UNITED STATES
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
September 30, 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 September 30, 1996
----------------- ---------------------------------
Common Stock, 20,875,101
Par Value $.01 Per Share
Life USA HOLDING, INC.
Securities and Exchange Commission Form 10-Q
for the Third Quarter Ended September 30, 1996
I N D E X
---------
Page
Number
------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheet (Unaudited)
September 30, 1996 and December 31, 1995.......................3-4
Condensed Consolidated Statement of Income
(Unaudited) Three months and nine months ended
September 30, 1996 and September 30, 1995.......................5
Condensed Consolidated Statement of Cash Flows
(Unaudited) Nine months ended September 30, 1996
and September 30, 1995...........................................6
Notes to Condensed Consolidated Financial Statements
(Unaudited)......................................................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................8-18
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings...............................................19
Item 2. Changes in Securities...........................................19
Item 3. Defaults Upon Senior Securities.................................19
Item 4. Submission of Matters to a Vote of Security Holders.............19
Item 5. Other Information...............................................19
Item 6. Exhibits and Reports on Form 8-K................................19
SIGNATURES:...................................................................20
<TABLE>
<CAPTION>
Life USA HOLDING, INC.
Condensed Consolidated Balance Sheet
(Dollars in thousands)
(Unaudited)
September 30, December 31,
1996 1995
------------- ------------
ASSETS
Investments:
Fixed maturity investments:
<S> <C> <C>
Available for sale, at fair value (amortized cost:
$842,867 at September 30, 1996 and $761,553 at
December 31, 1995) $ 839,393 $ 812,195
Held to maturity, at amortized cost (fair value:
$981,284 at September 30, 1996 and $953,167 at
December 31, 1995) 986,142 908,670
Policy loans 23,248 19,789
---------- ----------
Total investments 1,848,783 1,740,654
Cash and cash equivalents 31,049 33,222
Accrued investment income 26,521 23,510
Future policy benefits recoverable and amounts due
from reinsurers 2,137,876 1,862,311
Deferred policy acquisition costs 219,122 175,296
Other assets 37,854 32,546
---------- ----------
$4,301,205 $3,867,539
========== ==========
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Life USA HOLDING, INC.
Condensed Consolidated Balance Sheet (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
September 30, December 31,
1996 1995
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits $ 3,994,015 $ 3,566,012
Other policyholders' funds 7,643 4,453
Amounts due reinsurers 28,381 27,303
Accrued commissions to agents 9,118 11,364
Taxes, licenses and fees payable 21,548 18,913
Accounts payable 4,965 4,771
Convertible subordinated debentures 36,030 36,030
Deferred income taxes 13,965 19,640
Other liabilities 25,590 22,157
----------- -----------
Total liabilities 4,141,255 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, 20,875,101 shares issued and
outstanding (20,279,343 shares at December 31, 1995) 209 203
Common stock to be issued, 53,946 shares
(45,404 shares at December 31, l995) 490 382
Additional paid-in capital 81,890 80,931
Net unrealized gain (loss) on fixed maturity
investments - available for sale (2,362) 12,707
Retained earnings 79,723 62,673
----------- -----------
Total shareholders' equity 159,950 156,896
----------- -----------
$ 4,301,205 $ 3,867,539
=========== ===========
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Life USA HOLDING, INC.
Condensed Consolidated Statement of Income
(Dollars in thousands, except per share amounts)
(Unaudited)
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Policyholder charges $ 11,291 $ 9,758 $ 35,138 $ 26,656
Net investment income 32,948 28,986 95,519 78,738
Net realized gains (losses) on investments -- -- 1,671 (109)
Commissions and expense allowances, net 39,527 25,399 102,275 88,730
Other 266 59 412 186
------------ ------------ ------------ ------------
Total revenues 84,032 64,202 235,015 194,201
Benefits and expenses:
Interest credited to policyholder account values 25,120 22,353 73,604 60,860
Other benefits to policyholders 4,571 2,695 13,920 8,366
Amortization of deferred policy acquisition costs 5,660 5,613 18,571 15,595
Commissions 23,149 15,222 59,467 53,106
Taxes, licenses and fees 1,186 1,563 3,523 4,412
Operating expenses 13,670 10,730 38,980 32,203
------------ ------------ ------------ ------------
Total benefits and expenses 73,356 58,176 208,065 174,542
------------ ------------ ------------ ------------
Income before income taxes 10,676 6,026 26,950 19,659
Income taxes 3,914 2,203 9,900 7,172
------------ ------------ ------------ ------------
Net income $ 6,762 $ 3,823 $ 17,050 $ 12,487
============ ============ ============ ============
Income per common and common equivalent share:
Primary $ .30 $ .18 $ .76 $ .58
============ ============ ============ ============
Fully diluted $ .30 $ .18 $ .76 $ .58
============ ============ ============ ============
Number of shares used in per share calculation:
Primary 23,478,591 22,847,581 23,243,705 22,409,958
Fully diluted 23,482,537 22,851,810 23,253,123 22,417,772
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Life USA HOLDING, INC.
Condensed Consolidated Statement of Cash Flows
(Dollars in thousands)
(Unaudited)
Nine months ended September 30,
-------------------------------
1996 1995
------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 17,050 $ 12,487
Adjustments to reconcile net income to net
cash used in operating activities:
Accretion of discount on investments, net (1,745) (3,264)
Net realized (gains) losses on investments (1,671) 109
Policy acquisition costs deferred (29,348) (53,807)
Amortization of deferred policy acquisition costs 18,571 15,595
Other changes (5,332) 11,174
--------- ---------
Net cash used in operating activities (2,475) (17,706)
Cash flows from investing activities: Fixed maturity
investments-available for sale:
Purchases (123,337) (158,414)
Proceeds from sales 37,682 11,219
Proceeds from maturities and principal payments
on mortgage-backed securities 6,210 3,818
Fixed maturity investments-held to maturity:
Purchases (82,212) (242,033)
Proceeds from maturities and principal payments
on mortgage-backed securities 6,287 6,714
--------- ---------
Net cash used in investing activities (155,370) (378,696)
Cash flows from financing activities:
Receipts from universal life and investment products 223,131 391,637
Withdrawals on universal life and investment products (153,040) (101,785)
Interest credited to policyholder account values 73,604 60,860
Proceeds from convertible subordinated debenture issuance -- 30,000
Other financing activities 11,977 6,859
--------- ---------
Net cash provided by financing activities 155,672 387,571
--------- ---------
Net decrease in cash and cash equivalents (2,173) (8,831)
Cash and cash equivalents at beginning of the period 33,222 57,720
--------- ---------
Cash and cash equivalents at end of the period $ 31,049 $ 48,889
========= =========
See accompanying notes
</TABLE>
Life USA HOLDING, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 1996
(Unaudited)
1. The condensed consolidated balance sheet of Life USA Holding, Inc. (the
Company) at September 30, 1996 and the related condensed consolidated
statements of income for the three-month and nine-month periods ended
September 30, 1996 and 1995, and cash flows for the nine-month periods
ended September 30, 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-month and nine-month periods ended September 30,
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 (loss) on fixed maturity investments -
available for sale included in shareholders' equity consists of the
following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Gross unrealized gain (loss) on fixed maturity
investments - available for sale $ (3,474) $ 50,642
Adjustments for:
Deferred tax (liability) asset 1,216 (17,725)
Deferred tax asset valuation allowance (1,375) --
Deferred policy acquisition costs 1,956 (31,093)
Deferred tax asset (liability) (685) 10,883
-------- --------
Net unrealized gain (loss) on fixed maturity
investments - available for sale $ (2,362) $ 12,707
======== ========
</TABLE>
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), LifeUSA Securities, Inc. and LifeUSA Marketing,
Inc. (LifeUSA Marketing) 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.
Since April 1, 1991, LifeUSA has ceded a substantial portion of its new life
insurance and annuity business to the following three reinsurers (the
Reinsurers):
* Employers Reassurance Corporation, a subsidiary of Employers Reinsurance
Corporation, a member of the General Electric Company group (Employers);
* Munich American Reassurance Company, a subsidiary of Munich Reinsurance
Company, one of the largest German insurance companies (Munich); and
* Republic-Vanguard Life Insurance Company, a member of the Winterthur Swiss
Insurance Group, one of the largest Swiss insurance companies
(Republic-Vanguard).
Effective October 1, 1995, LifeUSA began ceding 75% of its new life insurance
and annuity business to the Reinsurers. From July 1, 1993 through September 30,
1995, LifeUSA ceded 50% of its new life insurance and annuity business to the
Reinsurers. LifeUSA receives commissions and expense allowances on business
ceded to the Reinsurers.
Since 1987, under the terms of agreements between the Company and Allianz Life
Insurance Company of North America (Allianz Life), LifeUSA agents have produced
life insurance and annuity business on Allianz Life policies which are similar
to LifeUSA policies. Effective October 1, 1995, LifeUSA began assuming 25% of
the new life insurance and annuity business produced by its agents for Allianz
Life. From July 1, 1993 through September 30, 1995, LifeUSA assumed 50% of the
new life insurance and annuity business produced by LifeUSA agents for Allianz
Life. The Company receives service fees on the business produced by LifeUSA
agents for Allianz Life.
At September 30, 1996 and 1995, life insurance account values in force (net of
reinsurance) aggregated $81.8 million and $64.4 million, respectively, and
annuity account values in force (net of reinsurance) aggregated $1.64 billion
and $1.53 billion, respectively.
RESULTS OF OPERATIONS
PREMIUMS. Total collected premiums in the third quarter of 1996, including
premiums on policies produced by LifeUSA agents for Allianz Life, increased by
35% to $307.9 million from $228.2 million in the third quarter of 1995. Total
collected premiums for the first nine months of 1996 were $790.4 million, a 2%
decrease from $808.5 million for the same period in 1995. The following table
shows the amounts of premiums collected, ceded and retained for the comparable
quarters and nine month periods (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Collected Premiums(1):
LifeUSA:
Life:
First year $ 2,895 $ 4,082 $ 10,196 $ 12,368
Single and renewal 12,395 11,034 36,529 32,717
-------- -------- -------- --------
Total Life 15,290 15,116 46,725 45,085
Annuities 165,919 140,095 463,141 485,294
-------- -------- -------- --------
Total LifeUSA collected premiums 181,209 155,211 509,866 530,379
Allianz Life:
Life:
First year 864 1,177 2,571 3,768
Single and renewal 3,735 3,251 11,074 9,598
-------- -------- -------- --------
Total Life 4,599 4,428 13,645 13,366
Annuities 122,052 68,580 266,867 264,732
-------- -------- -------- --------
Total Allianz Life collected premiums 126,651 73,008 280,512 278,098
-------- -------- -------- --------
Total collected premiums $307,860 $228,219 $790,378 $808,477
======== ======== ======== ========
Collected Premiums Not Retained or Assumed(2):
LifeUSA:
Life:
First year $ 2,017 $ 2,040 $ 6,529 $ 6,182
Single and renewal 7,963 7,447 23,768 22,374
-------- -------- -------- --------
Total Life 9,980 9,487 30,297 28,556
Annuities 122,237 70,895 336,317 246,121
-------- -------- -------- --------
Total LifeUSA collected premiums not retained 132,217 80,382 366,614 274,677
Allianz Life:
Life:
First year 620 588 1,714 1,884
Single and renewal 2,156 1,926 6,437 5,715
-------- -------- -------- --------
Total Life 2,776 2,514 8,151 7,599
Annuities 89,728 34,792 192,482 134,564
-------- -------- -------- --------
Total Allianz Life collected premiums not assumed 92,504 37,306 200,633 142,163
-------- -------- -------- --------
Total collected premiums not retained or assumed $224,721 $117,688 $567,247 $416,840
======== ======== ======== ========
Retained or Assumed Premiums(3):
LifeUSA:
Life:
First year $ 878 $ 2,042 $ 3,667 $ 6,186
Single and renewal 4,432 3,587 12,761 10,343
-------- -------- -------- --------
Total Life 5,310 5,629 16,428 16,529
Annuities 43,682 69,200 126,824 239,173
-------- -------- -------- --------
Total LifeUSA retained premiums 48,992 74,829 143,252 255,702
Allianz Life:
Life:
First year 244 589 857 1,884
Single and renewal 1,579 1,325 4,637 3,883
-------- -------- -------- --------
Total Life 1,823 1,914 5,494 5,767
Annuities 32,324 33,788 74,385 130,168
-------- -------- -------- --------
Total Allianz Life assumed premiums 34,147 35,702 79,879 135,935
-------- -------- -------- --------
Total retained or assumed premiums $ 83,139 $110,531 $223,131 $391,637
======== ======== ======== ========
</TABLE>
- -------------------------
(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 the 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.
Reference is made 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 third quarter of 1996 increased by 31% to $84.0
million compared to $64.2 million for the third quarter of 1995 and increased by
21% for the first nine months of 1996 to $235.0 million from $194.2 million for
the same period in 1995. These increases were primarily due to the increase in
commissions and expense allowances associated with the reduction in the
percentage of new business retained or assumed by LifeUSA to 25% from 50% which
was effective October 1, 1995, and the growth in invested assets and account
values in force.
Policyholder charges, which represent the amounts assessed against policy
account balances for the cost of insurance, policy administration and
surrenders, increased 16%, or $1.5 million, in the third quarter of 1996
compared to the third quarter of 1995, and 32%, or $8.5 million, in the first
nine months of 1996 compared to the first nine months of 1995, reflecting the
growth in and age of LifeUSA's net retained account values in force.
The increase in net investment income of 14%, or $4.0 million, in the third
quarter of 1996 compared to the third quarter of 1995, and 21%, or $16.8
million, in the first nine months of 1996 compared to the first nine months of
1995, resulted from the growth in invested assets (fixed maturity investments
and cash and cash equivalents) to $1.86 billion at September 30, 1996, from
$1.67 billion at September 30, 1995, partially offset by a decrease in the
weighted average annual yield on invested assets (exclusive of realized and
unrealized gains and losses) to 7.44% at September 30, 1996, compared to 7.52%
at September 30, 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
during the nine months ended September 30, 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
-------------- ----------------- ---------------- ------
<S> <C> <C> <C> <C>
Nine months ended:
September 30, 1996 1,671 615 443 613
September 30, 1995 (109) (39) (26) (44)
</TABLE>
Net commissions and expense allowances increased 56%, or $14.1 million, in the
third quarter of 1996 compared to the third quarter of 1995, and 15%, or $13.5
million, in the first nine months of 1996 compared to the first nine months of
1995. These increases were due primarily to the increase in collected premiums
not retained or assumed, which increased 91%, or $107.0 million, in the third
quarter of 1996 compared to the third quarter of 1995, and 36%, or $150.4
million, in the first nine months of 1996 compared to the first nine months of
1995 as a result of the reduction in the percentage of new business retained or
assumed by LifeUSA to 25% from 50% which was effective October 1, 1995.
The following table shows the amounts of net commissions and expense allowances
for the comparable quarters and nine month periods (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
LifeUSA:
Life:
First year $ 2,466 $ 2,438 $ 7,903 $ 7,104
Single and renewal 1,305 1,243 3,915 3,743
--------- --------- --------- ---------
Total Life 3,771 3,681 11,818 10,847
Annuities 17,653 10,511 49,644 35,861
--------- --------- --------- ---------
Total LifeUSA 21,424 14,192 61,462 46,708
Allianz Life:
Life:
First year 843 1,129 2,607 3,746
Single and renewal 555 483 1,692 1,431
--------- --------- --------- ---------
Total Life 1,398 1,612 4,299 5,177
Annuities 16,800 9,760 36,892 37,397
--------- --------- --------- ---------
Total Allianz Life 18,198 11,372 41,191 42,574
Lapse policy chargebacks (95) (165) (378) (552)
--------- --------- --------- ---------
Total commissions and expense allowances, net $ 39,527 $ 25,399 $ 102,275 $ 88,730
========= ========= ========= =========
</TABLE>
- --------------------------
The above table includes commissions and expense allowances related to LifeUSA
policies that have been ceded by LifeUSA to the Reinsurers and service fees
related to policies produced by LifeUSA agents for Allianz Life.
The Company pays a lapse policy chargeback to the Reinsurers when a life
insurance policy that has been ceded lapses before the end of 13 months. The
chargeback paid for each policy is equal to the excess of the allowances
received over the premiums received.
Reference is made to Note 2 (Reinsurance) to the December 31, 1995 consolidated
financial statements for further details regarding the Company's reinsurance
agreements.
BENEFITS AND EXPENSES. Total benefits and expenses were $73.4 million in the
third quarter of 1996 compared to $58.2 million in the third quarter of 1995 and
$208.1 million in the first nine months of 1996 compared to $174.5 million in
the first nine months of 1995. The increases in total benefits and expenses of
26% in the third quarter of 1996 compared to the third quarter of 1995 and 19%
in the first nine months of 1996 compared to the first nine months of 1995 were
primarily due to growth in account values in force.
The increase in interest credited to policyholder account values of 12%, or $2.8
million, in the third quarter of 1996 compared to the third quarter of 1995 and
21%, or $12.7 million, in the first nine months of 1996 compared to the first
nine months of 1995, reflects the growth in LifeUSA's account values in force.
The increase in other benefits to policyholders of 70%, or $1.9 million, in the
third quarter of 1996 compared to the third quarter of 1995 and 66%, or $5.6
million, in the first nine months of 1996 compared to the first nine months 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. 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 52%, or $7.9 million, in the third quarter of
1996 compared to the third quarter of 1995 and 12%, or $6.4 million, in the
first nine months of 1996 compared to the first nine months of 1995. These
increases were primarily due to the increase in collected premiums during the
third quarter of 1996 compared to the third quarter of 1995, the establishment
of accruals for production-based bonuses that will be paid at the end of 1996 if
total 1996 production exceeds that obtained during 1995 and less commissions
being deferred in the 1996 periods, when 25% of new business produced was
retained by LifeUSA, than were deferred in the 1995 periods, when 50% of new
business produced was retained.
Taxes, licenses and fees decreased 24%, or $400,000, in the third quarter of
1996 compared to the third quarter of 1995 and 20%, or $900,000, in the first
nine months of 1996 compared to the first nine months of 1995. These decreases
were primarily due to changes made in the method of accruing for premium taxes.
Operating expenses increased 27%, or $2.9 million, in the third quarter of 1996
compared to the third quarter of 1995 and 21%, or $6.8 million, in the first
nine months of 1996 compared to the first nine months 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 1996 periods, when 25% of new
business produced was retained by LifeUSA, than were deferred in the 1995
periods, when 50% of new business produced was retained.
NET INCOME. Net income was $6.8 million, or $.30 per share, in the third quarter
of 1996, compared to $3.8 million, or $.18 per share, in the third quarter of
1995, an increase of 77%. Net income was $17.1 million, or $.76 per share, in
the first nine months of 1996, compared to $12.5 million, or $.58 per share, in
the first nine months of 1995, an increase of 37%. The following table shows
operating income and earnings per share, the effect of those items considered to
be non-operating, and net income and earnings per share for the comparable
quarters and nine month periods, respectively (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months ended
September 30, September 30,
----------------------------------- -----------------------------------
1996 1995 1996 1995
---------------- ---------------- ---------------- ----------------
Income EPS Income EPS Income EPS Income EPS
-------- ---- -------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating income and earnings per share $ 6,938 $.30 $ 4,149 $.19 $ 17,175 $.77 $ 12,981 $.60
Increase (decrease) net income and earnings per share:
Net realized gains (losses) on investments -- -- -- -- 386 .01 (27) (.00)
Increase in reserve for future assessments(1) (176) (.00) (326) (.01) (511) (.02) (467) (.02)
-------- ---- -------- ---- -------- ---- -------- ----
Net income and earnings per share $ 6,762 $.30 $ 3,823 $.18 $ 17,050 $.76 $ 12,487 $.58
======== ==== ======== ==== ======== ==== ======== ====
</TABLE>
- ------------------------
(1) Reference is made to the state guaranty fund assessments section of Note 1
(Summary of Significant Accounting Policies) to the December 31, 1995
consolidated financial statements for further details regarding the methods
used by the Company to account for its liability for assessments.
LIQUIDITY AND CAPITAL RESOURCES
Through September 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 1997, 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 and assumption 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.
On May 17, 1996, the Company entered into an agreement with two of its
Reinsurers providing a long-term line of credit in the amount of $30 million.
Funds drawn against the line of credit will be used to fund certain investments
and acquisitions which the Company may make, capital contributions to LifeUSA or
capital expenditures. As of September 30, 1996, the Company had no outstanding
borrowings under this line of credit.
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 adequate 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 (i) the anticipated
increase in cash flow in the current period and the anticipated reduction in
capital requirements for new business retained or assumed by LifeUSA associated
with decreasing both 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% effective October 1, 1995, (ii) the
statutory profits generated by LifeUSA on the mature business which it has
retained or assumed, (iii) the $14 million in proceeds that remained at
September 30, 1996 from the $30 million convertible subordinated debenture
issued to Allianz Life in February 1995, (iv) the availability of the $30
million line of credit from two of its Reinsurers, and (v) cash generated by
operations, will provide sufficient capital resources to support the capital
needs of LifeUSA and meet all the Company's cash needs in the ordinary course of
business through 1997, based on currently anticipated life insurance and annuity
sales and on the continuation of acceptable reinsurance arrangements. The
Company's future investments in marketing organizations, which are discussed in
greater detail in the remainder of this section, may require additional capital
during 1997.
For LifeUSA to retain or assume 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 and assumes 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. As a result of reducing the
level of new business retained or assumed by LifeUSA from 50% to 25% effective
October 1, 1996, the need for additional capital to cover the statutory loss
from such business is reduced.
During the first nine months of 1996, LifeUSA produced a statutory net income of
$11.2 million. As a result, the Company has not made capital contributions to
LifeUSA during 1996. In addition, based on currently anticipated life insurance
and annuity sales and on the continuation of acceptable reinsurance
arrangements, the Company does not expect to contribute capital to LifeUSA
through 1997 in order to maintain adequate levels of statutory capital and
surplus.
As of September 30, 1996, LifeUSA had statutory capital and surplus for
regulatory purposes of $86.1 million compared to $75.7 million at December 31,
1995. Assuming the current level of its retention and assumption of new business
and the expected level of life insurance and annuity business produced by
LifeUSA agents, LifeUSA expects to continue to satisfy statutory capital and
surplus requirements primarily through statutory profits on its mature block of
retained inforce business, through the continued reinsurance of a portion of its
new business, and, to the extent necessary, through additional capital
contributions by the Company. However, in the future, the Company may alter the
level of its retention and assumption of new business depending upon future
levels of production, capital needs and availability of alternative financing.
The Company has developed a strategy to generate additional premium production
from LifeUSA's existing agents and from new production sources through
investments in marketing organizations and by recruiting new marketing
organizations to sell its products. 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. To date, the
Company has made loans to marketing organizations that account for 30% of the
Company's total life insurance and annuity production for the nine months ended
September 30, 1996. The loans include incentives for achieving increased
production. In addition, LifeUSA Marketing acquired a national marketing
organization in August 1996 that has been contracted with LifeUSA for seven
years, and in November 1996, acquired an equity interest in another national
marketing organization that has not been previously contracted with LifeUSA. 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. In addition, during the first nine months of
1996, the Company has signed marketing agreements with 27 national marketing
organizations to market LifeUSA life insurance and annuity products for the
first time.
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 actual total
adjusted capital to authorized control level risk-based capital is below certain
levels. LifeUSA's percentage of actual total adjusted capital to authorized
control level risk-based capital is well in excess of a ratio which would
require regulatory attention. During the first nine months of 1996, LifeUSA
produced a statutory net income of $11.2 million. As a result, the Company has
not made capital contributions to LifeUSA during 1996. In addition, based on
currently anticipated life insurance and annuity sales and on the continuation
of acceptable reinsurance arrangements, the Company does not expect to
contribute capital to LifeUSA through 1997 in order to maintain a percentage
well in excess of such ratios.
The NAIC has also considered changes in the model laws for nonforfeiture values
of life insurance and deferred annuity products, the provisions of which apply
to LifeUSA's most popular products. Since 1994, LifeUSA has made presentations
to and had discussions with the Life/Health Actuarial Task Force of the NAIC,
which is responsible for developing new model laws for nonforfeiture values.
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 may adopt new model laws addressing the nonforfeiture
values 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. A number of states have either adopted or are in the
process of adopting the model law by its January 1, 1997 effective date. This
law is not anticipated to have a significant impact on LifeUSA when it becomes
effective.
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.
The Minnesota Department of Commerce is currently performing an examination of
LifeUSA for the three years ended December 31, 1995. As of the current date, the
Company has not been made aware of any significant issues or recommendations
that will individually or in the aggregate be material.
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 its 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 possible changed criteria the A. M. Best Company may apply in the future.
INVESTMENTS. As of September 30, 1996, the Company had cash, cash equivalents
and fixed maturity investments on a consolidated basis totaling $1.86 billion,
including $7.6 million in restricted deposits with state insurance authorities
regulating LifeUSA. The Company did not hold any derivative financial
instruments, as defined by Statement of Financial Accounting Standards (SFAS)
No. 119, "Disclosures about Derivative Financial Instruments and Fair Value of
Financial Instruments" at September 30, 1996. The following table summarizes the
book, carrying and market values of each investment category held at September
30, 1996 (in thousands):
<TABLE>
<CAPTION>
Book % of Carrying % of Market % of
Value Total Value Total Value Total
---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 31,049 1.67% $ 31,049 1.67% $ 31,049 1.68%
Government Treasury and Agency
notes and bonds 103,310 5.55 103,488 5.57 106,109 5.73
Mortgage pass-throughs 39,765 2.14 39,991 2.15 39,959 2.16
Agency Collateralized Mortgage Obligations:
CMO - Sequential pay 6,536 .35 6,536 .35 6,481 .35
CMO - Planned amortization class 619,654 33.32 617,155 33.26 611,131 32.99
CMO - Accretion directed class 23,469 1.26 23,469 1.26 23,259 1.26
CMO - Targeted amortization class 11,912 .64 11,912 .64 12,581 .68
Investment grade corporate securities:
AAA+ to AAA- 36,749 1.98 36,843 1.98 37,122 2.00
AA+ to AA- 134,496 7.23 132,196 7.12 131,778 7.12
A+ to A- 454,819 24.45 453,498 24.43 453,457 24.49
BBB+ to BBB- 398,299 21.41 400,447 21.57 398,800 21.54
Non-investment grade -- -- -- -- -- --
---------- ------ ---------- ------ ---------- ------
Total $1,860,058 100.00% $1,856,584 100.00% $1,851,726 100.00%
========== ====== ========== ====== ========== ======
</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 September 30, 1996, the weighted
average credited interest rate for deferred annuities and life insurance
policies was 4.77% and the weighted average yield on the assets backing
liabilities was 7.49%. 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 $17.7 million during the first
nine months 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
September 30, 1996, the modified duration of LifeUSA's fixed income securities
was 6.12 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 55% at September 30,
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 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 the asset type in which to invest 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 September 30, 1996, the Company held 46%, or $839 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.
At September 30, 1996, the Company's shareholders' equity and book value per
share were $160.0 million and $7.64, respectively, compared to $156.9 million
and $7.72, respectively, at December 31, 1995. Excluding the effect of the net
unrealized gain (loss) on fixed maturity investments - available for sale
reported as a separate component of shareholders' equity in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the
Company's shareholders' equity and book value per share were $162.3 million and
$7.76, respectively, at September 30, 1996, compared to $144.2 million and
$7.09, respectively, at December 31, 1995.
* * * *
Statements other than historical information contained in this Report are
considered forward-looking and involve a number of risks and uncertainties. In
addition to the factors discussed in this Report, there are other factors that
could cause actual results to differ materially from expected results including,
but not limited to, development and acceptance of new products, impact of
changes in federal and state regulation, dependence upon key personnel, changes
in interest rates generally and credited rates on the new business retained or
assumed by LifeUSA, the level of premium production, competition and other risks
described from time to time 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:
(11) Statement of computation of per share earnings
(27) Financial data schedule (electronic filing only)
(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: November 12, 1996
/s/ Mark A. Zesbaugh
--------------------------------
Mark A. Zesbaugh
Executive Vice President
Chief Financial Officer
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 September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PRIMARY
Average shares outstanding and to be issued 20,927,005 20,286,706 20,702,575 20,252,581
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 151,586 160,875 141,130 179,355
Common equivalent shares assuming conversion
of convertible subordinated debentures 2,400,000 2,400,000 2,400,000 1,978,022
----------- ----------- ----------- -----------
Total common and common equivalent shares 23,478,591 22,847,581 23,243,705 22,409,958
=========== =========== =========== ===========
Net income $ 6,762 $ 3,823 $ 17,050 $ 12,487
Add convertible subordinated debenture interest,
net of federal income tax effect 218 218 653 540
----------- ----------- ----------- -----------
Adjusted net income $ 6,980 $ 4,041 $ 17,703 $ 13,027
=========== =========== =========== ===========
Per common and common equivalent share amount $ .30 $ .18 $ .76 $ .58
=========== =========== =========== ===========
FULLY DILUTED
Average shares outstanding and to be issued 20,927,005 20,286,706 20,702,575 20,252,581
Net effect of dilutive stock options and warrants
having exercise prices less than the greater of
the average or the end of period market price of
the common stock using the treasury stock method 155,532 165,104 150,548 187,169
Common equivalent shares assuming conversion
of convertible subordinated debentures 2,400,000 2,400,000 2,400,000 1,978,022
----------- ----------- ----------- -----------
Total common and common equivalent shares 23,482,537 22,851,810 23,253,123 22,417,772
=========== =========== =========== ===========
Net income $ 6,762 $ 3,823 $ 17,050 $ 12,487
Add convertible subordinated debenture interest,
net of federal income tax effect $ 218 $ 218 $ 653 $ 540
----------- ----------- ----------- -----------
Adjusted net income $ 6,980 $ 4,041 $ 17,703 $ 13,027
=========== =========== =========== ===========
Per common and common equivalent share amount $ .30 $ .18 $ .76 $ .58
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 839,393
<DEBT-CARRYING-VALUE> 986,142
<DEBT-MARKET-VALUE> 981,284
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,848,783
<CASH> 31,049
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 219,122
<TOTAL-ASSETS> 4,301,205
<POLICY-LOSSES> 3,994,015
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 7,643
<NOTES-PAYABLE> 36,030
0
0
<COMMON> 209
<OTHER-SE> 159,741
<TOTAL-LIABILITY-AND-EQUITY> 4,301,205
0
<INVESTMENT-INCOME> 95,519
<INVESTMENT-GAINS> 1,671
<OTHER-INCOME> 137,825
<BENEFITS> 87,524
<UNDERWRITING-AMORTIZATION> 18,571
<UNDERWRITING-OTHER> 101,970
<INCOME-PRETAX> 26,950
<INCOME-TAX> 9,900
<INCOME-CONTINUING> 17,050
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,050
<EPS-PRIMARY> .76
<EPS-DILUTED> .76
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
