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
June 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 June 30, 1996
----------------- ----------------------------
Common Stock, 20,790,736
Par Value $.01 Per Share
Life USA HOLDING, INC.
Securities and Exchange Commission Form 10-Q
for the Second Quarter Ended June 30, 1996
I N D E X
Page
Number
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheet (Unaudited)
June 30, 1996 and December 31, 1995...........................3-4
Condensed Consolidated Statement of Income
(Unaudited) Three months and six months ended
June 30, 1996 and June 30, 1995................................5
Condensed Consolidated Statement of Cash Flows
(Unaudited) Six months ended June 30, 1996
and June 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..........................8-19
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings.............................................20
Item 2. Changes in Securities.........................................20
Item 3. Defaults Upon Senior Securities...............................20
Item 4. Submission of Matters to a Vote of Security Holders...........20
Item 5. Other Information.............................................20
Item 6. Exhibits and Reports on Form 8-K..............................21
SIGNATURES: ................................................................22
<TABLE>
<CAPTION>
Life USA HOLDING, INC.
Condensed Consolidated Balance Sheet
(Dollars in thousands)
(Unaudited)
June 30, December 31,
1996 1995
---------- ----------
ASSETS
<S> <C> <C>
Investments:
Fixed maturity investments:
Available for sale, at fair value (amortized cost:
$812,487 at June 30, 1996 and $761,553 at
December 31, 1995) $ 807,095 $ 812,195
Held to maturity, at amortized cost (fair value:
$938,531 at June 30, 1996 and $953,167 at
December 31, 1995) 946,734 908,670
Policy loans 22,307 19,789
---------- ----------
Total investments 1,776,136 1,740,654
Cash and cash equivalents 32,542 33,222
Accrued investment income 25,385 23,510
Future policy benefits recoverable and amounts due
from reinsurers 2,036,624 1,862,311
Deferred policy acquisition costs 215,456 175,296
Other assets 34,404 32,546
---------- ----------
$4,120,547 $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)
June 30, December 31,
1996 1995
-------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Liabilities:
Future policy benefits $ 3,834,694 $ 3,566,012
Other policyholders' funds 5,410 4,453
Amounts due reinsurers 24,898 27,303
Accrued commissions to agents 7,936 11,364
Taxes, licenses and fees payable 17,898 18,913
Accounts payable 3,945 4,771
Convertible subordinated debentures 36,030 36,030
Deferred income taxes 14,605 19,640
Other liabilities 23,449 22,157
----------- -----------
Total liabilities 3,968,865 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, 20,790,736 shares issued and
outstanding (20,279,343 shares at December 31, 1995) 208 203
Common stock to be issued, 28,875 shares
(45,404 shares at December 31, l995) 271 382
Additional paid-in capital 81,755 80,931
Net unrealized gain (loss) on fixed maturity
investments - available for sale (3,512) 12,707
Retained earnings 72,960 62,673
----------- -----------
Total shareholders' equity 151,682 156,896
----------- -----------
$ 4,120,547 $ 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 June 30, Six months ended June 30,
1996 1995 1996 1995
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Policyholder charges $ 12,763 $ 8,705 $ 23,847 $ 16,897
Net investment income 31,644 26,787 62,571 49,751
Net realized gains (losses) on investments (8) 48 1,671 (109)
Commissions and expense allowances, net 32,932 34,573 62,749 63,331
Other 98 19 145 129
------------ ------------ ------------ ------------
Total revenues 77,429 70,132 150,983 129,999
Benefits and expenses:
Interest credited to policyholder account values 24,253 20,345 48,484 38,507
Other benefits to policyholders 4,680 2,820 9,349 5,671
Amortization of deferred policy acquisition costs 6,743 5,444 12,911 9,982
Commissions 19,167 20,832 36,318 37,883
Taxes, licenses and fees 1,100 1,491 2,337 2,849
Operating expenses 12,536 11,414 25,311 21,475
------------ ------------ ------------ ------------
Total benefits and expenses 68,479 62,346 134,710 116,367
------------ ------------ ------------ ------------
Income before income taxes 8,950 7,786 16,273 13,632
Income taxes 3,284 2,827 5,986 4,968
------------ ------------ ------------ ------------
Net income $ 5,666 $ 4,959 $ 10,287 $ 8,664
============ ============ ============ ============
Income per common and common equivalent share:
Primary $ .25 $ .23 $ .46 $ .40
============ ============ ============ ============
Fully diluted $ .25 $ .23 $ .46 $ .40
============ ============ ============ ============
Number of shares used in per share calculation:
Primary 23,349,003 22,844,512 23,126,263 22,187,596
Fully diluted 23,373,323 22,844,449 23,138,417 22,197,202
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Life USA HOLDING, INC.
Condensed Consolidated Statement of Cash Flows
(Dollars in thousands)
(Unaudited)
Six months ended June 30,
-------------------------
1996 1995
--------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 10,287 $ 8,664
Adjustments to reconcile net income to net
cash used in operating activities:
Accretion of discount on investments, net (1,033) (1,870)
Net realized (gains) losses on investments (1,671) 109
Policy acquisition costs deferred (18,839) (38,029)
Amortization of deferred policy acquisition costs 12,911 9,982
Other changes (12,677) 13,909
--------- ---------
Net cash used in operating activities (11,022) (7,235)
Cash flows from investing activities:
Fixed maturity investments-available for sale:
Purchases (90,886) (131,002)
Proceeds from sales 37,682 17,822
Proceeds from maturities and principal payments
on mortgage-backed securities 4,069 2,775
Fixed maturity investments-held to maturity:
Purchases (41,340) (192,641)
Proceeds from maturities and principal payments
on mortgage-backed securities 4,181 4,146
--------- ---------
Net cash used in investing activities (86,294) (298,900)
Cash flows from financing activities:
Receipts from universal life and investment products 139,991 281,106
Withdrawals on universal life and investment products (99,721) (66,412)
Interest credited to policyholder account values 48,484 38,507
Proceeds from convertible subordinated debenture issuance -- 30,000
Other financing activities 7,882 4,903
--------- ---------
Net cash provided by financing activities 96,636 288,104
--------- ---------
Net decrease in cash and cash equivalents (680) (18,031)
Cash and cash equivalents at beginning of the period 33,222 57,720
--------- ---------
Cash and cash equivalents at end of the period $ 32,542 $ 39,689
========= =========
See accompanying notes.
</TABLE>
Life USA HOLDING, INC.
Notes to Condensed Consolidated Financial Statements
June 30, 1996
(Unaudited)
1. The condensed consolidated balance sheet of Life USA Holding, Inc. (the
Company) at June 30, 1996 and the related condensed consolidated
statements of income for the three-month and six-month periods ended June
30, 1996 and 1995, and cash flows for the six-month periods ended June
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 six-month periods ended June 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>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Gross unrealized gain (loss) on fixed maturity
investments - available for sale $(5,391) $ 50,642
Adjustments for:
Deferred tax (liability) asset 1,887 (17,725)
Deferred tax asset valuation allowance (2,048) --
Deferred policy acquisition costs 3,139 (31,093)
Deferred tax asset (liability) (1,099) 10,883
-------- --------
Net unrealized gain (loss) on fixed maturity
investments - available for sale $ (3,512) $ 12,707
======== ========
</TABLE>
5. On May 17, 1996, the Company entered into a line of credit agreement with
two of its reinsurers that will be used to fund certain investments and
acquisitions the Company may make, capital contributions to LifeUSA
Insurance Company (LifeUSA) or for capital expenditures. The maximum
borrowing allowed under this agreement is $30 million (no amounts
outstanding at June 30, 1996) and borrowings under the line of credit may
be made through May 17, 1999. Borrowings under the line of credit mature
on March 31, 2001 and mandatory repayments of 25% of excess cash flow (as
defined) for the prior calendar year are due on June 30, 1999 and March
31, 2000. The line of credit agreement contains various financial
covenants, including maintenance of minimum levels of consolidated
tangible net worth for the Company and statutory capital and surplus and
risk-based capital for LifeUSA. The Company is required to pay a
commitment fee of 1/4 of 1% per annum on the average daily unused portion
of the credit line.
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.
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).
During the first six months of 1996, LifeUSA ceded 75% of its new life insurance
and annuity business to the Reinsurers, with Employers and Republic-Vanguard
each assuming 40% of the total and the remaining 20% being assumed by Munich.
LifeUSA receives commissions and expense allowances on business ceded to the
Reinsurers.
Since 1987, under the terms of general agency and joint marketing agreements
that the Company has entered into with 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. During
the first six months of 1996, LifeUSA assumed 25% of the new life insurance and
annuity business produced by its agents for Allianz Life. The Company receives
service fees on the business produced by LifeUSA agents for Allianz Life.
The Company derives a significant portion of its revenues from commissions and
expense allowances on business ceded to the 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:
Six months
ended June 30,
Components of Total Revenues 1996 1995
---------------------------- ---- ----
Commissions and expense allowances, net 42% 49%
Net investment income 41 38
Policyholder charges 16 13
Net realized gains (losses) on investments 1 0
The reduction in retention and assumption percentages outlined above may cause
this trend to change during 1996.
At June 30, 1996 and 1995, life insurance account values in force (net of
reinsurance) aggregated $77.8 million and $59.6 million, respectively, and
annuity account values in force (net of reinsurance) aggregated $1.60 billion
and $1.45 billion, respectively.
RESULTS OF OPERATIONS
PREMIUMS. Total collected premiums in the second quarter of 1996, including
premiums on policies produced by LifeUSA agents for Allianz Life, decreased by
20% to $258.6 million from $325.0 million in the second quarter of 1995. Total
collected premiums for the first six months of 1996 were $482.5 million, a 17%
decrease from $580.3 million collected during the same period in 1995. The
following table shows the amounts of premiums collected, ceded and retained for
the comparable quarters and six month periods (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Collected Premiums (1):
LifeUSA:
Life:
First year $ 3,423 $ 4,590 $ 7,301 $ 8,286
Single and renewal 12,037 10,778 24,134 21,682
-------- -------- -------- --------
Total Life 15,460 15,368 31,435 29,968
Annuities 162,302 203,348 297,222 345,200
-------- -------- -------- --------
Total LifeUSA collected premiums 177,762 218,716 328,657 375,168
Allianz Life:
Life:
First year 800 1,288 1,707 2,591
Single and renewal 3,658 3,138 7,339 6,348
-------- -------- -------- --------
Total Life 4,458 4,426 9,046 8,939
Annuities 76,411 101,875 144,815 196,152
-------- -------- -------- --------
Total Allianz Life collected premiums 80,869 106,301 153,861 205,091
-------- -------- -------- --------
Total collected premiums $258,631 $325,017 $482,518 $580,259
======== ======== ======== ========
Collected Premiums Not Retained or Assumed (2):
LifeUSA:
Life:
First year $ 2,192 $ 2,295 $ 4,512 $ 4,142
Single and renewal 7,821 7,386 15,805 14,925
-------- -------- -------- --------
Total Life 10,013 9,681 20,317 19,067
Annuities 117,811 102,931 214,080 175,228
-------- -------- -------- --------
Total LifeUSA collected premiums not retained 127,824 112,612 234,397 194,295
Allianz Life:
Life:
First year 540 644 1,094 1,296
Single and renewal 2,131 1,871 4,281 3,790
-------- -------- -------- --------
Total Life 2,671 2,515 5,375 5,086
Annuities 54,672 51,870 102,754 99,772
-------- -------- -------- --------
Total Allianz Life collected premiums not assumed 57,343 54,385 108,129 104,858
-------- -------- -------- --------
Total collected premiums not retained or assumed $185,167 $166,997 $342,526 $299,153
======== ======== ======== ========
Retained or Assumed Premiums (3):
LifeUSA:
Life:
First year $ 1,231 $ 2,295 $ 2,789 $ 4,144
Single and renewal 4,216 3,392 8,329 6,757
-------- -------- -------- --------
Total Life 5,447 5,687 11,118 10,901
Annuities 44,491 100,417 83,142 169,972
-------- -------- -------- --------
Total LifeUSA retained premiums 49,938 106,104 94,260 180,873
Allianz Life:
Life:
First year 260 644 613 1,295
Single and renewal 1,527 1,267 3,058 2,558
-------- -------- -------- --------
Total Life 1,787 1,911 3,671 3,853
Annuities 21,739 50,005 42,061 96,380
-------- -------- -------- --------
Total Allianz Life assumed premiums 23,526 51,916 45,732 100,233
-------- -------- -------- --------
Total retained or assumed premiums $ 73,464 $158,020 $139,992 $281,106
======== ======== ======== ========
</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 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.
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 second quarter of 1996 increased by 10% to
$77.4 million compared to $70.1 million for the second quarter of 1995 and
increased by 16% for the first six months of 1996 to $151.0 million from $130.0
million for the same period in 1995. These increases were primarily due to the
growth in invested assets and account values in force and net realized gains
recorded on investment sales.
Policyholder charges, which represent the amounts assessed against policy
account balances for the cost of insurance, policy administration and
surrenders, increased 47%, or $4.1 million, in the second quarter of 1996
compared to the second quarter of 1995, and 41%, or $7.0 million, in the first
six months of 1996 compared to the first six 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 18%, or $4.9 million, in the second
quarter of 1996 compared to the second quarter of 1995, and 26%, or $12.8
million, in the first six months of 1996 compared to the first six months of
1995, resulted from the growth in invested assets (fixed maturity investments
and cash and cash equivalents) to $1.79 billion at June 30, 1996, from $1.58
billion at June 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 7.42% at June 30, 1996, compared to 7.55% at June 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 each of the periods presented in the condensed consolidated statement of
income (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>
Three months ended:
June 30, 1996 $ (8) $ (3) $ (2) $ (3)
June 30, 1995 48 18 13 17
Six months ended:
June 30, 1996 1,671 615 443 613
June 30, 1995 (109) (39) (26) (44)
</TABLE>
Net commissions and expense allowances decreased 5%, or $1.6 million, in the
second quarter of 1996 compared to the second quarter of 1995, and 1%, or
$600,000, in the first six months of 1996 compared to the first six months of
1995. These decreases were due primarily to the decline in collected premium
which was only partially offset by the effect of the reduction in retention and
assumption of new business produced to 25% from 50% which became effective
October 1, 1995.
The following table shows the amounts of net commissions and expense allowances
for the comparable quarters and six month periods (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
--------- -------- -------- --------
<S> <C> <C> <C> <C>
LifeUSA:
Life:
First year $ 2,657 $ 2,516 $ 5,437 $ 4,666
Single and renewal 1,293 1,238 2,610 2,500
-------- -------- -------- --------
Total Life 3,950 3,754 8,047 7,166
Annuities 17,213 14,826 31,991 25,350
-------- -------- -------- --------
Total LifeUSA 21,163 18,580 40,038 32,516
Allianz Life:
Life:
First year 851 1,297 1,764 2,617
Single and renewal 573 467 1,138 948
-------- -------- -------- --------
Total Life 1,424 1,764 2,902 3,565
Annuities 10,436 14,402 20,092 27,637
-------- -------- -------- --------
Total Allianz Life 11,860 16,166 22,994 31,202
Lapse policy chargebacks (91) (173) (283) (387)
-------- -------- -------- --------
Total commissions and expense allowances, net $ 32,932 $ 34,573 $ 62,749 $ 63,331
======== ======== ======== ========
</TABLE>
The above table includes commissions and expense allowances related to LifeUSA
policies that have been ceded by LifeUSA to its 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 $68.5 million in the
second quarter of 1996 compared to $62.3 million in the second quarter of 1995
and $134.7 million in the first six months of 1996 compared to $116.4 million in
the first six months of 1995. The increases in total benefits and expenses of
10% in the second quarter of 1996 compared to the second quarter of 1995 and 16%
in the first six months of 1996 compared to the first six months of 1995 were
primarily due to growth in account values in force, partially offset by
decreased production.
The increase in interest credited to policyholder account values of 19%, or $3.9
million, in the second quarter of 1996 compared to the second quarter of 1995
and 26%, or $10.0 million, in the first six months of 1996 compared to the first
six months of 1995, reflects the growth in LifeUSA's account values in force.
The increase in other benefits to policyholders of 66%, or $1.9 million, in the
second quarter of 1996 compared to the second quarter of 1995 and 65%, or $3.7
million, in the first six months of 1996 compared to the first six 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.
Amortization of deferred policy acquisition costs increased 24%, or $1.3
million, in the second quarter of 1996 compared to the second quarter of 1995
and 29%, or $2.9 million, in the first six months of 1996 compared to the first
six months 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 decreased 8%, or $1.7 million, in the second quarter of
1996 compared to the second quarter of 1995 and 4%, or $1.6 million, in the
first six months of 1996 compared to the first six months of 1995. These
decreases were primarily due to the decrease in collected premiums, partially
offset by less commissions being deferred in 1996, when 25% of new business
produced was retained by LifeUSA, than were deferred in 1995, when 50% of new
business produced was retained.
Taxes, licenses and fees decreased 26%, or $400,000, in the second quarter of
1996 compared to the second quarter of 1995 and 18%, or $500,000, in the first
six months of 1996 compared to the first six months of 1995. These decreases
were 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.
Operating expenses increased 10%, or $1.1 million, in the second quarter of 1996
compared to the second quarter of 1995 and 18%, or $3.8 million, in the first
six months of 1996 compared to the first six 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 1996, when 25% of new business
produced was retained by LifeUSA, than were deferred in 1995, when 50% of new
business produced was retained.
NET INCOME. Net income was $5.7 million, or $.25 per share, in the second
quarter of 1996, compared to $5.0 million, or $.23 per share, in the second
quarter of 1995, an increase of 14%. 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 $5.8
million, or $.26 per share, in the second quarter of 1996 from $5.0 million, or
$.23 per share, in the second quarter of 1995. Net income was $10.3 million, or
$.46 per share, in the first six months of 1996, compared to $8.7 million, or
$.40 per share, in the first six months of 1995, an increase of 19%. 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 17% to $10.3 million, or $.46 per share, in the first six months of
1996 from $8.8 million, or $.41 per share, in the second quarter of 1995. These
increases were primarily due to the growth in invested assets and account values
in force.
LIQUIDITY AND CAPITAL RESOURCES
Through June 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.
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 the Company may make, capital contributions to LifeUSA or for
capital expenditures.
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 (i) 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%, (ii) the $14
million in proceeds that remained at June 30, 1996 from the $30 million
convertible subordinated debenture issued to Allianz Life in February 1995,
(iii) the availability of the $30 million line of credit from two of its
reinsurers, and (iv) 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.
The Company has developed a strategy to generate 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 signed marketing agreements with 21 national marketing organizations to
market LifeUSA life and annuity products for the first time and signed letters
of intent to acquire two national marketing organizations, one of 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.
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.
During the first six months of 1996, LifeUSA produced a statutory net income of
$6.9 million. As a result, the Company has not made significant capital
contributions to LifeUSA during 1996 in order to maintain adequate levels of
statutory capital and surplus.
As of June 30, 1996, LifeUSA had statutory capital and surplus for regulatory
purposes of $82.0 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 its
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. During the first six months of 1996, the Company's contributions
to LifeUSA were limited to $800,000 of electronic data processing equipment.
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 improve current earnings. 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. During the first six months of 1996, LifeUSA produced a
statutory net income of $6.9 million. As a result, the Company has not found it
necessary to make significant capital contributions to LifeUSA during 1996 in
order to maintain adequate levels of statutory capital and surplus. In addition,
the Company does not expect to contribute capital to LifeUSA in order to
maintain its percentage in excess of such ratios during the remainder of 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. Since
1994, LifeUSA has made presentations to and had discussions with 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. 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.
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 June 30, 1996, the Company had cash, cash equivalents and
fixed maturity investments on a consolidated basis totaling $1.79 billion,
including $7.4 million in restricted deposits with state insurance authorities
regulating LifeUSA. The Company does 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." The following table summarizes the book, carrying and
market values of each investment category held at June 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 $ 32,542 1.82% $ 32,542 1.82% $ 32,542 1.83%
Government Treasury and Agency
notes and bonds 102,962 5.75 103,022 5.77 105,670 5.94
Mortgage pass-throughs 38,126 2.13 38,293 2.14 38,211 2.15
Agency Collateralized Mortgage Obligations:
CMO - Sequential pay 6,659 .37 6,659 .37 6,596 .37
CMO - Planned amortization class 621,845 34.70 618,774 34.65 610,476 34.33
CMO - Accretion directed class 23,454 1.31 23,454 1.31 23,087 1.30
CMO - Targeted amortization class 11,870 .66 11,870 .66 12,478 .70
Investment grade corporate securities:
AAA+ to AAA- 36,741 2.05 36,823 2.06 37,000 2.08
AA+ to AA- 141,827 7.92 139,960 7.83 139,677 7.86
A+ to A- 387,937 21.65 385,120 21.56 384,679 21.63
BBB+ to BBB- 387,800 21.64 389,854 21.83 387,753 21.81
Non-investment grade -- -- -- -- -- --
---------- ------ ---------- ------ ---------- ------
Total $1,791,763 100.00% $1,786,371 100.00% $1,778,169 100.00%
========== ====== ========== ====== ========== ======
</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 June 30, 1996, the weighted
average credited interest rate for deferred annuities and life insurance
policies was 4.83% 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 $11.4 million during the first
six 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 June
30, 1996, the modified duration of LifeUSA's fixed income securities was 6.13
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 June 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 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 June 30, 1996, the Company held 46%, or $807 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 June 30, 1996, the Company's shareholders' equity and book value per share
were $151.7 million and $7.29, 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 $155.2 million and
$7.45, respectively, at June 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, 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
The Company held its annual meeting of shareholders on April 16, 1996. Proxies
for the meeting were solicited pursuant to Regulation 14 of the Securities
Exchange Act of 1934. The following matters were voted upon at the meeting:
<TABLE>
<CAPTION>
Votes Votes Votes
For Abstained Against
---------- --------- -------
1) To elect the following persons as Directors:
<S> <C> <C> <C>
Hugh Alexander 17,262,963 109,154 --
Jack H. Blaine 17,262,963 109,154 --
Joseph W. Carlson 17,262,960 109,157 --
Margery G. Hughes 17,262,931 109,186 --
Barbara J. Lautzenheiser 17,262,931 109,186 --
Robert W. MacDonald 17,261,179 110,938 --
Robert J. Oster 17,262,963 109,154 --
Daniel J. Rourke 17,262,808 109,309 --
Ralph Strangis 17,262,881 109,236 --
Donald J. Urban 17,262,901 109,216 --
Mark A. Zesbaugh 17,262,963 109,154 --
2) To ratify the appointment of Ernst & Young LLP
as the independent auditors for the Company for
the year 1996 17,327,308 22,096 22,713
</TABLE>
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) A report on Form 8-K was filed on June 17, 1996, to report that 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.
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: August 9, 1996
/s/ Mark A. Zesbaugh
----------------------------------
Mark A. Zesbaugh
Executive Vice President
Chief Financial Officer
EXHIBIT 11
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
Life USA HOLDING, INC.
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1996 1995 1996 1995
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
PRIMARY
Average shares outstanding and to be issued 20,815,668 20,254,407 20,590,362 20,235,465
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 133,335 190,105 135,901 188,595
Common equivalent shares assuming conversion
of convertible subordinated debentures 2,400,000 2,400,000 2,400,000 1,763,536
----------- ----------- ----------- -----------
Total common and common equivalent shares 23,349,003 22,844,512 23,126,263 22,187,596
=========== =========== =========== ===========
Net income $ 5,666 $ 4,959 $ 10,287 $ 8,664
Add convertible subordinated debenture interest,
net of federal income tax effect 218 219 435 322
----------- ----------- ----------- -----------
Adjusted net income $ 5,884 $ 5,178 $ 10,722 $ 8,986
=========== =========== =========== ===========
Per common and common equivalent share amount $ .25 $ .23 $ .46 $ .40
=========== =========== =========== ===========
FULLY DILUTED
Average shares outstanding and to be issued 20,815,668 20,254,407 20,590,362 20,235,465
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 157,655 190,042 148,055 198,201
Common equivalent shares assuming conversion
of convertible subordinated debentures 2,400,000 2,400,000 2,400,000 1,763,536
----------- ----------- ----------- -----------
Total common and common equivalent shares 23,373,323 22,844,449 23,138,417 22,197,202
=========== =========== =========== ===========
Net income $ 5,666 $ 4,959 $ 10,287 $ 8,664
Add convertible subordinated debenture interest,
net of federal income tax effect $ 218 $ 219 $ 435 $ 322
----------- ----------- ----------- -----------
Adjusted net income $ 5,884 $ 5,178 $ 10,722 $ 8,986
=========== =========== =========== ===========
Per common and common equivalent share amount $ .25 $ .23 $ .46 $ .40
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 807,095
<DEBT-CARRYING-VALUE> 946,734
<DEBT-MARKET-VALUE> 938,531
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,776,136
<CASH> 32,542
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 215,456
<TOTAL-ASSETS> 4,120,547
<POLICY-LOSSES> 3,834,694
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 5,410
<NOTES-PAYABLE> 36,030
0
0
<COMMON> 208
<OTHER-SE> 151,474
<TOTAL-LIABILITY-AND-EQUITY> 4,120,547
0
<INVESTMENT-INCOME> 62,571
<INVESTMENT-GAINS> 1,671
<OTHER-INCOME> 86,741
<BENEFITS> 57,833
<UNDERWRITING-AMORTIZATION> 12,911
<UNDERWRITING-OTHER> 63,966
<INCOME-PRETAX> 16,273
<INCOME-TAX> 5,986
<INCOME-CONTINUING> 10,287
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,287
<EPS-PRIMARY> .46
<EPS-DILUTED> .46
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
