As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 3/02/06  Phoenix Companies Inc/DE          10-K       12/31/05    8:2.2M                                   RR Donnelley/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                       HTML   1.68M 
 2: EX-10.24    Ex-10.24: Form of Transition Incentive Plan Award   HTML     17K 
 3: EX-10.36    Ex-10.36: Restricted Stock Units Agreement          HTML     28K 
 4: EX-12       Ex-12: Ratio of Earnings to Fixed Charges           HTML     29K 
 5: EX-23       Ex-23: Consent of Pricewaterhouecoopers LLP         HTML      7K 
 6: EX-31.1     Ex-31.1: Certification                              HTML     12K 
 7: EX-31.2     Ex-31.2: Certification                              HTML     12K 
 8: EX-32       Ex-32: Certification                                HTML      9K 

Unless otherwise stated, at all times on and after June 25, 2001, the effective date of Phoenix Home Life Mutual Insurance Company’s demutualization, “Phoenix,” “we,” “our” or “us” means The Phoenix Companies, Inc. (the “Company” or “PNX”) and its direct and indirect subsidiaries. At all times prior to June 25, 2001, “we,” “our” or “us” means Phoenix Home Life Mutual Insurance Company (which has been known as Phoenix Life Insurance Company since June 25, 2001) and its direct and indirect subsidiaries. Furthermore, “Phoenix Life” refers to Phoenix Life Insurance Company, “Life Companies” refers to Phoenix Life and its direct and indirect subsidiaries and “PXP” refers to Phoenix Investment Partners, Ltd. and its direct and indirect subsidiaries.

Description of Business

We are a manufacturer of insurance, annuity and asset management products for the accumulation, preservation and transfer of wealth. We provide products and services to affluent and high-net-worth individuals through their advisors and to institutions directly and through consultants. We offer a broad range of life insurance, annuity and asset management products and services through a variety of distributors.

The affluent and high-net-worth market is a growing market with significant demand for customized products and services. We define affluent as those households with a net worth of $500,000 or greater, excluding their primary residence. We define high-net-worth, a subset of the affluent category, as those households that have net worth, excluding primary residence, of over $1,000,000. Our products and services are designed to assist advisors and their clients in this target market to achieve three main goals:

We distribute our products and services through various financial intermediaries such as national and regional broker-dealers, banks, financial planning firms, advisor groups and other insurance companies.

Segments

We have two operating segments, Life and Annuity and Asset Management, which include three product lines: life insurance, annuities and asset management. Both segments serve the affluent and high-net-worth market, which presents opportunities to leverage our capabilities and relationships.

We report our remaining results in two non-operating segments—Venture Capital and Corporate and Other. Venture Capital includes: limited partnership interests in venture capital funds; leveraged buyout funds; and other private equity partnerships sponsored and managed by third parties. The segment does not include similar investments that are part of the closed block. At year-end, the Company closed the first phase of its planned sale of approximately three-quarters of our Venture Capital segment assets. The remaining assets will be sold during the first quarter of 2006. As a result of the transaction, this segment will be eliminated effective January 1, 2006, and earnings from the remaining venture capital assets will be allocated to the Life and Annuity segment. Corporate and Other includes: indebtedness; unallocated assets, liabilities and expenses; and certain businesses not of sufficient scale to report independently. These segments are significant for financial reporting purposes, but do not contain products or services relevant to our core manufacturing operations.

Our Life and Annuity segment offers a variety of life insurance and annuity products through non-affiliated distributors. We believe our competitive advantage in this segment consists of six main components:

Life and Annuity Products

Variable Universal Life. Variable universal life products provide insurance coverage and give the policyholder various investment choices, flexible premium payments and coverage amounts and limited guarantees. The policyholder may direct premiums and cash value into a variety of separate investment accounts, accounts that are maintained separately from the other assets of the Life Companies and are not part of the general accounts of the Life Companies, or into the general account. In separate investment accounts, the policyholder bears the entire risk of the investment results. We collect fees for the management of these various investment accounts and the net return is credited directly to the policyholder’s accounts. With some variable universal products, by maintaining a certain premium level the policyholder receives guarantees that protect the policy’s death benefit if, due to adverse investment experience, the policyholder’s account balance is zero. We retain the right within limits to adjust the fees we assess for providing administrative services. We also collect fees to cover mortality costs; these fees may be adjusted by us but may not exceed contractual limits.

Universal Life. Universal life products provide insurance coverage on the same basis as variable universal life products, except that premiums, and the resulting accumulated balances, are allocated only to our general account for investment. Universal life products may allow the policyholder to increase or decrease the amount of death benefit coverage over the term of the policy, and also may allow the policyholder to adjust the frequency and amount of premium payments. We credit premiums, net of expenses, to an account maintained for the policyholder. The account earns interest at rates determined by us, subject to certain minimums. Specific charges are made against the account for expenses. We also collect fees to cover mortality costs; these fees may be adjusted by us but may not exceed contractual limits.

Some universal life products provide secondary guarantees that protect the policy’s death benefit even if there is insufficient value in the policy to pay the monthly charges and mortality costs. These secondary guarantees are provided as long as the policyholder is able to fulfill the premium requirements of the secondary guarantee.

Term Life. Term life insurance provides a guaranteed benefit upon the death of the insured within a specified time period, in return for the periodic payment of premiums. Specified coverage periods range from one to 30 years, but not longer than the period over which premiums are paid. Premiums may be level for the coverage period or may vary. Term insurance products are sometimes referred to as pure protection products, in that there are normally no savings or investment elements. Term contracts generally expire without value at the end of the coverage period. Our term insurance policies allow policyholders to convert to permanent coverage, generally without evidence of insurability.

         Annuity Products

Variable annuities are separate account products, which means that the contractholder bears the investment risk as deposits are directed into a variety of separate investment accounts. The contractholder typically can also direct funds to a general account option which earns interest at rates determined by us, subject to certain minimums. Contractholders also may elect certain enhanced living benefit guarantees, for which they are assessed a specific charge. For example, in the fourth quarter of 2005 we introduced an innovative Guaranteed Minimum Withdrawal Benefit option for our products, which guarantees an income stream for the lifetime of the owner and their spouse. Our major sources of revenues from annuities are mortality and expense fees charged to the contractholder, generally determined as a percentage of the market value of any underlying separate account balances, and the excess of investment income over credited interest for funds invested in our general account.

For example, many of our products are designed to be used by corporations to fund special deferred compensation plans and benefit programs for key employees, commonly referred to as executive benefits. We view these products as a source of growing fee-based business. In addition, our products can be applied to a number of situations to meet the sophisticated needs of business owners and individuals, including for charitable giving.

Private Placement Life and Annuity Products. Private placement products are individually customized life and annuity offerings that include single premium life, second-to-die life and variable annuity products. These products have minimum deposits of over $500,000, targeting the wealthiest segment of the high-net-worth market. Both the average annuity deposit and the average face amount of life insurance policies sold by Philadelphia Financial Group, our wholly-owned private placement distributor, in 2005 were $13.3 million.

Underwriting

Insurance underwriting is the process of examining, accepting or rejecting insurance risks, and classifying those accepted in order to charge appropriate premiums or mortality charges. Underwriting also involves determining the amount and type of reinsurance appropriate for a particular type of risk.

We believe we have particular expertise in evaluating the underwriting risks relevant to our target market. We believe this expertise enables us to make appropriate underwriting decisions, including, in some instances, the issuance of policies on more competitive terms than other insurers would offer. Phoenix Life has a long tradition of underwriting innovation. In 1955, we were the first insurance company to offer reduced rates to women. We were among the first companies to offer reduced rates to non-smokers across all policy lines, beginning in 1967. Our underwriting team includes doctors and other medical staff to ensure, among other things, that we are focused on current developments in medical technology.

Our underwriting standards for life insurance are intended to result in the issuance of policies that produce mortality experience consistent with the assumptions used in product pricing. The overall profitability of our life insurance business depends, to a large extent, on the degree to which our mortality experience compares to our pricing assumptions. Our underwriting is based on our historical mortality experience, as well as on the experience of the insurance industry and of the general population. We continually compare our underwriting standards to those of the industry to assist in managing our mortality risk and to stay abreast of industry trends.

Our life insurance underwriters evaluate policy applications on the basis of the information provided by the applicant and others. We use a variety of methods to evaluate certain policy applications, such as those where the size of the policy sought is particularly large, or where the applicant is an older individual, has a known medical impairment or is engaged in a hazardous occupation or hobby. Consistent with industry practice, we require medical examinations and other tests depending upon the age of the applicant and the size of the proposed policy.

In the executive benefits market, we issue life policies covering multiple lives on a guaranteed issue basis, within specified limits per life insured, whereby the amount of insurance issued per life on a guaranteed basis is related to the total number of lives being covered and the particular need for which the product is being purchased. Guaranteed issue underwriting applies to employees actively at work, and product pricing reflects the additional guaranteed issue underwriting risk.

We establish and report liabilities for future policy benefits on our consolidated balance sheet to reflect the obligations under our insurance policies and contracts. Our liability for variable universal life insurance and universal life insurance policies and contracts is equal to the cumulative account balances, plus additional reserves we establish for policy riders. Cumulative account balances include deposits plus credited interest, less expense and mortality charges and withdrawals. Reserves for future policy benefits for whole life policies are calculated based on actuarial assumptions that include investment yields and mortality.

Reinsurance

While we have underwriting expertise and have experienced favorable mortality trends, we believe it is prudent to spread the risks associated with our life insurance products through reinsurance. As is customary in the life insurance industry, our reinsurance program is designed to protect us against adverse mortality experience generally and to reduce the potential loss we might face from a death claim on any one life.

We cede risk to other insurers under various agreements that cover individual life insurance policies. The amount of risk ceded depends on our evaluation of the specific risk and applicable retention limits. Under the terms of our reinsurance agreements, the reinsurer agrees to reimburse us for the ceded amount in the event a claim is incurred. However, we remain liable to our policyholders for ceded insurance if any reinsurer fails to meet its obligations. Since we bear the risk of nonpayment by one or more of our reinsurers, we cede business to well-capitalized, highly rated insurers. While our current retention limit on any one life is $10 million ($12 million on second-to-die cases), we may cede amounts below those limits on a case-by-case basis depending on the characteristics of a particular risk. Typically our reinsurance contracts allow us to reassume ceded risks after a specified period. This right is valuable where our mortality experience is sufficiently favorable to make it financially advantageous for us to reassume the risk rather than continue paying reinsurance premiums.

We reinsure 80% of the mortality risk on a block of policies acquired from Confederation Life Insurance Company, or Confederation Life, in 1997. We entered into two separate reinsurance agreements in 1998 and 1999 to reinsure a substantial portion of our otherwise retained individual life insurance business. In addition, we reinsure up to 90% of the mortality risk on some new issues. As of December 31, 2005, we had ceded $83.1 billion in face amount of reinsurance, representing 61% of our total face amount of $135.8 billion of life insurance in force.

On January 1, 1996, we entered into a reinsurance arrangement that covers 100% of the excess death benefits and related reserves for most variable annuity policies issued through December 31, 1999, including subsequent deposits. We retain the guaranteed minimum death benefit risks on the remaining variable deferred annuities in force that are not covered by this reinsurance arrangement.

The following table lists our five principal life reinsurers, together with the reinsurance recoverables on a statutory basis as of December 31, 2005, the face amount of life insurance ceded as of December 31, 2005, and the reinsurers’ A.M. Best ratings.

See Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K for Life and Annuity segment financial information.

Asset Management Segment

We conduct activities in Asset Management with a focus on two customer groups—retail investors and institutional clients. We provide asset management services to retail customers through open-end mutual funds, closed-end funds and managed accounts. Managed accounts include intermediary programs sponsored and distributed by non-affiliated broker-dealers, and direct managed accounts which are sold and administered by us. We also provide transfer agency, accounting and administrative services to our open-end mutual funds.

Through our institutional group, we provide investment management services primarily to corporations, multi-employer retirement funds and foundations, as well as to endowments and special purpose funds. In addition, we sponsor and manage structured finance products such as collateralized debt obligations, or CDOs, backed by portfolios of assets, for example, public high yield bonds or mortgage-backed or asset-backed securities.

Asset Managers

Our investment management services are provided by wholly-owned asset managers and unaffiliated sub-advisors. We provide our asset managers with a consolidated platform of distribution support, thereby allowing each manager to devote a high degree of focus to investment management activities. On an ongoing basis, we monitor the quality of the managers’ products by assessing their performance, style consistency and the discipline with which they apply their investment process.

Our managers and their respective styles, products and assets under management, are as follows:

         Retail Products

Managed Accounts. We provide investment management services through participation in certain intermediary managed account programs sponsored by various broker-dealers such as Merrill Lynch, Morgan Stanley and Salomon Smith Barney. These programs enable the sponsor’s client to select one or more of our managed account offerings for which the client pays an asset-based fee paid to the broker-dealer who, in turn, pays a management fee to us. Some of these programs include more than one of our asset managers. As of December 31, 2005, we managed 28,937 accounts relating to such intermediary managed account programs, representing approximately $6.1 billion of assets under management. In addition, we offer direct managed accounts, which are individual client accounts sold and administered by us. As of December 31, 2005, we managed 1,788 direct managed accounts representing $3.2 billion of assets under management.

Closed-End Mutual Funds. We manage the assets of five closed-end funds, each of which is traded on the New York Stock Exchange: DTF Tax-Free Income Inc.; Duff & Phelps Utility and Corporate Bond Trust Inc.; DNP Select Income Inc.; The Zweig Fund, Inc. and The Zweig Total Return Fund, Inc. Our closed-end fund assets under management totaled $4.2 billion as of December 31, 2005.

         Institutional Products

Life Companies

General Accounts. Goodwin, in conjunction with Phoenix Life’s portfolio management group, manages most of the assets of the Life Companies’ general accounts. As of December 31, 2005, PXP managed $13.5 billion of the Life Companies’ assets. The assets under management, revenues and expenses associated with the general accounts are not included in the Asset Management segment.

The following table presents information regarding the third-party assets under management by PXP for the years indicated:

See Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K for Asset Management segment financial information.

Competition

We face significant competition from a wide variety of financial institutions, including insurance companies and other asset management companies, as well as from proprietary products offered by our distribution sources such as banks, broker-dealers and financial planning firms. Our competitors include larger and, in some cases, more highly-rated insurance companies and other financial services companies. Many competitors offer similar products, use similar distribution sources, offer less expensive products, have greater access to key distribution channels and have greater resources than us.

Competition in our businesses is based on several factors including ratings, investment performance, access to distribution channels, service to advisors and their clients, product features, fees charged and commissions paid.

As we continue to focus on the development of our distribution channels, we increasingly must compete with other providers of life insurance, annuity and retail products to attract and maintain relationships with productive distributors that have the ability to sell our products. In particular, our ability to attract distributors for our products could be adversely affected if for any reason our products became less competitive or concerns arose about our asset quality, financial strength or ratings.

Distribution

We maintain a broad range of distribution relationships. We seek to build relationships with distributors who are, or who have access to, advisors to the affluent and high-net-worth market.

Our distribution strategy is to increase sales of profitable products by increasing the number of producers selling Phoenix products within existing relationships, by offering a greater array of products through existing distribution sources and by developing new relationships.

Since late 1999, we have significantly strengthened our wholesaling teams in order to enhance our relationships with distributors in each of our product areas. As of December 31, 2005, we employed 68 life insurance wholesalers, 22 annuity wholesalers and 35 asset management wholesalers, compared to 42, one and 25, respectively, as of December 31, 1999.

We also engage in collaborative account development among our life insurance, annuity and asset management wholesalers through joint marketing presentations and specialized services to advisors. We believe having many of the same investment choices available in each of our product lines contributes to the success of our strategy.

State Farm. In 2001, we entered into an agreement with a subsidiary of State Farm Mutual Automobile Insurance Company, or State Farm, to provide our life and annuity products and related services to State Farm’s affluent and high-net-worth customers, through qualified State Farm agents. We are the only third-party provider of life and annuity products and services at State Farm. By the end of 2005, we had trained and certified approximately 10,200, or 91%, of State Farm’s approximately 11,200 securities licensed agents to sell Phoenix products. Our relationship with State Farm gives us potential access to approximately 34% of the high-net-worth households in the United States. For 2005, State Farm ranked first among our distributors in the sale of both life insurance and annuity products.

National and Regional Broker-Dealers. National and regional broker-dealers are brokerage firms that engage financial advisors as employees rather than as independent contractors. To meet the evolving wealth management needs of their customers, national and regional broker-dealers offer products from third-party providers such as Phoenix. Simultaneously, many of these firms are seeking to reduce the number of relationships they have with product providers in favor of those that offer a range of products together with services designed to support advisors’ sales efforts. We believe our ability to offer a variety of life insurance, annuity and asset management products and services positions us to benefit from this trend. We have relationships across all product lines in many important distribution outlets that target the high-net-worth market including UBS, A.G. Edwards and Merrill Lynch.

Advisor Groups. The recent industry trend toward affiliations among small independent financial advisory firms has led to advisor groups becoming a distinct class of distributors. We believe we have a particularly strong position as a provider of life insurance products through Partners Marketing Group, Inc., or PartnersFinancial, which, since 1999, has been an important component of the National Financial Partners, or NFP, organization. In 2004, Linsco/ Private Ledger Financial Services, or LPL, purchased our affiliated retail distribution operations and our affiliated advisors had the opportunity to move to LPL as independent registered representatives.

Insurance Companies. Insurance companies have been moving their agents into an advisor/planner role, resulting in a need to provide their agents, particularly their top producers, with a wider selection of life insurance products to sell. Insurance companies responded to this need, in part, by negotiating arrangements with third-party providers, including other insurance companies. We have distribution relationships with financial services providers such as AXA Financial Inc., or AXA, and its brokerage outlet for internal producers, AXA Network. In addition, we continue to maintain relationships with individual agents of other companies and independent agents.

Financial Planning Firms. Financial planning firms are brokerage firms that engage financial advisors as independent contractors rather than as employees. Financial planning firms have begun to expand their offerings to include wealth preservation and transfer products. To capitalize on this trend, we establish relationships with the financial planning firm, and then build relationships with the individual advisors within the firm. This approach permits us to maximize the number of individual registered representatives who potentially may sell our products.

Emerging Distribution Sources. Philadelphia Financial Group offers Phoenix private placement life and annuity products through a variety of distribution sources with access to the high-net-worth market including family offices, financial institutions, accountants and attorneys. We also offer our life and annuity products through non-traditional sources such as private banks, private banking groups within commercial banks and regional and commercial banks that are focused on their high-net-worth client base.

Institutional Products Distribution

We have an Institutional Marketing Group, or IMG, which markets our institutional product offerings to consultants and other institutional clients. There are experienced institutional salespeople at several of our affiliated asset managers, as well as specialists in areas such as sub-advisory, defined contribution investment only, or DCIO, foundations, endowments and public plans. IMG also provides coordinated marketing support and services.

We direct our institutional marketing efforts primarily toward consultants who are retained by institutional investors to assist in competitive reviews of potential investment managers. These consultants recommend investment managers to their institutional clients based on their review of performance histories and investment styles. We maintain relationships with these consultants and provide information and materials to them in order to facilitate their review of our funds.

We believe we have a competitive advantage through the service and support we provide our distributors, including:

Non-operating Segments

Venture Capital Segment

We have invested in the venture capital markets for over 25 years through Phoenix Life’s investment portfolio. Phoenix Life’s venture capital investments include limited partnership interests in venture capital funds, leveraged buyout funds and other private equity partnerships sponsored and managed by third parties. We refer to all of these types of investments as venture capital. The Venture Capital segment represented 0.4% of total investments and cash and cash equivalents as of December 31, 2005. The carrying value of partnership investments in the Venture Capital segment was $71.7 million as of December 31, 2005. The segment does not include venture capital investments held within Phoenix Life’s closed block.

In October 2005, we entered into an agreement to sell $138.5 million of venture capital assets, approximately three quarters of the assets in our Venture Capital segment. As of February 1, 2006, 95% of the transaction had closed, and the remaining portion is expected to close by March 31, 2006. As a result of the transaction, the Venture Capital segment will be eliminated, effective January 1, 2006, and earnings from the remaining assets will be allocated to the Life and Annuity segment.

See Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K for Venture Capital segment financial information.

Corporate and Other Segment

The Corporate and Other segment includes: indebtedness; unallocated assets; liabilities and expenses; and certain businesses not of sufficient scale to report independently. Corporate and Other also includes certain international operations. As of December 31, 2005, we had a total of $12.9 million of assets in these international holdings.

See Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K for Corporate and Other segment financial information.

PNX was incorporated in Delaware in 2000. Our principal executive offices are located at One American Row, Hartford, Connecticut 06102-5056. Our telephone number is (860) 403-5000. Our website is located at www.PhoenixWealthManagement.com. (This and all other URLs included herein are intended to be inactive textual references only. They are not intended to be an active hyperlink to our website. The information on our website is not, and is not intended to be, part of this Form 10-K and is not incorporated into this report by reference.)

Phoenix Mutual Life Insurance Company was organized in Connecticut in 1851. In 1992, in connection with its merger with Home Life Insurance Company, or Home Life, the company redomiciled to New York and changed its name to Phoenix Home Life Mutual Insurance Company, or Phoenix Home Life.

On June 25, 2001, the effective date of its demutualization, Phoenix Home Life converted from a mutual life insurance company to a stock life insurance company, became a wholly-owned subsidiary of PNX and changed its name to Phoenix Life Insurance Company. All policyholder membership interests in the mutual company were extinguished on the effective date. At the same time, PXP became an indirect wholly-owned subsidiary of PNX.

In addition, on June 25, 2001, PNX completed its initial public offering, or IPO, in which 48.8 million shares of common stock were issued at a price of $17.50 per share. Net proceeds from the IPO were $807.9 million, which was contributed to Phoenix Life, as required under the plan of reorganization. On July 24, 2001, Morgan Stanley & Co. Incorporated exercised its right to purchase 1,395,900 additional shares of the common stock of PNX at the IPO price of $17.50 per share less underwriter’s discount. Net proceeds of $23.2 million were contributed to Phoenix Life. Our shares outstanding were subsequently reduced through share repurchases through October 2002.

The following chart illustrates our corporate structure as of December 31, 2005.

At December 31, 2005, we employed approximately 1,500 people. We believe our relations with our employees are good.

Poor relative investment performance of some of our equity asset management strategies has led to material redemptions which have reduced assets under management and revenues. We could have continued underperformance and outflows.

As of December 31, 2005, 61% of third-party assets under management underperformed against their respective three-year benchmarks. Partly as a result, our asset management business experienced net outflows of $5.6 billion during the year. This poor relative performance could continue, which could result in lower assets under management and lower revenues.

Poor performance of the equity markets could adversely affect sales and assets under management of our asset management, variable universal life and variable annuity products, as well as the performance of other equity investments and potential future pension plan funding requirements.

The United States equity markets can be volatile and experience both periods of strong growth and of substantial declines.

There are three ways in which equity market declines and volatility have affected, or have the potential to affect, us negatively.

Changes in interest rates could harm cash flow and profitability in our life and annuity businesses.

Our life insurance and annuity businesses are sensitive to interest rate changes. In periods of increasing interest rates, life insurance policy loans, surrenders and withdrawals could increase as policyholders seek investments with higher perceived returns. This could require us to sell invested assets at a time when their prices are depressed by the increase in interest rates, which could cause us to realize investment losses.

Conversely, during periods of declining interest rates, we could experience increased premium payments on products with flexible premium features, repayment of policy loans and increased percentages of policies remaining in force. We would obtain lower returns on investments made with these cash flows. In addition, borrowers may prepay or redeem mortgages and bonds in our investment portfolio so that we might have to reinvest those proceeds in lower yielding investments. As a consequence of these factors, we could experience a decrease in the spread between the returns on our investment portfolio and amounts credited to policyholders and contractholders, which could adversely affect our profitability.

We depend on non-affiliated distribution for our product sales and if our relationships with these distributors were harmed, we could suffer a loss in revenues.

We distribute our products through non-affiliated advisors, broker-dealers and other financial intermediaries. There is substantial competition for business within most of these distributors. We believe that our sales through these distributors depend on factors such as our financial strength, the quality of our products and on the services we provide to, and the relationships we develop with, our distributors. Our largest distributors of life insurance include a subsidiary of State Farm Mutual Automobile Company, or State Farm, and National Financial Partners, or NFP. In 2005, State Farm accounted for approximately 36% and NFP accounted for approximately 14% of our new life insurance and annuity sales based on first year commissions. We have had distribution arrangements with State Farm since our initial public offering in 2001 and with NFP since 1995. Our distributors are generally free to sell products from a variety of providers, which makes it important for us to continually offer distributors products and services they find attractive. We may not be able to establish or maintain satisfactory relationships with distributors if our products or services do not meet their needs. Accordingly, our revenues and profitability would suffer.

Downgrades to PNX’s debt ratings and Phoenix Life’s financial strength ratings could increase policy surrenders and withdrawals, adversely affect relationships with distributors, reduce new sales and earnings from certain of our life insurance products and increase our future borrowing costs.

Rating agencies assign Phoenix Life financial strength ratings, and assign us debt ratings, based in each case on their opinions of the relevant company’s ability to meet its financial obligations.

Financial strength ratings reflect a rating agency’s view of an insurance company’s ability to meet its obligations to its insureds. These ratings are therefore key factors underlying the competitive position of life insurers. The current financial strength and debt ratings are set forth in the chart below.

Fitch, Standard & Poor’s and Moody’s each have a stable outlook for our ratings, while A.M. Best had a negative outlook as of December 31, 2005. On February 27, 2006, A.M. Best affirmed our A financial strength rating and improved its outlook for the Company to stable from negative.

Downgrades could adversely affect our reputation and, hence, our relationships with existing distributors and our ability to establish additional distributor relationships. If this were to occur, we might experience a decline in sales of certain products and the persistency of existing customers. At this time, we cannot estimate the impact on sales or persistency. A significant decline in our sales or persistency could have a material adverse effect on our financial results.

Any rating downgrades may result in increased interest costs in connection with future borrowings. Such an increase would decrease our earnings and could reduce our ability to finance our future growth on a profitable basis.

Downgrades may also trigger defaults or repurchase obligations.

We might need to fund deficiencies in our closed block, which would result in a reduction in net income and could result in a reduction in investments in our on-going business.

We have allocated assets to our closed block to produce cash flows that, together with additional revenues from the closed block policies, are reasonably expected to support our obligations relating to these policies. Our allocation of assets to the closed block was based on actuarial assumptions about the performance of policies in the closed block and the continuation of the non-guaranteed policyholder dividend scales in effect for 2000, as well as assumptions about the investment earnings the closed block assets will generate over time. Since actual performance is likely to be different from these assumptions, it is possible that the cash flows generated by the closed block assets and the anticipated revenues from the policies included in the closed block will prove insufficient to provide for the benefits guaranteed under these policies even if the non-guaranteed policyholder dividend scale were to be reduced. If this were to occur, we would have to fund the resulting shortfall from assets outside of the closed block, which could adversely affect our profitability.

Our business operations, investment returns, and profitability could be adversely impacted by inadequate performance of third-party relationships.

We are dependent on certain third-party relationships to maintain essential business operations. These services include, but are not limited to, information technology infrastructure, application systems support, mutual fund and shareholder accounting services, transfer agent and cash management services, custodial services, records storage management, backup tape management, security pricing services, medical information, payroll, and employee benefit programs. In addition, we maintain contractual relationships with certain investment advisory and investment management firms to leverage their expertise. These firms manage select investments or portions of portfolios under sub-advisory agreements.

We periodically negotiate provisions and renewals of these relationships and there can be no assurance that such terms will remain acceptable to such third parties or us. An interruption in our continuing relationship with certain of these third parties or any material delay or inability to deliver essential services could materially affect our business operations and, potentially, adversely affect our profitability.

The independent trustees of our mutual funds and closed-end funds, intermediary program sponsors, managed account clients and institutional asset management clients could terminate their contracts with us. This would reduce our investment management fee revenues.

Each of the mutual funds and closed-end funds for which PXP acts as investment advisor or sub-advisor is registered under the Investment Company Act of 1940 and is governed by a board of trustees or board of directors. Each fund’s board has the duty of deciding annually whether to renew the contract under which PXP manages the fund. Board members have a fiduciary duty to act in the best interests of the shareholders of their funds. Either the board members or, in limited circumstances, the shareholders may terminate an advisory contract with PXP and move the assets to another investment advisor. The board members also may deem it to be in the best interests of a fund’s shareholders to make other decisions adverse to us, such as reducing the compensation paid to PXP or imposing restrictions on PXP’s management of the fund.

Our asset management agreements with intermediary program sponsors (who “wrap,” or make available, our investment products within the management agreements they have with their own clients), direct managed account clients and institutional clients are generally terminable by these sponsors and clients upon short notice without penalty. As a result, there would be little impediment to these sponsors or clients terminating our agreements if they became dissatisfied with our performance.

The termination of any of the above agreements relating to a material portion of assets under management would adversely affect our investment management fee revenues and could require us to take a charge to earnings as a result of the impairment of the goodwill or intangible assets associated with our asset managers.

We might be unable to attract or retain personnel who are key to our business.

The success of our business is dependent to a large extent on our ability to attract and retain key employees. Competition in the job market for professionals such as securities analysts, portfolio managers, sales personnel and actuaries is generally intense. In general, our employees are not subject to employment contracts or non-compete agreements. Any inability to retain our key employees, or attract and retain additional qualified employees, could have a negative impact on us.

Goodwill or intangible assets associated with our asset management business could become impaired requiring a non-cash charge to earnings in the event of significant market declines, net outflows of assets, or losses of investment management contracts.

As of December 31, 2005, our asset management business had $750.2 million in goodwill and intangible assets. The amount of goodwill and intangible assets on our balance sheet is supported by the assets under management and the related revenues of the business. It might be necessary to recognize an impairment of these assets if we experience:

If required, the recognition of a material impairment of these assets could lead to downgrades in our credit ratings or in our financial strength ratings.

We face strong competition in our businesses from mutual fund companies, banks, asset management firms and other insurance companies. This competition could impair our ability to retain existing customers, attract new customers and maintain our profitability.

We face strong competition in each of our businesses, comprising life insurance, annuities and asset management. We believe that our ability to compete is based on a number of factors, including product features, investment performance, service, price, distribution capabilities, scale, commission structure, name recognition and financial strength ratings. While there is no single company that we identify as a dominant competitor in our business overall, our actual and potential competitors include a large number of mutual fund companies, banks, asset management firms and other insurance companies, many of which have advantages over us in one or more of the above competitive factors. Recent industry consolidation, including acquisitions of insurance and other financial services companies in the United States by international companies, has resulted in larger competitors with financial resources, marketing and distribution capabilities and brand identities that are stronger than ours. Larger firms also may be able to offer, due to economies of scale, more competitive pricing than we can. In addition, some of our competitors are regulated differently than we are, which may give them a competitive advantage; for example, many non-insurance company providers of financial services are not subject to the costs and complexities of insurance regulation by multiple states. If we do not compete effectively in this environment, our profitability and financial condition would be materially adversely affected.

We could have material losses in the future from our discontinued reinsurance business.

In 1999, we discontinued our reinsurance operations through a combination of sale, reinsurance and placement of certain retained group accident and health reinsurance business into run-off. We adopted a formal plan to stop writing new contracts covering these risks and to end the existing contracts as soon as those contracts would permit. However, we remain liable for claims under those contracts.

We have established reserves for claims and related expenses that we expect to pay on our discontinued group accident and health reinsurance business. These reserves are based on currently known facts and estimates about, among other things, the amount of insured losses and expenses that we believe we will pay, the period over which they will be paid, the amounts we believe we will collect from our retrocessionaires and the likely legal and administrative costs of winding down the business. Our total reserves, including reserves for amounts recoverable from retrocessionaires, were $60.0 million as of December 31, 2005. Our total amounts recoverable from retrocessionaires related to paid losses were $20.0 million as of December 31, 2005.

We expect our reserves and reinsurance to cover the run-off of the business; however, the nature of the underlying risks is such that the claims may take years to reach the reinsurers involved. Therefore, we expect to pay claims out of existing estimated reserves for up to ten years as the level of business diminishes. In addition, unfavorable or favorable claims and/or reinsurance recovery experience is reasonably possible and could result in our recognition of additional losses or gains, respectively, in future years. For these reasons, we cannot know today what our actual claims experience will be. In addition, we are involved in disputes relating to certain portions of our discontinued group accident and health reinsurance business. See Note 17 to our consolidated financial statements in this Form 10-K for more information.

In establishing our reserves described above for the payment of insured losses and expenses on this discontinued business, we have made assumptions about the likely outcome of the disputes referred to above, including an assumption that substantial recoveries would be available from our reinsurers on all of our discontinued reinsurance business. However, the inherent uncertainty of arbitrations and lawsuits, including the uncertainty of estimating whether any settlements we may enter into in the future would be on favorable terms, makes it hard to predict outcomes with certainty. Given the need to use estimates in establishing loss reserves, and the difficulty in predicting the outcome of arbitrations and lawsuits, our actual net ultimate exposure likely will differ from our current estimate. If future facts and circumstances differ significantly from our estimates and assumptions about future events with respect to the disputes referred to above or other portions of our discontinued reinsurance business, our current reserves may need to be increased materially, with a resulting material adverse effect on our results of operations and financial condition.

Some of the Bush administration’s legislative proposals would reduce or eliminate the benefit of deferral of taxation for our insurance and annuity products. In addition, legislation eliminating or modifying either the federal estate tax or the federal taxation of investment income could adversely affect sales of and revenues from our life and annuity products.

The attractiveness to our customers of many of our products is due, in part, to favorable tax treatment. Current federal income tax laws generally permit the tax-deferred accumulation of earnings on the premiums paid by the holders of annuities and life insurance products. Legislative changes that have the effect of reducing the taxes imposed on investment income could reduce or eliminate the relative benefit of such deferral of taxation for our insurance and annuity products. The tax rate on long-term capital gains and certain dividend income has been reduced until 2008 and President Bush’s 2006 budget proposal would make these rate reductions permanent. If this happens, it could have a negative impact on our sales and revenues from life and annuity products. The President’s Advisory Panel on Federal Tax Reform recently proposed fundamental changes to the federal income tax law that include taxation of most inside build-up on life insurance policies and annuity contracts, enhanced and simplified alternatives for tax deferred savings for retirement and other purposes, substantial reductions in federal income taxes on capital gains and dividend income and other proposals that would tend to reduce or eliminate the relative tax advantages of our life and annuity products. Other comprehensive changes to the tax system have been proposed, including the adoption of a flat tax, value-added tax or similar alternative structure, the creation of new and expanded vehicles for tax-exempt savings and lower taxes on investment income. Substantial modifications to Social Security have also been proposed. The likelihood that any of these proposals would ultimately be enacted, and the potential impact of these proposals, if enacted, cannot be reasonably estimated.

Some of our life insurance products are specifically designed and marketed as policies that help a decedent’s heirs to pay estate tax. Legislation enacted in the spring of 2001 increased the size of estates exempt from the federal estate tax, phased in reductions in the estate tax rate between 2002 and 2009 and repealed the estate tax entirely in 2010. This legislation, despite its reinstatement of the estate tax in 2011, increased uncertainty in the market and has had a negative effect on our revenues, from sales of second-to-die life insurance policies. Second-to-die policies are often purchased by two people whose assets are largely illiquid, and whose heirs otherwise might have to attempt to liquidate part of the estate in order to pay the tax. President Bush and members of Congress have expressed a desire to modify the existing legislation, which could result in faster or more complete reduction or repeal of the estate tax.

Changes in insurance and securities regulation could affect our profitability by imposing further restrictions on the conduct of our business.

Our life insurance and annuity businesses are subject to comprehensive state regulation and supervision throughout the United States. State insurance regulators and the National Association of Insurance Commissioners, or the NAIC, continually reexamine existing laws and regulations, and may impose changes in the future that put further regulatory burdens on us, thereby increasing our costs of doing business or otherwise harm our business. This could have a material adverse effect on our results of operations and financial condition.

The United States federal government does not directly regulate the insurance business. However, federal legislation and administrative policies in areas which include employee benefit plan regulation, financial services regulation and federal taxation and securities laws could significantly affect each of our businesses, most notably our costs.

We and some of the policies, contracts and other products that we offer are subject to various levels of regulation under the federal securities laws administered by the SEC as well as regulation by those states and foreign countries in which we provide investment advisory services, offer products or conduct other securities-related activities. We could be restricted in the conduct of our business for failure to comply with such laws and regulations. Future laws and regulations, or the interpretation thereof, could have a material adverse effect on our results of operations and financial condition by increasing our expenses in order to comply with these laws and regulations.

     

As of December 31, 2005, the Company had no unresolved SEC staff comments regarding its periodic or current reports.

     

Our executive headquarters consist of our main office building at One American Row and one other building in Hartford, Connecticut, which we own and occupy. In September 2005, we sold a third Hartford office building, which was no longer needed. In July 2005, we sold the East Greenbush, New York property that had been used for our operations and leased back the space on a short-term basis. We relocated to another leased property in East Greenbush in January 2006. We also lease office space elsewhere in the United States as needed for our operations.

General

We are regularly involved in litigation and arbitration, both as a defendant and as a plaintiff. The litigation naming us as a defendant ordinarily involves our activities as an insurer, employer, investor or taxpayer. Several current proceedings are discussed below. In addition, state regulatory bodies, the Securities and Exchange Commission, or SEC, the National Association of Securities Dealers, Inc., or NASD, and other regulatory bodies regularly make inquiries of us and, from time to time, conduct examinations or investigations concerning our compliance with, among other things, insurance laws, securities laws, and laws governing the activities of broker-dealers. For example, during 2003 and 2004, the New York State Insurance Department conducted its routine quinquennial financial and market conduct examination of Phoenix Life and its New York domiciled life insurance subsidiary and the SEC conducted examinations of certain Phoenix Life variable products and certain Phoenix Life affiliated investment advisors and mutual funds. The New York State Insurance Department’s report, for the five-year period ending December 31, 2002, cited no material violations. In 2004, the NASD also commenced examinations of two Phoenix broker-dealers; the examinations were closed in April 2005 and November 2004, respectively. In February 2005, the NASD notified the Company that it was asserting violations of trade reporting rules by a PXP subsidiary. The Company responded to the NASD allegations in May 2005 but has not received any further inquiries to date.

Federal and state regulatory authorities from time to time make inquiries and conduct examinations regarding compliance by Phoenix Life and its subsidiaries with securities and other laws and regulations affecting their registered products. The Company endeavors to respond to such inquiries in an appropriate way and to take corrective action if warranted. Recently, there has been a significant increase in federal and state regulatory activity relating to financial services companies, with a number of recent regulatory inquiries focusing on late-trading, market timing and valuation issues. Our products entitle us to impose restrictions on transfers between separate account sub-accounts associated with our variable products.

In 2004 and 2005, the Boston District Office of the SEC conducted a compliance examination of certain of the Company’s affiliates that are registered under the Investment Company Act of 1940 or the Investment Advisers Act of 1940. Following the examination, the staff of the Boston District Office issued a deficiency letter primarily focused on perceived weaknesses in procedures for monitoring trading to prevent market timing activity. The staff requested the Company to conduct an analysis as to whether shareholders, policyholders and contract holders who invested in the funds that may have been affected by undetected market timing activity had suffered harm and to advise the staff whether the Company believes reimbursement is necessary or appropriate under the circumstances. A third party was retained to assist the Company in preparing the analysis. Based on this analysis, the Company advised the SEC that it does not believe that reimbursement is appropriate.

Over the past two years, a number of companies have announced settlements of enforcement actions with various regulatory agencies, primarily the SEC and the New York Attorney General’s Office. While no such action has been initiated against us, it is possible that one or more regulatory agencies may pursue this type of action against us in the future.

Financial services companies have also been the subject of broad industry inquiries by state regulators and attorneys general which do not appear to be company-specific. In this regard, in 2004, we received a subpoena from the Connecticut Attorney General’s office requesting information regarding certain distribution practices since 1998. Over 40 companies received such a subpoena. We cooperated fully and have had no further inquiry since filing our response.

In May 2005, we received a subpoena from the Connecticut Attorney General’s office and an inquiry from the Connecticut Insurance Department requesting information regarding finite reinsurance. We cooperated fully and have had no further inquiry since responding.

These types of regulatory actions may be difficult to assess or quantify, may seek recovery of indeterminate amounts, including punitive and treble damages, and the nature and magnitude of their outcomes may remain unknown for substantial periods of time. While it is not feasible to predict or determine the ultimate outcome of all pending inquiries, investigations and legal proceedings or to provide reasonable ranges of potential losses, we believe that their outcomes are not likely, either individually or in the aggregate, to have a material adverse effect on our consolidated financial condition, or consideration of available insurance and reinsurance and the provision made in our consolidated financial statements. However, given the large or indeterminate amounts sought in certain of these matters and litigation’s inherent unpredictability, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on our results of operation or cash flows.

Discontinued Reinsurance Business

In 1999, we discontinued our reinsurance operations through a combination of sale, reinsurance and placement of certain retained group accident and health reinsurance business into run-off. We adopted a formal plan to stop writing new contracts covering these risks and to end the existing contracts as soon as those contracts would permit. However, we remain liable for claims under contracts which have not been commuted.

We have established reserves for claims and related expenses that we expect to pay on our discontinued group accident and health reinsurance business. These reserves are based on currently known facts and estimates about, among other things, the amount of insured losses and expenses that we believe we will pay, the period over which they will be paid, the amounts we believe we will collect from our retrocessionaires and the likely legal and administrative costs of winding down the business.

Our total reserves, including reserves for amounts recoverable from retrocessionaires, were $60.0 million and $110.0 million as of December 31, 2005 and 2004, respectively. Our total amounts recoverable from retrocessionaires related to paid losses were $20.0 million and $60.0 million as of December 31, 2005 and 2004, respectively. We did not recognize any gains or losses during the years 2005, 2004 and 2003.

As of December 31, 2005, we have resolved a dispute with a retrocessionaire that had been the subject of arbitration initiated by the retrocessionaire in 2000. We had previously received favorable decisions from an arbitration panel and the English Court of Appeals that have resulted in payments by the retrocessionaire totaling $65.0 million, including $50.0 million during 2005. In July 2005, an arbitration panel determined that the retrocessionaire was not liable for certain billings related to a commutation totaling $25.0 million. We were denied permission to appeal this decision. As of December 31, 2005, the retrocessionaire is current in respect of the reinsurance recoverable balance on this contract.

See the Risks Related to Our Business section of Management’s Discussion and Analysis as well as Note 17 to our consolidated financial statements in this Form 10-K for additional information.

     

No matter was submitted to a vote of our security holders during the fourth quarter of the fiscal year covered by this report.

Market

Shares of our common stock trade on the New York Stock Exchange under the ticker symbol “PNX”. As of February 17, 2006, there were 243,796 registered holders of our common stock.

Unregistered Shares

We issued the following shares of common stock to eligible policyholders of Phoenix Life, effective as of June 25, 2001, in connection with Phoenix Life’s demutualization on that date: 56,174,373 shares in 2001; 4,237 shares in 2002; 1,853 shares in 2003; 54 shares in 2004; and 18 shares in 2005. We issued these shares to policyholders in exchange for their membership interests without registration under the Securities Act of 1933 in reliance on the exemption under Section 3(a)(10) of the Securities Act of 1933.

In 2005, we also issued 59,774 restricted stock units, or RSUs, to 13 of our independent directors, without registration under that act in reliance on the exemption under Regulation D for accredited investors. Each RSU is potentially convertible into one share of our common stock.

Stock Price

The following table presents the intraday high and low prices for our common stock on the New York Stock Exchange for the years 2005 and 2004. The closing price of our common stock at December 31, 2005 was $13.64.

Dividends

In 2005 and 2004, we paid a dividend of $0.16 per share to shareholders of record on June 13, 2005 and June 14, 2004, respectively. For a discussion of restrictions on our ability to pay dividends, see the Liquidity and Capital Resources section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K.

Repurchases

We did not repurchase any shares of our common stock during the two years ended December 31, 2005.

Our selected historical consolidated financial data as of and for each of the five years in the period ended December 31, 2005 follows. We derived the balance sheet data for 2005 and 2004 and the income statement data for the years 2005, 2004 and 2003 from our consolidated financial statements in this Form 10-K. We derived the balance sheet data for 2003, 2002 and 2001 and the income statement data for the years 2002 and 2001 from audited consolidated financial statements not in this Form 10-K. We have reclassified certain amounts for prior years to conform with our 2005 presentation. Prior to June 25, 2001, Phoenix Life was the parent company of our consolidated group. In connection with its demutualization, Phoenix Life became a subsidiary and PNX became the parent company of our consolidated group.

We prepared the following financial data, other than statutory data, in conformity with accounting principles generally accepted in the United States, or GAAP. We derived the statutory data from the Annual Statements of our Life Companies filed with state insurance regulatory authorities and prepared it in accordance with statutory accounting practices prescribed or permitted by state insurance regulators, which vary in certain material respects from GAAP.

The following should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements in this Form 10-K.

FORWARD-LOOKING STATEMENT

Management’s discussion and analysis reviews our consolidated financial condition at December 31, 2005 and 2004; our consolidated results of operations for the years 2005, 2004 and 2003; and, where appropriate, factors that may affect our future financial performance. This discussion should be read in conjunction with “Selected Financial Data” and our consolidated financial statements in this Form 10-K.

Overview

We are a manufacturer of insurance, annuity and asset management products for the accumulation, preservation and transfer of wealth. We provide products and services to affluent and high-net-worth individuals through their advisors and to institutions directly and through consultants. We offer a broad range of life insurance, annuity and asset management products and services through a variety of distributors. These distributors include independent advisors and financial services firms who make our products and services available to their clients.

We manufacture our products through two operating segments—Life and Annuity and Asset Management—which include three product lines—life insurance, annuities and asset management. Through Life and Annuity we offer a variety of life insurance and annuity products, including universal, variable universal and term life insurance, and a range of variable annuity offerings. Asset Management comprises two lines of business—retail and institutional.

Through our retail line of business, we provide investment management services through open-end mutual funds, closed-end funds and managed accounts. Managed accounts include intermediary programs sponsored and distributed by non-affiliated broker-dealers and direct managed accounts sold and administered by us. We also provide transfer agency, accounting and administrative services to our open-end mutual funds.

Through our institutional group, we provide investment management services primarily to corporations, multi-employer retirement funds and foundations, as well as to endowments and special purpose funds. In addition, we manage structured finance products such as collateralized debt obligations, or CDOs, backed by portfolios of assets, for example, public high yield bonds, mortgage-backed or asset-backed securities.

Through December 31, 2005, we reported our remaining activities in two non-operating segments—Venture Capital and Corporate and Other. Venture Capital includes limited partnership interests in venture capital funds, leveraged buyout funds and other private equity partnerships sponsored and managed by third parties. These assets are investments of the general account of Phoenix Life. In October 2005, we entered into an agreement to sell approximately three quarters of the assets in our Venture Capital segment. As a result of the transaction, the Venture Capital segment will be eliminated, effective January 1, 2006, and earnings from the remaining assets will be allocated to the Life and Annuity segment. See Business—Venture Capital Segment. Corporate and Other includes indebtedness; unallocated assets, liabilities and expenses; and certain businesses not of sufficient scale to report independently. See Business—Corporate and Other Segment. These non-operating segments are significant for financial reporting purposes, but do not contain products or services relevant to our core manufacturing operations.

We derive our revenues principally from:

Under GAAP, premium and deposit collections for variable life, universal life and annuity products are not recorded as revenues. These collections are reflected on our balance sheet as an increase in separate account liabilities for certain investment options of variable products. Collections for fixed annuities and certain

investment options of variable annuities are reflected on our balance sheet as an increase in policyholder deposit funds. Collections for other products are reflected on our balance sheet as an increase in policy liabilities and accruals.

Our expenses consist principally of:

Our profitability depends principally upon:

Prior to Phoenix Life’s demutualization, we focused on participating life insurance products, which pay policyholder dividends. As of December 31, 2005, 74% of our life insurance reserves were for participating policies. As a result, a significant portion of our expenses consists, and will continue to consist, of such policyholder dividends. Our net income is reduced by the amounts of these dividends. Policyholder dividends expense was $364.4 million during 2005, $404.7 million during 2004 and $418.8 million during 2003.

Our sales and financial results over the last several years have been affected by demographic, industry and market trends. The baby boom generation has begun to enter its prime savings years. Americans generally have begun to rely less on defined benefit retirement plans, social security and other government programs to meet their postretirement financial needs. Product preferences have shifted between fixed and variable options depending on market and economic conditions. Our balanced product portfolio including universal life, variable life and variable annuity products, as well as a broad array of mutual funds and managed accounts, has been positioned to meet this shifting demand.

Discontinued Operations

During 2004, we completed the sale of 100% of the common stock held by us in Phoenix National Trust Company. The effect of this transaction was not material to our consolidated financial statements. Phoenix National Trust Company is presented as a discontinued operation in our consolidated financial statements for all periods presented.

In 1999, we discontinued our reinsurance operations. See Note 14 to our consolidated financial statements in this Form 10-K for detailed information regarding our discontinued operations.

Life and Annuity

On December 30, 2005, we sold 100% of the common stock held by us in Phoenix National Insurance Company. This transaction was not material to our consolidated financial statements.

On January 11, 2005, we closed the sale of our interest in Lombard International Assurance S.A., or Lombard, to Friends Provident plc, or Friends Provident, for common shares in Friends Provident valued at $59.0 million. This transaction is further described in Note 1 to our consolidated financial statements in this Form 10-K. In connection with our disposition of Lombard, we entered into a total return swap agreement with a third party, which was settled with cash proceeds of $59.0 million on April 1, 2005 in exchange for all of our shares in Friends Provident.

Effective May 31, 2004, we sold our retail affiliated broker-dealer operations to Linsco/Private Ledger Financial Services, or LPL. As part of this transaction, advisors affiliated with WS Griffith Securities, Inc., or Griffith, and Main Street Management Company, or Main Street, had the opportunity to move to LPL as independent registered representatives. As of December 31, 2005, we have not determined the ultimate persistency of the business written by these advisors, but our experience through that date shows no material deterioration.

Revenues net of eliminations and direct expenses net of deferrals and certain transaction-related costs included in our consolidated financial statements related to our retail affiliated broker-dealer operations sold during 2004 are as follows:

During 2004, we incurred a $3.6 million after-tax charge for an impairment of goodwill related to Main Street, offset by a $2.7 million after-tax gain on the sale of the broker-dealer operations. Both the charge and the gain were recorded as realized investment gains and losses. In addition, in connection with this sale, we incurred a $10.2 million after-tax charge related to lease termination costs, offset by a $4.4 million after-tax gain related to curtailment accounting in connection with employee benefit plans. During the second quarter of 2005, we realized a gain of $1.5 million related to contingent consideration based on gross distribution concessions earned by LPL during the first year following the sale.

In 2003, we acquired the remaining interest in PFG Holdings, Inc., or PFG, the holding company for our private placement operation, for initial consideration of $16.7 million. Under the terms of the purchase agreement, we may be obligated to pay additional consideration of up to $77.4 million to the selling shareholders, including $7.0 million during 2006 and 2007 based on certain financial performance targets being met, and the balance in 2008 based on the appraised value of PFG as of December 31, 2007. During each of the two years in the period ended December 31, 2005, we paid $3.0 million under this obligation.

Asset Management

In March 2004, we acquired the remaining minority interests in Walnut Asset Management LLC and Rutherford Brown & Catherwood, LLC for $2.1 million. This additional purchase price was accounted for as a step-acquisition by PXP and was allocated to goodwill and definite-lived intangible assets, accordingly.

As a result of a step acquisition completed in 2005, PXP owns 100% of Kayne Anderson Rudnick Investment Management, LLC, or KAR. In 2002 we acquired a 60% equity interest in KAR for $102.4 million. In addition to the initial cost of the purchase, we made a payment of $30.1 million in the first quarter of 2004 based upon growth in management fee revenue for the purchased business through 2003. We had fully accrued for this payment as of December 31, 2003 and allocated it entirely to goodwill. In each of January 2005 and 2004, one member of KAR accelerated their portion of the 15% noncontrolling interest acquisitions, at which time we acquired an additional combined 0.3% of the company. We accrued $11.4 million related to the remaining 4.9% redemption required as of December 31, 2004 and allocated the purchase price to goodwill and definite-lived intangible assets. The two remaining 4.9% noncontrolling interest redemptions were accelerated and were acquired effective September 30, 2005, along with the remaining 25% noncontrolling interest for $77.2 million. Effective September 30, 2005, KAR became a wholly-owned subsidiary of PXP. PXP paid $9.7 million of the additional purchase price in October 2005 and issued promissory notes to the sellers in the amount of $67.0 million to finance the remainder of the acquisition, of which $9.8 million was paid on January 3, 2006. The remainder, plus deferred interest, is due in January 2007. The interest rate on the notes is 4.75%. Related to the initial purchase in 2002, we allocated $0.3 million of the initial purchase price to tangible net assets acquired and $102.1 million to intangible assets ($58.3 million to investment management contracts and $43.8 million to goodwill).

On May 2, 2005, we completed the acquisition of the minority interest in Seneca Capital Management, or Seneca, thereby increasing our ownership to 100%. The effect of this acquisition is not material to our consolidated financial statements.

The mandatorily redeemable noncontrolling interests in our less than wholly-owned asset management subsidiaries were subject to certain agreements, which were executed at the time of the acquisition. Upon acquisition of the remaining outstanding mandatorily redeemable interests, any previous rights under these agreements became nullified. We recorded $77.6 million, $15.2 million and $34.5 million of additional redemption or purchase price in 2005, 2004 and 2003, respectively, related to the redemption of noncontrolling membership interests under these agreements.

Corporate and Other

On January 14, 2005, we closed the sale to third parties of our equity holdings in Aberdeen for net proceeds of $70.4 million, resulting in an after-tax realized investment loss of $7.0 million. The January 2005 sale of our equity holdings in Aberdeen completed our disposition of our direct financial interests in Aberdeen. On November 19, 2004, we received payment in full of a $27.5 million convertible subordinated note issued by Aberdeen Asset Management PLC, or Aberdeen, a United Kingdom-based asset management company. Concurrently we relinquished our contractual right to one of two Aberdeen board seats we held related to our 16.5% equity interest in Aberdeen, at which point we concluded that in our judgment, we no longer had the ability to significantly influence Aberdeen’s operations. Accordingly, effective November 19, 2004, we changed our method of accounting for our equity holdings in Aberdeen from the equity method of accounting to the fair value method of accounting under SFAS No. 115, Accounting for Investments in Debt and Equity Securities. Based on our intent to sell our equity holdings in Aberdeen in the near-term, we designated our equity holdings as trading securities under the fair value method of accounting. Under the fair value method, the changes in fair value, based on the underlying value of Aberdeen’s shares as traded on the London Stock Exchange, as compared to our carrying value under the equity method are presented as an after-tax realized investment gain of $55.1 million in our consolidated statement of operations for the year ended December 31, 2004. In addition, our 2004 consolidated statement of operations includes a $14.7 million after-tax, non-cash charge related to the accounting for our proportionate share of Aberdeen’s 2004 settlement of alleged misselling activities with the United Kingdom’s Financial Services Authority. This charge has been accounted for by us under the equity method of accounting as it pre-dates our November 19, 2004 change in accounting for Aberdeen from the equity method to the fair value method. See Note 5 to our consolidated financial statements in this Form 10-K for more information on our holdings in Aberdeen.

During 2004, we sold the stock of Phoenix Global Solutions (India) Pvt. Ltd., our India-based information technology subsidiary, and essentially all of the assets of its United States affiliate, Phoenix Global Solutions, Inc., to Tata Consultancy Services Limited, a division of Tata Sons Ltd. This transaction was not material to our consolidated financial statements.

The Demutualization

Phoenix Home Life demutualized on June 25, 2001 by converting from a mutual life insurance company to a stock life insurance company, became a wholly-owned subsidiary of PNX and changed its name to Phoenix Life Insurance Company, or Phoenix Life. See Note 3 to our consolidated financial statements in this Form 10-K for detailed information regarding the demutualization and closed block.

Recently Issued Accounting Standards

In September 2005, the Accounting Standards Executive Committee, or AcSEC, of the American Institute of Certified Public Accountants, or AICPA, issued Statement of Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts, or SOP 05-1. SOP 05-1 provides guidance on accounting by insurance enterprises for deferred policy acquisition costs, or DAC, on internal replacements of insurance and investment contracts other than those specifically described in Statement of Financial Accounting Standards No. 97, or SFAS 97. The SOP defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. This SOP is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. We will adopt SOP 05-1 on January 1, 2007. We are currently assessing the impact of SOP 05-1 on our consolidated financial position and results of operations.

Share-Based Payment: On December 16, 2004 the Financial Accounting Standards Board, or the FASB, issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, or SFAS 123(R), which is effective January 1, 2006 and requires that compensation cost related to share-based payment transactions be recognized in financial statements at the fair value of the instruments issued. While prior to the issuance of SFAS 123(R), recognition of such costs at fair value was optional, we elected to do so for all share-based compensation that we awarded after December 31, 2002. Accordingly, we do not expect our adoption of SFAS 123(R) to have a material effect on our consolidated financial statements.

Other-Than-Temporary Impairments: FASB Staff Position Nos. FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, or FSP 115-1, is effective for reporting periods beginning after December 15, 2005. Earlier application is permitted. FSP 115-1 provides guidance as to the determination of other-than-temporarily impaired securities and requires certain financial disclosures with respect to unrealized losses. These accounting and disclosure requirements largely codify our existing practices as to other-than-temporarily impaired securities and thus, does not have a material effect on our consolidated financial statements.

Financial Instruments with Characteristics of Both Liabilities and Equity: Effective July 1, 2003, we adopted SFAS 150. The effect of our adoption was to reclassify the mandatorily redeemable noncontrolling interests related to our asset management subsidiaries from “minority interest” to “other liabilities” in our consolidated balance sheet. In addition, within our consolidated statement of operations, we reclassified earnings attributed to those interests from the caption “minority interest in net income of subsidiaries” to “other operating expenses.” These changes in presentation were not material to our consolidated financial statements. During 2005, we redeemed the outstanding noncontrolling interests.

Nontraditional Long-Duration Contracts and Separate Accounts: Effective January 1, 2004, we adopted the AICPA’s Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts, or SOP 03-1. SOP 03-1 provides guidance related to the accounting, reporting and disclosure of certain insurance contracts and separate accounts, including guidance for computing reserves for products with guaranteed benefits such as guaranteed minimum death benefits and for products with annuitization benefits such as guaranteed minimum income benefits. In addition, SOP 03-1 addresses the presentation and reporting of separate accounts, as well as rules concerning the capitalization and amortization of sales inducements. Since this new accounting standard largely codifies certain accounting and reserving practices related to applicable nontraditional long-duration contracts and separate accounts that we already followed, our adoption did not have a material effect on our consolidated financial statements.

Variable Interest Entities. A new accounting standard was issued in January 2003 that interprets the existing standard on consolidation. This new accounting standard was revised and reissued in December 2003 as FIN 46(R), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, or FIN 46(R). It clarifies the application of standards of consolidation to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties (“variable interest entities”). As of December 31, 2003, we adopted FIN 46(R) for special purpose entities, or SPEs, where we may hold a variable interest. Our adoption of FIN 46(R) resulted in no additional variable interest entities being consolidated by us.

In accordance with previous guidance, we continue to consolidate certain collateralized obligation trusts, or CDOs, which we sponsor.

The above non-cash credits (charges) to earnings and stockholders’ equity primarily relate to realized and unrealized investment losses within the CDOs. Upon maturity or other liquidation of the trusts, the fair value of the investments pledged as collateral will be used to settle the non-recourse collateralized obligations with any shortfall in such investments inuring to the third-party note and equity holders. To the extent there remains a recorded liability for non-recourse obligations after all the assets pledged as collateral are exhausted, such amount will be reduced to zero with a corresponding benefit to earnings. Accordingly, these investment losses and any future investment losses under this method of consolidation will ultimately reverse upon the maturity or other liquidation of the non-recourse collateralized obligations. These non-recourse obligations mature between 2011 and 2012 but contain call provisions. The call provisions may be triggered at the discretion of the equity investors based on market conditions and are subject to certain contractual limitations.

GAAP requires us to consolidate all the assets and liabilities of these collateralized obligation trusts which results in the recognition of realized and unrealized losses even though we have no legal obligation to fund such losses in the settlement of the collateralized obligations. The FASB continues to evaluate, through the issuance of FASB staff positions, the various technical implementation issues related to consolidation accounting. We will continue to assess the impact of any new implementation guidance issued by the FASB as well as evolving interpretations among accounting professionals. Additional guidance and interpretations may affect our application of consolidation accounting in future periods.

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Critical accounting estimates are reflective of significant judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The following are areas that we believe require significant judgments, together with references to the footnote(s) in which each accounting policy is discussed in relation to our business:

Full year 2005 net income of $108.4 million, or $1.06 per diluted share, increased 25% over 2004 net income of $86.4 million, or $0.86 per diluted share, which was substantially improved from the 2003 net loss of $6.2 million, or $0.07 per diluted share. The increase for 2005 was the result of 35% growth in Life and Annuity pre-tax operating earnings and a lower effective tax rate, partially offset by lower earnings in Asset Management and Venture Capital and lower investment gains. Full year 2005 net income included a $35.1 million gain on the settlement of our HRH stock purchase contracts in November, a $9.0 million loss on the sale of certain venture capital partnerships, a $7.0 million loss on the sale of our equity investment in Aberdeen and $12.4 million of restructuring charges, principally related to restructuring of our asset management operations and completion of our outsourcing of information technology infrastructure to Electronic Data Systems, or EDS. Finally, full year 2005 results include $1.3 million in realized gains related to CDOs consolidated by us under FIN 46(R), compared to realized losses of $12.9 million in 2004.

The 2004 increase in net income was the result of higher pre-tax operating earnings from Life and Annuity, which grew by 44%, higher Asset Management earnings, higher net investment gains and a lower effective tax rate, partially offset by lower Venture Capital segment earnings in 2004 and a higher loss for the Corporate and Other segment in 2004. Full year 2004 net income included a $41.2 million gain on our equity investment in Aberdeen, a $6.4 million charge related to the fourth quarter tender of $144.8 million in surplus notes and restructuring charges of $21.9 million, principally related to severance and other transition costs related to the sale of our life and annuity retail affiliated distribution operations and the outsourcing of our information technology infrastructure to EDS. Full year 2003 net income includes a $55.0 million charge for the impairment of our equity investment in Aberdeen and restructuring charges of $8.5 million principally related to employee severance costs. Finally, full year 2004 results include $12.9 million in realized losses related to CDOs consolidated by us under FIN 46(R), compared to realized losses of $2.4 million for 2003.

Total segment income for 2005 of $101.7 million, or $0.99 per diluted share, grew 26% over 2004 total segment income of $80.6 million, or $0.80 per diluted share, which was substantially improved from 2003 total segment income of $57.3 million, or $0.59 per diluted share. The 2005 increase was driven by higher Life and Annuity earnings offset by lower Asset Management and Venture Capital earnings and a higher loss for Corporate and Other in 2005. The increase in total segment income for full year 2004 was the result of higher earnings in the Life and Annuity and Asset Management segments, partially offset by lower Venture Capital earnings and a higher Corporate and Other segment loss in 2004. See Note 2 to our consolidated financial statements in this Form 10-K and “Results of Operations by Segment” below for a discussion of our segment reporting.

Life and Annuity pre-tax segment income was $192.5 million in 2005, compared to $142.8 million in 2004 and $99.4 million in 2003. The life insurance business had pre-tax income of $180.5 million in 2005 compared to $130.1 million in 2004 and $100.5 million in 2003, while the annuity business had pre-tax income of $12.0 million in 2005 compared to $12.7 million in 2004 and a loss of $1.1 million in 2003. Full year improvements for Life and Annuity in 2005 reflect strong investment margins for life and annuity lines and continued favorable mortality and persistency. Life and Annuity benefited from an adjustment, or unlocking, of assumptions primarily related to DAC, which increased pre-tax segment income by $23.8 million for the second quarter. However, this benefit was reduced in the second half of 2005 as a result of higher DAC amortization, particularly for universal life. Even without the DAC unlocking, life and annuity earnings increased by more than 18% over 2004.

Life sales regained momentum in 2005, after declining in 2004 due to the sale of our retail affiliated distribution and our unwillingness to compete aggressively with products that contain no-lapse guarantees. Total life premiums and annualized life premiums were up by 33% and 69%, respectively, over 2004. We continued to benefit from the strength of our distribution relationships that have access to our target market, the value-added services and support we provide as well as our large-case underwriting expertise. We experienced a significant increase in large estate and business planning cases, some of which involved the use of non-recourse premium financing. In the first quarter of 2006 we affirmed our position that we will not accept sales of policies that employ this type of premium financing and do not contain strong evidence of insurance need and an insurable

Full year 2004 earnings improvements in life and annuity reflect the benefits of expense savings, particularly from the sale of our retail affiliated distribution operations, and strong fundamentals including mortality, higher investment margins and persistency. Life insurance and annuity sales and deposits fell short of our expectations in 2004 and were well below 2003 levels. Life insurance sales were lower in 2004 due to our decision to maintain pricing and risk management discipline, particularly

Asset Management pre-tax segment loss was $10.5 million in 2005, compared to pre-tax income of $0.1 million in 2004 and a pre-tax segment loss of $8.7 million in 2003. The 2005 decrease was a result of lower revenues, due to declines in assets under management and lower performance fees and of a $10.6 million intangible asset impairment in the third quarter of 2005, offset by significantly lower expenses. In 2005, we completed the conversion of our asset management operations to a wholly-owned structure, refocused on retail distribution, adding more than 6,000 new producers, and expanded and strengthened our product offerings. These accomplishments put us in a stronger position for earnings growth. The improvement in 2004 results was driven by higher revenues from higher average assets under management and lower general and administrative expenses, partially offset by higher formulaic compensation expense, which is driven by higher investment product fee revenues.

December 31, 2005 assets under management for the Asset Management segment were $37.4 billion compared with $42.9 billion on December 31, 2004. Average assets under management were $41.3 billion as of December 31, 2005, compared to average assets under management of $44.9 billion and $42.9 billion in 2004 and 2003, respectively. Full year 2005 net flows were negative $5.6 billion (inflows of $10.3 billion; outflows of $15.9 billion) compared with negative net flows in 2004 of $6.6 billion (inflows of $6.7 billion; outflows of $13.3 billion), and negative net flows in 2003 of $1.2 billion (inflows of $7.0 billion; outflows of $8.2 billion). The full year 2005 negative net flows were driven by continued redemptions in managed accounts and institutional products, primarily related to certain underperforming equity strategies and the $1.2 billion redemption of the Phoenix-Mistic 2002-1 CDO, Ltd., or Mistic, in the third quarter of 2005. Sales increased 55% in 2005, driven by mutual fund sales, which increased 21% due to our emphasis on expanding relationships with advisors, as well as institutional sales, which more than doubled in 2005. The 2004 full year negative net flows were also driven primarily by outflows from certain underperforming equity strategies and by $1.7 billion of fixed income institutional redemptions during the year that were unrelated to performance. Fixed income products performed strongly, with positive net flows for 2004, excluding the institutional outflows noted above. Retail mutual fund sales rose by 12% in 2004, reflecting the strong fixed income and specialty fund performance.

We ended 2005 with a strong financial position. Shareholders’ equity was $2,007.1 million at December 31, 2005 and Phoenix Life’s statutory capital, surplus and AVR grew $68.1 million to $1,096.3 million at December 31, 2005 from $1,028.2 million at December 31, 2004. Phoenix Life’s risk-based capital, or RBC, is well above 350%, and PNX cash was $49.9 million at December 31, 2005. We also took steps to enhance our financial flexibility. In January of 2005, we disposed of our two largest non-strategic assets, Aberdeen and Lombard, which resulted in the receipt of net proceeds of nearly $130.0 million. In 2004 we closed on a tender offer for our 6.95% surplus notes scheduled to mature on December 1, 2006, receiving valid tenders of $144.8 million of

Venture Capital had 2005 pre-tax segment income of $14.8 million compared to income of $19.3 million and $36.2 million in 2004 and 2003, respectively. The 2005 results reflected lower portfolio returns in our partnerships, while the 2004 and 2003 results reflected generally favorable private equity market conditions.

Corporate and Other segment pre-tax loss for 2005 of $69.6 million was higher than the 2004 and 2003 losses of $59.1 million and $47.8 million, respectively. The full year 2005 results reflect higher interest expense on indebtedness, primarily from our surplus notes refinance transaction in December 2004 and the promissory notes related to the acquisition of the remaining interest in KAR, plus higher allocated corporate expenses as a result of a change in methodology. The full year 2004 results reflect higher earnings from the Company’s international operations offset by higher regulatory, compliance and corporate information technology costs and lower corporate investment income.

Our 2005 realized investment gains were $34.2 million (before offsets for DAC, policyholder dividend obligation liability and taxes) compared to realized investment losses of $0.8 million and $98.5 million in 2004 and 2003, respectively. After offsets, realized investment gains were $19.8 million in 2005, compared to losses of $7.2 million and $52.9 million in 2004 and 2003 respectively. Impairment losses, before offsets, of $35.3 million continued to decline from $49.5 million and $210.8 million in 2004 and 2003, respectively, as a result of the considerable improvement in credit market conditions since mid-2003. Impairment losses for 2004 include an $11.6 million impairment ($6.7 million after-taxes) related to our investment in an Argentina affiliate, while 2003 impairments include an $89.1 million impairment ($55.0 million after-taxes) of our equity investment in Aberdeen. Transaction gains, before offsets, of $69.5 million for 2005 compare with gains of $48.7 million in 2004 and $112.3 million in 2003. Transaction gains in 2005 include an $86.3 million realized gain on the settlement of HRH stock purchase contracts and a $13.9 million loss on the venture capital transaction. Transaction gains in 2003 included $35.3 million in pre-tax gains from the sale of certain of our equity investments.

2005 vs. 2004

Premium revenue decreased $61.9 million, or 6%, in 2005 from 2004, due primarily to decreases in premiums on the traditional life insurance block, which is comprised mainly of participating life insurance policies. Since our demutualization in 2001, we no longer sell participating life policies, resulting in a decline in participating life renewal premiums. In addition, there were large supplemental contract premiums in 2004 that did not recur in 2005.

Insurance and investment product revenue decreased $20.2 million, or 4%, in 2005 from 2004. Asset Management fees decreased $38.0 million in 2005 due primarily to lower average assets under management. Retail and institutional investment product fees decreased $23.1 million and $12.8 million, respectively, as a result of the decrease in average assets under management. Other investment product fees decreased $1.9 million due to decreased volumes in equity trading by certain investment managers, which resulted in fewer commissions earned. Approximately 52% of our management fee revenues were based on assets as of the beginning of a quarter, which causes fee revenues to lag behind changes in assets under management. These decreases were offset by Life and Annuity fees, which increased $23.0 million in 2005. This increase was due primarily to higher universal life fees, primarily cost of insurance fees, variable universal life fees and annuity fees. See the revenue by product discussion that follows for additional details. These increases were partially offset by lower other life revenues (excluding broker-dealer commissions and distribution fees), primarily related to the sale of our retail affiliated broker-dealer operations in May 2004. In addition, Corporate and Other revenues decreased in 2005 due to the sale of certain non-core businesses in 2004.

Broker-dealer commission and distribution fee revenues decreased $28.2 million, or 50%, in 2005 from 2004, due primarily to a revenue decrease of $28.8 million in the Life and Annuity segment in 2005 as a result of the sale of our retail affiliated broker-dealer operations in May 2004. Asset Management broker-dealer commission and distribution fee revenues increased slightly in 2005.

Net investment income increased $26.9 million, or 3%, in 2005 over 2004, due primarily to higher earnings from the Life and Annuity segment of $31.2 million, which were generated from partnership and private equity gains, higher funds on deposit, particularly for universal life and an increased invested asset base.

Net realized investment gains improved $35.0 million, to a gain of $34.2 million in 2005 from a loss of $0.8 million in 2004. This was due primarily to higher transaction-related gains of $20.8 million and lower impairment losses of $14.2 million, primarily related to investments pledged as collateral. Transaction-related gains included a realized gain for HRH stock that was delivered in settlement of the stock purchase contracts and the redemption of the Mistic CBO, offset by the realized loss on the sale of a portion of our venture capital assets.

Total policyholder benefits decreased $85.8 million, or 5%, in 2005 from 2004. Policyholder benefits decreased $45.5 million due primarily to a reduction of in-force policies for traditional life insurance and lower interest credited, particularly for annuities. Dividends decreased $40.3 million in 2005 due primarily to the change in the policyholder dividend obligation liability, which decreased dividend expense by $4.0 million in 2005, the effect of realized gains on the policyholder dividends, which decreased dividend expense by $16.2 million in 2005, and the reduction of the dividend scale in late 2005.

Policy acquisition cost amortization increased $21.9 million, or 20%, in 2005 over 2004, due primarily to an increase of $18.0 million related to the effect of realized gains and higher amortization for universal life and annuities offset by the effects of unlocking. Amortization increased for universal life insurance due to higher insurance margins and growth of in-force policies and increased for annuities due to improved investment margins and higher surrenders.

Intangible asset impairments of $10.6 million in 2005 related to $13.2 million of identified intangible assets for certain investment contracts that had experienced significant outflows.

Other operating expenses, which include non-deferrable policy acquisition costs, commissions due to broker-dealer registered agents, finders fees, formulaic incentive compensation related to asset management revenue growth and other segment and administrative expenses, decreased $82.8 million, or 15%, in 2005 from 2004. The decrease is due to lower restructuring and non-recurring expenses of $24.5 million, lower Life and Annuity expenses of $21.4 million and lower Asset Management expenses of $35.9 million. The decrease in Life and Annuity expenses is due to lower broker-dealer commissions, which resulted from the sale of our retail affiliated broker-dealer operations in May 2004, partially offset by higher expenses due to business growth and investment in product development. The primary reason for the decrease in Asset Management expenses related to lower incentive compensation expense and lower mandatorily redeemable interest costs due to the acquisition of the outstanding remaining mandatorily redeemable noncontrolling interest in certain subsidiaries during the second and third quarters.

Applicable income taxes decreased $12.8 million, or 32%, in 2005 from 2004, due to additional tax credits earned and tax benefits resulting from the completion of an IRS audit.

2004 vs. 2003

Premium revenue decreased $51.6 million, or 5%, in 2004 from 2003, due primarily to a $51.1 million decrease in participating life insurance premiums. Since our demutualization in 2001, we no longer sell participating life policies, resulting in a decline in renewal participating life premiums. This decline in policies in force reduces reserves, resulting in lower policyholder benefit costs.

Insurance and investment product fees increased $34.0 million, or 7%, in 2004 over 2003 due primarily to a $12.6 million increase in Asset Management fees and a $18.5 million increase in Life and Annuity fees. Asset Management retail and institutional investment product fees, which are asset-based, increased $9.8 million and $6.2 million, respectively, as a result of increased assets under management. These increases were partially offset by lower other investment product fees as a result of decreased volumes in equity trading by certain investment managers, which resulted in lower commissions earned. In 2004, approximately 57% of our management fee

Broker-dealer commission and distribution fee revenues decreased $24.6 million, or 30%, in 2004 from 2003, due to the sale of our retail affiliated broker-dealer operations in May 2004. This decrease was partially offset by a modest increase in broker-dealer commissions for Asset Management.

Net investment income decreased $31.7 million, or 3%, in 2004 from 2003, due primarily to lower venture capital earnings, which reflected the effect of less than favorable equity market conditions in 2004 compared to 2003. Mortgage loan income also declined in 2004 compared to 2003, reflecting the continued decline in mortgage loan assets, as the portfolio continues to run-off. Income reflected in the other invested assets category increased in 2004 compared to 2003, benefiting from higher investment income related to two direct equity investments. This increase was partially offset by lower investment income from our debt securities pledged as collateral related to our consolidated CDOs, which decreased $12.1 million from 2003, due primarily to decreased asset levels from paydowns and defaults.

The $85.9 million unrealized gain on trading equity securities in 2004 relates to our investment in Aberdeen. See Notes 1 and 5 to our consolidated financial statements in this Form 10-K for additional information related to our investments in Aberdeen.

Net realized investment losses decreased by $97.7 million, or 99%, in 2004 compared to 2003, due primarily to significantly lower impairments in general account debt and equity securities as a result of the improved in credit environment in 2004, offset by lower transaction-related gains. Realized losses from impairments on general account debt securities decreased $60.6 million from 2003. Impairment losses in 2004 included $12.6 million in charges related to two international investments, while 2003 included a $96.9 million pre-tax charge for the impairment of three international investments, $89.1 million of which related to the impairment of our equity investment in Aberdeen.

Policyholder benefits, including dividends, decreased $45.9 million, or 2%, due primarily to lower benefits and changes in policy reserves and policyholder dividends for participating life resulting from a decline in renewal premiums, as discussed above; lower interest credited from reduced crediting rates, principally from universal life; and lower general account funds on deposit for annuities. These decreases were partially offset by a larger increase in the policyholder dividend obligation, higher reserves for annuities and higher benefits for universal life and variable universal life insurance. The increase in universal life and variable universal life benefits was due to a large death claim, for universal life, in the first quarter of 2004 combined with very favorable mortality for both lines of business in 2003.

Policy acquisition cost amortization increased $16.1 million, or 17%, in 2004 over 2003, due primarily to higher amortization for annuities from higher gross margins, growth in funds on deposit and lower relative performance in 2004. Amortization for variable universal life, universal life and term life increased modestly as a result of growth in funds on deposit, or in-force policies, for term life. The effect of realized gains (losses) on the amortization also contributed to the increase in 2004. These increases were partially offset by modestly lower amortization for participating life.

Interest expense on non-recourse collateralized obligations decreased $15.3 million, or 31%, in 2004 from 2003 due primarily to decreased liabilities from paydowns.

Other operating expenses, which include non-deferrable policy acquisition costs, commissions due to broker-dealer registered agents, finders fees, formulaic compensation related to Asset Management revenue growth and other segment and administrative expenses, decreased $4.4 million, or 1%, in 2004 from 2003. The decrease is principally due to a decrease of $55.9 million for Life and Annuity ($48.1 million after elimination of inter-segment expenses), partially offset by increases in management restructuring and early retirement costs of

Income tax expense of $40.5 million in 2004 increased by $58.8 million from a tax benefit of $18.3 million in 2003. This increase is due primarily to the tax effect of the increase to income before continuing operations before minority interest and equity earnings of affiliates.

Effects of Inflation

For the years 2005, 2004 and 2003, inflation did not have a material effect on our consolidated results of operations.

Results of Operations by Segment

We evaluate segment performance on the basis of segment income and the Company’s financial performance based on total segment return on equity. See Note 2 to our consolidated financial statements in this Form 10-K for more information regarding our presentation of segment income. Realized investment gains and losses and certain other items are excluded from our calculation of segment income because we do not consider them when evaluating the financial performance of the segments. The size and timing of realized investment gains and losses are often subject to our discretion. Certain items are removed from segment after-tax income if, in our opinion, they are not indicative of overall operating trends. While some of these items may be significant components of net income reported in accordance with GAAP, we believe that segment income is an appropriate measure that represents the earnings attributable to the ongoing operations of the business. Investment income on debt and equity securities pledged as collateral as well as interest expense on non-recourse collateralized obligations, both related to two consolidated collateralized obligation trusts we sponsor, are included in the Corporate and Other segment. Excess investment income on debt and equity securities pledged as collateral represents investment advisory fees earned by our asset management subsidiary and are allocated to the Asset Management segment as investment product fees for segment reporting purposes only. Also, all interest expense is included in the Corporate and Other segment, as are several smaller subsidiaries and investment activities which do not meet the criteria of reportable segments. These include our remaining international operations and the run-off of our group pension and guaranteed investment contract businesses.

The criteria used to identify an item that will be excluded from segment income include: whether the item is infrequent and is material to the segment’s income; or whether it results from a business restructuring or a change in the regulatory requirements, or relates to other unusual circumstances (e.g., non-routine litigation). We include information on other items allocated to our segments in their respective consolidated financial statement footnotes for information only. Items excluded from segment income may vary from period to period. Because these items are excluded based on our discretion, inconsistencies in the application of our selection criteria may exist. Segment income and total segment return on equity are not substitutes for net income determined in accordance with GAAP and may be different from similarly titled measures of other companies.

We evaluate the Company’s financial performance based, in part, on total segment return on equity, calculated as total segment income as a percentage of average adjusted stockholders’ equity⁽¹⁾. We believe this ratio measures the return management is generating on shareholder investment and the efficiency of the Company’s use of its assets and resources.

We allocate capital to our Life and Annuity segment based on risk-based capital for our insurance products. We used a 300% risk-based capital ratio for allocations in 2002 through 2005. Capital within our Life Companies that is unallocated is included in our Corporate and Other segment. We allocate capital to our Asset Management segment on the basis of the historical capital within that segment. We allocate net investment income based on the assets allocated to the segments. We allocate tax benefits related to tax-advantaged investments to the segment that holds the investment. We allocate certain costs and expenses to the segments based on a review of the nature of the costs, time studies and other methodologies.

Life and Annuity Segment