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, 1994 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 re-
quired 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 latest practicable date.
CLASS OUTSTANDING AT OCTOBER 31, 1994
Common Stock, $1.00 Par Value 71,529,535
<PAGE>
TORCHMARK CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheet
Consolidated Statement of Operations
Consolidated Statement of Cash Flow
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
TORCHMARK CORPORATION
CONSOLIDATED BALANCE SHEET
(Amounts in thousands)
September 30December 31
----------- -----------
1994 1993
Assets ----------- -----------
- - ------
Investments:
Fixed maturities, available for sale, at fair
value (amortized cost: 1994 - $4,526,820
1993 - $4,387,026) $4,343,931 $4,579,034
Equity securities, at fair value
(cost: 1994 - $33,377; 1993 - $31,221) 46,076 40,961
Mortgage loans, at cost (estimated fair
value: 1994 - $3,215; 1993 - $4,024) 3,305 4,147
Investment real estate, at depreciated cost 121,581 110,730
Policy loans 155,311 149,890
Energy investments 333,416 345,805
Other long-term investments (at fair value) 33,836 26,989
Short-term investments 123,848 183,166
----------- ----------
Total investments 5,161,304 5,440,722
Cash 5,886 53,408
Investment in unconsolidated subsidiaries 85,114 79,319
Accrued investment income 64,743 56,801
Other receivables 185,496 152,910
Deferred acquisition costs 978,937 901,565
Value of insurance purchased 121,666 131,602
Property and equipment 100,234 80,511
Goodwill 170,568 178,645
Other assets 108,152 26,432
Separate account assets 667,476 544,327
----------- ----------
Total assets $7,649,576 $7,646,242
=========== ==========
Liabilities and Shareholders' Equity
- - ------------------------------------
Liabilities:
Future policy benefits $3,880,080 $3,745,416
Unearned and advance premiums 93,627 96,206
Policy claims and other benefits payable 156,103 159,451
Other policyholders' funds 4,211 4,313
----------- ----------
Total policy liabilities 4,134,021 4,005,386
Accrued income taxes 266,065 413,072
Short-term debt 154,016 107,108
Long-term debt (estimated fair value:
1994 - $765,487; 1993 - $857,715) 792,627 792,335
Other liabilities 376,817 366,759
Separate account liabilities 667,476 544,327
----------- ----------
Total liabilities 6,391,022 6,228,987
Shareholders' equity:
Preferred stock 0 1,000
Common stock 73,784 73,784
Additional paid-in capital 138,999 232,432
Unrealized investment gains, net of tax (80,785) 120,138
Retained earnings 1,223,896 1,082,031
Treasury stock, at cost (97,340) (92,130)
----------- ----------
Total shareholders' equity 1,258,554 1,417,255
----------- ----------
Total liabilities and shareholders' equity $7,649,576 $7,646,242
=========== ==========
See accompanying Notes to Consolidated Financial Statements.
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
1994 1993 1994 1993
--------- --------- --------- ---------
Revenues:
Life premium $145,463 $139,651 $433,845 $416,442
Health premium 186,320 196,362 577,936 603,710
Other premium 4,750 46,646 13,066 115,583
--------- --------- --------- ---------
Total premium 336,533 382,659 1,024,847 1,135,735
Financial services revenue 33,747 33,626 105,863 102,451
Net investment income 79,585 93,983 244,478 292,093
Energy revenues 14,293 19,662 47,743 65,140
Realized investment gains (1,278) 778 2,013 2,264
Other income 409 467 1,455 2,051
--------- --------- --------- ---------
Total revenue 463,289 531,175 1,426,399 1,599,734
Benefits and expenses:
Life policy benefits 101,061 95,665 301,429 283,629
Health policy benefits 111,486 119,622 345,408 368,130
Other policy benefits 11,210 34,673 32,326 87,352
--------- --------- --------- ---------
Total policy benefits 223,757 249,960 679,163 739,111
Amortization of deferred
acquisition costs 41,327 47,492 131,255 141,038
Commissions and premium taxes 33,626 44,502 104,206 133,319
Financial services expense 9,487 9,848 31,539 34,635
Energy operations expense 5,376 4,577 10,716 23,340
Other operating expense 40,602 41,156 121,710 131,814
Nonoperating expenses 0 0 0 34,500
Interest expense 19,218 19,281 55,374 47,420
--------- --------- --------- ---------
Total benefits and expenses 373,393 416,816 1,133,963 1,285,177
--------- --------- --------- ---------
Pre-tax operating income 89,896 114,359 292,436 314,557
Income tax (27,768) (47,018) (93,980) (111,269)
Equity in earnings of
unconsolidated subsidiaries 2,570 296 6,717 1,111
Minority interest in earnings
of consolidated subsidiaries 0 (3,225) 0 (10,696)
--------- --------- --------- ---------
Income before cumulative effect of
of changes in accounting
principles 64,698 64,412 205,173 193,703
Cumulative effect of changes in
accounting principles 0 0 0 22,444
--------- --------- --------- ---------
Net income $64,698 $64,412 $205,173 $216,147
========= ========= ========= =========
Net income per share before
cumulative effect of changes
in acccounting principles $0.90 $0.86 $2.83 $2.59
Cumulative effect of changes in
in accounting principles 0.00 0.00 0.00 0.31
--------- --------- --------- ---------
Net income per share $0.90 $0.86 $2.83 $2.90
========= ========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW
(Amounts in thousands)
Nine Months Ended
September 30,
---------------------
1994 1993
-------- ---------
Cash provided from operations $211,926 $373,749
Cash provided from (used for) investment activities:
Investments sold or matured:
Fixed maturities available for sale - sold 411,217 107,327
Fixed maturities available for sale - matured 690,442 245,763
Fixed maturities held to maturity - sold 0 20,276
Fixed maturities held to maturity - matured 0 565,980
Other long-term investments 70,893 19,013
--------- ---------
Total investments sold or matured 1,172,552 958,359
Investments acquired:
Fixed maturities - available for sale (1,214,945) (1,427,294)
Other long-term investments (105,674) (28,590)
--------- ---------
Total investments acquired (1,320,619) (1,455,884)
Net decrease (increase) in short-term investments 59,318 (60,860)
Sale of stock in affiliate 0 27,110
Purchases of stock of affiliates 0 (9,187)
Repayments of loans to affiliates 0 460
Additions to properties held for resale (78,705) 0
Disposition of properties 3,518 597
Additions to properties (39,227) (11,566)
Dividends from unconsolidated affiliates 342 0
--------- ---------
Cash provided from (used for) investment activities (202,821) (550,971)
Cash provided from (used for) financing activities:
Issuance of common stock 4,292 6,358
Issuance of 7 7/8% Notes 0 195,775
Issuance of 7 3/8% Notes 0 98,335
Other borrowings 46,900 65,000
Repayments of debt (108) (191,819)
Acquisition of treasury stock (106,054) 0
Cash dividends paid to shareholders (62,309) (63,696)
Net receipts from deposit product operations 60,652 69,673
--------- ---------
Cash provided from (used for) financing activities (56,627) 179,626
Net increase (decrease) in cash (47,522) 2,404
Cash at beginning of year 53,408 18,706
--------- ---------
Cash balance at end of period $5,886 $21,110
========= =========
See accompanying Notes to Consolidated Financial Statements.
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
NOTE A - Accounting Policies
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q, and, therefore,
do not include all 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, 1994 and the consolidated results of operations for the period
ended September 30, 1994 and 1993.
NOTE B - Acquisition of Preferred Stock
On March 31, 1994, Torchmark acquired the remaining outstanding shares
of its adjustable rate preferred stock at a price of $100 per share plus
accrued dividends. The acquisition was completed at an aggregate price of
$47 million. The preferred treasury stock was immediately retired.
NOTE C - Acquisition of American Income Holding, Inc.
Torchmark has commenced a cash tender offer for all of the outstanding
common stock of American Income Holding, Inc. for $35 per share or a total
purchase price of $565 million. The purchase will result in goodwill of
approximately $375 million which will be amortized over 40 years. The
purchase will be financed with a combination of bank and monthly income
preferred stock financing as well as internal funds.
NOTE D - Issuance of Securities
In October, 1994, Torchmark and its wholly-owned finance subsidiary
Torchmark Capital L.L.C. completed a public offering of eight million shares
of 9.18% Cumulative Monthly Income Preferred Securities, Series A ("MIPS")
at a face amount of $200 million issued by Torchmark Capital through an
underwriting syndicate. The securities are subject to a mandatory
redemption in full at September 30, 2024, although Torchmark may elect to
extend the MIPS for up to an additional 20 years if certain conditions are
met. They are redeemable at Torchmark's option after September 30, 1999.
Torchmark subsequently entered into a ten-year swap agreement with an
unaffiliated party whereby Torchmark agreed to pay a variable rate on the
$200 million fact amount in exchange for payment of the fixed dividend. In
a related transaction, Torchmark purchased a five-year cap on the swap
agreement that insures that the variable rate cannot exceed 10.39%.
Torchmark pays a yearly fee of $860 thousand for the cap agreement. Net
proceeds from the offering of approximately $193 million have been lent from
Torchmark Capital to Torchmark to provide part of the financing of the
acquisition of American Income Holding, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Operating Results
Net income per share for Torchmark Corporation's ("Torchmark") for the
first nine months of 1994 was $2.83, declining 2% over per-share earnings for
the same period of 1993 of $2.90. Net income was $205 million in the first
nine months of 1994, falling 5% over the prior period. After exclusion of
realized investment gains in both periods, net of taxes and related items, per
share earnings were $2.87 in 1994, declining slightly from $2.88 in 1993. In
comparing period-over-period results, an adjustment should be made to take
into account certain nonrecurring energy-related items that added
approximately $.07 per share to 1993 earnings. Earnings for 1993 were also
reduced because legislation increasing the corporate income tax rate from 34%
to 35% resulted in a $.13 charge in the third quarter of 1993 to adjust
Torchmark's beginning of year tax liability.
Because of the disposition of approximately 73% of Vesta Insurance Group,
Inc. ("Vesta") in the fourth quarter of 1993, Vesta's operations should be
removed from Torchmark's 1993 operations when making comparisons with 1993.
Prior to the disposition, Vesta was a wholly-owned subsidiary of Torchmark and
Vesta's operations were consolidated with Torchmark's. Since that time,
Torchmark's remaining 27% interest in Vesta operations has been reported on
the equity method. Also, in comparing year-over-year results of operations,
three other unusual items should be noted. Operations in 1993 included a
$34.5 million pretax charge, or $22.8 million after-tax, for nonoperating
expense consisting of directors' and officers' liability, legal and litigation
costs, and guaranty fund assessments. Results for 1993 also included an
increase in after-tax earnings of $22.4 million for the adoption of two
required accounting standards concerning income taxes and post-retirement
health benefits. A final item was Torchmark's acquisition, on October 1,
1993, of the remaining shares of United Investors Management Company
("UIMCO"), representing approximately 17% of that company. Minority interests
in the earnings of UIMCO, which amounted to $10.7 million in the 1993 nine
months, were not deducted after the acquisition date.
Torchmark's revenues declined 11%, from $1.6 billion to $1.4 billion.
After exclusion of Vesta's revenues in 1993, revenues declined 4% from $1.5
billion to $1.4 billion. Adjusting for Vesta's operations, premium was flat
at $1.0 billion. Net investment income declined from $286 million to $244
million, or 15%. The decline in net investment income resulted from lower
returns on energy investments, a significant increase in tax-exempt
securities, which have lower pretax yields, and lower yields on invested
assets. Energy operations revenues declined 27% to $48 million because of the
sale of a large energy property in late 1993. A more in-depth discussion of
investment and energy operations follows under the appropriate captions. The
issuance of two new debt offerings in 1993 caused interest expense to increase
17% to $55 million in the 1994 period.
Life insurance. Life insurance in Torchmark companies had a profit margin of
28% for the nine months of 1994. Premium for life insurance grew 4% to $434
million in the first nine months of 1994. Annualized life premium in force
also rose 6% over the prior year and stood at $641 million at September 30,
1994. Sales of life insurance as measured by annualized premium issued
increased 9% to $105 million. Benefits as a percentage of premium increased
from 68.1% in 1993 to 69.5% in 1994, primarily as a result of increased
mortality on direct response business. Acquisition expense as a percentage of
premium was 14.4% in 1994, after a $5.8 million adjustment to deferred
acquisition expense in recognition of realized investment gains related to
interest-sensitive life insurance products. Acquisition expense as a
percentage of premium was 15.0% in 1993. Life insurance in force was $64.7
billion at September 30, 1994, an increase of 7% over the prior year.
Health insurance. The combined health insurance premium of Torchmark's
subsidiaries declined 4% to $578 million for the 1994 nine months. Annualized
health insurance premium in force declined $47 million to $787 million at
September 30, 1994, or 6% compared to the same date in 1993. Medicare
Supplement annualized premium in force, which represented over 74% of total
annualized health premium in force at September 30, 1994, declined from $604
million to $581 million over the same period. Annualized premium in force for
under-age-65 health insurance declined $24 million or 20% because Torchmark's
subsidiaries have reduced their exposure in the past several quarters due to
poor profit margins. Sales of Medicare Supplement products declined from $108
million of annualized premium issued in the 1993 nine months to $71 million in
1994. Sales of all individual health products for the nine months declined
from $140 million in 1993 to $95 million in 1994. The decline in Medicare
Supplement sales is thought to be primarily a result of the confusion
surrounding health care reform proposals as well as increased sales
competition. Torchmark is seeking approval in most states to sell an
attained-age Medicare Supplement product in an effort to meet competition and
increase sales.
Annuities. Policy charges for annuities were $9.6 million in the 1994 nine
months compared to $6.8 million for the 1993 nine months, an increase of 41%.
These charges are assessed against the annuity account balance periodically
for insurance risk, sales, administration, and surrender. Annuities are sold
on both a fixed and variable basis. The combined annuity deposit account
balance at September 30, 1994 was $1.4 billion, growing 17% over the past
year. Fixed annuities grew 2% to $796 million while variable annuities rose
43% to $649 million. Annuity collections were $175 million in the 1994
period, declining 6% over collections of $187 million in the 1993 period.
Investment. After adjusting for Vesta's investment income, Torchmark's
investment income for the 1994 nine months declined $41 million or 15% from
the 1993 period due to lower returns from energy investments, an increase in
holdings of tax-exempt securities, and lower yields on the investment
portfolio. Although a decline in yield was experienced, average invested
assets grew 3.9% during the same periods excluding Vesta. The decline in
returns from energy investments, which accounted for $25 million of the
decrease in investment income, was primarily a result of completion of the
development in late 1993 of the Black Warrior basin, a coalbed methane gas
investment in Alabama. In 1993, costs associated with this project were
capitalized as developmental costs. In 1994, all costs were charged as
incurred. Benefits from this development are derived from Section 29 tax
credits that are not reflected in investment income. Another factor in the
decline was lower energy prices in 1994.
The relative attractiveness of tax-exempt securities improved in 1994
because of the increase in corporate tax rates. While pretax returns on
tax-exempts are lower than taxables, net after-tax returns are higher.
Torchmark's holdings in tax-exempt securities represented 15% of total
investments at September 30, 1994, compared to 11% at year-end 1993.
Tax-equivalent investment income for the insurance companies, excluding energy
income and Vesta, was $260 million in the 1994 period compared to $258 million
for the 1993 nine months.
Declining interest rates during 1993 encouraged refinancing of mortgages,
causing increased GNMA prepayments in 1993 and early 1994. These funds were
then reinvested at the much lower prevailing rates, causing a reduction in
Torchmark's investment income in late 1993 and throughout 1994. It is
estimated that the increased GNMA repayments reduced investment income $19.5
million in the first nine months of 1994 and $5.4 million in the same period
of 1993, resulting in a period-over-period reduction of $14.1 million.
The rise in interest rates during the first nine months of 1994 allowed
Torchmark to invest new funds in slightly higher yielding investments than in
the comparable nine-month period of 1993. Torchmark's subsidiary insurance
companies made permanent acquisitions at an average tax-equivalent yield of
7.24% in the 1994 nine-month period compared to 6.73% in the 1993 period.
However, the increase in rates also caused the market value of Torchmark's
fixed-maturity investments to decline during 1994 resulting in a $201 million
writedown of shareholders' equity, net of related taxes and deferred
acquisition costs. At September 30, 1994, the book value of Torchmark's fixed
maturities was $4.5 billion, compared to $4.4 billion at year-end 1993. At
September 30, 1994, book value exceeded market by $161 million. The average
life of the investment portfolio was extended because of a reduction in
expected prepayments of mortgage-backed holdings and the acquisition of longer
term securities. At September 30, 1994, the average life of Torchmark's
subsidiary insurance company investment portfolios was 7.7 years, compared
with 6.0 years at year-end 1993.
Financial services. Financial services revenues grew 3.3% to $106 million
for the first six months of 1994 over the prior-year period. This increase
was achieved even though the maximum sales charge on the United Funds was
reduced in the third quarter of 1993 to improve competitive position. The
reduced sales charges were more than offset by a 13% growth in management fee
income to $53 million. Average assets under management increased 12% in the
1994 period versus the 1993 period. Assets under management were $14.7
billion at September 30, 1994, $14.5 billion at year-end 1993, and $13.8
billion at September 30, 1993. While these assets grew consistently during
1993, the higher interest rates experienced during the 1994 nine months caused
lower security values, which limited the 1994 growth in assets under
management. Investment product sales rose 1% to $925 million in the 1994 nine
months as United Fund sales declined 2% to $696 million, Waddell & Reed Fund
sales rose 35% to $87 million, and variable annuity sales declined 2% to $142
million. Financial services margins improved in the 1994 period over the
prior-year period. Financial services direct expenses decreased 9% over the
prior-year period to $32 million, declining to 29.8% of revenues in 1994
versus 33.8% in 1993. In addition, general and administrative expenses
decreased as a percentage of revenues from 15.7% in 1993 to 14.1% in 1994. A
major reason for the direct expense improvement was the implementation in late
1993 of a 12b-1 service fee by the United Funds which is used to reimburse
Waddell & Reed for some of its shareholder servicing expense.
Energy. Energy operations revenues for the first six months of 1994 declined
27% to $48 million. The reduction in property revenues resulting from the
disposition of $84 million in producing properties in the fourth quarter of
1993 accounted for the decline in energy revenues. Net revenues from product
marketing operations rose 111% in the 1994 period, rising to $14.5 million.
Expenses for energy operations declined in 1994, largely because of the
elimination of expenses related to the previously-mentioned disposed
properties. Profit margins for energy operations were stable year over year.
As a percentage of energy operations revenue, pretax operating income was
16.3% in the 1994 period compared to 16.7% in same period of 1993.
Financial Condition
Liquidity. Torchmark's liquidity is represented by a positive cash flow,
marketable investments, and the availability of a line of credit facility.
Torchmark's cash inflows from operations, after deduction of current operating
requirements, and including net cash inflows from deposit product operations
were $273 million in the first nine months of 1994 compared to $443 million in
the same period of 1993. In addition, Torchmark received $690 million in
fixed-maturity repayments during the 1994 period which were either scheduled
maturities or unscheduled GNMA principal repayments. Excess cash flow from
operations and investment sales is generally reinvested.
At September 30, 1994, Torchmark had $130 million in cash and short-term
investments, compared to $237 million at the end of the previous year. These
assets represented 1.7% of Torchmark's total assets at September 30, 1994. In
addition, Torchmark's entire portfolio of fixed-income and equity securities,
in the amount of $4.4 billion at market value on September 30, 1994, is
available for sale should a need arise.
Torchmark's line of credit facility provides credit up to a maximum
amount of $250 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, 1994. At that date, Torchmark had
outstanding $135 million on the facility.
Acquisition. On September 15, 1994, Torchmark and American Income Holding,
Inc. ("American Income") signed a definative merger agreement whereby
Torchmark agreed to acquire American Income for $35 per share or a total
purchase price of approximately $565 million. Under the agreement, Torchmark
commenced a cash tender for all the outstanding common shares of American
Income, subject to a minimum condition that Torchmark acquire at least 51% of
the shares and subject to regulatory approval. The offer and merger have been
approved by the directors of American Income. It is expected that the merger
will be completed in 1994. Torchmark plans to finance the acquisition by the
issuance of $200 million of preferred stock, $175 million of additional bank
debt, the sale of investments, and internally generated funds.
Capital resources. On October 11, 1994, Torchmark issued 8 million shares
$200 million face amount Cumulative Monthly Income Preferrred Securities,
Series A ("MIPS") at an annual dividend rate of 9.18%. The MIPS are subject
to a mandatory redemption in full at September 30, 2024, although Torchmark
may elect to extend the MIPS for up to an additional 20 years if certain
conditions are met. They are redeemable at Torchmark's option after September
30, 1999. While obligated to pay dividends at a fixed rate of 9.18%,
Torchmark subsequently entered into a ten-year interest-rate swap agreement
with an unaffiliated party whereby Torchmark agreed to pay a variable rate on
the $200 million face amount in exchange for payment of the fixed dividend.
Additionally, Torchmark acquired a five-year interest-rate cap on the swap
agreement that insures the variable rate cannot exceed 10.39%. At October 31,
1994, the variable rate was 6.64%. Net proceeds from the issue, which were
$193 million after issue expenses, will be used to acquire AIH.
Torchmark's debt outstanding rose from $899 million at year-end 1993 to
$947 million at September 30, 1994. The increase resulted from $28 million
additional borrowings on Torchmark's line of credit and $19 million of energy
borrowings. The percentage of debt to total capitalization was 43% at
September 30, 1994, compared to 39% at year-end 1993. The 4% increase in the
debt-to-capitalization ratio resulted partially from the increase in debt and
partially from a decline in shareholders' equity.
Torchmark's shareholders' equity was $1.26 billion at September 30, 1994,
decreasing $159 million or 11% since 1993 year end. The decline in equity was
a result of two factors. The first factor was share purchases. Acquisition
of the remaining outstanding Torchmark adjustable-rate preferred stock on
March 31, 1994 at a cost of $47 million resulted in a reduction in
shareholder's equity in the same amount. Acquisition of 1.5 million Torchmark
common shares during the period at a cost of $59 million caused a reduction in
shareholders' equity in the amount of that cost.
The second factor in the decline in shareholders' equity related to the
change in market value of Torchmark's fixed investments caused by the increase
in interest rates during the nine-month period ended September 30, 1994. This
decline in value resulted in a decrease in shareholders' equity of $201
million, net of the related adjustment to deferred acquistion costs and taxes.
Without the required market value writedown and the share repurchases,
shareholders' equity would have increased $149 million. Book value per share
was $17.60 at September 30, 1994, compared to $18.80 at December 31, 1993 and
$16.72 at September 30, 1993. Book value per share would have been $18.88 at
September 30, 1994 without the required market value writedown. Annualized
return on common equity was 20.7% for the 1994 nine-month period compared to
25.7% for the same period of 1993.
Item 1. Legal Proceedings
Torchmark and its subsidiaries continue to be named as parties to pending
or threatened legal proceedings. Many of these lawsuits involve claims for
punitive damages. In particular, Torchmark's subsidiary, Liberty National
Life Insurance Company ("Liberty National"), is a party to a number of such
actions which seek punitive damages in state courts of Alabama, a jurisdiction
particularly recognized for its large punitive damage verdicts. Some of such
actions involving Liberty National also name Torchmark as a defendant. As of
September 30, 1994, Liberty National was a party to approximately 132 active
lawsuits (excluding employment-related litigation, interpleaders and stayed
cases), more than 100 of which were Alabama proceedings in which punitive
damages were sought. Two of these cases in which punitive damages are sought
are scheduled for trial in Alabama state courts prior to December 31, 1994,
additional pending cases have not yet been scheduled for trial, and one case
is in trial as of the date of execution of this Form 10-Q in a state court in
Alabama. The frequency of large punitive damages awards bearing little or no
relation to actual damages continues to increase.
As previously reported in the Form 10-K for the fiscal year ended
December 31, 1993 and the Forms 10-Q for the first and second quarters of
1994, litigation was filed in May 1992 against Liberty National in the Circuit
Court for Barbour County, Alabama (Robertson v. Liberty National, Case No.:
CV-92-021). This suit was amended in October 1992 to include claims on behalf
of a class of Liberty National policyholders alleging fraud in the exchange of
certain cancer insurance policies. The complaint sought substantial equitable
and injunctive relief and unspecified compensatory and punitive damages. A
policyholder class was certified by the Barbour County Court in March 1993.
Additionally, subsequent to the class certification, a number of individual
lawsuits based on substantially the same allegations as in Robertson were
filed by plaintiffs in Alabama, Georgia, Florida and Mississippi. Four
additional class action suits also based upon substantially the same
allegations as in Robertson were filed in Mobile County, Alabama (Adair v.
Liberty National, Case No.: 93-958 and Lamey v. Liberty National, Case No.: CV
93-1256) and in Polk County, Florida (Howell v. Liberty National, Case No.:
GC-G 93-2023 and Scott v. Liberty National, Case No.: GC-G 93-2415) after the
class certification. Lamey, Howell and Scott have been settled on an
individual basis. Adair is presently stayed as to those claims pending the
outcome of Robertson.
On October 25, 1993, a jury in the Circuit Court for Mobile County,
Alabama rendered a one million dollar verdict ($1,000 actual damages) against
Liberty National in McAllister v. Liberty National, Case No.: CV-92-4085, one
of twenty-five suits involving cancer policy exchanges which were filed prior
to class certification in the Barbour County litigation and therefore were
excluded from the Robertson class action. Liberty National filed appropriate
post-judgment motions and has appealed the McAllister verdict. Previously,
another judge in the Mobile County Court had granted a summary judgment in
favor of Liberty National in another substantially similar suit in which no
cancer claims had been submitted (Boswell v. Liberty National, Case No.:
CV-92-3342), which was appealed to the Alabama Supreme Court. On May 13,
1994, the Alabama Supreme Court reversed and remanded Boswell. The Court held
the plaintiffs had alleged injury or damages in the form of the additional
policy premium payments and these allegations were sufficient to withstand a
motion to dismiss the complaint. Following this order and pending a petition
for rehearing, the Boswell case was settled. Including the McAllister case,
only four of the preclass certification individual cancer exchange cases
remained active as of September 30, 1994.
As reported previously, a fairness hearing was held on January 20, 1994,
in the Robertson cancer policy exchange class action. Prior to that hearing,
class members had been mailed notice of the hearing and the proposed
settlement.
On February 4, 1994, the Circuit Court for Barbour County, Alabama ruled
that with a $16 million increase in the total value of the equitable and
monetary relief contained in the proposed Robertson settlement (from
approximately $39 million to $55 million in total value), the settlement would
be fair and would be approved, provided that the parties to the litigation
accepted the amended settlement within fourteen days of the issuance of the
ruling. On February 17, 1994, the Court extended for two weeks the period for
filing objections to or accepting the court's order conditionally approving
the class action settlement. On February 22, 1994, the Court entered an order
in the Robertson litigation, which delayed any final decision on the proposed
class action settlement and various motions to modify it (including motions to
delete Torchmark from the settlement release), pending certain specified
discovery to be completed within 90 days from the date the order was entered.
In the order, the Court directed limited additional discovery regarding
whether Torchmark had any active involvement in the cancer policy exchanges.
Pending completion of limited additional discovery, the Court reserved
jurisdiction and extended the deadline for acceptance or rejection of the
modifications set forth in the February 4, 1994 order. On May 6, 1994, the
Court entered an order in the Robertson litigation setting a hearing on May
19, 1994, on all outstanding motions in that case.
On May 26, 1994, the Barbour County Court entered an Order and Final
Judgment in the Robertson litigation, making final the findings and
conclusions of its February 4, 1994 Order. That Order has been accepted by
the parties to the action. The discovery regarding the propriety of
Torchmark's release by the settlement agreement was concluded prior to the
entry of the Order and Final Judgment, and Torchmark was included in the
release given on behalf of the class.
In connection with orders of the Barbour County Circuit Court, the $55
million proposed amended settlement charge was provided for in Torchmark's
1993 financial reports.
On July 5, 1994, certain intervenors in the Robertson litigation filed a
notice of appeal of the Order and Final Judgment approving class certification
and the settlement with the Supreme Court of Alabama. The appeal is currently
pending.
Purported class action litigation was filed in December 1993 against
Liberty National in the Circuit Court for Mobile County, Alabama asserting
fraud and misrepresentation in connection with exclusionary provisions of
accident and hospital accident policies sold to persons holding multiple
accident policies (Cofield v. Liberty National Life Insurance Company, Case
No.: CV-93-3667). A hearing on class certification in Cofield has been
postponed and has not been rescheduled.
On March 17, 1994, litigation was filed against Liberty National, a
subsidiary of Torchmark, certain officers and present and former directors of
Torchmark, and KPMG Peat Marwick, independent public accountants of Torchmark
and its subsidiaries, in the Circuit Court for Marion County, Alabama (Miles
v. Liberty National, Civil Action No. CV-94-67). The lawsuit asserts that it
is brought on behalf of a class composed of the shareholders of Torchmark.
The complaint alleges a failure to timely and adequately report alledgedly
material contingent liabilities arising out of insurance policy litigation
involving Liberty National. Compensatory and punitive damages in an
unspecified amount are sought.
In April 1994, the complaint in Miles was amended to add an additional
shareholder plaintiff and to name Torchmark as a defendant. A motion for
recusal of the trial judge is presently pending in the Miles. A second
similar action (Oakley v. Torchmark, Case No. CV-94-47) was filed on August
16, 1994 in the Circuit Court for Bibb County, Alabama. No class has
currently been certified. Torchmark, Liberty National and the individual
defendants intend to vigorously defend these actions.
In July 1994, a purported class action alleging fraudulent and deceitful
practices in premium billing and lapses of coverage on a payroll deduction
insurance plan was filed in the Superior Court for Gordon County, Georgia
against Liberty National (Bryant v. Liberty National, Civil Action No.
28979). The complaint alleges actual damages in excess of $10 million and
punitive damages of not less than $50 million as well as premium
reimbursements. No class has been certified and no proceedings of any
materiality have occurred in this case. Liberty National has removed this
case to federal court. Additionally, Liberty National had filed a declaratory
judgment action essentially seeking an accounting in this matter in the U.S.
District Court for the Northern District of Georgia on the same day Bryant was
filed. Liberty National intends to vigorously defend the Bryant action.
Also in July 1994, a purported class action (Bosarge v. Liberty National,
Case No.: CV-94-2177) was filed against Liberty National and Torchmark in the
Circuit Court for Mobile County, Alabama which alleges that Liberty National
agents have made misrepresentations in connection with converting policyholder
accounts to bank budget from other modes of premium payment. The lawsuit
claims that agents have represented that insureds would receive additional
"free insurance" if they changed to bank budget payment while charges for such
"free insurance" were actually made through bank budget payments. Injunctive
relief and unspecified actual and punitive damages are sought. No class has
been certified and no proceedings of any materiality have occurred in this
case. Liberty National intends to vigorously defend this action.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibits 11 - Computation of Earnings per share
(b) Reports on Form 8-K
(i) A Form 8-K dated September 29, 1994 reporting the execution of
a definitive Agreement and Plan of Merger, pursuant to which a
Torchmark subsidiary commenced a cash tender offer for all the
outstanding common stock of American Income Holding, Inc.
("American Income") was filed in the third quarter of 1994.
Financial statements filed as a part of this Form 8-K included:
(a) historical Consoldiated Financial Statements of American
Income as of December 31, 1992 and 1993 and for each of
the three years ended December 31, 1993;
(b) historical Consolidated Financial Statements of American
Income as of June 30, l994 and for the three-month and
six-month periods ended June 30, 1994; and
(c) Pro Forma Consolidated Condensed Financial Statements
(Unaudited) of Torchmark and American Income.
(ii) A Form 8-K dated September 30, 1994 was filed to submit as an
exhibit the Torchmark Capital L.L.C. Underwriting Agreement
Standard Provisions (Preferred Securities), dated September 30,1994.
No financial statements were required to be attached to this Form
8-K.
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: 11/10/94 /s/ R. K. Richey
___________________________________
R. K. Richey, Chairman and Chief Executive
Officer
Date: 11/10/94 /s/ Gary L. Coleman
___________________________________
Gary L. Coleman, Vice-President and
Chief Accounting Officer
Exhibit 11. Statement re computation of per share earnings.
TORCHMARK CORPORATION
COMPUTATION OF EARNINGS PER SHARE
Three months ended September 30,
1994 1993
------------- -------------
Net income $64,698,569 $64,411,934
Preferred dividends 0 (823,014)
------------- -------------
Net income available to common $64,698,569 $63,588,920
============= =============
Weighted average shares and common
stock equivalents outstanding 71,613,568 73,669,921
============= =============
Primary earnings per share:
Net income $0.90 $0.86
============= =============
Nine months ended September 30,
1994 1993
------------- -------------
Net income $205,173,114 $216,147,172
Preferred dividends (804,130) (2,467,384)
------------- -------------
Net income available to common $204,368,984 $213,679,788
============= =============
Weighted average shares and common
stock equivalents outstanding 72,286,441 73,645,671
============= =============
Primary earnings per share:
Net income $2.83 $2.90
============= =============
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