FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 31,149,365 shares of common stock, par value $.01 per share of
the issuer's common stock outstanding as of the close of business on May 10,
1999.
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INDEX
Part I - Financial Information Page No.
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets (Unaudited) March 31, 1999
and December 31, 1998......................................... 3
Consolidated Statements of Income (Unaudited) - For
the Three Months Ended March 31, 1999 and 1998................ 4
Consolidated Statements of Shareholders'
Equity (Unaudited) - For the Three Months Ended
March 31, 1999 and 1998....................................... 5
Consolidated Statements of Cash Flows (Unaudited) - For
the Three Months Ended March 31, 1999 and 1998................ 6
Condensed Notes to (Unaudited) Consolidated Financial Statements.. 7-9
Independent Accountants' Review Report............................ 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............ 11-19
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)
March 31, December 31,
1999 1998
(UNAUDITED)
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ASSETS:
Investments:
Fixed maturities:
Available for sale at market (Cost of
$1,914,180 and $1,841,276, respectively) $1,991,315 $1,951,454
Common stocks (Cost of $23,784
and $24,715, respectively) 29,162 34,240
Mortgage Loans 16,818 17,038
Real Estate 415 415
Policy Loans 17,457 17,879
Short-term investments 259,336 227,890
Other invested assets 252,165 244,097
Total investments 2,566,668 2,493,013
Cash and cash equivalents 0 1,407
Accrued investment income 32,668 24,309
Amounts due from security transactions 0 20,170
Federal income tax recoverable 0 4,740
Deferred policy acquisition costs 44,266 40,283
Furniture and equipment, net 712 693
Amounts due from reinsurers 8,516 8,700
Other assets 9,171 9,402
Assets held in separate account 4,166 4,082
TOTAL ASSETS $2,666,167 $2,606,799
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy Liabilities:
Policyholders' account balances $1,319,853 $1,314,784
Future policy benefits:
Annuity 408,974 400,717
Life and accident and health 52,334 52,270
Other policy liabilities 3,707 3,261
Total policy liabilities 1,784,868 1,771,032
Dollar Repurchase Agreements 218,663 148,651
Repurchase agreements 0 24,402
Note payable 100,000 50,000
Short-term note payable 10,000 23,000
Federal Income tax payable 1,326 0
Deposits on policies to be issued 5,761 1,939
Deferred federal income taxes 29,016 40,815
General expenses and taxes accrued 8,432 6,471
Other liabilities 4,001 13,163
Liabilities related to separate account 4,166 4,082
Total liabilities 2,166,233 2,083,555
Shareholders' Equity:
Capital stock ($.01 par value; authorized
100,000,000 shares; issued and outstanding,
31,180,289 shares in 1999 and 31,731,214
shares in 1998) 312 318
Additional paid-in-capital 0 1,268
Accumulated other comprehensive income 47,696 69,037
Retained earnings 451,926 452,621
Total Shareholders' Equity 499,934 523,244
TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY $2,666,167 $2,606,799
The accompanying notes are an integral part of these Unaudited
Consolidated Financial Statements.
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<TABLE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
THREE MONTHS ENDED
MARCH 31
(UNAUDITED)
1999 1998
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REVENUES:
Insurance Revenues:
Premiums $ 352 $ 170
Annuity considerations 8,818 7,668
Universal life and investment
type policy fee income 493 721
Net investment income 50,989 52,422
Realized investment gains 2,480 2,006
Other income 804 1,807
TOTAL REVENUES 63,936 64,794
BENEFITS AND EXPENSES:
Death and other life insurance benefits 1,783 1,908
Annuity benefits 10,204 10,315
Interest credited to policyholders'
account balances 19,113 18,900
Interest expense on notes payable 2,381 1,604
Other interest and other charges 77 74
Increase in liability for future
policy benefits 8,080 6,219
Commissions to agents, net 860 1,257
General expenses and taxes 3,901 4,340
Change in deferred policy acquisition
costs 377 (260)
TOTAL BENEFITS AND EXPENSES 46,776 44,357
Income before income taxes 17,160 20,437
Provision (benefit) for income taxes
Current 6,405 7,402
Deferred (307) (637)
6,098 6,765
Income before extraordinary item 11,062 13,672
Extraordinary item - loss on retirement of
debt, net of tax benefit of $276.5 (514) 0
NET INCOME $ 10,548 $ 13,672
Earnings per common share before
extraordinary item .35 .42
Extraordinary item (.02) 0
Earnings per common share $ .33 $ .42
Weighted average number of shares
outstanding during the period 31,478,121 32,491,158
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 THREE MONTHS ENDED MARCH 31, 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 $502,654
Comprehensive Income:
Net income 13,672 13,672
Net Unrealized
Investment Gains 6,420 6,420
Comprehensive Income 20,092
Purchase and
Retirement
of Stock (3) (5,943) (5,946)
Dividends Paid to
Shareholders ($.06
per share) (1,947) (1,947)
Balance at
March 31, 1998 $323 $12,331 $424,239 $77,960 $514,853
Balance at
January 1, 1999 $318 $ 1,268 $452,621 $69,037 $523,244
Comprehensive Income:
Net income 10,548 10,548
Net Unrealized
Investment
Losses (21,341) (21,341)
Comprehensive Loss (10,793)
Purchase and
Retirement
of Stock (6) (1,268) (8,882) (10,156)
Dividends Paid to
Shareholders ($.075
per share) (2,361) (2,361)
Balance at
March 31, 1999 $312 $ 0 $451,926 $47,696 $499,934
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)
THREE MONTHS ENDED
MARCH 31
(UNAUDITED)
1999 1998
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OPERATING ACTIVITIES:
Net income $ 10,548 $ 13,672
Adjustments to reconcile net income to net cash
provided by operating activities:
Benefit for deferred income taxes (307) (637)
Depreciation and amortization 120 110
Net accrual of discount on fixed maturities (1,988) (2,507)
Realized investment gains (2,480) (2,006)
Changes in:
Accrued investment income (8,359) (5,069)
Deferred policy acquisition costs 377 (260)
Federal income tax recoverable 4,740 0
Liability for future policy benefits 8,321 6,430
Other items (5,082) 9,092
Net Cash Provided By Operating Activities 5,890 18,825
INVESTING ACTIVITIES:
Fixed Maturities:
Available for Sale:
Acquisitions (166,875) (73,485)
Maturities, calls and repayments 58,462 56,340
Sales 37,271 0
Common Stocks:
Acquisitions (3,192) (4,362)
Sales 6,821 6,180
Decrease (Increase) in short term
investments and policy loans (31,024) 3,820
Other Invested Assets:
Additions to other invested assets (10,499) (27,329)
Distributions from other invested assets 2,430 5,123
Purchase of property and equipment (65) (8)
Mortgage loan on real estate 220 202
Amount due from security transactions 20,170 0
Net Cash Used In Investing Activities (86,281) (33,519)
FINANCING ACTIVITIES:
Proceeds from Dollar Repurchase Agreements 586,488 603,380
Repayment of Dollar Repurchase Agreements (516,476) (602,170)
Repayment of Reverse Repurchase Agreements (24,402) 0
Proceeds from (repayment of) line of credit (13,000) 3,000
Proceeds from (repayment of) Senior Note 50,000 0
Repurchase of Common Stock (10,156) (5,946)
Increase in policyholders' account balances 5,069 8,979
Deposits on policies to be issued 3,822 757
Dividends paid to shareholders (2,361) (1,947)
Net Cash Provided By Financing Activities 78,984 6,053
Decrease in Cash and Cash
Equivalents (1,407) (8,641)
Cash and Cash Equivalents at Beginning of Period 1,407 13,480
Cash and Cash Equivalents at End of Period $ 0 $ 4,839
Supplemental Cash Flow Disclosure:
Income Taxes Paid $ 63 $ 4,356
Interest Paid $ 1,528 $ 164
The accompanying notes are an integral part of these Unaudited Consolidated
Financial Statements.
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<PAGE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Business
Presidential Life Corporation ("the Company"), through its
wholly-owned subsidiary, Presidential Life Insurance Company ("Insurance
Company"), is engaged in the sale of life insurance and annuities.
B. Basis of Presentation and Principles of Consolidation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles ("GAAP") applicable to stock life insurance companies for
interim financial statements and with the requirements of Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles applicable to stock
life insurance companies for complete financial statements. In the
opinion of management, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation have been
included. Interim results for the three months ended March 31, 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 (losses), net of the effects of amortization of
deferred policy acquisition costs of approximately $9.1 million and
$13.4 million, and deferred Federal income taxes of approximately $22.8
million and $38.5 million, at March 31, 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, 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, acquisitions of private growth companies,
debt restructuring and merchant banking. 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 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
<PAGE>
C. Investments - continued
interests, in the aggregate, exceeds their related carrying value as of
March 31, 1999 and December 31, 1998. As of March 31, 1999, the Company
was committed to contribute, if called upon, an aggregate of
approximately $61.2 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.
D. Federal Income Taxes
The Company and its subsidiaries file a consolidated federal
income tax return. The asset and liability method in recording income
taxes on all transactions that have been recognized in the financial
statements is used. Deferred taxes are adjusted to reflect tax rates at
which future tax liabilities or assets are expected to be settled or
realized.
E. 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. 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 $413,897,000 represents investments owned in
any one issuer that aggregate 10% or more of Shareholders' Equity at
March 31, 1999.
Securities with a carrying value of approximately $5.5 million were
on deposit with various state insurance departments to comply with
applicable insurance laws.
<PAGE>
3. NOTES PAYABLE
Notes payable at March 31, 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 March 31,
1999, such unamortized costs were $8.87 million. The total principal is
due on February 15, 2009.
Notes payable at December 31, 1998 consist 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 a one-time
extraordinary charge to the Company's net income of $514 thousand, after
taxes.
The Company has one line of credit in the amount of $25,000,000 and
provides for interest on borrowings based on market indices. At March
31, 1999 the Company had $10,000,000 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 three months ended March 31, 1999 reflect
the reduction in the deferred tax asset as of March 31, 1999. The
Company's effective tax rate for the three months ended March 31, 1999
and 1998 was 35.5% and 33.1%, 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
March 31, 1999, and the related consolidated statements of income,
shareholders' equity and cash flows for the three-month periods ended
March 31, 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
May 7, 1999
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
The Company operates principally in a single business segment with
two primary lines of business-individual life insurance and individual
annuities. 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 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 three months ended March 31, 1999 compared to three
months ended March 31, 1998.
Revenues
Annuity Considerations and Life Insurance Premiums
Total annuity considerations and life insurance premiums increased
to approximately $9.2 million for the three months ended March 31, 1999
from approximately $7.8 million for the three months ended March 31,
1998, an increase of approximately $1.3 million. Of this amount,
annuity considerations increased to approximately $8.8 million for the
three months ended March 31, 1999 from approximately $7.7 million for
the three months ended March 31, 1998, an increase of approximately $1.2
million. 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 $24.0 million and
approximately $33.1 million during the three months ended March 31, 1999
and March 31, 1998, respectively. Management believes the successful
expansion of our Marketing Department will continue to generate new
sales. 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 $493 thousand for the three months ended March 31, 1999,
as compared to approximately $721 thousand for the three months ended
March 31, 1998. This represents approximately a $228 thousand decrease.
Net Investment Income
Net investment income totaled approximately $50.99 million during
the first three months of 1999, as compared to approximately $52.4
million during the first three months of 1998. This represents a
decrease of approximately $1.4 million. Investment income from "other
invested assets" totaled approximately $8.57 million during the first
three months of 1999, as compared to approximately $13.82 million during
the first three months of 1998. The Company's ratio of net investment
income to average cash and invested assets less net investment income
for the periods ended March 31, 1999 and March 31, 1998 was
approximately 8.97% and 9.4%, respectively.
Realized Investment Gains and Losses
Realized investment gains amounted to approximately $2.5 million
during the first three months of 1999, as compared to approximately $2.0
million during the first three months of 1998. Realized investment
gains were partially offset by realized investment losses of
approximately $2.2 million and $299.1 thousand for the three months
ended March 31, 1999 and March 31, 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 three months ended March 31,
1999 aggregated approximately $46.8 million, as compared to
approximately $44.4 million for the three months ended March 31, 1998.
This represents an increase of $2.4 million from the first quarter of
1998.
Interest Credited and Benefits to Policyholders
Interest credited and other benefits to policyholders amounted to
approximately $39.3 million for the three months ended March 31, 1999,
as compared to approximately $37.4 million for the three months ended
March 31, 1998. The increase is attributable to a higher level of
policyholder account balances.
The Insurance Company's average credited rate for reserves and
account balances for the three months ended March 31, 1999 and 1998 were
less than the Company's ratio of net investment income to mean assets
for the same period as noted above under "Net Investment Income".
Although management does not currently expect material declines in the
spread between the Company's average credited rate for reserves and
account balances and the Company's ratio of net investment income to
mean assets (the "Spread"), there can be no assurance that the Spread
will not decline in future periods or that such decline will not have a
material adverse effect on the Company's financial condition and results
of operations. Depending, in part, upon competitive factors affecting
the industry in general, and the Company, in particular, the Company
may, from time to time, change the average credited rates on certain of
its products. There can be no assurance that the Company will reduce
such rates or that any such reductions will broaden the Spread.
<PAGE>
Interest Expense on Notes Payable
The interest expense on the Company's notes payable amounted to
approximately $2.4 million for the three months ended March 31, 1999,
and approximately $1.6 million for the three months ended March 31,
1998. The increase in interest expense in the first quarter of 1999 is
attributable to the increase in the Company's senior note payable.
General Expenses, Taxes and Commissions
General expenses, taxes and commissions to agents totaled
approximately $4.8 million for the three months ended March 31, 1999, as
compared to approximately $5.6 million for the three months ended March
31, 1998. This represents approximately a decrease of $836 thousand.
The decrease principally is attributable to lower commissions and
related expenses incurred in the first quarter of 1999 associated with
the lower level of sales in 1999.
Deferred Policy Acquisition Costs
The change in Deferred Policy Acquisition Costs for the three months
ended March 31, 1999 resulted in a charge of approximately $377
thousand, as compared to a credit of approximately $260 thousand for the
three months ended March 31, 1998.
Income Before Income Taxes
For the reasons discussed above, income before income taxes amounted
to approximately $17.2 million for the three months ended March 31,
1999, as compared to approximately $20.4 million for the three months
ended March 31, 1998.
Income Taxes
Income tax expense was $6.1 million for the first three months of
1999 as compared to approximately $6.8 million for the first three
months of 1998. This decrease is primarily attributable to lower income
before income taxes partially offset by higher realized capital gains
for the three months ended March 31, 1999.
Net Income
For the reasons discussed above, the Company had net income of
approximately $10.55 million during the three months ended March 31,
1999 and net income of approximately $13.7 million during the three
months ended March 31, 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 source of cash is rent from its real
estate, interest on its investments and dividends from the Insurance
Company. During the first quarter of 1999, the Company's Board of
Directors declared a quarterly cash dividend of $.075 per share payable
on April 2, 1999. During the first quarter of 1999 the Company
purchased and retired 551,000 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 law. New York law states that no domestic stock life insurance
company shall distribute any dividend to its shareholders unless a notice
of its intention to declare such dividend and the amount thereof shall have
been filed with the Superintendent of the New York Insurance Department
("Superintendent") not less than 30 days in advance of such proposed
declaration. The Superintendent may disapprove such distribution by
giving written notice to such company within 30 days after such
filing that he or she finds that the financial condition of the company
does not warrant such distribution. The New York State Insurance
Department has established informal guidelines for the Superintendent's
findings which focus upon, among other things, the overall financial
condition and profitability of the insurer under statutory accounting
practices. During the first quarter of 1999 and 1998, the Insurance
Company did not pay dividends to the Company. 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 life
insurance policies and annuity contracts, operating expenses and the
purchase of investments. Net cash provided by the Company's operating
activities (reflecting principally: (i) premiums and contract charges
collected less (ii) benefits paid on life insurance and annuity products
plus (iii) income collected on invested assets less (iv) commissions and
other general expenses paid) was approximately $5.9 million and $18.8
million during the three months ended March 31, 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 $86.3 million, and $33.5 million
during the three months ended March 31, 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 are also considered to be a financing activity.
In addition, as previously discussed, the Company participates in dollar
roll repurchase agreements which are considered to be
a financing activity. Net cash provided by the Company's financing
activities amounted to approximately $78.98 million, and $6.1 million
during the three months ended March 31, 1999 and 1998, respectively.
This fluctuation primarily is attributable to the new Senior Note,
higher policyholder account balances, and the increase in dollar roll
repurchase agreements outstanding, partially offset by a decrease in
borrowings under the company's line of credit at March 31, 1999.
The Company currently has one bank line of credit for $25 million
of which $10 million is used at March 31, 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.
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 may 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 9.7% and 8.7% as of March 31, 1999, and
December 31, 1998, respectively). The weighted average duration of the
Company's debt portfolio was approximately five years as of March 31,
1999. The Company's fixed maturity investments are all classified as
available for sale and includes those securities available to be sold in
response to, among other things, changes in market interest rates,
changes in the security's prepayment risk, the Company's need for
liquidity and other similar factors. Fixed maturity investments
available for sale represent investments which may be sold in response
to changes in various economic conditions. These investments are
carried at estimated market value and unrealized gains and losses, net
of the effects of amortization of deferred policy acquisition costs and
deferred federal income taxes, are charged directly to shareholders'
equity, unless a decline in market value is considered to be other than
temporary in which event the Company recognizes a loss. Equity
securities include common stocks and non-redeemable preferred stocks and
are carried at market, with the related unrealized gains and losses, net
of federal income taxes, if any, charged directly to shareholders'
equity, unless a decline in market value is considered to be other than
temporary, in which event, the Company recognizes a loss.
The 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 March 31, 1999
and December 31, 1998, approximately 7.7% 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 fixed maturity 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 March 31, 1999 and
December 31, 1998, the carrying value of these securities was
approximately $221.98 million and $200.7 million, respectively
(representing approximately 8.3% and 7.7% of the Company's total assets
and 44.4% and 38.4%, respectively of shareholders' equity).
Investments in below investment grade securities have different
risks than investments in corporate debt securities rated investment
grade. Risk of loss upon default by the borrower is significantly
greater with respect to below investment grade securities than with
other corporate debt securities because below investment grade
securities generally are unsecured and often are subordinated to other
creditors of the issuer. Also, issuers of below investment grade
securities usually have high levels of indebtedness and often are more
sensitive to adverse economic conditions, such as recession or
increasing interest rates, than are investment grade issuers.
Typically, there only is a thinly traded market for such securities and
recent market quotations
<PAGE>
may not be available for some of these securities. Market quotes
generally are available only from a limited number of dealers and may
not represent firm bids of such dealers or prices for actual sales. The
Company attempts to reduce the overall risk in its below investment
grade portfolio, as in all of its investments, through careful credit
analysis, investment policy limitations, and diversification by company
and by industry.
As of March 31, 1999, approximately 9.84% of the Company's total
invested assets were invested in limited partnerships. Such investments
are included in the Company's consolidated balance sheet under the
heading "Other invested assets." See "Note 2 to the Notes to
Consolidated Financial Statements." The Company is committed, if called
upon during a specified period, to contribute an aggregate of
approximately $61.2 million of additional capital to certain of these
limited partnerships. However, management does not expect the entire
amount to be drawn down as certain of these limited partnerships are
nearing the end of the period during which investors are required to
make contributions. Pursuant to NYSID regulations, the Company's
investments in equity securities, including limited partnership
interests, may not exceed 20% of the Company's total invested assets.
The Company may make selective investments in additional limited
partnerships as opportunities arise. 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. There can
be no assurance that the Company will continue to achieve the same level
of returns on its investments in limited partnerships as it has
historically or that the Company will achieve any returns on such
investments at all. Further, there can be no assurance that the Company
will receive a return of all or any portion of its current or future
capital investments in limited partnerships. The failure of the Company
to receive the return of a material portion of its capital investments
in limited partnerships, or to achieve historic levels of return on such
investments, could have a material adverse effect on the Company's
financial condition and results of operations.
As previously discussed, the Company participates in "dollar roll"
repurchase agreements. Amounts outstanding to repurchase securities
under such agreements were $218.7 million and $148.7 million at March
31, 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 jurisdiction to
participate in guaranty associations, which are organized to pay
contractual obligations under insurance policies (and certificates
issued under group insurance policies) issued by impaired or insolvent
life insurance companies. These associations levy assessments (up to
prescribed limits) on all member insurers in a particular state on the
basis of the proportionate share of the premiums written by member
insurers in the lines of business in which the impaired or insolvent
insurer is engaged. Some states permit member insurers to recover
assessments paid through full or partial premium tax offsets. These
assessments may be deferred or forgiven under most guaranty laws if they
would threaten an insurer's solvency. The amount of
these assessments in prior years has not been material, however, the
amount and timing of any future assessment on the Insurance Company
under these laws cannot be reasonably estimated and are beyond the
control of the Company and the Insurance Company. Recent failures of
substantially larger insurance companies could result in future
assessments in material amounts.
<PAGE>
Effects of Inflation and Interest Rate Changes
Management does not believe that inflation has had a material
adverse effect on the Company's consolidated results of operations. The
Company seeks to manage its investment portfolio in part to reduce its
exposure to interest rate fluctuations. In general, the market value of
the Company's fixed maturity portfolio increases or decreases in an
inverse relationship with fluctuations in interest rates, and the
Company's net investment income increases or decreases in direct
relationship with interest rate changes. For example, if interest rates
decline, the Company's fixed maturity investments generally will
increase in market value, while net investment income will decrease as
fixed income investments mature or are sold and proceeds are reinvested
at the declining rates, and vice versa. Management is aware that
prevailing market interest rates frequently shift and, accordingly, the
Company has adopted strategies which are designed to address either an
increase or decrease in prevailing rates. In a rising interest rate
environment, the Company's average cost of funds would be expected to
increase over time as it prices its new and renewing annuities to
maintain a generally competitive market rate. Concurrently, the Company
would attempt to place new funds in investments which were matched in
duration to, and higher yielding than, the liabilities assumed.
Management believes that liquidity necessary to fund withdrawals would
be available through income, cash flow, the Company's cash reserves or
from the sale of short-term investments. In a declining interest rate
environment, the Company's cost of funds would be expected to decrease
over time, reflecting lower interest crediting rates on its fixed
annuities. Should increased liquidity be required for withdrawals,
management believes that the portion of the Company's investments which
are designated as available for sale in the Company's consolidated
balance sheet could be sold without materially adverse consequences in
light of the general strengthening which would be expected in the fixed
maturity security market.
Interest rate changes also may have temporary effects on the sale
and profitability of the universal life and annuity products offered by
the Company. For example, if interest rates rise, competing investments
(such as annuity or life insurance products offered by the Company's
competitors, certificates of deposit, mutual funds and similar
instruments) may become more attractive to potential purchasers of the
Company's products until the Company increases the rates credited to
holders of its universal life and annuity products. In contrast, as
interest rates fall, the Company attempts to lower its credited rates to
compensate for the corresponding decline in its net investment income.
As a result, changes in interest rates could materially adversely effect
the financial condition and results of operations of the Company
depending on the attractiveness of alternative investments available to
the Company's customers. In that regard, in the current low interest
rate environment, the Company has attempted to maintain its credited
rates at competitive levels which are designed to discourage surrenders
and which may be considered attractive to purchasers of new annuity
products. In addition, because the level of prevailing interest rates
impacts the Company as well as its competition, management does not believe
that the low interest rate environment has materially affected the Company's
competitive position vis a vis other life insurance companies that emphasize
the sale of annuity products. Notwithstanding the foregoing, if interest
rates continue at current levels, there can be no assurance that this segment
of the life insurance industry, including the Company, would not
experience increased levels of surrenders and reduced sales and thereby
be materially adversely affected.
<PAGE>
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. 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
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.
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
$4.0 million. Since 1994, the Company has incurred approximately $3.29
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.
<PAGE>
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 May 10, 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 March 31, 1999, the Company filed two
current reports on Form 8-K dated February 16, 1999 and February 18, 1999.
<PAGE>
PRESIDENTIAL LIFE CORPORATION
MARCH 31, 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: May 10, 1999 /s/ Herbert Kurz
Herbert Kurz, President and Duly
Authorized Officer of the Registrant
Date: May 10, 1999 /s/ Michael V. Oporto
Michael V. Oporto, Principal
Accounting Officer of the Registrant
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