-----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, CwghD7S7gHy0GDEAFUImOZFOhkxZW9DE16Y5RE+j+e+HXiWEeShC3FCxeJuiSCAq LzrU0zfGJpL/bmAfzwJN3A== 0000931763-98-002154.txt : 19980817 0000931763-98-002154.hdr.sgml : 19980817 ACCESSION NUMBER: 0000931763-98-002154 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NYSE 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: 98687285 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 June 30, 1998 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 JULY 31, 1998 Common Stock, 140,262,157 $1.00 Par Value Index of Exhibits (Page 27) Total number of pages included are 28. TORCHMARK CORPORATION INDEX Page ---- Part 1. FINANCIAL INFORMATION Item 1. Financial Statements Consoldiated Balance Sheet 1 Consolidated Statement of Operations 2 Consolidated Statement of Comprehensive Income 3 Consolidated Statement of Cash Flow 4 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II. OTHER INFORMATION Item 1. Legal Proceedings 24 Item 4. Submission of Matters to a Vote of Security Holders 26 Item 6. Exhibits and Reports on Form 8K 27 PART I - FINANCIAL INFORMATION Item 1. Financial Statements TORCHMARK CORPORATION CONSOLIDATED BALANCE SHEET (Amounts in thousands)
JUNE 30, DECEMBER 31, ASSETS: 1998 1997 ----------- ----------- Investments: Fixed maturities, available for sale, at fair value (amortized cost: 1998 - $5,577,711; 1997 - $5,646,397) $ 5,795,568 $ 5,859,668 Equity securities, at fair value (cost: 1998 - $10,699; 1997 - $3,284) 19,748 12,404 Mortgage loans, at cost (estimated fair value: 1998 - $105,345; 1997 - $79,096) 105,224 78,974 Investment real estate, at depreciated cost 177,251 167,297 Policy loans 225,387 221,703 Other long-term investments (at fair value) 36,033 75,445 Short-term investments 191,725 122,917 ----------- ----------- Total investments 6,550,936 6,538,408 Cash 14,039 25,766 Investment in affiliates 85,753 102,305 Accrued investment income 96,948 100,392 Other receivables 157,984 126,599 Deferred acquisition costs 1,413,958 1,371,131 Value of insurance purchased 190,649 216,988 Property and equipment 49,079 49,158 Goodwill 518,075 525,564 Other assets 40,533 34,541 Separate account assets 2,205,192 1,876,439 ----------- ----------- Total assets $11,323,146 $10,967,291 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY: Liabilities: Future policy benefits $ 4,467,623 $ 5,023,763 Unearned and advance premiums 83,514 83,722 Policy claims and other benefits payable 191,441 228,754 Other policyholders' funds 81,249 82,224 ----------- ----------- Total policy liabilities 4,823,827 5,418,463 Accrued income taxes 465,240 415,984 Short-term debt 418,282 347,152 Long-term debt (estimated fair value: 1998 - $440,508 ; 1997 - $600,319) 394,217 564,298 Other liabilities 237,940 219,020 Separate account liabilities 2,205,192 1,876,439 ----------- ----------- Total liabilities 8,544,698 8,841,356 Minority interest in consolidated affiliate 97,933 0 Monthly income preferred securities (estimated fair value: 1998 - $206,720 ; 1997 - $210,500) 193,229 193,199 Shareholders' equity: Preferred stock 0 0 Common stock 147,801 143,220 Additional paid-in capital 610,088 187,731 Unrealized investment gains, net of tax 132,181 136,926 Retained earnings 1,824,392 1,699,409 Treasury stock, at cost (227,176) (234,550) ----------- ----------- Total shareholders' equity 2,487,286 1,932,736 ----------- ----------- Total liabilities and shareholders' equity $11,323,146 $10,967,291 =========== ===========
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 SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ----------------------- 1998 1997 1998 1997 -------- -------- ---------- ---------- Revenue: Life premium $241,111 $228,210 $ 477,322 $ 450,570 Health premium 189,480 184,689 379,291 372,289 Other premium 8,773 6,988 15,768 12,718 -------- -------- ---------- ---------- Total premium 439,364 419,887 872,381 835,577 Financial services revenue 63,202 49,915 119,895 98,278 Net investment income 120,603 106,684 235,182 210,130 Realized investment gains (losses) (1,854) (22,948) (5,027) (33,779) Other income 666 448 1,054 662 -------- -------- ---------- ---------- Total revenue 621,981 553,986 1,223,485 1,110,868 Benefits and expenses: Life policyholder benefits 159,603 149,765 313,616 294,721 Health policyholder benefits 120,521 116,129 240,361 230,830 Other policyholder benefits 11,702 13,903 24,873 27,327 -------- -------- ---------- ---------- Total policyholder benefits 291,826 279,797 578,850 552,878 Amortization of deferred acquisition costs 57,755 55,128 115,089 111,651 Commissions and premium taxes 35,658 34,533 71,593 70,515 Financial services selling expense 16,711 12,157 30,924 24,484 Other operating expense 39,659 36,057 78,972 73,717 Amortization of goodwill 3,745 3,744 7,489 7,488 Interest expense 14,472 18,285 32,810 36,159 -------- -------- ---------- ---------- Total benefits and expenses 459,826 439,701 915,727 876,892 Income before income taxes and equity in earnings of unconsolidated affiliates 162,155 114,285 307,758 233,976 Income taxes (62,761) (41,423) (115,252) (84,879) Equity in earnings of Vesta 0 4,202 4,258 7,684 Adjustment to carrying value of Vesta (20,234) 0 (20,234) 0 Minority interest in consolidated subsidiaries (8,588) 0 (10,569) 0 Monthly income preferred securities dividend (2,468) (2,474) (4,939) (4,863) -------- -------- ---------- ---------- Net income before extraordinary items 68,104 74,590 161,022 151,918 Loss on redemption of debt, net of income tax benefit of $2,672 (4,962) 0 (4,962) 0 -------- -------- ---------- ---------- Net income $ 63,142 $ 74,590 $ 156,060 $ 151,918 ======== ======== ========== ========== BASIC EARNINGS PER SHARE: Net income before extraordinary items $ 0.49 $ 0.54 $ 1.15 $ 1.09 Loss on redemption of debt ($0.04) $ 0.00 ($0.04) $ 0.00 Net income $ 0.45 $ 0.54 $ 1.11 $ 1.09 ======== ======== ========== ========== Diluted earnings per share: Net income before extraordinary items $ 0.48 $ 0.53 $ 1.14 $ 1.07 Loss on redemption of debt ($0.03) $ 0.00 ($0.04) $ 0.00 Net income $ 0.45 $ 0.53 $ 1.10 $ 1.07 ======== ======== ========== ==========
See accompanying Notes to Consolidated Financial Statements. -2- TORCHMARK CORPORATION CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited and in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED June 30, JUNE 30, ------------------ ------------------ 1998 1997 1998 1997 ------- -------- -------- -------- Net income $63,142 $ 74,590 $156,060 $151,918 Other comprehensive income: Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period 27,549 99,079 32,955 (18,721) Less: reclassification adjustment for (gains) losses on securities included in net income (1,249) 15,785 907 26,907 Less: reclassification adjustment for amortization of discount and premium (934) (566) (1,934) (360) Less: foreign exchange adjustment on securities marked to market 903 354 903 354 Less: unrealized gains of Family Service at date of sale (28,315) 0 (28,315) 0 ------- -------- -------- -------- Unrealized gains (losses) on securities (2,046) 114,652 4,516 8,180 Unrealized gains (losses) on other investments (12,431) 1,087 (9,332) 3,697 Unrealized gains (losses) on deferred acquisition costs (1,501) (11,941) (1,641) (945) Foreign exchange translation adjustments (1,058) 208 (860) (501) ------- -------- -------- -------- Other comprehensive income (loss), before tax (17,036) 104,006 (7,317) 10,431 Income tax effect 5,864 (36,663) 2,572 (3,725) ------- -------- -------- -------- Other comprehensive income (loss) (11,172) 67,343 (4,745) 6,706 ------- -------- -------- -------- Comprehensive income $51,970 $141,933 $151,315 $158,624 ======= ======== ======== ========
See accompanying Notes to Consolidated Financial Statements. -3- TORCHMARK CORPORATION CONSOLIDATED STATEMENT OF CASH FLOW (Amounts in thousands)
SIX MONTHS ENDED JUNE 30 --------------------- 1998 1997 -------- -------- Cash provided from operations $217,388 $240,968 Cash provided from (used for) investment activities: Investments sold or matured: Fixed maturities available for sale - sold 251,039 625,008 Fixed maturities available for sale - matured, called, and repaid 232,730 211,974 Other long-term investments 56,523 61,945 -------- -------- Total investments sold or matured 540,292 898,927 Investments acquired: Fixed maturities (1,156,580) (1,018,408) Other long-term investments (67,767) (67,775) -------- -------- Total investments acquired (1,224,347) (1,086,183) Net decrease (increase) in short-term investments (77,630) (76,850) Proceeds from sale of discontinued energy operations 0 30,832 Payments related to sale of discontinued energy operations 0 (14,428) Disposition of properties 752 482 Additions to properties (3,247) (3,823) -------- -------- Cash used for investment activities (764,180) (251,043) Cash provided from (used for) financing activities: Issuance of common stock 2,727 12,700 Proceeds from W&R public offering 516,014 0 Proceeds from sale of Family Service 140,388 0 Additions to debt 279,319 38,725 Repayments of debt (380,070) 0 Acquisition of treasury stock 0 (54,462) Cash dividends paid to shareholders (42,626) (42,702) Cash dividends paid to W&R shareholders (3,203) 0 Net receipts from deposit product operations 22,516 43,879 -------- -------- Cash used for financing activities 535,065 (1,860) Net increase (decrease) in cash (11,727) (11,935) Cash at beginning of year 25,766 18,272 -------- -------- Cash at end of period $ 14,039 $ 6,337 ======== ========
See accompanying Notes to Consolidated Financial Statements. -4- TORCHMARK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note A - Accounting Policies The accompanying unaudited 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 June 30, 1998, and the consolidated results of operations for the periods ended June 30, 1998 and 1997. Note B - Investment in Vesta Insurance Group Torchmark owns as a passive investment 27.8% of Vesta Insurance Group, Inc. ("Vesta"), a property and casualty insurance company. In June, 1998, Vesta announced that (a) an investigation of accounting irregularities that occurred during the fourth quarter of 1997 and the first quarter of 1998 would result in an aggregate $14 million net after-tax reduction in previously reported net income, and, in addition, that (b) Vesta would restate its historical financial statements for the period of 1993 through the first quarter of 1998, reflecting reductions in reported net after-tax earnings of $49 million for the period of 1993 through 1997 and $10 million for the first quarter of 1998 in accordance with the equity method of accounting. Torchmark has recorded a pre-tax charge of $20 million ($13 million after tax) or $.09 per diluted share in the second quarter of 1998 to reflect its pro rata share of Vesta's cumulative reported financial corrections. As of August 7, 1998, Vesta has not reported its 1998 second quarter operating results. For this reason Torchmark's financial statements for the 1998 second quarter do not reflect any amount related to Vesta's 1998 second quarter operating results. It is presently anticipated that Torchmark will record its equity in Vesta's 1998 second quarter operating results in the quarter during which Vesta's 1998 second quarter results are announced. Note C - Sale of Family Service On June 1, 1998, Torchmark sold Family Service to an unaffiliated insurance carrier. Family Service, which was acquired in 1990, is an insurer of pre-need funeral policies but has not issued any new policies since 1995. Consideration for the sale was $140 million in cash. Torchmark recorded a pretax realized loss on the sale of approximately $14 million, but incurred a tax expense on the transaction of $9 million. In connection with the sale, Torchmark will continue to service the policies in force of Family Service for the next five years for a fee of $2 million per year plus certain variable processing costs. -5- Note D - Public Offering of Subsidiary Waddell and Reed Financial, Inc. ("W&R"),Torchmark's previously wholly- owned asset management subsidiary, completed an initial public offering of approximately 36% of its common stock in March, 1998. Proceeds from the offering were approximately $516 million after underwriters' fees and expenses. W&R used $481 million of the proceeds to repay notes owed to Torchmark and retained the balance. Torchmark used its portion of these proceeds to pay down short-term debt and to invest in fixed maturities. As a result of the transaction, Torchmark has deducted the 36% minority interest in W&R from its operating results and shareholders' equity subsequent to the offering. Additionally, Torchmark plans to distribute its remaining approximately 64% interest in W&R to Torchmark shareholders in a tax-free spin-off late in 1998, subject to the receipt of necessary regulatory approvals and tax rulings. The distribution ratio is expected to be approximately 30%. The spin-off, if and when completed, will constitute the distribution of a portion of the policyholders' surplus account resulting in a tax expense of approximately $50 million. -6- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OPERATING RESULTS 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 filing with the Securities and Exchange Commission ("SEC"). 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, deteriorating general economic conditions leading to increased lapses and/or decreased sales of Torchmark's policies, changes in governmental regulations (particularly those impacting taxes and mandates for health insurance products), financial markets trends that adversely affect sales of Torchmark's market-sensitive products, interest rate changes that adversely affect product sales and/or investment portfolio yield, increased pricing competition, adverse regulatory developments, adverse litigation results, and developments involving Vesta Insurance Group, Inc. ("Vesta"), described more fully elsewhere in this document under the caption "Investment in Vesta Insurance Group" on page 21 of this report. -7- In the first six months of 1998, Torchmark's net operating income was $191 million, a 10% increase over the prior-year period. Net operating income is net income before extraordinary items excluding after-tax realized investment gains and losses and the associated adjustment to deferred acquisition costs. In 1998, it also excludes an after-tax adjustment of $13 million, or $.09 per diluted share, to Torchmark's equity in earnings on its investment in Vesta as described in the discussion of Vesta on page 21 of this report. On a per-share basis, Torchmark's diluted operating earnings were $1.35 for the first six months of 1998 , compared with $1.23 a year earlier, an increase of 10%. Basic earnings per share were $1.36 per share, 9% higher than in the prior period. Diluted earnings differ from basic earnings per share because diluted earnings take into account the assumed exercise of Torchmark's outstanding stock options. Net income was $156 million in the1998 period, compared with $152 million in the same period for 1997. Net income was affected by an extraordinary loss from the redemption of debt in the after-tax amount of $5 million, or $.04 per diluted share, discussed more completely under the caption "Capital Resources." Net income was also affected by an after-tax realized investment loss of $17 million in the 1998 six-month period, compared with a loss of $22 million in the comparable 1997 period. The 1998 realized loss included a $23 million after-tax loss from the sale of Family Service Life Insurance Company ("Family Service") as discussed on page 21 of this report. The loss in 1997 resulted primarily from the intentional sale of fixed-maturity investments at a loss to offset current and prior year taxable gains. Net income per diluted share rose 3% to $1.10 in the first half of 1998, compared with $1.07 in the prior-year period. Net income per basic share rose 2% from $1.09 in the 1997 period to $1.11 for the same period of 1998. Operating revenues, or revenues excluding realized investment gains and losses, rose 7% to $1.23 billion in the first half of 1998. Total premium increased 4% to $872 million. Torchmark's net investment income rose 12% to $235 million in the 1998 period. Financial services revenues gained 22% to $120 million. Torchmark's operating expense increased 7% to $79 million in the 1998 six months from $74 million in the prior year first half. However, as a percentage of operating revenue, operating expenses fell slightly. The decline in expense as a percentage of revenue occurred in spite of a 51% increase in financial services administrative expense, which rose $7 million to $21 million for the 1998 six months (as discussed under the caption "Asset Management" on page 18 of this report). Excluding financial services expenses, overall operating expenses declined $1.7 million or 3%. As a percentage of operating revenues excluding financial services, these expenses fell from 5.7% in the 1997 six months to 5.2% in 1998. -8- INSURANCE OPERATIONS The following table is a summary of Torchmark's insurance operations. Net 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, less the financing cost of Torchmark's debt and Monthly Income Preferred Securities ("MIPS"). SUMMARY OF INSURANCE NET OPERATING INCOME (Dollar amounts in thousands) Six Months Ended June 30, Increase ------------------ ------------- 1998 1997 Amount % -------- -------- -------- --- Insurance underwriting income before other income and administrative expense: Life $127,267 $120,219 $ 7,048 6 Health 70,884 73,548 (2,664) (4) Annuity 11,144 9,091 2,053 23 -------- -------- -------- Total 209,295 202,858 6,437 3 Other income 2,151 1,749 402 23 Insurance administrative expense (52,106) (52,977) 871 (2) -------- -------- -------- Net underwriting income 159,340 151,630 7,710 5 Excess investment income 98,030 64,571 33,459 52 Corporate expense and other (14,028) (9,912) (4,116) 42 Income taxes (82,428) (70,188) (12,240) 17 -------- -------- -------- Insurance net operating income $160,914 $136,101 $ 24,813 18 -9- Life insurance. Torchmark's life insurance premium income rose 6% to $477 million in the first six months of 1998, from $451 million in the same six-month period last year. 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)
Six months ended June 30, -------------------------------------- 1998 1997 Increase ------------------ ------------------ ------------------ % of % of Amount Total Amount Total Amount % -------- -------- -------- -------- -------- -------- Liberty National Exclusive Agency $141,324 30 $140,852 31 $ 472 0 United American Independent Agency 18,661 4 18,168 4 493 3 United American Exclusive Agency 9,320 2 9,045 2 275 3 Direct Response 109,539 23 95,925 21 13,614 14 American Income Exclusive Agency 100,868 21 93,546 21 7,322 8 Military Independent Agency 44,484 9 38,275 8 6,209 16 United Investors Exclusive Agency 40,148 8 38,733 9 1,415 4 Other 12,978 3 16,026 4 (3,048) (19) -------- -------- -------- -------- -------- Total Premium $477,322 100 $450,570 100 $ 26,752 6
Life insurance underwriting income before administrative expenses was $127 million in the first half of 1998, growing 6% over the same period in 1997. As a percentage of premium, underwriting income was stable at 27% in both periods as shown in the table below. LIFE INSURANCE SUMMARY OF RESULTS (Dollar amounts in thousands)
Six months ended June 30, -------------------------------------- 1998 1997 Increase ------------------ ------------------ ------------------ % of % of Amount Total Amount Total Amount % -------- -------- -------- -------- -------- -------- Premium and policy charges $477,322 100 $450,570 100 $ 26,752 6 Net policy obligations 198,533 41 185,512 41 13,021 7 Commissions and acquisition expense 151,522 32 144,839 32 6,683 5 -------- -------- -------- Insurance underwriting income before other income and administrative expenses $127,267 27 $120,219 27 $ 7,048 6
-10- Annualized life premium in force was $1.04 billion at June 30, 1998, growing 5% over $985 million in force a year earlier. Life insurance sales, in terms of annualized premium issued, were $122 million in the 1998 six-month period, increasing 4% over 1997 same-period sales of $117 million. The following 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 ------------------------------------------ ----------------------------------------- Six months Ended June 30, Increase At June 30, Increase -------------------- ------------------ ------------------- ------------------- 1998 1997 Amount % 1998 1997 Amount % -------- --------- -------- ------- ---------- -------- -------- ------- Liberty Exclusive Agency $ 22,174 $ 21,749 $ 425 2 $ 300,027 $299,232 $ 795 0 UA Independent Agency 4,528 8,386 (3,858) (46) 41,256 41,955 (699) (2) UA Exclusive Agency 2,626 4,026 (1,400) (35) 21,026 21,286 (260) (1) Direct Response 48,217 40,138 8,079 20 252,087 222,437 29,650 13 American Income Agency 27,405 27,217 188 1 210,681 196,050 14,631 7 Military Agency 8,774 8,264 510 6 93,027 80,610 12,417 15 UI Exclusive Agency 6,418 4,959 1,459 29 90,966 86,747 4,219 5 Other distribution 1,863 2,539 (676) (27) 26,486 36,726 (10,240) (28) -------- -------- -------- ---------- -------- -------- Total Life $122,005 $117,278 $ 4,727 4 $1,035,556 $985,043 $ 50,513 5
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. In the 1998 six months, this distribution method generated $48 million in annualized premium issued, compared with $40 million in the same period of 1997, an increase of 20%. Direct Response annualized premium in force rose 13% over the prior year to $252 million at June 30, 1998. Premium income grew 14% to $110 million in the 1998 period. In addition to sales and premium growth, the Direct Response operation provides support to other Torchmark marketing agencies by providing sales leads. Torchmark's Military Agency experienced the greatest percentage increase in premium income at 16% to $44 million. It also recorded a 6% increase in annualized premium issued of $8.8 million during the 1998 first half. This agency consists of former military officers who sell exclusively to military officers and their families. -11- The Liberty National Exclusive Agency distribution system represented the largest component of life premium at 30% or $141 million in the 1998 period. Life insurance sales for this agency grew 2% to $22 million of annualized premium issued in the 1998 period. The American Income Agency produced sales of $27 million in annualized life premium in the period, an increase of 1%. This distribution system focuses on members of labor unions, credit unions, and other associations. The United Investors Exclusive Agency had the largest percentage increase in sales for Torchmark life insurance operations at 29%. Annualized premium issued rose to $6.4 million. Annualized life premium in force gained 5% to $91 million. These products are marketed through the Waddell & Reed Financial, Inc. ("W&R") sales force. Sales of life insurance by the United American Independent and Exclusive Agencies declined 42% in the 1998 six months on a combined basis. The decline in sales was attributable to Torchmark's emphasis in health insurance sales over life insurance sales in these agencies and to improvements in the Medicare Supplement market. Health insurance. Health insurance premium income was up 2% from $372 million in the first six months of 1997 to $379 million in the same period of 1998. The table below is an analysis of Torchmark's health premium by distribution method. HEALTH INSURANCE PREMIUM BY DISTRIBUTION METHOD (Dollar amounts in thousands) Six months ended June 30, ------------------------------- 1998 1997 Increase --------------- -------------- ----------- % to % to Amount Total Amount Total Amount % -------- ------ ------- ------ ----------- Liberty National Exclusive Agency $ 66,979 18 $ 62,124 17 $ 4,855 8 United American Independent Agency 212,760 56 218,898 59 (6,138) (3) United American Exclusive Agency 72,158 19 65,479 17 6,679 10 Direct Response 4,306 1 3,071 1 1,235 40 American Income Exclusive Agency 23,088 6 22,717 6 371 2 -------- --- -------- --- ------- Total Premium $379,291 100 $372,289 100 $ 7,002 2 -12- The following table presents underwriting margin data for health insurance. HEALTH INSURANCE SUMMARY OF RESULTS (Dollar amounts in thousands) Six months ended June 30, ------------------------------- 1998 1997 Increase --------------- -------------- ----------- % to % to Amount Total Amount Total Amount % -------- ------ ------- ------ ----------- Premium $379,291 100 $372,289 100 $ 7,002 2 Net policy obligations 230,028 60 219,271 59 10,757 5 Commissions and acquisition expense 78,379 21 79,470 21 (1,091) (1) -------- -------- ------- Insurance underwriting income before other income and administrative expense $ 70,884 19 $ 73,548 20 $(2,664) (4) Underwriting margins for health insurance, or underwriting income as a percentage of premium, declined from 20% in the first half of 1997 to 19% in the same period of 1998 as a result of a 1% increase in policy obligation ratios. Health policy obligations rose 5% while premium rose 2%. The 19% margin for the six months of 1998 was consistent with the margin for the full year of 1997. Cancer benefit increases resulting from inflationary cost increases have contributed to the increase in net policy obligations. Premium rate increases are being sought to offset these cost increases, but differences in the timing of cost increases and the subsequent regulatory approvals of rate increases cause fluctuations in margins. In Torchmark's Medicare Supplement business, underwriting income as a percentage of premium is restrained by Federally mandated loss ratios and market competition. Both cancer and Medicare Supplement products are profitable to Torchmark, and Torchmark continues to promote new sales for both products. -13- 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 ------------------------------------------ ----------------------------------------- Six months Ended June 30, Increase At June 30, Increase -------------------- ------------------ ------------------- ------------------- 1998 1997 Amount % 1998 1997 Amount % -------- --------- -------- ------- --------- -------- -------- ------- UA Independent Agency $24,177 $19,996 $4,211 21 $432,592 $442,862 $(10,270) (2) UA Exclusive Agency 28,419 19,834 8,585 43 156,268 137,880 18,388 13 Liberty Exclusive Agency 5,931 6,390 (459) (7) 135,623 128,617 7,006 5 American Income Agency 4,799 5,006 (207) (4) 44,081 43,060 1,021 2 Direct Response 2,788 2,116 672 32 9,046 6,835 2,211 32 ------- ------- ------- -------- -------- -------- Total Premium $66,114 $53,312 $12,802 24 $777,610 $759,254 $ 18,356 2
Annualized health insurance premium in force grew 2% to $778 million at June 30, 1998. Cancer annualized premium in force rose 6% to $136 million, primarily as a result of premium rate increases at Liberty National. Medicare Supplement annualized premium in force grew 1% to $541 million at June 30, 1998 and represented 70% of health premium in force on that date. Sales of health insurance, as measured by annualized premium issued, grew 24% to $66 million in the 1998 period. Medicare Supplement sales rose 41% in the 1998 period to $47 million. Growth in Medicare Supplement sales, which increased $13.6 million, accounted for more than the total increase in health sales of $12.8 million, due to a decline in cancer and other health product sales. Torchmark's Medicare Supplement products are sold by its 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. Cancer sales, produced primarily by the Liberty National Agency, were $5.1 million in the 1998 six months, compared with $5.5 million for the prior period. Other health product sales declined 2% to $14 million. -14- Annuities. The following table presents collection and balance information about Torchmark's annuities.
ANNUITIES COLLECTIONS AND DEPOSIT BALANCES (Dollar amounts in thousands) COLLECTIONS DEPOSIT BALANCES ------------------------------------ ------------------------------------------ Six Months Ended June 30, Increase At June 30, Increase -------------------- --------------- ----------------------- ----------------- 1998 1997 Amount % 1998 1997 Amount % -------- --------- --------- ----- ---------- ---------- --------- ------ Fixed $ 33,108 $ 48,186 $ (15,078) (31) $ 618,018 $ 994,737 $(376,719) (38) Variable 116,950 105,308 11,642 11 2,136,878 1,657,512 479,366 29 -------- -------- --------- ---------- ---------- --------- Total $150,058 $153,494 $ (3,436) (2) $2,754,896 $2,652,249 $ 102,647 4
Annuities are sold on both a fixed and a variable basis. Fixed annuity collections were $33 million in the first six months of 1998, compared with $48 million collected in the prior period, a decline of 31%. Collections of variable annuities were $117 million in the 1998 period, rising 11% from variable collections of $105 million in 1997. Fixed annuities on deposit with Torchmark declined 38% to $618 million. The decline was caused by the sale of Family Service, which had a block of fixed annuities in the amount of $396 million at April 30, 1998. Excluding Family Service, the fixed annuity balance would have increased 4%. The variable annuity balance on deposit rose 29% during the past twelve months, boosted in large part by the strength in financial markets. This balance was $2.1 billion at June 30, 1998, compared with $1.7 billion a year ago. -15- The following table presents underwriting margin data for Torchmark's annuities. ANNUITIES SUMMARY OF RESULTS (DOLLAR AMOUNTS IN THOUSANDS) SIX MONTHS ENDED JUNE 30, INCREASE ------------------ ------------- 1998 1997 AMOUNT % -------- ------- ------- -- Policy charges $ 15,768 $12,718 $ 3,050 24 Net policy obligations (5,804) (5,699) (105) 2 Commissions and acquisition expense 10,428 9,326 1,102 12 -------- ------- ------- -- Insurance underwriting income before other income and administrative expense $ 11,144 $ 9,091 $ 2,053 23 Policy charges for annuities for the 1998 six months were $16 million, compared with $13 million for the 1997 period, an increase of 24%. 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 variable annuities over the prior-year period. Annuity underwriting income improved 23% from $9 million in the 1997 period to $11 million in 1998, consistent with the growth in policy charges. -16- Investment. The following table summarizes Torchmark's insurance companies' investment income and excess investment income. INSURANCE OPERATIONS EXCESS INVESTMENT INCOME (Dollars in thousands) Six months Ended June 30, Increase -------------------- -------------- 1998 1997 Amount % --------- --------- ------- ------ Net investment income $ 237,681 $ 208,266 $29,415 14 Tax equivalency adjustment 5,304 4,360 944 22 --------- --------- ------- ------ Tax equivalent investment income 242,985 212,626 30,359 14 Required interest on net insurance policy liabilities (104,547) (104,415) (132) 0 Financing costs (40,408) (43,640) 3,232 (7) --------- --------- ------- ------ Excess investment income $ 98,030 $ 64,571 $33,459 52 On a tax equivalent basis, net investment income from insurance operations was $243 million during the first six months of 1998, an increase of 14% over $213 million during the same 1997 period. The 1998 amount includes $6.7 million interest income received on internal financing with W&R during the first quarter related to the March, 1998 initial public offering. The increase in investment income resulted from the increase in mean invested assets over the prior period. Mean invested assets at amortized cost increased 12% to $6.7 billion during the 1998 six months from $6.0 billion a year earlier. The increase in mean invested assets was primarily caused by the proceeds received from the W&R initial public offering but was also impacted by the accumulation of life reserves and reinvestment of cash flow. Excess investment income is tax-equivalent net investment income reduced by interest credited to net policy liabilities, less financing costs. Excess investment income for the six months ended June 30, 1998 was $98 million, compared with $65 million for the prior year six months. This 52% increase was caused primarily by three factors: (1) the W&R transaction, whereby $481 million in additional funds were available, allowing Torchmark to invest $399 million in new investments at an average yield of 6.92% and pay down $82 million in short-term debt, (2) the refinancing of long-term debt with short-term debt, saving an average of approximately 369 basis points in financing costs, and (3) the inclusion of $6.7 million interest on internal financing with W&R. Interest credited to policy liabilities remained stable at approximately $105 million. -17- The lower interest-rate environment during the first half of 1998 caused yields on new investments to be less attractive when contrasted with the prior year. Purchases made during the first half of 1998 totalled $1.1 billion and were made at an average yield of 6.98% This compares with $1.0 billion new purchases made in the six months of 1997 at an average yield of 7.34%. Excluding Family Service, new purchases made during the first half of 1998 totalled $1.0 billion and were made at an average yield of 7.06%.While new investments continue to emphasize high quality corporate issues with both short and long maturities, the estimated average life of purchases made during the first half of 1998 was 19.7 years, compared with 10.5 years for the same period last year. With new fixed income investments being made at yields below the average year-end 1997 portfolio yield of 7.49%, the fixed maturity portfolio had an estimated annual return of 7.43% by the end of June, 1998. At June 30, 1998, the portfolio had a 7.6 year average life and an effective duration of 5.1 years, compared with a 7.9 year average life and a 5.0 year duration a year earlier. The shorter average life in the portfolio resulted directly from the decline in rates, even though 1998 purchases were made at much longer maturities, because of the expected increase in prepayments of mortgage-backed investments. Additionally, because of declines in interest rates, the unrealized gain in the fixed maturity portfolio increased from $213 million at 1997 year end to $218 million at the end of June, 1998 in spite of the elimination of $24 million in unrealized gains by virtue of the Family Service sale. Other comprehensive income resulting from security value fluctuations on a pretax basis was income in 1998 of $33 million, compared with a loss of $19 million in 1997. The Family Service sale was completed on June 1, 1998 for proceeds of $140 million. Family Service had $778 million in invested assets at the date of sale. Family Service contributed $22 million in net investment income and $4.7 million in excess investment income through five months of 1998. The proceeds were invested at a yield of 7.11%. ASSET MANAGEMENT Completion of initial public offering. In March, 1998, Torchmark's asset management subsidiary, W&R, completed an initial public offering of approximately 24 million shares, or about 36% of its common stock. Net proceeds from the offering were approximately $516 million after underwriters' fees and expenses. W&R used $481 million of the proceeds to repay existing notes owed to Torchmark and other Torchmark subsidiaries. The remaining $35 million was retained by W&R. Of its $481 million proceeds, Torchmark invested $399 million at yields approximating 6.9% and used the $82 million balance to pay down short- term debt. While approximately $360 million par value -18- of Torchmark's funded debt at an average coupon rate of 9.2% was repaid during the second quarter of 1998, $295 million was essentially refinanced by short- term borrowings, because new borrowings were made in the amount of $377 million at an average rate of 5.7%. (See the discussion of Investments, Liquidity and Capital Resources.) The initial public offering resulted in a $426 million gain which was added to Torchmark's additional paid-in capital in accordance with Staff Accounting Bulletin 51. Torchmark retains the remaining 64% of the W&R stock. Accordingly, the 36% minority interest in W&R's operating results and shareholders' equity is deducted from the respective Torchmark amounts in consolidation. Torchmark plans to distribute these W&R shares to Torchmark shareholders in a tax-free spin-off late in 1998, subject to the receipt of necessary regulatory approvals and tax rulings. The distribution ratio is expected to be approximately three shares of W&R for every ten shares of Torchmark held at the time of distribution. The spin-off, if and when completed, will constitute the distribution of a portion of the policyholders' surplus account resulting in a tax expense of approximately $50 million. Operating results. Financial services revenues rose 22% to $120 million for the first six months of 1998 over the prior period. Asset management fees, the largest component of financial services revenues, increased 22% to $68 million from $56 million. These fees are based on the amount of assets under management. Average assets under management rose 28% in the 1998 period versus the same 1997 period. Assets under management were $26.7 billion at June 30, 1998, $23.4 billion at year-end 1997, and $21.3 billion at June 30, 1997. Mutual funds, which represented 89% of assets under management at June 30, 1998, increased 22% over the prior year to $23.7 billion. Commission revenues from investment product sales rose 23% to $44 million in the 1998 period from $36 million for the prior period. Investment product sales were up 26% to $910 million in the 1998 six months, compared with $724 million in the same period of 1997. Commissions from the sale of insurance products were $7.6 million in the 1998 six-month period, compared with $6.7 million in the 1997 period. Service fees increased 5% to $16 million. The sum of all financial services revenue components is greater than total financial services revenue because the portion of commission related to sales of the insurance and variable annuity products of United Investors Life Insurance Company is eliminated in consolidation. -19- The following table presents an analysis of asset management operations. ASSET MANAGEMENT SUMMARY OF RESULTS (Dollar amounts in thousands) Six months Ended June 30, Increase ------------------ -------------- 1998 1997 Amount % -------- -------- ------- ----- Management fees $ 67,641 $ 55,622 $12,019 22 Underwriting revenue 52,002 42,872 9,130 21 Service fees 16,030 15,337 693 5 Investment income 4,163 1,876 2,287 122 -------- -------- ------- Total revenue 139,836 115,707 24,129 21 Underwriting expense 44,826 37,059 7,767 21 Other expense 22,254 16,068 6,186 38 -------- -------- ------- Total expense 67,080 53,127 13,953 26 Pretax operating income 72,756 62,580 10,176 16 Intercompany interest (6,653) 0 (6,653) N/A Other intercompany expense 0 (911) 911 (100) Income taxes (25,546) (23,896) (1,650) 7 -------- -------- ------- Net income $ 40,557 $ 37,773 $ 2,784 7 Pretax operating income grew 16% over the prior period to $73 million. As a percentage of revenues, pretax income declined from 54% to 52%, largely as a result of growth in administrative expenses at a greater rate than revenues. Administrative expense rose 39%, due to increased compensation costs arising from the addition of several investment analysts and an increase in management compensation required to be more competitive with the mutual fund industry. Operating income excludes intercompany interest with Torchmark in the amount of $6.7 million of expense in 1998. Net income for the asset management segment was $41 million in 1998 including the after-tax effect of the intercompany interest, compared with $38 million in 1997. Torchmark has also deducted $11 million in earnings attributable to the 36% minority interests in W&R that Torchmark did not own for the period after the initial public offering. -20- INVESTMENT IN VESTA INSURANCE GROUP Torchmark owns as a passive investment 27.8% of Vesta, a property and casualty insurance company. Torchmark accounts for its investment in Vesta using the equity method of accounting, including its pro rata share of Vesta's reported operating results in earnings, and carrying its percentage interest in Vesta's net book value on the balance sheet as investment in affiliates. In June, 1998, Vesta announced that (a) an investigation of accounting irregularities that occurred during the fourth quarter of 1997 and the first quarter of 1998 would result in an aggregate $14 million net after-tax reduction in previously reported net income, and, in addition, that (b) it would restate its historical financial statements for the period of 1993 through the first quarter of 1998, reflecting reductions in reported net after-tax earnings of $49 million for the period of 1993 through 1997 and $10 million for the first quarter of 1998. To reflect its pro rata share of Vesta's cumulative reported financial corrections, Torchmark has recorded a pre-tax charge of $20 million ($13 million after tax) or $.09 per diluted share in the second quarter of 1998. Additionally, Vesta is now subject to numerous class action lawsuits in state and federal courts filed subsequent to such announcements. As of August 10, 1998, Vesta has not reported its 1998 second quarter operating results. For this reason Torchmark's financial statements for the 1998 second quarter do not reflect any amount related to Vesta's 1998 second quarter operating results. It is presently anticipated that Torchmark will record its equity in Vesta's 1998 second quarter operating results in the quarter during which Vesta's 1998 second quarter results are announced. The market value of Torchmark's 5.1 million share investment in Vesta, which was $109 million at June 30, 1998 ($21 5/16 per Vesta share), exceeded Torchmark's net carrying value of Vesta at that same date of $71 million, after deduction of a $15 million deferred tax. SALE OF FAMILY SERVICE On June 1, 1998, Torchmark sold Family Service to an unaffiliated insurance carrier. Family Service, which was acquired in 1990, is an insurer of pre-need funeral policies but has not issued any new policies since 1995. Consideration for the sale was $140 million in cash. Torchmark recorded a pretax realized loss on the sale of approximately $14 million, but incurred a tax expense on the transaction of $9 million. In connection with the sale, Torchmark will continue to service the policies in force of Family Service for the next five years for a fee of $2 million per year plus certain variable processing costs. Through May, 1998, Family Service contributed $25 million in revenues and $5.8 million in pretax income. Invested assets were $778 million and total assets were $828 million at the date of sale. -21- FINANCIAL CONDITION Liquidity. Torchmark's liquidity is indicated by its positive cash flow, marketable investments, and the availability of a line of credit facility. Torchmark's insurance and asset-management operations typically generate cash flows in excess of immediate requirements. Torchmark's net cash inflows from operations were $217 million in the first six months of 1998, compared with $241 million in the same period of 1997. In addition to cash flows from operations, Torchmark received $233 million in investment maturities or repayments during the first half of 1998. Torchmark's cash and short-term investments were $206 million at the end of June, 1998, rising 38% over the $149 million of these assets at December 31, 1997. Cash and short-term investments represented 1.8% of total assets at end of the second quarter of 1998. In addition, Torchmark's entire portfolio of fixed- income and equity securities, in the amount of $5.8 billion at market value on June 30, 1998, is available for sale. 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 June 30, 1998. At that date, Torchmark had commercial paper outstanding in the amount of $418 million and no borrowings on the line of credit. At December 31, 1997, $139 million in commercial paper was outstanding. During the second quarter of 1998, Torchmark borrowed $377 million on the line of credit to repay its 8 5/8% Sinking Fund Debentures and its 9 5/8% Senior Notes with accrued interest. Proceeds from the W&R transaction were used to pay down $82 million of commercial paper in the first quarter of 1998. Capital resources. Torchmark's total debt outstanding was $812 million at June 30, 1998, compared with $911 million at December 31, 1997 and $871 million at June 30, 1997. In March, 1998, Torchmark repaid $20 million principal amount on its 8 5/8% Sinking Fund Debentures due in 2017, of which $8 million was a mandatory redemption and $12 million was an optional repayment under the terms of the agreement. On April 1, 1998, Torchmark called the remaining $160 million principal balance of this debt at the prevailing call price of 103.76, or $166 million. A loss on the redemption of debt was recorded in the second quarter of 1998 in the after-tax amount of $5 million, representing the difference between the total call price and the carrying value of $158 million. Additionally, Torchmark's 9 5/8% Senior Notes, principal amount $200 million, matured on May 1, 1998. As previously mentioned, Torchmark borrowed on its commercial paper facility to repay the Sinking Fund Debentures that were called and to repay its Senior Notes upon maturity with accrued interest, in the combined amount of $377 million. -22- Torchmark's shareholders' equity was $2.49 billion at June 30, 1998, compared with $1.93 billion at 1997 year end and $1.71 billion one year ago. The June 30, 1998 shareholders' equity was increased by the $516 million proceeds from the W&R offering, but was also reduced by the $90 million of minority interests representing the 36% of W&R that Torchmark no longer owns. Book value per share was $17.73 at quarter end, compared with $13.80 at year-end 1997 and $12.36 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 $2.35 billion at June 30, 1998, compared with $1.81 billion at 1997 year end and $1.67 billion a year ago. On a per share basis, book value was $16.77 at the end of June, 1998, compared with $12.90 at year-end 1997 and $12.06 at June 30, 1997. The annualized return on common equity, excluding the effects of securities at market value and realized investment gains and losses, declined to 18.0% for the 1998 period from 20.9%. This decline was a result of the increased equity due to the W&R initial public offering. There have been no share purchases in 1998. Debt as a percentage of total capitalization was 24% at June 30, 1998, 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 31% at year-end 1997 and 32% at June 30, 1997. Interest coverage was 10.4 for the 1998 six months, compared with 7.5 for the prior-year period. -23- 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 June 30, 1998, Liberty was a party to approximately 187 active lawsuits (including 28 employment related cases and excluding interpleaders and stayed cases), 160 of which were Alabama proceedings in which punitive damages were sought. Liberty faces trial settings in these cases on an on-going basis. It has been previously reported that Liberty was a party to 53 individual cases filed in Chambers County, Alabama involving allegations that an interest- sensitive life insurance policy would be come paid-up or self-sustaining after a specified number of years. Only three of these cases remain pending with all others having been settled and dismissed by the Chambers County Circuit Court. It has been previously reported that Torchmark, its subsidiaries United American and Globe and certain individual officers are parties to purported class action litigation filed in April, 1996 in the U.S. District Court for the Northern District of Georgia (Crichlow v. Torchmark Corporation, Case No. 4:96- --------------------------------- CV-0086-HLM) involving certain hospital and surgical insurance policies issued by Globe and United American. In September, 1997, the U.S. District Court entered an order granting summary judgment against the plaintiffs on certain issues and denying national class certification, although indicating that plaintiffs could move for certification of a state class of Georgia policyholders. In December, 1997, plaintiffs moved for the certification of a state class of Georgia policyholders. That class certification motion has been denied and the portion of the case involving plaintiffs who are Mississippi residents has been transferred to the U.S. District Court for the North District of Mississippi. Discovery is proceeding on the remaining claims for breach of contract and the duty of good faith arising from closure of the block of business and certain post claim matters as well as fraud and conspiracy relating to pricing and delay in implementing rate increases. As previously reported, Liberty is a party to two lawsuits alleging that a class of persons were insured under Liberty cancer policies when Liberty knew that such persons -24- were not entitled to retain any benefits under these policies, one of which was filed in 1996 in the Circuit Court of Jefferson County, Alabama (Harris v. --------- Liberty National Life Insurance Company, Case No. CV-96-01836) and the other in - --------------------------------------- the Circuit Court of St. Clair County, Alabama (Gentry v. Liberty National Life ------------------------------- Insurance Company, Case No. CV-97-61). The St. Clair County Circuit Court - ----------------- conditionally certified a class in Gentry while the Jefferson County Circuit Court stayed the Harris case pending resolution of the Gentry case and did not certify a class in Harris. Plaintiffs in Harris then filed a petition for a writ of mandamus with the Alabama Supreme Court in Gentry seeking to preserve the class claims in their action in the Jefferson County Circuit Court. On January 30, 1998, the Alabama Supreme Court issued the writ of mandamus to the St. Clair County Circuit Court in the Gentry case. On February 20, 1998, Liberty filed a motion to dismiss the class claims in the Gentry case with the St. Clair County Circuit Court. On August 11, 1998, the St. Clair County Circuit Court dismissed all claims in Gentry. No class certification hearing has been scheduled in Harris. On July 9, 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-T-17A). This case, originally filed in June 1995 in the Circuit Court of Pineallas County, Florida, 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 district managers of Liberty, sought damages for lost wages, loss of future earnings, lost health benefits, lost retirement benefits and lost raises and expenses. Additionally, the three Florida plaintiffs sought compensatory and punitive damages as allowable under the Florida Civil Rights Act. Verdicts were returned in favor of Liberty regarding the claims of three of the plaintiffs while the remaining seven plaintiffs prevailed on their claims. Of the recommended total verdict, $3.2 million was a front pay advisory verdict, although the judge has discretion over the final amount of the award. $10 million of the recommended total verdict was punitive damages, which may be capped at a lower amount under applicable Florida law. The presiding judge has not yet entered a judgment on the jury verdict. Liberty intends to actively pursue all available post-trial and appellate relief. 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. -25- Item 4. Submission of Matters to a Vote of Security Holders (a) Annual Meeting of Shareholders held April 23, 1998 (b) Directors re-elected to additional three year terms at the Annual Meeting: Joseph M. Farley, C.B. Hudson and Joseph L. Lanier, Jr. Other directors whose terms of office continued after the Annual Meeting: David L. Boren, Louis T. Hagopian, Harold T. McCormick, George J. Records and R.K. Richey Additionally, Mark S. McAndrew was elected by the Board of Directors at their Annual Meeting also on April 23, 1998 to serve for the remainder of the term left vacant by the March 1998 resignation of Keith A. Tucker. (c) Election of Directors: For Withheld --- -------- Joseph M. Farley 118,429,917 1,160,892 C.B. Hudson 118,410,696 1,180,113 Joseph L. Lanier, Jr. 118,040,674 1,550,135 Approval of 1998 Stock Incentive Plan - A new consolidated stock-based incentive plan providing for the award of options, deferred stock, SARs, restricted stock and elective deferred compensation options to directors, officers, key employees, consultants of the Company and its subsidiaries: For Against Abstain Non-Vote --- ------- ------- -------- 61,599,690 42,950,793 793,072 14,247,254 Ratify appointment of KPMG Peat Marwick for 1998: For Against Abstain --- ------- ------- 119,254,780 82,215 253,814 -26- 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 second quarter of 1998 -27- 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: August 12,1998 /s/ Tony G. Brill ------------------------------- Tony G. Brill, Vice President Date: August 12, 1998 /s/ Gary L. Coleman ------------------------------- Gary L. Coleman, Vice President And Chief Accounting Officer -28- EX-11 2 STATEMENT OF RE COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS.
TORCHMARK CORPORATION COMPUTATION OF EARNINGS PER SHARE THREE MONTHS ENDED JUNE 30, 1998 1997 ------------- ------------- Net income before extraordinary items 68,104,000 74,590,000 Loss on redemption of debt (4,962,000) 0 Net income 63,142,000 74,590,000 Preferred dividends 0 0 ------------ ------------ Net income available to common shareholders $ 63,142,000 $ 74,590,000 ============ ============ Basic weighted average shares and common stock equivalents outstanding 140,259,633 138,688,376 Diluted weighted average shares and common stock equivalents outstanding 141,806,996 141,057,089 Basic earnings per share: Net income before extraordinary items $ 0.49 $ 0.54 Loss on redemption of debt $ (0.04) $ 0.00 Net income $ 0.45 $ 0.54 ============ ============ Diluted earnings per share: Net income before extraordinary items $ 0.48 $ 0.53 Loss on redemption of debt $ (0.03) $ 0.00 Net income $ 0.45 $ 0.53 ============ ============ SIX MONTHS ENDED JUNE 30, 1998 1997 ------------- ------------- Net income before extraordinary items 161,022,000 151,918,000 Loss on redemption of debt (4,962,000) 0 Net income 156,060,000 151,918,000 Preferred dividends 0 0 ------------ ------------ Net income available to common shareholders $156,060,000 $151,918,000 ============ ============ Basic weighted average shares and common stock equivalents outstanding 140,232,355 139,147,498 Diluted weighted average shares and common stock equivalents outstanding 141,752,867 141,334,317 Basic earnings per share: Net income before extraordinary items $ 1.15 $ 1.09 Loss on redemption of debt $ (0.04) $ 0.00 Net income $ 1.11 $ 1.09 ============ ============ Diluted earnings per share: Net income before extraordinary items $ 1.14 $ $1.07 Loss on redemption of debt $ ($0.04) $ $0.00 Net income $ $1.10 $ $1.07 ============ ============
EX-27 3 FINANCIAL DATA SCHEDULE
7 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 5,795,568 0 0 19,748 105,224 177,251 6,550,936 14,039 0 1,604,607 11,323,146 4,467,623 83,514 191,441 81,249 812,499 193,229 0 147,801 2,339,485 11,323,146 872,381 235,182 (5,027) 120,949 578,850 115,089 221,788 307,758 122,334 161,022 0 (4,962) 0 156,060 1.11 1.10 0 0 0 0 0 0 0
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