-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NQv8l79h+0GPRtvgiKek34slOVRjAuFB6cOX/SHLIGuSMWQfoaifYhVoIsQ373Vo k/XM9qmyHTzu+BHVasbW/g== 0000931763-99-003183.txt : 19991115 0000931763-99-003183.hdr.sgml : 19991115 ACCESSION NUMBER: 0000931763-99-003183 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TORCHMARK CORP CENTRAL INDEX KEY: 0000320335 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 630780404 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08052 FILM NUMBER: 99750013 BUSINESS ADDRESS: STREET 1: 2001 3RD AVE S CITY: BIRMINGHAM STATE: AL ZIP: 35233 BUSINESS PHONE: 2053254200 FORMER COMPANY: FORMER CONFORMED NAME: TORCHMARK CORP SAVINGS & INVESTMENT PLAN DATE OF NAME CHANGE: 19820825 FORMER COMPANY: FORMER CONFORMED NAME: LIBERTY NATIONAL INSURANCE HOLDING CO DATE OF NAME CHANGE: 19820701 10-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 30, 1999 Commission File Number 1-8052 TORCHMARK CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 63-0780404 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2001 3rd Avenue South, Birmingham, Alabama 35233 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (205) 325-4200 NONE Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding for each of the issuer's classes of common stock, as of the last practicable date. CLASS OUTSTANDING AT October 31, 1999 Common Stock, 131,536,597 $1.00 Par Value Index of Exhibits (Page 29) Total number of pages included are 30. TORCHMARK CORPORATION INDEX Page ---- Part I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheet 1 Consolidated Statement of Operations 2 Consolidated Statement of Comprehensive Income 4 Consolidated Statement of Cash Flow 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings 26 Item 6. Exhibits and Reports on Form 8-K 29 PART I - FINANCIAL INFORMATION Item 1. Financial Statements TORCHMARK CORPORATION CONSOLIDATED BALANCE SHEET (Amounts in thousands)
September 30, December 31, Assets: 1999 1998 ---------------- --------------- Investments: Fixed maturities, available for sale, at fair value (amortized cost: 1999 - $5,674,414; 1998 - $5,519,772) $ 5,521,046 $ 5,768,447 Equity securities, at fair value (cost: 1999 - $37,166; 1998 - $2,256) 32,441 9,843 Mortgage loans, at cost (estimated fair value: 1999 - $94,105; 1998 - $124,191) 93,987 124,072 Investment real estate, at depreciated cost 108,470 164,644 Policy loans 240,725 233,765 Other long-term investments (at fair value) 45,441 35,976 Short-term investments 73,213 75,844 ---------------- --------------- Total investments 6,115,323 6,412,591 Cash 9,073 4,920 Investment in unconsolidated subsidiaries 0 31,510 Accrued investment income 102,012 99,279 Other receivables 140,250 130,279 Deferred acquisition costs 1,680,275 1,502,511 Value of insurance purchased 157,211 170,640 Property and equipment 39,843 39,080 Goodwill 405,602 414,658 Other assets 28,364 18,298 Separate account assets 2,704,602 2,425,262 ---------------- --------------- Total assets $ 11,382,555 $ 11,249,028 ================ =============== Liabilities and Shareholders' Equity: Liabilities: Future policy benefits $ 4,797,227 $ 4,595,567 Unearned and advance premiums 89,122 85,923 Policy claims and other benefits payable 208,013 194,965 Other policyholders' funds 81,709 81,568 ---------------- --------------- Total policy liabilities 5,176,071 4,958,023 Accrued income taxes 341,256 511,311 Short-term debt 402,475 355,392 Long-term debt (estimated fair value: 1999 - $385,402 ; 1998 - $430,431) 371,524 383,422 Other liabilities 182,965 162,831 Separate account liabilities 2,704,602 2,425,262 ---------------- --------------- Total liabilities 9,178,893 8,796,241 Monthly income preferred securities (estimated fair value: 1999 - $199,040 ; 1998 - $205,040) 193,307 193,259 Shareholders' equity: Preferred stock 0 0 Common stock 147,801 147,801 Additional paid-in capital 612,495 610,925 Accumulated other comprehensive income (loss) (101,357) 144,501 Retained earnings 1,875,824 1,707,933 Treasury stock, at cost (524,408) (351,632) ---------------- --------------- Total shareholders' equity 2,010,355 2,259,528 ---------------- --------------- Total liabilities and shareholders' equity $ 11,382,555 $ 11,249,028 ================ ===============
See accompanying Notes to Consolidated Financial Statements. -1- TORCHMARK CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited and in thousands except per share data)
Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- -------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Revenue: Life premium $ 254,921 $ 241,212 $ 761,619 $ 718,534 Health premium 206,568 188,166 614,112 567,457 Other premium 10,361 8,586 28,893 24,354 ----------- ----------- ----------- ----------- Total premium 471,850 437,964 1,404,624 1,310,345 Net investment income 111,758 112,165 333,692 349,846 Realized investment losses (18,128) (39,750) (104,047) (44,777) Other income 299 892 6,248 1,937 ----------- ----------- ----------- ----------- Total revenue 565,779 511,271 1,640,517 1,617,351 Benefits and expenses: Life policyholder benefits 166,424 156,503 496,076 470,119 Health policyholder benefits 134,383 119,753 399,590 360,114 Other policyholder benefits 8,306 8,961 25,611 33,834 ----------- ----------- ----------- ----------- Total policyholder benefits 309,113 285,217 921,277 864,067 Amortization of deferred acquisition costs 62,921 57,248 184,573 172,337 Commissions and premium taxes 34,633 36,439 104,382 107,904 Other operating expense 29,079 29,314 86,676 89,488 Amortization of goodwill 3,018 3,018 9,055 9,055 Interest expense 13,327 12,981 38,653 45,791 ----------- ----------- ----------- ----------- Total benefits and expenses 452,091 424,217 1,344,616 1,288,642 Income before income taxes, equity in earnings of unconsolidated affiliates, discontinued operations, and extraordinary item 113,688 87,054 295,901 328,709 Income taxes (38,019) (27,532) (99,064) (117,238) Equity in earnings (losses) of Vesta 0 (3,875) 0 383 Adjustment to carrying value of Vesta 0 0 0 (20,234) Monthly income preferred securities dividend (2,357) (2,494) (6,871) (7,433) ----------- ----------- ----------- ----------- Net income from continuing operations, before extraordinary item and cumulative effect of change in accounting principle 73,312 53,153 189,966 184,187 Discontinued operations of Waddell & Reed: Income from operations (less applicable income tax of $0, $13,356, $571, and $38,902, respectively; and net of minority interest of $0, $8,043, $0, and $18,612, respectively) 0 13,924 (1,060) 43,912 Loss on disposal (including income tax of $48,391) 0 (52,531) 0 (52,531) ----------- ----------- ----------- ----------- Net income before extraordinary items and cumulative effect of change in accounting principle 73,312 14,546 188,906 175,568 Loss on redemption of debt (net of income tax benefit of $2,672) 0 0 0 (4,962) ----------- ----------- ----------- ----------- Net income before cumulative effect of change in accounting principle 73,312 14,546 188,906 170,606 Cumulative effect of change in accounting principle (less applicable tax of $8,661) 0 0 16,086 0 ----------- ----------- ----------- ----------- Net Income $ 73,312 $ 14,546 $ 204,992 $ 170,606 =========== =========== =========== ===========
(Continued) -2- TORCHMARK CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited and in thousands except per share data) (Continued)
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Basic earnings per share: Net income from continuing operations $ 0.55 $ 0.38 $ 1.42 $ 1.31 Discontinued operations of Waddell & Reed: Income from operations (net of tax) 0.00 0.10 (0.01) 0.31 Loss on disposal (net of tax) 0.00 (0.38) 0.00 (0.37) ----------- ----------- ----------- ----------- Net income before extraordinary item and cumulative effect of change in accounting principle 0.55 0.10 1.41 1.25 Loss on redemption of debt (less applicable tax benefit) 0.00 0.00 0.00 (0.03) ----------- ----------- ----------- ----------- Net income before cumulative effect of change in accounting principle 0.55 0.10 1.41 1.22 Cumulative effect of change in accounting principle (less applicable tax) 0.00 0.00 0.12 0.00 ----------- ----------- ----------- ----------- Net income $ 0.55 $ 0.10 $ 1.53 $ 1.22 =========== =========== =========== =========== Diluted earnings per share: Net income from continuing operations $ 0.55 $ 0.37 $ 1.41 $ 1.30 Discontinued operations of Waddell & Reed: Income from operations (net of tax) 0.00 0.10 (0.01) 0.31 Loss on disposal (net of tax) 0.00 (0.37) 0.00 (0.37) ----------- ----------- ----------- ----------- Net income before extraordinary item and cumulative effect of change in accounting principle 0.55 0.10 1.40 1.24 Loss on redemption of debt (less applicable tax benefit) 0.00 0.00 0.00 (0.04) ----------- ----------- ----------- ----------- Net income before cumulative effect of change in accounting principle 0.55 0.10 1.40 1.20 Cumulative effect of change in accounting principle 0.00 0.00 0.12 0.00 ----------- ----------- ----------- ----------- Net income $ 0.55 $ 0.10 $ 1.52 $ 1.20 =========== =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements -3- TORCHMARK CORPORATION CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited and in thousands)
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- --------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Net income $ 73,312 $ 14,546 $ 204,992 $ 170,606 Other comprehensive income: Unrealized gains (losses) on securities: Unrealized holding gains arising during period (112,175) 81,759 (440,138) 111,568 Less: reclassification adjustment for (gains) losses on securities included in net income 15,392 (1,460) 25,783 (553) Less: reclassification adjustment for amortization of discount and premium (697) (573) (979) (2,507) Less: foreign exchange adjustment on securities marked to market 121 692 (810) 1,595 ------------ ------------ ------------ ------------ Unrealized gains (losses) on securities (97,359) 80,418 (416,144) 110,103 Unrealized gains (losses) on other investments 23 (1,103) 8 (11,006) Unrealized gains (losses) on deferred acquisition costs 9,601 (6,569) 36,773 (8,210) Foreign exchange translation adjustments (18) (1,167) 1,321 (2,027) ------------ ------------ ------------ ------------ Other comprehensive income, before tax (87,753) 71,579 (378,042) 88,860 Income tax effect 30,717 (25,126) 132,184 (31,145) ------------ ------------ ------------ ------------ Other comprehensive income (57,036) 46,453 (245,858) 57,715 ------------ ------------ ------------ ------------ Comprehensive income (loss) $ 16,276 $ 60,999 ($40,866) $ 228,321 ============ ============ ============ ============
See accompanying Notes to Consolidated Financial Statements. -4- TORCHMARK CORPORATION CONSOLIDATED STATEMENT OF CASH FLOW (Amounts in thousands)
Nine Months Ended September 30 -------------------------------- 1999 1998 ------------ ----------- Cash provided from operations $ 294,861 $ 279,085 Cash provided from (used for) investment activities: Investments sold or matured: Fixed maturities available for sale - sold 1,139,457 509,138 Fixed maturities available for sale - matured, called, and 196,151 361,977 repaid Other long-term investments 224,733 56,049 ------------ ----------- Total investments sold or matured 1,560,341 927,164 Investments acquired: Fixed maturities (1,684,286) (1,541,007) Other long-term investments (45,289) (72,847) ------------ ----------- Total investments acquired (1,729,575) (1,613,854) Net decrease (increase) in short-term investments 2,622 (37,434) Dividends from Waddell & Reed 0 11,210 Repayment of note to Waddell & Reed 0 (1,390) Disposition of properties 6,621 1,129 Additions to properties (6,221) (3,892) ------------ ----------- Cash used for investment activities (166,212) (717,067) Cash provided from (used for) financing activities: Issuance of common stock 1,443 3,564 Proceeds from Waddell & Reed public offering 0 516,014 Offering proceeds retained by Waddell & Reed 0 (35,251) Proceeds from sale of Family Service 0 140,388 Additions to debt 47,233 209,079 Repayments of debt (12,132) (380,291) Acquisition of treasury stock (175,451) 0 Cash dividends paid to shareholders (36,347) (63,744) Net receipts from deposit product operations 50,758 39,724 ------------ ----------- Cash provided from (used for) financing activities (124,496) 429,483 Net increase (decrease) in cash 4,153 (8,499) Cash at beginning of year 4,920 11,085 ------------ ----------- Cash at end of period $ 9,073 $ 2,586 ============ ===========
See accompanying Notes to Consolidated Financial Statements. -5- TORCHMARK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note A - Accounting Policies The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q. Therefore, they do not include all of the disclosures required by generally accepted accounting principles. However, in the opinion of management, these statements include all adjustments, consisting of normal recurring accruals, which are necessary for a fair presentation of the consolidated financial position at September 30, 1999, and the consolidated results of operations for the periods ended September 30, 1999 and 1998. 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED Note B - Business Segments Torchmark's segments are based on the insurance product lines it markets and administers: life insurance, health insurance, and annuities. There is also an investment segment, which manages the investment portfolio, debt, and cash flow for the insurance segments and the corporate function. The measure of profitability for insurance segments is underwriting income before other income and administrative expenses. It represents the gross profit margin on insurance products before administrative expenses and is calculated by deducting net policy obligations, acquisition expenses, and commissions from premium revenue. The measure of profitability for the investment segment is excess investment income, which represents the income earned on the investment portfolio in excess of net policy requirements and financing costs associated with debt and Torchmark's Monthly Income Preferred Securities ("MIPS"). The tables below set forth revenue (excluding realized investment losses) and measures of profitability by segment as well as reconciliations from the total measures of profitability to pretax operating income for the nine-month periods ended September 30, 1999 and September 30, 1998, respectively. Selected Segment Information (Amounts in thousands)
Nine months ended September 30, 1999 -------------------------------------------------------------------------------------------- Life Health Annuity Investment Other Adjustments Consolidated --------- -------- -------- ----------- -------- ----------- ------------ Revenue: Premium $ 761,619 $614,112 $ 28,893 $1,404,624 Net investment income $ 342,381 $ (8,689) 333,692 Other income $2,625 (1,480) 1,145 Intersegment revenue - required interest on net policy obligations 102,196 3,860 25,658 (131,714) 0 --------- -------- -------- ----------- -------- ---------- ------------ Total revenue* $ 863,815 $617,972 $ 54,551 $ 210,667 $2,625 $ (10,169) $1,739,461 ========= ======== ======== =========== ======== ========== ============ Measures of profitability: Underwriting income before other income and administrative expense $ 198,743 $106,648 $ 19,235 $ 324,626 Excess investment income $ 161,443 161,443 Total measures of --------- -------- -------- ----------- --------- ---------- ------------ profitability $ 198,743 $106,648 $ 19,235 $ 161,443 $ 0 $ 0 $ 486,069 ========= ======== ======== =========== ========= ========== ============
* Excludes realized investment gains (losses) 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED Selected Segment Information (Amounts in thousands)
Nine months ended September 30, 1998 -------------------------------------------------------------------------------------------- Life Health Annuity Investment Other Adjustments Consolidated ------------ ---------- ---------- ------------ -------- ------------ -------------- Revenue: Premium $718,534 $ 567,457 $24,354 $ 1,310,345 Net investment income $358,217 $ (8,371) 349,846 Other income $ 3,581 (1,644) 1,937 Intersegment revenue - required interest on net policy obligations 105,500 6,899 36,333 (148,732) 0 ------------ ---------- ---------- ------------ -------- ------------ -------------- Total revenue* $824,034 $ 574,356 $60,687 $209,485 $ 3,581 $ (10,015) $ 1,662,128 ============ ========== ========== ============ ======== ============ ============== Measures of profitability: Underwriting income before other income and administrative expense $189,803 $ 104,691 $16,909 $ 311,403 Excess investment income $152,259 152,259 Total measures of ------------ ---------- ---------- ------------ -------- ------------ -------------- profitability $189,803 $ 104,691 $16,909 $152,259 $ 0 $ 0 $ 463,662 ============ ========== ========== ============ ======== ============ ==============
*Excludes realized investment losses and the gain from the sale of equipment Reconciliation of Measures of Profitablity to Pretax Operating Income (Amounts in thousands)
For the nine months ended September 30, --------------------------- 1999 1998 -------- --------- Total measures of profitablity $486,069 $ 463,662 Administrative expense (78,921) (78,145) Parent expense (7,755) (9,621) Tax equivalent adjustment (8,689) (8,371) Other income 2,625 3,581 Goodwill amortization (9,055) (9,055) Realized losses (104,047) (44,777) Gain on sale of equipment 5,103 0 Add back pretax cost of MIPS 10,571 11,435 -------- --------- Operating income before taxes $295,901 $ 328,709 ======== =========
8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Cautionary statements. Torchmark cautions readers regarding certain forward-looking statements contained in the following discussion and elsewhere in this document, and in any other statements made by, or on behalf of Torchmark whether or not in future filings with the Securities and Exchange Commission. Any statement that is not a historical fact, or that might otherwise be considered an opinion or projection concerning Torchmark or its business, whether express or implied, is meant as and should be considered a forward- looking statement. Such statements represent management's opinions concerning future operations, strategies, financial results or other developments. Forward-looking statements are based upon estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond Torchmark's control. If these estimates or assumptions prove to be incorrect, the actual results of Torchmark may differ materially from the forward-looking statements made on the basis of such estimates or assumptions. Whether or not actual results differ materially from forward- looking statements may depend on numerous foreseeable and unforeseeable events or developments, which may be national in scope, related to the insurance industry generally, or applicable to Torchmark specifically. Such events or developments could include, but are not necessarily limited to: 1) Deteriorating general economic conditions leading to increased lapses and/or decreased sales of Torchmark's policies; 2) Regulatory developments, including changes in governmental regulations (particularly those impacting taxes and changes to the Federal Medicare program that would affect Medicare Supplement insurance); 3) Financial markets trends that adversely affect sales of Torchmark's market-sensitive products; 4) Interest rate changes that adversely affect product sales and/or investment portfolio yield; 5) Increased pricing competition; 6) Adverse litigation results; 7) Adverse Year 2000 compliance results; 8) Developments involving Vesta Insurance Group, Inc., ("Vesta"); 9) The inability of Torchmark to achieve the anticipated levels of administrative and operational efficiencies; 10) The customer response to new products and marketing initiatives; 11) Adverse levels of mortality, morbidity, and utilization of healthcare services relative to Torchmark's assumptions; and 12) The inability of Torchmark to obtain timely and appropriate premium rate increases. 9 Results of Operations Divestitures. In the analysis and comparison of Torchmark's operating results with the prior period, the divestitures of Waddell & Reed and Family Service in 1998 should be taken into account. Waddell & Reed, formerly a wholly- owned asset management subsidiary of Torchmark, completed an initial public offering in March, 1998 of approximately 36% of its shares. Offering proceeds to Torchmark were $481 million, net of amounts retained by Waddell & Reed. In November, 1998 Torchmark distributed to its shareholders the remaining 64% of the Waddell & Reed shares through a tax-free spin-off. As a result of this spin- off, Torchmark retained no further ownership interest in Waddell & Reed. The divestiture of Waddell & Reed was accounted for as the disposal of a segment. Therefore, Torchmark's share of the operating results of Waddell & Reed prior to its divestiture are included in discontinued operations of the disposed segment. Family Service is a preneed funeral insurer which was a wholly-owned subsidiary of Torchmark. It was sold on June 1, 1998 for $140 million in cash. Family Service's operations are included with Torchmark's until the date of sale. However, in the following discussion of operating segments, the insurance operating results of Family Service have been removed from Torchmark's ongoing insurance operations for comparability. Operating Results. Torchmark management computes a classification of income called "net operating income from continuing operations." Net operating income from continuing operations is the measure of income Torchmark's management focuses on to evaluate the performance of the operations of the company. It excludes unusual and nonrecurring income or loss items which distort operating trends. The following items were excluded from net income in order to compute net operating income from continuing operations: 1) Realized investment losses and the related adjustment to deferred acquisition costs, net of tax; 2) The net income or loss from the discontinued operations of Waddell & Reed; 3) Torchmark's pro rata share of the income or losses related to Vesta; 4) The loss on redemption of debt, net of tax; 5) The one-time gain from the sale of equipment, net of tax; and 6) The effect of a change in accounting principle, which modified the accounting for an interest rate swap instrument. 10 The following table presents earnings and earnings per share data for Torchmark. Earnings and Earnings Per Share (Dollar amounts in thousands, except for per share data)
For the nine months ended September 30, % ------------------------------- 1999 1998 Change ----------- -------------- -------- Net operating income from continuing operations: Amount $254,280 $239,655 6.1 Per Share: Basic 1.90 1.71 11.1 Diluted 1.89 1.69 11.8 Net income: Amount $204,992 $170,606 20.2 Per Share: Basic 1.53 1.22 25.4 Diluted 1.52 1.20 26.7
Operating revenues exclude realized investment gains and losses. They also exclude the one-time gain of $5.1 million from the sale of corporate equipment. Operating revenues rose 5% to $1.7 billion in the first nine months of 1999. Total premium increased 7% to $1.4 billion and net investment income declined 5% to $334 million in the 1999 period. Torchmark's operating expense declined 3% to $87 million in 1999 in spite of the revenue growth. As a result, operating expense as a percentage of operating revenues for the first nine months decreased from 5.4% in 1998 to 5.0% in 1999. 11 The following table is a summary of Torchmark's net operating income from continuing operations by component. Insurance underwriting income is premium income less net policy obligations, commissions, acquisition expenses, and insurance administrative expenses. Excess investment income is tax equivalent net investment income reduced by the interest credited to net policy liabilities, and the financing cost of Torchmark's debt and Monthly Income Preferred Securities ("MIPS"). Summary of Net Operating Income from Continuing Operations (Dollar amounts in thousands)
Nine months Ended September 30, Increase ---------------------------- ---------------- 1999 1998 Amount % ------------ ------------ ---------- ---- Insurance underwriting income before other income and administrative expense: Life $ 198,743 $ 187,616 $11,127 6 Health 106,648 104,691 1,957 2 Annuity 19,235 16,811 2,424 14 ------------ ------------ -------- Total 324,626 309,118 15,508 5 Other income 2,625 3,581 (956) (27) Administrative expense (78,921) (77,253) (1,668) 2 ------------ ------------ -------- Insurance underwriting income excluding Family Service 248,330 235,446 12,884 5 Insurance underwriting income - Family Service 0 1,393 (1,393) Excess investment income 161,443 152,259 9,184 6 Corporate expense (7,755) (9,621) 1,866 (19) Goodwill amortization (9,055) (9,055) 0 0 Tax equivalency adjustment (8,689) (8,371) (318) 4 ------------ ------------ -------- Pretax insurance net operating income 384,274 362,051 22,223 6 Income tax (129,994) (122,396) (7,598) 6 ------------ ------------ -------- Net operating income from continuing operations $ 254,280 $ 239,655 $14,625 6 ============ ============ ======== Net operating income from continuing operations per diluted share $ 1.89 $ 1.69 12 ============ ============ ====
A discussion of Torchmark's operations by segment follows. 12 Life insurance. Torchmark's life insurance premium income rose 6% to $762 million in the first nine months of 1999. The following table presents Torchmark's life insurance premium and policy charges by distribution method. Life Insurance Premium by Distribution Method (Dollar amounts in thousands)
Nine months ended September 30, -------------------------------------------- 1999 1998 Increase ------------------- ------------------- --------------- % of % of Amount Total Amount Total Amount % --------- ------- --------- ------ ------- ----- Liberty National Exclusive Agency $ 216,267 29 $ 212,095 30 $ 4,172 2 Direct Response 184,792 24 165,591 23 19,201 12 American Income Exclusive Agency 161,873 21 152,476 21 9,397 6 Military Independent Agency 77,347 10 67,980 10 9,367 14 United Investors Agency 62,690 8 60,226 8 2,464 4 United American Independent Agency 27,959 4 27,841 4 118 0 United American Exclusive Agency 14,532 2 14,112 2 420 3 Other 16,159 2 15,721 2 438 3 --------- ------ --------- ----- ------- Total life premium excluding Family Service 761,619 100 716,042 100 45,577 6 ====== ===== ===== Family Service 0 2,492 (2,492) --------- --------- ------- Total life premium including Family Service $ 761,619 $ 718,534 $43,085 ========= ========= =======
13 Annualized life premium in force was $1.11 billion at September 30, 1999, rising 6% over $1.05 billion in force a year earlier. Life insurance sales, in terms of annualized premium issued, were $191 million in the 1999 nine-month period, increasing 5% over 1998 same-period sales of $183 million. The following table presents Torchmark's life insurance sales and in force data by distribution method. Life Insurance Annualized Premium Sales and In Force (Dollar amounts in thousands)
Sales In Force ---------------------------------------- ------------------------------------------- Nine months Ended September 30, Increase At September 30, Increase ------------------------ ------------- ----------------------- --------------- 1999 1998 Amount % 1999 1998 Amount % ---------- -------- -------- --- ---------- ---------- ------- ----- Direct Response $ 72,147 $ 70,384 $ 1,763 3 $ 279,045 $ 254,759 $24,286 10 Liberty National Exclusive Agency 38,395 33,052 5,343 16 306,086 297,718 8,368 3 AI Exclusive Agency 39,815 41,546 (1,731) (4) 227,109 214,312 12,797 6 Military Independent Agency 12,921 12,898 23 0 108,311 96,087 12,224 13 United Investors Agency 11,750 10,929 821 8 102,595 96,212 6,383 7 UA Independent Agency 8,916 6,669 2,247 34 41,979 40,947 1,032 3 UA Exclusive Agency 4,136 4,088 48 1 21,891 21,487 404 2 Other Distribution 3,378 3,243 135 4 26,443 26,843 (400) (1) ---------- -------- -------- ---------- ---------- ------- Total life $191,458 $182,809 $ 8,649 5 $1,113,459 $1,048,365 $65,094 6 ========== ======== ======== === ========== ========== ======= ===
Torchmark's Direct Response operation is conducted through direct mail, co-op mailings, television and consumer magazine advertising, and direct mail solicitations endorsed by groups, unions and associations. Direct Response sales increased 3% to $72 million in the first nine months of 1999, compared with $70 million in the same period of 1998. Annualized premium in force for this distribution method rose 10% over the prior year to $279 million at September 30, 1999, and premium income grew 12% to $185 million in the 1999 nine-month period. The $19 million growth in Direct Response premium income and the $24 million increase in annualized life premium in force were the largest increases of any Torchmark distribution channel in terms of dollar amount. In addition to sales and premium growth, the Direct Response operation provides support to other Torchmark marketing agencies by providing sales leads and assisting in agent recruiting, which has contributed indirectly to premium growth in those agencies. 14 The Direct Response operation has entered into an agreement with Reader's Digest Association to offer certain Torchmark insurance products to their subscribers. It is expected that this arrangement will further increase Direct Response sales, beginning in the fourth quarter of 1999. The Liberty National Exclusive Agency distribution system represented the largest component of life premium at 29% or $216 million in the 1999 nine-month period. Life insurance sales for this agency grew 16% to $38 million of annualized premium issued in the 1999 period. The $5.3 million in life insurance sales growth by Liberty's Agency was Torchmark's largest in dollar amount. The number of Liberty agents rose 6% over the prior year to 1,885 at September 30, 1999. In addition, agent productivity has increased in 1999. Torchmark's Military Agency produced the greatest percentage increase in premium income at 14% to $77 million. This agency also had a 13% increase in annualized life premium in force which was $108 million at September 30, 1999. Contributing to these increases is the very high level of persistency in this business. Military Agency sales were flat when compared with the 1999 period at $12.9 million. This agency consists of former military officers who sell exclusively to military officers and their families. The American Income Agency focuses on members of labor unions, credit unions, and other associations. This agency produced premium income of $162 million in the first nine months of 1999, an increase of 6%. While life sales were down 4% to $40 million for the nine months of 1999 compared with the same period of 1998, life sales have trended up each quarter of 1999 over the prior quarter. Annualized life premium in force rose 6% to $227 million at September 30, 1999. The sales decline in the 1999 nine months is reflective of the decline in the number of agents during the past few quarters. Management is in the process of implementing changes to this agency structure to focus on recruiting and retaining new agents. As a result, the decline in agents was reversed in the third quarter of 1999. The number of agents was 1,218 at September 30, 1999, increasing 5% over the prior quarter end. The United Investors Exclusive Agency had annualized life premium in force of $103 million at September 30, 1999, an increase of 7%. Annualized life premium issued rose 8% to $12 million. The United American Independent Agency grew life sales by 34% to $9 million in the 1999 period. It had $42 million annualized premium in force at the September quarter end. This agency has benefited from the Direct Response operation marketing support. 15 Life Insurance Summary of Results (Dollar amounts in thousands)
Nine months ended September 30, ------------------------------------------ 1999 1998 Increase ------------------- ------------------ ----------------- % to % to Amount Total Amount Total Amount % ---------- ------- --------- ------- --------- ------ Premium and policy charges $ 761,619 100 $ 716,042 100 $ 45,577 6 Net policy obligations 325,731 43 303,547 42 22,184 7 Commissions and acquisition expense 237,145 31 224,879 32 12,266 5 ---------- ------- --------- ------- --------- Insurance underwriting income before other income and administrative expense, excluding Family Service 198,743 26 187,616 26 11,127 6 ======= ======= ====== Family Service insurance underwriting income before other income and administrative expense 0 2,187 (2,187) ---------- --------- --------- Insurance underwriting income before other income and administrative expense $ 198,743 $ 189,803 $ 8,940 ========== ========= =========
Life insurance underwriting income before administrative expenses was $199 million in the first nine months of 1999, growing 6% over the same period in 1998 (excluding Family Service). As a percentage of premium, underwriting income was 26% in both periods. 16 Health insurance. Health insurance premium income rose 8% from $567 million in the first nine months of 1998 to $614 million in the same period of 1999. The table below is an analysis of Torchmark's health premium by distribution method. Health Insurance Premium by Distribution Method (Dollar amounts in thousands)
Nine months ended September 30, ---------------------------------------- 1999 1998 Increase ---------------- ----------------- ---------------- % to % to Amount Total Amount Total Amount % -------- ------ -------- ------ -------- ----- United American Independent Agency $320,786 52 $314,246 55 $ 6,540 2 United American Exclusive Agency 141,507 23 110,315 20 31,192 28 Liberty National Exclusive Agency 107,521 18 101,237 18 6,284 6 American Income Exclusive Agency 35,592 6 35,138 6 454 1 Direct Response 8,706 1 6,521 1 2,185 34 -------- ------ -------- ------ -------- Total Premium $614,112 100 $567,457 100 $ 46,655 8 ======== ====== ======== ====== ======== =====
The table below is a presentation of health insurance sales and in force data. Health Insurance Annualized Premium Sales and In Force (Dollar amounts in thousands)
Sales In Force ------------------------------------------- -------------------------------------------- Nine months Ended September 30, Increase At September 30, Increase ----------------------- ----------------- ----------------------- ------------------ 1999 1998 Amount % 1999 1998 Amount % ---------- ---------- ---------- ----- --------- ---------- ---------- ------ UA Exclusive Agency $ 70,946 $ 44,251 $ 26,695 60 $214,786 $ 163,705 $ 51,081 31 UA Independent Agency 48,111 35,663 12,448 35 442,040 426,969 15,071 4 Liberty Exclusive Agency 7,302 8,561 (1,259) (15) 151,914 146,552 5,362 4 AI Exclusive Agency 5,940 7,152 (1,212) (17) 44,785 44,379 406 1 Direct Response 3,064 3,309 (245) (7) 12,358 3,081 33 ---------- ---------- ---------- ----- --------- ---------- ---------- Total Premium $ 135,363 $ 98,936 $ 36,427 37 $865,883 $ 790,882 $ 75,001 9 ========== ========== ========== ===== ========= ========== ========== ======
17 Annualized health insurance premium in force grew 9% to $866 million at September 30, 1999. Sales of health insurance, as measured by annualized premium issued, grew 37% to $135 million in the 1999 nine months. Medicare Supplement sales rose 50% in the 1999 period to $106 million, accounting for all of the growth in Torchmark's total health sales. Medicare Supplement products are sold by Torchmark's United American Independent and Exclusive Agencies. Both of these agencies have experienced growth in agency size over the prior year. An additional factor in the increased Medicare Supplement sales was the support obtained from Torchmark's Direct Response operation in providing these agencies with leads and assistance in agent recruiting. Annualized Medicare Supplement premium in force was $613 million at September 30, 1999, rising 13% from a year earlier. Medicare Supplement represented 71% of Torchmark's total health premium in force at the end of September, 1999. Cancer sales, produced primarily by the Liberty National Agency, were $7.9 million in the 1999 nine months, increasing 3% from the prior-year period. Cancer annualized premium in force rose 6% to $156 million, primarily as a result of premium rate increases. Cancer business represents 18% of Torchmark's annualized health premium in force at September 30, 1999. Other health product sales rose 3% to $21 million in the 1999 period. Other health annualized premium in force declined 3% to $98 million. The following table presents underwriting margin data for health insurance. Health Insurance Summary of Results (Dollar amounts in thousands)
Nine months ended September 30, -------------------------------------------- 1999 1998 Increase -------------------------------------------- ------------------ % of % of Amount Total Amount Total Amount % ---------- ------ ---------- ------ --------- ---- Premium and policy charges $614,112 100 $567,457 100 $ 46,655 8 Net policy obligations 386,407 63 344,752 61 41,655 12 Commissons and acquisition expense 121,057 20 118,014 21 3,043 3 ---------- ------ ---------- ------ --------- Insurance underwriting income before other income and administrative expenses $106,648 17 $104,691 18 $ 1,957 2 ========== ====== ========== ====== ========= ====
18 Underwriting margins for health insurance, or underwriting income as a percentage of premium, declined from 18% in the first nine months of 1998 to 17% in the same period of 1999. The decline in margins resulted from a 2% increase in policy obligation ratios. The increase in obligations was due primarily to an increased loss ratio on a block of Liberty National's cancer insurance. A major premium rate increase was approved and went into effect in May, 1999 to offset some of these cost increases. Also, requests for additional increases in 1999 and future periods are being sought to address the decline in the margins for this block of cancer insurance, which had annualized premium in force of $71 million at September 30, 1999. In Torchmark's Medicare Supplement business, underwriting income as a percentage of premium is restrained by federally mandated loss ratios and market competition. Annuities. The following table presents collection and deposit balance information about Torchmark's annuities. Annuities Collections and Deposit Balances (Dollar amounts in thousands)
Collections Deposit Balances --------------------------------------------- ------------------------------------------------ Nine Months Ended September 30, Increase At September 30, Increase -------------------------- ---------------- ---------------------------- ----------------- 1999 1998 Amount % 1999 1998 Amount % ----------- --------- ---------- --- ----------- ----------- ----------- --- Fixed $ 55,257 $ 46,864 $ 8,393 18 $ 669,470 $ 640,343 $ 29,127 5 Variable 275,172 204,472 70,700 35 2,600,510 2,044,492 556,018 27 ----------- --------- ---------- --- ----------- ----------- ----------- --- Total $ 330,429 $ 251,336 $ 79,093 31 $ 3,269,980 $ 2,684,835 $ 585,145 22 =========== ========= ========== === =========== =========== =========== ===
Annuities are sold on both a fixed and a variable basis. Fixed annuity collections were $55 million in the first nine months of 1999, compared with $47 million collected in the prior period, an increase of 18%. Fixed annuities on deposit with Torchmark rose 5% to $669 million. Collections of variable annuities were $275 million in the 1999 nine-month period, increasing 35% over variable collections of $204 million in the first nine months of 1998. The variable annuity balance on deposit rose 27% during the past twelve months. This balance was $2.6 billion at September 30, 1999, $2.3 billion at December 31, 1998, and $2.0 billion a year ago. Strong financial markets in recent months have had a positive impact on the variable account balance and have been a major factor in increased variable annuity sales. 19 The following table presents underwriting margin data for Torchmark's annuities. Annuities Summary of Results (Dollar amounts in thousands)
Nine Months Ended September 30, Increase -------------------------- ---------------- 1999 1998 Amount % ----------- --------- ---------- --- Policy charges $ 28,893 $ 23,994 $ 4,899 20 Net policy obligations (4,844) (5,586) 742 (13) Commissions and acquisition expense 14,502 12,769 1,733 14 ----------- --------- ---------- --- Insurance underwriting income before other income and administrative expenses, excluding Family Service 19,235 16,811 2,424 14 === Family Service 0 98 (98) ----------- --------- ---------- Insurance underwriting income before other income and administrative expense $ 19,235 $ 16,909 $ 2,326 =========== ========= ==========
Policy charges for annuities for the 1999 first nine months were $29 million, compared with $24 million for the 1998 period, an increase of 20%. Policy charges are assessed against the annuity account balance periodically for insurance risk, sales, administration, and cash surrender. The increase in policy charges resulted primarily from the growth in the variable annuity balance over the prior-year period. Annuity underwriting income excluding Family Service improved 14% from $17 million in the nine-month 1998 period to $19 million in the same period of 1999. 20 Investment. The following table summarizes Torchmark's investment income and excess investment income. Excess Investment Income (Dollars in thousands)
Nine months Ended September 30, Increase ------------------------ ----------------- 1999 1998 Amount % -------- --------- --------- --- Net investment income $333,692 $ 349,846 $(16,154) (5) Tax equivalency adjustment 8,689 8,371 318 4 -------- --------- -------- Tax equivalent investment income 342,381 358,217 (15,836) (4) Required interest on net insurance policy liabilities (131,714) (148,732) 17,018 (11) Financing costs (49,224) (57,226) 8,002 (14) -------- --------- -------- Excess investment income $161,443 $ 152,259 $ 9,184 6 ======== ========= ======== ===
On a tax equivalent basis, net investment income was $342 million in the nine months of 1999, declining 4% from $358 million during the same 1998 period. The decline is attributable to the use of assets to repurchase Torchmark shares since late 1998 and the inclusion in 1998 investment income of $22 million attributable to Family Service on a tax-equivalent basis. Excess investment income is tax-equivalent net investment income reduced by the interest credited to net insurance policy liabilities and less Torchmark's financing costs. Financing costs include interest on debt and the pretax dividends on Torchmark's MIPS. Excess investment income for the 1999 nine months rose 6% to $161 million from $152 million for the same period of 1998. The increase resulted primarily from the reduction in Torchmark's borrowing cost due to the replacement of $360 million in long-term debt with short-term debt in the second quarter of 1998. During the first nine months of 1999, Torchmark continued to emphasize purchases of investment grade fixed maturity bonds. Year-to-date purchases totaled $1.7 billion and had an average yield of 7.32%, equivalent to an effective compounded yield of 7.47%. For the comparable 1998 period, adjusted to excluded Family Service, fixed maturity 21 acquisitions totaled $1.5 billion, and had average and effective compounded yields of 7.12% and 7.24%, respectively. The average life of 1999 fixed maturity acquisitions was 16.5 years compared with 20.5 years for the same period of 1998. The portfolio average yield was 7.39% during the first nine months, very close to a 7.41% yield for the same period of 1998 and 7.42% for the full year 1998. At September 30, 1999, the portfolio had an estimated average life of 12.8 years and an effective duration of 6.3 years. With the steady increase in interest rates thus far in 1999, the market value of assets held continued to decline. At September 30, 1999, the fixed maturity portfolio had an unrealized loss of $153 million, compared with an unrealized gain of $249 at year-end 1998. The overall quality of the portfolio continues to be high, with an average quality rating of A and only 5% of holdings in bonds rated below investment grade. Torchmark announced in the second quarter of 1999 that it intended to sell most of its investment real estate. Efforts to dispose of these properties revealed a carrying value in excess of estimated net realizable value. Accordingly, a pretax writedown was taken in the second quarter of 1999 in the amount of $64 million. During the third quarter of 1999, Torchmark entered into two transactions to dispose of the majority of its investment real estate. One transaction closed in the third quarter and the other closed on October 1, 1999. Total consideration for the combined transactions was $123 million. Because the properties were written down to net realizable value at June 30, 1999, no additional loss on these properties was recorded. After the sales, Torchmark retained $19 million in investment real estate, of which $9 million is located on properties partially occupied by Torchmark subsidiaries. In addition to the $64 million of real estate capital losses, Torchmark has also generated $26 million in losses from the sale of fixed maturities to carry back and recover capital gains taxes paid in prior years. There was also a $14 million loss recorded from the decline in market value on the interest-rate swap associated with Torchmark's MIPS. Market value of the swap at September 30, 1999 was $11 million. Financial Condition Liquidity. Torchmark's liquidity is represented by its positive cash flow, marketable investments, and the availability of a line of credit facility. Torchmark's insurance operations typically generate cash flows in excess of immediate requirements. Torchmark's net cash inflows from operations were $295 million in the first nine months of 1999, compared with $279 million in the same period of 1998. In addition to cash flows from operations, Torchmark received $196 million in investment maturities or repayments during the first nine months of 1999. Torchmark's cash and short-term investments were $82 million at the end of September, 1999, compared with $81 million of these assets at December 31, 1998. In 22 addition to these liquid assets, Torchmark's entire portfolio of fixed-income and equity securities, in the approximate amount of $5.6 billion at market value on September 30, 1999, is available for sale should any need arise. Torchmark has in place a line of credit facility, which is also designed as a backup credit line for a commercial paper program. This program provides credit up to a maximum amount of $600 million, and permits Torchmark to borrow from either the credit line or issue commercial paper at any time up to the combined facility maximum of $600 million. Terms of the facility permit borrowing up to the maximum amount at variable interest rates. Torchmark is subject to certain covenants regarding capitalization and earnings, with which Torchmark was in full compliance at September 30, 1999. At that date, Torchmark had commercial paper outstanding in the face amount of $403 million and no borrowings on the line of credit. At December 31, 1998, $357 million face amount of commercial paper was outstanding. Capital resources. Torchmark's total debt outstanding was $774 million at September 30, 1999, compared with $739 million at December 31, 1998 and $742 million at September 30, 1998. Long-term debt was $372 million at September 30, 1999, decreasing from $383 million at December 31, 1998 and from $394 million at September 30, 1998. During the first nine months of 1999, Torchmark acquired $4.0 million of its 7 3/8% notes due 2013 in the open market at a cost of $4.1 million and acquired $7.5 million of its 7 7/8% notes due 2023 in the market at a cost of $7.9 million. It also acquired $10.8 million of its 7 7/8% notes late in 1998. Debt as a percentage of total capitalization was 25% at September 30, 1999, counting the MIPS as equity and excluding the effects of fluctuations in security values based on changes in interest rates in the financial markets. The debt to capitalization ratio was 24% at year-end 1998 and was 23% at September 30, 1998. Interest coverage was 8.7 times for the 1999 nine months, compared with 8.2 times for the prior-year period. Had the $64 million real estate writeoff been excluded, 1999 interest coverage would have been 10.3 times. During July, 1999, Torchmark filed with the Securities and Exchange Commission a Form S-3 for the shelf registration of capital securities in an aggregate face amount of $300 million. Torchmark acquired 5.4 million of its shares on the open market during the first nine months of 1999. These share purchases were made at a cost of $175 million during the period. Share purchases were primarily funded by the sale of investments but borrowings on the line of credit were also made. Torchmark intends to make additional purchases under its share repurchase program on the open market when prices are attractive. However, share purchases will not be made when such purchases jeopardize the excellent to superior claims-paying ratings of its insurance subsidiaries. Torchmark's shareholders' equity was $2.01 billion at September 30, 1999, compared with $2.26 billion at 1998 year end and $2.53 billion one year ago. Book value 23 per share was $15.28 at September 30, 1999, compared with $16.51 at year-end 1998 and $18.03 a year earlier. After adjusting shareholders' equity to remove the effects of interest-rate fluctuations on the security portfolio on an after- tax basis, shareholders' equity was $2.10 billion at September 30, 1999, compared with $2.11 billion at 1998 year end and $2.35 billion a year ago. On a per share basis, adjusted book value was $15.96 at the end of September, 1999, compared with $15.43 at year-end 1998 and $16.76 at September 30, 1998. The decline in adjusted equity from a year earlier was impacted by the spin-off of Waddell & Reed, which accounted for a net reduction in equity of $174 million. The annualized return on common equity, or net operating income from continuing operations as a percentage of average equity excluding the effects of securities at market value, was 16.2% for the 1999 nine-month period. Return on equity for the same 1998 period was 14.8%. This increase was primarily a result of the share purchases. Year 2000 Compliance. As of November 1, 1999, to the best of its knowledge, information, and belief, Torchmark determined that its production information processing environment was Year 2000 compliant. As of this date, Torchmark has spent approximately $5.8 million completing its Year 2000 project requirements. Torchmark expects to remain within the project's budget of $6 million. As of November 1, 1999, Torchmark had accomplished the following: 1) Fully tested all internally-processed technical and business computer software for Year 2000 compliance, along with its computer hardware and telecommunications equipment; 2) Determined that all mechanical and electrical systems that use computer microprocessors, such as elevator and environmental control systems, are Year 2000 compliant; 3) Verified that its computer hardware and software vendors have made their products Year 2000 compliant; 4) Verified that all third parties that provide Torchmark with outsourced information processing services are compliant; 5) Verified, and tested where necessary, that all of the third parties that we have automated information processing interfaces with are Year 2000 compliant; 6) Assisted auditors from six state insurance departments in verifying that Torchmark and its subsidiaries are Year 2000 compliant; and 7) Determined that corporate-wide Year 2000 contingency plans have been developed, documented, and successfully tested. During the fourth quarter of 1999, certain Torchmark subsidiaries plan to repeat Year 2000 application software tests to further insure that no date- related programming errors have been introduced into the affected application systems. These Year 2000 tests will be re-performances of earlier date-sensitive application software testing activities. 24 Torchmark cannot guarantee that the Year 2000 will arrive without date- related computer system processing problems, and cannot guarantee the Year 2000 compliance of third party service providers upon which it relies. But, Torchmark believes that it has instituted the Year 2000 contingency planning procedures required to respond to potential millennium-related problems in a timely manner. 25 PART II - OTHER INFORMATION Item 1. Legal Proceedings. Torchmark and its subsidiaries continue to be named as parties to pending or threatened legal proceedings. These lawsuits involve tax matters, alleged breaches of contract, torts, including bad faith and fraud claims based on alleged wrongful or fraudulent acts of agents of Torchmark's subsidiaries, employment discrimination, and miscellaneous other causes of action. Many of these lawsuits involve claims for punitive damages in state courts of Alabama a jurisdiction particularly recognized for its large punitive damage verdicts. A number of such actions involving Liberty also name Torchmark as a defendant. As a practical matter, a jury's discretion regarding the amount of a punitive damage award is not limited by any clear, objective criteria under Alabama law. Accordingly, the likelihood or extent of a punitive damage award in any given case is virtually impossible to predict. As of September 30, 1999, Liberty was a party to approximately 141 active lawsuits (including 18 employment-related cases and excluding interpleaders and stayed cases), 117 of which were Alabama proceedings in which punitive damages were sought. Liberty faces trial settings in these cases on an on-going basis. Based upon information presently available, and in light of legal and other factual defenses available to Torchmark and its subsidiaries, contingent liabilities arising from threatened and pending litigation are not presently considered by management to be material. It should be noted, however, that large punitive damage awards bearing little or no relation to actual damages awarded by juries in jurisdictions in which Torchmark has substantial business, particularly in Alabama, continue to occur, creating the potential for unpredictable material adverse judgments in any given punitive damage suit. In 1978, the United States District Court for the Northern District of Alabama entered a final judgment in Battle v. Liberty National Life Insurance ----------------------------------------- Company, et al (Case No. CV-70-H-752-S), class action litigation involving - -------------- Liberty, a class composed of all owners of funeral homes in Alabama and a class composed of all insureds (Alabama residents only) under burial or vault policies issued, assumed or reinsured by Liberty. The final judgment fixed the rights and obligations of Liberty and the funeral directors authorized to handle Liberty burial and vault policies as well as reforming the benefits available to the policyholders under the policies. Although class actions are inherently subject to subsequent collateral attack by absent class members, the Battle decree ------ remains in effect to date. A motion filed in February 1990 to challenge the final judgment under Federal Rule of Civil Procedure 60(b) was rejected by both the District Court in 1991 and the Eleventh Circuit Court of Appeals in 1992 and a Writ of Certiorari was denied by the U.S. Supreme Court in 1993. In November 1993, an attorney (purporting to represent the funeral director class) filed a petition in the District Court seeking alternative relief under the final judgment. This 26 petition was voluntarily withdrawn on November 8, 1995 by petitioners. On February 23, 1996, Liberty filed a petition with the District Court requesting that it order certain contract funeral directors to comply with their obligations under the Final Judgment in Battle and their funeral service ------ contracts. A petition was filed on April 8, 1996 on behalf of a group of funeral directors seeking to modify the 1978 decree in Battle in light of changed ------ economic circumstances. All parties made extensive submissions to the District Court and a hearing on the opposing petitions was held by the District Court on February 9, 1999. On March 8, 1999, the District Court entered an order granting Liberty's petition to enforce the obligations of contract funeral directors under their funeral service contracts and denying the funeral directors' petition for review of the Battle Final Judgment and alternative relief. On July ------ 29, 1999, the funeral director class filed an appeal with the U.S. Court of Appeals for the Eleventh Circuit seeking to have the March 8, 1999 order vacated on the merits. Liberty filed a joint motion in the Eleventh Circuit Court seeking remand to the District Court for purposes of appointment of policyholder class counsel. The Circuit Court issued an order denying the joint motion on September 15, 1999 and the appeal remains pending. It has been previously reported that in July 1998, a jury in U.S. District Court in the Middle District of Florida recommended an aggregate total verdict amounting to $21.6 million against Liberty in Hipp v. Liberty National Life ----------------------------- Insurance Company (Case No. 95-1332-CIV-17A). This case, originally filed in - ----------------- 1995 in the Florida state court system, is a collective action under the Fair Labor Standards Act, alleging age discrimination by Liberty in violation of the Age Discrimination in Employment Act and the Florida Civil Rights Act. The plaintiffs, ten present or former Liberty district managers, sought damages for lost wages, loss of future earnings, lost health and retirement benefits and lost raises and expenses. Three of these plaintiffs, Florida residents, also sought compensatory and punitive damages allowable under Florida law. On November 20, 1998, the District Court remitted the $10 million punitive damage portion of the jury verdict to $0 , thus reducing the total verdict to $11 million (including an advisory verdict of $3.2 million in front pay awards). Additional revised front pay submissions were made by the plaintiffs to the District Court in December 1998 and Liberty responded thereto in January 1999. On March 11, 1999, the District Court reduced the Hipp verdict to $7 million by ---- denying the plaintiffs front pay damages and remitting the punitive damages awarded to the Florida resident plaintiffs to the $100,000 limit allowable under Florida law. Final judgment was entered by the District Court and Liberty filed its appeal with the Circuit Court of Appeals for the Eleventh Circuit on September 27, 1999. It has previously been reported that on June 17, 1998, the U.S. District Court for the Northern District of Georgia in Crichlow v. Torchmark Corporation --------------------------------- (Case No. 4:96-CV-0086-HLM) severed and transferred the claims of Mississippi policyholders in Crichlow to the U.S. District Court for the Northern District -------- of Mississippi (Greco v. Torchmark Corporation, Case No. 1:98-CV-196-D-D). ------------------------------ Plaintiffs in Greco then moved to certify a class of persons purchasing Globe ----- hospital and surgical insurance policies in Mississippi. Defendants filed a motion for summary judgment in Greco on February 1, 1999 and that ----- 27 motion for summary judgment was granted by the Mississippi District Court on October 29, 1999. Purported class action litigation was filed on October 14, 1999 against United American Insurance Company in the Circuit Court for Lee County, Florida as Eisenberg v. United American Life Insurance Company (Case No. 99-7915CA WCM). --------------------------------------------------- The action is brought on behalf of approximately 500,000 Florida purchasers of United American home health care insurance, including Medicare Supplement insurance, who paid premiums on an installment basis either semi-annually, quarterly, monthly or by monthly bank draft. The lawsuit alleges that United American is acting as an unlicensed premium finance company and that its service charges, if authorized, are unlawful and excessive. Plaintiffs are seeking declaratory and injunctive relief and statutory damages in the amount of twice the service charges paid by each member of the purported class. On May 18, 1999, purported class action litigation was filed in the United States District Court for the Northern District of California against American Income Life Insurance Company and certain of its employee benefit plans (Peek v. ------ American Income Life Insurance Company, Case No. C 99-2283). Plaintiffs on - -------------------------------------- behalf of all current and former public relations representatives of American Income assert that they have been improperly classified as independent contractors rather than employees and thus denied participation in American Income's employee benefit plans. The lawsuit alleges breach of fiduciary duty and wrongful denial of access to plan documents and other information under the Employee Retirement Income Security Act. Declaratory and injunctive relief together with restitution, disgorgement and statutory penalties are sought. 28 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: (11) Statement re computation of per share earnings (27) Financial Data Schedule (b) Reports on Form 8-K: No reports on Form 8-K were filed in the third quarter of 1999. 29 SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. TORCHMARK CORPORATION Date: November 11, 1999 /s/ C. B. Hudson ------------------------------------- C. B. Hudson, Chairman of the Board, President, and Chief Executive Officer Date: November 11, 1999 /s/ Gary L. Coleman ------------------------------------- Gary L. Coleman, Executive Vice President and Chief Financial Officer (Chief Accounting Officer) 30 EX-11 2 COMPUTATION OF PER SHARE EARNINGS Exhibit 11. Statement re computation of per share earnings. TORCHMARK CORPORATION COMPUTATION OF EARNINGS PER SHARE
Three months ended September 30, 1999 1998 ---------------- ---------------- Net income from continuing operations $ 73,312,000 $ 53,153,000 Discontinued operations of Waddell & Reed: Income from operations (net of tax) 0 13,924,000 Loss on disposal (net of tax) 0 (52,531,000) ---------------- ---------------- Net income $ 73,312,000 $ 14,546,000 ================ ================ Basic weighted average shares and common stock equivalents outstanding 132,468,138 140,262,269 Diluted weighted average shares and common stock equivalents outstanding 133,272,674 141,485,008 Basic earnings per share: Net income from continuing operations $ 0.55 $ 0.38 Discontinued operations of Waddell & Reed: Income from operations (net of tax) 0.00 0.10 Loss on disposal (net of tax) 0.00 (0.38) ---------------- ---------------- Net income $ 0.55 $ 0.10 ================ ================ Diluted earnings per share: Net income from continuing operations $ 0.55 $ 0.37 Discontinued operations of Waddell & Reed: Income from operations (net of tax) 0.00 0.10 Loss on disposal (net of tax) 0.00 (0.37) ---------------- ---------------- Net income $ 0.55 $ 0.10 ================ ================
(Continued on following page) Exhibit 11. Statement re computation of per share earnings. TORCHMARK CORPORATION COMPUTATION OF EARNINGS PER SHARE (Continued)
Nine months ended September 30, 1999 1998 --------------- --------------- Net income from continuing operations $ 189,966,000 $ 184,187,000 Discontinued operations of Waddell & Reed: Income from operations (net of tax) ( 1,060,000) 43,912,000 Loss on disposal (net of tax) 0 (52,531,000) --------------- --------------- Net income before extraordinary item and cumulative effect of change in accounting principle 188,906,000 175,568,000 Loss on redemption of debt (less applicable tax benefit) 0 (4,962,000) --------------- --------------- Net income before cumulative effect of change in accounting principle 188,906,000 170,606,000 Cumulative effect of change in accounting principle (less applicable tax) 16,086,000 0 --------------- --------------- Net income $ 204,992,000 $ 170,606,000 =============== =============== Basic weighted average shares and common stock equivalents outstanding 133,679,400 140,242,436 Diluted weighted average shares and common stock equivalents outstanding 134,553,855 141,664,915 Basic earnings per share: Net income from continuing operations $ 1.42 $ 1.31 Discontinued operations of Waddell & Reed: Income from operations (net of tax) (0.01) 0.31 Loss on disposal (net of tax) 0.00 (0.37) --------------- --------------- Net income before extraordinary item and cumulative effect of change in accounting principle 1.41 1.25 Loss on redemption of debt (less applicable tax benefit) 0.00 (0.03) --------------- --------------- Net income before cumulative effect of change in accounting principle 1.41 1.22 Cumulative effect of change in accounting principle (less applicable tax) 0.12 0.00 --------------- --------------- Net income $ 1.53 $ 1.22 =============== =============== Diluted earnings per share: Net income from continuing operations $ 1.41 $ 1.30 Discontinued operations of Waddell & Reed: Income from operations (net of tax) (0.01) 0.31 Loss on disposal (net of tax) 0.00 (0.37) --------------- --------------- Net income before extraordinary item and cumulative effect of change in accounting principle 1.40 1.24 Loss on redemption of debt (less applicable tax benefit) 0.00 (0.04) --------------- --------------- Net income before cumulative effect of change in accounting principle 1.40 1.20 Cumulative effect of change in accounting principle (less applicable tax) 0.12 0.00 --------------- --------------- Net income $ 1.52 $ 1.20 =============== ===============
EX-27 3 FINANCIAL DATA SCHEDULE
7 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 5,521,046 0 0 32,441 93,987 108,470 6,115,323 9,073 0 1,837,486 11,382,555 4,797,227 89,122 208,013 81,709 773,999 193,307 0 147,801 1,862,554 11,382,555 1,404,624 333,692 (104,047) 6,248 921,277 184,573 238,766 295,901 (99,064) 189,966 (1,060) 0 16,086 204,992 1.53 1.52 0 0 0 0 0 0 0
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