SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K405
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Title of Class
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K405 or any amendment to this Form 10-K405. [ X ]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant as of March 27, 2000 was approximately $433,368,905 based upon the
average bid and asked prices of such stock on that date.
The number of shares outstanding of the Registrant's common stock as of
March 27, 1999 was 30,411,853.
DOCUMENTS INCORPORATED BY REFERENCE
Selected designated portions of the definitive proxy statement to be used in
connection with the registrant's 2000 Annual Meeting of Shareholders are
incorporated by reference into Part III of this Form 10-K405. Other documents
incorporated by reference into this Form 10-K405 are listed in the Exhibit
Index.
<PAGE>
PART I
Item 1. Business
General
Presidential Life Corporation (the "Company") is an insurance
holding company that, through its wholly-owned subsidiary Presidential
Life Insurance Company (the "Insurance Company"), operates principally
in a single business segment with two primary lines of business--
individual annuities and individual life insurance. Unless the
context otherwise requires, the "Company" shall be deemed to
include Presidential Life Corporation and its subsidiaries. The
Company was founded in 1969 and, through the Insurance Company, is
licensed to market its products in 48 states and the District of Columbia.
Approximately 50.2% of the Company's fiscal 1999 annuity and life
insurance products were sold to individuals residing in the State of New York.
Products
The Company currently emphasizes the sale of a variety of single
premium and flexible premium annuity products (including those written
in connection with funding agreements for certain state lotteries,
group annuities and other structured settlements) as well as annual and
single premium life insurance products. Each of these products is
designed to meet the needs of increasingly sophisticated consumers for
supplemental retirement income, estate planning and protection from
unexpected death.
Annuity Business
Industry-wide sales of annuity products have experienced strong
growth in recent years. Annuities currently enjoy an advantage over
certain other savings mechanisms because the annuitant receives a tax
deferred accrual of interest on his or her investment.
Single Premium Annuity products require a one-time lump sum
premium payment. During the accumulation period, the accrual of
interest is on a tax deferred basis to the annuitant.
Single Premium Deferred Annuities ("SPDAs") provide for a single
premium payment at the time of issue, an accumulation period and an
annuity payout period at some future date. During the accumulation
period, the Company credits the account value of the annuitant with
interest earnings at a current interest rate that is guaranteed for
periods ranging from one to five years, at the annuitant's option, and
that, thereafter, is subject to change based on market and other
conditions. Each contract also has a minimum guaranteed rate. This
accrual of interest during the accumulation period is on a tax deferred
basis to the annuitant. After the number of years specified in the
annuity contract, the annuitant may elect to take the proceeds of the
annuity as a single payment, a specified income for life or a specified
income for a fixed number of years. The annuitant is permitted at any
time during the accumulation period to withdraw all or part of the
single premium paid plus the amount credited to his or her account.
Any such withdrawal, however, typically is subject to a surrender
charge during the early years of the annuity contract.
<PAGE>
Single Premium Immediate Annuity Products ("SPIAs") guarantee a
stream of payments which begin immediately and continue for the life
of the annuitant. The payment may be guaranteed for a period of time
(typically five to 20 years) (the "Guarantee Period"). If the
annuitant dies during the Guarantee Period, payments will continue to
be made to the annuitant's beneficiary for the balance of the Guarantee
Period. SPIAs differ from deferred annuities in that generally they
provide for payments to begin immediately and are not subject to
surrender or loan. The implicit interest rate on SPIAs is based on
market conditions which existed at the time that the annuity was issued
and is guaranteed for the term of the annuity.
Single Premium Immediate Income Products ("SPIIs") are similar to
SPIAs in that they guarantee a stream of payments. Unlike SPIAs, SPII
payments always are guaranteed for a specified period of time, not for
the life of the annuitant. Payments are made to the payee or
beneficiary even if the annuitant dies during the payout period.
Single Premium Immediate Structured Settlement Annuities provide
an alternative to a lump-sum payment or settlement in the case of a
lottery or a personal injury case, as the case may be, and generally
are purchased by state lottery agencies for the benefit of a lottery
winner or by property and casualty insurance companies for the benefit
of an injured claimant, as the case may be, with benefits scheduled
over a fixed period or, over a fixed period and for the life of the
annuitant thereafter. Structured settlements offer tax advantaged
long-range financial security to the annuitant and facilitate the
operations of state lottery agencies and the ability of casualty
insurance carriers to effect claim settlements. Structured settlement
annuities are long-term in nature, guarantee a fixed benefit stream and
cannot be surrendered or borrowed against.
Flexible Premium Annuity products provide similar benefits to
those provided by the Company's single premium deferred annuity
products, but instead permit periodic premium payments in such amounts
as the holder deems appropriate. As a result, the benefits
attributable to such products will fluctuate according to the level of
such payments.
Group Terminal Funding Annuity products provide benefits similar
to single premium immediate annuities. Benefits are provided to
employees when a company's pension plan is terminated or when the
employer wants to transfer liability for making payments. Group
terminal funding annuities cannot be surrendered or borrowed against.
All of the Company's deferred annuity products provide minimum
interest rate guarantees. The minimum guaranteed rates on the Company's
deferred annuity products currently range from 4% to 5 1/2% annually
and the contracts (except for SPIAs) are designed to permit the Company
to change the crediting rates annually subject to the minimum
guaranteed rate. The Company takes into account the profitability of
its annuity business and its relative competitive position in
determining the frequency and extent of changes to the interest
crediting rates.
The Company's deferred annuity products are designed to encourage
persistency (see "Pricing" below for a definition of the term
"persistency") by incorporating surrender charges that exceed the cost
of issuing the annuity. An annuitant may not terminate or withdraw
substantial funds for periods generally ranging from one to seven years
without incurring significant penalties in the form of surrender
charges. Notwithstanding the foregoing, approximately 50.9% of the
Company's deferred annuity contracts in force (measured by reserves)
as of December 31, 1999 are surrenderable without charge.
<PAGE>
The following table presents annuity products in force measured
by reserves, as well as certain statistical data for each of the years
in the five fiscal year period ended December 31, 1999, in each case,
as determined in accordance with generally accepted accounting
principles ("GAAP").
<TABLE>
ANNUITIES IN FORCE
Year Ended December 31,
1999 1998 1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Single premium
immediate structured
settlement
annuities $ 168,087 $ 166,360 $ 167,269 $ 164,214 $ 163,384
Single premium
immediate
annuities 384,194 314,108 281,665 263,974 262,449
Total immediate
annuities 552,281 480,468 448,934 428,188 425,833
Single premium
deferred annuities 914,460 865,884 835,900 810,636 808,292
Flexible premium
annuities 153,460 159,460 168,023 182,505 196,406
Group terminal
funding annuities 104,142 103,215 103,965 103,941 104,046
Total annuities $1,724,343 $1,609,027 $1,556,822 $1,525,270 $1,534,577
For the fiscal year ended December 31,
1999 1998 1997 1996 1995
Ratio of annualized
voluntary terminations
(surrenders and lapses)
to mean insurance
in force 16.5% 15.9% 15.2% 15.3% 16.5%
At end of year:
Number of annuity
contracts in
force 43,337 43,695 45,554 45,717 50,694
Average size of
annuity contract
in force $ 39,789 $ 36,824 $ 34,175 $ 33,363 $ 30,271
</TABLE>
<PAGE>
Annuity Considerations and Premiums - The following table sets
forth certain information with respect to the Insurance Company's
annuity considerations and premium revenues for each of the five fiscal
years ended December 31, 1999, as determined in accordance with
statutory accounting principles. 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
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 on
the Company's consolidated balance sheet.
Distribution of Products - By Gross Premiums and Other
Considerations
<TABLE>
For the fiscal year ended December 31,
1999 1998 1997 1996 1995
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Annuity
Considerations $191,815 $142,435 $132,601 $102,343 $ 97,313
Whole Life and
Term Life 8,589 8,041 8,364 8,254 8,200
Universal Life 5,550 4,240 3,811 3,152 3,581
Other 1,158 0 0 0 0
Total Premiums and
Considerations $207,112 $154,716 $144,776 $113,749 $109,094
Number of life
insurance policies
in force 18,605 18,491 18,708 19,069 19,650
Average size of
life insurance
policy in force $ 40,441 $ 41,794 $ 44,006 $ 45,352 $ 47,518
</TABLE>
<PAGE>
Life Insurance Business
Universal Life policies are interest-sensitive products which
typically provide the insured with "nonparticipating" (i.e.
non-dividend paying) life insurance with a cash value. Current
interest is credited to the policy's cash value based upon interest
rates that periodically are revised by the Company to reflect current
economic conditions (primarily interest rates). In no event, however,
will the interest rate credited on the policy's cash value be less than
the guaranteed rate specified in the policy. The Company offers both
flexible premium and single premium universal life insurance products.
The Company's flexible premium and single premium universal life
insurance products differ based on policy provisions affecting the
amount and timing of premium payments.
Whole Life policies are products which provide the insured with
life insurance with a guaranteed cash value. Typically, a fixed
premium, which costs more than comparable term coverage when the
policyholder is younger, but less than comparable term coverage as the
policyholder grows older, is paid over a period of years. Whole life
insurance products combine insurance protection with a savings plan
that gradually increases in amount over time. With respect to the
Company's whole life insurance products, the policyholder may borrow
against the policy's accumulated cash value. However, the death
benefit is decreased by the amount of the outstanding loan. In
addition, the policyholder may choose to surrender the policy and
receive the accumulated cash value rather than continuing the insurance
protection.
Term Life policies are products which provide insurance protection
if the insured dies during the time period specified in the policy.
No cash value is built up. These products provide the maximum benefit
for the lowest initial premium outlay. The Company's term life
insurance products include annually renewable, convertible and
decreasing term insurance.
Graded Benefit Life policies are products designed for the upper
age (i.e. ages 40 to 80), sub-standard applicant. Depending upon age,
these products provide for a limited death benefit of either the return
of premium plus 5% interest for three years, or the return of premium
plus 5% interest for two years. Thereafter, the death benefit is
limited to the face amount of the policy. This product typically is
offered with a maximum face value of $25,000.
Increasing Premium Whole Life policies are products which have
characteristics of both whole life and term life products. Initial
premiums are comparatively low and generally increase each year until
the twentieth policy year when the premium becomes fixed. No cash
values are built up in the early years of the policy, but cash values
do begin to accumulate in the later (typically around the fifteenth
policy year) years of the policy.
<PAGE>
Insurance Policies in Force - The following table provides a
reconciliation of beginning and ending universal, whole and term life
insurance policies, in force, as well as certain statistical data for
each of the years in the five fiscal year period ended December 31,
1999.
<TABLE>
LIFE INSURANCE IN FORCE
1999 1998 1997 1996 1995
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
In force beginning
of year
Universal $377,470 $383,233 $384,008 $393,002 $ 392,774
Whole<F1> 218,461 263,554 304,740 351,479 425,950
Term 176,875 176,470 176,061 189,254 185,934
Total 772,806 823,257 864,809 933,735 1,004,658
Sales and additions:
Universal 24,435 23,735 25,747 16,526 20,490
Whole<F1> 41,612 35,365 42,596 44,785 54,089
Term 49,887 27,954 28,985 19,295 29,404
Total 115,934 87,054 97,328 80,606 103,983
Terminations:
Death 7,233 6,134 6,549 7,047 10,329
Surrenders and
conversions 30,525 19,305 19,387 16,768 13,009
Lapses 98,541 107,484 108,846 121,761 147,134
Other 30 4,582 4,099 3,956 4,334
Total 136,329 137,505 138,881 149,532 174,906
In force end of year:
Universal 368,424 377,470 383,233 384,008 393,002
Whole<F1> 192,803 218,461 263,554 304,740 351,479
Term 191,185 176,875 176,470 176,061 189,254
Total $752,412 $772,806 $823,257 $864,809 $ 933,735
Total reinsurance
ceded $410,955 $438,827 $476,248 $517,484 $ 573,324
Total insurance in
force at end of year
net of reinsurance $341,457 $333,979 $347,009 $347,325 $ 360,411
<FN>
<F1> Includes graded benefit life insurance products.
</FN>
</TABLE>
<PAGE>
Marketing and Distribution
The Company, through the Insurance Company, is licensed to market
its products in 48 states and in the District of Columbia. The Company
sells its individual annuity and life insurance products through
approximately 735 independent general agents (approximately 240 of
which are located in the State of New York), who are independent
contractors. These independent general agents market the Company's
products through approximately 8,050 licensed insurance agents or
brokers, most of whom also write products similar to those sold by the
Company for other companies. Management believes that the Company
offers competitive commission rates and seeks to provide innovative
products and quality service to its independent general agents.
Compensation of agents is strictly regulated by the New York State
Department of Insurance (the "NYSDI").
The independent general agency system has been the Insurance
Company's primary distribution system since the Insurance Company was
founded. Management believes that the Company's consistent focus on
the independent general agent distribution system provides a cost
advantage, since the Company incurs no fixed costs associated with
recruiting, training and maintaining employee agents. Accordingly, a
substantial portion of the costs associated with generating new
business for the Company are not fixed costs but vary directly with the
level of business produced.
Since the Company utilizes independent general agents to market
its products, it is not dependent on any one agency for any substantial
amount of its business. On the other hand, the independent agents are
not captive to the Company, and most write products similar to those
sold by the Company for other companies. This can result in
significant sales declines if for any reason the Company is relatively
less competitive or if there is cause for general concern.
Among other things, crediting rates, commissions, the perceived
quality of the issuer, product features and services generally are
significant factors that management believes influence an agent's
willingness and ability to sell particular annuity products. The
Company generally issues annuity contracts, together with the agent's
commission check, within two business days of receiving the application
and premium. The Company also seeks to provide ongoing service to the
agent. Towards that end, the Company provides agents with access to
the Company's senior executives. In addition, agents and contract
owners can access information about their contracts via a toll-free
telephone number.
The Company's top ten general agents accounted for approximately
25.0% of the Company's combined individual life insurance policies and
annuity contracts sold, (measured by the combined premiums and
considerations), during fiscal 1999. Of the Company's combined annuity
contracts and individual life insurance policies sold, no single agent
accounted for more than 1.7% and no single general agency accounted for
more than 6.92% during 1999. The loss of any single sales source would
not have a material adverse effect on the Company, but the loss of
several could cause a decline in sales until they are replaced by the
appointment of other general agents. The Company's agency department
actively recruits new general agents on a continuous basis.
Pricing
Management believes that the Company is able to offer its products
at competitive prices to its targeted markets as a result of: (i)
maintaining relatively low issuance costs by selling through the
independent general agency system; (ii) minimizing home office
administrative costs; and (iii) utilizing appropriate underwriting
guidelines.
<PAGE>
The long-term profitability of sales of life and most annuity
products depends on the degree of margin of the actuarial assumptions
that underlie the pricing of such products. Actuarial calculations for
such products, and the ultimate profitability of sales of such
products, are based on four major factors: (i) persistency; (ii) rate
of return on cash invested during the life of the policy or contract;
(iii) expenses of acquiring and administering the policy or contract;
and (iv) mortality.
Persistency is the rate at which insurance policies remain in
force, expressed as a percentage of the number of policies remaining
in force over the previous year. Policyholders sometimes do not pay
premiums, thus, causing their policies to lapse.
The assumed rate of return on invested cash and desired spreads
during the period that insurance policies or annuity contracts are in
force also affects pricing of products and currently includes an
assumption by the Company of a specified rate of return and/or spread
on its investments for each year that such insurance or annuity product
is in force.
Another major factor affecting profitability is the level of
expenses. Management believes that one of the Company's strengths is
its concentration on minimizing expenses through periodic review and
adjustment of general and administrative costs.
Mortality is the rate of death experienced by life insurance
policyholders and certain annuitants taken as a group. For calculating
premiums, the Company uses actuarial assumptions with margins added to
allow for adverse statistical variations. Actual mortality experience
in a particular period may be different than actuarially expected
mortality experience and, consequently, may adversely affect the
Company's operating results for such period.
Underwriting Procedures
Premiums charged on insurance products are based, in part, on
assumptions about the expected mortality experience. In that regard,
the Company has adopted and follows detailed, uniform underwriting
procedures designed to assess and quantify insurance risks before
issuing life insurance policies to individuals. To implement these
procedures, the Company employs an experienced professional
underwriting staff. The underwriting practice of the Company is to
require attending physicians' statements and medical examinations for
each applicant over age 55 or for policies in excess of certain
prescribed policy amounts, ranging from $25,000 and up. These
requirements are graduated according to the applicant's age and the
face amount of the policy. The Company also carefully reviews medical
records and each applicant's written application for insurance, which
generally is prepared under the supervision of one of the Company's
independent general agents. The factors considered in evaluating an
application for individual life insurance coverage include the
applicant's age, occupation, avocations, driving record, finances,
aviation activities, smoking habits, alcohol usage and general health
and medical history. These factors are discovered through the
application, attending physicians' statements, consumer investigation
reports from investigative agencies, direct contact, motor vehicle
reports and the Medical Information Bureau, an insurance industry
information service. In accordance with industry practice, material
misrepresentations on a policy application can result in the
cancellation by the Company of the policy under the two year
incontestability clause in the general provisions of the policy.
<PAGE>
To the extent that an applicant does not meet the Company's
underwriting standards for issuance of a policy at the standard risk
classifications, the Company may offer to issue a classified,
sub-standard or impaired risk policy for a risk adjusted premium amount
rather than declining the application. The amount of the Company's
impaired risk insurance in force in proportion to the total amount of
the Company's individual life insurance in force was approximately 5.1%
at December 31, 1999.
Acquired Immune Deficiency Syndrome ("AIDS"), which has received
wide publicity because of its serious public health implications,
presents special concerns to the life insurance industry. Mortality
risks are accepted by insurers based on methods of classification
designed to appropriately relate premiums charged to such risks and,
in this connection, steps have been taken toward strengthening the
Company's underwriting and selection process. The Company considers
AIDS information in underwriting and pricing decisions in accordance
with applicable laws. A prospective policyholder must submit to a
blood or urine test, which includes AIDS antibody screening, if the
amount of coverage applied for equals or exceeds $100,000. The
Company's own mortality experience reflects no significant adverse
impact as a result of any acceleration of AIDS-related claims. The
Company is continuing to monitor developments in this area but is
necessarily unable to predict the long term impact of this problem on
the life insurance industry, in general, or on the Company, in
particular.
Life Insurance and Annuity Reserves
In accordance with applicable insurance regulations, the Company
has established and carries as liabilities in its statutory financial
statements actuarially determined reserves that are calculated to
satisfy its policy and contract obligations. Reserves, together with
premiums to be received on outstanding policies and contracts and
interest thereon at certain assumed rates, are calculated to be
sufficient to satisfy policy and contract obligations. The actuarial
factors used in determining such reserves are based on statutorily
prescribed mortality and morbidity tables and interest rates. Reserves
maintained also include unearned premiums, premium deposits, reserves
for claims that have been reported but are not yet paid, reserves for
claims that have been incurred but have not yet been reported and
claims in the process of settlement. Generally, the Company maintains
reserves on assumed reinsurance, but does not continue accumulating
reserves with respect to that portion of policies or contracts that are
reinsured with, or ceded to, other insurance companies. Reserves for
assumed reinsurance are computed on bases essentially comparable to
direct insurance reserves.
The reserves reflected in the Company's consolidated financial
statements included herein are calculated based on GAAP and differ from
those specified by the laws of the various states in which the Company
does business and those reflected in the Company's statutory financial
statements. These differences arise from the use of different
mortality and morbidity tables and interest rate assumptions, the
introduction of lapse assumptions into the reserve calculation and the
use of the net level premium reserve method on all insurance business.
See "Notes 1G, 1H and 8 to the Notes to the Consolidated Financial
Statements."
The reserves reflected in the Company's consolidated financial
statements are based upon the Company's best estimates of mortality,
persistency, expenses and investment income, with appropriate
provisions for adverse statistical deviation and the use of the net
level premium method for all non-interest-sensitive products. For all
interest-sensitive products the policy account value is equal to the
accumulation of gross premiums plus interest credited less mortality
and expense charges and withdrawals. In determining reserves for its
insurance and annuity products, the
<PAGE>
Company performs periodic studies to compare current experience for
mortality, interest and lapse rates with expected experience in the
reserve assumptions. Differences are reflected currently in earnings
for each period. The Company historically has not experienced
significant adverse deviations from its assumptions.
Claims Paying and Other Ratings
During 1999, the Insurance Company's rating was reaffirmed at "A-
(Excellent)" by A.M. Best Company ("A.M. Best"). Publications of A.M.
Best indicate that the "A-" rating is assigned to those companies that,
in A.M. Best's opinion, have achieved excellent overall performance
when compared to the norms of the insurance industry and that generally
have demonstrated a strong ability to meet their respective
policyholder and other contractual obligations over a long period of
time.
In evaluating a company's statutory financial and operating
performance, A.M. Best reviews the company's profitability, leverage
and liquidity, as well as the company's book of business, the adequacy
and soundness of its reinsurance, the quality and estimated market
value of its assets, the adequacy of its reserves and the experience
and competency of its management.
A.M. Best's rating is based on factors which primarily are
relevant to policyholders, agents and intermediaries and is not
directed towards the protection of investors, nor is it intended to
allow investors to rely on such a rating in evaluating the financial
condition of the Insurance Company. Moody's Investor Services
("Moody's") rates the Insurance Company's insurance financial strength
as Baa2. Standard & Poor's Corporation ("Standard & Poor's") rates the
Insurance Company's insurance financial strength as Api. The Company's
Senior Notes, due February 15, 2009 (the "Senior Notes"), are rated BBB
by Standard & Poor's and Ba1 by Moody's.
Policy Claims
Claims are received and reviewed by claims examiners at the
Company's home office. The initial review of claims includes
verification that coverage is in force and that the claim is not
subject to an exclusion under the policy. Birth and death certificates
are basic requirements. Medical records and investigative reports are
ordered for contestable claims.
Reinsurance
The Company follows the usual industry practice of reinsuring
("ceding") portions of its life insurance risks with other companies,
a practice which permits the Company to write policies in amounts
larger than the risk it is willing to retain on any one life, and also
to continue writing a larger volume of new business. The Company also
reinsures a portion of its life insurance business in order to obtain
commissions on the insurance ceded and thereby reduce its net
commission expense. The maximum amount of individual life insurance
normally retained by the Company on any one life is $50,000 per policy
and $100,000 per life. The maximum retention with respect to impaired
risk policies typically is the same. The Company cedes insurance
primarily on an "automatic" basis, under which risks are ceded to a
reinsurer on specific blocks of business where the underlying risks
meet certain predetermined criteria, and on a "facultative" basis,
under which the reinsurer's prior approval is required on each risk
reinsured. Reinsurance assumed consists entirely of the Company's
participation in Servicemen's Group Life Insurance.
<PAGE>
Use of reinsurance does not discharge an insurer from liability
on the insurance ceded. An insurer is required to pay the full amount
of its insurance obligations regardless of whether it is entitled or
able to receive payments from its reinsurer. No reinsurer of business
ceded by the Company has failed to pay any policy claims with respect
to such ceded business. At December 31, 1999, of the approximately
$752 million of the Company's individual life insurance in force, the
Company had ceded to reinsurers approximately $411 million of such
insurance in force. The principal reinsuring companies of individual
life policies with whom the Company does business at December 31, 1999
(and their corresponding A.M. Best ratings) were Life Reassurance
Corporation of America ("A+ (Superior)") and Swiss Re Life & Health
America ("A+ (Superior)").
Competition
The Company operates in a highly competitive environment. There
are numerous insurance companies, banks, securities brokerage firms and
other financial intermediaries marketing insurance products, annuities,
and other investments that compete with the Company, many of which have
substantially greater resources than the Company.
The Company believes that the principal competitive factors in the
sale of annuity and life insurance products are product features,
commission structure, perceived stability of the insurer, claims paying
ratings, name recognition, crediting rates, and service. Many other
insurance and other companies are capable of competing for sales in the
Company's target markets.
Management believes that the Company's ability to compete is
dependent upon, among other things, its ability to retain and attract
independent general agents to market its products, its ability to
develop competitive products that also are profitable and its ability
to provide quality service. Management believes that the Company has
good relationships with its agents, has an adequate variety of products
approved for issuance and generally is competitive within the industry.
Investments and Investment Policy
The Company derives a substantial portion of its total revenues
from investment income. The Company manages most of its investments
internally. All investments made on behalf of the Company are governed
by the general requirements and guidelines established and approved by
the Company's investment committee (the "Investment Committee") and by
qualitative and quantitative limits prescribed by applicable insurance
laws and regulations. The Investment Committee meets regularly to set
and review investment policy and to approve current investment plans.
The actions of the Investment Committee are subject to review and
approval by the Board of Directors of the Insurance Company. The
Company's investment policy must comply with NYSDI regulations and the
regulations of other applicable regulatory bodies.
The Company's investment philosophy generally focuses on
purchasing investment grade securities with the intention of holding
such securities to maturity. The Company's investment philosophy is
focused on the intermediate to longer-term horizon and is not oriented
towards trading. However, as market opportunities, liquidity or
regulatory considerations may dictate, securities may be sold prior to
maturity. The Company has categorized all fixed maturity securities
as available for sale and carries such investments at market value.
<PAGE>
The Company manages its investment portfolio to meet the
diversification, yield and liquidity requirements of its insurance
policy and annuity contract obligations. The Company's liquidity
requirements are monitored regularly so that cash flow needs are
sufficiently satisfied. Adjustments periodically are made to the
Company's investment policies to reflect changes in the Company's
short-and long-term cash needs, as well as changing business and
economic conditions.
As of December 31, 1999, approximately 20.2% of the Company's
investment portfolio was invested in mortgage-backed related securities
most of which are U.S. government and agency mortgage-backed
securities, and other mortgage-backed obligations, most of which are
collateralized mortgage obligations ("CMOs") backed by residential
mortgages. Most of the Company's CMOs represent beneficial ownership
interests in mortgage-backed securities of the Federal Home Loan
Mortgage Corporation ("FHLMC"), the Federal National Mortgage
Association ("FNMA"), the Government National Mortgage Association
("GNMA"), the Resolution Trust Corporation ("RTC") or other asset
backed securities. Mortgage-backed securities are subject to
significant prepayment risk due to the fact that, in periods of
declining interest rates, mortgages may be repaid more rapidly than
scheduled as borrowers refinance higher rate mortgages to take
advantage of the lower current rates. As a result, holders of
mortgage-backed securities may receive prepayments on their investments
which cannot be reinvested at an interest rate comparable to the rate
on the prepaid mortgages. Notwithstanding the foregoing, because the
Company historically has purchased CMOs in the secondary market at
prices which typically are below their par or maturity value, the
Company's portfolio has not been materially impacted as a result of
such prepayments. The Company does not invest in interest only or
principal only CMOs.
As of December 31, 1999, approximately 3.5% of the Company's
investment portfolio consisted of bonds acquired in private placements.
While these bonds are not usually registered with the Securities and
Exchange Commission (the "SEC" or "Commission"), management believes
that these bonds are marketable to other institutional investors.
Approximately 77.8% of the investments acquired by the Company in
private placements have been assigned a National Association Insurance
Commissioners ("NAIC") designation corresponding to one of the two
highest quality rating categories. NAIC designations corresponding to
the entire Investment Portfolio can be found on page 18.
As of December 31, 1999, approximately 9.7% of the Company's
investment portfolio, and approximately 60.4% of its stockholders'
equity, consisted of interests in over forty-five limited partnerships
which are engaged in a variety of investment strategies, principally
including merchant banking, real estate, debt restructurings and
international opportunities. 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.
The limited partnerships that are involved in merchant banking
activities generally seek to achieve significant rates of return
(including capital gains) through a wide variety of investment
strategies, including leveraged acquisitions, bridge financing and
other private equity investments in existing businesses.
The limited partnerships that are involved in real estate
activities generally invest in real estate assets, real estate joint
ventures and real estate operating companies. These partnerships seek
to achieve significant rates of return by targeting investments which
provide a strategic or competitive advantage and are priced at levels
which the general partner believes to be attractive.
<PAGE>
The limited partnerships that are involved in debt restructuring
activities take positions in debt and equity securities, loans
originated by banks and other liabilities of financially troubled
companies. Investments in companies undergoing debt restructurings,
which by their nature have a high degree of financial uncertainty, may
be senior, unsecured or subordinated indebtedness and carry a high
degree of risk of loss upon default by the borrower. The high level
of indebtedness characteristic of merchant banking and debt
restructuring transactions makes such underlying investments
particularly sensitive to interest rate increases, which could affect
the ability of the borrower to generate sufficient cash flow to meet
its fixed charges.
The limited partnerships that are involved in international
investments generally purchase sovereign debt, corporate debt and/or
equity in governments or foreign companies that are developing a
greater world wide presence. Such limited partnerships are operated
by a general partner who has a demonstrated expertise in this area and
the particular country involved. Such investments involve risks
related to the particular country including political instability,
currency fluctuations, and repatriation restrictions.
The Company has been investing in limited partnerships for over
nine years. During this time, the Company has had an opportunity to
consider and evaluate a substantial number of limited partnerships and
their managers. The Company makes limited partnership investments
based on a number of considerations, including the reputation,
investment philosophy (particularly with respect to risk), performance
history and investment strategy of the manager of the limited
partnership. Managers of the limited partnerships in which the Company
is invested include, among others, Blackstone Investment Management,
Omega Institutional Partners, Goldman Sachs Partners, Trust Company of
the West Asset Management, Clayton Dubilier & Rice Partners, Apollo
Real Estate and DLJ Real Estate Capital.
Limited partnership investments are selected through a careful,
two-stage review process. The Investment Analyst staff reviews the
offering documents and performance history of each investment manager.
Separately, the Investment Committee (which is comprised of investment
professionals who, collectively have more than 90 years experience in
analyzing investments) interviews the manager to determine whether the
investment philosophy (particularly with respect to risk) and
strategies of the limited partnership are in the best interests of the
Company. Only after a positive recommendation is made by both the
Investment Analyst Staff and the Investment Committee does the Company
invest in a limited partnership. In addition, the actions of the
Investment Committee are subject to review and approval by the Board
of Directors of the Company or the Insurance Company, as the case may
be. To evaluate both the carrying value and the continuing
appropriateness of the Company's investment in any limited partnership,
management maintains ongoing discussions with the investment manager
and considers the limited partnership's operations, its current and
near term projected financial condition, earnings capacity and
distributions received by the Company during the year.
Pursuant to the terms of certain limited partnership agreements
to which the Company is a party, the Company is committed to
contribute, if called upon, an aggregate of approximately $68.9 million
of additional capital to certain of these limited partnerships.
However, management does not expect the entire amount to be drawn down
as certain of these limited partnerships are nearing the end of the
period during which investors are required to make contributions.
<PAGE>
The book value of the Company's investments in limited
partnerships as of December 31, 1999, 1998 and 1997 was approximately
$245.5 million, $244.1 million and $208.2 million, respectively. Net
investment income derived from the Company's interests in limited
partnership investments aggregated approximately $30.4 million, $26.4
million and $39.8 million in fiscal 1999, 1998 and 1997, respectively.
The decrease in net investment income from limited partnerships in 1998
is attributable to losses of $18.0 million in certain investments in
limited partnerships.
Management anticipates that in the future it will continue to make
selective investments in limited partnerships as opportunities arise,
subject to the approval of the Chief Investment Officer and the
Investment Committee and the review and approval by the Board of
Directors of the Company or the Insurance Company, as the case may be.
There can be no assurance that the Company will continue to achieve the
same level of returns on its investments in limited partnerships that
it has received during the foregoing periods or that it will achieve
any returns on such investments at all. In addition, 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 returns on such investments, could have a material
adverse effect on the Company's financial condition and results of
operations.
As of December 31, 1999 the Company's investment portfolio also
consisted of approximately 0.3% invested in convertible debt
securities, approximately 7.1% invested in preferred stock,
approximately 0.6% invested in mortgage loans, and approximately 1.3%
invested in common stock. The Company's mortgage loans were
collateralized by commercial office and retail properties located in
New York and Pennsylvania. The Company's only real estate investments
are two buildings which are used as the current home office of the
Insurance Company and two acres of undeveloped land in Nyack, New York.
In order to enhance investment income, the Company participates
in "dollar roll" repurchase agreement transactions. Such transactions
involve the sale of a mortgage-backed security to a holding institution
and a simultaneous agreement to purchase a substantially similar
security (with the same coupon rate as the security sold) for forward
settlement (typically, around 60 days) at a lower dollar price. The
proceeds are invested in short-term investment grade commercial paper
or loan participations at a positive spread until the settlement date
of the similar security. In connection with its "dollar roll"
transactions, the Company does not engage in yield maintenance
transactions. The purchase and maturity dates of all short-term
investments are matched exactly to the sale and purchase dates of the
underlying collateral, with a 90-day maximum for any one transaction.
During this period, the holding institution receives all income and
prepayments for the security. To reduce the risk that a party will
default on its obligations under the repurchase agreement, the Company
only enters into "dollar roll" transactions with major securities
dealers such as Morgan Stanley Dean Witter & Co. Incorporated, Goldman,
Sachs & Co., Merrill Lynch & Co., Salomon Smith Barney Inc., Bear,
Stearns & Co. Inc., CS First Boston and Sandler, O'Neill L.P.
Additionally, if the counterparty to the "dollar roll" agreement
defaults under the terms of such agreement, the Company is not
obligated to repurchase the underlying securities to the transaction.
Under GAAP, during the period between the sale by the Company of a
mortgage-backed security to the institution party to the "dollar roll"
transaction and the Company's repurchase of a substantially similar
mortgage-backed security from the holding institution, the Company's
consolidated balance sheet will reflect both the mortgage-backed
security sold to the holding institution and the cash received for such
security as assets, and the Company's repurchase obligation as a
liability. In fiscal 1999 and 1998, dollar roll transactions generated
approximately $1.2 million and $1.1 million, respectively, of net
investment income for the Company. Amounts outstanding to repurchase
securities under dollar roll repurchase agreements and reverse
repurchase agreements were approximately $212.6 million and $173.1
million as of December 31, 1999 and December 31, 1998, respectively.
<PAGE>
The following table summarizes the Company's investment portfolio
at December 31, 1999.
<TABLE>
Investment Portfolio
Total Carrying Value<F1>
(dollars in thousands)
<S> <C>
Fixed Maturities
Bonds and Notes:
U.S. Government, government agencies
and authorities<F2> $ 363,107
Investment grade corporate<F3> 881,354
Public utilities 124,279
Below investment grade corporate<F3> 186,543
Mortgage backed 228,019
Preferred stocks 179,052
Total Fixed Maturities<F4> 1,962,354
Equity Securities
Common stock 32,470
Other Investments:
Policy loans 17,580
Mortgage loans 16,134
Other long-term investments<F5> 245,486
Cash and short-term investments<F6> 244,471
Total cash and investments $2,518,495
<FN>
<F1> All fixed maturity and equity securities are classified as available
for sale; accordingly total carrying value equals estimated market
value. Independent pricing services provide market prices for most
publicly-traded securities. Where prices are unavailable from pricing
services, prices are obtained from securities dealers. For other
long-term investments, estimated market value either approximates
estimated carrying value or was not readily ascertainable. See
Note 1(c) to the Notes to the Consolidated Financial Statements for
an explanation of the methodology used to value "Other Investments."
<F2> Approximately $302.9 million of such securities represent beneficial
ownership interests in mortgage backed securities of FDIC, FHLMC,
FNMA, GNMA or the RTC.
<F3> Ratings are based primarily upon those assigned by the NAIC and
converted to the generally comparable Moody's rating.
<F4> Includes approximately $15.9 million of convertible debt securities and
convertible preferred stock.
<F5> Consist principally of investments in limited partnerships which are
carried at the lower of cost or market, or equity as appropriate.
<F6> Includes approximately $212.6 million attributable to "dollar roll"
repurchase agreements.
</FN>
</TABLE>
<PAGE>
The following table summarizes the Company's investment results
for the periods indicated, as determined in accordance with GAAP.
<TABLE>
INVESTMENT RESULTS
Year Ended December 31,
1999 1998 1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Cash and total
invested
assets<F1> $2,506,250 $2,485,714 $2,398,240 $2,295,582 $2,065,285
Net investment
income<F2> $ 208,126 $ 187,155 $ 191,818 $ 186,180 $ 170,780
Effective yield<F3> 9.06% 8.14% 8.69% 8.83% 9.01%
Net realized
investment
gains<F4> $ 2,775 $ 17,185 $ 26,039 $ 20,020 $ 17,216
<FN>
<F1> Average of cash and aggregate invested amounts at the beginning and
end of period.
<F2> Net investment income is net of investment expenses and excludes
capital gains and losses and provision for income taxes.
<F3> Net investment income divided by average cash and total invested
assets minus net investment income.
<F4> Net realized investment gains (losses) include provisions for impairment
in value that are considered other than temporary and exclude provisions
for income taxes.
</FN>
</TABLE>
<TABLE>
The following table sets forth the composition of the Company's
bond portfolio by rating as of December 31, 1999.
Bond Portfolio Ratings
Percent
of Total
Estimated Estimated
Market Market
Rating<F1> Value<F2> Value<F2>
(Dollars in thousands)
<S> <C> <C>
Aaa ......................... $ 640,752 35.9%
Aa ......................... 72,273 4.1
A ......................... 260,554 14.6
Baa ......................... 621,993 34.9
Total investment grade<F3>. 1,595,572 89.5
Ba ......................... 155,827 8.7
B ......................... 19,952 1.1
C ......................... 11,949 0.7
Total non-investment grade. 187,728 10.5
Total...................... $1,783,300 100.0%
<FN>
<F1> Ratings are those assigned primarily by Moody's when available,
with remaining ratings as assigned by Standard & Poor's and converted
to a generally comparable Moody's rating. Bonds not rated by any
such organization (e.g., private placement securities) are included
based on the rating prescribed by the Securities Valuation
Office of the NAIC. NAIC class 1 is considered equivalent to an A
or higher rating; class 2, Baa; class 3, Ba; and classes 4-6, B and
below. All securities are classified as available for sale;
accordingly total carrying value equals estimated market value.
<F2> Independent pricing services provide market prices for most
publicly-traded securities. Where prices are unavailable from
pricing services, prices are obtained from securities dealers.
<F3> Approximately 24.3% of which consist of U.S. government and agency bonds.
</FN>
</TABLE>
<PAGE>
According to Moody's, bonds which are rated "A" possess many
favorable investment attributes and are to be considered as upper
medium grade obligations. Moody's applies numerical modifiers "1", "2"
and "3" in each generic rating classification from Aa to B. Modifier
"1" indicates a bond in the higher end of a generic rating
classification.
The NAIC assigns securities quality ratings and uniform prices
called "NAIC Designations," which are used by insurers when preparing
their statutory annual statements. The NAIC assigns designations to
publicly traded as well as privately placed securities. The
designations assigned by the NAIC range from class 1 to class 6, with
a designation in class 1 being of the highest quality. NAIC ratings
are assigned annually as of December 31, and rerated periodically. Of
the bonds and notes in the Company's investment portfolio,
approximately 89.0% were in one of the highest two NAIC Designations
at December 31, 1999. The following table sets forth the carrying
value and estimated market value of these securities according to NAIC
Designations at December 31, 1999.
<TABLE>
Percent
of Total
NAIC Designations Estimated Estimated
(generally comparable to Market Market
Moody's ratings)<F1> Value <F2> Value<F2>
(Dollars in thousands)
<S> <C> <C>
1 (Aaa, Aa, A) ............. $ 976,213 54.7%
2 (Baa) .................... 611,104 34.3
3 (Ba) ..................... 168,795 9.5
4 (B) ...................... 11,740 0.7
5 (Caa, Ca) ................ 12,448 0.7
6 (C) ...................... 3,000 0.1
$1,783,300 100.0%
<FN>
<F1> Comparison between NAIC Designations and Moody's rating is as
published by the NAIC. NAIC class 1 is considered equivalent to
an A or higher rating by Moody's; class 2, Baa; class 3, Ba; class 4,
B; class 5, Caa and Ca; and class 6, C. All securities are classified
as available for sale; accordingly total carrying value equals
estimated market value.
<F2> Independent pricing services provide market prices for most
publicly-traded securities. Where prices are unavailable from
pricing services, prices are obtained from securities dealers.
</FN>
</TABLE>
The Insurance Company is subject to Regulation 130 adopted and
promulgated by the NYSDI. Under this Regulation, the Insurance
Company's ownership of below investment grade debt securities is
limited to 20% of total admitted assets, as calculated under statutory
accounting. As of December 31, 1999, approximately 8.37% of the
Insurance Company's total admitted assets were invested in below
investment grade debt securities. In addition, as of that date, there
were no bond holdings in the Company's investment portfolio which were
in default. For a detailed discussion concerning below investment
grade debt securities, including the risks inherent in such
investments, see "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital
Resources." Also see "Note 2 to the Notes to Consolidated Financial
Statements" for certain other information concerning the Company's
investment portfolio.
<PAGE>
The following table sets forth the scheduled maturities for the
Company's investments in bonds and notes as of December 31, 1999.
<TABLE>
Scheduled Maturities
Percent
of Total
Estimated Estimated
Market Market
Maturity<F1> Value<F2> Value<F2>
(Dollars in thousands)
<S> <C> <C>
Due in one year or less $ 21,803 2.3%
Due after one year through five years 143,419 8.0
Due after five years through 10 years 94,348 3.8
Due after 10 years through 20 years 1,295,711 76.7
Total 1,555,281 90.8
Mortgage-backed bonds 228,019 9.2
Total bonds and notes $1,783,300 100.0%
<FN>
<F1> This table is based upon stated maturity dates and does not reflect the
effect of prepayments, which would shorten the average life of these
securities. All securities are classified as available for sale;
accordingly total carrying value equals estimated market value.
<F2> Independent pricing services provide market prices for most
publicly-traded securities. Where prices are unavailable from pricing
services, prices are obtained from securities dealers.
</FN>
</TABLE>
Insurance Regulation
General Regulation
As an insurance holding company, the Company is subject to
regulation by the State of New York, where the Insurance Company is
domiciled, as well as all states in which the Insurance Company
transacts business. Most states have enacted legislation that requires
each insurance company in a holding company system to register with the
insurance regulatory authority of its state of domicile and furnish to
it financial and other information concerning the operations of
companies within the holding company system that may materially affect
the operations, management or financial condition of the insurers
within the system. The Company has registered as a holding company
system in New York.
The laws and regulations of New York applicable to insurance
holding companies require, among other things, that all transactions
within a holding company system be fair and equitable and that charges
for services be reasonable. In addition, many transactions require
either prior notification to or approval of the Superintendent of
Insurance of the State of New York (the "Superintendent"). Prior
written approval of the Superintendent is required for the direct or
indirect acquisition of 10% or more of the insurance companies' voting
securities. Applicable state insurance laws, rather than federal
bankruptcy laws, also apply to the liquidation or reorganization of
insurance companies.
The Insurance Company is subject to regulation and supervision by
the insurance regulatory agencies of the states in which it is
authorized to transact business. State insurance laws establish
supervisory agencies with broad administrative and supervisory powers.
Principal among these powers are granting and revoking licenses
<PAGE>
to transact business, regulating marketing and other trade practices,
operating guaranty associations, licensing agents, approving policy
forms, regulating certain premium rates, regulating insurance holding
company systems, establishing reserve requirements, prescribing the
form and content of required financial statements and reports,
performing financial, market conduct and other examinations,
determining the reasonableness and adequacy of statutory capital and
surplus, defining acceptable accounting principles, regulating the
type, valuation and amount of investments permitted, and limiting the
amount of dividends that can be paid and the size of transactions that
can be consummated without first obtaining regulatory approval.
During the last decade, the insurance regulatory framework has
been placed under increased scrutiny by various states, the federal
government and the NAIC. Various states have considered or enacted
legislation that changes, and in many cases increases, the states'
authority to regulate insurance companies. Legislation was passed in
Congress that could result in the federal government assuming some role
in the regulation of insurance companies and allowing combinations
between insurance companies, banks and other entities. In recent
years, the NAIC has approved and recommended to the states for adoption
and implementation several regulatory initiatives designed to reduce
the risk of insurance company insolvencies and market conduct
violations. These initiatives include investment reserve requirements,
risk-based capital standards, codification of insurance accounting
principles, new investment standards and restrictions on an insurance
company's ability to pay dividends to its stockholders. The NAIC is
also currently developing model laws relating to product design and
illustrations for annuity products. Current proposals are still being
debated and the Company is monitoring developments in this area and the
effects any changes would have on the Company.
The Insurance Company is required to file detailed periodic
reports and financial statements with the state insurance regulators
in each of the states in which it does business. In addition,
insurance regulators periodically examine the Insurance Company's
financial condition, adherence to statutory accounting practices and
compliance with insurance department rules and regulations. As part
of their routine regulatory oversight process, the NYSDI generally
conducts detailed examinations every three years of the books, records
and accounts of the Insurance Company. The Insurance Company's last
examination occurred during 1997 for the three-year period ended
December 31, 1996. The final report did not raise any issues or
adjustments.
Regulation of Dividends and Other Payments from the Insurance Company
The Company is a legal entity separate and distinct from its
subsidiaries. As a holding company with no other business operations,
its primary sources of cash needed to meet its obligations, including
principal and interest payments on its outstanding indebtedness and to
pay dividends on its common stock, are rent from its real estate,
interest on its investments and dividends from the Insurance Company.
The Insurance Company is subject to various regulatory
restrictions on the maximum amount of payments, including loans or cash
advances, that it may make to the Company without obtaining prior
regulatory approval. As a New York domiciled insurance company, the
Insurance Company is subject to restrictions on the payment of
dividends under New York law. New York law states that no domestic
stock life insurance company shall distribute any dividend to its
shareholders unless a notice of its intention to declare such dividend
and the amount thereof shall have been filed with the Superintendent
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 NYSDI has
<PAGE>
established informal guidelines for the Superintendent's determinations
which focus upon, among other things, the overall financial condition
and profitability of the insurer under statutory accounting practices.
During fiscal 1999, 1998 and 1997, the Insurance Company paid dividends
of $28.4 million, $49.4 million and $24.8 million, respectively, to the
Company.
In the past, the NAIC proposed the NAIC Model Act which limits
dividends that may be paid in any calendar year without regulatory
approval to the lesser of (1) 10% of the insurer's statutory surplus
at the prior year-end or (2) 100% of the statutory net gain from
operations of the insurer (not including realized capital gains) for
the prior calendar year. The NAIC has determined that it will not grant
accreditation to any state insurance regulatory authority in a state
that has not enacted statutes "substantially similar" to the NAIC Model
Act regulating the payment of dividends by insurers. The New York
statutes applicable to the Insurance Company do not conform to the NAIC
Model Act and the legislature of New York may consider legislation to
bring New York laws into substantial compliance with the NAIC Model
Act.
Investment Reserve
Asset Valuation Reserve. Statutory accounting practices require
a life insurance company to maintain an Asset Valuation Reserve ("AVR")
to absorb realized and unrealized capital gains and losses on a portion
of an insurer's fixed income securities and equity securities.
The AVR is required to stabilize statutory surplus from
fluctuations in the market value of bonds, stocks, mortgage loans, real
estate and other invested assets. The maximum AVR is calculated based
on the application of various factors that are applied to the assets
in an insurer's portfolio. The AVR generally captures credit-related
realized and unrealized capital gains or losses on such assets. Each
year the amount of an insurer's AVR will fluctuate as the investment
portfolio changes and capital gains or losses are absorbed by the
reserve. To adjust for such changes over time, contributions must be
made to the AVR in an aggregate annual amount equal to 20% of the
difference between the maximum AVR as calculated and the actual AVR.
These contributions may result in a slower rate of growth in or a reduction
of the Insurance Company's Unassigned Surplus. The extent of the
impact of the AVR on the Insurance Company's surplus depends in part
on the future composition of the Insurance Company's investment portfolio.
Interest Maintenance Reserve. The Interest Maintenance Reserve
(the "IMR") captures capital gains and losses (net of taxes) on fixed
income investments (primarily bonds and mortgage loans) resulting from
interest rate changes, which are amortized into net income over the
estimated remaining periods to maturity of the investments sold. The
extent of the impact of the IMR depends on the amount of future capital
gains and losses on fixed maturity investments resulting from interest
rate changes.
NAIC-IRIS Ratios
The NAIC's Insurance Regulatory Information System ("IRIS") was
developed by a committee of state insurance regulators and primarily
is intended to assist state insurance departments in executing their
statutory mandates to oversee the financial
<PAGE>
condition of insurance companies operating in their respective states.
IRIS identifies 12 industry ratios and specifies "normal ranges" for
each ratio. The IRIS ratios were designed to advise state insurance
regulators of significant changes in the operations of an insurance
company, such as changes in its product mix, large reinsurance
transactions, increases or decreases in premiums received and certain
other changes in operations. These changes need not result from any
problems with an insurance company but merely indicate changes in
certain ratios outside ranges defined as normal by the NAIC. When an
insurance company has four or more ratios falling outside "normal
ranges," such state regulators may, but are not obligated to, inquire
of the company regarding the nature of the company's business to
determine the reasons for the ratios being outside the "normal range."
No regulatory significance results from being out of the normal range
on fewer than four of the ratios. The Company anticipates that it may
from time to time fall outside the "normal range" on some of these
ratios. For the year ended December 31, 1999, the Company was within
the normal range for all of the ratios. If four or more of the
Company's ratios fall outside the "normal range," the Company is likely
to experience regulatory inquiry and a higher level of scrutiny.
Risk-Based Capital
Under the NAIC's risk-based capital formula, insurance companies
must calculate and report information under a risk-based capital
formula. The standards require the computation of a risk-based capital
amount which then is compared to a company's actual total adjusted
capital. The computation involves applying factors to various
financial data to address four primary risks: asset default, adverse
insurance experience, disintermediation and external events. This
information is intended to permit insurance regulators to identify and
require remedial action for inadequately capitalized insurance
companies, but is not designed to rank adequately capitalized
companies. The NAIC formula provides for four levels of potential
involvement by state regulators for inadequately capitalized insurance
companies, ranging from regulatory control of the insurance company to
a requirement for the insurance company to submit a plan to improve its
capital. At December 31, 1999, the Insurance Company's total adjusted
capital was $368.6 million and the authorized control level risk based
capital was $65.6 million.
Assessments Against Insurers
Most applicable jurisdictions require insurance companies to
participate in guaranty funds which are designed to indemnify
policyholders of insolvent insurance companies. Insurers authorized
to transact business in these jurisdictions generally are subject to
assessments based on annual direct premiums written in that
jurisdiction. These assessments may be deferred or forgiven under most
guaranty laws if they would threaten an insurer's solvency and, in
certain instances, may be offset against future state premium taxes.
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.
Regulation at Federal Level
Although the federal government generally does not directly
regulate the insurance business, federal initiatives often have an
impact on the business in a variety of ways. Current and proposed
federal measures that may significantly affect the insurance business
include limitations on antitrust immunity, minimum solvency
requirements and the removal of barriers restricting banks from
engaging in the insurance and mutual fund business. It is not possible
to predict the outcome of any such congressional activity nor the
potential effects thereof on the Company.
<PAGE>
Affiliates
In addition to the Insurance Company, the Company has three
subsidiaries, Presidential Securities Corporation, P.L. Assigned
Services Corporation and Presidential Asset Management Company, Inc.
In the aggregate, these three subsidiaries are not material to the
Company's consolidated financial condition or results of operations.
On December 29, 1999, the Company announced the completion of the
purchase of The Central National Life Insurance Company of Omaha
("Central National") from the Household Insurance Group Holding
Company, a subsidiary of Household International, Inc. Central
National which has assets of $10.5 million and capital and surplus of
$10.5 million is licensed to market insurance products in 49 states,
the District of Columbia, Puerto Rico and the U.S. Virgin Islands.
Item 2. Properties
The Company owns, and the Insurance Company is the sole occupant
of, two adjacent office buildings located at 69 Lydecker Street and 10
North Broadway in Nyack, New York. These buildings contain an
aggregate of approximately 45,000 square feet of useable floor space.
The Insurance Company also owns two acres of unimproved land in
Nyack, New York.
Management believes that the Company's present facilities are
adequate for its anticipated needs.
Item 3. 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 March 27, 2000, 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 4. Submission of Matters to a Vote of Security Holders
No matters were submitted by the Company to its shareholders for
vote during the fiscal quarter ended December 31, 1999.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters
The Company's common stock trades on The NASDAQ Stock Market SM
under the symbol "PLFE." The following table sets forth, for the
indicated periods, the high and low bid quotations for the common
stock, as reported by the National Association of Securities Dealers,
Inc., and the per share cash dividends declared on the common stock.
Cash Dividends
High Low Declared Per Share
Fiscal 1998
First Quarter $23 7/8 $17 3/4 $.06
Second Quarter 23 3/8 18 11/16 .075
Third Quarter 23 15 .075
Fourth Quarter 20 5/8 14 .075
Fiscal 1999
First Quarter 20 3/4 17 1/2 $.075
Second Quarter 19 5/8 17 1/4 .09
Third Quarter 20 3/4 16 1/2 .09
Fourth Quarter 19 1/8 16 .09
Fiscal 2000
First Quarter 18 5/8 12 11/16 .09
(through March 27, 2000)
The Company regularly has paid semi-annual cash dividends since
1980 and since the first quarter of 1997 has paid quarterly cash
dividends. During the first quarter of 2000, the Company declared a
quarterly cash dividend of $.09 per share payable April 3, 2000. The
Company expects to continue its policy of paying regular cash
dividends, although there is no assurance as to future dividends
because they are dependent on future earnings, capital requirements,
financial condition, and dividends from the Insurance Company. Any
determination to pay dividends would be at the discretion of the
Company's Board of Directors and is subject to regulatory and
contractual restrictions as described in "Part I -- Business --
Insurance Regulation" and Part II -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources." At March 27, 2000, there were approximately
770 holders of record of the Company's common stock.
<PAGE>
Item 6. Selected Financial Data
Selected consolidated financial data for the Company are presented below
for each of the five years in the period ended December 31, 1999. This data
should be read in conjunction with the Company's Consolidated Financial
Statements and notes thereto and Item 7, Management's Discussion and Analysis
of Results of Operations and Financial Condition.
<TABLE>
Income Statement Data:
Year Ended December 31,
1999 1998 1997 1996 1995
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total Revenue $ 278,060 $ 242,206 $ 247,704 $ 223,674 $ 199,864
Benefits 181,126 146,410 136,998 124,260 123,923
Interest Expense
on Notes payable 8,960 7,124 5,850 5,049 5,045
Selling, General
and Administrative
Expenses 18,482 16,927 14,298 18,008 14,506
Total Benefits and
Expenses 208,568 170,461 157,146 147,317 143,474
Provision (benefit)
for Income Taxes 21,261 22,521 29,266 21,836 7,332
Net Income $ 47,717<F1> $ 49,224 $ 61,292 $ 54,521 $ 49,058
Income Per Share $ 1.53<F1> $ 1.53 $ 1.87 $ 1.64 $ 1.46
Dividends Per Share $ .345 $ .285 $ .22 $ .15 $ .105
<FN>
<F1> Includes extraordinary loss of $514 thousand or $.02 per share.
</FN>
Balance Sheet Data:
At December 31,
1999 1998 1997 1996 1995
(in thousands)
Assets $2,653,665 $2,606,799 $2,558,341 $2,406,925 $2,356,760
Total Capitalization
Notes Payable $ 100,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000
Shareholders'
Equity 406,468 523,244 502,654 423,063 401,060
Total $ 506,468 $ 573,244 $ 552,654 $ 473,063 $ 451,060
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company has one reportable operating 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 policyholders' account
balances. With respect to products that are accounted for as
policyholders' account balances, revenues are recognized over time in
the form of policy fee income, surrender charges and mortality and other
charges deducted from the policyholders' account balances. 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 Fiscal Year 1999 to Fiscal Year 1998 and Fiscal Year
1998 to Fiscal Year 1997.
Revenues
Annuity Considerations and Life Insurance Premiums
Total annuity considerations and life insurance premiums increased
to approximately $58.9 million in fiscal 1999 from approximately $32.2
million in fiscal 1998, an increase of approximately 82.8%. Of this
amount, annuity considerations increased to approximately $54.4 million
in fiscal 1999 from approximately $28.1 million in fiscal 1998, an
increase of approximately $26.3 million. In accordance with generally
accepted accounting principles, sales of single premium deferred
annuities are not reported as annuity considerations, but rather as
additions to policyholder account balances. Sales of single premium
annuities were approximately $186.1 million, $135.2 million and $125.5
million in fiscal 1999, 1998 and 1997, respectively. Management
believes that 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>
Total annuity considerations and life insurance premiums increased
to approximately $32.2 million in fiscal 1998 from approximately $23.6
million in fiscal 1997, an increase of approximately 36.4%. Of this
amount, annuity considerations increased to approximately $28.1 million
in fiscal 1998 from approximately $19.7 million in fiscal 1997, an
increase of approximately $8.4 million.
Policy Fee Income
Universal life and investment type policy fee income was
approximately $2.6 million in fiscal 1999, as compared to approximately
$2.1 million in fiscal 1998 and approximately $1.99 million in fiscal
1997. Policy fee income consists principally of amounts assessed during
the period against policyholders' account balances for mortality charges
and surrender charges.
Net Investment Income
Net investment income totaled approximately $208.1 million in
fiscal 1999, as compared to approximately $187.2 million in fiscal 1998
and approximately $191.8 million in fiscal 1997. This represents
approximately an 11.2% increase comparing fiscal 1999 to fiscal 1998 and
approximately a 2.4% decrease comparing fiscal 1998 to fiscal 1997.
Investment income from "other invested assets" totaled approximately
$30.4 million in fiscal 1999, $26.4 million in fiscal 1998 and $39.8
million in fiscal 1997. The decrease in investment income from "other
invested assets" during 1998 compared with 1997 is attributable to
losses of $18.0 million in certain investments in limited partnerships.
In fiscal 1999, 1998 and 1997, the Insurance Company participated in
"dollar roll" transactions (i.e., the sale of a mortgage-backed security
and a simultaneous agreement to purchase a similar security at a later
date at a lower price) to enhance investment income. The proceeds from
the sale are invested in short-term securities at a positive spread
until the settlement date of the similar security. During this period,
the holding institution receives all income and prepayments for the
security. The Company's ratio of net investment income to average cash
and invested assets less net investment income for the years ended
December 31, 1999, 1998 and 1997 was approximately 9.06%, 8.14% and
8.69%, respectively. For additional information, please refer to "Note
2 of the Notes to Consolidated Financial Statements."
Realized Investment Gains and Losses
Realized investment gains amounted to approximately $2.8 million in
fiscal 1999, as compared to approximately $17.2 million of gains in
fiscal 1998 and gains of approximately $26.0 million in fiscal 1997.
Realized investment gains for the years ended December 31, 1999, 1998
and 1997 are net of realized investment losses of approximately $14.8
million, $8.3 million and $4.9 million, respectively, attributable to
writedowns of certain securities contained in the Company's investment
portfolio. Realized investment gains result from sales of certain
equities and convertible securities, and calls and sales of securities
in the Company's investment portfolio. There can be no assurance that
the Company's investment portfolio will yield comparable investment
gains in future periods.
Other Income
The decrease in other income for fiscal 1998 as compared with
fiscal 1997 is the result of the settlement in the second quarter of
1997 of litigation with Fidelity Mutual Life Insurance Company pursuant
to which the Company received $1.7 million.
<PAGE>
Total Benefits and Expenses
Total benefits and expenses for fiscal 1999 aggregated
approximately $208.6 million, as compared to approximately $170.5
million for fiscal 1998 and approximately $157.1 million for fiscal
1997. This represents an increase of approximately 22.4% comparing
fiscal 1999 to fiscal 1998 and an increase of approximately 8.5%
comparing fiscal 1998 to fiscal 1997. The reasons for these changes
will be discussed under the respective components below.
Interest Credited and Benefits to Policyholders
Interest credited and benefits to policyholders amounted to
approximately $181.1 million in fiscal 1999 as compared to approximately
$146.4 million in fiscal 1998 and approximately $137.0 million in fiscal
1997. This represents an increase of approximately 23.7% comparing
fiscal 1999 to fiscal 1998 and approximately a 6.9% increase comparing
fiscal 1998 to fiscal 1997. The increase in fiscal 1999 principally is
attributable to a higher level of policyholder account balances as a
result of the increase in annuity considerations received during the year.
The Insurance Company's average credited rates for reserves and
account balances for the 12 months ended December 31, 1999, 1998 and
1997 were less than the Company's ratio of net investment income to mean
assets for the same periods as noted above under "Net Investment
Income." Although management does not currently expect material
declines in the spread between the Company's average credited rate for
reserves and account balances and the Company's ratio of net investment
income to mean assets (the "Spread"), there can be no assurance that the
Spread will not decline in future periods or that such decline will not
have a material adverse effect on the Company's financial condition and
results of operations. Depending, in part, upon competitive factors
affecting the industry in general, and the Company in particular, the
Company may, from time to time, adjust the average credited rates on
certain of its products. There can be no assurance that the Company
will reduce such rates or that any such reductions will broaden the Spread.
Interest Expense on Notes Payable
The interest expense on the Company's notes payable amounted to
approximately $8.96 million in fiscal 1999, approximately $7.12 million
in fiscal 1998 and approximately $5.85 million in fiscal 1997. The
increase in interest expense in fiscal 1999 and 1998 is attributable to
the increase in the Company's notes payable.
General Expenses, Taxes and Commissions
General expenses, taxes and commissions to agents totaled
approximately $23.7 million in fiscal 1999 as compared to approximately
$19.3 million in fiscal 1998 and approximately $17.2 million in fiscal
1997. This represents an increase of approximately 22.7% comparing
fiscal 1999 to fiscal 1998 and an increase of approximately 12.4%
comparing fiscal 1998 to fiscal 1997. The increase in fiscal 1999
compared to fiscal 1998 principally is attributable to higher
commissions and selling expenses incurred associated with the higher
level of sales of single premium annuities. The increase in fiscal 1998
compared to fiscal 1997 principally is attributable to higher costs
associated with system conversions and higher commissions and selling
expenses incurred associated with the higher level of sales of single
premium annuities.
<PAGE>
Deferred Policy Acquisition Costs
The change in the net DAC for fiscal 1999 resulted in a credit of
approximately $5.2 million, as compared to a credit of approximately
$2.4 million in fiscal 1998 and a credit of approximately $2.9 million
in fiscal 1997. Such changes are due (i) to the effect of revisions to
estimated gross profits on unamortized deferred acquisition costs which
are reflected in the year such estimated gross profits are revised and
(ii) to the increase in costs associated with recent new product sales
which have been deferred and are amortized in proportion to the
recognition of earned revenue.
Income Before Income Taxes
For the reasons discussed above, income before income taxes
amounted to approximately $69.5 million in fiscal 1999, as compared to
approximately $71.7 million in fiscal 1998 and approximately $90.6
million in fiscal 1997.
Income Taxes
Income tax expense was approximately $21.3 million for fiscal 1999,
as compared to approximately $22.5 million in fiscal 1998 and
approximately $29.3 million in fiscal 1997. The decrease in income
taxes in fiscal 1999 is primarily attributable to lower realized capital
gains during fiscal 1999.
Net Income
For the reasons discussed above, the Company had net income of
approximately $47.7 million in fiscal 1999, net income of approximately
$49.2 million in fiscal 1998 and net income of approximately $61.3
million in fiscal 1997.
Liquidity and Capital Resources
The Company is an insurance holding company and its primary uses of
cash are debt service obligations, operating expenses and dividend
payments. The Company's principal sources of cash are dividends from
the Insurance Company, sales of and interest on the Company's
investments and rent from its real estate. During 1999, the Company's
Board of Directors increased the quarterly dividend rate to $.09 per
share. During 1999 and 1998, the Company purchased and retired 918,300
and 896,900 shares of common stock, respectively. At December 31, 1999,
the Company was authorized to purchase an additional 417,000 shares of
common stock. At the February 2000 Board of Directors meeting, the
Board authorized the Company to purchase an additional 500,000 shares of
common stock.
The Insurance Company is subject to various regulatory restrictions
on the maximum amount of payments, including loans or cash advances,
that it may make to the Company without obtaining prior regulatory
approval. As a New York domiciled insurance company, the Insurance
Company is subject to restrictions on the payment of dividends under New
York 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 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 NYSDI 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 fiscal 1999, 1998, and 1997, the Insurance Company paid dividends
of $28.4 million, $49.4 million and $24.8 million, respectively, to the
Company.
<PAGE>
Principal sources of funds at the Insurance Company are premiums
and other considerations paid, 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), the
payment of policy acquisition costs, 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 $69.3 million, $37.0 million and $47.3
million in fiscal 1999, 1998 and 1997, respectively. Net cash used in
the Company's investing activities (principally reflecting investments
purchased less investments called, redeemed or sold) was approximately
$172.2 million, $27.2 million and $62.5 million in fiscal 1999, 1998 and
1997, respectively.
For purposes of the Company's consolidated statements of cash
flows, financing activities relate primarily to "dollar roll" repurchase
transactions, and to sales and surrenders of the Company's annuity and
universal life insurance products. The payment of dividends by the
Company to its stockholders also is considered to be a financing
activity. Net cash provided by (used in) the Company's financing
activities amounted to approximately $130.1 million, $(21.9) million and
$27.9 million in fiscal 1999, 1998 and 1997, respectively. These
fluctuations primarily are attributable to the new Senior Notes, higher
policyholder account balances (as a result of increased sales),
partially offset by the repayment of amounts outstanding under the
Company's line of credit during fiscal 1999.
The Company currently has one bank line of credit for $25 million
of which $15 million was used at December 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 and to repay the
amounts outstanding on the bank line of credit. The repayment of the 9
1/2% Senior Notes resulted in an extraordinary loss of $514 thousand,
after income taxes of $276.5 thousand.
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.
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, as described in "Item 5 - Market for the Registrant's Common
Equity and Related Shareholder Matters," satisfy its debt service
obligations and pay its other operating expenses.
<PAGE>
Market Risk
Market risk is the risk of loss arising from adverse changes in
market rates and prices, such as interest rates, foreign currency
exchange rates, and other relevant market rate or price changes. Market
risk is directly influenced by the volatility and liquidity in the
markets in which the related underlying assets are traded. The
following is a discussion of the Company's primary market risk exposures
and how those exposures are currently managed as of December 31, 1999.
The primary market risk to the Company's investment portfolio is
interest rate risk. The Company's exposure to equity price risk and
foreign exchange risk is not significant. The Company has no direct
commodity risk.
The Company believes that its fixed-rate liabilities should be
backed by a portfolio principally composed of fixed-rate investments
that generate predictable rates of return. The Company does not have a
specific target rate of return. Instead, its rates of return vary over
time depending on the current interest rate environment, the slope of
the yield curve, the spread at which fixed-rate investments are priced
over the yield curve, and general economic conditions. Its portfolio
strategy is constructed with a view to achieve adequate risk-adjusted
returns consistent with its investment objectives of effective asset-liability
matching, liquidity and safety.
The Company's deferred annuity products are designed to encourage
persistency by incorporating surrender charges. An annuitant may not
terminate or withdraw substantial funds for a period of generally seven
years without incurring significant penalties in the form of surrender
charges. Approximately 50.9%, 56.0%, and 60.2% of the Company's
deferred annuity contracts in force (measured by reserves) as of
December 31, 1999, 1998, and 1997 are surrenderable without charge. The
decrease since December 31, 1997 is attributable to the increase in
deferred annuity contracts inforce as a result of the increase in
annuity considerations received.
The market value of the Company's fixed maturity portfolio changes
as interest rates change. In general, rate decreases cause asset prices
to rise, while rate increases cause asset prices to fall. Interest rate
sensitivity can be modeled using the fixed maturity's effective duration
and convexity to estimate price change for a given rate change. To
model such changes, both spreads and yield curve slope are held constant
while the portfolio is subjected to a hypothetical instantaneous rate
change. Actual results may differ from the hypothetical change in
market rates assumed in this disclosure since the model does not reflect
the results of any actions that would be taken by the Company to
mitigate such hypothetical loss in market value.
Based on market values and prevailing interest rates as of December
31, 1999, a hypothetical instantaneous increase of 100 basis points
would produce a loss in fair value of fixed maturity assets of
approximately $163 million. Since the Company is able to hold its fixed
maturity securities to maturity, it does not expect to realize
significant losses under such a hypothetical scenario.
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
<PAGE>
invests a portion of its total assets in short-term investments
(approximately 8.14%, 8.74% and 10.32% as of December 31, 1999, 1998 and
1997, respectively). The weighted average duration of the Company's
bond portfolio was approximately five and one half years as of December
31, 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
estimated market value, and unrealized gains (losses), net of federal
income taxes and deferred policy acquisition costs, if any, 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 or credited 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.
Capital expenditures during fiscal 1999 were approximately
$169,000. As of December 31, 1999, the Company had no outstanding
commitments for significant capital expenditures.
The Insurance Company is subject to Regulation 130 adopted and
promulgated by the NYSDI. Under this Regulation, the Insurance
Company's ownership of below investment grade debt securities is limited
to 20.0% of total admitted assets, as calculated under statutory
accounting practices. As of December 31, 1999 and 1998, approximately
8.37% 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 securities which were purchased to achieve a more favorable
investment yield, all of which are classified as available for sale and
reported at estimated market value. As of December 31, 1999 and 1998,
the carrying value of these securities was approximately $187.7 million
and $200.7 million, respectively (representing approximately 7.1% and
7.7%, respectively, of the Company's total assets and 46.2% 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 than with respect to other corporate 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. Below investment grade debt investments, as well as
other investments, are being monitored on an ongoing basis.
In certain situations, the terms of some fixed maturity assets are
restructured or modified. There were no restructured fixed maturities
at December 31, 1999.
<PAGE>
As of December 31, 1999, approximately 9.9% of the Company's total
invested assets were invested in limited partnerships. Pursuant to
NYSDI regulations, the Company's investments in equity securities,
including limited partnership interests, may not exceed 20% of the
Insurance Company's invested assets. Investments in limited
partnerships are included in the Company's consolidated balance sheet
under the heading "Other invested assets." See "Note 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 $68.9 million of additional capital to certain of these
limited partnerships. However, management does not expect this entire
amount to be called because certain of these limited partnerships are
nearing the end of the period during which investors are required to
make contributions. The Company may make selective investments in
additional limited partnerships as opportunities arise. In general,
risks associated with such limited partnerships include those related to
their underlying investments (i.e., equity securities, debt securities
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, in fiscal 1999 and 1998 the Company
participated in "dollar roll" repurchase agreement transactions.
Amounts outstanding to repurchase securities under such agreements were
approximately $212.6 million and $148.7 million at December 31, 1999 and
1998, respectively. The Company may engage in selected "dollar roll"
transactions as market opportunities arise.
As part of a proposed rehabilitation plan for Fidelity Mutual Life
Insurance Company ("Fidelity"), on January 11, 1995 the Insurance
Company signed a definitive purchase agreement with the Pennsylvania
Insurance Commissioner and Fidelity to invest up to $45 million for a
minority (49.9%) stake in a Fidelity subsidiary insurance holding
company. In addition, the Company had agreed to purchase $25 million of
Senior Notes of such company.
The Company was informed by the Pennsylvania Insurance Commissioner
that in response to the significant improvement in the invested assets
of Fidelity, she reopened the process to select an equity investor for
the recapitalization and rehabilitation of Fidelity.
The Company disagreed with the Insurance Commissioner's actions and
commenced litigation which was settled in the second quarter of fiscal
1997. As part of the settlement, the Company received $1.7 million.
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
<PAGE>
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.
See "Item 1 - Business - Insurance Regulation" for a description of
certain NAIC initiatives that also may impact the Company's financial
condition and results of operations.
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 involved modifying or replacing certain
hardware and software maintained by the Company as well as communicating
with external service providers to ensure that they were taking the
appropriate action to remedy their Year 2000 issues. The modification
process of all administrative systems has been completed and the Company
has not experienced any failure of systems due to a Year 2000 readiness
problem.
Purchased hardware was capitalized in accordance with normal
policy. Personnel and all other costs related to the project were
expensed as incurred. Since 1994, the Company has incurred
approximately $4.3 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.
Effects of Inflation and Interest Rate Changes
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. In
addition, the market value of the Company's fixed maturity portfolio
decreases resulting in a decline in shareholders' equity. Concurrently,
the Company would attempt to place new funds in investments which were
matched in duration to, and higher yielding than, the liabilities
associated with such annuities. Management believes that liquidity
necessary in such an interest rate environment to fund withdrawals,
including surrenders, would be available through income, cash flow, the
Company's cash
<PAGE>
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 in such an interest rate environment, 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 in market prices which would be expected in the fixed
maturity security market.
Interest rate changes also may have temporary effects on the sale
and profitability of the universal life and annuity products offered by
the Company. For example, if interest rates rise, competing investments
(such as annuity or life insurance products offered by the Company's
competitors, certificates of deposit, mutual funds and similar
instruments) may become more attractive to potential purchasers of the
Company's products until the Company increases the rates credited to
holders of its universal life and annuity products. In contrast, as
interest rates fall, the Company attempts to lower its credited rates to
compensate for the corresponding decline in its net investment income.
As a result, changes in interest rates could materially adversely effect
the financial condition and results of operations of the Company
depending on the attractiveness of alternative investments available to
the Company's customers. In that regard, in the current interest rate
environment, the Company has attempted to maintain its credited rates at
competitive levels which are designed to discourage surrenders and which
may be considered attractive to purchasers of new annuity products. In
addition, because the level of prevailing interest rates impacts the
Company as well as its competition, management does not believe that the
current interest rate environment has materially affected the Company's
competitive position vis a vis other life insurance companies that
emphasize the sale of annuity products. Notwithstanding the foregoing,
if interest rates continue at current levels or decline, 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.
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
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
<PAGE>
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.
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is contained in the Liquidity
and Capital Resources section of Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Item 8. Financial Statements and Supplementary Data
See the accompanying Table of Contents to Consolidated Financial
Statements and Schedules on Page F-1.
Item 9. Changes in and Disagreements with Accountants On Accounting and
Financial Disclosure
None
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information relating to the Company's directors, nominees for
election as directors and executive officers will be included in the
Company's definitive Proxy Statement for its 2000 Annual Meeting of
Shareholders (the "Proxy Statement"), which the Company intends to file
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended, not later than 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K, under the heading "Directors
and Executive Officers" and is incorporated herein by reference.
Item 11. Executive Compensation
The information relating to compensation paid to executive officers
and directors of the Company will be included in the Proxy Statement
under the heading "Compensation of Directors and Executive Officers" and
is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information relating to the security ownership of certain
beneficial owners and management of the Company will be included in the
Proxy Statement under the heading "Security Ownership of Certain
Beneficial Owners and Management" and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Purchases of Annuity Contracts and Life Insurance Policies
From time to time in the ordinary course of business, certain of
the Company's directors and executive officers have purchased, and may
in the future, purchase annuity contracts or life insurance policies
from the Insurance Company. Such transactions in the past have been,
and will in the future be, on terms no less favorable to the Insurance
Company than those that could be obtained from unaffiliated third
parties. In that regard, since January 1, 1997, directors and executive
officers, have engaged in the following transactions with the Insurance
Company: Herbert Kurz, the President and a director of the Company,
purchased annuity contracts for $0, $0 and $200,000 during the fiscal
years ended December 31, 1999, 1998 and 1997, respectively.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a). The Independent Auditors' Report, Consolidated Financial
Statements and Consolidated Financial Statement Schedules listed in the
Table of Contents on page F-1 are being filed as part of this Form 10-K.
(b). During the last quarter of the fiscal year ended December 31,
1999 the Company did not file a current report on Form 8-K.
<PAGE>
(c). Exhibit Index
Exhibit
Number Description of Document
2.01 Certificate of Ownership and Merger, as filed
with the Secretary of State of Delaware on
July 27, 1993 (Incorporated by reference to
the Annual Report on Form 10-K of the Company
for the fiscal year ended December 31, 1993)
2.02 Certificate of Merger, as filed with the
Secretary of State of State of New York on
July 27, 1993 (Incorporated by reference to
the Annual Report on Form 10-K of the Company
for the fiscal year ended December 31, 1993)
3.01 Certificate of Amendment of the Certificate of
Incorporation of the Company, as filed with
the Secretary of State of State of New York on
June 8, 1993 (Incorporated by reference to the
Annual Report on Form 10-K of the Company for
the fiscal year ended December 31, 1993)
3.02 Certificate of Correction of the Certificate
of Amendment to the Certificate of
Incorporation of the Company, as filed with
the Secretary of State of State of New York on
June 29, 1993 (Incorporated by reference to
the Annual Report on Form 10-K of the Company
for the fiscal year ended December 31, 1993)
3.03 Certificate of Incorporation of Presidential
Life Corporation, a Delaware corporation (now
the Company) (Incorporated by reference to the
Annual Report on Form 10-K of the Company for
the fiscal year ended December 31, 1992)
3.04 By-Laws of Presidential Life Corporation, a
Delaware corporation (now the Company)
(Incorporated by reference to the Annual
Report on Form 10-K of the Company for the
fiscal year ended December 31, 1992)
4.01 Form of Indenture dated as of December 15,
1993 between the Registrant and M&T Bank
relating to the 9 1/2% Senior Notes due 2000
(Incorporated by reference to Exhibit 4.1 to
the Registration Statement on Form S-3 of the
Company filed on September 2, 1993)
4.02 Form of Indenture dated as of February 23,
1999 between the Registrant and Bankers Trust
Company relating to the 7 7/8% Senior Note due
2009 (Incorporated by reference to Exhibit 4.1
to Amendment No. 1 to the Registration
Statement on Form S-3 of the Company filed on
November 3, 1998)
<PAGE>
10.01 Reinsurance Agreements, dated January 1,
1969, March 1, 1979 and November 15,
1980, in each case together with all
amendments thereto, Between the
Registrant and Life Reassurance
Corporation of America (formerly known as
General Reassurance Corporation)
(Incorporated by reference to the Annual
Report on Form 10-K of the Company for
the fiscal year ended December 31, 1992)
10.02 Reinsurance Agreements, dated September
25, 1969 and November 21, 1980, in each
case together with all amendments
thereto, by and between Presidential Life
Insurance Company and Security Benefit
Life Insurance Company (now known as
Swiss Re Life & Health America)
(Incorporated by reference to the Annual
Report on Form 10-K of the Company for
the fiscal year ended December 31, 1992)
10.03 Form of Indemnification Agreement
(Incorporated by reference to the Annual
Report on Form 10-K of the Company for
the fiscal year ended December 31, 1992)
10.04 Presidential Life Corporation 1984 Stock
Option Plan (Incorporated by reference to
the Annual Report on Form 10-K of the
Company for the fiscal year ended
December 31, 1992)
10.05 Presidential Life Corporation 1996 Stock
Incentive Plan (Incorporated by reference
to Exhibit 28.1 to the Registration
Statement on Form S-8 of the Company
filed on July 16, 1996)
11.01 Statement Re Computation of Per Share
Earnings is clearly determinable from the
information contained in this Form 10-K
21.01 Subsidiaries of the Registrant
(Incorporated by reference to the Annual
Report on Form 10-K of the Company for
the fiscal year ended December 31, 1992)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ Herbert Kurz
Herbert Kurz
Principal Executive Officer
and Director
Date: March 27, 2000
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated:
Date: March 27, 2000 /s/ Herbert Kurz
Herbert Kurz
Principal Executive Officer
and Director
Date: March 27, 2000 /s/ Michael V. Oporto
Michael V. Oporto, Chief
Financial Officer and Principal
Accounting Officer
Date: March 27, 2000 /s/ Peter A. Cohen
Peter A. Cohen Director
Date: March 27, 2000 /s/ Jules Kroll
Jules Kroll Director
Date: March 27, 2000 /s/ Lawrence Rivkin
Lawrence Rivkin Director
Date: March 27, 2000 /s/ Morton B. Silberman
Morton B. Silberman Director
<PAGE>
TABLE OF CONTENTS TO
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page
Independent Auditors' Report...................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and 1998.... F-3
Consolidated Statements of Income - Years Ended December 31,
1999, 1998 and 1997.......................................... F-4
Consolidated Statements of Shareholders' Equity - Years Ended
December 31, 1999, 1998 and 1997............................. F-5
Consolidated Statements of Cash Flows - Years Ended December 31,
1999, 1998 and 1997.......................................... F-6
Notes to Consolidated Financial Statements........................ F-7
Consolidated Financial Statement Schedules:
II Condensed Balance Sheets (Parent Company Only) as of
December 31, 1999 and 1998................................. S-1
II Condensed Statements of Income (Parent Company
Only)- Years Ended December 31, 1999, 1998 and 1997........ S-2
II Condensed Statements of Cash Flows (Parent
Company Only) - Years Ended December 31, 1999, 1998
and 1997................................................... S-3
III Supplemental Insurance Information - Years Ended
December 31, 1999, 1998 and 1997........................... S-4
IV Reinsurance - Years Ended December 31, 1999, 1998 and 1997... S-5
All schedules not included are omitted because they are either not
applicable or because the information required therein is included in
the Notes to Consolidated Financial Statements.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Presidential Life Corporation
Nyack, New York 10960
We have audited the accompanying consolidated balance sheets of
Presidential Life Corporation and subsidiaries (the "Company") as of
December 31, 1999 and 1998 and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years
in the period ended December 31, 1999. Our audits also included the
consolidated financial statement schedules listed in the foregoing Table
of Contents. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of
December 31, 1999 and 1998 and the results of its operations and its
cash flows for each of the three years in the period ended December 31,
1999 in conformity with generally accepted accounting principles. Also,
in our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
New York, New York
February 15, 2000
<PAGE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
December 31
1999 1998
<S> <C> <C>
ASSETS:
Investments:
Fixed maturities available for sale $1,962,354 $1,951,454
Common stocks 32,470 34,240
Mortgage Loans 16,134 17,038
Real Estate 415 415
Policy Loans 17,580 17,879
Short-term investments 215,889 227,890
Other invested assets 245,486 244,097
Total investments 2,490,328 2,493,013
Cash and cash equivalents 28,582 1,407
Accrued investment income 27,816 24,309
Amounts due from security transactions 2,800 20,170
Deferred federal income taxes 25,611 0
Federal income tax recoverable 2,602 4,740
Deferred policy acquisition costs 48,844 40,283
Furniture and equipment, net 674 693
Amounts due from reinsurers 9,940 8,700
Other assets 12,443 9,402
Assets held in separate account 4,025 4,082
TOTAL ASSETS $2,653,665 $2,606,799
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy Liabilities:
Policyholders' account balances $1,385,957 $1,314,784
Future policy benefits:
Annuity 449,732 400,717
Life and accident and health 55,789 52,270
Other policy liabilities 4,340 3,261
Total policy liabilities 1,895,818 1,771,032
Dollar repurchase agreements 212,614 148,651
Repurchase agreements 0 24,402
Notes payable 100,000 50,000
Short-term note payable 15,000 23,000
Deposits on policies to be issued 6,662 1,939
Deferred federal income taxes 0 40,815
General expenses and taxes accrued 8,641 6,471
Other liabilities 4,437 13,163
Liabilities related to separate account 4,025 4,082
Total liabilities 2,247,197 2,083,555
Shareholders' Equity:
Capital stock ($.01 par value; authorized
100,000,000 shares; issued and outstanding
30,814,591 shares in 1999 and 31,731,214
shares in 1998) 308 318
Additional paid-in-capital 0 1,268
Accumulated other comprehensive
income (loss) (68,091) 69,037
Retained earnings 474,251 452,621
Total Shareholders' Equity 406,468 523,244
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $2,653,665 $2,606,799
The accompanying notes are an integral part of these Consolidated
Financial Statements.
</TABLE>
<PAGE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
<TABLE>
Years Ended December 31
1999 1998 1997
<S> <C> <C> <C>
REVENUES:
Insurance revenues:
Premiums $ 4,521 $ 4,086 $ 3,976
Annuity considerations 54,376 28,140 19,655
Universal life and investment type
policy fee income 2,559 2,100 1,988
Net investment income 208,126 187,155 191,818
Realized investment gains 2,775 17,185 26,039
Other income 5,703 3,540 4,228
TOTAL REVENUES 278,060 242,206 247,704
BENEFITS AND EXPENSES:
Death and other life insurance
benefits 8,116 7,612 7,236
Annuity benefits 43,016 40,697 37,867
Interest credited to policyholders'
account balances 78,000 76,776 76,202
Interest expense on notes payable 8,960 7,124 5,850
Other interest and other charges 531 274 445
Increase in liability for
future policy benefits 51,463 21,051 15,248
Commissions to agents, net 6,301 4,780 4,357
General expenses and taxes 17,379 14,522 12,813
Increase in deferred policy
acquisition costs (5,198) (2,375) (2,872)
TOTAL BENEFITS AND EXPENSES 208,568 170,461 157,146
Income before income taxes 69,492 71,745 90,558
Provision (benefit) for income taxes:
Current 24,866 26,902 31,165
Deferred (3,605) (4,381) (1,899)
21,261 22,521 29,266
Income before extraordinary item 48,231 49,224 61,292
Extraordinary item - loss on retirement
of debt, net of income tax benefit of
$276.5 (514) 0 0
NET INCOME $ 47,717 $ 49,224 $ 61,292
Weighted average number of shares
outstanding during the year 31,161,277 32,073,388 32,734,733
Earnings per common share before
extraordinary item $ 1.55 $ 1.53 $ 1.87
Extraordinary item (.02) 0 0
Earnings per common share $ 1.53 $ 1.53 $ 1.87
The accompanying notes are an integral part of these Consolidated Financial
Statements.
</TABLE>
<PAGE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
Accumulated
Additional Other
Capital Paid-in- Retained Comprehensive
Stock Capital Earnings Income (loss) Total
<S> <C> <C> <C> <C> <C>
Balance at
January 1, 1997 $330 $24,023 $358,416 $ 40,294 $423,063
Comprehensive Income:
Net income 61,292 61,292
Net Unrealized Investment
Gains (Losses) 31,246 31,246
Comprehensive Income 92,538
Purchase and Retirement
of Stock (4) (5,758) (5,762)
Issuance of Shares
under Stock Option Plan 9 9
Dividends Paid to
Shareholders ($.22 per
share) (7,194) (7,194)
Balance at
December 31, 1997 326 18,274 412,514 71,540 502,654
Comprehensive Income:
Net income 49,224 49,224
Net Unrealized Investment
Gains (Losses) (2,503) (2,503)
Comprehensive Income 46,721
Purchase and Retirement
of Stock (8) (17,060) (17,068)
Issuance of Shares
under Stock Option Plan 54 54
Dividends Paid to
Shareholders ($.285 per
share) (9,117) (9,117)
Balance at
December 31, 1998 318 1,268 452,621 69,037 523,244
Comprehensive Income:
Net income 47,717 47,717
Net Unrealized Investment
Gains (Losses) (137,128) (137,128)
Comprehensive Loss (89,411)
Purchase and Retirement
of Stock (10) (1,281) (15,375) (16,666)
Issuance of Shares
under Stock Option Plan 13 13
Dividends Paid to
Shareholders ($.345 per
share) (10,712) (10,712)
Balance at
December 31, 1999 $308 $ 0 $474,251 $(68,091) $406,468
The accompanying notes are an integral part of these Consolidated
Financial Statements.
</TABLE>
<PAGE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Years Ended December 31
1999 1998 1997
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 47,717 $ 49,224 $ 61,292
Adjustments to reconcile net income to
net cash provided by operating activities:
Benefit for deferred income taxes (3,605) (4,381) (1,899)
Depreciation and amortization 936 1,037 474
Net accrual of discount on fixed
maturities (8,469) (8,806) (4,181)
Realized investment gains (2,775) (17,185) (26,039)
Changes in:
Accrued investment income (3,507) 3,858 4,307
Deferred policy acquisition costs (5,198) (2,375) (2,872)
Federal income tax recoverable 2,138 (4,740) 0
Liability for future policy benefits 52,534 22,030 15,777
Other items (10,468) (1,629) 436
Net Cash Provided by
Operating Activities 69,303 37,033 47,295
INVESTING ACTIVITIES:
Fixed Maturities:
Available for Sale:
Acquisitions (434,070) (377,730) (338,058)
Sales 53,524 2,602 29,325
Maturities, calls and repayments 172,830 333,533 252,383
Common Stocks:
Acquisitions (21,038) (12,880) (18,722)
Sales 27,533 46,435 68,377
Decrease (increase) in short-term
investments and policy loans 12,300 36,449 (24,112)
Other Invested Assets:
Additions to other invested assets (48,413) (93,837) (110,760)
Distributions from other invested assets 47,024 57,902 78,701
Purchase of property and equipment (172) (289) (409)
Mortgage loan on real estate 904 827 757
Amounts due from security transactions 17,370 (20,170) 0
Net Cash Used in
Investing Activities (172,208) (27,158) (62,518)
FINANCING ACTIVITIES:
Proceeds from Dollar Repurchase
Agreements 2,522,329 2,115,345 2,429,540
Repayment of Dollar Repurchase
Agreements (2,458,365) (2,171,896) (2,425,221)
Proceeds from Reverse Repurchase
Agreements (24,402) 24,402 0
Proceeds from (repayment of) Senior Notes 50,000 0 0
Proceeds from (repayment of) line
of credit (8,000) 3,000 15,000
Increase (decrease) in policyholders'
account balances 71,173 33,884 20,355
Repurchase of common stock (16,666) (17,069) (5,762)
Deposits on policies to be issued 4,723 (497) 1,166
Dividends paid to shareholders (10,712) (9,117) (7,194)
Net Cash Provided by (Used in)
Financing Activities 130,080 (21,948) 27,884
Increase (Decrease) in Cash and Cash
Equivalents 27,175 (12,073) 12,661
Cash and Cash Equivalents at Beginning
of Year 1,407 13,480 819
Cash and Cash Equivalents at End of Year $ 28,582 $ 1,407 $ 13,480
Supplemental Cash Flow Disclosure:
Income Taxes Paid $ 22,453 $ 33,500 $ 27,700
Interest Paid $ 5,514 $ 6,216 $ 5,508
The accompanying notes are an integral part of these Consolidated Financial
Statements.
</TABLE>
<PAGE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES
NOTES TO 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.
On December 29, 1999, the Company announced the completion of the
purchase of The Central National Life Insurance Company of Omaha ("Central
National") from the Household Insurance Group Holding Company, a subsidiary
of Household International, Inc. Central National which has assets of
$10.5 million and capital and surplus of $10.5 million is licensed to
market insurance products in 49 states, the District of Columbia, Puerto
Rico and the U.S. Virgin Islands.
B. Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been
prepared in conformity with generally accepted accounting principles ("GAAP").
Intercompany transactions and balances have been eliminated in consolidation.
Certain amounts have been reclassified to conform to the current year's
presentation. The preparation of financial statements in conformity with
generally accepted accounting principles requires that management make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates. The Company has one reportable operating
segment and therefore, no additional disclosures are required under Statement
of Financial Accounting Standards No. 131 "Disclosures About Segments of
an Enterprise and Related Information". 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.
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 estimated market value and net unrealized
gains (losses), net of the effects of amortization of deferred policy
acquisition costs and deferred Federal income taxes are credited or charged
directly to shareholders' equity, unless a decline in market value is
considered to be other than temporary in which case the investment
is reduced to its net realizable value. Equity securities include common
stocks and non-redeemable preferred stocks and are carried at estimated
market, with the related unrealized gains and losses, net of deferred income
tax effect, if any, charged or credited 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
<PAGE>
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
December 31, 1999 and 1998. As of December 31, 1999, the Company was committed
to contribute, if called upon, an aggregate of approximately $68.9 million of
additional capital to certain of these limited partnerships.
In evaluating whether an investment security or other investment has
suffered an impairment in value which is deemed to be "other than temporary",
management considers all available evidence. When a decline in the value of
an investment security or other investment is considered to be other than
temporary, the investment is reduced to its net realizable value, (which
contemplates the price that can be obtained from the sale of such asset in
the ordinary course of business) 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.
Realized gains and losses on disposal of investments are determined
for fixed maturities and equity securities by the specific-identification
method.
Investments in short-term securities, which consist primarily of
United States Treasury Notes and corporate debt issues maturing in less than
one year, are recorded at amortized cost which approximates market. Mortgage
loans are stated at their amortized indebtedness. Policy loans are stated
at their unpaid principal balance.
The Company's investments in real estate include two buildings in
Nyack, New York, which are occupied entirely by the Company. The investments
are carried at cost less accumulated depreciation. Depreciation has been
provided on a straight line basis at the rate of 4% per annum for one
building and 5% per annum for the other. Accumulated depreciation amounted
to $206,800 and $206,800 at December 31, 1999 and 1998, respectively, and
related depreciation expense for the years ended December 31, 1999, 1998
and 1997 was $0, $2,400 and $3,200, respectively.
D. Furniture and Equipment
Furniture and equipment is carried at cost and depreciated on a
straight line basis over a period of five to ten years except for automobiles
which are depreciated over a period of three years. Accumulated depreciation
amounted to $565,400 and $377,400 at December 31, 1999 and 1998,
respectively, and related depreciation expense for the years ended
December 31, 1999, 1998 and 1997 was $190,700, $160,900 and $163,700,
respectively.
E. Recognition of Insurance Income and Related Expenses
Premiums from traditional life and annuity policies with life
contingencies are recognized generally as income over the premium paying
period. Benefits and expenses are matched with such income so as to result
in the recognition of profits over the life of the contracts. This matching
is accomplished by means of the provision for liabilities for future policy
benefits and the deferral and subsequent amortization of policy acquisition
costs.
For contracts with a single premium or a limited number of premium
payments due over a significantly shorter period than the total period over
which benefits are provided ("limited payment contracts"), premiums are
recorded as income when due with any excess profit deferred and recognized
in income in a constant relationship to insurance in force or, for annuities,
the amount of expected future benefit payments.
<PAGE>
E. Recognition of Insurance Income and Related Expenses - continued
Premiums from universal life and investment-type contracts are
reported as deposits to policyholders' account balances. Revenues from these
contracts consist of amounts assessed during the period against policyholders'
account balances for mortality charges and surrender charges. Policy benefits
and claims that are charged to expense include benefit claims incurred in
the period in excess of related policyholders' account balances and interest
credited to policyholders' account balances.
For the years ended December 31, 1999, 1998, and 1997, approximately
50.2%, 58.1% and 67.3%, respectively, of premiums from traditional life,
annuity, universal life and investment-type contracts received by the Company
were attributable to sales to annuitants and policyholders residing in the
State of New York.
F. Deferred Policy Acquisition Costs
The costs of acquiring new business (principally commissions, certain
underwriting, agency and policy issue expenses), all of which vary with and are
primarily related to the production of new business, have generally been
deferred. When a policy is surrendered, the remaining unamortized cost is
written off. Deferred policy acquisition costs are subject to recoverability
testing at time of policy issue and loss recognition testing at the end of
each year.
For immediate annuities with life contingencies, deferred policy
acquisition costs are amortized over the life of the contract, in proportion
to expected future benefit payments.
For traditional life policies, deferred policy acquisition costs are
amortized over the premium paying periods of the related policies using
assumptions that are consistent with those used in computing the liability
for future policy benefits. Assumptions as to anticipated premiums are
estimated at the date of policy issue and are consistently applied during
the life of the contracts. For these contracts the amortization periods
generally are for the scheduled life of the policy, not to exceed 30 years.
Deferred policy acquisition costs are amortized over periods
ranging from 15 to 25 years for universal life products and investment-type
products as a constant percentage of estimated gross profits arising
principally from surrender charges and interest and mortality margins based
on historical and anticipated future experience, updated regularly. The
effects of revisions to reflect actual experience on previous amortization
of deferred policy acquisition costs, subject to the limitation that the
accrued interest on the deferred acquisition costs balance may not exceed
the amount of amortization for the year, are reflected in earnings in the
period estimated gross profits are revised.
Unamortized deferred policy acquisition costs for the years ended
December 31, 1999 and 1998 are summarized as follows:
1999 1998
(in thousands)
Balance at the beginning of year $40,283 $37,685
Current year's costs deferred 11,479 8,706
Total 51,762 46,391
Less, amortization for the year 6,215 6,293
Total 45,547 40,098
Change in amortization (benefit)
related to unrealized gain
(loss) in investments (3,297) (185)
Balance at the end of the year $48,844 $40,283
<PAGE>
G. Future Policy Benefits
Future policy benefits for traditional life insurance policies
are computed using a net level premium method on the basis of actuarial
assumptions as to mortality, persistency and interest established at policy
issue. Assumptions established at policy issue as to mortality and
persistency are based on anticipated experience which, together with
interest and expense assumptions, provide a margin for adverse deviation.
Benefit liabilities for deferred annuities during the accumulation period
are equal to accumulated contractholders' fund balances and after
annuitization are equal to the present value of expected future payments.
During the three years in the period ended December 31, 1999, interest
rates used in establishing such liabilities range from 4.5% to 11% for
life insurance liabilities and from 5.5% to 13.60% for annuity liabilities.
H. Policyholders' Account Balances
Policyholders' account balances for universal life and investment-type
contracts are equal to the policy account values. The policy account values
represent an accumulation of gross premium payments plus credited interest
less mortality and expense charges and withdrawals.
These account balances are summarized as follows:
1999 1998 1997
(in thousands)
Account balances at beginning of year $1,314,784 $1,280,900 $1,260,545
Additions to account balances 238,535 209,601 209,568
Total 1,553,319 1,490,501 1,470,113
Deductions from account balances 167,362 175,717 189,213
Account balances at end of year $1,385,957 $1,314,784 $1,280,900
Interest rates credited to account balances ranged from 4% to 12.5%
in 1999, 1998 and 1997.
I. 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 income taxes are adjusted to reflect tax rates at which future tax
liabilities or assets are expected to be settled or realized.
J. Separate Accounts
Separate Accounts are established in conformity with New York State
Insurance Law and represent funds for which investment income and investment
gains and losses accrue to the policyholders. Assets and liabilities (stated
at market value) of the Separate Account, representing net deposits and
accumulated net investment earnings less fees, held primarily for the
benefit of contractholders, are shown as separate captions in the consolidated
balance sheets.
Deposits to the Separate Account are reported as increases in Separate
Account liabilities and are not reported in revenues. Mortality, policy
administration and surrender charges to the Separate Account are included
in revenues.
<PAGE>
K. Earnings Per Common Share
Earnings per share (EPS) presented on the face on the consolidated
statement of income has been calculated to reflect the adoption of SFAS No.
128 by the Company. 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 year ended December 31,
1999, 1998 and 1997 was 31,161,227, 32,073,388 and 32,736,202, respectively.
The dilution from the potential exercise of stock options outstanding did
not change basic EPS.
L. Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand and amounts due
from banks with an original maturity of three months or less.
M. 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 to
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.
2. INVESTMENTS
The following information summarizes the components of net investment
income and realized investment gains (losses).
Net Investment Income:
Year Ended December 31
1999 1998 1997
(in thousands)
Fixed maturities $163,112 $141,483 $134,740
Common stocks 677 1,621 1,341
Short-term investments 14,081 16,537 14,368
Other investment income 36,777 33,281 48,797
214,647 192,922 199,246
Less investment expenses 6,521 5,767 7,428
Net investment income $208,126 $187,155 $191,818
<PAGE>
2. INVESTMENTS - CONTINUED
There were no fixed maturities which were non-income producing for
more than twelve months at December 31, 1999 and 1998.
Realized Investment Gains (Losses):
Year Ended December 31,
1999 1998 1997
(in thousands)
Fixed maturities $ (1,273) $ 3,144 $12,080
Common stocks 4,048 14,041 13,959
Total realized gains
on investments $ 2,775 $17,185 $26,039
Unrealized Investment Gains (Losses):
Year Ended December 31,
1999 1998 1997
(in thousands)
Fixed maturities $ (88,359) $110,178 $109,995
Common stocks 4,816 9,525 13,752
Unrealized investment
gains (losses) $ (83,543) $119,703 $123,747
Amortization of deferred
acquisition costs 10,195 (13,492) (13,686)
Deferred federal income
taxes (25,647) (37,174) (38,521)
Net unrealized investment
gains (losses) (68,091) 69,037 71,540
Change in net unrealized
investment gains
(losses) $(137,128) $ (2,503) $ 31,246
The change in unrealized investment gains (losses) shown above
resulted primarily from changes in general economic conditions which directly
influenced investment security markets. These changes were also impacted by
writedowns of investment securities for declines in market values deemed to
be other than temporary.
The following tables provide additional information relating to
investments held by the Company:
<TABLE>
December 31, 1999:
AVAILABLE FOR SALE:
Amortized Gross Unrealized Market
Type of Investment Cost Gains Losses Value
(in thousands)
<S> <C> <C> <C> <C>
Fixed Maturities:
Bonds and Notes:
United States government
and government agencies
and authorities $ 349,499 $ 5,042 $ (4,534) $ 350,007
States, municipalities and
political subdivisions 26,743 1,132 (400) 27,475
Foreign governments 12,087 1,013 0 13,100
Public utilities 130,538 900 (7,159) 124,279
All other corporate bonds 1,325,404 29,059 (86,022) 1,268,441
Preferred stocks, primarily
corporate 206,439 3,234 (30,621) 179,052
Total Fixed Maturities: $2,050,710 $40,380 $(128,736) $1,962,354
Common Stocks $ 27,655 $ 5,977 $ (1,162) $ 32,470
</TABLE>
<PAGE>
2. INVESTMENTS - CONTINUED
<TABLE>
December 31, 1998:
AVAILABLE FOR SALE:
Amortized Gross Unrealized Market
Type of Investment Cost Gains Losses Value
(in thousands)
<S> <C> <C> <C> <C>
Fixed Maturities:
Bonds and Notes:
United States government
and government agencies
and authorities $ 387,430 $ 20,361 $ (111) $407,680
States, municipalities and
political subdivisions 26,707 4,153 0 30,860
Foreign governments 12,100 1,950 0 14,050
Public utilities 139,013 12,076 0 151,089
All other corporate bonds 1,069,931 85,409 (6,816) 1,148,524
Preferred stocks, primarily
corporate 206,095 6,254 (13,098) 199,251
Total Fixed Maturities: $1,841,276 $130,203 $(20,025) $1,951,454
Common Stocks $ 24,715 $ 10,065 $ (540) $ 34,240
</TABLE>
The estimated fair value of fixed maturities available for sale at
December 31, 1999, by contractual maturity, are as follows. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without penalties.
Market Value
(in thousands)
Due in one year or less $ 21,803
Due after one year through five years 158,082
Due after five years through ten years 129,153
Due after ten years 1,474,264
Total debt securities 1,783,302
Preferred stock 179,052
Total $1,962,354
Proceeds from sales of fixed maturities during 1999, 1998 and 1997
were $305.4 million, $527.5 million and $718.4 million, respectively. During
1999, 1998 and 1997, respectively, gross gains of $14.0 million, $9.0 million
and $16.4 million and gross losses of $1.4 million, $1.0 million and $4.5
million were realized on those sales.
As of December 31, 1999, the Company's mortgage loans were collateralized
by commercial office buildings in New York and Pennsylvania.
There were no investments owned in any one issuer that aggregate 10% or
more of shareholders' equity as of December 31, 1999.
<PAGE>
2. INVESTMENTS - CONTINUED
As of December 31, 1999 securities with a carrying value of approximately
$5.1 million were on deposit with various state insurance departments to comply
with applicable insurance laws.
As part of a proposed rehabilitation plan for Fidelity Mutual Life
Insurance Company ("Fidelity"), on January 11, 1995 the Insurance Company signed
a definitive purchase agreement with the Pennsylvania Insurance Commissioner
and Fidelity to invest up to $45 million for a minority (49.9%) stake in a
Fidelity subsidiary insurance holding company. In addition, the Company had
agreed to purchase $25 million of Senior Notes of such company.
The Company was informed by the Pennsylvania Insurance Commissioner that
in response to the significant improvement in the invested assets of Fidelity,
she has reopened the process to select an equity investor for the
recapitalization and rehabilitation of Fidelity. The Company disagreed with
the Insurance Commissioner's actions and commenced litigation which was settled
in the second quarter of 1997. As part of the settlement, the Company
received $1.7 million.
3. NOTES PAYABLE
Notes payable at December 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 December 31, 1999, unamortized costs were $8.2
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 of $276.5
thousand.
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.
The short-term note payable is a bank line of credit in the amount of
$25,000,000 and provides for interest on borrowings based on market indices.
At December 31, 1999 and 1998 the Company had $15,000,000 and $23,000,000
outstanding, respectively. The short-term note payable outstanding at
December 31, 1999 and 1998 had a weighted average interest rate of 6.108%
and 6.469%, respectively.
<PAGE>
4. SHAREHOLDERS' EQUITY
The Company is authorized to issue 100,000,000 shares of its $.01 par
value Common Stock. At December 31, 1999 30,814,591 shares were outstanding
and at December 31, 1998 31,731,214 shares were outstanding.
During 1999, the Company's Board of Directors increased the quarterly
dividend rate to $.09 per share. During 1999, 1998 and 1997, the Company
purchased and retired 918,300, 896,900 and 372,300 shares of common stock,
respectively. The Company is authorized pursuant to a resolution of the
Board of Directors to purchase an additional 417,000 shares of common stock.
Payment of dividends to the Company by the Insurance Company are
effectively restricted by the provisions of the New York Insurance Law
("Insurance Law"). All dividend payments are subject to the review and
disapproval by the New York Insurance Department. Under the New York State
Insurance Law, the New York Superintendent has broad discretion to
determine whether the financial condition of a stock life insurance company
would support the payment of dividends to its shareholders.
The New York Insurance Department has established informal guidelines
for the Superintendent's determinations which focus upon, among other things,
the overall financial condition and profitability of the insurer under statutory
accounting practices. During 1999, 1998 and 1997, the Insurance Company paid
dividends of $28.4 million, $49.4 million and $24.8 million, respectively, to
the Company.
Other Comprehensive Income (loss)
For the years ended Tax After-
December 31, Pre-Tax Expense/ Tax
Amount (Benefit) Amount
(in thousands)
1999
Unrealized gains (losses) on
investment securities:
Unrealized holding losses arising
during year $(208,192) $(72,868) $(135,324)
Less: reclassification adjustment for gains
realized in net income 2,775 971 1,804
Net unrealized investment gains (losses) $(210,967) $(73,839) $(137,128)
1998
Unrealized gains on investment securities:
Unrealized holding gains arising during
year $ 15,739 $ 5,509 $ 10,230
Less: reclassification adjustment for
gains realized in net income 17,185 4,452 12,733
Net unrealized investment gains (losses) $ (1,446) $ 1,057 $ (2,503)
1997
Unrealized gains on investment securities:
Unrealized holding gains arising
during year $ 74,757 $ 26,165 $ 48,592
Less: reclassification adjustment for
gains realized in net income 26,039 8,693 17,346
Net unrealized investment gains $ 48,718 $ 17,472 $ 31,246
<PAGE>
5. EMPLOYEE BENEFIT AND DEFERRED COMPENSATION PLANS
(a) Employee Retirement Plan
The Company has a noncontributory defined benefit pension plan covering
all eligible employees. The Company is both sponsor and administrator of
this plan. The plan provides for pension benefits based on average pay and
years of service.
Year Ended December 31,
1999 1998
(in thousands)
Change in benefit obligation
Benefit obligation (beginning of year) $ 5,978 $ 5,923
Service cost 338 438
Interest cost 347 388
Actuarial gain (967) (334)
Benefits paid (1,340) (437)
Benefit obligation (end of year) 4,356 5,978
Change in Plan assets
Fair value of assets (beginning of year) 4,707 4,558
Actual return on plan assets 585 287
Employer contribution 305 299
Benefits paid (1,340) (437)
Fair value of assets (end of year) 4,257 4,707
Funded status (99) (1,272)
Unrecognized transition amount 112 140
Unrecognized net actuarial loss (1,885) (824)
Prepaid (accrued) benefit cost $(1,872) $(1,956)
Weighted average assumptions
Discount rate 7.00% 7.00%
Expected return on assets 7.50 7.50
Rate of compensation increase 3.00 3.00
Components of net periodic benefit cost
Service cost $ 338 $ 438
Interest cost 347 388
Expected return on assets (362) (350)
Amortization of prior service cost 28 28
Recognized net actuarial loss (130) (65)
Net periodic benefit cost $ 221 $ 439
(b) Employee Savings Plan
The Company adopted an Internal Revenue Code (IRC) Section 401(k) plan
for its employees effective January 1, 1992. Under the plan, participants
may contribute up to a maximum of 15% of their pre-tax earnings or the
dollar limit as prescribed by IRC Section 415(d). A portion of participants'
pre-tax earnings may be matched by the Company. For the years ended
December 31, 1999, 1998 and 1997, the Company's contribution was
approximately $44,000, $43,300 and $43,700, respectively.
<PAGE>
5. EMPLOYEE BENEFIT AND DEFERRED COMPENSATION PLANS - CONTINUED
(c) Employee Stock Option Plan
The Company has adopted an incentive stock option plan recommended by the
Board of Directors and approved by the shareholders. This plan grants options
to purchase up to 1,000,000 shares of common stock of the Company to officers
and key employees. Option prices are 100% of the fair market value at date of
grant. The following schedule shows all options granted, exercised, expired
and exchanged under the Company's Incentive Stock Option Plan as of
December 31, 1999.
Information relating to the options is as follows:
Option Price
Number Amount Total
of Shares Per Share Price
Outstanding, January 1, 1997 49,400 $ 9.08 448,748
Granted 66,150 17.49 1,180,706
Exercised (1,014) 9.69 (9,826)
Cancelled (2,525) 12.43 (31,398)
Outstanding, December 31, 1997 112,011 $14.20 $1,588,230
Granted 80,700 18.13 1,462,688
Exercised (6,565) 8.29 (54,402)
Cancelled (10,886) 14.54 (158,328)
Outstanding, December 31, 1998 175,260 $16.19 $2,838,188
Granted 74,250 17.19 1,276,172
Exercised (1,677) 10.82 (18,149)
Cancelled (5,411) 17.53 (94,869)
Outstanding, December 31, 1999 242,422 $16.51 $4,001,342
At December 31, 1999, 74,605 options for shares of common stock were
exercisable.
The Company applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its stock option plan.
Accordingly, no compensation cost has been recognized for its fixed stock
option plan. Had compensation cost for the Company's stock option plan
been determined based on the fair value at the grant dates for awards
under the plan consistent with the method of FASB Statement 123, the
Company's net income and earnings per common share for the years ended
December 31, 1999 and 1998 would have been reduced to the pro forma amounts
indicated below:
Net income (in thousands) Year Ended December 31,
1999 1998 1997
As reported $47,717 $49,224 $61,292
Pro forma 47,625 49,114 61,188
Earnings per common share
As reported $1.53 $1.53 $1.87
Pro forma 1.53 1.53 1.87
The fair value of options granted under the Company's fixed stock
option plan during 1999 was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used: dividend yield of 1.96%, expected volatility of 49.0%,
risk free interest rate of 7.0%, and expected lives of 4 years.
<PAGE>
6. INCOME TAXES
The following is a reconciliation of income taxes computed using the
Federal statutory rate with the provision for income taxes for the years
ended December 31,:
1999 1998 1997
(in thousands)
Provision for income taxes computed
at Federal statutory rate $24,322 $25,111 $31,695
Increase (decrease) in income taxes
resulting from:
Utilization of prior unrecognized
deferred tax asset relating to
investment losses 0 (306) (868)
Losses producing no current benefit 514 784 81
Other (3,575) (3,068) (1,642)
Provision for Federal
income taxes $21,261 $22,521 $29,266
The Company provides for deferred income taxes resulting from temporary
differences which arise from recording certain transactions in different
years for income tax reporting purposes than for financial reporting purposes.
The sources of these differences and the tax effect of each were as follows:
1999 1998 1997
(in thousands)
Deferred policy acquisition costs $ 1,374 $ 621 $ 341
Policyholders' account balances (3) (21) 5
Investment adjustments (3,411) (1,236) (481)
Insurance reserves (830) (2,422) (924)
Other (735) (1,323) (840)
Deferred Federal income tax benefit $(3,605) $(4,381) $(1,899)
Deferred federal 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, and
(b) operating loss carryforwards. Significant components of the Company's net
deferred federal tax (asset) liability as of December 31, 1999 and 1998 are
as follows (in thousands):
1999 1998
Deferred federal income tax asset:
Investments $(10,650) $ (7,239)
Net unrealized investment losses (25,647) 0
Insurance reserves (9,760) (8,930)
Operating loss carryforwards (2,534) (1,517)
Other (224) (179)
(48,815) (17,865)
Valuation allowance 4,230 3,904
Net deferred federal income
tax asset $(44,585) $(13,961)
Deferred federal income tax liability:
Deferred policy acquisition costs $ 18,302 $ 16,927
Net unrealized investment gains 0 37,174
Policyholder account balances 66 69
Other 606 606
Deferred federal income tax liability 18,974 54,776
Net deferred federal income tax
(asset) liability $(25,611) $ 40,815
<PAGE>
6. INCOME TAXES - CONTINUED
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 years
ended December 31, 1999 and 1998 primarily reflect the reduction in the
deferred tax asset as a result of the utilization of previously unrecognized
investment losses.
Prior to 1984, Federal income tax law allowed life insurance companies
to exclude from taxable income and set aside certain amounts in a tax
memorandum account known as the Policyholder Surplus Account ("PSA").
Under the tax law, the PSA has been frozen at its December 31, 1983 balance
of $2,900,000 which may under certain circumstances become taxable in the
future. The Insurance Company does not believe that any significant
portion of the amount in this account will be taxed in the foreseeable
future. Accordingly, no provision for income taxes has been made thereon.
If the amount in the PSA were to become taxable, the resulting liability
using current rates would be approximately $1,015,000.
Under current tax law, there are certain limitations on the utilization
of non-life insurance company losses ("non-life losses") against life insurance
company income ("life income") in a consolidated federal income tax return.
The utilization of non-life losses against life income in any year is
limited to the lesser of 35 percent of life income or 35 percent of non-life
losses. Any unutilized balance of non-life losses is carried over to
subsequent tax years.
The Company has net operating loss carryforwards of approximately
$11,138,000 at December 31, 1999 of which $1,150,000 expire in 2010;
$1,671,000 in 2011; $4,120,000 in 2013; and $4,197,000 in 2014.
7. REINSURANCE
Reinsurance allows life insurance companies to share risks on a case by
case or aggregate basis with other insurance and reinsurance companies.
The Insurance Company cedes insurance to the reinsurer and compensates the
reinsurer for its assumption of risk. The maximum amount of individual
life insurance normally retained by the Company on any one life is $50,000
per policy and $100,000 per life. The maximum retention with respect to
impaired risk policies typically is the same. The Insurance Company
cedes insurance primarily on an "automatic" basis, under which risks are
ceded to a reinsurer on specific blocks of business where the underlying
risks meet certain predetermined criteria, and on a "facultative" basis,
under which the reinsurer's prior approval is required on each risk
reinsured.
The reinsurance of a risk does not discharge the primary liability of the
insurance company ceding that risk, but the reinsured portion of the claim is
recoverable from the reinsurer. The major reinsurance treaties into which the
Insurance Company has entered can be characterized as follows:
Reinsurance ceded from the Insurance Company to Life Reassurance
Corporation of America and Swiss Re Life & Health America Inc. at
December 31, 1999 and 1998 consists of coinsurance agreements aggregating
face amounts of $201.5 million and $203.1 million, respectively,
representing the amount of individual life insurance contracts that were
ceded to the reinsurers. The term "coinsurance" refers to an arrangement
under which the Insurance Company pays the reinsurers the gross premiums
on the portion of the policy to be reinsured and the reinsurers grant a
ceding commission to the Insurance Company to cover its acquisition costs
plus a margin for profit.
Premiums ceded for 1999, 1998 and 1997 amounted to approximately
$4.7 million, $4.4 million, and $4.5 million, respectively.
<PAGE>
8. STATUTORY FINANCIAL STATEMENTS
Accounting practices used to prepare statutory financial statements for
regulatory filings of stock life insurance companies differ from GAAP.
Material differences resulting from these accounting practices include:
deferred policy acquisition costs, deferred Federal income taxes and
statutory non-admitted assets are recognized under GAAP accounting while
statutory investment valuation reserves are not; premiums for universal
life and investment-type products are recognized as revenues for statutory
purposes and as deposits to policyholders' accounts under GAAP; different
assumptions are used in calculating future policyholders' benefits; and
different methods are used for calculating valuation allowances for
statutory and GAAP purposes; fixed maturities are recorded at market
value under GAAP while under statutory accounting practices they are
recorded principally at amortized cost.
In March 1998, the National Association of Insurance Commissioners
adopted the Codification of Statutory Accounting Principles (Codification).
The Codification, which is intended to standardize regulatory accounting
and reporting for the insurance industry, is proposed to be effective
January 1, 2001. However, statutory accounting principles will continue
to be established by individual state laws and permitted practices and it
is uncertain when, or if, the state of New York will require adoption
of Codification for the preparation of statutory financial statements.
The Company has not finalized the quantification of the effects of
Codification on its statutory financial statements.
For the years ended December 31,
1999 1998 1997
(in thousands)
Statutory surplus $298,029 $287,286 $296,725
Statutory net income $ 47,798 $ 52,105 $ 57,081
9. LITIGATION
From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business.
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.
10. FAIR VALUE INFORMATION
The following estimated fair value disclosures of financial instruments
have been determined using available market information, current pricing
information and appropriate valuation methodologies. If quoted market prices
were not readily available for a financial instrument, management determined
an estimated fair value. Accordingly, the estimates may not be indicative of
the amounts the Company could have realized in a market transaction.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value.
For fixed maturities and common stocks, estimated fair values were based
primarily upon independent pricing services. For a limited number of
privately placed securities, where prices are not available from independent
pricing services, the Company estimates market values using a matrix pricing
model, based on the issuer's credit standing and the security's interest rate
spread over U.S. Treasury bonds.
<PAGE>
10. FAIR VALUE INFORMATION- CONTINUED
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 to approximate the carrying value.
As of December 31, 1999, the Company was committed to contribute, if called
upon, an aggregate of approximately $68.9 million of additional capital to
certain of these limited partnerships. The market value of short-term
investments, mortgage loans and policy loans is estimated to approximate
the carrying value.
Estimated fair values of policyholders' account balances for investment
type products (i.e., deferred annuities, immediate annuities without life
contingencies and universal life contracts) are calculated by projecting the
contract cash flows and then discounting them back to the valuation date
at the appropriate discount rate. For immediate annuities without life
contingencies, the cash flows are defined contractually. For all other
products, projected cash flows are based on an assumed lapse rate and
crediting rate (based on the current treasury curve), adjusted for any
anticipated surrender charges. The discount rate is based on the current
duration-matched treasury curve, plus an adjustment to reflect the
anticipated spread above treasuries on investment grade fixed maturity
securities, less an expense and profit spread.
December 31, 1999 Carrying Value Estimated Fair Value
Assets (in thousands)
Fixed Maturities:
Available for Sale 1,962,354 1,962,354
Common Stock 32,470 32,470
Mortgage Loans 16,134 16,134
Policy Loans 17,580 17,580
Cash and Short-Term Investments 244,471 244,471
Other Invested Assets 245,486 245,486
Liabilities
Policyholders' Account Balances 1,385,957 1,272,349
Note Payable 100,000 91,089
Short-Term Note Payable 15,000 15,000
December 31, 1998 Carrying Value Estimated Fair Value
Assets (in thousands)
Fixed Maturities:
Available for Sale 1,951,454 1,951,454
Common Stock 34,240 34,240
Mortgage Loans 17,038 17,038
Policy Loans 17,879 17,879
Cash and Short-Term Investments 229,297 229,297
Other Invested Assets 244,097 244,097
Liabilities
Policyholders' Account Balances 1,314,784 1,306,665
Note Payable 50,000 51,125
Short-Term Note Payable 23,000 23,000
<PAGE>
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is presented below. Certain amounts
have been reclassified to conform to the current year's presentation.
<TABLE>
Three Months Ended
1999 March 31 June 30 September 30 December 31
(in thousands, except per share)
<S> <C> <C> <C> <C>
Premiums and other
insurance revenues $10,467 $19,379 $16,485 $20,828
Net investment income 50,989 49,338 50,099 57,700
Realized investment
gains (losses) 2,480 (1,725) 751 1,269
Total revenues 63,936 66,992 67,335 79,797
Benefits and expenses 46,776 53,766 50,546 57,480
Net income 10,548<F1> 9,484 12,695 14,990
Earnings per share $ .33<F1> $ .30 $ .41 $ .49
<FN>
<F1> Includes extraordinary loss of $514 thousand or $.02 per share.
</FN>
</TABLE>
<TABLE>
Three Months Ended
1998 March 31 June 30 September 30 December 31
(in thousands, except per share)
<S> <C> <C> <C> <C>
Premiums and other
insurance revenues $10,366 $ 9,929 $ 6,358 $11,213
Net investment income 52,422 57,654 35,716 41,363
Realized investment
gains 2,006 7,063 5,018 3,098
Total revenues 64,794 74,646 47,092 55,674
Benefits and expenses 44,357 46,265 39,169 40,670
Net income 13,672 18,497 6,512 10,543
Earnings per share $ .42 $ .58 $ .20 $ .33
<PAGE>
Schedule II
PRESIDENTIAL LIFE CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(in thousands)
</TABLE>
<TABLE>
December 31,
1999 1998
<S> <C> <C>
ASSETS:
Investment in subsidiaries at equity $417,647 $514,431
Cash in bank 5,115 394
Real estate, net 35 36
Fixed maturities, available for sale 55,289 14,524
Investments, common stocks 3,028 1,765
Short-term investments 0 24,526
Other invested assets 30,532 36,642
Amount due from security transactions 0 4,000
Deferred debt issue costs 8,213 0
Other assets 3,850 11,598
TOTAL ASSETS $523,709 $607,916
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Accounts payable, accrued expenses
and taxes $ 0 $ 148
Notes payable, long term 100,000 50,000
Short-term note payable 15,000 23,000
Other liabilities 2,241 11,524
TOTAL LIABILITIES 117,241 84,672
Total Shareholders' Equity 406,468 523,244
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $523,709 $607,916
</TABLE>
<PAGE>
Schedule II
PRESIDENTIAL LIFE CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
(in thousands)
<TABLE>
Year Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
REVENUES:
Income from rents $ 739 $ 739 $ 739
Investment income 5,771 1,289 5,460
Realized investment losses (703) (302) (933)
Other income 0 0 720
Total Revenues 5,807 1,726 5,986
EXPENSES:
Operating and administrative 590 816 517
Interest 8,960 7,124 5,850
Total Expenses 9,550 7,940 6,367
Loss before federal income taxes and
equity in income of subsidiaries (3,743) (6,214) (381)
Federal income tax benefit (2,139) (922) (926)
Income (loss) before equity in income
of subsidiaries (1,604) (5,292) 545
Equity in income of subsidiaries
before deducting dividends received 49,835 54,516 60,747
Income before extraordinary item 48,231 49,224 61,292
Extraordinary item - loss on
retirement of debt net of tax benefit
of $276.5 (514) 0 0
Net income $47,717 $49,224 $61,292
</TABLE>
<PAGE>
Schedule II
PRESIDENTIAL LIFE CORPORATION (PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
Year Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Operating Activities:
Net income $ 47,717 $ 49,224 $ 61,292
Adjustments to reconcile net income to
net cash provided by operating activities:
Realized investment losses 703 302 933
Depreciation and amortization 745 876 299
Equity in income of subsidiary
companies (49,835) (54,516) (60,747)
Deferred Federal income taxes (816) 159 (99)
Dividends from subsidiaries 29,715 50,150 24,800
Changes in:
Accrued investment income (545) 1,561 165
Accounts payable and accrued expenses (148) (749) (536)
Other assets and liabilities (2,249) (3,738) (751)
Net Cash Provided By
Operating Activities 25,287 43,269 25,356
Investing Activities:
Purchase of fixed maturities (55,694) (8,063) (1,988)
Sale of fixed maturities 4,627 3,923 1,000
Common stock acquisitions (5,976) 0 0
Common stock sales 5,639 302 0
Acquisition of subsidiary (14,420) 0 0
Other invested asset additions 0 (2,138) (37,846)
Other invested asset distributions 6,110 8,088 10,000
Decrease (increase) in short-term
investments 24,526 (21,831) 1,394
Net Cash Used In
Investing Activities (35,188) (19,719) (27,440)
Financing Activities:
Dividends to shareholders (10,712) (9,117) (7,194)
Proceeds from (repayment of) line of credit (8,000) 3,000 15,000
Repurchase of common stock (16,666) (17,068) (5,762)
Proceeds from (repayment of) Senior Notes 50,000 0 0
Net Cash Provided By (Used In)
Financing Activities 14,622 (23,185) (2,044)
Increase (Decrease) in Cash 4,721 365 (40)
Cash at Beginning of Year 394 29 69
Cash at End of Year $ 5,115 $ 394 $ 29
</TABLE>
<PAGE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES Schedule III
SUPPLEMENTAL INSURANCE INFORMATION
(in thousands)
<TABLE>
Column A Column B Column C Column D
Future Policy Benefits,
Losses, Claims,
Deferred Loss Expenses,
Policy and Policy-
Acquisition holder Account Unearned
Segment Costs Balances Premiums
<S> <C> <C> <C>
Year Ended
December 31, 1999
Life Insurance $ 7,916 $ 140,886 $0
Annuity 40,928 1,754,168 0
Accident and
Health 0 543 0
Total $48,844 $1,895,597 $0
Year Ended
December 31, 1998
Life Insurance $ 7,716 $ 133,189 $0
Annuity 32,567 1,637,667 0
Accident and
Health 0 11 0
Total $40,283 $1,770,867 $0
Year Ended
December 31, 1997
Life Insurance $ 7,647 $ 128,994 $0
Annuity 30,037 1,585,682 0
Accident and
Health 0 24 2
Total $37,684 $1,714,700 $2
Column A Column E Column F Column F-1
Other
Policy Mortality,
Claims Surrender
and and Other
Benefits Premium Charges to
Segment Payable Revenue Policyholders
Year Ended
December 31, 1999
Life Insurance $ 221 $ 4,289 $1,635
Annuity 0 54,376 924
Accident and
Health 0 232 0
Total $ 221 $ 58,897 $2,559
Year Ended
December 31, 1998
Life Insurance $ 165 $ 4,083 $1,603
Annuity 0 28,140 497
Accident and
Health 0 3 0
Total $ 165 $ 32,226 $2,100
Year Ended
December 31, 1997
Life Insurance $ 281 $ 3,973 $1,530
Annuity 0 19,655 458
Accident and
Health 0 3 0
Total $ 281 $ 23,631 $1,988
Column A Column G Column H Column I
Benefits,
Claims, Losses,
Interest
Credited to Amortization
Account Balances of Deferred
Net and Policy
Investment Settlement Acquisition
Segment Income Expenses Costs
Year Ended
December 31, 1999
Life Insurance $ 12,556 $ 15,343 $ 915
Annuity 195,563 165,088 5,300
Accident and
Health 7 164 0
Total $208,126 $ 180,595 $6,215
Year Ended
December 31, 1998
Life Insurance $ 11,325 $ 12,950 $ 800
Annuity 175,829 133,198 5,493
Accident and
Health 1 (12) 0
Total $187,155 146,136 $6,293
Year Ended
December 31, 1997
Life Insurance $ 11,416 $ 12,114 $1,100
Annuity 180,401 124,431 5,481
Accident and
Health 1 8 0
Total $191,818 $ 136,553 $6,581
Column A Column J Column K
Other
Operating Premiums
Segment Expenses Written
Year Ended
December 31, 1999
Life Insurance $ 5,402
Annuity 7,310
Accident and
Health 97 $232
Total $12,809
Year Ended
December 31, 1998
Life Insurance $ 4,319
Annuity 6,563
Accident and
Health 26 $3
Total $10,908
Year Ended
December 31, 1997
Life Insurance $ 2,738
Annuity 5,405
Accident and
Health 19 $3
Total $ 8,162
</TABLE>
<PAGE>
PRESIDENTIAL LIFE CORPORATION AND SUBSIDIARIES Schedule IV
REINSURANCE (in thousands)
<TABLE>
Column A Column B Column C Column D
Assumed
Ceded to From
Gross Other Other
Amount Companies Companies
<S> <C> <C> <C>
Year Ended December 31, 1999
Life Insurance in Force $ 791,236 $ 445,898 $ 439,967
Premiums:
Life Insurance $ 8,450 $ 4,552 $ 391
Annuity 54,376 0 0
Accident and Health Insurance 1,148 916 0
Total $ 63,974 $ 5,468 $ 391
Year Ended December 31, 1998
Life Insurance in Force $ 772,806 $ 438,827 $ 453,299
Premiums:
Life Insurance $ 7,995 $ 4,321 $ 409
Annuity 28,140 0 0
Accident and Health Insurance 3 0 0
Total $ 36,138 $ 4,321 $ 409
Year Ended December 31, 1997
Life Insurance in Force $ 823,257 $ 476,248 $ 452,480
Premiums:
Life Insurance $ 8,065 $ 4,512 $ 420
Annuity 19,655 0 0
Accident and Health Insurance 3 0 0
Total $ 27,723 $ 4,512 $ 420
Column A Column E Column F
Percentage
of Amount
Net Assumed
Amount to Net
Year Ended December 31, 1999
Life Insurance in Force $ 785,305 56.02
Premiums:
Life Insurance 4,289 9.12
Annuity 54,376 0
Accident and Health Insurance 232 0
Total $ 58,897
Year Ended December 31, 1998
Life Insurance in Force $ 787,278 57.58
Premiums:
Life Insurance $ 4,083 10.02
Annuity 28,140 0
Accident and Health Insurance 3 0
Total $ 32,226
Year Ended December 31, 1997
Life Insurance in Force $ 799,489 56.60
Premiums:
Life Insurance $ 3,973 10.57
Annuity 19,655 0
Accident and Health Insurance 3 0
Total $ 23,631
Note: Reinsurance assumed consists entirely of Servicemen's Group Life
Insurance.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 28,582
<SECURITIES> 2,210,713
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,312
<DEPRECIATION> (584)
<TOTAL-ASSETS> 2,653,665
<CURRENT-LIABILITIES> 34,740
<BONDS> 100,000
0
0
<COMMON> 308
<OTHER-SE> 406,160
<TOTAL-LIABILITY-AND-EQUITY> 2,653,665
<SALES> 58,897
<TOTAL-REVENUES> 278,060
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 208,568
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,960
<INCOME-PRETAX> 69,492
<INCOME-TAX> 21,261
<INCOME-CONTINUING> 48,231
<DISCONTINUED> 0
<EXTRAORDINARY> (514)
<CHANGES> 0
<NET-INCOME> 47,717
<EPS-BASIC> 1.53
<EPS-DILUTED> 1.53
</TABLE>
