Cloud, Chairman and Chief Executive Officer of The Cloud Company; Gordon Davis, Partner in the law firm of Venables LLP; John Forsgren, Former Vice Chairman, Executive Vice President and Chief Financial Officer of Northeast Utilities; Ann Maynard Gray, Former President of the Diversified Publishing Group of Capital Cities/ABC; Augustus Oliver, Managing Member of Oliver Press Partners; and Arthur Weinbach, Chairman of CA Technologies. And to complete the list, I’m Retired Chairman and Chief Executive Officer of GreenPoint Financial Corporation. Please join me in recognizing me Independent Members of our Board.
Now, I’d like to introduce James D. Wehr. Jim is also on the Board and as Phoenix’s President and Chief Executive Officer. In a few minutes Jim will give you a report on where Phoenix stands today and the direction we are headed in the future. He will also introduce his Executive Management team.
We have a great management team and Jim and I make call on some of them to help address to your questions. They're also available if you would like to speak privately with any of them today after the meeting. Let me just say on a personal level that I feel very privileged to work with Jim and the other members of his management group who are working so hard and so effectively to make this company as good as we all wanted to be.
Next let me introduce [Lanora La Conch] of Computershare who has been appointed as Inspector of Election. I believe Lanora is way in the back, way in the back to assist in the tabulation of proxies and ballots.
Before I continue with the rest of the meeting I would like to say a few words as your chairman. Throughout 2011 Phoenix continued to make significant progress critical to our future success. The fundamentals of the business are now solid and we have positive momentum on many key metrics including capital growth, earnings and sales. Our main disappointment, and we share this I am sure with each of you, is that this very real progress has not yet translated into a better stock price. Nevertheless Jim and the management team have consistently focused on the right priorities over the three years he has been CEO and are very successful in what they set out to do.
Phoenix today has a completely different business profile. We have a repositioned core life and annuity business serving middle market customers' retirement and protection needs and a growing distribution consulting firm. I am very confident in our company's prospect for the future. One behalf of the board and our shareholders I would like again to recognize Jim and all our Phoenix employees for the success they achieved in 2011 and the progress they continue to make in 2012.
Now, let me make one final introduction, Mr. John Mulrain, our Corporate Secretary and ask him to report on the mailing of the notice of this meeting and the presence of a quorum.
Thanks Tom. This meeting has held pursuant to a printed notice mailed on or about April 3, 2012 to each shareholder of record on March 19, 2012. A list of shareholders entitled to vote at this meeting has been available at this location for the past ten days and is available with the meeting for examination by any shareholder. All document concerning the call and notice of the meeting will be filled with the records of the meeting. The count of shares present immediately prior to the commencement of the meeting indicated that 78,637,386 shares of the company's voting capital stock were present in person or by proxy. This is approximately 68% of the outstanding voting stock of the company.
Thank you, John. I hereby declare a quorum present at this meeting.
If you would like to book in person at today's meeting please signal an usher and a ballot will be delivered to you at your seat. It's coming. Oh, you already have it. After voting has been completed on all matters on the agenda, the ballots will be collected and counted. If you have already submitted your proxy on the matters to be voted on, you do not need to submit anther ballot unless you wish to change your vote.
Before we proceed to the business and matters to be acted on today, I will entertain a motion to waive the reading of the minutes of last year's Annual Meeting held on May 17th, 2011. May I have such a motion please? Is there a second? All favor of the motion please say aye. Any opposed say no. The motion is passed and thankfully the reading of last year's minutes is waived.
We will now move on to the business matters contained in the agenda for this meeting. The first proposal is the election of three Directors to serve until the 2015 Annual Meeting of Shareholders. The nominees are Mr. Sanford Cloud, Mr. Gordon Davis, and Mr. Augustus Oliver. I'm now going to ask for a motion to elect each of the three nominated for election to the Board of Directors. Is there a second? Thank you very much.
If there are questions or comments specifically related this is the appropriate time to raise them. Please follow the procedures contained on the back of your agenda. Are there any questions or discussions?
Seeing and hearing none, we will move on. I suggest that those shareholders who are voting in person, now mark your ballots and retain them.
The second proposal being submitted to shareholders for action is the ratification of the appointment of PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for 2012. Before this proposal is moved, I would like to introduce Darlene Martin and Brody Gilbert of PricewaterhouseCoopers, would you please rise, you have to risen to face the shareholders. If you have questions during the discussion period of the company's auditors should appropriately address, these individuals will be glad to respond. I now ask for a motion to approve the proposal to ratify the appointment of PwC as the company's independent registered public accounting firm for this year. Is there a second? Thank you very much. Are there any questions or discussions on the appointment of PwC?
Those voting in person should now mark your ballots on this issue and retain them.
The third proposal is the advisory resolution on compensation paid to the company's named Executive Officers or say on pay. I'm going to ask on motion on that one. Is there a motion? Is there a second? Thank you very much. If there are questions or comments specifically relating to Executive Compensation matters, this is the appropriate time to raise them. Are there any questions or discussion?
Those shareholders voting in person can now mark your ballots on this particular question and still hold on to them.
The fourth and final proposal is to grant the Board discretionary authority to amend the company's certificate of incorporation to effect a reverse stock split and authorize share reduction. I'm now going to ask for a motion to approve granting the Board this authority. Is there a second? Thank you very much. Are there any questions or comments on this proposal?
Those shareholders voting in person can mark your ballots on this one and will the ushers please collect the ballots. I believe there is only one person who has filled out. You filled out a ballot and would an usher come and pick up that ballot please. Okay.
Will the secretary please report the preliminary results of the balloting? Please note that the final results of the voting, which will include any votes collected during this meeting will appear in an SEC Form 10-K, as required by SEC disclosure rule to be filed within four days of this meeting. John?
Preliminary results indicate that each of three nominees for election has received votes from at least 50% of the votes cast for directors.
Second approximately 93% of the votes cast have been voted in favor of the ratification of the appointment of PricewaterhouseCoopers LLP to serve as the independent registered public accounting firm of the company for the year 2012.
Third, approximately 46% of the votes cast have been voted in favor of the advisory resolution on compensation paid to the company's named Executive Officers.
And finally, approximately 90% of the votes cast has been voted in favor of granting the board discretionary authority to amend the company's certificate of incorporation to effective a reverse stock split and authorize share reduction.
Thank you, John. I hereby declare that the pre-nominees for director has been duly elected. The appointment of PricewaterhouseCoopers to audit the financial statements of the company and its subsidiaries for the year 2012 has been fully ratified. Shareholders did not approve the advisory resolution on compensation paid to the company's named Executive Officers. As a result, we will be seeking additional feedback from shareholders in evaluating our compensation program based on that feedback.
I must say that the feedback we have received so far is on the relationship between the CEO's relatively modest increase in compensations, and the change in the stock price, which was negative. As we consult with shareholders, we will be particularly grateful for any thoughts you may have on what we might do other than what we have been doing to affect the stock price.
Finally, shareholders have granted the Board discretionary authority to effect a reverse stock split.
This concludes the business portion of our annual meeting.
With that, I will now turn the podium over to Jim, who will report on the company. After Jim's remarks, we will open the floor to general questions and comments. Jim?
Thanks, Tom, and good morning everyone. It's great to be here, especially when there is solid progress to report once again. It's truly it's a team effort. So let me start off by introducing the management. This will be in alphabetical order. We ask that you stand and face the shareholders as I call your name.
Ed Cassidy, Executive Vice President, Distribution, and Managing Principal of Saybrus Partners; Peter Hofmann, Senior Executive Vice President and Chief Financial Officer; John LaGrasse, Executive Vice President, Alternative Retirement Solutions; Bonnie Malley, Executive Vice President and Chief Administrative Officer; John Mulrain, who Tom already introduced in his role as Corporate Secretary, John is also Executive Vice President and General Counsel; Philip Polkinghorn, Senior Executive Vice President, Business Development; and Chris Wilkos, Executive Vice President and Chief Investment Officer.
Of course, the management team doesn’t do it alone. So I want take this opportunity to acknowledge and thank all Phoenix employees for the success we have been able to achieve.
So let's take a look at what's been accomplished. We announced our first quarter results earlier this month, so I will present our results including first quarter results as well. My overall message to you this morning is one of dramatic change from three years ago and steady progress over the past year.
Let me address our share price, because it is the one area that has run counter to the favorable trends we have developed on almost every other operational and financial measures. Although it has long since recovered from the low point in early 2009, our share price, as Tom said, was down at 2011 even more than industry peers.
So far this year, stock is up 7%, but it has yet to recover fully from last year. In our view, the market is not giving us adequate credit for the progress we have made and little or no credit to our potential. However, I do believe that continued progress along the path we are on will lead to long term value for our shareholders. I have no doubt that we have the right priorities and are succeeding in the right areas. Mainly our balance sheet is stronger, business fundamentals including mortality and persistency are good, we are managing expenses aggressively, and we are growing the business profitably. After coming back from a very low point, we are now on solid footing gaining traction on growth and an opportunistic investment given our shares trading at 22% of book value.
My presentations won't dwell too long on history, but I do think it provides important context for how we have transformed this company. 2009 was a brutal year. Multiple downgrades from all the rating agencies, loss of major distributors which led to further downgrades, a product portfolio with essentially no market, the stock hitting bottom at $0.21, large losses, shrinking capital and an outsized expense structure.
This was an unsustainable enterprise if we didn’t change but we had confidence in the inherent value of the Phoenix franchise, and with the right plan and effective execution we could navigate the long road back.
Here we are today improved in all of these critical areas, ratings, distribution, financial strength and stock price. Phoenix is now a growing enterprise serving the middle market through independent distributors, mostly independent marketing organization or IMOs. We consider ourselves a boutique firm and now we’re focused and have a high degree of expertise. We have a variety of life and annuity products but most of our recent sales have been in the fixed indexed annuity space. We have a very large in-force block of almost $122 billion and around $5 billion in annuity assets under management.
We have taken a hard look at our competitive strengths. We have an edge in the middle market and with IMOs given our recognized brand and products that are well designed and provide value. Our long history dating back to 1851 speaks to a company that has staying power. Phoenix is poised to grow but we are also cognizant of where we've been. So, we approach growth with disciplined balanced sales, capital and earnings.
These four strategic pillars, I know already who works at Phoenix is all too familiar with these but they've worked and they're going to continue to work for us, are probably very familiar to those who follow us. They represent a very clear strategy we laid out three years ago that has brought us to where we are today.
In '09, our initial priorities were on the first three pillars, healthy balance sheet, policyholders' service and operational efficiency. Over time, they've provided the necessary foundation for our fourth pillar, profitable growth. We intensified our focus growth pillar in 2011 and continue that focus to 2012. The next several slides provide an update on specific progress against each of our strategic pillars.
Regaining balance sheet strength was our top priority when established this four pillar strategy. At March 31, statutory surplus had increased more than 50% since the end of '09 and our estimated risk based capital ratio was up 148 percentage points to 371%. Behind those numbers is a well diversified and high quality investment portfolio as well as favorable mortality experience especially in 2011.
We continue to take action to build a strong and flexible capital position including a reinsurance completed in the fourth quarter that added further financial flexibility. At March 31, we had almost $120 million in cash and securities at the holding company which is more than four times our annual holding company obligations.
Persistency of business is how we measure the success of our policyholders' service initiatives. Surrender rates reached very high levels in 2009. They've improved significantly ever since and are now at more normal levels. This took tremendous effort and as a testament to the ability of our team to set an objective and then deliver.
This pillar also encompasses our work at reducing service costs and aligning our overall service model with our growth strategy. There is clear overlap with our operational efficiency work which I'll turn to now.
We reduced core expenses by 23% since 2009 through series of actions that started with significant staff reduction and expanded to include employee benefit reductions and sweeping changes to our operating infrastructure.
In the simplest terms all of these actions aligned our expense structured with our current business model, and the work continues as our business continues to evolve. While on going expense management is critical generating growth is ultimately the key factor in making further progress on ratings and stock price appreciation.
Today, we continue to reduce our expenses in our operations while investing in both infrastructure changes and new business initiatives. We've committed to an additional $20 million of expense reductions by the end of 2013. Anybody who works for me knows I'm a bit of a camel so (inaudible). Okay back to business.
Let's look at where and how we’re growing the business. Since 2009 we focused on two primary areas, the middle market and distribution consulting. This slide shows the progress we've made with our middle market strategy which has been concentrated on fixed indexed annuities. There’s a strong demand in this low interest rate environment for income product like these and we've designed them to be profitable with the flexibility to adjust price as necessary.
As we built out our product portfolio we also had to rebuild distribution. We now have selling agreements with independent marketing organizations representing more than 7,000 independent producers. We've also worked with a few of the larger IMOs to co-develop products with exclusive distribution rights.
Thinking back and looking at where we were, we basically started at zero in this business in 2009 and are gradually up here in this space. Our annuity net flows have been positive for six straight quarters.
We are also working to grow our life business. Earlier this year, we launched [NXUL] product for the middle market and currently have selling agreements with eight distributors. We expect life sales be pretty modest this year, but believe it’s important for a long-term success to rebuild this business to help balance our growing annuity and distribution businesses.
In our distribution business, Saybrus Partners has been growing steadily. Results have improved every quarter since it was established in late ‘09 and it became profitable in the third quarter of 2011. We established Saybrus as a way to retain and use our existing distribution capabilities at a time when we were not telling a lot of our own products.
Saybrus rents our distribution capability to other institutions. For example, Saybrus consults with Edward Jones Advisors representing John Hancock and Pacific Life Products, and of course Saybrus continues to represent Phoenix products with our distributors, those IMOs I mentioned a moment ago.
We look at Saybrus as a separate process center, but as a distributor of Phoenix products, Saybrus’ success is key to the overall success of the enterprise. We are pleased with the progress on both the Phoenix and third-party aspects of Saybrus’ business model.
Ratings have been an important part of our storey for the last three years, starting as a big negative in 2009 and evolving to positive in 2011. Currently, two of the rating agencies have assigned us a positive outlook, seem like it was never going to happen, but it’s nice and finally has, and one is stable.
Earlier this year, we received our first upgrades since late '90s, when S&P upgraded our holding companies’ counterparty’s credit rating. What the rating agency is saying about us is probably more important than their actions. They acknowledged our stabilized and improved financial profile, improving capital adequacy and emerging earnings. They've specifically pointed to our reduced render activity, expense management and de-risking of the investment portfolio areas of strength. Most important, they believe we can grow.
So, for 2012 and beyond, profitable growth is our primary strategic objective. Looking at the growth pillar, we currently expect over a billion in annuity sales in 2012. We will continue to grow Saybrus profits through third-party and Phoenix sales and we are getting back into the life insurance business opportunistically.
At the same time, pillars one through three remain very important. We continue to focus on the balance sheet, increasing capital and financial flexibility as we maintain adequate RBC. We expect to maintain the now normal persistency levels and are working to reduce service costs further. We are currently building a service model that is more closely aligned with our new distribution and new products, and we are targeting further expense reductions; $20 million by the end of 2013, as we implement that more efficient service model and aggressively manage outside services.
While ongoing expense management is necessary generating growth is also a critical. So we will continue to invest in new business initiatives but carefully balance that growth with profitability, expense management and capital consumption.
At the beginning of my remarks, I said that Phoenix was an opportunistic investment. We built a strong platform with a healthy balance sheet, high quality investment portfolio, strong holding company liquidity and profitable in-force business. And building on that platform we are trending in the right direction, profitable growth. We are delivering earnings, managing expenses and growing sales.
Yeah, we are trading at 22% of book value. I believe this disconnect between improving fundamentals and growth in our share price will ultimately go away. In some ways, I think it's similar to where we were with the rating agencies a couple of years ago, our results were improving, but they wanted us to do more.
We continued to perform well and the rating agencies ultimately acknowledged our progress, improved outlooks and provided outlook upgrades and credit upgrades. Now, we have to do more the same, convince investors, continue delivering results, tell our story effectively, explore further actions we can take to enhance their shareholder value including capital management.
In summary, we have made significant measurable progress and have a sound strategy for growth going-forward. This management team has demonstrated delivered results and continues to execute. That makes me personally optimistic and enthusiastic about Phoenix's future.
I thank you for your support and for coming out to meet with us today.
With that, I'll turn it back the Tom.
Thank you, Jim for that very good and thorough update on the company, and we are now ready for general questions on any subjects relating to the company. Are there some questions? Yes, sir.
Thank you for the encouraging remarks. I was in (inaudible) once, I used to work over there for Paine Webber and I had great admiration for this building. I didn’t know that your or I didn’t pay attention about a reverse split, which I think a lot of people may not fully understand. But I noticed like yesterday when I looked at the computer, your stock was down to $1.79, your book value was over somewhere around $9.50, and of course what's that speaks to me is that you're liable for a takeover in a way, people see your value as, but I thought maybe if you don’t mind to explain a little about your book value and the possibility of a takeover, and what happened with your split, just curious that if you talk about it?
I am going to ask Jim to answer that. Of course, he is going to say that we don’t make comment on the possibilities of any kind of a combination with anybody, but Jim you want to extend on that?
Sure, sir, let me start with the reverse stock split. So I think people are more familiar with stock, stock splits than reverse stock splits, but it’s the same concept in reverse. So what we have asked for shareholder approval on and received is the potential to convert a larger number of shares into a small number of shares. The effect that will have will be that will increase the share price and reduce the number of shares. We think both of those are benefits to our shareholders.
A smaller number of shares should lead to ultimately a smaller number of shareholders likely. A big part of our expense is associated with a number of shareholders we have. We will have small individual shareholders maybe like yourself, but others in this room who received a small number of shares in the demutualization as policyholders.
So shrinking the number of shares should ultimately lead to a smaller number of shareholders which should lower our cost of administering our shareholder base. We have done some estimates in the range of $200,000 a year. A $200,000 a year to company like us is real money.
As Tom said, I am not going to comment on the takeover. I referenced the discount of our market share price to our book value, and that’s something that we want to see that discount closed, right. We want to see our share in the right way.
We want to see our share price appreciate. And all the things we have done over the last three years to clean up the balance sheet to lower expenses to improve earnings, we believe fundamentally should transfer into a higher share price. We are a bit disappointed that it hasn’t. I used the rating agency analogy, and a lot of questions people inside and outside of this company over the last couple of years, when is the rating agencies going to pay attention to the good work that’s been done, and eventually it happened.
You may or may not know, but it sounds like you I spent most of my career in the investment business, and it’s hard to control markets. What’s you can control is fundamentals, and we have done a half a lot to improve the fundamentals in this company. We believe that ultimately the market should recognize that. I don’t really want to focus too much on the market. I think it’s important that I and the management team and this board focused on the fundamentals on the premise that ultimately we do all the things we are doing it translates into better earnings, it translates into higher share price.
Thank you, Jim. Other questions? There being apparently no further questions that enables us to end on a very high note. I appreciate your question, which gave Jim the opportunity to give a very good answer regarding the progress that’s been made by the company and its future prospects. So, I would ask for a motion to adjourn. Is there a second? All in favor? Thank you very much. Thank you for coming and we are adjourned.
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