FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 33,075,847 shares of common stock, par value $.01 per share
of the issuer's common stock outstanding as of the close of business on
August 12, 1996.
INDEX
Part I - Financial Information Page No.
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets June 30, 1996
(Unaudited) and December 31, 1995. . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income (Unaudited) - For
the Six Months Ended June 30, 1996 and 1995 . . . . . . . . . . . .4
Consolidated Statements of Income (Unaudited) - For
the Three Months Ended June 30, 1996 and 1995 . . . . . . . . . . .5
Consolidated Statements of Shareholders'
Equity (Unaudited) - For the Six Months Ended
June 30, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . .6
Consolidated Statements of Cash Flows (Unaudited) - For
the Six Months Ended June 30, 1996 and 1995 . . . . . . . . . . . .7
Notes to (Unaudited) Consolidated Financial
Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . 8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . .11-17
Part II - Other Information. . . . . . . . . . . . . . . . . . . . . 18
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
<TABLE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, December 31,
1996 1995
(UNAUDITED)
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ASSETS:
Investments:
Fixed maturities:
Available for sale at market (Cost of
$1,746,428 and $1,748,142, respectively) $1,774,982 $1,855,663
Common stocks (Cost of $43,083 and
$34,080, respectively) 53,601 37,748
Mortgage Loans 18,973 19,015
Real Estate 427 429
Policy Loans 18,161 18,601
Short-term investments 199,504 192,621
Other invested assets 167,216 150,331
Total investments 2,232,864 2,274,408
Cash and cash equivalents (4,366) (1,874)
Accrued investment income 30,469 34,328
Deferred policy acquisition costs 43,309 33,330
Furniture and equipment, net 376 369
Amounts due from reinsurers 7,062 7,664
Federal income tax recoverable 0 477
Other assets 1,654 1,818
Assets held in separate account 5,994 6,240
TOTAL ASSETS $2,317,362 $2,356,760
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy Liabilities:
Policyholders' account balances $1,250,553 $1,269,898
Future policy benefits:
Annuity 362,252 362,027
Life and accident and health 48,251 47,464
Other policy liabilities 3,803 4,161
Total policy liabilities 1,664,859 1,683,550
Dollar Repurchase Agreements 182,590 160,416
Other notes payable 50,000 50,000
Deposits on policies to be issued 792 2,947
Federal income taxes payable 73 0
Deferred federal income taxes 22,493 44,760
General expenses and taxes accrued 5,602 4,770
Other liabilities 3,417 3,017
Liabilities related to separate account 5,994 6,240
Total liabilities 1,935,820 1,955,700
Shareholders' Equity:
Capital stock ($.01 par value, authorized
100,000,000 shares, issued and outstanding
33,214,464 shares in 1996 and 33,536,601
shares in 1995) 332 335
Additional paid in capital 27,053 30,130
Net unrealized investment gains 22,945 61,732
Retained earnings 331,212 308,863
Total Shareholders' Equity 381,542 401,060
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,317,362 $2,356,760
The accompanying notes are an integral part of these Unaudited Consolidated
Financial Statements.
</TABLE>
<TABLE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
SIX MONTHS ENDED
JUNE 30
(UNAUDITED)
1996 1995
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REVENUES:
Insurance Revenues:
Premiums $ 1,277 $ 1,646
Annuity considerations 2,319 1,397
Universal life and investment
type policy fee income 991 954
Net investment income 93,941 86,346
Realized investment gains 9,728 3,296
Other income 1,551 1,088
TOTAL REVENUES 109,807 94,727
BENEFITS AND EXPENSES:
Death and other life insurance benefits 3,108 3,315
Annuity benefits 17,993 17,815
Interest credited to policyholders'
account balances 37,381 38,772
Interest expense on notes payable 2,512 2,510
Other interest and other charges 245 260
Increase (decrease) in liability for
future policy benefits 1,000 (378)
Commissions to agents, net 1,209 1,604
General expenses and taxes 6,958 5,111
Decrease in deferred policy
acquisition costs 1,877 710
TOTAL BENEFITS AND EXPENSES 72,283 69,719
Income before income taxes 37,524 25,008
Provision (benefit) for income taxes
Current 14,028 795
Deferred (1,178) (171)
12,850 624
NET INCOME $ 24,674 $ 24,384
Income per share $ .74 $ .72
Weighted average number of shares
outstanding during the period 33,349,913 33,709,854
The accompanying notes are an integral part of these Unaudited Consolidated
Financial Statements.
</TABLE>
<TABLE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
THREE MONTHS ENDED
JUNE 30
(UNAUDITED)
1996 1995
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REVENUES:
Insurance Revenues:
Premiums $ 935 $ 1,049
Annuity considerations 1,455 905
Universal life and investment
type policy fee income 512 484
Net investment income 44,188 43,517
Realized investment gains 8,249 2,141
Other income 545 451
TOTAL REVENUES 55,884 48,547
BENEFITS AND EXPENSES:
Death and other life insurance benefits 1,472 1,484
Annuity benefits 8,976 9,091
Interest credited to policyholders'
account balances 18,468 19,568
Interest expense on notes payable 1,254 1,265
Other interest and other charges 172 66
Increase (decrease) in liability for
future policy benefits 1,534 (161)
Commissions to agents, net 625 858
General expenses and taxes 2,149 2,467
Decrease in deferred policy
acquisition costs 768 201
TOTAL BENEFITS AND EXPENSES 35,418 34,839
Income before income taxes 20,466 13,708
Provision (benefit) for income taxes
Current 6,562 (2,780)
Deferred (412) 266
6,150 (2,514)
NET INCOME $ 14,316 $ 16,222
Income per share $ .43 $ .48
Weighted average number of shares
outstanding during the period 33,223,706 33,709,854
The accompanying notes are an integral part of these Unaudited Consolidated
Financial Statements.
</TABLE>
<TABLE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 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 24,384 24,384
Issuance of
Shares Under
Stock Option
Plan 20 20
Change in
Unrealized
Investment
Gains, Net 64,580 64,580
Dividends
paid to
Shareholders
(.045 per
share) (1,514) (1,514)
Balance at
June 30,
1995 $337 $31,771 $ 25,117 $286,198 $0 $343,423
Balance at
December 31,
1995 $335 $30,130 $ 61,732 $308,863 $0 $401,060
Net Income 24,674 24,674
Issuance of
Shares Under
Stock Option
Plan 44 44
Purchase and
Retirement
of Stock (3) (3,121) (3,124)
Change in
Unrealized
Investment
Gains, Net (38,787) (38,787)
Dividends
paid to
Shareholders
(.07 per
share) (2,325) (2,325)
Balance at
June 30,
1996 $332 $27,053 $ 22,945 $331,212 $0 $381,542
The accompanying notes are an integral part of the Unaudited Consolidated
Financial Statements.
</TABLE>
<TABLE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
SIX MONTHS ENDED
JUNE 30
(UNAUDITED)
1996 1995
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OPERATING ACTIVITIES:
Net income $ 24,674 $ 24,384
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision (benefit) for deferred income taxes (1,178) (171)
Depreciation and amortization 247 252
Net accrual of discount on fixed maturities (750) (2)
Realized investment losses (gains) (9,728) (3,296)
Changes in:
Accrued investment income 3,859 (1,958)
Deferred policy acquisition cost 768 710
Federal income tax recoverable 477 0
Liability for future policy benefits (1,012) 199
Other items 9,191 (1,450)
Net Cash Provided by
Operating Activities 26,548 18,668
INVESTING ACTIVITIES:
Fixed Maturities:
Held for Investment:
Acquisitions 0 (185,589)
Sales 0 0
Maturities, calls and repayments 0 1,491
Available for Sale:
Acquisitions (200,435) (4,152)
Sales 9,147 40,046
Maturities, calls and repayments 186,969 18,223
Common Stocks:
Acquisitions (6,519) (18,222)
Sales 14,393 42,923
Decrease (increase) in short term
investments and policy loans (6,443) (100,573)
Other Invested Assets:
Additions to other invested assets (38,245) (26,953)
Distributions from other invested assets 16,884 11,753
Purchase of property and equipment (104) (26)
Mortgage loans on real estate 42 (1,655)
Amount due from security transactions 0 52,588
Net Cash Provided by (Used in)
Investing Activities (24,311) (170,146)
FINANCING ACTIVITIES:
Proceeds from Dollar Repurchase Agreements 1,000,082 752,683
Repayment of Dollar Repurchase Agreements (977,908) (593,992)
Increase (decrease) in policyholders'
account balances (19,345) 2,194
Repurchase of common stock (3,077) 0
Deposits on policies to be issued (2,155) 909
Dividends paid to shareholders (2,326) (1,514)
Other items 0 20
Net Cash Provided by (Used in)
Financing Activities (4,729) 160,300
Increase (decrease) in Cash and Cash
Equivalents (2,492) 8,822
Cash and Cash Equivalents at Beginning of Year (1,874) (772)
Cash and Cash Equivalents at End of Period $ (4,366) $ 8,050
Supplemental Cash Flow Disclosure:
Income Taxes Paid $ 14,006 $ 1,290
Interest Paid $ 2,375 $ 2,375
The accompanying notes are an integral part of these Unaudited Consolidated
Financial Statements.
</TABLE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Business
Presidential Life Corporation ("the Company"), through its
wholly-owned subsidiary Presidential Life Insurance Company ("the
Insurance Company"), is engaged in the sale of life insurance and
annuities.
B. Basis of Presentation and Principles of Consolidation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles ("GAAP") applicable to stock life insurance companies for
interim financial statements and with the requirements of Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles applicable to stock
life insurance companies for complete financial statements. In the
opinion of management, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation have been
included. Interim results for the six months ended June 30, 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 and
losses, net of the effects of amortization of deferred policy
acquisition costs of approximately $3.8 million and $15.6 million, and
deferred Federal income taxes of approximately $8.7 million and $32.2
million at June 30, 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 partnerships interest, for
purposes of disclosure, the market value of a limited partnership
interest is estimated at book value. Management believes that the net
realizable value of such limited partnership interests, in the
aggregate, exceeds their related carrying value as of June 30, 1996 and
December 31, 1995. As of June 30, 1996, the Company was committed to
contribute, if called upon, an aggregate of approximately $40.9 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%) interest in a Fidelity subsidiary insurance holding
company. In addition, the Company has agreed to purchase $25 million of
Senior Notes of such company. The Company 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.
Statement of Financial Accounting Standards No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS No. 125"), was issued in June of 1996 and requires
adoption not later than fiscal years that begin after December 31, 1996.
SFAS 125 establishes financial accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities. Management is evaluating the impact of SFAS No. 125 on the
Company.
2. INVESTMENTS
Investments in U.S. Government & Government Agencies with an
aggregate carrying value of $535,629,000 represent investments owned in
any one issuer that aggregate 10% or more of Shareholders' Equity as of
June 30, 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 June 30, 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 June
30, 1996, such unamortized costs were $1.3 million. There are no
principal payments required for the senior notes over the next three
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 six months ended June 30, 1996 reflect
the reduction in the deferred tax asset as of June 30, 1996. The
Company's effective tax rates for the six months ended June 30, 1996 and
1995 were 34.2% and 2.5%, respectively. As a result of the finalization
of the Company's 1994 federal income tax return, the federal income tax
recoverable as of June 30, 1995 was increased by $3.1 million which
reduced income tax expense by a similar amount.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
The Company operates principally in a single business segment with
two primary lines of business--individual annuities and individual life
insurance. Premiums shown on the Company's consolidated financial
statements in accordance with GAAP consist of premiums received for
whole or term life insurance products, as well as that portion of the
Company's single premium immediate annuities which have life
contingencies. With respect to that portion of single premium annuity
contracts without life contingencies, as well as single premium deferred
annuities and universal life insurance products, premiums collected by
the Company are not reported as premium revenues, but rather are
reported as additions to policyholder account balances. With respect to
products that are accounted for as policyholder account balances,
revenues are recognized over time in the form of policy fee income,
surrender charges and mortality and other charges deducted from the
policyholder's account balance. The Company's operating earnings are
derived primarily from these revenues, plus the Company's investment
results, including realized gains (losses), less interest credited,
benefits to policyholders and expenses.
Certain costs related to the sale of new business are deferred as
"deferred policy acquisition costs" ("DAC") and amortized into expenses
in proportion to the recognition of earned revenues. Costs deferred
include principally commissions, certain expenses of the policy issue
and underwriting departments and certain variable sales expenses. Under
certain circumstances, DAC will be expensed earlier than originally
estimated, including those circumstances where the policy terminations
are higher than originally estimated with respect to certain annuity
products. Most of the Company's annuity products have surrender charges
which are designed to discourage and mitigate the effect of early
terminations.
In June, 1996 the Insurance Company was notified that its A.M. Best
rating was reaffirmed at "A-(Excellent)."
Results of Operations
Comparison of Six Months Ended June 30, 1996 to Six Months Ended
June 30, 1995.
Revenues
Annuity Considerations and Life Insurance Premiums
Total annuity considerations and life insurance premiums increased
to approximately $3.6 million for the six months ended June 30, 1996
from approximately $3.0 million for the six months ended June 30, 1995.
Of this amount, annuity considerations increased to approximately $2.3
million for the six months ended June 30, 1996 from approximately $1.4
million for the six months ended June 30, 1995. 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 $30.8 million for the six months
ended June 30, 1996 compared to $42.8 million for the six months ended
June 30, 1995. Sales of single premium deferred annuities were $86.9
million in fiscal 1995.
Policy Fee Income
Universal life and investment type policy fee income was
approximately $991 thousand for the six months ended June 30, 1996, as
compared to approximately $954 thousand for the six months ended June
30, 1995. Policy fee income consists principally of amounts assessed
during the period against policyholders' account balances for mortality
charges and surrender charges.
Net Investment Income
Net investment income totaled approximately $93.9 million for the
six months ended June 30, 1996, as compared to approximately $86.3
million for the six months ended June 30, 1995. This represents an
increase of approximately 8.8%. Investment income from "other invested
assets" totaled approximately $17.3 million during the first six months
of 1996, as compared to $15.2 million during the first six months of
1995. The Company's ratio of net investment income to average cash and
invested assets less net investment income for the six months ended June
30, 1996 and June 30, 1995 were 8.7% and 9.1%, respectively.
Realized Investment Gains and Losses
Realized investment gains amounted to approximately $9.7 million
during the six months ended June 30, 1996, as compared to approximately
$3.3 million during the six months ended June 30, 1995. Realized
investment gains were partially offset by realized investment losses of
approximately $3.3 million and $.6 million for the six months ended June
30, 1996 and 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 six months ended June 30, 1996
aggregated approximately $72.3 million, as compared to approximately
$69.7 million for the six months ended June 30, 1995, an increase of
approximately 3.7%. The reasons for this increase are discussed under
the respective components below.
Interest Credited and Benefits to Policyholders
Interest credited and other benefits to policyholders aggregated
approximately $59.7 million for the six months ended June 30, 1996, as
compared to approximately $59.8 million for the six months ended June
30, 1995. As a result of the interest rate environment during the
second quarter of 1996, the Insurance Company increased its credited
rate of interest on its newly issued single premium deferred annuity
products and has increased rates overall on its other interest-sensitive
products. In addition, the renewal rates on existing policies were
decreased on their respective renewal dates.
The Insurance Company's average credited rate for reserves and
account balances for the six months ended June 30, 1996 and 1995 were
less than the Company's ratio of net investment income to mean invested
assets for the same periods as noted above under "Net Investment
Income". Although management does not currently expect material
declines in the spread between the Company's average credited rate for
reserves and account balances and the Company's ratio of net investment
income to mean assets (the "Spread"), there can be no assurance that the
Spread will not decline in future periods or that such decline will not
have a material adverse effect on the Company's financial condition and
results of operations. Depending, in part, upon competitive factors
affecting the industry in general, and the Company, in particular, the
Company may, from time to time, change the average credited rates on
certain of its products. There can be no assurance that the Company
will reduce such rates or that any such reductions will broaden the
Spread.
Interest Expense on Notes Payable
The interest expense on the Company's notes payable was
approximately $2.5 million for the six months ended June 30, 1996, as
compared to approximately $2.5 million for the six months ended June 30,
1995.
General Expenses, Taxes and Commissions
General expenses, taxes and commissions to agents aggregated
approximately $8.2 million for the six months ended June 30, 1996, as
compared to approximately $6.7 million for the six months ended June 30,
1995, an increase of approximately 21.6%. This increase is primarily
attributable to higher professional fees associated with the potential
acquisition of Fidelity.
Deferred Policy Acquisition Costs
Deferred Policy Acquisition Costs for the six months ended June 30,
1996 increased approximately $1.1 million resulting in a charge of $1.9
million, as compared to a charge of approximately $.7 million for the
six months ended June 30, 1995.
Income Before Income Taxes
For the reasons discussed above, income before income taxes
amounted to approximately $37.5 million for the six months ended June
30, 1996, as compared to approximately $25.0 million for the six months
ended June 30, 1995.
Income Taxes
Income tax expense was $12.9 million for the six months ended June
30, 1996 as compared to approximately $.6 million for the six months
ended June 30, 1995. The increase is primarily attributable to higher
realized capital gains for the six months ended June 30, 1996. In
addition, as a result of the finalization of the Company's 1994 federal
income tax return, the federal income tax recoverable as of June 30,
1995 was increased by $3.1 million which reduced income tax expense by
a similar amount.
Net Income
For the reasons discussed above, the Company had net income of
approximately $24.7 million during the six months ended June 30, 1996,
as compared to net income of approximately $24.4 million during the six
months ended June 30, 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 sources of cash are dividends from
the Insurance Company, sales of and interest on its investments
(exclusive of those held by the Insurance Company) and rent from its
real estate. During the second quarter of 1996, the Company's Board of
Directors increased the semi-annual dividend rate to $.07 per share and
authorized a buy-back program of up to 1,000,000 shares of its stock,
from time to time.
The Insurance Company is subject to various regulatory restrictions
on the maximum amount of payments, including loans or cash advances,
that it may make to the Company without obtaining prior regulatory
approval. As a New York domiciled insurance company, the Insurance
Company is subject to restrictions on the payment of dividends under New
York State law. New York State law states that no domestic stock life
insurance company shall distribute any dividend to its shareholders
unless a notice of its intention to declare such dividend and the amount
thereof shall have been filed with the Superintendent of the New York
Insurance Department ("Superintendent") not less than 30 days in advance
of such proposed declaration. The Superintendent may disapprove such
distribution by giving written notice to such company within 30 days
after such filing that he or she finds that the financial condition of
the company does not warrant such distribution. The New York State
Insurance Department has established informal guidelines for the
Superintendent's findings which focus upon, among other things, the
overall financial condition and profitability of the insurer under
statutory accounting practices. During the first six months of 1996,
the Insurance Company paid dividends to the Company of $15 million.
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 annuity
contracts and life insurance policies (including withdrawals and
surrender payments), operating expenses and the purchase of investments.
Net cash provided by the Company's operating activities (reflecting
principally: (i) premiums and contract charges collected less (ii)
benefits paid on life insurance and annuity products plus (iii) income
collected on invested assets less (iv) commissions and other general
expenses paid) was approximately $26.5 million and $18.7 million during
the six months ended June 30, 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 $(24.3) million and $(170.1) million during the
six months ended June 30, 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 also are considered to be a
financing activity. Net cash provided by (used in) the Company's
financing activities amounted to approximately $(4.7) million and $160.3
million during the six months ended June 30, 1996 and 1995,
respectively. This fluctuation primarily is attributable to the
increased activity in dollar roll repurchase agreements during the six
months ended June 30, 1995.
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, sale or issuance of capital stock of the Insurance Company,
certain asset sales and the ability to engage in mergers or similar
transactions. In the event the Company violates such covenants as
defined in the Indenture, the Company is obligated to repurchase 25% of
the outstanding principal amount of such notes. Management believes
that the Company 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 8.6% and 8.2% as of June 30, 1996 and
December 31, 1995, respectively). The weighted average duration of the
Company's investment portfolio was approximately seven years as of June
30, 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 for various
reasons. These investments are carried at 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 value, with
the related unrealized gains and losses, net of federal income taxes, if
any, charged directly to shareholders' equity, unless a decline in
market value is considered to be other than temporary, in which event,
the Company recognizes a loss.
The Company maintains a portfolio which includes below investment
grade debt securities which were purchased to achieve a more favorable
investment yield all of which are classified as available for sale and
reported at fair value. As of June 30, 1996 and December 31, 1995, the
carrying value of these securities was approximately $141.6 million and
$159.6 million, respectively, (representing approximately 6.1% and 6.8%,
respectively, of the Company's total assets and 37.1% and 39.8%
respectively, of shareholder's equity).
The Insurance Company is subject to Regulation 130 adopted and
promulgated by the New York State Insurance Department ("NYSID"). Under
this Regulation, the Insurance Company's ownership of below investment
grade debt securities is limited to 20.0% of total admitted assets, as
calculated under statutory accounting practices. As of June 30, 1996,
approximately 6.7% 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 debt securities will decline over
time. No new below investment grade debt investments have been made
since the first quarter of fiscal 1990, but some investment grade
corporate securities have been downgraded. Notwithstanding the
foregoing, the Company's investment policies may change from time to
time in response to market and other conditions.
Investments in below investment grade debt securities have
different risks than investments in corporate debt securities rated
investment grade. Risk of loss upon default by the borrower is
significantly greater with respect to below investment grade debt
securities because below investment grade debt securities generally are
unsecured and often are subordinated to other creditors of the issuer.
Also, issuers of below investment grade debt securities usually have
high levels of indebtedness and often are more sensitive to adverse
economic conditions, such as recession or increasing interest rates,
than are investment grade issuers. Typically, there is only a thinly
traded market for such securities and recent market quotations may not
be available for some of these securities. Market quotes generally are
available only from a limited number of dealers and may not represent
firm bids of such dealers or prices for actual sales. The Company
attempts to reduce the overall risk in its below investment grade
portfolio, as in all of its investments, through careful credit
analysis, investment policy limitations, and diversification by company
and by industry.
As of June 30, 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 $40.9 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. The Company may make selective investments in
additional limited partnerships as opportunities arise. 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. Interests held by the Company in
limited partnerships usually are not registered with the Commission and
typically are illiquid. In addition, there can be no assurance that the
Company will continue to achieve the same level of returns on its
investments in limited partnerships as it has historically or that the
Company will achieve any returns on such investments at all. Further,
there can be no assurance that the Company will receive a return of all
or any portion of its current or future capital investments in
limited partnerships. The failure of the Company to receive the return
of a material portion of its capital investments in limited
partnerships, or to achieve historic levels of return on such
investments, could have a material adverse effect on the Company's
financial condition and results of operations.
As previously discussed, during the first and second quarters of
fiscal 1996 and in fiscal 1995, the Company participated in "dollar
roll" repurchase agreements. Amounts outstanding to repurchase
securities under such agreements were $182.6 million and $160.4 at June
30, 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%) interest in a Fidelity subsidiary insurance holding
company. In addition, the Company has agreed to purchase $25 million of
Senior Notes of such company. The Company 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 jurisdictions to
participate in guaranty associations, which are organized to pay
contractual obligations under insurance policies (and certificates
issued under group insurance policies) issued by impaired or insolvent
life insurance companies. These associations levy assessments (up to
prescribed limits) on all member insurers in a particular state on the
basis of the proportionate share of the premiums written by member
insurers in the lines of business in which the impaired or insolvent
insurer is engaged. Some states permit member insurers to recover
assessments paid through full or partial premium tax offsets. These
assessments may be deferred or forgiven under most guaranty laws if they
would threaten an insurer's solvency. The amount of these assessments
in prior years has not been material, however, the amount and timing of
any future assessment on the Insurance Company under these laws cannot
be reasonably estimated and are beyond the control of the Company and
the Insurance Company. Recent failures of substantially larger
insurance companies could result in future assessments in material
amounts.
Effects of Inflation and Interest Rate Changes
Management does not believe that inflation has had a material
adverse effect on the Company's consolidated results of operations. The
Company manages its investment portfolio in part to reduce its exposure
to interest rate fluctuations. In general, the market value of the
Company's fixed maturity portfolio increases or decreases in an inverse
relationship with fluctuations in interest rates, and the Company's net
investment income increases or decreases in direct relationship with
interest rate changes. For example, if interest rates decline, the
Company's fixed maturity investments generally will increase in market
value, while net investment income will decrease as fixed income
investments mature or are sold and proceeds are reinvested at the
declining rates, and vice versa. Management is aware that prevailing
market interest rates frequently shift and, accordingly, the Company has
adopted strategies which are designed to address either an increase or
decrease in prevailing rates. In a rising interest rate environment,
the Company's average cost of funds would be expected to increase over
time as it prices its new and renewing annuities to maintain a generally
competitive market rate. Concurrently, the Company would attempt to
place new funds in investments which were matched in duration to, and
higher yielding than, the liabilities assumed. Management believes that
liquidity necessary to fund withdrawals would be available through
income, cash flow, the Company's cash reserves or from the sale of
short-term investments. In a declining interest rate environment, the
Company's cost of funds would be expected to decrease over time,
reflecting lower interest crediting rates on its fixed annuities.
Should increased liquidity be required for withdrawals, management
believes that the portion of the Company's investments which are
designated as available for sale in the Company's consolidated balance
sheet could be sold without materially adverse consequences in light of
the general strengthening which would be expected in the fixed maturity
security market.
Interest rate changes also may have temporary effects on the sale
and profitability of the universal life and annuity products offered by
the Company. For example, if interest rates rise, competing investments
(such as annuity or life insurance products offered by the Company's
competitors, certificates of deposit, mutual funds and similar
instruments) may become more attractive to potential purchasers of the
Company's products until the Company increases the rates credited to
holders of its universal life and annuity products. In contrast, as
interest rates fall, the Company attempts to lower its credited rates to
compensate for the corresponding decline in its net investment income.
As a result, changes in interest rates could materially adversely effect
the financial condition and results of operations of the Company
depending on the attractiveness of alternative investments available to
the Company's customers. In that regard, in the current interest rate
environment, the Company has attempted to maintain its credited rates at
competitive levels which are designed to discourage surrenders and which
may be considered attractive to purchasers of new annuity products. In
addition, because the level of prevailing interest rates impacts the
Company as well as its competition, management does not believe that the
current interest rate environment has materially affected the Company's
competitive position vis a vis other life insurance companies that
emphasize the sale of annuity products. Notwithstanding the foregoing,
if interest rates continue at current levels or decline further, there
can be no assurance that this segment of the life insurance industry,
including the Company, would not experience increased levels of
surrenders and reduced sales and thereby be materially adversely
affected.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", was issued in June of 1996 and requires
adoption not later than fiscal years that begin after December 31, 1996.
SFAS 125 establishes financial accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities. Management has not yet determined the impact of SFAS No.
125 on the Company.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company is involved in litigation relating
to claims arising out of its operations in the normal course of
business. As of August 12, 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 June 30, 1996, the Company filed
one Current Report of Form 8-K dated June 3, 1996.
PRESIDENTIAL LIFE CORPORATION
JUNE 30, 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: August 12, 1996 /s/ Herbert Kurz
Herbert Kurz, President and Duly
Authorized Officer of the Registrant
Date: August 12, 1996 /s/ Michael V. Oporto
Michael V. Oporto, Principal
Accounting Officer of the Registrant
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