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| PLFE > SEC Filings for PLFE > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
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
Negative market conditions have significantly impacted the financial markets and
accordingly, the Company's investments and revenues. The volatility and
disruption in today's economy has reached unprecedented levels and the adverse
changes that have come about have negatively affected our results of operations.
Our limited partnership portfolio has been significantly affected in this
recession and their returns, once robust, have turned negative in the first
quarter of 2009. This coupled with very low returns from our short-term
investment portfolio and realized investment losses, has resulted in a net loss
this quarter.
Results
Basic earnings (loss) per share were $(.29) and $.37 for the three-month periods ended March 31, 2009 and 2008, respectively. Our total revenues in the first three months of 2009 and 2008 were approximately $41.1 million and approximately $78.9 million, respectively. The decrease from 2008 to 2009 was primarily due to a decrease in net investment income from $65.6 million in 2008 to $35.8 million in 2009, a decrease of approximately $29.8 million
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 major 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, 2008, the Insurance Company's Company Action Level was $80.7 million and the Mandatory Control Level was $28.3 million. The Insurance Company's adjusted capital at December 31, 2008 was $370.9 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 April 2009, 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 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 February 2009, the Company repaid its corporate debt in full. The senior notes had been rated by Standard and Poor's (S&P) and Moody's at the time of repayment at B+ (positive) and B1 (positive), respectively. In consideration of this repayment the Company decided that it was no longer necessary to retain the rating services and ongoing credit surveillance by S&P and Moody's. The Company will maintain the Financial Strength Rating services of A.M. Best & Company.
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 three months ended March 31, 2009 with the same period in 2008.
Annuity Considerations and Life Insurance Premiums
Total annuity considerations and life insurance premiums decreased from approximately $10.8 million for the three months ended March 31, 2008 to approximately $8.0 million for the three months ended March 31, 2009. Of this amount, annuity considerations were approximately $4.2 million for the three months ended March 31, 2009 as compared to approximately $7.0 million for the three months ended March 31, 2008. The decrease is primarily due to decreased sales in our immediate annuities with life contingencies. 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 $59.1 million and approximately $43.4 million during the three months ended March 31, 2009 and March 31, 2008, respectively, an increase of approximately $15.7 million due to increased sales in deferred and immediate annuities.
Policy Fee Income
Universal life and investment type policy fee income was approximately $.6 million for the three-month period ended March 31, 2009 and approximately $.9 million for the three-month period ended March 31, 2008.
Net Investment Income
Net investment income totaled approximately $35.8 million during the first three
months of 2009, as compared to approximately $65.6 million during the first
three months of 2008. This represents a decrease of approximately $29.8
million. This decrease is primarily due to a decrease in income from limited
partnerships of $21.9 million, a decrease in income from short-term investments
of $3.4 million and a decrease in income from fixed maturities of $2.0 million.
The decrease in investment income from the limited partnerships is largely
reflective of the current uncertainty in today's economy and the inherent
volatility in the Company's limited partnership portfolio. 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
three month periods ended March 31, 2009 and March 31, 2008 were 4.00% and
6.98%., respectively.
Net Realized Investment Gains and Losses
Realized investment losses amounted to approximately $3.5 million during the first three months of 2009, as compared to investment gains of approximately $1.0 million during the first three months of 2008. The decrease of approximately $4.5 million was primarily due to a realized loss on fixed maturities of approximately $3.6 million in the first quarter of 2009 as opposed to a $2.7 million realized gain in the first quarter of 2008, a decline of $6.2 million. This was partially offset by an increase in realized gains on the payor swaptions of approximately $1.8 million. The realized loss on fixed maturities was primarily due to 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.
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. Realized investment gains (losses) also result from sales of certain equities and convertible securities, and calls and sales of fixed maturity investments in the Company's investment portfolio.
Total Benefits and Expenses
For the three months ended March 31, 2009, total benefits and expenses aggregated approximately $54.0 million, as compared to approximately $62.2 million for the three months ended March 31, 2008. This represents a decrease of approximately $8.2 million from the first three months of 2008. 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 $46.3 million for the three months ended March 31, 2009, as compared to approximately $51.3 million for the three months ended March 31, 2008. This represents a decrease of $5.0 million. The decrease is primarily due to a reduced amount of annuity policies inforce and therefore less interest and benefits paid to policyholders.
The Insurance Company's average credited rate for reserves and account balances for the three months ended March 31, 2009 was greater than the Company's ratio of net investment income to mean assets (based on book value) For the three months ended March 31, 2008, the Insurance Company's average credited rate for reserves and account balances was less than the Company's ratio of net investment income to mean assets (based on book value). There can be no assurance that the Company's ratio of net investment income to book value
Interest Expense on Notes Payable
The interest expense on the Company's notes payable amounted to approximately $.8 million for the three months ended March 31, 2009, and approximately $2.0 million for the three months ended March 31, 2008. On February 17th, 2009, the Corporation retired the remaining $67 million of its 7 7/8%, $100 million Senior Note.
General Expenses, Taxes and Commissions
General expenses, taxes and commissions to agents totaled approximately $8.1 million for the three months ended March 31, 2009, as compared to approximately $6.6 million for the quarter ended March 31, 2008. This represents an increase of approximately $1.5 million. The increase was primarily due to an increase in commissions on new premiums as well as an increase in general expenses.
Deferred Policy Acquisition Costs ("DAC")
The change in the net DAC for the three months ended March 31, 2009 resulted in a benefit of approximately $1.2 million, as compared to a charge of approximately $2.3 million for the three months ended March 31, 2008.
The change in net DAC is attributable to the costs associated with product sales, which have been deferred, (accounting for a credit of approximately $3.0 million in the first three months of 2009 and $2.3 million in the first three months of 2008). Another portion of such change is due to amortization of the DAC of deferred annuity business. Such changes accounted for a charge of approximately $0.5 million in the first three months of 2009 as compared to a charge of approximately $3.1 million in the first three months of 2008. 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 $1.3 million for the first three months 2009 and $1.5 million for the first three months of 2008).
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 caused the resulting DAC amortization to decrease $5.7 million from ($40.0) million at December 31, 2008 to ($45.7) million at March 31, 2009.
Income Before Income Taxes
For the reasons discussed above, income (loss) before income taxes amounted to approximately ($12.9) million for the three months ended March 31, 2009, as compared to approximately $16.7 million for the three months ended March 31, 2008.
Income Taxes
Income tax (benefit) expense was approximately ($4.4) million for the three months ended March 31, 2009 as compared to $5.8 million for the three months ended March 31, 2008. The income tax benefit in 2009 is attributable the current year's loss on income.
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 March 31, 2009 and March 31, 2008 to be 34.5%.
Federal income tax recoverable amounted to $30.2 million at March 31, 2009.
This is attributable to prior year's tax overpayments as well as the tax
benefits incurred from the first quarter 2009 net loss. The Company has the
ability to carry-back these losses to prior years.
Net Income
For the reasons discussed above, the Company had a net loss of approximately $8.4 million during the three months ended March 31, 2009 and a net income of approximately $10.9 million during the three months ended March 31, 2008.
Accumulated other comprehensive income decreased from approximately ($137.2)
million at December 31, 2008 to ($184.5) million at March 31, 2009. The
decrease was due to an increase in net unrealized investment losses, net of
taxes, during the first three months of the year of approximately $47.4 million.
Higher interest rates since year-end and general economic and market conditions
were the primary reasons for the reduction.
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 interest on its investments, dividends from the Insurance Company, and rent from its real estate. During the first quarter of 2009, the Company's Board of Directors declared quarterly cash dividends of $0.0625 per share payable on April 1, 2009. During the first three months of 2009 the Company did not purchase or retire any shares of common stock.
The Insurance Company is subject to various regulatory restrictions on the maximum amount of payments, including loans or cash advances, which it may make to the Company without obtaining prior regulatory approval. Under the New York Insurance Law, the Insurance Company is permitted, without prior insurance regulatory clearance, to pay a stockholder dividend to the Company as long as the aggregate amount of all such dividends in any calendar year does not exceed the lesser of (i) 10% of its surplus as of the immediately preceding calendar year or (ii) its net gain from operations for the immediately preceding calendar year (excluding realized capital gains and losses). The Insurance Company will be permitted to pay a stockholder dividend to the Company in excess of the lesser of such two amounts only if it files notice of its intention to declare such a dividend and the amount thereof with the Superintendent and the Superintendent does not disapprove the distribution. Under the New York Insurance Law, the Superintendent has broad discretion in determining whether the financial condition of a stock life insurance company would support the payment of such dividends to its stockholders. The New York State Insurance Department has established informal guidelines for such determinations. The guidelines, among other things, focus on the insurer's overall financial condition and profitability under statutory accounting practices. Management of the Company cannot provide assurance that the Insurance Company will have statutory earnings to support payment of dividends to the Company in an amount sufficient to fund its cash requirements and pay cash dividends or that the Superintendent will not disapprove any dividends that the Insurance Company must submit for the Superintendent's consideration. In 2008, the Insurance Company made $35.7 million in dividend payments to the Company. During the first quarter of 2009, the Insurance Company made a $16 million dividend payment to the Company.
The key need for liquidity in the Insurance Company is the need to fund policy . . .
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