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
March 31, 1997
Commission File No. 0-18485
Life USA HOLDING, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1578384
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
Suite 95, Interchange North Building
300 South Highway 169
Minneapolis, Minnesota 55426
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code: (612) 546-7386
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES __X__ NO ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 31, 1997
----------------- -----------------------------
Common Stock, 21,412,261
Par Value $.01 Per Share
Life USA HOLDING, INC.
Securities and Exchange Commission Form 10-Q
for the First Quarter Ended March 31, 1997
I N D E X
Page
Number
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheet (Unaudited)
March 31, 1997 and December 31, 1996............................3-4
Condensed Consolidated Statement of Income
(Unaudited) Three months ended March 31, 1997
and March 31, 1996................................................5
Condensed Consolidated Statement of Cash Flows
(Unaudited) Three months ended March 31, 1997
and March 31, 1996................................................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.................................20
SIGNATURES:...................................................................21
<TABLE>
<CAPTION>
Life USA HOLDING, INC.
Condensed Consolidated Balance Sheet
(Dollars in thousands)
(Unaudited)
March 31, December 31,
1997 1996
--------- -----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturity investments:
Available for sale, at fair value (amortized cost:
$866,308 at March 31, 1997 and $864,400 at
December 31, 1996) $ 852,142 $ 878,279
Held to maturity, at amortized cost (fair value:
$1,023,197 at March 31, 1997 and $1,013,761 at
December 31, 1996) 1,033,462 1,003,197
Policy loans 24,576 23,908
---------- ----------
Total investments 1,910,180 1,905,384
Cash and cash equivalents 38,106 20,989
Accrued investment income 27,240 27,834
Future policy benefits recoverable and amounts due
from reinsurers 2,226,840 2,179,999
Deferred policy acquisition costs 231,585 212,138
Other assets 40,103 40,379
---------- ----------
$4,474,054 $4,386,723
========== ==========
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Life USA HOLDING, INC.
Condensed Consolidated Balance Sheet (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
March 31, December 31,
1997 1996
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits $ 4,157,469 $ 4,078,621
Other policyholders' funds 8,618 5,381
Amounts due reinsurers 30,896 23,605
Accrued commissions to agents 6,388 10,243
Taxes, licenses and fees payable 16,506 17,868
Accounts payable 4,257 6,967
Convertible subordinated debentures 36,030 36,030
Deferred income taxes 14,017 12,924
Other liabilities 31,177 22,469
----------- -----------
Total liabilities 4,305,358 4,214,108
Shareholders' equity:
Preferred stock, $.01 par value; 15,000,000
shares authorized, none issued -- --
Common stock, $.01 par value; 45,000,000
shares authorized, 21,412,261 issued and
outstanding (20,953,517 shares at December 31, 1996) 214 210
Common stock to be issued, 37,915 shares
(21,384 shares at December 31, l996) 413 357
Additional paid-in capital 91,286 86,474
Notes receivable from stock sales (5,666) (3,888)
Net unrealized (loss) gain on fixed
maturity investments - available for sale (8,687) 3,335
Retained earnings 91,136 86,127
----------- -----------
Total shareholders' equity 168,696 172,615
----------- -----------
$ 4,474,054 $ 4,386,723
=========== ===========
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 March 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Policyholder charges $ 11,802 $ 11,084
Net investment income 34,306 30,926
Net realized gains on investments 1,234 1,679
Commissions and expense allowances, net 31,379 29,817
Other 631 48
----------- -----------
Total revenues 79,352 73,554
Benefits and expenses:
Interest credited to policyholder account values 26,245 24,230
Other benefits to policyholders 4,899 4,669
Amortization of deferred policy acquisition costs 6,581 6,168
Commissions 17,974 17,152
Taxes, licenses and fees 569 1,237
Operating expenses 15,004 12,776
----------- -----------
Total benefits and expenses 71,272 66,232
----------- -----------
Income before income taxes 8,080 7,322
Income taxes 2,935 2,701
----------- -----------
Net income $ 5,145 $ 4,621
=========== ===========
Income per common and common equivalent share:
Primary $ .22 $ .21
=========== ===========
Fully diluted $ .22 $ .21
=========== ===========
Number of shares used in per share calculation:
Primary 24,119,701 22,904,123
Fully diluted 24,117,545 22,904,112
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Life USA HOLDING, INC.
Condensed Consolidated Statement of Cash Flows
(Dollars in thousands)
(Unaudited)
Three months ended March 31,
----------------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,145 $ 4,621
Adjustments to reconcile net income to net
cash used in operating activities:
Accretion of discount on investments, net (641) (527)
Net realized gains on investments (1,234) (1,679)
Policy acquisition costs deferred (8,800) (9,275)
Amortization of deferred policy acquisition costs 6,581 6,168
Other changes 9,547 (7,370)
-------- --------
Net cash provided by (used in) operating activities 10,598 (8,062)
Cash flows from investing activities:
Fixed maturity investments-available for sale:
Purchases (35,910) (61,412)
Proceeds from sales 33,403 35,095
Proceeds from maturities and principal payments
on mortgage-backed securities 1,910 1,934
Fixed maturity investments-held to maturity:
Purchases (33,144) (18,005)
Proceeds from maturities and principal payments
on mortgage-backed securities 3,442 2,035
Investments in and loans to field marketing
organizations (1,350) --
-------- --------
Net cash used in investing activities (31,649) (40,353)
Cash flows from financing activities:
Receipts from universal life and investment products 65,224 66,528
Withdrawals on universal life and investment products (59,973) (45,740)
Interest credited to policyholder account values 26,245 24,230
Other financing activities 6,672 3,706
-------- --------
Net cash provided by financing activities 38,168 48,724
-------- --------
Net increase in cash and cash equivalents 17,117 309
Cash and cash equivalents at beginning of the period 20,989 33,222
-------- --------
Cash and cash equivalents at end of the period $ 38,106 $ 33,531
======== ========
See accompanying notes.
</TABLE>
Life USA HOLDING, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 1997
(Unaudited)
1. The condensed consolidated balance sheet of Life USA Holding, Inc. (the
Company) at March 31, 1997 and the related condensed consolidated
statements of income and cash flows for the three months ended March 31,
1997 and 1996, are unaudited; however, in the opinion of management, all
adjustments necessary for a fair presentation have been included and are
of a normal recurring nature. The results of operations for the three
months ended March 31, 1997 are not necessarily indicative of the results
to be expected for the full year. The balance sheet at December 31, 1996
is derived from the audited balance sheet as of that date.
2. Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
3. The accompanying condensed consolidated financial statements should be
read in conjunction with the notes to the December 31, 1996 consolidated
financial statements.
4. The net unrealized (loss) gain on fixed maturity investments - available
for sale included in shareholders' equity consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- -----------
<S> <C> <C>
Gross unrealized (loss) gain on fixed maturity
investments - available for sale $(14,166) $ 13,879
Adjustments for:
Deferred tax asset (liability) 4,958 (4,858)
Deferred tax asset valuation allowance (4,991) --
Deferred policy acquisition costs 8,480 (8,748)
Deferred tax (liability) asset (2,968) 3,062
-------- --------
Net unrealized (loss) gain on fixed maturity
investments - available for sale $ (8,687) $ 3,335
======== ========
</TABLE>
5. In February 1997, the FASB issued SFAS No. 128, "Earnings per Share."
SFAS No. 128 establishes standards for computing and presenting earnings
per share for all entities with complex capital structures. SFAS No. 128
is effective for financial statements issued for periods ending after
December 15, 1997 and will be adopted by the Company in the fourth
quarter of 1997. The Company is in the process of evaluating the impact
of adopting SFAS No. 128 but does not expect a material change in the per
share amounts currently presented.
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. (LifeUSA Securities) and
LifeUSA Marketing, Inc. (LifeUSA Marketing), should be read in conjunction with
the Company's consolidated financial statements and notes thereto included
elsewhere in this Report.
During 1996, the Company formed two wholly-owned subsidiaries: LifeUSA
Securities and LifeUSA Marketing. LifeUSA Securities has received approval from
the National Association of Securities Dealers, Inc. as a retail broker-dealer,
is marketing a family of LifeUSA mutual funds established through a
joint-venture agreement with a $16 billion asset management firm and is
exploring distribution of variable life insurance and annuity contracts. LifeUSA
Marketing conducts a variety of marketing activities for the Company, including
the acquisition of and investment in national field marketing organizations. The
results of operations and financial condition of LifeUSA Securities and LifeUSA
Marketing, both individually and in the aggregate, are not material to the 1997
or 1996 consolidated financial statements of the Company. Therefore, the
analysis that follows will focus primarily on the Company and LifeUSA.
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 each year. Entering into these reinsurance agreements has allowed
LifeUSA to write a larger volume of business than it would 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).
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. The Company receives service fees on the business produced
by LifeUSA agents for Allianz Life.
Effective October 1, 1995, LifeUSA began ceding 75% of its new life insurance
and annuity business to the reinsurers and assuming 25% of the new life
insurance and annuity business produced by its agents for Allianz Life. For
comparative purposes, LifeUSA's net retention (the percentage of new life
insurance and annuity business retained by LifeUSA and assumed by LifeUSA from
Allianz Life) was a constant 25% throughout 1996 and the first quarter of 1997.
LifeUSA receives commissions and expense allowances on business ceded to the
Reinsurers.
The following table shows LifeUSA's life insurance and annuity in force
information at March 31, 1997 and December 31, 1996 (in millions):
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
Life insurance account values:
All policies produced by LifeUSA agents (1) $ 270.7 $ 260.1
Direct and assumed business (2) 232.6 223.4
Net of reinsurance (3) 89.3 85.5
Life insurance face amounts:
All policies produced by LifeUSA agents (1) 8,124.3 8,171.2
Direct and assumed business (2) 7,055.1 7,104.0
Net of reinsurance (3) 2,357.2 2,385.2
Annuity account values:
All policies produced by LifeUSA agents (1) 4,954.7 4,876.7
Direct and assumed business (2) 3,523.0 3,496.3
Net of reinsurance (3) 1,667.3 1,655.5
</TABLE>
- ---------------------------
(1) Includes all policies produced by LifeUSA agents, including policies
produced by LifeUSA agents for Allianz Life.
(2) Includes all LifeUSA policies and the portion of policies produced by
LifeUSA agents for Allianz Life that have been assumed by LifeUSA.
(3) Includes the portion of LifeUSA policies that have been retained by LifeUSA
and the portion of policies produced by LifeUSA agents for Allianz Life
that have been assumed by LifeUSA.
Reference is made to Note 2 (Reinsurance) to the December 31, 1996 consolidated
financial statements for further details regarding the Company's reinsurance
agreements.
Since its inception, the Company has issued its common stock or granted options
to purchase its common stock to Field Marketing Organizations (FMOs) and agents
as production bonuses. Management believed that in the early years of the
Company these forms of equity participation provided agents with additional
incentives to place profitable business with LifeUSA, to encourage policyholder
persistency and to seek good underwriting risks for LifeUSA. From 1992 through
March 31, 1997, stock options were granted to FMOs and agents at an exercise
price which was equal to the greater of $10.00 per share or 150% of the average
closing bid price for the Company's common stock for the twenty trading days
immediately preceding the end of the quarter for which the stock option was
granted. The Company will discontinue the granting of stock options as
production bonuses after stock options earned by FMOs and agents during the
calendar quarter ended March 31, 1997 have been granted. Today, management
believes that the Company's entire agent compensation package, which includes
LifeUSA's standard cash commissions, annual cash production bonuses for major
producers and Producer Perks Certificates which are redeemable for merchandise
and earned by achieving certain levels of production, will, along with its
proven service and product offerings, continue to encourage strong agent
participation.
RESULTS OF OPERATIONS
In the first quarter of 1997, the Company, with its continued focus on the
marketing of long-term life insurance and annuity products, generated increases
in collected annuity deposits and invested assets. As a result, revenues from
policyholder charges, net investment income and net commissions and expense
allowances increased. Expenses incurred for interest credited to policyholder
account values and commissions also increased during the first quarter of 1997
for similar reasons. Primarily as a result of these factors, net income for the
first quarter of 1997 increased 11% compared to the first quarter of 1996. In
addition, the combination of two non-operating items (net realized gains on
investments and state guaranty fund assessment credits) had a positive effect of
$.01 per share on first quarter 1997 earnings per share. Expenses associated
with a national advertising campaign had an effect of $.03 per share on first
quarter 1997 earnings per share.
Below is a more detailed discussion of the trends in the amounts reported in the
condensed consolidated statement of income for the three months ended March 31,
1997 and 1996. These comments should be read in conjunction with the condensed
consolidated financial statements previously presented.
PREMIUMS AND DEPOSITS. Total collected premiums and deposits, including premiums
and deposits on policies produced by LifeUSA agents for Allianz Life, were
$235.0 million and $223.9 million in the first quarter of 1997 and 1996,
respectively, an increase of 5% in total collected premiums and deposits. The
following table shows the amounts of premiums and deposits collected, ceded and
retained for the comparable quarters (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
-------- --------
<S> <C> <C>
Collected Premiums and Deposits(1):
LifeUSA:
Life:
First year $ 2,390 $ 3,878
Single and renewal 13,209 12,097
-------- --------
Total Life 15,599 15,975
Annuities 98,141 134,920
-------- --------
Total LifeUSA collected premiums and deposits 113,740 150,895
Allianz Life:
Life:
First year 539 907
Single and renewal 3,797 3,681
-------- --------
Total Life 4,336 4,588
Annuities 116,965 68,404
-------- --------
Total Allianz Life collected premiums and deposits 121,301 72,992
-------- --------
Total collected premiums and deposits $235,041 $223,887
======== ========
Three Months Ended March 31,
----------------------------
1997 1996
-------- --------
Premiums and Deposits Not Retained or Assumed(2):
LifeUSA:
Life:
First year $ 1,794 $ 2,320
Single and renewal 8,506 7,984
-------- --------
Total Life 10,300 10,304
Annuities 70,977 96,269
-------- --------
Total LifeUSA premiums and deposits not retained 81,277 106,573
Allianz Life:
Life:
First year 404 554
Single and renewal 2,211 2,150
-------- --------
Total Life 2,615 2,704
Annuities 85,925 48,082
-------- --------
Total Allianz Life premiums and deposits not assumed 88,540 50,786
======== ========
Total collected premiums and deposits not retained or assumed $169,817 $157,359
======== ========
Retained or Assumed Premiums and Deposits (3):
LifeUSA:
Life:
First year $ 596 $ 1,558
Single and renewal 4,703 4,113
-------- --------
Total Life 5,299 5,671
Annuities 27,164 38,651
-------- --------
Total LifeUSA retained premiums and deposits 32,463 44,322
Allianz Life:
Life:
First year 135 353
Single and renewal 1,586 1,531
-------- --------
Total Life 1,721 1,884
Annuities 31,040 20,322
-------- --------
Total Allianz Life assumed premiums and deposits 32,761 22,206
-------- --------
Total retained or assumed premiums and deposits $ 65,224 $ 66,528
======== ========
</TABLE>
- -------------------------
(1) Includes premiums and deposits related to all policies produced by LifeUSA
agents, including policies produced by LifeUSA agents for Allianz Life.
(2) Includes premiums and deposits related to LifeUSA policies that have been
ceded by LifeUSA to the Reinsurers and premiums and deposits related to
policies produced by LifeUSA agents for Allianz Life that have not been
assumed by LifeUSA.
(3) Includes premiums and deposits related to LifeUSA policies that have been
retained by LifeUSA and premiums and deposits related to policies produced
by LifeUSA agents for Allianz Life that have been assumed by LifeUSA.
LifeUSA invests these premiums and deposits for the purpose of providing
future benefits to its policyholders.
Reference is made to Note 2 (Reinsurance) to the December 31, 1996 consolidated
financial statements for further details regarding the Company's reinsurance
agreements.
REVENUES. Total revenues were $79.4 million and $73.6 million in the first
quarter of 1997 and 1996, respectively. The increase in total revenues of 8% was
primarily due to the increase in policyholder charges and net investment income
generated by the growth of annuities in force and invested assets and from the
increase in net commissions and expense allowances associated with increased
production of business not retained or assumed.
Policyholder charges, which represent the amounts assessed against policy
account balances for the cost of insurance, policy administration and
surrenders, increased 6%, or $700,000, in the first quarter of 1997 compared to
the first quarter of 1996 reflecting the growth in and maturity of LifeUSA's net
retained annuities in force.
Increases in net investment income of 11%, or $3.4 million, in the first quarter
of 1997 compared to the first quarter of 1996 are primarily attributable to
increases in invested assets (fixed maturity investments and cash and cash
equivalents) to $1.92 billion at March 31, 1997 from $1.76 billion at March 31,
1996. The weighted average annual yield on invested assets (exclusive of
realized and unrealized gains and losses) was 7.42% at March 31, 1997, compared
to 7.41% at March 31, 1996.
In accordance with generally accepted accounting principles, net realized gains
on investments had the following impact on the amortization of deferred policy
acquisition costs, other benefits to policyholders, net income and earnings per
share for the three months ended March 31, 1997 and 1996 (dollars in thousands,
except per share amounts):
1997 1996
------ ------
Net realized gains on investments $1,234 $1,679
Increase in:
Amortization of deferred policy acquisition costs 453 618
Other benefits to policyholders 324 445
------ ------
Income before income taxes 457 616
Income taxes 164 229
------ ------
Net income $ 293 $ 387
====== ======
Earnings per share $ .01 $ .02
====== ======
Net commissions and expense allowances on premiums and deposits collected on
reinsured policies and service fees on business produced for Allianz Life
increased 5%, or $1.6 million, in the first quarter of 1997 compared to the
first quarter of 1996. The increase was due primarily to the increased
production of business not retained or assumed.
The following table shows the amounts of net commissions and expense allowances
for the quarter ended March 31, 1997 and 1996 (in thousands):
1997 1996
-------- --------
LifeUSA:
Life:
First year $ 2,031 $ 2,780
Single and renewal 1,384 1,317
-------- --------
Total Life 3,415 4,097
Annuities 11,025 14,778
-------- --------
Total LifeUSA 14,440 18,875
Allianz Life:
Life:
First year 574 913
Single and renewal 541 565
-------- --------
Total Life 1,115 1,478
Annuities 16,059 9,656
-------- --------
Total Allianz Life 17,174 11,134
Lapse policy chargebacks (235) (192)
-------- --------
Total commissions and expense allowances, net $ 31,379 $ 29,817
======== ========
- ------------------------------
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, 1996 consolidated
financial statements for further details regarding the Company's reinsurance
agreements.
BENEFITS AND EXPENSES. Total benefits and expenses were $71.3 million and $66.2
million in the first quarter of 1997 and 1996, respectively. The increase in
total benefits and expenses of 8% was primarily due to growth in and maturity of
annuities in force.
Increases in interest credited to policyholder account values of 8%, or $2.0
million, and other benefits to policyholders of 5%, or $200,000, in the first
quarter of 1997 compared to the first quarter of 1996, were primarily due to
growth of annuities in force.
Amortization of deferred policy acquisition costs increased 7%, or $400,000, in
the first quarter of 1997 as compared to the first quarter of 1996. This
reflects the combination of an increase in gross profits due to a growing, more
mature block of in force business, partially offset by a reduced impact of the
amortization of deferred policy acquisition costs generated by the net realized
gains on investments described above. 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 5%, or $800,000, in the first quarter of 1997
compared to the first quarter of 1996 due to the increase in total collected
premiums and deposits discussed above partially offset by the decline in
collected first year life premiums, which receive the highest commission rates
paid by LifeUSA.
Taxes, licenses and fees decreased 54%, or $700,000, in the first quarter of
1997 compared to the first quarter of 1996. This decrease was primarily due to
recoveries of guaranty fund assessments and state income taxes paid in 1996 upon
filing 1996 premium tax returns in the first quarter of 1997.
Operating expenses increased 17%, or $2.2 million, in the first quarter of 1997
compared to the first quarter of 1996. This increase was primarily due to the
growth of LifeUSA's annuity in force business and expenditures for a national
advertising and sales promotion campaign launched during the first quarter.
Income taxes were $2.9 million in the first quarter of 1997 and $2.7 million in
the first quarter of 1996. The effective income tax rates for the first quarter
of 1997 and 1996 were 36.3% and 36.9%, respectively.
NET INCOME. Net income was $5.1 million in the first quarter of 1997 and $4.6
million in the first quarter of 1996, which represents an increase of 11%.
Earnings per share were $.22 in the first quarter of 1997 compared to $.21 in
the first quarter of 1996, which represents an increase of 5%. The following
table summarizes the operating highlights for the three months ended March 31,
1997 and 1996:
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------------------------
1997 1996
------------------- -------------------
Income EPS Income EPS
------- ----- ------- -----
<S> <C> <C> <C> <C>
Consolidated net income and earnings per share $ 5,145 $0.22 $ 4,621 $0.21
Adjustments to arrive at consolidated net operating
income (1):
Net realized gains on investments (293) (0.01) (387) (0.02)
Charges (credits) for state guaranty fund assessments (111) 0.00 168 0.01
------- ----- ------- -----
Consolidated net operating income and earnings per
share 4,741 0.21 4,402 0.20
Impact of expenses associated with 1997 national
advertising campaign 780 0.03 -- --
------- ----- ------- -----
Consolidated net operating income and earnings per
share excluding impact of expenses associated with
national advertising campaign $ 5,521 $0.24 $ 4,402 $0.20
======= ===== ======= =====
</TABLE>
- ----------------------------------
(1) Consolidated net operating income equals net income, excluding, net of
related income taxes: (i) net realized gains on investments and the
corresponding increases in amortization of deferred policy acquisition
costs and other benefits to policyholders and (ii) charges for state
guaranty fund assessments.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1997, 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 remaining
from the $30 million convertible subordinated debenture purchased by Allianz
Life in February 1995, (iv) interest earned on invested assets, and (v) dividend
of $2.5 million paid by LifeUSA. 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. LifeUSA's ability to pay dividends in the future is subject to
compliance with Minnesota insurance laws and regulations.
The Company has entered into an agreement with two of its Reinsurers which
provides a long-term line of credit in the amount of $30 million. Funds drawn
against the line of credit can be used to fund certain investments and
acquisitions which the Company may make, capital contributions to LifeUSA or
capital expenditures. As of March 31, 1997, 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 statutory profits
generated by LifeUSA on the mature business which it has retained or assumed,
(ii) the $5 million in proceeds that remained at March 31, 1997 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, (iv) cash generated by operations, and (v) dividends from LifeUSA,
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 the current level of net retention and acceptable
reinsurance arrangements. The Company's future investments in marketing
organizations 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.
LifeUSA produced a statutory net income of $3.6 million during the first quarter
of 1997 compared to $3.1 million during the first quarter of 1996. As a result,
the Company did not make capital contributions to LifeUSA during the first
quarter of 1997. As of March 31, 1997, LifeUSA had statutory capital and surplus
for regulatory purposes of $87.7 million compared to $87.3 million at December
31, 1996. Assuming continuation of the current level of net retention 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 for 1997 primarily through statutory profits on its mature block of
retained inforce business. 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 by making loans
to or investing in marketing organizations and by recruiting new marketing
organizations to sell its products. The amount of any loan or investment relates
to the revenue currently generated by the marketing organization and the
projected increase in business produced for LifeUSA by the marketing
organization. To date, the Company has made loans to marketing organizations
that accounted for 34% of the Company's life insurance and annuity production
during the first quarter of 1997. The loans include incentives for achieving
increased production. In addition, in August 1996, LifeUSA Marketing acquired
Tax Planning Seminars, a national marketing organization that had been
contracted with LifeUSA for seven years and in November 1996, acquired an equity
interest in Creative Marketing International Corporation, another national
marketing organization that had not been contracted previously with LifeUSA. The
Company has made and expects to continue to make future investments by issuing
shares of its common stock and paying cash from its available resources ($5.4
million of fixed maturity investments - available for sale and cash and cash
equivalents as of March 31, 1997 on an unconsolidated basis), cash generated
from operations, cash dividends from LifeUSA and borrowings under its $30
million line of credit (no amounts outstanding at March 31, 1997). In addition,
during the first quarter of 1997, LifeUSA signed marketing agreements with eight
national marketing organizations to market LifeUSA life insurance and annuity
products for the first time. There can be no assurances that the Company's
premium volume or income will be enhanced by the loans to or investments in
marketing organizations or by the contracting of new national marketing
organizations.
REGULATORY ENVIRONMENT. LifeUSA is subject to regulation in the 49 states in
which it is authorized to do business. The laws of these states establish
supervisory agencies with 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.
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 continue to be reviewed by the
NAIC. LifeUSA's percentage of actual total adjusted capital to authorized
control level risk-based capital is well in excess of regulatory requirements.
The NAIC has also considered changes in the model laws for nonforfeiture values
of life insurance and deferred annuity 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
nonforfeiture values in the future, such adoption is not currently anticipated
to have a significant impact on LifeUSA.
NAIC committees are also considering a new annuity illustration model
regulation, a new approach to statutory valuation of liabilities (reserves) and
regulations for equity-indexed products. The Company is monitoring these
developments and no significant impact is anticipated at this time.
In December 1995, the NAIC passed a model regulation for disclosure in life
insurance policy illustrations. A number of states either have adopted the model
regulation by its January 1, 1997 effective date or are in the process of
adopting the model regulation. LifeUSA has already completed the certification
process required by the model regulation. This regulation has not had and is not
anticipated to have a significant impact on LifeUSA.
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. During 1996, the Minnesota Department of Commerce conducted a
triennial examination of LifeUSA for the three years ended December 31, 1995.
The Company expects to receive the final examination report in the near future
and has not been made aware of any issues or recommendations that will be
material individually or in the aggregate.
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.
In December 1996, Standard & Poor's assigned LifeUSA an initial claims-paying
ability rating of BBB+ (Adequate). Standard & Poor's assigns the BBB+ rating to
insurers which, in its opinion, offer adequate financial security, but capacity
to meet policyholder obligations is susceptible to adverse economic and
underwriting conditions.
INVESTMENTS. As of March 31, 1997, the Company had cash, cash equivalents and
fixed maturity investments on a consolidated basis totaling $1.92 billion,
including $7.5 million in restricted deposits with state insurance authorities
regulating LifeUSA. The following table summarizes the amortized cost, carrying
and fair values of each investment category held at March 31 (dollars in
thousands):
<TABLE>
<CAPTION>
Amortized % of Carrying % of Fair % of
Cost Total Value Total Value Total
---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 38,106 1.97% $ 38,106 1.98% $ 38,106 1.99%
Government Treasury and Agency notes and bonds 104,105 5.37 103,393 5.37 105,609 5.52
Mortgage pass throughs 40,710 2.10 40,570 2.11 40,570 2.12
Agency Collateralized Mortgage Obligations:
CMO -- Sequentials 5,986 0.31 5,986 0.31 5,884 0.31
CMO -- PACs 620,127 32.00 617,149 32.09 610,022 31.88
CMO -- ADs 23,498 1.21 23,498 1.22 23,313 1.22
CMO -- TACs 12,005 0.62 12,005 0.62 12,704 0.66
Investment grade corporate securities:
AAA+ to AAA- 36,757 1.90 36,808 1.91 36,838 1.93
AA+ to AA- 153,375 7.91 149,957 7.80 148,705 7.77
A+ to A- 464,911 23.99 461,072 23.97 459,235 24.00
BBB+ to BBB- 438,296 22.62 435,166 22.62 432,459 22.60
Non investment grade corporate securities -- -- -- -- -- --
---------- ------ ---------- ------ ---------- ------
Total cash and invested assets $1,937,876 100.00% $1,923,710 100.00% $1,913,445 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
As part of its asset and liability management practices, LifeUSA manages
investments and credited interest rates to produce a net investment spread
consistent with priced-for expectations. As of March 31, 1997, the weighted
average credited interest rate for deferred annuities and life insurance
policies was 4.72% and the weighted average yield on the assets backing
liabilities was 7.47%. As of December 31, 1996, this weighted average credited
interest rate was 4.74% and the weighted average yield on the assets backing
liabilities was 7.48%. Investment income from the assets backing liabilities
exceeded interest credited to policyholders by $6.6 million during the first
quarter of 1997. The investment portfolio is managed primarily by allocating new
cash flows into investments which have yield, maturity and other characteristics
suitable for LifeUSA's expected policyholder liabilities. Consistent with
LifeUSA's asset and liability management practices, as of March 31, 1997, the
effective duration of LifeUSA's fixed income securities was 5.90 years, compared
to 5.88 years as of December 31, 1996.
The percentage of the total market value of the Company's portfolio that was
comprised of investment grade corporate obligations was 56% at March 31, 1997.
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 guidelines for the acquisition of corporate securities do not allow
the purchase of securities that are rated below investment grade by Moody's
Investors Service and Standard & 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)
Collateralized Mortgage Obligations (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 March 31, 1997, the Company held 45%, or $852.1 million, of the total
market value of its fixed maturity investments 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 March 31, 1997, the Company's shareholders' equity and book value per share
were $168.7 million and $7.86, respectively, compared to $172.6 million and
$8.23, respectively, at December 31, 1996. Excluding the effect of the net
unrealized (loss) gain 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 $177.4 million and
$8.27, respectively, at March 31, 1997, compared to $169.3 million and $8.07,
respectively, at December 31, 1996.
* * * *
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: May 12, 1997
/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 March 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
PRIMARY
Average shares outstanding and to be issued 21,384,961 20,365,656
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 311,222 138,467
Common equivalent shares assuming conversion
of convertible subordinated debentures 2,423,518 2,400,000
----------- -----------
Total common and common equivalent shares 24,119,701 22,904,123
=========== ===========
Net income $ 5,145 $ 4,621
Add convertible subordinated debenture interest,
net of federal income tax effect 218 218
----------- -----------
Adjusted net income $ 5,363 $ 4,839
=========== ===========
Per common and common equivalent share amount $ .22 $ .21
=========== ===========
FULLY DILUTED
Average shares outstanding and to be issued 21,384,961 20,365,656
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 309,066 138,456
Common equivalent shares assuming conversion
of convertible subordinated debentures 2,423,518 2,400,000
----------- -----------
Total common and common equivalent shares 24,117,545 22,904,112
=========== ===========
Net income $ 5,145 $ 4,621
Add convertible subordinated debenture interest,
net of federal income tax effect 218 218
----------- -----------
Adjusted net income $ 5,363 $ 4,839
=========== ===========
Per common and common equivalent share amount $ .22 $ .21
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 852,142
<DEBT-CARRYING-VALUE> 1,033,462
<DEBT-MARKET-VALUE> 1,023,197
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,910,180
<CASH> 38,106
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 231,585
<TOTAL-ASSETS> 4,474,054
<POLICY-LOSSES> 4,157,469
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 8,618
<NOTES-PAYABLE> 36,030
0
0
<COMMON> 214
<OTHER-SE> 168,482
<TOTAL-LIABILITY-AND-EQUITY> 4,474,054
0
<INVESTMENT-INCOME> 34,306
<INVESTMENT-GAINS> 1,234
<OTHER-INCOME> 43,812
<BENEFITS> 31,144
<UNDERWRITING-AMORTIZATION> 6,581
<UNDERWRITING-OTHER> 33,547
<INCOME-PRETAX> 8,080
<INCOME-TAX> 2,935
<INCOME-CONTINUING> 5,145
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,145
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
