SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 1996
Commission File No. 0-18485
Life USA HOLDING, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1578384
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
Suite 95, Interchange North Building
300 South Highway 169
Minneapolis, Minnesota 55426
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code: (612) 546-7386
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES __X__ NO _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 31, 1996
----------------- -----------------------------
Common Stock, 20,335,509
Par Value $.01 Per Share
Life USA HOLDING, INC.
Securities and Exchange Commission Form 10-Q
for the First Quarter Ended March 31, 1996
I N D E X
Page
Number
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheet (Unaudited)
March 31, 1996 and December 31, 1995...........................3-4
Condensed Consolidated Statement of Income
(Unaudited) Three months ended March 31, 1996
and March 31, 1995...............................................5
Condensed Consolidated Statement of Cash Flows
(Unaudited) Three months ended March 31, 1996
and March 31, 1995...............................................6
Notes to Condensed Consolidated Financial Statements
(Unaudited)......................................................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................8-17
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings...............................................18
Item 2. Changes in Securities...........................................18
Item 3. Defaults Upon Senior Securities.................................18
Item 4. Submission of Matters to a Vote of Security Holders.............18
Item 5. Other Information...............................................18
Item 6. Exhibits and Reports on Form 8-K................................18
SIGNATURES: ............................................................... 19
<TABLE>
<CAPTION>
Life USA HOLDING, INC.
Condensed Consolidated Balance Sheet
(Dollars in thousands)
(Unaudited)
March 31, December 31,
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturity investments:
Available for sale, at fair value (amortized cost:
$787,654 at March 31, 1996 and $761,553 at
December 31, 1995) $ 796,446 $ 812,195
Held to maturity, at amortized cost (fair value:
$931,699 at March 31, 1996 and $953,167 at
December 31, 1995) 925,127 908,670
Policy loans 20,347 19,789
---------- ----------
Total investments 1,741,920 1,740,654
Cash and cash equivalents 33,531 33,222
Accrued investment income 24,037 23,510
Future policy benefits recoverable and amounts due
from reinsurers 1,940,990 1,862,311
Deferred policy acquisition costs 204,166 175,296
Other assets 32,377 32,546
---------- ----------
$3,977,021 $3,867,539
========== ==========
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Life USA HOLDING, INC.
Condensed Consolidated Balance Sheet (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
March 31, December 31,
1996 1995
---------- ----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits $3,692,591 $3,566,012
Other policyholders' funds 3,483 4,453
Amounts due reinsurers 20,999 27,303
Accrued commissions to agents 7,262 11,364
Taxes, licenses and fees payable 18,177 18,913
Accounts payable 4,377 4,771
Convertible subordinated debentures 36,030 36,030
Deferred income taxes 14,818 19,640
Other liabilities 27,872 22,157
---------- ----------
Total liabilities 3,825,609 3,710,643
Shareholders' equity:
Preferred stock, $.01 par value; 15,000,000
shares authorized, none issued -- --
Common stock, $.01 par value; 45,000,000
shares authorized, 20,335,509 shares issued and
outstanding (20,279,343 shares at December 31, 1995) 203 203
Common stock to be issued, 31,003 shares
(45,404 shares at December 31, l995) 266 382
Additional paid-in capital 81,398 80,931
Net unrealized gain on fixed maturity
investments - available for sale 2,251 12,707
Retained earnings 67,294 62,673
---------- ----------
Total shareholders' equity 151,412 156,896
---------- ----------
$3,977,021 $3,867,539
========== ==========
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Life USA HOLDING, INC.
Condensed Consolidated Statement of Income
(Dollars in thousands, except per share amounts)
(Unaudited)
Three months ended March 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
Policyholder charges $ 11,084 $ 8,193
Net investment income 30,926 22,965
Net realized gains (losses) on investments 1,679 (157)
Commissions and expense allowances, net 29,817 28,758
Other 48 109
------------ ------------
Total revenues 73,554 59,868
Benefits and expenses:
Interest credited to policyholder account values 24,230 18,161
Other benefits to policyholders 4,669 2,851
Amortization of deferred policy acquisition costs 6,168 4,538
Commissions 17,152 17,052
Taxes, licenses and fees 1,237 1,358
Operating expenses 12,776 10,061
------------ ------------
Total benefits and expenses 66,232 54,021
------------ ------------
Income before income taxes 7,322 5,847
Income taxes 2,701 2,141
------------ ------------
Net income $ 4,621 $ 3,706
============ ============
Income per common and common equivalent share:
Primary $ .21 $ .18
============ ============
Fully diluted $ .21 $ .18
============ ============
Number of shares used in per share calculation:
Primary 22,904,123 21,523,015
Fully diluted 22,904,112 21,542,291
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
Life USA HOLDING, INC.
Condensed Consolidated Statement of Cash Flows
(Dollars in thousands)
(Unaudited)
Three months ended March 31,
----------------------------
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,621 $ 3,706
Adjustments to reconcile net income to net
cash used in operating activities:
Accretion of discount on investments, net (527) (487)
Net realized (gains) losses on investments (1,679) 157
Policy acquisition costs deferred (9,275) (17,025)
Amortization of deferred policy acquisition costs 6,168 4,538
Other changes (7,370) 7,190
--------- ---------
Net cash used in operating activities (8,062) (1,921)
Cash flows from investing activities:
Fixed maturity investments-available for sale:
Purchases (61,412) (65,556)
Proceeds from sales 35,095 5,036
Proceeds from maturities and principal payments
on mortgage-backed securities 1,934 1,674
Fixed maturity investments-held to maturity:
Purchases (18,005) (77,794)
Proceeds from maturities and principal payments
on mortgage-backed securities 2,035 1,952
--------- ---------
Net cash used in investing activities (40,353) (134,688)
Cash flows from financing activities:
Receipts from universal life and investment products 66,528 123,086
Withdrawals on universal life and investment products (45,740) (32,263)
Interest credited to policyholder account values 24,230 18,161
Proceeds from convertible subordinated debenture issuance -- 30,000
Other financing activities 3,706 2,456
--------- ---------
Net cash provided by financing activities 48,724 141,440
--------- ---------
Net increase in cash and cash equivalents 309 4,831
Cash and cash equivalents at beginning of the period 33,222 57,720
--------- ---------
Cash and cash equivalents at end of the period $ 33,531 $ 62,551
========= =========
</TABLE>
See accompanying notes.
Life USA HOLDING, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 1996
(Unaudited)
1. The condensed consolidated balance sheet of Life USA Holding, Inc. (the
Company) at March 31, 1996 and the related condensed consolidated
statements of income and cash flows for the three months ended March 31,
1996 and 1995, are unaudited; however, in the opinion of management, all
adjustments necessary for a fair presentation have been included and are
of a normal recurring nature. The results of operations for the three
months ended March 31, 1996 are not necessarily indicative of the results
to be expected for the full year. The balance sheet at December 31, 1995
is derived from the audited balance sheet as of that date.
2. Certain 1995 amounts have been reclassified to conform to the 1996
presentation.
3. The accompanying condensed consolidated financial statements should be
read in conjunction with the notes to the December 31, 1995 consolidated
financial statements.
4. The net unrealized gain on fixed maturity investments - available for
sale included in shareholders' equity consists of the following:
March 31, December 31,
1996 1995
-------- --------
Gross unrealized gain on fixed maturity
investments - available for sale $ 8,792 $ 50,642
Adjustments for:
Deferred tax liability (3,077) (17,725)
Deferred policy acquisition costs (5,330) (31,093)
Deferred tax asset 1,866 10,883
-------- --------
Net unrealized gain on fixed maturity
investments - available for sale $ 2,251 $ 12,707
======== ========
5. On March 11, 1996, the Company announced that it had formed LifeUSA
Securities, Inc., a wholly-owned broker/dealer subsidiary, to offer a
family of proprietary mutual funds through licensed brokers in the
independent agent distribution system of LifeUSA Insurance Company
(LifeUSA). The Company is currently in the process of obtaining
regulatory approval for both the broker/dealer and the formation of the
funds. It is anticipated that the process will take approximately six to
nine months.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following analysis of the results of operations and financial condition of
Life USA Holding, Inc. (the Company) and its wholly-owned subsidiaries, LifeUSA
Insurance Company (LifeUSA) and LifeUSA Securities, Inc., should be read in
conjunction with the Company's condensed consolidated financial statements and
notes thereto included elsewhere in this Report.
Since its inception in 1987, LifeUSA has entered into various agreements to
reinsure a substantial portion of the new life insurance and annuity business
written in the states where it has been authorized to issue life insurance and
annuity products. Entering into these reinsurance agreements has allowed LifeUSA
to write volumes of business that it would not otherwise have been able to write
due to regulatory restrictions based on the amount of its statutory capital and
surplus. LifeUSA receives commissions and expense allowances on business ceded
to its reinsurers.
Prior to the Company's acquisition of Fidelity Union Life Insurance Company
(FULICO), a shell life insurance company into which LifeUSA was subsequently
merged in 1994, LifeUSA was authorized to issue life insurance and annuity
products in 40 states and the District of Columbia. In order to provide its
agents access to nine of the states in which it was not licensed (excluding only
New York), the Company entered into a general agency agreement in 1988 with
Allianz Life Insurance Company of North America (Allianz Life) which allowed
LifeUSA agents to produce life insurance and annuity business on Allianz Life
policies which are similar to LifeUSA policies in these nine states.
The Company receives service fees on the business produced by LifeUSA agents for
Allianz Life.
After the acquisition of FULICO and its subsequent merger with LifeUSA, LifeUSA
filed all of its life insurance and annuity products with the nine states where
it was not previously licensed. LifeUSA has received approval to issue all or
most of these products in those nine states.
In February 1995, the Company and Allianz Life entered into a series of
agreements to expand their combined marketing efforts nationwide, and Allianz
Life purchased a 15-year, $30 million convertible subordinated debenture from
the Company. The joint marketing agreement provided that existing LifeUSA life
insurance and annuity products would be filed as Allianz Life policies in all
states where LifeUSA agents are licensed. Of those states in which existing
LifeUSA products have been filed as Allianz Life policies, 45 states have
approved all products filed. LifeUSA continues to pursue the approval of all
products filed in the remaining four states and the District of Columbia.
LifeUSA agents are being licensed with Allianz Life so that LifeUSA products and
existing Allianz Life products can be sold by the LifeUSA distribution system.
LifeUSA may market and/or administer certain Allianz Life products sold by
LifeUSA agents and participate in the business under a reinsurance agreement.
The 1988 general agency agreement was terminated by the 1995 joint marketing
agreement and therefore no longer applies to new life insurance and annuity
business produced by LifeUSA agents for Allianz Life. However, the general
agency agreement remains in effect for renewal premium received on policies
originally issued under the terms of the general agency agreement. The Company
continues to receive service fees from Allianz Life on all new and renewal
premium received on policies produced by LifeUSA agents for Allianz Life under
the terms of the joint marketing agreement.
The Company derives its revenues from commissions and expense allowances on
business ceded to its reinsurers and service fees on the business produced by
LifeUSA agents for Allianz Life, net investment income and policyholder charges.
From July 1, 1993 through September 30, 1995, the retention percentage for new
life insurance and annuity business written directly by LifeUSA and the
assumption percentage for new business produced by LifeUSA agents for Allianz
Life were 50%. Effective October 1, 1995, both of these percentages were
decreased to 25% (see "Liquidity and Capital Resources" for further discussion).
The combination of the constant 50% retention of business written by LifeUSA or
produced for Allianz Life by LifeUSA agents from July 1, 1993 through September
30, 1995 and the growth in both invested assets and life insurance and annuity
account values in force has caused the ratio of commissions and expense
allowances to total revenues to decline, while the ratios of both net investment
income to total revenues and policyholder charges to total revenues have
increased as follows:
Three months
ended March 31,
---------------
Components of Total Revenues 1996 1995
------------------------------------------ ---- ----
Commissions and expense allowances, net 41% 48%
Net investment income 42 38
Policyholder charges 15 14
Net realized gains (losses) on investments 2 0
The reduction in retention and assumption percentages outlined above may cause
this trend to change during 1996.
At March 31, 1996 and 1995, life insurance account values in force (net of
reinsurance) aggregated $73.6 million and $54.8 million, respectively, and
annuity account values in force (net of reinsurance) aggregated $1.59 billion
and $1.32 billion, respectively.
RESULTS OF OPERATIONS
PREMIUMS. Total collected premiums in the first quarter of 1996, including
premiums on policies produced by LifeUSA agents for Allianz Life, decreased by
12% to $223.9 million from $255.2 million in the first quarter of 1995. The
following table shows the amounts of premiums collected, ceded and retained for
the comparable quarters (in thousands):
Three Months Ended March 31,
----------------------------
1996 1995
-------- --------
Collected Premiums (1):
LifeUSA:
Life:
First year $ 3,878 $ 3,696
Single and renewal 12,097 10,904
-------- --------
Total Life 15,975 14,600
Annuities 134,920 141,852
-------- --------
Total LifeUSA collected premiums 150,895 156,452
Allianz Life:
Life:
First year 907 1,303
Single and renewal 3,681 3,210
-------- --------
Total Life 4,588 4,513
Annuities 68,404 94,277
-------- --------
Total Allianz Life collected premiums 72,992 98,790
-------- --------
Total collected premiums $223,887 $255,242
======== ========
Collected Premiums Not Retained or Assumed (2):
LifeUSA:
Life:
First year $ 2,320 $ 1,847
Single and renewal 7,984 7,539
-------- --------
Total Life 10,304 9,386
Annuities 96,269 72,297
-------- --------
Total LifeUSA collected premiums not retained 106,573 81,683
Allianz Life:
Life:
First year 554 652
Single and renewal 2,150 1,919
-------- --------
Total Life 2,704 2,571
Annuities 48,082 47,902
-------- --------
Total Allianz Life collected premiums not assumed 50,786 50,473
-------- --------
Total collected premiums not retained or assumed $157,359 $132,156
======== ========
Retained or Assumed Premiums (3):
LifeUSA:
Life:
First year $ 1,558 $ 1,849
Single and renewal 4,113 3,365
-------- --------
Total Life 5,671 5,214
Annuities 38,651 69,555
-------- --------
Total LifeUSA retained premiums 44,322 74,769
Allianz Life:
Life:
First year 353 651
Single and renewal 1,531 1,291
-------- --------
Total Life 1,884 1,942
Annuities 20,322 46,375
-------- --------
Total Allianz Life assumed premiums 22,206 48,317
-------- --------
Total retained or assumed premiums $ 66,528 $123,086
======== ========
(1) Includes premiums related to all policies produced by LifeUSA agents,
including policies produced by LifeUSA agents for Allianz Life.
(2) Includes premiums related to LifeUSA policies that have been ceded by
LifeUSA to its reinsurers and premiums related to policies produced by
LifeUSA agents for Allianz Life that have not been assumed by LifeUSA.
(3) Includes premiums related to LifeUSA policies that have been retained by
LifeUSA and premiums related to policies produced by LifeUSA agents for
Allianz Life that have been assumed by LifeUSA. LifeUSA invests these
premiums for the purpose of providing future benefits to its
policyholders.
Refer to Note 2 (Reinsurance) to the December 31, 1995 consolidated financial
statements for further details regarding the Company's reinsurance agreements.
REVENUES. Total revenues for the first quarter of 1996 increased by 23% to $73.6
million compared to $59.9 million for the first quarter of 1995. The increase
was primarily due to the growth in invested assets and account values in force,
net realized gains recorded on investment sales and the increase in commissions
and expense allowances associated with changing the percentage of business
retained by LifeUSA to 25% on October 1, 1995, partially offset by the effect of
the decline in collected premiums on the amount of commissions and expense
allowances in the first quarter of 1996 compared to the first quarter of 1995.
Policyholder charges, which represent the amounts assessed against policy
account balances for the cost of insurance, policy administration and
surrenders, increased 35%, or $2.9 million, in the first quarter of 1996
compared to the first quarter of 1995 reflecting the growth in LifeUSA's account
values in force.
The increase in net investment income of 35%, or $8.0 million, in the first
quarter of 1996 compared to the first quarter of 1995 resulted from the growth
in invested assets (fixed maturity investments and cash and cash equivalents) to
$1.76 billion at March 31, 1996, from $1.41 billion at March 31, 1995, partially
offset by a decrease in the weighted average annual yield on invested assets
(exclusive of realized and unrealized gains and losses) to 7.41% at March 31,
1996, compared to 7.53% at March 31, 1995.
In accordance with generally accepted accounting principles, net realized gains
(losses) on investments had the following impact on the amortization of deferred
policy acquisition costs, other benefits to policyholders and pretax income for
the first quarter of 1996 and 1995, respectively (in thousands):
<TABLE>
<CAPTION>
Increase (decrease) in
--------------------------------------------------
Net realized Amortization of
gains (losses) deferred policy Other benefits Pretax
on investments acquisition costs to policyholders income
-------------- ----------------- ---------------- ------
Three months ended:
<S> <C> <C> <C> <C>
March 31, 1996 $1,679 $618 $445 $616
March 31, 1995 (157) (57) (39) (61)
</TABLE>
Net commissions and expense allowances on premiums collected on reinsured
policies and service fees on business produced for Allianz Life increased 4%, or
$1.1 million, in the first quarter of 1996 compared to the first quarter of 1995
despite the decline in collected premiums in the 1996 quarter. The increase was
due primarily to the decrease in retention of new business produced to 25% from
50% which became effective October 1, 1995.
BENEFITS AND EXPENSES. Total benefits and expenses were $66.2 million in the
first quarter of 1996 compared to $54.0 million in the first quarter of 1995.
The increase in total benefits and expenses of 23% was primarily due to growth
in account values in force, partially offset by decreased production.
The increase in interest credited to policyholder account values of 33%, or $6.1
million, in the first quarter of 1996 compared to the first quarter of 1995
reflects the growth in LifeUSA's account values in force.
The increase in other benefits to policyholders of 64%, or $1.8 million, in the
first quarter of 1996 compared to the first quarter of 1995 reflects the growth
in LifeUSA's account values in force and the additional accrual of bonuses to be
paid to policyholders (the primary component of other benefits to policyholders)
that is generated by the aforementioned net realized gains (losses) on
investments.
Amortization of deferred policy acquisition costs increased 36%, or $1.6
million, in the first quarter of 1996 compared to the first quarter of 1995
reflecting the increase in gross profits due to a larger, more mature block of
retained in force business. The amortization of deferred policy acquisition
costs was also affected by the amount of net realized gains (losses) on
investments discussed previously. The impact on estimated gross profits of
actual policy experience, including rates for lapses, surrenders and
annuitizations, is consistent with the assumptions in the models used by LifeUSA
to compute deferred policy acquisition cost amortization. Utilizing the actual
policy experience and appropriate assumptions for future periods, these models
indicate that deferred policy acquisition costs are fully recoverable.
Commissions to agents increased 1%, or $100,000, in the first quarter of 1996
compared to the first quarter of 1995. The increase was primarily due to less
commissions being deferred in the first quarter of 1996, when 25% of new
business produced was retained by LifeUSA, than were deferred in the first
quarter of 1995, when 50% of new business produced was retained. The impact of
the decrease in retention was partially offset by the decrease in collected
premiums discussed earlier.
Taxes, licenses and fees decreased 9%, or $100,000, in the first quarter of 1996
compared to the first quarter of 1995. This was primarily due to the decrease in
premium taxes associated with the decrease in collected premiums discussed
earlier, partially offset by an increase in the reserve established for future
guaranty fund assessments during the first quarter of 1996.
Operating expenses increased 27%, or $2.7 million in the first quarter of 1996
compared to the first quarter of 1995 as a result of the combination of the
increase in the number of LifeUSA's policies in force and less operating
expenses being deferred in the first quarter of 1996, when 25% of new business
produced was retained by LifeUSA, than were deferred in the first quarter of
1995, when 50% of new business produced was retained.
NET INCOME. Net income was $4.6 million or $.21 per share in the first quarter
of 1996, compared to $3.7 million or $.18 per share in the first quarter of
1995, an increase of 25%. Net income, excluding the effect of net realized gains
(losses) on investments and an increase in the reserve established for future
guaranty fund assessments, increased by 16% to $4.4 million or $.20 per share in
the first quarter of 1996 from $3.8 million or $.18 per share in the first
quarter of 1995. The increase in net income in the first quarter of 1996
compared to the first quarter of 1995 was primarily due to the growth in
invested assets and account values in force and the increase in commissions and
expense allowances associated with changing the percentage of business retained
by LifeUSA to 25% on October 1, 1995, partially offset by a decline in collected
premiums in the first quarter of 1996 compared to the first quarter of 1995.
LIQUIDITY AND CAPITAL RESOURCES
Through March 1996, the Company's primary sources of cash were (i) service fees
received by the Company for business produced by LifeUSA's agents for Allianz
Life, (ii) management fees from LifeUSA, (iii) proceeds from the $30 million
convertible subordinated debenture purchased by Allianz Life in February 1995,
and (iv) interest earned on invested assets. A substantial portion of the
Company's operating expenses is attributable to services provided to LifeUSA,
such as employees, data processing, facilities and supplies, which are
reimbursed by LifeUSA through management fees. LifeUSA is expected to have
sufficient cash to provide reimbursement through 1996, based on currently
anticipated life insurance and annuity sales and on the continuation of
acceptable reinsurance arrangements. The Company does not anticipate dividend
distributions from LifeUSA during 1996 because funds generated by LifeUSA are
expected to be utilized to pay management fees to the Company and other
operating expenses and to support capital requirements associated with the
retention of a portion of new life insurance and annuity business produced by
LifeUSA agents. In addition, LifeUSA's ability to pay dividends is subject to
compliance with Minnesota insurance laws and regulations.
The Company's cash needs consist of (i) capital contributions to LifeUSA to
permit increases in sales volume and retention or assumption of new life
insurance and annuity business produced by LifeUSA agents and to provide LifeUSA
sufficient capital and surplus to maintain acceptable capital ratios, (ii)
commission advances to agents, (iii) payment of interest on the Company's
convertible subordinated debentures, (iv) operating expenses, including expenses
in connection with the efforts to increase the production of LifeUSA's existing
agents and expand the size of LifeUSA's field force, and (v) investments in
marketing organizations expected to increase premium production volume for
LifeUSA. Management believes that the combination of the anticipated increase in
cash flow associated with decreasing the retention of new life insurance and
annuity business written directly by LifeUSA and the assumption of new business
produced by LifeUSA agents for Allianz Life to 25%, along with the $14 million
in proceeds that remained at March 31, 1996 from the $30 million convertible
subordinated debenture issued to Allianz Life in February 1995 and cash
generated by operations will provide sufficient capital resources to support the
capital needs of LifeUSA and meet all the Company's cash needs through the end
of 1996, with the possible exception of cash required for investments in
marketing organizations.
The Company has developed a strategy to increase premium production from
LifeUSA's existing agents and from new production sources through investments in
marketing organizations. The investments may be in the form of cash or the
Company's stock through a loan to or an equity investment in marketing
organizations. The amount of the investment will relate to the increase in
business produced for LifeUSA by the marketing organization. During 1996, the
Company has signed marketing agreements with three national marketing
organizations to market LifeUSA life and annuity products for the first time and
signed a letter of intent to acquire a national marketing organization which has
been contracted with LifeUSA for seven years. The Company is currently in
discussions with several other marketing organizations. There can be no
assurances, however, that such investments will enhance the Company's premium
volume or income.
On April 18, 1996, the Company announced that it had received a commitment from
two of its reinsurers to provide a long term line of credit in the amount of $25
million. The Company is currently negotiating the terms of the definitive
agreement. Funds drawn against the line will be used to fund investments in
marketing organizations expected to increase production for LifeUSA and for
general corporate purposes, including capital contributions to LifeUSA as may be
needed for LifeUSA to maintain acceptable levels of capital and surplus for
regulatory purposes.
For LifeUSA to assume or retain life insurance and annuity business, LifeUSA
must maintain a sufficient level of statutory capital and surplus as established
by the regulatory authorities in the jurisdictions where LifeUSA is licensed to
do business. As LifeUSA retains business, it is required to expense commissions
and other policy issuance costs for statutory accounting purposes and to
establish statutory reserves for policy benefits, thereby creating a statutory
loss and reducing statutory surplus in the first year of the policy. The
anticipated profits from the retained or assumed business are realized over the
remaining period that the policies are in force. In order to continue to retain
new business, the Company will need to make capital contributions to LifeUSA
until such time as the aggregate statutory profits are sufficient to maintain
adequate levels of statutory capital and surplus.
As of March 31, 1996, LifeUSA had statutory capital and surplus for regulatory
purposes of $78.6 million compared to $75.7 million at December 31, 1995. As the
life insurance and annuity business produced by LifeUSA agents increases,
LifeUSA expects to continue to satisfy statutory capital and surplus
requirements through statutory profits on its mature block of retained inforce
business, through the continued reinsurance of a portion of its new business,
and through additional capital contributions by the Company. During the first
quarter of 1996, the Company contributed to LifeUSA a total of $500,000 in order
to maintain LifeUSA's desired levels of statutory capital and surplus.
From July 1, 1993 through September 30, 1995, LifeUSA retained 50% of the new
life insurance and annuity business written by LifeUSA and assumed 50% of the
new life insurance and annuity business produced by LifeUSA's agents for Allianz
Life. Effective October 1, 1995, the Company decided to reduce the amount of
business retained or assumed by LifeUSA to 25% from 50% in order to reduce the
need for additional capital and boost current earnings potential. Assuming the
current level of premium production and the anticipated statutory profits from
the growing block of mature inforce business, management expects that LifeUSA
may not need significant capital contributions from the Company to retain or
assume 25% of the new business produced in 1996. The Company may further alter
the level of its retention and assumption of new business depending upon future
levels of production, capital needs and availability of alternative financing.
REGULATORY ENVIRONMENT. LifeUSA is subject to regulation in the various states
in which it is authorized to do business. The laws of these states establish
supervisory agencies with broad administrative powers related to granting and
revoking licenses to transact business, approving the form and content of
policies, reviewing the advertising and illustration of policies, licensing
agents, establishing reserve requirements and regulating the type and amount of
investments. Such regulations are primarily intended to protect policyholders.
The Company is also regulated in several states as an insurance holding company.
Recently, the insurance regulatory framework has been placed under increased
scrutiny by various states and by the National Association of Insurance
Commissioners (NAIC). Regulatory initiatives such as risk-based capital
standards have been undertaken to identify inadequately capitalized companies
and to reduce the risk of company insolvencies. The NAIC has established
risk-based capital standards to determine the capital requirements of a life
insurance company based upon the risks inherent in its operations. These
standards require the computation of a risk-based capital amount which is then
compared to a company's actual total adjusted capital. The computation involves
applying factors to various financial data to address four primary risks: asset
default, adverse insurance experience, interest rate risk and external events.
These standards mandate regulatory attention when the percentage of total
adjusted capital to authorized control level risk-based capital is below certain
levels. LifeUSA's percentage of total adjusted capital to authorized control
level risk-based capital is well in excess of a ratio which would require
regulatory attention. The Company expects that it will contribute capital to
LifeUSA in order to maintain its percentage in excess of such ratios during
1996.
The NAIC has also considered changes in the model law for nonforfeiture values
of deferred annuity products, which are LifeUSA's most popular products. In 1994
and 1995, LifeUSA made presentations to the Life/Health Actuarial Task Force of
the NAIC, whose responsibility it is to develop a new model law for
nonforfeiture values of deferred annuities. LifeUSA demonstrated that its
two-tier products use longer term, higher yielding investments to provide higher
retirement values to policyholders, while decreasing disintermediation and
solvency risks to LifeUSA. Although it is possible that the NAIC will adopt a
model law addressing the nonforfeiture values of annuities in the future, such
adoption is not currently anticipated to have a significant impact on LifeUSA.
In December 1995, the NAIC passed a model law for disclosure in life insurance
policy illustrations. This law is not anticipated to have a significant impact
on LifeUSA when it becomes effective on January 1, 1997.
Insurance laws also require LifeUSA to file detailed periodic reports with the
regulatory agencies in each of the states in which it writes business, and these
agencies may examine LifeUSA's business and accounts at any time. Under NAIC
rules, one or more of the regulatory agencies will periodically examine LifeUSA,
normally at three-year intervals, on behalf of the states in which LifeUSA is
licensed.
In April 1996, the B++ (Very Good) rating initially assigned LifeUSA in June
1994 was reaffirmed by the A.M. Best Company. The A. M. Best Company assigns the
B++ rating to companies which, in their opinion, have achieved very good overall
performance when compared to the standards established by the A. M. Best
Company. B++ companies have a good ability to meet their obligations to
policyholders over a long period of time. The Company may need to make
additional capital contributions to LifeUSA to maintain its B++ rating because
of criteria the A. M. Best Company may apply in the future.
INVESTMENTS. As of March 31, 1996, the Company had cash, cash equivalents and
fixed maturity investments on a consolidated basis totaling $1.76 billion,
including $7.5 million in restricted deposits with state insurance authorities
regulating LifeUSA. The Company does not hold any derivative financial
instruments, as defined by SFAS No. 119, "Disclosures about Derivative Financial
Instruments and Fair Value of Financial Instruments." The following table
summarizes the carrying and market values of each investment category held at
March 31, 1996 (in thousands):
<TABLE>
<CAPTION>
Carrying % of Market % of
Value Total Value Total
----- ----- ----- -----
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 33,531 1.91% $ 33,531 1.90%
Government, Treasury and Agency notes and bonds 100,354 5.72 103,607 5.88
Mortgage pass-throughs 31,929 1.82 31,927 1.81
Agency Collateralized Mortgage Obligations:
CMO - Sequential pay 6,742 .38 6,730 .38
CMO - Planned amortization class 623,483 35.52 622,848 35.36
CMO - Accretion directed class 23,440 1.34 23,540 1.34
CMO - Targeted amortization class 11,831 .67 12,624 .72
Investment grade corporate securities:
AAA+ to AAA- 32,172 1.83 32,841 1.86
AA+ to AA- 135,948 7.75 136,564 7.75
A+ to A- 359,411 20.48 361,291 20.51
BBB+ to BBB- 396,263 22.58 396,174 22.49
Non-investment grade -- -- -- --
----------- ------ ----------- -----
Total $ 1,755,104 100.00% $ 1,761,677 100.00%
=========== ====== =========== ======
</TABLE>
As part of its asset and liability management practices, LifeUSA manages
investments and credited interest rates to produce a net investment spread
consistent with priced-for expectations. As of March 31, 1996, the weighted
average credited interest rate for deferred annuities and life insurance
policies was 4.98% and the weighted average yield on the assets backing
liabilities was 7.48%. As of December 31, 1995, this weighted average credited
interest rate was 5.14% and the weighted average yield on the assets backing
liabilities was 7.52%. Investment income from the assets backing liabilities
exceeded interest credited to policyholders by $5.3 million during the first
quarter of 1996. The investment portfolio is managed primarily by allocating new
cash flows into investments which have yield, maturity and other characteristics
suitable for LifeUSA's expected policyholder liabilities. Consistent with
LifeUSA's asset and liability management practices, as of March 31, 1996, the
modified duration of LifeUSA's fixed income securities was 6.23 years, compared
to 6.26 years as of December 31, 1995.
The percentage of the total market value of the Company's portfolio that is
comprised of investment grade corporate obligations is 53% at March 31, 1996.
With each corporate security acquisition, LifeUSA's external managers perform a
comprehensive analysis of the credit implications and outlook of the issuing
corporation and industry. Ongoing procedures for monitoring and assessing any
potential deterioration or downgrade in credit quality are also in place. The
Company's guideline for corporate securities does not allow the purchase of
securities that are rated below investment grade by Moody's Investors Service
and/or Standard and Poor's Corporation.
The remainder of the Company's portfolio is comprised of government and
government agency obligations. Government and government agency obligations are
predominantly held in the form of Planned Amortization Class (PAC) CMOs, the
most conservative type of CMO issued. These CMOs are specifically structured to
provide the highest degree of protection against swings in repayments caused
primarily by changes in interest rates and have virtually no risk of default.
These securities are well-suited to fund the payment of the liabilities they
support.
Currently, the decision of which asset type to invest in is dictated by market
conditions and relative values within the respective markets at the time of
purchase. Management believes that these asset types will allow the Company to
maintain high quality, consistent yields and proper maturities for the overall
portfolio.
As of March 31, 1996, the Company held 46%, or $796 million, of the total market
value of its long term securities as available for sale. The Company believes
that this percentage is a prudent level that will allow enough liquidity to meet
any adverse cash flow experience. The Company continues to classify a
significant portion of its investment securities as held to maturity based on
its intent to hold such securities to maturity. A key feature of LifeUSA's
products is the provision of bonuses to encourage policyholders to withdraw
their funds over settlement periods lasting at least five years. Policyholders
taking cash settlements do not receive the bonuses. This feature allows the
Company to hold a significant amount of assets to maturity. Insurance
regulations require LifeUSA to perform an asset adequacy analysis each year to
determine if the assets are sufficient to fund future obligations. The Company's
asset adequacy analysis indicates that the assets are sufficient to fund future
obligations. The Company continually monitors and modifies the allocation of new
assets between held to maturity and available for sale as deemed prudent based
on the continuing analysis of cash flow projections and liquidity needs.
Forward-looking statements in this Report are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. There are
certain important factors that could cause results to differ materially from
those anticipated by some of the statements made above. Investors are cautioned
that all forward-looking statements involve risks and uncertainty. In addition
to the factors discussed above, among the other factors that could cause actual
results to differ materially are the following: interest rate changes,
regulatory changes, and competition. Additional information concerning those and
other factors is contained in the Company's Securities and Exchange Commission
filings, including but not limited to the Form 10-K, copies of which are
available from the Company without charge.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of the date of this Report, the Company is not involved in any material legal
proceeding.
ITEM 2. CHANGES IN SECURITIES
During the period covered by this Report, the constituent instruments defining
the rights of the holders of the common stock were not materially modified, nor
were the rights evidenced by the common stock materially limited or qualified by
the issuance or modification of any other class of securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
During the period covered by this Report, there has been no material default
with respect to any indebtedness of the Registrant or its subsidiary.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
(10) Consulting Agreement dated April 17, 1996 between Life USA
Holding, Inc. and Joseph W. Carlson
(11) Statement of computation of per share earnings
(27) Financial data schedule
(b) None.
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.
Life USA HOLDING, INC.
(Registrant)
Date: May 10, 1996
/s/ Mark A. Zesbaugh
Mark A. Zesbaugh
Executive Vice President
Chief Financial Officer
CONSULTING AGREEMENT
THIS AGREEMENT, made and entered as of April 17, 1996 by and between
LIFE USA HOLDING, INC., a Minnesota corporation (the "Company"), and JOSEPH W.
CARLSON, a resident of Wisconsin ("Carlson"),
WHEREAS, Carlson has been employed the Company as its President and
Secretary until his retirement on April 16, 1996 and as its Chief Financial
Officer and Treasurer from the Company's inception until January 1995; and
WHEREAS, Carlson retired on April 16, 1996 as an executive officer of
the Company and the Company desires to be assured of the services of Carlson as
a consultant on the terms and conditions set forth in this Agreement,
NOW, THEREFORE, in consideration of these premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. Consulting Services. During the Consulting Period (as defined below),
the Company hereby retains Carlson to render consulting services and advice to
or on behalf of the Company and its subsidiaries, including LifeUSA Insurance
Company and LifeUSA Securities, Inc., and Carlson agrees to provide such
consulting services in accordance with this Agreement. During the Consulting
Period, Carlson shall render to the Company or its subsidiaries such consulting
and advisory services as the Company may reasonably request, including but not
limited to finance and accounting matters, financial projections, reinsurance
matters and administration, and shall consult with officers of the Company or
its subsidiaries from time to time regarding any policy or operational matters
concerning the Company or its subsidiaries as to which such officers shall
reasonably request his knowledge or advice; provided that the Company may not,
without the consent of Carlson, request extensive travel by Carlson or
unreasonably interfere with Carlson's other activities. In addition, Carlson
will continue to serve on the Board of Directors of the Company and LifeUSA
Insurance Company without any additional compensation or directors fees (whether
in cash or stock options) until the annual meeting of shareholders in 1997. The
term "Consulting Period" shall mean the one year period beginning on the date
hereof and ending on April 16, 1997.
2. Compensation. In consideration of the consulting services to be
provided by Carlson to the Company and its subsidiaries during the Consulting
Period and the other covenants and agreements contained in this Agreement, the
Company shall pay Carlson the sum of Two Hundred Thousand and No/100 Dollars
($200,000.00) per annum in equal monthly installments commencing on the first
day of each month during the Consulting Period. Upon submission of appropriate
receipts therefor and subject to the prior approval of the proper officers of
the Company, Carlson shall be reimbursed for all out-of-pocket expenses
reasonably incurred by him for or on behalf of the Company or the subsidiaries
in connection with services requested by the Company and provided by him. In
addition, during the Consulting Period, the Company shall provide Carlson such
health insurance benefits as the Company provides to its employees to the same
extent as the Company provides health insurance benefits to its employees.
3. Relationship. It is expressly understood and intended by the parties
hereto that Carlson, in performing the services to be performed by him
hereunder, shall be acting as an independent contractor and not as an employee
of the Company, and that Carlson shall not be entitled to any employee benefits
of the Company.
4. Confidentiality. Carlson will hold in a fiduciary capacity for the
benefit of the Company or its subsidiaries all secret or confidential
information or data concerning the Company or its subsidiaries obtained by
Carlson prior hereto or during his services as consultant hereunder and will
not, during the Consulting Period or after termination of the Consulting Period,
communicate or divulge any such information, knowledge or data to any person,
firm or corporation or other entity other than the Company, employees of the
Company or its subsidiaries who need such information to perform their duties,
and persons, firms or corporations designated in writing by the Company.
5. Non-competitive Services. During the consulting Period, Carlson
agrees that he shall not, without the prior written consent of the Company,
"engage or be interested, directly or indirectly," whether alone or together
with or on behalf of or through any other person, firm, association, trust,
venture or corporation, whether as sole proprietor, partner, shareholder, agent,
officers, director, employee, technical adviser, lender, trustee, beneficiary,
or otherwise, in any "restricted business" within the United States. The term
"restricted business" means the life insurance business. The term "engage or be
interested, directly or indirectly" shall include giving advice or technical or
financial assistance, by loan, guarantees, stock transactions or in any manner
to any person, firm, association, trust, venture or corporation engaged in a
"restricted business" in the United States other than the Company or its
subsidiaries, except for a passive investment in any public company provided
that such investment shall not exceed 1% of any class of such company's
securities.
6. Severability. In the event that any provision of this Agreement is
considered by a court of competent jurisdiction to be excessive in its duration
or in the area to which it applies, it shall be considered modified and valid
for such duration and for such area as said court may determine reasonable under
the circumstances.
7. Injunctive Relief. In recognition of the irreparable harm that a
violation of the restrictive covenants under paragraph 5 would cause to the
Company, Carlson agrees that, in addition to any other relief afforded by law,
an injunction against such violation or violations may be issued against him and
every other person concerned thereby, it being the understanding of the parties
hereto that both damages and an injunction shall be proper modes of relief and
are not to be considered as alternative remedies.
8. Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given when delivered in person or two days after such notice has been
transmitted by telegram or telex, or by registered or certified mail (postage
prepaid, return receipt requested) to the respective parties as follows:
(a) If to the Company:
Life USA Holding, Inc.
Suite 700 Interchange North Building
300 South Highway 169
Minneapolis, MN 55425
Attn: Chief Executive Officer
(b) If to Carlson:
Joseph W. Carlson
1266 Highway 35
Hudson, WI 54016
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof).
9. Governing Law and Jurisdiction. This Agreement shall be governed by
and construed and enforced in accordance with the laws of the State of Minnesota
(other than the choice of law principles thereof). The parties hereto consent
and agree that any action arising out of this Agreement shall be maintained in
any court of competent jurisdiction in Hennepin County, Minnesota.
10. Entire Agreement. This Agreement contains all of the terms and
conditions agreed upon by the parties regarding the subject matter hereof and
supersedes all prior understandings, and may not be modified or amended except
by a writing signed by both parties.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
LIFE USA HOLDING, INC.
By /s/ Robert W. MacDonald
Robert W. MacDonald
Chairman and Chief Executive
Officer
/s/ Joseph W. Carlson
Joseph W. Carlson
EXHIBIT 11
<TABLE>
<CAPTION>
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
Life USA HOLDING, INC.
(Dollars in thousands, except per share amounts)
(Unaudited)
Three months ended March 31,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
PRIMARY
Average shares outstanding and to be issued 20,365,656 20,215,930
Net effect of dilutive stock options and warrants
having exercise prices less than the
average market price of the common
stock using the treasury stock method 138,467 187,085
Common equivalent shares assuming conversion
of convertible subordinated debentures 2,400,000 1,120,000
----------- -----------
Total common and common equivalent shares 22,904,123 21,523,015
=========== ===========
Net income $ 4,621 $ 3,706
Add convertible subordinated debenture interest,
net of federal income tax effect 218 103
----------- -----------
Adjusted net income $ 4,839 $ 3,809
=========== ===========
Per common and common equivalent share amount $ .21 $ .18
=========== ===========
FULLY DILUTED
Average shares outstanding and to be issued 20,365,656 20,215,930
Net effect of dilutive stock options and
warrants having exercise prices less than
the greater of the average or the
year-end market price of the common
stock using the treasury stock method 138,456 206,361
Common equivalent shares assuming conversion
of convertible subordinated debentures 2,400,000 1,120,000
----------- -----------
Total common and common equivalent shares 22,904,112 21,542,291
=========== ===========
Net income $ 4,621 $ 3,706
Add convertible subordinated debenture interest,
net of federal income tax effect 218 103
----------- -----------
Adjusted net income $ 4,839 $ 3,809
=========== ===========
Per common and common equivalent share amount $ .21 $ .18
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 796,446
<DEBT-CARRYING-VALUE> 925,127
<DEBT-MARKET-VALUE> 931,699
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,741,920
<CASH> 33,531
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 204,166
<TOTAL-ASSETS> 3,977,021
<POLICY-LOSSES> 3,692,591
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 3,483
<NOTES-PAYABLE> 36,030
0
0
<COMMON> 203
<OTHER-SE> 151,209
<TOTAL-LIABILITY-AND-EQUITY> 3,977,021
0
<INVESTMENT-INCOME> 30,926
<INVESTMENT-GAINS> 1,679
<OTHER-INCOME> 40,949
<BENEFITS> 28,899
<UNDERWRITING-AMORTIZATION> 6,168
<UNDERWRITING-OTHER> 31,165
<INCOME-PRETAX> 7,322
<INCOME-TAX> 2,701
<INCOME-CONTINUING> 4,621
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,621
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
