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The Phoenix Companies, Inc. (NYSE:PNX)

Q2 2008 Earnings Call Transcript

July 31, 2008 12:00 pm ET

Executives

Peter Hofmann – Senior EVP and CFO

Dona Young – Chairman, President and CEO

Jim Wehr – Senior EVP and Chief Investment Officer

Phil Polkinghorn – Senior EVP and President of Life and Annuity

Analysts

Bob Glasspiegel [ph]

Eric Berg [ph]

Andrew Kligerman [ph]

Jukka Lipponen [ph]

Operator

Good afternoon. My name is Sharon and I will be your conference operator today. At this time, I would like to welcome everyone to the Phoenix Companies’ second quarter 2008 earnings 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, Peter Hofmann. Sir, you may begin your conference.

Peter Hofmann

Thank you Sharon. Good afternoon everyone. Thank you for joining us. We apologize that there were some technical difficulties at the start of the call.

I'm going to start with the required disclosures and then turn it over to Dona Young, our Chairman, President, and CEO, for an overview of the quarter. After that, I will review the numbers and we'll open it up for your questions.

Also joining us for the Q&A session today are Phil Polkinghorn, President of Life and Annuity; George Aylward, President of Asset Management; Jim Wehr, Chief Investment Officer; and David Pellerin, Chief Accounting Officer.

Our second quarter earnings release, our quarterly financial supplement, and the second quarter earnings review presentation are all available on our website at phoenixwm.com. Slide 2 of the presentation contains the important disclosures. We may make forward-looking statements on this call that is subject to certain risks and uncertainties. These risks and uncertainties are discussed in detail in our second quarter earnings release and our latest SEC filings. Our actual results may differ materially from such forward-looking statements.

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

Now, I will turn this call over to Dona.

Dona Young

Thank you, Peter. Good afternoon and thank you for joining us on this call today.

Phoenix continues to confront broad market challenges in the quarter as well as issues specific to us. At the same time, we did not let either distract us from executing on our core business. We focused on what we can control and on that score, we made progress this quarter. Progress, we think, will stand us in good status. We look to our future as a pure-play life and annuity company.

Before I get into the specifics of the quarter, I do want to acknowledge how hard these markets have been on investors, our financial stock including Phoenix. We continue to focus on improving the results of our ongoing business and address the issues unique to us. As always, management and our Board are dedicated to enhancing share holder value.

Now let me turn to the quarter. Net income in the second quarter was 6.2 million and operating income was 14.8 million including 8.7 million of expenses, $5.7 million after tax related to the proxy contest earlier this year and the planned spin-off of the asset management business. The resilience of our ongoing life and annuity business underscores its inherent strength. Of course, the weak market conditions affected earnings of our variable life and annuity products and lowered investment income.

However, mortality in the second quarter was favorable and our year-to-date experience is in line with our long-term expectations. Sales showed growth year-over-year in the quarter in both life and annuity although life sales are not strong as in the first quarter, which was particularly robust.

During the quarter, we made further progress assembly in the essential building blocks for our future. We continue grow to our life and annuity business driven by strong sales in both the BGA channel and with State Farm.

We deepened our focus on operational excellence which we introduced in February. This is our strategy for business process improvement, expense management, and revenue enhancement. Our actions mean we will have the right expense in operational structure for both businesses when they begin their lives as separate entities, and we have moved forward on time and on task to be ready to separate the asset management business from our core life and annuity business.

I would like to give you a few details on the spin-off and where we are in that process. When we speak on the next quarterly call, I expect we will have completed that transaction. As we have said, we are targeting the fall and expect some time after Labor Day to schedule a conference call dedicated to asset management.

So here are a few highlights from our punch list of key actions to establish asset management as a stand-alone business. As you know the Form 10 was filed with the SEC in June. We received comments and are preparing to re-file the Form 10 over the next several weeks.

Operationally, a number of actions are taking place starting with George Aylward and his management team doing all the things required to get this new company ready for business. For instance, they've analyzed the appropriate staffing level they will need going forward which resulted in a 12% reduction in head count including the previously announced outsourcing of the transfer agent.

The management team has also chosen a name, Virtus Investment Partners and a new benefits program that will be available to their employees after they become a stand-alone asset management company. George is also close to having an IT vendor in place to support systems prospectively. And finally, an independent board of directors is being assembled for Virtus and should be complete over the next several weeks.

Overall, we expect to execute the separation this fall subject to the SEC's declaring the Form 10 effective and the Board’s final approval. George also has decided to stay in Hartford and is negotiating a lease for his new headquarters. With Virtus vacating its offices at 56 Prospect Street in Hartford, Phoenix is currently negotiating the sale of that property which should expect to complete by the end of the year. This will benefit Phoenix through ongoing expense saving and enhanced space utilization.

Looking at the asset management business in the quarter, from an investment performance and retailed net flow perspective, it held up well on a relative basis. For example, relative performance as measured by the percentage of assets under management in the top third [ph] of their peer group, improves sequentially and year-over-year. Currently, they are at 57% and 65% for the one and five year periods respectively.

Retail net close were the best since a year ago, demonstrating the fundamental strength of our mutual fund platform and its relative performance even when markets are severe.

We are particularly pleased with sales in our diverse prior fund which was a top performer for the first 6 months of the year. As we told you on the first quarter conference call, restructured products recalled during the second quarter, driving the outflows on that line. Institutional products experienced redemptions as well. Revenues in the quarter and year-to-date were affected significantly by the 30% decline in the FNP for the first half of the year with June being particularly difficult.

Now I want to turn to our ongoing life and annuity business and highlight how it was able to perform well in what is the most difficult market in decades. Pretax operating income for this business which includes life and annuity and corporate and other but excludes proxy and (inaudible) cost was 33.1 million of to 7% [ph] from the year ago quarter. This is solid performance, particularly given the much more favorable market conditions and stronger investment income in the last year’s second quarter.

The 16.5 million decrease in investment income year-over-year is due to several things including lack of gain in some partnerships in make hold [ph], as well as lower asset balances due to continued growth in our core business and a runoff of discontinued products. Mortality rebounded in the quarter and for the first half of the year is in line with our long-term mortality margin expectations of 50% for UL and 60% VUL. In fact margins were almost as good this quarter as they were in last year’s second quarter which was very strong.

You may recall the issue last quarter surrounding the GAAP accounting for reinsurance that produced counterintuitive result. As you saw my news release [ph] this morning, we have adopted a preferable method of accounting, effective this quarter, and I have adjusted prior periods to reflect this method. We believe the new method better reflects the economic and cash flow by recognizing both reinsurance calls and benefits as they occur.

Under the old method, we recognize the claims were unpaid, so recognize the reinsurance benefits overtime. We believe this change is preferable given our product mix and reinsurance risk mitigation strategy. Both the new and previous methods are employed by others in the industry.

As expected in this quarter, we continue to have investment impairments. Specifically, we have growth impairments of 27 million in the second quarter which was an improvement from the 40 million in the first quarter and 31 million in the fourth quarter of 2007.

We believe the current environment will remain challenging but are assured that our portfolio held up well in this difficult condition, not withstanding the impairments. This is a testament to our well-established portfolio discipline that rest on the twin principle of diversification and duration-matching.

Now, let me turn to sales. Annualized life sales were up 9% in the year-over-year quarter, a bit down from the first quarter which has more larger cases. Looking at just the second quarter, we are comfortable with the pace of growth that are processed especially in our highest flow channels, Brockage General Agency and State Farm. We are on track to realize our full-year objective of double-digit growth.

Now on annuity, obviously the rolling markets affected the annuity fee but with our growth in the deposits of 11% and close to positive for the third consecutive quarter, State Farm continued to be our top distribution channel for annuity and grew 43% year-over-year.

I would like to spend my last few minutes talking more about operational excellence because this is at the heart of creating greater value for our shareholders and a better experience for our customers. As I said a few minutes ago, a major part of operational excellence is expense management, something we are focused on for sometime now. We have been streamlining and focusing on only those areas that we believe will contribute most to growth. Specifically, this means we have reduced headcount about 7% for life and annuity and corporate and other. We have been able to do this by making improvements in operational efficiencies which had allowed us to pursue a combination of attrition at all levels and selective job eliminations. New process improvements, we are operating our businesses with fewer employees even in areas growing significantly.

We believe that Phoenix post-spin will operate from a strong size, we’ll be more streamlined, more focused company, delivering the innovative products in exceptional service our target market demands.

Our core business is growing in the competitive market place and was more focused to resources. We are confident, we can be more successful but one change are the drivers of our future growth which will remain product and partnering.

First product, one of our top ongoing objective has been to achieve product excellence through a combination of innovative new products and updates to existing products. This year our primary focus is to keep our core life product offerings current and transition then to the 2001 CSL [ph] mortality table.

In July, we launched an updated first to die [ph] VUL Phoenix Joint Edge which is one of our core products. Phoenix were first to market this product 15 years ago and currently, is the only company with such an offering as far as we know. This product is great for the business market and we have had good success with it at State Farm.

On the annuity side, we will continue to enhance our offerings with new benefit features. We are also generating sales in the flat fee annuity through the Jefferson National Relationship and expect to build on this early success for further growth.

We are intensely focused on developing alternative retirement products, bringing life and annuity features and guarantees to mutual funds and managed accounts. We continue to see this as a growth area.

You may recall that we were first to mark with guarantees on mass accounts by adding income-producing features of an annuity in a partnership with Lockwood Capital Management. We are seeing encouraging activity but it is still early.

We are also working on our longevity product. Phoenix Life Solutions is continuing to pursue an unmet need in the life settlements market. Like any new business, it is adjusting its business model to maximize profitability and to make efficient use of capital or auto advancing a principal solutions-based approach to customer needs.

Now partnering, a second ongoing objective we have had for some time is to become a distribution partner of choice to successful joint ventures, tailor products, and a quest to deliver superior service. State Farm remains our top distribution alliance. As on October 1, we will expand that relationship and make our variable product line available on a broad basis and at lower minimum phase and deposit amounts.

We are in the process of getting our systems in service areas ready to handle the increase in volume. This expansion will give us a deeper and broader balance of business. We are also refining our annuity distribution strategy. With exception of State Farm, we have been more successful with smaller, independent broker dealers.

Going forward, we will sharpen our focus further and target firms with less than 1500 reps because we believe we can differentiate ourselves more effectively in these smaller firms.

For our life products, we plan to add 24 VGAs by the end of the year, bringing our VGA relationships to 100. We are working to gain more share of business to some of our newer opportunities as we also expand into wire house, regional broker dealers and banks.

To sum it up, we are building on what has been a steady stable business all along. And that underscores our rationale for the spin. Separating the two businesses will allow each to pursue its unique growth strategies and operate under the model that suited each ones business needs.

We also believe being separate company will lead to new and better options for each.

With that, I will now turn it over to Peter.

Peter?

Peter Hofmann

Thanks Dona. I'm going to start by recapping the financial highlights if you turn to the presentation of slide 3. Operating income excluding the spinoff and proxy expenses was 20.5 million or $0.18 per share. Pretax earnings excluding asset managements and proxy and spinoff expenses were up 7% year-over-year. These earnings benefitted from favorable mortality but were hurt by the weak equity markets and below strand [ph] investment income. Asset management was also affected by the weak markets, as well as structure product redemptions. EBITDA of 3.7 million in this segment reflects lower assets under management and 1.2 million in unusual expenses during the quarter. We have net realized losses of 8.6 million significantly less than in the last two quarters. Statutory and earnings improved enhancing up dividend capacity at Phoenix Life.

As Dona already mentioned, we changed our reinsurance accounting method on April 1 and slide 4 illustrates the impact. You’ll recall that counterintuitive result we reported in the first quarter went a small number of large claims, created significant GAAP mortality costs in spite of the reinsurance on these claims.

The new method produces results much more consistent with the underlying reinsurance economics. In order to change the accounting method, we have to establish that the new method is preferable to the old method. Our independent auditors have reviewed the new method and concur with our judgment that it is preferable. We are applying this method retroactively to historical periods. You can see that the cumulative impact is modest but the quarterly results are far better aligned with the economics as reflected in statutory claims. All the numbers representing today reflect the new method.

Let’s now review the results. Please turn to slide 5. Life insurance earnings of 44 million return to a more normal level and improved over the first quarter which had the adverse mortality, as well as lower net investment income. Annuity earnings were 1.1 million, an increase over the first quarter but down from a year ago. Earnings reflect lower fees and higher back amortization resulting from the stock market decline and lower interest rate margins.

Corporate and other excluding spin-off and proxy expenses had a loss of 12.4 million. Asset management had a loss of 4 million in the quarter, this is primarily due to lower assets under management. Assets as of last quarter, we had additional expense related to the proxy contest and also incurred further costs to effect the spin-off. The quarter included 8.7 million of these items, and additional spinoff-related expenses will be incurred in the third quarter.

At this point, we’re not going to quantify the amount as some of the costs are likely to be capitalized. The effective tax rate on operating income in the second quarter was 27.7%. We expect a full-year effective tax rate of 30%.

As mentioned, net realized losses were down and mainly driven by impairments in our mortgaged-back portfolio.

Slide 6 summarizes our results in life insurance. Core life earnings increased to 20.5 million end-of-quarter, this compares with 14.6 million last quarter and 25.7 million a year ago. Universal Life earnings benefited from improved mortality offset by higher back amortization and lower fees in investment income. Variable Universal Life earnings were also affected by higher back amortization caused by somewhat higher surrenders and adverse market performance. Favorable mortality partially offset these negative items. Traditional Life earnings of 23.9 million were slightly above our expected range of 17 to 23 million per quarter. Lower investment gains were offset by lower expenses in this line.

Slide 7 shows our UL and VUL mortality results for the past five quarters. The new accounting method results in a better reflection of our mortality experience. The UL mortality margin in the second quarter improved to 54%, slightly ahead of our expected range of 50% and VUL mortality improved to 70%, well ahead of our expected range of about 60%.

Slide 8 shows annualized Life Premium sales. Annualized life sales are still down from the very strong fourth and first quarters but are up 9% over last year. You can see that compared to the first quarter the number of policy declined only modestly, implying a much greater drop in premium per case. This reflects particularly strong sales of large cases in the first quarter and some natural saturations in the timing and mix of sales. Our sales growth is reflected in the 9% growth in total life insurance enforced shown on the right side.

Slide 9 shows results for annuities. We have reclassified our alternative retirement solutions initiative out of this line and into other life and annuity which results in a very modest revisions to the historical numbers.

Earnings were 1.1 million in the second quarter compared with a loss of 4.1 million in the first quarter and earnings of 5.2 million a year ago. In total, the 3% decline in the market reduced earnings by 2.1 million in this line. Funds under management are down slightly over the last quarter and last year which resulted in lower fees and triggered higher back amortization in the quarter. Net flows were 27 million, a threefold increase from the prior year and were positive for the third consecutive quarter.

Slide 10 shows results for asset managements. You can see that assets under management fell by 1.1 billion or 3% to 33.4 billion end-of-quarter. Market performance accounted 4.2 billion of the decline. Overall net flows were negative 2.2 billion. And the biggest factor behind this was the closure of the three CDOs, totaling 1.2 million which Dona mentioned and which we mentioned on our last call. Excluding these closures the trend in outflows actually continued to improve.

On the institutional side we saw an increase in outflows related to a handful of accounts but retail outflows were the lowest in 18 quarters and mutual fund net flows of negative 34 million were significantly improved.

Turning to asset management income statement on slide 11, the decline in AUM has affected revenues which decreased 9.3 million from a year ago and 2.5 million sequentially. Our cost reductions have partially offset these declines resulting in EBITDA decline of 6.6 million and 1.1 million respectively for those periods. Again this included 1.2 million of severance and legal expense in the current period.

Let me turn now to the investment portfolio. On slide 12, you can see that while impairments remained elevated, they are down from the past two quarters. Gross impairments were 26.5 million with the largest proportion coming from the RMBS portfolio. After offsets, net realized losses were 8.6 million or slightly more than the half of the first quarter level.

We’re making progress on our operational excellence initiatives as Dona mentioned. Slide 13 summarizes the estimated impact on our life and annuity and corporate functions that excludes asset management. We’ve taken actions that have resulted in reductions of 3.8 million year-to-date and that are expected to generate 13.5 million for the full year. This includes a 7% reduction in the staff that Dona mentioned as well as the renegotiation of several significant vendor contracts. We have also avoided significant cost by improving productivity thereby not hiring staffs to support growing business volumes and by reprioritizing the number of projects. Overall, we’re on track towards the 15 million to 20 million goal that we have communicated to you.

Separate and apart from our operational excellence initiatives, we’re working to eliminate the expenses currently allocated to asset managements that will flow back to PNX when the spin becomes effective. The pending sales, including [ph] Dona referenced is one tangible element of this. To date, we have identified specific actions to offset approximately 70% of the allocated expense and we’re actively working to identify the remaining 30%.

Turning to slide 14, a few other metrics, statutory surplus of 934 million was down 10% from year end. The decline mainly reflects sales-related expenses from higher life and annuity sales, investment impairments and a dividend pay to the parent company. Estimated RBC remains in the 375% to 400% target range. Year-to-date statutory gain from operations for Phoenix Life was 32.8 million and our leverage remains low at 16.2%.

With that, I’m going to turn it back to Dona.

Dona Young

Thank you Peter. We will now take your questions, please remember to limit yourself to two questions at a time to enable others to participate, and if you have follow-up questions you can return to the queue.

Sharon, our operator, will now open up the line.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question is coming from Bob Glasspiegel [ph]. Please go ahead.

Bob Glasspiegel

Good afternoon. I’m looking at page 27, there’s a pretty big spike up in your high yields, primarily in the primary and private debt securities. I assume that’s not consciously stepping up the risk but rather fallen angels [ph], but maybe you could walk through what happened in the quarter and are they a sign of more to come.

Dona Young

Sure Bob, you pretty much got that right, Jim will fill you on the detail.

Jim Wehr

Yes, you really have it right Bob. It’s all explained by private placements and it’s all explained by fallen angels – fallen angels are downgrades in that sector. The (inaudible) goes through and raid securities and they came back to us in the second quarter. The number of downgrades, we’re kind of working our way through them. There’s some we may actually circle back and have a further conversation but it all came from downgrades, no new purchases.

Bob Glasspiegel

Okay and there’s no sure guidance that it’s going to going up in the third quarter as where the [ph] agencies aren’t creating[ph] any easier these days?

Jim Wehr

No I think frankly Bob it’s a reflection of a fact that they’re not creating any easier the fact that it went up as materially as it did in the second quarter.

Bob Glasspiegel

Okay and then if you could follow up, the losses to some of that same page of the supplement were now up to sort of 738 million of unrealized losses, on a GAAP basis will walk through the statutory and earnings overtime do you have – that’s a large number relative to your statutory capital, is there something we can think about, not to be concerned about that issue?

Jim Wehr

Yes, I think the biggest area to focus on there Bob is the fact that in the second quarter the increase is really explainable as Dona pointed out, by an increase in treasury rates not a widening of credit spreads which I would agree with you would at least forecast an increase in credit impairments down the road.

The interest rate issue is a little bit of a different issue and it’s really – the increase in the quarter is explained fully by increases in rates. I brought along with me the parts, the curve we’re invested in and two year rates were up a hundred basis points for the quarter, five years up 90, ten years up 55. Slow to meaningful increases over short period of time.

Bob Glasspiegel

Okay, I’ll follow through with Peter offline, Thank you.

Peter Hofmann

There was a – actually Bob, there’s one other point to make on that and that is the impairments that we take on a GAAP basis are prevalent to the ones that we take on a stat basis.

Bob Glasspiegel

Yes.

Peter Hofmann

It’s not as though there were some impairments that are not recognized in the statutory surplus.

Bob Glasspiegel

Fully understood, but those wouldn’t be in unrealized?

Peter Hofmann

No

Bob Glasspiegel

Why –

Peter Hofmann

No –

Dona Young

Thank you, Bob.

Operator

Our next question is from Eric Berg [ph]. Please go ahead.

Eric Berg

I actually had a couple of questions but before I get into them just a quick one for Peter, I’m surprised to hear that your statutory impairment all the same as your GAAP impairment given that statutory accounting define the impairment differently from GAAP, could you explain?

Peter Hofmann

I think the biggest difference is that the GAAP rules tends to focus on the time that securities have been trading below book value as well as the underlying credit fundamentals et cetera and the intent to hold. For the most part our portfolio has not been under water, so long that we need to apply a different impairment methodology to our GAAP versus our statutory portfolio.

Eric Berg

Okay, Dona, here’s my main question. What I’d like do to sort of move away from the trees and focus on the forest here, and what I mean by that is, in the end there’s a lot of discussion in this call as always about DAC [ph] and mortality and all this detail is very much appreciated and I know we need it but when I look at your life insurance earnings, the trend in the earnings of your main business by far, over the last or two and a half years, it looks pretty flat to me. And I’m just – and well, I realized that in one quarter there could be lots of explanation and lots of noise. That’s not true over two and half years. Why hasn't the life insurance – why the life insurance earnings seemingly stuck? Maybe you want to challenge that assertion. I’m not talking about revenues. I’m not talking about imports, policies, all these statistics. I’m talking about profits. Are they or are they not stuck and when can we expect to start seeing a trajectory upward? Thank you.

Dona Young

Eric, I’m not sure what you’re looking at. Are you on page 4?

Eric Berg

I’m looking at – fair question. I’m looking on the dividend we put together so you don’t have the advantage of seeing it, but essentially I’m looking at what you call your core life insurance earnings and I want to say that they seem to be hovering around between $22 million to $23 million core or non-traditional – the non-traditional earnings, the focus of the Phoenix Companies.

We can certainly pursue this offline but that’s what I’m focused on because I thought – I believe this is what is the focus of the Phoenix Companies – the earnings from your non-traditional life, universal life, and variable universal life combined.

Dona Young

Well, I think Eric, since you’re looking at other numbers that you've put together, maybe we should review this offline because from our vantage point as we look at the growth of the import business in total earnings year-over-year have been growing in our core life insurance business. And I will add that we do view all the earnings off of our closed block that in order to benefit off our shareholders as part of the earnings of the core life business as well.

Eric Berg

Very good observation.

Dona Young

We would have to review that with you.

Eric Berg

Very good. Thank you for offering me that opportunity.

Dona Young

Sure.

Eric Berg

Thank you.

Operator

Thank you.

Dona Young

Is there another question?

Operator

Our next question is coming from Andrew Kligerman [ph]. Please go ahead.

Andrew Kligerman

Yes. The first question, just around slide 8 on the annualized life sales. Just curious 'cause it looks like in 1Q as you said that the average job premium was somewhere around $26,000 and now it’s almost half that in the second quarter. So, what kind of contracts were sold that would cause the average finance to decline so sharply? Maybe you can give a color around that? And I have some follow-ups.

Dona Young

Sure. The color around that really is the point that Peter made. First and foremost, it relates to the reduction in the number of very large cases paid in the second quarter which would naturally have skewed the average premium. So that's –

Peter Hofmann

First, let me put it in context. The first quarter of '08 was a very, very strong quarter and probably and particularly in January was a very good month with some cases – very large cases that just didn’t get paid by year-end and that got paid in the early part of this year. And our average premium is really in this quarter about two-thirds of what it was in the (inaudible) half and it’s really more comparable to the second quarter which was due to mixed considerations about the same average premium this quarter.

So we’re in a more [ph] of business – a relatively modest number of very large cases, paying or not paying, getting and not getting sold, can influence us because while our average premium over the past seven quarters ranged from around $16,000 a case to as high as $27,000 a case. It’s not uncommon for us to have large numbers of cases with premiums that are six figures. And so if you have a number of those that closed, say in the first quarter, and don’t close in the second quarter, they can make this kind of difference.

Dona Young

Another point that I'd just add in. When I looked at mix by distributor in comparing the first quarter to the second quarter, that also influenced us because we had a higher percentage sold in the second quarter by State Farm and those that tend to be – excuse me – termed policies or the first-to-die type products. So again, that would impact that next issue. So you will see this variability which generally is quite consistent of course is the average face amount.

Andrew Kligerman

Got it. And then just following through on the annuity area, the earnings were off a bit versus a year ago 1.1 million versus 5.2. What I’ve noticed is really kind of not that big of a movement downward in the balances of these extra sensitive accounts that the investment income has been coming off. And just in terms of the investment spread, do you see any mitigation coming off in the future quarters? Any strategies to widen that? What can we expect in the upcoming quarters?

Peter Hofmann

Well, I guess, I’ll let Jim expand on part of this. But part of this is a rate and spread issue, but part of it is just a pure balances in the RPE and fixed accounts have declined substantially over the past quarter or six months’ year. But so, there's just plain pure spread-type balances in the annuity segment today than they were six months or a year ago.

Andrew Kligerman

But it looks like the yield on the remaining balances coming a lot – coming off pretty sharply though more so than one would expect.

Peter Hofmann

Yes. Andrew, you’re correct but it’s coming from – it’s not coming from the traditional bounties. Our yields there have been pretty consistent in the 6% range which have been kind of consistent with the portfolio yield. So not really dilutive to the portfolio and consistent with what we’ve been realizing for the last year or plus. It’s really coming from more of the investment pop type of volatile partnership gains may close as Dona referred earlier. So those things tend to be volatile and they’ve been down recently but volatility tends to reverse itself over time so we could see it – we could see -

Andrew Kligerman

Utilization.

Peter Hofmann

Yes, or a normalization.

Dona Young

And we’ve always talked about this in terms of having to look at those tops if you roll over a longer period of time because so far this year we have received zero with respect to those kinds of gains and same time last year, we essentially received the full year in the first half of the year. So we expect this will even out over time.

Peter Hofmann

Andrew, it's Peter. Just to connect the dots here. Why some of this shows up in the annuity line is largely because it’s the earnings on the surplus that’s assigned to the line that has some of these types of asset backing it. So it’s not as though we are backing the annuity liabilities with those types of assets but the earnings on the surplus will have those types of asset so it does get affected.

Andrew Kligerman

Okay. Thanks. Shall I move back in for another question? I guess I’ll go back in the queue.

Dona Young

Thank you.

Operator

Thank you. Our next question is from Jukka Lipponen [ph]. Please go ahead.

Jukka Lipponen

Good afternoon. First question, can you give us some update on the life settlement venture, the progress there, and particularly, I think you have talked about looking – having looked at some of these previously settled blocks of life insurance policies and your opportunities to potentially acquire some of those and perhaps to close on the closed block securitization proceeds if the opportunity came up?

Dona Young

Well, Phil will provide a little more color on the status of that business as it is part of his area of responsibility but I don’t think we’ve talked about utilization of the closed block to that business. I just want to clarify that point. Phil?

Phil Polkinghorn

Sure. Yes. We’ve started up that business. It's going up (inaudible) business and we have begun looking at individual settlements, courting on them, and yesterday we've made commitments to buy roughly $15 million worth of policies.

In terms of big pools of policies, we continue to look at those. We also look, though, for pools that are comprised of inventories that we feel comfortable with from the standpoint of insurable interest debt issue and do some screening there. So, we continue to see some interest from owners of those such pools but we also are very, very cautious in terms of making sure the underlying inventory is consistent with inventory that we would want to and that the transaction –

Jukka Lipponen

And my second question – I’m sorry if I missed this, but can you give us a little more color what was going on in other life product lines? The results seem to be a little less favorable this quarter.

Peter Hofmann

Jukka, this is Peter. What we did, and I went through this quickly, that we moved our Alternative Retirement Solutions, new business initiative into the other life (inaudible) line that is currently incurring some start-up expense which is what you see coming through there.

Jukka Lipponen

Okay. Thank you.

Operator

Thank you. We have a follow-up question from Bob Glasspiegel. Please go ahead.

Bob Glasspiegel

You said that the obviously equity markets have not been suitable to your asset management business in – the way the earnings are slipping the wrong way as you try to get this thing out. Is there a correction from here that would make getting this thing difficult that you wouldn’t do just that the earning wouldn’t support being a public company or we – does it have an issue to be concerned about?

Dona Young

Well, I think you’re absolutely right, Bob. That the current market environment, which is certainly markedly different than when the Board made the decision to spin-off in January, has had an impact on the earnings and the AUM of the asset management business. So, no question about that. And certainly the Board will have to consider all factors including market conditions at the time and actually give it final approval to a spin-off.

But if you recall, some of the factors that the Board considered after extensive review and evaluation over a period of time and with advisers as to the options to this business, some of the factors that came to the fore were that first, the advantage of the spin is that it can distribute full value to which share holders – to our share holders; and secondly, the Board retains control over the process and the timing. And in spite of the difficult markets, the Board remains unequivocal in its view that separation of these two businesses is in the best interest of all of our shareholders and will enable each of the two businesses to prosper better on a stand-alone basis.

And so in terms of where we are in the process, I think I gave you a good outline of where we are. We’re every focused on getting this on. We certainly are still targeting the end of the third quarter to get it done. But we will also consider and the Board will consider the environment and be mindful of that environment in terms of its final decision making as to the timing and that again is the beauty of (inaudible) that remains within the control of the Board.

Bob Glasspiegel

Fair answers. With the reversed stocks would it be possibly necessary for the (inaudible) Phoenix shares that they are trading so (inaudible) the Board will consider?

Dona Young

Bob, I really can’t speak to that. It will be speculative and not something that I can speak to at this point.

Bob Glasspiegel

Okay. Thank you very much.

Dona Young

Thanks Bob.

Operator

Thank you. We have another question from Andrew Kligerman. Please go ahead.

Dona Young

Andrew?

Operator

Sir, your line is live.

Andrew Kligerman

I'm sorry. Can you hear me? Am I on line?

Dona Young

I can now hear you now Andrew.

Andrew Kligerman

Okay. Sorry for that. Yes. I was just wondering, there’s been a lot of – there’s been some activity emanating lately. Has Phoenix been approached by any potential acquirers in the past year and a half and if so what conclusions may have been reached?

Dona Young

Andrew, we don’t comment on any rumors or speculations. So I have nothing to add.

Andrew Kligerman

Well, that's not really speculative. Just have you been approached at all?

Dona Young

I would not comment on that. That’s within the purview of Board discussion and deliberation and it’s not a topic that we comment on. We simply don’t comment.

Andrew Kligerman

Okay. Could you comment then maybe just on the performance of the current management? Eric made an interesting comment about earnings a little bit earlier and stock has been very rocky over the last several years. Any shots [ph] from the Board? You're the Chairman [ph] on performance?

Dona Young

I'm sorry. Any stock? I didn’t hear your question. Any –?

Andrew Kligerman

What was the Board – what are their conclusions around the performance of current management and the stocks performance listed? What's the take away there?

Dona Young

Well, certainly all the Board members, as every member of management is aware of how the stock has performed, I made comments about that at the opening. Beyond that, the Board's view of management is again within the Board's purview and I have no further comments to add.

Andrew Kligerman

Yes, but you’re the chairman and it doesn’t look like there’s been any change in the past five years. You’ve been on the Board of, for example, Wachovia Securities. It's just very interesting. I was looking at the performance of that stock since Phoenix has gone public and that stock has actually outperformed Phoenix and clearly the Board is taking some serious actions. You were a part of that board, and I’m wondering if there are any actions that would come out of your board just around performance or just some comments that the share holders might be able to hear about?

Dona Young

Well, Andrew, I respect your right to pose the question you've posed and I hope you’ll respect my right to remind you that we’re sitting here on a Phoenix Companies earnings call.

Andrew Kligerman

Right.

Dona Young

I'm not going to comment on any other company and I appreciate your questions that I have no further comments to add. Our Board is an active board, an engaged board that would use and consider all issues. They consider all (inaudible) and I have nothing else that I can provide that will illuminate further on your question, but thank you for asking.

Andrew Kligerman

Okay.

Operator

Thank you. Our final question comes from Jukka Lipponen. Please go ahead.

Jukka Lipponen

I just wanted to make sure that I understood your comments correctly regarding the spin that the Board has to consider the current market conditions. Does that mean that we'll cancel an outright sale of that business could be considered or is the Board still very much in favor of the spin?

Dona Young

Jukka, the Board reached a conclusion as I said before and as we all know that having evaluated the range of options itself that the spin-off one of the best option for separation. The Board does not operate in a vacuum. It doesn’t have blinders on and my point before I responded about the question was simply to say that look a lot's changed over the last six months in terms of the market environment and what are the advantages of the spin is the board retains the control on the timing of execution of that transaction and the board always preserves all of its options to consider a range of factors in determining the right outcome with respect to any decision and it will evaluate any decision from the perspective of what creates the greatest value for all of its shareholders at any point in time. But we are focused on the separation and we are proceeding as I outlined.

Jukka Lipponen

The other question I had with respect to the severance and legal expense in asset management, I assume the severance relates to the stock reduction. Peter, can you give us a little more color on the legal expenses?

Peter Hofmann

Yes. The legal expense relates to an actual – within the asset management business that it will be recurring some costs again. There‘ll be additional detail in the 10Q when it gets filed. We don’t believe it’s an action that has particular merit but it is disclosed in the Q.

Jukka Lipponen

Thank you.

Dona Young

Thank you. Okay. There being no further call – questions, operator, I think we can conclude this call. And I want to thank everyone for their participation and look forward to reporting to you on our progress after the third quarter. Thank you.

Operator

Thank you. This concludes today’s Phoenix Companies conference call. You may now disconnect and have a good day.

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Source: The Phoenix Companies, Inc. Q2 2008 Earnings Conference Call Transcript
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