UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended June 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission file Number 33-42611
THE MANHATTAN LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
New York 13-1004640
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1876 Waycross Road, Cincinnati, OH 45240
(Address of principal executive offices) (Zip Code)
(513) 595-2118
(Registrant's telephone number, including area code)
None
-------------------------------------------------
(Former name, former address and former fiscal
year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Number of shares of the Registrant's guarantee capital shares
outstanding as of June 30, 1996 was 3,341,624.
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements (Unaudited):
Condensed Balance Sheets - June 30, 1996 and
December 31, 1995 2
Condensed Statements of Income
- Three Months and Six Months Ended
June 30, 1996 and 1995 3
Statement of Shareholders' Equity
- Six Months Ended June 30, 1996 4
Condensed Statements of Cash Flows
- Six Months Ended June 30, 1996 and 1995 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 12
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K 28
Signatures 29
<PAGE>
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
CONDENSED BALANCE SHEETS
(Unaudited)
(in thousands except share amounts)
<TABLE>
<CAPTION>
Part I. Financial Information
June 30, December 31,
1996 1995
------- -----------
<S> <C> <C>
ASSETS
Fixed income securities
available-for-sale $ 296,973 $ 325,038
Equity securities, at market -- 2
Mortgage loans 76,149 70,048
Real estate acquired
through foreclosure 6,388 6,388
Policy loans 50,933 51,740
Other invested assets 22 --
Short-term investments 101 --
--------- ---------
Total Investments 430,566 453,216
Cash 3,839 711
Deferred policy acquisition costs 41,541 41,264
Furniture, equipment and leaseholds,
at cost, less accumulated depreciation
(1996 - $2,781; 1995 - $2,707) 490 512
Other assets 21,206 18,235
--------- ---------
TOTAL ASSETS $ 497,642 $ 513,938
========= =========
LIABILITIES
Policy liabilities $ 420,894 $ 428,812
Other liabilities 11,621 13,169
--------- ---------
TOTAL LIABILITIES 432,515 441,981
--------- ---------
POLICYHOLDERS' EQUITY 34,136 40,649
SHAREHOLDERS' EQUITY
Guarantee Capital Shares, $2 Par Value
(5,000,000 shares authorized, 3,341,624
shares issued and outstanding) 6,683 6,683
Retained earnings 24,550 23,606
Unrealized gain(loss
on fixed income securities
classified as available-for-sale (242) 1,019
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 30,991 31,308
--------- ---------
TOTAL LIABILITIES,
POLICYHOLDERS' EQUITY
AND SHAREHOLDERS' EQUITY $ 497,642 $ 513,938
========= =========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
CONDENSED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
REVENUE June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Insurance revenues $ 9,527 $ 10,003 $ 19,098 $ 19,872
Net investment income 8,086 8,419 16,555 16,618
Net realized (losses)
on investments (75) (430) 303 (992)
Other 8 1 11 12
--------- --------- --------- ---------
Total revenue 17,546 17,993 35,967 35,510
--------- --------- --------- ---------
BENEFITS AND EXPENSES
Policyholder benefits 8,003 9,937 17,469 17,611
Interest expense 2,432 2,301 4,877 4,723
Underwriting,
acquisition and
insurance expenses 4,215 5,135 9,199 10,320
Policyholders'
dividends and
participation in
operations 1,073 706 2,200 2,312
--------- --------- --------- ---------
Total benefits and
expenses 15,723 18,079 33,745 34,966
--------- --------- --------- ---------
Income (losses)
before federal
income taxes 1,823 (86) 2,222 544
Federal income tax
expense (benefit):
Current 229 (236) 454 472
Deferred 1,101 (161) 824 (703)
--------- --------- --------- ---------
1,330 (397) 1,278 (231)
--------- --------- --------- ---------
Net income $ 493 $ 311 $ 944 $ 775
========= ========= ========= =========
Earnings per share $ .15 $ .09 $ .28 $ .23
========= ========= ========= =========
Weighted average
number of shares
outstanding 3,341,624 3,341,624 3,341,624 3,341,624
========= ========= ========= =========
(/table>
The accompanying notes are an integral part of the
financial statements.
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
(in thousands)
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
Guarantee on Available Total
Capital Retained for Sale Shareholders'
Shares Earnings Securities Equity
------- -------- ---------- ------
<S> <C> <C> <C> <C>
Balance at
December 31, 1995 $ 6,683 $23,606 $ 1,019 $31,308
Net income for
the six months
ended June 30, 1996 -- 944 -- 944
Unrealized depreciation
in value of fixed
income securities
classified as
available-for-sale,
net of income taxes -- -- (1,261) (1,261)
------- ------- ------- -------
Balance at
June 30, 1996 $ 6,683 $24,550 $ (242) $30,991
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the
financial statements.
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 944 $ 775
Charges (credits) to net
income not affecting cash:
Policyholders' share of
income in excess of
dividends paid 2,316 (445)
Interest credited to
interest sensitive products 2,406 2,503
Interest credited to
universal life policies 2,471 2,220
Accrual of discount on
investments, net (225) (434)
Realized (gains) losses
on investments (303) 992
Depreciation 74 76
Amortization of deferred
policy acquisition costs 1,856 1,572
Deferred federal income
tax benefit 824 (703)
Change in operating assets
and liabilities:
Accrued investment
(income) loss (2) 160
Policy acquisition
costs deferred (2,133) (1,872)
Federal income tax
recoverable 349 872
Policy liabilities (7,443) (1,079)
Other items, net (493) (966)
------ -------
Cash provided by operating
activities 641 3,671
------ -------
INVESTING ACTIVITIES
Purchases of investments:
Fixed income securities
and equity securities
held-to-maturity 0 (3,038)
Fixed income securities
and equity securities
available-for-sale (64,032) (60,948)
Mortgage Loans and
Real Estate (16,394) (5,077)
Short-term investments,
net (85) (1,857)
Purchases of furniture,
equipment and leaseholds (52) (54)
Sales, maturities,
redemptions and repayments
of investments:
Fixed income securities
and equity securities
held-to-maturity 0 4,653
Fixed income securities
and equity securities
available-for-sale 77,308 59,692
Mortgage loans and
real estate 10,287 3,727
Policy loans, net 807 (1,863)
------ -------
Cash provided or (used)
by investing activities 7,839 (4,765)
------ -------
FINANCING ACTIVITIES
Premiums/deposits to
interest sensitive contracts 143 2,176
Withdrawals from interest
sensitive contracts (6,155) (4,946)
Receipts from universal life
policies credited to
policyholder account balances 3,431 3,013
Return of policyholder
account balances on
universal life policies (2,771) (1,771)
------ -------
Cash used by
financing activities (5,352) (1,528)
------ -------
Increase (Decrease) in cash 3,128 (2,622)
Cash at beginning of period 711 2,545
------ -------
Cash at end of period $3,839 $ (77)
====== =======
</TABLE>
The accompanying notes are an integral part of the
financial statements.
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Basis of Presentation
The accompanying unaudited condensed financial statements of
The Manhattan Life Insurance Company (the Company) have been
prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. The results of operations for any interim period are
not necessarily indicative of results for the year. The
unaudited interim condensed financial statements should be read
in conjunction with the financial statements and notes thereto
contained in the Annual Report of the Company for the year ended
December 31, 1995.
In 1993 the Company announced that a special committee of its
independent directors had been formed to consider the fairness
of a proposal to eliminate minority interests in the Company's
guarantee capital shares by using a reverse stock split to
reduce all outstanding minority shares to fractional shares
payable in cash. The proposal was made by The Union Central
Life Insurance Company (Union Central), a Cincinnati based
mutual life insurance company. Under the proposal, the
Company's minority shareholders would receive $5.125 for each
guarantee capital share held immediately prior to the
consummation of the proposed transaction. The special committee
has been authorized by the Board of Directors to engage a
financial advisor, legal counsel and any other advisor necessary
to assist it in its consideration of the proposal.
The reverse stock split is an established method for eliminating
minority shareholders. This technique, which is a form of
amendment to a corporation's certificate of incorporation
pursuant to state law, allows a corporation to reverse split its
outstanding shares of stock into a lesser number of outstanding
shares of stock. In the situation where a reverse stock split
is aimed at eliminating minority shareholders, the corporation
may issue one new share of stock in exchange for a number of old
shares in excess of the number of such old shares held by the
largest minority shareholder. As a result, the holdings of all
minority shareholders would be reduced to a fraction of a share
for which they would be paid cash in lieu of the issuance of a
certificate for such fractional shares.
Union Central has proposed that the Company effect a 1-for-
303,784 reverse split of its guarantee capital shares which
would result in (i) the elimination of minority shareholder
interests in the Company, and (ii) Union Central being the sole
remaining holder of the guarantee capital shares. The ratio of
1-for-303,784 was chosen by the board to ensure the largest
single minority shareholder, and consequently all other minority
shareholders, would have their holdings reduced to a fraction of
a share for which they would be paid a fair price in cash. As
of June 30, 1996 and December 31, 1995, the Company had
3,341,624 guarantee capital shares issued and outstanding; of
these shares, Union Central owned 2,433,345 or approximately
72.8%. It is anticipated the reverse stock split would reduce
the number of guarantee capital shares issued and outstanding
from 3,341,624 to 8. It is anticipated the remaining 908,279
guarantee capital shares held by shareholders other than Union
Central will be returned in exchange for cash in the aggregate
amount of approximately $4,655,000. The par value of the
guarantee capital shares will be increased from $2.00 per share
to $835,406 per share. The aggregate amount of capital
guaranteed to the Company's policyholders will remain at its
current balance of $6,683,248.
All holders of guarantee capital shares will return their shares
to the Company for either new guarantee capital shares or cash.
Each holder of guarantee capital shares that returns a group of
303,784 shares together with cash in the amount of $227,838,
will receive in exchange one new guarantee capital share. Each
holder that returns less than a group of 303,784 guarantee
capital shares (including a shareholder who owns in excess of
303,784 guarantee capital shares) will receive $5.125 in cash
for each guarantee capital share returned.
Pursuant to the exchange, Union Central will return to the
Company 2,433,345 guarantee capital shares plus cash in the
amount of $1,822,704 in exchange for which it will receive 8 new
guarantee capital shares and approximately $15,700 in cash for
the remaining guarantee capital shares in excess of the amount
required for each new guarantee capital share. The Company does
not anticipate any of the minority shareholders will accumulate
the number of guarantee capital shares required to be exchanged
for a new guarantee capital share.
The Company proposes to use funds from the Guarantee Capital
Reserve (GCR) to pay for the guarantee capital shares held by
its minority shareholders after the reverse stock split.
The proposal is subject to approval of the Company's guarantee
shareholders, as well as its Board of Directors. The proposal
is currently being reviewed by the New York Insurance Department
(the Department) and their independent consultant.
As more fully described in Note 4 to the Condensed Financial
statements, during first quarter 1995, the company adopted
statement of Financial Accounting Standards No. 114, "Accounting
by Creditors for Impairment of a Loan" (SFAS 114).
Note 2. Shareholder Dividends
The payment of cash dividends by the Company to its
shareholders is dependent upon compliance with certain
regulatory limits and restrictions imposed by the Company's
charter. The Company's charter provides for three types of
shareholder distributions:
a) Interest at a specified rate on the par value of the
guarantee capital shares issued and outstanding ($195,000
annually),
b) Interest, at the Company's portfolio earnings rate on
invested assets, on the accumulated balance in the GCR, and
c) A distribution of the shareholders' portion of the
Company's profits. Such amounts may, at the discretion of the
Company's Board of Directors, be distributed as a stock dividend
of additional guarantee capital shares, paid in cash subject to
certain limits and prior regulatory approval, or reserved for
the benefit of the shareholders in a GCR.
Interest on the guarantee capital shares may be paid in any year
dividends are distributed to policyholders and is not subject to
prior regulatory approval.
Historically, the shareholders' portion of Company profits has
been equal to $1 for every $7 of policyholders' dividends paid
on traditional, participating policies. Cash dividends are
limited based on the Company's prior year statutory earnings, or
increase in statutory surplus, and are further subject to prior
approval by the Department. The GCR represents a restricted
segment of statutory unassigned surplus, and as such, does not
represent a commitment or liability to pay shareholder
dividends. For financial statements prepared in accordance with
generally accepted accounting principles, the GCR is included in
shareholders' equity.
The Company and the Department have agreed to the following
guidelines under which shareholder distributions from the GCR
would be permitted, subject to prior approval by the Department:
If the Company's statutory-basis surplus is less than or
equal to 9% of its statutory policy reserves, then principal and
interest distributions are limited to the lesser of the prior
year statutory gain from operations, (after policyholders'
dividends and federal income taxes and before realized gains and
losses) or the prior year's increase in statutory surplus or,
If its statutory-basis surplus exceeds 9% of statutory
policy reserves, the principal and interest distributions are
limited to the greater of the prior year statutory gain from
operations, (after policyholders' dividends and federal income
taxes and before realized gains and losses), or the prior year
increase in statutory surplus.
The foregoing limits are subject to adjustment, by the
Department, for unusually large realized gains or the effects of
surplus relief reinsurance transactions. Based on the formula
described above, no shareholder dividends will be paid in 1996,
because the Company recorded both a statutory loss before net
realized gains and losses and a decrease in statutory surplus
for the year ended 1995. Since the Company plans to eliminate
minority interests in the Company's guarantee capital shares by
using a reverse stock split to reduce all outstanding minority
shares to fractional shares payable in cash, it made no cash
dividend payments to its shareholders from principal or interest
accumulated in the GCR for the year ended December 31, 1995.
See Note 1 of Notes to Condensed Financial Statements for
detailed discussion about the reverse stock split.
The balance in the GCR was $15,912,000 and $14,910,000 at June
30, 1996 and December 31, 1995, respectively, and the ratio of
the Company's statutory surplus to its policy reserves was 7.81%
and 7.70%, respectively. Interest added to the GCR amounted to
$630,000, and $445,000 for the six months ended June 30, 1996,
and 1995, respectively, and the interest was included in the
Company's results of operations as a reduction of policyholders'
dividends and participation in operations.
The following table summarizes the allocation of the Company's
net income between the shareholders and the policyholders:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Distributable income:
Income $ 493 $ 311 $ 944 $ 775
Policyholders' dividends and
participation in operations 1,073 706 2,200 2,312
Less interest credited to GCR (340) (210) (630) (445)
------ ------ ------ ------
Distributable income $1,226 $ 807 $2,514 $2,642
====== ====== ====== ======
Shareholders' share
of net income:
1/8 of distributable income $ 153 $ 101 $ 314 $ 330
Interest credited to GCR 340 210 630 445
------ ------ ------ ------
Net income $ 493 $ 311 $ 944 $ 775
====== ====== ====== ======
Policyholders' 7/8th share
of distributable income
(reported as policyholders'
dividends and participation
in operations in the
Statements of Income) $1,073 $ 706 $2,200 $2,312
/TABLE
<PAGE>
Note 3. Shareholders' Share of Surplus
The Company is the only existing life insurance company
domiciled in New York which has authorized and outstanding
guarantee capital shares. Neither applicable New York State law
nor the Company's charter contain express provisions
establishing the extent of the interest of the holders of the
guarantee capital shares in the statutory unassigned surplus
(total surplus less guarantee capital shares and GCR) of the
Company and there has never been a judicial determination of the
extent of such interest. Further, the laws applicable to the
Company do not provide for its voluntary liquidation or
dissolution; the Company may only be liquidated under the
supervision of the New York Superintendent of Insurance in the
event of insolvency. In such a liquidation or dissolution, the
entire assets of the Company would be used to satisfy claims of
creditors and policyholders and there would be no statutory
unassigned surplus for distribution to the holders of the
guarantee capital shares. Accordingly, in the opinion of
counsel to the Company, no unqualified legal opinion can be
rendered as to the degree, if any, to which the holders of the
guarantee capital shares would be entitled to participate in any
current or liquidating distribution of unassigned surplus.
However, in the view of such counsel, if there should occur a
liquidation or other winding-up of the Company's business in
which assets exceeded liabilities on policies and the claims of
other creditors, or if there should occur a partial distribution
of surplus in the absence of such a liquidation or winding-up,
although there are reasonable arguments which could be made to
the effect that the entire unassigned surplus would be
distributable solely to the policyholders or solely to the
shareholders, the more likely outcome if the question should be
litigated is that it would be held that one-eighth of the
unassigned surplus would be distributable to the shareholders
and seven-eighths to the policyholders. See Note 2 of Notes to
Condensed Financial Statements for a discussion of the
methodology used to allocate current and accumulated profits
between the shareholders and the policyholders in the
accompanying financial statements.
Note 4. Accounting Pronouncements
During the first quarter of 1995, the Company adopted Statement
of Financial Accounting Standards No. 114, "Accounting by
Creditors of Impairment of a Loan " (SFAS 114). SFAS 114 was
amended by Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan - Income
Recognition " (SFAS 118). SFAS 118 had no impact on the
Company's adoption of SFAS 114.
SFAS 114 and SFAS 118 require that an impaired mortgage loan's
fair value be measured based on the present value of future cash
flows discounted at the loan's effective interest rate, at the
loan's observable market price, or at the fair value of the
collateral if the loan is collateral dependent. If the fair
value of a mortgage loan is less than the recorded investment in
the loan, the difference is recorded as an allowance for
mortgage loan losses. The change in the allowance for mortgage
loan losses is reported with realized gains or losses on
investments. Interest income on impaired loans is accrued on
the net reported value of the impaired loans; changes in actual
or estimated cash flows are charged or credited to the allowance
for mortgage loan losses. The adoption of SFAS 114 had an
immaterial effect on the financial statements of the Company.
On November 15, 1995, the Financial Accounting Standards Board
(FASB) staff issued a Special Report, "A Guide to Implementation
of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities" (SFAS 115 Special Report). In accordance
with provisions in the SFAS 115 Special Report, the Company
chose to reclassify all held-to-maturity securities to
available-for-sale at December 31, 1995. At the date of
transfer, the amortized cost of those securities was
$312,690,000, with a market value totaling $325,038,000
($98,793,000 of mortgage-backed securities and $226,245,000 of
corporate bonds). For the six month period ended June 30, 1996,
the amortized cost of the available-for-sale securities was
$299,912,000, with a market value totaling $296,973,000
($93,666,000 of mortgage-backed securities and $203,307,000 of
corporate bonds). In addition, there were equity securities
classified as available-for-sale with market values totaling
$2,000 at December 31, 1995. There were no equity securities
held at June 30, 1996.
The following table identifies changes in investment value and
unrealized gain (loss) resulting from changes in the market
value of investments classified as "Available-for-Sale":
<TABLE>
<CAPTION>
Fixed Equity
Maturities Securities Total
(in thousands)
<S> <C. <C> <C>
Market Value at
June 30, 1996 $296,973 $ -- $296,973
Book Value at
June 30, 1996 299,912 -- 299,912
-------- ----- --------
Unrealized (Loss)
as of June 30, 1996: $ (2,939) $ -- $ (2,939)
======== ===== ========
Market Value at
December 31, 1995 $325,038 $ 2 $325,040
Book Value at
December 31, 1995 312,690 2 312,692
======== ===== ========
Unrealized Gain as of
December 31, 1995: $ 12,348 $ -- $ 12,348
======== ===== ========
Change in Unrealized Gain
from December 31, 1995: $(15,287) $ -- $(15,287)
======== ===== ========
Shareholders' 1/8 share
of change in unrealized gain
from December 31, 1995 $ (1,911) $ -- $ (1,911)*
======== ===== ========
Policyholders' 7/8 share of
change in unrealized gain
from December 31, 1995 $(13,376) $ -- $(13,376)*
======== ===== ========
</TABLE>
* The change in unrealized gains (losses) caused shareholders' equity to
decrease $1,261 (net of deferred taxes of $650) and policyholders'
equity to decrease $8,828 (net of deferred taxes of $4,548) for the six
months ended June 30, 1996.
Note 5. Federal Income Taxes
The provision for federal income taxes does not bear the
customary relationship to income before taxes due to the
presentation of taxes on a total Company basis which is based on
the sum of shareholders' and policyholders' pretax income.
Effectively, 7/8th's of the tax expense is allocated to the
policyholders in the final allocation of net income. See the
calculation of policyholders' dividends and participation in
operations included in Note 2 of Notes to the Condensed
Financial Statements.
During the three month's ended June 30, 1996, the policyholders'
dividend liability, because of a change in estimate, was reduced
by approximately $2,700,000. This caused a $945,000 increase in
the current period's deferred federal income tax expense.
However, because of the unique corporate structure, (see Note 2
and 3 of Notes to the Condensed Financial Statements) the effect
on shareholder's net income as a result of this adjustment was
limited to 1/8th of the deferred federal income tax expense,
$118,000.
The Company is taxed under the life insurance company provisions
of the Internal Revenue Code (the Code). Under the Code, a life
insurance company's taxable income incorporates income from all
sources, including premiums, investment income and certain
changes in reserves. Amendments to the Code adopted in 1990
require life insurance companies to capitalize and amortize
policy acquisition costs calculated by prescribed formulas.
These deferred acquisition costs are determined based on
Internal Revenue Service (IRS) prescribed percentages of net
premiums which vary by type of policy. Prior tax law permitted
these costs to be deducted as they were incurred. By deferring
deductions, this law has the effect of increasing the current
tax incurred, and decreasing deferred taxes payable by a
corresponding amount. This provision of the act resulted in
increases in the Company's taxable income of $156,000 and
$543,000 for the quarters ended June 30, 1996 and 1995,
respectively.
Included in the Condensed Balance Sheets at June 30, 1996 and
December 31, 1995 is a net deferred tax asset of $2,811,000 and
a net deferred tax liability of $1,563,000, respectively. The
shift from a net deferred tax liability to a net deferred tax
asset occurred as a result of recognizing an unrealized loss of
$2,939,000 on our investment portfolio at June 30, 1996 compared
to an unrealized gain of $12,348,000 at December 31, 1995. (See
Note 4 of Notes to Condensed Financial Statements for further
information). As discussed in the preceding paragraph, the
overall net deferred tax asset is primarily the result of the
accumulation of deferred acquisition costs that will be
deductible in future periods. Based on offsetting deferred tax
credits, taxable income in the carryback period and expected
future taxable income, it is management's determination that it
is more likely than not that the net deferred tax asset will be
realized.
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis highlights the major trends
affecting the three months and six months ended June 30, 1996.
To provide a basis for the discussion, reference should be made
to the financial statements, notes to financial statements and
supplementary financial data included in the Annual Report for
the year ended December 31, 1995.
General. The Manhattan Life Insurance Company (the Company)
maintains its Home Offices at 111 West 57th Street, New York,
New York 10019; (212) 484-9300. The Company was incorporated
under the laws of New York in 1850.
At June 30, 1996 and December 31, 1995, The Union Central
Life Insurance Company (Union Central) owned 72.8% of the
Company's guarantee capital shares.
See Note 1 of Notes to Condensed Financial Statements for
discussion about the proposal to eliminate minority
shareholders.
While the Company is authorized to write life, health
insurance and annuity business, its business consists primarily
of individual life insurance and annuity business. The Company
writes insurance both on a participating basis, where a portion
of the premium is returned to policyholders in the form of
dividends, and on a nonparticipating basis. Nonparticipating
insurance does not pay dividends to policyholders, and in
comparison with participating policies, generally has lower
premiums. The Company does not issue group life insurance
policies.
The Company operates in a highly competitive industry in
which it does not hold a significant market share. The Company
competes not only with other life insurance companies but also
with other financial institutions. By offering a full line of
products including interest-sensitive products, both with and
without life contingencies, the Company meets this competition
for its selected customer group.
Impact of the Corporate Charter on the Company's Dividends
Policy. The Company is a guarantee capital life insurance
company. Its stock is not common stock. The term "guarantee"
refers to the fact that the capital supplied by the shareholders
is "guaranteed" to the Company and does not constitute in any
manner a guarantee by anyone or of any assets of the Company.
The Company's stock represents capital guaranteed to the Company
as an enterprise primarily for the benefit of the Company's
policyowners. Life insurance companies with guarantee capital
like the Company's stock were well known in the early 1800's and
at the time the Company was organized in 1850. The guarantee
capital form of business organization is not well known today,
and management believes the Company is the only life insurance
company in the United States retaining this form of
organization. Because of the Company's unusual corporate
status, the legal rights of holders of the Company's stock are
uncertain in some respects, including the right to share in
unassigned surplus in the unlikely event of liquidation. New
York law does not provide any specific guidance as to the
relative rights of shareholders and policyholders with respect
to unassigned surplus, and the Company has not been able to
obtain an unqualified legal opinion as to those rights. While
the Company believes the shareholders and policyholders would
share in unassigned surplus according to their respective one-
eighth/seven-eighths share of profits, there can be no assurance
that such would be the case. As of June 30, 1996 the Company's
unassigned statutory surplus amounted to $6,773,000 of which the
one-eighth portion which should presumably be attributable to
holders of the Company's stock was $847,000. If it should prove
to be the case that the Company's shareholders have no
entitlement to unassigned statutory surplus, they would stand to
lose, collectively, such one-eighth share thereof.
The payment of cash dividends by the Company to its
shareholders is dependent upon compliance with certain
regulatory limits and restrictions imposed by the Company's
charter. The Company's charter provides for three types of
shareholder distributions:
a) Interest at a specified rate on the par value of the
guarantee capital shares issued and outstanding ($195,000
annually),
b) Interest, at the Company's portfolio earnings rate on
invested assets, on the accumulated balance in the Guarantee
Capital Reserve (GCR), and
c) A distribution of the shareholders' portion of the
Company's profits. Such amounts may, at the discretion of the
Company's Board of Directors, be distributed as a stock dividend
of additional guarantee capital shares, paid in cash subject to
certain limits and prior regulatory approval, or reserved for
the benefit of the shareholders in a GCR.
Interest on the guarantee capital shares may be paid in any
year dividends are distributed to policyholders and is not
subject to prior regulatory approval.
Historically, the shareholders' portion of Company profits has
been equal to $1 for every $7 of policyholders' dividends paid
on traditional, participating policies. Cash dividends are
limited based on Company's prior year statutory earnings, or
increase in statutory surplus, and are further subject to prior
approval by the Department. For financial statements prepared
in accordance with generally accepted accounting principles, the
GCR is included in shareholders' equity.
The Company and the Department have agreed to the following
guidelines under which shareholder distributions from the GCR
will be permitted, subject to prior approval by the Department:
If the Company's statutory-basis surplus is less than or
equal to 9% of its statutory policy reserves, then
principal and interest distributions are limited to the
lesser of the prior year statutory gain from operations,
(after policyholders' dividends and federal income taxes
and before realized gains and losses) or the prior year's
increase in statutory surplus or,
If its statutory-basis surplus exceeds 9% of statutory
policy reserves, the principal and interest distributions
are limited to the greater of the prior year statutory
gain from operations, (after policyholders' dividends and
federal income taxes and before realized gains and losses),
or the prior year increase in statutory surplus.
The foregoing limits are subject to adjustment by the
Department for the effects of surplus relief reinsurance
transactions. Based on the formula described above, no
shareholder dividends will be paid in 1996, because the Company
recorded both a statutory loss before net realized gains and
losses and a decrease in statutory surplus for the year ended
1995. Since the Company plans to eliminate minority interests
in the Company's guarantee capital shares by using a reverse
stock split to reduce all outstanding minority shares to
fractional shares payable in cash, it made no cash dividend
payments to its shareholders from principal or interest
accumulated in the GCR for the year ended December 31, 1995.
See Note 1 of Notes to Condensed Financial Statements for
detailed discussion about the reverse stock split.
The GCR is a restricted segment of the Company's total
statutory surplus, and does not represent a commitment or
liability to pay shareholder dividends. Interest credited to
the GCR, which is a significant component of net income, depends
on the unpaid reserve balance and the Company's portfolio
interest rate. Changes in the GCR balance are summarized as
follows:
<TABLE>
<CAPTION>
Six Months Year
Ended Ended
June 30, December 31,
1996 1995
--------- -----------
(in thousands)
<S> <C> <C>
Balance at beginning of period $14,910 $13,171
1/7 of policyholder dividends paid 372 744
Interest at the portfolio rate from
the prior period 630 995
------- -------
Balance at end of period $15,912 $14,910
======= =======
Average portfolio rate for period 7.78% 8.31%
======= =======
</TABLE>
The ratio of the Company's statutory surplus to its policy
reserves was 7.81%, and 7.70%, at June 30, 1996 and December 31,
1995, respectively.
It should also be noted that the trend in the life insurance
industry has been away from sales of traditional participating
policies towards interest sensitive and term products. Since
the amounts distributable to the Company shareholders have been
historically tied to the amounts distributable to holders of
participating policies (on the one-eighth/seven eighths basis),
to the extent outstanding participating policies decrease or the
dividend scale on these policies decreases, the amount of
profits potentially distributable to holders of the Company's
stock will decrease. The Company's management is working to
counter this trend. In 1991, management developed and
introduced a whole life participating policy, Par Flex, designed
to compete with interest sensitive products. Since 1991, the
number of Par Flex policies in force has increased from 61 to
2,421 at June 30, 1996 resulting in an increase in annualized
gross premiums of $5,815,000 and an increase in force of
$224,317,000. In addition, the Par Flex plan has developed a
dividend liability of $306,000 at June 30, 1996. Management
plans to continue developing whole life participating products
in the future.
Results of Operations:
Earnings. The Company's charter provides for the allocation
of its after-tax profits between its shareholders and its
policyholders. The shareholders' portion includes interest on
undistributed shareholder profits accumulated at interest in the
GCR, plus one-eighth of distributable income (i.e., income after
income taxes and interest on the GCR, but before policyholder
dividends). The table below summarizes the shareholders' share
of net income:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Distributable income:
Income $ 493 $ 311 $ 944 $ 775
Policyholders' dividends and
participation in operations 1,073 706 2,200 2,312
Less interest credited to GCR (340) (210) (630) (445)
------ ------ ------ ------
Distributable income $1,226 $ 807 $2,514 $2,642
====== ====== ====== ======
Shareholders' share
of net income:
1/8 of distributable income $ 153 $ 101 $ 314 $ 330
Interest credited to GCR 340 210 630 445
------ ------ ------ ------
Net income $ 493 $ 311 $ 944 $ 775
====== ====== ====== ======
Policyholders' 7/8th share of
distributable income
(reported as policyholders'
dividend and participation
in operations in the
Statements of Income) $1,073 $ 706 $2,200 $2,312
====== ====== ====== ======
</TABLE>
The Company's charter ameliorates the effect on shareholders
of deteriorating economic conditions, investment losses, losses
resulting from asset/liability mismatches, mortality losses, or
losses resulting from any other adverse experience by causing
seven-eights of the amount of such losses to be charged to
policyholders' equity. For example, if the Company experienced
a $1,000,000 extraordinary loss on mortality in a given
financial quarter, the shareholders' share of the loss would be
$125,000 on a generally accepted accounting principles (GAAP)
pre-tax basis. On the other hand, if the Company as an
enterprise experienced a $1,000,000 extraordinary gain from
operations for a given financial period, the shareholders' share
of the gain would be $125,000 of income on a GAAP pre-tax basis.
Insurance Revenues, Policyholder Benefit Expenses and
Interest Expenses. Below is a breakdown of insurance revenues,
policyholder benefit expenses and interest expenses by lines of
business:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Insurance Revenue:
Individual Traditional Life
Premiums $ 6,482 $ 7,265 $13,165 $14,529
Individual Universal Life
Policy Charges 3,044 2,735 5,930 5,336
Annuities and GICS 1 3 3 7
------- ------- ------- -------
Total Insurance Revenue $ 9,527 $10,003 $19,098 $19,872
======= ======= ======= =======
Policyholder Benefits:
Death Benefits:
Individual Traditional Life $ 4,523 $ 4,543 $ 8,449 $ 9,102
Individual Universal Life 1,897 2,291 3,929 2,834
------- ------- ------- -------
Total Death Benefits 6,420 6,834 12,378 11,936
------- ------- ------- -------
Surrender Benefits:
Individual Traditional Life 3,023 2,406 4,337 3,851
------- ------- ------- -------
Change in Policy Reserves:
Individual Traditional Life (2,867) (797) (2,828) (1,490)
Annuities and GICS (476) (685) (335) (1,027)
------- ------- ------- -------
Total Changes in Policy Reserves (3,343) (1,482) (3,163) (2,517)
------- ------- ------- -------
Other Benefits:
Individual Traditional Life 362 478 823 1,027
Annuities and GICS 1,541 1,701 3,094 3,314
------- ------- ------- -------
Total Other Benefits<F1> 1,903 2,179 3,917 4,341
------- ------- ------- -------
Total Policyholder Benefits $ 8,003 $ 9,937 $17,469 $17,611
======= ======= ======= =======
Interest Expense:
Individual Universal Life $ 1,245 $ 1,065 $ 2,471 $ 2,220
Annuities and GICS 1,187 1,236 2,406 2,503
------- ------- ------- -------
Total Interest Expense $ 2,432 $ 2,301 $ 4,877 $ 4,723
======= ======= ======= =======
<FN>
<F1> Other benefits include matured endowment payouts and annuity benefit
payouts.
</FN>
</TABLE>
The following discussion describes the results in more detail.
Individual Traditional Life. Individual traditional life
insurance revenues decreased as production decreased when
compared to the same period in the prior year, and ceded
premiums increased
In the past there was an industry wide shift in product mix
towards interest sensitive products, and as a result, management
believes that profit margins industry wide have decreased
significantly. The industry profit margins on interest
sensitive products have been historically lower than profit
margins on traditional life products. The profit margins on
traditional life products are following this industry trend as
the Company has had to make traditional products more
competitive with interest sensitive products either by
increasing the product dividend scale or by decreasing the
premiums. Due to current economic conditions, management
believes there will be an industry trend back to traditional
whole life products. As a result, the Company introduced a new
participating product in 1991. Management plans to continue
developing whole life participating products in the future in
order to increase the book of business that pays policy
dividends.
Individual traditional life policyholder death benefits
decreased and surrenders increased for the six months ended
June 30, 1996 compared to the same period in the prior year due
to random fluctuations which are inherent to the life insurance
industry. The decrease in life reserves was larger in 1996
compared to the same period in 1995, due to less new business in
1996 compared to 1995, and an increase in the level of
surrenders.
Individual Universal Life. Universal life revenues, for the
six months ended June 30, 1996, increased compared to the same
period in 1995 due to an increase in the number of universal
life policies in-force. Growth in this line of business is
expected to continue in 1996.
Individual universal life death benefits for the six months
ended June 30, 1996, increased compared to the same period in
the prior year due to unfavorable mortality experience.
Interest expense increased slightly between periods since
the increase in universal life in-force more than offset the
decrease in interest crediting rates from 6.41% for the six
month period ended June 30, 1995 to 6.17% for the same period in
1996. Consistent with industry practice, the Company has the
opportunity to adjust crediting rates on individual universal
life insurance to reflect market conditions. The current
economic environment and market rates have caused the decrease
in the interest crediting rates.
Annuities and GIC's. Annuity revenues are not significant
because the Company suspended the sale of guaranteed interest
contracts (GIC's) in 1985 to reduce the asset/liability mismatch
resulting from funding GIC's with commercial mortgages and to
strengthen its capital position as measured by the ratio of its
statutory surplus to total assets. Over ninety-seven percent of
the GIC liability remaining at June 30, 1996 represents
investment contracts owned by the Company's pension plan.
In 1988, the Company began issuing single premium deferred
annuities (SPDA's) due to the availability of sufficient capital
and improved operating results. The sales of SPDA's had been
very insignificant and as a result, the Company suspended the
sale of SPDA's in October, 1993. However, as a result of the
upturn in interest rates in 1994, the Company reopened the sale
of this product effective October, 1994 and saw a return to
active sales in 1995. However, the Company again closed the
sale of SPDA's effective January 1, 1996, due to the reduction
in interest rates.
Interest expense for the period ending June 30, 1996 remains
consistent when compared to the period ending June 30, 1995.
The weighted average annual interest rates credited on the
Company's annuity products are as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Guaranteed Interest Contracts 5.96% 5.99% 5.99% 6.04%
Single Premium Deferred Annuity 6.03% 6.19% 6.14% 6.06%
</TABLE>
Investment Income. Investment activities are an integral
part of the Company's business, with investment income
representing a major component of total revenues. The major
categories of net investment income by class of investment are
summarized as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Fixed maturities $ 5,941 $ 6,085 $12,230 $12,006
Mortgages 1,817 1,790 3,514 3,555
Real estate 343 401 700 794
Policy loans 752 758 1,514 1,501
Short-term investments 27 77 47 150
Other 34 28 68 64
------- ------- ------- -------
8,914 9,139 18,073 18,070
Investment expenses (828) (720) (1,518) (1,452)
------- ------- ------- -------
Net investment income $ 8,086 $ 8,419 $16,555 $16,618
======= ======= ======= =======
</TABLE>
For the six months ended June 30, 1996, net investment
income decreased $63,000 from the same period in 1995. This
decrease is due to two factors. First, net investment yield
decreased from 7.70% at June 30, 1995 to 7.62% at June 30, 1996.
The investment yield is affected by bond market conditions, as
well as the conditions of specific markets such as real estate.
Second, investment expenses increased as a result of an increase
in real estate expenses on foreclosures.
Realized Gains (Losses). Realized investment gains (losses) by
class of investment are summarized as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Fixed maturities $ (49) $ 170 $ 361 $ (19)
Equity securities -- -- (3) --
Mortgages (26) (600) (55) (973)
------- ------- ------- -------
Realized gains (losses)
on investments $ (75) $ (430) $ 303 $ (992)
======= ======= ======= =======
</TABLE>
The net realized gains in 1996 are a result of investment sales
activity in the fixed income securities offset by a $55,000
increase in the allowance for potential mortgage losses.
Proceeds, gross realized gains and gross realized losses from
the sales of investments in debt securities classified as
available-for-sale follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Proceeds $37,039 $30,766 $68,288 $57,780
Gross Realized Gains 713 615 1,394 1,127
Gross Realized Losses (755) (436) (1,019) (1,261)
</TABLE>
The provision for mortgage losses has fluctuated between
periods. The Company establishes the mortgage reserve based
upon its continuing review of the mortgage portfolio and
individual problem mortgages. The allowance for potential
mortgage losses is affected to a significant degree by general
economic conditions. While the Company believes it has provided
adequate mortgage reserves, subsequent economic and market
conditions may require establishing additional reserves. See
Investments for further information.
Underwriting, Acquisition and Insurance Expense.
Underwriting, acquisition and insurance expenses for the six
months ended June 30, 1996 decreased when compared to the same
period in 1995 due to decreased commissions caused by less new
business, and decreased operating costs.
Policyholders' Dividends and Participation in Operations.
The Company's charter provides for the allocation of its
distributable income (income before policyholders' dividends but
after federal income taxes) between its shareholders and its
policyholders on a one-eighth/seven-eighths basis. Refer to
Notes 2 and 3 of Notes to Condensed Financial Statements for
further discussion. The following schedule summarizes
policyholders' dividends and participation in operations:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Distributable income
- (See Footnote 2 of
Notes to Condensed
Financial Statements) $ 1,226 $ 807 $ 2,514 $ 2,642
======= ======= ======= =======
Policyholders' 7/8th share
of distributable income
(reported as policyholders'
dividends and participation
in operations in the
Statements of Income) $ 1,073 $ 706 $ 2,200 $ 2,312
======= ======= ======= =======
Policyholders' dividends $(1,396) $ 1,334 $ (116) $ 2,757
Increase (Decrease) in
policyholders' equity 2,469 (628) 2,316 (445)
Total policyholders' dividends
and participation in operations $ 1,073 $ 706 $ 2,200 $ 2,312
======= ======= ======= =======
</TABLE>
During the three month's ended June 30, 1996, the policyholders'
dividend liability, because of a change in estimate, was reduced by
approximately $2,700,000. This caused a decrease in policyholders'
dividends, and an increase in the policyholders' participation in
operations. The effect on total policyholders' dividends and
participation in operations, because of the unique corporate structure,
(see Note 2 and 3 of Notes to the Condensed Financial Statements) was
limited to 7/8th's of the total federal income tax effect, $827,000.
Insurance Regulations. Life insurance companies are subject to
regulation and supervision primarily by their respective states of
domicile and also by each state in which they are authorized to do
business. The extent of such regulation varies from state to state. All
states impose statutory restrictions, primarily for the protection of
policyholders, administered by regulatory agencies with broad
discretionary authority. The Company is required to submit detailed
annual reports to the insurance regulatory agency in each state in which
it is licensed. Such statements must comply with rules of the National
Association of Insurance Commissioners (NAIC). In accordance with rules
and practices of the NAIC, the Company is examined periodically by
representatives of insurance departments of states where it is licensed to
do business. The Company was last examined for the four year period ended
December 31, 1993. Reports and statements filed by the Company are open
to inspection by the public at the offices of the Department in Albany,
New York and New York, New York.
The Company also can be required, under the solvency or guaranty laws
of most states in which it does business, to pay assessments (up to
prescribed limits) to fund policyholder losses or liabilities of insurance
companies that become insolvent. These assessments may be deferred or
forgiven under most guaranty laws if they would threaten an insurers
financial strength and, in certain instances, may be offset against future
premium taxes. The amount of any future assessments under these laws
cannot reasonably be estimated. However, management believes that such
assessments will not have a material adverse effect on the Company's
financial condition.
Federal Income Taxes. The Company is taxed under the life insurance
company provisions of the Internal Revenue Code (the Code). Under the
Code, a life insurance company's taxable income incorporates income from
all sources, including premiums, investment income and certain changes in
reserves. Amendments to the Code adopted in 1990 require life insurance
companies to capitalize and amortize policy acquisition costs calculated
by prescribed formulas. These deferred acquisition costs are determined
based on Internal Revenue Service (IRS) prescribed percentages of net
premiums that vary by type of policy. Prior tax law permitted these costs
to be deducted as they were incurred. By deferring deductions, this law
has the effect of increasing the current tax incurred, and decreasing
deferred taxes payable by a corresponding amount. This provision of the
act resulted in increases in the Company's taxable income of $156,000 and
$221,000 for the three months and six months ended June 30, 1996 compared
to $543,000 and $720,000 for the same periods in 1995. The Company had a
net deferred tax asset at June 30, 1996.
Included in the Condensed Balance Sheets at June 30, 1996 and December
31, 1995 is a net deferred tax asset of $2,811,000 and a net deferred tax
liability of $1,563,000, respectively. The shift from a net deferred tax
liability to a net deferred tax asset occurred as a result of recognizing
an unrealized loss of $2,939,000 on our investment portfolio at June 30,
1996 compared to an unrealized gain of $12,348,000 at December 31, 1995.
(See Note 4 of Notes to Condensed Financial Statements for further
information.) As discussed in the preceding paragraph, the overall net
deferred tax asset is primarily the result of the accumulation of deferred
acquisition costs that will be deductible in future periods. Based on
offsetting deferred tax credits, taxable income in the carryback period,
and expected future taxable income, it is management's determination that
it is more likely than not that the net deferred tax asset will be
realized.
Certain proposals to make additional changes in the federal income tax
laws and regulations affecting insurance companies or insurance products
continue to be considered at various levels in the United States Congress
and the Internal Revenue Service. The Company can not predict whether any
additional tax reform measures will be adopted in the foreseeable future
or, if adopted, whether such measures will have a material effect on its
operations.
Financial Condition:
Liquidity. The Company is domiciled in New York and subject to
Regulation 126 adopted and promulgated by the Department. Under this
regulation, the Company is required to annually file a report which
summarizes the results of projecting asset and liability cash flows under
multiple interest rate scenarios. Due to the decrease in the long-term
expectation of the Company's investment yield versus the expected yield
used when pricing the structured settlement and lottery annuities from
1981 to 1986, the Company recorded an additional statutory reserve
totalling $1,400,000 based on test results as of December 31, 1995. An
additional GAAP reserve of $3,300,000 was recorded as of December 31,
1995.
The Company has no material off-balance-sheet risks, except for
mortgage commitments made in the normal course of business.
Management believes that the Company's sources of liquidity are more
than adequate to meet its anticipated needs.
Capital Resources. The following comparison of the Company's capital
ratios demonstrates the adequacy of the Company's statutory surplus:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Ratio of statutory surplus
plus the asset valuation reserve
to statutory assets
Manhattan Life 7.6% 7.4%
Industry * 9.6%
Ratio of statutory surplus
plus the asset valuation reserve
to invested assets
Manhattan Life 7.9% 7.6%
Industry * 10.0%
</TABLE>
* Source: The Townsend & Schupp Company's annual survey of
254 of the largest U.S. life insurance companies ranked by total
assets. (Comparative ratio's as of June 30, 1996 are not
available.)
The increase in the above ratios is a result of a statutory
gain of $928,000 for the period ended June 30, 1996.
The difference between the Company's 1995 ratios compared to
the industry ratios is the result of two factors. The Company
recorded a statutory net loss of $2,102,000 for the year ended
December 31, 1995. In addition, a $1,400,000 additional
statutory reserve was recorded by the Company. This was
required as a result of requirements of Regulation 126 adopted
and promulgated by the Department. See Liquidity Section for
more information.
The Company has no surplus relief reinsurance agreements or
other types of surplus financing transactions in effect at June
30, 1996 or December 31,1995.
<PAGE>
<PAGE>
Investments. The current investment strategy for the
Company is designed to maintain the portfolio's overall quality,
yield, liquidity, asset/liability structure, asset
diversification, and to avoid issuer concentration and higher
risk assets. All of the investments in the portfolio are well
within diversification, quality and other requirements of state
insurance laws. The Company is directing most of its new
investment cash flow in 1996 to the acquisition of investment
grade bonds, and commercial mortgages.
The composition of the Company's invested assets is as
follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
Category 1996 Percent 1995 Percent
- - - -------- ------- ------- ----------- -------
<S> <C> <C> <C> <C>
Fixed Maturities:
Mortgage-Backed Securities $ 93,666 22% $ 98,793 22
Corporate Bonds 203,307 47 226,245 50
-------- --- -------- ---
Total Fixed Income Securities 296,973 69 325,038 72
Other Invested Assets 22 0 -- 0
Short-term 101 0 -- 0
Common Stock 0 0 2 0
Commercial Mortgages 76,149 18 70,048 16
Real Estate Owned 6,388 1 6,388 1
Policy Loans 50,933 12 51,740 11
-------- --- -------- ---
TOTAL INVESTMENTS $430,566 100% $453,216 100%
======== === ======== ===
</TABLE>
This schedule excludes cash held by the Company
totaling $3,839,000 and $711,000 at June 30, 1996 and
December 31, 1995, respectively.
Fixed Income Securities. Investments in fixed
maturities represent the majority of the invested assets of
the Company. The investments are carefully selected as to
quality, maturity and yield to insure the ability to meet
policyholder claims in a timely manner and provide
increases to the Company's growth capital for the further
vitality of its business. The Company also seeks to match
the rates it credits on its investment spread products to
reflect the amounts the Company earns on its invested
assets. A mix of government bonds, mortgaged-backed
securities, asset-backed securities, corporate bonds and
money market instruments are utilized to meet these
objectives.
November 15, 1995, the Financial Accounting Standards
Board (FASB) staff issued a Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115
Special Report). In accordance with provisions in the SFAS
115 Special Report, the Company chose to reclassify all
held-to-maturity securities to available-for-sale at
December 31, 1995. In addition, there were equity
securities classified as available-for-sale with market
values totaling $2,000 at December 31, 1995. There were no
equity securities held at June 30, 1996.
The following table identifies changes in investment
value and unrealized gain (loss) resulting from changes in
the market value of investments classified as "Available-for-Sale":
<TABLE>
<CAPTION>
Fixed Equity
Maturities Securities Total
---------- ---------- -----
(in thousands)
<S> <C> <C> <C>
Market Value at June 30, 1996 $296,973 $ -- $296,973
Book Value at June 30, 1996 299,912 -- 299,912
-------- -------- --------
Unrealized (Loss) as of
June 30, 1996: $ (2,939) $ -- $ (2,939)
======== ======== ========
Market Value at December 31, 1995 $325,038 $ 2 $325,040
Book Value at December 31, 1995 312,690 2 312,692
======== ======== ========
Unrealized Gain as of
December 31, 1995: $ 12,348 $ -- $ 12,348
======== ======== ========
Change in Unrealized Gain from
December 31, 1995: $(15,287) $ $ (15,287)
======== ======== ========
Shareholders' 1/8 share
of change in unrealized
gain from December 31, 1995 $ (1,911) $ -- $ (1,911)*
======== ======== ========
Policyholders' 7/8 share of
change in unrealized gain
from December 31, 1995 $(13,376) $ -- $(13,376)*
======== ======== ========
</TABLE>
* The change in unrealized gains (losses) caused
shareholders' equity to decrease $1,261 (net of deferred
taxes of $650) and policyholders' equity to decrease $8,828
(net of deferred taxes of $4,548) for the six months ended
June 30, 1996.
Management periodically reviews its fixed maturities
portfolio to determine if factors evidencing an other than
temporary impairment in value exist for individual
securities. In making this determination, management
evaluates the strength of the issuer's liquidity and its
continued ability to service its contractual obligations
and the occurrence of events of default. As of June 30,
1996, no bonds were in default.
The weighted average maturity of the marketable bond
portfolio excluding mortgaged-backed securities was 7.35
years as of June 30, 1996.
At June 30, 1996, the Company continued to invest in
mortgage-backed securities. The mortgage-backed securities
are subject to risks associated with variable prepayments.
As such, those securities may have a different actual
maturity than planned at the time of purchase. Securities
that have an amortized cost that is greater than par and
that are backed by mortgages that prepay faster than
expected will incur a reduction in yield or an increase in
yield if prepaid slower than expected. Those securities
that have an amortized cost that is less than par and that
prepay faster than expected will generate an increase in
yield or a decrease in yield if prepaid slower than
expected. The degree to which a security is susceptible to
either gains or losses is influenced by the difference
between its amortized cost and par, the relative
sensitivity of the underlying mortgages backing the assets
to prepayment in a changing interest rate environment, and
the repayment priority of the securities in the overall
securitization schedule.
The Company limits the extent of those risks by
generally avoiding securities whose cost significantly
exceeds par, by purchasing securities that are backed by
stable collateral, and by concentrating on securities with
enhanced priority in their trust structure. Such
securities with reduced risk typically have a lower yield,
but higher liquidity, than higher-risk mortgage-backed
securities. At selected times, higher-risk securities may
be purchased if they do not compromise the safety of the
Company's general portfolio. At June 30, 1996, the Company
does not have a significant amount of higher-risk mortgage-
backed securities. The Company's CMO portfolio is
structured to produce acceptable yields while minimizing
the risk of prepayment uncertainty.
High-yield, below investment grade securities included
in the investment portfolio increased to $32,925,000
(market: $32,387,000) at June 30, 1996 from $24,357,000
(market: $24,531,000) at December 31, 1995 and amounted to
approximately 7.41% of invested assets and approximately
6.51% of total assets at June 30, 1996. Management
believes that the current level of investment in high-yield
securities, at only 7.41% of invested assets, offers
desired returns without undue risk. The interest rates
available on those high-yield below-investment-grade
securities are significantly higher than are available on
other corporate debt securities. However, the risk of loss
due to default by the borrower is significantly greater
with respect to such below-investment-grade securities
because those securities are generally unsecured and are
often subordinated to other creditors of the issuer and
issued by companies that usually have high levels of
indebtedness. The Company attempts to minimize the risks
associated with those below-investment-grade securities by
limiting the exposure to any one issuer and by closely
monitoring the credit worthiness of such issuers. The
Company's management does not presently anticipate its
investments in high yield securities will have any
significant adverse effect on the Company's financial
condition or income from operations.
Real Estate Owned. Real Estate acquired through
foreclosure or "in-substance" foreclosure amounted to
$6,388,000 at June 30, 1996 and December 31, 1995, and is
valued as follows:
- Upon foreclosure, the carrying value of the property
is recorded at the lower of cost or net realizable value,
which becomes its new cost basis. Net realizable value for
real estate is determined based upon internal or external
appraisals and other available information about the
property, which may take into consideration a number of
factors, including; (i) discounted cashflows; (ii) sales of
comparable properties; (iii) geographic location of
property and related market conditions; and (iv)
disposition costs. The net realizable value determined by
the Company may be greater than the price which may be
realized if the Company were forced to liquidate such
properties on an immediate sale basis. The Company has the
intent and ability to hold these assets until appropriate
sales opportunities arise. Foreclosed properties are
actively managed by the Company in order to maximize net
realizable value.
- Subsequent to foreclosure, the carrying value of the
property is periodically evaluated and written down, if
necessary, to reflect any additional amounts considered
unrecoverable upon sale.
- At the time of the sale, the difference between the
sales price and the carrying value is recorded as a
realized gain or loss.
Mortgages. At June 30, 1996 the Company's mortgage
loans on real estate increased $6,101,000 from $70,048,000
at December 31, 1995 to $76,149,000 at June 30, 1996, net
of an allowance for potential mortgage loan losses of
$1,436,000 and $1,381,000 at June 30, 1996 and December 31,
1995, respectively. During the fourth quarter of 1994, the
Company began participating in new loan fundings with Union
Central. New loan fundings, on a participating basis,
continue with Union Central during 1996 in order to
geographically diversify the existing portfolio. During
the first six months of 1996, the Company participated in
43 new originations totaling $11,885,000 out of a total
loan amount of $87,246,000.
The Company's mortgage portfolio is monitored closely
through the review of loan and property information such as
annual operating statements, property inspection reports,
and real estate tax records. This information is evaluated
in light of current economic conditions and other factors
such as geographic and property-type loan concentrations.
This evaluation is part of the regular review to determine
whether adjustments to the allowance for potential mortgage
losses appear warranted.
The Company also monitors its mortgage portfolio in an
attempt to identify loans which are not currently
classified as delinquent, but where the Company has
knowledge which causes it to have concerns as to the
ability of borrowers to comply with the present loan
repayment terms. These loans ("watchlist loans") are
subject to increased scrutiny and review by the Company.
Watchlist loans totalled $12,632,000 and $13,964,000 at
June 30, 1996 and December 31, 1995, respectively. These
loans were considered by management in establishing the
$1,436,000 mortgage loan loss reserve.
It is the Company's policy to place mortgages on
nonaccrual status when it appears probable that accrued
interest will not be recovered. None of the Company's
mortgages were on nonaccrual status at June 30, 1996 or
December 31, 1995.
The Company classifies mortgages that are 90 days or
more delinquent as to interest and/or principal payments or
those in the process of foreclosure as being in default.
None of the Company's mortgages were in default as of June
30, 1996 or at December 31, 1995. As part of the valuation
process, management reviews loans individually and makes
economic estimates of property values and probability
estimates of losses occurring based on the analysis of
operating statements, compilation of current and projected
market data, a review of property inspection reports,
appraisals and judgments regarding the financial strength
of individual borrowers. This valuation process was used
by management in establishing the $1,436,000 mortgage loan
loss reserve as of June 30, 1996. Included in the mortgage
loan loss reserve are amounts provided for specific
properties for which management believes market conditions
or other factors indicate the net realizable value of the
underlying collateral is less than the mortgage balance
(and any accrued interest). Net realizable value for real
estate assets is determined based upon the market value of
a property which takes into consideration capital
improvements and leasing activities. Management believes
the Company's mortgage loan loss reserve is adequate.
However, management cannot predict with assurance where the
economy is headed or how the mortgage portfolio would be
affected by various economic circumstances. Management
closely monitors the mortgage portfolio and regularly
reviews the mortgage loan reserves to determine whether
adjustments to the reserve or asset values appear
warranted.
There has been no troubled debt restructurings since
year end 1989.
A summary of the characteristics of the Company's
mortgage portfolio (before deducting the valuation reserve
of $1,436,000 and $1,381,000 at June 30, 1996 and December
31, 1995, respectively) follows ($ in thousands):
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
Percent Percent
Geographic Diversification: of Total of Total
-------- --------
<S> <C> <C> <C> <C>
New England $ 1,354 1.7% $ 1,486 2.1%
Middle Atlantic 22,930 29.6 27,029 37.8
South Atlantic 9,470 12.2 6,317 8.8
East North Central 8,252 10.6 6,328 8.9
West North Central 4,556 5.9 4,614 6.4
East South Central 2,525 3.3 1,694 2.4
West South Central 9,700 12.5 8,893 12.5
Mountain 7,058 9.1 5,889 8.2
Pacific 11,740 15.1 9,179 12.9
------- ----- ------- -----
Total $77,585 100.0% $71,429 100.0%
======= ===== ======== =====
Property Type:
Office $19,561 25.2% $16,078 22.5%
Apartment 20,980 27.1 22,325 31.3
Retail 27,928 36.0 24,308 34.0
Industrial 6,393 8.2 6,433 9.0
Residential 240 .3 260 .4
Other 2,483 3.2 2,025 2.8
------- ----- ------- -----
Total $77,585 100.0% $71,429 100.0%
======= ===== ======= =====
Maturities:
Past Maturity $ 1,000 1.3% $ 2 0%
Maturing within 1 year 1,216 1.6 12,757 17.9
Maturing in 2-5 years 24,913 32.1 25,527 35.7
Maturing in 6-10 years 10,070 13.0 5,836 8.2
Maturing in over 10 years 40,386 52.0 27,307 38.2
------- ----- ------- -----
Total $77,585 100.0% $71,429 100.0%
======= ===== ======= =====
</TABLE>
<PAGE>
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
Part II. Other Information
Item 6.
(b) Exhibits and Reports on Form 8-K: None.
<PAGE>
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
THE MANHATTAN LIFE INSURANCE COMPANY
(The Registrant)
By /s/ Daniel J. Fischer
Daniel J. Fischer
Dated: August 14, 1996 President and Chief Executive
Officer and General Counsel
By /s/ James N. Kotsonis
James N. Kotsonis
Dated: August 14, 1996 Senior Vice President,
Chief Actuary and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000061953
<NAME> MANHATTAN LIFE INSURANCE CO
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 296,973
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 76,149
<REAL-ESTATE> 6,388
<TOTAL-INVEST> 430,566
<CASH> 3,839
<RECOVER-REINSURE> 2,194
<DEFERRED-ACQUISITION> 41,541
<TOTAL-ASSETS> 497,642
<POLICY-LOSSES> 417,812
<UNEARNED-PREMIUMS> 3,082
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 6,683
<TOTAL-LIABILITY-AND-EQUITY> 30,991
19,098
<INVESTMENT-INCOME> 16,555
<INVESTMENT-GAINS> 303
<OTHER-INCOME> 11
<BENEFITS> 17,469
<UNDERWRITING-AMORTIZATION> 9,199
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 2,222
<INCOME-TAX> 1,278
<INCOME-CONTINUING> 944
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 944
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
<RESERVE-OPEN> 6,597
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 22,773
<PAYMENTS-PRIOR> 43,337
<RESERVE-CLOSE> 5,954
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
