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 September 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 September 30, 1996 was 3,341,624.
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements (Unaudited):
Condensed Balance Sheets - September 30, 1996 and
December 31, 1995 . . . . . . . . . . . . . . . . . . . .2
Condensed Statements of Income - Three Months and
Nine Months Ended September 30, 1996 and 1995 . . . . . .3
Statement of Shareholders' Equity - Nine Months
Ended September 30, 1996. . . . . . . . . . . . . . . . .4
Condensed Statements of Cash Flows - Nine Months
Ended September 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 . . . . . 13
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K. . . . . . . . . . . . 29
Signatures . . . . . . . . . . . . . . . . . . . . . . 30
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
CONDENSED BALANCE SHEETS
(Unaudited)
(in thousands except share amounts)
<TABLE>
<CAPTION>
Part I. Financial Information
September 30, December 31,
1996 1995
------------ -----------
<S> <C> <C>
ASSETS
Fixed income securities
available-for-sale $ 296,143 $ 325,038
Equity securities, at market -- 2
Mortgage loans 78,747 70,048
Real estate acquired through
foreclosure 7,394 6,388
Policy loans 50,055 51,740
Other invested assets 23 --
Short-term investments 2,100 --
---------- ----------
Total Investments 434,462 453,216
Cash 1,259 711
Deferred policy acquisition costs 41,694 41,264
Furniture, equipment and
leaseholds,at cost,
less accumulated depreciation
(1996 - $2,819; 1995 - $2,707) 468 512
Other assets 21,915 18,235
---------- ----------
TOTAL ASSETS $ 499,798 $ 513,938
========== ==========
LIABILITIES
Policy liabilities $ 422,281 $ 428,812
Other liabilities 11,634 13,169
---------- ----------
TOTAL LIABILITIES 433,915 441,981
---------- ----------
POLICYHOLDERS' EQUITY 34,423 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 25,019 23,606
Unrealized gain (loss) on
fixed maturities classified
as available-for-sale (242) 1,019
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 31,460 31,308
---------- ----------
TOTAL LIABILITIES,
POLICYHOLDERS' EQUITY
AND SHAREHOLDERS' EQUITY $ 499,798 $ 513,938
========== ==========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
<PAGE>
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
CONDENSED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE
Insurance revenues $ 9,391 $ 10,236 $ 28,489 $ 30,108
Net investment income 8,440 10,266 24,995 26,884
Net realized gains
(losses) on investments (32) 1,336 271 344
Other 5 6 16 17
---------- --------- ---------- ---------
Total revenue 17,804 21,844 53,771 57,353
---------- --------- ---------- ---------
BENEFITS AND EXPENSES
Policyholder benefits 9,521 11,220 26,990 28,831
Interest expense 2,461 2,581 7,338 7,304
Underwriting, acquisition
and insurance expenses 3,980 5,178 13,179 15,498
Policyholders' dividends
and participation in
operations 1,214 2,100 3,414 4,412
---------- --------- ---------- ---------
Total benefits and expenses 17,176 21,079 50,921 56,045
---------- --------- ---------- ---------
Income before federal
income taxes 628 765 2,850 1,308
Federal income tax expense
(benefit):
Current 111 231 565 703
Deferred 48 (29) 872 (732)
---------- --------- ---------- ---------
159 202 1,437 (29)
---------- --------- ---------- ---------
Net income $ 469 $ 563 $ 1,413 $ 1,337
========== ========= ========== =========
Earnings per share $ .14 $ .17 $ .42 $ .40
========== ========= ========== =========
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>
<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 nine months
ended September 30, 1996 -- 1,413 -- 1,413
Unrealized depreciation in
value of fixed income
securities classified as
available-for-sale,
net of income taxes -- -- (1,261) (1,261)
------ ------- ------- -------
Balance at September 30, 1996 $6,683 $25,019 $ (242) $31,460
====== ======= ======= =======
</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>
Nine Months Ended September 30,
------------------------------
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,413 $ 1,337
Charges (credits) to net income
not affecting cash:
Policyholders' share of
income in excess of
dividends paid 2,602 471
Interest credited to interest
sensitive products 3,585 3,812
Interest credited to
universal life policies 3,753 3,492
Accrual of discount on
investments, net (339) (622)
Realized (gains) on
investments, net (271) (344)
Depreciation 112 110
Amortization of deferred
policy acquisition costs 2,812 2,614
Deferred federal income
tax expense (benefit) 872 (732)
Change in operating assets
and liabilities:
Accrued investment (income) (267) (433)
Policy acquisition costs deferred (3,242) (3,067)
Federal income tax recoverable 235 1,003
Policy liabilities (8,420) (1,151)
Other items, net (860) (1,205)
------- -------
Cash provided by
operating activities 1,985 5,285
------- -------
INVESTING ACTIVITIES
Purchases of investments:
Fixed income securities and
equity securities
held-to-maturity -- (3,038)
Fixed income securities and
equity securities
available-for-sale (78,757) (99,296)
Mortgage loans and real estate (22,059) (10,758)
Short-term investments, net (2,035) (1,766)
Purchases of furniture,
equipment and leaseholds (68) (89)
Sales, maturities, redemptions
and repayments of investments:
Fixed income securities
and equity securities
held-to-maturity -- 5,400
Fixed income securities
and equity securities
available-for-sale 92,846 90,240
Mortgage loans and real estate 12,400 12,516
Policy loans, net 1,685 (1,324)
------- -------
Cash provided (used) by
investing activities 4,012 (8,115)
------- -------
FINANCING ACTIVITIES
Premiums/deposits to
interest sensitive contracts 143 3,937
Withdrawals from interest
sensitive contracts (6,910) (5,558)
Receipts from universal life
policies credited to
policyholder account balances 4,943 4,565
Return of policyholder account
balances on universal
life policies (3,625) (3,677)
------- -------
Cash used by financing activities (5,449) (733)
------- -------
Increase (decrease) in cash 548 (3,563)
Cash at beginning of period 711 2,545
------- -------
Cash (Overdraft) at end of period $ 1,259 $(1,018)
======= =======
</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 Union Central.
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 a 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.
On October 2, 1996, the Company announced that its Board of
Directors unanimously adopted a plan for acquisition of its
minority interests in its guarantee capital shares. It is
anticipated that the Plan, which would be effective pursuant to a
1 for 303,784 reverse split of the Company's outstanding
guarantee capital shares, would result in the elimination of
minority shareholder interests and Union Central being the sole
remaining holder of the guarantee capital shares of the Company.
Pursuant to the Plan, the Company's minority shareholders would
receive $7.50 in cash for each guarantee capital share held by
them immediately prior to the consummation of the proposed
transaction in lieu of the issuance of any fractional new
guarantee capital shares resulting from the reverse stock split.
As of September 30, 1996, 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 Plan 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 exchanged for
cash in the aggregate amount of approximately $6,812,000. The
par value of the guarantee capital shares will be increased from
$2.00 per share to $835,406 per share.
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 $7.50 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 of
approximately $1,800,000 in exchange for which it will receive 8
new guarantee capital shares and approximately $23,000 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) of approximately $5,012,000 and Guarantee Capital
of approximately $1,800,000 to pay for the guarantee capital
shares held by its minority shareholders after the reverse stock
split. Union Central will contribute approximately $1,800,000 to
the Company's Guarantee Capital; as a result the aggregate amount
of capital guaranteed to the Company's policyholders will remain
at its current balance of $6,683,000.
Manhattan Life will call a Special Meeting of its shareholders to
consider and vote upon the proposed transaction. The proposed
transaction is subject to the affirmative vote of shareholders
holding at least two-thirds of the outstanding guarantee capital
shares. Union Central owns approximately 72.8% of the Company's
outstanding guarantee capital shares and, therefore, has
sufficient voting power to approve the reverse stock split
without the affirmative vote of any other shareholder of the
Company. Union Central has advised the Company that it intends
to vote its shares in favor of the reverse stock split. The
proposed transaction is also subject to review by the New York
Insurance Department (the Department). The Company presently
expects the proposed transaction will be completed in the fourth
quarter of 1996.
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 $16,365,000 and $14,910,000 at
September 30, 1996 and December 31, 1995, respectively, and the
ratio of the Company's statutory surplus to its policy reserves
was 7.68% and 7.70%, respectively. Interest added to the GCR
amounted to $925,000, and $707,000 for the nine months ended
September 30, 1996, and 1995, respectively, and it was included
in the Company's results of operations as a reduction of
policyholders' dividends and participation in operations.
<PAGE>
The following table summarizes the allocation of the Company's
net income between the shareholders and the policyholders:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Distributable income:
Net income $ 469 $ 563 $ 1,413 $ 1,337
Policyholders' dividends
and participation in
operations 1,214 2,100 3,414 4,412
Less interest credited
to GCR (295) (262) (925) (707)
------- ------- ------- -------
Distributable income $ 1,388 $ 2,401 $ 3,902 $ 5,042
======= ======= ======= =======
Shareholders' share
of net income:
1/8 of distributable income $ 174 $ 301 $ 488 $ 630
Interest credited to GCR 295 262 925 707
------- ------- ------- -------
Net income $ 469 $ 563 $ 1,413 $ 1,337
======= ======= ======= =======
Policyholders' 7/8th share
of distributable income
(reported as policyholders'
ividendsand participation
in operations in the
Statements of Income) $ 1,214 $ 2,100 $ 3,414 $ 4,412
======= ======= ======= =======
</TABLE>
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
nine month period ended September 30, 1996, the amortized cost of
the available-for-sale securities was $299,080,000, with a market
value totaling $296,143,000 ($87,625,000 of mortgage-backed
securities and $208,518,000 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 September 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 September 30, 1996 $296,143 $ -- $296,143
Book Value at September 30, 1996 299,080 -- 299,080
-------- -------- --------
Unrealized (Loss) as of
September 30, 1996: $ (2,937) $ -- $ (2,937)
======== ======== ========
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: $(15,285) $ -- $(15,285)
======== ======== ========
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 $(13,374) $ -- $(13,374)*
======== ======== ========
</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 $8,827 (net of
deferred taxes of $4,547) for the nine months ended
September 30, 1996.
<PAGE>
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' share of 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.
For the nine months ended September 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
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 $311,000 and
$532,000 for the three months and nine months ended September 30,
1996 compared to $193,000 and $667,000 for the same periods in
1995.
Included in the Condensed Balance Sheets at September 30, 1996
and December 31, 1995 is a net deferred tax asset of $2,762,000
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 recording an unrealized loss of
$2,937,000 on the Company's investment portfolio at September 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>
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 nine months ended September 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 September 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
September 30, 1996 the Company's unassigned statutory surplus
amounted to $6,163,000, of which the one-eighth portion which
should presumably be attributable to holders of the Company's
stock was $770,000. If it should prove to be the case that the
Company 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>
Nine Months Year
Ended Ended
September 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 530 744
Interest at the portfolio rate
from the prior period 925 995
-------- --------
Balance at end of period $ 16,365 $ 14,910
======== ========
Average portfolio rate
for the prior period 7.62% 8.31%
======== ========
</TABLE>
The ratio of the Company's statutory surplus to its policy
reserves was 7.68%, and 7.70%, at September 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 the number of outstanding participating policies
decrease or the dividend scale on these policies decreases, the
amount of profits potentially distributable to holders of the
Company's guarantee capital shares 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 2,474 at September 30, 1996, resulting in an
increase in annualized gross premiums of $5,745,000 and an
increase in in force of $226,274,000. In addition, the Par Flex
plan has developed a dividend liability of $322,000 at September
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 Nine Months
Ended Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Distributable income:
Net income $ 469 $ 563 $1,413 $1,337
Policyholders' dividends and
participation in operations 1,214 2,100 3,414 4,412
Less interest credited to GCR (295) (262) (925) (707)
------ ------ ------ ------
Distributable income $1,388 $2,401 $3,902 $5,042
====== ====== ====== ======
Shareholders' share of net income:
1/8 of distributable income 174 301 488 630
Interest credited to GCR 295 262 925 707
------ ------ ------ ------
Net income $ 469 $ 563 $1,413 $1,337
====== ====== ====== ======
Policyholders' 7/8th share
of distributable income
(reported as policyholders'
dividend and participation
in operations in the statements
of income) $1,214 $2,100 $3,414 $4,412
====== ====== ====== ======
</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 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 Nine Months
Ended Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Insurance Revenue:
Individual Traditional Life Premiums $ 6,312 $ 7,391 $19,477 $21,920
Individual Universal Life
Policy Charges 3,078 2,844 9,008 8,180
Annuities and GICS 1 1 4 8
------- ------- ------- -------
Total Insurance Revenue $ 9,391 $10,236 $28,489 $30,108
======= ======= ======= =======
Policyholder Benefits:
Death Benefits:
Individual Traditional Life $ 5,116 $ 5,541 $13,565 $14,643
Individual Universal Life 1,456 2,801 5,385 5,635
------- ------- ------- -------
Total Death Benefits 6,572 8,342 18,950 20,278
------- ------- ------- -------
Surrender Benefits:
Individual Traditional Life 2,052 2,048 6,389 5,899
------- ------- ------- -------
Change in Policy Reserves:
Individual Traditional Life (951) (771) (3,779) (2,260)
Annuities and GICS 24 (179) (311) (1,206)
------- ------- ------- -------
Total Changes in Policy Reserves (927) (950) (4,090) (3,466)
------- ------- ------- -------
Other Benefits:
Individual Traditional Life 313 374 1,136 1,400
Annuities and GICS 1,511 1,406 4,605 4,720
------- ------- ------- -------
Total Other Benefits (1) 1,824 1,780 5,741 6,120
------- ------- ------- -------
Total Policyholder Benefits $ 9,521 $11,220 $26,990 $28,831
======= ======= ======= =======
Interest Expense:
Individual Universal Life $ 1,283 $ 1,272 $ 3,753 $ 3,492
Annuities and GICS 1,178 1,309 3,585 3,812
------- ------- ------- -------
Total Interest Expense $ 2,461 $ 2,581 $ 7,338 $ 7,304
======= ======= ======= =======
</TABLE>
(1) Other benefits include matured endowment payouts and
annuity benefit payouts.
The following discussion describes the results in more
detail.
<PAGE>
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 by decreasing premiums. 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 nine months ended
September 30, 1996 compared to the same period in the prior year
due to random fluctuations which are inherent in 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
nine months ended September 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 nine months
ended September 30, 1996, decreased compared to the same period
in the prior year.
Interest expense increased slightly between periods since the
increase in universal life in-force more than offset the decrease
in interest crediting rates from 6.44% for the nine month period
ended September 30, 1995 to 6.26% 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. Guaranteed Interest Contracts (GIC's)
revenues are not significant because the Company suspended the
sale of 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-eight percent of
the GIC liability remaining at September 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 September 30, 1996
remains consistent when compared to the period ending September
30, 1995. The weighted average annual interest rates credited on
the Company's annuity products are as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Guaranteed Interest Contracts 5.95% 5.99% 5.98% 6.02%
Single Premium Deferred Annuity 5.91% 6.33% 6.08% 6.17%
</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 Nine Months
Ended Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Fixed maturities $ 5,751 $ 6,371 $17,982 $18,378
Mortgages 1,773 3,340 5,287 6,895
Real estate 363 380 1,063 1,174
Policy loans 756 801 2,269 2,302
Short-term investments 52 122 99 272
Other 17 27 85 90
------- ------- ------- -------
8,712 11,041 26,785 29,111
Investment expenses (272) (775) (1,790) (2,227)
------- ------- ------- -------
Net investment income $ 8,440 $10,266 $24,995 $26,884
======= ======= ======= =======
</TABLE>
For the nine months ended September 30, 1996, net investment
income decreased $1.9 from the same period in 1995 as net
investment yield decreased from 8.31% at September 30, 1995 to
7.69% at September 30, 1996, and the amount of overall invested
assets decreased. The net investment yield was affected by a
$1.8 million default interest collection on a mortgage payoff
during 1995. Investment expenses decreased in the quarter and
nine months ended September 30, 1996 due to a settlement of a
lawsuit related to a mortgage loan. The Company recovered
approximately $368,000 of previously incurred expenses in the
quarter ended September 30, 1996.
Realized Gains (Losses). Realized investment gains (losses) by
class of investment are summarized as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Fixed maturities $ (52) $ 887 $ 309 $ 868
Equity securities -- 113 (3) 113
Mortgages 20 336 (35) (637)
----- ------ ----- -----
Realized gain (losses) on investments $ (32) $1,336 $ 271 $ 344
===== ====== ===== =====
</TABLE>
The net realized gains in 1996 are a result of investment
sales activity in the available-for-sale portfolio of fixed
income securities offset by a $35,000 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 Nine Months
Ended Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Proceeds $11,458 $24,823 $79,746 $82,604
Gross Realized Gains 94 833 1,488 1,960
Gross Realized Losses (298) (217) (1,317) (1,478)
</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 nine
months ended September 30, 1996 decreased when compared to the
same period in 1995 due to 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 Nine Months
Ended Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Distributable income
- (See Footnote 2 of
Notes to Financial Statements) $ 1,388 $ 2,401 $ 3,902 $ 5,042
======= ======= ======= =======
Policyholders' 7/8th share
of distributable income
(reported as policyholders'
dividends and participation
in operations in the
Statements of Income) $ 1,214 $ 2,100 $ 3,414 $ 4,412
======= ======= ======= =======
Policyholders' dividends $ 929 $ 1,184 $ 813 $ 3,941
Increase in policyholders' equity 285 916 2,601 471
------- ------- ------- -------
Total policyholders' dividends
and participation in operations $ 1,214 $ 2,100 $ 3,414 $ 4,412
======= ======= ======= =======
</TABLE>
During the nine months ended September 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 $311,000
and $532,000 for the three months and nine months ended
September 30, 1996 compared to $193,000 and $667,000 for the same
periods in 1995.
Included in the Condensed Balance Sheets at September 30, 1996
and December 31, 1995 is a net deferred tax asset of $2,762,000
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 recording an unrealized loss of
$2,937,000 on our investment portfolio at September 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 issued 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>
September 30, December 31,
1996 1995
------------- -----------
<S> <C> <C>
Ratio of statutory surplus plus
the asset valuation reserve to
statutory assets
Manhattan Life 7.5% 7.4%
Industry * 9.6%
Ratio of statutory surplus plus
the asset valuation reserve to
invested assets
Manhattan Life 7.8% 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
September 30, 1996 are not available.)
The increase in the above ratios is a result of a statutory
gain from operations of $799,000 for the period ended
September 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
September 30, 1996 or December 31,1995.
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, mortgage-backed
securities, and commercial mortgages.
The composition of the Company's invested assets is as follows
(in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1996 Percent 1995 Percent
<S> <C> <C> <C> <C>
Category
Fixed Maturities:
Mortgage-Backed Securities $ 87,625 20% $ 98,793 22%
Corporate Bonds 208,518 48 226,245 50
-------- --- -------- ---
Total Fixed Income Securities 296,143 68 325,038 72
Other Invested Assets 23 0 -- 0
Short-term 2,100 0 -- 0
Common Stock -- 2 0
Commercial Mortgages 78,747 18 70,048 16
Real Estate Owned 7,394 2 6,388 1
Policy Loans 50,055 12 51,740 11
-------- --- -------- ---
TOTAL INVESTMENTS $434,462 100% $453,216 100%
======== === ======== ===
</TABLE>
This schedule excludes cash held by the Company totalling
$1,259,000 and $711,000 at September 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.
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. 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 September 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" (in
thousands):
<TABLE>
<CAPTION>
Fixed Equity
Maturities Securities Total
---------- ---------- -----
(in thousands)
<S> <C> <C> <C>
Market Value at September 30, 1996 $296,143 $ -- $296,143
Book Value at September 30, 1996 299,080 -- 299,080
-------- ----- --------
Unrealized (Loss) as of
September 30, 1996: $ (2,937) $ -- $ (2,937)
======== ===== ========
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: $(15,285) $ -- $(15,285)
======== ===== ========
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 $(13,374) $ -- $(13,374)*
======== ===== ========
</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 $8,827 (net of
deferred taxes of $4,547) for the nine months ended
September 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 September 30, 1996, no bonds were in default.
The weighted average maturity of the marketable bond
portfolio excluding mortgaged-backed securities was 8.83 years as
of September 30, 1996.
At September 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 September 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 $34,964,000 (market:
$34,906,000) at September 30, 1996 from $24,357,000 (market:
$24,531,000) at December 31, 1995 and amounted to approximately
6.38% of invested assets and approximately 5.5% of total assets
at September 30, 1996. Management believes that the current level
of investment in high-yield securities, at only 6.38% 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. Also, 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 $7,394,000 and
$6,388,000 at September 30, 1996 and December 31, 1995. The
increase is due to the capitalization of building improvements.
It 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 September 30, 1996 the Company's mortgage
loans on real estate increased $8,699,000 from $70,048,000 at
December 31, 1995 to $78,747,000 at September 30, 1996, net of an
allowance for potential mortgage loan losses of $1,416,000 and
$1,381,000 at September 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 nine months of 1996, the
Company participated in 63 new originations totalling $17,550,000
out of a total loan amount of $131,196,000.
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 $9,204,000 and $13,964,000 at
September 30, 1996 and December 31, 1995, respectively. These
loans were considered by management in establishing the
$1,416,000 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 September 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 September 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 $1,416,000
mortgage loan loss reserve as of September 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 have 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 $1,381,000 at September 30, 1996 and December 31, 1995,
respectively) follows ($ in thousands):
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
Percent Percent
of Total of Total
------------------ -----------------
<S> <C> <C> <C> <C>
Geographic Diversification:
New England $ 1,285 1.6% $ 1,486 2.1%
Middle Atlantic 20,380 25.4 27,029 37.8
South Atlantic 10,193 12.7 6,317 8.8
East North Central 9,882 12.3 6,328 8.9
West North Central 4,525 5.6 4,614 6.4
East South Central 2,472 3.1 1,694 2.4
West South Central 10,725 13.4 8,893 12.5
Mountain 9,038 11.3 5,889 8.2
Pacific 11,663 14.6 9,179 12.9
-------- ----- ------- -----
Total $80,163 100.0% $71,429 100.0%
======= ===== ======= =====
Property Type:
Office $21,880 27.3% $16,078 22.5%
Apartment 20,071 25.0 22,325 31.3
Retail 28,730 35.8 24,308 34.0
Industrial 6,543 8.2 6,433 9.0
Residential 232 0.3 260 .4
Other 2,707 3.4 2,025 2.8
------- ----- ------- -----
Total $80,163 100.0% $71,429 100.0%
======= ===== ======= =====
Maturities:
Past Maturity $ 0 0.0% $ 2 0.0%
Maturing within 1 year 1,195 1.5 12,757 17.9
Maturing in 2-5 years 23,755 29.6 25,527 35.7
Maturing in 6-10 years 9,927 12.4 5,836 8.2
Maturing in over 10 years 45,286 56.5 27,307 38.2
------- ----- ------- -----
Total $80,163 100.0% $71,429 100.0%
======= ===== ======= =====
</TABLE>
<PAGE>
THE MANHATTAN LIFE INSURANCE COMPANY
Part II. Other Information
Item 6.
(b) Exhibits and Reports on Form 8-K: None.
<PAGE>
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
Dated: November 13, 1996 Daniel J. Fischer
President and Chief Executive
Officer and General Counsel
By /s/James N. Kotsonis
Dated: November 13, 1996 James N. Kotsonis
Senior Vice President,
Chief Actuary and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000061953
<NAME> MANHATTAN LIFE INSURANCE COMPANY
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 296,143
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 78,747
<REAL-ESTATE> 7,394
<TOTAL-INVEST> 434,462
<CASH> 1,259
<RECOVER-REINSURE> 1,660
<DEFERRED-ACQUISITION> 41,694
<TOTAL-ASSETS> 499,798
<POLICY-LOSSES> 419,258
<UNEARNED-PREMIUMS> 3,023
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 6,683
<TOTAL-LIABILITY-AND-EQUITY> 499,798
28,489
<INVESTMENT-INCOME> 24,995
<INVESTMENT-GAINS> 271
<OTHER-INCOME> 16
<BENEFITS> 26,990
<UNDERWRITING-AMORTIZATION> 13,179
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 2,850
<INCOME-TAX> 1,437
<INCOME-CONTINUING> 1,413
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,413
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
<RESERVE-OPEN> 6,597
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 31,948
<PAYMENTS-PRIOR> 43,337
<RESERVE-CLOSE> 5,133
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
