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
June 30, 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)
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 June 30, 1999
--------------- ----------------------------
Common Stock, 24,000,031
Par Value $.01 Per Share
<PAGE>
Life USA HOLDING, INC.
Securities and Exchange Commission Form 10-Q
for the Second Quarter Ended June 30, 1999
I N D E X
Page
Number
------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheet (Unaudited)
June 30, 1999 and December 31, 1998..............................3-4
Condensed Consolidated Statement of Income
(Unaudited) Three months and six months ended
June 30, 1999 and June 30, 1998....................................5
Condensed Consolidated Statement of Cash Flows
(Unaudited) Six months ended
June 30, 1999 and June 30, 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............................13-30
Management's Discussion and Analysis of Financial
Condition and Results of Operations on Business Segments ......31-38
Item 3. Quantitative and Qualitative Disclosures About Market Risk .......39
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings..............................................39-40
Item 2. Changes in Securities.............................................40
Item 3. Defaults Upon Senior Securities...................................40
Item 4. Submission of Matters to a Vote of Security Holders............40-41
Item 5. Other Information.................................................41
Item 6. Exhibits and Reports on Form 8-K..................................41
SIGNATURES:...................................................................42
<PAGE>
Life USA HOLDING, INC.
Condensed Consolidated Balance Sheet
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturity investments:
Available for sale, at fair value (amortized cost:
$1,029,919 at June 30, 1999 and $966,205 at
December 31, 1998) $ 1,020,591 $ 1,020,691
Held to maturity, at amortized cost (fair value:
$1,223,437 at June 30, 1999 and $1,314,009 at
December 31, 1998) 1,215,317 1,259,072
Other invested assets 79,651 46,323
------------ ------------
Total investments 2,315,559 2,326,086
Cash and cash equivalents 49,981 21,570
Accrued investment income 34,563 33,729
Future policy benefits recoverable and amounts due
from reinsurers 2,905,908 2,801,109
Deferred policy acquisition costs 259,155 216,725
Other assets 52,622 59,500
------------ ------------
$ 5,617,788 $ 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>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits $ 5,189,696 $ 5,030,833
Other policyholders' funds 15,951 9,839
Amounts due reinsurers 49,366 43,546
Accrued commissions to agents 6,632 8,990
Taxes, licenses and fees payable 4,922 6,023
Accounts payable 6,231 5,262
Long-term debt 15,000 15,000
Convertible subordinated debentures -- 5,898
Deferred income taxes 13,301 19,172
Other liabilities 49,036 34,171
------------ ------------
Total liabilities 5,350,135 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, 24,000,031 issued and
outstanding (24,752,156 shares at December 31, 1998) 239 248
Common stock to be issued, 17,090 shares
(24,361 shares at December 31, l998) 340 328
Additional paid-in capital 153,741 150,096
Notes receivable from stock sales (4,266) (4,266)
Retained earnings 122,926 120,145
Accumulated other comprehensive income:
Net unrealized gain (loss) on investments
- available for sale (5,327) 13,434
------------ ------------
Total shareholders' equity 267,653 279,985
------------ ------------
$ 5,617,788 $ 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 June 30, Six months ended June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Policyholder charges $ 12,439 $ 13,968 $ 24,817 $ 27,034
Net investment income 42,520 39,148 86,195 78,089
Net realized gains (losses) on investments (7) 788 1,476 767
Commissions and expense allowances and concessions 38,042 34,797 72,322 74,062
Other 912 996 1,628 1,823
------------ ------------ ------------ ------------
Total revenues 93,906 89,697 186,438 181,775
Benefits and expenses:
Interest credited to policyholder account values 32,340 29,098 63,568 58,421
Other benefits to policyholders 5,470 5,815 11,978 11,641
Amortization of deferred policy acquisition costs 7,788 8,442 16,997 15,952
Commissions 22,341 20,328 42,613 43,236
Taxes, licenses and fees 909 902 1,556 796
Operating expenses 17,814 16,177 36,904 33,172
------------ ------------ ------------ ------------
Total benefits and expenses 86,662 80,762 173,616 163,218
------------ ------------ ------------ ------------
Income before income taxes 7,244 8,935 12,822 18,557
Income taxes 2,815 3,361 4,489 6,974
------------ ------------ ------------ ------------
Net income before minority interest 4,429 5,574 8,333 11,583
Minority interest, net of tax (71) -- (168) --
------------ ------------ ------------ ------------
Net income $ 4,500 $ 5,574 $ 8,501 $ 11,583
============ ============ ============ ============
Basic earnings per common share $ .19 $ .22 $ .35 $ .45
============ ============ ============ ============
Diluted earnings per common share $ .18 $ .21 $ .34 $ .43
============ ============ ============ ============
Cash dividend declared per common share $ .025 $ .025 $ .05 $ .025
============ ============ ============ ============
Number of shares used in per share calculation:
Basic 23,810,977 25,914,569 24,242,350 25,844,861
Diluted 24,719,872 26,910,992 24,830,736 26,924,840
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
Life USA HOLDING, INC.
Condensed Consolidated Statement of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,501 $ 11,583
Adjustments to reconcile net income to net
cash provided by operating activities:
Accretion of discount on investments, net (2,655) (2,591)
Net realized (gains) losses on investments (1,476) (767)
Policy acquisition costs deferred (21,192) (20,384)
Amortization of deferred policy acquisition costs 16,997 15,952
Other changes 20,299 15,323
------------ ------------
Net cash provided by operating activities 20,474 19,116
Cash flows from investing activities:
Investments-available for sale:
Purchases (214,780) (94,054)
Proceeds from sales 120,473 25,789
Proceeds from maturities and principal payments
on mortgage-backed securities 11,178 12,263
Investments-held to maturity:
Purchases (5,481) (65,197)
Proceeds from sales 5,000 10,785
Proceeds from maturities and principal payments
on mortgage-backed securities 46,539 35,755
Purchases of option contracts (5,048) (1,667)
Sales of (investments in) field marketing organizations 6,579 (9,100)
------------ ------------
Net cash used in investing activities (35,540) (85,426)
Cash flows from financing activities:
Receipts from universal life and investment products 149,713 148,682
Withdrawals on universal life and investment products (167,764) (158,089)
Interest credited to policyholder account values 63,568 58,421
Change in deferred liability and reserves 5,516 10,141
Proceeds from exercise of stock options 5,263 4,899
Proceeds from common stock issuance to Allianz Life 10,000 --
Repurchase of common stock (18,315) --
Redemption of convertible subordinated debentures (5,898) --
Dividends paid (1,220) (648)
Proceeds from issuance of LTCAmerica common stock 2,602 --
Other financing activities 12 2,775
------------ ------------
Net cash provided by financing activities 43,477 66,181
------------ ------------
Net increase (decrease) in cash and cash equivalents 28,411 (129)
Cash and cash equivalents at beginning of the period 21,570 34,139
------------ ------------
Cash and cash equivalents at end of the period $ 49,981 $ 34,010
============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
6
<PAGE>
Life USA HOLDING, INC.
Notes to Condensed Consolidated Financial Statements
June 30, 1999
(Unaudited)
1. The condensed consolidated balance sheet of Life USA Holding, Inc. (the
Company) at June 30, 1999 and the related condensed consolidated
statements of income and cash flows for the three months and six months
ended June 30, 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 and six months ended June 30, 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. On May 17, 1999, Life USA Holding, Inc. (the Company), Allianz Life
Insurance Company of North America (Allianz Life), and a subsidiary of
Allianz Life entered into an Agreement and Plan of Merger, pursuant to
which the Allianz Life subsidiary will be merged with and into the
Company (the Allianz Life merger). As a result of the Allianz Life
merger, the Company will become a wholly-owned subsidiary of Allianz
Life and the outstanding shares of the Company's common stock at the
time of the merger (other than shares owned by Allianz Life and
shareholders who exercise their dissenter's rights) will be converted
into the right to receive $20.75 per share in cash. Completion of the
Allianz Life merger is subject to receipt of the requisite regulatory
approvals, approval by the Company's shareholders and other customary
closing conditions.
On May 19, 1999, the Company filed a Form 8-K Current Report with the
Securities and Exchange Commission (SEC) with respect to the Allianz
Life merger. On June 25, 1999, the Company filed a preliminary proxy
statement and Allianz Life filed a preliminary Schedule 13E-3 with the
SEC. The SEC has reviewed these filings and the Company's related
periodic filings and requested additional information. The Company
estimates that the Allianz Life merger will be completed in
mid-September 1999.
The Company will be the surviving corporation in the merger and a
wholly-owned subsidiary of Allianz Life; after the merger, the common
stock of the Company will no longer be publicly traded.
7
<PAGE>
5. The net unrealized gain (loss) on investments - available for sale
included in shareholders' equity consists of the following:
June 30, December 31,
1999 1998
------------ ------------
Gross unrealized gain (loss) on
investments - available for sale $ (8,199) $ 54,486
Adjustments for:
Deferred tax liability (1,546) (19,070)
Deferred policy acquisition costs 4,418 (33,818)
Deferred tax asset 2,870 11,836
Deferred tax asset valuation allowance (2,870) --
------------ ------------
Net unrealized gain (loss) on
investments - available for sale $ (5,327) $ 13,434
============ ============
6. 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.
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, as amended by SFAS No. 137 is required to
be adopted in years beginning after June 15, 2000. The Company has not
yet determined the impact of the new statement.
7. 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 not
material and are included with other assets in the Condensed
Consolidated Balance Sheet.
8. 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
8
<PAGE>
information about a company's operating segments that is to be
disclosed in financial statements. SFAS No. 131 was adopted by the
Company for the year ended December 31, 1998. Management currently has
organized the Company into three business segments in order to focus on
the distinct functional characteristics associated with the activities
performed by each. The results of operations for the Company's
Insurance, Marketing and Corporate business segments are presented in
Management's Discussion and Analysis of Financial Condition and Results
of Operations on Business Segments.
9. 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.
10. The terms of an agreement announced in January 1998 ("the agreement
with Allianz Life") allowed 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
intended to 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 at
a price per share of 250% of the Company's six-month average book value
per share (excluding SFAS No. 115 "Accounting for Certain Investments
in Debt and Equity Securities"). Allianz Life acquired 406,092 shares
of the Company's common stock at $24.625 per share in August 1998 and
395,062 shares at the mutually agreed upon purchase price of $25.3125
per share in February 1999.
Pending completion of the Allianz Life merger (see Management's
Discussion and Analysis of Financial Condition and Results of
Operations), the purchase of the Company's common stock by Allianz Life
under the agreement with Allianz Life has been suspended. If the
conditions precedent to the merger are not satisfied, or if the Allianz
Life merger agreement is terminated for any other reason, the
obligations of Allianz Life to purchase common stock will be reinstated
and the parties will agree to appropriate adjustments for the period
during which the merger was pending.
11. During the fourth quarter of 1998, LifeUSA Insurance purchased
50,001,000 shares of common stock of LTCAmerica Holding, Inc.
(LTCAmerica), $.01 par value, at a price of $.10 per share, and
LTCAmerica management purchased 800,000 shares of LTCAmerica common
stock at a price of $.10 per share. Throughout the first five months of
1999, LTCAmerica issued 5,044,420 shares of common stock at a price of
$.50 per share resulting in proceeds of $2.5 million. The difference
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. The resulting gain of $1.5 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 88.3% at June 30,
1999, from 98.4% at December 31, 1998.
Due to the pending Allianz Life merger (see Management's Discussion and
Analysis of Financial Condition and Results of Operations), the Board
of Directors of LTCAmerica has
9
<PAGE>
approved a plan to redeem the outstanding LTCAmerica common stock
purchased by LTCAmerica management and outside investors, with simple
interest calculated at an annual rate of 8% from the date of investment
to the date of redemption of outstanding shares. LTCAmerica expects to
complete the redemption during the third quarter of 1999.
12. 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 net loss from operations
during the first six months of 1999.
13. Accumulated other comprehensive income represents the net unrealized
gain (loss) on available for sale investments as shown on the Condensed
Consolidated Balance Sheet. The increase (decrease) in accumulated
other comprehensive income for the three-month periods ended June 30,
1999 and 1998 was $(11.8) million and $2.7 million, respectively. The
increase (decrease) in accumulated other comprehensive income for the
first six months of 1999 and 1998 was $(18.8) million and $5.3 million,
respectively.
14. 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 June 30, 1999, 3.4 million shares have been repurchased by
the Company at an average price of $11.09 per share. Due to the pending
Allianz Life merger (see Management's Discussion and Analysis of
Financial Condition and Results of Operations), the stock repurchase
program has been suspended.
15. The Company had the following legal contingencies outstanding as of
June 30, 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,
10
<PAGE>
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.
Briefing on these motions was completed on June 2, 1999 and the court
has taken 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 December 1997
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.
11
<PAGE>
16. Basic and diluted earnings per share for the quarters ended June 30,
1999 and 1998 were computed as follows (dollars in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- --------------------------
1999 1998 1999 1998
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
BASIC
Weighted-average shares outstanding 23,810,977 25,914,569 24,242,350 25,844,861
=========== =========== =========== ===========
Net income $ 4,500 $ 5,574 $ 8,501 $ 11,583
=========== =========== =========== ===========
Per common share amount $ .19 $ .22 $ .35 $ .45
=========== =========== =========== ===========
DILUTED
Average shares outstanding and to be issued 23,828,068 25,946,755 24,250,894 25,860,954
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 891,804 964,237 579,842 1,063,886
----------- ----------- ----------- -----------
Adjusted weighted-average shares 24,719,872 26,910,992 24,830,736 26,924,840
=========== =========== =========== ===========
Net income $ 4,500 $ 5,574 $ 8,501 $ 11,583
Add convertible subordinated debenture interest,
net of federal income tax effect $ -- $ -- $ -- $ 85
----------- ----------- ----------- -----------
Adjusted net income $ 4,500 $ 5,574 $ 8,501 $ 11,668
=========== =========== =========== ===========
Per common share amount $ .18 $ .21 $ .34 $ .43
=========== =========== =========== ===========
</TABLE>
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PENDING ALLIANZ LIFE MERGER
On May 17, 1999, Life USA Holding, Inc. (the Company), Allianz Life Insurance
Company of North America (Allianz Life), and a subsidiary of Allianz Life
entered into an Agreement and Plan of Merger, pursuant to which the Allianz Life
subsidiary will be merged with and into the Company (the Allianz Life merger).
As a result of the Allianz Life merger, the Company will become a wholly-owned
subsidiary of Allianz Life and the outstanding shares of the Company's common
stock at the time of the merger (other than shares owned by Allianz Life and
shareholders who exercise their dissenter's rights) will be converted into the
right to receive $20.75 per share in cash. Completion of the Allianz Life merger
is subject to receipt of the requisite regulatory approvals, approval by the
Company's shareholders and other customary closing conditions.
On May 19, 1999, the Company filed a Form 8-K Current Report with the Securities
and Exchange Commission (SEC) with respect to the Allianz Life merger. On June
25, 1999, the Company filed a preliminary proxy statement and Allianz Life filed
a preliminary Schedule 13E-3 with the SEC. The SEC has reviewed these filings
and the Company's related periodic filings and requested additional information.
The Company estimates that the Allianz Life merger will be completed in
mid-September 1999.
The Company will be the surviving corporation in the merger and a wholly-owned
subsidiary of Allianz Life; after the merger, the common stock of the Company
will no longer be publicly traded.
GENERAL
The following analysis of the results of operations and financial condition of
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 may 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 the 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,
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<PAGE>
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 $3.8 billion in assets for financial institutions,
foundations, retirement plans and high net worth individuals, including $1.7
billion of LifeUSA Insurance's portfolio.
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. 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. Management's Discussion and Analysis of Financial
Condition and Results of Operations on Business Segments, which follows on page
31, 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") allowed 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 intended to 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 at a price per share of 250% of the Company's six-month average
book value per share (excluding SFAS No. 115 "Accounting for Certain Investments
in Debt and Equity Securities"). Allianz Life acquired 406,092 shares of the
Company's common stock at $24.625 per share in August 1998 and 395,062 shares at
the mutually agreed upon purchase price of $25.3125 per share in February 1999.
Pending completion of the Allianz Life merger described above, the purchase of
the Company's common stock by Allianz Life under the agreement with Allianz Life
has been suspended. If the conditions precedent to the merger are not satisfied,
or if the Allianz Life merger agreement is terminated for any other reason, the
obligations of Allianz Life to purchase common stock will be reinstated and the
parties will agree to appropriate adjustments for the period during which the
merger was pending.
14
<PAGE>
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
* 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 the retention of its life insurance business from 25% to
50%. LifeUSA Insurance receives commissions and expense allowances on business
ceded.
As a result of the pending Allianz Life merger, LifeUSA Insurance has notified
Employers and Republic-Vanguard, the two remaining Reinsurers, that it will
discontinue ceding new business effective January 1, 2000. All reinsurance
agreements for business produced prior to January 1, 2000 will remain effective.
15
<PAGE>
The following table shows LifeUSA Insurance life insurance and annuity in force
information at June 30, 1999 and December 31, 1998 (in millions):
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Life insurance account values:
All policies produced by LifeUSA Insurance agents (1) $ 349.9 $ 333.6
Direct and assumed business (2) 300.2 286.2
Net of reinsurance (3) 117.7 111.6
Life insurance face amounts:
All policies produced by LifeUSA Insurance agents (1) 7,491.4 7,679.7
Direct and assumed business (2) 6,484.4 6,646.2
Net of reinsurance (3) 2,347.1 2,333.6
Annuity account values:
All policies produced by LifeUSA Insurance agents (1) 5,885.5 5,743.1
Direct and assumed business (2) 4,147.1 4,054.0
Net of reinsurance (3) 1,856.1 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.
16
<PAGE>
RESULTS OF OPERATIONS
PREMIUMS AND DEPOSITS. Total collected premiums and deposits, including the
Allianz/LUSA Business, were $271.3 million and $251.5 million in the second
quarter of 1999 and 1998, respectively, an increase of 8%. Total collected
premiums and deposits were $515.9 million and $541.3 million in the first six
months of 1999 and 1998, respectively, a decrease of 5%. 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 June 30, Six months ended June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Collected Premiums and Deposits (1):
LifeUSA Insurance:
Life:
First year $ 1,225 $ 1,494 $ 2,477 $ 2,975
Single and renewal 12,621 13,124 25,580 26,486
----------- ----------- ----------- -----------
Total Life 13,846 14,618 28,057 29,461
Long term care 27 -- 36 --
Annuities 145,033 132,562 280,068 285,453
----------- ----------- ----------- -----------
Total LifeUSA Insurance collected premiums and deposits 158,906 147,180 308,161 314,914
Allianz Life:
Life:
First year 176 422 473 845
Single and renewal 3,743 3,936 7,599 7,775
----------- ----------- ----------- -----------
Total Life 3,919 4,358 8,072 8,620
Long term care 15 -- 16 --
Annuities 108,459 99,972 199,687 217,799
----------- ----------- ----------- -----------
Total Allianz Life collected premiums and deposits 112,393 104,330 207,775 226,419
----------- ----------- ----------- -----------
Total collected premiums and deposits $ 271,299 $ 251,510 $ 515,936 $ 541,333
=========== =========== =========== ===========
</TABLE>
- -------------------------------
(1) Includes all LifeUSA Insurance products and all Allianz/LUSA Business.
17
<PAGE>
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- --------------------------
1998 1998 1998 1998
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Premiums and Deposits Not Retained or Assumed (2):
LifeUSA Insurance:
Life:
First year $ 623 $ 1,059 $ 1,315 $ 2,170
Single and renewal 8,412 8,670 17,041 17,490
----------- ----------- ----------- -----------
Total Life 9,035 9,729 18,356 19,660
Long term care 20 -- 27 --
Annuities 100,691 93,518 194,806 206,575
----------- ----------- ----------- -----------
Total LifeUSA Insurance premiums and deposits not retained 109,746 103,247 213,189 226,235
Allianz Life:
Life:
First year 132 317 355 635
Single and renewal 2,293 2,383 4,642 4,675
----------- ----------- ----------- -----------
Total Life 2,425 2,700 4,997 5,310
Long term care 11 -- 12 --
Annuities 80,413 73,939 148,013 161,106
----------- ----------- ----------- -----------
Total Allianz Life premiums and deposits not assumed 82,849 76,639 153,022 166,416
----------- ----------- ----------- -----------
Total collected premiums and deposits not retained or assumed $ 192,595 $ 179,886 $ 366,211 $ 392,651
=========== =========== =========== ===========
Retained or Assumed Premiums and Deposits (3):
LifeUSA Insurance:
Life:
First year $ 602 $ 435 $ 1,162 $ 805
Single and renewal 4,209 4,454 8,539 8,996
----------- ----------- ----------- -----------
Total Life 4,811 4,889 9,701 9,801
Long term care 7 -- 9 --
Annuities 44,342 39,044 85,262 78,878
----------- ----------- ----------- -----------
Total LifeUSA Insurance retained premiums and deposits 49,160 43,933 94,972 88,679
Allianz Life:
Life:
First year 44 105 118 210
Single and renewal 1,450 1,553 2,957 3,100
----------- ----------- ----------- -----------
Total Life 1,494 1,658 3,075 3,310
Long term care 4 -- 4 --
Annuities 28,046 26,033 51,674 56,693
----------- ----------- ----------- -----------
Total Allianz Life assumed premiums and deposits 29,544 27,691 54,753 60,003
----------- ----------- ----------- -----------
Total retained or assumed premiums and deposits $ 78,704 $ 71,624 $ 149,725 $ 148,682
=========== =========== =========== ===========
</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.
18
<PAGE>
REVENUES. Total revenues were $93.9 million and $89.7 million in the second
quarter of 1999 and 1998, respectively. The increase in total revenues of 5% was
primarily due to the increase in net investment income generated by the growth
of annuities in force and invested assets and an increase in commissions and
expense allowances associated with increased production of business not retained
or assumed. For the first six months of 1999 and 1998, total revenues were
$186.4 million and $181.8 million, respectively. The increase in total revenues
of 3% 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. The discussion that follows gives a line-by-line comparison of
revenues for the three-month and six-month periods ended June 30, 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 11%, or $1.5 million, in the second quarter of 1999
compared to the second quarter of 1998 and 8%, or $2.2 million, in the first six
months of 1999 compared to the first six months of 1998. These decreases reflect
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 9%, or $3.4 million, in the second
quarter of 1999 and 10% or $8.1 million in the first six months of 1999 compared
to the second quarter and first six months of 1998, respectively, 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.
Also contributing to the increase in net investment income was the sale of the
minority equity interest in CMIC and an increase in invested assets (fixed
maturity investments, other invested assets and cash and cash equivalents) to
$2.37 billion at June 30, 1999 from $2.26 billion at June 30, 1998, which was
partially offset by a 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 7.17% at June 30, 1999, compared
to 7.26% at June 30, 1998. The following table shows the components of net
investment income for the three-months and six-month periods ended June 30, 1999
and 1998 (in thousands):
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Fixed maturities $ 39,704 $ 38,858 $ 79,927 $ 76,973
Common stock 53 -- 61 --
Cash and cash equivalents 534 633 1,027 1,337
Policy loans 154 193 337 349
Unrealized gain (loss) on option contracts 2,611 (155) 4,073 163
Sale of minority equity interest in CMIC -- -- 1,782 --
Other 25 39 60 69
------------ ------------ ------------ ------------
43,081 39,568 87,267 78,891
Investment expenses (561) (420) (1,072) (802)
------------ ------------ ------------ ------------
Net investment income $ 42,520 $ 39,148 $ 86,195 $ 78,089
============ ============ ============ ============
</TABLE>
19
<PAGE>
The Company sold investments from its surplus assets (see page 28 for further
discussion on surplus assets) resulting in a $13,000 net realized gain in the
second quarter of 1999. Surplus assets do not back policyholder liabilities and,
thus are not subject to adjustments for deferred policy acquisition costs and
other benefits to policyholders. Net realized gains (losses) 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-month and
six-month periods ended June 30, 1999 and 1998 (dollars in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net realized gains (losses) on investments $ (6) $ 798 $ 1,477 $ 838
Increase (decrease) in:
Amortization of deferred policy acquisition costs (5) 305 (5) 334
Other benefits to policyholders (4) 228 (4) 237
----------- ----------- ----------- -----------
Income before income taxes 3 265 1,486 267
Income taxes 2 100 521 101
----------- ----------- ----------- -----------
Net income $ 1 $ 165 $ 965 $ 166
=========== =========== =========== ===========
Earnings per share $ .00 $ .01 $ .04 $ .01
=========== =========== =========== ===========
</TABLE>
Commissions and expense allowances and concessions increased 9%, or $3.2
million, in the second quarter of 1999 compared to the second quarter of 1998.
Commissions and expense allowances and concessions decreased 2%, or $1.7
million, in the first six months of 1999 compared to the first six months of
1998. The increase for the quarter and decrease through the first six months is
consistent with the trends in total collected premiums and deposits discussed
previously, partially offset by changes in reinsurance retention of annuity and
life business effective April 1, 1998 and changes in the mix of deferred annuity
products sold.
20
<PAGE>
The following table shows the amounts of commissions and expense allowances and
concessions for the quarter ended June 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
LifeUSA Insurance:
Life:
First year $ 754 $ 1,278 $ 1,591 $ 2,707
Single and renewal 1,339 1,392 2,714 2,808
----------- ----------- ----------- -----------
Total Life 2,093 2,670 4,305 5,515
Long term care 37 -- 47 --
Annuities 17,146 15,324 33,325 33,024
----------- ----------- ----------- -----------
Total LifeUSA Insurance 19,276 17,994 37,677 38,539
Allianz Life:
Life:
First year 209 448 472 921
Single and renewal 505 543 1,028 1,074
----------- ----------- ----------- -----------
Total Life 714 991 1,500 1,995
Long term care 14 -- 16 --
Annuities 15,536 15,721 32,367 33,456
----------- ----------- ----------- -----------
Total Allianz Life 18,264 16,712 33,883 35,451
Lapse policy chargebacks (126) (151) (275) (319)
----------- ----------- ----------- -----------
Total commissions and expense allowances 37,414 34,555 71,285 73,671
LifeUSA Securities concessions 628 242 1,037 391
----------- ----------- ----------- -----------
Commissions and expense allowances and concessions $ 38,042 $ 34,797 $ 72,322 $ 74,062
=========== =========== =========== ===========
</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 $86.7 million and $80.8
million in the second quarters of 1999 and 1998, respectively. Total benefits
and expenses were $173.6 million and $163.2 million for the first six months of
1999 and 1998, respectively. The increase in total benefits and expenses of 7%
for the quarter and 6% for the first six months was primarily due to the funding
of LTCAmerica in the long-term care market, increased legal expenses relating to
litigation and increased costs associated with the pending Allianz Life merger.
The discussion that follows gives a line-by-line comparison of benefits and
expenses for the three-month and six-month periods ended June 30, 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 11%, or $3.2
million, in the second quarter of 1999 compared to the second quarter of 1998,
and 9% or $5.1 million for the first six months of 1999 compared to
21
<PAGE>
the first six months of 1998, reflects the increases in policyholder benefits
attributable to the increase in an equity return component of LifeUSA
Insurance's equity-indexed annuity products and growth in annuities in force.
The increases in other benefits to policyholders and amortization of deferred
policy acquisition costs for the first six months of 1999 compared to the first
six months of 1998 were impacted by an unlocking of financial product models in
the first quarter of 1999. LifeUSA Insurance uses financial product models to
estimate future gross profits and to allocate current gross margins in order to
accrue for bonuses to be paid to policyholders (the primary component of other
benefits to policyholders) and amortize deferred policy acquisition costs.
LifeUSA Insurance reviews these models periodically and unlocks them when new
information that provides better insight regarding anticipated experience for a
given block of business becomes available.
In the first quarter of 1999, the review of financial product models developed
for a block of annuity business produced from August of 1996 through September
of 1998 indicated that unlocking was necessary in order to reflect changes in
the product mix originally assumed for this block of business. The primary
components of the product mix that changed were the average bonus paid and the
LifeUSA Insurance and Allianz/LUSA Business split of total business produced.
Both of these changes impact the estimated gross profits produced by these
models. Although the average annuity in the block of business was less than two
years old at the time of unlocking, the models used to accrue for bonuses to be
paid to policyholders and amortize deferred policy acquisition costs assume that
the block of business has a 30 year life. In addition, historical experience
from more mature blocks of business issued by LifeUSA Insurance has indicated
that it is not unusual for it to take three to four years for information to
emerge which provides better insight regarding anticipated experience for a
given block of business.
Although it is unusual to unlock financial models at such an early stage in a
product's 30-year life, management determined that the initial unlocking for
this block of business was required in the first quarter of 1999 in order to
reflect the changes in the product mix discussed above. The impact of the
unlocking was not material to the $234 million of deferred policy acquisition
costs recorded at March 31, 1999. Other benefits to policyholders and
amortization of deferred policy acquisition costs increased by $900,000 and $2.0
million, respectively, as a result of the unlocking.
The decrease in other benefits to policyholders of 6%, or $345,000, in the
second quarter of 1999 compared to the second quarter of 1998 reflects lower
amortization of deferred bonuses associated with the decrease in surrenders and
annuitizations. The increase in other benefits to policyholders of 3%, or
$337,000, in the first six months of 1999 compared to the first six months of
1998 reflects the $900,000 increase in reserves resulting from the unlocking 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 decreased 8%, or $654,000, in
the second quarter of 1999 as compared to the second quarter of 1998. This
reflects lower amortization associated with the decrease in surrenders and
annuitizations. Amortization of deferred policy acquisition costs increased 7%,
or $1.0 million, in the first six months of 1999 as compared to the first six
months of 1998. This reflects $2.0 million of increased amortization of deferred
policy acquisition costs resulting from the unlocking 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 increased 10%, or $2.0 million, in the second quarter of
1999 compared to the second quarter of 1998 and decreased 1%, or $623,000,
during the first six months of 1999 compared to the first six months of 1998 in
a consistent relationship with the trend in total collected premiums and
deposits during the corresponding period, partially offset by a change in the
mix of deferred annuity products sold.
Taxes, licenses and fees increased $7,000 in the second quarter of 1999 compared
to the second quarter of 1998. During the first six months of 1999 compared to
the first six months of 1998, taxes, licenses and fees increased $760,000. This
increase was primarily due to a reduction in guaranty fund assessments accrued
in first quarter 1998.
Operating expenses increased 10%, or $1.6 million, in the second quarter of 1999
compared to the second quarter of 1998 and 11%, or $3.7 million, in the first
six months of 1999 compared to the first six months of 1998. This increase was
primarily due to the funding of LTCAmerica in the long-term care market,
increased legal expenses relating to litigation and increased costs associated
with the pending Allianz Life merger.
Income taxes were $2.8 million in the second quarter of 1999 and $3.4 million in
the second quarter of 1998. Income taxes were $4.5 million and $7.0 million for
the six-month periods ended June 30, 1999 and 1998, respectively. The effective
income tax rates for the first six months of 1999 and 1998 were 35.0% and 37.6%,
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 $4.5 million in the second quarter of 1999 and $5.6
million in the second quarter of 1998, which represents a decrease of 19%.
Diluted earnings per share were $.18 in the second quarter of 1999 compared to
$.21 in the second quarter of 1998, which represents a decrease of 14%. The per
share decrease is lower than the net income decrease due to the repurchase of
3.4 million shares of the Company's common stock
22
<PAGE>
and a reduction in the dilutive impact of "in the money" stock options. Net
income was $8.5 million for the first six months of 1999 and $11.6 million for
the first six months of 1998, which represents a decrease of 21%.
The following table summarizes the operating highlights for the three-month and
six-month periods ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three months ended June 30,
-------------------------------------------------------
1999 1998
------------------------- -------------------------
Income EPS Income EPS
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Consolidated net income and diluted earnings per share $ 4,500 $ .18 $ 5,574 $ .21
Adjustments to arrive at consolidated net operating income (1):
Net realized gains on investments (1) (.00) (165) (.01)
Charges (credits) for state guaranty fund assessments 11 .00 (18) (.00)
Tax liability for prior years' activity -- -- 32 .00
---------- ---------- ---------- ----------
Consolidated net operating income and earnings per share $ 4,510 $ .18 $ 5,423 $ .20
========== ========== ========== ==========
<CAPTION>
Six months ended June 30,
-------------------------------------------------------
1999 1998
------------------------- -------------------------
Income EPS Income EPS
---------- ---------- ---------- ----------
Consolidated net income and diluted earnings per share $ 8,501 $ .34 $ 11,583 $ .43
Adjustments to arrive at consolidated net operating income (1):
Net realized gains on investments (965) (.04) (166) (.01)
Charges (credits) for state guaranty fund assessments (105) (.00) (668) (.02)
Tax liability for prior years' activity -- -- 32 .00
---------- ---------- ---------- ----------
Consolidated net operating income and earnings per share 7,431 .30 10,781 .40
Sale of minority equity interest in CMIC (1,565) (.06) -- --
Unlocking of financial product models 1,886 .08 -- --
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 $ 8,077 $ .33 $ 10,781 $ .40
========== ========== ========== ==========
</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, (ii) charges (credits) for state
guaranty fund assessments and (iii) tax liability for prior years' activity.
23
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Through June 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 from the exercise of stock options,
* proceeds from the sale of LTCAmerica common stock to LTCAmerica management
and outside investors
* 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.
Upon completion of the Allianz Life merger, management believes the Company will
have access to capital from Allianz Life in amounts sufficient to fund the
Company's needs. The $15 million outstanding under the $50 million line of
credit from the Reinsurers will be repaid and the line of credit will be
terminated prior to completion of the Allianz Life merger.
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 and expenses in connection with the pending Allianz Life merger,
* capital contributions to LifeUSA Marketing for investments in marketing
organizations expected to increase premium and deposit production volume for
LifeUSA Insurance and Allianz Life,
* redemption of $5.9 million of convertible subordinated debentures on June
30, 1999,
* payment of the Company's final quarterly dividend on August 13, 1999,
* repayment of the $15 million borrowed under the line of credit from the
Reinsurers prior to completion of the Allianz Life merger,
* contributions to LifeUSA Securities to ensure compliance with NASD capital
requirements,
* contributions to LTCAmerica for operating expenses, to purchase an existing
long-term care insurance company or a "shell" insurance company and to make
investments in long term care marketing organizations,
* contributions to LTCAmerica to redeem outstanding shares purchased by
LTCAmerica management and outside investors with interest, and
* 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 connection with the merger agreement with Allianz Life, the Company
terminated the stock repurchase program previously authorized by its Board of
Directors. From the third quarter of 1998 through April 1999, 3.4 million shares
of its common stock were repurchased by the Company at an average price of
$11.09 per share.
24
<PAGE>
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.
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 $7.4 million during the first
six months of 1999 compared to $10.5 million during the first six months of
1998. As of June 30, 1999, LifeUSA Insurance had statutory capital and surplus
for regulatory purposes of $119.7 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.
The Company's Board of Directors declared cash dividends of 2.5 cents per share
for the first and second quarters of 1999, payable on May 14, 1999 and August
13, 1999, respectively, to shareholders of record as of April 28, 1999 and July
28, 1999, respectively. The Company declared similar quarterly dividends in
1998.
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.
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.
25
<PAGE>
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 June 30, 1999, the NAIC Life Insurance Illustration Model Regulation was
effective in 30 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. During July 1999, the Minnesota Department of Commerce began a
triennial examination of LifeUSA Insurance for the three years ended December
31, 1998 in conjunction with its examination of Allianz Life.
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 June 30, 1999, LifeUSA Securities' net capital
exceeded the minimum required balance.
As a result of the pending Allianz Life merger, the A.M. Best Company placed the
A- rating (Excellent) assigned to LifeUSA Insurance under review in May 1999.
This type of rating review is standard practice for an insurance company that
has announced a pending merger. 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.
In May 1998, Moody's Investors Service (Moody's) assigned an A3 rating to
LifeUSA Insurance. This rating falls within Moody's "Strong Companies" category.
As a result of the pending Allianz Life merger described previously, Moody's has
placed their rating of LifeUSA Insurance under review. This type of rating
review is standard practice for an insurance company that has announced a
pending merger.
26
<PAGE>
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. As a result of the pending Allianz Life merger
described previously, S&P has placed their rating of LifeUSA Insurance under
review. This type of rating review is standard practice for an insurance company
that has announced a pending merger.
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 June 30, 1999, the
final cost of the project was $652,000. 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 In June 1999, the Company achieved its plan to ensure that all systems
are Y2K compliant. All of the Company's mainframe, local area network and
voicemail systems are Y2K compliant. 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 was upgraded to provide more
functionality and was installed during the second quarter of 1999. 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 Y2K compliant as of June 1999.
Testing of data exchange with key external business partners was completed for
purposes of date compliance during the second quarter of 1999. 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 were completed in June 1999.
27
<PAGE>
INVESTMENTS. As of June 30, 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 $7.4 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 June 30, 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 $ 49,981 2.11% $ 49,981 2.11% $ 49,981 2.11%
Government Treasury and Agency notes and bonds 100,383 4.24 101,243 4.28 105,426 4.44
Taxable municipals 10,663 .45 10,394 .44 10,009 .42
Mortgage pass throughs 46,287 1.96 46,807 1.98 46,807 1.97
Agency Collateralized Mortgage Obligations:
CMO -- Sequentials 7,524 .32 7,604 .32 7,621 .32
CMO -- PACs 525,657 22.21 526,558 22.26 529,684 22.32
CMO -- ADs 21,657 .91 21,657 .92 22,067 .93
CMO -- TACs 5,519 .23 5,519 .23 6,016 .25
Investment grade corporate securities:
AAA+ to AAA- 87,865 3.71 86,700 3.67 87,651 3.69
AA+ to AA- 204,661 8.65 202,987 8.58 202,897 8.55
A+ to A- 737,586 31.16 734,288 31.04 734,668 30.95
BBB+ to BBB- 471,162 19.91 467,902 19.77 466,991 19.68
Non investment grade corporate securities 26,271 1.11 24,249 1.03 24,193 1.02
Common stock 21,253 .90 22,382 .95 22,382 .94
Equity options 13,730 .58 20,505 .87 20,505 .86
Policy loans 36,764 1.55 36,764 1.55 36,764 1.55
-------------------------------------------------------------------------------
Total cash and invested assets $2,366,963 100.00% $2,365,540 100.00% $2,373,662 100.00%
===============================================================================
</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
June 30, 1999, the weighted average credited interest rate for deferred
annuities and life insurance policies was 4.80% and the weighted average yield
on the assets backing liabilities was 7.22%. 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 $16.9 million
during the first six months 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 June 30, 1999, the effective duration of
LifeUSA Insurance's assets backing liabilities was 4.88 years, compared to 4.70
years as of December 31, 1998.
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 non-investment
grade corporate securities. 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.
28
<PAGE>
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 inforce 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 June 30, 1999, management believes a proper hedge exists.
LifeUSA Insurance purchases 5-year "over-the-counter" and 5-year Cliquet
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 June 30, 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 June 30, 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.
As of June 30, 1999, the Company held 45%, or $1.02 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.
29
<PAGE>
SHAREHOLDER'S EQUITY. At June 30, 1999, the Company's shareholders' equity and
book value per share were $267.7 million and $11.04, respectively, compared to
$280.0 million and $11.30, respectively, at December 31, 1998. Excluding the
effect of the net unrealized gain (loss) on fixed maturity investments available
for sale reported as a separate component of shareholders' equity in accordance
with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," the Company's shareholders' equity and book value per share were
$273.0 million and $11.26, respectively, at June 30, 1999, compared to $266.6
million and $10.76, respectively, at December 31, 1998.
30
<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
tables on pages 33-36 summarize the results of operations for the second
quarters and the first six months 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 insurance products for LifeUSA
Insurance, Allianz Life and LTCAmerica and 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 $92.4 million and $88.3 million in the second
quarter of 1999 and 1998, and $182.1 million and $179.5 million for the first
six months 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.
31
<PAGE>
EXPENSES. Total expenses were $85.4 million and $81.3 million in the second
quarter of 1999 and 1998 and $170.6 million and $165.5 million for the first six
months of 1999 and 1998, respectively. The increase in total expenses of 4% for
the quarter and 3% for the first six months of 1999 compared to 1998 is
primarily attributable to increases in interest credited to policyholder account
values attributable to the increase in an equity return component of LifeUSA
Insurance's equity-indexed annuity products and growth in annuities in force and
legal expenses relating to litigation. These factors were partially offset by a
decrease for the first six months of 1999 compared to 1998 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 3% in the
first six months of 1999 compared to 1998, is calculated as a percentage of
premiums and deposits and will vary generally with the change in premium and
deposit production that decreased 5% over the same period. 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 $35.3 million and $32.3 million in the second
quarter of 1999 and 1998, and $69.2 million and $67.6 million in the first six
months of 1999 and 1998, respectively. The increase in total revenues during
1999 of 9% for the quarter and 2% for the first six months is primarily
attributable to an increase in marketing fees earned during the second quarter
from the Insurance Segment based on increased production of total collected
premiums and deposits and increased investment income during the first six
months of 1999 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 $32.1 million and $30.1 million in the second
quarter of 1999 and 1998, and $62.3 million and $63.0 million in the first six
months of 1999 and 1998, respectively. The increase in total expenses during
1999 of 6% for the quarter is primarily attributable to commissions incurred
that are based on premium and deposit production discussed previously. The
decrease in total expenses during the first six months of 1999 compared the
first six months of 1998 of 2% is primarily attributable to management of
operating expenses offset by increased commissions incurred. 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.
32
<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 $3.6 million and $2.8 million for second quarter
1999 and 1998, and $6.8 million and $5.6 million in the first six months of 1999
and 1998, respectively. The increase in total revenues during 1999 of 29% for
the quarter and 23% for the first six months is primarily attributable to an
increase in concession revenues of LifeUSA Securities from sales of securities
products.
EXPENSES. Total expenses were $6.6 million and $2.9 million for the second
quarter of 1999 and 1998, and $12.4 million and $5.5 million for the first six
months of 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.
33
<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 the quarter ended June 30,
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 $ 12,439 $ 13,968 (11)% $ -- $ -- --%
Net investment income 42,241 38,757 8 -- 18 N/A
Net realized gains (losses) on investments (7) 788 N/A -- -- --
Commissions and expense allowances and concessions 37,396 34,797 7 -- -- --
Marketing fee -- -- -- 34,614 31,526 9
Corporate fee -- -- -- -- -- --
Equity income in subsidiaries -- -- -- 437 494 (12)
Other 342 (52) N/A 255 244 5
------------------------------------ ---------------------------------
Total revenues 92,411 88,258 4 35,306 32,282 9
Benefits and expenses:
Interest credited to policyholder account values 32,340 29,098 11 -- -- --
Other benefits to policyholders 5,470 5,815 (6) -- -- --
Amortization of deferred policy acquisition costs 7,788 8,442 (8) -- -- --
Commissions and marketing fee 29,234 26,749 9 26,832 24,448 9
Taxes, licenses and fees 908 902 1 -- -- --
Operating expenses:
Salaries and employee benefits 3,887 3,752 3 1,803 1,872 (4)
Data processing 898 905 (1) 208 373 (45)
Printing and office supplies 146 246 (41) 286 392 (28)
Depreciation and amortization 712 629 13 709 681 4
Other 3,972 4,789 (17) 2,290 2,375 (4)
------------------------------------ ---------------------------------
Total benefits and expenses 85,355 81,327 4 32,128 30,141 6
------------------------------------ ---------------------------------
Income before income taxes 7,056 6,931 0 3,178 2,141 48
Income taxes 2,691 2,433 10 1,318 1,004 31
------------------------------------ ---------------------------------
Net income before minority interest 4,365 4,498 (5) 1,860 1,137 64
Minority interest, net of tax -- -- -- -- -- --
------------------------------------ ---------------------------------
Net income (loss) $ 4,365 $ 4,498 (5)% $ 1,860 $ 1,137 64%
==================================== =================================
</TABLE>
34
<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>
$ -- $ -- --% $ -- $ -- $ 12,439 $ 13,968 (11)%
363 373 (3) (84) -- 42,520 39,148 8
-- -- -- -- -- (7) 788 N/A
646 -- N/A -- -- 38,042 34,797 9
-- -- -- (34,614) (31,526) -- -- --
2,255 2,103 7 (2,255) (2,103) -- -- --
98 68 44 -- -- 535 562 (5)
228 242 (6) (448) -- 377 434 (14)
- ------------------------------------ ----------------------- -----------------------------------
3,590 2,786 29 (37,401) (33,629) 93,906 89,697 5
-- -- -- -- -- 32,340 29,098 11
-- -- -- -- -- 5,470 5,815 (6)
-- -- -- -- -- 7,788 8,442 (8)
540 196 275 (34,265) (31,065) 22,341 20,328 9
1 -- -- -- -- 909 902 1
2,544 920 276 (142) (190) 8,092 6,354 27
154 52 296 (13) (20) 1,247 1,310 (5)
316 47 672 (54) (74) 694 611 13
101 73 38 -- -- 1,522 1,383 10
2,924 1,635 79 (2,927) (2,280) 6,259 6,519 (4)
- ------------------------------------ ----------------------- -----------------------------------
6,580 2,923 225 (37,401) (33,629) 86,662 80,762 7
- ------------------------------------ ----------------------- -----------------------------------
(2,990) (137) (2,182) -- -- 7,244 8,935 (19)
(1,194) (76) (1,571) -- -- 2,815 3,361 (16)
- ------------------------------------ ----------------------- -----------------------------------
(1,796) (61) (2,944) -- -- 4,429 5,574 (21)
(71) -- N/A -- -- (71) -- N/A
- ------------------------------------ ----------------------- -----------------------------------
$ (1,725) $ (61) (2,828) $ -- $ -- $ 84,500 $ 5,574 (19)%
==================================== ======================= ===================================
</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.
35
<PAGE>
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 the six months ended June 30, 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 $ 24,817 $ 27,034 (9)% $ -- $ -- --%
Net investment income 83,848 77,468 8 1,783 27 6,603
Net realized gains (losses) on investments 1,476 793 86 -- -- --
Commissions and expense allowances and concessions 71,264 73,672 (4) -- -- --
Marketing fee -- -- -- 66,128 66,322 (1)
Corporate fee -- -- -- -- -- --
Equity income in subsidiaries -- -- -- 795 776 2
Other 672 488 38 470 490 (6)
----------------------------------- ----------------------------------
Total revenues 182,077 179,455 1 69,176 67,615 2
Benefits and expenses:
Interest credited to policyholder account values 63,568 58,421 9 -- -- --
Other benefits to policyholders 11,978 11,641 3 -- -- --
Amortization of deferred policy acquisition costs 16,997 15,952 6 -- -- --
Commissions and marketing fee 55,572 57,042 (3) 51,557 51,372 0
Taxes, licenses and fees 1,555 796 95 -- -- --
Operating expenses:
Salaries and employee benefits 7,706 7,569 1 3,626 3,795 (5)
Data processing 1,863 1,823 2 460 773 (41)
Printing and office supplies 292 621 (53) 596 829 (29)
Depreciation and amortization 1,396 1,234 13 1,459 1,240 17
Other 9,712 10,405 (7) 4,566 5,031 (10)
----------------------------------- ----------------------------------
Total benefits and expenses 170,639 165,504 3 62,264 63,040 (2)
----------------------------------- ----------------------------------
Income before income taxes 11,438 13,951 (19) 6,912 4,575 51
Income taxes 4,410 4,966 (12) 2,251 2,036 10
----------------------------------- ----------------------------------
Net income before minority interest 7,028 8,985 (23) 4,661 2,539 84
Minority interest, net of tax -- -- -- -- -- --
----------------------------------- ----------------------------------
Net income (loss) $ 7,028 $ 8,985 (23)% $ 4,661 $ 2,539 84%
=================================== ==================================
</TABLE>
36
<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>
$ -- $ -- --% $ -- $ -- $ 24,817 $ 27,034 (9)%
731 765 (4) (167) (171) 86,195 78,089 10
-- (26) N/A -- -- 1,476 767 92
1,058 390 271 -- -- 72,322 74,062 (2)
-- -- -- (66,128) (66,322) -- -- --
4,413 4,361 1 (4,413) (4,361) -- -- --
150 68 220 -- -- 945 844 12
474 1 N/A (933) -- 683 979 (30)
- ------------------------------------ ---------------------- ------------------------------------
6,826 5,559 23 (71,641) (70,854) 186,438 181,775 3
-- -- -- -- -- 63,568 58,421 9
-- -- -- -- -- 11,978 11,641 3
-- -- -- -- -- 16,997 15,952 7
902 315 286 (65,418) (65,493) 42,613 43,236 (1)
1 -- -- -- -- 1,556 796 95
4,671 1,801 259 (295) (341) 15,708 12,824 22
321 102 314 (30) (36) 2,614 2,662 (2)
642 106 604 (113) (137) 1,417 1,419 (1)
199 125 59 -- -- 3,054 2,599 17
5,618 3,079 82 (5,785) (4,847) 14,111 13,668 3
- ------------------------------------ ---------------------- ------------------------------------
12,354 5,528 223 (71,641) (70,854) 173,616 163,218 6
- ------------------------------------ ---------------------- ------------------------------------
(5,528) 31 (17,832) -- -- 12,822 18,557 (31)
(2,172) (28) 7,757 -- -- 4,489 6,974 (36)
- ------------------------------------ ---------------------- ------------------------------------
(3,356) 59 (5,688) -- -- 8,333 11,583 (29)
(168) -- N/A -- -- (168) -- N/A
- ------------------------------------ ---------------------- ------------------------------------
$ (3,188) $ 59 (5,403) $ -- $ -- $ 88,501 $ 11,583 (27)%
==================================== ====================== ====================================
</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.
37
<PAGE>
* * * *
Statements other than historical information contained in this Report, 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 (a) failure to complete
the pending Allianz Life merger; (b) 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; (c) regulatory constraints on existing or future products
rendering the products unmarketable or unprofitable; (d) 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; (e) loss of key
personnel; (f) the Company's ability to manage assets and produce returns
providing sufficient spread on invested assets backing policyholder liabilities;
(g) the strength of the equity markets and the interest rate environment; (h)
field marketing organization investment in the education and support of agents
selling the Company's products; (i) the ability of owned and minority-owned
marketing organizations to increase production and profitability; (j) increase
in the size and improvement in the productivity of the Company's distribution
system; (k) willingness of the private market to identify and allocate
significant resources to long-term care coverage; (l) the Company's ability to
attract and retain committed, competent and creative home office owners and
management; (m) 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; (n)
litigation, with or without merit, claiming significant resources of the
enterprise; and (o) the efficacy of the Company's remediation of all operational
systems and non-computer devices and internal computer software to avoid Year
2000 problems, 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.
38
<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. Briefing
on these motions was completed on June 2, 1999 and the court has taken 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.
39
<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
The Company held its annual meeting of shareholders on April 13, 1999. Proxies
for the meeting were solicited pursuant to Regulation 14 of the Securities
Exchange Act of 1934. The following matters were voted upon at the meeting:
<TABLE>
<CAPTION>
Votes Votes Votes Broker
For Abstained Against Non-Vote
---------- --------- ------- --------
<S> <C> <C> <C> <C>
1) To elect the following persons as Directors:
Hugh Alexander 22,761,055 167,463 -- --
Jack H. Blaine 22,759,137 169,381 -- --
Edward J. Bonach 22,756,111 172,407 -- --
Margery G. Hughes 22,758,356 170,162 -- --
Robert S. James 22,384,811 543,707 -- --
Barbara J. Lautzenheiser 22,759,555 168,963 -- --
Robert W. MacDonald 22,760,859 167,659 -- --
Daniel J. Rourke 22,760,375 168,143 -- --
Ralph Strangis 22,761,055 167,463 -- --
Donald J. Urban 22,758,087 170,431 -- --
Mark A. Zesbaugh 22,759,846 168,672 -- --
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Votes Votes Votes Broker
For Abstained Against Non-Vote
---------- --------- ------- --------
<S> <C> <C> <C> <C>
2) To ratify the appointment of Ernst & Young
LLP as the independent auditors for the
Company for the year 1999 22,862,660 29,978 35,880 --
</TABLE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
(27) Financial data schedule (electronic filing only)
(b) A report on Form 8-K was filed May 19, 1999, to report that the
Company, Allianz Life, and a subsidiary of Allianz Life entered into
an agreement and plan of merger on May 17, 1999.
41
<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: August 12, 1999
/s/ Mark A. Zesbaugh
-----------------------------------
Mark A. Zesbaugh
Executive Vice President
Chief Financial Officer
42
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 1,020,591
<DEBT-CARRYING-VALUE> 1,215,317
<DEBT-MARKET-VALUE> 1,223,437
<EQUITIES> 22,382
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,315,559
<CASH> 49,981
<RECOVER-REINSURE> 2,905,908
<DEFERRED-ACQUISITION> 259,155
<TOTAL-ASSETS> 5,617,788
<POLICY-LOSSES> 5,189,696
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 15,951
<NOTES-PAYABLE> 0
0
0
<COMMON> 239
<OTHER-SE> 267,414
<TOTAL-LIABILITY-AND-EQUITY> 5,617,788
0
<INVESTMENT-INCOME> 86,195
<INVESTMENT-GAINS> 1,476
<OTHER-INCOME> 1,628
<BENEFITS> 75,546
<UNDERWRITING-AMORTIZATION> 16,997
<UNDERWRITING-OTHER> 81,073
<INCOME-PRETAX> 12,822
<INCOME-TAX> 4,489
<INCOME-CONTINUING> 8,333
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,501
<EPS-BASIC> .35
<EPS-DILUTED> .34
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
