|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
Carrying Value
|
Estimated Fair Value
|
|
|
|
(In thousands)
|
|
Assets
|
|
|
|
|
Policy Loans
|
$
|
18,442
|
|
$
|
18,442
|
|
|
Limited Partnerships
|
|
11,651
|
|
|
11,651
|
|
Liabilities
|
|
|
|
|
|
|
|
Policyholders' Account Balances
|
$
|
2,323,364
|
|
$
|
2,555,894
|
|
24
|
|
|
|
|
|
|
|
|
|
4.
|
CHANGE IN NET UNREALIZED INVESTMENT GAINS/(LOSSES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
|
|
|
|
|
|
Pre-Tax
|
|
(Expense)/
|
|
After-Tax
|
|
|
Amount
|
|
Benefit
|
|
Amount
|
For the nine months ended September 30, 2012:
|
(In thousands)
|
Net unrealized gains on investment securities:
|
|
|
|
|
|
|
|
|
Net unrealized holding gains arising during period
|
$
|
122,892
|
|
$
|
(43,012)
|
|
$
|
79,880
|
Plus: reclassification adjustment for net gains realized in net income
|
|
(6,804)
|
|
|
2,381
|
|
|
(4,423)
|
Change related to deferred policy acquisition costs
|
|
(2,507)
|
|
|
877
|
|
|
(1,630)
|
Net unrealized investment gains
|
$
|
113,581
|
|
$
|
(39,754)
|
|
$
|
73,827
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2011:
|
|
|
|
|
|
|
|
|
Net unrealized gains on investment securities:
|
|
|
|
|
|
|
|
|
Net unrealized holding gains arising during period
|
$
|
183,282
|
|
$
|
(64,333)
|
|
$
|
118,949
|
Plus: reclassification adjustment for net gains realized in net income
|
|
(20,862)
|
|
|
7,301
|
|
|
(13,561)
|
Change related to deferred policy acquisition costs
|
|
(11,811)
|
|
|
4,134
|
|
|
(7,677)
|
Net unrealized investment gains
|
$
|
150,609
|
|
$
|
(52,898)
|
|
$
|
97,711
|
5.
SHAREHOLDERS' EQUITY
During 2011 and the first nine months of 2012, the Board of Directors maintained a quarterly dividend of $.0625 per share. During 2011 and through the first nine months of 2012, the Company had not purchased or retired shares of its common stock. The Company is authorized pursuant to a resolution of the Board of Directors to purchase up to 385,000 shares of common stock.
6.
EMPLOYEE BENEFIT AND DEFERRED COMPENSATION PLANS
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 the dollar limit as prescribed by IRC Section 415(d). In addition, the Company contributes 5% of each employees salary to the 401(k) plan. The Company contribution is subject to a vesting schedule and is made for all employees, irrespective of an employees contribution to the plan. The Company contributed approximately $167,100 and $332,500 into this plan during the nine months ended September 30, 2012 and September 30, 2011, respectively. On March 1, 2012, the Company granted 17,042 of restricted stock grants to employees that vest evenly over a 3-year period.
7.
INCOME TAXES
Income taxes represent the net amount of income taxes that the Company expects to pay to or receive from various taxing jurisdictions in connection with its operations. The Company provides for federal and state income taxes currently payable, as well as those deferred due to temporary differences between the financial reporting and tax bases of assets and liabilities. The Companys accounting for income taxes represents managements best estimate of various events and transactions.
Deferred tax assets and liabilities resulting from temporary differences between the financial reporting and tax bases of assets and liabilities are measured at the balance sheet date using enacted tax rates expected to apply to taxable income in the years the temporary differences are expected to reverse. Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, (b) operating loss carry forwards and (c) a valuation allowance. A significant portion of the deferred tax assets relates to unrealized losses in the Companys bond portfolio. If the Company determines that any of its deferred income tax assets will not result in future tax benefits, a valuation allowance must be established for the portion of these assets that is not expected to be realized. Upon review, the Companys management concluded that it is more likely than not that the deferred income tax assets will be realized. The Company does not record a tax valuation allowance relating to the net unrealized losses on investments, excluding stocks, because it is more likely than not that these losses would reverse or be utilized in future periods. The Company has the ability and it is the Companys intent to fully recover the principal, which could allow the Company to hold these securities until their maturity; therefore, the Company considers the impairment to be temporary.
The Company files income tax returns in the United States federal jurisdiction and various state jurisdictions. In the United States, the Company is generally no longer subject to federal income tax examinations by tax authorities for the years prior to 2006. For 2006 and 2007, the Company may be subject to tax examinations because the IRS and the Company agreed to an extension of the statute of limitations.
25
The Company applies FASB guidance relating to accounting for uncertainty in income taxes. The liability for unrecognized tax benefits was $0 and $7,374 at September 30, 2012 and December 31, 2011, respectively, which is included within Federal Income Taxes Recoverable/Payable in the Consolidated Balance Sheet. The Company records interest and penalties accrued on unrecognized tax benefits as well as interest received from favorable settlements within income tax expense. The total amount of accrued interest and penalties included in the uncertain tax liability was $145,033 and $110,261 as of September 30, 2012 and December 31, 2011, respectively.
As of September 30, 2012, the Company is not aware of any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits or liabilities will significantly increase or decrease within the next 12 months.
8
PURCHASE OF GREAT AMERICAN LIFE ASSURANCE COMPANY
On July 3, 2012, the Company completed the purchase of Great American Life Assurance Company (GALAC), an Ohio domiciled insurance company with approximately $5.60 million in statutory capital and surplus, for cash of $7.04 million
.
As a result, GALAC became a wholly-owned subsidiary of the Company and subsequently, the name of the company was changed to Presidential Life Insurance Company USA (PLIC-USA). PLIC-USA is in the process of changing its corporate domicile from Ohio to Delaware. At the time of purchase, PLIC-USAs statutory capital and surplus principally consisted of cash, short-term investments, and bonds reduced by liabilities for accrued expenses and taxes. All policyholder obligations related to in-force contracts of GALAC are fully reinsured. PLIC-USA maintains licenses to write life and annuity business in 38 states plus the District of Columbia. The Company is obtaining the aforesaid licenses and statutory capital and surplus as part of this transaction. With respect to the state licenses acquired, the Company recorded an intangible asset with indefinite life of approximately $1.2 million. The acquisition of PLIC-USA has been reflected in the accompanying financial statements.
9
ENTRY INTO AGREEMENT AND PLAN OF MERGER WITH ATHENE ANNUITY & LIFE ASSURANCE COMPANY
On July 12, 2012, the Company and Athene Annuity & Life Assurance Company (Athene), a Delaware-domiciled insurer focused on retail fixed and index annuity sales and reinsurance, entered into an Agreement and Plan of Merger (the Merger Agreement), pursuant to which, subject to the satisfaction or waiver of the conditions therein, a newly formed subsidiary of Athene (Merger Sub) will merge with and into the Company (the Merger), with the Company surviving the Merger as a wholly owned subsidiary of Athene.
Pursuant to the terms of the Merger Agreement, at the effective time of the Merger, each outstanding share of the Companys common stock, par value $0.01 per share (Company Common Stock), will be converted into the right to receive $14.00 in cash (the Merger Consideration). In addition, each unexercised option (each, a Company Option) outstanding immediately prior to the effective time of the Merger will be cancelled and converted into the right to receive an amount in cash, if any, without interest and net of all applicable withholding taxes, equal to (a) the excess, if any, of the Merger Consideration over the per share exercise price of the applicable Company Option, multiplied by (b) the aggregate number of shares of common stock that may be acquired upon exercise of such Company Option. Immediately prior to the effective time of the Merger, restricted shares held under the Company Equity Plan (as defined in the Merger Agreement) will become fully vested. Such fully vested shares will then be converted into the right to receive the Merger Consideration at the effective time of the Merger.
The aggregate purchase price will total approximately $415 million.
The Merger Agreement contains certain termination rights of the Company and Athene. The Company will be required to pay Athene a termination fee of $18.0 million (the Termination Fee) upon termination of the Merger Agreement under specified circumstances, including: (i) termination by the Company of the Merger Agreement in order to enter into a definitive acquisition agreement with respect to a Superior Proposal (as defined in the Merger Agreement); (ii) termination by Athene of the Merger Agreement in the event that, among others, (a) the Board of Directors of the Company effects a Change in Recommendation (as defined in the Merger Agreement) prior to obtaining Company shareholder approval or (b) the Board of Directors of the Company fails to reaffirm publicly and unconditionally its recommendation that the Companys shareholders adopt the Merger Agreement and approve the Merger within two business days of Athenes written request to do so (such request may be made at any time following public disclosure of an alternative acquisition transaction proposal), which public reaffirmation must also include the unconditional rejection of such alternative acquisition transaction proposal; (iii) termination by Athene or the Company in the event that the holders of a majority of the outstanding shares of Company Common Stock fail to approve the Merger Agreement; and (iv) termination by Athene or the Company in the event that the closing of the Merger does not occur by the Outside Date (as defined in the Merger Agreement), and (A) an Acquisition Proposal is publicly disclosed after the date of the Merger Agreement and prior to such termination, and (B) within 12 months after such termination, the Company enters into a definitive agreement with respect to, or consummates, the transaction contemplated by any Acquisition Proposal (as defined in the Merger Agreement). The Merger
26
Agreement sets forth certain other circumstances under which the Termination Fee may be due and owing from the Company to Athene.
If the Merger Agreement is terminated by either party for any reason other than the failure to obtain such enumerated regulatory approvals or a breach of the Merger Agreement by Athene, the Company will reimburse Athene for its out-of-pocket expenses, excluding Hedging Costs, up to a maximum of $3.0 million. Alternatively, if either party terminates the Merger Agreement as a result of certain failures to obtain regulatory approvals as enumerated therein, the Company will be required to reimburse Athene for their out-of-pocket expenses, excluding Hedging Costs (as defined in the Merger Agreement), up to a maximum of $1.0 million, plus 50% of all Net Hedging Costs (as defined in the Merger Agreement) not to exceed $12.5 million.
The Merger is conditioned, among other things, on: (i) the approval of the holders of a majority of the outstanding shares of Company Common Stock; (ii) the absence of certain legal impediments to the consummation of the Merger; and (iii) the receipt of certain regulatory approvals regarding the transactions contemplated by the Merger Agreement, including expiration of the waiting period under the Hart-Scott Rodino Antitrust Improvements Act of 1976 (the HSR Act) and approvals by certain state insurance regulatory authorities, including the New York State Department of Financial Services. Early termination of the waiting period under the HSR Act was granted on August 20, 2012. In addition, prior to the receipt of the Extraordinary Dividend (as defined in the Merger Agreement), the Company must have Net Assets (as defined in the Merger Agreement) of at least $40.0 million, comprised of substantially the same type and mix of assets as the Net Assets of the Company on the date of the Merger Agreement.
At September 30, 2012, the Company had $62.2 million of Net Assets. We expect that prior to the closing of the Merger, Net Assets will be further reduced by the payment of ordinary dividends, operating expenses and transaction costs related to the Merger. In the third quarter approximately $1.2 million in transaction costs were incurred in connection with the sale of the Company.
The Merger is expected to close in late 2012. Upon consummation of the Merger, the Company will delist from the NASDAQ and no longer be a publicly traded corporation.
10
COMMITMENTS AND CONTINGENCIES
From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. As of September 30, 2012, the Company is not a party to any legal proceedings, the adverse outcome of which, in our opinion, individually or in the aggregate, would have a material adverse effect on the Company's financial condition or results of operations.
Litigation Relating to the Merger
The Company, its directors, Athene and Merger Sub were named as defendants in four complaints filed in the Supreme Court of the State of New York, County of Rockland. One complaint is captioned Katen Patel on behalf of himself and others similarly situated as Plaintiff v. Presidential Life Corp., Donald L. Barnes, John D. McMahon, Dominic F. DAdamo, William A. Demilt, Ross B. Levin, Lawrence Read, Lawrence Rivkin, Stanley Rubin, Frank A. Shepard, William M. Trust Jr., Athene Annuity & Life Assurance Company and Eagle Acquisition Corp., and was filed on July 18, 2012 (the Patel Complaint). The second complaint (the Palmisano Complaint) was brought in the name of an Anthony Palmisano, allegedly on behalf of himself and others similarly situated, against the Company as well as the same directors named in the Patel Complaint. The Palmisano Complaint was filed on July 30, 2012. The third complaint (the Tazakine Complaint) was brought in the name of Charles Tazakine allegedly on behalf of himself and others similarly situated against the Company and those same directors. The Tazakine Complaint was filed on August 9, 2012. The fourth complaint (the Kahn Complaint) was brought in the name of Alan Kahn allegedly on behalf of himself and others similarly situated against the Company and those same directors. The Kahn Complaint was filed on August 10, 2012.
These four cases were consolidated by stipulation and order that was filed on September 5, 2012. Pursuant to this order, the actions were consolidated under the caption In re Presidential Life Corp, Shareholder Litigation, Index Number 034636/2012. Further, the complaint (the Consolidated Complaint) in the Kahn action is deemed to be the operative complaint for all of the four cases pending in Supreme Court, Rockland County.
The Consolidated Complaint, purportedly brought on behalf of a class of stockholders, alleges that our directors breached their fiduciary duties in connection with the proposed Merger purportedly because, among other things, the proposed Merger is the product of a flawed process, the Merger Agreement contains preclusive deal protection terms and our directors failed to properly value Presidential. The Consolidated Complaint further alleges that Athene aided and abetted the directors purported breaches. The Consolidated Complaint seeks injunctive and other equitable relief, including enjoining us from consummating the Merger, and damages, in addition to fees and costs.
27
We believe that the claims asserted in these suits are without merit and intend to vigorously defend these matters.
11
SUBSEQUENT EVENT
Litigation Relating to the Merger
On October 23, 2012, an action was brought in the United States District Court, Southern District of New York, by Philip Brent allegedly on behalf of himself and other shareholders. The Brent complaint makes similar allegations as contained in the Consolidated Complaint. In addition, the Brent Complaint alleges that the preliminary proxy statement issued by the Company contains false and misleading statements in violation of Section 14(a) of the Securities Exchange Act and Rule 14a-9 promulgated pursuant to Section 14(a) of the Securities Exchange Act. We believe that the claims asserted in this suit are without merit and intend to vigorously defend this matter.
The Presidential Life Insurance Company 2012 Discretionary Bonus Plan
As previously disclosed in a Form 8-K filed on October 26, 2012, on October 23, 2012 the Compensation Committee of the Board of Directors of the Insurance Company adopted the Presidential Life Insurance Company 2012 Discretionary Bonus Plan. Certain employees of the Insurance Company are eligible to earn cash bonuses.
28
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
General
We are engaged in the sale of insurance products including individual annuities, individual life insurance and accident and health insurance. Our revenues are derived primarily from premiums received from the sale of annuity contracts and life, accident and health products, investment income and from gains (net of losses) from our investment portfolio.
Under GAAP, our revenues from the sale of whole 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 life insurance products and life contingent annuities are reported as premium income on our income statement. Premiums from the sale of deferred annuities, universal life insurance products and annuities without life contingencies are not reported as revenues, but rather are reported as additions to policyholders account balances on our balance sheet. For these products, revenues are recognized principally through the spread between interest income on invested assets and interest credited to policyholders accounts. Additional revenues are recognized over time in the form of policy fee income, surrender charges and mortality and other charges deducted from policyholders account balances.
The profitability of our individual annuities, individual life insurance and group accident and health products depends largely on the size of our in-force book of business, the adequacy of product pricing and underwriting discipline, and the efficiency of our claim and expense management.
This Quarterly Report on Form 10-Q (Form 10-Q) contains forward-looking statements that involve risks and uncertainties. Forward-looking statements reflect management's current expectations of future events, trends or results based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can be identified by words such as anticipates, believes, estimates, expects, intends, plans, predicts and similar terms. Forward-looking statements are not guarantees of future performance and the Companys actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those set forth in Part I, Item 1A of our 2011 Form 10-K, which are incorporated herein by reference, and those, if any, discussed in Risk Factors under Part II, Item 1A of this Form 10-Q. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Executive Overview
Results
Our net income was $12.1 million or $0.41 per share for the nine months ended September 30, 2012, compared with net income of $24.2 million or $0.82 per share for the same period in 2011. The decrease in net income of $12.1 million for the nine months ended September 30, 2012 compared to 2011 is principally due to a decrease in net realized investment gains of $15.4 million, a decrease in net investment spread of $5.7 million and an increase in general expenses of $2.5 million, partially offset by decreases in income taxes of $6.5 million, a decrease in other-than-temporary impairment (OTTI) losses of $1.4 million and change in policy acquisition costs of $2.1 million and other miscellaneous items totalling $1.5 million.
Our total revenues for the nine months ended September 30,
2012 were $179.5 million, a decrease of 7.4% or $14.3 million from $193.8 million for the nine months ended September 30,
2011. Benefits and expenses increased by $4.2 million or 2.7% for the nine months ended September 30, 2012 in comparison to the same nine-month period in 2011.
Third quarter 2012 net income was $5.2 million or $0.18 per share, compared with net income of $2.9 million or $0.10 per share for the comparable quarter in 2011. Income before income taxes was $7.9 million and $4.4 million for the third quarters of 2012 and 2011, respectively, a period-over-period increase of $3.5 million. The increase in income before income taxes of $3.5 million is principally due to an increase in net realized gains of $2.1 million, a decrease in OTTI losses of $2.8 million and a decrease in liability for future policy benefits of $2.1 million, partially offset by an increase in general expenses of $2.1 million and a decrease in net investment spread of $1.4 million. Income taxes were $2.8 million and $1.5 million for the third quarter of 2012 and 2011, respectively, an increase of $1.3 million.
Pricing
Management believes that we are able to offer products at competitive prices to our 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.
29
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 may not continue to pay premiums/annuity considerations, thus causing their policies/annuity contracts 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
Our 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. From a financial statement perspective, these factors must be considered when determining the recognition of impairments and income, as well as the determination of fair values.
See Note 1 to the Condensed Consolidated Financial Statements Summary of Significant Accounting Policies for a discussion of the evaluation of available-for-sale securities holdings in accordance with our impairment policy, whereby we evaluate whether such investments are other-than-temporarily impaired (OTTI) and factors considered by security classification in the OTTI evaluation. 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 we deem 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.
We derive a predominant portion of our total revenues from investment income. We manage most of our investments internally. All investments are governed by the Statement of Investment Policy established and approved by the Finance and Investment Committee and the Board of Directors of the Insurance Company and Presidential Life Corporation and by qualitative and quantitative limits prescribed by applicable insurance laws and regulations. The Finance and Investment Committee meets regularly to set and review investment policy and to approve current investment plans. The actions of the Finance and Investment Committees are subject to review and approval by the Board of Directors of the Insurance Company and Presidential Life Corporation. Our Statement of Investment Policy must comply with the New York State Department of Financial Services (NYDFS) regulations and the regulations of other applicable regulatory bodies.
Our investment philosophy generally focuses on purchasing investment-grade securities with the intention of holding such securities to maturity. Our investment philosophy also focuses 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. We have categorized all fixed maturity securities as available for sale and carry such investments at market value.
We manage our investment portfolio to meet the diversification, yield and liquidity requirements of our insurance policy and annuity contract obligations. Our liquidity requirements are monitored regularly so that cash flow needs are met. Adjustments are made periodically to our investment policies to reflect changes in our short and long-term cash needs, as well as changing business and economic conditions.
We seek to manage our investment portfolio in part to reduce our exposure to interest rate fluctuations. In general, the market value of our fixed maturity portfolio increases or decreases in an inverse relationship with fluctuations in interest rates, and our net investment income increases or decreases in direct relationship with interest rate changes. For example, if interest rates decline, our 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. If interest rates increase, our fixed maturity investments generally will decrease in market value, while net investment income will generally increase. Because prevailing market interest rates frequently shift, we have adopted strategies that are designed to address either an increase or decrease in prevailing rates.
The primary market risk in our investment portfolio is interest rate risk and to a lesser degree, credit risk. Our exposure to foreign exchange risk is not significant. We have no direct commodity risk. Changes in interest rates can potentially impact our profitability. In certain scenarios where interest rates are volatile, we could be exposed to disintermediation risk and reduction in net interest rate spread or profit margin. (See the discussion below in Asset/Liability Management for additional information related to the Companys interest risk and its management.)
30
Risk-Based Capital
Under the National Association of Insurance Commissioners (NAIC) 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 companys 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, 2011, the Insurance Companys Company Action Level was $69.2 million and the Mandatory Control Level was $24.2 million. The Insurance Companys adjusted capital at December 31, 2011 was $384.9 million, which exceeds the amounts triggering all four action levels. The Companys RBC ratio as of December 31, 2011 was 556%, and we estimate the RBC ratio would increase to approximately 571% as of September 30, 2012.
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 our 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 prospects of our business may be adversely impacted.
In April 2012, the A.M. Best Company affirmed the financial strength rating of the Insurance Company of B++ (Good) and upgraded the issuer credit rating, or ICR, to bbb+ (Good) from bbb (Good) of the Insurance Company and increased the ICR of Presidential Life Corporation to bb+ (Fair) from bb (Fair). The ratings have been assigned a stable outlook.
The ratings reflect our strong capitalization and the early stage execution of our business strategy to move from a regional distributor of annuity products to a national platform. However, A.M. Best believes that our narrow product offering, the income volatility of our limited partnership investments and the high minimum crediting rates on our in-force business partially offset the positive rating factors.
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 Bests 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 that 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 our financial condition.
Results of Operations
A comparison of the significant items for the nine months ended September 30, 2012 with the same period in 2011 and a comparison of significant items for the three months ended September 30, 2012 with the same period in 2011 has been set forth below.
A.
Revenues
Total annuity considerations and life and accident and health insurance premiums were $27.1 million and $19.5 million for the first nine months of 2012 and 2011, respectively, a period-over-period increase of $7.6 million or 39%. Life insurance and accident and health premiums were $12.9 million and $13.5 million for the first nine months of 2012 and 2011, respectively, a period-over-period decrease of $0.6 million or 4.4%. Immediate annuity considerations with life contingencies were approximately $14.2 million and $6.0 million for the first nine months of 2012 and 2011, respectively, a period-over-period increase of $8.2 million or 136.7%. These amounts do not include consideration from the sales of deferred annuities or immediate annuities without life contingencies. Under GAAP, such sales are reported as additions to policyholder account balances. Consideration from such sales was approximately $40.5 million and $40.8 million in the first nine months of 2012 and 2011, respectively.
Total annuity considerations and life and accident and health insurance premiums increased from approximately $6.2 million
31
for the three months ended September 30, 2011 to approximately $10.3 million for the three months ended September 30, 2012.
Policy Fee Income
Universal life and investment type policy fee income was approximately $2.5 million and $2.6 million for the nine months ended September 30, 2012 and 2011, respectively, a period-over-period decrease of $0.1 million or 3.8%. Universal life and investment type policy fee income was approximately $0.8 million for both of the third quarters in 2012 and 2011. Policy fee income consists principally of amounts assessed during the period against policyholders account balances for mortality and surrender charges.
Net Investment Income and Equity in Earnings on Limited Partnerships
Net investment income and equity in earnings on limited partnerships totalled approximately $140.3 million and $148.6 million during the first nine months of 2012 and 2011, respectively, a period-over-period decrease of $8.3 million or 5.6%.
The Company had net investment income and equity in earnings from the limited partnerships of $45.9 million and $48.3 million for the three month periods ended September 30, 2012 and 2011, respectively, a period-over-period decrease of $2.4 million or 5.0%. Income included within distributions of the limited partnerships accounted for under the fair value method are classified as realized gains and losses and therefore excluded from net investment income (see below).
Net investment income totalled approximately $139.0 million and $146.6 million for the first nine months of 2012 and 2011, respectively, a period-over-period decrease of $7.6 million or 5.2%. Excluding the return on the Companys limited partnership investments and other realized gains, the investment yield ratios (net investment income to average cash and invested assets based on book value) for the first nine months of 2012 and 2011 were 5.62% and 5.90%, respectively.
Income from limited partnerships that are accounted for using the equity method of accounting amounted to approximately $1.3 million and $2.1 million for the first nine months of 2012 and 2011, respectively, a period-over-period decrease of $0.8 million or 38.1%. Income from limited partnerships accounted for under the equity method tend to fluctuate since changes in unrealized gains and losses are reflected within earnings. Income included within distributions of the limited partnerships accounted for under the fair value method are classified as realized gains and losses and therefore excluded from net investment income (see below).
Net Realized Investment Gains and Losses and OTTI losses recognized in earnings
The Company had net realized investment gains, including OTTI losses, of $4.0 million for the three months ended September 30, 2012 and net realized investment losses, including OTTI losses, of $0.9 million for the same quarter in 2011, a period-over-period increase of $4.9 million. Net realized investment gains, including OTTI losses, were $6.8 million and $20.9 million for the first nine months of 2012 and 2011, respectively, a period-over-period reduction of $14.1 million.
The table below details the components of these amounts:
32
The decrease in net realized gains, including OTTI for the nine month periods was primarily due to one hedge fund redemption of $10.6 million within our limited partnership portfolio in the second quarter of 2011. Realized gains on limited partnerships tend to fluctuate from period-to-period consistent with fluctuations in distributions.
B.
Benefits and Expenses
Interest Credited and Benefits to Policyholders
Interest credited and benefits paid and accrued to policyholders were $45.5 million and $43.8 million for the three months ended September 30, 2012 and 2011, respectively, a period-over-period increase of $1.7 million or 3.9%, and were $135.0 million and $131.8 million for the nine months ended September 30, 2012 and 2011, respectively, a period-over-period increase of $3.2 million or 2.4%. The increases are primarily due to decreases in the change in liability for future policy benefits.
A significant contributor to our profitability depends, in large part, on the investment returns generated on our portfolio, (excluding our limited partnerships), less what we are contractually obligated to credit to our policyholders (this is referred to as investment spread). The crediting rates on reserves for the first nine months of 2012 and 2011 were 4.93% and 4.99%, respectively. The actual investment spreads for the nine months ended September 30, 2012 and September 30, 2011 were 0.69% and 0.91%, respectively.
General Expenses and Taxes
General expenses and taxes were $20.1 million and $17.6 million for the first nine months of 2012 and 2011, respectively, a period over period increase of $2.5 million or 14.2%, and were $6.6 million and $4.5 million for the three months ended September 30, 2012 and 2011, respectively, a period over period increase of $2.1 million or 46.7%. The third quarter increase was primarily due to approximately $1.2 million in transaction costs incurred in connection with the sale of the Company and approximately $0.5 million in consulting fees associated with systems implementation projects.
Commissions
Commissions to agents, net were $3.7 million and $3.1 million for the first nine months of 2012 and 2011, respectively a period-over-period increase of $0.6 million or 19.4%.
Commissions to agents, net were
$1.3 million and $0.7 million for the three months ended September 30, 2012 and 2011, respectively a period-over-period increase of $0.6 million or 85.7%. Commission expense increased in the third quarter 2012 relative to 2011 due to higher annuity sales compared to the previous year.
33
Change in Deferred Policy Acquisition Costs (DAC)
The net expense from changes in the net DAC was $2.3 million and $4.5 million for the nine months ended September 30, 2012 and 2011, respectively, a period-over-period decrease of $2.2 million or 48.9%, principally related to lower amortization of DAC on annuity sales due to lower realized gains. For the quarters ended September 30, 2012 and 2011, the net expense from changes in the net DAC was $1.1 million and $1.3 million, respectively, a period over period decrease of $0.2 million or 15.4%. Despite higher sales, deferred costs for the first nine months of 2012 and 2011 were stable due to a reduction in deferred costs of $0.5 million during the first nine months of 2012 resulting from the prospective adoption of a new accounting principle that reduced the scope of deferrable costs to those directly linked to successful sales efforts.
Changes in DAC consist of the following three elements as summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30,
|
|
|
For the nine months ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in DAC due to deferred costs associated with product sales
|
|
$
|
(872)
|
|
$
|
(1,184)
|
|
$
|
(3,341)
|
|
$
|
(3,972)
|
Amortization of DAC on deferred annuity business
|
|
|
967
|
|
|
1,142
|
|
|
2,416
|
|
|
4,736
|
Amortization of DAC on the remainder of the Companys business
|
|
|
1,010
|
|
|
1,337
|
|
|
3,261
|
|
|
3,693
|
Net change in DAC
|
|
$
|
1,105
|
|
$
|
1,295
|
|
$
|
2,336
|
|
$
|
4,457
|
Under applicable accounting rules, DAC related to deferred annuities is amortized in proportion to the estimated gross profits over the estimated lives of the contracts. The lower level of amortization in the first nine months as well as the third quarter of 2012 results primarily from lower gross profit in 2012 relative to 2011.
C.
Income Before Income Taxes
For the reasons discussed above, income before income taxes amounted to approximately $18.4 million and $36.9 million for the nine months ended September 30, 2012 and 2011, respectively, a period-over-period decrease of $18.5 million or 50.1%. For the quarters ended September 30, 2012 and 2011, the income before income taxes amounted to approximately $7.9 million and $4.4 million, respectively, a period over period increase of $3.5 million or 79.5%.
D.
Income Taxes
Income tax expense was approximately $6.3 million and $12.7 million for nine months ended September 30, 2012 and 2011, respectively, a period-over-period decrease of $6.4 million or 50.4%. The income tax expense was approximately $2.8 million and $1.5 million for the third quarters of 2012 and 2011, respectively, a period-over-period increase of $1.3 million or 86.7%. The annual effective income tax rates were 34.1% and 34.5% for the nine months ended September 30, 2012 and 2011, respectively.
E.
Net Income
For the reasons discussed above, net income was approximately $12.1 million and $24.2 million for the nine months ended September 30, 2012 and 2011, respectively, a period-over-period decrease of $12.1 million. The Company had net income of $5.2 million and $2.9 million for the three months ended September 30, 2012 and 2011, respectively, a period-over-period increase of $2.3 million.
34
Accumulated Other Comprehensive Income
The increase in other comprehensive income, related to the increase in net unrealized gains, totaled approximately $29.0 million and $63.2 million for the third quarters of 2012 and 2011, respectively,
a period-over-period decrease of $34.2 million. Accumulated other comprehensive income increased from approximately $192.8 million at December 31, 2011 to $266.6 million at September 30, 2012. The increase was due to an increase in net unrealized investment gains, net of taxes, during the first nine months of 2012 of approximately $73.8 million. A decline in interest rates was the primary reason for these increases.
|
|
|
|
|
|
The following information summarizes the components of the unrealized investment gains:
|
|
|
As of
|
|
|
September 30, 2012
|
|
|
December 31, 2011
|
|
(In thousands)
|
|
|
|
|
|
|
Fixed maturities
|
$
|
422,225
|
|
$
|
313,872
|
Limited partnerships
|
|
23,561
|
|
|
15,994
|
Common stocks
|
|
720
|
|
|
554
|
Unrealized investment gains
|
|
446,506
|
|
|
330,420
|
Deferred federal income tax expense
|
|
(143,576)
|
|
|
(103,824)
|
Amortization (benefit) of deferred acquisition costs
|
|
(36,288)
|
|
|
(33,781)
|
Net unrealized investment gains
|
$
|
266,642
|
|
$
|
192,815
|
Liquidity and Capital Resources
We are an insurance holding company and our primary uses of cash are operating expenses and dividend payments. Our principal sources of cash are interest on our investments, dividends from the Insurance Company and rent from our real estate. During each of the first, second and third quarters of 2012, our Board of Directors declared a quarterly cash dividend of $0.0625 per share payable on April 1, 2012, July 1, 2012 and October 1, 2012, respectively. During the first nine months of 2012, we 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 statutory 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) on a statutory basis. 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 of the NYDFS and the Superintendent does not disapprove the distribution. 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 NYDFS 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. We cannot provide assurance that the Insurance Company will have statutory earnings to support payment of dividends to us in an amount sufficient to fund our 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 2011, the Insurance Company made $26.9 million in dividend payments to us. In the first nine months of 2012, the Insurance Company made $34.25 million in dividend payments to us.
The key need for liquidity in the Insurance Company is the need to fund policy benefit payments on surrendered or expired annuities. Approximately 33.9% of the aggregate policyholders account balances on in-force deferred annuities held by us have provisions that allow the purchaser to surrender the policy in exchange for the payment of a surrender fee. In an environment of flat or falling interest rates, surrender activity is generally low, as annuitants prefer to lock in the higher rates obtained. In an environment of rising interest rates, or even in an environment where interest rates are decreasing at the same time surrender charges are expiring, surrender activity would be expected to increase, as investors seek to place their money in higher interest rate instruments. In 2011, annuity surrenders and death claims outpaced new sales causing a minor decline in total annuity in-force. In 2012, we believe that surrenders and death claim activity combined with the challenging low interest rate environment for annuity sales may result in a slight decline in total annuities in-force. Policyholder account balance surrenders totaled approximately $77.4 million and $83.4 million for the nine-months ended September 30, 2012 and 2011, respectively. In 2012, surrender charges will expire for
35
approximately 10.9% of aggregate policyholders account balances on in-force deferred annuities, or $216.7 million. This allows the annuitant to terminate or withdraw funds from his or her annuity contract without incurring substantial penalties in the form of surrender charges. The existing surrender charges act as a disincentive to surrender, as the annuitant must take into account the cost of surrender in calculating the likelihood of higher post-surrender returns, although, if interest rates climb sufficiently, such fees may not have a significant deterrent effect. Also, our ability to increase the interest rate on certain of these policies can act as a disincentive to surrender. On the other hand, a significant reduction in the credited rates at the same time the surrender charge is expiring can result in an increase in surrenders. We have operated in the annuity business throughout rising and falling interest rate periods and have consistently managed this business regardless of the rate trends. Our ratio of surrenders to average reserves on our deferred annuity business for the third quarter of 2012 and the first nine months of 2012 was approximately 5.6% and 5.1%, respectively, on an annualized basis. As of December 31, 2011, our ratio of surrenders to average reserves on our deferred annuity business was 5.5% on an annualized basis.
We conduct testing of our cash flow needs based on varying interest rate scenarios. These tests are conducted pursuant to the NYDFS requirements and are filed with that Department. Recent testing indicates that in a moderately increasing interest rate environment, annuity surrenders would not materially alter our liquidity needs. This is partially due to the fact that our average annuity credited rate is somewhat higher than the market average. Our blend of deferred and immediate annuities and its payor swaption investments operate as a buffer to us against the impact of interest sensitive surrenders in a possibly rising interest rate environment.
Our life and accident and health insurance liabilities are actuarially calculated on a regular basis and we are capable of meeting such liabilities. Reserves for such business are carefully monitored and regulated by the NYDFS. Because life and accident and health insurance products represent a relatively small percentage of our product mix and because the business is heavily reinsured, it is not anticipated that any spike in life and accident and health insurance claims would have a material impact on our liquidity.
We do not currently rely on credit facilities to fund our liquidity needs for the payment of policyholder withdrawals or claims and do not anticipate such a need in the coming year. Moreover, based on projected trends and in the economy as a whole on our financial condition, we do not anticipate the need to liquidate a material amount of our investment portfolio to meet surrender and policy claim liabilities in the coming year.
Principal sources of funds at the Insurance Company are premiums and other considerations paid, contract charges earned, net investment income received and proceeds from investments called, redeemed or sold. The principal uses of these funds are the payment of benefits on life insurance policies and annuity contracts, operating expenses and the purchase of investments. Net cash (used in) our 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 ($10.8) million and ($16.1) million during the nine months ended September 30, 2012 and 2011, respectively. Net cash provided by the Company's investing activities (principally reflecting investments purchased less investments called, redeemed or sold) was approximately $ 21.2 million, and $73.1 million during the nine months ended September 30, 2012 and 2011, respectively.
For purposes of our consolidated statements of cash flows, financing activities relate primarily to sales and surrenders of our universal life insurance and annuity products. The payment of dividends by us is also considered to be a financing activity. Net cash used in our financing activities amounted to approximately ($41.7) million and ($59.3) million during the nine months ended September 30, 2012 and 2011, respectively. Under GAAP, consideration from single premium annuity contracts without life contingencies, universal life insurance products and deferred annuities are not reported as premium revenues, but are reported as additions to policyholder account balances, which are liabilities on our consolidated balance sheet.
Given the Insurance Company's historic cash flow and current financial results, we believe that, for the next twelve months and for the reasonably foreseeable future, the Insurance Company's cash flow from investments and operating activities will provide sufficient liquidity for the operations of the Insurance Company, as well as provide sufficient funds to us, so that we will be able to pay our other operating expenses. Due to potential changes in the economic climate, we can make no assurances with respect to the payment of future dividends.
To meet our anticipated liquidity requirements, we purchase investments taking into account the anticipated future cash flow requirements of its underlying liabilities. In managing the relationship between assets and liabilities, we analyze the cash flows necessary to correspond with the expected cash needs on the underlying liabilities under various interest rate scenarios. In addition, we invest a portion of its total assets in short-term investments, approximately 3.1% and 1.5% as of September 30, 2012 and December 31, 2011, respectively. We manage the investment portfolio focusing on duration management to support our current and future liabilities. Through periodic monitoring of the effective duration of the companys assets and liabilities, we ensure that the degree of duration mismatch is within the guidelines of our policy which provides for a mismatch of up to one year. As of September
36
30, 2012 and December 31, 2011, the effective duration of the Company's fixed income portfolio was approximately 5.85 and 5.92 years, respectively, which was within one year of our liability duration.
|
|
|
|
|
|
|
|
|
|
The table below summarizes the credit quality of our fixed maturity securities, excluding preferred stocks, as of September 30, 2012 and December 31, 2011 as rated by Standard and Poors.
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2012
|
|
|
As of December 31, 2011
|
(In thousands)
|
|
Fair Value
|
|
% of Fair Value
|
|
|
Fair Value
|
|
% of Fair Value
|
|
|
|
|
|
|
|
|
|
|
US Treasuries
|
$
|
43,871
|
|
1.3%
|
|
$
|
43,354
|
|
1.3%
|
AAA
|
|
135,131
|
|
3.9%
|
|
|
145,701
|
|
4.2%
|
AA
|
|
427,427
|
|
12.2%
|
|
|
380,259
|
|
11.1%
|
A
|
|
1,103,569
|
|
31.5%
|
|
|
1,065,556
|
|
31.0%
|
BBB, BBB+, BBB-
|
|
1,638,289
|
|
46.6%
|
|
|
1,588,158
|
|
46.3%
|
BB, BB+, BB-
|
|
103,675
|
|
3.0%
|
|
|
141,408
|
|
4.1%
|
B
|
|
38,069
|
|
1.1%
|
|
|
58,773
|
|
1.7%
|
CCC, CC, C or lower
|
|
14,356
|
|
0.4%
|
|
|
15,252
|
|
0.3%
|
Total
|
$
|
3,504,387
|
|
100.0%
|
|
$
|
3,438,461
|
|
100.0%
|
On a statutory basis, the Insurance Company is subject to Regulation 130 adopted and promulgated by the NYDFS. 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 September 30, 2012 and December 31, 2011, approximately 4.3% and 5.1%, respectively, of the Insurance Company's total admitted assets were invested in below investment grade debt securities.
Investments in below investment grade securities have different risks than investments in corporate debt securities rated investment grade. Risk of loss upon default by the borrower is significantly greater with respect to below investment grade securities than with other corporate debt securities because below investment grade securities generally are unsecured and often are subordinated to other creditors of the issuer. Also, issuers of below investment grade securities usually have high levels of indebtedness and often are more sensitive to adverse economic conditions, such as recession or increasing interest rates, than are investment grade issuers. Typically, there 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. We attempt to reduce the overall risk in our below investment grade portfolio, as in all of our 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.
As of September 30, 2012, the carrying value of our investments in limited partnerships was approximately $171.7 million or 5.0% of the Company's total invested assets on a statutory basis. Pursuant to NYDFS regulations, our investments in equity securities, including limited partnership interests, may not exceed 20% of our total invested assets. At September 30, 2012 and December 31, 2011, our investments in equity securities, including limited partnership interests, were approximately 5.0% and 4.8%, respectively, of our total invested assets. Such investments are included in our consolidated balance sheet under the heading "Limited partnerships". We are committed, if called upon during a specified period, to contribute an aggregate of approximately $31.2 million of additional capital to certain of these limited partnerships. However, management does not expect the entire amount to be drawn down, as certain of our investments in limited partnerships are nearing the end of the period during which investors are required to make contributions. Commitments of $30.3 million and $0.9 million will expire in 2012 and 2013, respectively. The commitment expirations are estimates based upon the commitment periods of each of the partnerships. Certain partnerships provide, however, that in the event capital from the investments is returned to the limited partners prior to the end of the commitment period (generally 3-5 years), the capital may be recalled. 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 our ability to typically take quarterly distributions (to the extent that distributions are available) of partnership earnings, except for earnings of hedge fund limited partnerships. There can be no assurance that we will continue to achieve the same level of returns on our investments in limited partnerships as we have historically or that we will achieve any returns on such investments at all. Further, there can be no assurance that we will receive a return of all or any portion of our current or future capital investments in limited partnerships. The failure to receive the return of a material portion of our capital investments in limited partnerships, or to achieve historic levels of return on such investments, could have a material adverse effect on our financial condition and results of operations.
All 50 states of the United States and the District of Columbia have insurance guaranty fund laws requiring all life insurance companies doing business within the jurisdiction to participate in guaranty associations that 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
37
basis of the proportionate share of the premiums written by member insurers in the lines of business in which the impaired or insolvent insurer is engaged. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets. These assessments may be deferred or forgiven under most guaranty laws if they would threaten an insurer's solvency. The amount of these assessments in prior years has not been material. However, the amount and timing of any future assessment on the Insurance Company under these laws cannot be reasonably estimated and are beyond our control.
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.
We believe that a portfolio composed principally of fixed-rate investments that generate predictable rates of return should support our fixed-rate liabilities. We do not have a specific target rate of return. Instead, our 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. Our portfolio strategy is designed to achieve adequate risk-adjusted returns consistent with our investment objectives of effective asset-liability matching, liquidity and safety.
The market value of our fixed maturity portfolio changes as interest rates change. In general, rate decreases causes asset prices to rise, while rate increases causes asset prices to fall.
Asset/Liability Management
A persistent focus of the Insurance Companys management is maintaining the appropriate balance between the duration of its invested assets and the duration of its contractual liabilities to its annuity holders and credit suppliers. Towards this end, at least quarterly, our investment department determines the duration of our invested assets in coordination with our actuaries, who are responsible for calculating the liability duration. In the event it is determined that the duration gap between our assets and liabilities exceeds a one year target level, we re-position our assets through the sale of invested assets or the purchase of new investments.
As an element of our asset liability management strategy, we have utilized hedges against the risks posed by a rapid and sustained rise in interest rates by entering into a form of derivative transaction known as payor swaptions. Swaptions are options to enter into an interest rate swap arrangement with a counterparty (major money-center U.S. bank) at a specified future date. At expiration, the counterparty would be required to pay the Insurance Company the amount of the present value of the difference between the fixed rate of interest on the swap agreement and a specified strike rate in the agreement multiplied by the notional amount of the swap agreement. The total notional amount of our three payor swaptions at September 30, 2012 was $221.5 million and the swaptions expire annually from January 2015 through 2017. The effect of these transactions would be to lessen the negative impact on the Insurance Company of a significant and prolonged increase in interest rates on the valuation of fixed maturity investments. With the swaptions, we should be able to maintain more competitive crediting rates to policyholders when interest rates rise.
We have determined that the payor swaptions represent a non-qualified hedge. These investments are classified on the balance sheet as Derivative Instruments. The value of the payor swaptions is recognized at fair value (market value), with any change in fair value reflected in the income statement as a realized gain or loss. The market value of the payor swaptions totalled $1,651,437 at September 30, 2012. This represented a decrease in market value since December 31, 2011 of $1,706,365.
We conduct periodic cash flow tests assuming different interest rates scenarios in order to demonstrate the reserve adequacy. If a test reveals a potential deficiency, we may be required to increase our reserves to satisfy its statutory accounting requirements. Based on testing as of December 31, 2011, the Insurance Company holds a reserve of $7.7 million which satisfies the statutory requirements.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet financing arrangements and have made no financial commitments or guarantees with any unconsolidated subsidiary or special purpose entity. All of our subsidiaries are wholly owned and their results are included in the accompanying consolidated financial statements.
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
After
|
|
|
|
Contractual Obligations
|
|
1 Year
|
|
1-3 Years
|
|
4-5 Years
|
|
5 Years
|
|
|
Total
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy Liabilities (1)
|
|
$
|
571,065
|
|
$
|
841,633
|
|
$
|
579,955
|
|
$
|
2,347,868
|
|
$
|
4,340,521
|
Unfunded Limited Partnership Commitments (2)
|
|
$
|
30,350
|
|
$
|
876
|
|
$
|
-
|
|
$
|
-
|
|
$
|
31,226
|
FIN 48 Liabilities
|
|
$
|
(286)
|
|
$
|
329
|
|
$
|
(285)
|
|
$
|
-
|
|
$
|
(242)
|
Purchase obligations and Other (3)
|
|
$
|
290
|
|
$
|
400
|
|
$
|
99
|
|
$
|
-
|
|
$
|
789
|
Total Contractual Obligations
|
|
$
|
601,419
|
|
$
|
843,238
|
|
$
|
579,769
|
|
$
|
2,347,868
|
|
$
|
4,372,294
|
(1
)
The difference between the recorded liability of $3,021.3 million, and the total payment obligation amount of $4,340.5 million, is $1,319.2 million and is comprised of (
i
) future interest to be credited; (
ii
) the effect of mortality discount for those payments that are life contingent; and (
iii
) the impact of surrender charges on those contracts that have such charges. Of the total payment of $4,340.5 million, $2,861.3 million, or approximately 65.9%, is from our deferred annuity, life, and accident and health business. Determining the timing of these payments involves significant uncertainties, including mortality, morbidity, persistency, investment returns, and the timing of policyholder surrender. Notwithstanding these uncertainties, the table reflects an estimate of the timing of such payments.
(2
)
See Note 2 Investments, of the consolidated financial statements
(3
)
Purchase obligations include contracts where we have a non-cancelable commitment to purchase goods and services.
Effects of Inflation and Interest Rate Changes
In a rising interest rate environment, our average cost of funds would be expected to increase over time, as we price our new and renewing annuities to maintain a generally competitive market rate. In addition, the market value of our fixed maturity portfolio would be expected to decrease, resulting in a decline in shareholders' equity. Concurrently, we would attempt to place new funds in investments that were matched in duration to, and higher yielding than, the liabilities associated with such annuities. Moreover, surrenders of our outstanding annuities would likely accelerate. Management believes that liquidity necessary in such an interest rate environment to fund withdrawals, including surrenders, would be available through income, cash flow, our cash reserves and, if necessary, proceeds from the monetization of the payor swaption investments described above and the sale of short-term and long-term investments.
In a declining interest rate environment, our cost of funds would be expected to decrease over time, reflecting lower interest crediting rates on our fixed annuities. Conversely, in an increasing interest rate environment, the cost of funds would be expected to increase, reflecting higher interest crediting rates. Should increased liquidity be required for withdrawals in such an interest rate environment, management believes that the portion of our investments that are designated as available for sale in our consolidated balance sheet could be sold without materially adverse consequences in light of the general strengthening in market prices that would be expected in the fixed maturity security market.
Interest rate changes also may have temporary effects on the sale and profitability of our annuity products. For example, if interest rates rise, competing investments (such as annuity or life insurance products offered by our competitors, certificates of deposit, mutual funds and similar instruments) may become more attractive to potential purchasers of our products until we increase the rates credited to holders of our annuity products. In contrast, as interest rates fall, we would attempt to lower our credited rates to compensate for the corresponding decline in net investment income. As a result, changes in interest rates could materially adversely affect our financial condition and results of operations depending on the attractiveness of alternative investments available to our customers. In that regard, in the current interest rate environment, we have attempted to maintain our credited rates at competitive levels designed to discourage surrenders and also to be considered attractive to purchasers of new annuity products.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (
²
GAAP
²
) requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in the consolidated financial statements. In applying these accounting policies, we make subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to the Insurance Companys business operations. The accounting policies we considered to be critically important in the preparation and understanding of our financial statements and related disclosures are presented in Item
7. Managements Discussion and Analysis of Financial Condition and Results of Operations
39
of our Annual Report on Form 10-K for the year ended December 31, 2011.
New Accounting Pronouncements
See Note 1(L) of the consolidated financial statements for a full description of the new accounting pronouncements including the respective dates of adoption and the effects on the results of our operations and financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
For a discussion of market risks, refer to the Liquidity and Capital Resources section of Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. During the first nine months of 2012, there were no significant changes or developments that would materially alter the market risk assessment performed as of December 31, 2011.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) of the Securities Exchange Act of 1934. As of September 30, 2012, we have, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of such disclosure controls and procedures. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
40
PART II - OTHER INFORMATION
Item 1.
Legal Proceedings
From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. As of September 30, 2012 the Company is not a party to any legal proceedings, the adverse outcome of which, in our opinion, individually or in the aggregate, would have a material adverse effect on our financial condition or results of operations.
Litigation Relating to the Merger
The Company, its directors, Athene and Merger Sub were named as defendants in four complaints filed in the Supreme Court of the State of New York, County of Rockland. One complaint is captioned Katen Patel on behalf of himself and others similarly situated as Plaintiff v. Presidential Life Corp., Donald L. Barnes, John D. McMahon, Dominic F. DAdamo, William A. Demilt, Ross B. Levin, Lawrence Read, Lawrence Rivkin, Stanley Rubin, Frank A. Shepard, William M. Trust Jr., Athene Annuity & Life Assurance Company and Eagle Acquisition Corp., and was filed on July 18, 2012 (the Patel Complaint). The second complaint (the Palmisano Complaint) was brought in the name of an Anthony Palmisano, allegedly on behalf of himself and others similarly situated, against the Company as well as the same directors named in the Patel Complaint. The Palmisano Complaint was filed on July 30, 2012. The third complaint (the Tazakine Complaint) was brought in the name of Charles Tazakine allegedly on behalf of himself and others similarly situated against the Company and those same directors. The Tazakine Complaint was filed on August 9, 2012. The fourth complaint (the Kahn Complaint) was brought in the name of Alan Kahn allegedly on behalf of himself and others similarly situated against the Company and those same directors. The Kahn Complaint was filed on August 10, 2012.
These four cases were consolidated by stipulation and order that was filed on September 5, 2012. Pursuant to this order, the actions were consolidated under the caption In re Presidential Life Corp, Shareholder Litigation, Index Number 034636/2012. Further, the complaint (the Consolidated Complaint) in the Kahn action is deemed to be the operative complaint for all of the four cases pending in Supreme Court, Rockland County.
The Consolidated Complaint, purportedly brought on behalf of a class of stockholders, alleges that our directors breached their fiduciary duties in connection with the proposed Merger purportedly because, among other things, the proposed Merger is the product of a flawed process, the Merger Agreement contains preclusive deal protection terms and our directors failed to properly value Presidential. The Consolidated Complaint further alleges that Athene aided and abetted the directors purported breaches. The Consolidated Complaint seeks injunctive and other equitable relief, including enjoining us from consummating the Merger, and damages, in addition to fees and costs.
On October 23, 2012, an action was brought in the United States District Court, Southern District of New York by Philip Brent allegedly on behalf of himself and other shareholders. The Brent complaint makes similar allegations as contained in the Consolidated Complaint. In addition, the Brent Complaint alleges that the preliminary proxy statement issued by the Company contains false and misleading statements in violation of Section 14(a) of the Securities Exchange Act and Rule 14a-9 promulgated pursuant to Section 14(a) of the Securities Exchange Act.
We believe that the claims asserted in these suits are without merit and intend to vigorously defend these matters.
Item 1A.
Risk Factors
Our business is subject to certain risks and events that, if they occur, could adversely affect the financial condition and results of operations and the trading price of our common stock. For a discussion of these risks, please refer to the Risk Factors section of the Companys 2011 Form 10-K. In connection with its preparation of this quarterly report, management has reviewed and considered these risk factors and has determined that there have been material changes to the Companys risk factors since the date of filing the Annual Report. The following additional risk factors should be read in conjunction with the risk factors in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
There can be no assurance that the proposed Merger will be completed.
The Merger is conditioned, among other things, on: (i) the approval of the holders of a majority of the outstanding shares of Company Common Stock; (ii) the absence of certain legal impediments to the consummation of the Merger; and (iii) the receipt of certain regulatory approvals regarding the transactions contemplated by the Merger Agreement, including expiration of the waiting period under the HSR Act and approvals by certain state insurance regulatory authorities, including the New York State Department of Financial Services. Early termination of the waiting period under the HSR Act was granted on August 20, 2012. In addition, prior to the receipt of the Extraordinary Dividend, the Company must have Net Assets of at least $40.0 million, comprised of substantially the
41
same type and mix of assets as the Net Assets of the Company on the date of the Merger Agreement. There is no assurance that all of the conditions to the consummation of the Merger will be satisfied or that the Merger will be completed.
The Company's future business and financial results could be adversely affected by the incurrence of costs related to the Merger, including the Termination Fee, and the transactions contemplated by the Merger Agreement.
Upon termination of the Agreement, the Company is required to pay Athene a termination fee of $18.0 million under specified circumstances, including: (i) termination by the Company of the Merger Agreement in order to enter into a definitive acquisition agreement with respect to a Superior Proposal (as defined in the Merger Agreement); (ii) termination by Athene of the Merger Agreement in the event that, among others, (a) the Board of Directors of the Company effects a Change in Recommendation (as defined in the Merger Agreement) prior to obtaining Company shareholder approval or (b) the Board of Directors of the Company fails to reaffirm publicly and unconditionally its recommendation that the Companys shareholders adopt the Merger Agreement and approve the Merger within two business days of Athenes written request to do so (such request may be made at any time following public disclosure of an alternative acquisition transaction proposal), which public reaffirmation must also include the unconditional rejection of such alternative acquisition transaction proposal; (iii) termination by Athene or the Company in the event that the holders of a majority of the outstanding shares of Company Common Stock fail to approve the Merger Agreement; and (iv) termination by Athene or the Company in the event that the closing of the Merger does not occur by the Outside Date (as defined in the Merger Agreement), and (A) an Acquisition Proposal is publicly disclosed after the date of the Merger Agreement and prior to such termination, and (B) within 12 months after such termination, the Company enters into a definitive agreement with respect to, or consummates, the transaction contemplated by any Acquisition Proposal. The Merger Agreement sets forth certain other circumstances under which the Termination Fee may be due and owing from the Company to Athene.
If the Merger Agreement is terminated by either party for any reason other than the failure to obtain such enumerated regulatory approvals or a breach of the Merger Agreement by Athene, the Company will reimburse Athene for its out-of-pocket expenses, excluding Hedging Costs, up to a maximum of $3.0 million. Alternatively, if either party terminates the Merger Agreement as a result of certain failures to obtain regulatory approvals as enumerated therein, the Company will be required to reimburse Athene for their out-of-pocket expenses, excluding Hedging Costs (as defined in the Merger Agreement), up to a maximum of $1.0 million, plus 50% of all Net Hedging Costs (as defined in the Merger Agreement) not to exceed $12.5 million.
In addition, the Company has incurred and will continue to incur costs relating to the Merger that are payable whether or not the Merger is completed, including legal, accounting, financial advisory and printing fees and other fees related to holding a special meeting of the Company's shareholders. In the third quarter approximately $1.2 million in transaction costs were incurred in connection with the sale of the Company.
In addition, the Company could be adversely affected by having had its management focused on completing the proposed Merger instead of on pursuing other business strategies that could have been beneficial to the Company, such as acquisition or investment opportunities. The Company's businesses and operations may also be harmed to the extent that third parties, such as customers, brokers and agents, may be concerned about the Company's ability to effectively operate in the marketplace on a stand-alone basis, or if there is management or employee uncertainty surrounding the future direction or strategy of the Company. The Company may lose key employees and ongoing business and prospects, as well as relationships with customers and other third parties as a result of these uncertainties.
If the Merger is not completed, the Company may have difficulty in taking advantage of alternative business opportunities or effectively responding to competitive pressures. In addition, the Merger Agreement restricts the Company from making acquisitions or dispositions and taking other specified actions without the consent of Athene pending completion of the Merger. These restrictions may prevent the Company from pursuing attractive business opportunities or addressing other developments that may arise prior to the completion of the Merger.
The Merger Agreement limits the Company's ability to pursue alternatives to the Merger and contains provisions that could affect the decisions of a third party considering making an alternative acquisition proposal.
The Merger Agreement contains restrictions on the Companys ability to solicit or engage in discussions or negotiations with any third party regarding a proposal to acquire a significant interest in or a significant portion of the assets of the Company. Further, the Company's right to enter into an agreement providing for an unsolicited Superior Proposal (as defined in the Merger Agreement) is subject to a requirement to provide four business days' prior notice to Athene and to discuss and consider in good faith any changes to the terms of the Merger proposed by Athene in response to the Superior Proposal. In addition, the Company is required to pay to Athene the Termination Fee if the Merger Agreement is terminated under certain circumstances, including termination by the Company in order to enter into an agreement providing for a Superior Proposal. The foregoing provisions may limit the Company's ability to pursue an alternative acquisition proposal from a third party and could also affect the decision by a third party to make a competing acquisition proposal, including the structure, pricing and terms thereof.
42
If the Merger is not completed, the Company's common stock price may be adversely affected.
If the Merger is not completed, the trading price of the Company's common stock may decline to the extent that the current market prices reflect a market assumption that the Merger will be completed. In addition, any adverse operational or financial effect on the Company caused by the failure to complete the Merger could adversely affect the price of its common stock.
43
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3.
Defaults Upon Senior Securities
None
Item 4.
Mine Safety Disclosures
Not Applicable
Item 5.
Other Information
None
Item 6.
Exhibits
a) Exhibits
31.1
Certification of Chief Executive Officer
31.2
Certification of Chief Financial Officer
32.1
Certification of Chief Executive Officer
32.2
Certification of Chief Financial Officer
b)
Reports on Form 8-K
Description
Granting of restricted stock to certain officers effective March 1, 2012 (filed as Item 5.02 to the Companys Form 8-K, filed on March 2, 2012 and incorporated herein by reference).
Entry into a definitive material agreement regarding the purchase of Great American Life Assurance Company through a Stock Purchase Agreement dated February 23, 2012 as amended on July 3, 2012 with GALAC Holding Company, the Seller and an affiliate of the American Financial Group, Inc. (filed as Item 1.01 to the Companys Form 8-K, filed on July 6, 2012 and incorporated herein by reference).
Entry into a definitive material agreement regarding the Merger of the Company with Athene Annuity & Life Assurance Company, a Delaware insurance company through an Agreement and Plan of Merger dated July 12, 2012 (filed as Item 1.01 to the Companys Form 8-K, filed on July 13, 2012 and incorporated herein by reference).
44
PRESIDENTIAL LIFE CORPORATION
November 9, 2012
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Presidential Life Corporation
(Registrant)
Date: November 9, 2012
/s/ Donald L. Barnes
Donald L. Barnes, President and Duly
Authorized Officer of the Registrant
Date: November 9, 2012
/s/ P.B. (Pete) Pheffer
P.B. (Pete) Pheffer, Chief Financial
Officer of the Registrant
45
Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Exchange Act Rule 13a-15f
I, Donald L. Barnes, Chief Executive Officer of Presidential Life Corporation certify that
:
1.
I have reviewed this quarterly report on Form 10-Q of Presidential Life Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4.
The company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and
5.
The company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting.
Date
:
November 9, 2012
/s/Donald L. Barnes
---------------------
Donald L. Barnes
Chief Executive Officer
46
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Exchange Act Rule 13a-15f
I, P.B. (Pete) Pheffer, Chief Financial Officer and Treasurer of Presidential Life Corporation certify that:
1. I have reviewed this quarterly report on Form 10
-
Q of Presidential Life Corporation,
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4.
The company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and
5.
The company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting.
Date
:
November 9, 2012
/s/P.B. (Pete) Pheffer
----------------------
P.B. (Pete) Pheffer
Chief Financial Officer
47
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Presidential Life Corporation (the "Company") on Form 10-Q for the period ending September 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Donald L. Barnes, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/Donald L. Barnes
------------------
Donald L. Barnes
Chief Executive Officer
November 9, 2012
48
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Presidential Life Corporation (the "Company") on Form 10-Q for the period ending September 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, P.B. (Pete) Pheffer, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/ P.B. (Pete) Pheffer
-------------------
P.B. (Pete) Pheffer
Chief Financial Officer
November 9, 2012
49