The Phoenix Companies, Inc. Q4 2007 Earnings Call Transcript

The Phoenix Companies, Inc. (PNX)

Q4 2007 Earnings Call

February 7, 2008 10:00 am ET

Executives

Ron Aldridge

Dona D. Young - Chairman, President and Chief Executive Officer

George R. Aylward - Senior Executive Vice President and President, Asset Management

Peter A. Hofmann - Senior Executive Vice President and Chief Financial Officer

Jim D. Wehr - Senior Executive Vice President and Chief Investment Officer

David R. Pellerin to Senior Vice President and Chief Accounting Officer

Philip K. Polkinghorn - Senior Executive Vice President and President, Life and Annuity

Analysts

Robert Glasspiegel - Langen McAlenney

Keith Walsh - Citigroup

Thomas Gallagher - Credit Suisse

Steven Schwartz - Raymond James

[Yuga inaudible] - KBW

Eric Berg - Lehman Brothers

Presentation

Operator

At this time I would like to welcome everyone the The Phoenix Companies conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer period. (Operator Instructions). It is now my pleasure to turn the floor over to your host, Mr. Ron [Aldridge]. Sir, you may begin your conference.

Ron Aldridge

Thank you Lynn. Good morning everyone and thank you for joining us. Today’s call was hosted by Dona Young, Chairman, President and CEO of Phoenix. Also joining us are Phil Polkinghorn, President of Life and Annuity, George Aylward, President of Asset Management, Peter Hofman, Chief Financial Officer, Jim Wehr, Chief Investment Officer, and Dave Pellerin, Chief Accounting Officer. If you have not received our fourth quarter earnings release, our Quarterly Financial Supplement, and the fourth quarter Earnings Review Presentation by email you can download these from our website at www.pheonixwm.com. If you turn to slide 2 of the presentation I want to make you aware that we may make forward looking statements on this call within the meaning of The Private Securities Litigation Reform Act of 1995. These forward looking statements are subject to certain risks and uncertainties. I refer you to the disclosures contained in our fourth quarter earnings release and our latest SEC filings. These risks and uncertainties may cause actual results to differ materially from those contemplated in such forward looking statements. In addition to generally accepted accounting principles, we use non-GAAP financial measures to evaluate our financial results. A reconciliation of Phoenix’s non-GAAP financial measures to the applicable GAAP measures and other applicable disclosures are included in our press release and financial supplement. Now I will turn the line over to Dona.

Questions- and- Answer Session

Dona D. Young

Thank you Ron. Good morning everyone. This is certainly a time of change. As you saw with our two announcements this morning, we are delivering growth in our core business and generating continued strong financial performance while addressing the structural issues that will position those businesses for long term success. At the same time profound change is occurring in the financial markets. We believe that Phoenix, though not immune from the impact of the new credit environment and economic slowdown, is well positioned for continued success in these turbulent financial markets. I would like to begin by mentioning some highlights of a very productive 2007. We extended our State Farm contract for 5 additional years from 2011 to 2016. We entered into the [VJ] distribution channel where we drove strong sales growth. We reached an agreement with National Life Group to promote our variable annuities and to add their Sentinel funds as investment options. We signed an agreement with Jefferson National to develop a low cost no load variable annuity aimed at the fee based advisor. We formed Life Solutions Subsidiary. We began an alternative products business, and we continued our multi-year efforts to improve efficiency and cut costs. One recent example of these efforts is our decision in the fourth quarter to outsource a significant portion of our asset management transfer agent activity. We had a successful year in our results.

Now let’s look at those results for the fourth quarter and full year. Operating income in the quarter was solid reaching $29.7 million or $0.26 per share. Net income totaled $4.5 million or $0.04 per share. Net income was reduced by net realized investment losses of $20.9 million or $0.18 per share. Looking at the full year I am particularly pleased to report that 2007 operating income grew 55% year-over-year to $135.3 million, a company record. As strategies we put in place over the past several years continue to achieve great success year over year 2007 net income grew 24% to $123.9 million, also a company record. This strong income growth is driven by enhancements for our product offerings, new and expanded distribution relationships, and improvements in operational profits. We see a very bright future ahead for Phoenix with a continued solid income and sales growth driven by increasing our market share in our current business and by entering new businesses with high growth potential. 2007 life and annuity pretax income of $215.7 million also set a company record. This growth was driven by income from Universal Life of $59.6 million, up 12% year-over-year and from annuities up 4 fold. Life sales and annuity deposits showed excellent performance at both the quarter and the year. Total annualized life premiums grew 82% year over year for the quarter and 36% for the full year.

Total wholesale annuity deposits excluding discontinued products grew 63% for the quarter and 51% for the full year. Annuities resumed sequential improvement and quarterly net deposits as growth in new higher margin variable annuities more than offset the runoff of older lower margin products. Both quarterly and full year annuity net deposits were positive. This strong growth in life and annuity sales bodes well for potential future income growth. Insurance fundamentals remain solid in the quarter and for the full year. Mortality margins and investment margins and persistency all performed within expected ranges. Our broad and expanding distribution relationships were key drivers of this strong performance. Phoenix’s unique alliance with State Farm as the sole provider of life insurance and annuities to State Farm’s high net worth and affluent customers continues to strengthen. In the 6 full years of our alliance, Life Sales through State Farm grew 14% in the quarter and 13% for the full year. Annuity deposits through State Farm grew 63% in the quarter and 43% for the full year. We expect combined life and annuity sales through State Farm to double over the next 4 years. Sales through the Brokerage Channel Agency channel which we entered in late 2006 are large, growing and well diversified. Sales to VGAs represented over 35% of our annual life, life premium in 2007. Twenty six firms generated more than $1 million of annual life premiums during the year.

Looking at distribution on the annuity side. Very strong deposit growth in the quarter was driven by State Farm which continued to generate the majority of our deposits, and also by a strong contribution from National Life Group. Moving to the investment portfolio. Among the asset impairments recorded in the quarter was $17 million pretax for the full value of the Durant CDO. This position which we identified as potentially at risk in previous calls is a one of a kind security in our portfolio. It is our only CDO with sub-prime collateral, in fact our only asset backed CDO. The remaining CDOs in our portfolio are primarily backed by bank loans, investment grade bonds and commercial mortgage backed securities, areas that have seen relatively low levels of default to date. While we are disappointed with increased asset impairments in the fourth quarter and full year, what is unusual is not the current level of impairment, but the extraordinary low levels of defaults we saw in 2004 through 2006. We remain comfortable with the state of our investment portfolio. It continues to be of high quality while diversified by sector, industry and issuer and liquid. We have an experienced credit staff who follow disciplined processes of bottom up security analysis and monitoring and who have managed through trying markets like this before. Our investment portfolio remains concentrated in corporate bonds where in spite of the subprime issue, default rates remain at very low levels. In structured products we have limited exposure in sectors currently experiencing greater volatility. Our residential mortgage backed exposure remains high quality, diversified, and with minimal holdings in the recent [inaudible] that have been the most troublesome. We have very small exposure to bonds at broker dealers, mortgage banks and home builders. Our holdings wrapped by financial guarantors are also small. Peter will show you slides with more detail in these areas in a moment.

Assets management performed well in the quarter relative to the difficult market environment. While product sales were restrained by investor’s hesitancy to invest in equities, it was encouraging that fund outflows also remained low. As we indicated in December, net flows for the full year were modestly negative at $513.1 million. This represented a substantial improvement in flows by more than $3.5 billion in 2007 versus 2006. To lend some perspective, cumulative net outflows in 2003 through 2006 exceeded $17 billion. This turn around in fund flow performance was attributable in large part to a substantial improvement in relative invest performance. 51% and 60% of assets under management exceeded their 3 year and 5 year benchmarks respectively in the quarter. 63% and 64% of asset management funds performed in the top 1/3 of their category. 49% of mutual funds received 4 or 5 stars from Morning Star and 81% received 3, 4, or 5 stars. Full year 2007 operating income and net income for asset management improved substantially over 2006 due to the absence of intangible impairments this year.

Now let me turn to this mornings other announcement. We intend to distribute our asset management business as an independent company, excluding Goodwin Capital Advisors, in a tax free spin off to Phoenix’s share holders. Owners of Phoenix common stock as off the spin off date will receive publicly traded shares of the new asset management company. The details of this transaction including the number of shares of the new company shareholders will receive and the precise timing of the transaction will be announced as they are finalized in the coming months. The entity to be spun off achieved 2007 estimated EBITDA of approximately $37 million to $42 million, excluding Goodwin and reflecting in the operating expense structure anticipated for the new company. We expect the spin off to occur during the third quarter of 2008. The spin off entity will include the current affiliates Duff & Phelps, Kayne Anderson Rudnick, SCM, Oakhurst, Zweig, Engemann, and Walnut.

Independence of advisory relationships with Vontobel, Harris, Sasko, Turner, Acadian, [HFCC Holbiss], New Star, and the Boston Company will continue. Goodwin will continue to be owned by Phoenix and will manage the general account. In addition, it will act as subadvisor to certain mutual funds of the spin off company and will manage assets for institutional clients. Phoenix Asset Management offers more that 50 mutual funds with a broad range of investment objectives including a number of funds in all major asset classes. The business also manages closed end funds, managed accounts, and institutional products. These products have calmed administration and distribution support. A network of 35 internal and external wholesalers provides broad distribution to all major wire houses and platforms.

No doubt you are asking why are we taking this action and why are we taking it now? As you know, over the course of 5 years we have been working to reshape and refocus the asset management business resulting in significantly improved performance beginning about 18 months ago. This performance enables us to develop good options for the business. Options that were previously nonexistent. For the first time we can realistically consider whether the asset management and the life and annuity businesses would perform better as independent entities. We concluded that they would. The spin off frees up too much improved businesses to prosper and to achieve more on their own than they could together. Phoenix’s life business has been refocused as a pure manufacturer of quality products distributed though third party and meeting the needs of affluent and high net worth customers. Our product portfolio combines a broad core of competitive life offerings with innovative products that meet unmet needs. Third party distribution is strong, expanding and diversified. Improved customer service is driving increasing market share. Phoenix’s annuity business has been refocused away from low margin fixed annuities and outdated products to higher margin variable annuities with living benefits supported by living strategies. While distribution is largely through State Farm, alliances with National Life and soon with Jefferson National offer new distribution channels as well as new product opportunities.

From the point of view of Phoenix operating as a pure life and annuity company allows management to focus exclusively on that business. It eliminates confusion by removing from the evaluation of life and annuity asset management SCAP earnings and balance sheet and exposure to volatile equity markets. It enables the overhead and expense structure to be appropriately sized for the business thereby eliminating excess overhead. Phoenix Life and Annuity will continue to pursue exciting opportunities and promising new businesses such as Life Solutions and alternative products. The asset management business has similarly been refocused and reshaped over the past 5 years through firm buy ins and divestitures, through product launches and terminations, through subadvisory relationships and funded options. The new business has greater product breadth, balance and quality than ever before. Asset Managements performance has improved dramatically. 2007 financial results were solid with strong performance in EBITDA and a substantial improvement in fund flows. 2007 mutual fund sales grew 40% year over year lead by strong sales growth from a number of products including Phoenix Multi-Sector Short Term Bond Fund, Phoenix Mid Cap Value, Phoenix Foreign Opportunity Fund, Phoenix Real Estate Securities, Phoenix Diversifier and Phoenix Quality Small Cap Fund.

This spin off is a catalyzing event for Phoenix Asset Management and its employees. It creates a separate currency, the common stock of the new company to attract, motivate, and retain key personnel and a line of incentives of its various affiliates. It enables the new company access to capital and the ability to use its cash flow to pursue strategic goals, investing in growth, making acquisitions, expanding its marketing budget and wholesale capabilities and investing in product development. There are other good reasons for this transaction. Both companies have strong experienced and highly motivated management teams. We live in a world of increasing specialization and Phoenix Life and Annuity and Phoenix Asset Management will now be free to prosper from their unique areas of expertise. We live in an economy where flexibility and low fixed cost bases are important success factors. This spin off gives both companies the greater operational nimbleness they need to compete effectively. For investors the spin off clarifies the value of the two businesses in a way that isn’t possible as part of the same company. The common stock of a life insurance company trades on an ROE basis, while the stock of an asset management company trades on a multiple of cash earnings. Investors have tended to value The Phoenix Companies as a whole on an ROE basis which serves to obscure the value of the asset management business. In addition, we believe that the current evaluation of Phoenix stock at about 70% of tangible equity, a measure that is a close proxy of life in annuity equity understates the value of the life insurance business given our strong balance sheet, earnings growth, and operational momentum.

I am proud of the efforts of our Life and Annuity and Asset Management colleagues to successfully refocus their businesses and drive strong performance. While I personally and all of us in Life and Annuity will miss working with our Asset Management colleagues, we celebrate their opportunity to set their own direction and to earn success on their own terms.

Now Peter Hofmann will look at our financial results in more detail. Before I turn the floor over to Peter I would like to point out that this is Peter’s first earnings conference call as Chief Financial Officer. Peter is an invaluable member of our senior management team as our analysts know from working with him over the years. Also, this is Dave Pellerin’s first quarter as our Chief Accounting Officer. Peter and Dave are both doing excellent jobs and as you can tell from our announcements this morning, they have been very busy. Peter.

Peter A. Hofmann

Thanks Dona. Let me turn your attention to slide 3. Full year earnings in 2007 were $1.17 per share which is a meaningful increase from $0.77 in 2006. You will recall that 2006 included an impairment charge as well as the dilutive impact of settling our equity units. On a technical note, the 2007 number, because of the sale of our Argentine subsidiary EMCO in the fourth quarter, two pennies of 2007 operating income for the full year have been reclassified as discontinued operations and there are similar effects in other historical periods that are displayed in our financial supplement.

Now if you turn to slide 4, we earned $0.26 in the quarter, in the quarter that actually had relatively little noise. Pretax income improved sequentially for the second quarter in a row but it was down from the strong fourth quarter of 2006. If you recall a year ago we had some unusual investment income as well as a favorable back unlocking. We had a more modest favorable unlocking of $4.3 million this quarter. The tax rate in the fourth quarter was a more normal 31.7%. For 2008 and beyond you should continue to use 32% as the effective operating tax rate. Corporate and other benefited from the market decline in the fourth quarter which lowered deferred compensation liabilities. In the first quarter and throughout 2008 you will see a reduction in interest expense when our senior notes mature later this month.

Let me review the life insurance results starting on slide 5. Core life earnings were even with the prior year. Mortality in UL improved from the third quarter but was still slightly below our expectations. UL also benefited from a favorable back unlocking of $2.3 million which is part of the $4.3 million I mentioned earlier. On the right hand side of the page you can see the steady contribution from the closed block in blue and other traditional which is shown in green is a bit more volatile. The factors driving this line are investment income which can be volatile due to partnership gains, make hold premiums and the like, as well as results in the term business and our run off [coley] block. The fourth quarter in particular benefited from strong term insurance results and good mortality in [coley].

Looking ahead I expect lower investment gains in this line offset by lower expenses. Closed block income will continue to gradually decline. Overall traditional earnings should be in the $17 million to $23 million per quarter range. Both Dona and I already mentioned the mortality trend in UL and you can see it graphically on slide 6. UL mortality margin recovered to 48% slightly shy of our expected 50% range. VUL mortality remains excellent. For 2008 we again expect UL mortality margins in the 50% range and VUL margins north of 60%. The reason we expect higher VUL margins is that this product depends more heavily on the mortality margin for its profitability where the UL profitability is derived both from mortality and from investment margin.

Turning to annuities, the earnings picture that you can see on slide 7 belies some of the positive trends in this line of business. This is one line where when you get into the P&L there is a bit of noise. Recall that the fourth quarter of 2006 included a negative back unlocking of $15.3 million. This quarter we had a positive reserve release which was substantially offset by back charges. Apart from these items earnings were down because of lower spread income and higher back amortization as a result of the weak markets. Decline in spread income was really driven by higher surrenders of discontinued products. The benefits of these surrenders is that they continue to free up capital to support growth of the more profitable products. There the picture is bright. Our continuing VA deposits grew 63% and net flows were a positive $47 million. This is the first year that we have seen positive net flows in annuities since 2003.

Turning now to asset management. Slide 8 shows EBITDA operating margins for that business. We continue to generate a steady $10 million or so of EBITDA a quarter and the margin is also stable in the high teens. As Dona alluded to, there is an opportunity to grow from this base especially with the business operating as an independent entity. Again as Dona mentioned slide 9 shows the new flows which were negative as a result of lower sales while redemption held stable. Investors simply were putting less money to work.

Let’s take a look a the full year. Slide 10 shows a break out of full year operating income by product. Pretax total operating income rose 43% year-over-year. Life and annuity earnings grew 1% from improved earnings in UL and annuities offset by VUL and traditional. What is going on here is that against a growing base of business we have continued to make investments in new business opportunities to help propel our future growth. Asset management became a positive earnings contributor in 2007 and you can see expenses declined in corporate and other. Income taxes increased only 4.3% year-over-year due to the tax benefits we had in the second and third quarters.

Slide 11 shows some key balance sheet ratios, statutory surplus for Phoenix Life Company was $1.41 billion down slightly for the year. The decline during 2007 was really the result of a $92 million dividend paid the holding company as well as a voluntary $18 million pension plan contribution. On top of that, some strain from some strong life sales and an impact from higher credit impairments. Leverage has been steadily improving with a 20.2% at year end with the maturing and repayment of $154 million of senior notes in February that will improve to 16%. The RBC ratio remains well within our targeted range of 375% to 400%.

Now moving on to the general account. Unfortunately the credit environment continues to be challenging and shows no near term sign of improvement. I am just going to spend a few minutes drilling down into the investment portfolio. Slide 12 shows our exposure to residential mortgage back securities at year end 2007. As you can see our RMBS portfolio is concentrated in securities with agency and prime collateral which we judge to be of high quality. Nearly 94% of our ALT-A mortgage backed securities are rated AA and AAA as are more than 98% of our subprime mortgage backed securities. The column on the right shows the proportion of each category that is in the closed block and does not have a direct impact on GAAP earnings.

Next on slide 13 our general accounts CDOs are valued at $367 million. As you can see we have focused on investments backed by bank loans and in addition 98% of this portfolio is rated at investment grade. With the write off of our only asset backed CDO this quarter we have no remaining sub prime CDOs.

Looking at some of the industry sectors that have been at the center of the credit crisis, if you look on slide 14 our exposure is manageable and from a GAAP earning perspective, again a significant proportion is in the closed block, although I should say that the percentage in the closed block is not out of line with the overall proportion of our general account that is in the closed block. We have no direct exposure to the financial guarantors either in the portfolio or though derivative positions in the general account.

Slide 15 shows our estimated exposures to bonds wrapped by guarantors and as you can see a significant portion has corporate bonds as the underlying credit, both publics and privates. In general the quality of the underlying credits is very high. With respect to the structured bonds, RMBS, CMBS,AVS, and CDOs that are wrapped, one noteworthy point here is that virtually no sub prime and CMBS investments rely on the wrapper to achieve the ratings. In sum, looking at the investment portfolio overall we feel we are positioned relatively well in the current environment. With that I will turn it back to Dona.

Dona D. Young

Thanks Peter. As you can see looking on slide 16 we delivered another solid year and another solid quarter. Actually it was our best year since the deneutralization. Fourth quarter 2007 operating income was $29.7 million or $0.26 per share and fourth quarter net income was $4.5 million or $0.04 per share. 2007 operating income of $135.3 million or $1.17 per share and net income of $123.9 million or $1.07 per share set company records since we went public in 2001. Life sales grew 29% year over year, earned annuity deposits grew 1% year-over-year, indicative of potential income growth. Asset management net flows improved by more than $3.5 billion year over year. We will provide a more detailed business review and outlook at out February 14^th investor day and we hope to see all of you there.

Now we would be happy to take your questions. Please limit yourself to 2 questions at a time. Lynn can you open up the lines for questions?

Operator

Thank you everyone. (Operator Instructions) We will pause for just a moment to compile the Q & A roster. Our first question is coming from Bob Robert Glasspiegel of Langen McAlenney.

Robert Glasspiegel - Langen McAlenney

Good morning. Peter, congratulations on your new assignment, I look forward to working with you in you new capacity.

Peter A. Hofmann

Thank you, Bob.

Robert Glasspiegel - Langen McAlenney

Can you give us any guidance, just a corporate overhead as to what is going to be remaining prospectively?

Peter A. Hofmann

What we have done in the release that announces the spin is given you the net impact of expenses that are currently allocated to the spin co versus the expected expense structure that is being put in place there. You can see the differential. The components of what will no longer be allocated; really I look at in 3 pieces. One 1 is charges that simply will no longer be there as a result of the census changing, the people changing which are benefits in other people related allocations because those will be the new company. Then there is a component that represents individuals and other expenses that are currently tagged at the overhead level directly to support EXP. Those will be either transferred or replaced in terms of the new companies operating structure. Then there is some component of general overhead charges that are currently allocated that we will need to look at from a PNX perspective and address. In terms of breaking out the numbers for those three pieces, we are not prepared to do that at this point; we are still working out the details but net-net we expect to benefit in the range that we indicated in the press release.

Dona D. Young

[inaudible] on February 14^th we intend to talk in much greater detail about our focus on operational excellence. I think at that point you will get greater insight into the issues and the opportunities quite frankly.

Robert Glasspiegel - Langen McAlenney

My second questions is, on the RBC ratio which I think the words were, comfortably over 400%, it has now slipped into where your target range is. Just some color on what drove that and confidence that we shouldn’t be nervous about that as a trend.

Dona D. Young

I guess I would say you shouldn’t be nervous about that as a trend. We said a range of 375 to 400, we are in that range. A good deal of that change is attributable to the very strong sales growth we have in life insurance. From an investors standpoint that is a really good thing. Life insurance is capital intensive and it is going to use some of the RBC in that regard and I want to see us to continue to grow and again we have opportunities to fuel that growth even when we consider what are the choices with the closed block securitization or other transactions. So, we are very comfortable with the range and we are comfortable that we will be able to be consistently within that range.

Robert Glasspiegel - Langen McAlenney

It is not impacted by the spend, right?

Dona D. Young

No not at all, not at all.

Robert Glasspiegel - Langen McAlenney

Okay, I just wanted to be clear on that, thank you.

Dona D. Young

You’re welcome, thanks Bob.

Operator

Thank you. Our next question is coming from Keith Walsh of Citi.

Keith Walsh - Citigroup

Hey, good morning everybody. Two quick questions; first on the asset management spin. Maybe if you could put a little color on any opportunity to put debt on that operation to get cash back to the Life Co, and then just on the UL margins. Mortality margins have improved but still well below, I guess Q4 or Q1 ‘07 and Q2. What is a normalized level we should be looking at? Thanks.

Philip K. Polkinghorn

This is Phil. Normalized levels we have said for universal life look for something around 50%, the low 50’s and for variable universal life look for something around 60%. They will bounce around from quarter to quarter but I think if you look back at any sort of fourth quarter period any running four quarters usually are in that range.

Dona D. Young

Keith, getting to your first question on the spin. One of the beauties of separating these businesses at this point in time given the progress both have made is that we expect the spun out asset management business to be able to have a solid capital structure that reflects the asset management business. In the asset management business they can have a higher level of debt as part of their capital structure because they are not rating sensitive and so this is one of the areas where being part of The Phoenix Companies and related to the life company limited the opportunities set for them in terms of their capital structure and their growth opportunities.

Keith Walsh - Citigroup

Okay, thanks.

Dona D. Young

You’re welcome.

Operator

Our next question is coming from Tom Gallagher of Credit Suisse.

Thomas Gallagher - Credit Suisse

Good morning, first question is, did you pursue any other strategic alternatives as it relates to the asset management business before ultimately deciding on this spin? Did you potentially look to sell it as an alternative? That is my first question.

Dona D. Young

Okay, do you want me to answer that and then you’ll give me your second questions Tom?

Thomas Gallagher - Credit Suisse

Please.

Dona D. Young

As indicated if we started back to 2003 which is really in my mind the starting point. In 2003 when I became CEO the reality is we had two businesses that had a significant number of challenges. I remember saying very clearly that first order of business was to get each of those businesses in a position where they had good options. And, our explanation of strategic considerations has been an ongoing process not a one and done type of situation. As the asset management business began to perform more strongly with performance flow improvement, leadership improvement, the build out of mutual funds, we began to have a set of opportunities to more seriously consider. The long and short of it is, yes, our board considered a range of options. They considered those range of options over a long period of time and with input from management and advisors. As you know every option or every alternative comes with both risks and rewards and based on the view that our board had which is really a singular view to look at all of the various issues, they concluded that at this time the spin off was the best opportunity to create long term value for our shareholders. That is what we are doing. The board always has a fiduciary obligation to consider credible options and they will always perform according to that fiduciary obligation. This is a thoughtful, carefully considered decision and one that we are excited about.

Thomas Gallagher - Credit Suisse

Okay, thank you. Then just one other related question I guess that has two parts. First, just technically speaking what happens to the carrying value on the GAAP balance sheet in terms of the good will and other intangibles when this spin occurs? Also relatedly I just want to make sure that I understand it that the value of the asset management business is not currently housed in the insurance entity in that it is held by the operating company so that there wouldn’t be a regulatory capital impact from this move.

Dona D. Young

Yes, let me answer the second part of your questions then I will ask Dave Pellerin to respond to your technical question. From the time of deneutralization we destacked our asset management business so that it is directly held by the holding company. Dave?

David R. Pellerin

In terms of the question regarding the accounting for the spin and in particular balance sheet issues. At the time of the transaction this will be effectively a dividend to share holders and as such the assets and liabilities associated with the asset management business will leave the balance sheet of PNX at book value. Now between today’s announcement and that transaction date we will continue to comply with the existing accounting rules surrounding good will and intangibles and as such to the extent that there are events or circumstances indicated then we would perform impairment testing and at the point of time of the distribution we would also be required under the accounting rules to perform an additional impairment test. I would point out also as you may know we conducted our annual testing for impairment under goodwill in the fourth quarter and did not record an impairment.

Thomas Gallagher - Credit Suisse

Okay, thanks a lot.

Operator

Thank you. Our next question is coming from Steven Schwartz of Raymond James.

Steven Schwartz - Raymond James

Hey, good morning everybody. On the spin off, just so I understand, I think that Peter was saying here that your full year EBITDA was $38.9 million excluding Goodwin’s $5 million, that would bring that down to $33.9 million. You are suggesting that once expenses are restructured, you could be looking at $37 million to $42 million, does that imply that there is $3.1 million to $8.1 million of expenses that could be put back on the life co?

David R. Pellerin

It implies that the net impact would be in that range which as I said before would be a combination of what would flow back to the life company in terms of allocated overhead minus an estimate of a stand alone support structure to support spin co. Again, we are not prepared today to put a specific number on the expense number but it would actually be larger than the $3.3 million to $3.8 million that you mentioned.

Steven Schwartz - Raymond James

It would be larger than that?

David R. Pellerin

Yes.

Dona D. Young

Let me respond by saying that again we will talk about this more at our investor day but we intend, we at Phoenix Life Annuity Company intend, to eliminate any excess overhead and we have a plan to deal with that and address it. That will occur over a period of time but it will be done with focus and as much speed as possible. We will eliminate that overhead. I mean our goal with operational excellence is really to be a low cost high quality provider of our products and services that are delivered with speed and excellence. That is more than buzz words, it is a focus of the management team.

Steven Schwartz - Raymond James

Okay, then Peter if we could turn to the annuity segment for a second. I wasn’t quite sure what you were saying. Maybe we could get to some type of normalized number there. You had I believe that [TAC] was lowered by about $2.1 billion pretax but you had some reserve items there maybe you are saying that. What’s that real normalized number, if you will.

Peter A. Hofmann

There is actually not a huge impact in normalized number for the quarter. It is not significantly different from what we report. But when you drill into the P&L of the annuity business and the supplement, you will see some things bouncing around. What you will see is that the mortality costs which usually is a cost fairly sizable positive impact which is a result of a reserve release and there is a corresponding back offset to that which results in a modest positive and then there is basically an additional small back charge so that when you net it all out, there is not a lot of impact on the P&L from this. What drove the decline as I mentioned in my comments in terms of the earnings is a combination of the lower spread income and a higher back amortization that is just part of the normal market impact in the quarter.

Steven Schwartz - Raymond James

Then I am getting a little bit confused if you don’t mind if I follow up here. The only number that you stated in the press release that was kind of abnormal was this back benefit of $4.3 million I believe it was. You said was it $2.3 million was in universal?

Peter A. Hofmann

Yes and the remainder was in annuities.

Steven Schwartz - Raymond James

Okay, so is that $2.2 million, is that the [TAC] offset to the reserve release?

Peter A. Hofmann

That is the net of the reserve release and the offsetting back. So it is the net positive, the fact is that we had another modest negative back so when I say that it is substantially offset, it is substantially offset.

Steven Schwartz - Raymond James

Alright so there was a [TAC] piece missing from the commentary. Thank you very much I will get back in line.

Dona D. Young

Thank you Steven.

Operator

Thank you, our next question is coming from [Yuga inaudible] of KBW.

[Yuga inaudible] - KBW

Good morning. Dona, can you give us an update in terms of the closed block securitization and opportunities to deploy those proceeds?

Dona D. Young

Yes, the update is pretty straight forward, [Yuga]. There are two factors to deploy or redeploying proceeds from the closed block. The first is; do we have an appropriate use for those proceeds? We define that by being strategically related to our life and annuity business and high return opportunities. That could include acquisitions, but it could also include as I suggested earlier fueling organic growth and fueling some of the new businesses that we are launching and that we expect to be high market businesses. The second component of it is, then once you have the use; what is your structure? We have talked about that in the past and we certainly have a structure set up to use. We also recognize that the securitization market place is fairly dynamic at the moment but the good new is that we are not dependent on that structure alone. From our stand point we have that as an opportunity, a major opportunity to further transform the life and annuity business of The Phoenix Company.

[Yuga inaudible] - KBW

My second question is for Peter. I missed... You made some comment relating to comp expenses.

Peter A. Hofmann

Yes, this is in our corporate segment. We have had this the last several quarters. It is a deferred compensation and liability that is where the change in the market value of the assets runs through OCI but the liability change runs through expense so when the market declines we have an impact on earnings that is favorable. This is a deferred comp plan that is basically a funded plan similar to a separate 401K plan or separate account plan where the assets and the liabilities are always matched and it relates to retired employees.

[Yuga inaudible] - KBW

How much was the benefit this quarter?

Peter A. Hofmann

About $2 million.

[Yuga inaudible] - KBW

Okay, great. Thank you.

Operator

Our next question is coming from Eric Berg of Lehman Brothers

Eric Berg - Lehman Brothers

Thank you very much, good morning Dona, good morning to the rest of your team. I really just have one question about the motivation for the spin off move, making sure that my understanding of it is correct because presumably you have been perfectly content with your financial reporting. It seems very complete and transparent to me, because you spend a lot of time thinking about compensation and you are obviously thoughtful about how you compensate your people at the life company, presumably the same thing was true at the money management companies, and because there are several examples I could cite of money managers that are very successfully owned by other organizations including life insurers, I’m still struggling to understand why you feel from an economic prospective, I prefer not to talk about accounting what investors know, what they can do, what they can’t do, why they were hamstrung under the Phoenix and what is going to be different prospectively. Why do the economics, I hope my question is clear, I am struggling a little bit here, why do the economics of the money management business change outside the Phoenix versus inside the Phoenix?

Dona D. Young

Sure Eric, let me give you my perspective on that. I understand your question and you are right, we have spent a lot of care in being transparent and aligning compensation. We have also spent a heck of a lot of time restructuring a business that in 2003 was dysfunctional. That gives rise to the opportunities we have today. Now specifically to your question, I think that the biggest factor here is that as part of The Phoenix Company we were not going to deploy any capital, any additional capital to the growth of the asset management because we are first and foremost a life insurance company. I can’t speak to other companies or structures but at least for The Phoenix Company, deploying more capital to asset management, increasing the level of good will and intangibles on our books would not have been a good trade simply put. At this point which is different than it was 5 years ago, 3 year ago, even 2 years ago, the asset management business has opportunities to grow. It has product, it has management, it has mutual fund growth, it has a rationalized structure, and now with the spin off it can have a capital structure that is appropriate. It can have more leverage than we as a life company would be prepared to take on to support that growth. It is going to be constrained in its growth opportunities without the ability to have an appropriate capital structure. I know you mentioned other companies. I just want to point out that while that is true, there is something that is very different about The Phoenix Companies which I think has often got lost. That is that I don’t think you can point to another company, another life company, and we trade as a life company, that has 1/3 of its equity affiliated with its asset management business. That is a big difference. Those are my points of view as to why it is going to be different going forward. The timing is because the business is in a position to take advantage of opportunities today that didn’t present previously.

Eric Berg - Lehman Brothers

Helpful, thank you.

Dona D. Young

You are welcome.

Operator

Thank you, we have a follow up question coming from Bob Glasspiegel of Langen McAlenney.

Robert Glasspiegel - Langen McAlenney

I would like some more color on just how asset management performance levels are throughout January. Any sort of color on where you closed the month, your current level of assets would be appreciated. In particular, are we at the bottom of the structured finance sort of performance redemption situation or is there potentially more bad new than that smaller segment?

Dona D. Young

Sure, Bob. I am going to turn that over to George.

George R. Aylward

Yes, Bob. In January and throughout the beginning part of February there is still obviously a lot of volatility concern in the markets that have been impacting investors. Generally what we see in the first quarter is an increase in general investing and in our flows and I think that what we have seen is generally consistent with that. We are pleased with the trends that we have seen in the first quarter on the mutual funds side. Vis a vi the lack of interest in investing in the fourth quarter so I think that has generally been good for us. Our overall product performance in January through February again we are pleased with the trends we are seeing there. The sustainability in certain core products and some others that are doing better than they had done before, so we are very happy with that. Going to the whole CDO part of the business, in particular the ABF CDO market, as you are very well aware, is a very challenged market and there continues to be impact to the entire product class regarding who that manager is and we are not immune to that, but on a relative basis I think we are faring as well as other individuals are. It continues to be a very challenging market for those products.

Robert Glasspiegel - Langen McAlenney

Where are the total assets at the end of January? I assume with the down market they would be under $40 billion.

George R. Aylward

We are not going to provide the interim number for assets under management at this point.

Robert Glasspiegel - Langen McAlenney

If I just did what the market did would that be close?

George R. Aylward

It would be difficult because you would have to do both a prorating equity markets as well as fixed income markets and there is enough variance where I don’t know if that would be the best meaningful way to do it.

Robert Glasspiegel - Langen McAlenney

Okay, thank you.

Dona D. Young

Thanks, Bob.

Operator

Thank you. We have a follow up question coming from Steven Schwartz of Raymond James.

Steven Schwartz - Raymond James

Hey, just two fast ones. Going forward will the asset management company still be considered operating or will they be considered discontinued for accounting purposes?

David R. Pellerin

At the consummation of the spin off from that point forward, asset management will be characterized as a discontinued operation for Phoenix and as such historical results will be re-classed to the discontinued operations line.

Steven Schwartz - Raymond James

Okay, then Dona, just to follow up quickly on your comment about the securitization market, it being dynamic. It seems to me that you were saying that if you had a reason to pull the trigger you think you could do so irrespective of maybe what the bond insurers look like. Is that what you are trying to say?

Dona D. Young

That is a very fair read of what I was trying to say. If we had a use today or tomorrow, I am not concerned that we wouldn’t have vehicle by which to act.

Steven Schwartz - Raymond James

Okay, great. Thank you.

Dona D. Young

Okay, thank you. Lynn are there anymore callers

Operator

At this time there appear to be no further questions. I will turn the floor back over to you Dona.

Dona D. Young

Thanks so much, thank you all for listening to our call. I know we had a lot to share today but we will have more to share at our investor day which is a week from today, February 14^th. We look forward to seeing all of you at that time. Thanks, have a good day.

Operator

Thank you, this concludes today’s Phoenix Companies conference calls. You may now disconnect your line and have a wonderful day.

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