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, 1999
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 31,108,778 shares of common stock, par value $.01 per share
of the issuer's common stock outstanding as of the close of business on
August 9, 1999.
<PAGE>
INDEX
Part I - Financial Information Page No.
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets June 30,
1999 (Unaudited) and December 31, 1998. . . . . . . . . . . . . . .3
Consolidated Statements of Income (Unaudited) - For
the Six Months Ended June 30, 1999 and 1998 . . . . . . . . . . . .4
Consolidated Statements of Income (Unaudited) - For
the Three Months Ended June 30, 1999 and 1998 . . . . . . . . . . .5
Consolidated Statements of Shareholders'
Equity (Unaudited) - For the Six Months Ended
June 30, 1999 and 1998. . . . . . . . . . . . . . . . . . . . . . .6
Consolidated Statements of Cash Flows (Unaudited) - For
the Six Months Ended June 30, 1999 and 1998 . . . . . . . . . . . .7
Condensed Notes to (Unaudited) Consolidated Financial
Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . 8-10
Independent Accountants' Review Report. . . . . . . . . . . . . . 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . .12-19
Part II - Other Information. . . . . . . . . . . . . . . . . . . . . 20
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......................................................... 21
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<TABLE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, December 31,
1999 1998
(UNAUDITED)
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ASSETS:
Investments:
Fixed maturities:
Available for sale at market (Cost of
$1,925,690 and $1,841,276, respectively) $1,970,288 $1,951,454
Common stocks (Cost of $21,986 and
$24,715, respectively) 28,176 34,240
Mortgage Loans 16,595 17,038
Real Estate 415 415
Policy Loans 17,372 17,879
Short-term investments 249,429 227,890
Other invested assets 263,358 244,097
Total investments 2,545,633 2,493,013
Cash and cash equivalents 604 1,407
Accrued investment income 26,160 24,309
Amounts due from security transactions 0 20,170
Federal income tax recoverable 5,326 4,740
Deferred policy acquisition costs 49,561 40,283
Furniture and equipment, net 674 693
Amounts due from reinsurers 8,674 8,700
Other assets 8,994 9,402
Assets held in separate account 4,065 4,082
TOTAL ASSETS $2,649,691 $2,606,799
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy Liabilities:
Policyholders' account balances $1,328,493 $1,314,784
Future policy benefits:
Annuity 423,363 400,717
Life and accident and health 53,819 52,270
Other policy liabilities 4,044 3,261
Total policy liabilities 1,809,719 1,771,032
Dollar Repurchase Agreements 214,998 148,651
Repurchase agreements 0 24,402
Note payable 100,000 50,000
Short-term note payable 0 23,000
Deposits on policies to be issued 2,703 1,939
Deferred federal income taxes 17,167 40,815
General expenses and taxes accrued 9,241 6,471
Other liabilities 4,473 13,163
Liabilities related to separate account 4,065 4,082
Total liabilities 2,162,366 2,083,555
Shareholders' Equity:
Capital stock ($.01 par value, authorized
100,000,000 shares, issued and outstanding
31,108,628 shares in 1999 and 31,731,214
shares in 1998) 311 318
Additional paid in capital 6 1,268
Accumulated other comprehensive income 29,680 69,037
Retained earnings 457,328 452,621
Total Shareholders' Equity 487,325 523,244
TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY $2,649,691 $2,606,799
The accompanying notes are an integral part of these Unaudited
Consolidated Financial Statements.
</TABLE>
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<TABLE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
SIX MONTHS ENDED
JUNE 30
(UNAUDITED)
1999 1998
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REVENUES:
Insurance Revenues:
Premiums $ 1,372 $ 1,153
Annuity considerations 24,623 15,644
Universal life and investment
type policy fee income 1,151 1,140
Net investment income 100,327 110,076
Realized investment gains 755 9,069
Other income 2,700 2,357
TOTAL REVENUES 130,928 139,439
BENEFITS AND EXPENSES:
Death and other life insurance benefits 3,823 3,566
Annuity benefits 20,680 20,735
Interest credited to policyholders'
account balances 38,524 38,110
Interest expense on notes payable 4,683 3,833
Other interest and other charges 304 142
Increase in liability for future
policy benefits 23,111 12,572
Commissions to agents, net 2,415 2,337
General expenses and taxes 7,914 8,229
Change in deferred policy
acquisition costs (911) 1,097
TOTAL BENEFITS AND EXPENSES 100,543 90,621
Income before income taxes 30,385 48,818
Provision (benefit) for income taxes
Current 12,296 19,475
Deferred (2,456) (2,826)
9,840 16,649
Income before extraordinary item 20,545 32,169
Extraordinary item - loss on retirement of
debt, net of income tax benefit of $276.5 (514) 0
NET INCOME $ 20,031 $ 32,169
Income per common share before
extraordinary item .66 1.00
Extraordinary item (.02) 0
Income per common share $ .64 $ 1.00
Weighted average number of shares
outstanding during the period 31,307,120 32,297,875
The accompanying notes are an integral part of these Unaudited
Consolidated Financial Statements.
</TABLE>
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<TABLE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
THREE MONTHS ENDED
JUNE 30
(UNAUDITED)
1999 1998
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REVENUES:
Insurance Revenues:
Premiums $ 1,020 $ 983
Annuity considerations 15,805 7,977
Universal life and investment
type policy fee income 658 419
Net investment income 49,338 57,654
Realized investment gains (losses) (1,725) 7,063
Other income 1,896 550
TOTAL REVENUES 66,992 74,646
BENEFITS AND EXPENSES:
Death and other life insurance benefits 2,041 1,658
Annuity benefits 10,475 10,420
Interest credited to policyholders'
account balances 19,410 19,210
Interest expense on notes payable 2,302 2,229
Other interest and other charges 227 68
Increase in liability for future
policy benefits 15,031 6,353
Commissions to agents, net 1,555 1,081
General expenses and taxes 4,013 3,889
Change in deferred policy acquisition costs (1,288) 1,357
TOTAL BENEFITS AND EXPENSES 53,766 46,265
Income before income taxes 13,226 28,381
Provision (benefit) for income taxes
Current 5,891 12,073
Deferred (2,149) (2,189)
3,742 9,884
NET INCOME $ 9,484 $ 18,497
Income per share $ .30 $ .58
Weighted average number of shares
outstanding during the period 31,137,998 32,106,715
The accompanying notes are an integral part of these Unaudited
Consolidated Financial Statements.
</TABLE>
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<TABLE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
Accumulated
Additional Other
Capital Paid-in- Retained Comprehensive
Stock Capital Earnings Income Total
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Balance at
January 1, 1998 $ 326 $ 18,274 $ 412,514 $ 71,540 $502,654
Comprehensive Income:
Net income 32,169 32,169
Net Unrealized Investment
Gains 5,242 5,242
Comprehensive Income 37,411
Purchase and Retirement
of Stock (6) (12,527) (12,533)
Dividends Paid to
Shareholders ($.135
per share) (4,346) (4,346)
Balance at
June 30, 1998 $ 320 $ 5,747 $ 440,337 $ 76,782 $523,186
Balance at
January 1, 1999 $ 318 $ 1,268 $ 452,621 $ 69,037 $523,244
Comprehensive Income:
Net income 20,031 20,031
Net Unrealized Investment
Losses (39,357) (39,357)
Comprehensive Loss (19,326)
Purchase and Retirement
of Stock (7) (1,268) (10,183) (11,458)
Issuance of shares under
Stock Option Plan 6 6
Dividends Paid to
Shareholders ($.165
per share) (5,141) (5,141)
Balance at
June 30, 1999 $ 311 $ 6 $ 457,328 $ 29,680 $487,325
</TABLE>
The accompanying notes are an integral part of these Unaudited Consolidated
Financial Statements.
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<TABLE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
SIX MONTHS ENDED
JUNE 30
(UNAUDITED)
1999 1998
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OPERATING ACTIVITIES:
Net income $ 20,031 $ 32,169
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision (benefit) for deferred income taxes (2,456) (2,826)
Depreciation and amortization 391 944
Net accrual of discount on fixed maturities (3,648) (5,045)
Realized investment (gains) (755) (9,069)
Changes in:
Accrued investment income (1,851) 8,380
Deferred policy acquisition cost (911) 1,097
Federal income tax recoverable (586) 0
Liability for future policy benefits 24,195 12,886
Other items (4,989) 1,491
Net Cash Provided by
Operating Activities 29,421 40,027
INVESTING ACTIVITIES:
Fixed Maturities:
Available for Sale:
Acquisitions (229,794) (123,589)
Sales 43,764 2,602
Maturities, calls and repayments 100,892 134,618
Common Stocks:
Acquisitions (4,711) (7,787)
Sales 12,561 18,030
Increase in short term investments
and policy loans (21,032) (22,690)
Other Invested Assets:
Additions to other invested assets (31,474) (68,701)
Distributions from other invested assets 12,213 11,221
Purchase of property and equipment (74) (47)
Mortgage loans on real estate 443 405
Amount due from security transaction 20,170 0
Net Cash Used in Investing Activities (97,042) (55,938)
FINANCING ACTIVITIES:
Proceeds from Dollar Repurchase Agreements 1,238,930 1,228,447
Repayment of Dollar Repurchase Agreements (1,172,584) (1,217,984)
Repayment of Reverse Repurchase Agreements (24,402) 0
Increase in policyholders' account balances 13,709 7,040
Repurchase of Common Stock (11,458) (12,533)
Proceeds from (repayment of) line of credit (23,000) 3,000
Proceeds from (repayment of) Senior Note 50,000 0
Deposits on policies to be issued 764 (1,193)
Dividends paid to shareholders (5,141) (4,346)
Net Cash Provided by Financing Activities 66,818 2,431
Decrease in Cash and Cash Equivalents (803) (13,480)
Cash and Cash Equivalents at Beginning of Year 1,407 13,480
Cash and Cash Equivalents at End of Period $ 604 $ 0
Supplemental Cash Flow Disclosure:
Income Taxes Paid $ 12,606 $ 19,099
Interest Paid $ 1,725 $ 2,900
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 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 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 six months ended June 30, 1999
are not necessarily indicative of the results that may be expected for
the year ending December 31, 1999. 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, 1998.
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 $5.1 million and $13.4 million, and
deferred Federal income taxes of approximately $12.8 million and $38.5
million at June 30, 1999 and December 31, 1998, 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, 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, acquisitions of private growth companies,
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
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
period. 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 June 30, 1999 and December 31, 1998.
As of June 30, 1999, the Company was committed to contribute, if called
upon, an aggregate of approximately $76.8 million of additional capital
to certain of these limited partnerships.
<PAGE>
C. Investments - continued
In evaluating whether an investment security or other investment
has suffered an impairment in value which is deemed to be "other than
temporary", management considers all available evidence. When a decline
in the value of an investment security or other investment is considered
to be other than temporary, the investment is reduced to its net
realizable value, which becomes the new cost basis. The amount of
reduction is recorded as a realized loss. A recovery from the adjusted
cost basis is recognized as a realized gain only at sale.
The Company participates in "dollar roll" repurchase agreement
transactions to enhance investment income. Dollar roll transactions
involve the sale of certain mortgage backed securities to a holding
institution and a simultaneous agreement to purchase substantially
similar securities for forward settlement at a lower dollar price. The
proceeds are invested in short-term securities at a positive spread
until the settlement date of the similar securities. During this
period, the holding institution receives all income and prepayments for
the security. Dollar roll repurchase agreement transactions are treated
as financing transactions for financial reporting purposes.
D. Federal Income Taxes
The Company accounts for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes" ("SFAS 109") which requires an asset
and liability method in recording income taxes on all transactions that
have been recognized in the financial statements. SFAS 109 provides that
deferred income taxes be adjusted to reflect tax rates at which future
tax liabilities or assets are expected to be settled or realized.
E. Earnings Per Common Share
Basic EPS is computed based upon the weighted average number of
common shares outstanding during the year. Diluted EPS is computed
based upon the weighted average number of common shares including
contingently issuable shares and other dilutive items. The weighted
average number of common shares used to compute diluted EPS for the
three months ended June 30, 1999 and 1998 was 31,161,215 and 32,106,715,
respectively. The weighted average number of common shares used to
compute diluted EPS for the six months ended June 30, 1999 and 1998 was
31,328,794 and 32,297,875, respectively. The dilution from the
potential exercise of stock options outstanding did not change basic EPS.
F. New Accounting Pronouncements
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. In June 1999, the FASB issued Statement of Financial
Accounting Standards No. 137, which amends SFAS 133 by deferring the
effective date for fiscal years beginning after June 15, 2000. The
Company has not yet completed its analysis to determine the impact of
this statement on the Company's financial statements.
<PAGE>
2. INVESTMENTS
There were no investments in any one issuer that aggregate 10% or
more of Shareholders' Equity as of June 30, 1999.
Securities with a carrying value of approximately $5.3 million were
on deposit with various state insurance departments to comply with
applicable insurance laws.
3. NOTES PAYABLE
Notes payable at June 30, 1999 consist of $100 million, 7 7/8%
Senior Notes ("Senior Notes") due February 15, 2009. Interest is
payable February 15 and August 15. Debt issue costs are being amortized
on the interest method over the term of the notes. As of June 30, 1999,
such unamortized costs were $8.7 million. The total principal is due on
February 15, 2009.
Notes payable at December 31, 1998 consisted of $50 million, 9 1/2%
Senior Notes, ("9 1/2% Senior Notes") due December 15, 2000. The
Company repaid the 9 1/2% Senior Notes during March 1999 which resulted
in an extraordinary charge to the Company's net income of $514 thousand,
after income taxes.
The Company has one bank line of credit in the amount of
$25,000,000 and provides for interest on borrowings based on market
indices. At June 30, 1999 the Company had no borrowings 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 six months ended June 30, 1999 reflect
the reduction in the deferred income tax asset as of June 30, 1999. The
Company's effective tax rates for the six months ended June 30, 1999 and
1998 were 32.4% and 34.1%, 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
June 30, 1999, and the related consolidated statements of income for the
three-month and six-month periods ended June 30, 1999 and 1998 and the
consolidated statements of shareholders' equity and cash flows for the
six-month periods ended June 30, 1999 and 1998. 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, 1998, 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 16, 1999, 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,
1998 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
July 29, 1999
<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.
Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. 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 investment 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 Six Months Ended June 30, 1999 to Six Months Ended
June 30, 1998.
Revenues
Annuity Considerations and Life Insurance Premiums
Total annuity considerations and life insurance premiums increased
to approximately $26.0 million for the six months ended June 30, 1999
from approximately $16.8 million for the six months ended June 30, 1998.
Of this amount, annuity considerations increased to approximately $24.6
million for the six months ended June 30, 1999 from approximately $15.6
million for the six months ended June 30, 1998. 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
annuities were approximately $66.0 million for the six months ended June
30, 1999 compared to $61.5 million for the six months ended June 30,
1998. 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 sales directors have added new general agents which have
generated sales.
<PAGE>
Policy Fee Income
Universal life and investment type policy fee income was
approximately $1,151 thousand for the six months ended June 30, 1999, as
compared to approximately $1,140 thousand for the six months ended June
30, 1998. 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 $100.3 million for the
six months ended June 30, 1999, as compared to approximately $110.1
million for the six months ended June 30, 1998. This represents a
decrease of approximately 8.9%. Investment income from "other invested
assets" totaled approximately $12.5 million during the first six months
of 1999, as compared to $30.1 million during the first six months of
1998. 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, 1999 and June 30, 1998 were 8.87% and 9.32%, respectively.
Realized Investment Gains and Losses
Realized investment gains amounted to approximately $800 thousand
during the six months ended June 30, 1999, as compared to approximately
$9.1 million during the six months ended June 30, 1998. Realized
investment gains were partially offset by realized investment losses of
approximately $8.9 million and $1.7 million for the six months ended
June 30, 1999 and 1998, 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.
Total Benefits and Expenses
Total benefits and expenses for the six months ended June 30, 1999
aggregated approximately $100.5 million, as compared to approximately
$90.6 million for the six months ended June 30, 1998, an increase of
approximately 10.9%. 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 $86.4 million for the six months ended June 30, 1999, as
compared to approximately $75.1 million for the six months ended June
30, 1998. The increase is primarily attributable to the increase in the
liability for future policy benefits during the six months ended June
30, 1999 as a result of the increase in annuity considerations received
during the period.
The Insurance Company's average credited rate for future policy
benefits and account balances for the six months ended June 30, 1999 and
1998 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 future policy benefits 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.
<PAGE>
Interest Expense on Notes Payable
The interest expense on the Company's notes payable was
approximately $4.7 million for the six months ended June 30, 1999, as
compared to approximately $3.8 million for the six months ended June 30,
1998. The increase is attributable to the increase in the Company's
senior note payable.
General Expenses, Taxes and Commissions
General expenses, taxes and commissions to agents aggregated
approximately $10.3 million for the six months ended June 30, 1999 as
compared to approximately $10.6 million for the six months ended June
30, 1998. The decrease principally is attributable to lower general
expenses in the first six months of 1999 partially offset by higher
commissions and selling expenses incurred in the first six months of
1999 associated with the higher level of sales in the first six months
of 1999.
Deferred Policy Acquisition Costs
Deferred Policy Acquisition Costs for the six months ended June 30,
1999 resulted in a benefit of $911 thousand, as compared to a charge of
approximately $1.1 million for the six months ended June 30, 1998. This
change is primarily attributable to an increase in the costs associated
with new product sales (such as commissions) which have been deferred
and will be 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 $30.4 million for the six months ended June
30, 1999, as compared to approximately $48.8 million for the six months
ended June 30, 1998.
Income Taxes
Income tax expense was $9.8 million for the six months ended June
30, 1999 as compared to approximately $16.6 million for the six months
ended June 30, 1998. The decrease is primarily attributable to higher
income from operations and realized capital gains for the six months
ended June 30, 1998.
Net Income
For the reasons discussed above, the Company had net income of
approximately $20.0 million during the six months ended June 30, 1999,
as compared to net income of approximately $32.2 million during the six
months ended June 30, 1998.
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 1999, the Company's Board of
Directors declared a quarterly cash dividend of $.09 per share payable
on July 1, 1999. During the second quarter of 1999 the Company
purchased and retired 72,500 shares of common stock. For the six months
ended June 30, 1999, the Company has purchased and retired 623,500
shares of common stock. The Company is authorized to purchase an
additional 712,000 shares of common stock.
<PAGE>
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 1999,
the Insurance Company paid dividends to the Company of $28.47 million.
During the fiscal year 1998, the Insurance Company paid dividends of
$49.4 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 $29.4 million and $40.0 million during
the six months ended June 30, 1999 and 1998, respectively. Net cash
used in the Company's investing activities (principally reflecting
investments purchased less investments called, redeemed or sold) was
approximately $(97.0) million and $(55.9) million during the six months
ended June 30, 1999 and 1998, 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 the Company's financing
activities amounted to approximately $66.8 million and $2.4 million
during the six months ended June 30, 1999 and 1998, respectively. This
fluctuation primarily is attributable to the new Senior Note, higher
policyholder account balances and the increased activity in dollar roll
repurchase agreements outstanding, partially offset by the repurchase of
common stock and repayment of amounts outstanding under the bank line of
credit during the six months ended June 30, 1999.
The Company currently has one bank line of credit for $25 million
of which no amounts were used at June 30, 1999.
During the first quarter of 1999, the Company sold $100 million of
its 7 7/8% Senior Notes due 2009. The net proceeds were used to retire
all of the outstanding $50 million, 9 1/2% Senior Notes and to repay the
amounts outstanding on the bank line of credit.
The indenture governing the Senior Notes contains covenants
relating to limitations on 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 my be obligated to
offer to repurchase all of the outstanding principal amount of such
notes. The Company believes that it is in compliance with all of the
covenants.
<PAGE>
Given the Insurance Company's historic cash flow and current
financial results, management believes that for the next twelve months
and for the reasonably foreseeable future, the Insurance Company's cash
flow from operating activities will provide sufficient liquidity for the
operations of the Insurance Company, as well as provide sufficient funds
to the Company, so that the Company will be able to make dividend
payments, satisfy its debt service obligations and pay its other
operating expenses.
To meet its anticipated liquidity requirements, the Company
purchases investments taking into account the anticipated future cash
flow requirements of its underlying liabilities. In managing the
relationship between assets and liabilities, the Company analyzes the
cash flows necessary to correspond with the expected cash needs on the
underlying liabilities under various interest rate scenarios. In
addition, the Company invests a portion of its total assets in short-term
investments (approximately 9.4% and 8.7% as of June 30, 1999 and
December 31, 1998, respectively). The weighted average duration of the
Company's investment portfolio was approximately 6 years as of June 30,
1999. The Company's fixed maturity investments are all classified as
available for sale and include 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 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 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, 1999
and December 31, 1998, approximately 7.6% and 7.3%, 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 June 30, 1999 and December 31, 1998, the
carrying value of these securities was approximately $197.5 million and
$200.7 million, respectively, (representing approximately 7.5% and 7.7%,
respectively, of the Company's total assets and 40.5% and 38.4%
respectively, of shareholders' 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 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.
<PAGE>
As of June 30, 1999, approximately 10.3% 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 1C 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 $76.8 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 1999 and in fiscal 1998, the Company participated in "dollar
roll" repurchase agreements. Amounts outstanding to repurchase
securities under such agreements were $215.0 million and $148.7 at June
30, 1999 and December 31, 1998, respectively. The Company may engage in
selected "dollar roll" transactions as market opportunities arise.
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.
<PAGE>
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 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 decline, 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 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. In June 1999, the FASB issued Statement of Financial
Accounting Standards No. 137, which amends SFAS 133 by deferring the
effective date for fiscal years beginning after June 15, 2000. The
Company has not yet completed its analysis to determine the impact of
this statement on the Company's financial statements.
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
believes that the modification process of all significant administrative
systems has been 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.
<PAGE>
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 are 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
$4.5 million. Since 1994, the Company has incurred approximately $3.81
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 August 9, 1999, 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, 1999, the Company did
not file a current report on Form 8-K.
<PAGE>
PRESIDENTIAL LIFE CORPORATION
JUNE 30, 1999
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 9, 1999 /s/ Herbert Kurz
Herbert Kurz, President and Duly
Authorized Officer of the Registrant
Date: August 9, 1999 /s/ Michael V. Oporto
Michael V. Oporto, Principal
Accounting Officer of the Registrant
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<PERIOD-END> JUN-30-1999
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