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 September 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 33,527,567 shares of common stock, par value $.01 per share of
the issuer's common stock outstanding as of the close of business on November
10, 1995.
INDEX
Part I - Financial Information Page No.
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets September 30, 1995
(Unaudited) and December 31, 1994............................. 3
Consolidated Statements of Income (Unaudited) - For
the Nine Months Ended September 30, 1995 and 1994............. 4
Consolidated Statements of Income (Unaudited) - For
the Three Months Ended September 30, 1995 and 1994............ 5
Consolidated Statements of Shareholders'
Equity (Unaudited) - For the Nine Months Ended
September 30, 1995 and 1994................................... 6
Consolidated Statements of Cash Flows (Unaudited) - For
the Nine Months Ended September 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)
September 30, December 31,
1995 1994
(UNAUDITED)
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ASSETS:
Investments:
Fixed maturities:
Held to maturity at amortized cost
(Market value of $465,205 and
$210,858, respectively) $ 448,072 $ 221,362
Available for sale at market (Cost of
$1,255,889 and $1,362,366,
respectively) 1,308,334 1,290,825
Common stocks (Cost of $45,754 and
$36,507, respectively) 54,997 38,074
Mortgage Loans 19,149 17,623
Real Estate 430 432
Policy Loans 18,768 18,741
Short-term investments 270,201 130,124
Other invested assets 150,252 142,488
Total investments 2,270,203 1,859,669
Cash and cash equivalents (860) (772)
Accrued investment income 32,865 22,797
Deferred policy acquisition costs 40,110 58,319
Furniture and equipment, net 412 529
Amounts due from reinsurers 8,422 7,460
Amounts due from investment transactions 1,426 52,588
Deferred federal income taxes 0 7,566
Federal income tax recoverable 0 9,134
Other assets 1,920 2,135
Assets held in separate account 6,666 6,619
TOTAL ASSETS $2,361,164 $2,026,044
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy Liabilities:
Policyholders' account balances $1,268,143 $1,255,691
Future policy benefits:
Annuity 361,694 361,331
Life and accident and health 46,526 46,572
Other policy liabilities 3,013 3,201
Total policy liabilities 1,679,376 1,666,795
Dollar Repurchase Agreements 222,522 39,363
Notes payable 50,000 50,000
Deposits on policies to be issued 1,528 1,605
Federal income taxes payable 2,424 0
Deferred federal income taxes 31,530 0
General expenses and taxes accrued 5,009 3,751
Other liabilities 509 1,958
Liabilities related to separate account 6,666 6,619
Total liabilities 1,999,564 1,770,091
Shareholders' Equity:
Capital stock ($.01 par value, authorized
100,000,000 shares, issued and outstanding
33,527,471 shares in 1995 and 33,709,473
shares in 1994) 335 337
Additional paid in capital 30,086 31,751
Net unrealized investment gains (losses) 34,769 (39,463)
Retained earnings 296,410 263,328
Total Shareholders' Equity 361,600 255,953
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $2,361,164 $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)
NINE MONTHS ENDED
SEPTEMBER 30
(UNAUDITED)
1995 1994
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REVENUES:
Insurance revenues:
Premiums $ 2,708 $ 2,386
Annuity considerations 3,063 632
Universal life and investment
type policy fee income 1,448 1,662
Net investment income 127,095 117,761
Realized investment gains 11,435 4,618
Other income 1,360 1,105
TOTAL REVENUES 147,109 128,164
BENEFITS AND EXPENSES:
Death and other life insurance benefits 5,159 4,966
Annuity benefits 27,042 26,962
Interest credited to policyholders'
account balances 58,786 57,600
Interest expense on notes payable 3,781 4,402
Other interest and other charges 366 315
Change in liability for future
policy benefits 7 (1,427)
Commissions to agents, net 2,436 1,089
General expenses and taxes 8,174 5,960
Decrease in deferred policy
acquisition costs 771 787
TOTAL BENEFITS AND EXPENSES 106,522 100,654
Income before income taxes 40,587 27,510
Provision (benefit) for income taxes
Current 6,866 8,311
Deferred (875) (1,882)
5,991 6,429
NET INCOME $ 34,596 $ 21,081
Income per share $ 1.03 $ .62
Weighted average number of shares
outstanding during the period 33,665,821 33,865,879
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
SEPTEMBER 30
(UNAUDITED)
1995 1994
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REVENUES:
Insurance revenues:
Premiums $ 1,062 $ 989
Annuity considerations 1,666 451
Universal life and investment
type policy fee income 494 729
Net investment income 40,749 35,011
Realized investment gains 8,139 (729)
Other income 272 484
TOTAL REVENUES 52,382 36,935
BENEFITS AND EXPENSES:
Death and other life insurance
benefits 1,844 1,728
Annuity benefits 9,227 9,161
Interest credited to policyholders'
account balances 20,014 19,137
Interest expense on notes payable 1,271 1,295
Other interest and other charges 106 167
Change in liability for future
policy benefits 385 299
Commissions to agents, net 832 354
General expenses and taxes 3,063 1,692
Decrease (increase) in deferred
policy acquisition costs 61 (596)
TOTAL BENEFITS AND EXPENSES 36,803 33,237
Income before income taxes 15,579 3,698
Provision (benefit) for income taxes
Current 6,071 598
Deferred (704) (229)
5,367 369
NET INCOME $ 10,212 $ 3,329
Income per share $ .30 $ .10
Weighted average number of shares
outstanding during the period 33,665,821 33,865,879
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 NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
Net
Additional Unrealized
Capital Paid-in- Investment Retained Treasury
Stock Capital Gains (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 21,081 21,081
Stock
Issued
from
Options 9 9
Change in
Unrealized
Investment
Gains, Net (21,954) (21,954)
Dividends
Paid to
Shareholders
(.045 per
share) (1,525) (1,525)
Balance at
9/30/94 $ 339 $ 32,526 $ (16,824) $246,017 $ 0 $262,058
Balance at
12/31/94 $ 337 $ 31,751 $ (39,463) $263,328 $ 0 $255,953
Net Income 34,596 34,596
Stock
Issued
from
Options 39 39
Change in
Unrealized
Investment
Gains, Net 74,232 74,232
Purchase and
Retirement
of Stock (2) (1,704) (1,706)
Dividends
paid to
Shareholders
(.045 per
share) (1,514) (1,514)
Balance at
9/30/95 $ 335 $ 30,086 $ 34,769 $296,410 $ 0 $361,600
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)
NINE MONTHS ENDED
SEPTEMBER 30
(UNAUDITED)
1995 1994
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OPERATING ACTIVITIES:
Net income $ 34,596 $ 21,081
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision (benefit) for deferred income
taxes (875) (1,882)
Depreciation and amortization 375 415
Net accrual of discount on fixed maturities (425) (85)
Realized investment losses (gains) (11,435) (4,618)
Changes in:
Accrued investment income (10,068) (2,408)
Deferred policy acquisition costs 771 787
Federal income tax recoverable 9,134 0
Liabilities for future policy benefits 317 (2,792)
Other items 545 (5,044)
Net Cash Provided by Operating
Activities 22,935 5,454
INVESTING ACTIVITIES:
Fixed Maturities:
Held To Maturity:
Acquisitions (238,062) (157,792)
Sales 0 0
Maturities, calls and repayments 11,967 6,500
Available For Sale:
Acquisitions (5,253) (232,649)
Sales 42,296 10,563
Maturities, calls and repayments 40,124 200,264
Common Stocks:
Acquisitions (21,323) (34,736)
Sales 53,142 11,766
Change in short term investments
and policy loans (140,104) 327,447
Other Invested Assets:
Additions to other invested assets (27,052) (81,140)
Distributions from other invested assets 19,288 8,284
Purchase of property and equipment (35) (25)
Mortgage loans on real estate (1,526) (7,746)
Amount due from security transactions 51,162 10,714
Other items 0 (126)
Net Cash Provided by (Used in) Investing
Activities (215,376) 61,324
FINANCING ACTIVITIES:
Proceeds from Dollar Repurchase Agreements 1,207,647 1,048,025
Repayment of Dollar Repurchase Agreements (1,024,488) (1,053,642)
Decrease in notes payable 0 (44,745)
Increase (decrease) in policyholders'
account balances 12,452 (29,911)
Repurchase of common stock (1,667) 0
Deposits on policies to be issued (77) 492
Dividends paid to shareholders (1,514) (1,525)
Other items 0 10
Net Cash Provided by (Used in)
Financing Activities 192,353 (81,296)
Increase (decrease) in Cash and Cash Equivalents (88) (14,518)
Cash and Cash Equivalents at Beginning of Year (772) 20,200
Cash and Cash Equivalents at End of Period $ (860) $ 5,682
Supplemental Cash Flow Disclosure:
Income Taxes Paid $ 1,357 $ 9,718
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 nine months ended September 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.
Certain amounts have been reclassified to conform to the current year's
presentation.
C. Investments
Fixed maturity investments 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 $7.6 million and deferred Federal
income taxes of approximately $15.6 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, or equity as appropriate, 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 partnership 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 September 30, 1995
and December 31, 1994. Certain amounts relating to distributions from
"other invested assets" have been reclassified to conform to the current
year's presentation. As of September 30, 1995, the Company was committed
to contribute, if called upon, an aggregate of approximately $36.3
million of additional capital to certain of these limited partnerships.
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.
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 $525,122,000 represent investments owned in
any one issuer that aggregate 10% or more of Shareholders' Equity as of
September 30, 1995.
Securities with a carrying value of approximately $5.4 million were
on deposit with various state insurance departments to comply with
applicable insurance laws.
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 expects to close on the
transaction during the middle of 1996.
3. NOTES PAYABLE
Notes payable at September 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 September 30, 1995, such unamortized costs were $1.5 million.
There are no principal payments required for the senior notes over the
next five years.
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 nine months ended September 30, 1995
reflect the reduction in the deferred tax asset as of September 30,
1995. The Company's effective tax rates for the nine months ended
September 30, 1995 and 1994 were 14.8% and 23.4%, respectively. As a
result of the finalization of the Company's federal income tax return,
the federal income tax recoverable recorded at December 31, 1994 was
increased by $3.1 million which reduced income tax expense by a similar
amount. Such amount was received in the third quarter of 1995.
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 Nine Months Ended September 30, 1995 to Nine Months
Ended
September 30, 1994.
Revenues
Annuity Considerations and Life Insurance Premiums
Total annuity considerations and life insurance premiums increased
to approximately $5.8 million for the nine months ended September 30,
1995 from approximately $3.0 million for the nine months ended September
30, 1994, an increase of approximately 91.2%. Of this amount, annuity
considerations increased to approximately $3.1 million for the nine
months ended September 30, 1995 from approximately $0.6 million for the
nine months ended September 30, 1994, an increase of approximately
385.0%. In accordance with generally accepted accounting principles,
sales of single premium deferred annuities and universal life products
are not reported as insurance revenues, but rather as additions to
policyholder account balances. Sales of single premium deferred
annuities were approximately $65.5 million for the nine months ended
September 30, 1995 compared to $25.6 million for the nine months ended
September 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 $1.4 million for the nine months ended September 30, 1995,
as compared to approximately $1.7 million for the nine months ended
September 30, 1994, a decrease of approximately 12.9%. 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 $127.1 million for the
nine months ended September 30, 1995, as compared to approximately
$117.8 million for the nine months ended September 30, 1994. This
represents an increase of approximately 14.2%. Investment income from
"other invested assets" totaled approximately $19.2 million during the
nine months ended September 30, 1995, as compared to approximately $12.4
million during the nine months ended September 30, 1994. The Company's
ratio of net investment income to average cash and invested assets less
net investment income for the nine months ended September 30, 1995 was
8.9% and for the nine months ended September 30, 1994 was 8.2%,
respectively.
Realized Investment Gains and Losses
Realized investment gains amounted to approximately $11.4 million
during the nine months ended September 30, 1995, as compared to
approximately $4.6 million of gains during the nine months ended
September 30, 1994. Realized investment gains for the nine months ended
September 30, 1995 were partially offset by realized investment losses
of approximately $5.0 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 nine months ended September 30,
1995 aggregated approximately $106.5 million, as compared to
approximately $100.7 million for the nine months ended September 30,
1994, an increase of approximately 5.8%. The reasons for this decrease
are discussed under the respective components below.
Interest Credited and Benefits to Policyholders
Interest credited and other benefits to policyholders aggregated
approximately $91.0 million for the nine months ended September 30,
1995, as compared to approximately $88.1 million for the nine months
ended September 30, 1994. This represents an increase of approximately
3.3%. This increase principally is attributable to a higher average
credited interest rate of 6.41% for the nine months ended September 30,
1995 compared with an average rate of 6.17% for the nine months ended
September 30, 1994 and a higher level of policyholder account balances.
During the third quarter of 1995, the Insurance Company increased its
credited rate of interest on its newly issued deferred annuity products
and increased rates overall on its other interest-sensitive products. In
addition, the renewal rates on existing policies were increased on their
respective renewal dates.
The Insurance Company's average credited rate for reserves and
account balances for the nine months ended September 30, 1995 and 1994
was approximately 5.9% and 5.8%, 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 $3.8 million for the nine months ended September 30, 1995,
as compared to approximately $4.0 million for the nine months ended
September 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 $10.6 million for the nine months ended September 30,
1995, as compared to approximately $7.0 million for the nine months
ended September 30, 1994, an increase of approximately 50.5%. This
increase is primarily attributable to an increase in (i) commissions and
related expenses as a result of an increase in sales of single premium
deferred annuities and (ii) data processing related expenses as a result
of upgrading certain computer systems.
Deferred Policy Acquisition Costs
The change in the net Deferred Policy Acquisition Costs for the
nine months ended September 30, 1995 resulted in a charge of
approximately $0.8 million, as compared to
a charge of approximately $0.8 million for the nine months ended
September 30, 1994.
Income Before Income Taxes
For the reasons discussed above, income before income taxes
amounted to approximately $40.6 million for the nine months ended
September 30, 1995, as compared to approximately $27.5 million for the
nine months ended September 30, 1994.
Income Taxes
Income tax expense was $6.0 million for the nine months ended
September 30, 1995 as compared to approximately $6.4 million for the
nine months ended September 30, 1994. As a result of the finalization
of the Company's federal income tax return, the federal income tax
recoverable from operations and capital loss carryback recorded at
December 31, 1994 was increased by $3.1 million which reduced income tax
expense by a similar amount. Such amount was received in the third
quarter of 1995.
Net Income
For the reasons discussed above, the Company had net income of
approximately $34.6 million during the nine months ended September 30,
1995, as compared to net income of approximately $21.1 million during
the nine months ended September 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 nine 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 $22.9 million and $5.5 million during
the nine months ended September 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 $(215.4) million and $61.3 million
during the nine months ended September 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 $192.4 million and
$(81.3) million during the nine months ended September 30, 1995 and
1994, respectively. This fluctuation primarily is attributable to the
increased activity in dollar roll repurchase agreements during the nine
months ended September 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 11.4% and 6.4% as of September 30, 1995
and December 31, 1994, respectively). The weighted average duration of
the Company's investment portfolio was approximately seven years as of
September 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 September 30, 1995, the
carrying value of these securities was approximately $157.9 million
(representing approximately 6.7% of the Company's total assets and 43.7%
of shareholder's equity) and the estimated market value of these
securities was approximately $164.0 million (representing approximately
6.9% of the Company's total assets and 45.3% 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 September 30,
1995, approximately 8.0% 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 only is 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 September 30, 1995, approximately 6.6% 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 $36.3 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 three 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 $222.5 million and $39.4 at September 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. The Company expects to close on the transaction
during the middle of 1996.
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 November 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
SEPTEMBER 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: November 10, 1995 /s/ Herbert Kurz
Herbert Kurz, President and
Duly Authorized Officer of the
Registrant
Date: November 10, 1995 /s/ Michael V. Oporto
Michael V. Oporto, Principal
Accounting Officer of the
Registrant
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