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 March 31, 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 33,709,473 shares of common stock, par value $.01 per share of
the issuer's common stock outstanding as of the close of business on May 1,
1995.
INDEX
Part I - Financial Information Page No.
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets March 31, 1995
(Unaudited) and December 31, 1994............................. 3
Consolidated Statements of Income (Unaudited) - For
the Three Months Ended March 31, 1995 and 1994................ 4
Consolidated Statements of Shareholders'
Equity (Unaudited) - For the Three Months Ended
March 31, 1995 and 1994....................................... 5
Consolidated Statements of Cash Flows (Unaudited) - For
the Three Months Ended March 31, 1995 and 1994................ 6
Notes to (Unaudited) Consolidated Financial Statements........ 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 10-16
Part II - Other Information......................................... 17
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.......................................................... 18
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PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, December 31,
1995 1994
(UNAUDITED)
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ASSETS:
Investments:
Fixed maturities:
Held to maturity at amortized cost (Market value of
$261,684 and $210,858, respectively) $ 262,624 $ 221,362
Available for sale at market (Cost of
$1,340,983 and $1,362,366, respectively) 1,318,863 1,290,825
Common stocks (Cost of $39,121
and $36,507, respectively) 41,146 38,074
Mortgage Loans 19,404 17,623
Real Estate 431 432
Policy Loans 18,118 18,741
Short-term investments 211,457 130,124
Other invested assets 157,099 142,488
Total investments 2,029,142 1,859,669
Cash and cash equivalents 460 (772)
Accrued investment income 26,647 22,797
Deferred policy acquisition costs 51,127 58,319
Furniture and equipment, net 482 529
Amounts due from reinsurers 8,062 7,460
Amounts due from investment transactio ns 944 52,588
Deferred federal income taxes 0 7,566
Federal income tax recoverable 5,606 9,134
Other assets 2,083 2,135
Assets held in separate account 6,478 6,619
TOTAL ASSETS $2,131,031 $2,026,044
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy Liabilities:
Policyholders' account balances $1,251,870 $1,255,691
Future policy benefits:
Annuity 361,448 361,331
Life and accident and h ealth 46,429 46,572
Other policy liabilities 4,030 3,201
Total policy liabilities 1,663,777 1,666,795
Dollar Repurchase Agreements 103,097 39,363
Other notes payable 50,000 50,000
Deposits on policies to be issued 2,673 1,605
Deferred federal income taxes 7,109 0
General expenses and taxes accrued 5,224 3,751
Other liabilities 493 1,958
Liabilities related to separate account 6,478 6,619
Total liabilities 1,838,851 1,770,091
Shareholders' Equity:
Capital stock ($.01 par value, authorized
100,000,000 shares, issued and outstanding
33,709,473 shares in 1995 and 33,709,473
shares in 1994) 337 337
Additional paid-in-capital 31,751 31,751
Net unrealized investment loss es (11,398) (39,463)
Retained earnings 271,490 263,328
Total Shareholders' Equity 292,180 255,953
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,131,031 $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)
THREE MONTHS ENDED
MARCH 31
(UNAUDITED)
1995 1994
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REVENUES:
Insurance Revenues:
Premiums $ 597 $ 512
Annuity considerations 492 132
Universal life and investment
type policy fee income 470 504
Net investment income 37,035 39,249
Realized investment gains 6,875 6,442
Other income 637 300
TOTAL REVENUES 46,106 47,139
BENEFITS AND EXPENSES:
Death and other life insurance benefits 1,831 1,701
Annuity benefits 8,724 9,011
Interest credited to policyholders'
account balances 19,204 19,193
Interest expense on notes payable 1,171 1,367
Other interest and other charges 194 75
Decrease in liability for future
policy benefits (217) (798)
Commissions to agents, net 746 374
General expenses and taxes 2,644 2,923
Decrease in deferred policy
acquisition costs 509 924
TOTAL BENEFITS AND EXPENSES 34,806 34,770
Income before income taxes 11,300 12,369
Provision (benefit) for income taxes
Current 3,575 3,532
Deferred (437) (626)
3,138 2,906
NET INCOME $ 8,162 $ 9,463
Income per share $ .24 $ .28
Weighted average number of shares
outstanding during the period 33,709,473 33,865,181
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 THREE MONTHS ENDED MARCH 31, 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
Balance at
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12/31/93 $339 $32,517 $ 5,130 $226,461 $ 0 $264,447
Net Income 9,463 9,463
Stock issued
for options 5 5
Increase
in
Unrealized
Investment
Gains, Net 12,965 12,965
Balance at
3/31/94 $339 $32,522 $ 18,095 $235,924 $ 0 $286,880
Balance at
12/31/94 $337 $31,751 $(39,463) $263,328 $ 0 $255,953
Net Income 8,162 8,162
Increase
in
Unrealized
Investment
Gains, Net 28,065 28,065
Balance at
3/31/95 $337 $31,751 $(11,398) $271,490 $ 0 $292,180
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)
THREE MONTHS ENDED
MARCH 31
(UNAUDITED)
1995 1994
OPERATING ACTIVITIES:
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Net income $ 8,162 $ 9,463
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision (benefit) for deferred income
taxes (437) (626)
Depreciation and amortization 127 142
Net accrual of discount on fixed maturi ies (3) (796)
Realized investment losses (gains) (6,875) (6,442)
Changes in:
Accrued investment income (3,850) (1,303)
Deferred policy acquisition cost 509 928
Liability for future policy benefits 26 (1,094)
Other items 8,783 4,222
Net Cash Provided By Operating Activities 6,442 4,494
INVESTING ACTIVITIES:
Fixed Maturities:
Held for Investment:
Acquisitions (42,324) (34,191)
Sales 0 0
Maturities, calls and repayments 717 330
Available for Sale:
Acquisitions (2,450) (209,731)
Sales 506 25,012
Maturities, calls and repayments 8,997 96,973
Common Stocks:
Acquisitions (12,997) (24,130)
Sales 26,820 2,902
Decrease (Increase) in short term
investments and policy loans (80,710) 227,045
Other Invested Assets:
Additions to other invested assets (20,358) (52,337)
Distributions from other invested assets 5,747 3,376
Purchase of property and equipment (5) 0
Mortgage loan on real estate (1,781) 0
Amount due from security transactions 51,644 0
Other items 0 86
Net Cash Provided By (Used In)
Investing Activities (66,194) 35,335
FINANCING ACTIVITIES:
Proceeds from Dollar Repurchase Agreements 271,297 254,317
Repayment of Dollar Repurchase Agreements (207,563) (259,242)
Decrease in notes payable 0 (44,745)
Decrease in policyholders' account balances (3,821) (9,159)
Deposits on policies to be issued 1,068 (536)
Other items 3 5
Net Cash Provided By (Used In)
Financing Activities 60,984 (59,360)
Increase (decrease) in Cash and Cash
Equivalents 1,232 (19,531)
Cash and Cash Equivalents at Beginning of
Period (772) 20,200
Cash and Cash Equivalents at End of Period $ 460 $ 669
Supplemental Cash Flow Disclosure:
Income Taxes Paid $ 47 $ 3,063
Interest Paid $ 0 $ 813
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 ("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 three months ended March 31, 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 losses, net of the effects of amortization of deferred policy
acquisition costs of approximately ($3.1) million and deferred Federal
income taxes of approximately ($6.4) million, are charged directly to
shareholders' equity, unless a decline in market value is considered to
be other than temporary. 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.
"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
C. Investments - continued
aggregate, exceeds their related carrying value as of March 31, 1995 and
December 31, 1994. As of March 31, 1995, the Company was committed to
contribute, if called upon, an aggregate of approximately $41.6 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.
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%) stake 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
The following table lists the carrying values of securities owned of
any one issuer that aggregate 10% or more of Shareholders' Equity as of
March 31, 1995.
Amounts At Which Shown
In Consolidated Balance Sheet
(in thousands)
U.S. Government & Government Agencies $491,868
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 March 31, 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 March 31,
1995, such unamortized costs were $1.7 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 three months ended March 31, 1995 reflect
the reduction in the deferred tax asset as of March 31, 1995. The
Company's effective tax rate for the three months ended March 31, 1995
and 1994 was 27.8% and 23.5%, respectively.
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 life insurance and individual
annuities. 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.
On June 20, 1994 the Insurance Company was notified that its A.M.
Best rating was raised to "A- (Excellent)."
Results of Operations
Comparison of three months ended March 31, 1995 compared to three
months ended March 31, 1994.
Revenues
Annuity Considerations and Life Insurance Premiums
Total annuity considerations and life insurance premiums increased
to approximately $1,089 thousand for the three months ended March 31,
1995 from approximately $644 thousand for the three months ended March
31, 1994, an increase of approximately 69.1%. Of this amount, annuity
considerations increased to approximately $492 thousand for the three
months ended March 31, 1995 from approximately $132 thousand for the
three months ended March 31, 1994, an increase of approximately 272.7%.
Sales of single premium immediate annuity products increased during the
three months ended March 31, 1995 compared to the three months ended
March 31, 1994.
Policy Fee Income
Universal life and investment type policy fee income was
approximately $470 thousand for the three months ended March 31, 1995,
as compared to approximately $504 thousand for the three months ended
March 31, 1994. This represents approximately a
6.7% decrease. This decrease was primarily attributable to the lower
level of surrender charges incurred by annuitants in connection with
their annuity contracts during the three months ended March 31, 1995.
Net Investment Income
Net investment income totaled approximately $37.0 million during the
first three months of 1995, as compared to approximately $39.2 million
during the first three months of 1994. This represents a decrease of
approximately 5.6%. The Company has reduced its exposure to below
investment grade securities by replacing such securities with investment
grade securities at lower yields resulting in the Company's net
investment income having been reduced. The Company's ratio of net
investment income to average cash and invested assets less net
investment income for the periods ended March 31, 1995 and December 31,
1994 was approximately 7.9% and 7.8%, respectively.
Realized Investment Gains and Losses
Realized investment gains amounted to approximately $6.9 million
during the first three months of 1995, as compared to approximately $6.4
million during the first three months of 1994. More than half of the
realized capital gains for the three months ended March 31, 1995 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 $1.9 million attributable
to other than temporary impairments in the value of certain securities
contained in the Company's investment 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 three months ended March 31,
1995 aggregated approximately $34.8 million, as compared to
approximately $34.8 million for the three months ended March 31, 1994.
This represents no change from the first quarter of 1994.
Interest Credited and Benefits to Policyholders
Interest credited and other benefits to policyholders amounted to
approximately $29.7 million for the three months ended March 31, 1995,
as compared to approximately $29.2 million for the three months ended
March 31, 1994. This represents an increase of approximately 1.9%.
This increase principally is attributable to higher average credited
interest rates of 6.3% and 6.1% for the three months ended March 31,
1995 and 1994, partially offset by a lower level of policyholder account
balances. As a result of the increasing interest rate environment, the
Insurance Company has raised its credited rate of interest on its newly
issued single premium deferred annuity products and has increased rates
overall on all of 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 three months ended March 31, 1995 and 1994 were
approximately 5.9% and 6.0%, respectively. These rates were less than
the Company's ratio of net investment income to mean assets for the same
period 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 amounted to
approximately $1.2 million for the three months ended March 31, 1995,
and approximately $1.4 million for the three months ended March 31,
1994. The decrease is directly attributable to the Company repurchasing
its subordinated notes in January of 1994.
General Expenses, Taxes and Commissions
General expenses, taxes and commissions to agents totaled
approximately $3.4 million for the three months ended March 31, 1995, as
compared to approximately $3.3 million for the three months ended March
31, 1994. This represents approximately a 2.8% increase. The increase
principally is attributable to higher commissions paid as a result of an
increase in sales of single premium deferred annuities in 1995 partially
offset by lower general expenses.
Deferred Policy Acquisition Costs
A change in the net Deferred Policy Acquisition Costs for the three
months ended March 31, 1995 resulted in a charge of approximately $509
thousand, as compared to a charge of approximately $924 thousand for the
three months ended March 31, 1994, a decrease of approximately 45.0%.
Income Before Income Taxes
For the reasons discussed above, income before income taxes amounted
to approximately $11.3 million for the three months ended March 31,
1995, as compared to approximately $12.4 million for the three months
ended March 31, 1994.
Income Taxes
Income tax expense was $3.1 million for the first three months of
1995 as compared to approximately $2.9 million for the first three
months of 1994. This increase is primarily attributable to higher
realized capital gains for the three months ended March 31, 1995.
Net Income
For the reasons discussed above, the Company had net income of
approximately $8.2 million during the three months ended March 31, 1995
and net income of approximately $9.5 million during the three months
ended March 31, 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 source of cash is rent from its real
estate, interest on its investments and dividends from the Insurance
Company.
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 law. New York 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 quarter of 1995 and 1994, the Insurance
Company did not pay dividends to the Company. 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 life
insurance policies and annuity contracts, 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 $6.4 million and $4.5
million during the three months ended March 31, 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 ($66.2) million,
and $35.3 million during the three months ended March 31, 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 are also considered to be a financing activity.
In addition, as previously discussed, the Company participates in dollar
roll repurchase agreements which are considered to be
a financing activity. Net cash provided by (used in) the Company's
financing activities amounted to approximately $61.0 million, and
$(59.3) million during the three months ended March 31, 1995 and 1994,
respectively. This fluctuation primarily is attributable to the
increased activity in dollar roll repurchase agreements during the three
months ended March 31, 1995 and the repayment of its subordinated notes
in January of 1994.
In January 1994, the Company prepaid $44.7 million principal value
of its 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 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.
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 9.9% and 6.4% as of March 31, 1995, and
December 31, 1994, respectively). The weighted average duration of the
Company's investment portfolio was approximately seven years as of March
31, 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 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 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 include common stocks and
non-redeemable preferred stocks and 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 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 March 31, 1995, the carrying
value of these securities was approximately $164 million (representing
approximately 7.7% of the Company's total assets and 56.1% of
shareholders' equity) and the estimated market value of these securities
was approximately $159 million (representing approximately 7.4% of the
Company's total assets and 54.3% of shareholders' equity).
The Insurance Company is subject to Regulation 130 adopted and
promulgated by the New York State Insurance Department ("NYSDI"). 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 March 31, 1995, approximately 8.4% of the Insurance
Company's total admitted assets were invested in below investment grade
debt securities.
Management expects that (primarily as a result of calls, redemptions
and repayments) the percentage of the Company's portfolio invested in
below investment grade securities will decline over time. No new
investments in below investment grade bonds 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 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 securities than with
other corporate debt securities because below investment grade
securities generally are unsecured and often are subordinated to other
creditors of the
issuer. Also, issuers of below investment grade 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 March 31, 1995, approximately 7.7% 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 $41.6 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, the Company participates in "dollar roll"
repurchase agreements. Amounts outstanding to repurchase securities
under such agreements were $103.1 million and $39.4 million at March 31,
1995 and December 31, 1994, respectively. The Company may engage in
selected "dollar roll" transactions as market opportunities arise.
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%) stake in a Fidelity subsidiary insurance holding
company. In addition, the Company has agreed to purchase $25 million of
Senior Notes of such company.
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 jurisdiction 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 seeks to manage 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 (as was the case in fiscal 1993 and 1992), 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 low 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 low 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, 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 May 1, 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
MARCH 31, 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: May 1, 1995 /s/ Herbert Kurz
Herbert Kurz, President and Duly
Authorized Officer of the Registrant
Date: May 1, 1995 /s/ Michael V. Oporto
Michael V. Oporto, Principal
Accounting Officer of the Registrant
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