UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 1996
Commission File Number 0-20882
Standard Management Corporation
(Exact name of registrant as specified in its charter)
Indiana No. 35-1773567
(State of incorporation) (IRS employer identification no.)
9100 Keystone Crossing
Indianapolis, Indiana 46240
(Address of principal executive offices)
(317) 574-6200
(Telephone)
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, and
(2) has been subject to such filing requirements for the past 90
days: Yes [X] No [ ]
As of April 30, 1996, the Registrant had outstanding 4,531,522
shares of common stock.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STANDARD MANAGEMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
ASSETS
March 31, December 31,
1996 1995
----------- ------------
(Unaudited) (Audited)
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Investments:
Securities available for sale:
Fixed maturity securities, at fair value
(amortized cost: $225,584 in 1996 and $225,643 in 1995) $227,630 $232,092
Equity securities, at fair value (cost: $51 in 1996 and $52 in 1995) 51 52
Mortgage loans, at unpaid principal balances 3,006 2,963
Policy loans, at unpaid principal balances 7,156 8,509
Real estate, at cost less accumulated depreciation of $85 in
1996 and $81 in 1995 556 556
Other invested assets 1,304 1,367
Short-term investments, at cost, which approximates fair value 9,562 35,058
-------- --------
Total investments 249,265 280,597
Cash 1,521 5,762
Amounts due and recoverable from reinsurers 57,514 33,419
Deferred policy acquisition costs 13,613 10,054
Present value of future profits, less accumulated amortization of
$2,369 in 1996 and $2,803 in 1995 14,518 15,246
Excess of acquisition cost over net assets acquired, less
accumulated amortization of $233 in 1996 and $393 in 1995 2,483 3,175
Other assets 8,657 8,640
Assets held in separate accounts 124,138 122,705
-------- --------
Total assets $471,709 $479,598
======== ========
See accompanying notes to consolidated financial statements.
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STANDARD MANAGEMENT CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in Thousands, Except Per Share Amounts)
LIABILITIES AND SHAREHOLDERS EQUITY
March 31, December 31,
1996 1995
----------- ------------
(Unaudited) (Audited)
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Liabilities:
Future policy benefits:
Interest-sensitive annuities and other financial products $210,653 $212,500
Traditional life insurance 78,741 82,762
-------- --------
Total future policy benefits 289,394 295,262
Policy claims and other policyholders benefits and funds 2,295 2,572
-------- --------
291,689 297,834
Accounts payable and accrued expenses 5,015 4,880
Class action litigation and settlement liability 0 3,000
Obligations under capital lease 977 1,084
Notes payable 5,418 3,107
Deferred federal income taxes 364 2,583
Excess of net assets acquired over acquisition cost, less
accumulated amortization of $2,798 in 1996 and $2,451 in 1995 3,816 4,163
Liabilities related to separate accounts 124,138 122,705
-------- --------
Total liabilities 431,417 439,356
Class S Cumulative Convertible Redeemable Preferred Stock,
par value $10 per share, 11% dividend, redeemable in February 2003:
Authorized 300,000 shares; issued and outstanding 272,808 shares,
redemption value of $10 per share plus accumulated and unpaid
dividends 2,772 0
Shareholders' equity:
Preferred stock, no par value:
Authorized 700,000 shares; none issued and outstanding 0 0
Common stock, no par value:
Authorized 20,000,000 shares; issued 5,459,573 shares 39,808 39,808
Treasury stock, at cost, 925,051 shares in 1996 and
502,025 shares in 1995 (deduction) (4,710) (2,621)
Unrealized gain (loss) on securities available for sale (749) 2,582
Foreign currency translation adjustment 1,137 1,159
Retained earnings (deficit) 2,034 (686)
-------- --------
Total shareholders equity 37,520 40,242
-------- --------
Total liabilities and shareholders' equity $471,709 $479,598
======== ========
See accompanying notes to consolidated financial statements.
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STANDARD MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, Dollars in Thousands, Except Per Share Amounts)
Three Months Ended
March 31,
1996 1995
---------- ---------
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Revenues:
Premium income $ 1,499 $ 1,394
Net investment income 4,660 4,679
Net realized investment gains 238 55
Gain on disposal of subsidiaries 886 0
Universal life policy charges 334 374
Amortization of excess of net assets acquired over acquisition cost 347 347
Management fees and similar income from separate accounts 385 266
Annuity policy charges and other income 507 264
--------- ---------
Total revenues 8,856 7,379
Benefits and expenses:
Benefits and claims 827 1,811
Interest credited on interest-sensitive annuities and
other financial products 2,645 2,562
Salaries and wages 1,208 1,041
Amortization 447 356
Other operating expenses 2,115 1,321
Interest expense and financing costs 123 18
--------- ---------
Total benefits and expenses 7,365 7,109
--------- ---------
Income before federal income taxes, extraordinary gain on early
redemption of preferred stock and preferred stock dividends 1,491 270
Federal income tax expense (credit) (1,174) (16)
--------- ---------
Income before extraordinary gain on early redemption of
preferred stock and preferred stock dividends 2,665 286
Extraordinary gain on early redemption of preferred stock, net of $0
federal income tax 101 0
--------- ---------
Net income 2,766 286
Preferred stock dividends 46 0
--------- ---------
Earnings available to common shareholders $ 2,720 $ 286
========= =========
Earnings per share:
Income before extraordinary gain on early redemption of preferred
stock and preferred stock dividends $ .48 $ .06
Extraordinary gain on early redemption of preferred stock .02 0
--------- ---------
Net income .50 .06
Preferred stock dividends 0 0
--------- ---------
Earnings available to common shareholders $ .50 $ .06
========= =========
Weighted average number of shares outstanding:
Common shares 4,736,232 5,035,809
Common equivalent shares 1,045,620 0
--------- ---------
5,781,852 5,035,809
========= =========
See accompanying notes to consolidated financial statements.
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STANDARD MANAGEMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, Dollars in Thousands)
Three Months Ended
March 31,
1996 1995
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OPERATING ACTIVITIES
Net income $ 2,720 $ 286
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Extraordinary gain on early redemption of preferred stock (101) 0
Amortization of deferred policy acquisition costs 135 169
Policy acquisition costs deferred (557) (315)
Class action litigation and settlement liability 0 (33)
Deferred income taxes (43) 421
Depreciation and amortization 113 (16)
Change in future policy benefits 2,060 987
Net increase (decrease) in policy claims and other policyholders'
benefits and funds (168) (262)
Net realized investment gains (238) (55)
Decrease (increase) in accrued investment income (112) 614
Other (1,393) 2,144
--------- ---------
Net cash provided (used) by operating activities 2,416 3,940
FINANCING ACTIVITIES
Borrowings under line of credit agreements 2,300 0
Repayments on short-term borrowings and capital lease obligation (97) (550)
Premiums received on interest-sensitive annuities and other financial
products credited to policyholder account balances, net of premiums ceded 3,987 3,279
Return of policyholder account balances on interest-sensitive annuities and other
financial products, net of premiums ceded (3,806) (4,865)
Redemption of preferred stock (173) 0
Purchase of common stock for treasury (2,089) (21)
--------- ---------
Net cash provided (used) by financing activities 122 (2,157)
INVESTING ACTIVITIES
Fixed maturity securities available for sale:
Purchases (57,522) (46,834)
Sales 36,779 42,602
Maturities 1,223 802
Short-term investments, net 5,154 1,493
Other investments, net (3,641) 510
Proceeds from sale of First International Life Insurance Company, less cash
transferred to seller of $265 11,228 0
--------- ---------
Net cash provided (used) by investing activities (6,779) (1,427)
--------- ---------
Net increase (decrease) in cash (4,241) 356
Cash at beginning of period 5,762 1,604
--------- ---------
Cash at end of period $ 1,521 $ 1,960
========= =========
See accompanying notes to consolidated financial statements.
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STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, Dollars in Thousands, Except Per Share Amounts)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles ("GAAP") for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. The
results of operations for the interim periods shown in this report
are not necessarily indicative of the results that may be expected
for the fiscal year. This is particularly true in the life
insurance industry, where mortality results in interim periods can
vary substantially from such results over a longer period. In the
opinion of management, the information contained herein reflects
all adjustments necessary to make the results of operations for the
interim periods a fair statement of such operations. All such
adjustments are of a normal recurring nature.
The preparation of financial statements requires management to
make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Such estimates and
assumption could change in the future as more information becomes
known, which could impact the amounts reported and disclosed
herein.
The consolidated financial statements for the quarter ended
March 31, 1996 include the assets and liabilities and results of
operations of Dixie National Life Insurance Company ("Dixie
National Life") which was acquired on October 2, 1995.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Standard
Management Corporation ("SMC") Annual Report on Form 10-K for the
year ended December 31, 1995.
Note 2 - Shareholders' Equity
In connection with the class action lawsuit settlement,
300,000 shares designated as Class S Cumulative Convertible
Redeemable Preferred Stock ("Class S Preferred Stock"), $10.00 per
share par value were issued February 8, 1996. The Class S
Preferred Stock is redeemable in February 2003, has an 11%
cumulative dividend payable in February 2003, and is convertible
into SMC common stock at $8.00 per share until February 1998 and
$10.50 per share thereafter.
SMC may voluntarily redeem the Class S Preferred Stock prior
to February 2003 at par value plus accumulated and unpaid
dividends. As of March 31, 1996, SMC has repurchased and retired
27,192 shares of Class S Preferred Stock on the open market at a
cost of $173. This repurchase resulted in an extraordinary gain on
early redemption of preferred stock of $101.
STANDARD MANAGEMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited, Dollars in Thousands, Except Per Share Amounts)
The components of the balance sheet caption "Unrealized gain
(loss) on securities available for sale" in shareholders' equity
are summarized as follows:
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March 31, December 31,
1996 1995
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Fair value of securities available for sale $227,681 $232,144
Amortized cost of securities available for sale 225,635 225,695
-------- --------
Net unrealized gain (loss) (2,046) 6,449
Adjustment to deferred policy acquisition costs 756 (2,380)
Adjustment to present value of future profits 103 (174)
Deferred federal income tax (expense) benefit 437 (1,311)
Minority interest 1 (2)
-------- --------
Net unrealized gain (loss) on securities available for sale $ (749) $ 2,582
======== ========
Foreign currency translation adjustment for the three months
ended March 31, 1996 resulted in a decrease in shareholders' equity
of $22 from December 31, 1995.
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SMC declared a 5% stock dividend on shares of its common stock
for shareholders of record on May 17, 1996 which will be
distributed to shareholders on June 21, 1996. Share and per share
amounts in the consolidated financial statements as of March 31,
1996, and for the quarter then ended, have not been adjusted to
reflect this stock dividend.
Note 3 - Income Taxes
The effective consolidated federal income tax expense (credit)
rate for SMC and subsidiaries (the "Company") was (79)% for the
first quarter of 1996, compared to (6)% for the first quarter of
1995. The large credit in 1996 is primarily due to tax benefits of
$1,420 related to the sale of First International Life Insurance
Company ("First International") (see Note 4). Also, the effective rates
are less than the statutory rates primarily because the
amortization of excess of net assets acquired over acquisition cost
resulting from the acquisition of Standard Management International
is not subject to United States income tax. The Company also has
received the benefits of a special deduction available to small
life insurance companies and the utilization of operating loss
carryforwards. The benefits of the special deduction available to
small life insurance companies will no longer be available when
consolidated assets exceed $500,000.
Note 4 - Disposal of Subsidiaries
On March 18, 1996, Standard Life Insurance Company of Indiana
("Standard Life"), a wholly-owned subsidiary of SMC, signed a
definitive stock purchase agreement to sell a duplicate charter in
the form of its wholly-owned subsidiary, First International, to
Guardian Insurance and Annuity Co., Inc. ("GIAC"), a subsidiary of
The Guardian Life Insurance Company of America, New York, New York.
Standard Life received sale proceeds of $11,493, including $1,500
for the charter and licenses associated with First International
and $1,800 of reinsurance ceding commissions. In addition, First
International, Standard Life and GIAC have entered into a series of
reinsurance and other agreements that include provisions for
Standard Life to continue to administer current First International
policies and retain a majority of the profits from First
International's business in Standard Life.
In an unrelated matter, the Company decided in February 1996
to terminate the reinsurance agreement between Standard Reinsurance
of North America Ltd. ("Standard Reinsurance") and Salamandra
Joint-Stock Insurance Company in Ukraine ("Salamandra"), and to not
renew the Barbados license of Standard Reinsurance. This resulted
in the write-off of SMC's investment in Standard Reinsurance and
certain intangible assets of Standard Reinsurance amounting to
$156.
The combined effect of the gain on sale of First International
and related contracts, and the Standard Reinsurance write-offs, was
an increase in revenues of $886 and a tax benefit of $1,420, for
net income of approximately $2,306 or $.40 per share in the first
quarter of 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 and 1995
Operating Income. The income from operations (before net
realized investment gains and gain on disposal of subsidiaries) was
$214 per share in 1996, compared to $250 per share for 1995. The
change resulted from international operations producing income from
operations of $231 compared to an international gain from
operations of $51 per share for the first quarter of 1996 and 1995,
respectively. The international operating gains resulted primarily
from increased management fees on an increasing separate account
base due to portfolio sales in 1995, coupled with a decrease in
marketing costs in 1996 when compared to the first quarter of 1995.
The income (loss) from operations in the United States decreased to
a loss of $(17) in 1996 compared to income of $199 in 1995. The decline was
attributable to an increase in interest expense from borrowings to repurchase
common and preferred stock and additional costs to convert the operations and
expand the marketing effort in Dixie National Life.
Premium Income. Premium income is composed of premiums,
including renewal premiums, received on ordinary life insurance
policies. The Company's new product sales are composed primarily
of annuity products. Under GAAP, deposits from interest-sensitive
annuities and other financial products are not recorded as
revenues. Net premiums received from the sales of interest-
sensitive annuities and other financial products (which are not
recorded as revenues) were $3,987 compared to $3,279 for the first
quarter of 1996 and 1995, respectively. The increase in premium
deposits is partially due to a decrease in the quota-share portion
of business ceded pursuant to a reinsurance agreement under which
70% of a portion of Standard Life's annuity business pursuant to
the terms of the agreement produced after December 31, 1994 is
ceded. The Company decreased the quota-share portion of business
ceded pursuant to this agreement to 50% at September 1, 1995, which
was further decreased to 25% effective April 1, 1996. Premium
deposits ceded pursuant to this reinsurance agreement reduced net
premium by $2,301 in the first quarter of 1996 compared to $5,452
in 1995.
Gross domestic premium deposits received from interest-
sensitive annuities and financial products were $6,288 for the
three months ended March 31, 1996 compared to $8,731 for the three
months ended March 31, 1996. The decline is partially due to
increased competitive pressures. To protect its profit margins,
the Company was not willing to match other insurers' high interest
crediting and commission rates. Since the Company's operating
income is primarily a function of its investment spreads, mortality
experience, and operating expenses, a change in premium deposits in
a single period does not directly cause operating income to change,
although continued increases or decreases in premiums may affect
the growth rate of total assets on which investment spreads are
earned.
GAAP premium income for the first quarter of 1996 was $1,499,
an increase of 8% from $1,394 for the first quarter of 1995. This
increase is mainly attributable to the inclusion of Dixie National
Life in the results of operations for periods after October 2,
1995. Dixie National Life's premium income of $406 in 1996 more
than offsets the decline in premiums from the cession of a portion
of First International's life insurance business and the regular
policy lapses, surrenders and expiries in the Company's closed
blocks of business.
Net Investment Income. Net investment income decreased to
$4,660 for the first quarter of 1996 from $4,679 for the comparable
period of 1995. The decrease primarily resulted from a decrease in
the average annualized yield of the Company's investment portfolio
to 7.38% from 7.60% for the first quarter of 1996 and 1995,
respectively, and the sale of the invested assets of First
International. The interest rate environment was generally lower
in 1996 than in the first quarter of 1995, and this is the main
reason investment yields declined. The amortized cost of total
invested assets increased 5% to $257,337 at March 31, 1996 from
$245,609 at December 31, 1994, reflecting increases due to the
continued growth in the Company's total invested assets
attributable to sales of flexible premium deferred annuities
("FPDAs") and the inclusion of Dixie National Life in the results
of operations effective October 2, 1995.
Net Realized Investment Gains. Net realized investment gains
increased to $238 from $55 for the first quarter of 1996 and 1995,
respectively. Net realized gains from trading account securities
increased to $28 from $22 for the first quarter of 1996 and 1995,
respectively. Net realized gains fluctuate from period to period
and arise when securities are sold in response to changes in the
investment environment which provide opportunities to maximize
return on the investment portfolio without adversely affecting the
quality and overall yield of the investment portfolio.
The pretax net unrealized gain (loss) on the Company's fixed
maturity portfolio was $(2,046) at March 31, 1996 compared to
$6,449 at December 31, 1995, reflecting the general rise in
interest rates during the quarter. The gross unrealized losses and
gains on fixed maturity securities were $(5,250) and $3,204 at March
31, 1996, respectively. In the absence of continued decreases in
interest rates the Company may be unable to realize gains on its
investment portfolio at the levels of prior years or could
recognize losses from sales of securities prior to maturity. The
Company's future earnings could be adversely affected to the extent
it is unable to realize gains on its investment portfolio.
Gain on disposal of subsidiaries. On March 18, 1996, the
Company completed the sale of a duplicate charter associated with
First International to GIAC. The Company received sale proceeds of
$11,493, including $1,500 for the charter and licenses associated
with First International and $1,800 of reinsurance ceding
commissions. In addition, First International, Standard Life and
GIAC have entered into a series of reinsurance and other agreements
that include provisions for Standard Life to administer current
First International policies.
In an unrelated matter, the Company decided in February 1996
to terminate the reinsurance agreement between Standard Reinsurance
and Salamandra, and to not renew the Barbados license of Standard
Reinsurance. This resulted in the write-off of SMC's investment
in Standard Reinsurance and certain intangible assets of Standard
Reinsurance amounting to $156.
The combined effect of the pre-tax gain on the sale of First
International and related contracts, and the Standard Reinsurance
write-offs, was $886 in the first quarter of 1996.
Universal Life Policy Charges. Universal life policy charges
decreased 12% to $334 for the first quarter of 1996 compared to
$374 for the first quarter of 1995. The universal life policy
charges resulted from the inclusion of Dixie National Life in
operating results for periods after October 2, 1995 which offset
the absence of policy charges from the Company's closed blocks of
universal life business which were sold to GIAC through a
reinsurance contract effective January 1, 1996.
Amortization of Excess of Net Assets Acquired Over Acquisition
Cost. Amortization of excess of net assets acquired over
acquisition cost ("negative goodwill") is recorded to amortize into
earnings the negative goodwill recorded in connection with the
acquisition of Standard Management International in 1993. The
negative goodwill is being amortized on a straight-line basis over
five years. Amortization of negative goodwill was $347 for the
first and second quarter of 1996 and 1995, respectively.
Management Fees and Similar Income From Separate Accounts.
Management fees and similar income is recorded from investment
management fee income recorded by Standard Management International
on its separate account assets and investment contracts.
Management fees and similar income from separate accounts increased
45% to $385 for the first quarter of 1996 from $266 for the first
quarter of 1995. This increase is due primarily to an increase in
the value of assets held in separate accounts from $94,301 at
December 31, 1994 to $124,138 at March 31, 1996. Net deposits from
sales of unit-linked products by Standard Management International
were $3,553 and $8,231 for the three months ended March 31, 1996
and 1995, respectively.
Annuity Policy Charges and Other Income. Annuity policy
charges and other income primarily includes override commissions
received from unaffiliated companies by Standard Marketing
Corporation ("Standard Marketing"), a wholly-owned subsidiary which
is a wholesale distributor of life insurance and annuity products,
and policy surrender charges on annuity products. Annuity policy
charges and other income increased $243 or 92% to $507 for the
first quarter of 1996 compared to $264 for the comparable 1995
period. The increase resulted primarily from administration fees and
other income related to reinsurance and administration agreements with GIAC
in 1996 and increased commissions received by Standard Marketing from the
sale of unaffiliated products.
Benefits and Claims. Benefits and claims include life
insurance and payout annuity benefits paid and changes in policy
reserves. Benefits and claims decreased 54% to $827 for the first
quarter of 1996 from $1,811 for the first quarter of 1995. The
decrease resulted primarily from a decrease in death and surrender benefits
primarily due to the business ceded to GIAC. Mortality experience
is volatile with no predictable trends from quarter to quarter.
Interest Credited on Annuities and Other Financial Products.
Interest credited on annuities and other financial products was
$2,645 for the first quarter of 1996, an increase of $200 or 3%
from $2,562 for the comparable prior year period. The increase
resulted primarily from increases in interest credited from the
growth in policy reserves for FPDAs. This more than offset the
Company's continued ability to enhance investment spreads due to
its decrease of credited interest rates on annuities and other
financial products. At March 31, 1996, the weighted average
interest credited rate for Standard Life's annuities and other
financial product liabilities was 5.26% compared to 5.77% at March
31, 1995.
Salaries and Wages. Salaries and wages were $1,208 for the
first quarter of 1996, an increase of 8% from $1,041 for the
comparable prior year period. This fluctuation was caused
primarily by the acquisition of Dixie National Life.
Amortization. Amortization expense includes charges to
operations for the amortization of deferred policy acquisition
costs, the present value of future profits, the excess of cost over
net assets acquired and subsidiary organization costs.
Amortization expense increased 26% to $447 for the first quarter of
1996 from $356 for the first quarter of 1995. The increase in
current year amortization expense resulted primarily from increased
amortization of deferred acquisition costs as gross profits from
business sold in recent years began to emerge and from the
amortization of present value of future profits for the acquisition
of Dixie National Life, which more than offset reduced amortization
of excess of cost over net assets acquired and present value of
future profits due to the sale of First International.
Other Operating Expenses. Other operating expenses increased
60% to $2,115 for the first quarter of 1996 from $1,321 for the
first quarter of 1995. The increase in other operating expenses
resulted primarily from the expenses of Dixie National Life
included in the results for the first quarter of 1996 and the
increased expenses related to potential acquisitions.
Interest Expense and Financing Costs. Interest expense and
financing costs increased to $123 in 1996 from $18 in 1995. The
increase in interest expense during 1996 resulted from the
borrowings on the Revolving Line of Credit Agreement and the
capital lease obligations, and amortization of the deferred debt
issuance costs associated with the Revolving Line of Credit
Agreement. These borrowings occurred after March 31, 1995.
Federal Income Taxes. Federal income tax expense (credit) was
$(1,174) for the first quarter of 1996, compared to $(16) for the
first quarter of 1995. The change is primarily due to tax benefits
related to the sale of First International. Also, the effective
rates are less than the statutory rates primarily because the
amortization of excess of net assets acquired over acquisition cost
resulting from the acquisition of Standard Management International
is not subject to United States income tax. The Company also has
received the benefits of a special deduction available to small
life insurance companies and the utilization of operating loss
carryforwards. The benefits of the special deduction available to
small life insurance companies will no longer be available when
consolidated assets exceed $500,000.
LIQUIDITY AND CAPITAL RESOURCES
SMC is an insurance holding company. The liquidity
requirements of SMC are met primarily from management fees,
equipment rental fees and payments for other charges and dividends
received from SMC's subsidiaries as well as SMC working capital.
These are SMC's primary source of funds to pay operating expenses
and meet debt service obligations. The payment of dividends and
management and other fees by Standard Life to SMC is subject to
restrictions under the insurance laws of Indiana, Standard Life's
jurisdiction of domicile. These internal sources of liquidity have
been supplemented in the past by external sources such as lines of
credit and revolving credit agreements and long-term debt and
equity financing in the capital markets.
The Company reported on a consolidated GAAP basis net cash
provided (used) by operations of $2,416 and $3,940 for
the first quarter of 1996 and 1995, respectively. Although
deposits received on the Company's interest-sensitive annuities and
other financial products are not included in cash flow from
operations under GAAP, such funds are available for use by the
Company. Cash provided (used) by operations plus net deposits
received, less net account balances returned to policyholders on
interest sensitive annuities and other financial products, resulted
in positive cash flow of $2,597 and $2,354 for the first quarter of
1996 and 1995, respectively.
SMC's "parent company only" operating expenses (not including
class action litigation and settlement costs and interest expense)
were $774 and $476 for the first quarter of 1996 and 1995,
respectively. Assuming the continuation of current debt level
($5,600) and the current interest rates (weighted average rate of
8.625%) annual debt service in 1996 would be approximately $460 in
interest expense on the Revolving Line of Credit Agreement with a
bank (the "Credit Agreement"). In addition, SMC will also pay $539
in rental payments relating to a capital lease obligation in 1996.
In April 1993, SMC instituted a program to repurchase its
common stock from time to time. The purpose of the stock
repurchase program is to enhance shareholder value. The Company
has repurchased 925,051 shares of its common stock for $4,710 as of
March 31, 1996. At March 31, 1996, the Company is authorized to
purchase an additional 574,949 shares under this program. The
Company implemented a policy to issue shares for the exercise of
stock options from treasury stock. The repurchases in 1996 have
been paid through additional borrowings under the Credit Agreement.
In February 1996, SMC instituted a program to repurchase from
time to time up to 300,000 shares of its Class S Preferred Stock in
the open market or privately negotiated transactions. As of April
30, 1996, SMC has repurchased and retired 53,820 shares of its Class S
Preferred Stock for $335.
On May 1, 1996, the Board of Directors declared a stock
dividend of 5% on shares of its common stock for shareholders of
record on May 17, 1996. The stock dividend will be distributed on
June 21, 1996, with shareholders receiving shares of common stock
equivalent to 5% of common shares owned as of May 17, 1996 and
costs equivalent for fractional shares. The maximum number of
shares to be issued pursuant to this action is 226,576.
At April 30, 1996, SMC had "parent company only" cash and
short-term investments of $250. These funds are available to the
Company for general corporate purposes including repayment of debt
outstanding and additional capital infusions into Standard Life.
Pursuant to the management services agreement with SMC,
Standard Life paid SMC a monthly fee of $150 during 1996 and 1995
for certain management services related to the production of
business, investment of assets and evaluation of acquisitions. The
agreement was approved by the Indiana Department of Insurance with
the stipulation that Dixie National Life would pay an annual fee of
at least $1,500 to Standard Life during 1996. A management service
agreement between Standard Life and Dixie National Life, which
currently provides for a management fee of $154 per month to be
paid by Dixie National Life to Standard Life, was approved by the
Mississippi Department of Insurance. Both of these agreements
provide that they may be modified or terminated by the department
of insurance in the event of financial hardship of Standard Life or
Dixie National Life.
Pursuant to the management services agreement with SMC,
Premier Life (Luxembourg) paid SMC a management fee of $25 per
quarter during 1996 and 1995 for certain management and
administrative services. The agreement provides that it may be
modified or terminated by either SMC or Premier Life (Luxembourg).
At April 1, 1995, SMC sold its property and equipment to a
leasing/financing company for $1,396 and subsequently entered into
a capital lease obligation whereby SMC pays a monthly rental amount
of $45. SMC charges a monthly equipment rental fee to its
subsidiaries of $50.
The Credit Agreement provides for SMC to borrow up to $6,000
in the form of a five-year reducing revolving loan arrangement,
which may be extended to seven years at the discretion of the bank.
SMC has agreed to pay a non-use fee of .50% per annum on the unused
portion of the commitment. In connection with the Credit
Agreement, SMC issued warrants to the bank to purchase 30,000
shares of SMC Common Stock. Borrowings under this Credit Agreement
may be used for contributions to surplus of insurance subsidiaries,
acquisition financing, and repurchases of preferred and common
stock of the Company. The debt is secured by a Pledge Agreement of
all of the issued and outstanding shares of common stock of
Standard Life and Standard Marketing. Interest on the borrowings
under the Credit Agreement is determined, at the option of SMC, to
be: (i) a fluctuating rate of interest to the corporate base rate
announced by the bank from time to time plus 1% per annum, or (ii)
a rate at LIBOR plus 3.25%. Given the Company's current level of
borrowings, no principal repayments will be required until November
1997. With the bank's consent, principal payments may be deferred
until November 1998 or 1999. Indebtedness incurred under the
Credit Agreement is subject to certain restrictions and covenants
including, among other things, certain minimum financial ratios,
minimum statutory surplus requirements for the insurance
subsidiaries, minimum consolidated equity requirements for the
Company and certain investment and indebtedness limitations. As of
March 31, 1996, the Company was in compliance with all restrictions
and covenants in the Credit Agreement. At April 30, 1996, SMC had
borrowed $5,600 under this Credit Agreement at interest rates
ranging from 8.3125% to 8.8125%.
Dividends from Standard Life to SMC are limited by laws
applicable to insurance companies. As an Indiana domiciled
insurance company, Standard Life may pay a dividend or distribution
from its surplus profits, without the prior approval of the Indiana
Commissioner of Insurance, if the dividend or distribution,
together with all other dividends and distributions paid within the
preceding twelve months, does not exceed the greater of (i) net
gain from operations or (ii) 10% of surplus, in each case as shown
in its preceding annual statutory financial statements. For the
year ended December 31, 1995, Standard Life reported statutory net
gain from operations of $124 and statutory surplus of $10,186.
During 1996, Standard Life can pay dividends of $1,019 without
regulatory approval; Standard Life must notify the Indiana
regulatory authorities of their intent to pay dividends at least
thirty days prior to payment. Regulatory approval will be required
for additional dividend payments in excess of this amount by
Standard Life during 1996.
SMC anticipates the available cash from its existing working
capital, plus anticipated 1996 dividends, management fees and
rental income, will be more than adequate to meet its anticipated
1996 "parent company only" cash requirements for 1996.
SMC has a note receivable of $2,858 from an affiliate and a
note payable of $2,858 to a different affiliate. This note
receivable and note payable are eliminated in the consolidated
financial statements.
Standard Life. The principal liquidity requirements of
Standard Life are its contractual obligations to policyholders,
dividend, rent and management fee payments to SMC and other
operating expenses. The primary source of funding for these
obligations has been cash flow from premium income, net investment
income, net realized investment gains and sales of FPDAs. These
sources of liquidity for Standard Life significantly exceed
scheduled uses. Liquidity is also affected by unscheduled benefit
payments including death benefits and policy withdrawals and
surrenders. The amount of withdrawals and surrenders is affected
by a variety of factors such as renewal interest crediting rates,
interest rates for competing products, general economic conditions,
Standard Life's A.M. Best ratings and events in the industry which
affect policyholders' confidence.
The policies and annuities issued by Standard Life contain
provisions which allow policyholders to withdraw or surrender their
policies under defined circumstances. These policies and annuities
generally contain provisions which apply penalties or otherwise
restrict the ability of policyholders to make such withdrawals or
surrenders. Standard Life closely monitors the surrender and
policy loan activity of its insurance products and manages the
composition of its investment portfolios, including liquidity, in
light of such activity.
Changes in interest rates may affect the incidence of policy
surrenders and other withdrawals. In addition to the potential
impact on liquidity, unanticipated withdrawals in a changing
interest rate environment could adversely affect earnings if the
Company were required to sell investments at reduced values in
order to meet liquidity demands. The Company manages the asset and
liability portfolios in order to minimize the adverse earnings
impact of changing market interest rates. The Company seeks assets
which have duration characteristics similar to the liabilities
which they support.
Statutory surplus is computed according to rules prescribed by
the National Association of Insurance Commissioners ("NAIC"), as
modified by the Indiana Department of Insurance, or the state in
which the insurance subsidiaries do business. Statutory accounting
rules are different from GAAP and are intended to reflect a more
conservative perspective. The Company's long-term growth goals
contemplate continued growth in its insurance businesses. To
achieve these growth goals, Standard Life will need to increase
statutory surplus. Additional statutory surplus may be secured
through various sources such as internally generated statutory
earnings, equity sales or infusions by the Company with funds
generated through debt or equity offerings. With respect to new
business, statutory accounting practices require that: (i)
acquisition costs and (ii) reserves for future guaranteed principal
payments and interest in excess of statutory rates, be expensed in
the year the new business is written. These items cause a
statutory loss ("surplus strain") from many insurance products in
the year they are issued. The Company designs its products to
minimize such first-year losses, but certain products continue to
cause a statutory loss in the year written. For each product, the
Company controls the amount of new premiums written in order to
manage the effect of such statutory surplus strain.
In March 1996, Standard Life sold its subsidiary, First
International, and realized an increase in statutory capital and
surplus of approximately $4,156 from the statutory gain on the sale
and related reinsurance transactions.
Commencing January 1, 1995, the Company began to reinsure a
portion of its annuity business. The primary purposes of the
reinsurance agreement are to limit the net loss arising from large
risks, maintain the Company's exposure to loss within capital
resources, and provide additional capacity for future growth. The
Company's largest annuity reinsurer at March 31, 1996, Winterthur
Life Re Insurance Company ("Winterthur"), is rated "A" (Excellent)
by A.M. Best. From January 1, 1995 to August 31, 1995
approximately 70% of certain of Standard Life's annuity business
produced was ceded. The Company decreased the quota-share portion
of business ceded to 50% at September 1, 1995 and further reduced
it to 25% effective April 1, 1996. Winterthur limits dividends and
other transfers by Standard Life to SMC or affiliated companies in
certain circumstances.
State insurance regulatory authorities impose minimum risk-
based capital requirements on insurance enterprises that were
developed by the NAIC. The formulas for determining the amount of
risk-based capital ("RBC") specify various weighting factors that
are applied to financial balances or various levels of activity
based on the perceived degree of risk. Regulatory compliance is
determined by a ratio (the "Ratio") of the enterprise's regulatory
total adjusted capital, as defined by the NAIC, to its authorized
control level RBC, as defined by the NAIC. Enterprises below
specific trigger points or ratios are classified within certain
levels, each of which requires specified corrective action. Each
of the Company's insurance subsidiaries has a Ratio that is at
least 300% of the minimum RBC requirements; accordingly, the
subsidiaries meet the RBC requirements.
Management believes that operational cash flow of Standard
Life will be sufficient to meet its anticipated needs for 1996. If
the need arises for cash which is not readily available, additional
liquidity could be obtained from the sale of invested assets. Net
cash flow from operations on a statutory basis of Standard Life,
after payment of benefits and operating expenses, was $6,856 and
$4,263 for the three months ended March 31, 1996 and year ended
December 31, 1995, respectively.
Standard Management International. The balance sheet of the
Company at March 31, 1996, includes a $3,816 credit representing
the excess of net assets acquired over acquisition cost which will
be amortized into future earnings on the purchase of Standard
Management International. This amortization is a non-cash credit
to the Company statement of operations.
Standard Management International may pay dividends from
accumulated earnings without regulatory approval. Premier Life
(Bermuda) did not pay dividends in 1995 and 1994. Standard
Management International and Premier Life (Luxembourg) were not
permitted to pay dividends in 1995 and 1994 due to accumulated
losses.
Standard Management International policyholders invest in
assets denominated in a wide range of currencies. Policyholders
effectively bear the currency risk, if any, as these investments
are matched by policyholder separate account liabilities.
Policyholders are not permitted to invest directly into options,
futures and derivatives. Therefore, their investment and currency
risk is limited to premiums they have paid. Standard Management
International could be exposed to currency fluctuations if
currencies within the conventional investment portfolio or certain
actuarial reserves are mismatched. The assets and liabilities of
this portfolio and the reserves are continually matched by the
company and at regular intervals by the independent actuary. In
addition, Premier Life (Luxembourg)'s shareholder's equity is
denominated in Luxembourg francs. Premier Life (Luxembourg) does
not hedge it's translation risk, but this is currently being
reviewed to protect SMC against currency fluctuations. At March
31, 1996, there is an unrealized gain from foreign currency
translation adjustment of $1,137.
Uncertainties Regarding Intangible Assets. Included in the
Company's financial statements as of March 31, 1996 are certain
assets that are valued for financial statement purposes primarily
on the basis of assumptions established by the Company's
management. These assets include deferred acquisition costs,
present value of future profits, costs in excess of net assets
acquired and organization and deferred debt issuance costs. The
total value of these assets reflected in the March 31, 1996
consolidated balance sheet aggregated $30,790, or 7% of its assets.
The Company has established procedures to periodically review the
assumptions utilized to value these assets and determine the need
to make any adjustments in such values in the Company's
consolidated financial statements. The Company has determined that
the assumptions utilized in the initial valuation of these assets
are consistent with the current operations of the Company as of
March 31, 1996.
In February 1996, the Company decided to terminate the
operations of Standard Reinsurance, which resulted in the write-off
of SMC's investment in Standard Reinsurance and certain intangible
assets in the first quarter of 1996 amounting to $156.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
11.1 Statement regarding computation of per share earnings.
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 1996.
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.
Dated: May 14, 1996
STANDARD MANAGEMENT CORPORATION
(Registrant)
By: /s/ RONALD D. HUNTER
Ronald D. Hunter
Chairman of the Board,
President and
Chief Executive Officer
By: /s/ JOHN J. QUINN
John J. Quinn
Executive Vice President,
Treasurer and
Chief Financial Officer
(Principal Financial Officer)
<PAGE>
EXHIBIT INDEX
Sequential
Exhibit Page
Number Description of Document Number
- - ----------- -------------------------------------------- ----------
11.1 Statement regarding computation of per
share earnings.
27 Financial Data Schedule
<TABLE>
EXHIBIT 11.1
STANDARD MANAGEMENT CORPORATION
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(Unaudited, Dollars in Thousands, Except Per Share Amounts)
Three Months Ended
March 31,
-------------------------
1996 1995
--------- ---------
PRIMARY
<S> <C> <C>
Shares outstanding, beginning of period 4,957,548 5,039,481
Weighted average shares issued (purchased) during the period:
Treasury stock purchased (221,316) (3,672)
Common equivalent shares related to:
Stock warrants at average market price 0 0
Stock options at average market price 0 0
Net issuable shares for modified treasury stock method
(after assumed buyback of 20% of outstanding stock
options and warrants) 1,045,620 0
--------- ---------
Weighted average primary shares outstanding 5,781,852 5,035,809
========= =========
Income before extraordinary gain on early redemption of preferred stock and
preferred stock dividends as reported $ 2,665 $ 286
Reduction in interest expense and increase in short-term investment
income for modified treasury stock method 131 0
--------- ---------
2,796 286
Extraordinary gain on early redemption of preferred stock 101 0
--------- ---------
Net income (as adjusted) 2,897 286
Preferred stock dividends as reported (46) 0
Preferred stock dividends reduction for modified stock method 46 0
--------- ---------
Earnings available to common shareholders (as adjusted) $ 2,897 $ 286
========= =========
Earnings Per Share:
Income before extraordinary gain on early redemption of
preferred stock and preferred stock dividends $ .48 $ .06
Extraordinary gain on early redemption of preferred stock .02 0
--------- ---------
Net income .50 .06
Preferred stock dividend 0 0
--------- ---------
Earnings available to common shareholders $ .50 $ .06
========= =========
FULLY DILUTED <F1>
Weighted average primary shares outstanding 5,781,852 5,035,809
Incremental common equivalent shares:
Related to options and warrants using the period-end market price,
if higher than average market price 0 135,388
--------- ---------
Weighted average fully diluted shares outstanding 5,781,852 5,171,197
========= =========
Income before extraordinary gain on early redemption of preferred stock
and preferred stock dividends as reported $ 2,665 $ 286
Reduction in interest expense and increase in short-term investment income
for modified treasury stock method 125 0
--------- ---------
2,790 286
Extraordinary gain on early redemption of preferred stock 101 0
--------- ---------
Net income (as adjusted) 2,891 286
Preferred stock dividends as reported (46) 0
Preferred stock dividends reduction for modified stock method 46 0
--------- ---------
Earnings available to common shareholders (as adjusted) $ 2,891 $ 286
========= =========
Earnings Per Share:
Income before extraordinary gain on early redemption of
preferred stock and preferred stock dividends $ .48 $ .06
Extraordinary gain on early redemption of preferred stock .02 0
--------- ---------
Net income .50 .06
Preferred stock dividend 0 0
--------- ---------
Earnings available to common shareholders $ .50 $ .06
========= =========
<FN1> This calculation is submitted in accordance with the Securities Exchange Act of 1934
Release No. 9083 although not required by footnote 2 to paragraph 14 of APB Opinion
No. 15 because it results in dilution of less than 3%.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statements of income filed as
part of the Quarterly Report on Form 10-Q for the Quarterly Period Ended March
31, 1996 and is qualified in its entirety by reference to such Quarterly Report
on Form 10-Q.
</LEGEND>
<CIK> 0000853971
<NAME> STANDARD MANAGEMENT CORPORATION
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 227,630
<DEBT-CARRYING-VALUE> 227,630
<DEBT-MARKET-VALUE> 227,630
<EQUITIES> 51
<MORTGAGE> 3,006
<REAL-ESTATE> 556
<TOTAL-INVEST> 249,265
<CASH> 1,521
<RECOVER-REINSURE> 57,514
<DEFERRED-ACQUISITION> 13,613
<TOTAL-ASSETS> 471,709
<POLICY-LOSSES> 289,394
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 2,295
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 5,418
2,772
0
<COMMON> 39,808
<OTHER-SE> (2,288)
<TOTAL-LIABILITY-AND-EQUITY> 471,709
1,499
<INVESTMENT-INCOME> 4,660
<INVESTMENT-GAINS> 238
<OTHER-INCOME> 2,459
<BENEFITS> 3,472
<UNDERWRITING-AMORTIZATION> 447
<UNDERWRITING-OTHER> 3,446
<INCOME-PRETAX> 1,491
<INCOME-TAX> (1,174)
<INCOME-CONTINUING> 2,665
<DISCONTINUED> 0
<EXTRAORDINARY> 101
<CHANGES> 0
<NET-INCOME> 2,766
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
