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4: EX-10.3 Employment Agreement 12± 62K
5: EX-10.4 Employment Agreement 12± 61K
6: EX-11 Statement of Computation of Per Share Earnings 2± 9K
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[LOGO]
LIFEUSA(R)
1996 Annual Report
COMPANY DESCRIPTION
Life USA Holding, Inc. is a national financial services holding and marketing
company based in Minneapolis. Its primary subsidiary, LifeUSA Insurance Company,
is represented by over 130 marketing organizations nationwide and over 50,000
independent agents. Life USA Holding, Inc. common stock trades on the Nasdaq
National Market tier of The Nasdaq Stock Market under the symbol LUSA.
HIGHLIGHTS OF 1996
* Consolidated total revenues increased to $316.9 million in 1996 from
$272.8 million in 1995.
* Consolidated net income increased to $23.5 million in 1996 from $19.1
million in 1995.
* Collected premiums for 1996 (including Allianz Life) increased to $1.05
billion from $1.04 billion in 1995.
* Consolidated assets increased to $4.39 billion at December 31, 1996
from $3.87 billion at December 31, 1995.
* Life USA Holding, Inc. entered into a $30 million line of credit
agreement with two of its reinsurers in May 1996.
* LifeUSA Marketing, Inc. acquired Tax Planning Seminars in August 1996.
* LifeUSA Marketing, Inc. acquired a minority interest in Creative
Marketing International Corporation in November 1996.
* The ANNU-A-DEX(SM) equity indexed annuity was introduced in September
1996.
* Life USA Holding, Inc. formed LifeUSA Securities, Inc. in March 1996.
LifeUSA Securities, Inc. received approval from the National
Association of Securities Dealers, Inc. as a wholesale broker-dealer in
October 1996.
MESSAGE TO SHAREHOLDERS
Come back with me 10 years to February 26, 1987, the date our company was
incorporated. Until that date, with the exception of the five original founders
(plus one reinsurance actuary, a high-priced lawyer and a public relations
specialist), no one had ever heard the name, "LifeUSA." Despite this anonymity,
the articles of incorporation stated that Life USA Holding, Inc. ". . . was
formed to become a national life insurance holding company." A presumptuous
objective for a start-up company in a mature industry dominated by century-old
financial giants. Almost no one gave the company much chance to survive, let
alone become a force in the industry.
Now come forward to today. Not only has the company survived, but the Life
USA name is household in the life insurance industry. Setting new standards for
product innovation, service and distribution strategies, Life USA is now one of
the fastest growing, most successful companies in the industry. Ironically, it's
the financial giants who have struggled to survive. Many have passed from the
scene, while others have been so severely wounded by the changes of the decade
that they seem to stagger from crisis to scandal.
Today, Life USA, the unknown company of 1987, enters its second decade as a
flourishing, highly visible company fully intent on taking its place among
industry leaders with over $4 billion of assets, annual premiums in excess of $1
billion, and representation by over 50,000 agents.
Life USA ended its first decade with a bang-up year. Boosted by an 11%
increase in fourth quarter collected premiums, consolidated 1996 net income
increased 23%, to $23.5 million or $1.04 per share, compared to $19.1 million or
$.88 per share in 1995. 1996 consolidated net operating income increased 31%, to
$25.0 million or $1.11 per share, compared to $19.1 million or $.88 per share in
1995.
Of particular note, LifeUSA Insurance Company reported a 1996 after-tax
statutory profit of $13.2 million. This is a significant improvement over the
$367,000 after-tax statutory profit reported in 1995. Statutory profits are
important because they are indicative of a growing block of profitable inforce
business, reduce the need for external capital, are a critical measure for
rating agency action, and provide the basis for potential dividends from the
life insurance company to the parent.
Consolidated revenues increased 16% in 1996, to $316.9 million, compared to
$272.8 million in 1995. During 1996, consolidated assets increased 13%, to $4.39
billion from $3.87 billion. Consolidated net investment income increased 19%
during 1996, to $129.4 million from $109.1 million reported in 1995.
Total collected premiums for 1996 were $1.05 billion, a 1% increase over
the $1.04 billion reported in 1995. Normally, one would not look upon a 1%
increase in premiums as a positive, but in light of the current difficult sales
environment for fixed income products, the results are very encouraging. A.M.
Best projected that industry wide fixed annuity premium would decline
approximately 30% from 1995 to 1996.
For LifeUSA to post even a small gain in premiums while competing against a
roaring stock market with long-term interest rates below 7%, demonstrates the
underlying potency of our distribution system, not matched by many other
companies. Of note is that almost 12% of our total premiums were produced by
marketing organizations contracted with LifeUSA for less than two years. This
lays the groundwork for even more growth in the future.
Life USA has accomplished much during our first decade. We are pleased, but
not satisfied. Now, it's on to the next century.
We look to a combination of operational and strategic factors to foster
continued success. As Life USA enters its second decade, it's time to take our
story to a broader public. The process will start with a national advertising
and promotional campaign, targeted to our marketing niche. The objective is to
enhance the credibility and visibility of Life USA, not only with agents, but
with consumers and investors as well. Ultimately, we hope this effort will
translate into expanded distribution, increased sales and profits and a more
meaningful valuation of the company.
LifeUSA agents will start the year with two new products in their arsenal
-- the ANNU-A-DEX(SM) and the IDEAL(SM) annuity.
1
The ANNU-A-DEX is a competitive fixed annuity, offering an initial 7%
premium bonus, but with an additional benefit tied to the performance of the S&P
500(R) Index. The appeal of the product is that one can buy a competitive fixed
annuity, with principal and interest guaranteed, and should the S&P 500(R) Index
outperform the annuity over a seven-year period, one-half of the incremental
growth is added to the value of the annuity. While not an investment product,
the ANNU-A-DEX is positioned as an alternative "safe haven" for investment
funds. An investor can "lock-in" current gains and still participate, should the
stock market continue to rise, all with no down-side exposure.
The IDEAL annuity (introduced during the first quarter of 1997), is unique
in that it provides up to 10 years of protection against interest rate changes
-- up or down. When issued, the IDEAL annuity offers a base credited rate, plus
a 1.5% annual interest bonus, both guaranteed for five years. Thus, the
policyholder is protected against a decline in interest rates for the next five
years. At the end of the first five-year term, the policyholder has the option
to "re-enter" the policy at the interest rate being credited on new issues. The
new credited rate, plus another 1.5% annual interest bonus, is then guaranteed
for a new five-year term. Thus, the policyholder is also protected against a
rise in interest rates.
The interest rate change protection along with other competitive benefits
make this an IDEAL annuity for the consumer. A handsome compensation package
makes this an IDEAL annuity for agents. Over time, this annuity could be the
IDEAL stimulant needed for increased sales.
LifeUSA believes that the best insurance product for the consumer and the
company is one that offers exceptional long-term benefits, as opposed to a
short-term, commodity-type product. This type of benefit-oriented product must
be explained and sold by a knowledgeable sales person. For that reason, LifeUSA
is even more committed to building the largest and strongest agent distribution
system in the industry.
We believe that distribution will be the key to success in the future. Not
only distribution of our own products, but distribution of products for other
manufacturers. If you can control distribution, you control your competitor's
products. That does not necessarily mean that you own or control the
distribution system, but that you own and control "access" to the distribution
system. The one who wins the distribution battles of the next few years will win
the war.
With that in mind, in 1996, Life USA purchased Tax Planning Seminars, a
large marketing organization based in Voorhees, New Jersey, and made a
substantial ownership investment in Creative Marketing International
Corporation, another marketing organization based in Overland Park, Kansas.
These two organizations sell an aggregate of over $200 million of annual annuity
premiums. There is no guarantee that LifeUSA will receive all the business these
organizations produce, but we will receive first call and will profit from
business sold with other companies as well as LifeUSA. Encouraged by the initial
success of these two transactions, Life USA will be looking aggressively for
similar opportunities in 1997 and beyond.
Several years of low interest rates and a thriving stock market have caused
the market for fixed annuities to shrink, but the potential market for annuities
has barely been tapped. Should long-term interest rates rise above 8% and the
stock market make even a modest correction, there is a vast pool of capital that
will be looking for a safe haven, and LifeUSA is well-positioned to take
advantage of such a circumstance.
Just the same, to cover all the bases, 1997 will see the launch of LifeUSA
Securities, Inc. to market a family of LifeUSA mutual funds. We are also
exploring the distribution of variable life and annuity contracts issued by
other companies. This action expands and helps to balance our product universe,
as well as enhance our ability to attract an even broader base of distribution.
2
While nothing is guaranteed, when the momentum of our past success is
combined with the fresh plans we have for the future, then it becomes clear that
Life USA is well positioned for a healthy start to our second decade. In short,
we are encouraged, both by our past success and future opportunities.
Before we close out our first decade and move on, I would like to pause
just a moment to thank all those who have been so important to our success.
Living in Minnesota, we're not far from the headwaters of the Mississippi
River. At the point of origin, one can easily jump across the river. As the
river moves south, it gradually becomes the mighty Mississippi, not because of
the volume of the water at the source, but from hundreds of creeks, streams and
other rivers that flow into it. Viewing the Mississippi in all its grandeur, one
cannot identify the various sources of the river because the contributions all
flow together to make one great river.
The same dynamics are true with a successful business. At the beginning, it
was easy to identify the source of the power at Life USA. However, as the
company has grown, hundreds, even thousands, of people have added their part.
Today, it is impossible to break out individual contributions. They all flow
together. To all of those who have believed and contributed their talents to our
success, I offer a deep, sincere thanks. And, along with that goes our
commitment to make our second decade even better than the first.
Robert W. MacDonald
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Life USA Holding, Inc.
CHIEF EXECUTIVE OFFICER
LifeUSA Insurance Company
THEN AND NOW
(1987 - 1996)
CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
1996 1987
--------------------------
Collected Premiums ...... $1,052,458 $ 179
Total Revenues .......... 316,898 286
Net Income (Loss) ....... 23,454 (2,135)
Earnings (Loss) Per Share 1.04 (.11)
CONSOLIDATED BALANCE SHEET DATA AS OF DECEMBER 31
(DOLLARS IN THOUSANDS):
1996 1987
-----------------------
Fixed Maturity Investments ......... $1,881,476 $ 3,362
Total Shareholders' Equity (Deficit) 172,615 (521)
3
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
Life USA Holding, Inc.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
[Enlarge/Download Table]
AS OF AND FOR THE YEAR ENDED DECEMBER 31 1996
-----------------------------------------------------------------------------------------
Consolidated results of operations:
Revenues ............................................................... $ 316,898
Net income ............................................................. 23,454
Adjustments to arrive at net operating income (1):
Net realized gains on investments ..................................... (408)
Charges for state guaranty fund assessments ........................... 1,998
------------
Net operating income (1) ............................................... 25,044
Per share data:
Fully diluted shares ................................................... 23,402,846
Convertible subordinated debenture interest addback, net of tax ........ $ 870
Net income ............................................................. 1.04
Net operating income (1) ............................................... 1.11
Consolidated financial position:
Assets ................................................................. $ 4,386,723
Invested assets (fixed maturity investments and cash and cash
equivalents) .......................................................... 1,902,465
Debt (convertible subordinated debentures) ............................. 36,030
Shareholders' equity:
As reported ........................................................... 172,615
Excluding SFAS No. 115 ................................................ 169,280
Common stock data:
Shares issued and outstanding and to be issued 20,974,901 Book value per
share:
As reported ........................................................... $ 8.23
Excluding SFAS No. 115 ................................................ 8.07
Closing Price ......................................................... 12.00
Financial ratios and other data:
Return on invested assets--net income .................................. 1.23%
Return on invested assets--net operating income (1) .................... 1.32%
Return on equity--net income:
As reported ........................................................... 13.59%
Excluding SFAS No. 115 ................................................ 13.86%
Return on equity--net operating income (1):
As reported ........................................................... 14.51%
Excluding SFAS No. 115 ................................................ 14.79%
Debt to equity:
As reported ........................................................... 20.87%
Excluding SFAS No. 115 ................................................ 21.28%
Closing price to net income per share .................................. 11.55x
Closing price to net operating income per share (1) .................... 10.8x
Closing price to book value per share:
As reported ........................................................... 1.46x
Excluding SFAS No. 115 ................................................ 1.49x
Total market capitalization ............................................ $ 251,699
-----------------------------
1) Net operating income equals net income, excluding, net of related
income taxes: (i) net realized gains on investments and the
corresponding increases in amortization of deferred policy acquisition
costs and other benefits to policyholders and (ii) charges for state
guaranty fund assessments.
In 1993, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets
and liabilities are determined based on differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities and
are measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse. Prior to the adoption of SFAS No. 109,
income tax expense was based on items of income and expense that were reported
in different years in the financial statements and tax returns and were measured
at the tax rate in effect in the year the difference originated. As permitted by
SFAS No. 109, the Company restated its 1992 financial statements.
4
(WIDE TABLE CONTINUED)
FIVE YEAR
AVERAGE
COMPOUND
1995 1994 1993 1992 GROWTH RATE
--------------------------------------------------------------------------------
$ 272,781 $ 206,313 $ 199,685 $ 145,800 22.78%
19,097 14,469 15,115 9,870 39.44%
(1,828) (641) (989) (1,877)
1,877 1,704 624 961
---------------------------------------------------------------
19,146 15,532 14,750 8,954 59.95%
22,527,463 20,424,921 19,439,945 14,887,306
$ 757 N/A N/A N/A
0.88 $ 0.71 $ 0.78 $ 0.66 26.87%
0.88 0.76 0.76 0.60 45.46%
$ 3,867,539 $ 3,065,271 $ 2,394,471 $ 1,537,375 34.08%
1,754,087 1,249,321 899,998 447,386 49.20%
36,030 6,041 6,351 8,336
156,896 106,916 107,204 38,898 43.44%
144,189 123,836 107,204 38,898 42.88%
20,324,747 20,179,617 19,978,118 14,262,937
$ 7.72 $ 5.30 $ 5.37 $ 2.73 32.62%
7.09 6.14 5.37 2.73 32.10%
8.00 7.25 18.88 11.13
1.09% 1.16% 1.68% 2.21%
1.09% 1.24% 1.64% 2.00%
12.17% 13.53% 14.10% 25.37%
13.24% 11.68% 14.10% 25.37%
12.20% 14.53% 13.76% 23.02%
13.28% 12.54% 13.76% 23.02%
22.96% 5.65% 5.92% 21.43%
24.99% 4.88% 5.92% 21.43%
9.08x 10.23x 24.28x 16.78x
9.1x 9.5x 24.9x 18.5x
1.04x 1.37x 3.52x 4.08x
1.13x 1.18x 3.52x 4.08x
$ 162,598 $ 146,302 $ 377,087 $ 158,675
Also, in 1993, the Company implemented SFAS No. 113, "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts."
SFAS No. 113 requires the reporting of assets and liabilities relating to
ceded life insurance contracts on a gross basis rather than the previous
practice of reporting these items net of reinsurance. In accordance with
Financial Accounting Standards Board (FASB) Interpretation No. 39,
"Offsetting of Amounts Related to Certain Contracts," the Company presents
assets and liabilities related to its annuity contracts on a gross basis.
Total assets and liabilities for all periods presented have been increased to
reflect the implementation of SFAS No. 113 and FASB Interpretation No. 39.
In 1994, the Company adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." Beginning January 1, 1994, under the provisions
of SFAS No. 115, held to maturity investments are carried at amortized cost and
available for sale investments are carried at fair value, with unrealized gains
and losses reported as a separate component of shareholders' equity.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIFE USA HOLDING, INC.
GENERAL
The following analysis of the results of operations and financial condition
of Life USA Holding, Inc. (the Company) and its wholly-owned subsidiaries,
LifeUSA Insurance Company (LifeUSA), LifeUSA Securities, Inc. (LifeUSA
Securities) and LifeUSA Marketing, Inc. (LifeUSA Marketing), should be read in
conjunction with the Company's consolidated financial statements and notes
thereto included elsewhere in this Annual Report.
During 1996, the Company formed two wholly-owned subsidiaries: LifeUSA
Securities and LifeUSA Marketing. LifeUSA Securities has received approval from
the National Association of Securities Dealers, Inc. as a wholesale
broker-dealer, will initially market a family of LifeUSA mutual funds
established through a joint-venture agreement with a $16 billion asset
management firm and is exploring distribution of variable life insurance and
annuity contracts. LifeUSA Marketing conducts a variety of marketing activities
for the Company, including the acquisition of and investment in national field
marketing organizations. The results of operations and financial condition of
LifeUSA Securities and LifeUSA Marketing, both individually and in the
aggregate, are not material to the 1996 consolidated financial statements of the
Company. Therefore, the analysis that follows will focus primarily on the
Company and LifeUSA.
Since its inception in 1987, LifeUSA has entered into various agreements to
reinsure a substantial portion of the new life insurance and annuity business
written each year. Entering into these reinsurance agreements has allowed
LifeUSA to write a larger volume of business than it would otherwise have been
able to write due to regulatory restrictions based on the amount of its
statutory capital and surplus.
Since April 1, 1991, LifeUSA has ceded a substantial portion of its new
life insurance and annuity business to the following three reinsurers (the
Reinsurers):
* Employers Reassurance Corporation, a subsidiary of Employers
Reinsurance Corporation, a member of the General Electric
Company group;
* Munich American Reassurance Company, a subsidiary of Munich
Reinsurance Company, one of the largest German insurance
companies; and
* Republic-Vanguard Life Insurance Company, a member of the
Winterthur Swiss Insurance Group, one of the largest Swiss
insurance companies.
Effective October 1, 1995, LifeUSA began ceding 75% of its new life
insurance and annuity business to the Reinsurers. From July 1, 1993 through
September 30, 1995, LifeUSA ceded 50% of its new life insurance and annuity
business to the Reinsurers. LifeUSA receives commissions and expense allowances
on business ceded to the Reinsurers.
Since 1987, under the terms of agreements between the Company and Allianz
Life Insurance Company of North America (Allianz Life), LifeUSA agents have
produced life insurance and annuity business on Allianz Life policies which are
similar to LifeUSA agents for Allianz Life. Effective October 1, 1995, LifeUSA
began assuming 25% of the new life insurance and annuity business produced by
its agents for Allianz Life. From July 1, 1993 through September 30, 1995,
LifeUSA assumed 50% of the new life insurance and annuity business produced by
LifeUSA agents for Allianz Life.
The reduction in LifeUSA's net retention (the percentage of new life
insurance and annuity business retained by LifeUSA and assumed by LifeUSA from
Allianz Life) from 50% to 25%, effective October 1, 1995, is one of the primary
reasons for several fluctuations discussed in the Results of Operations section
that follows. For comparative purposes, LifeUSA's net retention was a constant
25% throughout 1996, 50% for the first nine months and 25% for the last three
months of 1995 and a constant 50% throughout 1994. These reductions will be
referred to as "the October 1, 1995 reduction in LifeUSA's net retention" during
the remainder of this document.
6
The following table shows LifeUSA's life insurance and annuity in force
information at December 31 (in millions):
1996 1995
-------- --------
Life insurance account values:
All policies produced by LifeUSA agents (1) $ 260.1 $ 216.0
Direct and assumed business (2) ........... 223.4 185.6
Net of reinsurance (3) .................... 85.5 69.1
Life insurance face amounts:
All policies produced by LifeUSA agents (1) 8,171.2 7,939.0
Direct and assumed business (2) ........... 7,104.0 6,924.7
Net of reinsurance (3) .................... 2,860.2 2,923.7
Annuity account values:
All policies produced by LifeUSA agents (1) 4,876.7 4,369.7
Direct and assumed business (2) ........... 3,496.3 3,183.3
Net of reinsurance (3) .................... 1,655.5 1,574.1
------------------------------
(1) Includes all policies produced by LifeUSA agents, including policies
produced by LifeUSA agents for Allianz Life.
(2) Includes all LifeUSA policies and the portion of policies produced by
LifeUSA agents for Allianz Life that have been assumed by LifeUSA.
(3) Includes the portion of LifeUSA policies that have been retained by
LifeUSA and the portion of policies produced by LifeUSA agents for
Allianz Life that have been assumed by LifeUSA.
Reference is made to Note 2 (Reinsurance) to the December 31, 1996 consolidated
financial statements for further details regarding the Company's reinsurance
agreements.
7
RESULTS OF OPERATIONS
In 1996, the Company generated increases in collected life insurance
premiums and annuity deposits, invested assets and life insurance and annuities
in force. As a result, revenues from policyholder charges, net investment income
and commissions and expense allowances increased. Expenses incurred for interest
credited to policyholder account values and commissions also increased during
1996 for similar reasons. Primarily as a result of these factors, net income and
earnings per share for 1996 increased 23% and 18%, respectively, compared to the
corresponding results achieved during 1995. In addition, the combination of two
non-operating items (net realized gains on investments and charges for state
guaranty fund assessments) had a slight negative effect on 1996 net income and
earnings per share.
PREMIUMS AND DEPOSITS. Total collected premiums and deposits, including
premiums and deposits on policies produced by LifeUSA agents for Allianz Life,
were $1.05 billion, $1.04 billion and $915.5 million in 1996, 1995 and 1994,
respectively, and represented an increase of 1% in 1996 compared to 1995 and an
increase of 14% in 1995 compared to 1994. The following table shows the amounts
of premiums and deposits collected, ceded and retained for the three years (in
thousands):
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
----------------------------------
Collected Premiums and Deposits (1):
LifeUSA:
Life:
First year .......................................... $ 12,731 $ 16,451 $ 16,197
Single and renewal .................................. 49,242 44,418 38,731
----------------------------------
Total Life ......................................... 61,973 60,869 54,928
Annuities ............................................ 547,748 585,739 481,138
----------------------------------
Total LifeUSA collected premiums and deposits ..... 609,721 646,608 536,066
Allianz Life:
Life:
First year .......................................... 3,261 4,693 5,318
Single and renewal .................................. 14,817 13,010 10,839
----------------------------------
Total Life ......................................... 18,078 17,703 16,157
Annuities ............................................ 424,659 379,588 363,319
----------------------------------
Total Allianz Life collected premiums and deposits 442,737 397,291 379,476
----------------------------------
Total collected premiums and deposits ........... $1,052,458 $1,043,899 $915,542
==================================
8
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
--------------------------------------
Premiums and Deposits Not Retained or Assumed (2):
LifeUSA:
Life:
First year ........................................... $ 8,416 $ 8,351 $ 8,443
Single and renewal ................................... 31,925 30,167 27,828
------------------------------
Total Life .......................................... 40,341 38,518 36,271
Annuities ............................................. 397,566 312,325 249,803
------------------------------
Total LifeUSA premiums and deposits not retained ... 437,907 350,843 286,074
Allianz Life:
Life:
First year ............................................ 2,228 2,377 2,661
Single and renewal .................................... 8,596 7,722 6,711
------------------------------
Total Life .......................................... 10,824 10,099 9,372
Annuities ............................................. 309,198 211,731 188,062
------------------------------
Total Allianz Life premiums and deposits not assumed 320,022 221,830 197,434
------------------------------
Total premiums and deposits not
retained or assumed .............................. $757,929 $572,673 $483,508
==============================
Retained or Assumed Premiums and Deposits(3):
LifeUSA:
Life:
First year ........................................... $ 4,315 $ 8,100 $ 7,754
Single and renewal ................................... 17,317 14,251 10,903
------------------------------
Total Life .......................................... 21,632 22,351 18,657
Annuities ............................................. 150,182 273,414 231,335
------------------------------
Total LifeUSA retained premiums and deposits ....... 171,814 295,765 249,992
Allianz Life:
Life:
First year ........................................... 1,033 2,316 2,657
Single and renewal ................................... 6,221 5,288 4,128
------------------------------
Total Life .......................................... 7,254 7,604 6,785
Annuities ............................................. 115,461 167,857 175,257
------------------------------
Total Allianz Life assumed premiums and deposits ... 122,715 175,461 182,042
------------------------------
Total retained or assumed premiums and deposits ... $294,529 $471,226 $423,034
==============================
-------------------------------
(1) Includes premiums and deposits related to all policies produced by
LifeUSA agents, including policies produced by LifeUSA agents for
Allianz Life.
(2) Includes premiums and deposits related to LifeUSA policies that have
been ceded by LifeUSA to the Reinsurers and premiums and deposits
related to policies produced by LifeUSA agents for Allianz Life that
have not been assumed by LifeUSA.
(3) Includes premiums and deposits related to LifeUSA policies that have
been retained by LifeUSA and premiums and deposits related to policies
produced by LifeUSA agents for Allianz Life that have been assumed by
LifeUSA. LifeUSA invests these premiums and deposits for the purpose of
providing future benefits to its policyholders.
Reference is made to Note 2 (Reinsurance) to the December 31, 1996 consolidated
financial statements for further details regarding the Company's reinsurance
agreements.
9
REVENUES. Total revenues were $316.9 million, $272.8 million, and $206.3
million in 1996, 1995 and 1994, respectively. The increase in total revenues of
16% in 1996 compared to 1995 was primarily due to the increase in policyholder
charges and net investment income generated by the growth in life insurance and
annuities in force and invested assets and the increase in commissions and
expense allowances associated with the October 1, 1995 reduction in LifeUSA's
net retention. The increase in total revenues of 32% in 1995 compared to 1994
was primarily due to the growth in life insurance and annuities in force and
invested assets, net realized gains recorded on investment sales and the
increase in commissions and expense allowances associated with the October 1,
1995 reduction in LifeUSA's net retention and the increase in collected premiums
and deposits in 1995 compared to 1994.
Policyholder charges, which represent the amounts assessed against policy
account balances for the cost of insurance, policy administration and
surrenders, increased 30%, or $10.9 million, in 1996 compared to 1995, and 66%,
or $14.3 million, in 1995 compared to 1994, reflecting the growth in LifeUSA's
net retained life insurance and annuities in force.
Increases in net investment income of 19%, or $20.3 million, in 1996
compared to 1995, and 46%, or $34.6 million, in 1995 compared to 1994, are
primarily attributable to increases in invested assets (fixed maturity
investments and cash and cash equivalents) to $1.90 billion at December 31, 1996
from $1.75 billion at December 31, 1995 and $1.25 billion at December 31, 1994.
The weighted average annual yield on invested assets (exclusive of realized and
unrealized gains and losses) was 7.44% at December 31, 1996, compared to 7.46%
at December 31, 1995 and 1994.
In accordance with generally accepted accounting principles, net realized
gains on investments had the following impact on the amortization of deferred
policy acquisition costs, other benefits to policyholders, net income and
earnings per share for 1996, 1995 and 1994 (dollars in millions, except per
share amounts):
1996 1995 1994
--------------------
Net realized gains on investments ......... $1.8 $7.6 $1.2
Increase in:
Amortization of deferred policy acquisition
costs .................................... .7 2.8 .1
Other benefits to policyholders ........... .5 2.0 .1
--------------------
Income before income taxes ................ .6 2.8 1.0
Income taxes .............................. .2 .9 .3
--------------------
Net income ................................ $ .4 $1.9 $ .7
--------------------
Earnings per share ........................ $.02 $.08 $.03
====================
The total of the increases in amortization of deferred policy acquisition
costs and other benefits to policyholders as a percentage of net realized gains
on investments is greater in 1996 and 1995 than in 1994 due to the fact that the
majority of the gains recorded in 1996 and 1995 were a result of the sale of
securities which supported policyholder liabilities, while the majority of the
gains recorded in 1994 were a result of the sale of securities which supported
the Company's shareholders' equity.
Net commissions and expense allowances on premiums and deposits collected
on reinsured policies and service fees on business produced for Allianz Life
increased 15%, or $17.9 million, in 1996 compared to 1995. The increase was due
primarily to the October 1, 1995 reduction in LifeUSA's net retention. The
increase in net commissions and expense allowances of 10%, or $10.9 million, in
1995 compared to 1994 was due primarily to the increase in collected premiums
and deposits in 1995 and the October 1, 1995 reduction in LifeUSA's net
retention.
10
The following table shows the amounts of net commissions and expense
allowances for 1996, 1995 and 1994 (in thousands):
[Enlarge/Download Table]
1996 1995 1994
----------------------------------
LifeUSA:
Life:
First year ............................................. $ 10,263 $ 9,746 $ 9,183
Single and renewal ..................................... 5,246 5,039 4,694
--------------------------------
Total Life ............................................ 15,509 14,785 13,877
Annuities ............................................... 59,003 45,776 37,995
--------------------------------
Total LifeUSA ........................................ 74,512 60,561 51,872
Allianz Life:
Life:
First year ............................................. 3,336 4,746 5,336
Single and renewal ..................................... 2,227 1,941 1,634
--------------------------------
Total Life ............................................ 5,563 6,687 6,970
Annuities ............................................... 58,431 53,344 51,093
--------------------------------
Total Allianz Life ................................... 63,994 60,031 58,063
Lapse policy chargebacks ................................. (772) (746) (1,036)
--------------------------------
Total commissions and expense allowance, net......... $137,734 $119,846 $108,899
================================
-------------------------------
The above table includes commissions and expense allowances related to LifeUSA
policies that have been ceded by LifeUSA to the Reinsurers and service fees
related to policies produced by LifeUSA agents for Allianz Life.
The Company pays a lapse policy chargeback to the Reinsurers when a life
insurance policy that has been ceded lapses before the end of 13 months. The
chargeback paid for each policy is equal to the excess of the allowances
received over the premiums received.
Reference is made to Note 2 (Reinsurance) to the December 31, 1996 consolidated
financial statements for further details regarding the Company's reinsurance
agreements.
EXPENSES. Total expenses were $279.8 million, $242.8 million and $183.3
million in 1996, 1995 and 1994, respectively. The increase in total expenses of
15% in 1996 compared to 1995 was primarily due to growth in life insurance and
annuities in force and the increase of 32% in 1995 compared to 1994 was
primarily due to growth in life insurance and annuities in force and increased
production.
Increases in interest credited to policyholder account values of 18%, or
$14.9 million, in 1996 compared to 1995 and 45%, or $26.3 million, in 1995
compared to 1994 reflect the growth in LifeUSA's life insurance and annuities in
force.
The increases in other benefits to policyholders of 18%, or $2.7 million,
in 1996 compared to 1995 and 119%, or $8.0 million, in 1995 compared to 1994
reflect the growth in LifeUSA's life insurance and annuities in force, the
additional accrual of bonuses to be paid to policyholders (the primary component
of other benefits to policyholders) that is generated by the net realized gains
on investments described above and the revisions made to the estimates in the
models used to accrue for bonuses to be paid to policyholders described below.
Amortization of deferred policy acquisition costs increased 11%, or $2.4
million, in 1996 compared to 1995 and 90%, or $10.5 million, in 1995 compared to
1994 reflecting the increase in gross profits due to a growing, more mature
block of in force business, the additional amortization of deferred policy
acquisition costs that is generated by the net realized gains on investments
described above and the revisions made to the estimates in the models used to
amortize deferred policy acquisition costs described below.
11
LifeUSA uses models to estimate future gross profits and allocate current
gross margins in order to amortize deferred policy acquisition costs and accrue
for bonuses to be paid to policyholders (the primary component of other benefits
to policyholders). In accordance with Statement of Financial Accounting
Standards (SFAS) No. 97, "Accounting and Reporting by Insurance Enterprises for
Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale
of Investments," LifeUSA is required to make revisions to the estimates in these
models and adjust amortization accordingly. During 1996, 1995 and 1994,
revisions were made to the estimates in the models used to amortize deferred
policy acquisition costs and accrue for bonuses to be paid to policyholders. The
cumulative effect of these revisions increased pretax income by $2.7 million in
1996, decreased pretax income by $200,000 in 1995 and increased pretax income by
$1.4 million in 1994.
The following table shows comparative rates for lapses, surrenders and
annuitizations for 1996, 1995 and 1994:
[Enlarge/Download Table]
1996 1995 1994
---------------------------
Annualized first year lapse rate for life insurance policies
(excluding single premium) ................................. 20.7% 21.1% 20.6%
Cumulative annualized first year surrender rate for annuities 1.1 1.1 1.1
Cumulative annualized first year annuitization rate for
annuities .................................................. 5.9 6.0 6.2
The impact on estimated gross profits of actual policy experience,
including the rates shown above, is consistent with the assumptions in the
models used by LifeUSA to compute deferred policy acquisition cost amortization.
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 12%, or $8.5 million, in 1996 compared to
1995 due to the increase in collected premiums and deposits discussed above and
the October 1, 1995 reduction in LifeUSA's net retention which resulted in less
commissions being deferred in 1996 than were deferred in 1995, partially offset
by the decline in collected first year life premiums, which receive the highest
commission rates paid by LifeUSA. Commissions to agents increased 12%, or $7.6
million, in 1995 compared to 1994 due to the increase in collected premiums and
deposits discussed above and due to the October 1, 1995 reduction in LifeUSA's
net retention which resulted in less commissions being deferred in 1995 than
were deferred in 1994.
Taxes, licenses and fees decreased 54%, or $4.1 million, in 1996 compared
to 1995. This decrease was primarily due to the combined impact of a $1.8
million refund of state premium taxes paid in prior years that was received
during 1996 and changes made in the method of accruing for premium taxes,
partially offset by the slight increase in charges for state guaranty fund
assessments recorded during 1996. The increase in taxes, licenses and fees of
16%, or $1.1 million in 1995 compared to 1994 is primarily due to the increase
in charges related to state guaranty fund assessments recorded during 1995. The
Company holds a reserve for future assessments that is based on current data
from various industry sources that monitor the status of open and closed
insolvencies and is adjusted as assessments are received. Charges for state
guaranty fund assessments, including adjustments made to the Company's reserve
for future assessments, represented $3.1 million, $3.0 million and $2.6 million
of total taxes, licenses and fees recorded in 1996, 1995 and 1994, respectively.
Operating expenses increased 30%, or $12.7 million, in 1996 compared to
1995. This increase was primarily due to the growth in LifeUSA's life insurance
and annuities in force and the October 1, 1995 reduction in LifeUSA's net
retention which resulted in less operating expenses being deferred in 1996 than
were deferred in 1995. Operating expenses increased 17%, or $6.2 million, in
1995 compared to 1994. This increase was also primarily due to the growth in
LifeUSA's life insurance and annuities in force and the October 1, 1995
reduction in LifeUSA's net retention which resulted in less operating expenses
being deferred in 1995 than were deferred in 1994.
12
Income taxes were $13.6 million in 1996, $10.9 million in 1995 and $8.6
million in 1994. The effective income tax rates for 1996, 1995 and 1994 were
36.7%, 36.3% and 37.2%, respectively.
NET INCOME. Net income was $23.5 million in 1996, $19.1 million in 1995 and
$14.5 million in 1994 which represents an increase in net income of 23% in 1996
compared to 1995 and 32% in 1995 compared to 1994. Earnings per share were $1.04
in 1996, $.88 in 1995 and $.71 in 1994 which represents an increase of 18% in
1996 compared to 1995 and 24% in 1995 compared to 1994. The following table
shows net operating income (net income, excluding, net of related income taxes,
net realized gains on investments and the corresponding increases in
amortization of deferred policy acquisition costs and other benefits to
policyholders and charges for state guaranty fund assessments) and earnings per
share, the effect of those items considered to be non-operating and net income
and earnings per share for 1996, 1995 and 1994, respectively (income in
millions):
[Enlarge/Download Table]
1996 1995 1994
--------------------------------------------
INCOME EPS INCOME EPS INCOME EPS
--------------------------------------------
Net operating income and earnings per share $25.1 $1.11 $19.1 $.88 $15.5 $.76
Increase (decrease) net income and
earnings per share:
Net realized gains on investments ......... .4 .02 1.9 .08 .7 .03
Change for state guaranty fund assessments (2.0) (.09) (1.9) (.08) (1.7) (.08)
-------------------------------------------
Net income and earnings per share ......... $23.5 $1.04 $19.1 $.88 $14.5 $.71
===========================================
LIQUIDITY AND CAPITAL RESOURCES
During 1996, the Company's primary sources of cash were (i) service fees
received by the Company for business produced by LifeUSA's agents for Allianz
Life, (ii) management fees from LifeUSA, (iii) proceeds from the $30 million
convertible subordinated debenture purchased by Allianz Life in February 1995,
and (iv) interest earned on invested assets. A substantial portion of the
Company's operating expenses is attributable to services provided to LifeUSA,
such as employees, data processing, facilities and supplies, which are
reimbursed by LifeUSA through management fees. LifeUSA is expected to have
sufficient cash to provide reimbursement through 1997, based on currently
anticipated life insurance and annuity sales and on the continuation of
acceptable reinsurance arrangements. In addition, LifeUSA has made a formal
request to the Commissioner of the State of Minnesota Department of Commerce to
pay a $2.5 million cash dividend to the Company during 1997. LifeUSA's ability
to pay dividends in the future is also subject to compliance with Minnesota
insurance laws and regulations.
In May 1996, the Company entered into an agreement with two of its
Reinsurers which provides a long-term line of credit in the amount of $30
million. Funds drawn against the line of credit can be used to fund certain
investments and acquisitions which the Company may make, capital contributions
to LifeUSA or capital expenditures. As of December 31, 1996, the Company had no
outstanding borrowings under this line of credit.
The Company's cash needs consist of (i) capital contributions to LifeUSA to
permit increases in sales volume and retention or assumption of new life
insurance and annuity business produced by LifeUSA agents and to provide LifeUSA
sufficient capital and surplus to maintain adequate capital ratios, (ii)
commission advances to agents, (iii) payment of interest on the Company's
convertible subordinated debentures, (iv) operating expenses, including expenses
in connection with the efforts to increase the production of LifeUSA's existing
agents and expand the size of LifeUSA's field force, and (v) investments in
marketing organizations expected to increase premium production volume for
LifeUSA. Management believes that the combination of (i) the anticipated
increase in cash flow during 1997 and the anticipated reduction in capital
requirements for new business retained or assumed by LifeUSA associated with the
October 1, 1995
13
reduction in LifeUSA's net retention, (ii) the statutory profits generated by
LifeUSA on the mature business which it has retained or assumed, (iii) the $5
million in proceeds that remained at December 31, 1996 from the $30 million
convertible subordinated debenture issued to Allianz Life in February 1995, (iv)
the availability of the $30 million line of credit from two of its Reinsurers,
and (v) cash generated by operations, will provide sufficient capital resources
to support the capital needs of LifeUSA and meet all the Company's cash needs in
the ordinary course of business through 1997, based on currently anticipated
life insurance and annuity sales and on the continuation of acceptable
reinsurance arrangements. The Company's future investments in marketing
organizations may require additional capital during 1997.
For LifeUSA to retain or assume life insurance and annuity business,
LifeUSA must maintain a sufficient level of statutory capital and surplus as
established by the regulatory authorities in the jurisdictions where LifeUSA is
licensed to do business. As LifeUSA retains and assumes business, it is required
to expense commissions and other policy issuance costs for statutory accounting
purposes and to establish statutory reserves for policy benefits, thereby
creating a statutory loss and reducing statutory surplus in the first year of
the policy. The anticipated profits from the retained or assumed business are
realized over the remaining period that the policies are in force. As a result
of the October 1, 1995 reduction in LifeUSA's net retention, the need for
additional capital to cover the statutory loss from such business has been
reduced.
During 1996, LifeUSA produced a statutory net income of $13.2 million. As a
result, the Company did not make significant capital contributions to LifeUSA
during 1996. In addition, based on currently anticipated life insurance and
annuity sales, projected statutory profits from LifeUSA's mature block of in
force business and the continuation of acceptable reinsurance arrangements, the
Company does not expect to contribute capital to LifeUSA through 1997 in order
to maintain adequate levels of statutory capital and surplus.
As of December 31, 1996, LifeUSA had statutory capital and surplus for
regulatory purposes of $87.3 million compared to $75.7 million at December 31,
1995. Assuming continuation of the current level of retention and assumption of
new business and the expected level of life insurance and annuity business
produced by LifeUSA agents, LifeUSA expects to continue to satisfy statutory
capital and surplus requirements for 1997 primarily through statutory profits on
its mature block of retained inforce business. In the future the Company may
alter the level of its retention and assumption of new business depending upon
future levels of production, capital needs and availability of alternative
financing.
The Company has developed a strategy to generate additional premium
production from LifeUSA's existing agents and from new production sources by
making loans to or investing in marketing organizations and by recruiting new
marketing organizations to sell its products. The amount of any loan or
investment relates to the revenue currently generated by the marketing
organization and the projected increase in business produced for LifeUSA by the
marketing organization. To date, the Company has made loans to marketing
organizations that account for 31% of the Company's 1996 life insurance and
annuity production. The loans include incentives for achieving increased
production. In addition, in August 1996, LifeUSA Marketing acquired Tax Planning
Seminars, a national marketing organization that had been contracted with
LifeUSA for seven years and in November 1996, acquired an equity interest in
Creative Marketing International Corporation, another national marketing
organization that had not been contracted previously with LifeUSA. The Company
has made and expects to continue to make future investments by issuing shares of
its common stock and paying cash from its available resources ($5.6 million of
fixed maturity investments -- available for sale and cash and cash equivalents
as of December 31, 1996 on an unconsolidated basis), cash generated from
operations, cash dividends from LifeUSA and borrowings under its $30 million
line of credit (no amounts outstanding at December 31, 1996). In addition,
during 1996, the Company signed marketing agreements with 31 national marketing
organizations to market LifeUSA life insurance and annuity products for the
first time. There can be no assurances that the Company's premium volume or
income will be enhanced by the loans to or investments in marketing
organizations or by the contracting of new national marketing organizations.
14
REGULATORY ENVIRONMENT. LifeUSA is subject to regulation in the 49 states
in which it is authorized to do business. The laws of these states establish
supervisory agencies with administrative powers related to granting and revoking
licenses to transact business, approving the form and content of policies,
reviewing the advertising and illustration of policies, licensing agents,
establishing reserve requirements and regulating the type and amount of
investments. Such regulations are primarily intended to protect policyholders.
The Company is also regulated in several states as an insurance holding company.
The insurance regulatory framework continues to be reviewed by various
states and by the National Association of Insurance Commissioners (NAIC).
Regulatory initiatives such as risk-based capital standards have been undertaken
to identify inadequately capitalized companies and to reduce the risk of company
insolvencies. The NAIC has established risk-based capital standards to determine
the capital requirements of a life insurance company based upon the risks
inherent in its operations. LifeUSA's percentage of actual total adjusted
capital to authorized control level risk-based capital is well in excess of
regulatory requirements. As a result of the production of statutory net income
of $13.2 million during 1996, the Company did not make significant capital
contributions to LifeUSA during 1996 and, based on currently anticipated life
insurance and annuity sales and the continuation of reinsurance arrangements,
the Company does not expect to contribute capital to LifeUSA through 1997 in
order to maintain an acceptable risk-based capital ratio.
The NAIC has also considered changes in the model laws for nonforfeiture
values of life insurance and deferred annuity products. Since 1994, LifeUSA has
made presentations to and had discussions with the Life/Health Actuarial Task
Force of the NAIC, which is responsible for developing new model laws for
nonforfeiture values. LifeUSA demonstrated that its two-tier products use
longer-term, higher-yielding investments to provide higher retirement values to
policyholders, while decreasing disintermediation and solvency risks to LifeUSA.
Although it is possible that the NAIC may adopt new model laws addressing
nonforfeiture values in the future, such adoption is not currently anticipated
to have a significant impact on LifeUSA.
NAIC committees are also considering a new annuity illustration model
regulation, a new approach to statutory valuation of liabilities (reserves) and
regulations for equity-indexed products. The Company is monitoring these
developments and no significant impact is anticipated at this time.
In December 1995, the NAIC passed a model regulation for disclosure in life
insurance policy illustrations. A number of states either have adopted the model
regulation by its January 1, 1997 effective date or are in the process of
adopting the model regulation. LifeUSA has already completed the certification
process required by the model regulation. This regulation has not had and is not
anticipated to have a significant impact on LifeUSA.
Insurance laws also require LifeUSA to file detailed periodic reports with
the regulatory agencies in each of the states in which it writes business, and
these agencies may examine LifeUSA's business and accounts at any time. Under
NAIC rules, one or more of the regulatory agencies will periodically examine
LifeUSA, normally at three-year intervals, on behalf of the states in which
LifeUSA is licensed. During 1996, the Minnesota Department of Commerce conducted
a triennial examination of LifeUSA for the three years ended December 31, 1995.
The Company expects to receive the final examination report in the near future
and has not been made aware of any issues or recommendations that will be
material individually or in the aggregate.
In April 1996, the B++ (Very Good) rating initially assigned LifeUSA in
June 1994 was reaffirmed by the A.M. Best Company. The A. M. Best Company
assigns the B++ rating to companies which, in its opinion, have achieved very
good overall performance when compared to the standards established by the A. M.
Best Company. B++ companies have a good ability to meet their obligations to
policyholders over a long period of time.
15
In December 1996, Standard & Poor's assigned LifeUSA an initial
claims-paying ability rating of BBB+ (Adequate). Standard & Poor's assigns the
BBB+ rating to insurers which, in its opinion, offer adequate financial
security, but capacity to meet policyholder obligations is susceptible to
adverse economic and underwriting conditions.
INVESTMENTS. As of December 31, 1996, the Company had cash, cash
equivalents and fixed maturity investments on a consolidated basis totaling
$1.90 billion, including $7.6 million in restricted deposits with state
insurance authorities regulating LifeUSA. The following table summarizes the
book, carrying and market values of each investment category held at December 31
(dollars in thousands):
[Enlarge/Download Table]
BOOK % OF CARRYING % OF MARKET % OF
1996 VALUE TOTAL VALUE TOTAL VALUE TOTAL
-------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents ............ $ 20,989 1.11% $ 20,989 1.10% $ 20,989 1.10%
Government Treasury and Agency
notes and bonds ..................... 98,982 5.24 100,909 5.30 104,537 5.46
Mortgage pass-throughs ............... 46,085 2.44 46,804 2.46 46,836 2.45
Agency Collateralized Mortgage
Obligations:
CMO -- Sequential pay .............. 6,260 .33 6,260 .33 6,284 .33
CMO -- Planned amortization class .. 615,995 32.63 615,556 32.36 616,286 32.22
CMO -- Accretion directed class .... 23,484 1.24 23,484 1.23 23,672 1.24
CMO -- Targeted amortization class . 11,970 .63 11,970 .63 12,675 .66
Investment grade corporate securities:
AAA+ to AAA- ....................... 36,749 1.95 36,900 1.94 37,930 1.98
AA+ to AA- ......................... 153,408 8.12 153,276 8.06 154,056 8.05
A+ to A- ........................... 485,766 25.72 491,040 25.81 493,102 25.78
BBB+ to BBB- ....................... 388,898 20.59 395,277 20.78 396,662 20.73
Non-investment grade corporate
securities .......................... -- -- -- -- -- --
--------------------------------------------------------------------------
Total ................................ $1,888,586 100.00% $1,902,465 100.00% $1,913,029 100.00%
==========================================================================
[Enlarge/Download Table]
BOOK % OF CARRYING % OF MARKET % OF
1995 VALUE TOTAL VALUE TOTAL VALUE TOTAL
-------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents ............ $ 33,222 1.95% $ 33,222 1.89% $ 33,222 1.85%
Government Treasury and Agency
notes and bonds ..................... 96,435 5.66 101,895 5.81 107,660 5.99
Mortgage pass-throughs ............... 32,104 1.88 33,347 1.90 33,667 1.87
Agency Collateralized Mortgage
Obligations:
CMO -- Sequential pay .............. 5,445 .32 5,445 .31 5,507 .31
CMO -- Planned amortization class .. 616,271 36.17 620,785 35.39 638,969 35.53
CMO -- Accretion directed class .... 23,426 1.38 23,426 1.34 24,524 1.36
CMO -- Targeted amortization class . 11,862 .70 11,862 .68 13,228 .74
Investment grade corporate securities:
AAA+ to AAA- ....................... 43,650 2.56 44,015 2.51 46,694 2.60
AA+ to AA- ......................... 123,941 7.28 129,105 7.36 132,157 7.35
A+ to A- ........................... 325,710 19.12 339,005 19.33 346,502 19.26
BBB+ to BBB- ....................... 391,379 22.98 411,980 23.48 416,454 23.14
Non-investment grade corporate
securities .......................... -- -- -- -- -- --
--------------------------------------------------------------------------
Total ................................ $1,703,445 100.00% $1,754,087 100.00% 1,798,584 100.00%
==========================================================================
16
As part of its asset and liability management practices, LifeUSA manages
investments and credited interest rates to produce a net investment spread
consistent with priced-for expectations. As of December 31, 1996, the weighted
average credited interest rate for deferred annuities and life insurance
policies was 4.74% and the weighted average yield on the assets backing
liabilities was 7.48%. As of December 31, 1995, this weighted average credited
interest rate was 5.14% and the weighted average yield on the assets backing
liabilities was 7.52%. Investment income from the assets backing liabilities
exceeded interest credited to policyholders by $24.2 million during 1996. The
investment portfolio is managed primarily by allocating new cash flows into
investments which have yield, maturity and other characteristics suitable for
LifeUSA's expected policyholder liabilities. Consistent with LifeUSA's asset and
liability management practices, as of December 31, 1996, the modified duration
of LifeUSA's fixed income securities was 6.01 years, compared to 6.26 years as
of December 31, 1995.
The percentage of the total market value of the Company's portfolio that
was comprised of investment grade corporate obligations was 57% at December 31,
1996. With each corporate security acquisition, LifeUSA's external managers
perform a comprehensive analysis of the credit implications and outlook of the
issuing corporation and industry. Ongoing procedures for monitoring and
assessing any potential deterioration or downgrade in credit quality are also in
place. The Company's guidelines for the acquisition of corporate securities does
not allow the purchase of securities that are rated below investment grade by
Moody's Investors Service and Standard & Poor's Corporation.
The remainder of the Company's portfolio is comprised of government and
government agency obligations. Government and government agency obligations are
predominantly held in the form of Planned Amortization Class (PAC) CMOs, the
most conservative type of CMO issued. These CMOs are specifically structured to
provide the highest degree of protection against swings in repayments caused
primarily by changes in interest rates and have virtually no risk of default.
These securities are well-suited to fund the payment of the liabilities they
support.
Currently, the decision of the asset type in which to invest is dictated by
market conditions and relative values within the respective markets at the time
of purchase. Management believes that these asset types will allow the Company
to maintain high quality, consistent yields and proper maturities for the
overall portfolio.
As of December 31, 1996, the Company held 46%, or $878 million of the total
market value of its long term securities as available for sale. The Company
believes that this percentage is a prudent level that will allow enough
liquidity to meet any adverse cash flow experience. The Company continues to
classify a significant portion of its investment securities as held to maturity
based on its intent to hold such securities to maturity. A key feature of
LifeUSA's products is the provision of bonuses to encourage policyholders to
withdraw their funds over settlement periods lasting at least five years.
Policyholders taking cash settlements do not receive the bonuses. This feature
allows the Company to hold a significant amount of assets to maturity. Insurance
regulations require LifeUSA to perform an asset adequacy analysis each year to
determine if the assets are sufficient to fund future obligations. The Company's
asset adequacy analysis indicates that the assets are sufficient to fund future
obligations. The Company continually monitors and modifies the allocation of new
assets between held to maturity and available for sale as deemed prudent based
on the continuing analysis of cash flow projections and liquidity needs.
At December 31, 1996, the Company's shareholders' equity and book value per
share were $172.6 million and $8.23, respectively, compared to $156.9 million
and $7.72, respectively, at December 31, 1995. Excluding the effect of the net
unrealized gain on fixed maturity investments -- available for sale reported as
a separate component of shareholders' equity in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the
Company's shareholders' equity and book value per share were $169.3 million and
$8.07, respectively, at December 31, 1996, compared to $144.2 million and $7.09,
respectively, at December 31, 1995.
17
Statements other than historical information contained in this Report
are considered forward-looking and involve a number of risks and
uncertainties. In addition to the factors discussed in this Report,
there are other factors that could cause actual results to differ
materially from expected results including, but not limited to,
development and acceptance of new products, impact of changes in
federal and state regulation, dependence upon key personnel, changes in
interest rates generally and credited rates on the new business
retained or assumed by LifeUSA, the level of premium production,
competition and other risks described from time to time in the
Company's Securities and Exchange Commission filings, including but not
limited to the Form 10-K, copies of which are available from the
Company without charge.
18
LIFE USA HOLDING, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
[Enlarge/Download Table]
DECEMBER 31, DECEMBER 31,
1996 1995
--------------------------
ASSETS
Investments:
Fixed maturity investments (Note 3): Available for sale, at fair value
(amortized cost:
$864,400 at
December 31, 1996 and $761,553 at December 31, 1995) ................... $ 878,279 $ 812,195
Held to maturity, at amortized cost (fair value:
$1,013,761 at
December 31, 1996 and $953,167 at December 31, 1995) ................... 1,003,197 908,670
Policy loans .............................................................. 23,908 19,789
--------------------------
Total investments ..................................................... 1,905,384 1,740,654
Cash and cash equivalents ................................................... 20,989 33,222
Accrued investment income ................................................... 27,834 23,510
Future policy benefits recoverable and amounts due
from reinsurers (Note 2) ................................................... 2,179,999 1,862,311
Deferred policy acquisition costs ........................................... 212,138 175,296
Other assets ................................................................ 40,379 32,546
--------------------------
$ 4,386,723 $ 3,867,539
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits .................................................... $ 4,078,621 $ 3,566,012
Other policyholders' funds ................................................ 5,381 4,453
Amounts due reinsurers (Note 2) ........................................... 23,605 27,303
Accrued commissions to agents ............................................. 10,243 11,364
Taxes, licenses and fees payable .......................................... 17,868 18,913
Accounts payable .......................................................... 6,967 4,771
Convertible subordinated debentures (Note 5) .............................. 36,030 36,030
Deferred income taxes ..................................................... 12,924 19,640
Other liabilities ......................................................... 22,469 22,157
--------------------------
Total liabilities ........................................................ 4,214,108 3,710,643
Commitments and contingencies (Notes 2 and 4)
Shareholders' equity (Notes 7 and 11):
Preferred stock, $.01 par value; 15,000,000 shares
authorized, none issued .................................................. -- --
Common stock, $.01 par value; 45,000,000 shares authorized,
20,953,517 shares issued and outstanding (20,279,343 shares
at December 31, 1995) .................................................... 210 203
Common stock to be issued, 21,384 shares (45,404 shares at
December 31, l995) ....................................................... 357 382
Additional paid-in capital ................................................ 86,474 80,931
Notes receivable from stock sales ......................................... (3,888) --
Net unrealized gain on fixed maturity investments --
available for sale (Note 3) .............................................. 3,335 12,707
Retained earnings ......................................................... 86,127 62,673
--------------------------
Total shareholders' equity ............................................... 172,615 156,896
--------------------------
$ 4,386,723 $ 3,867,539
==========================
SEE ACCOMPANYING NOTES.
19
LIFE USA HOLDING, INC.
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
---------------------------------------
Revenues:
Policyholder charges .................................. $ 46,842 $ 35,983 $ 21,659
Net investment income (Note 3) ........................ 129,412 109,092 74,510
Net realized gains on investments (Note 3) ............ 1,791 7,634 1,183
Commissions and expense allowances, net (Note 2) ...... 137,734 119,846 108,899
Other ................................................. 1,119 226 62
---------------------------------------
Total revenues ....................................... 316,898 272,781 206,313
Expenses:
Interest credited to policyholder account
values ............................................... 99,517 84,665 58,405
Other benefits to policyholders ....................... 17,414 14,698 6,706
Amortization of deferred policy acquisition
costs ................................................ 24,495 22,096 11,643
Commissions ........................................... 80,093 71,575 63,988
Taxes, licenses and fees .............................. 3,596 7,734 6,678
Operating expenses .................................... 54,718 42,052 35,861
---------------------------------------
Total expenses ....................................... 279,833 242,820 183,281
---------------------------------------
Income before income taxes .............................. 37,065 29,961 23,032
Income taxes (Note 8) ................................... 13,611 10,864 8,563
---------------------------------------
Net income .............................................. $ 23,454 $ 19,097 $ 14,469
=======================================
Income per common and common equivalent share:
Primary ............................................... $ 1.04 $ .88 $ .71
=======================================
Fully diluted ......................................... $ 1.04 $ .88 $ .71
=======================================
Number of shares used in per share calculation:
Primary ............................................... 23,350,431 22,521,604 20,409,047
Fully diluted ......................................... 23,402,846 22,527,463 20,424,921
SEE ACCOMPANYING NOTES.
20
LIFE USA HOLDING, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
------------------------------------
Cash flows from operating activities:
Net income ............................................ $ 23,454 $ 19,097 $ 14,469
Adjustments to reconcile net income to net cash
used in operating activities:
Accretion of discount on investments, net ........... (2,441) (4,344) (4,439)
Net realized gains on investments ................... (1,791) (7,634) (1,183)
Policy acquisition costs deferred ................... (38,992) (65,460) (60,664)
Amortization of deferred policy acquisition costs ... 24,495 22,096 11,643
Convertible subordinated debentures (Note 5) ........ -- (11) (310)
Deferred income tax (benefit) provision ............. (1,669) 2,180 4,032
Changes in operating assets and liabilities (Note 10) (13,347) (7,594) (10,864)
Stock compensation (Note 7) ......................... 1,436 831 943
-----------------------------------
Net cash used in operating activities ................... (8,855) (40,839) (46,373)
Cash flows from investing activities:
Fixed maturity investments-available for sale:
Purchases ........................................... (152,389) (397,171) (320,904)
Proceeds from sales ................................. 42,542 382,606 63,646
Proceeds from maturities and principal payments on
mortgage-backed securities ......................... 9,081 4,984 5,319
Transfer from fixed maturity investments-held to
maturity ........................................... -- (339,470) --
Fixed maturity investments-held to maturity:
Purchases ........................................... (102,603) (442,085) (116,233)
Proceeds from maturities and principal payments on
mortgage-backed securities ......................... 10,227 9,532 11,488
Transfer to fixed maturity investments-available for
sale ............................................... -- 339,470 --
Investments in and loans to field marketing
organizations ...................................... (10,469) -- --
Acquisition of Fidelity Union Life Insurance Company .. -- -- (1,100)
-----------------------------------
Net cash used in investing activities ................... (203,611) (442,134) (357,784)
Cash flows from financing activities:
Receipts from universal life and investment products .. 294,529 471,226 432,034
Withdrawals on universal life and investment products . (208,523) (140,462) (80,401)
Interest credited to policyholders .................... 99,517 84,665 58,405
Proceeds from exercise of stock options and warrants .. 226 195 937
Proceeds from convertible subordinated debenture
issuance ............................................. -- 30,000 --
Other financing activities ............................ 14,484 12,851 4,709
-----------------------------------
Net cash provided by financing activities ............... 200,233 458,475 415,684
-----------------------------------
Net (decrease) increase in cash and cash equivalents .... (12,233) (24,498) 11,527
Cash and cash equivalents at beginning of the year ...... 33,222 57,720 46,193
-----------------------------------
Cash and cash equivalents at end of the year ............ $ 20,989 $ 33,222 $ 57,720
===================================
Cash paid during the year for interest .................. $ 1,984 $ 1,223 $ 473
===================================
Cash paid during the year for income taxes .............. $ 16,263 $ 8,000 $ 6,634
===================================
SEE ACCOMPANYING NOTES.
21
LIFE USA HOLDING, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
[Enlarge/Download Table]
NUMBER
OF COMMON COMMON
STOCK SHARES STOCK
---------------------
Balance at December 31, 1993 ................................... 19,978,118 $200
Cumulative effect of change in accounting principle.............
Issuance of common shares to Employee Savings Plan ............. 81,734 1
Issuance of shares through conversion of convertible
subordinated debentures ....................................... 17,019 0
Issuance of shares through exercise of options ................. 74,581 1
Issuance of shares through exercise of warrants ................ 16,134 0
Conversion repurchase .......................................... 1,794 0
Common stock to be issued-shares, net of
191,262 shares issued ......................................... 10,237
Change in net unrealized gain (loss) on fixed maturity
investments -- available for sale..............................
Net income......................................................
--------------------
Balance at December 31, 1994 ................................... 20,179,617 202
Issuance of common shares to Employee Savings Plan ............. 95,028 1
Issuance of shares through conversion of convertible
subordinated debentures ....................................... 571 0
Issuance of shares through exercise of options ................. 26,627 0
Common stock to be issued-shares, net of 122,226 shares issued . 22,904
Change in net unrealized gain (loss) on fixed maturity
investments -- available for sale..............................
Net income......................................................
--------------------
Balance at December 31, 1995 ................................... 20,324,747 203
Issuance of common shares to Employee Savings Plan ............. 167,457 2
Issuance of shares through field marketing organization loan
program ....................................................... 478,262 5
Issuance of shares through exercise of options ................. 28,455 0
Common stock to be issued-shares, net of 674,174 shares issued . (24,020)
Change in net unrealized gain on fixed maturity
investments -- available for sale..............................
Net income......................................................
--------------------
Balance at December 31, 1996 ................................... 20,974,901 $210
====================
SEE ACCOMPANYING NOTES.
22
(WIDE TABLE CONTINUED)
[Enlarge/Download Table]
NET UNREALIZED
NOTES GAIN (LOSS) ON
COMMON ADDITIONAL RECEIVABLE FIXED MATURITY TOTAL
STOCK TO PAID-IN FROM INVESTMENTS- RETAINED SHAREHOLDERS'
BE ISSUED CAPITAL STOCK SALES AVAILABLE FOR SALE EARNINGS EQUITY
-----------------------------------------------------------------------------------------
$ 192 $77,705 $29,107 $107,204
$ 831 831
(943) 942 --
308 308
839 840
97 97
4 4
914 914
(17,751) (17,751)
14,469 14,469
-----------------------------------------------------------------------------------------
163 79,895 (16,920) 43,576 106,916
(831) 830 --
11 11
195 195
1,050 1,050
29,627 29,627
19,097 19,097
-----------------------------------------------------------------------------------------
382 80,931 12,707 62,673 156,896
(1,436) 1,434 --
3,883 $(3,888) --
226 226
1,411 1,411
(9,372) (9,372)
23,454 23,454
-----------------------------------------------------------------------------------------
$ 357 $86,474 $(3,888) $ 3,335 $86,127 $172,615
=========================================================================================
SEE ACCOMPANYING NOTES.
23
LIFE USA HOLDING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Life USA Holding, Inc. (the Company) was incorporated on February 26, 1987
in the State of Minnesota for the purpose of acquiring, managing and funding the
operations of a life insurance company. During 1987, the Company acquired
Financial Assurance, Incorporated (FAI), a Colorado domiciled stock life
insurance company, authorized to issue life insurance products in 40 states and
the District of Columbia. After the acquisition, the Company changed the name of
FAI to LifeUSA Insurance Company, which conducts its life insurance business
under the registered trade name of "LifeUSA."
During 1994, the Company acquired Fidelity Union Life Insurance Company
(FULICO), a Minnesota domiciled shell life insurance company authorized to issue
life insurance products in 49 states (excluding only New York) and the District
of Columbia, and subsequently merged LifeUSA and FULICO into a single company.
The surviving company retained the LifeUSA name and is domiciled in Minnesota,
where the Company is headquartered.
LifeUSA sells a variety of innovative life insurance and annuity products
which offer long-term retirement benefits to consumers who seek protection
against outliving their financial resources. These products are sold by a
national marketing and distribution system comprised of independent agents and
home office staff.
During 1996, the Company formed two additional wholly-owned subsidiaries,
LifeUSA Securities, Inc. (LifeUSA Securities) and LifeUSA Marketing, Inc.
(LifeUSA Marketing). LifeUSA Securities has received approval from the National
Association of Securities Dealers, Inc. as a wholesale broker-dealer, will
initially market a family of LifeUSA mutual funds established through a
joint-venture agreement with a $16 billion asset management firm and is
exploring distribution of variable life insurance and annuity contracts. LifeUSA
Marketing conducts a variety of marketing activities for the Company, including
the acquisition of and investment in national field marketing organizations.
During 1996, LifeUSA Marketing acquired Tax Planning Seminars and a minority
equity interest in Creative Marketing International Corporation, both national
field marketing organizations.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, LifeUSA, LifeUSA Securities and
LifeUSA Marketing. All intercompany accounts and transactions have been
eliminated in consolidation.
INVESTMENTS
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." The adoption of SFAS No. 115 increased the carrying
value of available for sale investments by $1.8 million. This amount was offset
by a reduction in deferred policy acquisition costs of $.4 million and the
recording of a $.6 million deferred tax liability, resulting in a net unrealized
gain of $.8 million which was recorded as a separate component of shareholders'
equity.
The Company classifies investments at the time of purchase as held to
maturity or available for sale. Investments which the Company has the ability
and positive intent to hold to maturity are so classified and carried at
amortized cost. All other investments are classified as available for sale and
carried at fair value, with unrealized gains and losses reported as a separate
component of shareholders' equity.
The Company anticipates prepayments in the accounting for discounts and
premiums related to its Collateralized Mortgage Obligation (CMO) investments. As
differences arise between actual and anticipated prepayments, the effective
yield of CMOs is recalculated to reflect actual prepayments to date and
anticipated future prepayments. The net investment in the CMOs is then adjusted
to the amount that would have existed had the new effective yield been applied
since the acquisition of the CMOs.
24
Realized gains and losses on sales of available for sale investments are
recorded as revenue using the specific identification method. In addition, the
amortization of deferred policy acquisition costs and other benefits to
policyholders are adjusted for gains and losses realized on sales of available
for sale investments which support policyholder liabilities. Changes in the fair
value of available for sale investments are reflected directly in shareholders'
equity, net of related adjustments for deferred policy acquisition costs and
deferred taxes and related valuation allowances that would have been recorded if
these investments would have been sold as of the balance sheet date.
Investments that are determined to have a decline in value that is other
than temporary are written down to estimated fair value. This value becomes the
investment's new cost basis and the amount of the write down is recorded as a
realized loss.
CASH AND CASH EQUIVALENTS
The Company considers investments with a maturity at the date of their
acquisition of three months or less to be cash equivalents. The carrying amounts
reported in the balance sheet for these financial instruments are based on cost
and approximate fair value.
ACCOUNTING FOR CEDED COMMISSIONS AND EXPENSE ALLOWANCES
Commissions and expense allowances, and the expenses associated with these
revenues, are recognized in the period in which life insurance premiums and
annuity deposits are ceded. The net cost of reinsurance for life insurance
policies is realized ratably over the life of the affected business in relation
to gross profits.
ACCOUNTING FOR LIFE INSURANCE POLICIES AND ANNUITY CONTRACTS
Revenues from universal life insurance, single premium life insurance and
annuities represent amounts assessed against policyholders and are reported in
the period that the amounts are assessed. The liability for future policy
benefits for universal life insurance, single premium life insurance and
annuities is equal to the sum of the balance that accrues to the benefit of
policyholders, any amounts that have been assessed to compensate the insurer for
services to be performed over future periods, an accrual for future retirement
bonuses and any amounts previously assessed against policyholders that are
refundable on termination of the contract. The liability for contracts in a
payout status is based on the 1983 Individual Annuity Table at interest rates
ranging from 5.5% to 8.5%.
The Company reports assets and liabilities related to ceded life insurance
and annuity contracts on a gross basis. Specifically, account values ceded to
reinsurers are reflected as a receivable and the liability for future policy
benefits is recorded on a gross basis.
For business written directly, LifeUSA defers the cost of acquiring new
business, principally sales compensation, policy issue costs, underwriting and
other related sales expenses. LifeUSA defers the same proportion of costs of
acquiring new business as the proportion of business retained. For business
produced by LifeUSA's agents for Allianz Life Insurance Company of North America
(Allianz Life) and assumed by LifeUSA, the amount of the allowance paid by
LifeUSA to Allianz Life as the cost of acquiring new business is deferred. These
deferred costs are amortized over the lives of the policies in proportion to the
estimated gross profits expected to be realized on the policies.
ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS
In accordance with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company applies Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its stock option plans. Note 7 to the
Consolidated Financial Statements contains a summary of the pro forma effects to
reported net income and earnings per share for 1996 and 1995 as if the Company
had elected to recognize compensation cost based on the fair value of the
options granted as prescribed by SFAS No. 123.
25
STATE GUARANTY FUND ASSESSMENTS
The Company uses the accrual basis of accounting to record its liability
for state guaranty fund assessments. The liability recorded includes a provision
for anticipated assessments that is calculated using data available from various
industry sources that monitor the current status of open and closed insolvencies
and report the premium base utilized by each state in calculating amounts
assessed to individual insurers. Although additional provisions may be required,
the Company is currently unaware of any significant pending assessments
requiring accrual.
The Company has also established an asset for assessments expected to be
recovered through future premium tax offsets. Although changing legislative
initiatives may affect the right to offset, the Company is currently unaware of
any such initiatives affecting the recoverability of the asset recorded at
December 31, 1996.
In December 1996, the American Institute of Certified Public Accountants
released an exposure draft of a proposed Statement of Position (SOP) titled
"Accounting by Insurance and Other Enterprises for Guaranty-Fund and Certain
Other Insurance-Related Assessments," for the purpose of soliciting comments on
all matters addressed by the proposed SOP. Because the proposed SOP may be
changed significantly prior to its issuance as a final document, the Company has
not determined the impact of the proposed SOP on its financial position or
operating results.
INCOME PER SHARE
Primary income per share is computed based on the weighted average number
of shares outstanding, assuming conversion of all stock options and warrants
having exercise prices less than the average market price of the common stock
using the treasury stock method. The dilutive effect of debentures considered to
be common stock equivalents is included in the primary earnings per share
calculation using the if-converted method. Fully diluted income per share is
computed based on the weighted average number of shares outstanding assuming
conversion of all stock options and warrants having exercise prices less than
the greater of the average or the year-end market price of the common stock
using the treasury stock method. The dilutive effect of all debentures is
included in the fully diluted earnings per share calculation using the
if-converted method.
INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between the financial reporting basis and the tax basis of the Company's assets
and liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW FINANCIAL ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 125 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996, and is to be applied prospectively. Retroactive application
of SFAS No. 125 is not permitted. The Company is in the process of evaluating
whether SFAS 125 applies to annuity business written directly by LifeUSA that is
ceded under the terms of reinsurance agreements and therefore has not been able
to determine the impact of adoption on its financial position or operating
results. If found to be applicable, SFAS No. 125 will be adopted by the Company
in the first quarter of 1997.
RECLASSIFICATIONS
Certain 1995 and 1994 amounts have been reclassified to conform to the 1996
presentation.
26
2. REINSURANCE
Since its inception in 1987, LifeUSA has entered into various agreements to
reinsure a substantial portion of the new life insurance and annuity business
written each year. Entering into these reinsurance agreements has allowed
LifeUSA to write a larger volume of business than it would otherwise have been
able to write due to regulatory restrictions based on the amount of its
statutory capital and surplus.
In addition, under the terms of agreements between the Company and Allianz
Life, LifeUSA agents have produced life insurance and annuity business on
Allianz Life policies which are similar to LifeUSA policies. LifeUSA has assumed
a portion of this business under reinsurance agreements.
The Company receives commissions and expense allowances on the portions of
the LifeUSA life insurance and annuity products reinsured and service fees on
business produced by LifeUSA's agents and written by Allianz Life. The
commissions and expense allowances and service fees received on life insurance
policies are approximately 150% of the first-year planned target premium and
range from 12-1/2 % to 18% of renewal and first-year excess premiums. The
Company also receives commissions and expense allowances and service fees
ranging from 6-1/2 % to 22% on annuity deposits. An additional allowance equal
to .20% of the account value of all annuities issued after April 1, 1991 is
received as of the beginning of policy years two through ten.
REINSURANCE CEDED
LifeUSA ceded from 95% to 100% of its new life insurance and annuity
business to Transamerica Occidental Life Insurance Company (TOLIC) from 1987
through March 31, 1991, and from April 1, 1991 through December 31, 1992, ceded
100% of its new business equally to the following three reinsurers (the
Reinsurers):
* Employers Reassurance Corporation, a subsidiary of Employers
Reinsurance Corporation, a member of the General Electric Company
group;
* Munich American Reassurance Company, a subsidiary of Munich Reinsurance
Company, one of the largest German insurance companies; and
* Republic-Vanguard Life Insurance Company, a member of the Winterthur
Swiss Insurance Group, one of the largest Swiss insurance companies.
From 1990 through 1992, TOLIC and the Reinsurers retroceded 25% to 30% of
this business back to LifeUSA. Effective December 31, 1992, the retrocession
agreement with the Reinsurers was terminated with respect to new business
written by LifeUSA after that date. From 1993 through 1996, LifeUSA retained a
portion of its new business and ceded the remainder equally to the Reinsurers.
Effective January 1, 1996, Munich American Reassurance Company reduced its share
of the new business ceded by LifeUSA to the Reinsurers to 20%, while both
Employers Reassurance Corporation and Republic-Vanguard Life Insurance Company
increased their share of this business to 40%.
During 1994, an agreement was reached with TOLIC and the Reinsurers to
unwind the retrocession agreements in effect from 1990 through 1992 and record
all business written under the terms of those agreements as direct reinsurance.
As a result, LifeUSA has accounted for all business previously retroceded to
LifeUSA from TOLIC and the Reinsurers as being retained by LifeUSA and all
business ultimately assumed by TOLIC and the Reinsurers as being ceded to TOLIC
and the Reinsurers by LifeUSA at issuance. This change had no impact on the
Company's financial position or operating results for any period presented. All
disclosures in these notes reflect the unwinding of the retrocession agreements
as discussed in this paragraph.
27
The following table shows the percentages of new life insurance and annuity
business written by LifeUSA that have been ceded to TOLIC and the Reinsurers
since inception:
LIFE INSURANCE ANNUITY
-------------- -------
September 1987 - December 1988.. 100% 100%
January 1989 - December 1989 ... 95 100
January 1990 - December 1990 ... 75 75
January 1991 - December 1992 ... 70 75
January 1993 - June 1993 ....... 65 65
July 1993 - September 1995 ..... 50 50
October 1995 - Present ......... 75 75
The reinsurance agreements require the Reinsurers' approval of policy forms
and terms of LifeUSA's products reinsured by the Reinsurers. Under these
agreements, $437.9 million, $350.8 million and $286.1 million of premiums and
deposits were ceded to the Reinsurers and TOLIC by LifeUSA for the years ended
December 31, 1996, 1995 and 1994, respectively.
When a life insurance policy ceded to TOLIC or the Reinsurers lapses before
the end of 13 months, the Company has agreed to pay a chargeback equal to the
excess of the allowances received over the premiums received. As of December 31,
1996 and 1995, the reserve for lapsed policy chargebacks was $700,000 and
$650,000, respectively.
Reporting assets and liabilities related to reinsurance ceded on a gross
basis reflects the possibility that reinsured risks could become a liability to
the Company in the event the Reinsurers or TOLIC become unable to meet the
obligations they have assumed. Any restriction, limitation or condition imposed
by the Reinsurers could have a material effect on LifeUSA's ability to write new
business if LifeUSA was not able to replace the current reinsurers.
REINSURANCE ASSUMED
All new life insurance and annuity business produced by LifeUSA's agents
and written by Allianz Life from 1987 through 1994 was ceded to TOLIC. Effective
January 1, 1990, LifeUSA entered into a retrocession agreement with TOLIC to
assume a portion of this business. During 1994, LifeUSA terminated the
retrocession agreement with TOLIC and entered into an agreement with Allianz
Life to assume a portion of this business directly from Allianz Life effective
January 1, 1995. Under these agreements, $122.7 million, $175.5 million and
$182.0 million of premiums and deposits were assumed by LifeUSA from Allianz
Life and TOLIC for the years ended December 31, 1996, 1995 and 1994,
respectively.
The following table shows the percentages of new life insurance and annuity
business produced by LifeUSA's agents and written by Allianz Life that have been
assumed by LifeUSA since inception:
LIFE INSURANCE ANNUITY
-------------- -------
September 1987 - December 1989.. --% --%
January 1990 - December 1990 ... 25 25
January 1991 - December 1991 ... 30 25
January 1992 - June 1993 ....... 50 30
July 1993 - September 1995 ..... 50 50
October 1995 - Present ......... 25 25
28
MAINTENANCE EXPENSES
The Company is obligated to continue servicing the underlying life
insurance and annuity policies written directly by LifeUSA or produced by
LifeUSA's agents for Allianz Life. For policies issued prior to 1991, the
Company believes that the present value of anticipated future expenses required
to service policies that have been ceded will exceed the present value of
anticipated future renewal allowances by $250,000, and has accrued a liability
for that amount. This requires estimating renewal allowances and servicing costs
many years into the future, and it is possible that actual future renewal
allowances and servicing costs will not conform to the assumptions inherent in
the current estimation of allowances and costs. Management continuously monitors
actual renewal allowance and servicing cost experience as it emerges and, should
material changes in the assumptions occur, the liability will be modified to the
extent that the present value of future servicing costs is expected to exceed
the present value of future renewal allowances.
3. INVESTMENTS
The amortized cost and fair value of fixed maturity investments as of
December 31 are as follows (in thousands):
[Enlarge/Download Table]
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------
1996:
AVAILABLE FOR SALE
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 11,839 $ 1,023 $ 19 $ 12,843
Foreign government obligations ............ 59,096 1,432 509 60,019
Investment grade corporate obligations .... 611,958 19,264 7,592 623,630
Mortgage-backed securities ................ 181,507 1,969 1,689 181,787
---------------------------------------------------
$ 864,400 $23,688 $9,809 $ 878,279
===================================================
HELD TO MATURITY
U.S. Treasury securities and obligations of
U.S. government corporations and agencies. $ 17,409 $ 3,382 $ -- $ 20,791
Foreign government obligations ............ 10,638 325 79 10,884
Investment grade corporate obligations .... 452,863 7,768 2,511 458,120
Mortgage-backed securities ................ 522,287 8,791 7,112 523,966
---------------------------------------------------
$1,003,197 $20,266 $9,702 $1,013,761
===================================================
29
[Enlarge/Download Table]
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------
1995:
AVAILABLE FOR SALE
U.S. Treasury securities and obligations of
U.S government corporations and agencies . $ 11,518 $ 1,581 $ 3 $ 13,096
Foreign government obligations ............ 58,100 3,882 -- 61,982
Investment grade corporate obligations .... 521,320 39,423 -- 560,743
Mortgage-backed securities ................ 170,615 5,884 125 176,374
-------------------------------------------------
$761,553 $50,770 $128 $812,195
=================================================
HELD TO MATURITY
U.S. Treasury securities and obligations of
U.S government corporations and agencies . $ 16,148 $ 4,978 $ -- $ 21,126
Foreign government obligations ............ 10,669 787 -- 11,456
Investment grade corporate obligations .... 351,725 17,131 -- 368,856
Mortgage-backed securities ................ 530,128 21,671 70 551,729
-------------------------------------------------
$908,670 $44,567 $ 70 $953,167
=================================================
Fair values for investments are based on quoted market prices. No holdings
of any issuer are greater than 5% of the Company's total investments in fixed
maturities, other than direct or guaranteed obligations of the United States
government or United States government corporations and agencies. The foreign
government obligations held are denominated in U.S. dollars and issued and
traded in the United States.
The amortized cost and fair value of fixed maturity investments at December
31, 1996, by contractual maturity, are as follows (in thousands):
[Enlarge/Download Table]
AVAILABLE FOR SALE HELD TO MATURITY
--------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------------------------------------------------
Due in one year or less .............. $ 5,224 $ 5,285 $ -- $ --
Due after one year through five years 11,898 11,892 157,624 156,887
Due after five years through ten years 301,185 315,358 185,171 189,984
Due after ten years .................. 364,586 363,957 138,115 142,924
--------------------------------------------------
682,893 696,492 480,910 489,795
Mortgage-backed securities ........... 181,507 181,787 522,287 523,966
-------------------------------------------------
Total ................................ $ 864,400 $878,279 $1,003,197 $1,013,761
==================================================
Expected maturities in the foregoing table may differ from contractual
maturities because borrowers may have the right to prepay obligations with or
without prepayment penalties.
30
During 1996, 1995 and 1994, the Company sold certain investments classified
as available for sale. Proceeds from these sales were immediately reinvested in
investments of a similar high grade as those investments sold. Gross gains of
$1.9 million, $9.4 million and $2.0 million were realized on these sales in
1996, 1995 and 1994, respectively. Gross losses of $.1 million, $1.8 million and
$.8 million were realized on these sales in 1996, 1995 and 1994, respectively.
The recognition of these net realized gains resulted in an increase in the
amortization of deferred policy acquisition costs and an increase in other
benefits to policyholders of $1.2 million, $4.8 million and $.2 million in 1996,
1995 and 1994, respectively.
As permitted by the special report entitled "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities -- Questions and Answers," issued by the FASB in November 1995, the
Company transferred certain securities from held to maturity to available for
sale on November 20, 1995. Prior to their transfer, the held to maturity
securities were carried at a total amortized cost of $339.5 million. Unrealized
gains of $1.1 million were recorded upon transferring these securities to
available for sale, where they are carried at fair value.
The components of net investment income are as follows (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
-----------------------------------
Fixed maturities ............ $ 128,629 $ 106,566 $ 73,458
Cash and cash equivalents.... 1,403 3,090 1,544
Policy loans ................ 519 356 249
Agent advances .............. 94 133 74
-----------------------------------
130,645 110,145 75,325
Investment expenses ......... (1,233) (1,053) (815)
-----------------------------------
Net investment income ....... $ 129,412 $ 109,092 $ 74,510
===================================
LifeUSA has entered into investment management agreements with Investment
Advisers, Inc. (IAI) and Allianz Investment Corporation, an affiliate of Allianz
Life. For their services, IAI and Allianz Investment Corporation are paid a fee
based on the market value of investments at the end of each quarter. For the
years ended December 31, 1996, 1995 and 1994, LifeUSA paid a total of $1.0
million, $.8 million and $.6 million, respectively, for investment management
services.
Fixed maturity investments with a total carrying value of $7.6 million are
on deposit with various states in support of statutory requirements as of
December 31, 1996.
The net unrealized gain on fixed maturity investments -- available for sale
included in shareholders' equity consists of the following at December 31 (in
thousands):
1996 1995
--------------------
Gross unrealized gain on fixed maturity
investments -- available for sale ........ $ 13,879 $ 50,642
Adjustments for:
Deferred tax liability ................. (4,858) (17,725)
Deferred policy acquisition costs ...... (8,748) (31,093)
Deferred tax asset ..................... 3,062 10,883
--------------------
Net unrealized gain on fixed maturity
investments -- available for sale ........ $ 3,335 $ 12,707
====================
31
4. LINE OF CREDIT
On May 17, 1996, the Company entered into a line of credit agreement with
two of the Reinsurers that can be used to fund certain investments and
acquisitions the Company may make, capital contributions to LifeUSA or capital
expenditures. The maximum borrowing allowed under this agreement is $30 million
(no amounts outstanding at December 31, 1996). Borrowings under the line of
credit may be made through May 17, 1999, will mature on March 31, 2001 and will
be subject to mandatory repayments from 25% of excess cash flow (as defined) for
the prior calendar year on June 30, 1999 and March 31, 2000. The line of credit
agreement contains various financial covenants, including maintenance of minimum
levels of consolidated tangible net worth for the Company and statutory capital
and surplus and risk-based capital for LifeUSA. The Company is required to pay a
commitment fee of 1/4 of 1% per annum on the average daily unused portion of the
credit line.
5. CONVERTIBLE SUBORDINATED DEBENTURES
During 1995, Allianz Life purchased a 15-year, $30 million convertible
subordinated debenture from the Company. The interest rate on the convertible
subordinated debenture is fixed at 5% per annum for the first five years. In
years 6 through 15, the debenture will be amortized in equal semi-annual
payments of $1.5 million, with interest set annually at LIBOR (London Interbank
Offering Rate) plus 1% per annum.
During the first five years, Allianz Life may convert the debenture into
the Company's common stock at $12.40 per share (subject to customary
anti-dilution adjustments). During years 6 through 10, the conversion price is
the higher of $12.40 per share (subject to customary anti-dilution adjustments)
or two times the Company's GAAP (Generally Accepted Accounting Principles) book
value per share, as calculated at the end of the month preceding conversion. The
debenture may be redeemed by the Company at any time without penalty.
Contemporaneous with the issuance of the debenture to Allianz Life, the
Company also issued Allianz Life, for no additional consideration, a conversion
protection warrant to acquire 2.4 million shares of the Company's common stock
at $12.40 per share, which is only exercisable if the debenture is redeemed
prior to February 17, 2000 and the average trading price for the Company's
common stock has not been at least $15.625 per share for any consecutive 45
trading days. The conversion protection warrant expires on the earlier of (i)
February 17, 2000, or (ii) 30 days after the Company has notified Allianz Life
that the average trading price for the Company's common stock has been at least
$15.625 per share for any consecutive 45 trading days.
The agreements also grant Allianz Life preemptive rights to acquire
additional shares of the Company's common stock equal to 10.5% of (i) the number
of shares of the Company's common stock deemed outstanding for the purpose of
computing fully diluted earnings per share under the treasury stock method of
accounting as of the end of the month immediately preceding the notice of
exercise of preemptive rights, less (ii) 22,857,142. The exercise price per
share is equal to the lesser of (i) $12.40 or (ii) the weighted average price at
which shares of the Company's common stock have been issued subsequent to
February 17, 1995, subject to certain exceptions and customary anti-dilution
adjustments.
Allianz Life also has observer rights at the meetings of the Boards of
Directors of the Company and LifeUSA so long as the convertible debt is held by
Allianz Life or its affiliates, or 2.0 million shares of the Company's common
stock are owned by Allianz Life or its affiliates. In addition, in the event
that the convertible debt is converted in its entirety into the Company's common
stock and so long as Allianz Life owns at least 2.0 million shares of the
Company's common stock, Allianz Life will have the right to designate one
director of the Company and one director of LifeUSA.
32
Prior to 1993, the Company's agents and employees earned convertible
subordinated debentures as compensation. At December 31, 1996, $6.0 million of
these debentures are outstanding. The debentures bear an 8% fixed interest rate
which is payable annually. The debentures mature on June 30, 2000 or sooner at
the option of the Company or mandatorily upon the sale of the Company. Subject
to certain conditions, the debentures may be converted into shares of the
Company's common stock at a conversion price of $22.50 per share through June
30, 1997. This conversion price increases by $1.50 per year up to a maximum of
$27.00 per share. The debentures are subordinate to all present and future
indebtedness of the Company, including lease obligations. During 1995 and 1994,
$11,000 and $309,000 of debentures were converted to 571 and 17,019 shares of
common stock, respectively.
The Allianz Life debenture is a common stock equivalent for the purpose of
calculating the Company's primary earnings per share, while the debentures
outstanding to the Company's agents and employees are not considered to be
common stock equivalents.
6. LEASES
The Company leases office space, telephone equipment and furniture under
operating leases expiring in various years through February 2001, with rights to
lease additional office space at specified future dates and options to renew the
leases for office space for an additional eight years and ten months from the
expiration date. The office lease payments are subject to adjustment for real
estate taxes and maintenance expenses. Rent expense on these operating leases
charged to operations was $1.5 million, $1.3 million and $1.4 million for the
years ended December 31, 1996, 1995 and 1994, respectively.
Minimum future rental payments under noncancelable operating leases having
remaining terms in excess of one year as of December 31, 1996 are as follows (in
thousands):
1997..................... $1,913
1998..................... 1,938
1999..................... 2,132
2000..................... 2,132
2001..................... 356
------
$8,471
======
7. CAPITAL STRUCTURE
PREFERRED STOCK
The Board of Directors has the authority to designate additional classes of
preferred stock and the rights and preferences of any class of preferred stock
from the 15 million authorized preferred shares. The issuance of preferred stock
may adversely affect various rights, including voting rights, of the common
shareholders and may be used as an anti-takeover device.
STOCK WARRANTS
In September 1992, the Company entered into an agreement with Lions Gate
Capital Ltd. (Lions Gate) whereby Lions Gate assisted the Company in investor
relations matters through August 1993. As compensation for its services, Lions
Gate was issued a warrant to acquire 192,000 shares of common stock. Lions Gate
could elect monthly to receive all or a part of each month's compensation in
cash instead of that month's portion of the warrant. The number of shares under
this warrant was reduced by the amount of cash compensation Lions Gate elected
to receive. Lions Gate received cash totaling $15,500 during the period covered
by the agreement. As of December 31, 1996 and 1995, there were outstanding
warrants originally issued to Lions Gate for 176,500 shares of common stock at
an exercise price of $10.00 per share, subject to certain adjustments. These
warrants expire on September 30, 1997. No further warrants are issuable to Lions
Gate.
33
COMMON STOCK TO BE ISSUED
In connection with employee and Company contributions to the Life USA
Holding, Inc. Employee Savings Plan (Savings Plan), 21,384 shares of common
stock are to be issued at a price of $12.00 per share at December 31, 1996 and
45,404 shares of common stock were to be issued at prices of $8.00 to $9.00 per
share at December 31, 1995 to employee accounts under the Savings Plan.
NOTES RECEIVABLE FROM STOCK SALES
During 1996, the Company issued common stock to several of its field
marketing organizations (FMOs) in exchange for promissory notes in order to
provide additional incentives for the FMOs to increase the life insurance and
annuity business produced for LifeUSA or through LifeUSA under its joint
marketing agreement with Allianz Life. The shares of common stock issued for the
account of the FMO are held in the possession of the Company as security for the
repayment of the promissory note. The promissory notes bear interest at the rate
of 8% per annum compounded monthly and payable at maturity (the fifth
anniversary of the date of the note).
STOCK OPTION PLANS
The Company has elected to follow APB No. 25 and related Interpretations in
accounting for its stock options because, as discussed below, the alternative
fair value accounting provided for under SFAS No. 123 requires the use of highly
subjective option valuation models that were developed for use in valuing
publicly traded stock options. Under APB No. 25, no compensation cost is
recognized since the exercise price of the Company's stock options is equal to,
or greater than, the market price of the underlying stock on the date of grant.
The binomial and Black and Scholes option valuation models were developed
for use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options. To further facilitate the
use of the information disclosed, a range of reasonable values also is presented
with the Company's pro forma information to reflect the variability of the
results of the valuation process that would arise from changes made to the
assumptions.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined using binomial option
valuation models as if the Company had accounted for its employee stock options
under the fair value method of that Statement. The assumptions used for each
stock option plan are included in the discussion of that specific plan.
In 1990, the Company established the Life USA Holding, Inc. 1990 Stock
Option Plan (the 1990 Stock Option Plan). The 1990 Stock Option Plan provides
for the granting of stock options to employees and consultants of the Company.
An aggregate of 4 million shares of common stock is reserved for issuance upon
the exercise of the options granted. The purchase price of the shares of common
stock subject to options granted under the 1990 Stock Option Plan is determined
by a committee of the Board of Directors and cannot be less than 100% of the
fair market value on the date the option is granted for incentive stock options
and cannot be less than 85% of the fair market value on the date the option is
granted for non-qualified options. No options may be granted under the 1990
Stock Option Plan after September 2000. The option vesting period and exercise
period are determined by the committee at the date of the grant. The vesting
periods range from zero to four years. During 1996, the committee determined
that the life of all outstanding employee stock options issued with a five year
life would be extended to ten years and all future employee stock option grants
would be issued with a life of ten years. The additional expense related to the
grant extensions is disclosed separately in the 1996 pro forma disclosures.
34
Based upon this information, the following assumptions were used in
determining the SFAS 123 expense associated with the 1990 Stock Option Plan. The
volatility used was 38.03% and 36.89% for 1996 and 1995, respectively; the risk
free interest rates ranged from 5.04% to 6.38% and 5.88% to 6.05% for 1996 and
1995, respectively; and the expected option life was seven years and four years
for 1996 and 1995, respectively.
Exercise prices for options outstanding as of December 31, 1996 ranged from
$6.00 to $28.00. A summary of the Company's stock option activity for the 1990
Stock Option Plan, and related information for the years ended December 31
follows (in thousands, except exercise price amounts):
[Enlarge/Download Table]
1996 1995
-----------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
-----------------------------------------------------------
Outstanding -- beginning of year ......... 2,289 $10.26 2,103 $10.10
Granted equal to market .................. 373 8.77 67 8.88
Granted above market ..................... 151 12.96 165 12.76
Exercised ................................ (29) 7.00 (27) 6.05
Canceled ................................. (64) 11.50 (19) 15.48
-----------------------------------------------------------
Outstanding -- end of year ............... 2,720 10.21 2,289 10.26
===========================================================
Exercisable -- end of year ............... 1,858 $10.39 1,376 $10.27
===========================================================
Weighted-average fair value of options
granted during the year (using SFAS
123 assumptions) ........................ $ 4.21 $ 2.70
===========================================================
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1996 (in thousands, except exercise price
and remaining contractual life amounts):
[Enlarge/Download Table]
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------------------------
WEIGHTED-AVERAGE
REMAINING
RANGE OF CONTRACTUAL WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES LIFE NUMBER EXERCISE PRICE NUMBER EXERCISE PRICES
--------------------------------------------------------------------------------------------------
$ 6.00 - 9.00 7.2 977 $ 7.45 640 $ 6.78
$ 9.01 - 13.50 7.6 1,519 10.93 994 11.14
$13.51 - 20.25 7.5 180 15.70 180 15.70
$20.26 - 28.00 6.8 44 24.52 44 24.52
Beginning in 1992, the Company granted stock options as commission bonuses
to LifeUSA's agents (Agent Option Plan) based on net earned commissions on
business written. An aggregate of 4,797,843 shares of the Company's common stock
is reserved for issuance upon the exercise of these options. The purchase price
of shares of common stock subject to these options is the greater of $10.00 per
share or 150% of the average closing bid price for the Company's common stock
for the twenty days immediately preceding the end of the calendar quarter for
which the stock option is granted. These options vest immediately upon issuance
and expire on the December 31st in the fifth year following the date of grant.
Based upon this information, the following assumptions were used in
determining the SFAS 123 expense associated with the Agent Option Plan. The
volatility used was 36.89% for 1996 and 1995; the risk free interest rates
ranged from 6.10% to 6.15% and 5.95% to 6.05% for 1996 and 1995, respectively;
and the expected option life was four years for 1996 and 1995.
35
Exercise prices for options outstanding as of December 31, 1996 ranged from
$10.00 to $27.28. A summary of the Company's stock option activity for the Agent
Option Plan, and related information for the years ended December 31 follows (in
thousands, except exercise price amounts):
[Enlarge/Download Table]
1996 1995
--------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------------------------------------------------------
Outstanding -- beginning of year ........ 3,482 $14.93 2,406 $15.60
Granted above market .................... 664 12.79 1,088 13.48
Canceled ................................ (111) 15.88 (12) 15.88
--------------------------------------------------------
Outstanding -- end of year .............. 4,035 14.56 3,482 14.93
========================================================
Exercisable -- end of year .............. 4,035 $14.56 3,482 $14.93
========================================================
Weighted-average fair value of options
granted during the year (using SFAS
123 assumptions) ....................... $ 2.37 $ 1.93
========================================================
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1996 (in thousands, except exercise price
and remaining contractual life amounts):
[Enlarge/Download Table]
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------------------------
WEIGHTED-AVERAGE
RANGE OF REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES CONTRACTUAL LIFE NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE
--------------------------------------------------------------------------------------------------
$ 9.01 - 13.50 3.4 1,833 $11.56 1,833 $11.56
$13.51 - 20.25 3.1 1,852 15.49 1,852 15.49
$20.26 - 28.00 2.0 350 25.29 350 25.29
During 1993, the Company established the LifeUSA Director Option Plan
(Director Option Plan) which provides for the granting of stock options to
members of the Company's Board of Directors who are not and have not been
full-time employees of the Company or any of its subsidiaries. Each such
director receives a non-qualified stock option to purchase 1,000 shares of
common stock for each meeting of the Board of Directors attended. The price of
the option will be equal to the fair market value of the stock on the date of
the meeting. An aggregate of 100,000 shares of common stock is reserved for
issuance upon the exercise of the options granted. These options vest
immediately, are exercisable six months and one day after issuance, and expire
on the earlier of five years from issuance or one year after the director ceases
to be a member of the Board of Directors.
Based upon this information, the following assumptions were used in
determining the SFAS 123 expense associated with the Director Option Plan. The
volatility used was 36.89% for 1996 and 1995; the risk free interest rates
ranged from 6.03% to 6.10% and 5.88% to 5.99% for 1996 and 1995, respectively;
and the expected option life was four years for 1996 and 1995.
36
Exercise prices for options outstanding as of December 31, 1996 ranged from
$8.25 to $19.50. A summary of the Company's stock option activity for the
Director Option Plan, and related information for the years ended December 31
follows (in thousands, except exercise price amounts):
[Enlarge/Download Table]
1996 1995
--------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------------------------------------------------------
Outstanding -- beginning of year ........ 45 $11.67 25 $13.88
Granted equal to market ................. 20 8.78 20 8.92
--------------------------------------------------------
Outstanding -- end of year .............. 65 10.78 45 11.67
========================================================
Exercisable -- end of year .............. 55 $11.12 35 $12.55
========================================================
Weighted-average fair value of options
granted during the year (using SFAS
123 assumptions) ....................... $ 3.28 $ 3.32
========================================================
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1996 (in thousands, except exercise price
and remaining contractual life amounts):
[Enlarge/Download Table]
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------------------------
WEIGHTED-AVERAGE
RANGE OF REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES CONTRACTUAL LIFE NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE
--------------------------------------------------------------------------------------------------
$ 6.00 - 9.00 3.8 30 $ 8.57 25 $ 8.59
$ 9.01 - 13.50 3.1 25 10.23 20 10.44
$13.51 - 20.25 1.9 10 18.81 10 18.81
For purposes of pro forma disclosures, the estimated fair value of the
options is charged to expense in the year of grant. The expense generated as a
result of the grant of agent options has been reduced by the amount that would
be deferred as a cost of acquiring new business. This amount has been calculated
using a method consistent with that utilized by LifeUSA to defer commissions
paid to agents. The Company's pro forma information follows (in thousands,
except for earnings per share information):
[Enlarge/Download Table]
1996 1995
-----------------------------------------------------------------------------------------------------
RANGE OF VALUES RANGE OF VALUES
---------------- ----------------
SFAS 123 HIGH LOW SFAS 123 HIGH LOW
-------------------------------------------------------------------
Reported net income ......... $23,454 $23,454 $23,454 $19,097 $19,097 $19,097
Additional expense:
1990 Stock Option Plan:
Original grants ........ (1,273) (1,626) (444) (362) (512) (154)
Grant extensions ....... (3,628) (5,091) (981) -- -- --
Agent Option Plan ........ (998) (1,512) (320) (867) (1,393) (225)
Director Option Plan ..... (38) (49) (21) (38) (50) (21)
-------------------------------------------------------------------
Pro forma net income ........ $17,517 $15,176 $21,688 $17,830 $17,142 $18,697
===================================================================
Pro forma earnings per share:
Primary .................. $ .79 $ .69 $ .97 $ .82 $ .79 $ .86
===================================================================
Fully diluted ............ $ .78 $ .68 $ .96 $ .82 $ .79 $ .86
===================================================================
37
SAVINGS PLAN
In 1990, the Company adopted the Savings Plan. An aggregate of 700,000
shares of common stock is reserved for issuance by the Savings Plan. All
permanent employees age 18 and over are eligible to participate in the Savings
Plan. Participants may contribute from 1% to 15% of their annual salary to the
Savings Plan, and the Company will match these contributions at a percentage to
be determined annually at the discretion of the Company. The Company may also
contribute a discretionary profit sharing amount, determined annually.
Contributions made to the Savings Plan by the Company are invested in common
stock of the Company. During the years of 1996, 1995 and 1994, the Company
matched the participants' contributions dollar-for-dollar up to 6% of their
annual salaries. The Company's expense for the years ended December 31, 1996,
1995 and 1994, was $.9 million, $.7 million and $.6 million, respectively.
DIVIDENDS
The ability of the Company to pay dividends is limited because a majority
of the Company's revenues is produced by LifeUSA, and distributions by LifeUSA
to the Company are subject to approval and other limitations imposed by the
Department of Commerce of the State of Minnesota. Although LifeUSA has made
a formal request of the Department of Commerce of the State of Minnesota for
approval to pay a $2.5 million dividend to the Company during 1997, the Company
does not currently intend to pay dividends.
8. INCOME TAXES
Income taxes consist of the following (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
--------------------------------
Current:
Federal ...... $14,459 $ 8,312 $4,197
State ........ 821 372 334
--------------------------------
Total current.... 15,280 8,684 4,531
Deferred ........ (1,669) 2,180 4,032
--------------------------------
$13,611 $10,864 $8,563
================================
The reconciliation between income tax expense and the amount computed by
applying the statutory federal income tax rate for the years ended December 31
is as follows (in thousands):
[Enlarge/Download Table]
1996 1995 1994
------------------------------------------------------------------
PROVISION RATE PROVISION RATE PROVISION RATE
------------------------------------------------------------------
Income taxes based on the statutory rate... $12,973 35.0% $10,486 35.0% $8,061 35.0%
State income tax, net of federal benefit... 453 1.2 183 .6 231 1.0
Other ..................................... 185 .5 195 .7 271 1.2
------------------------------------------------------------------
Income taxes .............................. $13,611 36.7% $10,864 36.3% $8,563 37.2%
==================================================================
38
The components of the deferred tax (benefit) provision for the years ended
December 31 are as follows (in thousands):
1996 1995 1994
------------------------------------
Deferred policy acquisition costs.... $ 3,548 $ 12,810 $ 15,453
Future policy benefits .............. (3,840) (10,173) (10,373)
Deferred agent compensation ......... 49 (534) (745)
State guaranty fund assessments ..... (1,109) (729) 211
Other ............................... (317) 806 (514)
------------------------------------
$(1,669) $ 2,180 $ 4,032
====================================
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
DECEMBER 31,
------------------
1996 1995
------------------
Deferred tax assets:
Future policy benefits .............. $52,143 $48,303
Unrealized gains/losses on
investments ........................ 3,062 10,883
Deferred agent compensation ......... 2,664 2,713
State guaranty fund assessments ..... 1,723 641
Other ............................... 5,930 5,513
------------------
Total gross deferred tax assets ........ 65,522 68,053
Deferred tax liabilities:
Deferred policy acquisition costs.... 67,536 63,988
Unrealized gains/losses on
investments ........................ 4,858 17,725
State guaranty fund assessments ..... 878 905
Other ............................... 5,174 5,075
------------------
Total gross deferred tax liabilities.... 78,446 87,693
------------------
Net deferred tax liability ............. $12,924 $19,640
==================
The Company began filing life-nonlife consolidated income tax returns in
1994.
The Internal Revenue Service is currently auditing the Company's and
LifeUSA's federal income tax returns for the years 1992 and 1991. The outcome of
the examination is not known at this time.
9. RELATED PARTY TRANSACTIONS
The Company incurred legal fees of $.4 million, $.4 million and $.3 million
for the years ended December 31, 1996, 1995 and 1994, respectively, from the law
firm of which one of its directors and one officer of the Company are members.
Members of such firm beneficially owned 328,830 shares of the Company at
December 31, 1996, or approximately 1.6% of the then outstanding shares.
The Company incurred actuarial and other consulting fees of $.7 million,
$.9 million and $.9 million for the years ended December 31, 1996, 1995 and
1994, respectively, from the firm of which one of its directors is a member.
The Company incurred legal and other consulting fees of $.1 million, $.1
million, and $.2 million for the years ended December 31, 1996, 1995 and 1994,
respectively, from the firm of which one of its directors is a member.
39
10. STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURES
Changes in operating assets and liabilities consist of (in thousands):
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---------------------------------
Increase in policy loans ................................ $ (1,553) $ (1,666) $ (1,520)
Increase in accrued investment income ................... (4,324) (14,091) (4,221)
Increase in future policy benefits recoverable and
amounts due from reinsurers ............................ (7,678) (5,768) (4,962)
Decrease (increase) in other assets ..................... 2,636 (14,867) (4,287)
Increase (decrease) in other policyholders' funds ....... 928 (48) 1,608
(Decrease) increase in amounts due reinsurers ........... (3,698) 12,242 2,669
(Decrease) increase in accrued commissions to agents .... (1,121) 2,859 306
(Decrease) increase in taxes, licenses and fees
payable ................................................ (1,045) 13,542 3,024
Increase (decrease) in accounts payable ................. 2,196 565 (36)
Increase (decrease) in other liabilities ................ 312 (362) (3,445)
---------------------------------
$(13,347) $ (7,594) $(10,864)
=================================-
Supplemental schedule of noncash financing activities:
Issuance of stock upon conversion of
convertible subordinated debentures ................. $ -- $ 11 $ 309
Cancellation of convertible subordinated
debentures .......................................... -- -- 1
Issuance of stock to employees as
compensation ........................................ 1,436 831 943
11. STATUTORY CAPITAL AND SURPLUS
LifeUSA, domiciled in Minnesota, prepares its statutory financial
statements in accordance with accounting practices prescribed or permitted by
the Department of Commerce of the State of Minnesota. LifeUSA does not utilize
any accounting practices in the preparation of its statutory financial
statements which differ from those prescribed by the Department of Commerce of
the State of Minnesota.
At December 31, 1996 and 1995, LifeUSA had statutory capital and surplus of
$87.3 million and $75.7 million, respectively, as reported to regulatory
authorities. During 1996 and 1995, the Company contributed to LifeUSA a total of
$1.4 million and $25.4 million, respectively, to increase LifeUSA's statutory
capital and surplus. LifeUSA has made a formal request to the Department of
Commerce of the State of Minnesota for approval to pay a $2.5 million cash
dividend to the Company during 1997. LifeUSA's ability to pay dividends in the
future is also subject to compliance with Minnesota insurance laws and
regulations. Statutory net income for the years ended December 31, 1996 and 1995
was $13.2 million and $.4 million, respectively, while the statutory net loss
for the year ended December 31, 1994 was $12.5 million. Differences between net
income and statutory results of operations arise primarily from deferred policy
acquisition costs, future policy benefits, deferred income taxes, amortization
of licenses and noncash transactions relating to agent advances.
40
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
[Download Table]
QUARTER ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996:
Revenues ................... $73,554 $77,429 $84,032 $81,883
Net income ................. 4,621 5,666 6,762 6,404
Income per common and common
equivalent share:
Primary ................. .21 .25 .30 .28
Fully diluted ........... .21 .25 .30 .28
1995:
Revenues ................... 59,868 70,132 64,202 78,580
Net income ................. 3,706 4,959 3,823 6,609
Income per common and common
equivalent share:
Primary ................. .18 .23 .18 .30
Fully diluted ........... .18 .23 .18 .30
The results for the quarters ended December 31 were impacted by the following
items (dollars in thousands, except per share amounts):
[Enlarge/Download Table]
1996 1995
-------------------------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
-------------------------------------------------------
NET INCOME PER SHARE NET INCOME PER SHARE
-------------------------------------------------------
Net realized gains on investments ......... $ -- $ -- $ 1,870 $ .08
Charges for state guaranty fund assessments (1,487) (.06) (1,415) (.06)
Reduction of state premium tax expense .... 1,838 .08 -- --
Adjustments made to annual
production based accruals ................ (938) (.04) 590 .03
Revisions made to the estimates in the
models used to amortize deferred policy
acquisition costs and accrue for bonuses
to be paid to policyholders .............. 1,184 .05 -- --
41
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments:
CASH AND CASH EQUIVALENTS AND POLICY LOANS
The carrying amounts reported in the balance sheet for these financial
instruments approximate fair value.
INVESTMENT CONTRACTS
The fair value of the Company's liabilities for deferred annuity contracts
is estimated to be the cash surrender value of each contract. The cash surrender
value represents the policyholder's account balance less applicable surrender
charges. The fair value of liabilities for supplemental contracts without life
contingencies and in-benefit annuity contracts is estimated by discounting
estimated cash flows using appropriate market interest rates.
The fair value of the Company's deferred policy acquisition costs is not
required to be disclosed. However, in the event that the fair value of the
liabilities for deferred annuity contracts, supplemental contracts without life
contingencies and in-benefit annuity contracts were realized (i.e., the business
is sold or completely ceded to a third party), the deferred policy acquisition
cost asset with a carrying value of $167.9 million and $155.4 million at
December 31, 1996 and 1995, respectively, would have a fair value of $0.
CONVERTIBLE SUBORDINATED DEBENTURES
The fair value of convertible subordinated debentures is estimated using
discounted cash flow analyses, based on interest rates for similar types of
financial instruments with maturities consistent with those remaining for the
debentures.
The carrying amounts and fair values of the Company's financial instruments
are as follows (in thousands):
[Enlarge/Download Table]
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------------------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
------------------------------------------------------------
ASSETS
Fixed maturity investments:
Available for sale .................... $ 878,279 $ 878,279 $ 812,195 $ 812,195
Held to maturity ...................... 1,003,197 1,013,761 908,670 953,167
Policy loans ............................. 23,908 23,908 19,789 19,789
Cash and cash equivalents ................ 20,989 20,989 33,222 33,222
Future policy benefits recoverable and
amounts due from reinsurers ............. 2,065,817 1,999,158 1,766,833 1,633,730
LIABILITIES
Investment contracts:
Deferred annuities .................... $2,884,403 $2,562,624 $2,651,463 $2,359,788
Supplementary contracts and
in-benefit annuities ................. 954,150 984,832 716,648 749,391
Convertible subordinated debentures ...... 36,030 39,633 36,030 32,813
42
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's holdings of a particular financial
instrument. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing balance sheet financial
instruments without attempting to estimate the value of estimated future
business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in the estimates.
43
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Life USA Holding, Inc.
We have audited the accompanying consolidated balance sheets of Life USA
Holding, Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Life USA
Holding, Inc. at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
In 1994, as discussed in Note 1 to the consolidated financial statements,
the Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
/s/ Ernst & Young LLP
Minneapolis, Minnesota
January 31, 1997
44
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Life USA Holding, Inc. is responsible for the
consolidated financial statements, accompanying notes and all other information
presented in this Annual Report. The consolidated financial statements have been
prepared in conformity with generally accepted accounting principles appropriate
in the circumstances and include amounts based on the best estimates and
judgments of management.
In order to safeguard assets and to maintain the integrity and objectivity
of data in these financial statements, Life USA Holding, Inc. maintains a
comprehensive system of internal accounting controls. These controls are
supported by the careful selection and training of qualified personnel and an
appropriate division of responsibilities. In addition, an integral part of the
comprehensive system of internal control is an effective internal audit
department. The Life USA Holding, Inc. internal audit department systematically
evaluates the adequacy and effectiveness of internal accounting controls and
measures adherence to established policies and procedures. The management of
Life USA Holding, Inc. believes that as of December 31, 1996, its system of
internal control is adequate to accomplish the objectives discussed herein.
The financial statements for the years ended December 31, 1996, 1995 and
1994 have been audited by Ernst & Young LLP, independent auditors. Their audits
were made in accordance with generally accepted auditing standards and included
a review of the system of internal controls to the extent necessary to express
an opinion on the financial statements.
The audit committee of the Board of Directors, comprised solely of outside
directors, meets regularly with the independent auditors, management and
internal auditors to review the scope and results of the audit work performed.
The independent auditors have unrestricted access to the audit committee,
without the presence of management, to discuss the results of their audit, the
adequacy of internal accounting controls and the quality of financial reporting.
/s/ Robert W. MacDonald
-------------------------
Robert W. MacDonald
Chairman and Chief Executive Officer
/s/ Mark A. Zesbaugh
-------------------------
Mark A. Zesbaugh
Executive Vice President and
Chief Financial Officer
45
LIFE USA HOLDING, INC.
BOARD OF DIRECTORS
Robert W. MacDonald, CLU
Chairman
Chief Executive Officer
Margery G. Hughes
President
Chief Operating Officer
Mark A. Zesbaugh, CPA, CFA, FLMI
Executive Vice President
Chief Financial Officer
Treasurer and Secretary
Daniel J. Rourke, CLU
Senior Vice President
Chief Marketing Officer
Donald J. Urban
Senior Vice President
Director of Sales
Joseph W. Carlson, FLMI
Consultant
Ralph Strangis
Counsel to the Company
Member of the Law Firm
Kaplan, Strangis and Kaplan, P.A.
Robert J. Oster
Private Venture Capital Investor
Jack H. Blaine
President
National Organization of Life
and Health Insurance
Guaranty Associations
Hugh Alexander
Member of Alexander Law Firm, P.C.
Barbara J. Lautzenheiser
Lautzenhieser & Associates
OFFICERS
Robert W. MacDonald, CLU
Chairman
Chief Executive Officer
Margery G. Hughes
President
Chief Operating Officer
Mark A. Zesbaugh, CPA, CFA, FLMI
Executive Vice President
Chief Financial Officer
Treasurer and Secretary
Daniel J. Rourke, CLU
Senior Vice President
Chief Marketing Officer
Donald J. Urban
Senior Vice President
Director of Sales
Bradley E. Barks, FSA, MAAA, CPA
Senior Vice President Finance
Bruce D. Bengtson, FSA, MAAA
Senior Vice President
Chief Actuary
Bruce J. Parker
Assistant Secretary
Member of the Law Firm
Kaplan, Strangis and Kaplan, P.A
---------------
VICE PRESIDENTS
Jo-Anne S. Halek
Kimberly A. Lees
----------------
ANNUAL MEETING
The annual meeting of the shareholders of Life USA Holding, Inc. will be held on
April 15, 1997 at the Interchange Tower, 600 South Highway 169, Minneapolis,
Minnesota 55426. All shareholders are invited to attend.
CORPORATE INFORMATION
CORPORATE OFFICE
300 South Highway 169
Minneapolis, Minnesota 55426
612-546-7386
General Counsel
Kaplan, Strangis and Kaplan, P.A
Minneapolis, Minnesota
Independent Auditors
Ernst & Young LLP
Minneapolis, Minnesota
Transfer Agent
Harris Trust and Savings Bank
Chicago, Illinois
----------------
REINSURANCE PARTNERS
Allianz Life Insurance Company
of North America
Minneapolis, Minnesota
Employers Reassurance Corporation
Overland Park, Kansas
Munich American
Reassurance Company
Atlanta, Georgia
Republic-Vanguard Life
Insurance Company
Dallas, Texas
Transamerica Occidental Life
Insurance Company
Charlotte, North Carolina
FORM 10-K
The Life USA Holding, Inc. Form 10-K can be obtained by writing to
Mark A. Zesbaugh, Chief Financial Officer, 300 South Highway 169,
Minneapolis, Minnesota 55426.
SHAREHOLDER INFORMATION
Life USA Holding, Inc. common stock trades on the Nasdaq National Market tier of
The Nasdaq Stock Market under the symbol: "LUSA." No dividends have been paid
since inception.
1995 1996
--------------- --------------
HIGH LOW HIGH LOW
--------------------------------
1st Quarter $11-3/8 $7-3/16 $9-7/8 $7-5/8
2nd Quarter $10-1/2 $ 8-5/8 $9-3/8 $7-5/8
3rd Quarter $10-1/8 $ 8-1/4 $9-1/4 $7-3/4
4th Quarter $ 9-1/4 $ 7-5/8 $ 12 $8-5/8
As of December 31, 1996, there were 5,093 holders of record of the Company's
common stock.
46
LIFEUSA INSURANCE COMPANY
BOARD OF DIRECTORS
Robert W. MacDonald, CLU
Chief Executive Officer
Daniel J. Rourke, CLU
Chairman
Donald J. Urban
President
Margery G. Hughes
Executive Vice President
Mark A. Zesbaugh, CPA, CFA, FLMI
Senior Vice President
Treasurer
Jacqueline K. Katrein, CPA
Senior Vice President
Support Division
Chief Financial Officer
Joseph W. Carlson, FLMI
Consultant
Ralph Strangis
Counsel to the Company Member of
the Law Firm Kaplan, Strangis and
Kaplan, P.A.
Robert J. Oster
Private Venture Capital Investor
Stephen M. Kerns
Insurmark
David A. Sunderland
Sunderland Insurance Services
Joseph R. Lehman, CFP, CLU
Life Sales
Edward A. Omert
Roster Financial
OFFICERS
Robert W. MacDonald, CLU
Chief Executive Officer
Daniel J. Rourke, CLU
Chairman
LifeUSA Insurance Company
Chairman and
Chief Executive Officer
Universal Benefits Life Division
Donald J. Urban
President
Margery G. Hughes
Executive Vice President
Mark A. Zesbaugh, CPA, CFA, FLMI
Senior Vice President
Treasurer
Ronald L. Berger, CPA
Senior Vice President
Information & Technology
Denise M. Blizil
Senior Vice President
Operating Division
Secretary
Linda K. Burm
Senior Vice President
Chief Operating Officer
Universal Benefits Life Division
Jacqueline K. Katrein
Senior Vice President
Support Division
Chief Financial Officer
Charles M. Kavitsky
Senior Vice President
Sales and Marketing
VICE PRESIDENTS
Robin Aeshliman
Leo J. Anderson, FLMI
Rolf D. Baglien, CPA
Kevin J. Boyce
Caroyln K. Cosgrove, FLMI
Michael A. Eitel, CPA
Lorraine M. Frankewicz
John T. Helgerson, CLU
Susan L. Kumpula
Lane A. Kurle, FLMI
Robert L. Miller
Kathaleen A. Morrow
Janet M. Neary
David K. Sandberg, ASA, MAAA
Susan K. Swanson
Cathy H. Waldhauser, FSA, MAAA
Kevin E. Walker, FLMI
Deborah J. Wesenberg, FLMI, FALU, CLU
Scott A. Wheeler, CPA, CLU, FLMI
----------------
ASSISTANT VICE PRESIDENTS
Kristi K. Bizer, CPA, FLMI
Lisa B. Carlson
Brenda Z. Duenwald
Jeffrey R. Girod
Amelia L. Jensen
John R. Kraft
Richard P. Lapcinski
Leslie J. LeQue
Neil H. McKay, FSA, MAAA
Rodney D. Meyer, ALHC, FLMI
Lisa M. Nicholson
Philip B. Rosenbaum, CPA, FLMI
Sharyl L. Schultz, CLU
Roxanne M. Watercott
Ann M. Yaggie
47
LIFEUSA(R)
300 South Highway 169
Minneapolis, Minnesota 55426
Dates Referenced Herein and Documents Incorporated by Reference
| This ‘10-K’ Filing | | Date | | Other Filings |
|---|
| |  |
| | 3/31/01 |
| | 6/30/00 |
| | 3/31/00 |
| | 2/17/00 |
| | 6/30/99 | | 10-Q |
| | 5/17/99 | | 8-K |
| | 9/30/97 | | 10-Q |
| | 6/30/97 | | 10-Q |
| | 4/15/97 | | DEF 14A |
| Filed on: | | 3/25/97 |
| | 1/31/97 |
| | 1/1/97 |
| For Period End: | | 12/31/96 |
| | 5/17/96 |
| | 1/1/96 |
| | 12/31/95 |
| | 11/20/95 |
| | 10/1/95 |
| | 9/30/95 |
| | 2/17/95 |
| | 1/1/95 |
| | 12/31/94 |
| | 1/1/94 |
| | 12/31/93 |
| | 7/1/93 |
| | 12/31/92 |
| List all Filings |
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