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| PLFE > SEC Filings for PLFE > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
General
Presidential Life Corporation ("the Company or Corporation"), through its wholly-owned subsidiary, Presidential Life Insurance Company ("Insurance Company"), is engaged in the sale of insurance products with two primary lines of business: individual annuities and individual life insurance. Our revenues are derived primarily from premiums received from the sale of annuity contracts and universal life insurance policies, premiums received for whole life and term life insurance products and gains (or losses) from our investment portfolio.
For financial statement purposes, our revenues from the sale of whole life and
term life insurance products and annuity contracts with life contingencies are
treated differently from our revenues from the sale of annuity contracts without
life contingencies, deferred annuities and universal life insurance products.
Premiums from the sale of whole or term life insurance products and life
contingency annuities are reported as premium income on our financial
statements. Premiums from the sale of deferred annuities, universal life
insurance products and annuities without life contingencies are not reported as
premium revenues, but rather are reported as additions to policyholders' account
balances. From these products, revenues are recognized over time in the form of
policy fee income, surrender charges and mortality and other charges deducted
from policyholders' account balances.
Profitability in the Insurance Company's individual annuities and individual life insurance depends largely on the size of its inforce block, the adequacy of product pricing and underwriting discipline, the efficiency of its claims and expense management, and the performance of the investment portfolio.
When we use the term "We," "Us" and "Our" we mean Presidential Life Corporation, a Delaware Corporation, and its consolidated subsidiaries.
In this discussion we have included statements that may constitute "forward-looking statements" within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts but instead represent only our beliefs regarding future events, many of which, by their nature, are inherently uncertain and beyond our control. These statements may relate to our future plans and objectives. By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results may differ, possibly materially, from the results indicated in these forward-looking statements.
Executive Overview
Results
Basic earnings per share were $.72 and $2.02 for the nine-month periods ended September 30, 2008 and 2007, respectively. Our total revenues in the first nine months of 2008 and 2007 were approximately $222.1 million and approximately $290.2 million, respectively. The decrease from 2007 to 2008 was primarily due to realized investment losses of approximately $29.6 million in 2008 compared to realized investment gains of $30.7 million in 2007, a decrease of approximately $60.3million. A decrease in investment income of approximately $18 million also contributed to the overall decrease in revenue.
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.
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.
Investments
The Company˘s principal investments are in fixed maturities, all of which are exposed to at least one of three primary sources of investment risk: credit, interest rate and market valuation. The financial statement risks are those associated with the recognition of impairments and income, as well as the determination of fair values. Management evaluates whether temporary or other than temporary impairments have occurred on a case-by-case basis. Management considers a wide range of factors about the security issuer and uses its best judgment in evaluating the cause and decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. Inherent in management's evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential. Considerations used by the Company in the other than temporary impairment evaluation process include, but are not limited to: (i) the length of time and the extent to which the market value has been below amortized cost; (ii) whether the issuer is experiencing significant financial difficulties; (iii) financial difficulties being experienced by an entire industry sector or sub-sector; (iv) economically depressed geographic locations; (v) situations where the issuer, series of issuers or industry has a catastrophic type of loss or has exhausted natural resources; (vi) in situations where it is determined that an impairment is attributable to changes in market interest rates, the Corporation's ability and intent to hold impaired securities until recovery of fair value at or above cost; and (vii) other subjective factors, including concentrations and information obtained from regulators and rating agencies. In addition, the earnings on certain investments are dependent upon market conditions, which could result in prepayments and changes in amounts to be earned due to changing interest rates or equity markets. The determination of fair values in the absence of quoted market values is based on valuation methodologies, securities the Company deems to be comparable, and assumptions deemed appropriate given the circumstances. The use of different methodologies and assumptions may have a material effect on the estimated fair value amounts.
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 New York State Insurance Department ("NYSID") 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 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.
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 are made periodically 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.
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. Management is aware that prevailing market interest rates frequently shift and, accordingly, the Company has adopted strategies that are designed to address either an increase or decrease in prevailing rates.
The primary market risk in the Company's investment portfolio is interest rate risk and to a lesser degree, equity price risk. The Company's exposure to foreign exchange risk is not significant. The Company has no direct commodity risk. Changes in interest rates can potentially impact the Company's profitability. In certain scenarios where interest rates are volatile, the Company could be exposed to disintermediation risk and reduction in net interest rate spread or profit margin. To help address this risk, the Company has entered into a series of Payor Swaption investments designed to protect the Company against an instantaneous rise in the interest rates of 300 basis points (See the discussion below in "Asset/Liability Management" under Management's Discussion and Analysis.)
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 a requirement for an insurance company to submit a plan to improve its capital (Company Action Level) to regulatory control of the insurance company (Mandatory Control Level). At December 31, 2007, the Insurance Company's Company Action Level was $84.0 million and the Mandatory Control Level was $29.4 million. The Insurance Company's adjusted capital at December 31, 2007 was $418.3 million, which exceeds all four action levels.
Agency Ratings
Ratings are an important factor in establishing the competitive position in the insurance and financial services marketplace. There can be no assurance that the Corporation's or the Insurance Company's ratings will continue for any given period of time or that they will not be changed. In the event the ratings are downgraded, the level of revenues or the persistency of the Insurance Company's business may be adversely impacted.
In March 2008, A.M. Best Company reaffirmed the Insurance Company's rating at "B+" (Good) with a stable outlook. At the time of the B+ rating, publications of A.M. Best indicated that the "B+" rating was assigned to those companies that, in A.M. Best's opinion, have achieved a very good overall performance when compared to the norms of the insurance industry and that generally have demonstrated a good ability to meet their respective policyholder and other contractual obligations over a long period of time. The B+ rating is within A.M Best's "Secure" classification, along with A++, A+, A, A-, and B++ ratings. In 2007, A.M. Best Company changed the Financial Strength Rating Descriptor for B+ and B++ ratings on insurance companies from "Very Good" to "Good". The change was made to make the Rating Descriptor consistent with the existing Rating definition and did not, in any way, represent a change in A.M. Best's opinion of the Company.
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.
In July 2008, Moody's Investor Services ("Moody's") upgraded the financial strength of the Insurance Company to Ba1 ("Questionable financial security") with a positive outlook, from Ba2 ("Questionable financial security") with a stable outlook. Moody's also raised the senior debt rating of the Corporation from B2 to B1 ("Speculative, subject to high credit risk") with a positive outlook.
In April 2008, Standard & Poor's Ratings Services raised its counterparty credit rating on the Corporation to 'B+' from 'B'. An obligation rated 'B' is more vulnerable to nonpayment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment of the obligation. At the same time it raised its counterparty credit and financial strength ratings on the Insurance Company to 'BB+' from 'BB' with a positive outlook. An insurer rated 'BB' has marginal financial security characteristics. Positive attributes exist, but adverse business conditions could lead to insufficient ability to meet financial commitments.
In June 2008, Fitch Ratings affirmed the Insurance Company's Aq rating, "Strong," - possessing strong capacity to meet policyholder and contract obligations based solely on the Company's stand-alone financial statement characteristics. Fitch Ratings found that risk factors are moderate, and the impact of any adverse business and economic factors is expected to be small.
A Comparison of the significant items for the nine months ended September 30, 2008 with the same period in 2007 and a comparison of significant items for the three months ended September 30, 2008 with the same period in 2007.
Revenues
Annuity Considerations and Life Insurance Premiums
Total annuity considerations and life insurance premiums increased to approximately $37.5 million for the nine months ended September 30, 2008 from approximately $28.3 million for the nine months ended September 30, 2007. Of this amount, annuity considerations were approximately $26.2 million for the nine months ended September 30, 2008 as compared to approximately $18.0 million for the nine months ended September 30, 2007. In accordance with GAAP, sales of single premium deferred annuities and single premium immediate income annuities without life contingencies are not reported as insurance revenues, but rather as additions to policyholder account balances. Based on statutory accounting, revenue from sales of single premium annuities were approximately $132.6 million and approximately $111.0 million during the nine months ended September 30, 2008 and September 30, 2007, respectively, an increase of approximately $21.6 million due to increased sales in deferred and immediate annuities.
Annuity considerations were approximately $13.2 million for the three month period ended September 30, 2008 and approximately $7.5 million for the three month period ended September 30, 2007. The increase was primarily due to increased sales in deferred and immediate annuities.
Policy Fee Income
Universal life and investment type policy fee income was approximately $2.1 million for the nine-month period ended September 30, 2008 and approximately $1.9 million for the nine-month period ended September 30, 2007.
Net Investment Income
Net investment income totaled approximately $210.3 million during the first nine
months of 2008, as compared to approximately $228.3 million during the first
nine months of 2007. This represents a decrease of approximately $18 million.
This decrease is due to a decrease in income from fixed maturities of $10.7
million and a decrease in income from short-term investments of $13.4 million.
The decrease in income from fixed maturities was primarily due to lower
invested assets, which was due to a high surrender rate in the prior year in the
Company's annuity business. The decrease in income from short-term investments
was primarily due to lower short-term interest rates. The Company's ratios of
net investment income to average cash and invested assets (based on book value)
less net investment income for the nine month periods ended both September 30,
2008 and 2007 was 7.56%.
The Company had net investment income of $75.1 million and $78.8 million for the three month periods ended September 30, 2008 and September 30, 2007, respectively. The variance of approximately $3.7 million is primarily due to the decrease in short-term interest rates resulting in a decrease in income from short-term investments.
Net Realized Investment Gains and Losses
Realized investment losses amounted to approximately $29.6 million during the
first nine months of 2008, as compared to investment gains of approximately
$30.7 million during the first nine months of 2007. The decrease of
approximately $60.3 million was primarily due to a decrease in realized gains on
fixed maturities of approximately $44.6 million, a decrease in realized gains on
common stock of approximately $9.1 million and a decrease in realized gains on
the payor swaptions of approximately $6.5 million. Realized investment gains
from fixed maturities were primarily due to calls on the Company's trust
preferred securities in the first half of 2007. In 2008, the few calls on the
Company's portfolio were offset by write downs in the fixed maturity portfolio.
The change in the fair value of the derivative instruments is reflected in the
income statement as a realized loss or gain.
Realized investment losses for the nine months and three months ended September 30, 2008 include realized investment losses or write downs of approximately $33.6 million and $27.4 million, respectively, attributable to other than temporary impairments in the value of certain securities contained in the Company's investment portfolio. Approximately $ 18.3 million of these losses, or 54%, represented a write-down in the value of bond and preferred stock investments in Lehman Brothers Holdings, Inc. The Company had approximately $52,000 in write-downs attributable to other than temporary impairments in common stock for the nine months ended September 30, 2007.
The Company had realized investment losses of $26.1 million for the three months ended September 30, 2008 and $1.9 million in realized losses for the three months ended September 30, 2007. The variance of approximately $24.2 million is primarily due the write downs in the fixed maturity portfolio.
When impairments are determined to be other than temporary, the Company adjusts the book value to reflect the fair value, as appropriate, on a quarterly basis and the amount of the impairments are recorded as realized investment losses in the income statement.
Total Benefits and Expenses
Total benefits and expenses for the three months ended September 30, 2008, totaled $62.4 million, a decrease of $0.6 million from the $63.0 million recorded from the three months ended September 30, 2007. For the nine months ended September 30, 2008, total benefits and expenses aggregated approximately $189.6 million, as compared to approximately $199.1 million for the nine months ended September 30, 2007. This represents a decrease of approximately $9.5 million from the first nine months of 2007. The reasons for this decrease are discussed in the following paragraphs.
Interest Credited and Benefits to Policyholders
Interest credited and other benefits to policyholders amounted to approximately $158.6 million for the nine months ended September 30, 2008, as compared to approximately $162.3 million for the nine months ended September 30, 2007. This represents a decrease of $3.7 million. The decrease is primarily due to increased surrenders on deferred annuities that exceeded new premiums. For the three month period ended September 30, 2008. Interest credited and other benefits to policyholders increased to $53.2 million from $51.0 million for three month period ended September 30, 2007.
The Insurance Company's average credited rate for reserves and account balances for the nine months ended September 30, 2008 and 2007 was less than the Company's ratio of net investment income to mean assets (based on book value) for the same period as noted above under "Net Investment Income". Although management does not currently expect material declines in the spread between the Company's average credited rate for reserves and account balances and the Company's ratio of net investment income to book value mean assets (the "Spread"), there can be no assurance that the Spread will not decline in future periods or that such decline will not have a material adverse effect on the Company's financial condition and results of operations. Depending, in part, upon competitive factors affecting the industry in general, and the Company, in particular, the Company may, from time to time, change the average credited rates on certain of its products. There can be no assurance that the Company will be able to reduce such rates or that any such reductions will broaden the Spread. The actual spread, excluding capital gains, for the nine months ended September 30, 2008 was 2.34% compared to 2.26% for the same period in 2007.
Interest Expense on Notes Payable
The interest expense on the Company's notes payable amounted to approximately $5.9 million for the nine months ended September 30, 2008, and approximately $7.3 million for the nine months ended September 30, 2007.
General Expenses, Taxes and Commissions
General expenses, taxes and commissions to agents totaled approximately $20.2 million for the nine months ended September 30, 2008, as compared to approximately $20.9 million for the nine months ended September 30, 2007. This represents a decrease of approximately $0.7million.
General expenses, taxes and commissions to agents totaled approximately $6.5 million for the three months ended September 30, 2008, as compared to approximately $7.3 million for the three months ended September 30, 2007. This represents a decrease of approximately $0.8 million.
Deferred Policy Acquisition Costs ("DAC")
The change in the net DAC for the nine months ended September 30, 2008 resulted in a charge of approximately $4.9 million, as compared to a charge of approximately $8.6 million for the nine months ended September 30, 2007.
The change in net DAC is attributable to the costs associated with product sales, which have been deferred, (accounting for a credit of approximately $6.1 million in the first nine months of 2008 and $8.5 million in the first nine months of 2007). Another portion of such change is due to amortization of the DAC of deferred annuity business. Such changes accounted for a charge of approximately $6.7 million in the first nine months of 2008 as compared to a charge of approximately $13.1 million in the first nine months of 2007. The balance of the change in net DAC is due to the amortization of the DAC for the remainder of the business including traditional, universal life and immediate annuities (accounting for a charge of approximately $4.2 million for the first nine months 2008 and $3.9 million for the first nine months of 2007).
The change in the net DAC for the three months ended September 30, 2008 resulted in a charge of approximately $0.8 million, as compared to a charge of approximately $2.6 million for the three months ended September 30, 2007.
DAC is adjusted for the impact of unrealized gains or losses on investments as if these gains or losses had been realized with corresponding credits or charges included in accumulated other comprehensive income. The significant change in the unrealized losses
Income Before Income Taxes
For the reasons discussed above, income before income taxes amounted to approximately $32.6 million for the nine months ended September 30, 2008, as compared to approximately $91.1 million for the nine months ended September 30, 2007 and $1.0 million for the three months ended September 30, 2008, as compared to approximately $22.3 million for the three months ended September 30, 2007.
Income Taxes
Income tax expense was approximately $0.3 million for the three months ended September 30, 2008 as compared to $7.7 million for the three months ended September 30, 2007. For the nine months ended September 30, 2008, Income tax expense was approximately $11.2 million as compared to approximately $31.5 million for the first nine months of 2007. The decrease is attributable to lower income before income taxes primarily due to realized investment losses.
In order to calculate income tax expense the Company estimates an annual effective income tax rate based on projected results for the year and applies this projected rate to income before taxes to calculate income tax expense. Any refinements made, due to subsequent information that affects the estimated annual effective income tax rate, are reflected as adjustments in the current period. The Company currently estimates the annual effective income tax rate from continuing operations as of September 30, 2008 and September 30, 2007 to be 34.5%.
Federal income tax recoverable amounted to $18.8 million at September 30, 2008.
This amount is primarily attributable to other than temporary impairments the
Company realized in the value of certain securities contained in its investment
portfolio. The Company has the ability to carry-back these losses to prior
years.
Net Income
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