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, 1998
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)
incorporationor 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, 1998
----- -----------------------------
Common Stock, 25,893,100
Par Value $.01 Per Share
<PAGE>
Life USA HOLDING, INC.
Securities and Exchange Commission Form 10-Q
for the First Quarter Ended March 31, 1998
I N D E X
Page
Number
------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheet (Unaudited)
March 31, 1998 and December 31, 1997.............................3-4
Condensed Consolidated Statement of Income
(Unaudited) Three months ended March 31, 1998
and March 31, 1997.................................................5
Condensed Consolidated Statement of Cash Flows
(Unaudited) Three months ended March 31, 1998
and March 31, 1997.................................................6
Notes to Condensed Consolidated Financial Statements
(Unaudited)......................................................7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................9-22
Management's Discussion and Analysis of Financial
Condition and Results of Operations on Business Segments ......23-26
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings.................................................27
Item 2. Changes in Securities.............................................27
Item 3. Defaults Upon Senior Securities...................................27
Item 4. Submission of Matters to a Vote of Security Holders...............27
Item 5. Other Information.................................................27
Item 6. Exhibits and Reports on Form 8-K..................................27
SIGNATURES: ..................................................................28
<PAGE>
Life USA HOLDING, INC.
Condensed Consolidated Balance Sheet
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturity investments:
Available for sale, at fair value (amortized cost:
$857,013 at March 31, 1998 and $846,466 at
December 31, 1997) $ 892,262 $ 882,159
Held to maturity, at amortized cost (fair value:
$1,308,207 at March 31, 1998 and $1,289,621 at
December 31, 1997) 1,267,985 1,249,488
Policy loans 30,369 29,003
---------- ----------
Total investments 2,190,616 2,160,650
Cash and cash equivalents 66,926 34,139
Accrued investment income 30,923 30,976
Future policy benefits recoverable and amounts due
from reinsurers 2,659,082 2,577,598
Deferred policy acquisition costs 218,507 215,097
Other assets 53,405 44,314
---------- ----------
$5,219,459 $5,062,774
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
Life USA HOLDING, INC.
Condensed Consolidated Balance Sheet (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits $ 4,801,450 $ 4,686,172
Other policyholders' funds 11,041 9,208
Amounts due reinsurers 49,832 38,403
Accrued commissions to agents 7,096 11,583
Taxes, licenses and fees payable 9,269 8,415
Accounts payable 5,948 5,323
Convertible subordinated debentures 6,021 36,030
Deferred income taxes 17,215 16,513
Other liabilities 42,309 28,727
----------- -----------
Total liabilities 4,950,181 4,840,374
Shareholders' equity:
Preferred stock, $.01 par value; 15,000,000
shares authorized, none issued -- --
Common stock, $.01 par value; 45,000,000
shares authorized, 25,893,100 issued and
outstanding (22,723,830 shares at December 31, 1997) 259 227
Common stock to be issued, 39,012 shares
(35,458 shares at December 31, l997) 608 565
Additional paid-in capital 147,044 108,372
Notes receivable from stock sales (5,710) (7,477)
Retained earnings 118,584 112,564
Accumulated other comprehensive income:
Net unrealized gain on fixed
maturity investments - available for sale 8,493 8,149
----------- -----------
Total shareholders' equity 269,278 222,400
----------- -----------
$ 5,219,459 $ 5,062,774
=========== ===========
</TABLE>
See accompanying notes.
<PAGE>
Life USA HOLDING, INC.
Condensed Consolidated Statement of Income
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Policyholder charges $ 13,066 $ 11,802
Net investment income 38,623 34,306
Net realized gains (losses) on investments (21) 1,234
Commissions and expense allowances, net 39,117 31,379
Other 1,293 631
------------ ------------
Total revenues 92,078 79,352
Benefits and expenses:
Interest credited to policyholder account values 29,005 26,245
Other benefits to policyholders 6,144 4,899
Amortization of deferred policy acquisition costs 7,510 6,581
Commissions 22,908 17,974
Taxes, licenses and fees (106) 569
Operating expenses 16,995 15,004
------------ ------------
Total benefits and expenses 82,456 71,272
------------ ------------
Income before income taxes 9,622 8,080
Income taxes 3,613 2,935
------------ ------------
Net income $ 6,009 $ 5,145
============ ============
Basic earnings per common share $ .23 $ .24
============ ============
Diluted earnings per common share $ .23 $ .22
============ ============
Number of shares used in per share calculation:
Basic 25,736,873 21,347,046
Diluted 26,939,419 24,119,582
</TABLE>
See accompanying notes.
<PAGE>
Life USA HOLDING, INC.
Condensed Consolidated Statement of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,009 $ 5,145
Adjustments to reconcile net income to net
cash provided by operating activities:
Accretion of discount on investments, net (1,211) (641)
Net realized (gains) losses on investments 21 (1,234)
Policy acquisition costs deferred (10,237) (8,800)
Amortization of deferred policy acquisition costs 7,510 6,581
Other changes 19,370 9,547
---------- ----------
Net cash provided by operating activities 21,462 10,598
Cash flows from investing activities:
Fixed maturity investments-available for sale:
Purchases (40,692) (35,910)
Proceeds from sales 25,789 33,403
Proceeds from maturities and principal payments
on mortgage-backed securities 4,631 1,910
Fixed maturity investments-held to maturity:
Purchases (27,004) (33,144)
Proceeds from maturities and principal payments
on mortgage-backed securities 9,483 3,442
Investments in and loans to field marketing
organizations (5,500) (1,350)
---------- ----------
Net cash used in investing activities (33,293) (31,649)
Cash flows from financing activities:
Receipts from universal life and investment products 77,058 65,224
Withdrawals on universal life and investment products (73,581) (59,973)
Interest credited to policyholder account values 29,005 26,245
Change in deferred liability and reserves 5,278 4,020
Proceeds from exercise of stock options 3,814 1,484
Other financing activities 3,044 1,168
---------- ----------
Net cash provided by financing activities 44,618 38,168
---------- ----------
Net increase in cash and cash equivalents 32,787 17,117
Cash and cash equivalents at beginning of the period 34,139 20,989
---------- ----------
Cash and cash equivalents at end of the period $ 66,926 $ 38,106
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
Life USA HOLDING, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 1998
(Unaudited)
1. The condensed consolidated balance sheet of Life USA Holding, Inc. (the
Company) at March 31, 1998 and the related condensed consolidated
statements of income and cash flows for the three months ended March
31, 1998 and 1997, 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, 1998 are not
necessarily indicative of the results to be expected for the full year.
The balance sheet at December 31, 1997 is derived from the audited
balance sheet as of that date.
2. Certain 1997 amounts have been reclassified to conform to the 1998
presentation.
3. The accompanying condensed consolidated financial statements should be
read in conjunction with the notes to the December 31, 1997
consolidated financial statements.
4. The net unrealized gain on fixed maturity investments - available for
sale included in shareholders' equity consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- ------------
<S> <C> <C>
Gross unrealized gain on fixed maturity
investments - available for sale $ 35,249 $ 35,693
Adjustments for:
Deferred tax liability (12,492) (12,835)
Deferred policy acquisition costs (21,945) (22,629)
Deferred tax asset 7,681 7,920
---------- ----------
Net unrealized gain on fixed maturity
investments - available for sale $ 8,493 $ 8,149
========== ==========
</TABLE>
5. Some of the products sold by the Company are single premium deferred
annuity products with an additional benefit credited to the policy
annuitization value based on the growth in the Standard & Poor's 500
Index. The Company has analyzed the characteristics of these benefits
and has purchased option contracts with similar characteristics to
hedge these risks. These options are reported at fair value in other
assets on the consolidated balance sheet. Unrealized gains and losses
on the contracts are recorded in other revenues to offset the effects
of changes in the future policy benefits liability for the index
benefit.
The Financial Accounting Standards Board (FASB) has issued an exposure
draft, "Accounting for Derivative and Similar Financial Instruments and
for Hedging Activities," which addresses the accounting for derivative
instruments, such as the options owned by the Company, used as hedges
against changes in the fair value of specified assets or liabilities.
The Company's use of option contracts to hedge against increases in the
future policy benefits
<PAGE>
liability and the Company's accounting treatment of these contracts
fully meet the criteria for fair value hedge accounting defined in this
exposure draft. A final statement from the FASB could be issued in
1998, and would be effective for financial statements issued for
periods beginning January 1, 2000. The Company's accounting treatment
is also consistent with the fair value treatment prescribed by
Statement of Financial Accounting Standards (SFAS) No. 80, "Accounting
for Futures Contracts" for hedges of liabilities carried at fair value.
6. In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 125 defines the accounting treatment and disclosure
requirements for securities lending programs. During the third quarter
of 1997, the Company entered a securities lending program with the
custodial bank of the Company's fixed maturity investment portfolio.
The Company currently reports fees earned under this arrangement in net
investment income. The effective date of the securities lending
provisions of SFAS No. 125 was amended by SFAS No. 127 to apply to
transactions occurring after December 31, 1997 and was adopted by the
Company in the first quarter of 1998. The adoption of this statement
had no impact on its financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 defines the financial statement presentation for
all changes in a company's equity during a period except those
resulting from investments by owners and distributions to owners. SFAS
No. 130 was adopted by the Company in the first quarter of 1998. The
effect of the statement is merely a change in presentation on the
balance sheet. The adoption of this statement had no impact on the
amount of net income, earnings per share or total shareholders' equity
reported.
In December 1997, the American Institute of Certified Public
Accountants released Statement of Position (SOP) 97-3 titled
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments." The SOP was adopted by the Company in the first quarter
of 1998. As the SOP is generally consistent with the Company's former
method of accounting for assessments, adoption did not have a material
impact on its financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 supersedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise" and
defines financial and descriptive information about a company's
operating segments that is to be disclosed in financial statements.
SFAS No. 131 will be adopted by the Company for the year ended December
31, 1998.
7. In February 1998, Allianz Life Insurance Company of North America
(Allianz Life) converted the $30 million debenture it purchased from
the Company in 1995. In order to complete the conversion, the Company
issued Allianz Life 2.43 million shares of common stock at a conversion
price of $12.34 per share.
<PAGE>
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 Insurance), LifeUSA Marketing, Inc. (LifeUSA
Marketing) and LifeUSA Securities, Inc. (LifeUSA Securities) and should be read
in conjunction with the Company's consolidated financial statements and notes
thereto included elsewhere in this Report.
LifeUSA Insurance sells a variety of innovative life insurance and annuity
products which offer long-term retirement benefits to consumers who seek
protection against outliving their financial resources. These products are sold
by a national marketing and distribution system comprised of Field Marketing
Organizations (FMOs) with independent agents and serviced by home office staff.
LifeUSA Marketing conducts a variety of marketing activities for the Company,
including the acquisition of and investment in national FMOs. LifeUSA Marketing
owns a minority interest in various FMOs which are accounted for using the
equity method of accounting. In April 1998, LifeUSA Marketing acquired a
minority interest in Signature Financial Services, Inc. (SFS), a national life
insurance and annuity marketing company that has an agent base of over 7,500
agents. As a result of the transaction, SFS has become a national FMO for
LifeUSA Insurance. In March 1998, LifeUSA Marketing acquired a 50% minority
interest in Life Sales LLC, a national life insurance and annuity marketing
company that has represented the Company for ten years and operates with an
agent base of over 12,000 agents.
LifeUSA Securities is a retail broker-dealer which distributes a full range of
securities products which include: a family of LifeUSA mutual funds, other
established mutual funds, variable life insurance and annuity contracts and
general securities transactions.
In April 1998, the Company purchased a 40% minority interest in Windsor
Financial Group, LLC (Windsor), a Minneapolis-based investment management firm.
Windsor currently manages $1.5 billion in assets for financial institutions,
foundations, retirement plans and high net worth individuals. LifeUSA Insurance
will retain Windsor to manage a substantial portion of its portfolio.
Management has organized the Company into three business segments in order to
focus on the distinct functional revenue and expense characteristics associated
with the activities performed by each. The segments include: Insurance,
Marketing and Corporate. Management's Discussion and Analysis of Business
Segments which follows on page 23, focuses on these segments and the financial
information used by management to make decisions and analyze the results of
operations of each segment.
RELATIONSHIP WITH ALLIANZ LIFE
Since 1988, under the terms of agreements between the Company and Allianz Life
Insurance Company of North America (Allianz Life), life insurance and annuity
products have been produced for Allianz Life on policy forms similar to those of
LifeUSA Insurance (the "Allianz/LUSA Business"). The Company has received
commission and expense allowances, provided all administrative and other home
office services, paid commissions due agents and premium taxes on the
Allianz/LUSA Business. LifeUSA Insurance assumes 25% of the Allianz/LUSA
Business and pays commission and expense allowances on the assumed business.
Beginning in 1997, long-term
<PAGE>
care business was produced for Allianz Life, and the Company received commission
and expense allowances for that business.
In an agreement announced in January 1998 ("the agreement with Allianz Life"),
Allianz Life will acquire up to 35 percent of the outstanding common stock of
the Company over the next five years, and the current marketing agreement
between the two companies was extended to December 31, 2000.
Allianz Life will acquire its interest in the Company as a result of several
specific actions. First, over the next five years, Allianz Life will purchase
from the Company $100 million of newly issued common stock in increments of $10
million semi-annually, beginning in July of 1998. The price at which Allianz
Life will purchase the common stock will be at 250 percent of the Company's six
month average book value per share (excluding SFAS No. 115), at the time the
common stock is issued. LifeUSA Insurance may use these shares of the Company's
common stock to pay for the commission and expense allowances on business it
assumes from Allianz Life. Second, in February 1998, Allianz Life converted the
$30 million debenture it purchased from the Company in 1995. In order to
complete the conversion, the Company issued Allianz Life 2.43 million shares of
common stock at a conversion price of $12.34 per share. Allianz Life also
exercised its preemptive rights and purchased 241,846 additional shares at
$12.36 per share. Third, Allianz Life purchased 925,000 shares from certain
members of the Company's management at $16.44 per share. In addition, Allianz
Life may acquire an additional 1,604,104 shares of the Company's common stock in
open market purchases in the next year and as of March 31, 1998, Allianz Life
has acquired 909,900 of such shares.
REINSURANCE
Since its inception in 1987, LifeUSA Insurance 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 Insurance 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.
From April 1, 1991 through March 31, 1998, LifeUSA Insurance has ceded a
substantial portion of its new life insurance and annuity business to the
following three reinsurers (the Reinsurers):
* Employers Reassurance Corporation, a subsidiary of Employers Reinsurance
Corporation, a member of the General Electric Company group (Employers);
* Munich American Reassurance Company, a subsidiary of Munich Reinsurance
Company, one of the largest German insurance companies (Munich); and
* Republic-Vanguard Life Insurance Company, a member of the Winterthur Swiss
Insurance Group, one of the largest Swiss insurance companies
(Republic-Vanguard).
Effective October 1, 1995, LifeUSA Insurance began ceding 75% of its new life
insurance and annuity business to the reinsurers. Effective April 1, 1998,
LifeUSA Insurance will begin ceding 50% of its new life insurance and 70% of its
annuity business.
Effective April 1, 1998, and in accordance with the agreement with Allianz Life,
Allianz Life began assuming a portion of LifeUSA Insurance's business. Given
Allianz Life's participation and the increase in retention by
<PAGE>
LifeUSA Insurance, Munich will no longer be assuming any new business from
LifeUSA Insurance. LifeUSA Insurance receives commissions and expense allowances
on business ceded.
The following table shows LifeUSA Insurance life insurance and annuity in force
information at March 31, 1998 and December 31, 1997 (in millions):
March 31, 1998 December 31, 1997
-------------- -----------------
Life insurance account values:
All policies (1) $ 308.6 $ 299.1
Direct and assumed business (2) 265.0 257.0
Net of reinsurance (3) 102.7 99.3
Life insurance face amounts:
All policies (1) 7,951.9 7,997.5
Direct and assumed business (2) 6,883.7 6,931.7
Net of reinsurance (3) 2,317.3 2,277.7
Annuity account values:
All policies (1) 5,623.4 5,518.4
Direct and assumed business (2) 3,991.3 3,916.6
Net of reinsurance (3) 1,798.7 1,781.1
- --------------------------------------------
(1) Includes all LifeUSA Insurance products and all Allianz/LUSA Business.
(2) Includes all LifeUSA Insurance products and the Allianz/LUSA Business
assumed by LifeUSA Insurance.
(3) Includes the portion of LifeUSA Insurance products retained by LifeUSA
Insurance and the portion of Allianz/LUSA Business assumed by LifeUSA
Insurance.
Reference is made to Reinsurance in the Company and Business Description section
on pages 10-12 of the 1997 Annual Report to Shareholders and Form 10-K for
further details regarding the Company's reinsurance agreements.
RESULTS OF OPERATIONS
In the first quarter of 1998, 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 1998
for similar reasons. Primarily as a result of these factors, net income for the
first quarter of 1998 increased 17% compared to the first quarter of 1997.
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
$.03 per share on first quarter 1998 earnings per share, compared to a positive
effect of $.01 per share in first quarter 1997. In first quarter 1997, expenses
associated with a national advertising campaign had an effect of $.03 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,
1998 and 1997. These comments should be read in conjunction with the condensed
consolidated financial statements previously presented.
<PAGE>
PREMIUMS AND DEPOSITS. Total collected premiums and deposits, including the
Allianz/LUSA Business, were $289.8 million and $235.0 million in the first
quarter of 1998 and 1997, respectively, an increase of 23% 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,
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Collected Premiums and Deposits (1):
LifeUSA Insurance:
Life:
First year $ 1,481 $ 2,390
Single and renewal 13,362 13,209
---------- ----------
Total Life 14,843 15,599
Annuities 152,891 98,141
---------- ----------
Total LifeUSA Insurance collected premiums and deposits 167,734 113,740
Allianz Life:
Life:
First year 423 539
Single and renewal 3,839 3,797
---------- ----------
Total Life 4,262 4,336
Annuities 117,827 116,965
---------- ----------
Total Allianz Life collected premiums and deposits 122,089 121,301
---------- ----------
Total collected premiums and deposits $ 289,823 $ 235,041
========== ==========
</TABLE>
- ------------------------------------
(1) Includes all LifeUSA Insurance products and all Allianz/LUSA Business.
<PAGE>
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Premiums and Deposits Not Retained or Assumed (2):
LifeUSA Insurance:
Life:
First year $ 1,111 $ 1,794
Single and renewal 8,820 8,506
---------- ----------
Total Life 9,931 10,300
Annuities 113,057 70,977
---------- ----------
Total LifeUSA Insurance premiums and deposits not retained 122,988 81,277
Allianz Life:
Life:
First year 318 404
Single and renewal 2,292 2,211
---------- ----------
Total Life 2,610 2,615
Annuities 87,167 85,925
---------- ----------
Total Allianz Life premiums and deposits not assumed 89,777 88,540
---------- ----------
Total collected premiums and deposits not retained or assumed $ 212,765 $ 169,817
========== ==========
Retained or Assumed Premiums and Deposits (3):
LifeUSA Insurance:
Life:
First year $ 370 $ 596
Single and renewal 4,542 4,703
---------- ----------
Total Life 4,912 5,299
Annuities 39,834 27,164
---------- ----------
Total LifeUSA Insurance retained premiums and deposits 44,746 32,463
Allianz Life:
Life:
First year 105 135
Single and renewal 1,547 1,586
---------- ----------
Total Life 1,652 1,721
Annuities 30,660 31,040
---------- ----------
Total Allianz Life assumed premiums and deposits 32,312 32,761
---------- ----------
Total retained or assumed premiums and deposits $ 77,058 $ 65,224
========== ==========
</TABLE>
- ------------------------------------
(2) Includes premiums and deposits related to LifeUSA Insurance ceded by
LifeUSA Insurance to the Reinsurers and premiums and deposits related to
Allianz/LUSA Business that have not been assumed by LifeUSA Insurance.
(3) Includes premiums and deposits related to LifeUSA Insurance retained by
LifeUSA Insurance and premiums and deposits related to Allianz/LUSA
Business assumed by LifeUSA Insurance. LifeUSA Insurance invests these
premiums and deposits for the purpose of providing future benefits to its
policyholders.
Reference is made to Reinsurance in the Company and Business Description section
on pages 10-12 in the Annual Report to Shareholders and Form 10-K for further
details on the Company's reinsurance agreements.
<PAGE>
REVENUES. Total revenues were $92.1 million and $79.4 million in the first
quarter of 1998 and 1997, respectively. The increase in total revenues of 16%
was primarily due to the increase in net commissions and expense allowances
associated with increased production of business not retained or assumed. Also
contributing to the increase in revenues was the increase in net investment
income generated by the growth of annuities in force and invested assets. The
discussion which follows gives a line-by-line comparison of revenues for the
first quarter ended March 31, 1998 and 1997. See also the Business Segments
section which follows for additional analysis of the results of operations.
Policyholder charges, which represent the amounts assessed against policy
account balances for the cost of insurance, policy administration and
surrenders, increased 11%, or $1.3 million, in the first quarter of 1998
compared to the first quarter of 1997 reflecting the growth in and maturity of
LifeUSA Insurance's net retained account values in force.
An increase in net investment income of 13%, or $4.3 million, in the first
quarter of 1998 compared to the first quarter of 1997 is primarily attributable
to an increase in invested assets (fixed maturity investments and cash and cash
equivalents) to $2.23 billion at March 31, 1998 from $1.92 billion at March 31,
1997, which was partially offset by the reduction in yield on investments. The
weighted average annual yield on invested assets (exclusive of realized and
unrealized gains and losses) was 7.26% at March 31, 1998, compared to 7.42% at
March 31, 1997.
In accordance with generally accepted accounting principles, net realized gains
on investments (excluding gains/losses on fixed assets) 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, 1998 and 1997 (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Net realized gains on investments $ 40 $ 1,234
Increase in:
Amortization of deferred policy acquisition costs 28 453
Other benefits to policyholders 10 324
--------- ---------
Income before income taxes 2 457
Income taxes 1 164
--------- ---------
Net income $ 1 $ 293
========= =========
Earnings per share $ .00 $ .01
========= =========
</TABLE>
Net commissions and expense allowances on premiums and deposits collected on
reinsured policies and service fees on business produced for Allianz Life
increased 25%, or $7.7 million, in the first quarter of 1998 compared to the
first quarter of 1997. The increase is consistent with the 23% increase in total
collected premiums and deposits.
<PAGE>
The following table shows the amounts of net commissions and expense allowances
for the quarter ended March 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
LifeUSA:
Life:
First year $ 1,429 $ 2,031
Single and renewal 1,416 1,384
---------- ----------
Total Life 2,845 3,415
Annuities 17,700 11,025
---------- ----------
Total LifeUSA 20,545 14,440
Allianz Life:
Life:
First year 473 574
Single and renewal 531 541
---------- ----------
Total Life 1,004 1,115
Annuities 17,735 16,059
---------- ----------
Total Allianz Life 18,739 17,174
Lapse policy chargebacks (167) (235)
---------- ----------
Total commissions and expense allowances, net $ 39,117 $ 31,379
========== ==========
</TABLE>
- --------------------------------
The above table includes commissions and expense allowances related to LifeUSA
Insurance policies that have been ceded by LifeUSA Insurance to the Reinsurers
and service fees related to Allianz/LUSA Business.
The Company pays a lapse policy chargeback to the Reinsurers when a life
insurance policy that has been ceded lapses before the end of 15 months. The
chargeback paid for each policy is equal to the excess of the allowances
received over the premiums received.
Reference is made to Reinsurance in the Company and Business Description section
on pages 10-12 in the Annual Report to Shareholders and Form 10-K for further
details on the Company's reinsurance agreements.
BENEFITS AND EXPENSES. Total benefits and expenses were $82.5 million and $71.3
million in the first quarter of 1998 and 1997, respectively. The increase in
total benefits and expenses of 16% was primarily due to increased sales and
growth in annuities in force. The discussion which follows gives a line-by-line
comparison of benefits and expenses for the first quarter ended March 31, 1998
and 1997. See also the Business Segments section which follows for additional
analysis of the results of operations.
An increases in interest credited to policyholder account values of 11%, or $2.8
million, in the first quarter of 1998 compared to the first quarter of 1997,
reflects the growth in annuities in force. The increase in other benefits to
policyholders of 25%, or $1.2 million, reflects the growth and maturity of in
force business and additional reserves for index related benefits on policies in
force.
<PAGE>
Amortization of deferred policy acquisition costs increased 14%, or $929,000, in
the first quarter of 1998 as compared to the first quarter of 1997. This
reflects the combination of an increase in gross profits due to a growing, more
mature block of in force business, partially offset by reduced amortization of
deferred policy acquisition costs as a result of the net realized gains on
investments described previously. 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 27%, or $4.9 million, in the first quarter of
1998 compared to the first quarter of 1997 due to the increase in total
collected premiums and deposits discussed previously and a change in the mix of
deferred annuity products sold, both of which were partially offset by the
decline in collected first year life insurance premiums.
Taxes, licenses and fees decreased $675,000, in the first quarter of 1998
compared to the first quarter of 1997. This decrease was primarily due to a
reduction in guaranty fund assessments accrued.
Operating expenses increased 13%, or $2.0 million, in the first quarter of 1998
compared to the first quarter of 1997. This increase was primarily due to the
growth of LifeUSA Insurance's annuity in force business.
A comprehensive analysis of the Year 2000 issue was completed in 1997. Key code
programming changes were identified and are expected to be Year 2000 compliant
by the end of the second quarter of 1998 at a cost of less than $500,000. In
addition, a plan is in place to test and monitor all other software applications
as well as obtain Year 2000 compliance assurance from outside vendors. Because
the Company has only been operating since 1987, it has significantly less
exposure than most companies.
Income taxes were $3.6 million in the first quarter of 1998 and $2.9 million in
the first quarter of 1997. The effective income tax rates for the first quarter
of 1998 and 1997 were 37.5% and 36.3%, respectively.
<PAGE>
NET INCOME. Net income was $6.0 million in the first quarter of 1998 and $5.1
million in the first quarter of 1997, which represents an increase of 17%.
Diluted earnings per share were $.23 in the first quarter of 1998 compared to
$.22 in the first quarter of 1997, which represents an increase of 5%. The per
share increase is lower than the net income increase due to an increase of 2.8
million diluted shares used in the earnings per share calculation for first
quarter 1998. The increase in diluted shares is due primarily to the conversion
and dilutive impact of "in the money" stock options and the transactions
associated with the agreement with Allianz Life (see Exhibit 11 which follows
for details). The following table summarizes the operating highlights for the
three months ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------------------------------
1998 1997
----------------------- -----------------------
Income EPS Income EPS
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Consolidated net income and diluted earnings per share $ 6,009 $ 0.23 $ 5,145 $ 0.22
Adjustments to arrive at consolidated net operating income (1):
Net realized gains on investments (1) (0.00) (293) (0.01)
Credits for state guaranty fund assessments (650) (0.03) (111) 0.00
--------- --------- --------- ---------
Consolidated net operating income and earnings per share 5,358 0.20 4,741 0.21
Impact of expenses associated with national advertising
campaign -- -- 780 0.03
--------- --------- --------- ---------
Consolidated net operating income and earnings per share
excluding impact of expenses associated with national
advertising campaign $ 5,358 $ 0.20 $ 5,521 $ 0.24
========= ========= ========= =========
</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) credits for state
guaranty fund assessments.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1998, the Company's primary available sources of
cash were (i) service fees received by the Company for the Allianz/LUSA
Business, (ii) management fees from LifeUSA Insurance, (iii) interest earned on
invested assets, (iv) a dividend of $2.5 million paid by LifeUSA Insurance in
the first quarter of 1998, (v) issuance of shares upon exercise of common stock
options, (vi) $3.0 million in proceeds from shares purchased by Allianz Life
upon exercise of its preemptive rights, and (vii) a $50 million long-term line
of credit from two of its reinsurers. A substantial portion of the Company's
operating expenses is attributable to services provided to LifeUSA Insurance,
such as employees, data processing, facilities and supplies, which are
reimbursed by LifeUSA Insurance through management fees. LifeUSA Insurance is
expected to have sufficient cash to provide reimbursement through 1998, based on
currently anticipated life insurance and annuity sales and on the continuation
of acceptable reinsurance arrangements. LifeUSA Insurance's ability to pay
dividends in the future is subject to compliance with Minnesota insurance laws
and regulations.
As discussed previously, the extended marketing relationship with Allianz Life
and related infusion of $100 million in capital over the next five years
beginning in July of 1998, gives the Company additional opportunity to expand
its distribution system and take advantage of marketing opportunities. Effective
April 1, 1998 and in accordance with the agreement with Allianz Life, Allianz
Life, either as a direct writer or reinsurer, has the right to retain 37.5
percent of the new life insurance and annuity business produced by the Company's
agents, up from 25% under the previous marketing agreement. Also, LifeUSA
Insurance will increase the retention of its annuity business from 25 to 30
percent and its life insurance business from 25 to 50 percent.
The Company's cash needs consist of (i) operating expenses, including expenses
in connection with the efforts to increase the production of LifeUSA Insurance
existing agents and expand the size of LifeUSA Insurance field force, (ii)
capital contributions to LifeUSA Marketing for investments in and additional
purchase payments to marketing organizations expected to increase premium and
deposit production volume for LifeUSA Insurance and Allianz Life, (iii)
commission advances to agents, (iv) borrowings under the line of credit, (v)
potential contributions to LifeUSA Securities to ensure compliance with NASD
capital requirements, and (vi) capital contributions to LifeUSA Insurance to
permit increases in sales volume and retention or assumption of new life
insurance and annuity business produced by LifeUSA Insurance agents and to
provide LifeUSA Insurance sufficient capital and surplus to maintain adequate
capital ratios. Management believes that the available sources of cash will
provide sufficient capital resources to support the capital needs of LifeUSA
Insurance and meet all the Company's cash needs in the ordinary course of
business through 1998, based on currently anticipated life insurance and annuity
sales, expected levels of net retention and acceptable reinsurance agreements.
For LifeUSA Insurance to retain or assume life insurance and annuity business,
LifeUSA Insurance must maintain a sufficient level of statutory capital and
surplus as established by the regulatory authorities in the jurisdictions where
LifeUSA Insurance is licensed to do business. As LifeUSA Insurance 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. The combination of these dynamics first produced
statutory net income during 1995.
<PAGE>
LifeUSA Insurance had statutory net income of $18.4 million in 1997 compared to
$13.2 million in 1996. As a result, the Company did not make capital
contributions to LifeUSA Insurance during 1997. As of December 31, 1997, LifeUSA
Insurance had statutory capital and surplus for regulatory purposes of $103.7
million compared to $87.3 million at December 31, 1996. LifeUSA Insurance
expects to continue to satisfy statutory capital and surplus requirements
through 1998 primarily through statutory profits on its maturing block of
retained inforce business. Effective April 1, 1998 under the terms of the
agreement with Allianz Life, LifeUSA Insurance will increase the retention of
its annuity business from 25 to 30 percent and its life insurance business from
25 to 50 percent. The Company does not anticipate a significant impact on
statutory capital as a result of the changes in retention levels.
In April 1998, the Company announced that its Board of Directors declared a cash
dividend of 2.5 cents per share for the first quarter of 1998, payable on May
15, 1998, to shareholders of record on April 27, 1998. This is the first
dividend declared in the eleven-year history of the Company. It is the intention
of the Board of Directors to pay regular quarterly dividends in 1998 of 2.5
cents per share, or ten cents per share on an annual basis.
The Board of Directors of the Company declares when dividends are paid on its
common stock. In addition, there are statutory and regulatory limitations upon
the extent to which dividends may be paid to the Company from an insurance
subsidiary, including the restriction that an insurance company may only pay
ordinary dividends out of unassigned funds (earned surplus). Approval by the
Department of Commerce of the State of Minnesota is required for LifeUSA
Insurance to pay dividends in any 12-month period in an amount exceeding the
lesser of (i) 10 percent of the insured's statutory earned surplus at the end of
the preceding year or (ii) the insured's statutory net gain from operations, not
including realized capital gains, for the year preceding the distribution, both
of which are determined in accordance with the Minnesota insurance laws and
regulations. LifeUSA Insurance paid $2.5 million in extraordinary dividends to
the Company during first quarter 1998 and 1997, which were permitted by the
Department of Commerce of the State of Minnesota.
REGULATORY ENVIRONMENT. LifeUSA Insurance 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
and as a third party administrator.
With the objective of reducing the risk of company insolvencies, the National
Association of Insurance Commissioners (NAIC) established risk-based capital
standards. The risks inherent in a life insurance company's operation determine
its current capital requirements. These standards continue to be reviewed by the
NAIC. LifeUSA Insurance's current percentage of actual total adjusted capital to
authorized control level risk-based capital is well in excess of regulatory
requirements.
The NAIC continues to consider changes to model laws based on innovative product
designs. Nonforfeiture law discussions have been considering how to better
support multiple benefit product designs, such as LifeUSA Insurance's two-tier
annuities or universal life contracts with enhanced retirement benefits. LifeUSA
Insurance has been able to successfully demonstrate the financial stability of
such designs, which provide higher retirement benefits to consumers while
decreasing disintermediation and solvency risks to LifeUSA Insurance.
<PAGE>
By the end of 1997, twenty-one states had adopted the NAIC Life Insurance
Illustration Model Regulation. A requirement of the regulation is that
prescribed tests be satisfied to demonstrate illustrated benefits are self
supporting and not lapse supported. The requirements of this regulation have
been successfully implemented by LifeUSA Insurance. NAIC committees are also
considering a new annuity illustration model regulation. It proposes to
establish disclosure requirements, illustration formats, and rules for testing
the supportability of illustrated benefits. LifeUSA Insurance is monitoring
these developments and no significant impact is anticipated at this time.
A new approach to statutory valuation of liabilities (reserves) and regulations
for equity-indexed products is also being considered by NAIC committees. LifeUSA
Insurance is monitoring these developments and no significant impact is
anticipated at this time.
Insurance laws also require LifeUSA Insurance to file detailed periodic reports
with the regulatory agencies in each of the states in which it writes business,
and these agencies may also examine LifeUSA Insurance business operations and
financial statements at any time. Under NAIC rules, one or more of the
regulatory agencies will periodically examine LifeUSA Insurance, normally at
three-year intervals, on behalf of the states in which LifeUSA Insurance is
licensed. During 1996, the Minnesota Department of Commerce conducted a
triennial examination of LifeUSA Insurance 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
are material individually or in the aggregate to its business operations or
financial statements.
LifeUSA Securities, as a registered broker and dealer in securities, is subject
to the Securities and Exchange Commission's Uniform Net Capital Rule. As of
March 31, 1998, LifeUSA Securities' net capital exceeded the minimum required
balance.
In June 1997, the B++ (Very Good) rating assigned to LifeUSA Insurance 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 Insurance 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.
In September 1997, Moody's Investors Service assigned a Baa3 (adequate) rating
to LifeUSA Insurance. This rating falls within Moody's "Strong Companies"
category and reflects LifeUSA Insurance's high asset quality, good
administrative efficiency and strong tie with its distribution network.
As a result of the agreement with Allianz Life, A.M. Best Company, Standard &
Poor's and Moody's Investors Service are reexamining the ratings assigned to
LifeUSA Insurance during 1998.
<PAGE>
INVESTMENTS. As of March 31, 1998, the Company had cash, cash equivalents and
fixed maturity investments on a consolidated basis totaling $2.23 billion,
including $7.5 million in restricted deposits with state insurance authorities
regulating LifeUSA Insurance. The following table summarizes the amortized cost,
carrying and fair values of each investment category held at March 31, 1998
(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 $ 66,926 3.05% $ 66,926 3.00% $ 66,926 2.95%
Government Treasury and Agency notes and bonds 72,913 3.33 76,294 3.43 82,054 3.62
Mortgage pass throughs 60,910 2.78 62,874 2.82 62,874 2.77
Agency Collateralized Mortgage Obligations:
CMO -- Sequentials 4,795 .22 4,795 .22 4,841 .21
CMO -- PACs 606,840 27.69 610,391 27.41 625,831 27.60
CMO -- ADs 23,562 1.07 23,562 1.06 24,466 1.08
CMO -- TACs 9,676 .44 9,676 .43 10,531 .46
Investment grade corporate securities:
AAA+ to AAA- 42,772 1.95 43,064 1.93 44,964 1.98
AA+ to AA- 192,014 8.76 195,669 8.79 199,249 8.79
A+ to A- 601,037 27.42 614,044 27.57 621,155 27.40
BBB+ to BBB- 505,569 23.07 515,670 23.15 520,296 22.95
Non investment grade corporate securities 4,910 .22 4,208 .19 4,208 .19
----------------------------------------------------------------------------
Total cash and invested assets $2,191,924 100.00% $2,227,173 100.00% $2,267,395 100.00%
============================================================================
</TABLE>
As part of its asset and liability management practices, LifeUSA Insurance
manages investments and credited interest rates to produce a net investment
spread consistent with priced-for expectations. As of March 31, 1998, the
weighted average credited interest rate for deferred annuities and life
insurance policies was 4.97% and the weighted average yield on the assets
backing liabilities was 7.33%. As of December 31, 1997, the weighted average
credited interest rate was 5.00% and the weighted average yield on the assets
backing liabilities was 7.34%. The decrease in the weighted average yield on
assets backing liabilities is attributable, in part, to LifeUSA Insurance
repositioning a portion of the available for sale investment portfolio as
discussed below. This decrease in yield was offset by the gains realized on the
repositioning. Investment income from the assets backing liabilities exceeded
interest credited to policyholders by $7.7 million during first quarter 1998.
The investment portfolio is managed primarily by allocating new cash flows into
investments which have yield, maturity and other characteristics suitable for
LifeUSA Insurance expected policyholder liabilities. Consistent with LifeUSA
Insurance asset and liability management practices, as of March 31, 1998, the
effective duration of LifeUSA Insurance fixed income securities was 4.94 years,
compared to 5.03 years as of December 31, 1997.
The percentage of the total fair value of the Company's portfolio that was
comprised of investment grade corporate obligations was 61% at March 31, 1998.
With each corporate security acquisition, LifeUSA Insurance 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.
The remainder of the Company's portfolio is substantially comprised of
government and government agency obligations. Government and government agency
obligations are primarily held in the form of Planned Amortization Class (PAC)
Collateralized Mortgage Obligations (CMOs), the most conservative type of CMO
<PAGE>
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 the types of assets invested in will allow
the Company to maintain high quality, consistent yields and proper maturities
for the overall portfolio.
As of March 31, 1998, the Company held 41%, or $892.3 million, of the total fair
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 Insurance products is the provision of bonuses to encourage terminating
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 Insurance 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.
In 1997, LifeUSA Insurance repositioned a portion of its available for sale
investment portfolio to achieve a more efficient matching of asset maturities to
expected policyholder payments. The repositioning, completed in October,
resulted in the disposal of bonds with an amortized cost of approximately $157.3
million with maturities of 6 to 11 years, and purchasing a like amount of
investment grade corporate obligations with maturities of 2 to 5 years in
length. By targeting these specific maturities, this repositioning provided a
better match with the expected cash flows of LifeUSA Insurance expected
liabilities. These transactions resulted in only minor changes in overall yields
and a net realized gain of approximately $2.9 million.
During the third quarter of 1997, the Company entered a securities lending
program with the custodial bank of the Company's fixed maturity investment
portfolio. Under this program, the Company has made available approximately 50%
of its portfolio to be used in a pool of securities available for lending
transactions, however, the Company anticipates that only 6% of its portfolio
will be on loan at any point in time. The custodial bank provides the securities
to borrowers in exchange for cash collateral of at least 102% of the daily
market value of securities on loan. Since the Company retains effective control
of all securities on loan, no accounting recognition of these transactions is
required. Fees earned by the Company under the arrangement are reported with net
investment income and are currently immaterial.
EQUITY. At March 31, 1998, the Company's shareholders' equity and book value per
share were $269.3 million and $10.38, respectively, compared to $222.4 million
and $9.77, respectively, at December 31, 1997. Excluding the effect of the net
unrealized 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 $260.8 million and
$10.06, respectively, at March 31, 1998, compared to $214.3 million and $9.41,
respectively, at December 31, 1997.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ON BUSINESS SEGMENTS
Management has organized the Company into three business segments in order to
focus on the distinct functional revenue and expense characteristics associated
with the activities performed by each. The Insurance Segment focuses on the
administration, asset/liability management and reinsurance of fixed insurance
products. The Marketing Segment focuses its efforts on the field force used to
distribute fixed insurance products and the management of investments in
marketing subsidiaries. The Corporate Segment provides strategic direction for
all segments and includes the operations of LifeUSA Securities because the
results of operations of LifeUSA Securities are not yet material and do not
warrant separate disclosure. The results of operations for the Company's
Insurance, Marketing and Corporate Segments are presented in the discussion
which follows. Management continues to analyze the proper allocation of
identifiable assets and liabilities to the business segments.
INSURANCE SEGMENT. The Insurance Segment develops fixed insurance products for
LifeUSA Insurance and Allianz Life, cedes a portion of the business written by
LifeUSA Insurance to the Reinsurers, assumes a portion of the Allianz/LUSA
Business, manages the assets and liabilities for business retained or assumed by
LifeUSA Insurance and administers all of the Allianz/LUSA Business.
The Insurance Segment's primary revenue sources are policyholder charges, net
investment income and net commissions and expense allowances. The Insurance
Segment's primary expenses are interest credited to policyholder account values,
other benefits to policyholders, amortization of deferred policy acquisition
costs, intersegment marketing fees paid to the Marketing Segment for the
production of LifeUSA Insurance and Allianz Life annuity deposits and life
insurance premium and operating expenses. The Insurance Segment's profitability
is derived from its ability to effectively manage the assets and liabilities
retained or assumed by LifeUSA Insurance and manage the operating expenses
incurred to administer all of the business produced.
REVENUES. Total revenues were $91.0 million and $78.7 million in first quarter
1998 and 1997, respectively. Since the revenues reported by the Insurance
Segment account for the majority of the revenues reported by the Company on a
consolidated basis, the reasons for the increase are consistent with those
previously discussed in the Results of Operations section.
EXPENSES. Total expenses were $84.0 million and $71.7 million in first quarter
1998 and 1997, respectively. The increase in total expenses of 17% is primarily
attributable to the increase in the marketing fee paid to the Marketing Segment,
net of deferral, as a result of the increase in premium production. The
marketing fee, which increased 24% from first quarter 1997, is calculated as a
percentage of premium and will vary generally with the change in premium
production which increased 23% from first quarter 1997. Differences in the mix
of production between annuities and life insurance and differences in the mix of
premium between single, first year and renewal will cause the marketing service
fee to change by greater or lesser amounts than the change in premium.
<PAGE>
OPERATING SEGMENTS RESULTS OF OPERATIONS. The following table summarize the
results of operations reported by the three business segments and reconciles to
the Company's consolidated results of operations for first quarter March 31,
1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
Insurance Segment Marketing Segment
Percent Percent
1998 1997 Change 1998 1997 Change
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Policyholder charges $ 13,066 $ 11,802 11% $ -- $ -- -%
Net investment income 38,222 34,122 12 9 -- 100
Net realized gains (losses) on investments 5 1,234 (100) -- -- --
Commissions and expense allowances, net 39,117 31,379 25 -- -- --
Marketing fee -- -- -- 34,796 27,846 25
Corporate fee -- -- -- -- -- --
Other 616 160 285 528 471 12
------------------------------------ ------------------------------------
Total revenues 91,026 78,697 16 35,333 28,317 25
Expenses:
Interest credited to policyholder account values 29,005 26,245 11 -- -- --
Other benefits to policyholders 6,144 4,899 25 -- -- --
Amortization of deferred policy acquisition costs 7,510 6,581 14 -- -- --
Commissions and marketing fee 30,293 24,401 24 26,924 20,987 28
Taxes, licenses and fees (106) 569 (119) -- -- --
Operating expenses:
Salaries and employee benefits 3,817 3,860 (1) 1,923 1,393 38
Data processing 918 783 17 400 300 33
Printing and office supplies 375 217 73 437 368 19
Other 6,050 4,147 46 3,215 2,898 11
------------------------------------ ------------------------------------
Total expenses 84,006 71,702 17 32,899 25,946 27
------------------------------------ ------------------------------------
Income (loss) before income taxes 7,020 6,995 0 2,434 2,371 3
Income taxes 2,533 2,537 0 1,032 862 20
------------------------------------ ------------------------------------
Net income (loss) $ 4,487 $ 4,458 1% $ 1,402 $ 1,509 (16%)
==================================== ====================================
</TABLE>
MARKETING SEGMENT. The Marketing Segment provides all services related to the
recruitment of agents and FMOs, support of agents contracted to sell LifeUSA
Insurance and Allianz Life annuities, life insurance and Allianz Life long-term
care products and incentive programs to increase production. The Marketing
Segment also manages all acquisitions of and investments in field marketing
organizations.
The Marketing Segment's primary revenue source is the intersegment marketing fee
assessed to the Insurance Segment for the production of LifeUSA Insurance and
Allianz Life annuities, life insurance and Allianz Life long-term care premiums
and deposits. This fee is calculated as a percentage of the premiums and
deposits produced with varying rates for life insurance and annuity production
and for first year, single and renewal premium and deposits. The amount assessed
is comparable to commissions earned by large national FMOs performing similar
services. The Marketing Segment's profitability is derived from its ability to
manage commissions and operating costs.
<PAGE>
<TABLE>
<CAPTION>
Corporate Segment Eliminating Entries (1) Consolidated
Percent Percent
1998 1997 Change 1998 1997 1998 1997 Change
-------------------------------------- ------------------------------ ----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ -- $ -- -% $ -- $ -- $ 13,066 $ 11,802 11%
392 184 113 -- -- 38,623 34,306 13
(26) -- (100) -- -- (21) 1,234 (102)
-- -- -- -- -- 39,117 31,379 25
-- -- -- (34,796) $ (27,846) -- -- --
2,258 1,852 22 (2,258) (1,852) -- -- --
149 -- 100 1,293 631 105
-------------------------------------- ------------------------------ ----------------------------------------
2,773 2,036 36 (37,054) (29,698) 92,078 79,352 16
-- -- -- -- -- 29,005 26,245 11
-- -- -- -- -- 6,144 4,899 25
-- -- -- -- -- 7,510 6,581 14
119 -- 100 (34,428) (27,414) 22,908 17,974 27
-- -- -- -- -- (106) 569 (119)
881 730 21 (151) (156) 6,470 5,827 11
50 43 16 (16) (16) 1,352 1,110 22
59 53 11 (63) (57) 808 581 39
1,496 2,496 (40) (2,396) (2,055) 8,365 7,486 12
-------------------------------------- ------------------------------ ----------------------------------------
2,605 3,322 (22) (37,054) (29,698) 82,456 71,272 16
-------------------------------------- ------------------------------ ----------------------------------------
168 (1,286) 113 -- -- 9,622 8,080 19
48 (464) 110 -- -- 3,613 2,935 23
-------------------------------------- ------------------------------ ----------------------------------------
$ 120 $ (822) 115% -- -- $ 6,009 $ 5,145 17%
====================================== ============================== ========================================
</TABLE>
- ------------------------------------
(1) On a consolidated basis, the Company defers the costs of acquiring new
business and amortizes these costs over the lives of the policies in proportion
to the estimated gross profits expected to be realized on the policies. For
business segment reporting purposes, the amortization of deferred policy
acquisition costs is recorded as an expense of the Insurance Segment. In
addition, expenses allocated to the Marketing Segment and Corporate Segment for
business segment reporting purposes that are deferred by the Company on a
consolidated basis are reported direct (gross of the amounts deferred) by each
of these segments. The Insurance Segment reports the impact of these deferrals
as a reduction in the marketing and corporate fees paid to the Marketing Segment
and Corporate Segment, respectively. The differences between the total of the
expenses reported by all of the segments and the expenses (net of deferrals)
reported by the Company on a consolidated basis appear as intersegment
eliminations in the tables presented above.
REVENUES. Total revenues were $35.3 million and $28.3 million in first quarter
1998 and 1997, respectively. The increase in total revenues of 25% is primarily
attributable to the increase in the marketing fee which is based on premium and
deposit production. Total collected premiums and deposits increased 23% from
1997 for the same reason. The entire amount of the marketing fee is charged to
the Insurance Segment and is eliminated in consolidation.
EXPENSES. Total expenses were $32.9 million and $25.9 million in first quarter
1998 and 1997, respectively. The increase in total expenses of 27% is primarily
due to the 28% increase in commissions incurred.
<PAGE>
Commissions increased due to the increase in premium and deposit production and
a change in the mix of deferred annuity products sold, both of which were
partially offset by the decline in collected first year life insurance premiums.
CORPORATE SEGMENT. The Corporate Segment provides strategic direction for the
Company and its various business segments and includes the operations of LifeUSA
Securities because the results of LifeUSA Securities are not yet material and do
not warrant separate disclosure. The Corporate Segment charges a fee to all
other segments based on the revenues of those individual segments. Expenses of
an enterprise-wide nature, such as the 1997 national advertising campaign, are
retained by the Corporate Segment.
REVENUES. Total revenues were $2.8 million and $2.0 million for first quarter
1998 and 1997, respectively. The increase in total revenues of 36% from 1997 is
primarily related to the increases in the Corporate fee which is directly
related to the increase in revenues for the Insurance Segment and Marketing
Segment. Total revenues of the Insurance Segment increased 16% from 1997. Total
revenues of the Marketing Segment increased 25% from 1997. These increases
produced increases in the Corporate fee of 22% for first quarter 1998 compared
to first quarter 1997. Net investment income increased 113% due to an increase
in invested assets.
EXPENSES. Total expenses were $2.6 million and $3.3 million for first quarter
1998 and 1997, respectively. The decrease of 22% from 1997 is primarily
attributable to the cost of a national advertising and sales campaign that was
launched during first quarter 1997.
* * * *
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,
distribution system expansion, changes in interest rates generally and credited
rates on the new business retained or assumed by LifeUSA Insurance, sales
volume, failure of the Company and its subsidiaries or significant third parties
to achieve year 2000 compliance or material expense in connection with such
compliance, competition and other risks described from time to time in the
Company's Securities and Exchange Commission filings, including but not limited
to the Annual Report to Shareholders and Form 10-K, copies of which are
available from the Company without charge.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in the legal proceedings previously
disclosed in the Annual Report to Shareholders and Form 10-K.
ITEM 2. CHANGES IN SECURITIES
During the period covered by this Report, the constituent instruments defining
the rights of the holders of the common stock were not materially modified, nor
were the rights evidenced by the common stock materially limited or qualified by
the issuance or modification of any other class of securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
During the period covered by this Report, there has been no material default
with respect to any indebtedness of the Registrant or its subsidiary.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
(10) Amendment No. 3, dated January 30, 1998, to the Loan Agreement entered
into as of May 17, 1996 between the Company and Employers Reassurance
Corporation, Republic-Vanguard Life Insurance Company and Winterthur
Life Re Insurance Company (electronic filing only).
(11) Statement of computation of per share earnings
(27) Financial data schedule (electronic filing only)
(b) A report on Form 8-K was filed on January 13, 1998, to report that the
Company and Allianz Life entered into an agreement under which Allianz Life
will acquire up to 35 percent of the outstanding stock of the Company, and
that the marketing agreement between the two companies will be extended to
December 31, 2000.
A report on Form 8-K was filed on January 20, 1998, to report that six
annuity policyholders commenced a lawsuit for damages due to certain
alleged misrepresentations and alleged inadequate disclosures against the
Company in the United States Court for the Eastern District of
Pennsylvania.
<PAGE>
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, 1998
/s/ Mark A. Zesbaugh
------------------------------
Mark A. Zesbaugh
Executive Vice President
Chief Financial Officer
EXHIBIT 10
AMENDMENT NO. 3
TO
LOAN AGREEMENT
THIS AMENDMENT, made and entered into as of January 30, 1998 among
LIFE USA HOLDING, INC., as Borrower, EMPLOYERS REASSURANCE CORPORATION, as Agent
and one of the Lenders, REPUBLIC-VANGUARD LIFE INSURANCE COMPANY and WINTERTHUR
LIFE RE INSURANCE COMPANY, as the other Lenders.
W I T N E S S E T H:
WHEREAS, the parties hereto have entered into the Loan Agreement
dated as of May 17, 1996 and as amended by Amendment No. 1 thereto dated as of
December 30, 1996 and Amendment No. 2 thereto dated May 30, 1997 (the
"Agreement" and all terms defined in the Agreement are used herein as defined in
the Agreement) pursuant to which the Lenders have agreed to make advances to
Borrower on the terms and conditions set forth therein; and
WHEREAS, Borrower has informed the Agent and the Lenders of its
pending transactions with Allianz and provided them with copies of the Stock
Purchase Agreement dated January 13, 1998 (the "Stock Purchase Agreement")
between Borrower and Allianz;
WHEREAS, the Agent and the Lenders are willing to confirm that,
notwithstanding anything to the contrary contained in the Agreement, the
execution and delivery of the Stock Purchase Agreement by Borrower did not and
the performance by Borrower and LifeUSA of the terms of the Stock Purchase
Agreement and the agreements contemplated thereby will not violate any
representation, term or condition of the Agreement or result in or constitute a
default under the Agreement; and
WHEREAS, the parties desire to amend and modify the Agreement as
provided in this Amendment,
NOW, THEREFORE, in consideration of these premises and of the
covenants, conditions and promises hereinafter set forth and for One Dollar
($1.00) and other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties hereto agree as follows:
1. Confirmation and Waiver. Notwithstanding anything contained in
the Agreement, the Agent and the Lenders hereby irrevocably waive any breach of
any representation, term or condition or default under which would result from
the execution and delivery of the Stock Purchase Agreement by Borrower or the
performance by Borrower or LifeUSA of its obligations
<PAGE>
under the Stock Purchase Agreement and the agreements to be entered into
pursuant to the Stock Purchase Agreement. It is further agreed that Allianz is
not an Affiliate of Borrower and will not be an Affiliate of Borrower as a
result of the transactions contemplated by the Stock Purchase Agreement;
provided, however, the parties agree that the Lenders may terminate the
Commitments and require repayment in full of any outstanding amounts under the
Notes and other outstanding Obligations upon ninety (90) days prior written
notice to Borrower if Borrower or any of its subsidiaries hereafter engages in
any transaction with Allianz which the Lenders determine are not on terms which
are arms-length and reasonable to Borrower or its subsidiary engaging in such
transaction, except that the foregoing proviso does not apply to any
transactions contemplated by the Stock Purchase Agreement. Specifically, the
Agent and the Lenders agree that the issuance of any debentures by Borrower
pursuant to Section 2.4 of the Stock Purchase Agreement will not violate Section
7.3 of the Agreement.
2. Representations and Warranties. Borrower represents and warrants
to Agent and Lenders as follows:
(a) All of the representations and warranties of Borrower contained
in the Agreement or in any of the Loan Documents are true and correct in all
material respects on the date hereof as though made on such date, except to the
extent that any such representation or warranty expressly relates to an earlier
date and for changes permitted or contemplated by the Agreement, except as such
representations and warranties are modified or supplemented as follows:
(i) Financial Statements. The representations and
warranties contained in Section 4.6(a) as to audited consolidated
financial statements of Borrower and its Subsidiaries are also made
as to the audited consolidated financial statements of Borrower and
its Subsidiaries as of and for the year ended December 31, 1996
which financial statements have been previously delivered to the
Lenders. The representations and warranties contained in Section
4.6(b)(i) as to annual statutory financial statements of Borrower
and its Subsidiaries are also made as to the annual (audited)
statutory financial statements of Borrower and its Subsidiaries as
of and for the fiscal years ended December 31, 1995 and 1996 which
financial statements have been previously delivered to the Lenders.
(ii) Projections. The representations and warranties
contained in Section 4.7 as to projections provided by Borrower are
also made as to the projections provided by Borrower for the fiscal
years ending on December 31, 1997 through 2002 which have been
previously provided to the Lenders.
(iii) Litigation. Schedule 4.16 attached hereto
supersedes and replaces Schedule 4.16 which was originally delivered
in connection with the execution of the Agreement and
<PAGE>
lists certain litigation relating to Borrower or its Subsidiaries as
of the date of this Amendment.
In addition, Borrower represents and warrants that, as of the date hereof, no
Default or Event of Default has occurred and is continuing.
(b) The execution, delivery and performance by Borrower of this
Amendment have been duly authorized by all necessary or proper corporate action
and do not require the consent or approval of any Person which has not been
obtained.
(c) This Amendment has been duly executed and delivered by Borrower
and constitutes a legal, valid and binding obligation of Borrower, enforceable
against Borrower in accordance with its terms.
3. Fees and Expenses. Pursuant to Section 10.2, Borrower shall pay
all reasonable out-of-pocket costs and expenses of Agent in connection with the
preparation of this Amendment, including the reasonable fees and expenses of its
counsel.
4. Full Force and Effect. Except as expressly set forth herein, the
Agreement as amended hereby shall continue in full force and effect in
accordance with its terms.
5. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which, when so executed and delivered, shall be deemed to be an original and all
of which taken together shall constitute but one and the same instrument.
6. Governing Law. This Amendment shall be governed by and construed
in accordance with the laws of the State of New York, without regard to the
principles thereof regarding conflict of laws.
[The balance of this page is intentionally blank]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement, each
as of the date first above written.
LIFE USA HOLDING, INC., as Borrower
By: /s/Mark A. Zesbaugh
---------------------------
Mark A. Zesbaugh, Executive
Vice President and Chief
Financial Officer
EMPLOYERS REASSURANCE
CORPORATION, as Agent and Lender
By: /s/James D. Maughn
---------------------------
Its: Executive Vice President & Actuary
REPUBLIC-VANGUARD LIFE INSURANCE
COMPANY, as Lender
By: /s/ John Brill
---------------------------
Its: Senior Vice President
WINTERTHUR LIFE RE INSURANCE
COMPANY, as Lender
By: /s/ John Brill
---------------------------
Its: Senior Vice President
<PAGE>
SCHEDULE 4.16
LIST OF LITIGATION
In addition to routine litigation in the ordinary course of
business, there are the following cases outstanding:
(a) Snell et al. vs. Allianz Life Insurance Company of North
America and LifeUSA Insurance Company (class action
commenced in July, 1997 relating to life insurance
policies pending in Minnesota Federal Court);
(b) Benevento et al. vs. LifeUSA Holding, Inc. (a class
action commenced in January 1998 relating to annuities
currently pending in Pennsylvania Federal Court); and
(c) Mattson vs. LifeUSA Insurance Company (termination of
agent case in which agent claims damages of $60
million).
EXHIBIT 11
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
Life USA HOLDING, INC.
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1997
------------ ------------
<S> <C> <C>
BASIC
Weighted-average shares outstanding 25,736,873 21,347,046
============ ============
Net income $ 6,009 $ 5,145
============ ============
Per common share amount $ .23 $ .24
============ ============
DILUTED
Average shares outstanding and to be issued 25,775,885 21,384,961
Neteffect of dilutive stock options and warrants,
having exercise prices of the average market
price of the common stock using the treasury
stock method 1,163,534 311,222
Shares assuming conversion of convertible
subordinated debentures -- 2,423,399
------------ ------------
Adjusted weighted-average shares 26,939,419 24,119,582
============ ============
Net income $ 6,009 $ 5,145
Add convertible subordinated debenture interest,
net of federal income tax effect 85 218
------------ ------------
Adjusted net income $ 6,094 $ 5,363
============ ============
Per common share amount $ .23 $ .22
============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 892,262
<DEBT-CARRYING-VALUE> 1,267,985
<DEBT-MARKET-VALUE> 1,308,207
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,190,616
<CASH> 66,926
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 218,507
<TOTAL-ASSETS> 5,219,459
<POLICY-LOSSES> 4,801,450
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 11,041
<NOTES-PAYABLE> 6,021
0
0
<COMMON> 259
<OTHER-SE> 269,019
<TOTAL-LIABILITY-AND-EQUITY> 5,219,459
0
<INVESTMENT-INCOME> 38,623
<INVESTMENT-GAINS> (21)
<OTHER-INCOME> 53,476
<BENEFITS> 35,149
<UNDERWRITING-AMORTIZATION> 7,510
<UNDERWRITING-OTHER> 39,797
<INCOME-PRETAX> 9,622
<INCOME-TAX> 3,613
<INCOME-CONTINUING> 6,009
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,009
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
