FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
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 0-5486
PRESIDENTIAL LIFE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-2652144
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
69 Lydecker Street, Nyack, New York 10960
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 914 - 358-2300
(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
There were 33,525,684 shares of common stock, par value $.01 per share
of the issuer's common stock outstanding as of the close of business on
August 10, 1995.
INDEX
Part I - Financial Information Page No.
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets June 30, 1995
(Unaudited) and December 31, 1994.............................. 3
Consolidated Statements of Income (Unaudited) - For
the Six Months Ended June 30, 1995 and 1994................... 4
Consolidated Statements of Income (Unaudited) - For
the Three Months Ended June 30, 1995 and 1994................. 5
Consolidated Statements of Shareholders'
Equity (Unaudited) - For the Six Months Ended
June 30, 1995 and 1994........................................ 6
Consolidated Statements of Cash Flows (Unaudited) - For
the Six Months Ended June 30, 1995 and 1994................... 7
Notes to (Unaudited) Consolidated Financial Statements........ 8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 11-17
Part II - Other Information......................................... 18
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures.......................................................... 19
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PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, December 31,
1995 1994
(UNAUDITED)
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ASSETS:
Investments:
Fixed maturities:
Held to maturity at amortized cost
(Market value of $422,577 and $210,858,
respectively) $ 405,122 $ 221,362
Available for sale at market (Cost of
$1,291,090 and $1,362,366, respectively) 1,333,232 1,290,825
Common stocks (Cost of $30,586 and
$36,507, respectively) 36,044 38,074
Mortgage Loans 19,278 17,623
Real Estate 430 432
Policy Loans 18,508 18,741
Short-term investments 230,930 130,124
Other invested assets 157,688 142,488
Total investments 2,201,232 1,859,669
Cash and cash equivalents 8,050 (772)
Accrued investment income 24,755 22,797
Deferred policy acquisition costs 42,092 58,319
Furniture and equipment, net 453 529
Amounts due from reinsurers 7,375 7,460
Amounts due from investment transactions 0 52,588
Deferred federal income taxes 0 7,566
Federal income tax recoverable 9,628 9,134
Other assets 1,955 2,135
Assets held in separate account 6,614 6,619
TOTAL ASSETS $2,302,154 $2,026,044
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy Liabilities:
Policyholders' account balances $1,257,885 $1,255,691
Future policy benefits:
Annuity 361,156 361,331
Life and accident and health 46,548 46,572
Other policy liabilities 3,241 3,201
Total policy liabilities 1,668,830 1,666,795
Dollar Repurchase Agreements 198,054 39,363
Notes payable 50,000 50,000
Deposits on policies to be issued 2,514 1,605
Deferred federal income taxes 27,037 0
General expenses and taxes accrued 3,590 3,751
Other liabilities 2,092 1,958
Liabilities related to separate account 6,614 6,619
Total liabilities 1,958,731 1,770,091
Shareholders' Equity:
Capital stock ($.01 par value, authorized
100,000,000 shares, issued and outstanding
33,713,659 shares in 1995 and 33,709,473
shares in 1994) 337 337
Additional paid in capital 31,771 31,751
Net unrealized investment gains (losses) 25,117 (39,463)
Retained earnings 286,198 263,328
Total Shareholders' Equity 343,423 255,953
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,302,154 $2,026,044
The accompanying notes are an integral part of these Unaudited
Consolidated Financial Statements.
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PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
SIX MONTHS ENDED
JUNE 30
(UNAUDITED)
1995 1994
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REVENUES:
Insurance Revenues:
Premiums $ 1,646 $ 1,397
Annuity considerations 1,397 181
Universal life and investment
type policy fee income 954 933
Net investment income 75,385 76,956
Realized investment gains 14,257 11,141
Other income 1,088 621
TOTAL REVENUES 94,727 91,229
BENEFITS AND EXPENSES:
Death and other life insurance benefits 3,315 3,238
Annuity benefits 17,815 17,801
Interest credited to policyholders'
account balances 38,772 38,463
Interest expense on notes payable 2,510 2,713
Other interest and other charges 260 148
Change in liability for future
policy benefits (378) (1,726)
Commissions to agents, net 1,604 735
General expenses and taxes 5,111 4,662
Decrease in deferred policy
acquisition costs 710 1,383
TOTAL BENEFITS AND EXPENSES 69,719 67,417
Income before income taxes 25,008 23,812
Provision (benefit) for income taxes
Current 795 7,713
Deferred (171) (1,653)
624 6,060
NET INCOME $ 24,384 $ 17,752
Income per share $ .72 $ .52
Weighted average number of shares
outstanding during the period 33,709,854 33,865,581
The accompanying notes are an integral part of these Unaudited Consolidated
Financial Statements.
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PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
THREE MONTHS ENDED
JUNE 30
(UNAUDITED)
1995 1994
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REVENUES:
Insurance Revenues:
Premiums $ 1,049 $ 885
Annuity considerations 905 49
Universal life and investment
type policy fee income 484 429
Net investment income 38,352 37,626
Realized investment gains 7,306 4,699
Other income 451 321
TOTAL REVENUES 48,547 44,009
BENEFITS AND EXPENSES:
Death and other life insurance benefits 1,484 1,537
Annuity benefits 9,091 8,790
Interest credited to policyholders'
account balances 19,568 19,270
Interest expense on notes payable 1,265 1,265
Other interest and other charges 66 73
Change in liability for future
policy benefits (161) (928)
Commissions to agents, net 858 361
General expenses and taxes 2,467 1,739
Decrease in deferred policy
acquisition costs 201 459
TOTAL BENEFITS AND EXPENSES 34,839 32,566
Income before income taxes 13,708 11,443
Provision (benefit) for income taxes
Current (2,780) 4,181
Deferred 266 (1,027)
(2,514) 3,154
NET INCOME $ 16,222 $ 8,289
Income per share $ .48 $ .24
Weighted average number of shares
outstanding during the period 33,709,854 33,865,581
The accompanying notes are an integral part of these Unaudited Consolidated
Financial Statements.
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PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
Net
Unrealized
Additional Investment
Capital Paid-in- Gains Retained Treasury
Stock Capital Losses) Earnings Stock Total
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Balance at
12/31/93 $339 $32,517 $ 5,130 $226,461 $ 0 $264,447
Net Income 17,752 17,752
Stock
Issued
from
Options 9 9
Increase in
Unrealized
Investment
Gains, Net (18,561) (18,561)
Dividends
paid to
Shareholders
(.045 per
share) (1,523) (1,523)
Balance at
6/30/94 $339 $32,526 $(13,431) $242,690 $ 0 $262,124
Balance at
12/31/94 $337 $31,751 $(39,463) $263,328 $ 0 $255,953
Net Income 24,384 24,384
Stock
Issued
from
Options 20 20
Change in
Unrealized
Investment
Gains, Net 64,580 64,580
Dividends
paid to
Shareholders
(.045 per
share) (1,514) (1,514)
Balance at
6/30/95 $337 $31,771 $ 25,117 $286,198 $ 0 $343,423
The accompanying notes are an integral part of the Unaudited Consolidated
Financial Statements.
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PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
SIX MONTHS ENDED
JUNE 30
(UNAUDITED)
1995 1994
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OPERATING ACTIVITIES:
Net income $ 24,384 $ 17,752
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision (benefit) for deferred income taxes (171) (1,653)
Depreciation and amortization 252 283
Net accrual of discount on fixed maturities (2) (88)
Realized investment losses (gains) (14,257) (11,141)
Changes in:
Accrued investment income (1,958) 3,511
Deferred policy acquisition cost 710 2,338
Liability for future policy benefits 199 (2,910)
Other items 9,511 (1,367)
Net Cash Provided by
Operating Activities 18,668 6,725
INVESTING ACTIVITIES:
Fixed Maturities:
Held for Investment:
Acquisitions (185,589) (135,093)
Sales 0 0
Maturities, calls and repayments 1,491 1,025
Available for Sale:
Acquisitions (4,152) (230,388)
Sales 40,046 930
Maturities, calls and repayments 18,223 191,065
Common Stocks:
Acquisitions (18,222) (30,164)
Sales 42,923 6,982
Change in short term
investments and policy loans (100,573) 321,014
Other Invested Assets:
Additions to other invested assets (26,953) (57,373)
Distributions from other invested assets 11,753 4,658
Purchase of property and equipment (26) (4)
Mortgage loans on real estate (1,655) (7,409)
Amount due from security transactions 52,588 0
Other items 0 (126)
Net Cash Provided by (Used in)
Investing Activities (170,146) 65,117
FINANCING ACTIVITIES:
Proceeds from Dollar Repurchase Agreements 752,683 715,211
Repayment of Dollar Repurchase Agreements (593,992) (740,856)
Decrease in notes payable 0 (44,745)
Increase (decrease) in policyholders'
account balances 2,194 (19,219)
Deposits on policies to be issued 909 (373)
Dividends paid to shareholders (1,514) (1,523)
Other items 20 9
Net Cash Provided by (Used in)
Financing Activities 160,300 (91,496)
Increase (decrease) in Cash and Cash
Equivalents 8,822 (19,654)
Cash and Cash Equivalents at Beginning of Year (772) 20,200
Cash and Cash Equivalents at End of Period $ 8,050 $ 546
Supplemental Cash Flow Disclosure:
Income Taxes Paid $ 1,290 $ 8,363
Interest Paid $ 2,375 $ 3,188
The accompanying notes are an integral part of these Unaudited Consolidated
Financial Statements.
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PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Business
Presidential Life Corporation ("the Company"), through its
wholly-owned subsidiary Presidential Life Insurance Company ("the
Insurance Company"), is engaged in the sale of life insurance and
annuities.
B. Basis of Presentation and Principles of Consolidation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles ("GAAP") applicable to stock life insurance companies for
interim financial statements and with the requirements of Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles applicable to stock
life insurance companies 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. Interim results for the six months ended June 30, 1995 are
not necessarily indicative of the results that may be expected for the
year ending December 31, 1995. Management believes that, although the
disclosures are adequate to make the information presented not
misleading, the consolidated financial statements should be read in
conjunction with the footnotes contained in the Company's audited
consolidated financial statements for the year ended December 31, 1994.
C. Investments
Fixed maturities held to maturity include bonds and redeemable
preferred stocks and are carried at amortized cost unless a decline in
market value is considered to be other than temporary. Management
believes that the Company has the ability to hold such investments to
maturity and it is the intent of management to hold such securities to
maturity.
Fixed maturity investments available for sale represent investments
which may be sold in response to changes in various economic conditions.
These investments are carried at estimated market value and unrealized
gains and losses, net of the effects of amortization of deferred policy
acquisition costs of approximately $5.7 million and deferred Federal
income taxes of approximately $11.8 million, are charged directly to
shareholders' equity, unless a decline in market value is considered to
be other than temporary in which case the investment is reduced to its
net realizable value. Equity securities include common stocks and
non-redeemable preferred stocks and are carried at market, with the
related unrealized gains and losses, net of deferred income taxes, if
any, charged directly to shareholders' equity, unless a decline in
market value is deemed to be other than temporary in which case the
investment is reduced to its net realizable value.
"Other invested assets" are recorded at the lower of cost or market
and primarily include interests in limited partnerships, which
principally are engaged in venture capital, acquisitions of private
growth companies, debt restructuring and merchant banking. Limited
partnership interests usually are not registered and typically are
illiquid. To evaluate the appropriateness of the carrying value of a
limited partnership interest, management maintains ongoing discussions
with the investment manager and considers the limited partnership's
operation, its current and near term projected financial condition,
earnings capacity and distributions received by the Company during the
year. Because it is not practicable to obtain an independent valuation
for each limited partnerships interest, for purposes of disclosure, the
market value of a limited partnership interest is estimated at book
value. Management believes that the net realizable value of such
limited partnership interests, in the aggregate, exceeds their related
carrying value as of June 30, 1995 and December 31, 1994. As of June
30, 1995, the Company was committed to contribute, if called upon, an
aggregate of approximately $39.4 million of additional capital to
certain of these limited partnerships.
C. Investments - continued
In evaluating whether an investment security or other investment
has suffered an impairment in value which is deemed to be "other than
temporary", management considers all available evidence. When a decline
in the value of an investment security or other investment is considered
to be other than temporary, the investment is reduced to its net
realizable value, which becomes the new cost basis. The amount of
reduction is recorded as a realized loss. A recovery from the adjusted
cost basis is recognized as a realized gain only at sale.
The Company participates in "dollar roll" repurchase agreement
transactions to enhance investment income. Dollar roll transactions
involve the sale of certain mortgage backed securities to a holding
institution and a simultaneous agreement to purchase substantially
similar securities for forward settlement at a lower dollar price. The
proceeds are invested in short-term securities at a positive spread
until the settlement date of the similar securities. During this
period, the holding institution receives all income and prepayments for
the security. Dollar roll repurchase agreement transactions are treated
as financing transactions for financial reporting purposes.
As part of a proposed rehabilitation plan for Fidelity Mutual Life
Insurance Company ("Fidelity"), on January 11, 1995 the Insurance
Company signed a definitive purchase agreement with the Pennsylvania
Insurance Commissioner and Fidelity to invest up to $45 million for a
minority (49.9%) interest in a Fidelity subsidiary insurance holding
company. In addition, the Company has agreed to purchase $25 million of
Senior Notes of such company.
D. Federal Income Taxes
The Company accounts for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes" ("SFAS 109") which requires an asset
and liability method in recording income taxes on all transactions that
have been recognized in the financial statements. SFAS 109 provides that
deferred taxes be adjusted to reflect tax rates at which future tax
liabilities or assets are expected to be settled or realized.
2. INVESTMENTS
Investments in U.S. Government & Government Agencies with an
aggregate carrying value of $511,949,000 represent investments owned in
any one issuer that aggregate 10% or more of Shareholders' Equity as of
June 30, 1995.
Securities with a carrying value of approximately $4.9 million were
on deposit with various state insurance departments to comply with
applicable insurance laws.
3. NOTES PAYABLE
Notes payable at June 30, 1995 and December 31, 1994 consist of $50
million, 9 1/2% Senior Notes ("Senior Notes") due December 15, 2000.
Interest is payable June 15 and December 15. Debt issue costs are being
amortized on the interest method over the term of the notes. As of June
30, 1995, such unamortized costs were 1.6 million. There are no
principal payments required for the senior notes over the next five
years.
3. NOTES PAYABLE - continued
Covenants
The indenture governing the senior notes contains covenants
relating to limitations on additional indebtedness, restricted payments,
liens and sale or issuance of capital stock of the Insurance Company.
In the event the Company violates such covenants as defined in the
indenture, the Company is obligated to offer to repurchase 25% of the
outstanding principal amount of such notes. The Company believes that
it is in compliance with all of the covenants.
4. INCOME TAXES
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes, (b) operating loss carryforwards and (c) a valuation
allowance.
The valuation allowance relates principally to investment
writedowns recorded for financial reporting purposes, which have not
been recognized for income tax purposes, due to the uncertainty
associated with their realizability for income tax purposes. Changes in
the valuation allowance for the six months ended June 30, 1995 reflect
the reduction in the deferred tax asset as of June 30, 1995. The
Company's effective tax rates for the six months ended June 30, 1995 and
1994 were 2.5% and 25.4%, respectively. As a result of the finalization
of the Company's federal income tax return, the federal income tax
recoverable was increased by $3.1 million which reduced income tax
expense by a similar amount.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
The Company operates principally in a single business segment with
two primary lines of business--individual annuities and individual life
insurance. Premiums shown on the Company's consolidated financial
statements in accordance with GAAP consist of premiums received for
whole or term life insurance products, as well as that portion of the
Company's single premium immediate annuities which have life
contingencies. With respect to that portion of single premium annuity
contracts without life contingencies, as well as single premium deferred
annuities and universal life insurance products, premiums collected by
the Company are not reported as premium revenues, but rather are
reported as additions to policyholder account balances. With respect to
products that are accounted for as policyholder account balances,
revenues are recognized over time in the form of policy fee income,
surrender charges and mortality and other charges deducted from the
policyholder's account balance. The Company's operating earnings are
derived primarily from these revenues, plus the Company's investment
results, including realized gains (losses), less interest credited,
benefits to policyholders and expenses.
Certain costs related to the sale of new business are deferred as
"deferred policy acquisition costs" ("DAC") and amortized into expenses
in proportion to the recognition of earned revenues. Costs deferred
include principally commissions, certain expenses of the policy issue
and underwriting departments and certain variable sales expenses. Under
certain circumstances, DAC will be expensed earlier than originally
estimated, including those circumstances where the policy terminations
are higher than originally estimated with respect to certain annuity
products. Most of the Company's annuity products have surrender charges
which are designed to discourage and mitigate the effect of early
terminations.
During June, 1995 the Insurance Company was notified that its A.M.
Best rating was reaffirmed at "A-(Excellent)."
Results of Operations
Comparison of Six Months Ended June 30, 1995 to Six Months Ended
June 30, 1994.
Revenues
Annuity Considerations and Life Insurance Premiums
Total annuity considerations and life insurance premiums increased
to approximately $3.0 million for the six months ended June 30, 1995
from approximately $1.6 million for the six months ended June 30, 1994.
Of this amount, annuity considerations increased to approximately
$1.4 million for the six months ended June 30, 1995 from approximately
$.2 million for the six months ended June 30, 1994. In
accordance with generally accepted accounting principles, sales of
single premium deferred annuities are not reported as insurance
revenues, but rather as additions to policyholder account balances.
Sales of single premium deferred annuities were approximately $48.4
million for the six months ended June 30, 1995 compared to $20.7 million
for the six months ended June 30, 1994. Sales of single premium
deferred annuities were $44.6 million in fiscal 1994.
Policy Fee Income
Universal life and investment type policy fee income was
approximately $954 thousand for the six months ended June 30, 1995, as
compared to approximately $933 thousand for the six months ended June
30, 1994. Policy fee income consists principally of amounts assessed
during the period against policyholders' account balances for mortality
charges and surrender charges.
Net Investment Income
Net investment income totaled approximately $75.4 million for the
six months ended June 30, 1995, as compared to approximately $77.0
million for the six months ended June 30, 1994. This represents a
decrease of approximately 2.0%. The Company's ratio of net investment
income to average cash and invested assets less net investment income
for the six months ended June 30, 1994 was 7.5% and for the six months
ended June 30, 1995 was 7.9%, respectively.
Realized Investment Gains and Losses
Realized investment gains amounted to approximately $14.3 million
during the six months ended June 30, 1995, as compared to approximately
$11.1 million during the six months ended June 30, 1994. Approximately
half of the realized investment gains for the six months ended June 30,
1995 and 1994 were attributable to distributions of capital gains from
the Company's investments in certain limited partnerships which
partially were offset by realized investment losses of approximately
$3.3 million attributable to sales and writedowns of certain securities
contained in the Company's portfolio. There can be no assurance that the
Company's investment portfolio will yield comparable investment gains in
future periods.
Total Benefits and Expenses
Total benefits and expenses for the six months ended June 30, 1995
aggregated approximately $69.7 million, as compared to approximately
$67.4 million for the six months ended June 30, 1994, an increase of
approximately 4%. The reasons for this increase are discussed under the
respective components below.
Interest Credited and Benefits to Policyholders
Interest credited and other benefits to policyholders aggregated
approximately $59.8 million for the six months ended June 30, 1995, as
compared to approximately $57.9 million for the six months ended June
30, 1994. This represents an increase of approximately 3.2%. This
increase principally is attributable to a higher average credited
interest rate of 6.4% for the six months ended June 30, 1995 compared
with an average rate of 6.2% for the six months ended June 30, 1994. As
a result of the interest rate environment during the latter half of 1994
and the first quarter of 1995, the average credited rate increased.
However during the second quarter of 1995, the Insurance Company
decreased its credited rate of interest on its newly issued deferred
annuity products and decreased rates overall on its other
interest-sensitive products. In addition, the renewal rates on existing
policies were decreased on their respective renewal dates.
The Insurance Company's average credited rate for reserves and
account balances for the six months ended June 30, 1995 and 1994 was
approximately 5.9% and 6.0%, respectively. These rates were less than
the Company's ratio of net investment income to mean invested assets for
the same periods as noted above under "Net Investment Income". Although
management does not currently expect material declines in the spread
between the Company's average credited rate for reserves and account
balances and the Company's ratio of net investment income to mean assets
(the "Spread"), there can be no assurance that the Spread will not
decline in future periods or that such decline will not have a material
adverse effect on the Company's financial condition and results of
operations. Depending, in part, upon competitive factors affecting the
industry in general, and the Company, in particular, the Company may,
from time to time, change the average credited rates on certain of its
products. There can be no assurance that the Company will reduce such
rates or that any such reductions will broaden the Spread.
Interest Expense on Notes Payable
The interest expense on the Company's notes payable was
approximately $2.5 million for the six months ended June 30, 1995, as
compared to approximately $2.7 million for the six months ended June 30,
1994. This decrease is directly attributable to the Company
repurchasing the Subordinated Notes due May 15, 1994 ("Subordinated
Notes") in January of 1994.
General Expenses, Taxes and Commissions
General expenses, taxes and commissions to agents aggregated
approximately $6.7 million for the six months ended June 30, 1995, as
compared to approximately $5.4 million for the six months ended June 30,
1994, an increase of approximately 24.4%. This increase is primarily
attributable to an increase in commissions and related expenses as a
result of an increase in sales of single premium deferred annuities.
Deferred Policy Acquisition Costs
A change in the net Deferred Policy Acquisition Costs for the six
months ended June 30, 1995 resulted in a charge of approximately $.7
million, as compared to a charge of approximately $1.4 million for the
six months ended June 30, 1994, a decrease of approximately 49%. This
change is primarily attributable to an increase in the costs associated
with new product sales which will be deferred and amortized in
proportion to the recognition of earned revenues.
Income Before Income Taxes
For the reasons discussed above, income before income taxes
amounted to approximately $25.0 million for the six months ended June
30, 1995, as compared to approximately $23.8 million for the six months
ended June 30, 1994.
Income Taxes
Income tax expense was $.6 million for the six months ended June
30, 1995 as compared to approximately $6.1 million for the six months
ended June 30, 1994. As a result of the finalization of the Company's
1994 federal income tax return, the federal income tax recoverable from
operations and capital loss carryback was increased by $3.1 million
which reduced income tax expense by a similar amount.
Net Income
For the reasons discussed above, the Company had net income of
approximately $24.4 million during the six months ended June 30, 1995,
as compared to net income of approximately $17.8 million during the six
months ended June 30, 1994.
Liquidity and Capital Resources
The Company is an insurance holding company and its primary uses of
cash are debt service obligations, operating expenses and dividend
payments. The Company's principal sources of cash are dividends from
the Insurance Company, sales of and interest on its investments
(exclusive of those held by the Insurance Company) and rent from its
real estate.
The Insurance Company is subject to various regulatory restrictions
on the maximum amount of payments, including loans or cash advances,
that it may make to the Company without obtaining prior regulatory
approval. As a New York domiciled insurance company, the Insurance
Company is subject to restrictions on the payment of dividends under New
York State law. New York State law states that no domestic stock life
insurance company shall distribute any dividend to its shareholders
unless a notice of its intention to declare such dividend and the amount
thereof shall have been filed with the Superintendent of the New York
Insurance Department ("Superintendent") not less than 30 days in advance
of such proposed declaration. The Superintendent may disapprove such
distribution by giving written notice to such company within 30 days
after such filing that he or she finds that the financial condition of
the company does not warrant such distribution. The New York State
Insurance Department has established informal guidelines for the
Superintendent's findings which focus upon, among other things, the
overall financial condition and profitability of the insurer under
statutory accounting practices. During the first six months of 1995,
the Insurance Company paid dividends to the Company of $5 million.
During the fiscal year 1994, the Insurance Company paid dividends of $12
million to the Company.
Principal sources of funds at the Insurance Company are premiums
and other considerations paid, contract charges earned, net investment
income received and proceeds from investments called, redeemed or sold.
The principal uses of these funds are the payment of benefits on annuity
contracts and life insurance policies (including withdrawals and
surrender payments), operating expenses and the purchase of investments.
Net cash provided by the Company's operating activities (reflecting
principally: (i) premiums and contract charges collected less (ii)
benefits paid on life insurance and annuity products plus (iii) income
collected on invested assets less (iv) commissions and other general
expenses paid) was approximately $18.7 million and $6.7 million during
the six months ended June 30, 1995 and 1994, respectively. Net cash
provided by (used in) the Company's investing activities (principally
reflecting investments purchased less investments called, redeemed or
sold) was approximately $(170.1) million and $65.1 million during the
six months ended June 30, 1995 and 1994, respectively.
For purposes of the Company's consolidated statements of cash
flows, financing activities relate primarily to sales and surrenders of
the Company's universal life insurance and annuity products. The
payment of dividends by the Company also are considered to be a
financing activity. Net cash provided by (used in) the Company's
financing activities amounted to approximately $160.3 million and
$(91.5) million during the six months ended June 30, 1995 and 1994,
respectively. This fluctuation primarily is attributable to the
decreased activity in dollar roll repurchase agreements during the six
months ended June 30, 1995 and the repayment of the Subordinated Notes
in January of 1994.
In January 1994, the Company prepaid $44.7 million principal value
of the Subordinated Notes. These Notes bore interest at a rate of
11.125% per annum. The Company currently has no bank lines of credit.
The indenture governing the Senior Notes contains covenants which,
among other things, restrict the ability of the Company to incur
additional indebtedness, create or permit liens, effect certain asset
sales and engage in mergers or similar transactions. Management
believes that the Company currently is in compliance with all covenants
and restrictions contained in the indenture and, further, that
compliance with these covenants and restrictions will not have a
material adverse effect on the Company's financial condition or results
of operations.
Given the Insurance Company's historic cash flow and current
financial results, management believes that for the next twelve months
and for the reasonably foreseeable future, the Insurance Company's cash
flow from operating activities will provide sufficient liquidity for the
operations of the Insurance Company, as well as provide sufficient funds
to the Company, so that the Company will be able to make dividend
payments, satisfy its debt service obligations and pay its other
operating expenses.
To meet its anticipated liquidity requirements, the Company
purchases investments taking into account the anticipated future cash
flow requirements of its underlying liabilities. In managing the
relationship between assets and liabilities, the Company analyzes the
cash flows necessary to correspond with the expected cash needs on the
underlying liabilities under various interest rate scenarios. In
addition, the Company invests a portion of its total assets in short-term
investments (approximately 10.0% and 6.4% as of June 30, 1995 and
December 31, 1994, respectively). The weighted average duration of the
Company's investment portfolio was approximately seven years as of June
30, 1995. The Company's available for sale category includes those
securities available to be sold in response to, among other things,
changes in market interest rates, changes in the security's prepayment
risk, the Company's need for liquidity and other similar factors. Fixed
maturity investments available for sale represent investments which may
be sold for various reasons. These investments are carried at estimated
market value, in the aggregate, and unrealized gains and losses, net of
the effects of amortization of deferred policy acquisition costs and
deferred federal income taxes, are charged directly to shareholders'
equity, unless a decline in market value is considered to be other than
temporary, in which event, the Company recognizes a loss. Equity
securities, which include common stocks and non-redeemable preferred
stocks, are carried at market, with the related unrealized gains and
losses, net of federal income taxes, if any, charged directly to
shareholders' equity, unless a decline in market value is considered to
be other than temporary, in which event, the Company recognizes a loss.
The Company maintains a portfolio which includes below investment
grade debt securities which were purchased to achieve a more favorable
investment yield substantially all of which are classified as available
for sale and reported at fair value. As of June 30, 1995, the carrying
value of these securities was approximately $163.2 million (representing
approximately 7.1% of the Company's total assets and 47.5% of
shareholder's equity) and the estimated market value of these securities
was approximately $165.5 million (representing approximately 7.2% of the
Company's total assets and 48.2% of shareholder's equity).
The Insurance Company is subject to Regulation 130 adopted and
promulgated by the New York State Insurance Department ("NYSID"). Under
this Regulation, the Insurance Company's ownership of below investment
grade debt securities is limited to 20.0% of total admitted assets, as
calculated under statutory accounting practices. As of June 30, 1995,
approximately 8.6% of the Insurance Company's total admitted assets were
invested in below investment grade debt securities.
Management expects (primarily as a result of calls, redemptions and
repayments) the percentage of the Company's portfolio invested in below
investment grade debt securities to decline over time. No new below
investment grade debt investments have been made since the first quarter
of fiscal 1990, but some investment grade corporate securities have been
downgraded. Notwithstanding the foregoing, the Company's investment
policies may change from time to time in response to market and other
conditions.
Investments in below investment grade debt securities have
different risks than investments in corporate debt securities rated
investment grade. Risk of loss upon default by the borrower is
significantly greater with respect to below investment grade debt
securities because below investment grade debt securities generally are
unsecured and often are subordinated to other creditors of the issuer.
Also, issuers of below investment grade debt securities usually have
high levels of indebtedness and often are more sensitive to adverse
economic conditions, such as recession or increasing interest rates,
than are investment grade issuers. Typically, there is only a thinly
traded market for such securities and recent market quotations may not
be available for some of these securities. Market quotes generally are
available only from a limited number
of dealers and may not represent firm bids of such dealers or prices for
actual sales. The Company attempts to reduce the overall risk in its
below investment grade portfolio, as in all of its investments, through
careful credit analysis, investment policy limitations, and
diversification by company and by industry.
As of June 30, 1995, approximately 7.2% of the Company's total
invested assets were invested in limited partnerships. Such investments
are included in the Company's consolidated balance sheet under the
heading "Other invested assets." See "Note 2 to the Notes to
Consolidated Financial Statements." The Company is committed, if called
upon during a specified period, to contribute an aggregate of
approximately $39.4 million of additional capital to certain of these
limited partnerships. However, management does not expect the entire
amount to be drawn down as certain of these limited partnerships are
nearing the end of the period during which investors are required to
make contributions. Pursuant to NYSDI regulations, the Company's
investments in equity securities, including limited partnership
interests, may not exceed 20% of the Company's total invested assets.
The Company may make selective investments in additional limited
partnerships as opportunities arise. Interests held by the Company in
limited partnerships usually are not registered with the Commission and
typically are illiquid. In addition, there can be no assurance that the
Company will continue to achieve the same level of returns on its
investments in limited partnerships as it has historically or that the
Company will achieve any returns on such investments at all. Further,
there can be no assurance that the Company will receive a return of all
or any portion of its current or future capital investments in
limited partnerships. The failure of the Company to receive the return
of a material portion of its capital investments in limited
partnerships, or to achieve historic levels of return on such
investments, could have a material adverse effect on the Company's
financial condition and results of operations.
As previously discussed, during the first and second quarters of
fiscal 1995 and in fiscal 1994, the Company participated in "dollar
roll" repurchase agreements. Amounts outstanding to repurchase
securities under such agreements were $198.1 million and $39.4 at June
30, 1995 and December 31, 1994, respectively.
As part of a proposed rehabilitation plan for Fidelity Mutual Life
Insurance Company ("Fidelity"), on January 11, 1995 the Insurance
Company signed a definitive purchase agreement with the Pennsylvania
Insurance Commissioner and Fidelity to invest up to $45 million for a
minority (49.9%) interest in a Fidelity subsidiary insurance holding
company. In addition, the Company has agreed to purchase $25 million of
Senior Notes of such company. The Company may finance the purchase of
the Senior Notes.
All 50 states of the United States, the District of Columbia and
Puerto Rico have insurance guaranty fund laws requiring all life
insurance companies doing business within the jurisdictions to
participate in guaranty associations, which are organized to pay
contractual obligations under insurance policies (and certificates
issued under group insurance policies) issued by impaired or insolvent
life insurance companies. These associations levy assessments (up to
prescribed limits) on all member insurers in a particular state on the
basis of the proportionate share of the premiums written by member
insurers in the lines of business in which the impaired or insolvent
insurer is engaged. Some states permit member insurers to recover
assessments paid through full or partial premium tax offsets. These
assessments may be deferred or forgiven under most guaranty laws if they
would threaten an insurer's solvency. The amount of these assessments
in prior years has not been material, however, the amount and timing of
any future assessment on the Insurance Company under these laws cannot
be reasonably estimated and are beyond the control of the Company and
the Insurance Company. Recent failures of substantially larger
insurance companies could result in future assessments in material
amounts.
Effects of Inflation and Interest Rate Changes
Management does not believe that inflation has had a material
adverse effect on the Company's consolidated results of operations. The
Company manages its investment portfolio in part to reduce its exposure
to interest rate fluctuations. In general, the market value of the
Company's fixed maturity portfolio increases or decreases in an inverse
relationship with fluctuations in interest rates, and the Company's net
investment income increases or decreases in direct relationship with
interest rate changes. For example, if interest rates decline, the
Company's fixed maturity investments generally will increase in market
value, while net investment income will decrease as fixed income
investments mature or are sold and proceeds are reinvested at the
declining rates, and vice versa. Management is aware that prevailing
market interest rates frequently shift and, accordingly, the Company has
adopted strategies which are designed to address either an increase or
decrease in prevailing rates. In a rising interest rate environment,
the Company's average cost of funds would be expected to increase over
time as it prices its new and renewing annuities to maintain a generally
competitive market rate. Concurrently, the Company would attempt to
place new funds in investments which were matched in duration to, and
higher yielding than, the liabilities assumed. Management believes that
liquidity necessary to fund withdrawals would be available through
income, cash flow, the Company's cash reserves or from the sale of
short-term investments. In a declining interest rate environment, the
Company's cost of funds would be expected to decrease over time,
reflecting lower interest crediting rates on its fixed annuities.
Should increased liquidity be required for withdrawals, management
believes that the portion of the Company's investments which are
designated as available for sale in the Company's consolidated balance
sheet could be sold without materially adverse consequences in light of
the general strengthening which would be expected in the fixed maturity
security market.
Interest rate changes also may have temporary effects on the sale
and profitability of the universal life and annuity products offered by
the Company. For example, if interest rates rise, competing investments
(such as annuity or life insurance products offered by the Company's
competitors, certificates of deposit, mutual funds and similar
instruments) may become more attractive to potential purchasers of the
Company's products until the Company increases the rates credited to
holders of its universal life and annuity products. In contrast, as
interest rates fall, the Company attempts to lower its credited rates to
compensate for the corresponding decline in its net investment income.
As a result, changes in interest rates could materially adversely effect
the financial condition and results of operations of the Company
depending on the attractiveness of alternative investments available to
the Company's customers. In that regard, in the current interest rate
environment, the Company has attempted to maintain its credited rates at
competitive levels which are designed to discourage surrenders and which
may be considered attractive to purchasers of new annuity products. In
addition, because the level of prevailing interest rates impacts the
Company as well as its competition, management does not believe that the
current interest rate environment has materially affected the Company's
competitive position vis a vis other life insurance companies that
emphasize the sale of annuity products. Notwithstanding the foregoing,
if interest rates continue at current levels or decline further, there
can be no assurance that this segment of the life insurance industry,
including the Company, would not experience increased levels of
surrenders and reduced sales and thereby be materially adversely
affected.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company is involved in litigation relating
to claims arising out of its operations in the normal course of
business. As of August 10, 1995, the Company is not a party to any
legal proceedings, the adverse outcome of which, in management's
opinion, individually or in the aggregate, would have a material adverse
effect on the Company's financial condition or results of operations.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
None
b) Reports on Form 8-K
None
PRESIDENTIAL LIFE CORPORATION
JUNE 30, 1995
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.
Presidential Life Corporation
(Registrant)
Date: August 10, 1995 /s/ Herbert Kurz
Herbert Kurz, President and Duly
Authorized Officer of the Registrant
Date: August 10, 1995 /s/ Michael V. Oporto
Michael V. Oporto, Principal
Accounting Officer of the Registrant
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