<PAGE>
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 March 31, 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 APRIL 30, 1998
Common Stock, 140,253,268
$1.00 Par Value
Index of Exhibits (Page 18)
Total number of pages included are 19.
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<TABLE>
<CAPTION>
TORCHMARK CORPORATION
INDEX
Page
------
<S> <C> <C>
Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated 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 6
PART II. OTHER INFORMATION
Item 6. Exhibits And Reports on Form 8-K 18
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TORCHMARK CORPORATION
CONSOLIDATED BALANCE SHEET
(Amounts in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Assets:
Investments:
Fixed maturities, available for sale, at fair value
(amortized cost: 1998 - $6,064,878;
1997 - $5,646,397) $6,283,171 $5,859,668
Equity securities, at fair value
(cost: 1998 - $3,284; 1997 - $3,284) 13,945 12,404
Mortgage loans, at cost (estimated fair value:
1998 - $86,699; 1997 - $79,096) 86,578 78,974
Investment real estate, at depreciated cost 171,332 167,297
Policy loans 223,693 221,703
Other long-term investments (at fair value) 81,849 75,445
Short-term investments 239,749 122,917
----------- -----------
Total investments 7,100,317 6,538,408
Cash 44,181 25,766
Investment in unconsolidated subsidiaries 113,489 102,305
Accrued investment income 107,654 100,392
Other receivables 146,372 126,599
Deferred acquisition costs 1,391,600 1,371,131
Value of insurance purchased 219,767 216,988
Property and equipment 49,001 49,158
Goodwill 521,818 525,564
Other assets 34,380 34,541
Separate account assets 2,104,836 1,876,439
----------- -----------
Total assets $11,833,415 $10,967,291
=========== ===========
Liabilities and Shareholders' Equity:
Liabilities:
Future policy benefits $5,074,346 $5,023,763
Unearned and advance premiums 84,121 83,722
Policy claims and other benefits payable 194,971 228,754
Other policyholders' funds 81,450 82,224
----------- -----------
Total policy liabilities 5,434,888 5,418,463
Accrued income taxes 451,562 415,984
Short-term debt 435,373 347,152
Long-term debt (estimated fair value:
1998 - $431,254 ; 1997 - $600,319) 393,971 564,298
Other liabilities 379,910 219,020
Separate account liabilities 2,104,836 1,876,439
----------- -----------
Total liabilities 9,200,540 8,841,356
Monthly income preferred securities (estimated
fair value: 1998 - $207,040 ; 1997 - $210,500) 193,214 193,199
Shareholders' equity:
Preferred stock 0 0
Common stock 147,967 143,220
Additional paid-in capital 614,242 187,731
Unrealized investment gains, net of tax 143,353 136,926
Retained earnings 1,765,787 1,699,409
Treasury stock, at cost (231,688) (234,550)
----------- -----------
Total shareholders' equity 2,439,661 1,932,736
----------- -----------
Total liabilities and shareholders' equity $11,833,415 $10,967,291
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- 1 -
<PAGE>
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited and in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
REVENUE:
Life premium $236,211 $222,360
Health premium 189,811 187,600
Other premium 6,995 5,730
--------- ---------
Total premium 433,017 415,690
Financial services revenue 56,693 48,363
Net investment income 114,579 103,446
Realized investment gains (losses) (3,173) (10,831)
Other income 388 214
--------- ---------
Total revenue 601,504 556,882
BENEFITS AND EXPENSES:
Life policyholder benefits 154,013 144,956
Health policyholder benefits 119,840 114,701
Other policyholder benefits 13,171 13,424
--------- ---------
Total policyholder benefits 287,024 273,081
Amortization of deferred acquisition costs 57,334 56,523
Commissions and premium taxes 35,935 35,982
Financial services selling expense 14,213 12,327
Other operating expense 39,313 37,660
Amortization of goodwill 3,744 3,744
Interest expense 18,338 17,874
--------- ---------
Total benefits and expenses 455,901 437,191
Income before income taxes and
equity in earnings of unconsolidated affiliates 145,603 119,691
Income taxes (52,491) (43,456)
Equity in earnings of unconsolidated subsidiaries 4,258 3,482
Monthly income preferred securities dividend (2,471) (2,389)
Minority interest (1,981) 0
--------- ---------
Net income $92,918 $77,328
======== ========
Basic net income per share $0.66 $0.55
======== ========
Diluted net income per share $0.66 $0.55
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- 2 -
<PAGE>
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited and in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Net income $92,918 $77,328
Other comprehensive income:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period 5,406 (117,800)
Less: reclassification adjustment for (gains) losses
on securities included in net income 2,156 11,122
Less: reclassification adjustment for amortization of
discount and premium (1,000) 206
------- -------
Unrealized gains (losses) on securities 6,562 (106,472)
Unrealized gains (losses) on other investments 3,099 2,610
Unrealized gains (losses) on deferred acquisition costs (140) 10,996
Foreign exchange translation adjustments 198 (709)
------- -------
Other comprehensive income (loss), before tax 9,719 (93,575)
Income (tax) benefit related to other
comprehensive income (loss) (3,292) 32,938
------- -------
Other comprehensive income (loss) 6,427 (60,637)
------- -------
Comprehensive income $99,345 $16,691
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- 3 -
<PAGE>
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW
(Amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash provided from operations $146,342 $129,692
Cash provided from (used for) investment activities:
Investments sold or matured:
Fixed maturities available for sale - sold 51,565 238,219
Fixed maturities available for sale - matured, called,
and repaid 102,246 100,604
Other long-term investments 3,852 12,471
--------- ---------
Total investments sold or matured 157,663 351,294
Investments acquired:
Fixed maturities (573,476) (401,871)
Other long-term investments (21,603) (27,235)
--------- ---------
Total investments acquired (595,079) (429,106)
Net decrease (increase) in short-term investments (116,832) (141,126)
Proceeds from sale of discontinued energy operations 0 25,502
Disposition of properties 241 250
Additions to properties (1,344) (1,029)
--------- ---------
Cash used for investment activities (555,351) (194,215)
Cash provided from (used for) financing activities:
Issuance of common stock 2,170 9,438
Proceeds from W&R public offering 516,014 0
Additions to debt 0 46,591
Repayments of debt (82,236) (65)
Acquisition of treasury stock 0 0
Cash dividends paid to shareholders (20,918) (22,404)
Net receipts from deposit product operations 12,394 16,914
--------- ---------
Cash used for financing activities 427,424 50,474
Net increase (decrease) in cash 18,415 (14,049)
Cash at beginning of year 25,766 18,272
--------- ---------
Cash at end of period $44,181 $4,223
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- 4 -
<PAGE>
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, 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 March 31, 1998, and
the consolidated results of operations for the periods ended March 31, 1998, and
1997.
NOTE B - 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.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OPERATING RESULTS
Torchmark has provided certain precautionary language concerning forward-
looking statements contained in statements made by or on behalf of the company,
whether written or oral, in its Form 10-K for the fiscal year ended December 31,
1997, which is on file with the Securities and Exchange Commission. The
following should be read in conjunction with such precautionary language.
For the first quarter of 1998, Torchmark's net operating income was $95
million, a 13% increase over the prior year. Net operating income is net income
excluding after-tax realized investment gains and losses and the associated
adjustment to deferred acquisition costs. On a per-share basis, Torchmark's
diluted operating earnings were $.67 for the 1998 quarter, compared with $.60 a
year earlier, an increase of 12%. Basic earnings per share were $.68 per share,
13% 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 $93 million
in the 1998 period, compared with $77 million in the same period for 1997. Net
income was affected by an after-tax realized investment loss of $2 million in
the 1998 period, compared with a loss of $7 million in 1997. The realized losses
in both periods 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 20% to $.66 in the first quarter of 1998, compared
with $.55 in the prior-year period. Net income per basic share was the same as
diluted in both periods.
Operating revenues, or revenues excluding realized investment gains and
losses, rose 7% to $605 million in the first three months of 1998. Total
premium increased 4% to $433 million. Torchmark's net investment income rose 11%
to $115 million in the 1998 quarter. Financial services revenues gained 17% to
$57 million.
Torchmark's operating expense increased 4% to $39 million in the 1998
quarter from $38 million in the prior year first quarter. However, as a
percentage of operating revenue, operating expenses fell from 6.6% in the 1997
period to 6.5%.
6
<PAGE>
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 and less the financing cost of Torchmark's debt and
Monthly Income Preferred Securities ("MIPS").
<TABLE>
<CAPTION>
SUMMARY OF INSURANCE NET OPERATING INCOME
(Dollar amounts in thousands)
Three months
Ended March 31, Increase
-------------------- ----------------
1998 1997 Amount %
--------- --------- ----------- ---
<S> <C> <C> <C> <C>
Insurance underwriting income before
other income and administrative
expense:
Life $ 64,255 $ 59,079 $ 5,176 9
Health 35,881 37,861 (1,980) (5)
Annuity 4,941 4,361 580 13
--------- --------- -----------
Total 105,077 101,301 3,776 4
Other income 944 715 229 32
Insurance administrative expense (26,769) (26,767) (2) 0
--------- --------- -----------
Net underwriting income 79,252 75,249 4,003 5
Excess investment income 47,005 31,114 15,891 51
Corporate expense and other (4,829) (5,785) 956 (17)
Income taxes (41,214) (34,424) (6,790) 20
--------- --------- -----------
Insurance net operating income $ 80,214 $ 66,154 $14,060 21
</TABLE>
7
<PAGE>
Life insurance. Torchmark's life insurance premium income rose 6% to $236
million in the first quarter of 1998, from $222 million in the same quarter last
year. The following table presents Torchmark's life insurance premium and policy
charges by distribution method.
<TABLE>
<CAPTION>
LIFE INSURANCE
PREMIUM BY DISTRIBUTION METHOD
(Dollar amounts in thousands)
Three months ended March 31,
--------------------------------------
1998 1997 Increase
----------------- ------------------- -------------------
% of % of
Amount Total Amount Total Amount %
--------- ------- ---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Liberty National Exclusive Agency $ 70,654 30 $ 70,226 31 $ 428 1
United American Independent Agency 9,365 4 8,916 4 449 5
United American Exclusive Agency 4,623 2 4,406 2 217 5
Direct Response 53,377 23 46,487 21 6,890 15
American Income Exclusive Agency 49,889 21 46,170 21 3,719 8
Military Independent Agency 21,816 9 18,718 8 3,098 17
United Investors Exclusive Agency 19,620 8 19,403 9 217 1
Other 6,867 3 8,034 4 (1,167) (15)
--------- ------- ---------- -------- ----------
Total Premium $ 236,211 100 $ 222,360 100 $ 13,851 6
</TABLE>
Life insurance underwriting income before administrative expenses was $64
million in the first quarter of 1998, growing 9% 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.
<TABLE>
<CAPTION>
LIFE INSURANCE
SUMMARY OF RESULTS
(Dollar amounts in thousands)
Three months ended March 31,
------------------------------------
1998 1997 Increase
---------------- ---------------- ---------------
% to % to
Amount Total Amount Total Amount %
--------- ------ --------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Premium and policy charges $ 236,211 100 $ 222,360 100 $ 13,851 6
Net policy obligations 96,392 41 90,780 41 5,612 6
Commissions and acquisition expense 75,564 32 72,501 33 3,063 4
--------- --------- --------
Insurance underwriting income before
other income and administrative
expenses $ 64,255 27 $ 59,079 27 $ 5,176 9
</TABLE>
8
<PAGE>
Annualized life premium in force grew 6% over the prior-year quarter and
was $1.02 billion at March 31, 1998, compared with $961 million a year earlier.
Life insurance sales, in terms of annualized premium issued, were $59 million in
the 1998 first quarter, increasing 10% over 1997 sales of $54 million. The
following presents Torchmark's life insurance sales and in force data by
distribution method.
<TABLE>
<CAPTION>
LIFE INSURANCE ANNUALIZED PREMIUM SALES AND IN FORCE
(Dollar amounts in thousands)
SALES IN FORCE
---------------------------------------- ---------------------------------------------
Three months
Ended March 31, Increase At March 31, Increase
--------------------- --------------- --------------------- -----------------------
1998 1997 Amount % 1998 1997 Amount %
---------- ---------- --------- ----- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liberty Exclusive Agency $ 10,439 $ 9,753 $ 686 7 $ 298,184 $ 296,785 $ 1,399 0
UA Independent Agency 2,157 3,637 (1,480) (41) 41,752 40,519 1,233 3
UA Exclusive Agency 1,324 1,984 (660) (33) 20,888 20,754 134 1
Direct Response 24,178 18,077 6,101 34 242,330 211,007 31,323 15
American Income Agency 12,882 12,681 201 2 206,245 191,375 14,870 8
Military Agency 4,263 3,928 335 9 89,518 77,290 12,228 16
UI Exclusive Agency 2,943 2,654 289 11 89,760 85,862 3,898 5
Other Distribution 775 1,091 (316) (29) 32,532 37,815 (5,283) (14)
--------- -------- ------- ---------- --------- ----------
Total Life $ 58,961 $ 53,805 $ 5,156 10 $1,021,209 $ 961,407 $ 59,802 6
</TABLE>
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 1998, this
distribution method generated $24 million in annualized premium issued, compared
with $18 million in 1997, an increase of 34%. Direct Response annualized
premium in force rose 15% over the prior year to $242 million at March 31, 1998.
Premium income grew 15% to $53 million in the 1998 first quarter. 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 at 17% to $22 million. It also recorded a 9% increase in annualized
premium issued of $4.3 million for the first quarter. This agency consists of
former military officers who sell exclusively to military officers and their
families.
9
<PAGE>
The Liberty National Exclusive Agency distribution system represented the
largest component of life premium at 30% or $71 million in the 1998 period.
Life sales for this agency grew 7% to $10 million in the 1998 first quarter.
The American Income Agency produced sales of $13 million in annualized life
premium in the quarter, an increase of 2%. This distribution system focuses on
members of labor unions, credit unions, and other associations.
Health insurance. Health insurance premium increased 1% from $188 million
in the first quarter of 1997 to $190 million in the same period of 1998. The
table below is an analysis of Torchmark's health premium by distribution method.
<TABLE>
<CAPTION>
HEALTH INSURANCE
PREMIUM BY DISTRIBUTION METHOD
(Dollar amounts in thousands)
Three months ended March 31,
------------------------------------
1998 1997 Increase
---------------- ------------------ ------------------
% to % to
Amount Total Amount Total Amount %
--------- ------ --------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Liberty National Exclusive Agency $ 33,649 18 $ 30,637 16 $ 3,012 10
United American Independent Agency 107,224 56 111,510 60 (4,286) (4)
United American Exclusive Agency 35,242 19 32,760 17 2,482 8
Direct Response 2,259 1 1,487 1 772 52
American Income Exclusive Agency 11,437 6 11,206 6 231 2
--------- ------ --------- ------- ----------
Total Premium $ 189,811 100 $ 187,600 100 $ 2,211 1
</TABLE>
Underwriting margins for health insurance, or underwriting income as a
percentage of premium, declined from 20% in the first quarter of 1997 to 19% in
the first quarter of 1998 as a result of increases in policy obligation ratios.
The following table presents underwriting margin data for health insurance.
10
<PAGE>
<TABLE>
<CAPTION>
HEALTH INSURANCE
SUMMARY OF RESULTS
(Dollar amounts in thousands)
Three months ended March 31,
-------------------------------------
1998 1997 Increase
----------------- ------------------ ---------------
% of % of
Amount Total Amount Total Amount %
---------- ------ ---------- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Total premium $ 189,811 100 $ 187,600 100 $ 2,211 1
Net policy obligations 114,573 60 108,550 58 6,023 6
Commissons and
acquisition expense 39,357 21 41,189 22 (1,832) (4)
---------- ---------- ----------
Insurance underwriting income before
other income and administrative
expenses $ 35,881 19 $ 37,861 20 $ (1,980) (5)
</TABLE>
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. The underwriting margins for
health insurance for the first quarter of 1998 were consistent with these
margins for the full calendar year of 1997.
Annualized health insurance premium in force grew 1% to $771 million at March
31, 1998. The table below is a presentation of health insurance sales and in
force data.
<TABLE>
<CAPTION>
HEALTH INSURANCE ANNUALIZED PREMIUM SALES AND IN FORCE
(Dollar amounts in thousands)
SALES IN FORCE
---------------------------------------------- -------------------------------------------
Three months
Ended March 31, Increase At March 31, Increase
----------------------- ----------------- ------------------------ ---------------------
1998 1997 Amount % 1998 1997 Amount %
---------- ----------- --------- ------ ----------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UA Independent Agency $ 11,631 $ 9,523 $ 2,108 22 $ 433,963 $ 448,843 $ (14,880) (3)
UA Exclusive Agency 12,733 9,639 3,094 32 148,097 136,216 11,881 9
Liberty Exclusive Agency 2,618 3,204 (586) (18) 136,447 129,980 6,467 5
American Income Agency 2,295 2,336 (41) (2) 43,739 42,357 1,382 3
Direct Response 1,871 589 1,282 218 9,063 5,471 3,592 66
---------- --------- -------- ---------- --------- ---------
Total Premium $ 31,148 $ 25,291 $ 5,857 23 $ 771,309 $ 762,867 $ 8,442 1
</TABLE>
11
<PAGE>
Cancer annualized premium in force at Liberty National rose 7% to $136
million, primarily as a result of premium rate increases. Medicare Supplement
annualized premium in force grew slightly to $534 million at March 31, 1998 and
represented over 69% of health premium in force on that date.
Sales of health insurance, as measured by annualized premium issued, grew
23% to $31 million in the 1998 quarter. Medicare Supplement sales rose over 33%
in the 1998 first quarter to $22 million. Growth in Medicare Supplement sales
accounted for $5.5 million of the $5.9 million total growth in annualized health
premium issued. 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 were $2.4 million in 1998, declining 1%, while other health product
sales increased 6% to $6.9 million.
Annuities. The following table presents underwriting margin data for
Torchmark's annuities.
<TABLE>
<CAPTION>
ANNUITIES
SUMMARY OF RESULTS
(Dollar amounts in thousands)
Three months
Ended March 31, Increase
------------------------- -----------------
1998 1997 Amount %
----------- ------------ --------- -------
<S> <C> <C> <C> <C>
Premium and policy charges $ 6,995 $ 5,730 $ 1,265 22
Net policy obligations (3,070) (2,962) (108) 4
Commissions and
acquisition expense 5,124 4,331 793 18
---------- ----------- ------- -------
Insurance underwriting income before
other income and administrative
expenses $ 4,941 $ 4,361 $ 580 13
</TABLE>
Annuities are sold on both a fixed and a variable basis. Fixed annuity
collections were $17 million in the 1998 quarter, compared with $20 million
collected in the prior period, a decline of 13%. Collections of variable
annuities were $47 million in the 1998 period, declining 2% from variable
collections of $48 million in 1997. Fixed annuities on deposit with Torchmark
grew 3% to over $1 billion at March 31, 1998. The variable annuity
12
<PAGE>
balance on deposit rose 41% during the past twelve months, boosted in large part
by the strength in financial markets. This balance was $2.04 billion at March
31, 1998, compared with $1.45 billion a year ago. Policy charges for annuities
for the 1998 three months were $7.0 million, compared with $5.7 million for the
1997 period, an increase of 22%. 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 13% from $4.4 million in the 1997 period to $4.9 million in 1998.
Investment. On a tax equivalent basis, net investment income from insurance
operations was $122 million in the first quarter of 1998, compared with $105
million in the same quarter of 1997. The 1998 amount includes $6.7 million
received on inter-segment financing with W&R related to the March, 1998 initial
public offering. Excess investment income, which is tax equivalent net
investment income reduced by interest credited to net policy liabilities and
less financing costs, is summarized in the following table.
<TABLE>
<CAPTION>
INSURANCE OPERATIONS
EXCESS INVESTMENT INCOME
(Dollars in thousands)
Three months
Ended March 31, Increase
-------------------------- --------------------
1998 1997 Amount %
------------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Net investment income $ 119,800 $ 102,538 $ 17,262 17
Tax equivalency adjustment 2,675 2,311 364 16
------------ ----------- ----------
Tax equivalent investment income 122,475 104,849 17,626 17
Required interest on net insurance (53,330) (52,186) (1,144) 2
policy liabilities
Financing costs (22,140) (21,549) (591) 3
------------ ----------- ----------
Excess investment income $ 47,005 $ 31,114 $ 15,891 51
</TABLE>
The increase in investment income resulted from the increase in mean
invested assets over the prior period. Mean invested assets at amortized cost
increased to $6.8 billion for the 1998 quarter, a 14% increase over the prior
period. Asset increases have recently been attributable to the accumulation of
life insurance reserves, but the increase during this period was also impacted
by $481 million in funds representing Torchmark's portion of proceeds received
from the initial public offering of W&R.
The lower interest-rate environment during the first quarter of 1998 caused
yields on new investments to be less attractive when contrasted with the prior
year. During the
13
<PAGE>
first quarter of 1998, new investments in the amount of $552 million were made
at an average yield of 7.21%. This compares with an average yield of 7.34% on
$397 million of new investments made during the same period of 1997. 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 quarter of 1998 was 22.8 years, compared with 9.4 years for the same
period last year.
With new fixed income investments being made at yields below the average
portfolio yield of 7.51%, the fixed maturity portfolio had an estimated annual
return of 7.47% by the end of the first quarter of 1998. At March 31, 1998, the
portfolio had an 8.2 year average life and an effective duration of 5.2 years,
compared with 7.6 years and 4.8 years, respectively, a year ago. Largely due to
the continued decline 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 the first quarter of 1998. Other comprehensive income resulting
from security value fluctuations on a pretax basis was income in 1998 of $7
million, compared with a loss of $106 million in 1997.
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. Torchmark used the $481 million proceeds to pay down short-
term debt and to invest in fixed maturity investments. 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 are
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 grew 17% to $57 million
for the first quarter of 1998 over the prior period. Asset management fees, the
largest component of financial services revenues, rose 19% to $32 million from
$27 million. These fees are
14
<PAGE>
based on the amount of assets under management. Average assets under management
rose 25% in the 1998 quarter versus the same 1997 period. Assets under
management were $25.9 billion at March 31, 1998, $23.4 billion at year-end 1997,
and $19.0 billion at March 31, 1997. Commission revenues from investment product
sales rose 13% to $20 million in the 1998 period from $18 million for the prior
period. Investment product sales were $403 million in the 1998 quarter, as
compared with $362 million in the same period of 1997, an increase of 12%.
Commissions from the sale of insurance products were $3.5 million in the 1998
quarter, compared with $3.4 million in the 1997 quarter. Service fees increased
3% to $7.8 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.
The following table presents an analysis of asset management operations.
<TABLE>
<CAPTION>
ASSET MANAGEMENT
SUMMARY OF RESULTS
(Dollar amounts in thousands)
Three months
Ended March 31, Increase
------------------------ ---------------------
1998 1997 Amount %
------------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Management fees $ 32,426 $ 27,337 $ 5,089 19
Underwriting revenue 23,461 21,089 2,372 11
Service fees 7,773 7,538 235 3
Investment income 1,432 908 524 58
------------- ---------- -----------
Total revenue 65,092 56,872 8,220 14
Underwriting expense 20,419 18,477 1,942 11
Other expense 10,216 8,195 2,021 25
------------- ---------- -----------
Total expense 30,635 26,672 3,963 15
Pretax operating income 34,457 30,200 4,257 14
Intercompany interest (6,653) 0 (6,653) N/A
Other intercompany expense 0 (449) 449 (100)
Income taxes (11,057) (11,537) 480 (4)
------------- ---------- -----------
Net income $ 16,747 $ 18,214 $ (1,467) (8)
</TABLE>
Pre-tax operating income as a percentage of total revenue was 53% in the
1998 quarter, compared with 52% in the 1997 quarter. Operating income excludes
intercompany interest with Torchmark in the amount of $6.7 million of expense in
1998 and $968 thousand of income in 1997. Net income for the asset management
segment was $16.7 million in 1998 including the after-tax effect of the
intercompany interest, compared with $18.2 million in 1997. Torchmark has also
deducted $2.0 million in earnings
15
<PAGE>
attributable to the 36% minority interests in W&R that Torchmark did not own for
the period after the initial public offering.
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 $146 million in the first quarter of 1998, compared with $130
million in the same period of 1997, a 13% increase. In addition to cash flows
from operations, Torchmark received $102 million in investment maturities or
repayments during the 1998 period.
Torchmark's cash and short-term investments were $284 million at the end of
March, 1998, rising 91% over the $149 million of these assets at December
31, 1997. Cash and short-term investments represented 2.4% of total assets at
end of the first quarter of 1998. In addition, Torchmark's entire portfolio
of fixed-income and equity securities, in the amount of $6.3 billion at market
value on March 31, 1998, is available for sale should a need arise.
Torchmark has in place a line of credit facility, which is also designed as
a backup credit line for a commercial paper program. This program provides
credit up to a maximum amount of $600 million, and permits Torchmark to borrow
from either the credit line or issue commercial paper at any time up to the
combined facility maximum of $600 million. Terms of the facility permit
borrowing up to the maximum amount at variable interest rates. Torchmark is
subject to certain covenants regarding capitalization and earnings, with which
Torchmark was in full compliance at March 31, 1998. At that date, Torchmark had
commercial paper outstanding in the amount of $77 million and no borrowings on
the line of credit. At December 31, 1997, $139 million in commercial paper was
outstanding. Subsequent to March 31, 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.
Capital resources. Torchmark's total debt outstanding was $829 million at
March 31, 1998, compared with $911 million at December 31, 1997 and $879 million
at March 31, 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 redemption of debt will be recorded in the second quarter of
1998 in the after-tax amount of $6 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. The carrying amount of Torchmark's Senior Notes and Sinking Fund
Debentures are
16
<PAGE>
included along with the commercial paper in short-term debt. 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.
Torchmark's shareholders' equity was $2.44 billion on March 31, 1998,
compared with $1.93 billion at 1997 year end and $1.64 billion one year ago.
The March 31, 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 $17.39 at quarter end, compared with $13.80 at year-end
1997 and $11.70 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 $2.31 billion at March 31, 1998, compared
with $1.81 billion at 1997 year end and $1.66 billion a year ago. On a per
share basis, book value was $16.47 at the end of March, 1998, compared with
$12.90 at year-end 1997 and $11.88 at March 31, 1997. The annualized return on
common equity, excluding the effects of securities at market value and realized
investment gains and losses, declined to 19.5% for the 1998 period from 20.7%.
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 25% at March 31, 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 March 31, 1997.
Interest coverage was 8.9 for the 1998 quarter, compared with 7.7 for the prior
quarter.
17
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Statement re computation of per share earnings
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the first quarter of 1998
18
<PAGE>
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: March 31, 1998 /s/ C. B. Hudson
__________________________
C. B. Hudson, Chairman of the
Board, President, & Chief
Executive Officer
Date: March 31, 1998 /s/ Gary L. Coleman
__________________________
Gary L. Coleman, Vice President
And Chief Accounting Officer
19
<PAGE>
Exhibit 11. Statement re computation of per share earnings.
TORCHMARK CORPORATION
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1997
----------- -----------
<S> <C> <C>
Net income 92,918,000 77,328,000
Preferred dividends 0 0
----------- -----------
Net income available to common shareholders $92,918,000 $77,328,000
=========== ===========
Basic weighted average shares and
common stock equivalents outstanding 140,204,774 139,611,722
Diluted weighted average shares and
common stock equivalents outstanding 141,697,167 141,562,894
Basic net income per share $0.66 $0.55
=========== ===========
Diluted net income per share $0.66 $0.55
=========== ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 6,283,171
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 13,945
<MORTGAGE> 86,578
<REAL-ESTATE> 171,332
<TOTAL-INVEST> 7,100,317
<CASH> 44,181
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,611,367
<TOTAL-ASSETS> 11,833,415
<POLICY-LOSSES> 5,074,346
<UNEARNED-PREMIUMS> 84,121
<POLICY-OTHER> 194,971
<POLICY-HOLDER-FUNDS> 81,450
<NOTES-PAYABLE> 829,344
193,214
0
<COMMON> 147,967
<OTHER-SE> 2,291,694
<TOTAL-LIABILITY-AND-EQUITY> 11,833,415
433,017
<INVESTMENT-INCOME> 114,579
<INVESTMENT-GAINS> (3,173)
<OTHER-INCOME> 57,081
<BENEFITS> 287,024
<UNDERWRITING-AMORTIZATION> 57,334
<UNDERWRITING-OTHER> 111,543
<INCOME-PRETAX> 145,603
<INCOME-TAX> 52,491
<INCOME-CONTINUING> 92,918
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 92,918
<EPS-PRIMARY> .66
<EPS-DILUTED> .66
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
