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, 1999
Commission File No. 0-18485
Life USA HOLDING, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1578384
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
Suite 95, Interchange North Building
300 South Highway 169
Minneapolis, Minnesota 55426
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code: (612) 546-7386
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES ___X___ NO _______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 31, 1999
------------ -----------------------------
Common Stock, 23,893,242
Par Value $.01 Per Share
<PAGE>
Life USA HOLDING, INC.
Securities and Exchange Commission Form 10-Q
for the First Quarter Ended March 31, 1999
I N D E X
Page
Number
------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheet (Unaudited)
March 31, 1999 and December 31, 1998..............................3-4
Condensed Consolidated Statement of Income
(Unaudited) Three months ended March 31, 1999
and March 31, 1998..................................................5
Condensed Consolidated Statement of Cash Flows
(Unaudited) Three months ended March 31, 1999
and March 31, 1998..................................................6
Notes to Condensed Consolidated Financial Statements
(Unaudited)......................................................7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................12-29
Management's Discussion and Analysis of Financial
Condition and Results of Operations on Business Segments........30-36
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........36
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings..................................................36
Item 2. Changes in Securities..............................................37
Item 3. Defaults Upon Senior Securities....................................37
Item 4. Submission of Matters to a Vote of Security Holders................37
Item 5. Other Information..................................................37
Item 6. Exhibits and Reports on Form 8-K...................................37
SIGNATURES: ..................................................................38
<PAGE>
Life USA HOLDING, INC.
Condensed Consolidated Balance Sheet
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturity investments:
Available for sale, at fair value (amortized cost:
$982,028 at March 31, 1999 and $966,205 at
December 31, 1998) $ 1,009,612 $ 1,020,691
Held to maturity, at amortized cost (fair value:
$1,286,666 at March 31, 1999 and $1,314,009 at
December 31, 1998) 1,250,131 1,259,072
Other invested assets 69,799 46,323
------------ ------------
Total investments 2,329,542 2,326,086
Cash and cash equivalents 36,014 21,570
Accrued investment income 32,999 33,729
Future policy benefits recoverable and amounts due
from reinsurers 2,842,453 2,801,109
Deferred policy acquisition costs 233,865 216,725
Other assets 51,887 59,500
------------ ------------
$ 5,526,760 $ 5,458,719
============ ============
</TABLE>
See accompanying notes.
3
<PAGE>
Life USA HOLDING, INC.
Condensed Consolidated Balance Sheet (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits $ 5,097,996 $ 5,030,833
Other policyholders' funds 10,923 9,839
Amounts due reinsurers 37,191 43,546
Accrued commissions to agents 6,478 8,990
Taxes, licenses and fees payable 5,028 6,023
Accounts payable 6,127 5,262
Long-term debt 15,000 15,000
Convertible subordinated debentures 5,898 5,898
Deferred income taxes 14,850 19,172
Other liabilities 54,230 34,171
------------ ------------
Total liabilities 5,253,721 5,178,734
Shareholders' equity:
Preferred stock, $.01 par value; 15,000,000
shares authorized, none issued -- --
Common stock, $.01 par value; 60,000,000
shares authorized, 23,893,242 issued and
outstanding (24,752,156 shares at December 31, 1998) 239 248
Common stock to be issued, 27,597 shares
(24,361 shares at December 31, l998) 301 328
Additional paid-in capital 151,489 150,096
Notes receivable from stock sales (4,266) (4,266)
Retained earnings 118,823 120,145
Accumulated other comprehensive income:
Net unrealized gain on investments - available for sale 6,453 13,434
------------ ------------
Total shareholders' equity 273,039 279,985
------------ ------------
$ 5,526,760 $ 5,458,719
============ ============
</TABLE>
See accompanying notes.
4
<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,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues:
Policyholder charges $ 12,378 $ 13,066
Net investment income 43,675 38,941
Net realized gains (losses) on investments 1,483 (21)
Commissions and expense allowances and concessions 34,280 39,265
Other 716 827
------------ ------------
Total revenues 92,532 92,078
Benefits and expenses:
Interest credited to policyholder account values 31,228 29,323
Other benefits to policyholders 6,508 5,826
Amortization of deferred policy acquisition costs 9,209 7,510
Commissions 20,272 22,908
Taxes, licenses and fees 647 (106)
Operating expenses 19,090 16,995
------------ ------------
Total benefits and expenses 86,954 82,456
------------ ------------
Income before income taxes 5,578 9,622
Income taxes 1,674 3,613
------------ ------------
Net income before minority interest 3,904 6,009
Minority interest, net of tax (97) --
------------ ------------
Net income $ 4,001 $ 6,009
============ ============
Basic earnings per common share $ .16 $ .23
============ ============
Diluted earnings per common share $ .16 $ .23
============ ============
Cash dividend declared per common share $ .025 $ --
============ ============
Number of shares used in per share calculation:
Basic 24,642,173 25,736,873
Diluted 24,937,649 26,939,419
</TABLE>
See accompanying notes.
5
<PAGE>
Life USA HOLDING, INC.
Condensed Consolidated Statement of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,001 $ 6,009
Adjustments to reconcile net income to net
cash provided by operating activities:
Accretion of discount on investments, net (1,698) (1,211)
Net realized (gains) losses on investments (1,483) 21
Policy acquisition costs deferred (10,166) (10,237)
Amortization of deferred policy acquisition costs 9,209 7,510
Other changes 8,488 19,370
------------ ------------
Net cash provided by operating activities 8,351 21,462
Cash flows from investing activities:
Investments-available for sale:
Purchases (128,744) (40,692)
Proceeds from sales 87,343 25,789
Proceeds from maturities and principal payments
on mortgage-backed securities 7,493 4,631
Investments-held to maturity:
Purchases (5,481) (27,004)
Proceeds from maturities and principal payments
on mortgage-backed securities 15,920 9,483
Sales of (investments in) field marketing organizations 8,000 (5,500)
------------ ------------
Net cash used in investing activities (15,469) (33,293)
Cash flows from financing activities:
Receipts from universal life and investment products 71,019 77,058
Withdrawals on universal life and investment products (82,805) (73,581)
Interest credited to policyholder account values 31,228 29,323
Change in deferred liability and reserves 5,725 4,960
Proceeds from exercise of stock options 94 3,814
Proceeds from common stock issuance to Allianz Life 10,000 --
Repurchase of common stock (15,398) --
Dividends paid (623) --
Proceeds from issuance of LTCAmerica common stock 2,349 --
Other financing activities (27) 3,044
------------ ------------
Net cash provided by financing activities 21,562 44,618
------------ ------------
Net increase in cash and cash equivalents 14,444 32,787
Cash and cash equivalents at beginning of the period 21,570 34,139
------------ ------------
Cash and cash equivalents at end of the period $ 36,014 $ 66,926
============ ============
</TABLE>
See accompanying notes.
6
<PAGE>
Life USA HOLDING, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 1999
(Unaudited)
1. The condensed consolidated balance sheet of Life USA Holding, Inc. (the
Company) at March 31, 1999 and the related condensed consolidated
statements of income and cash flows for the three months ended March
31, 1999 and 1998, 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, 1999 are not
necessarily indicative of the results to be expected for the full year.
The balance sheet at December 31, 1998 is derived from the audited
balance sheet as of that date.
2. Certain 1998 amounts have been reclassified to conform to the 1999
presentation.
3. The accompanying condensed consolidated financial statements should be
read in conjunction with the notes to the December 31, 1998
consolidated financial statements.
4. The net unrealized gain on investments - available for sale included in
shareholders' equity consists of the following:
March 31, December 31,
1999 1998
----------- ------------
Gross unrealized gain on
investments - available for sale $ 27,584 $ 54,486
Adjustments for:
Deferred tax liability (9,669) (19,070)
Deferred policy acquisition costs (17,634) (33,818)
Deferred tax asset 6,172 11,836
----------- -----------
Net unrealized gain on
investments - available for sale $ 6,453 $ 13,434
=========== ===========
5. Certain LifeUSA Insurance Company (LifeUSA Insurance) annuity products
provide an additional benefit credited to the policy annuitization
value based on the growth in the Standard & Poor's (S&P) 500 Index.
LifeUSA Insurance has analyzed the characteristics of these benefits
and has purchased option contracts tied to the S&P 500 Index with
similar characteristics to hedge these risks. The option contracts are
reported at fair value in other invested assets on the Condensed
Consolidated Balance Sheet. Unrealized gains and losses on the option
contracts are recorded in net investment income on the Condensed
Consolidated Statement of Income to offset increases in the future
policy benefits liability for the index benefit that are shown in
interest credited to policyholder account values on the Condensed
Consolidated Statement of Income. The cost of the option contract is
amortized over the life of the option contract and is reflected in the
future policy benefits liability for the index benefit.
7
<PAGE>
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative and Similar Financial Instruments and for Hedging
Activities," which addresses the accounting for derivative instruments,
such as the option contracts owned by the Company, used as hedges
against changes in cash flow or the fair value of specified assets or
liabilities. This statement is required to be adopted in years
beginning after September 15, 1999. The Company has not yet determined
the impact of the new statement.
6. In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting For the
Costs of Computer Software Developed For or Obtained For Internal Use."
The Company adopted the SOP on January 1, 1999. The SOP requires the
capitalization of certain costs incurred in connection with developing
or obtaining software for internal use. Amounts capitalized are
included with other assets in the Condensed Consolidated Balance Sheet.
7. In March 1999, the Company sold its minority equity interest in
Creative Marketing International Corporation (CMIC). An after-tax gain
of $1.6 million was recorded on the sale.
8. The terms of an agreement announced in January 1998 ("the agreement
with Allianz Life") allow Allianz Life Insurance Company of North
America (Allianz Life) to acquire up to 35% of the outstanding common
stock of the Company over a five-year period. In February 1999, under
the terms of the agreement with Allianz Life, Allianz Life acquired
395,062 shares of the Company's common stock for $10 million.
9. During the fourth quarter of 1998, LifeUSA Insurance purchased
50,001,000 shares at $.10 per share, of LTCAmerica Holding, Inc.
(LTCAmerica) $.01 par value common stock. Any sales of unissued
LTCAmerica common stock shares to outside investors would cause LifeUSA
Insurance's ownership interest in LTCAmerica to decrease. The
differences between the purchase price paid by outside investors and
the $.10 per share purchase price paid by LifeUSA Insurance, results in
a gain or loss for LifeUSA Insurance. LifeUSA Insurance records gains
or losses on issuance of LTCAmerica shares as an equity transaction in
consolidation.
Early in the first quarter of 1999, LTCAmerica management completed a
transaction that was initiated in the fourth quarter of 1998.
Management purchased 800,000 shares of LTCAmerica common stock at a
price of $.10 per share. Then, throughout the first quarter of 1999,
LTCAmerica received proceeds from outside investors of $2.3 million
resulting from the issuance of 4,538,420 shares of common stock at a
price of $.50 per share. The resulting gain of $1.8 million for LifeUSA
Insurance was recorded in equity in the Company's Condensed
Consolidated Balance Sheet. As a result of these transactions, LifeUSA
Insurance's ownership of LTCAmerica decreased to 89.1% at March 31,
1999, from 98.4% at December 31, 1998.
8
<PAGE>
10. Minority interest represents the interest of outside investors other
than LifeUSA Insurance in LTCAmerica. The minority interest, net of tax
shown on the Condensed Consolidated Statement of Income, reflects the
outside investors' portion of the LTCAmerica first quarter 1999 net
loss from operations.
11. Accumulated other comprehensive income represents the net unrealized
gain on available for sale investments as shown on the Condensed
Consolidated Balance Sheet. The changes in accumulated other
comprehensive income for first quarter 1999 and 1998 were $(7.0)
million and $344,000, respectively.
12. In April 1999, the Company announced that its Board of Directors
authorized the Company to increase its current stock repurchase program
by 2.5 million shares to a total of 6.5 million shares of its common
stock. As of March 31, 1999, 3.3 million shares have been repurchased
by the Company at an average price of $12.18 per share.
13. The Company had the following legal contingencies outstanding as of
March 31, 1999:
In July 1997, two policyholders of Fidelity Union Life Insurance
Company (FULICO) whose policies were assumed by Allianz Life commenced
an action against Allianz Life in state court in California. LifeUSA
Insurance was also named as a defendant in the lawsuit because it is
the successor of FULICO and a third plaintiff who is a policyholder of
LifeUSA Insurance asserted certain claims against LifeUSA Insurance.
This action is styled on behalf of the named plaintiffs and seeks
certification on behalf of a class of policyholders that had purchased
insurance products of Allianz/FULICO and LifeUSA Insurance. The
plaintiffs allege that they and other policyholders have been damaged
due to certain alleged improper life insurance sales practices relating
to vanishing premiums, churning and retirement plans, among other
things. In 1994, Allianz sold the stock of FULICO to the Company. The
Company then merged its Colorado life insurance subsidiary with FULICO
and changed FULICO's corporate name to LifeUSA Insurance in order to
redomesticate its Colorado life insurance subsidiary to Minnesota and
obtain licenses in all states except for New York. As part of the
transaction, Allianz Life assumed all of the business written by FULICO
prior to the sale of the stock of FULICO to the Company and agreed to
indemnify the Company and LifeUSA Insurance against any liabilities of
FULICO arising prior to the date on which FULICO was sold to the
Company. The case has been transferred to the United States Federal
Court for the District of Minnesota by agreement of the parties.
Allianz Life and the plaintiffs' attorneys have reached a tentative
settlement of the claims against Allianz Life. As part of the
settlement, plaintiffs have dismissed the claims against the Company
without prejudice, but will have the right to bring the claims again
after further investigation. While it is not possible to predict the
outcome of the litigation, the Company does not anticipate any material
adverse financial result.
9
<PAGE>
In December 1997, six annuity policyholders commenced a lawsuit against
the Company. The action is styled on behalf of the named plaintiffs and
seeks certification on behalf of a class of policyholders that
purchased annuity policies. The plaintiffs allege that they and other
annuity policyholders have been damaged due to certain alleged
misrepresentations and alleged inadequate disclosures at the times the
annuities were purchased and from time to time thereafter. The case was
commenced in the United States Federal Court for the Eastern District
of Pennsylvania. On April 15, 1999, the Company made a motion for
summary judgement and the plaintiffs moved for class certification.
These motions will be fully briefed on June 2, 1999 and the court will
take them under advisement. While it is not possible to predict the
outcome of the litigation, the Company does not anticipate any material
adverse financial result.
In June 1998, an action similar to the December 1997 lawsuit was
commenced against the Company by one annuity policyholder on behalf of
herself seeking certification on behalf of a class of all other New
Jersey annuity policyholders in New Jersey State Court. The case has
been removed to United States Federal Court for the District of New
Jersey and the Company moved to consolidate it with the January 1998
case in the United States Federal Court for the Eastern District of
Pennsylvania. That motion was granted in April 1999. The plaintiff has
moved to remand to state court and that motion is pending. The
litigation is in the early stages and, while it is not possible to
predict the outcome of the litigation, the Company does not anticipate
any material adverse financial result.
In March 1999, the North Carolina Department of Insurance made claims
against the Company for agent defalcation. The Company has recorded a
liability of $500,000. The Company believes the loss is probable and
the amount is a reasonable estimate.
10
<PAGE>
14. Basic and diluted earnings per share for the quarters ended March 31,
1999 and 1998 were computed as follows (dollars in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Three months ended March 31,
1999 1998
------------ ------------
<S> <C> <C>
BASIC
Weighted-average shares outstanding 24,642,173 25,736,873
============ ============
Net income $ 4,001 $ 6,009
============ ============
Per common share amount $ .16 $ .23
============ ============
DILUTED
Average shares outstanding and to be issued 24,669,770 25,775,885
Net effect of dilutive stock options and warrants,
having exercise prices of the average market
price of the common stock using the treasury
stock method 267,879 1,163,534
------------ ------------
Adjusted weighted-average shares 24,937,649 26,939,419
============ ============
Net income $ 4,001 $ 6,009
Add convertible subordinated debenture interest,
net of federal income tax effect -- 85
------------ ------------
Adjusted net income $ 4,001 $ 6,094
============ ============
Per common share amount $ .16 $ .23
============ ============
</TABLE>
11
<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) 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 that 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 the products are serviced by
home office staff.
In July 1998, LTCAmerica Holding, Inc. (LTCAmerica) was formed for the purpose
of acquiring, managing and funding the operations of an insurance company
offering life insurance, annuity and health insurance products providing long
term care benefits to consumers. LTCAmerica currently markets and administers
disability income and long term care insurance products developed for and issued
by LifeUSA Insurance and Allianz Life. LTCAmerica will seek to purchase, as a
subsidiary, either an existing long term care insurance company or a shell
insurance company that will underwrite and issue long term care products.
LTCAmerica is a majority-owned subsidiary of LifeUSA Insurance.
LifeUSA Marketing conducts a variety of marketing activities for the Company,
including the acquisition of and investment in national FMOs. In February 1999,
LifeUSA Marketing acquired a minority equity interest in Sunderland Insurance
Services, Inc., a national insurance and annuity marketing company with an agent
base of over 22,000 agents. In March 1999, LifeUSA Marketing sold its minority
equity interest in CMIC that it had acquired in November 1996. LifeUSA Marketing
currently owns an equity interest in seven FMOs. In May 1999, Tax Planning
Seminars, Inc., a wholly-owned subsidiary of LifeUSA Marketing, acquired the
assets of Pinnacle USA, Inc., which has been a significant national insurance
and annuity marketing organization with the Company over the past ten years.
LifeUSA Securities is a retail broker-dealer and registered investment advisor
that distributes a full range of securities products, including non-proprietary
mutual funds, variable life insurance and annuity contracts, and processes
general securities transactions.
In April 1998, the Company purchased a minority interest in Windsor Financial
Group, LLC (Windsor), a Minneapolis-based investment management firm. Windsor
currently manages $3.7 billion in assets for financial institutions,
foundations, retirement plans and high net worth individuals, including $1.8
billion of LifeUSA Insurance's portfolio.
12
<PAGE>
Management has organized the Company into three business segments in order to
focus on the distinct functional revenue, expense and asset 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 30, focuses on these segments and the
financial information used by management to make decisions and analyze the
results of operations.
RELATIONSHIP WITH ALLIANZ LIFE
Since 1988, under the terms of agreements between the Company and 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 commissions and expense allowances,
provided all administrative and other home office services, paid commissions due
agents and paid applicable premium taxes on the Allianz/LUSA Business. LifeUSA
Insurance assumes 25% of the Allianz/LUSA Business and pays commissions and
expense allowances on the assumed business to Allianz Life. During 1997 and
1998, LifeUSA Insurance produced long term care insurance business for Allianz
Life and received marketing and service fees for that business.
The terms of an agreement announced in January 1998 ("the agreement with Allianz
Life") allow Allianz Life to acquire up to 35% of the outstanding common stock
of the Company and to extend the marketing agreement between the two companies
to December 31, 2000. Allianz Life will acquire its interest in the Company over
a five-year period, ending in 2002, by purchasing from the Company $100 million
of newly issued common stock in increments of $10 million semi-annually. The
price at which Allianz Life will purchase the common stock will be at 250% of
the Company's six-month average book value per share (excluding SFAS No. 115),
at the time the common stock is issued. In August 1998, Allianz Life acquired
406,092 shares of the Company's common stock at $24.625 per share, and in
February 1999, Allianz Life acquired 395,062 shares at the mutually agreed upon
purchase price of $25.3125 per share. If the price at which Allianz Life would
purchase the Company's common stock is more that 200% of the current market
price at the time the common stock is tendered, Allianz Life can decline to
purchase part or all of the stock, and the Company can require Allianz Life to
purchase a convertible debenture for a like amount of capital.
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 statutory capital and surplus
requirements.
From April 1, 1991 through March 31, 1998, LifeUSA Insurance 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
13
<PAGE>
* Republic-Vanguard Life Insurance Company, a member of Partner Re Ltd., one
of the world's largest reinsurance companies (Republic-Vanguard).
Effective April 1, 1998, and in accordance with the agreement with Allianz Life,
Allianz Life began assuming a portion of LifeUSA Insurance's business. Also
effective April 1, 1998, Munich ceased assuming any new business from LifeUSA
Insurance, and LifeUSA Insurance increased the retention of its annuity business
from 25% to 30% and its life insurance business from 25% to 50%. 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, 1999 and December 31, 1998 (in millions):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Life insurance account values:
All policies produced by LifeUSA Insurance agents (1) $ 342.4 $ 333.6
Direct and assumed business (2) 293.6 286.2
Net of reinsurance (3) 114.9 111.6
Life insurance face amounts:
All policies produced by LifeUSA Insurance agents (1) 7,785.3 7,679.7
Direct and assumed business (2) 6,736.6 6,646.2
Net of reinsurance (3) 2,382.9 2,333.6
Annuity account values:
All policies produced by LifeUSA Insurance agents (1) 5,796.1 5,743.1
Direct and assumed business (2) 4,088.7 4,054.0
Net of reinsurance (3) 1,836.6 1,825.0
</TABLE>
- ----------------------------------------------
(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 11-14 of the 1998 Annual Report and Form 10-K for further details
regarding the Company's reinsurance agreements.
14
<PAGE>
RESULTS OF OPERATIONS
Total collected premiums and deposits decreased 16% in first quarter 1999
compared to first quarter 1998. Expenses due to one-time revisions of financial
product models and the Company's investment in LTCAmerica were incurred in first
quarter 1999 and, primarily as a result of these factors, net income for the
first quarter of 1999 decreased 33% compared to the first quarter of 1998.
Below is a more detailed discussion of the trends in the amounts reported in the
Condensed Consolidated Statement of Income for the quarters ended March 31, 1999
and 1998. These comments should be read in conjunction with the condensed
consolidated financial statements previously presented.
PREMIUMS AND DEPOSITS. Total collected premiums and deposits, including the
Allianz/LUSA Business, were $244.6 million and $289.8 million in the first
quarter of 1999 and 1998, respectively, a decrease of 16% 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,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Collected Premiums and Deposits (1):
LifeUSA Insurance:
Life:
First year $ 1,252 $ 1,481
Single and renewal 12,959 13,362
------------ ------------
Total Life 14,211 14,843
Long term care 9 --
Annuities 135,035 152,891
------------ ------------
Total LifeUSA Insurance collected premiums and deposits 149,255 167,734
Allianz Life:
Life:
First year 297 423
Single and renewal 3,855 3,839
------------ ------------
Total Life 4,152 4,262
Long term care 1 --
Annuities 91,229 117,827
------------ ------------
Total Allianz Life collected premiums and deposits 95,382 122,089
------------ ------------
Total collected premiums and deposits $ 244,637 $ 289,823
============ ============
</TABLE>
- --------------------------------------------
(1) Includes all LifeUSA Insurance products and all Allianz/LUSA Business.
15
<PAGE>
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Premiums and Deposits Not Retained or Assumed (2):
LifeUSA Insurance:
Life:
First year $ 691 $ 1,111
Single and renewal 8,630 8,820
------------ ------------
Total Life 9,321 9,931
Long term care 7 --
Annuities 94,115 113,057
------------ ------------
Total LifeUSA Insurance premiums and deposits not retained 103,443 122,988
Allianz Life:
Life:
First year 223 318
Single and renewal 2,348 2,292
------------ ------------
Total Life 2,571 2,610
Long term care 1 --
Annuities 67,601 87,167
------------ ------------
Total Allianz Life premiums and deposits not assumed 70,173 89,777
------------ ------------
Total collected premiums and deposits not retained or assumed $ 173,616 $ 212,765
============ ============
Retained or Assumed Premiums and Deposits (3):
LifeUSA Insurance:
Life:
First year $ 561 $ 370
Single and renewal 4,329 4,542
------------ ------------
Total Life 4,890 4,912
Long term care 2 --
Annuities 40,920 39,834
------------ ------------
Total LifeUSA Insurance retained premiums and deposits 45,812 44,746
Allianz Life:
Life:
First year 74 105
Single and renewal 1,507 1,547
------------ ------------
Total Life 1,581 1,652
Long term care 0 --
Annuities 23,628 30,660
------------ ------------
Total Allianz Life assumed premiums and deposits 25,209 32,312
------------ ------------
Total retained or assumed premiums and deposits $ 71,021 $ 77,058
============ ============
</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 not 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 11-14 of the 1998 Annual Report and Form 10-K for further details on
the Company's reinsurance agreements.
16
<PAGE>
REVENUES. Total revenues were $92.5 million and $92.1 million in the first
quarter of 1999 and 1998, respectively. The increase in total revenues of less
than 1% was primarily due to the increase in net investment income generated by
the growth of annuities in force and invested assets and net realized gains on
investments. These factors were partially offset by the decrease in commissions
and expense allowances associated with decreased production of business not
retained or assumed. The discussion that follows gives a line-by-line comparison
of revenues for the quarters ended March 31, 1999 and 1998. See also the
Business Segments section that 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, decreased 5%, or $688,000, in the first quarter of 1999 compared to
the first quarter of 1998, reflecting a decrease in surrender charges and
annuitizations as a result of increased sales of longer minimum deferral
products.
An increase in net investment income of 12%, or $4.7 million, in the first
quarter of 1999 compared to the first quarter of 1998 is primarily attributable
to increases in fair values of index options used to hedge the equity return
component of LifeUSA Insurance's equity-indexed annuity products and the sale of
the minority equity interest in CMIC. Also contributing to the increase in net
investment income was an increase in invested assets (fixed maturity
investments, other invested assets and cash and cash equivalents) to $2.37
billion at March 31, 1999 from $2.26 billion at March 31, 1998, which was
partially offset by the reduction in yield on investments. The weighted average
annual yield on fixed maturities and cash and cash equivalents (exclusive of
realized and unrealized gains and losses) was 7.18% at March 31, 1999, compared
to 7.26% at March 31, 1998. The following table shows the components of net
investment income for the quarters ended March 31, 1999 and 1998 (in thousands):
1999 1998
---------- ----------
Fixed maturities $ 40,222 $ 38,115
Common stock 8 --
Cash and cash equivalents 493 704
Policy loans 183 156
Unrealized gain on option contracts 1,462 318
Sale of minority equity interest in CMIC 1,782 --
Other 36 30
---------- ----------
44,186 39,323
Investment expenses (511) (382)
---------- ----------
Net investment income $ 43,675 $ 38,941
========== ==========
17
<PAGE>
The Company sold investments from its surplus assets (see page 28 for further
discussion on surplus assets) resulting in a $1.5 million net realized gain in
the first quarter of 1999. Surplus assets do not back policyholder liabilities
thus are not subject to adjustments for deferred policy acquisition costs and
other benefits to policyholders. 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 quarters ended March 31, 1999 and 1998 (dollars
in thousands, except per share amounts):
1999 1998
--------- ---------
Net realized gains on investments $ 1,483 $ 40
Increase in:
Amortization of deferred policy acquisition costs -- 28
Other benefits to policyholders -- 10
--------- ---------
Income before income taxes 1,483 2
Income taxes 519 1
--------- ---------
Net income $ 964 $ 1
========= =========
Earnings per share $ .04 $ .00
========= =========
Commissions and expense allowances and concessions decreased 13%, or $5.0
million, in the first quarter of 1999 compared to the first quarter of 1998. The
decrease is consistent with the 16% decrease in total collected premiums and
deposits discussed previously, partially offset by changes in the mix of
deferred annuity products sold.
18
<PAGE>
The following table shows the amounts of commissions and expense allowances and
concessions for the quarter ended March 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
LifeUSA Insurance:
Life:
First year $ 838 $ 1,429
Single and renewal 1,374 1,416
---------- ----------
Total Life 2,212 2,845
Long term care 10 --
Annuities 16,179 17,700
---------- ----------
Total LifeUSA Insurance 18,401 20,545
Allianz Life:
Life:
First year 262 473
Single and renewal 523 531
---------- ----------
Total Life 785 1,004
Long term care 2 --
Annuities 14,832 17,735
---------- ----------
Total Allianz Life 15,619 18,739
Lapse policy chargebacks (149) (167)
---------- ----------
Total commissions and expense allowances 33,871 39,117
LifeUSA Securities concessions 409 148
---------- ----------
Total commissions and expense allowances and concessions $ 34,280 $ 39,265
========== ==========
</TABLE>
- -----------------------------------------
The above table includes commissions and expense allowances related to LifeUSA
Insurance policies that have been ceded by LifeUSA Insurance to the Reinsurers,
service fees related to Allianz/LUSA Business and concessions related to LifeUSA
Securities sales.
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 11-14 of the 1998 Annual Report and Form 10-K for further details on
the Company's reinsurance agreements.
BENEFITS AND EXPENSES. Total benefits and expenses were $87.0 million and $82.5
million in the first quarters of 1999 and 1998, respectively. The increase in
total benefits and expenses of 5% was primarily due to a $2.0 million increase
in amortization of deferred policy acquisition costs and a $900,000 increase in
reserves resulting from one-time revisions of financial product models. The
discussion that follows gives a line-by-line comparison of benefits and expenses
for the quarters ended March 31, 1999 and 1998. See also the Business Segments
section that follows for additional analysis of the results of operations.
An increase in interest credited to policyholder account values of 6%, or $1.9
million, in the first quarter of 1999 compared to the first quarter of 1998,
reflects the increases in fair values of index options used to hedge the equity
return component of LifeUSA Insurance's equity-indexed annuity products and
growth in annuities in force.
19
<PAGE>
The increase in other benefits to policyholders of 12%, or $682,000, reflects
the $900,000 increase in reserves resulting from one-time revisions of financial
product models partially offset by lower amortization of deferred bonuses
associated with the decrease in surrenders and annuitizations.
Amortization of deferred policy acquisition costs increased 23%, or $1.7
million, in the first quarter of 1999 as compared to the first quarter of 1998.
This reflects the $2.0 million of increased amortization of deferred policy
acquisition costs resulting from one-time revisions of financial product models
partially offset by lower amortization associated with the decrease in
surrenders and annuitizations. Utilizing the actual policy experience and
appropriate assumptions for future periods, these models indicate that deferred
policy acquisition costs are fully recoverable.
Commissions to agents decreased 12%, or $2.6 million, in the first quarter of
1999 compared to the first quarter of 1998 due to the 16% decrease in total
collected premiums and deposits discussed previously, partially offset by a
change in the mix of deferred annuity products sold.
Taxes, licenses and fees increased $753,000 in the first quarter of 1999
compared to the first quarter of 1998. This increase was primarily due to a
reduction in guaranty fund assessments accrued in first quarter 1998.
Operating expenses increased 12%, or $2.1 million, in the first quarter of 1999
compared to the first quarter of 1998. This increase was primarily due to the
Company's investment in LTCAmerica and expenses related to an agent defalcation.
Income taxes were $1.7 million in the first quarter of 1999 and $3.6 million in
the first quarter of 1998. The effective income tax rates for the first quarter
of 1999 and 1998 were 30.0% and 37.5%, respectively. The decrease in the
effective income tax rate is due to differences between the book and tax basis
of the Company's minority equity interest in CMIC that was sold during the first
quarter of 1999. The Company estimates its effective income tax rate for the
remainder of 1999 to be approximately 36.5%.
NET INCOME. Net income was $4.0 million in the first quarter of 1999 and $6.0
million in the first quarter of 1998, which represents a decrease of 33%.
Diluted earnings per share were $.16 in the first quarter of 1999 compared to
$.23 in the first quarter of 1998, which represents a decrease of 30%. The per
share decrease is lower than the net income decrease due to the repurchase of
3.3 million shares of the Company's common stock and a reduction in the dilutive
impact of "in the money" stock options. These factors were partially offset by
the transactions associated with the agreement with Allianz Life.
20
<PAGE>
The following table summarizes the operating highlights for the three months
ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------------------------------
1999 1998
------------------------- -------------------------
Income EPS Income EPS
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Consolidated net income and diluted earnings per share $ 4,001 $ .16 $ 6,009 $ .23
Adjustments to arrive at consolidated net operating income (1):
Net realized gains on investments (964) (.04) (1) (.00)
Credits for state guaranty fund assessments (116) (.00) (650) (.03)
---------- ---------- ---------- ----------
Consolidated net operating income and earnings per share 2,921 .12 5,358 .20
Sale of minority equity interest in CMIC (1,565) (.06) -- --
Financial product model adjustment 1,886 .07 -- --
Agent defalcation 325 .01 -- --
---------- ---------- ---------- ----------
Consolidated net operating income and earnings per share
excluding sale of minority equity interest in CMIC, financial
product model adjustment and agent defalcation $ 3,567 $ .14 $ 5,358 $ .20
========== ========== ========== ==========
</TABLE>
- -----------------------------------------------
(1) Consolidated net operating income equals net income, excluding, net of
related income taxes: (i) net realized gains on investments and the
corresponding increases in amortization of deferred policy acquisition
costs and other benefits to policyholders and (ii) credits for state
guaranty fund assessments.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1999, the Company's primary available sources of
cash were:
* service fees received by the Company for the Allianz/LUSA Business,
* management fees from LifeUSA Insurance,
* interest earned on invested assets,
* $10 million received from Allianz Life's stock purchase in February 1999,
* dividend totaling $5 million paid to the Company by LifeUSA Insurance,
* proceeds received from sale of minority equity interest in CMIC, and
* a $50 million long-term line of credit from the Company's 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 1999, based on currently anticipated life
insurance and annuity sales and on the continuation of acceptable reinsurance
arrangements.
The extended marketing relationship with Allianz Life and related infusion of
the remaining $80 million in capital through 2002, along with the $50 million
line of credit from the Reinsurers and dividends from LifeUSA Insurance,
provides sufficient capital to fund the Company's needs.
The Company's cash needs consist of:
* operating expenses, including expenses in connection with efforts to
increase the production of existing agents and expand the size of the field
force,
* capital contributions to LifeUSA Marketing for investments in marketing
organizations expected to increase premium and deposit production volume
for LifeUSA Insurance and Allianz Life,
* repayments of borrowings under the line of credit to the Reinsurers,
* operating expenses of and potential contributions to LifeUSA Securities to
ensure compliance with NASD capital requirements,
* quarterly dividends to shareholders of record,
* authorized repurchases of its common stock,
* potential contributions to LTCAmerica to purchase an existing long-term
care insurance company or a "shell" insurance company and commence
operations,
* potential 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.
In April 1999, the Company announced that its Board of Directors authorized the
Company to increase its current stock repurchase program by 2.5 million shares
to a total of 6.5 million shares of its common stock. As of March 31, 1999, 3.3
million shares have been repurchased by the Company at an average price of
$12.18 per share. Repurchased shares will be deemed to be outstanding shares for
purposes of calculating the 35% of the outstanding common stock of the Company
to be acquired over the next four years by Allianz Life.
Management believes that the available sources of cash will provide sufficient
capital resources to meet all the Company's cash needs in the ordinary course of
business during the next twelve months, based on currently anticipated life
insurance and annuity sales, expected levels of net retention and acceptable
reinsurance agreements.
22
<PAGE>
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.
LifeUSA Insurance produced statutory net income of $2.5 million during first
quarter 1999 compared to $4.8 million during the first quarter of 1998. As of
March 31, 1999, LifeUSA Insurance had statutory capital and surplus for
regulatory purposes of $115.4 million compared to $113.1 million at December 31,
1998. LifeUSA Insurance expects to continue to satisfy statutory capital and
surplus requirements through 1999 primarily through statutory profits on its
maturing block of retained in force business.
In April 1999, the Company announced that its Board of Directors declared a cash
dividend of 2.5 cents per share for the first quarter of 1999, payable on May
14, 1999, to shareholders of record as of April 28, 1999. The Company declared
similar quarterly dividends in 1998. It is the intention of the Board of
Directors to pay regular quarterly dividends in 1999 of 2.5 cents per share, or
ten cents per share on an annual basis.
Although the Board of Directors of the Company has declared dividends on the
Company's common stock, there are statutory and regulatory limitations upon the
extent to which dividends may be paid to a parent from an insurance subsidiary,
including the restriction that an insurance company may only pay ordinary
dividends out of unassigned funds (earned surplus). The Department of Commerce
of the State of Minnesota may permit LifeUSA Insurance to pay dividends to the
Company 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 Minnesota insurance laws and regulations. The
Department of Commerce of the State of Minnesota permitted LifeUSA Insurance to
pay $5.0 million in extraordinary dividends to the Company during January 1999
and $2.5 million during 1998 and 1997.
23
<PAGE>
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 considered how to better support
multiple benefit product designs, such as LifeUSA Insurance's two-tier annuities
and universal life insurance 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.
As of March 31, 1999, the NAIC Life Insurance Illustration Model Regulation was
effective in twenty-nine states. 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. In March 1999, the NAIC
adopted a new annuity disclosure model regulation. Adoption in each state is
required before it becomes law. The new model requires a product specific
disclosure document and a copy of the NAIC Buyer's Guide to Fixed Deferred
Annuities be provided to the consumer at the time of application. It does not
regulate illustrations and does not require self-support or lapse-support
testing of annuity illustrations. LifeUSA Insurance is monitoring these
developments and no significant impact is anticipated at this time.
NAIC committees are considering a new approach to statutory valuation of
liabilities (reserves) and regulations for equity-indexed products. 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's 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 and a report of Association Financial Examination was released June 30,
1998. The recommendations contained in the report were not material individually
or in the aggregate to LifeUSA Insurance's business operations or financial
statements.
LifeUSA Securities, as a registered broker and dealer and registered investment
advisor in securities, is subject to the Securities and Exchange Commission's
Uniform Net Capital Rule. As of March 31, 1999, LifeUSA Securities' net capital
exceeded the minimum required balance.
24
<PAGE>
In June 1998, the A.M. Best Company upgraded the rating assigned to LifeUSA
Insurance to A- (Excellent) from B++ (Very Good). The A- rating is assigned to
companies which, in A.M. Best's opinion, have excellent financial strength,
operating performance and market profile, on balance, when compared to the
standards established by the A.M. Best Company. A- companies have a strong
ability to meet their ongoing obligations to policyholders. According to A.M.
Best, the upgrade reflects LifeUSA Insurance's innovative product portfolio and
marketing ability, its extensive distribution system, its strong reinsurance
relationships, and its ability to raise capital through its parent as
demonstrated by the 1998 agreement with Allianz Life.
In May 1998, Moody's Investors Service (Moody's) upgraded the rating assigned to
LifeUSA Insurance to A3 from Baa3. This rating falls within Moody's "Strong
Companies" category. According to Moody's, the upgrade reflects the significant
minority interest to be held by Allianz Life, as well as the enhanced marketing,
reinsurance and strategic ties between the Company and Allianz Life.
In August 1998, Standard & Poor's (S&P) affirmed LifeUSA Insurance's initial
claims-paying ability rating of BBB+ (Adequate). S&P 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.
YEAR 2000 UPDATE
GENERAL A comprehensive analysis of the Year 2000 (Y2K) issue was completed in
1997. This analysis established a plan for compliance of all Company information
systems and significant non-computer devices to ensure accurate processing of
date data from the twentieth and into the twenty-first centuries. The project
also included identification of key vendors and obtaining assurances that their
key systems are Y2K compliant. Because the Company has only been operating since
1987, significant systems were already Y2K compliant. As of December 31, 1998,
the total cost of the project was estimated at $650,000, with $640,000 incurred
through March 31, 1999. In addition, ongoing monitoring of the upgrading of
operating systems, development tools and desktop applications will be performed
during the normal course of business.
SYSTEMS The Company continues to execute its plan to ensure that all systems are
Y2K compliant and expects to complete the plan by June 1999. All of the
Company's mainframe, local area network and voicemail systems are all Y2K
compliant with the exception of systems being upgraded in the normal course of
business. Full scale production level system testing was completed in September
1998. These tests covered key functional components of the systems and tested
conditions through the first quarter of 2001. The machine environment and
application software executed as expected into 2001. Complete documentation of
each test has been compiled and is being archived.
Full scale production level system testing for each of the personal computer
based applications was completed in January 1999. These tests covered key
functional components of the applications and tested conditions through the
first quarter of 2001. Complete documentation of each test has been compiled and
is being archived. The personal computer based applications executed as expected
into year 2001.
Applications being upgraded in the normal course of business include the
financial accounting application and the LifeUSA Insurance policy assembly
application. The financial accounting application is being upgraded to provide
more functionality. This application is Y2K compliant and installation during
the second quarter 1999 is
25
<PAGE>
on schedule. LifeUSA Insurance automated its policy assembly application in
April 1999, and that application is Y2K compliant. In addition, all personal
computer hardware and non-computer hardware is or will be Y2K compliant by June
1999.
ONGOING ACTIVITY Follow-up on compliance assurances by key vendors and business
partners was ongoing through the end of 1998 and will continue in 1999, as
appropriate. Testing of data exchange with key external business partners
continues for purposes of date compliance with testing being executed during the
first quarter of 1999 as partners reach date compliance. Contingency planning
continues as additional back-up protection with respect to key vendors who have
provided assurances that their systems are Y2K compliant.
SUMMARY At this time, the Company is aware of no Y2K compliance issues that will
negatively impact the key business processes of the Company or its affiliated
companies. All Y2K compliance plan activities are scheduled to be completed by
June 1999.
26
<PAGE>
INVESTMENTS. As of March 31, 1999, the Company had cash, cash equivalents, fixed
maturity investments, common stock, equity options and policy loans on a
consolidated basis totaling $2.37 billion, including $7.6 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, 1999 (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 $ 36,014 1.54% $ 36,014 1.52% $ 36,014 1.50%
Government Treasury and Agency notes and bonds 101,035 4.33 104,638 4.42 110,838 4.61
Taxable municipals 10,667 .46 10,646 .45 10,491 .44
Mortgage pass throughs 47,350 2.03 49,153 2.08 49,153 2.05
Agency Collateralized Mortgage Obligations:
CMO -- Sequentials 2,244 .10 2,244 .09 2,295 .10
CMO -- PACs 546,941 23.44 549,594 23.23 562,173 23.40
CMO -- ADs 21,644 .93 21,644 .91 22,441 .93
CMO -- TACs 6,290 .27 6,290 .27 6,917 .29
Investment grade corporate securities:
AAA+ to AAA- 87,876 3.77 87,950 3.72 90,046 3.75
AA+ to AA- 198,028 8.49 200,498 8.48 203,638 8.48
A+ to A- 740,889 31.75 752,051 31.79 760,880 31.68
BBB+ to BBB- 443,288 18.96 451,068 19.08 453,515 18.88
Non investment grade corporate securities 25,907 1.11 23,967 1.01 23,893 .99
Common stock 19,767 .85 19,808 .84 19,808 .82
Equity options 10,638 .46 14,760 .62 14,760 .61
Policy loans 35,231 1.51 35,231 1.49 35,231 1.47
------------------------------------------------------------------------------
Total cash and invested assets $2,333,809 100.00% $2,365,556 100.00% $2,402,093 100.00%
==============================================================================
</TABLE>
ASSETS BACKING LIABILITIES. 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, 1999, the weighted average credited interest rate for deferred
annuities and life insurance policies was 4.81% and the weighted average yield
on the assets backing liabilities was 7.24%. As of December 31, 1998, the
weighted average credited interest rate was 4.85% and the weighted average yield
on the assets backing liabilities was 7.26%. Investment income from the assets
backing liabilities exceeded interest credited to policyholders by $9.0 million
during first quarter of 1999. The investment portfolio is managed primarily by
allocating new cash flows into investments that have yield, maturity and other
characteristics suitable for LifeUSA Insurance's expected policyholder
liabilities. Consistent with LifeUSA Insurance's asset and liability management
practices, as of March 31, 1999, the effective duration of LifeUSA Insurance's
assets backing liabilities was 4.67 years, compared to 4.70 years as of December
31, 1998.
27
<PAGE>
SURPLUS ASSETS. LifeUSA Insurance's assets backing liabilities represent
approximately 95% of total cash and investments. The remaining 5% of investments
are referred to as surplus assets. Surplus assets represent the contributed
capital and accumulated earnings of LifeUSA Insurance. The surplus assets do not
back the liabilities of LifeUSA Insurance and can therefore be managed with a
discretionary perspective. During the first quarter of 1999, LifeUSA Insurance
modified its investment guidelines related to the management of surplus assets
to allow a small percentage to be invested in common stock and high-yield bonds.
The remainder of the surplus assets is invested in government, government agency
and investment-grade corporate securities. All securities constituting the
surplus asset portfolio are designated available for sale and are closely
monitored to a predetermined bond and equity indexed benchmark specified by both
LifeUSA Insurance and its external investment manager, Allianz of America, Inc.
EQUITY OPTIONS. Certain LifeUSA Insurance annuity products provide an additional
benefit credited to the policy annuitization value based on the growth in the
Standard & Poor's (S&P) 500 Index. LifeUSA Insurance has analyzed the
characteristics of these benefits and has purchased option contracts tied to the
S&P 500 Index with similar characteristics to hedge these risks. Management
monitors correlation of in force amounts and option contract values to ensure
proper matching. If persistency assumptions were to deviate significantly from
anticipated rates, management would purchase or sell option contracts as deemed
appropriate. As of March 31, 1999, management believes a proper hedge exists.
LifeUSA Insurance purchases 5-year and 7-year "over-the-counter" European-Asian
call option contracts based on the S&P 500 Index. LifeUSA Insurance purchases
option contracts only from counterparties rated AA- or better and the option
contracts are not used for trading purposes.
COMBINED PORTFOLIO. The percentage of the total fair value of the Company's
portfolio that was comprised of investment grade corporate obligations was 63%
at March 31, 1999. With each corporate security acquisition, LifeUSA Insurance's
external managers perform a comprehensive analysis of the credit implications
and outlook of the issuing corporation and industry. Ongoing procedures for
monitoring and assessing any potential deterioration or downgrade in credit
quality are also in place.
Approximately 1% of the total fair value of the Company's portfolio was
comprised of non-investment grade corporate obligations at March 31, 1999. The
Company believes that there is no impairment to these investments, as they will
continue to receive principal and interest payments through maturity.
The remainder of the Company's portfolio is 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 issued. These
CMOs are specifically structured to provide the highest degree of protection
against swings in repayments caused primarily by changes in interest rates, have
virtually no risk of default and 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 in which it invests
will allow the Company to maintain high quality, consistent yields and proper
maturities for the overall portfolio.
28
<PAGE>
As of March 31, 1999, the Company held 44%, or $1.01 billion, 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's 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. LifeUSA Insurance'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.
SHAREHOLDER'S EQUITY. At March 31, 1999, the Company's shareholders' equity and
book value per share were $273.0 million and $11.41, respectively, compared to
$280.0 million and $11.30, respectively, at December 31, 1998. 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
$266.6 million and $11.14, respectively, at March 31, 1999, compared to $266.6
million and $10.76, respectively, at December 31, 1998.
29
<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 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, product
design and promotion, advertising and the management of investments in marketing
subsidiaries. The Corporate Segment provides strategic direction for all
segments and includes the operations of LifeUSA Securities and LTCAmerica
because their results of operations 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 that follows.
There were no material changes to the assets of each segment disclosed in the
Annual Report and Form 10-K that would warrant disclosure in this Report. The
table on pages 34 and 35 summarizes the results of operations for the first
quarters of 1999 and 1998.
The Company evaluates the performance of each business segment based on profit
or loss from operations. The accounting policies of the reportable segments are
the same as those described in the summary of significant accounting policies.
The asset and income statement items are allocated based on the functionality
and nature of the activities performed by each segment.
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 reinsurers and assumes a portion of the Allianz/LUSA
Business. The Insurance Segment manages the assets and liabilities for business
retained or assumed by LifeUSA Insurance and administers all of the LifeUSA
Insurance and Allianz/LUSA Business.
The Insurance Segment's primary revenue sources are net investment income, net
commissions and expense allowances, service fees and policyholder charges. 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/LUSA Business and operating
expenses. The Insurance Segment's primary assets are investments, reinsurance
recoverables, deferred policy acquisition costs, accrued investment income and
policy loans. These assets represent approximately 98% of the total consolidated
assets. The Insurance Segment's profitability is derived from its ability to
effectively manage the assets and liabilities retained or assumed by LifeUSA
Insurance and to manage the operating expenses incurred in the administration of
all business produced.
REVENUES. Total revenues were $89.7 million and $91.0 million in the first
quarter of 1999 and 1998, 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 changes are consistent with
those previously discussed in the Company's Results of Operations section.
EXPENSES. Total expenses were $85.3 million and $84.0 million in the first
quarter of 1999 and 1998, respectively. The increase in total expenses of 2% in
1999 compared to 1998 is primarily attributable to
30
<PAGE>
increases in other benefits to policyholders and amortization of deferred policy
acquisition costs due to the one-time revisions of financial product models.
These factors were partially offset by a decrease in the marketing fee paid to
the Marketing Segment, net of deferral, as a result of the decrease in premium
and deposit production. The marketing fee, which decreased 13% from 1998, is
calculated as a percentage of premiums and deposits and will vary generally with
the change in premium and deposit production that decreased 16% from 1998.
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 fee to change by greater or lesser amounts than the change
in premium and deposit production.
MARKETING SEGMENT. The Marketing Segment provides all services related to the
recruitment and development of agents and FMOs, support of agents producing
LifeUSA Insurance business and Allianz/LUSA Business, and advertising, promotion
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
business and Allianz/LUSA Business. 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 assets, which account for
less than 1% of total consolidated assets, consist primarily of investments in
subsidiaries. The Marketing Segment's profitability is derived from its ability
to manage commissions and operating costs.
REVENUES. Total revenues were $33.9 million and $35.3 million in the first
quarter of 1999 and 1998, respectively. The decrease in total revenues of 4% in
1999 compared to 1998 is primarily attributable to the marketing fee that is
based on premium and deposit production discussed previously. This factor was
partially offset by an increase in net investment income due to the sale of
CMIC. The entire amount of the marketing fee is charged to the Insurance Segment
and is eliminated in consolidation.
EXPENSES. Total expenses were $30.1 million and $32.9 million in the first
quarter of 1999 and 1998, respectively. The decrease in total expenses of 8% in
1999 compared to 1998 is primarily attributable to commissions incurred that are
based on premium and deposit production discussed previously. 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 also cause
commissions to change.
31
<PAGE>
CORPORATE SEGMENT. The Corporate Segment provides strategic direction for the
Company and its various business segments and includes the operations of LifeUSA
Securities and LTCAmerica because their results 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. The Corporate
Segment retains expenses of an enterprise-wide nature. Assets consist primarily
of surplus investments and investments in subsidiaries.
REVENUES. Total revenues were $3.2 million and $2.9 million for first quarter
1999 and 1998, respectively. The increase in total revenues of 13% in 1999
compared to 1998 is due to an increase in concessions and equity income in
subsidiaries partially offset by the decrease in the corporate fee. The increase
in concessions is due to an increase in LifeUSA Securities's sales of security
products. Equity income in subsidiaries is a result of the 40% minority interest
in Windsor purchased in April 1998. The corporate fee decrease is due to a
decrease in 1999 revenues for the Marketing and Insurance Segments.
EXPENSES. Total expenses were $5.8 million and $2.7 million for 1999 and 1998,
respectively. The increase in 1999 compared to 1998 is primarily attributable to
the Company's investment in LTCAmerica and an increase in salaries and employee
benefits.
32
<PAGE>
BUSINESS SEGMENTS RESULTS OF OPERATIONS. The following table summarizes 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,
1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Insurance Segment Marketing Segment
Percent Percent
1999 1998 Change 1999 1998 Change
-------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Policyholder charges $ 12,378 $ 13,066 (5)% $ -- $ -- --%
Net investment income 41,607 38,540 8 1,783 9 N/A
Net realized gains (losses) on investments 1,483 5 N/A -- -- --
Commissions and expense allowances and concessions 33,868 39,117 (13) -- -- --
Marketing fee -- -- -- 31,514 34,796 (9)
Corporate fee -- -- -- -- -- --
Equity income in subsidiaries -- -- -- 358 282 27
Other 329 298 10 214 246 (13)
-------------------------------------- -----------------------------------
Total revenues 89,665 91,026 (1) 33,869 35,333 (4)
Expenses:
Interest credited to policyholder account values 31,228 29,323 6 -- -- --
Other benefits to policyholders 6,508 5,826 12 -- -- --
Amortization of deferred policy acquisition costs 9,209 7,510 23 -- -- --
Commissions and marketing fee 26,338 30,293 (13) 24,725 26,924 (8)
Taxes, licenses and fees 647 (106) N/A -- -- --
Operating expenses:
Salaries and employee benefits 3,819 3,817 0 1,823 1,923 (5)
Data processing 965 918 5 251 400 (37)
Printing and office supplies 147 375 (61) 310 437 (29)
Depreciation and amortization 684 605 13 750 559 34
Other 5,739 5,445 5 2,274 2,656 (14)
-------------------------------------- -----------------------------------
Total benefits and expenses 85,284 84,006 2 30,133 32,899 (8)
-------------------------------------- -----------------------------------
Income before income taxes 4,381 7,020 (38) 3,736 2,434 53
Income taxes 1,719 2,533 (32) 934 1,032 (9)
-------------------------------------- -----------------------------------
Net income before minority interest 2,662 4,487 (41) 2,802 1,402 100
Minority interest, net of tax -- -- -- -- -- --
-------------------------------------- -----------------------------------
Net income (loss) $ 2,662 $ 4,487 (41)% $ 2,802 $ 1,402 100%
====================================== ===================================
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Corporate Segment Eliminating Entries(1) Consolidated
Percent Percent
1999 1998 Change 1999 1998 1999 1998 Change
- ---------------------------------------- ---------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ -- $ -- --% $ -- $ -- $ 12,378 $ 13,066 (5)%
369 477 (23) (84) (85) 43,675 38,941 12
-- (26) (100) -- -- 1,483 (21) N/A
412 148 178 -- -- 34,280 39,265 (13)
-- -- -- (31,514) (34,796) -- -- --
2,157 2,258 (4) (2,157) (2,258) -- -- --
52 -- N/A -- -- 410 282 45
246 1 245 (483) -- 306 545 (44)
- ---------------------------------------- ---------------------------- -----------------------------------------
3,236 2,858 13 (34,238) (37,139) 92,532 92,078 0
-- -- -- -- -- 31,228 29,323 6
-- -- -- -- -- 6,508 5,826 12
-- -- -- -- -- 9,209 7,510 23
362 119 204 (31,153) (34,428) 20,272 22,908 (12)
-- -- -- -- -- 647 (106) N/A
2,127 881 141 (153) (151) 7,616 6,470 18
167 50 234 (16) (16) 1,367 1,352 1
325 59 451 (59) (63) 723 808 (11)
98 52 88 -- -- 1,532 1,216 26
2,696 1,529 76 (2,857) (2,481) 7,852 7,149 10
- ---------------------------------------- ---------------------------- -----------------------------------------
5,775 2,690 115 (34,238) (37,139) 86,954 82,456 5
- ---------------------------------------- ---------------------------- -----------------------------------------
(2,539) 168 N/A -- -- 5,578 9,622 (42)
(979) 48 N/A -- -- 1,674 3,613 (54)
- ---------------------------------------- ---------------------------- -----------------------------------------
(1,560) 120 N/A -- -- 3,904 6,009 (35)
(97) -- N/A -- -- (97) -- N/A
- ---------------------------------------- ---------------------------- -----------------------------------------
$ (1,463) $ 120 N/A $ -- $ -- $ 4,001 $ 6,009 (33)%
======================================== ============================ =========================================
</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 deferred policy acquisition costs and
the corresponding amortization is recorded as an asset and 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.
34
<PAGE>
* * * *
Statements other than historical information contained in this Report, including
the statements involving hypothetical events included in the "Market Risk
Disclosure," are forward-looking statements and, therefore, subject to risks and
uncertainties, including those identified below, which could cause the actual
results to differ materially from statements. In addition to statements which
are forward-looking by reason of context, the words "believe," "expect,"
"anticipate," "intend," "designed," "goal," "objective," "optimistic," "will"
and similar expressions identify forward-looking statements. Factors which could
cause actual results to differ materially from the forward-looking statements,
thereby resulting in a material adverse impact on the business, results of
operations or financial condition of the Company, include but are not limited to
(i) the Company's ability to develop or receive regulatory approval of new
products intended to be marketed as uniquely suited to meet identified needs for
life insurance, retirement income planning and long-term care; (ii) regulatory
constraints on existing or future products rendering the products unmarketable
or unprofitable; (iii) the Company's ability to favorably differentiate its
products and service levels from those of competitors, including other insurance
and financial services companies and various investment vehicles readily
available to consumers; (iv) loss of key personnel; (v) the Company's ability to
manage assets and produce returns providing sufficient spread on invested assets
backing policyholder liabilities; (vi) the strength of the equity markets and
the interest rate environment; (vii) field marketing organization investment in
the education and support of agents selling the Company's products; (viii) the
ability of owned and minority-owned marketing organizations to increase
production and profitability; (ix) increase in the size and improvement in the
productivity of the Company's distribution system; (x) continuation of mutually
beneficial relationships with Allianz Life and the Reinsurers; (xi) continued
access to capital at favorable rates; (xii) willingness of the private market to
identify and allocate significant resources to long-term care coverage; (xiii)
the Company's ability to attract and retain committed, competent and creative
home office owners and management; (xiv) the Company's ability to ensure the
continuous availability of technology at levels necessary to efficiently process
and maintain the business produced for the entire enterprise and manage the
assets of the enterprise; (xv) litigation, with or without merit, claiming
significant resources of the enterprise; and (xvi) the ability of the Company to
adequately remediate all operational systems and non-computer devices and
internal computer software to avoid Year 2000 problems without significant
additional expense, and the reliability of assurances obtained from and ongoing
data exchange testing with key vendors and business partners to address Year
2000 problems. Forward-looking statements speak only as of the date on which
they are made, and the Company does not undertake an obligation to update or
revise any forward-looking statements.
35
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's market risk exposure
previously disclosed in the Annual Report and Form 10-K.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 1997, two policyholders of Fidelity Union Life Insurance Company
(FULICO) whose policies were assumed by Allianz Life commenced an action against
Allianz Life in state court in California. LifeUSA Insurance was also named as a
defendant in the lawsuit because it is the successor of FULICO and a third
plaintiff who is a policyholder of LifeUSA Insurance asserted certain claims
against LifeUSA Insurance. This action is styled on behalf of the named
plaintiffs and seeks certification on behalf of a class of policyholders who had
purchased insurance products of Allianz/FULICO and LifeUSA Insurance. The
plaintiffs allege that they and other policyholders have been damaged due to
certain alleged improper life insurance sales practices relating to vanishing
premiums, churning and retirement plans, among other things. In 1994, Allianz
sold the stock of FULICO to the Company. The Company then merged its Colorado
life insurance subsidiary with FULICO and changed FULICO's corporate name to
LifeUSA Insurance in order to redomesticate its Colorado life insurance
subsidiary to Minnesota and obtain licenses in all states except for New York.
As part of the transaction, Allianz Life assumed all of the business written by
FULICO prior to the sale of the stock of FULICO to the Company and agreed to
indemnify the Company and LifeUSA Insurance against any liabilities of FULICO
arising prior to the date on which FULICO was sold to the Company. The case has
been transferred to the United States Federal Court for the District of
Minnesota by agreement of the parties. Allianz Life and the plaintiffs'
attorneys have reached a tentative settlement of the claims against Allianz
Life. As part of the settlement, plaintiffs have dismissed the claims against
the Company without prejudice, but will have the right to bring the claims again
after further investigation. While it is not possible to predict the outcome of
the litigation, the Company does not anticipate any material adverse financial
result.
In December 1997, six annuity policyholders commenced a lawsuit against the
Company. The action is styled on behalf of the named plaintiffs and seeks
certification on behalf of a class of policyholders that purchased annuity
policies. The plaintiffs allege that they and other annuity policyholders have
been damaged due to certain alleged misrepresentations and alleged inadequate
disclosures at the times the annuities were purchased and from time to time
thereafter. The case was commenced in the United States Federal Court for the
Eastern District of Pennsylvania. On April 15, 1999, the Company made a motion
for summary judgement and the plaintiffs moved for class certification. These
motions will be fully briefed on June 2, 1999 and the court will take them under
advisement. While it is not possible to predict the outcome of the litigation,
the Company does not anticipate any material adverse financial result.
36
<PAGE>
In June 1998, an action similar to the December 1997 lawsuit was commenced
against the Company by one annuity policyholder on behalf of herself seeking
certification on behalf of a class of all other New Jersey annuity policyholders
in New Jersey State Court. The case has been removed to United States Federal
Court for the District of New Jersey and the Company moved to consolidate it
with the January 1998 case in the United States Federal Court for the Eastern
District of Pennsylvania. That motion was granted in April 1999. The plaintiff
has moved to remand to state court and that motion is pending. The litigation is
in the early stages and, while it is not possible to predict the outcome of the
litigation, the Company does not anticipate any material adverse financial
result.
In March 1999, the North Carolina Department of Insurance made claims against
the Company for agent defalcation. The Company has recorded a liability of
$500,000. The Company believes the loss is probable and the amount is a
reasonable estimate.
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
(27) Financial data schedule (electronic filing only).
37
<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 14, 1999
/s/ Mark A. Zesbaugh
----------------------------------
Mark A. Zesbaugh
Executive Vice President
Chief Financial Officer
38
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 1,009,612
<DEBT-CARRYING-VALUE> 1,250,131
<DEBT-MARKET-VALUE> 1,286,666
<EQUITIES> 19,808
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,329,542
<CASH> 36,014
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 233,865
<TOTAL-ASSETS> 5,526,760
<POLICY-LOSSES> 5,097,996
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 10,923
<NOTES-PAYABLE> 5,898
0
0
<COMMON> 239
<OTHER-SE> 272,800
<TOTAL-LIABILITY-AND-EQUITY> 5,526,760
0
<INVESTMENT-INCOME> 43,675
<INVESTMENT-GAINS> 1,483
<OTHER-INCOME> 47,374
<BENEFITS> 37,736
<UNDERWRITING-AMORTIZATION> 9,209
<UNDERWRITING-OTHER> 40,009
<INCOME-PRETAX> 5,743
<INCOME-TAX> 1,742
<INCOME-CONTINUING> 4,001
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,001
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
