<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 June 30, 1999 Commission File Number 1-8052
TORCHMARK CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 63-0780404
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2001 3/rd/ 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, 1999
Common Stock, 133,047,661
$1.00 Par Value
Index of Exhibits (Page 28)
Total number of pages included are 29.
<PAGE>
<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 4
Consolidated Statement of Cash Flow 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 6. Exhibits and Reports on Form 8-K 28
</TABLE>
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
TORCHMARK CORPORATION
CONSOLIDATED BALANCE SHEET
(Amounts in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
Assets:
Investments:
Fixed maturities, available for sale, at fair value
(amortized cost: 1999 - $5,641,207;
1998 - $5,519,772) $ 5,583,495 $ 5,768,447
Equity securities, at fair value
(cost: 1999 $33,766; 1998 - $2,256) 30,750 9,843
Mortgage loans, at cost (estimated fair value:
1999 - $94,444; 1998 - $124,191) 94,326 124,072
Investment real estate, at depreciated cost 133,404 164,644
Policy loans 236,294 233,765
Other long-term investments (at fair value) 47,222 35,976
Short-term investments 40,701 75,844
------------- ------------
Total investments 6,166,192 6,412,591
Cash 13,747 4,920
Investment in unconsolidated subsidiaries 0 31,510
Accrued investment income 103,036 99,279
Other receivables 137,332 130,279
Deferred acquisition costs 1,678,786 1,502,511
Value of insurance purchased 160,425 170,640
Property and equipment 40,392 39,080
Goodwill 408,621 414,658
Other assets 20,099 18,298
Separate account assets 2,621,628 2,425,262
------------- ------------
Total assets $ 11,300,258 $ 11,249,028
============= ============
Liabilities and Shareholders' Equity:
Liabilities:
Future policy benefits $ 4,726,498 $ 4,595,567
Unearned and advance premiums 90,631 85,923
Policy claims and other benefits payable 203,674 194,965
Other policyholders' funds 81,661 81,568
------------- ------------
Total policy liabilities 5,102,464 4,958,023
Accrued income taxes 381,190 511,311
Short-term debt 398,238 355,392
Long-term debt (estimated fair value:
1999 - $392,668, 1998 - $430,431 371,494 383,422
Other liabilities 171,718 162,831
Separate account liabilities 2,621,628 2,425,262
------------- ------------
Total liabilities 9,046,732 8,796,241
Monthly income preferred securities (estimated
fair value: 1999 - $202,000; 1998 - $205,040) 193,291 193,259
Shareholders' equity:
Preferred stock 0 0
Common Stock 147,801 147,801
Additional paid-in capital 612,178 610,925
Accumulated other comprehensive income (44,321) 144,501
Retained earnings 1,814,666 1,707,933
Treasury stock, at cost (470,089) (351,632)
------------- ------------
Total shareholders' equity 2,060,235 2,259,528
------------- ------------
Total liabilities and shareholders' equity $ 11,300,258 $ 11,249,028
============= ============
</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 Six Months Ended
June 30, June 30,
--------------------- ------------------------
1999 1998 1999 1998
--------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue:
Life premium $ 255,357 $ 241,111 $ 506,698 $ 477,322
Health premium 204,502 189,480 407,544 379,291
Other premium 10,151 8,773 18,532 15,768
--------- --------- ---------- -----------
Total premium 470,010 439,364 932,774 872,381
Net investment income 110,538 117,881 221,934 237,681
Realized investment gains (losses) (78,803) (1,854) (85,919) (5,027)
Other income 5,483 657 5,949 1,045
--------- --------- ---------- -----------
Total revenue 507,228 556,048 1,074,738 1,106,080
Benefits and expenses:
Life policyholder benefits 166,730 159,603 329,652 313,616
Health policyholder benefits 133,554 120,521 265,207 240,361
Other policyholder benefits 8,434 11,702 17,305 24,873
--------- --------- ---------- -----------
Total policyholder benefits 308,718 291,826 612,164 578,850
Amortization of deferred acquisition costs 62,082 57,755 121,652 115,089
Commissions and premium taxes 35,117 35,660 69,749 71,465
Other operating expense 28,371 29,460 57,597 60,174
Amortization of goodwill 3,019 3,019 6,037 6,037
Interest expense 12,750 14,472 25,326 32,810
--------- --------- ---------- -----------
Total benefits and expenses 450,057 432,192 892,525 864,425
Income before income taxes and
equity in earnings of Vesta 57,171 123,856 182,213 241,655
Income taxes (18,640) (48,272) (61,045) (89,706)
Equity in earnings of Vesta 0 0 0 4,258
Adjustments to carrying value of Vesta 0 (20,234) 0 (20,234)
Monthly income preferred securities dividend (net of tax) (2,225) (2,468) (4,514) (4,939)
--------- --------- ---------- -----------
Net income from continuing operations 36,306 52,882 116,654 131,034
Discounted operations of Waddell & Reed:
Income from operations (net of tax) 0 15,222 0 29,988
Loss on disposal (tax) (1,060) 0 (1,060) 0
--------- --------- ---------- -----------
Net income before extraordinary item and cumulative
effect of change in accounting principle 35,246 68,104 115,594 161,022
Loss on redemption of debt (less applicable tax
benefit of $2,672) 0 (4,962) 0 (4,962)
--------- --------- ---------- -----------
Net income before cumulative effect of change in
accounting principle 35,246 63,142 115,594 156,060
Cumulative effect of change in accounting principle
(less applicable tax of $8,661) 0 0 16,086 0
--------- --------- ---------- -----------
Net Income $ 35,246 $ 63,142 $ 131,680 $ 156,060
========= ========= ========== ===========
</TABLE>
(Continued on following page)
2
<PAGE>
<TABLE>
<CAPTION>
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited and in thousands except per share data)
(Continued)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic earnings per share:
Net income from continuing operations $0.27 $0.38 $0.87 $0.93
Discontinued operations of Waddell & Reed:
Income from operations (net of tax) 0.00 0.11 0.00 0.22
Loss on disposal (tax) (0.01) 0.00 (0.01) 0.00
----- ----- ----- -----
Net income before extraordinary item and cumulative
effect of change in accounting principle 0.26 0.49 0.86 1.15
Loss on redemption of debt (less applicable tax benefit) 0.00 (0.04) 0.00 (0.04)
----- ----- ----- -----
Net income before cumulative effect of change in
accounting principle 0.26 0.45 0.86 1.11
Cumulative effect of change in accounting principle
(less applicable tax) 0.00 0.00 0.12 0.00
----- ----- ----- -----
Net income $0.26 $0.45 $0.98 $1.11
===== ===== ===== =====
Diluted earnings per share:
Net income from continuing operations $0.27 $0.37 $0.86 $0.92
Discontinued operations of Waddell & Reed:
Income from operations (net of tax) 0.00 0.11 0.00 0.22
Loss on disposal (tax) (0.01) 0.00 (0.01) 0.00
----- ----- ----- -----
Net income before extraordinary item and cumulative
effect of change in accounting principle 0.26 0.48 0.85 1.14
Loss on redemption of debt(less applicable tax benefit) 0.00 (0.03) 0.00 (0.04)
----- ----- ----- -----
Net income before cumulative effect of change in
accounting principle 0.26 0.45 0.85 1.10
Cumulative effect of change in accounting principle
(less applicable tax) 0.00 0.00 0.12 0.00
----- ----- ----- -----
Net Income $0.26 $0.45 $0.97 $1.10
===== ===== ===== =====
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited and in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -----------------------------
1999 1998 1999 1998
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net income $ 35,246 $63,142 $131,680 $156,060
Other comprehensive income:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period (182,725) 23,787 (327,963) 29,193
Less: reclassification adjustment for gains (losses)
on securities included in net income 7,930 (1,249) 10,391 907
Less: reclassification adjustment for amortization of
discount and premium (45) (934) (282) (1,934)
Less: foreign exchange adjustment on securities
marked to market (371) 903 (931) 903
------------ ------------ ------------- -------------
Unrealized gains (losses) on securities (175,211) 22,507 (318,785) 29,069
Unrealized gains (losses) on other investments (47) (12,387) (15) (9,288)
Unrealized gains (losses) on deferred acquisition costs 16,469 (1,501) 27,172 (1,641)
Foreign exchange translation adjustments 716 (1,058) 1,339 (860)
------------ ------------ ------------- -------------
Other comprehensive income (loss), before tax (158,073) 7,561 (290,289) 17,280
Income tax benefit (expense) related to other
comprehensive income (loss) 55,565 (2,726) 101,467 (6,018)
------------ ------------ ------------- -------------
Other comprehensive income (loss) (102,508) 4,835 (188,822) 11,262
------------ ------------ ------------- -------------
Comprehensive income (loss) ($67,262) $67,977 ($57,142) $167,322
============ ============ ============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW
(Unaudited and in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash provided from operations $ 192,420 $ 194,062
Cash provided from (used for) investment activities:
Investments sold or matured:
Fixed maturities available for sale - sold 512,885 251,039
Fixed maturities available for sale - matured, called, and repaid 242,041 231,657
Other long-term investments 29,809 11,250
---------- ----------
Total investments sold or matured 784,735 493,946
Investments acquired:
Fixed maturities (886,730) (1,089,068)
Other long-term investments (35,359) (57,072)
---------- ----------
Total investments acquired (922,089) (1,146,140)
Net decrease (increase) in short-term investments 35,135 (50,497)
Disposition of properties 6,586 749
Additions to properties (5,233) (1,595)
---------- ----------
Cash used for investment activities (100,866) (703,537)
Cash provided from (used for) financing activities:
Issuance of common stock 1,205 2,727
Proceeds from W&R public offering 0 516,014
Offering proceeds retained by Waddell & Reed 0 (35,251)
Proceeds from sale of Family Service 0 140,388
Additions to debt 42,920 279,319
Repayments of debt (12,058) (380,070)
Acquisition of treasury stock (120,588) 0
Cash dividends paid to shareholders (24,344) (42,626)
Net receipts from deposit product operations 30,138 22,516
---------- ----------
Cash provided from (used for) financing activities: (82,727) 503,017
Net increase (decrease) in cash 8,827 (6,458)
Cash at beginning of year 4,920 11,085
---------- ----------
Cash at end of period $ 13,747 $ 4,627
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note A - Accounting Policies
The accompanying consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q. Therefore, they do not include
all of the disclosures required by generally accepted accounting principles.
However, in the opinion of management, these statements include all adjustments,
consisting of normal recurring accruals, which are necessary for a fair
presentation of the consolidated financial position at June 30, 1999, and the
consolidated results of operations for the periods ended June 30, 1999 and 1998.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
Note B - Business Segments
Torchmark's segments are based on the insurance product lines it markets
and administers: life insurance, health insurance, and annuities. There is also
an investment segment, which manages the investment portfolio, debt, and cash
flow for the insurance segments and the corporate function. The measure of
profitability for insurance segments is underwriting income before other income
and administrative expenses. It represents the gross profit margin on insurance
products before administrative expenses and is calculated by deducting net
policy obligations, acquisition expenses, and commissions from premium revenue.
The measure of profitability for the investment segment is excess investment
income, which represents the income earned on the investment portfolio in excess
of net policy requirements and financing costs associated with debt and
Torchmark's Monthly Income Preferred Securities ("MIPS"). The tables below set
forth revenue (excluding realized investment losses) and measure of
profitability by segment as well as reconciliations from the total measures of
profitability to pretax operating income for the six-month periods ended June
30, 1999 and June 30, 1998, respectively.
Selected Segment Information
(Amounts in thousands)
<TABLE>
<CAPTION>
Six months ended June 30, 1999
--------------------------------------------------------------------------------------------------
Life Health Annuity Investment Other Adjustments Consolidated
--------- ---------- --------- ---------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Premium $ 506,698 $ 407,544 $ 18,532 $ 932,774
Net investment income $ 227,448 $ (5,514) 221,934
Other income $ 1,802 (956) 846
Intersegment revenue -
required interest on net
policy obligations 67,524 2,878 16,921 (87,323) 0
--------- ---------- -------- ---------- ------- ----------- ------------
Total revenue* $ 574,222 $ 410,422 $ 35,453 $ 140,125 $ 1,802 $ (6,470) $ 1,155,554
========= ========== ======== ========== ======= =========== ============
Measure of profitability:
Underwriting income
before other income and
administrative expense $ 133,148 $ 70,441 $ 11,987 $ 215,576
Excess investment income $ 107,854 107,854
Total measure of --------- ---------- -------- ---------- ------- ----------- ------------
profitability $ 133,148 $ 70,441 $ 11,987 $ 107,854 $ 0 $ 0 $ 323,430
========= ========== ======== ========== ======= =========== ============
</TABLE>
* excludes realized investment gains (losses)
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
Selected Segment Information
(Amounts in thousands)
<TABLE>
<CAPTION>
Six months ended June 30, 1998
--------------------------------------------------------------------------------------------------
Life Health Annuity Investment Other Adjustments Consolidated
--------- ---------- --------- ---------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Premium $ 477,322 $ 379,291 $ 15,768 $ 872,381
Net investment income $ 242,985 $ (5,304) 237,681
Other income $ 2,151 (1,106) 1,045
Intersegment revenue -
required interest on net
policy obligations 72,691 4,719 27,137 (104,547) 0
--------- ---------- -------- ---------- ------- ----------- ------------
Total revenue* $ 550,013 $ 384,010 $ 42,905 $ 138,438 $ 2,151 $ (6,410) $ 1,111,107
========= ========== ======== ========== ======= =========== ============
Measure of profitability:
Underwriting income
before other income and
administrative expense $ 127,267 $ 70,884 $ 11,144 $ 209,295
Excess investment income $ 98,030 98,030
--------- ---------- -------- ---------- ------- ----------- ------------
Total measure of
profitability $ 127,267 $ 70,884 $ 11,144 $ 98,030 $ 0 $ 0 $ 307,325
========= ========== ======== ========== ======= =========== ============
</TABLE>
* Excludes realized investment losses and the gain from the sale of equipment
Reconciliation of Measure of Profitablity to Pretax Operating Income
(Amounts in thousands)
<TABLE>
<CAPTION>
For the six months ended
June 30,
------------------------
1999 1998
----------- ----------
<S> <C> <C>
Total measure of profitablity $ 323,430 $ 307,325
Administrative expense (52,421) (52,106)
Parent expense (5,176) (6,945)
Tax equivalent adjustment (5,514) (5,304)
Other income 1,802 2,151
Goodwill amortization (6,037) (6,037)
Realized losses (85,919) (5,027)
Gain on sale of equipment 5,103 0
Add back pretax cost of MIPS 6,945 7,598
----------- ----------
Operating income before taxes $ 182,213 $ 241,655
=========== ==========
</TABLE>
8
<PAGE>
Note C - Change in Accounting Principle
Torchmark has in place a swap agreement with an unaffiliated party whereby
Torchmark pays a variable dividend rate on its $200 million face amount
outstanding MIPS in exchange for payment of a 9.18% fixed dividend. In the
second quarter of 1999, Torchmark changed its method of accounting for this swap
agreement to recognize changes in its fair value, net of tax, as realized
investment gains or losses. This method of accounting for such instruments is
believed to be preferable under the guidance established by Statement of
Financial Accounting Standards No. 80, "Accounting for Futures Contracts ("SFAS
80") and the Securities and Exchange Commission. Previously, Torchmark accounted
for the swap using hedge accounting under SFAS 80. The after-tax cumulative
effect of the change at January 1, 1999 of $16.1 million (net of income taxes of
$8.7 million) is included in income of the six months ended June 30, 1999. The
effect of the change on the three months ended June 30, 1999, was to increase
realized losses which decreased income from continuing operations by $4.4
million ($.03 per diluted share). The effect of the change on the six months
ended June 30, 1999 was to increase realized losses which decreased income from
continuing operations by $7.4 million ($.05 per diluted share) excluding the
cumulative effect of the change in accounting principle. The pro forma effect of
the retroactive application of the new accounting method to the three and six
month periods ended June 30, 1998 would be to increase net income by $700
thousand ($.01 per diluted share) and $742 thousand ($.01 per diluted share),
respectively.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Cautionary statements. Torchmark cautions readers regarding certain
forward-looking statements contained in the following discussion and elsewhere
in this document, and in any other statements made by, or on behalf of Torchmark
whether or not in future filings with the Securities and Exchange Commission.
Any statement that is not a historical fact, or that might otherwise be
considered an opinion or projection concerning Torchmark or its business,
whether express or implied, is meant as and should be considered a
forward-looking statement. Such statements represent management's opinions
concerning future operations, strategies, financial results or other
developments.
Forward-looking statements are based upon estimates and assumptions that
are subject to significant business, economic and competitive uncertainties,
many of which are beyond Torchmark's control. If these estimates or assumptions
prove to be incorrect, the actual results of Torchmark may differ materially
from the forward-looking statements made on the basis of such estimates or
assumptions. Whether or not actual results differ materially from forward-
looking statements may depend on numerous foreseeable and unforeseeable events
or developments, which may be national in scope, related to the insurance
industry generally, or applicable to Torchmark specifically. Such events or
developments could include, but are not necessarily limited to:
1) Deteriorating general economic conditions leading to increased lapses
and/or decreased sales of Torchmark's policies;
2) Regulatory developments, including changes in governmental regulations
(particularly those impacting taxes and changes to the Federal
Medicare program that would affect Medicare Supplement insurance);
3) Financial markets trends that adversely affect sales of Torchmark's
market-sensitive products;
4) Interest rate changes that adversely affect product sales and/or
investment portfolio yield;
5) Increased pricing competition;
6) Adverse litigation results;
7) Adverse Year 2000 compliance results;
8) Developments involving Vesta Insurance Group, Inc., ("Vesta");
9) The inability of Torchmark to achieve the anticipated levels of
administrative and operational efficiencies;
10) The customer response to new products and marketing initiatives;
11) Adverse levels of mortality, morbidity, and utilization of healthcare
services relative to Torchmark's assumptions; and
12) The inability of Torchmark to obtain timely and appropriate premium
rate increases.
10
<PAGE>
Results of Operations
Divestitures. In the analysis and comparison of Torchmark's operating
results with the prior period, the divestitures of Waddell & Reed and Family
Service in 1998 should be taken into account. Waddell & Reed, formerly a wholly-
owned asset management subsidiary of Torchmark, completed an initial public
offering in March, 1998 of approximately 36% of its shares. Offering proceeds to
Torchmark were $481 million, net of amounts retained by Waddell & Reed. In
November, 1998 Torchmark distributed to its shareholders the remaining 64% of
the Waddell & Reed shares through a tax-free spin-off. As a result of this spin-
off, Torchmark retained no further ownership interest in Waddell & Reed. The
divestiture of Waddell & Reed was accounted for as the disposal of a segment.
Therefore, Torchmark's share of the operating results of Waddell & Reed prior to
its divestiture are included in discontinued operations of the disposed segment.
Family Service is a preneed funeral insurer which was a wholly-owned
subsidiary of Torchmark. It was sold on June 1, 1998 for $140 million in cash.
Family Service's operations are included with Torchmark's until the date of
sale. However, in the following discussion of operating segments, the insurance
operating results of Family Service have been removed from Torchmark's ongoing
insurance operations for comparability.
Operating Results. Torchmark management computes a classification of income
called "net operating income from continuing operations." Net operating income
from continuing operations is the measure of income Torchmark's management
focuses on to evaluate the performance of the operations of the company. It
excludes unusual and nonrecurring income or loss items which distort operating
trends.
The following items were excluded from net income in order to compute net
operating income from continuing operations:
1) Realized investment gains and losses and the related adjustment to
deferred acquisition costs, net of tax;
2) The net income from the discontinued operations of Waddell & Reed;
3) Torchmark's pro rata share of the income or losses related to Vesta;
4) The loss on redemption of debt, net of tax;
5) The gain from the sale of equipment, net of tax; and
6) The effect of a change in accounting principle, which modified the
accounting for an interest rate swap instrument.
11
<PAGE>
The following table presents earnings and earnings per share data for
Torchmark.
Earnings and Earnings Per Share
(Dollar amounts in thousands, except for per share data)
<TABLE>
<CAPTION>
For the six months ended
June 30, %
------------------------
1999 1998 Change
---------- --------- ------
<S> <C> <C> <C>
Net operating income from continuing
operations:
Amount $ 169,184 $158,146 7.0
Per Share:
Basic 1.26 1.13 11.5
Diluted 1.25 1.12 11.6
Net income:
Amount 131,680 156,060 (15.6)
Per Share:
Basic 0.98 1.11 (11.7)
Diluted 0.97 1.10 (11.8)
</TABLE>
Operating revenues exclude realized investment gains and losses. They also
exclude the one-time gain of $5.1 million from the sale of corporate equipment.
Operating revenues rose 4% to $1.16 billion in the first half of 1999. Total
premium increased 7% to $933 million and net investment income declined 7% to
$222 million in the 1999 period. Torchmark's operating expense declined 4% to
$58 million in 1999 in spite of the revenue growth. As a result, operating
expense as a percentage of operating revenues for the first six months decreased
from 5.4% in 1998 to 5.0% in 1999.
12
<PAGE>
The following table is a summary of Torchmark's net operating income from
continuing operations by component. 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 the financing cost of Torchmark's debt and Monthly Income Preferred
Securities ("MIPS").
Summary of Net Operating Income from Continuing Operations
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Six months
Ended June 30, Increase
---------------------------- ----------------------
1999 1998 Amount %
------------ ----------- ------------- ------
<S> <C> <C> <C> <C>
Insurance underwriting income before
other income and administrative
expense:
Life $ 133,148 $ 125,080 $ 8,068 6
Health 70,441 70,884 (443) (1)
Annuity 11,987 11,046 941 9
------------ ----------- -------------
Total 215,576 207,010 8,566 4
Other income 1,802 2,151 (349) (16)
Administrative expense (52,421) (51,214) (1,207) 2
------------ ----------- -------------
Insurance underwriting income excluding
Family Service 164,957 157,947 7,010 4
Insurance underwriting income - Family Service 0 1,393 (1,393) (100)
Excess investment income 107,854 98,030 9,824 10
Corporate expense (5,176) (6,945) 1,769 (25)
Goodwill amortization (6,037) (6,037) 0 0
Tax equivalency adjustment (5,514) (5,304) (210) 4
------------ ----------- -------------
Pretax insurance net operating income 256,084 239,084 17,000 7
Income tax (86,900) (80,938) (5,962) 7
------------ ----------- -------------
Net operating income from continuing operations $ 169,184 $ 158,146 $ 11,038 7
============ =========== =============
Net operating income from continuing operations
per diluted share $ 1.25 $ 1.12 12
============ ===========
</TABLE>
A discussion of Torchmark's operations by segment follows.
13
<PAGE>
Life insurance. Torchmark's life insurance premium income rose 7% to $507
million in the first six months of 1999. The following table presents
Torchmark's life insurance premium and policy charges by distribution method.
Life Insurance
Premium by Distribution Method
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------------------------
1999 1998 Increase
--------------------- --------------------- ----------------
% of % of
Amount Total Amount Total Amount %
---------- -------- ---------- -------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Liberty National Exclusive Agency $ 144,339 29 $ 141,531 30 $ 2,808 2
Direct Response 123,675 24 109,539 23 14,136 13
American Income Exclusive Agency 107,069 21 100,868 21 6,201 6
Military Independent Agency 50,788 10 44,484 9 6,304 14
United Investors Agency 41,984 8 39,941 9 2,043 5
United American Independent Agency 18,625 4 18,661 4 (36) 0
United American Exclusive Agency 9,654 2 9,320 2 334 4
Other 10,564 2 10,486 2 78 1
---------- -------- ---------- -------- ---------
Total life premium excluding Family Service 506,698 100 474,830 100 31,868 7
---------- ---------- ---------
Family Service 0 2,492 (2,492)
---------- ---------- ---------
Total life premium including Family Service $ 506,698 $ 477,322 $ 29,376 6
========== ========== =========
</TABLE>
14
<PAGE>
Annualized life premium in force was $1.10 billion at June 30, 1999,
rising 6% over $1.04 billion in force a year earlier. Life insurance sales, in
terms of annualized premium issued, were $129 million in the 1999 six-month
period, increasing 6% over 1998 same-period sales of $122 million. The
following table presents Torchmark's life insurance sales and in force data by
distribution method.
Life Insurance
Annualized Premium Sales and In Force
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Sales In Force
----------------------------------------- ---------------------------------------------
Six months
Ended June 30, Increase At June 30, Increase
----------------------- -------------- --------------------------- ---------------
1999 1998 Amount % 1999 1998 Amount %
--------- ------------ ---------- --- ---------- ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Direct Response $ 49,429 $ 48,217 $ 1,212 3 $ 274,902 $ 252,087 $ 22,815 9
Liberty Exclusive Agency 26,314 22,174 4,140 19 306,595 300,027 6,568 2
AI Exclusive Agency 25,929 27,405 (1,476) (5) 222,998 210,681 12,317 6
Military Independent Agency 8,878 8,774 104 1 105,383 93,027 12,356 13
United Investors Agency 7,949 6,418 1,531 24 100,899 90,966 9,933 11
UA Independent Agency 5,634 4,528 1,106 24 41,473 41,256 217 1
UA Exclusive Agency 2,731 2,626 105 4 21,714 21,026 688 3
Other Distribution 2,246 1,863 383 21 26,611 26,486 125 0
--------- ------------ -------- ---------- ---------- --------
Total life $129,110 $122,005 $ 7,105 6 $1,100,575 $1,035,556 $ 65,019 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. Direct
Response sales increased 3% to $49 million in the first half of 1999, compared
with $48 million in the same period of 1998. Annualized premium in force for
this distribution method rose 9% over the prior-year period to $275 million at
June 30, 1999, and premium income grew 13% to $124 million in the 1999 six
months. The $14 million growth in Direct Response premium income and the $23
million increase in annualized premium in force were the largest increases of
any Torchmark distribution channel, respectively, in terms of dollar amount.
In addition to sales and premium growth, the Direct Response operation
provides support to other Torchmark marketing agencies by providing sales
leads and agent recruiting, which has contributed indirectly to premium growth
in those agencies.
15
<PAGE>
The Liberty National Exclusive Agency distribution system represented the
largest component of life premium at 29% or $144 million in the 1999 six-month
period. Life insurance sales for this agency grew 19% to $26 million of
annualized premium issued in the 1999 period. While the number of Liberty
agents, which was 1,826 at June 30, 1999, did not increase from a year earlier,
agent productivity rose in 1999 over 1998.
Torchmark's Military Agency produced the greatest percentage increase in
premium income at 14% to $51 million. It also recorded a 13% increase in
annualized life premium in force which was $105 million at June 30, 1999.
Military Agency sales rose 1% to $8.9 million in the 1999 period. This agency
consists of former military officers who sell exclusively to military officers
and their families.
The American Income Agency focuses on members of labor unions, credit
unions, and other associations. This agency produced premium income of $107
million in the first half of 1999, an increase of 6%. While life sales were down
5% to $26 million for the six months of 1999 compared with the same period of
1998, life sales of $13.5 million in the 1999 second quarter increased 9% over
first quarter 1999 sales. Annualized life premium in force rose 6% to $223
million at June 30, 1999. The decline in sales is reflective of the decline in
the number of agents which was 1,160 at June 30, 1999, down 18% from 1,409 a
year earlier. Management is implementing changes to this agency structure to
focus on recruiting and retaining new agents.
The United Investors Exclusive Agency had annualized life premium in force
of $101 million at June 30, 1999, an increase of 11%. Annualized life premium
issued rose 24% to $7.9 million.
The United American Independent Agency grew life sales by 24% to $5.6
million in the 1999 period. It had $41 million annualized premium in force at
the June quarter end. This agency has benefited from the Direct Response
operation marketing support.
16
<PAGE>
Life Insurance
Summary of Results
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------------------------
1999 1998 Increase
------------------ -------------------- ------------------
% to % to
Amount Total Amount Total Amount %
--------- --------- ---------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Premium and policy charges $ 506,698 100 $ 474,830 100 $ 31,868 7
Net policy obligations 217,129 43 201,315 43 15,814 8
Commissions and
acquisition expense 156,421 31 148,435 31 7,986 5
--------- --------- --------
Insurance underwriting income before
other income and administrative
expenses, excluding Family Service 133,148 26 125,080 26 8,068 6
Family Service insurance underwriting
income before other income and
administrative expense 0 2,187 (2,187)
--------- --------- --------
Insurance underwriting income before
other income and administrative expense $ 133,148 $ 127,267 $ 5,881
========= ========= ========
</TABLE>
Life insurance underwriting income before administrative expenses excluding
Family Service was $133 million in the first six months of 1999, growing 6% over
the same period in 1998. As a percentage of premium, underwriting income was 26%
in both periods.
17
<PAGE>
Health insurance. Health insurance premium income rose 7% from $379 million
in the first six months of 1998 to $408 million in the same period of 1999. The
table below is an analysis of Torchmark's health premium by distribution method.
Health Insurance
Premium by Distribution Method
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Six months ended June 30,
------------------------------------------
1999 1998 Increase
------------------ -------------------- ----------------
% to % to
Amount Total Amount Total Amount %
--------- ------- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
United American Independent Agency $ 215,645 53 $212,760 56 $ 2,885 1
United American Exclusive Agency 91,892 23 72,158 19 19,734 27
Liberty National Exclusive Agency 70,858 17 66,979 18 3,879 6
American Income Exclusive Agency 23,397 6 23,088 6 309 1
Direct Response 5,752 1 4,306 1 1,446 34
--------- ----- -------- ------ --------
Total Premium $ 407,544 100 $379,291 100 $ 28,253 7
========= ======== ========
</TABLE>
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)
<TABLE>
<CAPTION>
Sales In Force
------------------------------------------- -----------------------------------------------
Six months
Ended June 30, Increase At June 30, Increase
--------------------- ------------------ -------------------------- -----------------
1999 1998 Amount % 1999 1998 Amount %
-------- -------- ----------- ---- ----------- ----------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UA Exclusive Agency $ 47,270 $ 28,419 $ 18,851 66 $ 203,193 $ 156,268 $ 46,925 30
UA Independent Agency 30,951 24,177 6,774 28 440,028 432,592 7,436 2
Liberty Exclusive Agency 5,045 5,931 (886) (15) 153,624 135,623 18,001 13
AI Exclusive Agency 3,883 4,799 (916) (19) 44,438 44,081 357 1
Direct Response 2,396 2,788 (392) (14) 12,205 9,046 3,159 35
-------- -------- ----------- ----------- ----------- ---------
Total Premium $ 89,545 $ 66,114 $ 23,431 35 $ 853,488 $ 777,610 $ 75,878 10
======== ======== =========== =========== =========== =========
</TABLE>
18
<PAGE>
Annualized health insurance premium in force grew 10% to $853 million at
June 30, 1999. Sales of health insurance, as measured by annualized premium
issued, grew 35% to $90 million in the 1999 six months. Medicare Supplement
sales rose 52% in the 1999 period to $71 million, accounting for all of the
growth in Torchmark's total health sales. Medicare Supplement products are sold
by Torchmark's United American Independent and Exclusive Agencies. Both of these
agencies have experienced growth in agency size over the prior year. An
additional factor in the increased Medicare Supplement sales was the support
obtained from Torchmark's Direct Response operation in providing these agencies
with leads and assistance in agent recruiting. Annualized Medicare Supplement
premium in force was $600 million at June 30, 1999, rising 11% from a year
earlier. Medicare Supplement represented 70% of Torchmark's total health premium
in force at the end of the 1999 June quarter.
Cancer sales, produced primarily by the Liberty National Agency, were $5.3
million in the 1999 six months, increasing 4% from the prior-year period. Cancer
annualized premium in force rose 16% to $157 million, primarily as a result of
premium rate increases. Other health product sales declined 9% to $13 million in
the 1999 period.
The following table presents underwriting margin data for health insurance.
Health Insurance
Summary of Results
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------------------------
1999 1998 Increase
--------------------- -------------------- -----------------
% of % of
Amount Total Amount Total Amount %
---------- ------ --------- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Premium and policy charges $ 407,544 100 $ 379,291 100 $ 28,253 7
Net policy obligations 256,309 63 230,028 60 26,281 11
Commissions and
acquisition expense 80,794 20 78,379 21 2,415 3
---------- --------- --------
Insurance underwriting income before
other income and administrative
expenses $ 70,441 17 $ 70,884 19 $ (443) (1)
========== ========= ========
</TABLE>
Underwriting margins for health insurance, or underwriting income as a
percentage of premium, declined from 19% in the first half of 1998 to 17% in the
same period of 1999 as a result of a 3% increase in policy obligation ratios.
The increase in obligations was due primarily to an increasing loss ratio on a
block of Liberty National's cancer insurance.
19
<PAGE>
Premium rate increases are being sought to offset these cost increases. A major
rate increase went into effect in May, 1999, the full benefit of which will not
be recognized until later in 1999. Also, requests for additional increases in
1999 and future periods are possible to address the decline in the margins for
this block of cancer insurance. In Torchmark's Medicare Supplement business,
underwriting income as a percentage of premium is restrained by federally
mandated loss ratios and market competition.
Annuities. The following table presents collection and balance information
about Torchmark's annuities.
Annuities
Collections and Deposit Balances
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Collections Deposit Balances
-------------------------------------------- ------------------------------------------------
Six Months
Ended June 30, Increase At June 30, Increase
------------------------ ---------------- ------------------------- ------------------
1999 1998 Amount % 1999 1998 Amount %
---------- ---------- --------- ---- ----------- ----------- --------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed $ 33,500 $ 29,276 $ 4,224 14 $ 657,732 $ 618,018 $ 39,714 6
Variable 187,581 116,950 70,631 60 2,584,970 2,136,878 448,092 21
---------- ---------- --------- ----------- ----------- ---------
Total $ 221,081 $ 146,226 $ 74,855 51 $ 3,242,702 $ 2,754,896 $ 487,806 18
========== ========== ========= =========== =========== =========
</TABLE>
Annuities are sold on both a fixed and a variable basis. Fixed annuity
collections were $34 million in the first six months of 1999, compared with $29
million collected in the prior period, an increase of 14%. Fixed annuities on
deposit with Torchmark rose 6% to $658 million. Collections of variable
annuities were $188 million in the 1999 period, increasing 60% over variable
collections of $117 million in the first six months of 1998. The variable
annuity balance on deposit rose 21% during the past twelve months. This balance
was $2.6 billion at June 30, 1999, $2.3 billion at December 31, 1998, and $2.1
billion a year ago. The low interest environment which has resulted in strong
financial markets in recent months has had a positive impact on the variable
account balance and has been a major factor in increased variable annuity sales.
20
<PAGE>
The following table presents underwriting margin data for Torchmark's
annuities.
Annuities
Summary of Results
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Six months
Ended June 30, Increase
--------------------- ---------------
1999 1998 Amount %
--------- --------- -------- ----
<S> <C> <C> <C> <C>
Policy charges $ 18,532 $ 15,408 $ 3,124 20
Net policy obligations (2,743) (3,937) 1,194 (30)
Commissions and
acquisition expense 9,288 8,299 989 12
--------- --------- --------
Insurance underwriting income before
other income and administrative
expenses, excluding Family Service 11,987 11,046 941 9
Family Service 0 98 (98)
--------- --------- --------
Insurance underwriting income before
other income and administrative expense $ 11,987 $ 11,144 $ 843
========= ========= ========
</TABLE>
Policy charges for annuities for the 1999 first six months were $18.5
million, compared with $15.4 million for the 1998 period, an increase of 20%.
Policy charges are assessed against the annuity account balance periodically for
insurance risk, sales, administration, and cash surrender. The increase in
policy charges resulted primarily from the growth in the variable annuity
balance over the prior-year period. Annuity underwriting income excluding Family
Service improved 9% from $11.0 million in the 1998 period to $12.0 million in
the same period of 1999.
21
<PAGE>
Investment. The following table summarizes Torchmark's investment income
and excess investment income.
Excess Investment Income
(Dollars in thousands)
<TABLE>
<CAPTION>
Six months
Ended June 30, Increase
--------------------- ----------------
1999 1998 Amount %
--------- --------- -------- ---
<S> <C> <C> <C> <C>
Net investment income $ 221,934 $ 237,681 $ (15,747) (7)
Tax equivalency adjustment 5,514 5,304 210 4
Tax equivalent investment income 227,448 242,985 (15,537) (6)
--------- ---------
Required interest on net insurance policy liabilities (87,323) (104,547) 17,224 (16)
Financing costs (32,271) (40,408) 8,137 (20)
--------- --------- ---------
Excess investment income $ 107,854 $ 98,030 $ 9,824 10
========= ========= =========
</TABLE>
On a tax equivalent basis, net investment income was $227 million in
the first six months of 1999, declining 6% from $243 million during the same
1998 period. The 1998 amount includes $7 million in the first quarter on
internal financing with Waddell & Reed related to the March, 1998 initial public
offering. Also, 1998 investment income included $22 million attributable to
Family Service on a tax-equivalent basis.
Excess investment income is tax-equivalent net investment income
reduced by the interest credited to net insurance policy liabilities and less
Torchmark's financing costs. Financing costs include interest on debt and the
pretax dividends on Torchmark's MIPS. Excess investment income for the 1999
first six months rose 10% to $108 million from $98 million a year earlier. The
increase resulted primarily from the reduction in Torchmark's borrowing cost due
to the replacement of $360 million in long-term debt with short-term debt in the
second quarter of 1998 and a reduction in total debt. Excess investment income
also benefited from the increase in invested assets relative to net policy
liabilities.
During the first six months of 1999, Torchmark continued its program of
acquiring primarily investment grade fixed maturity bonds. Purchases totaled
$887 million, and had an average yield of 7.22%, equivalent to an effective
compounded yield of 7.35%. For the comparable 1998 period, adjusted for the sale
of Family Service, purchases totaled $1.00 billion with average and effective
compounded yields of 7.06% and 7.19%, respectively. The fixed maturity portfolio
average yield was 7.38% during the first six
22
<PAGE>
months, compared with 7.42% for the year 1998 and 7.43% for the comparable 1998
period. At June 30, the portfolio had an estimated average life of 11.8 years
and an effective duration of 6.0 years.
With the continued increase in interest rates during the first six months
of 1999, the market value of each asset sector was affected. At June 30, 1999,
the fixed maturity portfolio had an unrealized loss of $58 million, compared
with an unrealized gain of $249 million at year-end 1998. Volatility in the
portfolio market value is to be expected as interest rates and maturity of
holdings vary. The portfolio overall quality remained high with an average
quality rating of A with approximately 5% of holdings rated below investment
grade.
Torchmark intends to sell most of its investment real estate. In the
second quarter of 1999, efforts to dispose of these properties revealed that the
portfolio's carrying value exceeded its estimated realizable value of $133
million. For this reason, Torchmark wrote down its real estate portfolio to its
estimated realizable value, resulting in a pretax loss on investment real estate
of $64 million ($41 million after tax).
Financial Condition
Liquidity. Torchmark's liquidity is represented by its positive cash flow,
marketable investments, and the availability of a line of credit facility.
Torchmark's insurance operations typically generate cash flows in excess of
immediate requirements. Torchmark's net cash inflows from operations were $192
million in the first half of 1999, compared with $194 million in the same period
of 1998. In addition to cash flows from operations, Torchmark received $242
million in investment maturities or repayments during the first six months of
1999.
Torchmark's cash and short-term investments were $54 million at the end of
June, 1999, compared with $81 million of these assets at December 31, 1998. In
addition to these liquid assets, Torchmark's entire portfolio of fixed-income
and equity securities, in the approximate amount of $5.6 billion at market value
on June 30, 1999, is available for sale should any need arise.
Torchmark has in place a line of credit facility, which is also designed as
a backup credit line for a commercial paper program. This program provides
credit up to a maximum amount of $600 million, and permits Torchmark to borrow
from either the credit line or issue commercial paper at any time up to the
combined facility maximum of $600 million. Terms of the facility permit
borrowing up to the maximum amount at variable interest rates. Torchmark is
subject to certain covenants regarding capitalization and earnings, with which
Torchmark was in full compliance at June 30, 1999. At that date, Torchmark had
commercial paper outstanding in the face amount of $399 million and no
borrowings on the line of credit. At December 31, 1998, $357 million face amount
of
23
<PAGE>
commercial paper was outstanding.
Capital resources. During July, 1999, Torchmark filed with the Securities
and Exchange Commission a Form S-3 Registration Statement to register capital
securities in an aggregate face account of $300 million. Proceeds from the
issuance of these securities could possibly be used to redeem the MIPS, which
are callable on or after September 30, 1999 at a redemption price of $25 per
share, or $200 million aggregate amount, plus unpaid and accrued dividends.
Proceeds could also be used for other business opportunities or corporate
purposes.
Torchmark's total debt outstanding was $770 million at June 30, 1999,
compared with $739 million at December 31, 1998 and $812 million at June 30,
1998. Long-term debt was $371 million at June 30, 1999, decreasing from $383
million at December 31, 1998 and from $394 million at June 30, 1998. During the
first six months of 1999, Torchmark acquired $4.0 million of its 7 3/8% notes
due 2013 in the open market at a cost of $4.1 million and acquired $7.5 million
of its 7 7/8% notes due 2023 in the market at a cost of $7.9 million. It also
acquired $10.8 million of its 7 7/8% notes late in 1998. Debt as a percentage
of total capitalization was 25% at June 30, 1999, counting the MIPS as equity
and excluding the effects of fluctuations in security values based on changes in
interest rates in the financial markets. The debt to capitalization ratio was
24% at both year-end 1998 and at June 30, 1998. Interest coverage was 8.2 times
for the 1999 six months, compared with 8.4 times for the prior-year period. Had
the $64 million real estate writeoff been excluded, 1999 interest coverage would
have been 10.7 times.
Torchmark acquired 3.7 million of its shares on the open market during the
first half of 1999. These share purchases were made at a cost of $121 million
during the six months. Share purchases were primarily funded by the sale of
investments but borrowings on the line of credit were also made. Torchmark
intends to make additional purchases under its share repurchase program on the
open market when prices are attractive.
Torchmark's shareholders' equity was $2.06 billion at June 30, 1999,
compared with $2.26 billion at 1998 year end and $2.49 billion one year ago.
Book value per share was $15.46 at June 30, 1999, compared with $16.51 at year-
end 1998 and $17.73 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 $2.09 billion at June 30, 1999,
compared with $2.11 billion at 1998 year end and $2.35 billion a year ago. On a
per share basis, adjusted book value was $15.71 at the end of June, 1999,
compared with $15.43 at year-end 1998 and $16.77 at June 30, 1998. The decline
in adjusted equity from a year earlier was impacted by the spin-off of Waddell &
Reed, which accounted for a net reduction in equity of $174 million.
The annualized return on common equity, or net operating income from
continuing operations as a percentage of average equity excluding the effects of
securities at market value, was 16.2% for the 1999 six months. Return on equity
for the same 1998 period was
24
<PAGE>
14.8%. This increase was primarily a result of the share purchases.
Year 2000 Compliance. As of August 1, 1999, Torchmark remained on schedule
to complete its corporate-wide Year 2000 compliance requirements. Business-
critical testing has been completed. All non-critical computer software testing
is scheduled to be completed during the third quarter of 1999. In addition,
Torchmark is in the process of completing all of the verification and interface
testing of its business-critical Year 2000 third-party interrelationships.
Torchmark has also completed addressing its non-information technology Year 2000
concerns, which included correcting and replacing various systems. It is also
finalizing its Year 2000 testing of its vendor supported computer software.
Torchmark has continued to use its own employees to meet its Year 2000
project completion requirements. Through the end of second quarter 1999,
Torchmark had spent approximately $5.8 million on its Year 2000 project,
including Torchmark's internal computer hardware and software processing costs,
internally-provided programming costs, the use of outside computer software
contractors, the cost of testing its application software modifications, and all
computer hardware and software replacement costs. These project costs have been
expensed as they have been incurred. Total cost of the project is expected to
be approximately $6 million at the time it is completed.
Torchmark has established viable Year 2000 contingency plans for all
business-critical areas. Management has developed and documented Year 2000
contingency procedures throughout the corporation for its business-critical
computer systems. Contingency procedures relating to critical third-party
organizations have also been completed. The contingency plans include possible
manual operations, the use of outside staff, the redeployment of internal staff,
and the implementation of alternative information processing procedures.
25
<PAGE>
commercial paper was outstanding.
Capital resources. During July, 1999, Torchmark filed with the
Securities and Exchange Commission a Form S-3 Registration Statement to register
capital securities in an aggregate face account of $300 million. Proceeds from
the issuance of these securities could possibly be used to redeem the MIPS,
which are callable on or after September 30, 1999 at a redemption price of $25
per share, or $200 million aggregate amount, plus unpaid and accrued dividends.
Proceeds could also be used for other business opportunities or corporate
purposes.
Torchmark's total debt outstanding was $770 million at June 30, 1999,
compared with $739 million at December 31, 1998 and $812 million at June 30,
1998. Long-term debt was $371 million at June 30, 1999, decreasing from $383
million at December 31, 1998 and from $394 million at June 30, 1998. During the
first six months of 1999, Torchmark acquired $4.0 million of its 7 3/8% notes
due 2013 in the open market at a cost of $4.1 million and acquired $7.5 million
of its 7 7/8% notes due 2023 in the market at a cost of $7.9 million. It also
acquired $10.8 million of its 7 7/8% notes late in 1998. Debt as a percentage of
total capitalization was 25% at June 30, 1999, counting the MIPS as equity and
excluding the effects of fluctuations in security values based on changes in
interest rates in the financial markets. The debt to capitalization ratio was
24% at both year-end 1998 and at June 30, 1998. Interest coverage was 8.2 times
for the 1999 six months, compared with 8.4 times for the prior-year period. Had
the $64 million real estate writeoff been excluded, 1999 interest coverage would
have been 10.7 times.
Torchmark acquired 3.7 million of its shares on the open market during
the first half of 1999. These share purchases were made at a cost of $121
million during the six months. Share purchases were primarily funded by the sale
of investments but borrowings on the line of credit were also made. Torchmark
intends to make additional purchases under its share repurchase program on the
open market when prices are attractive.
Torchmark's shareholders' equity was $2.06 billion at June 30, 1999,
compared with $2.26 billion at 1998 year end and $2.49 billion one year ago.
Book value per share was $15.46 at June 30, 1999, compared with $16.51 at year-
end 1998 and $17.73 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 $2.09 billion at June 30, 1999,
compared with $2.11 billion at 1998 year end and $2.35 billion a year ago. On a
per share basis, adjusted book value was $15.71 at the end of June, 1999,
compared with $15.43 at year-end 1998 and $16.77 at June 30, 1998. The decline
in adjusted equity from a year earlier was impacted by the spin-off of Waddell &
Reed, which accounted for a net reduction in equity of $174 million.
The annualized return on common equity, or net operating income from
continuing operations as a percentage of average equity excluding the effects of
securities at market value, was 16.2% for the 1999 six months. Return on equity
for the same 1998 period was
24
<PAGE>
14.8%. This increase was primarily a result of the share purchases.
Year 2000 Compliance. As of August 1, 1999, Torchmark remained on
schedule to complete its corporate-wide Year 2000 compliance requirements.
Business-critical testing has been completed. All non-critical computer software
testing is scheduled to be completed during the third quarter of 1999. In
addition, Torchmark is in the process of completing all of the verification and
interface testing of its business-critical Year 2000 third-party
interrelationships. Torchmark has also completed addressing its non-information
technology Year 2000 concerns, which included correcting and replacing various
systems. It is also finalizing its Year 2000 testing of its vendor supported
computer software.
Torchmark has continued to use its own employees to meet its Year 2000
project completion requirements. Through the end of second quarter 1999,
Torchmark had spent approximately $5.8 million on its Year 2000 project,
including Torchmark's internal computer hardware and software processing costs,
internally-provided programming costs, the use of outside computer software
contractors, the cost of testing its application software modifications, and all
computer hardware and software replacement costs. These project costs have been
expensed as they have been incurred. Total cost of the project is expected to be
approximately $6 million at the time it is completed.
Torchmark has established viable Year 2000 contingency plans for all
business-critical areas. Management has developed and documented Year 2000
contingency procedures throughout the corporation for its business-critical
computer systems. Contingency procedures relating to critical third-party
organizations have also been completed. The contingency plans include possible
manual operations, the use of outside staff, the redeployment of internal staff,
and the implementation of alternative information processing procedures.
25
<PAGE>
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, 1999, Liberty was a
party to approximately 125 active lawsuits (including 15 employment related
cases and excluding interpleaders and stayed cases), more than 104 of which were
Alabama proceedings in which punitive damages were sought. Liberty faces trial
settings in these cases on an on-going basis.
Based upon information presently available, and in light of legal and
other factual defenses available to Torchmark and its subsidiaries, contingent
liabilities arising from threatened and pending litigation are not presently
considered by management to be material. It should be noted, however, that large
punitive damage awards bearing little or no relation to actual damages awarded
by juries in jurisdictions in which Torchmark has substantial business,
particularly in Alabama, continue to occur, creating the potential for
unpredictable material adverse judgments in any given punitive damage suit.
As previously reported, Liberty has been subject to 76 individual
cancer policy lawsuits pending in Alabama and Mississippi, which were stayed or
otherwise held in abeyance pending final resolution of Robertson v. Liberty
--------------------
National Life Insurance Company (Case No. CV-92-021). Liberty filed motions to
- -------------------------------
dismiss these lawsuits based upon the U.S. Supreme Court opinion issued in
Robertson in March 1997. Only one of these individual cancer policy lawsuits
- ---------
remains, the other such suits having been dismissed.
Torchmark has previously reported the case of Lawson v. Liberty
-----------------
National Life Insurance Company (Case No. CV-96-01119), filed in Jefferson
- -------------------------------
County, Alabama, where the plaintiffs sought to represent a class of
interest-sensitive life insurance policyholders. In February, 1999, the Circuit
Court dismissed all class allegations. On July 22, 1999, all remaining
individual claims in Lawson were settled.
------
26
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
(a) Annual Meeting of Shareholders - April 29, 1999
(b) Election of Directors
Nominees: Mark S. McAndrew, George J. Records and R.K. Richey
Other directors whose terms of office continue after the
meeting:
(c) Election of Directors:
Nominee For Withheld
----------------- ----------- ---------
Mark S. McAndrew 111,612,952 1,044,874
George J. Records 111,606,473 1,051,353
R.K. Richey 111,508,699 1,149,127
Ratification of Appointment of Deloitte & Touche LLP as
independent auditors:
For Against Abstain
--- ------- -------
112,188,504 134,144 335,178
27
<PAGE>
Exhibit 11. Statement re computation of per share earnings.
TORCHMARK CORPORATION
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three months ended June 30,
1999 1998
------------ ------------
<S> <C> <C>
Net income from continuing operations $ 36,306,000 $ 52,882,000
Discontinued operations of Waddell & Reed:
Income from operations (net of tax) 0 15,222,000
Loss on disposal (tax) (1,060,000) 0
------------ ------------
Net income before extraordinary item 35,246,000 68,104,000
Loss on redemption of debt (less applicable tax
benefit of $2,672) 0 (4,962,000)
------------ ------------
Net income $ 35,246,000 $ 63,142,000
============ ============
Basic weighted average shares and
common stock equivalents outstanding 133,373,457 140,259,633
Diluted weighted average shares and
common stock equivalents outstanding 134,322,687 141,806,996
Basic earnings per share:
Net income from continuing operations $ 0.27 $ 0.38
Discontinued operations of Waddell & Reed:
Income from operations (net of tax) 0.00 0.11
Loss on disposal (tax) (0.01) 0.00
------------ ------------
Net income before extraordinary item 0.26 0.49
Loss on redemption of debt (less applicable tax
benefit) 0.00 (0.04)
------------ ------------
Net income $ 0.26 $ 0.45
============ ============
Diluted earnings per share:
Net income from continuing operations $ 0.27 $ 0.37
Discontinued operations of Waddell & Reed:
Income from operations (net of tax) 0.00 0.11
Loss on disposal (tax) (0.01) 0.00
------------ ------------
Net income before extraordinary item 0.26 0.48
Loss on redemption of debt (less applicable tax
benefit) 0.00 (0.03)
------------ ------------
Net income $ 0.26 $ 0.45
============ ============
</TABLE>
(Continued on following page)
<PAGE>
TORCHMARK CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(continued)
<TABLE>
<CAPTION>
Six Months ended June 30,
1999 1998
------------- -------------
<S> <C> <C>
Net income from continuing operations $ 116,654,000 $ 131,034,000
Discontinued operations of Waddell & Reed:
Income from operations (net of tax) 0 29,988,000
Loss on disposal (tax) (1,060,000) 0
------------- -------------
Net income before extraordinary item and cumulative
effect of change in accounting principle 115,594,000 161,022,000
Loss on redemption of debt (less applicable
tax benefit of $2,672) 0 (4,962,000)
------------- -------------
Net income before cumulative effect of change in
accounting principle 115,594,000 156,060,000
Cumulative effect of change in accounting principle
(less applicaple tax of $8,661) 16,086,000 0
------------- -------------
Net Income $ 131,680,000 $ 156,060,000
============= =============
Basic weighted average shares and
common stock equivalents outstanding 134,295,069 140,232,355
Diluted weighted average shares and
common stock equivalents outstanding 135,224,746 141,752,867
Basic earnings per share:
Net income from continuing operations $ 0.87 $ 0.93
Discountinued operations of Waddell & Reed -
Income from operations (net of tax) 0.00 0.22
Loss on disposal (tax) (0.01) 0.00
------------- ------------
Net income before extraordinary item and cumulative
effect of change in accounting principle 0.86 1.15
Loss on redemption of debt (less applicable
tax benefit) 0.00 (0.04)
------------- -------------
Net income before cumulative effect of change in
accounting principle 0.86 1.11
Cumulative effect of change in accounting principle
(less applicable tax) 0.12 0.00
------------- -------------
Net Income $ 0.98 $ 1.11
============= =============
Diluted earnings per share:
Net income from continuing operations $ 0.86 $ 0.92
Discontinued operations of Waddell & Reed -
Income from operations (net of tax) 0.00 0.22
Loss on disposal (tax) (0.01) 0.00
------------- -------------
Net Income before extraordinary item and cumulative
effect of change in accounting principle 0.85 1.14
Loss on redemption of debt (less applicable
tax benefit) 0.00 (0.04)
------------- -------------
Net income before cumulative effect of change in
accounting principle 0.85 1.10
Cumulative effect of change in accounting principle
(less applicable tax) 0.12 0.00
------------- -------------
Net Income $ 0.97 $ 1.10
============= =============
</TABLE>
<PAGE>
August 9, 1999
Torchmark Corporation
2001 3rd Avenue South
Birmingham, Alabama 35233
Dear Sirs/Madams:
At your request, we have read the description included in your Quarterly Report
on Form 10-Q to the Securities and Exchange Commission for the quarter ended
June 30, 1999, of the facts relating to the Company's decision to change its
method of accounting for its interest rate swap agreement. We believe, on the
basis of the facts so set forth and other information furnished to us by
appropriate officials of the Company, that the accounting change described in
your Form 10-Q for the quarter ended June 30, 1999 is to an alternative
accounting principle that is preferable under the circumstances.
We have not audited any consolidated financial statements of Torchmark
Corporation and its consolidated subsidiaries as of any date or for any period.
Therefore, we are unable to express, and we do not express, an opinion on the
facts set forth in the above-mentioned Form 10-Q, on the related information
furnished to us by officials of the Company, or on the financial position,
results of operations, or cash flows of Torchmark Corporation and its
consolidated subsidiaries as of any date or for any period.
Yours truly,
DELOITTE & TOUCHE LLP
Dallas, Texas
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 5,583,495
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 30,750
<MORTGAGE> 94,326
<REAL-ESTATE> 133,404
<TOTAL-INVEST> 6,166,192
<CASH> 13,747
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,789,211
<TOTAL-ASSETS> 11,300,258
<POLICY-LOSSES> 4,726,498
<UNEARNED-PREMIUMS> 90,631
<POLICY-OTHER> 203,674
<POLICY-HOLDER-FUNDS> 81,661
<NOTES-PAYABLE> 779,428
193,291
0
<COMMON> 147,801
<OTHER-SE> 1,912,434
<TOTAL-LIABILITY-AND-EQUITY> 11,300,258
932,774
<INVESTMENT-INCOME> 221,934
<INVESTMENT-GAINS> (85,919)
<OTHER-INCOME> 5,949
<BENEFITS> 612,164
<UNDERWRITING-AMORTIZATION> 121,652
<UNDERWRITING-OTHER> 158,709
<INCOME-PRETAX> 182,213
<INCOME-TAX> 61,045
<INCOME-CONTINUING> 116,654
<DISCONTINUED> (1,060)
<EXTRAORDINARY> 0
<CHANGES> 16,086
<NET-INCOME> 131,680
<EPS-BASIC> .98
<EPS-DILUTED> .97
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
