Document/Exhibit Description Pages Size
1: 10-K Annual Report 80 465K
2: EX-10.1 Investment Management Agreement 4 18K
11: EX-10.10 Guaranty 4 29K
12: EX-10.11 Guaranty 10 33K
13: EX-10.12 Guaranty 10 34K
14: EX-10.13 Pledge Agreement 16 47K
15: EX-10.14 Security Agreement 6 24K
16: EX-10.15 Administration and Marketing Agreement 10 41K
17: EX-10.16 Administration and Marketing Agreement 10 41K
18: EX-10.17 Interests and Liabilities Agreement 19 66K
19: EX-10.18 Retrocession Agreement 4 20K
20: EX-10.19 Master Agreement for Cash Management Services 5 28K
3: EX-10.2 Investment Management Agreement 4 18K
21: EX-10.20 Service Agreement 8 30K
22: EX-10.21 Employee Leasing Agreement 5 23K
23: EX-10.22 1998 Stock Option Plan 12 47K
4: EX-10.3 Amendment No. 4 to Loan Agreement 5 21K
5: EX-10.4 Amendment No. 5 to Loan Agreement 7 29K
6: EX-10.5 Amendment No. 3 to Stock Purchase Agreement 2 12K
7: EX-10.6 First Amendments to Employment Agreements 6 29K
8: EX-10.7 Employment Agreements 28 144K
9: EX-10.8 Credit Agreement 13 57K
10: EX-10.9 Revolving Note 1 10K
24: EX-21 Subsidiaries of the Registrant 1 8K
25: EX-23 Consent of Independent Auditors 1 9K
26: EX-24 Power of Attorney 2 14K
27: EX-27 Financial Data Schedule 2± 10K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, l998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________________ to ___________________.
Commission file number 0-18485.
Life USA HOLDING, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1578384
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 95, Interchange North Building
300 South Highway 169
Minneapolis, Minnesota 55426
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612)-546-7386
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of l934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES _X_ NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Annual
Report to Shareholders and Form 10-K or any amendment to this Annual Report to
Shareholders and Form 10-K. [ ]
The aggregate market value of the voting stock (17,603,796 shares) held by
non-affiliates of the registrant as of February 12, 1999 was $201,387,426.
The number of shares outstanding of the issuer's classes of common stock as of
February 12, l999:
Common stock, $.01 Par Value - 17,603,796 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual shareholders meeting to
be held April 13, 1999 are incorporated by reference into Part III.
CONTENTS
PAGE
-----
Financial Summary ................... 1
Letter to Shareholders .............. 2
Selected Consolidated Financial and
Operating Data ..................... 6
General ............................. 8
Management's Discussion & Analysis --
Consolidated ....................... 16
Management's Discussion & Analysis --
Segment Reporting .................. 29
Consolidated Financial Statements and
Notes .............................. 36
Form 10-K and other corporate
information ........................ 65
Topical cross-reference ............. 65
ABOUT THE COMPANY
Life USA Holding, Inc. is a national financial services holding and marketing
company with $5.46 billion in consolidated assets and three wholly-owned
subsidiaries. LifeUSA Insurance Company, its largest and most significant
wholly-owned subsidiary, is licensed to write and sell life insurance and
several forms of annuities, and is represented by over 140 marketing
organizations and 70,000 independent agents nationwide. LifeUSA Marketing, Inc.
conducts a variety of marketing activities, including acquiring equity interests
in independent marketing organizations. LifeUSA Securities, Inc. is a retail
broker-dealer that distributes a full range of securities products, including
non-proprietary mutual funds, variable life insurance and annuity contracts, and
processes general securities transactions. Life USA Holding, Inc. common stock
trades on The Nasdaq Stock Market under the symbol LUSA.
HIGHLIGHTS OF 1998
o Consolidated total revenues were $362.6 million.
o Consolidated net income was $21.9 million.
o Collected premiums and deposits (including business produced for Allianz
Life) were $1.06 billion.
o Consolidated assets increased to $5.46 billion at December 31, 1998.
o LifeUSA Insurance Company's A.M. Best rating was upgraded to A-
(Excellent).
o LifeUSA Insurance Company's Moody's Investors Service rating was upgraded
to A3 (Strong).
o Agreement announced in January 1998 with Allianz Life to invest $100
million in LifeUSA over five years.
o LTCAmerica Holding, Inc. was formed in July 1998.
o LifeUSA Marketing, Inc. acquired minority interests in Life Sales LLC in
March 1998 and Signature Financial Services, Inc. in April 1998.
o Life USA Holding, Inc. acquired a minority interest in Windsor Financial
Group, LLC in April 1998.
o LifeUSA Marketing, Inc. recruited over 20,000 new agents.
o Life USA Holding, Inc. paid dividends of 2.5 cents per share to
shareholders in the second, third and fourth quarters of 1998.
o In July 1998, the Company announced that its Board of Directors authorized
a program to repurchase up to four million shares of its common stock
through periodic purchases in the marketplace.
o LifeUSA Insurance ranked fourth in sales of equity-indexed annuity
products.
FINANCIAL SUMMARY
FINANCIAL SUMMARY
[Enlarge/Download Table]
PERCENT
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 CHANGE
---------------------------------------------------- --------------- --------------- ------------
Consolidated Results of Operations
Revenues .......................................... $ 362,648 $ 369,903 (2)%
Net income ........................................ 21,907 26,978 (19)
Net operating income .............................. 20,782 26,078 (20)
Consolidated Financial Position
Total assets ...................................... $ 5,458,719 $ 5,062,774 8%
Invested assets ................................... 2,301,333 2,165,786 6
Debt .............................................. 20,898 41,030 (49)
Shareholders' equity (excluding SFAS 115) ......... 266,551 214,251 24
Financial Ratios
Return on invested assets ......................... .95% 1.25% --
Return on equity (excluding SFAS 115) ............. 8.22% 12.59% --
Debt to equity (excluding SFAS 115) ............... 7.84% 19.15% --
Per Share Data
Diluted net income per share ...................... $ .83 $ 1.11 (25)%
Diluted net operating income per share ............ .79 1.07 (26)
Book value (excluding SFAS 115) ................... 10.76 9.41 14
Adjusted weighted-average shares .................. 26,426,291 25,160,437 5
Shares issued, outstanding and to be issued ....... 24,776,517 22,759,288 9
Share price
High
1st Quarter ..................................... $ 17.56 $ 11.88
2nd Quarter ..................................... 17.00 14.25
3rd Quarter ..................................... 14.00 17.25
4th Quarter ..................................... 13.75 18.00
Low
1st Quarter ..................................... 12.50 9.00
2nd Quarter ..................................... 11.13 9.13
3rd Quarter ..................................... 10.75 13.75
4th Quarter ..................................... 9.50 16.00
[BAR CHARTS]
TOTAL REVENUES NET INCOME INVESTED ASSETS PREMIUM & DEPOSITS
$ MILLIONS $ MILLIONS $ BILLIONS $ BILLIONS
94 206 94 14 94 1.2 94 0.9
95 273 95 19 95 1.8 95 1.0
96 317 96 23 96 1.9 96 1.1
97 370 97 27 97 2.2 97 1.3
98 363 98 22 98 2.3 98 1.1
BOOK VALUE PER SHARE
(EXCLUDING SFAS 115)
DOLLARS
94 6.14
95 7.09
96 8.07
97 9.41
98 10.76
1
Life USA Holding, Inc.
LETTER TO SHAREHOLDERS
LETTER TO SHAREHOLDERS
It may be a stretch to suggest that a year in which both sales and net
income declined was a good year, but let me try. Of course, no one involved in
the management of Life USA (the Company) is ever satisfied with disappointing
financial results. And, despite our best efforts, the cold truth is that in 1998
consolidated net income declined 19% to $21.9 million or $.83 per share,
compared to $27.0 million or $1.11 per share for 1997. The principal reason for
the reduced earnings was an 18% decline in 1998 collected premiums to $1.06
billion in 1998 from $1.29 billion in 1997.
Actually, net income would have been reduced even more had it not been for
the extraordinary efforts of our president and chief operating officer, Maggie
Hughes, the senior management of the company and the dedicated home office
owners who worked diligently and successfully to control expenses. In 1998,
consolidated operating expenses increased only 2% to $63.6 million, compared to
$62.4 million for 1997. Total consolidated expenses increased minimally in 1998
to $327.5 million, from $326.8 million in 1997.
What then, you may ask, occurred during 1998 to offset the weak financial
results, and make the year a success? Well, there were a number of
accomplishments that we believe will have a decided impact on future results.
First of all, the collected premium results of 1998 should not be
discounted. In the worst possible environment for the sale of traditional fixed
annuities, the coordinated efforts of our field force, marketing company and the
entire home office support staff resulted in over $1 billion of new premium.
That is a remarkable accomplishment, especially in light of projections that
total industry production for fixed annuities declined 30% in 1998.
The year got off to a good start with the announcement in January 1998 of
an enhanced relationship with Allianz Life Insurance Company of North America
(Allianz Life). In exchange for the extension of the marketing, administration
and reinsurance relationship with the Company, Allianz Life agreed to provide
the Company with a sequentially timed equity placement (STEP) of $100 million.
Every six months, over a five-year period, Allianz Life will provide the Company
with $10 million of fresh capital. This will be accomplished either by the
purchase of newly issued common stock or a convertible debenture. In either
case, the terms of purchase are quite favorable to the Company. The transaction
with Allianz Life is important in that it assures the Company of a reliable
source of capital to support future growth.
During 1998, the A.M. Best Company increased the rating of LifeUSA
Insurance Company (LifeUSA Insurance) from B++ to A-, and Moody's Investment
Services upgraded its rating of LifeUSA Insurance from Baa3 to A3. The enhanced
ratings for the company offer concrete evidence of growing financial maturity
and stability.
During 1998, a record total of 20,752 new independent agents were
contracted with LifeUSA Insurance. As these agents become familiar with LifeUSA
Insurance's products and services, they form a basis for future premium growth.
With over 70,000 agents under contract, LifeUSA Insurance has one of the most
extensive agent distribution systems in the industry. In addition, during 1998,
LifeUSA Marketing made equity investments in two major national marketing
groups. The investments made in agent marketing companies are designed to
increase current production and assure continued access to the production for
years to come.
On the financial side, 1998 was the year in which the Company declared the
first shareholder dividend of 2.5 cents per quarter, and the board of directors
authorized the company to repurchase up to four million shares of the Company's
common stock. With the cost of capital at less than 5% and shares trading well
below what the company believes to be the fair value of the stock, it was
advantageous to existing shareholders to repurchase the Company's stock on the
open market. At the end of 1998, a total of 1.8 million shares had been
repurchased.
Probably the most significant activities of 1998 revolved around product
development. Over the past few years, as interest rates declined to historic
lows and the stock market rose to historic highs, many financial analysts
discounted the Company as a mono-line product (fixed annuities) company that
would have a difficult time growing. For the most part, the criticism was valid
and recognized by management. At the time, there
Life USA Holding, Inc.
2
LETTER TO SHAREHOLDERS
were two choices: change the product mix by developing variable annuity and life
insurance products or maintain the current product mix and attempt to offset a
shrinking fixed annuity market by expanding market share.
Not willing to commit the capital and resources required to develop the
manufacturing, administrative and distribution capabilities needed to enter the
variable market (dominated by the largest companies) as a Johnny-come-lately,
management opted for the second option. While hoping (praying) to see the
environment for the sale of fixed annuities improve, management set out to
expand the Company's share of a shrinking market. The strategy required
aggressive recruiting of agents and investments in national marketing
organizations. To a point, the strategy was successful. For the past four years,
as other fixed annuity providers have either exited the market or experienced
significant de-growth, the Company has "held its own," producing over $1 billion
of premium each year. But, we seek to do more than "hold our own."
With that in mind, LifeUSA Insurance has developed a series of products
that we believe will be attractive, even in an environment of low interest rates
and a robust stock market. Make no mistake, these products are fixed annuities,
but they are structured in a way to allow the annuity holder to enhance the
value of the annuity by participating in a portion of the growth in the S&P 500
Index. This is accomplished with the use of "options" in the S&P Index. Since
these are still fixed annuities with principal and interest rates guaranteed,
the policyholder is spared the normal downside risk associated with equity
investments.
While these products, under the generic name of "equity-indexed" annuities,
have been on the market for a number of years, LifeUSA Insurance intends to
introduce a new generation of products in 1999. The new products are designed to
be aggressors in the marketplace, taking business away from the equity market.
In 1998, the sale of equity-indexed products accounted for over 30% of
total LifeUSA Insurance sales. In terms of premium production of equity-indexed
products, LifeUSA Insurance ranks among the top five companies in the industry.
Using the new products as the primary weapons, LifeUSA Insurance intends to take
equity-indexed annuities to a new level in 1999, both in terms of benefits
offered the consumer and total production. The goal is to become the industry
leader in equity-indexed annuities.
The new type of equity-indexed product developed by LifeUSA Insurance is
the PowerHouse. The PowerHouse has the advantage of combining all the most
popular features of various equity-indexed annuities into one product. In
addition, LifeUSA Insurance will be the first company to take the concept of
indexing and apply it to the payouts received by the annuitant. Now the
annuitant will have the option to participate in the growth of the S&P 500
Index, even while receiving benefits from the annuity.
To meet the growing needs of those retiring now, LifeUSA Insurance has
developed an innovative single-premium, immediate annuity. The product, called
WealthCare, offers three benefits not available from any other single-premium,
immediate annuity. Those benefits are a death benefit, annual payouts indexed to
the S&P 500 Index (with no downside risk) and an increase in benefits should the
annuitant become sick or disabled prior to death. With the new equity-indexed
products and the unique innovations applied to them, LifeUSA Insurance becomes
an even more potent force in the annuity market and now will be able to compete
heads-up against variable products.
No longer can LifeUSA Insurance be considered a mono-line annuity product
company. While equity-indexed products are certainly not investments per se, as
are variable annuities, such products are designed to compete effectively in a
low interest rate, rising stock market environment. Equity-indexed products also
offer the advantage of being less costly to administer (they use the same system
as traditional fixed annuities), and since agents are not required to have a
securities license to sell the product, the company can use the existing
distribution system. The broad distribution system of LifeUSA Insurance gives
the company a tremendous advantage in marketing equity-indexed products.
The Company is now well-positioned for any market. Should the market for
traditional fixed annuities reverse itself and begin to grow, the Company is
ready to be an industry leader. If the current interest rate and investment
environment continues, the Company can compete effectively. The addition of the
single-premium immediate annuity should also help capture the ever-growing flow
of retirement funds. Our estimate is that the equity-indexed family of products
could account for as much as 50% of total premium in 1999 and gives some reason
to be optimistic that our efforts will result in increased total sales.
3
Life USA Holding, Inc.
LETTER TO SHAREHOLDERS
Annuities were not the only area of product development for LifeUSA
Insurance. In order to put some life into life sales, an exciting new concept in
life insurance was developed. The new product is called LifeFund and it truly is
an innovation in life insurance. With traditional life insurance, there is
always a "fund" of money available to the insured. The only problem is that the
insured has to die for his beneficiaries to access the fund. That was great when
people died young, but that was 100 years ago. We all know there are
catastrophes other than death that can impact the financial stability of a
family. Events such as heart attack, stroke, disabling accident and cancer can
threaten the very life of the family, even if the event is not life threatening.
LifeFund is a new type of life insurance that meets the needs of the consumer by
making all or part of the fund available to the insured -- at the time of
occurrence, not just at death. We believe LifeFund will be well received by
regulators, consumers and agents. LifeFund can be the catalyst for increased
life insurance sales.
New products were not the only areas of development for the Company during
1998. After getting off to a rocky start, LifeUSA Securities has been stabilized
by the addition of stronger marketing and administrative management, as well as
a strengthening staff. We do not anticipate that LifeUSA Securities will be
profitable in 1999, but we do expect to make important progress, especially in
expanding the base of registered representatives. LifeUSA Securities seeks to
position itself as the broker-dealer of choice for the independent insurance
agent who is also registered to sell securities. This approach is in tune with,
and provides support to, the total distribution system of LifeUSA Insurance.
The other new development for the Company in 1998 was planning for the
entrance into the long-term care market. But, the Company is not looking to just
dabble in the long-term care market. Our objective is to be a dominant player in
the long-term care market within five years.
Most experts agree that providing financing for the long-term care of an
aging population is the growth market for the insurance industry. As long as the
government gets out of the way, the companies that provide a solution to the
impending crisis in long-term care financing will be well rewarded. The Company
is going to make an effort to be one of those companies.
To accomplish our end, LTCAmerica Holding, Inc. (LTCAmerica) has been
formed as a subsidiary of LifeUSA Insurance. Established as an independent
company, LTCAmerica will be able to focus and concentrate on becoming a leader
in the long-term care market. LTCAmerica has been structured in the "shadow"
image of the Company, including the expectation that common stock ownership will
be offered to the employees, agents and marketing organizations working to build
the company. The concept of agent and employee ownership worked well with the
Company, and we believe it will work even better with LTCAmerica.
What is important to understand about the private market for long-term care
is that it is still quite small and immature. There is no doubt that the need to
finance long-term care offers tremendous potential; the risk is whether or not
the potential emerges in a way for private insurance companies to participate.
One thing is certain, the success of LTCAmerica will not be determined by
how much of the current long-term care market can be captured. It is too small
to be worth the effort. No, the key to success for LTCAmerica will be found in
its ability to expand the market for the sale of long-term care insurance. This
can only be accomplished by encouraging agents who have never sold the product
to do so. To achieve this goal, two things are needed: favorable access to an
extensive distribution system of agents and new products that are easier to
understand and sell.
With access to the 70,000 agents of the LifeUSA Insurance distribution
system, LTCAmerica is in a unique position to leverage the first requirement for
success. To meet the second need, LTCAmerica is currently in the process of
developing a totally new approach to long-term care insurance. When these two
elements are combined, we believe that LTCAmerica will be positioned to be a
leading player in the long-term care market.
Despite the decline in sales and income in 1998, the Company continued to
build value. A review of the numbers following this letter will highlight
increases in consolidated assets, shareholder equity and book value. Hopefully,
as a Life USA shareholder, you will be encouraged by the actions we have taken
to assure the steady, long-term growth and success of our company. Sometimes
it's difficult to be a long-term company
Life USA Holding, Inc.
4
LETTER TO SHAREHOLDERS
in a short-term world, but we are confident that the course we have chosen will
return equitable and competitive long-term benefits to our policyholders, as
well as substantial long-term returns to our shareholders. We believe the
efforts and accomplishments of 1998 moved our company closer to our goals.
Please accept my thanks for your continued support of Life USA, and I offer
a special thanks to all of those associated with Life USA and our affiliated
companies, who have worked so diligently to assure the continued success of our
company.
/s/ Robert W. MacDonald
Robert W. MacDonald
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Life USA Holding, Inc.
CHIEF EXECUTIVE OFFICER
LifeUSA Insurance Company
5
Life USA Holding, Inc.
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
S SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
[Enlarge/Download Table]
AS OF AND FOR THE YEAR ENDED DECEMBER 31 1998
--------------------------------------------------------------------------------- --------------
Consolidated results of operations:
Revenues ....................................................................... $ 362,648
Net income ..................................................................... 21,907
Adjustments to arrive at net operating income(1):
Net realized gains on investments ............................................ (167)
Charges (credits) for state guaranty fund assessments ........................ (1,068)
Changes in tax liability for prior years' activity ........................... 110
-----------
Net operating income(1) ........................................................ 20,782
Per share data:
Adjusted weighted-average shares ............................................... 26,426,291
Convertible subordinated debenture interest addback, net of tax ................ $ 85
Net income ..................................................................... 0.83
Net operating income(1) ........................................................ 0.79
Consolidated financial position:
Assets ......................................................................... $ 5,458,719
Invested assets (fixed maturity investments and cash and cash equivalents) ..... 2,301,333
Debt (convertible subordinated debentures and line of credit) .................. 20,898
Shareholders' equity:
As reported .................................................................. 279,985
Excluding SFAS No. 115 ....................................................... 266,551
Common stock data:
Shares issued and outstanding and to be issued ................................. 24,776,517
Book value per share:
As reported .................................................................. $ 11.30
Excluding SFAS No. 115 ....................................................... 10.76
Cash dividends declared per share .............................................. 0.08
Closing price .................................................................. 12.88
Financial ratios and other data:
Return on invested assets--net income .......................................... 0.95%
Return on invested assets--net operating income(1) ............................. 0.90%
Return on equity--net income:
As reported .................................................................. 7.82%
Excluding SFAS No. 115 ....................................................... 8.22%
Return on equity--net operating income(1):
As reported .................................................................. 7.42%
Excluding SFAS No. 115 ....................................................... 7.80%
Debt to equity:
As reported .................................................................. 7.46%
Excluding SFAS No. 115 ....................................................... 7.84%
Closing price to net income per share (P/E ratio) .............................. 15.5x
Closing price to net operating income per share(1) ............................. 16.3x
Closing price to book value per share:
As reported .................................................................. 1.14x
Excluding SFAS No. 115 ....................................................... 1.20x
Total market capitalization .................................................... $ 318,998
------------------
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, (ii) charges (credits) for state guaranty fund assessments and
(iii) changes in tax liability for prior years' activity.
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.
Life USA Holding, Inc.
6
[Enlarge/Download Table]
FIVE YEAR
AVERAGE
COMPOUND
1997 1996 1995 1994 1993 GROWTH RATE
-------------- -------------- -------------- -------------- -------------- ------------
$ 369,903 $ 316,898 $ 272,781 $ 206,313 $ 199,685 12.68%
26,978 23,454 19,097 14,469 15,115 7.70%
(670) (408) (1,828) (641) (989)
(930) 1,998 1,877 1,704 624
700 0 0 0 0
----------- ----------- ----------- ----------- -----------
26,078 25,044 19,146 15,532 14,750 7.10%
25,160,437 23,358,663 22,524,396 20,409,047 19,055,286
$ 870 $ 870 $ 757 N/A N/A
1.11 1.04 0.88 $ 0.71 $ 0.79 0.96%
1.07 1.11 0.88 0.76 0.77 0.40%
$ 5,062,774 $ 4,386,723 $ 3,867,539 $ 3,065,271 $ 2,394,471 17.92%
2,165,786 1,902,465 1,754,087 1,249,321 899,998 20.66%
41,030 36,030 36,030 6,041 6,351
222,400 172,615 156,896 106,916 107,204 21.17%
214,251 169,280 144,189 123,836 107,204 19.98%
22,759,288 20,974,901 20,324,747 20,179,617 19,978,118
$ 9.77 $ 8.23 $ 7.72 $ 5.30 $ 5.37 16.06%
9.41 8.07 7.09 6.14 5.37 14.93%
0.00 0.00 0.00 0.00 0.00
16.88 12.00 8.00 7.25 18.88
1.25% 1.23% 1.09% 1.16% 1.68%
1.20% 1.32% 1.09% 1.24% 1.64%
12.13% 13.59% 12.17% 13.53% 14.10%
12.59% 13.86% 13.24% 11.68% 14.10%
11.73% 14.51% 12.20% 14.53% 13.76%
12.17% 14.79% 13.28% 12.54% 13.76%
18.45% 20.87% 22.96% 5.65% 5.92%
19.15% 21.28% 24.99% 4.88% 5.92%
15.2x 11.5x 9.1x 10.2x 23.8x
15.8x 10.8x 9.1x 9.5x 24.4x
1.73x 1.46x 1.04x 1.37x 3.52x
1.79x 1.49x 1.13x 1.18x 3.52x
$ 384,063 $ 251,699 $ 162,598 $ 146,302 $ 377,087
------------------
In 1997, the Company adopted SFAS No. 128, "Earnings per Share." SFAS No. 128
requires basic and diluted earnings per share. Basic earnings per share is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. It excludes the
effects of options, warrants and convertible securities. Diluted earnings per
share is computed based on the weighted average number of shares outstanding
assuming that the proceeds from conversion of all stock options and warrants
shall be used to purchase common stock at the average market price during the
period. In accordance with SFAS No. 128, the Company has restated earnings per
share for the years 1993 through 1996.
7
Life USA Holding, Inc.
GENERAL
GENERAL
COMPANY STRUCTURE
Life USA Holding, Inc. (the Company) is a national financial services
holding and marketing company with $5.46 billion in consolidated assets. LifeUSA
Insurance Company (LifeUSA Insurance), its largest wholly-owned subsidiary, is
licensed to write and sell life insurance and annuities through independent
field marketing organizations and agents in the District of Columbia and all
states except New York. LifeUSA Marketing, Inc. (LifeUSA Marketing) and LifeUSA
Securities, Inc. (LifeUSA Securities) are also wholly-owned subsidiaries of the
Company.
LifeUSA Insurance sells a variety of innovative life insurance and annuity
products that offer long-term retirement benefits to consumers who seek
protection against outliving their financial resources. The products are sold by
a national marketing and distribution system comprised of Field Marketing
Organizations (FMOs) with independent agents, and the products are serviced by
home office staff.
In July 1998, LTCAmerica Holding, Inc. (LTCAmerica) was formed for the
purpose of acquiring, managing and funding the operations of an insurance
company offering life insurance, annuity and health insurance products providing
long-term care benefits to consumers. LTCAmerica will seek to purchase, as a
subsidiary, either an existing long-term care insurance company or a shell
insurance company that will underwrite and issue long-term care products.
LTCAmerica is a majority-owned subsidiary of LifeUSA Insurance.
LifeUSA Marketing conducts a variety of marketing activities for the
Company, including the acquisition of and investment in national FMOs. In August
1996, LifeUSA Marketing acquired Tax Planning Seminars, a national marketing
organization that had been contracted with LifeUSA Insurance for seven years. In
addition, LifeUSA Marketing acquired minority equity interests in Creative
Marketing International Corporation in November 1996, Personalized Brokerage
Services, Inc. in May 1997, Ann Arbor Annuity Exchange in July 1997, Roster
Financial, LLC in December 1997, Life Sales LLC in March 1998 and Signature
Financial Services, Inc. in April 1998, all national FMOs.
LifeUSA Securities is a retail broker-dealer that distributes a full range
of securities products, including non-proprietary mutual funds, variable life
insurance and annuity contracts, and processes general securities transactions.
In April 1998, the Company purchased a minority interest in Windsor
Financial Group, LLC (Windsor), a Minneapolis-based investment management firm.
Windsor manages $3.7 billion of assets for financial institutions, foundations,
retirement plans and high net worth individuals, including $1.9 billion of
LifeUSA Insurance's portfolio.
Management has organized the Company into three business segments in order
to focus on the distinct functional revenue, expense and asset characteristics
associated with the activities performed by each. The segments include:
Insurance, Marketing and Corporate. Management's Discussion and Analysis on
Business Segments which follows on page 29, focuses on these segments and the
financial information used by management to make decisions and analyze the
results of operations.
MARKETING AND DISTRIBUTION
As of December 31, 1998, 140 independent FMOs and over 70,000 agents were
licensed to market LifeUSA Insurance policies and produce business for Allianz
Life Insurance Company of North America (Allianz Life). All FMOs and agents are
independent contractors and are responsible for their operating and marketing
expenses.
FMOs coordinate and pay for the marketing of LifeUSA Insurance products and
provide recruiting, training and management of the agents contracted through
them. Depending on the marketing techniques it uses and the market in which it
operates, an FMO may have as many as several thousand agents. LifeUSA Marketing
provides marketing support to FMOs through marketing training seminars, product
and business system demonstrations, product literature and home office support.
The FMO receives a gross cash commission from LifeUSA Insurance on business
produced and, within specified LifeUSA Insurance guidelines, allocates such
commissions among its agents.
Life USA Holding, Inc.
8
GENERAL
Cash commissions as a percentage of first year premiums are higher for life
insurance sales than annuity sales. Commissions are based on a percentage of the
targeted annual premiums and consist of both a higher first year commission and
a lower renewal commission on premiums paid on a life insurance policy after the
first year. FMOs and agents are subject to a chargeback of all or a portion of
the commissions paid in the event a life insurance policy is canceled or
surrendered, including cancellations for the non-payment of premiums, within the
first 15 months of issuance. As is customary in the industry, LifeUSA Insurance
advances agents up to 50% of first year commissions when life insurance policies
are sold even though most of the premiums have not yet been received. LifeUSA
Insurance contracts include a financial guaranty by the FMOs for chargebacks and
advances to agents within the FMO's organization.
The Company has developed a strategy to generate additional premium and
deposit production from existing LifeUSA Insurance agents and from new
production sources by investing in FMOs. The amount of any investment relates to
the revenue currently generated by the FMO and the projected increase in
business produced for LifeUSA Insurance by the FMO. During 1998, the FMOs in
which LifeUSA Marketing has an equity interest produced 30% of the Company's
life insurance and annuity production. In addition, LifeUSA Marketing recruits
new FMOs to sell its products. During 1998, LifeUSA Insurance signed marketing
agreements with 15 FMOs to market LifeUSA Insurance life insurance and annuity
products for the first time. There can be no assurances that the Company's
premium and deposit volume or income will be enhanced by the investments in FMOs
or by the contracting of new FMOs.
Although LifeUSA Insurance's larger and more successful FMOs and agents
tend to produce a majority of their business with LifeUSA Insurance, there is no
requirement that they do so. FMOs and agents may also be contracted with other
life insurance companies. Each FMO essentially serves as a "wholesaler" for
LifeUSA Insurance. A typical FMO consists of one or more highly experienced
individuals who have demonstrated the ability to build, manage and supervise a
marketing organization that is producing, or has the potential to produce, a
minimum of $1.25 million in annual life insurance and annuity commissions.
During 1998, one FMO, Life Sales LLC, accounted for 14% of LifeUSA
Insurance's total production (which includes production for Allianz Life on
policy forms similar to LifeUSA Insurance's). LifeUSA Marketing owns 50% of Life
Sales LLC. Although no other single FMO accounted for more than 10% of LifeUSA
Insurance's total production, the top FMOs (including their respective agents)
produced the following portions of LifeUSA Insurance's total business during
1998:
PERCENT OF CPCS(1)
-------------------
Top 5 FMOs ................ 34%
Top 10 FMOs ............... 49%
Top 25 FMOs ............... 76%
------------------
(1) CPCs (Combined Production Credits) are a measurement of the life insurance
and annuity business produced.
PRODUCTS
LifeUSA Insurance's products compete against the products of other
insurance companies on the basis of long-term benefits. Policyholder persistency
is encouraged by LifeUSA Insurance through increased retirement income benefits
for long-term policyholders and lower benefits in case of early surrender or
lapse. LifeUSA Insurance's products are designed to permit long-term investment
of assets by LifeUSA Insurance during the time premiums are being paid, benefits
are accumulated and benefits are being paid out. This product design not only
makes the products attractive to certain consumers, but also allows LifeUSA
Insurance to purchase assets that have cash flows consistent with the liability.
The target market for LifeUSA Insurance's products are consumers with average
annual incomes of $25,000 to $60,000. Management believes that this market is
not adequately serviced by the insurance industry and that the features of
LifeUSA Insurance's products will be attractive to these consumers.
LifeUSA Insurance has designed its products to emphasize long-term value
and benefits. Management believes that this is a need of the "baby-boom"
generation and that the insurance industry is best suited to provide long-term
benefits in the form of income guaranteed for a lifetime. The economic concern
today is
9
Life USA Holding, Inc.
GENERAL
not dying too soon, but living too long. By de-emphasizing short-term gain and
lump sum cash benefits to those who surrender their policies, LifeUSA
Insurance's products are less exposed to the disintermediation risk faced by
companies selling commodity-type products.
A disintermediation risk occurs when current interest rates are higher than
the interest rates earned by a company's existing investment portfolio. The risk
is that policyholders will move their funds away from the company to get higher,
short-term rates. If the assets supporting the policies are invested long-term
to support long-term rates of return and the liabilities offer short-term
liquidity, those who surrender their policies for cash take more than their fair
share from the company and from persisting policyholders.
Management believes that consumer demand for individually-funded retirement
products providing an adequate stream of retirement income is increasing and
will continue to increase in the future. This is due primarily to the aging of
the United States population, the reduction in employee-sponsored retirement
plans and consumer concerns as to whether government-sponsored retirement
programs, such as Social Security, will continue to provide meaningful
retirement benefits.
ANNUITY PRODUCTS LifeUSA Insurance's annuities are designed to offer
flexible premium deposit payments and a variety of annuitization options to the
annuitant. The product design also protects LifeUSA Insurance against the
negative effects of disintermediation and other lump sum withdrawals by
providing cash surrender values at amounts less than the annuitization values.
To encourage persistency, LifeUSA Insurance's annuities pay enhanced benefits to
policyholders that allow the annuity funds to accumulate over the long term and
then elect some form of income payout option rather than a lump sum cash
payment. At December 31, 1998, annuity account values in force (including
business produced by LifeUSA Insurance agents for Allianz Life) totaled $5.7
billion ($3.9 billion of which was ceded to reinsurers). Over 88% of the in
force annuities are single premium annuities. The following describes LifeUSA
Insurance's most significant annuity products:
ACCUMULATOR(TM) CLASSIC The Accumulator Classic has an 8% bonus and permits
the policyholder to elect to receive the entire policy value over as few as
five years. The Accumulator Classic accounted for approximately 16% of total
annuity deposits in 1998. Approximately 5.5% of such policies annuitize on
the first anniversary of the policy. The Accumulator Classic is marketed in
all states except Oregon and Washington and was introduced in 1988.
ACCUMULATOR(TM) CASH BONUS ANNUITY The Instant Cash Bonus Option is a feature
of the Accumulator Cash Bonus annuity that allows the policyholder to receive
the first-year annuity bonus in cash. The Accumulator Cash Bonus annuity,
introduced in 1993, accounted for approximately 29% of total annuity deposits
in 1998 and is marketed in all states except New Jersey, Oregon and
Washington.
ACCUMULATOR(TM) BONUS MAXXX(TM) ANNUITY The Accumulator Bonus MAXXX annuity
has an immediate 10% bonus on all premium payments in the first policy year.
It includes a nursing home benefit and the IDEA disability benefit that
provides a policyholder 60% additional monthly retirement income in the event
of total disability due to illness, accident or old age; the income increase
is 30% in the event of partial disability. The Accumulator Bonus MAXXX
annuity accounted for approximately 5% of total annuity deposits in 1998, the
year it was introduced. It is marketed in all states except Washington, D.C.,
New Jersey, North Dakota, Oklahoma, Oregon, South Carolina, Texas, Vermont
and Washington.
IDEA(R) The IDEA -- Individual Disability Escalating Annuity -- is a unique
concept in annuity product design providing a policyholder with 60%
additional monthly retirement income in the event of total disability due to
illness, accident or old age; the income increase is 30% in the event of
partial disability. The increased income benefit is paid as long as the
disability lasts, even for life. The IDEA is available on the Accumulator
Bonus MAXXX annuity and Universal Annuity Life products.
IDEAL(TM) ANNUITY The IDEAL annuity provides up to 10 years of protection
against interest rate changes (increases and decreases). When issued, the
IDEAL annuity offers a base credited rate, plus a 1.5% annual interest bonus,
both guaranteed for 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
credited on new issues. The new credited rate, plus another 1.5% annual
interest bonus, is then guaranteed for a new five-year term, also protecting
the policyholder against a rise in interest rates. The IDEAL annuity,
introduced in 1997,
Life USA Holding, Inc.
10
GENERAL
accounted for approximately 7% of total annuity deposits in 1998 and is
marketed in all states except New Jersey, North Dakota, Oklahoma, Oregon and
Washington.
IDEAL(TM) INDEX 50 ANNUITY The IDEAL Index 50 annuity combines the protection
against interest rate changes of the IDEAL annuity with an additional benefit
tied to the performance of the S&P 500(R) Index over the five-year term. The
IDEAL Index 50 annuity is a competitive fixed annuity, with principal and
interest guaranteed, which adds one half of the incremental growth of the S&P
500(R) Index to the value of the annuity if the S&P 500(R) Index outperforms
the annuity over a five-year period. While not an investment product, the
IDEAL Index 50 annuity is positioned as an alternative "safe haven" for
investment funds. By shifting from equity investments to the IDEAL Index 50
annuity, an investor can "lock-in" current equity gains and still
participate, should the stock market continue to rise. The IDEAL Index 50
annuity, introduced in 1997, accounted for approximately 11% of total annuity
deposits in 1998. It is marketed in all states except New Jersey, North
Dakota, Oklahoma, Oregon, South Carolina and Washington.
IDEAL(TM) INDEX 75 ANNUITY The IDEAL Index 75 annuity is similar to the IDEAL
Index 50 annuity except that three-fourths of the S&P 500(R) Index
incremental growth is added to the annuitization value of the annuity. The
IDEAL Index 75 annuity accounted for approximately 21% of total annuity
deposits in 1998, the year it was introduced. It is marketed in the same
states as the IDEAL Index 50 annuity.
LIFE INSURANCE PRODUCTS At December 31, 1998, life insurance account values
in force (including business produced by LifeUSA Insurance's agents for Allianz
Life) aggregated $333.6 million ($222.0 million of which was ceded to
reinsurers). The majority of in force life insurance business is paid in annual
or more frequent installments. The following describes LifeUSA Insurance's most
significant life insurance products:
UNIVERSAL ANNUITY LIFE(R) I AND UNIVERSAL ANNUITY LIFE(R) III The Universal
Annuity Life (UAL) products are specifically designed to pay the insured as
much for living as for dying. At younger ages, when the protection against
premature death is needed most, the UAL products provide tax-free benefits
for the policyholder's family or business. At retirement, there are a variety
of annuitization options available that provide significant additional
monthly income if a life-time payout is selected. The IDEA option (described
previously) is available as a rider. The UAL I and UAL III products are
marketed in all states except that product approval by regulatory authorities
is pending review in New Jersey for UAL I and New Jersey and Pennsylvania for
UAL III. In 1998, the UAL I and UAL III products accounted for 88% of total
life insurance premiums. The UAL I and UAL III were introduced in 1990 and
1991, respectively.
LIFEUSA SECURITIES LifeUSA Securities is a full service registered
broker-dealer in all 50 states. As a general securities dealer, LifeUSA
Securities offers virtually all types of securities on the listed and
over-the-counter markets. General securities purchases and trades are cleared
through Bear Stearns Securities Corporation. Other products available include:
mutual funds, unit investment trusts, variable life insurance and annuity
contracts, limited partnerships and long-term care insurance.
REINSURANCE
RELATIONSHIP WITH ALLIANZ LIFE Since 1988, under the terms of agreements
between the Company and Allianz Life, life insurance and annuity products have
been produced for Allianz Life on policy forms similar to those of LifeUSA
Insurance (the "Allianz/LUSA Business"). The Company has received commission and
expense allowances, provided all administrative and other home office services,
paid commissions due agents and paid applicable premium taxes on the
Allianz/LUSA Business. LifeUSA Insurance assumes 25% of the Allianz/LUSA
Business and pays commission and expense allowances on the assumed business to
Allianz Life. During 1997 and 1998, the Company produced long-term care
insurance business for Allianz Life and received marketing and service fees for
that business.
The terms of an agreement announced in January 1998 ("the agreement with
Allianz Life") allow Allianz Life to acquire up to 35% of the outstanding common
stock of the Company and to extend the marketing agreement between the two
companies to December 31, 2000. Allianz Life will acquire its interest in the
Company over a five-year period, ending in 2002, by purchasing from the Company
$100 million of newly
11
Life USA Holding, Inc.
GENERAL
issued common stock in increments of $10 million semi-annually. The price at
which Allianz Life will purchase the common stock will be at 250% of the
Company's six-month average book value per share (excluding Statement of
Financial Accounting Standards No. 115), at the time the common stock is issued.
In August 1998, Allianz Life acquired 406,092 shares of the Company's common
stock at $24.625 per share, and in February 1999, Allianz Life acquired 395,062
shares at the mutually agreed upon purchase price of $25.3125 per share. If the
price at which Allianz Life would purchase the Company's common stock is more
that 200% of the current market price at the time the common stock is tendered,
Allianz Life can decline to purchase the stock, and the Company can require
Allianz Life to purchase a convertible debenture for a like amount of capital.
See Note 10 to the Consolidated Financial Statements.
Effective April 1, 1998 and in accordance with the agreement with Allianz
Life, Allianz Life, either as a direct writer or reinsurer, has the right to
retain 37.5% of the new life insurance and annuity business produced by the
Company's agents, up from 25% under the previous marketing agreement.
REINSURANCE CEDED Since its inception in 1987, LifeUSA Insurance has
entered into various agreements to reinsure a substantial portion of the new
life insurance and annuity business written each year. Entering into these
reinsurance agreements has allowed LifeUSA Insurance to write a larger volume of
business than it would otherwise have been able to write due to statutory
capital and surplus requirements.
From April 1, 1991 through March 31, 1998, LifeUSA Insurance ceded a
substantial portion of its new life insurance and annuity business to the
following three reinsurers (the Reinsurers):
o Employers Reassurance Corporation, a subsidiary of Employers Reinsurance
Corporation, a member of the General Electric Company group (Employers);
o Munich American Reassurance Company, a subsidiary of Munich Reinsurance
Company, one of the largest German insurance companies (Munich); and
o Republic-Vanguard Life Insurance Company, a member of PartnerRe Ltd., one
of the largest reinsurance companies (Republic-Vanguard).
Effective April 1, 1998, and in accordance with the agreement with Allianz
Life, Allianz Life began assuming a portion of LifeUSA Insurance's business.
Also effective April 1, 1998, Munich ceased assuming any new business from
LifeUSA Insurance and LifeUSA Insurance increased the retention of its annuity
business from 25% to 30% and its life insurance business from 25% to 50%.
The following table shows the percentages of new life insurance and annuity
business written by LifeUSA that have been ceded 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 - March 1998 ............. 75 75
April 1998 - Present .................. 50 70
The Company receives commissions and expense allowances on the portions of
LifeUSA Insurance's life insurance and annuity products reinsured and service
fees on the Allianz/LUSA Business. The commissions and expense allowances and
service fees (combined together and shown on the Consolidated Statement of
Income as commission and expense allowances, net) received on life insurance
policies are approximately 150% of the first-year planned target premium and
range from 121/2% to 18% of renewal and first-year excess premiums. The Company
also receives commissions and expense allowances and service fees ranging from
61/2% to 22% on annuity deposits.
An additional allowance equal to .20% of the account value and renewal
premium deposits of LifeUSA Insurance annuities issued from April 1, 1991 until
December 31, 1996 is received as of the beginning of policy years two through
ten. For LifeUSA Insurance annuities issued from January 1, 1997 through
Life USA Holding, Inc.
12
GENERAL
March 31, 1998, an additional allowance equal to .16% of the account value and
renewal premium deposits is received as of the beginning of policy years two
through the life of the policy. In April 1998, this additional allowance was
changed to .21%. In April 1998, the Company began earning an additional
allowance equal to .09% of the account value and renewal premium deposits of all
annuities produced for Allianz Life, which is received as of the beginning of
policy years two through the life of the policy.
Under the reinsurance agreements, $428.7 million, $545.8 million and $437.9
million of premiums and deposits were ceded to the Reinsurers by LifeUSA
Insurance for the years ended December 31, 1998, 1997 and 1996, respectively.
When a life insurance policy ceded to the Reinsurers lapses before the end of 15
months, LifeUSA Insurance has agreed to pay a chargeback equal to the excess of
the allowances received over the premiums received. As of December 31, 1998 and
1997, the reserve for lapsed policy chargebacks was $650,000. Assets and
liabilities related to reinsurance ceded are required to be reported on a gross
basis reflecting the possibility that reinsured risks could become a liability
to the Company in the event the Reinsurers become unable to meet the obligations
they have assumed. The reinsurance agreements require the Reinsurers' approval
of policy forms and terms of LifeUSA Insurance products reinsured by the
Reinsurers.
Any restriction, limitation or condition imposed by the Reinsurers could
have a material effect on LifeUSA Insurance's ability to write new business if
LifeUSA Insurance was not able to replace the current reinsurers, or obtain the
required capital to support the level of new business.
REINSURANCE ASSUMED LifeUSA Insurance assumes a portion of new Allianz/LUSA
Business directly from Allianz Life. Under this agreement, $116.1 million,
$146.0 million and $122.7 million of premiums and deposits were assumed by
LifeUSA Insurance from Allianz Life for the years ended December 31, 1998, 1997
and 1996, respectively.
The following table shows the percentages of new Allianz/LUSA Business for
Allianz Life that have been assumed by LifeUSA Insurance 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
MAINTENANCE EXPENSES The Company is obligated to continue servicing the
underlying life insurance and annuity policies written directly by LifeUSA
Insurance and the Allianz/LUSA Business. 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, a liability
would be established to the extent that the present value of future servicing
costs is expected to exceed the present value of future renewal allowances.
13
Life USA Holding, Inc.
GENERAL
LIFE INSURANCE AND ANNUITIES IN FORCE
The following table shows LifeUSA Insurance life insurance and annuities in
force information at December 31, 1998 and December 31, 1997 (in millions):
[Enlarge/Download Table]
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------- ------------------
Life insurance account values:
All policies produced by LifeUSA Insurance agents(1) ....... $ 333.6 $ 299.1
Direct and assumed business(2) ............................. 286.2 257.0
Net of reinsurance(3) ...................................... 111.6 99.3
Life insurance face amounts:
All policies produced by LifeUSA Insurance agents(1) ....... 7,679.7 7,997.5
Direct and assumed business(2) ............................. 6,646.2 6,931.7
Net of reinsurance(3) ...................................... 2,333.6 2,277.7
Annuity account values:
All policies produced by LifeUSA Insurance agents(1) ....... 5,743.1 5,518.4
Direct and assumed business(2) ............................. 4,054.0 3,916.6
Net of reinsurance(3) ...................................... 1,825.0 1,781.1
------------------
(1) Includes all LifeUSA Insurance products and all Allianz/LUSA Business.
(2) Includes all LifeUSA Insurance products and the Allianz/LUSA Business
assumed by LifeUSA Insurance.
(3) Includes the portion of LifeUSA Insurance products retained by LifeUSA
Insurance and the portion of Allianz/LUSA Business assumed by LifeUSA
Insurance.
UNDERWRITING
All life insurance business is subject to standard underwriting procedures
as agreed to by the Reinsurers, using an underwriting manual from the
Reinsurers. Republic-Vanguard is the reinsurer currently charged with the
responsibility of reviewing the underwriting practices of LifeUSA Insurance and
performing periodic audits (every other year) of LifeUSA Insurance's compliance
with underwriting procedures and results. There are minimal underwriting
requirements with regard to annuity business.
LifeUSA Insurance can underwrite all life policies with a face amount up to
$500,000 without approval of Republic-Vanguard. Amounts above this level require
individual evaluation by Republic-Vanguard. As appropriate, varying
requirements, including tests, medical exams and personal financial statements,
may be required at higher ages and/or larger face amounts of insurance.
INVESTMENT POLICIES
The Company's long-term investment portfolio is comprised of U.S. Treasury
securities, U.S. Government agency securities, foreign government obligations
denominated in U.S. dollars and issued and traded in the United States,
mortgage-backed securities issued or guaranteed by U.S. government corporations
or agencies and investment grade corporate obligations. The Company has never
purchased real estate, private direct mortgages or below investment-grade
securities. The Company engages Windsor and Allianz Investment Corporation
(AIC), an affiliate of Allianz Life, to serve as the Company's investment
advisers. At December 31, 1998, assets managed for customers by Windsor and AIC
exceed $3.7 billion and $21.9 billion, respectively.
Windsor and AIC purchase investment securities for the Company based on the
Company's guidelines. The investment philosophy of LifeUSA Insurance is
reflected in investment guidelines adopted by the Board of Directors of the
Company annually, as follows:
SIZE: no more than 5% of the Company's invested assets in any issuer other
than direct or guaranteed United States obligations, no more than 25% of
invested assets in any industry, and no more than 2% of any issue other than
direct or guaranteed United States obligations;
QUALITY: minimum quality of purchase must be "BBB-" or better, average
quality "A" or better;
DURATION: match to liabilities, allow for sufficient liquidity and cash flow
matching; and
INCOME: manage to maintain or increase income, excluding capital gains.
Life USA Holding, Inc.
14
GENERAL
AGENT AND EMPLOYEE OWNERSHIP
Historically, the Company has issued a variety of equity-based financial
instruments (common stock, convertible subordinated debentures and stock
options) to LifeUSA Insurance agents and the Company's home office employees in
order to provide these individuals with an ownership interest in the Company and
create an important incentive to produce premiums and maintain profitable
operations. From 1992 through March 31, 1997, the Company granted stock options
as commission bonuses to LifeUSA Insurance agents based on net earned
commissions on business written. The Company discontinued the granting of stock
options as production bonuses in the calendar quarter ended March 31, 1997. The
Company also has a stock option plan for employees under which employees on the
anniversary date of their employment receive options on a number of shares of
common stock equal to 1% of their annual salary at an exercise price per share
of not less than 150% of the market value of a share of common stock on the date
the option is issued. The Company expects to continue to grant stock options to
employees.
QUALITY OF SERVICE
Management believes that quality service, responsiveness and support to
agents and to policyholders have been and continue to be critical to agent
retention, policyholder satisfaction and cost-effective operations. As a result
of their ownership interests in the Company, home office employees have a
special commitment to their jobs and are referred to as "home office owners." An
example of home office responsiveness created by this commitment is the "48-hour
challenge." If an insurance application conforming to normal standards is not
completed within 48 hours, the agent receives $100. For 1998, 43,615
applications were submitted and only 47 challenges were paid.
At December 31, 1998, the Company employed 426 full-time and 29 part-time
persons, and the number of persons performing home office functions were as
follows:
NUMBER OF
HOME OFFICE FUNCTION EMPLOYEES
--------------------------------------- ----------
Executive ........................... 17
Operations .......................... 196
Support ............................. 84
Marketing ........................... 60
Information Services ................ 71
Owner Services ...................... 14
Securities .......................... 13
The Company's employees are not represented by a collective bargaining
unit. The Company considers its general relations with its employees to be
excellent.
COMPETITION
The industry in which the Company operates is highly competitive, with many
competitors offering diverse products through various alternative marketing or
distribution systems. The Company's products compete not only with life
insurance and annuities, but they also compete with other retirement-oriented
financial products, and stock and bond mutual funds. Competition for FMOs and
agents with demonstrated ability is also intense. However, management believes
that LifeUSA Insurance has been able to attract and will continue to be able to
attract, motivate and retain productive, independent FMOs and agents by
providing innovative products and quality service.
15
Life USA Holding, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
RESULTS OF OPERATIONS
The following analysis of the results of operations and financial condition
of Life USA Holding, Inc. (the Company) and its wholly-owned subsidiaries,
LifeUSA Insurance Company (LifeUSA Insurance), LifeUSA Marketing, Inc. (LifeUSA
Marketing) and LifeUSA Securities, Inc. (LifeUSA Securities), should be read in
conjunction with the Company's consolidated financial statements and notes
thereto included elsewhere in this Annual Report to Shareholders and Form 10-K.
In 1998, the Company's production of total collected premiums and deposits
decreased 18% compared to 1997. As a result, revenues from commission and
expense allowances and expenses for commissions paid decreased. The Company
generated increases in invested assets and annuities in force and as a result,
revenues from policyholder charges and net investment income and expenses for
interest credited to policyholder account values increased. Primarily as a
result of these factors, net income for 1998 decreased 19% compared to 1997.
PREMIUMS AND DEPOSITS. Total collected premiums and deposits, including
Allianz/LUSA Business, were $1.06 billion, $1.29 billion and $1.05 billion in
1998, 1997 and 1996, respectively, and represented a decrease of 18% in 1998
compared to 1997 and an increase of 23% in 1997 compared to 1996. 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,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
Collected Premiums and Deposits(1):
LifeUSA Insurance:
Life:
First year ...................................... $ 5,611 $ 7,883 $ 12,731
Single and renewal .............................. 52,116 52,323 49,242
---------- ---------- ----------
Total Life .................................... 57,727 60,206 61,973
Annuities ....................................... 559,059 684,992 547,748
---------- ---------- ----------
Total LifeUSA Insurance collected premiums
and deposits ................................ 616,786 745,198 609,721
Allianz Life:
Life:
First year ...................................... 1,426 2,142 3,261
Single and renewal .............................. 15,164 14,961 14,817
---------- ---------- ----------
Total Life .................................... 16,590 17,103 18,078
Annuities ....................................... 422,582 532,151 424,659
---------- ---------- ----------
Total Allianz Life collected premiums
and deposits ................................ 439,172 549,254 442,737
---------- ---------- ----------
Total collected premiums and deposits ....... $1,055,958 $1,294,452 $1,052,458
========== ========== ==========
------------------
(1) Includes all LifeUSA Insurance products and all Allianz/LUSA Business.
Life USA Holding, Inc.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
Premiums and Deposits Not Retained or Assumed(2):
LifeUSA Insurance:
Life:
First year .................................... $ 3,801 $ 5,913 $ 8,416
Single and renewal ............................ 34,512 34,021 31,925
-------- -------- --------
Total Life .................................. 38,313 39,934 40,341
Annuities ..................................... 390,348 505,829 397,566
-------- -------- --------
Total LifeUSA Insurance premiums and
deposits not retained ..................... 428,661 545,763 437,907
Allianz Life:
Life:
First year .................................... 1,072 1,607 2,228
Single and renewal ............................ 9,177 8,833 8,596
-------- -------- --------
Total Life .................................. 10,249 10,440 10,824
Annuities ..................................... 312,832 392,807 309,198
-------- -------- --------
Total Allianz Life premiums and deposits
not assumed ................................ 323,081 403,247 320,022
-------- -------- --------
Total premiums and deposits not retained or
assumed ................................... $751,742 $949,010 $757,929
======== ======== ========
Retained or Assumed Premiums and Deposits(3):
LifeUSA Insurance:
Life:
First year .................................... $ 1,810 $ 1,970 $ 4,315
Single and renewal ............................ 17,604 18,302 17,317
-------- -------- --------
Total Life .................................. 19,414 20,272 21,632
Annuities ..................................... 168,711 179,163 150,182
-------- -------- --------
Total LifeUSA Insurance retained premiums
and deposits .............................. 188,125 199,435 171,814
Allianz Life:
Life:
First year .................................... 354 535 1,033
Single and renewal ............................ 5,987 6,128 6,221
-------- -------- --------
Total Life .................................. 6,341 6,663 7,254
Annuities ..................................... 109,750 139,344 115,461
-------- -------- --------
Total Allianz Life assumed premiums
and deposits .............................. 116,091 146,007 122,715
-------- -------- --------
Total retained or assumed premiums
and deposits .............................. $304,216 $345,442 $294,529
======== ======== ========
------------------
(2) Includes premiums and deposits related to LifeUSA Insurance ceded by LifeUSA
Insurance to the Reinsurers and premiums and deposits related to
Allianz/LUSA Business not assumed by LifeUSA Insurance.
(3) Includes premiums and deposits related to LifeUSA Insurance retained by
LifeUSA Insurance and premiums and deposits related to Allianz/LUSA Business
assumed by LifeUSA Insurance. LifeUSA Insurance invests these premiums and
deposits for the purpose of providing future benefits to its policyholders.
Reference is made to the Reinsurance information under the caption
"General-Reinsurance" on pages 11-13 in this Annual Report and Form 10-K for
further details on the Company's reinsurance agreements.
17
Life USA Holding, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
REVENUES. Total revenues were $362.6 million, $369.9 million and $316.9
million in 1998, 1997 and 1996, respectively. The decrease in total revenues of
2% in 1998 compared to 1997 was primarily due to the decrease in net commissions
and expense allowances associated with decreased production of business. This
factor was partially offset by the increase in net investment income generated
by the growth of invested assets and by an increase in policyholder charges. The
increase in total revenues of 17% in 1997 compared to 1996 was primarily due to
the increase in net commissions and expense allowances associated with increased
production of business not retained or assumed. Also contributing to this
increase in revenues was the increase in net investment income generated by the
growth of invested assets and net realized gains on investments. The discussion
which follows gives a line-by-line comparison of revenue for the years ended
December 31, 1998, 1997 and 1996. See also the Business Segments section which
follows for additional analysis of the results of operations.
Policyholder charges, which represent the amounts assessed against policy
account values for the cost of insurance, policy administration, annuitizations
and surrenders, increased 7%, or $3.6 million, in 1998 compared to 1997, and 6%,
or $2.6 million, in 1997 compared to 1996, reflecting the growth in and maturity
of LifeUSA Insurance net retained account values in force. The following table
shows the amounts of policyholder charges for 1998, 1997 and 1996 (in
thousands):
1998 1997 1996
----------- ------------ ------------
Direct .............. $ 105,390 $ 94,405 $ 82,904
Assumed ............. 19,026 18,187 16,540
Ceded ............... (71,355) (63,122) (52,602)
--------- --------- ---------
Net ................. $ 53,061 $ 49,470 $ 46,842
========= ========= =========
Increases in net investment income of 10%, or $13.8 million, in 1998
compared to 1997, and 11%, or $14.7 million, in 1997 compared to 1996, are
attributable to increases in invested assets (fixed maturity investments and
cash and cash equivalents) to $2.30 billion at December 31, 1998 from $2.17
billion at December 31, 1997 and $1.90 billion at December 31, 1996, which was
only partially offset by the reduction in yield on investments. The weighted
average annual yield on invested assets (exclusive of realized and unrealized
gains and losses) was 7.23%, 7.30% and 7.44% at December 31, 1998, 1997 and
1996, respectively.
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 1998, 1997 and 1996
(dollars in millions, except per share amounts):
[Download Table]
1998 1997 1996
-------- --------- ---------
Net realized gains on investments ................ $ .8 $ 4.4 $ 1.8
Increase in:
Amortization of deferred policy acquisition costs .3 1.9 .7
Other benefits to policyholders ................. .2 1.4 .5
---- ----- -----
Income before income taxes ....................... .3 1.1 .6
Income taxes ..................................... .1 .4 .2
---- ----- -----
Net income ....................................... $ .2 $ .7 $ .4
==== ===== =====
Diluted earnings per share ....................... $ .01 $ .03 $ .02
===== ====== ======
Net commissions and expense allowances on premiums and deposits collected
on reinsured policies and service fees on business produced for Allianz Life
decreased 15%, or $26.0 million, in 1998 compared to 1997. This decrease is
consistent with the 18% decrease in total collected premiums and deposits and
with the decline in collected first year life insurance premiums, both of which
were partially offset by changes in the mix of deferred annuity products sold.
The increase in net commissions and expense allowances of 24%, or $32.4 million,
in 1997 compared to 1996, is consistent with the 23% increase in total collected
premiums and deposits.
Life USA Holding, Inc.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
The following table shows the amounts of net commissions and expense
allowances for 1998, 1997 and 1996 (in thousands):
[Enlarge/Download Table]
1998 1997 1996
------------ ------------ ------------
LifeUSA Insurance:
Life:
First year .............................................. $ 4,718 $ 7,153 $ 10,263
Single and renewal ...................................... 5,520 5,515 5,246
-------- -------- --------
Total Life ............................................. 10,238 12,668 15,509
Annuities ............................................... 64,292 77,145 59,003
-------- -------- --------
Total LifeUSA Insurance .............................. 74,530 89,813 74,512
Allianz/LUSA Business:
Life:
First year .............................................. 1,570 2,148 3,336
Single and renewal ...................................... 2,082 2,110 2,227
-------- -------- --------
Total Life ........................................... 3,652 4,258 5,563
Annuities ............................................... 66,603 76,955 58,431
-------- -------- --------
Total Allianz/LUSA Business .......................... 70,255 81,213 63,994
Lapse policy chargebacks ................................... (656) (908) (772)
-------- -------- --------
Total commissions and expense allowances, net ....... $144,129 $170,118 $137,734
======== ======== ========
------------------
The above table includes commissions and expense allowances related to LifeUSA
Insurance policies that have been ceded by LifeUSA Insurance to the Reinsurers
and service fees related to Allianz/LUSA Business.
The Company pays a lapse policy chargeback to the Reinsurers when a life
insurance policy that has been ceded lapses before the end of 15 months. The
chargeback paid for each policy is equal to the excess of the allowances
received over the premiums received.
Reference is made to the Reinsurance information under the caption
"General-Reinsurance" on pages 11-13 in this Annual Report and Form 10-K for
further details on the Company's reinsurance agreements.
EXPENSES. Total expenses were $327.5 million, $326.8 million and $279.8
million in 1998, 1997 and 1996, respectively. Total expenses were relatively
flat in 1998 compared to 1997 which reflects the growth in and maturity of
annuities in force offset by the decline in premium production and the 1997
national advertising and sales promotion campaign. The increase in total
expenses of 17% in 1997 compared to 1996 was primarily due to increased sales in
1997 and the national advertising and sales promotion campaign. The discussion
that follows gives a line-by-line comparison of expenses for the years ended
December 31, 1998, 1997 and 1996. See also the Business Segments section that
follows for additional analysis of the results of operations.
Increases in interest credited to policyholder account values of 8%, or
$8.5 million, in 1998 compared to 1997 and 10%, or $10.0 million, in 1997
compared to 1996 reflect the growth in annuities in force. The following table
shows the amounts of interest credited to policyholder account values for 1998,
1997 and 1996 (in thousands):
1998 1997 1996
------------- ------------- -------------
Direct ......... $ 213,855 $ 191,538 $ 172,838
Assumed ........ 49,372 46,616 41,187
Ceded .......... (145,229) (128,647) (114,508)
---------- ---------- ----------
Net ............ $ 117,998 $ 109,507 $ 99,517
========== ========== ==========
Increases in other benefits to policyholders of 22%, or $5.1 million, in
1998 compared to 1997 reflect increased surrenders, additional reserves for
index-related benefits, accrual of bonuses to be paid to policyholders and
growth in and maturity of in force business. Increases in other benefits to
policyholders of
19
Life USA Holding, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
32%, or $5.6 million, in 1997 compared to 1996 reflect the accrual of bonuses to
be paid to policyholders that is generated by the production of new business and
the additional accrual of bonuses that is generated by the net realized gains on
investments described above.
Amortization of deferred policy acquisition costs increased 8%, or $2.3
million, in 1998 compared to 1997. This increase reflects an increase in gross
profits due to a growing and more mature block of in force business with
slightly increased surrenders. Amortization of deferred policy acquisition costs
increased 13%, or $3.3 million, in 1997 compared to 1996. This reflects the
combination of an increase in gross profits due to a growing, more mature block
of in force business and an increase in the amortization of deferred policy
acquisition costs as a result of the net realized gains on investments described
above.
LifeUSA Insurance uses models to estimate future gross profits and to
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). LifeUSA Insurance is required to make
revisions to the estimates in these models and adjust amortization accordingly.
In 1998 and 1997, minor revisions were made to the estimates used in these
models, however, the impact on financial results was insignificant. During 1996,
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.
The following table shows comparative rates for lapses, surrenders and
annuitizations for 1998, 1997 and 1996:
[Enlarge/Download Table]
1998 1997 1996
---------- ---------- ----------
Annualized first year lapse rate for life insurance policies
(excluding single premium) ................................. 24.9% 22.7% 20.7%
Annualized first year (13 months) surrender rate for
annuities .................................................. 1.2 1.2 1.1
Annualized first year (13 months) annuitization rate for
annuities .................................................. 5.5 6.1 5.9
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 Insurance 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 decreased 15%, or $15.6 million, in 1998 compared to
1997. This decrease is consistent with the decrease in total collected premiums
and deposits discussed previously and with the decline in collected first year
life insurance premiums, both of which were partially offset by changes in the
mix of deferred annuity products sold. Commissions to agents increased 27%, or
$21.3 million, in 1997 compared to 1996. This increase was due to an increase in
total collected premiums and deposits discussed previously and a change in the
mix of deferred annuity products sold, both of which were partially offset by
the decline in collected first year life insurance premiums.
Taxes, licenses and fees (which consists primarily of premium taxes and
state guaranty fund assessments) decreased 31%, or $851,000, in 1998 compared to
1997. The decrease was primarily due to a general decline in overall industry
assessment liabilities and the decrease in premium production. Taxes, licenses
and fees decreased 24%, or $853,000, in 1997 compared to 1996. This decrease was
primarily due to a general decline in overall industry assessment liabilities
and a reduction in the Company's estimates for future assessment liabilities,
recoveries in the first quarter of 1997 of guaranty fund assessments and state
income taxes paid in 1996 and offsetting increases in premium taxes related to
increased production.
Operating expenses increased 2%, or $1.2 million, in 1998 compared to 1997.
The increase was due primarily to the growth of LifeUSA Insurance's in force
annuity business, partially offset by the expenditures for a national
advertising and sales promotion campaign during 1997. Operating expenses
increased 14%, or $7.7 million, in 1997 compared to 1996. The increase was due
primarily to the growth of LifeUSA Insurance in force annuity business and the
expenditures for the national advertising and sales promotion campaign in 1997.
Life USA Holding, Inc.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
Income taxes were $13.3 million in 1998, $16.1 million in 1997 and $13.6
million in 1996. The effective income tax rates for 1998, 1997 and 1996 were
37.7%, 37.4% and 36.7%, respectively.
NET INCOME. Net income was $21.9 million in 1998, $27.0 million in 1997,
and $23.5 million in 1996, which represents a decrease in net income of 19% in
1998 compared to 1997 and an increase of 15% in 1997 compared to 1996. Diluted
earnings per share was $.83 in 1998, $1.11 in 1997 and $1.04 in 1996 which
represents a decrease of 25% in 1998 compared to 1997 and an increase of 7% in
1997 compared to 1996. For 1998, the per share decrease is higher than the net
income decrease due primarily to the shares issued as a result of the agreement
with Allianz Life and option exercises partially offset by the repurchase of 1.8
million shares, which increased the number of shares used in the earnings per
share calculation. For 1997, the per share increase is lower than the net income
increase due to an increase of 1.8 million shares used in the earnings per share
calculations. (See Note 8 to the Consolidated Financial Statements for details).
The following table summarizes the operating highlights for 1998, 1997 and
1996 (dollars in millions, except per share amounts):
[Enlarge/Download Table]
1998 1997 1996
-------------------- --------------------- ---------------------
INCOME EPS INCOME EPS INCOME EPS
---------- --------- ---------- ---------- ---------- ----------
Consolidated net income and earnings per share $ 21.9 $ .83 $ 27.0 $ 1.11 $ 23.4 $ 1.04
Adjustments to arrive at consolidated net
operating income(1):
Net realized gains on investments ................... ( .2) (.01) ( .7) ( .03) ( .4) ( .02)
Charges (credits) for state guaranty fund
assessments ........................................ ( 1.0) (.04) ( .9) ( .04) 2.0 .09
Tax liability for prior years' activity ............. .1 .01 .7 .03 -- --
------- ------ ------- ------- ------- -------
Consolidated net operating income and earnings
per share ........................................... 20.8 .79 26.1 1.07 25.0 1.11
Impact of expenses associated with national
advertising campaign ................................ -- -- 2.0 .08 -- --
------- ------ ------- ------- ------- -------
Consolidated net operating income and earnings
per share excluding impact of expenses
associated with national advertising campaign ....... $ 20.8 $ .79 $ 28.1 $ 1.15 $ 25.0 $ 1.11
======= ====== ======= ======= ======= =======
------------------
(1) Consolidated net operating income equals net income, excluding, net of
related income taxes: (i) net realized gains on investments and the
corresponding increases in amortization of deferred policy acquisition costs
and other benefits to policyholders, (ii) charges (credits) for state
guaranty fund assessments, and (iii) changes in tax liability for prior
years' activity.
LIQUIDITY AND CAPITAL RESOURCES
During 1998, the Company's primary available sources of cash were:
o service fees received by the Company for the Allianz/LUSA Business;
o management fees from LifeUSA Insurance;
o interest earned on invested assets;
o $10 million received from Allianz Life's stock purchase in August 1998;
o dividends totaling $2.5 million paid to the Company by LifeUSA Insurance;
o issuance of shares upon exercise of common stock options; and
o a $50 million long-term line of credit from its Reinsurers.
In September 1998, the Company borrowed $10 million under its line of
credit increasing the total outstanding balance to $15 million.
A substantial portion of the Company's operating expenses is attributable
to services provided to LifeUSA Insurance, such as employees, data processing,
facilities and supplies, which are reimbursed by LifeUSA Insurance through
management fees. LifeUSA Insurance is expected to have sufficient cash to
provide
21
Life USA Holding, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
reimbursement through 1999, based on currently anticipated life insurance and
annuity sales and on the continuation of acceptable reinsurance arrangements.
The extended marketing relationship with Allianz Life and related infusion
of $100 million in capital through 2002, along with the $50 million line of
credit from the Reinsurers and dividends from LifeUSA Insurance, provides
sufficient capital to fund the Company's needs.
The Company's cash needs consist of:
o operating expenses, including expenses in connection with efforts to
increase the production of existing agents and expand the size of the
field force;
o capital contributions to LifeUSA Marketing for investments in marketing
organizations expected to increase premium and deposit production volume
for LifeUSA Insurance and Allianz Life;
o repayments of borrowings under the line of credit to the Reinsurers; o
operating expenses of and potential contributions to LifeUSA Securities to
ensure compliance with NASD capital requirements;
o quarterly dividends to shareholders of record; o authorized repurchases of
its common stock;
o potential contributions to LTCAmerica to purchase an existing long-term
care insurance company or a "shell" insurance company and commence
operations; and
o contributions to LifeUSA Insurance to permit increases in sales volume and
retention or assumption of new life insurance and annuity business
produced by LifeUSA Insurance agents and to provide LifeUSA Insurance
sufficient capital and surplus to maintain adequate capital ratios.
In July 1998, the Company announced that its Board of Directors authorized
a program to repurchase up to four million shares of its common stock through
periodic purchases in the marketplace. The shares to be repurchased represented
approximately 15% of the Company's 26.0 million shares outstanding. As of
December 31, 1998, 1.8 million shares have been repurchased by the Company at an
average price of $12.50 per share. Repurchased shares will be deemed to be
outstanding shares for purposes of calculating the 35% of the outstanding common
stock of the Company to be acquired over the next five years by Allianz Life.
Management believes that the available sources of cash will provide
sufficient capital resources to meet all the Company's cash needs in the
ordinary course of business during the next twelve months, based on currently
anticipated life insurance and annuity sales, expected levels of net retention
and acceptable reinsurance agreements.
For LifeUSA Insurance to retain or assume life insurance and annuity
business, LifeUSA Insurance must maintain a sufficient level of statutory
capital and surplus as established by the regulatory authorities in the
jurisdictions where LifeUSA Insurance is licensed to do business. As LifeUSA
Insurance retains and assumes business, it is required to expense commissions
and other policy issuance costs for statutory accounting purposes and to
establish statutory reserves for policy benefits, thereby creating a statutory
loss and reducing statutory surplus in the first year of the policy. The
anticipated profits from the retained or assumed business are realized over the
remaining period that the policies are in force. The combination of these
dynamics first produced statutory net income during 1995.
LifeUSA Insurance produced statutory net income of $17.2 million in 1998
compared to $18.4 million in 1997. As of December 31, 1998, LifeUSA Insurance
had statutory capital and surplus for regulatory purposes of $113.1 million
compared to $103.7 million at December 31, 1997. LifeUSA Insurance expects to
continue to satisfy statutory capital and surplus requirements through 1999
primarily through statutory profits on its maturing block of retained in force
business. Effective April 1, 1998, LifeUSA Insurance increased the retention of
its annuity business from 25 to 30% and its life insurance business from 25 to
50%. The changes in the retention levels did not produce a significant impact on
statutory capital in 1998.
In January 1999, the Company announced that its Board of Directors declared
a cash dividend of 2.5 cents per share for the fourth quarter of 1998, payable
on February 12, 1999, to shareholders of record as of January 28, 1999. The
Company declared similar dividends for the first, second and third quarters of
1998. It is the intention of the Board of Directors to pay regular quarterly
dividends in 1999 of 2.5 cents per share, or ten cents per share on an annual
basis.
Life USA Holding, Inc.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
Although the Board of Directors of the Company declares dividends on its
common stock, there are statutory and regulatory limitations upon the extent to
which dividends may be paid to a parent from an insurance subsidiary, including
the restriction that an insurance company may only pay ordinary dividends out of
unassigned funds (earned surplus). The Department of Commerce of the State of
Minnesota must permit LifeUSA Insurance to pay dividends to the Company in any
12-month period in an amount exceeding the lesser of (i) 10 percent of the
insurer's statutory earned surplus at the end of the preceding year or (ii) the
insurer's statutory net gain from operations, not including realized capital
gains, for the year preceding the distribution, both of which are determined in
accordance with Minnesota insurance laws and regulations. The Department of
Commerce of the State of Minnesota permitted LifeUSA Insurance to pay $2.5
million in extraordinary dividends to the Company during 1998 and 1997 and $5
million in January 1999.
REGULATORY ENVIRONMENT. LifeUSA Insurance is subject to regulation in the
49 states in which it is authorized to do business. The laws of these states
establish supervisory agencies with administrative powers related to granting
and revoking licenses to transact business, approving the form and content of
policies, reviewing the advertising and illustration of policies, licensing
agents, establishing reserve requirements and regulating the type and amount of
investments. Such regulations are primarily intended to protect policyholders.
The Company is also regulated in several states as an insurance holding company
and as a third party administrator.
With the objective of reducing the risk of company insolvencies, the
National Association of Insurance Commissioners (NAIC) established risk-based
capital standards. The risks inherent in a life insurance company's operation
determine its current capital requirements. These standards continue to be
reviewed by the NAIC. LifeUSA Insurance's current percentage of actual total
adjusted capital to authorized control level risk-based capital is well in
excess of regulatory requirements.
The NAIC continues to consider changes to model laws based on innovative
product designs. Nonforfeiture law discussions have considered how to better
support multiple benefit product designs, such as LifeUSA Insurance's two-tier
annuities and universal life insurance contracts with enhanced retirement
benefits. LifeUSA Insurance has been able to successfully demonstrate the
financial stability of such designs, which provide higher retirement benefits to
consumers while decreasing disintermediation and solvency risks to LifeUSA
Insurance.
As of December 31, 1998, the NAIC Life Insurance Illustration Model
Regulation was effective in twenty-seven states. A requirement of the regulation
is that prescribed tests be satisfied to demonstrate illustrated benefits are
self-supporting and not lapse-supported. The requirements of this regulation
have been successfully implemented by LifeUSA Insurance. In December 1998, the
NAIC finalized a new annuity disclosure model regulation. Final NAIC adoption is
anticipated in March 1999, and adoption in each state is required before it
becomes law. The new model requires a product specific disclosure document and a
copy of the NAIC Buyer's Guide to Fixed Deferred Annuities be provided to the
consumer at the time of application. It does not regulate illustrations and does
not require self-support or lapse-support testing of annuity illustrations.
LifeUSA Insurance is monitoring these developments and no significant impact is
anticipated at this time.
NAIC committees are considering a new approach to statutory valuation of
liabilities (reserves) and regulations for equity-indexed products. LifeUSA
Insurance is monitoring these developments and no significant impact is
anticipated at this time.
Insurance laws also require LifeUSA Insurance to file detailed periodic
reports with the regulatory agencies in each of the states in which it writes
business, and these agencies may also examine LifeUSA Insurance's business
operations and financial statements at any time. Under NAIC rules, one or more
of the regulatory agencies will periodically examine LifeUSA Insurance, normally
at three-year intervals, on behalf of the states in which LifeUSA Insurance is
licensed. During 1996, the Minnesota Department of Commerce conducted a
triennial examination of LifeUSA Insurance for the three years ended December
31, 1995 and a report of Association Financial Examination was released June 30,
1998. The recommendations contained in the report were not material individually
or in the aggregate to LifeUSA Insurance's business operations or financial
statements.
23
Life USA Holding, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
LifeUSA Securities, as a registered broker and dealer in securities, is
subject to the Securities and Exchange Commission's Uniform Net Capital Rule. As
of December 31, 1998, LifeUSA Securities' net capital exceeded the minimum
required balance.
In June 1998, the A.M. Best Company upgraded the rating assigned to LifeUSA
Insurance to A- (Excellent) from B++ (Very Good). The A- rating is assigned to
companies which, in A.M. Best's opinion, have excellent financial strength,
operating performance and market profile, on balance, when compared to the
standards established by the A.M. Best Company. A- companies have a strong
ability to meet their ongoing obligations to policyholders. According to the
A.M. Best Company, the upgrade reflects LifeUSA Insurance's innovative product
portfolio and marketing ability, its extensive distribution system, its strong
reinsurance relationships, and its ability to raise capital through its parent
as demonstrated by the 1998 agreement with Allianz Life.
In May 1998, Moody's Investors Service (Moody's) upgraded the rating
assigned to LifeUSA Insurance to A3 from Baa3. This rating falls within Moody's
"Strong Companies" category. According to Moody's, the upgrade reflects the
significant minority interest to be held by Allianz Life, as well as the
enhanced marketing, reinsurance and strategic ties between the Company and
Allianz Life.
In August 1998, Standard & Poor's (S&P) affirmed LifeUSA Insurance's
initial claims-paying ability rating of BBB+ (Adequate). S&P assigns the BBB+
rating to insurers which, in its opinion, offer adequate financial security, but
capacity to meet policyholder obligations is susceptible to adverse economic and
underwriting conditions.
INVESTMENTS As of December 31, 1998, the Company had cash, cash equivalents
and fixed maturity investments on a consolidated basis totaling $2.30 billion,
including $7.7 million in restricted deposits with state insurance authorities
regulating LifeUSA Insurance. The following table summarizes the amortized cost,
carrying and fair values of each investment category held at December 31, 1998
and 1997 (dollars in thousands):
[Enlarge/Download Table]
AMORTIZED % OF CARRYING % OF FAIR % OF
1998 COST TOTAL VALUE TOTAL VALUE TOTAL
--------------------------------------------------- ------------- ----------- ------------- ----------- ------------- -----------
Cash and cash equivalents ......................... $ 21,570 .96% $ 21,570 .94% $ 21,570 .92%
Government Treasury and Agency notes and
bonds ............................................ 84,532 3.76 89,927 3.91 98,178 4.17
Taxable municipals ................................ 11,073 .49 11,226 .49 11,239 .48
Mortgage pass throughs ............................ 51,520 2.29 53,947 2.34 53,947 2.29
Agency Collateralized Mortgage Obligations:
CMO -- Sequentials ............................... 2,491 .11 2,491 .11 2,540 .11
CMO -- PACs ...................................... 613,703 27.31 618,159 26.86 634,303 26.92
CMO -- ADs ....................................... 21,619 .96 21,619 .94 22,514 .96
CMO -- TACs ...................................... 7,106 .32 7,106 .31 7,733 .33
Investment grade corporate securities:
AAA+ to AAA- ..................................... 73,975 3.29 74,668 3.24 77,237 3.28
AA+ to AA- ....................................... 190,650 8.49 197,282 8.57 203,387 8.63
A+ to A- ......................................... 687,305 30.59 708,241 30.78 723,494 30.71
BBB+ to BBB- ..................................... 456,726 20.34 472,717 20.54 477,820 20.25
Non investment grade corporate securities ......... 24,577 1.09 22,380 .97 22,308 .95
---------- ------ ---------- ------ ---------- ------
Total cash and invested assets .................... $2,246,847 100.00% $2,301,333 100.00% $2,356,270 100.00%
========== ====== ========== ====== ========== ======
Life USA Holding, Inc.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
[Enlarge/Download Table]
AMORTIZED % OF CARRYING % OF FAIR % OF
1997 COST TOTAL VALUE TOTAL VALUE TOTAL
--------------------------------------------------- ------------- ---------- ------------- ---------- ------------- ----------
Cash and cash equivalents ......................... $ 34,139 1.60% $ 34,139 1.58% $ 34,139 1.55%
Government Treasury and Agency notes and
bonds ............................................ 74,338 3.49 77,740 3.59 83,441 3.78
Mortgage pass throughs ............................ 52,189 2.45 54,137 2.50 54,137 2.45
Agency Collateralized Mortgage Obligations:
CMO -- Sequentials ............................... 5,098 .24 5,098 .24 5,138 .23
CMO -- PACs ...................................... 605,517 28.43 608,825 28.11 624,652 28.32
CMO -- ADs ....................................... 23,543 1.11 23,543 1.09 24,604 1.12
CMO -- TACs ...................................... 10,516 .49 10,516 .49 11,446 .52
Investment grade corporate securities:
AAA+ to AAA- ..................................... 42,765 2.01 43,091 1.99 44,962 2.04
AA+ to AA- ....................................... 178,360 8.37 182,162 8.41 185,460 8.41
A+ to A- ......................................... 590,210 27.71 603,158 27.85 609,665 27.64
BBB+ to BBB- ..................................... 508,511 23.87 519,695 23.98 524,593 23.77
Non investment grade corporate securities ......... 4,907 .23 3,682 .17 3,682 .17
---------- ------ ---------- ------ ---------- ------
Total cash and invested assets .................... $2,130,093 100.00% $2,165,786 100.00% $2,205,919 100.00%
========== ====== ========== ====== ========== ======
As part of its asset and liability management practices, LifeUSA Insurance
manages investments and credited interest rates to produce a net investment
spread consistent with priced-for expectations. As of December 31, 1998, the
weighted average credited interest rate for deferred annuities and life
insurance policies was 4.85% and the weighted average yield on the assets
backing liabilities was 7.26%. As of December 31, 1997, the weighted average
credited interest rate was 5.00% and the weighted average yield on the assets
backing liabilities was 7.34%. Investment income from the assets backing
liabilities exceeded interest credited to policyholders by $32.9 million during
1998. The investment portfolio is managed primarily by allocating new cash flows
into investments that have yield, maturity and other characteristics suitable
for LifeUSA Insurance's expected policyholder liabilities. Consistent with
LifeUSA Insurance's asset and liability management practices, as of December 31,
1998, the effective duration of LifeUSA Insurance's fixed income securities was
4.66 years, compared to 5.03 years as of December 31, 1997.
The percentage of the total fair value of the Company's portfolio that was
comprised of investment grade corporate obligations was 63% at December 31,
1998. With each corporate security acquisition, LifeUSA Insurance's external
managers perform a comprehensive analysis of the credit implications and outlook
of the issuing corporation and industry. Ongoing procedures for monitoring and
assessing any potential deterioration or downgrade in credit quality are also in
place. The Company's guidelines for the acquisition of corporate securities do
not allow the purchase of securities that are rated below investment grade by
Moody's Investors Service and Standard & Poor's.
Approximately 1% of the total fair value of the Company's portfolio was
comprised of non-investment grade corporate obligations at December 31, 1998.
The Company believes that there is no impairment to these investments, as they
will continue to receive principal and interest payments through maturity.
The remainder of the Company's portfolio is comprised of government and
government agency obligations. Government and government agency obligations are
primarily held in the form of Planned Amortization Class (PAC) Collateralized
Mortgage Obligations (CMOs), the most conservative type of CMO issued. These
CMOs are specifically structured to provide the highest degree of protection
against swings in repayments caused primarily by changes in interest rates, have
virtually no risk of default and are well-suited to fund the payment of the
liabilities they support.
Currently, the decision of the asset type in which to invest is dictated by
market conditions and relative values within the respective markets at the time
of purchase. Management believes that the types of assets in which it invests
will allow the Company to maintain high quality, consistent yields and proper
maturities for the overall portfolio.
As of December 31, 1998, the Company held 44%, or $1.02 billion, of the
total fair value of its fixed maturity investments as available for sale. The
Company believes that this percentage is a prudent level that
25
Life USA Holding, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
will allow enough liquidity to meet any adverse cash flow experience. The
Company continues to classify a significant portion of its investment securities
as held to maturity based on its intent to hold such securities to maturity. A
key feature of LifeUSA Insurance's products is the provision of bonuses to
encourage terminating policyholders to withdraw their funds over settlement
periods lasting at least five years. Policyholders taking cash settlements do
not receive the bonuses. This feature allows the Company to hold a significant
amount of assets to maturity. Insurance regulations require LifeUSA Insurance to
perform an asset adequacy analysis each year to determine if the assets are
sufficient to fund future obligations. LifeUSA Insurance's asset adequacy
analysis indicates that the assets are sufficient to fund future obligations.
The Company continually monitors and modifies the allocation of new assets
between held to maturity and available for sale as deemed prudent based on the
continuing analysis of cash flow projections and liquidity needs.
At December 31, 1998, the Company's shareholders' equity and book value per
share were $280.0 million and $11.30, respectively, compared to $222.4 million
and $9.77, respectively, at December 31, 1997. Excluding the effect of the net
unrealized gain on fixed maturity investments -- available for sale reported as
a separate component of shareholders' equity in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the
Company's shareholders' equity and book value per share were $266.6 million and
$10.76, respectively, at December 31, 1998, compared to $214.3 million and
$9.41, respectively, at December 31, 1997.
MARKET RISK DISCLOSURE
Market risk is the risk of loss that may occur when fluctuations in
interest and currency exchange rates and equity and commodity prices change the
value of a financial instrument. Both derivative and nonderivative financial
instruments have market risk. The Company is primarily exposed to interest rate
risk.
INTEREST RATE RISK LifeUSA Insurance first manages interest rate risk
through the design of its deferred annuity products and secondarily through
asset and liability management.
LifeUSA Insurance's core two-tier annuity product structure significantly
reduces interest rate risk by encouraging long-term persistency and settlements
by the policyholder. Historically, more than two-thirds of LifeUSA Insurance's
annuity policyholders have elected to annuitize their benefits instead of
surrender for cash. This increases the Company's ability to predict and manage
cash flows relative to traditional annuity products. Changes in external
interest rates have had little discernible effect on surrender and annuitization
activity throughout the history of LifeUSA Insurance.
Projected liability cash flows reflect LifeUSA Insurance's experience and
actuarial projections of policyholder behavior based on product design. Assets
purchased to back the liabilities have cash flows consistent with the liability
structure. Asset cash flows are tightly structured through investment-grade
non-callable corporate obligations or Planned Amortization Class Collateralized
Mortgage Obligations. Currently 63% of the total fair value of the Company's
investments are corporate investment-grade fixed income maturity obligations and
35% are direct government and government agency mortgage-backed securities.
Liability duration measures are used as a guideline in establishing the
initial laddered purchase of assets. In addition, cash flow analysis of the in
force business using a combination of current and probable future interest rate
scenarios is used to monitor and, if needed, adjust the asset portfolio
accordingly. Investment guidelines are designed to maintain a stable portfolio
yield using a buy-and-hold strategy with long-term, fixed income securities.
As a result of the Company's approach to managing interest rate risk, if
interest rates on December 31, 1998 abruptly increased 100 basis points, there
would be no material effect on 1999 net income. This effect on net income does
not consider the possible effects a change in economic activity could have in
such an environment. The Company's customers and competitors would also respond
to these fluctuations, and regulators or legislators might act in ways the
Company cannot foresee. Because the Company cannot be certain what specific
actions would be taken and their effects, the sensitivity analysis above assumes
no significant changes in the Company's financial structure.
Life USA Holding, Inc.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
DERIVATIVES LifeUSA purchases 5-year and 7-year "over-the-counter"
European-Asian call option contracts based on the S&P 500 index. The option
contracts are used specifically to hedge the potential policyholder benefit
associated with the equity-indexed annuity policies sold by LifeUSA Insurance.
LifeUSA Insurance only purchases option contracts from counterparties rated AA-
or better and the option contracts are not used for trading purposes.
As of December 31, 1998, LifeUSA Insurance's investment in option contracts
is as follows (dollars in thousands):
YEAR OF NOTIONAL NUMBER OF WEIGHTED AVG. MARKET
EXPIRATION PAR UNITS STRIKE PRICE COST VALUE
------------ ---------- ----------- --------------- -------- ---------
2002 $ 3,076 3,239 $1,278 $ 444 $ 821
2003 44,826 41,107 1,418 7,727 9,759
2004 2,200 2,593 1,239 347 643
2005 662 657 1,393 164 161
------- ------ ------ -------
Totals $50,764 47,596 $8,682 $11,384
======= ====== ====== =======
The option contracts are reported at fair value in other assets on the
Consolidated Balance Sheet. Unrealized gains and losses on the option contracts
are recorded in other revenues to offset increases in the future policy benefits
liability for the index benefit that are shown in other benefits to
policyholders on the Consolidated Statement of Income. The cost of the option
contract is amortized over the life of the option contract and is reflected in
the future policy benefits liability for the index benefit. Any realized gains
at expiration are credited to policyholder reserves.
YEAR 2000 UPDATE
GENERAL A comprehensive analysis of the Year 2000 (Y2K) issue was completed
in 1997. This analysis established a plan for compliance of all Company
information systems and significant non-computer devices to ensure accurate
processing of date data from the twentieth and into the twenty-first centuries.
The project also included identification of key vendors and obtaining assurances
that their key systems are Y2K compliant. Because the Company has only been
operating since 1987, significant systems were already Y2K compliant. Total cost
of the project was estimated at $500,000. At the end of fourth quarter of 1998,
incurred costs totaled $616,000 with final costs expected to be approximately
$650,000, including upgrading of operating systems, development tools and
desktop applications.
SYSTEMS The Company continues to execute its plan to ensure that all
systems are Y2K compliant and expects to complete the plan by June 1999. All of
the Company's mainframe, local area network and voicemail systems are all Y2K
compliant with the exception of systems being upgraded in the normal course of
business. Full scale production level system testing was completed in September
1998. These tests covered key functional components of the systems and tested
conditions through the first quarter of 2001. The machine environment and
application software executed as expected into 2001. Complete documentation of
each test has been compiled and is being archived.
Full scale production level system testing for each of the personal
computer based applications was completed in January 1999. These tests covered
key functional components of the applications and tested conditions through the
first quarter of 2001. Complete documentation of each test has been compiled and
is being archived. The personal computer based applications executed as expected
into year 2001.
Applications being upgraded in the normal course of business include the
financial accounting application and the LifeUSA Insurance policy assembly
application. The financial accounting application is being upgraded to provide
more functionality. This application is Y2K compliant and installation by the
end of first quarter 1999 is on schedule. LifeUSA Insurance is automating its
policy assembly application during the first quarter of 1999, and that
application will be Y2K compliant. In addition, all personal computer hardware
and non-computer hardware is or will be Y2K compliant by June 1999.
ONGOING ACTIVITY Follow-up on compliance assurances by key vendors and
business partners was ongoing through the end of 1998 and will continue in 1999,
as is appropriate. Testing of data exchange with
27
Life USA Holding, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF CONSOLIDATED OPERATIONS
key external business partners continues for purposes of date compliance with
testing being executed during the first quarter of 1999 as partners reach date
compliance. Contingency planning continues as additional back-up protection with
respect to key vendors who have provided assurances that their systems are Y2K
compliant.
SUMMARY At this time, the Company is aware of no Y2K compliance issues that
will negatively impact the key business processes of the Company or its
affiliated companies. All Y2K compliance plan activities are scheduled to be
completed by June 1999.
Life USA Holding, Inc.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ON BUSINESS SEGMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ON BUSINESS SEGMENTS
Management has organized the Company into three business segments in order
to focus on the distinct functional activities performed by each. The Insurance
Segment focuses on the administration, asset/liability management and
reinsurance of fixed insurance products. The Marketing Segment focuses its
efforts on the field force used to distribute fixed insurance products, product
design and promotion, advertising and the management of investments in marketing
subsidiaries. The Corporate Segment provides strategic direction for all
segments and includes the operations of LifeUSA Securities and LTCAmerica
because their results of operations are not yet material and do not warrant
separate disclosure. The results of operations for the Company's Insurance,
Marketing and Corporate Segments are presented in the discussion that follows.
The table on pages 32 and 33 summarizes the results of operations for each of
the three years in the period ended December 31, 1998 and total assets as of
December 31, 1998, 1997 and 1996.
The Company evaluates the performance of each business segment based on
profit or loss from operations. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies in Note 1 to the Consolidated Financial Statements. The
asset and income statement items are allocated based on the functionality and
nature of the activities performed by each segment.
INSURANCE SEGMENT. The Insurance Segment develops fixed insurance products
for LifeUSA Insurance and Allianz Life, cedes a portion of the business written
by LifeUSA Insurance to reinsurers and assumes a portion of the Allianz/LUSA
Business. The Insurance Segment manages the assets and liabilities for business
retained or assumed by LifeUSA Insurance and administers all of the LifeUSA
Insurance and Allianz/LUSA Business.
The Insurance Segment's primary revenue sources are net investment income,
net commissions and expense allowances, service fees and policyholder charges.
The Insurance Segment's primary expenses are interest credited to policyholder
account values, other benefits to policyholders, amortization of deferred policy
acquisition costs, intersegment marketing fees paid to the Marketing Segment for
the production of LifeUSA Insurance and Allianz/LUSA Business and operating
expenses. The Insurance Segment's primary assets are investments, reinsurance
recoverables, deferred policy acquisition costs, accrued investment income and
policy loans. These assets represent approximately 98% of the total consolidated
assets. The Insurance Segment's profitability is derived from its ability to
effectively manage the assets and liabilities retained or assumed by LifeUSA
Insurance and to manage the operating expenses incurred in the administration of
all business produced.
REVENUES. Total revenues were $358.4 million, $368.3 million and $316.2
million in 1998, 1997 and 1996, respectively. Since the revenues reported by the
Insurance Segment account for the majority of the revenues reported by the
Company on a consolidated basis, the reasons for the changes are consistent with
those previously discussed in the Company's Results of Operations section.
EXPENSES. Total expenses were $330.5 million, $338.9 million and $293.6
million in 1998, 1997 and 1996, respectively. The decrease in total expenses of
2% in 1998 compared to 1997 is primarily attributable to the decrease in the
marketing fee paid to the Marketing Segment, net of deferral, as a result of the
decrease in premium and deposit production. This factor is partially offset by
an increase in interest credited to policyholder account values due to growth of
annuities in force. The marketing fee, which decreased 17% from 1997, is
calculated as a percentage of premium and will vary generally with the change in
premium and deposit production which decreased 18% from 1997. Differences in the
mix of production between annuities and life insurance and differences in the
mix of premium between single, first year and renewal will cause the marketing
fee to change by greater or lesser amounts than the change in premium and
deposit production. The increase in total expenses of 15% in 1997 compared to
1996 is primarily attributable to the 22% increase in the marketing fee as a
result of the 23% increase in premium production.
MARKETING SEGMENT. The Marketing Segment provides all services related to
the recruitment and development of agents and FMOs, support of agents producing
LifeUSA Insurance business and Allianz/LUSA
29
Life USA Holding, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ON BUSINESS SEGMENTS
Business, and advertising, promotion and incentive programs to increase
production. The Marketing Segment also manages all acquisitions of and
investments in field marketing organizations.
The Marketing Segment's primary revenue source is the intersegment
marketing fee assessed to the Insurance Segment for the production of LifeUSA
Insurance business and Allianz/LUSA Business. This fee is calculated as a
percentage of the premiums and deposits produced with varying rates for life
insurance and annuity production and for first year, single and renewal premium
and deposits. The amount assessed is comparable to commissions earned by large
national FMOs performing similar services. The Marketing Segment's assets, which
account for less than 1% of total consolidated assets, consist primarily of
investments in subsidiaries. The Marketing Segment's profitability is derived
from its ability to manage commissions and operating costs.
REVENUES. Total revenues were $133.8 million, $155.3 million and $129.2
million in 1998, 1997 and 1996, respectively. The decrease in total revenues of
14% in 1998 compared to 1997, and the increase in total revenues of 20% in 1997
compared to 1996, is primarily attributable to the marketing fee that is based
on premium and deposit production discussed previously. The entire amount of the
marketing fee is charged to the Insurance Segment and is eliminated in
consolidation.
EXPENSES. Total expenses were $126.8 million, $140.8 million and $114.8
million in 1998, 1997 and 1996, respectively. The decrease in total expenses of
10% in 1998 compared to 1997, and the increase in total expenses of 23% in 1997
compared to 1996, is primarily attributable to commissions incurred that are
based on premium and deposit production discussed previously. Differences in the
mix of production between annuities and life insurance and differences in the
mix of premium between single, first year and renewal will also cause
commissions to change.
CORPORATE SEGMENT. The Corporate Segment provides strategic direction for
the Company and its various business segments and includes the operations of
LifeUSA Securities and LTCAmerica because their results are not yet material and
do not warrant separate disclosure. The Corporate Segment charges a fee to all
other segments based on the revenues of those individual segments. The Corporate
Segment retains expenses of an enterprise-wide nature, such as the 1997 national
advertising campaign. Assets consist primarily of surplus investments and
investments in subsidiaries.
REVENUES. Total revenues were $10.8 million, $10.4 million and $8.0 million
for 1998, 1997 and 1996, respectively. The increase in total revenues of 4% in
1998 compared to 1997 is due to an increase in other revenues and equity income
in subsidiaries partially offset by the decrease in the corporate fee. The
increase in other revenues is due to an increase in LifeUSA Securities
concession revenue on sales of security products. Equity income in subsidiaries
is a result of the 40% minority interest in Windsor purchased in April 1998. The
corporate fee decrease is due to a decrease in 1998 revenues for the Marketing
and Insurance Segments. The increase in total revenues of 30% in 1997 compared
to 1996 is primarily related to the increases in the corporate fee that is
directly related to the increase in 1997 revenues for the Insurance Segment and
Marketing Segment. In addition, net investment income on the fixed maturity
investments held by the Company was first allocated to the Corporate Segment
beginning in 1997. Prior to 1997, net investment income was fully allocated to
the Insurance Segment.
EXPENSES. Total expenses were $10.6 million, $11.2 million and $8.0 million
for 1998, 1997 and 1996, respectively. The decrease of 6% in 1998 compared to
1997 is primarily attributable to the cost of a national advertising and sales
campaign that was completed in 1997 partially offset by an increase in LifeUSA
Securities commissions paid. The increase of 41% for 1997 compared to 1996 is
primarily attributable to the cost of the national advertising campaign.
Life USA Holding, Inc.
30
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31
Life USA Holding, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ON BUSINESS SEGMENTS
BUSINESS SEGMENTS RESULTS OF OPERATIONS. The following table summarizes the
results of operations and total assets reported by the three business segments
and reconciles to the Company's consolidated results of operations and
consolidated assets for the years ended 1998, 1997 and 1996 (in thousands):
[Enlarge/Download Table]
INSURANCE SEGMENT MARKETING SEGMENT
----------------------------------------- --------------------------------
1998 1997 1996 1998 1997 1996
------------- ------------- ------------- ---------- ---------- ----------
Revenues:
Policyholder charges ................... $ 53,061 $ 49,470 $ 46,842 $ -- $ -- $ --
Net investment income .................. 156,895 143,263 129,410 22 -- --
Net realized gains (losses) on
investments ........................... 795 4,371 1,791 -- -- --
Commissions and expense
allowances, net ....................... 144,129 170,118 137,734 -- -- --
Marketing fee .......................... -- -- -- 131,753 154,500 128,481
Corporate fee .......................... -- -- -- -- -- --
Equity income in subsidiaries .......... -- -- -- 972 109 47
Other .................................. 3,565 1,090 429 1,074 658 643
---------- ---------- ---------- -------- -------- --------
Total revenues ...................... 358,445 368,312 316,206 133,821 155,267 129,171
Expenses:
Interest credited to policyholder
account values ........................ 117,998 109,507 99,517 -- -- --
Other benefits to policyholders ........ 28,052 23,001 17,414 -- -- --
Amortization of deferred policy
acquisition costs ..................... 30,120 27,789 24,495 -- -- --
Commissions and marketing fee .......... 111,092 134,348 109,879 103,930 119,896 97,157
Taxes, licenses and fees ............... 1,892 2,743 3,596 -- -- --
Operating expenses:
Salaries and employee benefits ....... 15,243 16,226 14,597 7,741 6,167 4,575
Data processing ...................... 3,630 3,311 4,306 1,424 1,260 1,873
Printing and office supplies ......... 932 972 779 1,387 1,360 1,261
Depreciation and amortization ........ 2,545 2,454 2,084 2,738 1,571 794
Other ................................ 18,996 18,577 16,940 9,567 10,500 9,104
---------- ---------- ---------- -------- -------- --------
Total expenses ...................... 330,500 338,928 293,607 126,787 140,754 114,764
---------- ---------- ---------- -------- -------- --------
Income before income taxes .............. 27,945 29,384 22,599 7,034 14,513 14,407
Income taxes ............................ 10,011 10,826 8,294 3,118 5,624 5,293
---------- ---------- ---------- -------- -------- --------
Net income .............................. $ 17,934 $ 18,558 $ 14,305 $ 3,916 $ 8,889 $ 9,114
========== ========== ========== ======== ======== ========
Assets:
Investment in equity method
subsidiaries ........................... -- -- -- $ 35,122 $ 21,131 $ 12,342
========== ========== ========== ======== ======== ========
Total assets ............................ $5,371,201 $5,004,303 $4,357,466 $ 37,456 $ 22,521 $ 12,569
========== ========== ========== ======== ======== ========
------------------
(1) On a consolidated basis, the Company defers the costs of acquiring new
business and amortizes these costs over the lives of the policies in
proportion to the estimated gross profits expected to be realized on the
policies. For business segment reporting purposes, the deferred policy
acquisition costs and the corresponding amortization is recorded as an asset
and expense of the Insurance Segment. In addition, expenses allocated to the
Marketing Segment and Corporate Segment for business segment reporting
purposes that are deferred by the Company on a consolidated basis are
reported direct (gross of the amounts deferred) by each of these segments.
The Insurance Segment reports the impact of these deferrals as a reduction
in the marketing and corporate fees paid to the Marketing Segment and
Corporate Segment, respectively. The differences between the total of the
expenses reported by all of
Life USA Holding, Inc.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ON BUSINESS SEGMENTS
[Enlarge/Download Table]
CORPORATE SEGMENT ELIMINATING ENTRIES(1) CONSOLIDATED
---------------------------------- ------------------------------------------- -------------------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
---------- ---------- ---------- ------------- ------------- ------------- ------------- ------------- -------------
$ -- $ -- $ -- $ -- $ -- $ -- $ 53,061 $ 49,470 $ 46,842
1,029 834 2 -- -- -- 157,946 144,097 129,412
(26) (24) -- -- -- -- 769 4,347 1,791
-- -- -- -- -- -- 144,129 170,118 137,734
-- -- -- (131,753) (154,500) (128,481) -- -- --
8,644 9,590 8,032 (8,644) (9,590) (8,032) -- -- --
271 -- -- -- -- -- 1,243 109 47
861 14 -- -- -- -- 5,500 1,762 1,072
------- ------- ------- ---------- ---------- ---------- ---------- ---------- ----------
10,779 10,414 8,034 (140,397) (164,090) (136,513) 362,648 369,903 316,898
-- -- -- -- -- -- 117,998 109,507 99,517
-- -- -- -- -- -- 28,052 23,001 17,414
-- -- -- -- -- -- 30,120 27,789 24,495
728 11 -- (129,967) (152,863) (126,943) 85,783 101,392 80,093
-- -- -- -- -- -- 1,892 2,743 3,596
3,767 3,142 4,452 (778) (700) (600) 25,973 24,835 23,024
222 183 77 (73) (60) (78) 5,203 4,694 6,178
142 130 196 (251) (218) (203) 2,210 2,244 2,033
333 166 95 -- -- -- 5,616 4,191 2,973
5,409 7,608 3,155 (9,328) (10,249) (8,689) 24,644 26,436 20,510
------- ------- ------- ---------- ---------- ---------- ---------- ---------- ----------
10,601 11,240 7,975 (140,397) (164,090) (136,513) 327,491 326,832 279,833
------- ------- ------- ---------- ---------- ---------- ---------- ---------- ----------
178 (826) 59 -- -- -- 35,157 43,071 37,065
121 (357) 24 -- -- -- 13,250 16,093 13,611
------- ------- ------- ---------- ---------- ---------- ---------- ---------- ----------
$ 57 $ (469) $ 35 $ -- $ -- $ -- $ 21,907 $ 26,978 $ 23,454
======= ======= ======= ========== ========== ========== ========== ========== ==========
$ 1,803 -- -- -- -- -- $ 36,925 $ 21,131 $ 12,342
======= ======= ======= ========== ========== ========== ========== ========== ==========
$36,710 $61,418 $58,889 $ 13,352 $ (25,468) $ (42,201) $5,458,719 $5,062,774 $4,386,723
======= ======= ======= ========== ========== ========== ========== ========== ==========
------------------
the segments and the expenses (net of deferrals) reported by the Company on a
consolidated basis appear as intersegment eliminations in the tables
presented above. Eliminations for assets consist primarily of adjustments
made to investments in wholly-owned subsidiaries, including dividends which
are assumed to be made from the Marketing Segment to the Corporate Segment.
33
Life USA Holding, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ON BUSINESS SEGMENTS
Statements other than historical information contained in this Annual
Report and Form 10-K, including the statements involving hypothetical
events included in the "Market Risk Disclosure," are forward-looking
statements and, therefore, subject to risks and uncertainties, including
those identified below, which could cause the actual results to differ
materially from statements. In addition to statements which are
forward-looking by reason of context, the words "believe," "expect,"
"anticipate," "intend," "designed," "goal," "objective," "optimistic,"
"will" and similar expressions identify forward-looking statements.
Factors which could cause actual results to differ materially from the
forward-looking statements, thereby resulting in a material adverse
impact on the business, results of operations or financial condition of
the Company, include but are not limited to (i) the Company's ability to
develop or receive regulatory approval of new products intended to be
marketed as uniquely suited to meet identified needs for life insurance,
retirement income planning and long-term care; (ii) regulatory
constraints on existing or future products rendering the products
unmarketable or unprofitable; (iii) the Company's ability to favorably
differentiate its products and service levels from those of competitors,
including other insurance and financial services companies and various
investment vehicles readily available to consumers; (iv) loss of key
personnel; (v) the Company's ability to manage assets and produce
returns providing sufficient spread on invested assets backing
policyholder liabilities; (vi) the strength of the equity markets and
the interest rate environment; (vii) field marketing organization
investment in the education and support of agents selling the Company's
products; (viii) the ability of owned and minority-owned marketing
organizations to increase production and profitability; (ix) increase in
the size and improvement in the productivity of the Company's
distribution system; (x) continuation of mutually beneficial
relationships with Allianz Life and the Reinsurers; (xi) continued
access to capital at favorable rates; (xii) willingness of the private
market to identify and allocate significant resources to long-term care
coverage; (xiii) the Company's ability to attract and retain committed,
competent and creative home office owners and management; (xiv) the
Company's ability to ensure the continuous availability of technology at
levels necessary to efficiently process and maintain the business
produced for the entire enterprise and manage the assets of the
enterprise; (xv) litigation, with or without merit, claiming significant
resources of the enterprise; and (xvi) the ability of the Company to
adequately remediate all operational systems and non-computer devices
and internal computer software to avoid Year 2000 problems without
significant additional expense, and the reliability of assurances
obtained from and ongoing data exchange testing with key vendors and
business partners to address Year 2000 problems. Forward-looking
statements speak only as of the date on which they are made, and the
Company does not undertake an obligation to update or revise any
forward-looking statements.
Life USA Holding, Inc.
34
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35
Life USA Holding, Inc.
CONSOLIDATED BALANCE SHEET
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
[Enlarge/Download Table]
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- -------------
ASSETS
Investments:
Fixed maturity investments:
Available for sale, at fair value (amortized cost: $966,205 at
December 31, 1998 and $846,466 at December 31, 1997) .................... $1,020,691 $ 882,159
Held to maturity, at amortized cost (fair value: $1,314,009 at
December 31, 1998 and $1,289,621 at December 31, 1997) .................. 1,259,072 1,249,488
Policy loans ............................................................... 34,939 29,003
---------- ----------
Total investments ....................................................... 2,314,702 2,160,650
Cash and cash equivalents ................................................... 21,570 34,139
Accrued investment income ................................................... 33,729 30,976
Future policy benefits recoverable and amounts due from reinsurers .......... 2,801,109 2,577,598
Deferred policy acquisition costs ........................................... 216,725 215,097
Other assets ................................................................ 70,884 44,314
---------- ----------
$5,458,719 $5,062,774
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits ..................................................... $5,030,833 $4,686,172
Other policyholders' funds ................................................. 9,839 9,208
Amounts due reinsurers ..................................................... 43,546 38,403
Accrued commissions to agents .............................................. 8,990 11,583
Taxes, licenses and fees payable ........................................... 6,023 8,415
Accounts payable ........................................................... 5,262 5,323
Long-term debt ............................................................. 15,000 5,000
Convertible subordinated debentures ........................................ 5,898 36,030
Deferred income taxes ...................................................... 19,172 16,513
Other liabilities .......................................................... 34,171 23,727
---------- ----------
Total liabilities ....................................................... 5,178,734 4,840,374
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value; 15,000,000 shares authorized,
none issued ............................................................... -- --
Common stock, $.01 par value; 60,000,000 shares authorized,
24,752,156 shares issued and outstanding (22,723,830 shares at
December 31, 1997) ........................................................ 248 227
Common stock to be issued, 24,361 shares (35,458 shares at
December 31, l997) ........................................................ 328 565
Additional paid-in capital ................................................. 150,096 108,372
Notes receivable from stock sales .......................................... (4,266) (7,477)
Retained earnings .......................................................... 120,145 112,564
Accumulated other comprehensive income:
Net unrealized gain on fixed maturity investments -- available for sale .... 13,434 8,149
---------- ----------
Total shareholders' equity .............................................. 279,985 222,400
---------- ----------
$5,458,719 $5,062,774
========== ==========
SEE ACCOMPANYING NOTES.
Life USA Holding, Inc.
36
CONSOLIDATED STATEMENT OF INCOME
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
Revenues:
Policyholder charges .................................... $ 53,061 $ 49,470 $ 46,842
Net investment income ................................... 157,946 144,097 129,412
Net realized gains on investments ....................... 769 4,347 1,791
Commissions and expense allowances, net ................. 144,129 170,118 137,734
Other ................................................... 6,743 1,871 1,119
----------- ----------- -----------
Total revenues ....................................... 362,648 369,903 316,898
Expenses:
Interest credited to policyholder account values ........ 117,998 109,507 99,517
Other benefits to policyholders ......................... 28,052 23,001 17,414
Amortization of deferred policy acquisition costs ....... 30,120 27,789 24,495
Commissions ............................................. 85,783 101,392 80,093
Taxes, licenses and fees ................................ 1,892 2,743 3,596
Operating expenses ...................................... 63,646 62,400 54,718
----------- ----------- -----------
Total expenses ....................................... 327,491 326,832 279,833
----------- ----------- -----------
Income before income taxes ............................... 35,157 43,071 37,065
Income taxes ............................................. 13,250 16,093 13,611
----------- ----------- -----------
Net income ............................................... $ 21,907 $ 26,978 $ 23,454
=========== =========== ===========
Basic earnings per common share .......................... $ .85 $ 1.24 $ 1.13
=========== =========== ===========
Diluted earnings per common share ........................ $ .83 $ 1.11 $ 1.04
=========== =========== ===========
Number of shares used in per share calculation:
Basic ................................................... 25,659,567 21,795,258 20,762,192
Diluted ................................................. 26,426,291 25,160,437 23,358,663
SEE ACCOMPANYING NOTES.
37
Life USA Holding, Inc.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
[Enlarge/Download Table]
NUMBER TOTAL
OF COMMON SHAREHOLDERS'
STOCK SHARES EQUITY
-------------- --------------
Balance at December 31, 1995 ........................................................... 20,324,747 $ 156,896
Comprehensive income
Net income ............................................................................ 23,454
Change in net unrealized gain (loss) on fixed maturity investments, net of effect
on deferred policy acquisition costs of $21,145 and net of tax of $4,855 .............
Reclassification adjustment for realized gains included in income net of effect
on deferred policy acquisition costs of $(1,200) and net of tax of $191 ..............
Other Comprehensive income ............................................................. (9,372)
---------
Total Comprehensive income ............................................................. 14,082
Issuance of common shares to Employee ..................................................
Savings Plan ........................................................................... 167,457 --
Issuance of shares through field marketing organization loan program, net .............. 478,262 --
Issuance of shares through exercise of options ......................................... 28,455 226
Common stock to be issued-shares, net of 674,174 shares issued ......................... (24,020) 1,411
---------- ---------
Balance at December 31, 1996 ........................................................... 20,974,901 172,615
Comprehensive income
Net income ............................................................................ 26,978
Change in net unrealized gain (loss) on fixed maturity investments, net of effect
on deferred policy acquisition costs of $(17,181) and net of tax of $3,466 ...........
Reclassification adjustment for realized gains included in income net of effect
on deferred policy acquisition costs of $(3,300) and net of tax of $347 ..............
Other Comprehensive income ............................................................. 4,814
---------
Total Comprehensive income ............................................................. 31,792
Issuance of common shares to Employee Savings Plan ..................................... 101,251 --
Issuance of shares through field marketing organization loan program, net .............. 263,652 (257)
Issuance of shares through exercise of options ......................................... 1,216,250 15,372
Issuance of shares through subsidiary acquisition ...................................... 132,188 1,450
Issuance of shares through warrants exercised .......................................... 57,615 --
Issuance of shares through conversion of convertible subordinated debentures ........... 110 --
Common stock to be issued-shares, net of 1,770,313 shares issued ....................... 13,321 1,428
---------- ---------
Balance at December 31, 1997 ........................................................... 22,759,288 222,400
Comprehensive income
Net income ............................................................................ 21,907
Change in net unrealized gain (loss) on fixed maturity investments, net of effect
on deferred policy acquisition costs of $(11,689) and net of tax of $2,388 ...........
Reclassification adjustment for realized gains included in income net of effect
on deferred policy acquisition costs of $(500) and net of tax of $69 .................
Other Comprehensive income ............................................................. 5,285
---------
Total Comprehensive income ............................................................. 27,192
Issuance of common shares to Employee Savings Plan ..................................... 118,482 (100)
Issuance (cancellation) of shares through field marketing organization loan program,
net ................................................................................... (83,094) (101)
Issuance of shares through exercise of options ......................................... 621,857 7,428
Issuance of shares through subsidiary acquisition ...................................... 85,345 3,261
Issuance of shares through conversion of convertible subordinated debentures ........... 380 11
Issuance of shares associated with Allianz agreement ................................... 3,079,056 42,619
Repurchase of common stock ............................................................. (1,793,700) (22,408)
Common stock to be issued-shares, net of 2,028,326 shares issued ....................... (11,097) 1,598
Dividends to shareholders .............................................................. (1,915)
---------
Balance at December 31, 1998 ........................................................... 24,776,517 $ 279,985
========== =========
SEE ACCOMPANYING NOTES.
Life USA Holding, Inc.
38
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
[Enlarge/Download Table]
NOTES ACCUMULATED
COMMON ADDITIONAL RECEIVABLE OTHER
COMMON STOCK TO PAID-IN FROM COMPREHENSIVE RETAINED
STOCK BE ISSUED CAPITAL STOCK SALES INCOME EARNINGS
---------- ----------- ------------ ------------- --------------- -----------
$203 $ 382 $ 80,931 $ -- $ 12,707 $ 62,673
23,454
(8,972)
(400)
--------
(9,372)
2 (1,436) 1,434
5 3,883 (3,888)
0 226
1,411
-------------------------------------------------------------------------------------
210 357 86,474 (3,888) 3,335 86,127
26,978
5,514
(700)
--------
4,814
1 (1,220) 1,219
3 3,586 (3,589) (257)
12 15,360
1 1,449
284 (284)
1,428
-------------------------------------------------------------------------------------
227 565 108,372 (7,477) 8,149 112,564
21,907
5,485
(200)
--------
5,285
1 (1,835) 1,734
(1) (783) 1,248 (565)
7 7,421
1 1,297 1,963
11
31 42,588
(18) (10,544) (11,846)
1,598
(1,915)
---------
$248 $ 328 $ 150,096 $ (4,266) $ 13,434 $ 120,145
====== ======== ========= ======== ======== =========
SEE ACCOMPANYING NOTES.
39
Life USA Holding, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
Cash flows from operating activities:
Net income ...................................................... $ 21,907 $ 26,978 $ 23,454
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Accretion of discount on investments, net ..................... (5,425) (2,970) (2,441)
Net realized gains on investments ............................. (769) (4,347) (1,791)
Policy acquisition costs deferred ............................. (42,937) (44,628) (38,992)
Amortization of deferred policy acquisition costs ............. 30,120 27,789 24,495
Deferred income tax (benefit) provision ....................... 340 470 (1,669)
Changes in operating assets and liabilities ................... (15,821) 3,116 (13,347)
Stock compensation ............................................ 1,741 1,220 1,436
---------- ---------- ----------
Net cash provided by (used in) operating activities .............. (10,844) 7,628 (8,855)
Cash flows from investing activities:
Fixed maturity investments-available for sale:
Purchases ..................................................... (169,869) (191,093) (152,389)
Proceeds from sales ........................................... 26,288 196,818 42,542
Proceeds from maturities and principal payments on
mortgage-backed securities ................................... 24,854 17,088 9,081
Fixed maturity investments-held to maturity:
Purchases ..................................................... (92,937) (262,113) (102,603)
Proceeds from sales ........................................... 10,785 -- --
Proceeds from maturities and principal payments on
mortgage-backed securities ................................... 77,821 18,283 10,227
Investments in and loans to field marketing organizations ....... (12,756) (12,510) (10,469)
---------- ---------- ----------
Net cash used in investing activities ............................ (135,814) (233,527) (203,611)
Cash flows from financing activities:
Receipts from universal life and investment products ............ 304,216 345,442 294,529
Withdrawals on universal life and investment products ........... (318,371) (257,260) (208,529)
Interest credited to policyholders .............................. 117,998 109,507 99,517
Change in deferred liability and reserves ....................... 24,868 19,587 14,511
Proceeds from exercise of stock options ......................... 7,423 15,372 226
Proceeds from line of credit .................................... 10,000 5,000 --
Proceeds from common stock issuance to Allianz Life ............. 10,000 -- --
Repurchase of common stock ...................................... (22,408) -- --
Dividends paid .................................................. (1,915) -- --
Other financing activities ...................................... 2,278 1,401 (21)
---------- ---------- ----------
Net cash provided by financing activities ........................ 134,089 239,049 200,233
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents ............. (12,569) 13,150 (12,233)
Cash and cash equivalents at beginning of the year ............... 34,139 20,989 33,222
---------- ---------- ----------
Cash and cash equivalents at end of the year ..................... $ 21,570 $ 34,139 $ 20,989
========== ========== ==========
Cash paid during the year for interest ........................... $ 2,117 $ 2,148 $ 1,984
========== ========== ==========
Cash paid during the year for income taxes ....................... $ 12,941 $ 14,100 $ 16,263
========== ========== ==========
SEE ACCOMPANYING NOTES.
Life USA Holding, Inc.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 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 Insurance and FULICO into a single
company. The surviving company retained the LifeUSA name and is domiciled in
Minnesota, where the Company is headquartered.
LifeUSA Insurance sells a variety of innovative life insurance and annuity
products that offer long-term retirement benefits to consumers who seek
protection against outliving their financial resources. The products of LifeUSA
Insurance are sold by a national marketing and distribution system comprised of
FMOs with independent agents and the products are serviced by home office staff.
During 1996, the Company formed two wholly-owned subsidiaries: LifeUSA
Securities and LifeUSA Marketing. LifeUSA Securities is a retail broker-dealer
that distributes a full range of securities products, including non-proprietary
mutual funds, variable life insurance and annuity contracts, and processes
general securities transactions. LifeUSA Marketing conducts a variety of
marketing activities for the Company, including the acquisition of and
investments in national FMOs.
In July 1998, LTCAmerica was formed for the purpose of acquiring, managing
and funding the operations of an insurance company offering life insurance,
annuity and health insurance products providing long-term care benefits to
consumers. LTCAmerica will seek to purchase, as a subsidiary, either an existing
long-term care insurance company or a shell insurance company that will
underwrite and issue long-term care insurance products. LTCAmerica is a
majority-owned subsidiary of LifeUSA Insurance.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
INVESTMENTS
The Company classifies investments at the time of purchase as held to
maturity or available for sale. Investments that 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 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.
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 that 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.
41
Life USA Holding, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. The Company does not own any such investments.
INVESTMENT IN EQUITY METHOD SUBSIDIARIES
The Company uses the equity method of accounting for the various
organizations in which it holds a minority interest. The excess of amounts
invested over the proportionate equity in the investees' net assets has been
accounted for as goodwill and is being amortized over a 15-year life. The
Company's investment in various companies is classified as investment in equity
method subsidiaries and is included in other assets on the Consolidated Balance
Sheet. Any gains or losses are reflected in the investment balance and are also
reflected in other income on the Consolidated Statement of Income.
CASH AND CASH EQUIVALENTS
The Company considers investments with 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 OPTION CONTRACTS
Certain LifeUSA Insurance annuity products provide an additional benefit
credited to the policy annuitization value based on the growth in the Standard &
Poor's (S&P) 500 Index. LifeUSA Insurance has analyzed the characteristics of
these benefits and has purchased option contracts tied to the S&P 500 Index with
similar characteristics to hedge these risks. Management monitors correlation of
in force amounts and option contract values to ensure proper matching. If
persistency assumptions were to deviate significantly from anticipated rates,
management would purchase or sell option contracts as deemed appropriate. As of
December 31, 1998, management believes a proper hedge exists.
The option contracts are reported at fair value in other assets on the
Consolidated Balance Sheet. Unrealized gains and losses on the option contracts
are recorded in other revenues on the Consolidated Statement of Income to offset
increases in the future policy benefits liability for the index benefit that are
shown in other benefits to policyholders on the Consolidated Statement of
Income. The cost of the option contract is amortized over the life of the option
contract and is reflected in the future policy benefits liability for the index
benefit. Any realized gains at expiration are credited to policyholder reserves.
LifeUSA Insurance purchases 5-year and 7-year "over-the-counter"
European-Asian call option contracts based on the S&P 500 index. LifeUSA
Insurance only purchases option contracts from counterparties rated AA- or
better and the option contracts are not used for trading purposes.
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 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 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 5.25% to 10.25%.
For business written directly, LifeUSA Insurance defers the cost of
acquiring new business, principally sales compensation, policy issue costs,
underwriting and other related sales expenses. LifeUSA Insurance defers the same
proportion of costs of acquiring new business as the proportion of business
retained. For the Allianz/LUSA Business assumed by LifeUSA Insurance, the amount
of the allowance paid by LifeUSA
Life USA Holding, Inc.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Insurance 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.
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, 1998.
In December 1997, the American Institute of Certified Public Accountants
(AICPA) released Statement of Position (SOP) 97-3 titled "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments." The SOP was
adopted by the Company in the first quarter of 1998. As the accounting
prescribed by the SOP is generally consistent with the Company's former method
of accounting for assessments, adoption did not have a material impact on the
Company's financial statements.
EARNINGS PER COMMON SHARE
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. It excludes the effects of options, warrants and convertible securities.
Diluted earnings per share is computed based on the weighted average number of
shares outstanding assuming that the proceeds from conversion of all stock
options and warrants shall be used to purchase common stock at the average
market price during the period. See Note 8 to the Consolidated Financial
Statements for the 1998, 1997, and 1996 calculation of basic and diluted
earnings per common share.
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.
The Company files a life-nonlife consolidated federal income tax return.
Allocation of consolidated federal income tax is based upon separate company
federal income tax provision calculations.
In 1998, the Internal Revenue Service completed the audit of the Company's
and LifeUSA Insurance's federal income tax returns for the years 1993 through
1996. There were no material adjustments as a result of the examination.
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.
REINSURANCE
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.
43
Life USA Holding, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW FINANCIAL ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 125 defines the accounting treatment and disclosure requirements for
securities lending programs. During the third quarter of 1997, the Company
entered a securities lending program with the custodial bank of its fixed
maturity investment portfolio. The Company currently reports fees earned under
this arrangement in net investment income. The effective date of the securities
lending provisions of SFAS No. 125 was amended by SFAS No. 127 to apply to
transactions occurring after December 31, 1997 and was adopted by the Company in
the first quarter of 1998. The adoption of this statement had no impact on its
financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 defines the financial statement presentation for all
changes in a company's equity during a period, except those resulting from
investments by owners and distributions to owners. SFAS No. 130 was adopted by
the Company in the first quarter of 1998. The effect of the statement is merely
a change in presentation on the balance sheet and statement of shareholders'
equity. The adoption of this statement had no impact on the amount of net
income, earnings per common share or total shareholders' equity reported.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise" and defines
financial and descriptive information about a company's operating segments that
is to be disclosed in financial statements. SFAS No. 131 was adopted by the
Company for the year ended December 31, 1998. Management currently has organized
the Company into three business segments in order to focus on the distinct
functional characteristics associated with the activities performed by each. The
results of operations for the Company's Insurance, Marketing and Corporate
business segments are presented in Management's Discussion and Analysis of
Financial Condition and Results of Operations on Business Segments.
In March 1998, the AICPA issued SOP 98-1, "Accounting For the Costs of
Computer Software Developed For or Obtained For Internal use." The Company plans
to adopt the SOP on January 1, 1999. The SOP will require the capitalization of
certain costs incurred after the date of adoption in connection with developing
or obtaining software for internal use. The Company currently expenses such
costs as incurred. As a result of adopting the new SOP, the Company expects to
capitalize approximately $1.3 million related to internal use software developed
projects in 1999 that otherwise would have been expensed as incurred.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative and
Similar Financial Instruments and for Hedging Activities," which addresses the
accounting for derivative instruments, such as the option contracts owned by the
Company, used as hedges against changes in cash flow or the fair value of
specified assets or liabilities. This statement is required to be adopted in
years beginning after September 15, 1999. The Company has not yet determined the
impact of the new statement.
RECLASSIFICATIONS
Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
presentation.
Life USA Holding, Inc.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 2. INVESTMENTS
The amortized cost and fair value of fixed maturity investments as of
December 31, 1998 and 1997 are as follows (in thousands):
[Enlarge/Download Table]
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ------------ ------------ -------------
1998:
AVAILABLE FOR SALE
U.S. Treasury securities and obligations of U.S.
government corporations and agencies ............ $ 12,485 $ 1,845 $ 3 $ 14,327
Foreign government obligations ................... 36,726 3,553 -- 40,279
Taxable municipals ............................... 6,062 154 -- 6,216
Investment grade corporate obligations ........... 707,388 45,151 900 751,639
Non investment grade corporate obligations ....... 21,581 -- 2,197 19,384
Mortgage-backed securities ....................... 181,963 6,883 -- 188,846
---------- ------- ------ ----------
$ 966,205 $57,586 $3,100 $1,020,691
========== ======= ====== ==========
HELD TO MATURITY
U.S. Treasury securities and obligations of U.S
government corporations and agencies ............ $ 24,751 $ 7,005 $ -- $ 31,756
Foreign government obligations ................... 10,570 1,247 -- 11,817
Taxable municipals ............................... 5,011 57 45 5,023
Investment grade corporate obligations ........... 701,268 31,476 2,446 730,298
Non investment grade corporate obligations ....... 2,996 -- 72 2,924
Mortgage-backed securities ....................... 514,476 17,788 73 532,191
---------- ------- ------ ----------
$1,259,072 $57,573 $2,636 $1,314,009
========== ======= ====== ==========
1997:
AVAILABLE FOR SALE
U.S. Treasury securities and obligations of U.S.
government corporations and agencies ............ $ 13,940 $ 1,317 $ 1 $ 15,256
Foreign government obligations ................... 26,395 2,086 -- 28,481
Investment grade corporate obligations ........... 623,303 30,057 1,797 651,563
Non investment grade corporate obligations ....... 4,907 -- 1,225 3,682
Mortgage-backed securities ....................... 177,921 5,305 49 183,177
---------- ------- ------ ----------
$ 846,466 $38,765 $3,072 $ 882,159
========== ======= ====== ==========
HELD TO MATURITY
U.S. Treasury securities and obligations of U.S.
government corporations and agencies ............ $ 23,398 $ 4,911 $ -- $ 28,309
Foreign government obligations ................... 10,605 789 -- 11,394
Investment grade corporate obligations ........... 696,542 18,480 1,904 713,118
Mortgage-backed securities ....................... 518,943 18,027 170 536,800
---------- ------- ------ ----------
$1,249,488 $42,207 $2,074 $1,289,621
========== ======= ====== ==========
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.
45
Life USA Holding, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 2. INVESTMENTS (CONTINUED)
The amortized cost and fair value of fixed maturity investments at December
31, 1998, 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 ...................... $ 7,051 $ 7,106 $ 66,353 $ 66,571
Due after one year through five years ........ 103,940 109,283 256,887 259,997
Due after five years through ten years ....... 328,135 349,377 307,710 332,642
Due after ten years .......................... 345,116 366,079 113,646 122,608
-------- ---------- ---------- ----------
784,242 831,845 744,596 781,818
Mortgage-backed securities ................... 181,963 188,846 514,476 532,191
-------- ---------- ---------- ----------
Total ........................................ $966,205 $1,020,691 $1,259,072 $1,314,009
======== ========== ========== ==========
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.
During 1998, 1997 and 1996, the Company sold certain investments classified
as available for sale. Proceeds from these sales were immediately reinvested in
investments of a high grade similar to those investments sold. Gross gains of
$1.3 million, $6.1 million and $1.9 million were realized on these sales in
1998, 1997 and 1996, respectively. Gross losses of $.5 million, $1.7 million and
$.1 million were realized on these sales in 1998, 1997 and 1996, 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 $.5 million, $3.3 million and $1.2 million in 1998,
1997 and 1996, respectively.
In June 1998, a fixed maturity investment classified as held to maturity
was sold with an amortized cost of $10 million. The realized gain on this sale
was not significant. The sale of this fixed maturity investment was due to
significant deterioration in the issuer's creditworthiness as indicated by
downgrades by Standard & Poor's and Moody's Investor Services just prior to the
sale.
The components of net investment income are as follows (in thousands):
[Download Table]
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
Fixed maturities ................ $156,430 $142,548 $128,629
Cash and cash equivalents ....... 2,409 2,222 1,403
Policy loans .................... 760 607 519
Other ........................... 109 68 94
-------- -------- --------
159,708 145,445 130,645
Investment expenses ............. (1,762) (1,348) (1,233)
-------- -------- --------
Net investment income ........... $157,946 $144,097 $129,412
======== ======== ========
During 1998, the Company had investment management agreements with Windsor,
Investment Advisors, Inc. (IAI) and AIC, an affiliate of Allianz Life. For their
services in 1998, Windsor, IAI and AIC were paid a fee based on the market value
of investments at the end of each quarter. For the years ended December 31,
1998, 1997 and 1996, the Company paid an aggregate of $1.0 million, $1.1 million
and $1.0 million, respectively, for investment management services.
Fixed maturity investments with a total carrying value of $7.7 million are
on deposit with various states in support of statutory requirements as of
December 31, 1998.
Life USA Holding, Inc.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 2. INVESTMENTS (CONTINUED)
The net unrealized gain on fixed maturity investments -- available for sale
included in shareholders' equity consists of the following at December 31 (in
thousands):
[Download Table]
1998 1997 1996
------------ ------------ ----------
Gross unrealized gain on fixed maturity
investments -- available for sale ......... $ 54,486 $ 35,693 $ 13,879
Adjustments for:
Deferred tax liability .................. (19,070) (12,835) (4,858)
Deferred policy acquisition costs ....... (33,818) (22,629) (8,748)
Deferred tax asset ...................... 11,836 7,920 3,062
--------- --------- --------
Net unrealized gain on fixed maturity
investments -- available for sale ......... $ 13,434 $ 8,149 $ 3,335
========= ========= ========
The gross unrealized gain on fixed maturity investments -- available for
sale before adjustments for deferred taxes and deferred policy acquisition costs
increased (decreased) $18.8 million, $21.8 million and $(36.8) million for the
years ended December 31, 1998, 1997 and 1996, respectively.
NOTE 3. EQUITY INTERESTS
In 1996, LifeUSA Marketing acquired Tax Planning Seminars (TPS), a field
marketing organization (FMO). In addition, LifeUSA Marketing holds minority
equity interests of 50% of Life Sales LLC (LS), 40% of Creative Marketing
International Corporation (CMIC), 45% of Personalized Brokerage Services, Inc.
(PBS), 35% of Ann Arbor Annuity Exchange (Ann Arbor), 40% of Roster Financial,
LLC (Roster) and 40% of Signature Financial Services, Inc (SF). In April 1998,
the Company purchased a 40% minority interest in Windsor, a Minneapolis-based
investment management firm. TPS is included in the consolidated financial
statements of the Company with elimination of intercompany profits and balances.
LifeUSA Marketing and the Company use the equity method of accounting for the
companies in which it holds a minority interest.
As of December 31, 1998 and 1997, LifeUSA Marketing and the Company had
invested $36.9 million and $21.1 million, respectively, in its various
companies. The excess of amounts invested over the proportionate equity in the
investees' net assets has been accounted for as goodwill and is being amortized
over a 15-year life. Total amortization for the years ended December 31, 1998,
1997 and 1996 was $2.1 million, $1.0 million and $200,000, respectively.
The LS, PBS, Ann Arbor, Roster and SF acquisition agreements contain
certain provisions which permit and could require LifeUSA Marketing to purchase
part or all of the remaining equity interests.
NOTE 4. LINE OF CREDIT
During 1996, the Company entered into a line of credit agreement with two
of the Reinsurers. The line of credit is available for use to fund certain
investments and acquisitions the Company may make, capital contributions to
LifeUSA Insurance, repurchase of common stock or capital expenditures. In 1997,
the maximum borrowing allowed under this agreement was increased to $50 million.
Borrowings under the line of credit, as amended, may be made through May 17,
2000, will mature on March 31, 2002 and will be subject to mandatory repayments
from 25% of excess cash flow (as defined) for the prior calendar year on June
30, 2000 and March 31, 2001. 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 Insurance. The Company is required to pay a
commitment fee of 1/4 of 1% per quarter on the average daily unused portion of
the credit line. In September 1998, the Company borrowed $10 million under its
line of credit increasing the total outstanding balance to $15 million. The
Company has no other outstanding borrowings under this agreement.
NOTE 5. CONVERTIBLE SUBORDINATED DEBENTURES
During 1995, Allianz Life purchased a 15-year, $30 million convertible
subordinated debenture from the Company. In February 1998, Allianz Life
converted the $30 million debenture it purchased from the Company into shares of
common stock as described in Note 10 to the Consolidated Financial Statements.
47
Life USA Holding, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 5. CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED)
Prior to 1993, the Company's agents and employees earned convertible
subordinated debentures as a portion of their compensation. At December 31,
1998, $5.9 million of these debentures were 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 $25.50 per share
through June 30, 1999. 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 1998 and
1997, $8,816 and $2,562 of debentures were converted to 380 and 110 shares of
common stock, respectively. No debentures were converted in 1996.
NOTE 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 nine 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 $2.0 million, $1.9 million and $1.5 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
Minimum future rental payments under noncancelable operating leases having
remaining terms in excess of one year as of December 31, 1998 are as follows (in
thousands):
1999 .............. $2,334
2000 .............. 2,334
2001 .............. 389
------
$5,057
======
NOTE 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.
COMMON STOCK TO BE ISSUED
In connection with employee and Company contributions to the Life USA
Holding, Inc. Employee Savings Plan (Savings Plan), 24,361 shares of common
stock were to be issued at the price of $12.875 per share at December 31, 1998
and 35,458 shares of common stock were to be issued at prices ranging from
$16.125 to $16.875 per share at December 31, 1997 to employee accounts under the
Savings Plan.
NOTES RECEIVABLE FROM STOCK SALES
During 1998, 1997 and 1996, the Company issued common stock to several of
its 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 Insurance or through LifeUSA Insurance under its 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 rates ranging from 8% to 10%
per annum compounded monthly and are payable at maturity (the fifth anniversary
of the date of the note).
STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion
(APB) No. 25 "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its stock options because, as discussed
below, the alternative fair value accounting provided for under SFAS No. 123
"Accounting for
Life USA Holding, Inc.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 7. CAPITAL STRUCTURE (CONTINUED)
Stock-Based Compensation," requires the use of highly subjective option
valuation models that were developed for use in valuing publicly traded stock
options. Currently, 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.
In a recent proposed FASB Interpretation, the FASB limited the scope of APB
No. 25 to individuals who meet the common law definition of an employee. As a
result, options issued to directors and agents of the Company would have to be
accounted for under SFAS No. 123. The final FASB Interpretation, which is
expected to be issued in September 1999, is effective when issued. If adopted,
the Interpretation would be applied prospectively but would be applied to plan
modifications and grants that occur after December 15, 1998. The Company has not
yet determined the impact of the proposed Interpretation.
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 five 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; the purchase price 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.
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 36.37%, 37.47% and 38.03% for 1998, 1997 and 1996,
respectively; the risk free interest rates ranged from 4.39% to 4.86%, 5.07% to
5.70% and 5.04% to 6.38% for 1998, 1997 and 1996, respectively; and the expected
option life was seven years for 1998, 1997 and 1996. The dividend yield for 1998
was .58% to 1.00%.
49
Life USA Holding, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 7. CAPITAL STRUCTURE (CONTINUED)
Exercise prices for options outstanding as of December 31, 1998 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]
1998 1997 1996
---------------------------- ---------------------------- ---------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- ------------------ --------- ------------------ --------- -----------------
Outstanding -- beginning of year 3,231 $ 11.72 2,720 $ 10.21 2,289 $ 10.26
Granted equal to market ........ 217 13.27 714 13.98 373 8.77
Granted above market ........... 203 21.39 178 19.84 151 12.96
Exercised ...................... (547) 9.22 (360) 8.82 (29) 7.00
Canceled ....................... (53) 17.83 (21) 11.48 (64) 11.50
----- -------- ----- -------- ----- --------
Outstanding -- end of year ..... 3,051 $ 12.82 3,231 $ 11.72 2,720 $ 10.21
===== ======== ===== ======== ===== ========
Exercisable -- end of year ..... 2,426 $ 12.73 2,154 $ 11.53 1,858 $ 10.39
===== ======== ===== ======== ===== ========
Weighted-average fair value of
options granted during the year
(using SFAS 123 assumptions) .. $ 5.32 $ 6.55 $ 4.21
======== ======== ========
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1998 (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 IN YEARS NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE
------------------ ------------------ -------- ------------------ -------- -----------------
$ 6.00 - 9.00 5.1 474 $ 7.54 388 $ 7.21
$ 9.01 - 13.50 6.3 1,564 11.21 1,295 11.07
$13.51 - 20.25 8.3 794 16.14 524 16.35
$20.26 - 28.00 8.2 219 23.72 219 23.72
Beginning in 1992, the Company granted stock options as commission bonuses
to LifeUSA Insurance agents (Agent Option Plan) based on net earned commissions
on business written. 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.
The options vest immediately upon issuance and expire on December 31 in the
fifth year following the date of grant. As a result, 646,438 options granted in
1993 and 166,808 options granted in 1992 expired in 1998 and 1997, respectively.
The Company discontinued the granting of stock options as production bonuses
following the calendar quarter ended March 31, 1997.
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 34.58% and 36.89% for 1997 and 1996 respectively; the risk
free interest rates was 5.39% for 1997 and ranged from 6.10% to 6.15% for 1996;
and the expected option life was four years for 1997 and 1996.
Life USA Holding, Inc.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 7. CAPITAL STRUCTURE (CONTINUED)
Exercise prices for options outstanding as of December 31, 1998 ranged from
$11.02 to $18.90. 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]
1998 1997 1996
---------------------------- ---------------------------- ---------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- ------------------ --------- ------------------ --------- -----------------
Outstanding -- beginning of year 3,256 $ 15.44 4,237 $ 14.58 3,482 $ 14.93
Granted equal to market ........ -- -- 101 15.71 862 13.38
Exercised ...................... (75) 12.19 (846) 11.83 -- --
Canceled ....................... (686) 21.49 (236) 13.11 (107) 16.37
----- -------- ----- -------- ----- --------
Outstanding -- end of year ..... 2,495 $ 13.87 3,256 $ 15.44 4,237 $ 14.58
===== ======== ===== ======== ===== ========
Exercisable -- end of year ..... 2,495 $ 13.87 3,256 $ 15.44 4,237 $ 14.58
===== ======== ===== ======== ===== ========
Weighted-average fair value of
options granted during the year
(using SFAS 123 assumptions) .. $ -- $ 1.89 $ 2.37
======== ======== ========
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1998 (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 IN YEARS NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE
------------------ ------------------ -------- ------------------ -------- -----------------
$ 9.01 - 13.50 2.3 1,024 $ 12.24 1,024 $ 12.24
$13.51 - 20.25 1.9 1,471 15.00 1,471 15.00
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 exercise
price of the option is equal to the fair market value of the stock on the date
of the meeting. An aggregate of 200,000 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 34.36%, 34.58% and 36.89% for 1998, 1997 and 1996
respectively; the risk free interest rates ranged from 4.58% to 4.62%, 4.97% to
5.21% and 6.03% to 6.10% for 1998, 1997 and 1996, respectively; and the expected
option life was four years for 1998, 1997 and 1996. The dividend yield for 1998
was .61% to .81%.
51
Life USA Holding, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 7. CAPITAL STRUCTURE (CONTINUED)
Exercise prices for options outstanding as of December 31, 1998 ranged from
$8.25 to $18.13. 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]
1998 1997 1996
---------------------------- ---------------------------- ---------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- ------------------ --------- ------------------ --------- -----------------
Outstanding -- beginning of year 69 $ 11.61 65 $ 10.78 45 $ 11.67
Granted equal to market ........ 16 14.33 16 13.41 20 8.78
Canceled ....................... (6) 19.27 -- -- -- --
Exercised ...................... -- -- (12) 9.51 -- --
Outstanding -- end of year ..... 79 $ 11.58 69 $ 11.61 65 $ 10.78
==== ======== === ======== == ========
Exercisable -- end of year ..... 71 $ 11.43 62 $ 11.08 55 $ 11.12
==== ======== === ======== == ========
Weighted-average fair value of
options granted during the year
(using SFAS 123 assumptions) .. $ 4.81 $ 4.62 $ 3.28
======== ======== ========
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1998 (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 IN YEARS NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE
------------------- ------------------ -------- ------------------ -------- -----------------
$ 6.00 - 9.00 1.9 24 $ 8.57 24 $ 8.57
$ 9.01 - 13.50 2.1 32 10.70 28 10.47
$13.51 - 20.25 3.4 23 15.96 19 16.43
For purposes of pro forma disclosures, the estimated fair value of the
options is charged to expense in the year of grant. During 1998, the expense has
been reduced by dividend payments to shareholders and by amounts deferred from
previous years' cost of acquiring new business. This amount has been calculated
using a method consistent with that utilized by LifeUSA Insurance to defer
commissions paid to agents. The Company's pro forma information follows (in
thousands, except for earnings per share information):
[Enlarge/Download Table]
1998 1997
----------------------------------- --------------------------------
RANGE OF VALUES RANGE OF VALUES
------------------------ ---------------------
SFAS 123 HIGH LOW SFAS 123 HIGH LOW
---------- ---------- ------------- ---------- ---------- ----------
Reported net income ............ $ 21,907 $ 21,907 $21,907 $ 26,978 $ 26,978 $ 26,978
Additional expense: ............
1990 Stock Option Plan:
Original grants .............. (1,217) (1,627) (443) (3,415) (4,275) (1,328)
Grant extensions ............. -- -- -- -- -- --
Agent Option Plan ............ (21) (32) (7) (158) (259) (60)
Director Option Plan ......... (41) (55) (27) (43) (56) (26)
-------- -------- -------- -------- -------- --------
Pro forma net income ........... $ 20,628 $ 20,193 $21,430 $ 23,362 $ 22,388 $ 25,564
======== ======== ======== ======== ======== ========
Pro forma earnings per share:
Basic ........................ $ .80 $ .79 $ .84 $ 1.07 $ 1.03 $ 1.17
======== ======== ======== ======== ======== ========
Diluted ...................... $ .78 $ .77 $ .81 $ .96 $ .92 $ 1.05
======== ======== ======== ======== ======== ========
1996
--------------------------------
RANGE OF VALUES
---------------------
SFAS 123 HIGH LOW
---------- ---------- ----------
Reported net income ............ $ 23,454 $ 23,454 $23,454
Additional expense: ............
1990 Stock Option Plan:
Original grants .............. (1,273) (1,626) (444)
Grant extensions ............. (3,628) (5,091) (981)
Agent Option Plan ............ (998) (1,512) (320)
Director Option Plan ......... (38) (49) (21)
-------- -------- -------
Pro forma net income ........... $ 17,517 $ 15,176 $21,688
======== ======== =======
Pro forma earnings per share:
Basic ........................ $ .84 $ .73 $ 1.05
======== ======== =======
Diluted ...................... $ .79 $ .69 $ .97
======== ======== =======
Life USA Holding, Inc.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 7. CAPITAL STRUCTURE (CONTINUED)
SAVINGS PLAN
In 1990, the Company adopted the Savings Plan. An aggregate of 1,000,000
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. Prior to
January 1, 1998, contributions made to the Savings Plan by the Company were
invested in common stock of the Company. Effective January 1, 1998, Company
contributions may be in the form of common stock of the Company or cash
contributions to the employee's elected mutual funds in the Savings Plan. During
the years of 1998, 1997 and 1996, 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, 1998, 1997 and 1996, was $1.2 million,
$1.1 million and $.9 million, respectively.
STOCK REPURCHASE PROGRAM
In July 1998, the Company announced that its Board of Directors authorized
a program to repurchase up to four million shares of its common stock through
periodic purchases in the marketplace. The shares to be repurchased represented
approximately 15% of the Company's 26.0 million shares outstanding. As of
December 31, 1998, 1.8 million shares have been repurchased by the Company at an
average price of $12.50 per share. Repurchased shares will be deemed to be
outstanding shares for purposes of calculating the 35% of the outstanding common
stock of the Company to be acquired under the agreement with Allianz Life. See
Note 10 to the Consolidated Financial Statements for more details.
DIVIDENDS
In January 1999, the Company announced that its Board of Directors declared
a cash dividend of 2.5 cents per share for the fourth quarter of 1998, payable
on February 12, 1999 to shareholders of record as of January 28, 1999. The
Company declared similar dividends for the first, second and third quarters of
1998. It is the intention of the Board of Directors to pay regular quarterly
dividends in 1999 of 2.5 cents per share, or ten cents per share on an annual
basis.
The ability of the Company to pay dividends is limited because a majority
of the Company's revenues is produced by LifeUSA Insurance, and distributions by
LifeUSA Insurance to the Company are subject to permission and other limitations
imposed by the Department of Commerce of the State of Minnesota. LifeUSA
Insurance paid $2.5 million in extraordinary dividends to the Company during
1998 and 1997 and $5 million in January 1999, as permitted by the Department of
Commerce of the State of Minnesota.
53
Life USA Holding, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 8. EARNINGS PER SHARE
Basic and diluted earnings per share for the years ended December 31, 1998,
1997 and 1996 were computed as follows (dollars in thousands, except per share
amounts):
[Enlarge/Download Table]
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
BASIC
Weighted-average shares outstanding ................. 25,659,567 21,795,258 20,762,192
========== ========== ==========
Net income .......................................... $ 21,907 $ 26,978 $ 23,454
============ ============ ============
Per common share amount ............................. $ .85 $ 1.24 $ 1.13
============ ============ ============
DILUTED
Average shares outstanding and to be issued ......... 25,665,658 21,808,351 20,767,538
Effect of dilutive securities: employee stock
options, convertible debentures and warrants ....... 760,633 929,208 171,714
Shares assuming conversion of convertible
subordinated debentures ............................ -- 2,422,878 2,419,411
------------ ------------ ------------
Adjusted weighted-average shares .................... 26,426,291 25,160,437 23,358,663
============ ============ ============
Net income .......................................... $ 21,907 $ 26,978 $ 23,454
Add convertible subordinated debenture interest,
net of federal income tax effect ................... 85 870 870
------------ ------------ ------------
Adjusted net income ................................. $ 21,992 $ 27,848 $ 24,324
============ ============ ============
Per common share amount ............................. $ .83 $ 1.11 $ 1.04
============ ============ ============
NOTE 9. INCOME TAXES
Income taxes consist of the following (in thousands):
[Download Table]
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
Current income taxes:
Federal ........................ $11,304 $15,346 $ 14,459
State .......................... 187 277 821
------- ------- --------
Total current income taxes ....... 11,491 15,623 15,280
Deferred income taxes ............ 1,759 470 (1,669)
------- ------- --------
Total income taxes ............ $13,250 $16,093 $ 13,611
======= ======= ========
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]
1998 1997 1996
---------------------- ---------------------- ----------------------
PROVISION RATE PROVISION RATE PROVISION RATE
----------- ---------- ----------- ---------- ----------- ----------
Income taxes based on the statutory rate ....... $12,305 35.0% $15,075 35.0% $12,973 35.0%
State income tax, net of federal benefit ....... 266 .8 366 .8 453 1.2
Other taxes .................................... 679 1.9 652 1.1 185 .5
------- ---- ------- ---- ------- ----
Total income taxes ............................ $13,250 37.7% $16,093 37.4% $13,611 36.7%
======= ==== ======= ==== ======= ====
Life USA Holding, Inc.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 9. INCOME TAXES (CONTINUED)
The components of the deferred tax provision (benefit) for the years ended
December 31 are as follows (in thousands):
[Download Table]
1998 1997 1996
----------- ----------- -----------
Deferred policy acquisition costs ........ $ 3,784 $ 4,511 $ 3,548
Future policy benefits ................... (4,162) (5,279) (3,840)
Deferred agent compensation .............. 187 260 49
State guaranty fund assessments .......... 300 749 (1,109)
Other .................................... 1,650 229 (317)
-------- -------- --------
$ 1,759 $ 470 $ (1,669)
======== ======== ========
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
[Download Table]
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
Deferred tax assets:
Future policy benefits ....................... $ 61,584 $57,422
Unrealized gains/losses on investments ....... 11,836 7,920
Deferred agent compensation .................. 2,217 2,404
State guaranty fund assessments .............. 1,109 1,109
Other ........................................ 10,637 7,978
-------- -------
Total gross deferred tax assets ................. 87,383 76,833
Deferred tax liabilities:
Deferred policy acquisition costs ............ 75,831 72,047
Unrealized gains/losses on investments ....... 19,070 12,835
State guaranty fund assessments .............. 1,524 1,013
Other ........................................ 10,130 7,451
-------- -------
Total gross deferred tax liabilities ............ 106,555 93,346
-------- -------
Net deferred tax liability ...................... $ 19,172 $16,513
======== =======
NOTE 10. AGREEMENT WITH ALLIANZ LIFE
In an agreement announced in January 1998 ("the agreement with Allianz
Life"), Allianz Life will acquire up to 35 percent of the outstanding common
stock of the Company over the period ending 2002, and the marketing agreement
between the two companies was extended to December 31, 2000. Allianz Life will
acquire its interest in the Company as a result of several specific actions:
First, over a five-year period ending 2002, Allianz Life will purchase from
the Company $100 million of newly issued common stock in increments of $10
million semi-annually. The purchase of common stock will provide the Company
with $100 million of equity capital through the use of a financing vehicle
called a Sequentially Timed Equity Placement. The price at which Allianz Life
will purchase the common stock will be at 250 percent of the Company's book
value per share (excluding SFAS No. 115) at the time the common stock is issued.
If the price at which Allianz Life would purchase the Company's common stock,
calculated at 250 percent of the then current book value, is more than 200
percent of the current market price at the time the common stock is tendered,
Allianz Life can decline to purchase the stock. However, in such an event, the
Company may require Allianz Life to purchase a convertible debenture for a like
amount of capital. The convertible debenture would include a 10 year term,
interest only payments for the first five years, interest at a rate equal to the
10 year U.S. treasury bond, at the time of issue, conversion at 200 percent of
the market price at issue, and a mandatory conversion provision at 80 percent of
the conversion price. Second, in February 1998, Allianz Life converted the $30
million debenture it purchased from the Company in 1995. In order to complete
the conversion, the Company issued Allianz Life 2.43 million shares of common
stock at
55
Life USA Holding, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 10. AGREEMENT WITH ALLIANZ LIFE (CONTINUED)
a conversion price of $12.34 per share. Allianz Life also exercised its
preemptive rights and purchased 241,846 additional shares at $12.36 per share.
Third, Allianz Life purchased 925,000 shares from certain members of the
Company's management at $16.44 per share. In addition, Allianz Life may acquire
an additional 1,604,104 shares of the Company's common stock in open market
purchases through February 6, 2000.
In August 1998, Allianz Life acquired 406,092 shares of the Company's
common stock with the initial $10 million semi-annual installment. As of
December 31, 1998 Allianz Life had purchased an aggregate of 5,304,056 shares.
Allianz Life has nominated two individuals to the Company's Board of
Directors, and additional directors may be nominated proportional to Allianz
Life's percentage ownership. The agreement limits Allianz Life's ownership to
35% of the Company's common stock (excluding the effect of the Company's share
repurchase program), precludes it from making management changes and provides
certain other standstill protections.
NOTE 11. RELATED PARTY TRANSACTIONS
The Company currently has investment management agreements with Windsor and
AIC. For their services in 1998, Windsor and AIC were paid a fee based on the
market value of investments at the end of each quarter. For the years ended
December 31, 1998, 1997 and 1996, the Company paid Windsor and AIC an aggregate
of $.4 million, $.2 million and $.1 million, respectively, for investment
management services.
The Company incurred legal fees of $.7 million, $.4 million and $.4 million
for the years ended December 31, 1998, 1997 and 1996, respectively, from the law
firm of which one of its directors and two officers of the Company are members.
Members of such firm beneficially owned 281,830 shares of the Company at
December 31, 1998, or approximately 1.1% of the then outstanding shares.
The Company incurred actuarial and other consulting fees of $.8 million,
$1.2 million and $.7 million for the years ended December 31, 1998, 1997 and
1996, respectively, from the firm of which one of its directors is a member.
The Company incurred legal and other consulting fees of $.1 million, $.2
million, and $.1 million for the years ended December 31, 1998, 1997 and 1996,
respectively, from the firm of which one of its directors is a member.
Life USA Holding, Inc.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 12. STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURES Changes in operating
assets and liabilities consist of (in thousands):
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
Increase in policy loans ................................... $ (1,649) $ (1,628) $ (1,553)
Increase in accrued investment income ...................... (2,753) (3,142) (4,324)
Increase in recoverable on paid losses and amounts due
from reinsurers ........................................... (11,848) (10,791) (7,678)
(Increase) decrease in other assets ........................ (10,743) 8,551 2,636
Increase in other policyholders' funds ..................... 631 3,827 928
Increase (decrease) in amounts due reinsurers .............. 5,143 14,798 (3,698)
(Decrease) increase in accrued commissions to agents ....... (2,593) 1,340 (1,121)
Decrease in taxes, licenses and fees payable ............... (2,392) (9,453) (1,045)
(Decrease) increase in accounts payable .................... (61) (1,644) 2,196
Increase in other liabilities .............................. 10,444 1,258 312
--------- --------- ---------
$ (15,821) $ 3,116 $ (13,347)
========= ========= =========
Supplemental schedule of noncash financing activities:
Issuance of stock upon conversion of convertible
subordinated debentures ................................. $ 11 $ 3 $ --
Issuance of stock to employees as compensation ........... 1,835 1,220 1,436
Issuance of stock upon conversion of convertible
subordinated debenture and shares associated with
agreement with Allianz Life ............................. 42,619 -- --
NOTE 13. STATUTORY CAPITAL AND SURPLUS
LifeUSA Insurance, 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 Insurance does not
utilize any accounting practices in the preparation of its statutory financial
statements that differ from those prescribed by the Department of Commerce of
the State of Minnesota.
At December 31, 1998 and 1997, LifeUSA Insurance had statutory capital and
surplus of $113.1 million and $103.7 million, respectively, as reported to
regulatory authorities. The Company made no capital contributions to LifeUSA
Insurance in 1998 or 1997. LifeUSA Insurance paid $2.5 million in extraordinary
dividends to the Company during 1998 and 1997 and $5 million in January 1999.
The extraordinary dividends were permitted by the Department of Commerce of the
State of Minnesota. LifeUSA Insurance's ability to pay dividends in the future
is subject to compliance with Minnesota insurance laws and regulations.
Statutory net income for the years ended December 31, 1998, 1997 and 1996 was
$17.2 million, $18.4 million and $13.2 million, respectively. Differences
between net income and statutory net income arise primarily from deferred policy
acquisition costs, future policy benefits, deferred income taxes, amortization
of licenses and noncash transactions relating to agent advances.
57
Life USA Holding, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
[Download Table]
QUARTER ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- --------- -------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1998:
Revenues ................. $92,078 $89,697 $ 88,767 $92,106
Net income ............... 6,009 5,574 5,168 5,156
Earnings per common share:
Basic .................. .23 .22 .20 .20
Diluted ................ .23 .21 .20 .20
1997:
Revenues ................. $79,352 $91,816 $107,187 $91,548
Net income ............... 5,145 5,331 9,628 6,874
Earnings per common share:
Basic ................... .24 .25 .44 .31
Diluted ................. .22 .23 .38 .27
The results for the quarters ended December 31 were impacted by the
following items (dollars in thousands, except per share amounts):
[Enlarge/Download Table]
1998 1997
-------------------------- -------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
-------------------------- -------------------------
NET INCOME PER SHARE NET INCOME PER SHARE
------------ ----------- ------------ ----------
Net realized gains on investments ................. $ -- $ -- $ 76 $ .00
Credits for state guaranty fund assessments ....... 413 .01 977 .04
NOTE 15. 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 Consolidated Balance Sheet for these
financial instruments approximate fair value.
DERIVATIVE FINANCIAL INSTRUMENTS
LifeUSA purchases 5-year and 7-year "over-the-counter" European-Asian call
option contracts based on the S&P 500 index. The Company only purchases option
contracts from counterparties rated AA- or better and the option contracts are
not used for trading purposes. The notional par amounts of the option contracts
were $51,000 and $5,000 at December 31, 1998 and 1997, respectively. Fair values
are based on quoted market prices.
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 $195.8 million and $182.8 million at
December 31, 1998 and 1997, respectively, would have a fair value of $0.
Life USA Holding, Inc.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
CONVERTIBLE SUBORDINATED DEBENTURES AND LONG-TERM DEBT
The fair value of convertible subordinated debentures and long-term debt is
estimated using discounted cash flow analyses, based on interest rates for
similar types of financial instruments with consistent maturities.
The carrying amounts and fair values of the Company's financial instruments
are as follows (in thousands):
[Enlarge/Download Table]
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------- --------------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
---------------- ------------ ---------------- -------------
ASSETS
Fixed maturity investments:
Available for sale ...................... $1,020,691 $1,020,691 $ 882,159 $ 882,159
Held to maturity ........................ 1,259,072 1,314,009 1,249,488 1,289,621
Policy loans .............................. 34,939 34,939 29,003 29,003
Cash and cash equivalents ................. 21,570 21,570 34,139 34,139
Option contracts .......................... 11,384 11,384 848 848
Future policy benefits recoverable
and amounts due from reinsurers .......... 2,658,485 2,423,527 2,449,309 2,211,385
LIABILITIES
Investment contracts:
Deferred annuities ...................... $3,439,658 $3,014,152 $3,333,160 $2,873,536
Supplementary contracts and
in-benefit annuities ................... 1,275,773 1,296,468 1,076,337 1,118,775
Long-term debt ............................ 15,000 15,875 5,000 5,369
Convertible subordinated debentures ....... 5,898 6,314 36,030 46,955
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.
NOTE 16. REINSURANCE
For details regarding life insurance and annuity reinsurance ceded and
assumed refer to the information under the caption "General-Reinsurance" on
pages 11 through 13 of this Annual Report and Form 10-K. Such information is
incorporated by reference into these Notes to Consolidated Financial Statements.
NOTE 17. CONTINGENCIES
For details of current legal proceedings outstanding, refer to LEGAL
PROCEEDINGS on page 66 of this Annual Report and Form 10-K. Such information is
incorporated by reference into these Notes to Consolidated Financial Statements.
59
Life USA Holding, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 18. LIFE USA HOLDING, INC. (PARENT ONLY) FINANCIAL INFORMATION
LIFE USA HOLDING, INC.
(PARENT ONLY)
BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
[Enlarge/Download Table]
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- -------------
ASSETS
Fixed maturity investments -- available for sale, at fair value
(amortized cost: $3,271 at December 31, 1998 and $8,139 at
December 31, 1997) ............................................ $ 3,584 $ 7,161
Cash and cash equivalents ...................................... 8,817 9,009
Fixed assets and leasehold improvements, net ................... 5,459 5,828
Investments in subsidiaries, net ............................... 280,090 245,819
Deferred income taxes .......................................... 2,530 2,039
Other assets ................................................... 13,543 7,624
-------- --------
$314,023 $277,480
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Amounts due reinsurers ........................................ $ 211 $ 428
Accounts payable .............................................. 4,866 4,878
Accrued commissions to agents ................................. 3,534 4,575
Convertible subordinated debentures ........................... 5,898 36,030
Long-term debt ................................................ 15,000 5,000
Other policyholders' funds .................................... 13 15
Other liabilities ............................................. 4,516 4,154
-------- --------
Total liabilities ............................................ 34,038 55,080
Shareholders' equity:
Preferred stock, $.01 par value; 15,000,000 shares authorized,
none issued .................................................. -- --
Common stock, $.01 par value; 60,000,000 shares authorized,
24,752,156 shares issued and outstanding (22,723,830 shares at
December 31, 1997) ........................................... 248 227
Common stock to be issued, 24,361 shares (35,458 shares at
December 31, 1997) ........................................... 328 565
Additional paid-in capital .................................... 150,096 108,372
Notes receivable from stock sales ............................. (4,266) (7,477)
Retained earnings ............................................. 120,145 112,564
Accumulated other comprehensive income: Net unrealized gain
on fixed maturity investments -- available for sale .......... 13,434 8,149
-------- --------
Total shareholders' equity ................................... 279,985 222,400
-------- --------
$314,023 $277,480
======== ========
Life USA Holding, Inc.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 18. LIFE USA HOLDING, INC. (PARENT ONLY) FINANCIAL INFORMATION
(CONTINUED)
LIFE USA HOLDING, INC.
(PARENT ONLY)
STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
Revenues:
Management fees ................................... $ 35,119 $ 34,976 $ 32,476
Net investment income ............................. 1,361 810 1,378
Commissions and expense allowances, net ........... 69,599 80,305 63,222
Equity in income of wholly-owned subsidiaries ..... 19,696 23,972 21,321
Other ............................................. 848 553 316
-------- -------- --------
Total revenues ................................... 126,623 140,616 118,713
Expenses:
Commissions ....................................... 43,276 50,381 38,133
Salaries and employee benefits .................... 26,910 25,456 24,720
Depreciation and amortization ..................... 2,023 1,705 1,246
Interest expense .................................. 1,386 2,194 1,982
Other ............................................. 29,465 31,763 27,609
-------- -------- --------
Total expenses ................................... 103,060 111,499 93,690
-------- -------- --------
Income before income taxes ......................... 23,563 29,117 25,023
Income taxes ....................................... 1,656 2,139 1,569
-------- -------- --------
Net income ......................................... $ 21,907 $ 26,978 $ 23,454
======== ======== ========
61
Life USA Holding, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 18. LIFE USA HOLDING, INC. (PARENT ONLY) FINANCIAL INFORMATION
(CONTINUED)
LIFE USA HOLDING, INC.
(PARENT ONLY)
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
Cash flows from operating activities:
Net income ......................................... $ 21,907 $ 26,978 $ 23,454
Adjustments to reconcile net income to net
cash provided by operating activities ............. (13,486) (22,060) (10,147)
--------- --------- ---------
Net cash provided by operating activities ........... 8,421 4,918 13,307
Cash flows from investing activities:
Fixed maturity investments -- available for sale:
Purchases ........................................ -- (4,907) --
Proceeds from sales .............................. 4,916 -- --
Proceeds from maturities and principal
payments on mortgage-backed securities .......... -- 2,000 --
Investment in LifeUSA Securities, Inc. ............. (1,605) (1,320) (285)
Investment in LifeUSA Marketing, Inc. .............. (16,047) (10,382) (9,250)
Loans to field marketing organizations ............. -- (1,605) (1,219)
Capital expenditures ............................... (1,255) (1,650) (2,629)
--------- --------- ---------
Net cash used in investing activities ............... (13,991) (17,864) (13,383)
Cash flows from financing activities:
Proceeds from exercise of stock options ............ 7,423 15,372 226
Proceeds from line of credit ....................... 10,000 5,000 --
Proceeds from common stock issuance to
Allianz Life ...................................... 10,000 -- --
Repurchase of common stock ......................... (22,408) -- --
Dividends paid ..................................... (1,915) -- --
Other financing activities ......................... 2,278 1,401 (25)
--------- --------- ---------
Net cash provided by financing activities ........... 5,378 21,773 201
--------- --------- ---------
Net (decrease) increase in cash and cash
equivalents ........................................ (192) 8,827 125
Cash and cash equivalents at beginning
of the year ........................................ 9,009 182 57
--------- --------- ---------
Cash and cash equivalents at end of the year ........ $ 8,817 $ 9,009 $ 182
========= ========= =========
Cash paid during the year for interest .............. $ 2,117 $ 2,148 $ 1,984
========= ========= =========
Cash paid during the year for income taxes .......... $ 12,604 $ 13,612 $ 15,782
========= ========= =========
Supplemental schedule of noncash investing and
financing activities:
Issuance of stock upon conversion of
convertible subordinated debentures ............... $ 11 $ 3 $ --
Issuance of stock to employees as compensation 1,835 1,220 1,436
Fixed assets contributed to LifeUSA Insurance
Company ........................................... -- -- 1,362
Issuance of stock upon conversion of
convertible subordinated debenture and shares
associated with agreement with Allianz Life ....... 42,619 -- --
Life USA Holding, Inc.
62
REPORT OF INDEPENDENT AUDITORS
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, 1998 and 1997, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Minneapolis, Minnesota
January 29, 1999
63
Life USA Holding, Inc.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
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 to Shareholders and Form 10-K. 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, 1998, its system of
internal control is adequate to accomplish the objectives discussed herein.
The financial statements for the years ended December 31, 1998, 1997 and
1996 have been audited by Ernst & Young LLP, independent auditors. The 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
Life USA Holding, Inc.
64
ANNUAL REPORT ON FORM 10-K
ANNUAL REPORT ON FORM 10-K
Securities and Exchange Commission
Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1998
Life USA Holding, Inc.
Commission file number 0-18485
Incorporated in the State of Minnesota
IRS Employer Identification No. 41-1578384
Suite 95 Interchange North Building
300 South Highway 169
Minneapolis, Minnesota 55426
Telephone: (612) 546-7386
Securities registered pursuant to Section 12(g) of the Act (and listed on the
Nasdaq Stock Market):
Common Stock, $.01 par value
Life USA Holding, Inc. (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months and (2) has been subject to such filing requirements for the past 90
days.
Theaggregate market value of the voting and outstanding stock (17,603,796
shares) held by non-affiliates of the registrant as of February 12, 1999 was
$201,387,426.
This Annual Report to Shareholders and Form 10-K combines the disclosure
requirements of the Securities and Exchange Commission and generally accepted
accounting principles. Certain portions of the Annual Report to Shareholders
and Form 10-K as referenced in the table at right are incorporated in the
Form 10-K.
Portions of the proxy statement for the annual shareholders meeting to be held
April 13, 1999 are incorporated by reference into Part III.
FORM 10-K
CROSS-REFERENCE
TABLE OF CONTENTS PAGE(S)
----------------------------------------- -------------------------
PART I
Item 1. Business
General 8-15,41
Investments 14,18,24-27,
41,45-47
Reinsurance 11-13,17,19,59
Capital Resources 21-23
Marketing Organization
Ownership 8,42,47
The Agreement with
Allianz Life 2,11-13,22,55-56
Line of Credit 21,22,47
Regulatory Matters 23,24
Statutory Income and
Capital of LifeUSA
Insurance Company 22,27,57
Item 2. Properties 66
Item 3. Legal Proceedings 66
Item 4. Submission of Matters to a
Vote of Security Holders none
PART II.
Item 5. Market for Registrant's
Common Equity and
Related Stockholder
Matters 1,22,23,74
Item 6. Selected Financial Data 6-7
Item 7. Management's Discussion
and Analysis of Financial
Condition and Results of
Operations 16-35
Item 7a. Quantitative and Qualitative
Disclosures about Market
Risk 26,27
Item 8. Financial Statements and 32,33,36-40,
Supplementary Data 57,69
Item 9. Changes in and
Disagreements
with Accountants on
Accounting and Financial
Disclosure None
PART III.
Item 10. Directors and Executive
Officers of the Registrants *
Item 11. Executive Compensation *
Item 12. Security Ownership of
Certain Beneficial Owners
and Management *
Item 13. Certain Relationships and
Related Transactions *
PART IV.
Item 14. Exhibits, Financial Statement
Schedules and Reports on
Form 8-K 66-73
*Life USA Holding, Inc.'s Proxy Statement for the 1999 Annual Meeting of
Shareholders is incorporated herein by reference.
65
Life USA Holding, Inc.
ANNUAL REPORT ON FORM 10-K
PROPERTIES
Under leases expiring in February 2001, the Company leases approximately
141,000 square feet of office space at Interchange North Building, 300 South
Highway 169, Minneapolis, Minnesota. See Note 6 to the Consolidated Financial
Statements. Based on the Company's business plan, management believes the
Company's current facilities will be adequate through 1999.
LEGAL PROCEEDINGS
In July 1997, two policyholders of FULICO whose policies were assumed by
Allianz Life commenced an action against Allianz Life in state court in
California. LifeUSA Insurance was also named as a defendant in the lawsuit
because it is the successor of FULICO and a third plaintiff who is a
policyholder of LifeUSA Insurance asserted certain claims against LifeUSA
Insurance. This action is styled on behalf of the named plaintiffs and seeks
certification on behalf of a class of policyholders who had purchased insurance
products of Allianz/FULICO and LifeUSA Insurance. The plaintiffs allege that
they and other policyholders have been damaged due to certain alleged improper
life insurance sales practices relating to vanishing premiums, churning and
retirement plans, among other things. In 1994, Allianz sold the stock of FULICO
to the Company. The Company then merged its Colorado life insurance subsidiary
with FULICO and changed FULICO's corporate name to LifeUSA Insurance in order to
redomesticate its Colorado life insurance subsidiary to Minnesota and obtain
licenses in all states except for New York. As part of the transaction, Allianz
Life assumed all of the business written by FULICO prior to the sale of the
stock of FULICO to the Company and agreed to indemnify the Company and LifeUSA
Insurance against any liabilities of FULICO arising prior to the date on which
FULICO was sold to the Company. The case has been transferred to the United
States Federal Court for the District of Minnesota by agreement of the parties.
Allianz Life and the plaintiffs' attorneys have reached a tentative settlement
of the claims against Allianz Life. As part of the settlement, plaintiffs will
dismiss the claims against the Company without prejudice, but will have the
right to bring the claims again after further investigation. While it is not
possible to predict the outcome of the litigation, the Company does not
anticipate any material adverse financial result.
In December 1997, six annuity policyholders commenced a lawsuit against the
Company. The action is styled on behalf of the named plaintiffs and seeks
certification on behalf of a class of policyholders who purchased annuity
policies. The plaintiffs allege that they and other annuity policyholders have
been damaged due to certain alleged misrepresentations and alleged inadequate
disclosures at the times the annuities were purchased and from time to time
thereafter. The case was commenced in the United States Court for the Eastern
District of Pennsylvania. The litigation is in the discovery stage and is
currently scheduled to be available for trial as early as May 21, 1999. While it
is not possible to predict the outcome of the litigation, the Company does not
anticipate any material adverse financial result.
In June 1998, an action similar to the December 1997 lawsuit was commenced
against the Company by one annuity policyholder on behalf of herself seeking
certification on behalf of a class of all other New Jersey annuity policyholders
in New Jersey State Court. The case has been removed to United States Federal
Court for the District of New Jersey and the Company has moved to consolidate it
with the January 1998 case in the United States Federal Court for the Eastern
District of Pennsylvania. The plaintiff has moved to remand to state court and
has objected to the consolidation. The litigation is in the early stages and,
while it is not possible to predict the outcome of the litigation, the Company
does not anticipate any material adverse financial result.
Life USA Holding, Inc.
66
ANNUAL REPORT ON FORM 10-K
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the executive officers of the Company, their ages and
titles:
[Enlarge/Download Table]
NAME AGE TITLE
------------------------- ----- ---------------------------------------------------
Robert W. MacDonald 56 Chairman and Chief Executive Officer
Margery G. Hughes 48 President and Chief Operating Officer
Mark A. Zesbaugh 34 Executive Vice President, Chief Financial Officer,
Treasurer and Secretary
Daniel J. Rourke 69 Senior Vice President and Chief Marketing Officer
Donald J. Urban 57 Senior Vice President and Director of Sales
Bradley E. Barks 39 Senior Vice President Finance
Michael W. Farley 36 Senior Vice President and Chief Actuary
Bruce D. Bengtson 49 Senior Vice President
Neil H. McKay 37 Vice President Financial Analysis
67
Life USA Holding, Inc.
ANNUAL REPORT ON FORM 10-K
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of l934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Life USA HOLDING, INC.
By: /s/ MARK. A. ZESBAUGH
--------------------------------
Mark A. Zesbaugh
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this
registration statement has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
[Enlarge/Download Table]
/S/ ROBERT W. MACDONALD Chief Executive Officer March 8, 1999
------------------------- (Principal Executive Officer) and Director
Robert W. MacDonald
/S/ MARK A. ZESBAUGH Chief Financial Officer March 8, 1999
------------------------- (Principal Financial and Accounting
Mark A. Zesbaugh Officer) and Director
* Director * Director
------------------------- -------------------------
Hugh Alexander Barbara J. Lautzenheiser
* Director * Director
------------------------- -------------------------
Edward J. Bonach Daniel J. Rourke
* Director * Director
------------------------- -------------------------
Jack H. Blaine Ralph Strangis
* Director * Director
------------------------- -------------------------
Margery G. Hughes Donald J. Urban
* Director
-------------------------
Robert S. James
*By: /s/ MARK A. ZESBAUGH March 8, 1999
Mark A. Zesbaugh
Attorney-in-fact
* Mark A. Zesbaugh, on his own behalf and pursuant to Powers of Attorney, dated
prior to the date hereof, attested by the officers and directors listed above
and filed with the Securities and Exchange Commission, by signing his name
hereto does hereby sign and execute this Report of Life USA Holding, Inc. on
behalf of each of the officers and directors named above, in the capacities
in which the name of each appears above.
Life USA Holding, Inc.
68
EXHIBITS
EXHIBITS
FINANCIAL STATEMENTS FILED PAGES
-------------------------------------------------- --------
Life USA Holding, Inc.
Consolidated Financial Statements ............... 36-40
Notes to Consolidated Financial Statements ....... 41-62
Report of Independent Auditors ................... 63
Life USA Holding, Inc. Condensed
Financial Information (Parent Only) ............. 60-62
All other schedules to the consolidated financial statements required by
Article 7 of Regulation S-X include information that is disclosed elsewhere in
the Annual Report and Form 10-K, or are inapplicable and therefore have been
omitted.
The following Exhibit Index lists the Exhibits to Annual Report and Form
10-K.
69
Life USA Holding, Inc.
EXHIBITS
[Enlarge/Download Table]
REGULATION S-K
EXHIBIT TABLE
ITEM REFERENCE
---------------------------------------------------------------------------------------- ---------------
Restated Articles of Incorporation of the Company ...................................... 3(7)
Amended and Restated Bylaws of the Company ............................................. 3(17)
Form of Stock Certificate .............................................................. 4(6)
Form of Option Certificate ............................................................. 4(7)
Service Agreement dated January 27, 1988 between the Company and North American
Life and Casualty Company ............................................................. 10(2)
Agreement dated April 6, 1987 with Transamerica Insurance Corporation of California .... 10(1)
Life Coinsurance Agreement effective September 1, 1987 between Transamerica
Occidental Life Insurance Company and Universal Security Assurance Life Insurance
Company and Addendum thereto .......................................................... 10(3)
Amendment to Life Coinsurance Agreement effective January 1, 1989 ...................... 10(20)
Addenda No. 2 through 8 to Life Coinsurance Agreement between LifeUSA Insurance
and Transamerica Occidental Life Insurance Company .................................... 10(20)
Life and ADB YRT Retrocession Agreement between LifeUSA Insurance and
Transamerica Occidental Life Insurance Company effective January 1, 1990 .............. 10(9)
Addendum No. 1 to Life and ADB YRT Retrocession Agreement between LifeUSA
Insurance and Transamerica Occidental Life Insurance Company .......................... 10(20)
Life and ADB YRT Reinsurance Agreement between LifeUSA Insurance Company and
Transamerica Occidental Life Insurance Company effective January 1, 1995 .............. 10(15)
Retrocessional Agreement between LifeUSA Insurance and Transamerica Occidental Life
Insurance Company effective April 1, 1991 ............................................. 10(8)
Addenda No. 1, 2 and 3 to Retrocessional Agreement between LifeUSA Insurance and
Transamerica Occidental Life Insurance Company ........................................ 10(20)
Trust Agreement between Transamerica Occidental Life Insurance Company, LifeUSA
Insurance Company and State Street Bank and Trust Company effective October 28,
1996 .................................................................................. 10(20)
Form of Indemnification Agreement dated as of December 31, 1989 ........................ 10(2)
Life USA Holding, Inc. Employee Savings Plan effective January 1, 1990 ................. 10(4)
First through Seventh Amendment to Employee Savings Plan ............................... 10(20)
Restated Life USA Holding, Inc. Stock Option Plan ...................................... 10(7)
Life USA Director Option Plan .......................................................... 10(10)
Life and Annuity Coinsurance Agreement effective April 1, 1991 among LifeUSA
Insurance Company, Employers Reassurance Corporation, Munich American
Reassurance Company and Republic-Vanguard Life Insurance Company ...................... 10(5)
Addenda Nos. 1 through 13 to the Life and Annuity Coinsurance Agreement ................ 10(20)
Life and ADB YRT Reinsurance Agreement between LifeUSA Insurance and the
Reinsurers effective January 1, 1993 .................................................. 10(8)
Addendum No. 1 through 2 to Life and ADB YRT Reinsurance Agreement between
LifeUSA Insurance and the Reinsurers .................................................. 10(20)
Life and Annuity Coinsurance Agreement effective January 1, 1995 between Allianz Life
Insurance Company of North America and LifeUSA Insurance Company ...................... 10(11)
Amendment to Life and Annuity Coinsurance Agreement between Allianz Life Insurance
Company of North America and LifeUSA Insurance Company ................................ 10(15)
Life USA Holding, Inc.
70
EXHIBITS
[Enlarge/Download Table]
REGULATION S-K
EXHIBIT TABLE
ITEM REFERENCE
--------------------------------------------------------------------------------------- ---------------
Joint Marketing Agreement entered into by and between Allianz Life Insurance Company
of North America and Life USA Holding, Inc. .......................................... 10(11)
Investment Management Agreement entered into by and between LifeUSA Insurance
Company and Allianz Investment Corporation ........................................... 10(11)
Investment Management Agreement entered into by and between Life USA Holding,
Inc. and Allianz Investment Corporation .............................................. 10(11)
Investment Management Agreement entered into by and between LifeUSA Insurance
Company and Windsor Financial Group, LLC ............................................. 10(19)
Investment Management Agreement entered into by and between Life USA Holding,
Inc. and Windsor Financial Group, LLC ................................................ 10(19)
Loan Agreement dated May 17, 1996 between Life USA Holding, Inc. and Employers
Reassurance Corporation and Named Lenders ............................................ 10(12)
Stock Pledge Agreement dated May 17, 1996 between Life USA Holding, Inc. and
Employers Reassurance Corporation .................................................... 10(12)
Amendment No. 1 to the Loan Agreement between Life USA Holding, Inc. and
Employers Reassurance Corporation and Named Lenders .................................. 10(20)
Amendment No. 2 to the Loan Agreement between Life USA Holding, Inc. and
Employers Reassurance Corporation and Named Lenders .................................. 10(20)
Amendment No. 3 to the Loan Agreement between Life USA Holding, Inc. and
Employers Reassurance Corporation and Named Lenders .................................. 10(16)
Amendment No. 4 to the Loan Agreement between Life USA Holding, Inc. and
Employers Reassurance Corporation and Named Lenders .................................. 10(19)
Amendment No. 5 to the Loan Agreement between Life USA Holding, Inc. and
Employers Reassurance Corporation and Named Lenders .................................. 10(19)
Claims Administration Agreement dated December 30, 1996 between Allianz Life
Insurance Company of North America and LifeUSA Insurance Company ..................... 10(13)
Amendment No. 1 to the Claims Administration Agreement between Allianz Life
Insurance Company of North America and LifeUSA Insurance Company ..................... 10(15)
Administration and Marketing Agreement dated December 30, 1996 between Allianz Life
Insurance Company of North America and Life USA Holding, Inc. ........................ 10(13)
Amendment No. 1 to the Administration and Marketing Agreement between Allianz Life
Insurance Company of North America and Life USA Holding, Inc. ........................ 10(15)
Stock Purchase Agreement dated January 13, 1998 between Life USA Holding, Inc. and
Allianz Life Insurance Company of North America ...................................... 10(14)
Amendment No. 1 to the Stock Purchase Agreement between Life USA Holding, Inc.
and Allianz Life Insurance Company of North America .................................. 10(18)
Amendment No. 2 to the Stock Purchase Agreement between Life USA Holding, Inc.
and Allianz Life Insurance Company of North America .................................. 10(18)
Amendment No. 3 to the Stock Purchase Agreement between Life USA Holding, Inc.
and Allianz Life Insurance Company of North America .................................. 10(19)
Reinsurance Agreement between Allianz Life Insurance Company of North America and
LifeUSA Insurance Company ............................................................ 10(15)
71
Life USA Holding, Inc.
EXHIBITS
[Enlarge/Download Table]
REGULATION S-K
EXHIBIT TABLE
ITEM REFERENCE
---------------------------------------------------------------------------------------- ---------------
Employment Agreements dated January 1, 1998 between Life USA Holding, Inc. and
each of Robert W. MacDonald, Margery G. Hughes, Donald J. Urban, Mark A.
Zesbaugh, Bradley E. Barks and Charles M. Kavitsky .................................... 10(15)
First Amendments to Employment Agreements dated December 17, 1998 between Life
USA Holding, Inc. and each of Donald J. Urban and Bradley E. Barks .................... 10(19)
Employment Agreements dated December 17, 1998 between Life USA Holding, Inc. and
each of Hazel Reid and Robin Aeshliman ................................................ 10(19)
Credit Agreement dated December 22, 1998 between LTCAmerica Holding, Inc. and
Norwest Bank Minnesota, National Association .......................................... 10(19)
Revolving Note dated December 22, 1998 between LTCAmerica Holding, Inc. and
Norwest Bank Minnesota, National Association .......................................... 10(19)
Guaranty dated December 22, 1998 by Allianz Life Insurance Company of North
America, Inc. in favor of Norwest Bank Minnesota, National Association guaranteeing
account of LTCAmerica Holding, Inc. ................................................... 10(19)
Guaranty dated December 22, 1998 by LTCAmerica Holding, Inc. in favor of Allianz Life
Insurance Company of North America .................................................... 10(19)
Guaranty dated December 22, 1998 by Life USA Holding, Inc. in favor of Allianz Life
Insurance Company of North America .................................................... 10(19)
Pledge Agreement dated December 22, 1998 between LTCAmerica Holding, Inc. and
Allianz Life Insurance Company of North America ....................................... 10(19)
Security Agreement dated December 22, 1998 between Life USA Holding, Inc. and
Allianz Life Insurance Company of North America ....................................... 10(19)
Administration and Marketing Agreement dated January 1, 1999 between Allianz Life
Insurance Company of North America and LTCAmerica Holding, Inc. ....................... 10(19)
Administration and Marketing Agreement dated January 1, 1999 between LifeUSA
Insurance Company and LTCAmerica Holding, Inc. ........................................ 10(19)
Interests and Liabilities Agreement dated January 1, 1999 between LifeUSA Insurance
Company and Allianz Life Insurance Company of North America ........................... 10(19)
Retrocession Agreement effective January 1, 1999 issued to Allianz Life Insurance
Company of North America by LifeUSA Insurance Company ................................. 10(19)
Cash Management Agreement dated February 16, 1999 between LTCAmerica Holding,
Inc. and Norwest Bank Minnesota, National Association ................................. 10(19)
Service Agreement dated January 1, 1999 between LTCAmerica Holding, Inc. and Life
USA Holding, Inc. ..................................................................... 10(19)
Employee Leasing Agreement dated December 22, 1998 between LTCAmerica Holding,
Inc. and Life USA Holding, Inc. ....................................................... 10(19)
LTCAmerica Holding, Inc. 1998 Stock Option Plan ........................................ 10(19)
Statement of Computation of Per Share Earnings (Years Ended December 31, 1998,
1997 and 1996 -- see Note 8 of the Annual Report to Shareholders) ..................... 11(19)
1998 Annual Report to Shareholders ..................................................... 13(19)
Subsidiaries of the Registrant ......................................................... 21(19)
Consent of Ernst & Young LLP (electronic filing only) .................................. 21(19)
Powers of Attorney ..................................................................... 24(19)
Financial Data Schedule (electronic filing only) ....................................... 27(19)
Life USA Holding, Inc.
72
EXHIBITS
------------------
(1) Filed with the Company's Registration Statement No. 33-21989 and
incorporated by reference herein.
(2) Filed with the Company's 1989 Annual Report on Form 10-K, as amended, and
incorporated by reference herein.
(3) Filed with the Company's Registration Statement No. 33-30506, as amended by
Post-Effective Amendment No. 1, and incorporated by reference herein.
(4) Filed with the Company's Registration Statement No. 33-37981 and
incorporated by reference herein.
(5) Filed with the Company's 1990 Annual Report on Form 10-K and incorporated
by reference herein.
(6) Filed with the Company's Quarterly Report on Form 10-Q for the period ended
March 31, 1992 and incorporated by reference herein.
(7) Filed with the Company's Registration Statement No. 33-52624 and
incorporated by reference herein.
(8) Filed with the Company's Registration Statement No. 33-68528 and
incorporated by reference herein.
(9) Filed with Amendment No. 1 to the Company's Registration Statement No.
33-68528 and incorporated by reference herein.
(10) Filed with the Company's 1993 Annual Report on Form 10-K and incorporated
by reference herein.
(11) Filed with the Company's Current Report on Form 8-K filed March 3, 1995 and
incorporated by reference herein.
(12) Filed with the Company's Current Report on Form 8-K filed June 17, 1996 and
incorporated by reference herein.
(13) Filed with the Company's 1996 Annual Report on Form 10-K and incorporated
by reference herein.
(14) Filed with the Company's Current Report on Form 8-K filed January 13, 1998
and incorporated by reference herein.
(15) Filed with the Company's 1997 Annual Report on Form 10-K and incorporated
by reference herein.
(16) Filed with the Company's Quarterly Report on Form 10-Q for the period ended
March 31, 1998 and incorporated by reference herein.
(17) Filed with the Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1998 and incorporated by reference herein.
(18) Filed with the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1998 and incorporated by reference herein.
(19) Filed with this Annual Report on Form 10-K.
(20) Amendments and addenda made in the ordinary course of business available
from the Company upon request.
The exhibits filed with this Annual Report on Form 10-K may be obtained by
writing to:
Mark A. Zesbaugh
Executive Vice President, Chief Financial Officer and Treasurer
Life USA Holding, Inc.
300 South Highway 169 Suite 95
Minneapolis, MN 55426
During the three months ended December 31, 1998, the Company did not file any
Current Reports on Form 8-K.
73
Life USA Holding, Inc.
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
Ralph Strangis
Counsel to the Company
Member of the Law Firm
Kaplan, Strangis and Kaplan, P.A.
Jack H. Blaine
Former President
National Organization of Life
and Health Insurance
Guaranty Associations
Hugh Alexander
Member of
Alexander Law Firm, P.C.
Barbara J. Lautzenheiser
Lautzenheiser & Associates
Edward J. Bonach
Robert S. James
Allianz Life Insurance Company
of North America
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
Michael W. Farley, FSA, MAAA
Senior Vice President
Chief Actuary
Bruce D. Bengtson, FSA, MAAA
Senior Vice President
Jo-Anne S. Halek
Vice President
Kimberly A. Lees
Vice President
Neil H. McKay, FSA, MAAA
Vice President
Troy D. Auth, CPA, FLMI
Assistant Secretary
Catherine A. Bartlett
Bruce J. Parker
Assistant Secretary
Members of the Law Firm
Kaplan, Strangis and Kaplan, P.A.
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
ANNUAL MEETING
The annual meeting of the shareholders of Life USA Holding, Inc. will be held on
April 13, 1999 at the Interchange Tower, 600 South Highway 169, Minneapolis,
Minnesota 55426. All shareholders are invited to attend.
SHAREHOLDER INFORMATION
Life USA Holding, Inc. common stock trades on the Nasdaq National Market tier of
The Nasdaq Stock Market under the symbol LUSA. The Company paid a dividend of
2.5 cents per share in the second, third and fourth quarters of 1998.
Over-the-counter market quotations reflect inter-dealer prices without retail
mark-up, mark-down or commissions and may not necessarily represent actual
transactions.
As of February 12, 1999, there were 8,251 holders of record of the Company's
common stock. On March 8, 1999, the closing sale price per share of the
Company's common stock as reported by Nasdaq was $12.75.
Life USA Holding, Inc.
74
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
Ralph Strangis
Counsel to the Company
Member of the Law Firm
Kaplan, Strangis and Kaplan, P.A.
Linda K. Burm
Senior Vice President
Chief Operating Officer
OFFICERS
Robert W. MacDonald, CLU
Chief Executive Officer
Daniel J. Rourke, CLU
Chairman
LifeUSA Insurance Company
Chairman
LifeUSA Marketing, Inc.
Donald J. Urban
President
Margery G. Hughes
Executive Vice President
Mark A. Zesbaugh, CPA, CFA, FLMI
Senior Vice President
Treasurer
Linda K. Burm
Senior Vice President
Chief Operating Officer
Jacqueline K. Katrein, CPA
Senior Vice President
Chief Financial Officer
Lane A. Kurle, FLMI
Senior Vice President
Secretary
VICE PRESIDENTS
Leo J. Anderson, FLMI
Robert M. Anderson, FLMI, ALHC
Kevin J. Boyce
Carolyn K. Cosgrove, FLMI
Brenda Z. Duenwald
Michael A. Eitel, CPA
Charles F. Field, FLMI, ALHC
Susan L. Kumpula
Lorraine M. Landram
Blaine T. McGuire, CPA
Robert L. Miller
Kathaleen A. Morrow
Janet M. Neary
Philip B. Rosenbaum, CPA, FLMI
David K. Sandberg, ASA, MAAA
Susan K. Swanson
Cathy H. Waldhauser, FSA, MAAA
Kevin E. Walker, FLMI
Deborah J. Wesenberg, FLMI,
FALU, CLU
Ann M. Yaggie
ASSISTANT VICE PRESIDENTS
Lisa M. Arneson, FLMI
Jill J. Bradley, FLMI
John R. Busse, FLMI
Jeffrey R. Girod
Christine M. Goebel, ACS
John R. Kraft
Amelia L. Lanier
Richard P. Lapcinski
Leslie J. LeQue
Julie A. Letner
Rodney D. Meyer, FLHC, FLMI
Julie Minnich
Denise A. Neumann
Lisa M. Nicholson
Kirsten A. Petsilis
Roxanne M. Watercott
75
Life USA Holding, Inc.
LIFEUSA MARKETING, INC.
BOARD OF DIRECTORS
Daniel J. Rourke, CLU
Chairman
Charles M. Kavitsky
Chief Executive Officer
President
Denise M. Blizil
Senior Vice President
Chief Operating Officer
Ronald L. Berger, CPA
Senior Vice President
Chief Financial Officer
John A. Amann
Vice President, Sales
Linda K. Burm
Chief Operating Officer
LifeUSA Insurance Company
David A. Schliesman
Vice President, Sales
Raj K. Sinha, MS, MBS, CLU, CFP
Vice President, Marketing
Donald J. Urban
President and Chief Executive Officer
LTCAmerica Holding, Inc.
President
LifeUSA Insurance Company
Mark A. Zesbaugh, CPA, CFA, FLMI
Chief Financial Officer
Life USA Holding, Inc.
Robert J. Burskey
Ann Arbor Annuity Exchange, Inc.
Richard E. Griffith
CFC Insurance Marketing Corporation
Thomas R. Kestler, CSP, CLU, ChFC
Kestler Financial Group, Inc.
Joseph R. Lehman, CFP, CLU
Life Sales
Walter F. Lineberger III, CLU, ChFC
Annuity Masters at
Personalized Brokerage Services, Inc.
James A. Martin II, CLU, ChFC
Tax Planning Seminars
Edward A. Omert
Roster Financial, LLC
David A. Sunderland, CLU
The Sunderland Group
Thomas J. Wade
American Financial Marketing, Inc.
OFFICERS
Daniel J. Rourke, CLU
Chairman
Charles M. Kavitsky
Chief Executive Officer
President
Denise M. Blizil
Senior Vice President
Chief Operating Officer
Ronald L. Berger, CPA
Senior Vice President
Chief Financial Officer
Secretary
VICE PRESIDENTS
John A. Amann
John T. Helgerson, CLU
David A. Schliesman
Raj K. Sinha, MS, MBS, CLU, CFP
Mark A. Zesbaugh, CPA, CFA, FLMI
ASSISTANT VICE PRESIDENTS
Lisa B. Carlson
Susan M. Gengler
Sharyl L. Schultz, CLU
Life USA Holding, Inc.
76
LIFEUSA SECURITIES, INC.
BOARD OF DIRECTORS
Robert W. MacDonald, CLU
Chairman
Life USA Holding, Inc.
Mark A. Zesbaugh, CPA, CFA, FLMI
President
Margery G. Hughes
President
Life USA Holding, Inc.
Bruce D. Bengtson, FSA, MAAA
Senior Vice President
Life USA Holding, Inc.
OFFICERS
Mark A. Zesbaugh, CPA, CFA, FLMI
President, Chief Executive Officer,
Secretary and Chief
Financial Officer
Tracy H. Gardner
Vice President
Chief Operating Officer
Philip B. Rosenbaum, CPA, FLMI
Treasurer
VICE PRESIDENTS
Kristi K. Bizer, CPA, FLMI
Timothy J. Lyle
Corey J. Walther
77
Life USA Holding, Inc.
LTCAMERICA HOLDING, INC.
BOARD OF DIRECTORS
Donald J. Urban
President
Chief Executive Officer
Bradley E. Barks, FSA, MAAA, CPA
Chairman
Chief Financial Officer
Mark A. Zesbaugh, CPA, CFA, FLMI
Executive Vice President
Chief Financial Officer
Treasurer and Secretary
Life USA Holding, Inc.
Robert W. MacDonald, CLU
Chairman
Chief Executive Officer
Life USA Holding, Inc.
Margery G. Hughes
President
Chief Operating Officer
Life USA Holding, Inc.
Daniel J. Rourke, CLU
Senior Vice President
Chief Marketing Officer
Life USA Holding, Inc.
Bruce D. Bengtson, FSA, MAAA
Senior Vice President
Life USA Holding, Inc.
OFFICERS
Donald J. Urban
President
Chief Executive Officer
Robin L. Aeshliman
Vice President and Secretary
Chief Operating Officer
Bradley E. Barks, FSA, MAAA, CPA
Chairman
Chief Financial Officer
Hazel Reid
Vice President
Chief Marketing Officer
VICE PRESIDENTS
Darryl J. Chouinard, FLMI
ASSISTANT VICE PRESIDENTS
Sharon M. Friedrichsen
Troy A. Hamlin
Life USA Holding, Inc.
78
Dates Referenced Herein and Documents Incorporated by Reference
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