FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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 31,743,989 shares of common stock, par value $.01 per share of
the issuer's common stock outstanding as of the close of business on November
12, 1998.
<PAGE>
INDEX
Part I - Financial Information Page No.
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets (Unaudited)
September 30, 1998 and December 31, 1997...................... 3
Consolidated Statements of Income (Unaudited) - For
the Nine Months Ended September 30, 1998 and 1997............. 4
Consolidated Statements of Income (Unaudited) - For
the Three Months Ended September 30, 1998 and 1997............ 5
Consolidated Statements of Shareholders'
Equity (Unaudited) - For the Nine Months Ended
September 30, 1998 and 1997................................... 6
Consolidated Statements of Cash Flows (Unaudited) - For
the Nine Months Ended September 30, 1998 and 1997............. 7
Condensed Notes to Unaudited Consolidated Financial
Statements.................................................... 8-11
Independent Accountants' Review Report........................ 12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 13-21
Part II - Other Information......................................... 22
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.......................................................... 23
<PAGE>
<TABLE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share data)
September 30, December 31,
1998 1997
<S> <C> <C>
ASSETS:
Investments:
Fixed maturities:
Available for sale at market (Cost
of $1,748,124 and $1,799,929,
respectively) $1,841,928 $1,909,924
Common stocks (Cost of $35,158 and
$32,021, respectively) 47,433 45,773
Mortgage Loans 17,252 17,865
Real Estate 415 417
Policy Loans 17,320 18,120
Short-term investments 208,131 264,098
Other invested assets 262,999 208,162
Total investments 2,395,478 2,464,359
Cash and cash equivalents 813 13,480
Accrued investment income 26,127 28,167
Deferred policy acquisition costs 39,086 37,685
Furniture and equipment, net 662 567
Amounts due from reinsurers 8,146 8,249
Other assets 9,645 1,222
Assets held in separate account 3,983 4,612
TOTAL ASSETS $2,483,940 $2,558,341
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy Liabilities:
Policyholders' account balances $1,293,977 $1,280,900
Future policy benefits:
Annuity 394,505 380,109
Life and accident and health 52,344 50,848
Other policy liabilities 3,021 3,124
Total policy liabilities 1,743,847 1,714,981
Dollar Repurchase Agreements 99,201 205,202
Note payable 50,000 50,000
Short-term note payable 23,000 20,000
Deposits on policies to be issued 2,665 2,436
Deferred federal income taxes 38,229 46,575
General expenses and taxes accrued 8,441 7,074
Other liabilities 3,964 4,807
Liabilities related to separate account 3,983 4,612
Total liabilities 1,973,330 2,055,687
Shareholders' Equity:
Capital stock ($.01 par value, authorized
100,000,000 shares, issued and outstanding
31,921,863 shares in 1998 and 32,621,549
shares in 1997) 319 326
Additional paid in capital 4,354 18,274
Net unrealized investment gains 61,478 71,540
Retained earnings 444,459 412,514
Total Shareholders' Equity 510,610 502,654
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $2,483,940 $2,558,341
The accompanying notes are an integral part of these Unaudited Consolidated
Financial Statements.
</TABLE>
<PAGE>
<TABLE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
NINE MONTHS ENDED
SEPTEMBER 30
(UNAUDITED)
1998 1997
<S> <C> <C>
REVENUES:
Insurance revenues:
Premiums $ 2,076 $ 1,982
Annuity considerations 19,965 14,808
Universal life and investment
type policy fee income 1,695 1,522
Net investment income 145,792 142,466
Realized investment gains 14,087 20,531
Other income 2,916 3,739
TOTAL REVENUES 186,531 185,048
BENEFITS AND EXPENSES:
Death and other life insurance benefits 5,574 5,126
Annuity benefits 30,930 28,299
Interest credited to policyholders'
account balances 57,183 56,638
Interest expense on notes payable 5,546 4,415
Other interest and other charges 207 371
Change in liability for future
policy benefits 15,533 12,420
Commissions to agents, net 3,499 3,442
General expenses and taxes 10,514 10,016
Change in deferred policy
acquisition costs 805 (627)
TOTAL BENEFITS AND EXPENSES 129,791 120,100
Income before income taxes 56,740 64,948
Provision (benefit) for income taxes
Current 20,987 21,871
Deferred (2,928) (1,861)
TOTAL PROVISION FOR INCOME TAXES 18,059 20,010
NET INCOME $ 38,681 $ 44,938
Income per share $ 1.20 $ 1.37
Weighted average number of shares
outstanding during the period 32,179,413 33,772,968
The accompanying notes are an integral part of these Unaudited Consolidated
Financial Statements.
</TABLE>
<PAGE>
<TABLE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
THREE MONTHS ENDED
SEPTEMBER 30
(UNAUDITED)
1998 1997
<S> <C> <C>
REVENUES:
Insurance revenues:
Premiums $ 923 $ 884
Annuity considerations 4,320 6,831
Universal life and investment
type policy fee income 555 566
Net investment income 35,716 44,444
Realized investment gains 5,018 9,518
Other income 560 743
TOTAL REVENUES 47,092 62,986
BENEFITS AND EXPENSES:
Death and other life insurance benefits 2,008 2,026
Annuity benefits 10,195 9,475
Interest credited to policyholders'
account balances 19,073 19,204
Interest expense on notes payable 1,713 1,634
Other interest and other charges 65 143
Change in liability for future
policy benefits 2,962 5,304
Commissions to agents, net 1,161 1,546
General expenses and taxes 2,284 2,264
Change in deferred policy
acquisition costs (292) (1,468)
TOTAL BENEFITS AND EXPENSES 39,169 40,128
Income before income taxes 7,923 22,858
Provision (benefit) for income taxes
Current 1,512 6,563
Deferred (101) 277
TOTAL PROVISION FOR INCOME TAXES 1,411 6,840
NET INCOME $ 6,512 $ 16,018
Income per share $ .20 $ .49
Weighted average number of shares
outstanding during the period 31,946,352 32,686,691
The accompanying notes are an integral part of these Unaudited Consolidated
Financial Statements.
</TABLE>
<PAGE>
<TABLE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
Net
Additional Unrealized
Capital Paid in Investment Retained
Stock Capital Gains (Losses) Earnings Total
<S> <C> <C> <C> <C> <C>
Balance at
December
31, 1996 $330 $24,023 $40,294 $358,416 $423,063
Net income 44,938 44,938
Issuance of
Shares Under
Stock Option
Plan 4 4
Purchase and
Retirement
of Stock (4) (5,758) (5,762)
Change in
Unrealized
Investment
Gains, Net 30,294 30,294
Dividends
Paid to
Shareholders
(.16 per
share) (5,238) (5,238)
Balance at
September
30, 1997 $326 $18,269 $70,588 $398,116 $487,299
Balance at
December
31, 1997 $326 $18,274 $71,540 $412,514 $502,654
Net Income 38,681 38,681
Issuance of
Shares Under
Stock Option
Plan 51 51
Purchase and
Retirement
of Stock (7) (13,971) (13,978)
Change in
Unrealized
Investment
Gains, Net (10,062) (10,062)
Dividends
paid to
Shareholders
(.21 per
share) (6,736) (6,736)
Balance at
September
30, 1998 $319 $ 4,354 $61,478 $444,459 $510,610
The accompanying notes are an integral part of the Unaudited Consolidated
Financial Statements.
</TABLE>
<PAGE>
<TABLE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30
(UNAUDITED)
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 38,681 $ 44,938
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Benefit for deferred income taxes (2,928) (1,861)
Depreciation and amortization 983 361
Net accrual of discount on fixed maturities (7,002) (1,800)
Realized investment gains (14,087) (20,531)
Changes in:
Accrued investment income 2,040 3,120
Deferred policy acquisition costs 805 (627)
Federal income tax payable (10,726) (2,838)
Liabilities for future policy benefits 15,892 12,659
Other items 1,980 1,220
Net Cash Provided by
Operating Activities 25,638 34,641
INVESTING ACTIVITIES:
Fixed Maturities:
Available For Sale:
Acquisitions (221,865) (285,667)
Sales 2,602 10,363
Maturities, calls and repayments 271,131 221,804
Common Stocks:
Acquisitions (10,405) (15,558)
Sales 28,301 43,090
Decrease in short term investments
and policy loans 56,767 1,064
Other Invested Assets:
Additions to other invested assets (86,131) (80,899)
Distributions from other invested assets 31,294 44,776
Purchase of property and equipment (203) (352)
Mortgage loans on real estate 613 561
Net Cash Provided by (Used in)
Investing Activities 72,104 (60,818)
FINANCING ACTIVITIES:
Proceeds from Dollar Repurchase Agreements 1,669,076 1,814,159
Repayment of Dollar Repurchase Agreements (1,775,077) (1,808,457)
Increase in policyholders' account balances 13,077 10,090
Proceeds from line of credit 3,000 16,500
Repurchase of common stock (13,978) (5,762)
Deposits on policies to be issued 229 2,532
Dividends paid to shareholders (6,736) (5,238)
Net Cash Provided by (Used in)
Financing Activities (110,409) 23,824
Decrease in Cash and Cash Equivalents (12,667) (2,353)
Cash and Cash Equivalents at Beginning of Period 13,480 819
Cash and Cash Equivalents at End of Period $ 813 $ (1,534)
Supplemental Cash Flow Disclosure:
Income Taxes Paid $ 32,166 $ 24,710
Interest Paid $ 3,311 $ 2,540
The accompanying notes are an integral part of these Unaudited Consolidated
Financial Statements.
</TABLE>
<PAGE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONDENSED 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 conformity 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 annual financial statements. In
the opinion of management, all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation have
been included. Interim results for the nine months ended September 30,
1998 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1998. 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, 1997.
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 $11.5 million and $13.4 million, and
deferred Federal income taxes of approximately $28.7 million and $38.5
million at September 30, 1998 and December 31, 1997, respectively, are
credited or charged directly to shareholders' equity, unless a decline
in market value is considered to be other than temporary in which case
the investment is reduced to its net realizable value. Equity
securities include common stocks and non-redeemable preferred stocks and
are carried at market, with the related unrealized gains and losses, net
of deferred income taxes, if any, credited or charged directly to
shareholders' equity, unless a decline in market value is deemed to be
other than temporary in which case the investment is reduced to its net
realizable value.
"Other invested assets" are recorded at the lower of cost or
market, or equity as appropriate, and primarily include interests in
limited partnerships, which principally are engaged in real estate,
international opportunities, hedge funds, debt restructuring and
merchant banking. Limited partnership interests usually are not
registered and typically are illiquid. In general, risks associated
with such limited partnerships include those related to their underlying
investments (i.e., equity securities, debt securities, hedges and real
estate), plus a level of illiquidity, which is mitigated by the ability
of the Company to take annual distributions of partnership earnings. To
evaluate the appropriateness of the carrying value of a limited
partnership interest, management maintains ongoing discussions with the
investment manager and considers the limited partnership's operation,
its current and near term projected financial condition, earnings
capacity and distributions received by the Company during the year.
Because it is not practicable to obtain an independent valuation for
each limited partnership interest, for purposes of disclosure, the
market value of a limited partnership interest is estimated at book
value. Management believes that the net realizable value of such
limited partnership interests, in the aggregate, exceeds their related
carrying value as of September 30, 1998 and December 31, 1997. As of
September 30, 1998, the Company was committed to contribute, if called
upon, an aggregate of approximately $54.4 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 had agreed to purchase $25 million of
senior notes of such company. The Company was informed by the
Pennsylvania Insurance Commissioner, that in response to the significant
improvement in the invested assets of Fidelity, she reopened the process
to select an equity investor for the recapitalization and rehabilitation
of Fidelity. The Company disagreed with the Commissioner's actions and
commenced litigation which was settled in the second quarter of 1997.
As part of the settlement, the Company received $1.7 million in that quarter.
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
In December 1996, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125." SFAS No. 127 amends SFAS No. 125
by deferring for one year the effective date of paragraph 15 of SFAS No.
125, addressing secured borrowings and collateral, and for repurchase
agreement, dollar roll, security lending and similar transactions, of
paragraphs 9 through 12 and 237(b) of SFAS No. 125. SFAS No. 127 is
effective for certain transactions occurring after December 31, 1997,
and must be applied prospectively. The Company adopted SFAS 127
effective January 1998. There was no effect on the Company's financial
position from the adoption of SFAS 127.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130), which
establishes standards for displaying comprehensive income and its
components in a full set of general-purpose financial statements.
Effective January 1998, the Company adopted SFAS 130. Total
comprehensive income for the nine-month periods ended September 30, 1998
and 1997 was $28.62 million and $75.23 million, respectively. The
difference between net income and comprehensive income was the change in
unrealized investment gains (losses) which arose during the period.
Also in June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 establishes
standards for reporting information about operating segments in annual
financial statements and requires reporting selected information about
operating segments in interim financial reports issued to shareholders.
SFAS 131 is effective for fiscal years beginning after December 15,
1997. The Company's definition of its operating segments did not change.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosure about Pensions and Other
Postretirement Benefits" (SFAS 132), which revises employers'
disclosures about pension and other postretirement benefit plans to
require standardized disclosures for pensions and other postretirement
benefits, additional disclosure of information on changes in the benefit
obligations and fair values of plan assets, and elimination of certain
disclosures that were deemed no longer useful. It does not change the
measurement or recognition of those plans. SFAS 132 is effective for
fiscal years beginning after December 15, 1997.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. It also establishes specific conditions that
must be met in order for a derivative to be recognized as a hedge of
certain exposures. The Company has not yet completed its analysis to
determine the impact of this statement on the Company's financial
statements. SFAS 133 is effective for fiscal years beginning after June
15, 1999.
2. INVESTMENTS
Investments in U.S. Government & Government Agencies with an
aggregate carrying value of $409.9 million represent investments owned
in any one issuer that aggregate 10% or more of Shareholders' Equity as
of September 30, 1998.
Securities with a carrying value of approximately $5.9 million were
on deposit with various state insurance departments to comply with
applicable insurance laws.
3. NOTES PAYABLE
Notes payable at September 30, 1998 and December 31, 1997 consist
of a $50 million, 9 1/2% Senior Notes ("Senior Notes") due December 15,
2000. Interest is payable June 15 and December 15. Debt issue costs
were amortized on the interest method over the term of the Senior Notes.
The total principal is due on December 15, 2000. The Senior Notes are
callable after December 14, 1998.
The Company has filed a registration statement with the Securities
and Exchange Commission covering up to $100 million aggregate principal
amount of senior notes ("New Senior Notes"). The net proceeds from the
sale of such offering are expected to be used to retire existing
indebtedness and for general corporate purposes. The Company intends to
complete the offering during the fourth quarter of 1998.
In connection with the offering of the New Senior Notes, the
Company entered into a forward treasury lock agreement with a
creditworthy financial institution pursuant to which the Company will
make or receive, respectively, payments in respect of an aggregate
notional principal amount of $100 million depending upon whether the
interest rate for ten-year Treasury Notes in effect on the settlement
date has increased or declined during the term of the agreement. The
amount of any unrecognized gain or loss is not recognized in the
financial statements and fluctuates with the ten-year Treasury Note. At
September 30 and October 30, 1998, the agreement had an unrealized loss
of $10.87 million and $9.52 million respectively. If by the settlement
date the Company has issued the related debt, the unrecognized gain or
loss will be capitalized and amortized over the term of the New Senior
Notes as a decrease or increase in interest expense. To the extent that
the Company has not issued the related debt by the settlement date, the
Company can extend the settlement date to coincide with the offering of
the New Senior Notes. To the extent the Company changes its intention
with respect to the issuance of the New Senior Notes, the Company will
be required to recognize gain or loss as if the settlement had occurred
at that time.
The Company has one bank line of credit in the amount of $25.0
million and provides for interest on borrowings based on market indices.
At September 30, 1998 the Company had $23.0 million outstanding under
the line of credit.
4. INCOME TAXES
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes, (b) operating loss carryforwards and (c) a valuation
allowance.
The valuation allowance relates principally to investment
writedowns recorded for financial reporting purposes, which have not
been recognized for income tax purposes due to the uncertainty
associated with their realizability for income tax purposes. Changes in
the valuation allowance for the nine months ended September 30, 1998
reflect the reduction in the deferred tax asset as of September 30,
1998. The Company's effective tax rates for the nine months ended
September 30, 1998 and 1997 were 31.8% and 30.8%, respectively.
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Shareholders
Presidential Life Corporation
Nyack, New York 10960
We have reviewed the accompanying consolidated balance sheet of
Presidential Life Corporation and subsidiaries ("the Company") as of
September 30, 1998, and the related consolidated statements of income
for the three-month and nine-month periods ended September 30, 1998 and
1997, and the consolidated statements of shareholders' equity and cash
flows for the nine-month periods ended September 30, 1998 and 1997.
These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and of making inquiries of persons
responsible for financial and accounting matters. It is substantially
less in scope than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is the expression of
an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such consolidated financial statements for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Presidential Life
Corporation and subsidiaries as of December 31, 1997, and the related
consolidated statements of income, shareholders' equity, and cash flows
for the year then ended (not presented herein); and in our report dated
February 12, 1998, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set
forth in the accompanying consolidated balance sheet as of December 31,
1997 is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
Deloitte & Touche LLP
New York, New York
October 30, 1998
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company operates in a single business segment with two primary
lines of business -- individual annuities and individual life insurance.
The Company currently emphasizes the sale of a variety of single premium
and flexible premium annuity products (including those written in
connection with funding agreements for certain state lotteries, group
annuities and other structured settlements), as well as annual and
single premium life insurance products. Each of these products is
designed to meet the needs of increasingly sophisticated consumers for
supplemental retirement income, estate planning and financial protection
in the event of unexpected death. 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 charges 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.
The Insurance Company is rated "A- (Excellent)" by A.M. Best.
Results of Operations
Comparison of Nine Months Ended September 30, 1998 to Nine Months
Ended September 30, 1997.
Revenues
Annuity Considerations and Life Insurance Premiums
Total annuity considerations and life insurance premiums increased
to approximately $22.0 million for the nine months ended September 30,
1998 from approximately $16.8 million for the nine months ended
September 30, 1997. Of this amount, annuity considerations increased to
approximately $20.0 million for the nine months ended September 30, 1998
from approximately $14.8 million for the nine months ended September 30,
1997. In accordance with generally accepted accounting principles,
sales of single premium deferred annuities and universal life products
are not reported as insurance revenues, but rather as additions to
policyholder account balances. Sales of single premium annuities were
approximately $93.1 million for the nine months ended September 30, 1998
compared to $94.9 million for the nine months ended September 30, 1997.
Management believes the increase in annuity considerations is due to the
successful expansion of our Marketing Department. Beginning in 1996,
the Company added regional sales directors in various states. These
regional directors have added new general agents which have generated sales.
Policy Fee Income
Universal life and investment type policy fee income was
approximately $1.7 million for the nine months ended September 30, 1998,
as compared to approximately $1.5 million for the nine months ended
September 30, 1997. 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 $145.8 million for the
nine months ended September 30, 1998, as compared to approximately
$142.5 million for the nine months ended September 30, 1997. This
represents an increase of approximately 2.3%. Investment income from
"other invested assets" totaled approximately $25.1 million during the
nine months ended September 30, 1998, as compared to approximately $29.7
million during the nine months ended September 30, 1997. The decrease
in investment income from "other invested assets" during the nine months
ended September 30, 1998 is attributable to losses of $13.3 million
related to hedge fund investments in Long Term Capital Partners L.P. and
The Global Convergence Fund L.P. The Company's ratio of net investment
income to average cash and invested assets less net investment income
for the nine months ended September 30, 1998 was 8.77% and for the nine
months ended September 30, 1997 was 8.67%, respectively.
Realized Investment Gains and Losses
Realized investment gains amounted to approximately $14.1 million
during the nine months ended September 30, 1998, as compared to
approximately $20.5 million of gains during the nine months ended
September 30, 1997. Realized investment gains for the nine months ended
September 30, 1998 and 1997 are net of realized investment losses of
approximately $3.4 million and $2.1 million, respectively, attributable
to other than temporary impairments in the value of certain securities
contained in the Company's investment portfolio. Realized investment
gains result from sales of certain equities and convertible securities,
and calls and sales of securities 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.
Other Income
The decrease in other income in the nine months ended September 30,
1998 is the result of the settlement in the second quarter of 1997 of
the litigation concerning Fidelity.
Total Benefits and Expenses
Total benefits and expenses for the nine months ended September 30,
1998 aggregated approximately $129.8 million, as compared to
approximately $120.1 million for the nine months ended September 30,
1997, an increase of approximately 8.1%. The reasons for this increase
are discussed under the respective components below.
Interest Credited and Benefits to Policyholders
Interest credited and benefits to policyholders aggregated
approximately $109.4 million for the nine months ended September 30,
1998, as compared to approximately $102.9 million for the nine months
ended September 30, 1997. This represents an increase of approximately
6.4%. The increase is attributable to the increase in policyholders'
account balances as of September 30, 1998 as a result of the increase in
annuity considerations received during the period.
The Insurance Company's average credited rate for reserves and
account balances for the nine months ended September 30, 1998 and 1997
was 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 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 $5.5 million for the nine months ended September 30, 1998,
as compared to approximately $4.4 million for the nine months ended
September 30, 1997. The increase is attributable to the increase in the
amounts borrowed under the Company's short term note payable.
General Expenses, Taxes and Commissions
General expenses, taxes and commissions to agents aggregated
approximately $14.0 million for the nine months ended September 30,
1998, as compared to approximately $13.5 million for the nine months
ended September 30, 1997, an increase of approximately 4.1%. The
increase principally is attributable to higher commissions and selling
expenses incurred in the first nine months of 1998 associated with the
higher level of sales in the first nine months of 1998 partially offset
by a refund of $0.8 million of state assessment fees paid in previous
years.
Deferred Policy Acquisition Costs
The change in the net Deferred Policy Acquisition Costs for the
nine months ended September 30, 1998 resulted in a charge of
approximately $0.8 million, as compared to a credit of approximately
$0.6 million for the nine months ended September 30, 1997. This change
is primarily attributable to an increase in the costs associated with
recent new product sales which have been deferred and are amortized
in proportion to the recognition of earned revenue.
Income Before Income Taxes
For the reasons discussed above, income before income taxes
amounted to approximately $56.7 million for the nine months ended
September 30, 1998, as compared to approximately $64.9 million for the
nine months ended September 30, 1997.
Income Taxes
Income tax expense was $18.1 million for the nine months ended
September 30, 1998 as compared to approximately $20.0 million for the
nine months ended September 30, 1997. The decrease is primarily
attributable to higher income from operations and realized capital gains
for the nine months ended September 30, 1997.
Net Income
For the reasons discussed above, the Company had net income of
approximately $38.7 million during the nine months ended September 30,
1998, as compared to net income of approximately $44.9 million during
the nine months ended September 30, 1997.
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 third quarter of 1998, the Company's Board of
Directors declared a quarterly cash dividend of $.075 per share payable
on October 1, 1998. During the third quarter of 1998 the Company
purchased and retired 65,900 shares of common stock. For the nine
months ended September 30, 1998, the Company has purchased and retired
705,900 shares of common stock. The Company is authorized to purchase
an additional 526,333 shares of common stock.
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
State Insurance Department ("Superintendent") not less than 30 days in
advance of such proposed declaration. The Superintendent may disapprove
such distribution by giving written notice to such company within 30
days after such filing that he or she finds that the financial condition
of the company does not warrant such distribution. The New York State
Insurance Department has established informal guidelines for the
Superintendent's findings which focus upon, among other things, the
overall financial condition and profitability of the insurer under
statutory accounting practices. During the first nine months of 1998,
the Insurance Company paid dividends to the Company of $49.4 million.
During the fiscal year 1997, the Insurance Company paid dividends of
$24.8 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 $25.6 million and $34.6 million during
the nine months ended September 30, 1998 and 1997, respectively. Net
cash provided by (used in) the Company's investing activities
(principally reflecting investments purchased less investments called,
redeemed or sold) was approximately $72.1 million and $(60.8) million
during the nine months ended September 30, 1998 and 1997, 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 $(110.4) million and
$23.8 million during the nine months ended September 30, 1998 and 1997,
respectively. This fluctuation primarily is attributable to the reduced
activity in dollar roll repurchase transactions, partially offset by
higher policyholder account balances (as a result of increased sales),
an increase in common stock repurchased, and an increase in borrowings
under the Company's line of credit during the nine months ended
September 30, 1998.
The Company currently has one bank line of credit for $25.0 million
of which $23.0 million was drawn at September 30, 1998.
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 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.
During the first quarter of 1998, Standard & Poor's upgraded the Senior
Note from BBB- to BBB.
The Company has filed a registration statement with the Securities
and Exchange Commission covering up to $100 million aggregate principal
amount of senior notes ("New Senior Notes"). The net proceeds from the
sale of such offering are expected to be used to retire existing
indebtedness and for general corporate purposes. The Company expects to
complete the offering during the fourth quarter of 1998.
In connection with the offering of the New Senior Notes, the
Company entered into a forward treasury lock agreement with a
creditworthy financial institution pursuant to which the Company will
make or receive, respectively, payments in respect of an aggregate
notional principal amount of $100 million depending upon whether the
interest rate for ten-year Treasury Notes in effect on the settlement
date has increased or declined during the term of the agreement. The
amount of any unrecognized gain or loss is not recognized in the
financial statements and fluctuates with the ten-year Treasury Note. At
September 30 and October 30, 1998, the agreement had an unrealized loss
of $10.87 million and $9.52 million respectively. If by the settlement
date the Company has issued the related debt, the unrecognized gain or
loss will be capitalized and amortized over the term of the New Senior
Notes as a decrease or increase in interest expense. To the extent that
the Company has not issued the related debt by the settlement date, the
Company can extend the settlement date to coincide with the offering of
the New Senior Notes. To the extent the Company changes its intention
with respect to the issuance of the New Senior Notes, the Company will
be required to recognize gain or loss as if the settlement had occurred
at that time.
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.
The Company's deferred annuity products are designed to encourage
persistency by incorporating surrender charges that exceed the cost of
issuing the annuity. An annuitant may not terminate or withdraw
substantial funds for periods generally ranging from one to seven years
without incurring significant penalties in the form of surrender
charges. Approximately 57.5%, 60.2% and 64.2% of the Company's deferred
annuity contracts in force (measured by reserves) as of September 30,
1998 and December 31, 1997 and 1996 are surrenderable without charge.
The decrease since December 31, 1996 is attributable to the increase in
deferred annuity contracts in force as a result of the increase in
annuity considerations received.
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 8.4% and 10.3% as of September 30, 1998
and December 31, 1997, respectively). The McCaulay's duration to
maturity at market value of the Company's investment portfolio was
approximately 5.4 years as of September 30, 1998. 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. 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
credited or 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, credited or 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 Insurance Company is subject to Regulation 130 adopted and
promulgated by the New York State Insurance Department ("NYSID"). Under
this Regulation, the Insurance Company's ownership of below investment
grade debt securities is limited to 20.0% of total admitted assets, as
calculated under statutory accounting practices. As of September 30,
1998 and December 31, 1997, approximately 6.3% and 5.4%, respectively,
of the Insurance Company's total admitted assets were invested in below
investment grade debt securities.
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 September 30, 1998 and December 31, 1997,
the carrying value of these securities was approximately $196.7 million
and $164.6 million, respectively, (representing approximately 7.9% and
6.4%, respectively, of the Company's total assets and 38.5% and 32.8%,
respectively, of shareholder's equity).
Investments in below investment grade debt securities have
different risks than investments in corporate debt securities rated
investment grade. Risk of loss upon default by the borrower is
significantly greater with respect to below investment grade debt
securities because below investment grade debt securities generally are
unsecured and often are subordinated to other creditors of the issuer.
Also, issuers of below investment grade debt securities usually have
high levels of indebtedness and often are more sensitive to adverse
economic conditions, such as recession or increasing interest rates,
than are investment grade issuers. Typically, there only is a thinly
traded market for such securities and recent market quotations may not
be available for some of these securities. Market quotes generally are
available only from a limited number of dealers and may not represent
firm bids of such dealers or prices for actual sales. The Company
attempts to reduce the overall risk in its below investment grade
portfolio, as in all of its investments, through careful credit
analysis, investment policy limitations, and diversification by company
and by industry.
As of September 30, 1998, approximately 10.98% of the Company's
total invested assets were invested in limited partnerships and 1.99%
were invested in equity securities. Pursuant to NYSID regulations, the
Company's investments in equity securities, including limited
partnership interests, may not exceed 20% of the Insurance Company's
invested assets. Investments in limited partnerships are included in
the Company's consolidated balance sheet under the heading "Other
invested assets." See "Note 1.C. to the Notes to Unaudited Consolidated
Financial Statements." The Company is committed, if called upon during
a specified period, to contribute an aggregate of approximately $54.4
million of additional capital to certain of these limited partnerships.
However, management does not expect the entire amount to be drawn down
as certain of these limited partnerships are nearing the end of the
period during which investors are required to make contributions. The
Company may make selective investments in additional limited
partnerships as opportunities arise. In general, risks associated with
such limited partnerships include those related to their underlying
investments (i.e., equity securities, debt securities, hedges and real
estate), plus a level of illiquidity, which is mitigated by the ability
of the Company to take annual distributions of partnership earnings.
During the third quarter of 1998, the Company recorded losses of $13.3
million related to hedge fund investments in Long Term Capital Partners
L.P. and The Global Convergence Fund, L.P. There can be no assurance
that the Company will continue to achieve the same level of returns on
its investments in limited partnerships as it has historically or that
the Company will achieve any returns on such investments at all.
Further, there can be no assurance that the Company will receive a
return of all or any portion of its current or future capital
investments in limited partnerships. The failure of the Company to
receive the return of a material portion of its capital investments in
limited partnerships, or to achieve historic levels of return on such
investments, could have a material adverse effect on the Company's
financial condition and results of operations.
As previously discussed, during the first three quarters of fiscal
1998 and in fiscal 1997, the Company participated in "dollar roll"
repurchase agreements. Amounts outstanding to repurchase securities
under such agreements were $99.2 million and $205.2 at September 30,
1998 and December 31, 1997, 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 had agreed to purchase $25 million of
senior notes of such company. The Company was informed by the
Pennsylvania Insurance Commissioner, that in response to the significant
improvement in the invested assets of Fidelity, she reopened the process
to select an equity investor for the recapitalization and rehabilitation
of Fidelity. The Company disagreed with the Commissioner's actions and
commenced litigation which was settled in the second quarter of 1997.
As part of the settlement, the Company received $1.7 million in that
quarter.
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 since all of the Company's investments are
designated as available for sale in the Company's consolidated balance
sheet that they 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
In December 1996, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125." SFAS No. 127 amends SFAS No. 125
by deferring for one year the effective date of paragraph 15 of SFAS No.
125, addressing secured borrowings and collateral, and for repurchase
agreement, dollar roll, security lending and similar transactions, of
paragraphs 9 through 12 and 237(b) of SFAS No. 125. SFAS No. 127 is
effective for certain transactions occurring after December 31, 1997,
and must be applied prospectively. The Company adopted SFAS 127
effective January 1998. There was no effect on the Company's financial
position from the adoption of SFAS 127.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130), which
establishes standards for displaying comprehensive income and its
components in a full set of general-purpose financial statements.
Effective January 1998, the Company adopted SFAS 130. Total
comprehensive income for the nine-month periods ended September 30, 1998
and 1997 was $28.62 million and $75.23 million, respectively. The
difference between net income and comprehensive income was the change in
unrealized investment gains (losses) which arose during the period.
Also in June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 establishes
standards for reporting information about operating segments in annual
financial statements and requires reporting selected information about
operating segments in interim financial reports issued to shareholders.
SFAS 131 is effective for fiscal years beginning after December 15,
1997. The Company's definition of its operating segments did not
change.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosure about Pensions and Other
Postretirement Benefits" (SFAS 132), which revises employers'
disclosures about pension and other postretirement benefit plans to
require standardized disclosures for pensions and other postretirement
benefits, additional disclosure of information on changes in the benefit
obligations and fair values of plan assets, and elimination of certain
disclosures that were deemed no longer useful. It does not change the
measurement or recognition of those plans. SFAS 132 is effective for
fiscal years beginning after December 15, 1997.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. It also establishes specific conditions that
must be met in order for a derivative to be recognized as a hedge of
certain exposures. The Company has not yet completed its analysis to
determine the impact of this statement on the Company's financial
statements. SFAS 133 is effective for fiscal years beginning after June
15, 1999.
Year 2000 Matters
In 1994, the Company initiated the process of migrating to a local
area network and preparing its computer systems and applications for the
Year 2000. This process involves modifying or replacing certain
hardware and software maintained by the Company as well as communicating
with external service providers to ensure that they are taking the
appropriate action to remedy their Year 2000 issues. Management expects
that the modification process of all significant applications will be
completed by December 31, 1998 and that all of the remaining non-critical
system and application changes will be completed during the second half
of 1999.
The Company has initiated formal communications with its
significant vendors and business partners to determine the extent to
which the Company may be vulnerable to those third parties' failure to
properly remediate their own year 2000 issues. While the Company is not
presently aware of any such significant exposure, the Company cannot
predict the outcome of other companies' remediation efforts.
While the Company is not presently aware of any significant
exposure that its systems will not be properly remediated on a timely
basis, there can be no assurances that all year 2000 remediation
processes will be completed and properly tested before the year 2000, or
that contingency plans will sufficiently mitigate the risk of a year
2000 readiness problem. The failure of the systems of the Company or
its significant vendors or business partners due to a year 2000
readiness problem could have a material adverse effect on the Company.
The Company's contingency plans, which are expected to be completed
during the second quarter of 1999, will be structured to address both
remediation of those systems not yet compliant and their components and
overall business operating risk. These plans are intended to mitigate
both internal risk as well as potential risks relative to a significant
exposure identified relative to the dependencies on third-party systems.
Purchased hardware will be capitalized in accordance with normal
policy. Personnel and all other costs related to the project are being
expensed as incurred. Based on Management's best estimates, the total
cost to the Company of both migrating to a local area network, replacing
software and Year 2000 compliance activities is not expected to exceed
$3.2 million. Since 1994, the Company has incurred approximately $2.8
million in connection with migrating to a local area network, replacing
software and Year 2000 compliance. The total cost to the Company of
these Year 2000 compliance activities has not been and is not
anticipated to be material to its financial position or results of
operations in any given year.
Forward Looking Information
The Company cautions readers regarding certain forward-looking
statements contained in this report and in any other statements made by,
or on behalf of, the Company, whether or not in future filings with the
Securities and Exchange Commission (the "SEC"). Forward-looking
statements are statements not based on historical information and which
relate to future operations, strategies, financial results, or other
developments. Statements using verbs such as "expect," "anticipate,"
"believe" or words of similar import generally involve forward-looking
statements. Without limiting the foregoing, forward-looking statements
include statements which represent the Company's beliefs concerning
future levels of sales and redemptions of the Company's products,
investment spreads and yields, or the earnings and profitability of the
Company's activities.
Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business,
economic and competitive uncertainties and contingencies, many of which
are beyond the Company's control and many of which are subject to
change. These uncertainties and contingencies could cause actual
results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company. Whether or not actual
results differ materially from forward-looking statements may depend on
numerous foreseeable and unforeseeable developments. Some may be
national in scope, such as general economic conditions, changes in tax
law and changes in interest rates. Some may be related to the insurance
industry generally, such as pricing competition, regulatory developments
and industry consolidation. Others may relate to the Company
specifically, such as credit, volatility and other risks associated with
the Company's investment portfolio. The Company disclaims any
obligation to update forward-looking information.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company is involved in litigation relating
to claims arising out of its operations in the normal course of
business. As of November 12, 1998, the Company is not a party to any
legal proceedings, the adverse outcome of which, in management's
opinion, individually or in the aggregate, would have a material adverse
effect on the Company's financial condition or results of operations.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
None
b) Reports on Form 8-K
None
<PAGE>
PRESIDENTIAL LIFE CORPORATION
SEPTEMBER 30, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Presidential Life Corporation
(Registrant)
Date: November 12, 1998 /s/ Herbert Kurz
Herbert Kurz, President and Duly
Authorized Officer of the Registrant
Date: November 12, 1998 /s/ Michael V. Oporto
Michael V. Oporto, Principal
Accounting Officer of the Registrant
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 813
<SECURITIES> 2,097,492
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,227
<DEPRECIATION> (530)
<TOTAL-ASSETS> 2,483,940
<CURRENT-LIABILITIES> 38,070
<BONDS> 50,000
0
0
<COMMON> 319
<OTHER-SE> 510,291
<TOTAL-LIABILITY-AND-EQUITY> 2,483,940
<SALES> 22,041
<TOTAL-REVENUES> 186,531
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 129,791
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,546
<INCOME-PRETAX> 56,740
<INCOME-TAX> 18,059
<INCOME-CONTINUING> 38,681
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,681
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.20
</TABLE>
