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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ................ to ................
Commission File Number 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 33,211,069 shares of common stock, par value $.01 per share of
the issuer's common stock outstanding as of the close of business on May 8,
1996.
INDEX
Part I - Financial Information Page No.
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets March 31, 1996
(Unaudited) and December 31, 1995............................. 3
Consolidated Statements of Income (Unaudited) - For
the Three Months Ended March 31, 1996 and 1995................ 4
Consolidated Statements of Shareholders'
Equity (Unaudited) - For the Three Months Ended
March 31, 1996 and 1995....................................... 5
Consolidated Statements of Cash Flows (Unaudited) - For
the Three Months Ended March 31, 1996 and 1995................ 6
Notes to (Unaudited) Consolidated Financial Statements........ 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 10-17
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)
March 31, December 31,
1996 1995
(UNAUDITED)
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ASSETS:
Investments:
Fixed maturities:
Available for sale at market (Cost of
$1,735,673 and $1,748,142, respectively) $1,789,934 $1,855,663
Common stocks (Cost of $38,082
and $34,080, respectively) 46,220 37,748
Mortgage Loans 19,042 19,015
Real Estate 428 429
Policy Loans 18,605 18,601
Short-term investments 215,319 192,621
Other invested assets 167,562 150,331
Total investments 2,257,110 2,274,408
Cash and cash equivalents 3,181 (1,874)
Accrued investment income 31,283 34,328
Deferred policy acquisition costs 40,152 33,330
Furniture and equipment, net 371 369
Amounts due from reinsurers 7,702 7,664
Federal income tax recoverable 0 477
Other assets 1,733 1,818
Assets held in separate account 6,230 6,240
TOTAL ASSETS $2,347,762 $2,356,760
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy Liabilities:
Policyholders' account balances $1,263,419 $1,269,898
Future policy benefits:
Annuity 361,513 362,027
Life and accident and health 47,315 47,464
Other policy liabilities 3,289 4,161
Total policy liabilities 1,675,536 1,683,550
Dollar Repurchase Agreements 188,284 160,416
Other notes payable 50,000 50,000
Deposits on policies to be issued 850 2,947
Federal income taxes payable 5,927 0
Deferred federal income taxes 29,693 44,760
General expenses and taxes accrued 7,027 4,770
Other liabilities 1,024 3,017
Liabilities related to separate account 6,230 6,240
Total liabilities 1,964,571 1,955,700
Shareholders' Equity:
Capital stock ($.01 par value, authorized
100,000,000 shares, issued and outstanding
33,315,843 shares in 1996 and 33,536,601
shares in 1995) 333 335
Additional paid-in-capital 28,084 30,130
Net unrealized investment gains 35,553 61,732
Retained earnings 319,221 308,863
Total Shareholders' Equity 383,191 401,060
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,347,762 $2,356,760
The accompanying notes are an integral part of these Unaudited
Consolidated Financial Statements.
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<TABLE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
THREE MONTHS ENDED
MARCH 31
(UNAUDITED)
1996 1995
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REVENUES:
Insurance Revenues:
Premiums $ 342 $ 597
Annuity considerations 864 492
Universal life and investment
type policy fee income 479 470
Net investment income 49,753 42,830
Realized investment gains 1,479 1,154
Other income 1,006 637
TOTAL REVENUES 53,923 46,180
BENEFITS AND EXPENSES:
Death and other life insurance benefits 1,636 1,831
Annuity benefits 9,017 8,724
Interest credited to policyholders'
account balances 18,913 19,204
Interest expense on notes payable 1,258 1,245
Other interest and other charges 73 194
Decrease in liability for future
policy benefits (534) (217)
Commissions to agents, net 584 746
General expenses and taxes 4,809 2,644
Decrease in deferred policy
acquisition costs 1,109 509
TOTAL BENEFITS AND EXPENSES 36,865 34,880
Income before income taxes 17,058 11,300
Provision (benefit) for income taxes
Current 7,466 3,575
Deferred (766) (437)
6,700 3,138
NET INCOME $ 10,358 $ 8,162
Income per share $ .31 $ .24
Weighted average number of shares
outstanding during the period 33,476,119 33,709,473
The accompanying notes are an integral part of these Unaudited
Consolidated Financial Statements.
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<TABLE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(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
December 31,
1994 $337 $31,751 $(39,463) $263,328 $0 $255,953
Net Income 8,162 8,162
Change
in
Unrealized
Investment
Gains, Net 28,065 28,065
Balance at
March 31,
1995 $337 $31,751 $(11,398) $271,490 $0 $292,180
Balance at
December 31,
1995 $335 $30,130 $ 61,732 $308,863 $0 $401,060
Net Income 10,358 10,358
Purchase and
Retirement of
Stock (2) (2,059) (2,061)
Issuance of
Shares Under
Stock Option
Plan 13 13
Change in
Unrealized
Investment
Gains, Net (26,179) (26,179)
Balance at
March 31,
1996 $333 $28,084 $ 35,553 $319,221 $0 $383,191
The accompanying notes are an integral part of the Unaudited Consolidated
Financial Statements.
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<TABLE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
THREE MONTHS ENDED
MARCH 31
(UNAUDITED)
1996 1995
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OPERATING ACTIVITIES:
Net income $ 10,358 $ 8,162
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision (benefit) for deferred income taxes (766) (437)
Depreciation and amortization 124 127
Net accrual of discount on fixed maturities (220) (3)
Realized investment gains (1,479) (6,875)
Changes in:
Accrued investment income 3,045 (3,850)
Deferred policy acquisition cost 1,109 509
Federal income tax recoverable 477 687
Liability for future policy benefits 663 26
Other items 2,719 8,096
Net Cash Provided By Operating Activities 16,030 6,442
INVESTING ACTIVITIES:
Fixed Maturities:
Held for Investment:
Acquisitions 0 (42,324)
Sales 0 0
Maturities, calls and repayments 0 717
Available for Sale:
Acquisitions (76,313) (2,450)
Sales 0 506
Maturities, calls and repayments 88,530 8,997
Common Stocks:
Acquisitions (2,946) (12,997)
Sales 2,543 26,820
Decrease (Increase) in short term
investments and policy loans (22,702) (80,710)
Other Invested Assets:
Additions to other invested assets (23,151) (20,358)
Distributions from other invested assets 5,920 5,747
Purchase of property and equipment (51) (5)
Mortgage loan on real estate (27) (1,781)
Amount due from security transactions (22) 51,644
Net Cash Provided By (Used In)
Investing Activities (28,219) (66,194)
FINANCING ACTIVITIES:
Proceeds from Dollar Repurchase Agreements 416,433 271,297
Repayment of Dollar Repurchase Agreements (388,565) (207,563)
Repurchase of Common Stock (2,048) 0
Decrease in policyholders' account balances (6,479) (3,821)
Deposits on policies to be issued (2,097) 1,068
Other items 0 3
Net Cash Provided By (Used In)
Financing Activities 17,244 60,984
Increase (decrease) in Cash and Cash
Equivalents 5,055 1,232
Cash and Cash Equivalents at Beginning of Period (1,874) (772)
Cash and Cash Equivalents at End of Period $ 3,181 $ 460
Supplemental Cash Flow Disclosure:
Income Taxes Paid $ 1,063 $ 47
Interest Paid $ 0 $ 0
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, 1996 are
not necessarily indicative of the results that may be expected for the
year ending December 31, 1996. 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, 1995.
C. Investments
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 market value and
unrealized gains (losses), net of the effects of amortization of
deferred policy acquisition costs of approximately $7.7 million and
$15.6 million, and deferred Federal income taxes of approximately $18.4
million and $32.2 million, at March 31, 1996 and December 31, 1995,
respectively, 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, 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 March 31, 1996 and
December 31, 1995. As of March 31, 1996, the Company was committed to
contribute, if called upon, an aggregate of approximately $43.5 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 had agreed to purchase $25 million of
Senior Notes of such company. The Company was informed by Pennsylvania
Insurance Commissioner Linda S. Kaiser, that in response to the
significant improvement in the invested assets of Fidelity, she has
reopened the process to select an equity investor for the
recapitalization and rehabilitation of Fidelity. The Company disagrees
with the Commissioner's decision to reopen the process and has reserved
all of its rights, including those under the Stock Purchase Agreement
signed in January 1995 with the Pennsylvania Insurance Department.
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.
E. New Accounting Pronouncements
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"), was issued in October of
1995 and requires adoption not later than fiscal years that begin after
December 15, 1995. SFAS 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans. It
requires expanded disclosures of stock-based compensation arrangements
with employees and encourages (but does not require) application of the
"fair value" method of accounting for an employee stock option. If an
entity retains the accounting defined under APB Opinion No. 25,
"Accounting for Stock Issued to Employees", certain pro forma
disclosures of net income and earnings per share must be made as if the
fair value based method defined in SFAS 123 had been applied. The
Company has determined that it will retain the accounting methodology
prescribed by APB No. 25 and will disclose the pro forma effects of such
stock-based compensation as required in 1996.
2. INVESTMENTS
Investments in U.S. Government & Government Agencies with an
aggregate carrying value of $549,751,000 represent investments owned in
any one issuer that aggregate 10% or more of Shareholders' Equity as of
March 31, 1996.
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, 1996 and December 31, 1995 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, 1996, such unamortized costs were $1.7 million. There are no
principal payments required for the senior notes over the next four
years and the total principal is due on December 15, 2000. The senior
notes are callable after December 14, 1998.
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, 1996 reflect
the reduction in the deferred tax asset as of March 31, 1996. The
Company's effective tax rate for the three months ended March 31, 1996
and 1995 was 39.3% and 27.8%, 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.
In June, 1995 the Insurance Company was notified that its A.M. Best
rating was reaffirmed at "A- (Excellent)."
Results of Operations
Comparison of three months ended March 31, 1996 compared to three
months ended March 31, 1995.
Revenues
Annuity Considerations and Life Insurance Premiums
Total annuity considerations and life insurance premiums increased
to approximately $1,206 thousand for the three months ended March 31,
1996 from approximately $1,089 thousand for the three months ended March
31, 1995, an increase of approximately 10.7%. Of this amount, annuity
considerations increased to approximately $864 thousand for the three
months ended March 31, 1996 from approximately $492 thousand for the
three months ended March 31, 1995, an increase of approximately 75.6%.
In accordance with generally accepted accounting principles, sales of
single premium deferred annuities are not reported as insurance
revenues, but rather as additions to policyholder account balances.
Sales of single premium deferred annuities were approximately $14.5
million and approximately $19.6 million during the three months ended
March 31, 1996 and March 31, 1995, respectively.
Policy Fee Income
Universal life and investment type policy fee income was
approximately $479 thousand for the three months ended March 31, 1996,
as compared to approximately $470 thousand for the three months ended
March 31, 1995. This represents approximately a 1.9% increase.
Net Investment Income
Net investment income totaled approximately $49.8 million during the
first three months of 1996, as compared to approximately $42.8 million
during the first three months of 1995. This represents an increase of
approximately 16.2%. Investment income from "other invested assets"
totaled approximately $11.3 million during the first three months of
1996, as compared to approximately $8.0 million during the first three
months of 1995. The Company's ratio of net investment income to average
cash and invested assets less net investment income for the periods
ended March 31, 1996 and March 31, 1995 was approximately 9.5% and 9.1%,
respectively.
Realized Investment Gains and Losses
Realized investment gains amounted to approximately $1.5 million
during the first three months of 1996, as compared to approximately $1.2
million during the first three months of 1995. Realized investment
gains were partially offset by realized investment losses of
approximately $300 thousand and $1.9 million for the three months ended
March 31, 1996 and March 31, 1995, respectively 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,
1996 aggregated approximately $36.9 million, as compared to
approximately $34.9 million for the three months ended March 31, 1995.
This represents an increase of $2.0 million from the first quarter of
1995.
Interest Credited and Benefits to Policyholders
Interest credited and other benefits to policyholders amounted to
approximately $29.6 million for the three months ended March 31, 1996,
as compared to approximately $29.7 million for the three months ended
March 31, 1995. 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, 1996 and 1995 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 $1.3 million for the three months ended March 31, 1996,
and approximately $1.2 million for the three months ended March 31, 1995.
General Expenses, Taxes and Commissions
General expenses, taxes and commissions to agents totaled
approximately $5.4 million for the three months ended March 31, 1996, as
compared to approximately $3.4 million for the three months ended March
31, 1995. This represents approximately an increase of $2 million. The
increase principally is attributable to higher professional fees
associated with the potential acquisition of Fidelity and higher
investment management fees.
Deferred Policy Acquisition Costs
Deferred Policy Acquisition Costs for the three months ended March
31, 1996 increased approximately $600 thousand resulting in a charge of
approximately $1,109 thousand, as compared to a charge of approximately
$509 thousand for the three months ended March 31, 1995.
Income Before Income Taxes
For the reasons discussed above, income before income taxes amounted
to approximately $17.1 million for the three months ended March 31,
1996, as compared to approximately $11.3 million for the three months
ended March 31, 1995.
Income Taxes
Income tax expense was $6.7 million for the first three months of
1996 as compared to approximately $3.1 million for the first three
months of 1995. This increase is primarily attributable to higher
income before income taxes and realized capital gains for the three
months ended March 31, 1996.
Net Income
For the reasons discussed above, the Company had net income of
approximately $10.4 million during the three months ended March 31, 1996
and net income of approximately $8.2 million during the three months
ended March 31, 1995.
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 1996 and
1995, the Insurance Company did not pay dividends to the Company.
During the fiscal year 1995, the Insurance Company paid dividends of $5
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 $16.0 million and $6.4
million during the three months ended March 31, 1996 and 1995,
respectively. Net cash provided by (used in) the Company's investing
activities (principally reflecting investments purchased less
investments called, redeemed or sold) was approximately ($28.2) million,
and $(66.2) million during the three months ended March 31, 1996 and
1995, 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 the Company's financing
activities amounted to approximately $17.2 million, and $61.0 million
during the three months ended March 31, 1996 and 1995, respectively.
This fluctuation primarily is attributable to the increase in dollar
roll repurchase agreements outstanding at March 31, 1996.
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 9.2% and 8.2% as of March 31, 1996, and
December 31, 1995, respectively). The weighted average duration of the
Company's investment portfolio was approximately seven years as of March
31, 1996. The Company's fixed maturity investments are all classified
as available for sale and 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, all of which are classified as available for sale and
reported at fair value. As of March 31, 1996, the carrying value of
these securities was approximately $166 million (representing
approximately 7.1% of the Company's total assets and 43.3% 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, 1996, approximately 8.1% 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, 1996, approximately 7.2% of the Company's total
invested assets were invested in limited partnerships. Such investments
are included in the Company's consolidated balance sheet under the
heading "Other invested assets." See "Note 2 to the Notes to
Consolidated Financial Statements." The Company is committed, if called
upon during a specified period, to contribute an aggregate of
approximately $43.5 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 $188.3 million and $160.4 million at March
31, 1996 and December 31, 1995, 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 had agreed to purchase $25 million of
Senior Notes of such company. The Company was informed by Pennsylvania
Insurance Commissioner Linda S. Kaiser, that in response to the
significant improvement in the invested assets of Fidelity, she has
reopened the process to select an equity investor for the
recapitalization and rehabilitation of Fidelity. The Company disagrees
with the Commissioner's decision to reopen the process and has reserved
all of its rights, including those under the Stock Purchase Agreement
signed in January 1995 with the Pennsylvania Insurance Department.
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, 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.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation", was issued in October of 1995
and requires adoption not later than fiscal years that begin after
December 15, 1995. SFAS 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans. It
requires expanded disclosures of stock-based compensation arrangements
with employees and encourages (but does not require) application of the
"fair value" method of accounting for an employee stock option. If an
entity retains the accounting defined under APB Opinion No. 25,
"Accounting for Stock Issued to Employees", certain pro forma
disclosures of net income and earnings per share must be made as if the
fair value based method defined in SFAS 123 had been applied. The
Company has determined that it will retain the accounting methodology
prescribed by APB No. 25 and will disclose the pro forma effects of such
stock-based compensation as required in 1996.
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 8, 1996, 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
During the quarter ended March 31, 1996, the Company filed one
Current Report of Form 8-K dated January 16, 1996.
PRESIDENTIAL LIFE CORPORATION
MARCH 31, 1996
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 8, 1996 /s/ Herbert Kurz
Herbert Kurz, President and Duly
Authorized Officer of the Registrant
Date: May 8, 1996 /s/ Michael V. Oporto
Michael V. Oporto, Principal
Accounting Officer of the Registrant
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