<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 September 30, 2000 Commission File Number 1-8052
TORCHMARK CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 63-0780404
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2001 3rd Avenue South, Birmingham, Alabama 35233
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (205) 325-4200
NONE
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding for each of the issuer's classes of
common stock, as of the last practicable date.
CLASS OUTSTANDING AT October 31, 2000
Common Stock, 126,250,235
$1.00 Par Value
Index of Exhibits (Page 26)
Total number of pages included are 27.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TORCHMARK CORPORATION
CONSOLIDATED BALANCE SHEET
(Amounts in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
Assets
Investments:
Fixed maturities, available for sale, at fair value (amortized
cost: 2000 - $6,106,746; 1999 - $5,954,697) $ 5,808,147 $ 5,679,795
Equity securities, at fair value (cost: 2000 - $1,758; 1999 - $37,121) 5,244 29,189
Mortgage loans, at cost (fair value:
2000 - $118,500; 1999 - $94,716) 118,386 94,599
Investment real estate, at depreciated cost 15,991 16,379
Policy loans 252,455 244,607
Other long-term investments, at fair value 24,152 23,054
Short-term investments 83,116 100,187
----------- -----------
Total investments 6,307,491 6,187,810
Cash 12,168 14,441
Accrued investment income 115,483 112,475
Other receivables 69,570 53,458
Deferred acquisition costs 1,893,487 1,741,570
Value of insurance purchased 137,334 151,752
Property and equipment 39,419 38,761
Goodwill 393,528 402,584
Other assets 19,897 15,138
Separate account assets 3,874,062 3,413,675
----------- -----------
Total assets $12,862,439 $12,131,664
========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Future policy benefits $ 5,051,135 $ 4,869,241
Unearned and advance premiums 90,223 85,344
Policy claims and other benefits payable 227,896 215,923
Other policyholders' funds 80,338 81,919
----------- -----------
Total policy liabilities 5,449,592 5,252,427
Accrued income taxes 384,713 309,271
Short-term debt 308,968 418,394
Long-term debt (fair value:
2000 - $374,370; 1999 - $378,046) 371,885 371,555
Other liabilities 171,414 179,681
Separate account liabilities 3,874,062 3,413,675
----------- -----------
Total liabilities 10,560,634 9,945,003
Monthly income preferred securities
(fair value: 2000 - $198,000; 1999 - $193,040) 193,377 193,324
Shareholders' equity:
Preferred stock 0 0
Common stock 147,801 147,801
Additional paid-in capital 623,339 622,318
Accumulated other comprehensive income (loss) (182,869) (174,222)
Retained earnings 2,145,096 1,910,487
Treasury stock, at cost (624,939) (513,047)
----------- -----------
Total shareholders' equity 2,108,428 1,993,337
----------- -----------
Total liabilities and shareholders' equity $12,862,439 $12,131,664
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
1
<PAGE>
<TABLE>
<CAPTION>
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited and in thousands except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -----------------------------
2000 1999 2000 1999
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Life premium $272,109 $254,921 $ 808,830 $ 761,619
Health premium 226,714 206,568 675,683 614,112
Other premium 13,915 10,361 38,112 28,893
---------- ---------- ----------- -----------
Total premium 512,738 471,850 1,522,625 1,404,624
Net investment income 118,073 111,758 352,611 333,692
Realized investment gains (losses) 9,092 (18,128) (2,606) (104,047)
Other income 651 299 2,074 6,248
---------- ---------- ----------- -----------
Total revenue 640,554 565,779 1,874,704 1,640,517
Benefits and expenses:
Life policyholder benefits 179,413 166,424 534,710 496,076
Health policyholder benefits 147,101 134,383 437,693 399,590
Other policyholder benefits 9,178 8,306 28,083 25,611
---------- ---------- ----------- -----------
Total policyholder benefits 335,692 309,113 1,000,486 921,277
Amortization of deferred acquisition costs 69,061 62,921 202,695 184,573
Commissions and premium taxes 37,650 34,633 112,010 104,382
Other operating expense 29,945 29,079 89,607 86,676
Amortization of goodwill 3,018 3,018 9,055 9,055
Interest expense 13,352 13,327 41,331 38,653
---------- ---------- ----------- -----------
Total benefits and expenses 488,718 452,091 1,455,184 1,344,616
Income from continuing operations before income taxes and
cumulative effect of change in accounting principle 151,836 113,688 419,520 295,901
Income taxes (51,420) (38,019) (141,996) (99,064)
Monthly income preferred securities dividend (net of tax) (2,680) (2,357) (7,612) (6,871)
---------- ---------- ----------- -----------
Income from continuing operations before cumulative
effect of change in accounting principle 97,736 73,312 269,912 189,966
Discontinued operations of Waddell & Reed:
Loss on disposal (tax) 0 0 0 (1,060)
---------- ---------- ----------- -----------
Income before cumulative effect of change in
accounting principle 97,736 73,312 269,912 188,906
Cumulative effect of change in accounting principle
(less applicable tax of $8,661) 0 0 0 16,086
---------- ---------- ----------- -----------
Net income $ 97,736 $ 73,312 $ 269,912 $ 204,992
========== ========== =========== ===========
</TABLE>
(Continued on following page)
2
<PAGE>
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited and in thousands except per share data)
(Continued)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
2000 1999 2000 1999
----- ----- ----- ------
<S> <C> <C> <C> <C>
Basic earnings per share:
Net income from continuing operations $0.77 $0.55 $2.10 $ 1.42
Discontinued operations of Waddell & Reed -
Loss on disposal (tax) 0.00 0.00 0.00 (0.01)
----- ----- ----- ------
Net income before cumulative effect of change in
accounting principle 0.77 0.55 2.10 1.41
Cumulative effect of change in accounting principle
(less applicable tax) 0.00 0.00 0.00 0.12
----- ----- ----- ------
Net income $0.77 $0.55 $2.10 $ 1.53
===== ===== ===== ======
Diluted earnings per share:
Net income from continuing operations $0.77 $0.55 $2.09 $ 1.41
Discontinued operations of Waddell & Reed:
Loss on disposal (tax) 0.00 0.00 0.00 (0.01)
----- ----- ----- ------
Net income before cumulative effect of change in
accounting principle 0.77 0.55 2.09 1.40
Cumulative effect of change in accounting principle
(less applicable tax) 0.00 0.00 0.00 0.12
----- ----- ----- ------
Net income $0.77 $0.55 $2.09 $ 1.52
===== ===== ===== ======
</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 Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2000 1999 2000 1999
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Net income $ 97,736 $ 73,312 $269,912 $ 204,992
Other comprehensive income (loss):
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period 61,176 (112,175) (14,323) (440,138)
Less: reclassification adjustment for (gains) losses
on securities included in net income (20,354) 15,392 3,758 25,783
Less: reclassification adjustment for amortization of
discount and premium (1,102) (697) (2,676) (979)
Less: foreign exchange adjustment on securities
marked to market 836 121 962 (810)
-------- --------- -------- ---------
Unrealized gains (losses) on securities 40,556 (97,359) (12,279) (416,144)
Unrealized gains on other investments 5,755 23 425 8
Deferred acquisition cost adjustment resulting from
unrealized (gains) losses on investments (3,815) 9,601 587 36,773
Foreign exchange translation adjustments (418) (18) (1,343) 1,321
-------- --------- -------- ---------
Other comprehensive income (loss), before tax 42,078 (87,753) (12,610) (378,042)
Income tax (expense) benefit related to other
comprehensive income (loss) (15,624) 30,717 3,963 132,184
-------- --------- -------- ---------
Other comprehensive income (loss) 26,454 (57,036) (8,647) (245,858)
Comprehensive income (loss) $124,190 $ 16,276 $261,265 $ (40,866)
======== ========= ======== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW
(Unaudited and in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------------------
2000 1999
---------- -----------
<S> <C> <C>
Cash provided from operations $ 383,854 $ 294,861
Cash provided from (used for) investment activities:
Investments sold or matured:
Fixed maturities available for sale - sold 475,918 1,139,457
Fixed maturities available for sale - matured,
called, and repaid 184,420 196,151
Other long-term investments 38,743 224,733
--------- -----------
Total investments sold or matured 699,081 1,560,341
Investments acquired:
Fixed maturities (813,980) (1,684,286)
Other long-term investments (34,420) (45,289)
--------- -----------
Total investments acquired (848,400) (1,729,575)
Net decrease in short-term investments 17,123 2,622
Disposition of properties 344 6,621
Additions to properties (6,369) (6,221)
--------- -----------
Cash used for investment activities (138,221) (166,212)
Cash provided from (used for) financing activities:
Issuance of common stock 945 1,443
Additions to debt 0 47,233
Repayments of debt (109,426) (12,132)
Acquisition of treasury stock (113,596) (175,451)
Cash dividends paid to shareholders (34,994) (36,347)
Net receipts from deposit product operations 9,165 50,758
--------- -----------
Cash used for financing activities (247,906) (124,496)
Net increase (decrease) in cash (2,273) 4,153
Cash at beginning of year 14,441 4,920
--------- -----------
Cash at end of period $ 12,168 $ 9,073
========= ===========
</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 September 30, 2000, and
the consolidated results of operations and cash flow for the periods ended
September 30, 2000 and 1999.
Note B - Derivatives
Torchmark is required to adopt FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by FASB Statement No.
137. This statement is effective for all physical quarters for all physical
years beginning after June 15, 2000. For Torchmark, the statement becomes
effective January 1, 2001.
Management believes that Statement 133 will have an immaterial impact on
Torchmark's financial statements. Other than an interest rate swap on its
Monthly Income Preferred Securities ("MIPS"), which is carried at fair market
value, Torchmark's use of derivatives is limited.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
Note C - 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 and acquisition expenses from premium revenue. The measure
of profitability for the investment segment is excess investment income, which
is the income earned on the investment portfolio in excess of net policy
requirements and financing costs associated with debt and Torchmark's MIPS. The
tables below set forth revenue (excluding realized investment losses) and
measures of profitability by segment as well as reconciliations from the total
measures of profitability to pretax operating income for the nine-month periods
ended September 30, 2000 and September 30, 1999, respectively.
<TABLE>
<CAPTION>
Selected Segment Information
(Amounts in thousands)
Nine months ended September 30, 2000
-------------------------------------------------------------------------------
Life Health Annuity Investment Other Adjustments Consolidated
-------- -------- ------- ---------- ------ ----------- ------------
Revenue:
<S> <C> <C> <C> <C> <C> <C> <C>
Premium $808,830 $675,683 $38,112 $1,522,625
Net investment income $ 359,836 $(7,225) 352,611
Other income $3,644 (1,570) 2,074
Intersegment revenue -
required interest on
net policy obligations 110,376 934 26,152 (137,462) 0
-------- -------- ------- --------- ------ ------- ----------
Total revenue* $919,206 $676,617 $64,264 $ 222,374 $3,644 $(8,795) $1,877,310
======== ======== ======= ========= ====== ======= ==========
Measures of profitability:
Underwriting income
before other income and
administrative expenses $200,797 $120,305 $22,224 $ 343,326
Excess investment
income $ 169,332 169,332
-------- -------- ------- --------- ------ ------- ----------
Total measures of
profitability $200,797 $120,305 $22,224 $ 169,332 $ 0 $ 0 $ 512,658
======== ======== ======= ========= ====== ======= ==========
</TABLE>
* Excludes realized investment gains (losses)
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
<TABLE>
<CAPTION>
Selected Segment Information
(Amounts in thousands)
Nine months ended September 30, 1999
-------------------------------------------------------------------------------------
Life Health Annuity Investment Other Adjustments Consolidated
-------- -------- ------- --------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Premium $761,619 $614,112 $28,893 $1,404,624
Net investment income $ 342,381 $ (8,689) 333,692
Other income $2,625 (1,480) 1,145
Intersegment revenue -
required interest on
net policy obligations 102,196 3,860 25,658 (131,714) 0
-------- -------- ------- --------- ------ -------- ----------
Total revenue* $863,815 $617,972 $54,551 $ 210,667 $2,625 $(10,169) $1,739,461
======== ======== ======= ========= ====== ======== ==========
Measures of profitability:
Underwriting income before other
income and administrative expense $198,743 $106,648 $19,235 $ 324,626
Excess investment income $ 161,443 161,443
-------- -------- ------- --------- ------ -------- ----------
Total measures of profitability $198,743 $106,648 $19,235 $ 161,443 $ 0 $ 0 $ 486,069
======== ======== ======= ========= ====== ======== =========
*Excludes realized investment losses
</TABLE>
Reconciliation of Measures of Profitability to Pretax Operating Income
(Amounts in thousands)
For the nine months ended
September 30,
---------------------------
2000 1999
--------- ----------
Total measures of profitability $512,658 $ 486,069
Other income 3,644 2,625
Insurance administrative expenses (82,552) (78,921)
Parent expense (7,055) (7,755)
Tax equivalent adjustment (7,225) (8,689)
Goodwill amortization (9,055) (9,055)
Realized losses (2,606) (104,047)
Gain on sale of equipment 0 5,103
Pretax cost of MIPS 11,711 10,571
-------- ---------
Operating income before taxes $419,520 $ 295,901
======== =========
8
<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) and regulatory
inquiries regarding industrial life 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) The inability of Torchmark to achieve the anticipated levels of
administrative and operational efficiencies;
8) The customer response to new products and marketing initiatives;
9) Adverse levels of mortality, morbidity, and utilization of healthcare
services relative to Torchmark's assumptions; and
10) The inability of Torchmark to obtain timely and appropriate premium
rate increases for health insurance policies.
9
<PAGE>
Results of Operations
Torchmark management computes a classification of income called "net
operating income." Torchmark management focuses on net operating income 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 the appropriate period
in order to compute net operating income:
1) Realized investment losses and the related adjustment to deferred
acquisition costs, net of tax;
2) A one-time gain on the sale of equipment in 1999 (included in other
income) in the after-tax amount of $3.3 million;
3) Discontinued operations relating to Waddell & Reed in 1999; and
4) The effect of a change in accounting principle in 1999, which modified
the accounting for an interest rate swap instrument.
The following table presents earnings and earnings per share data for
Torchmark.
Earnings and Earnings Per Share
(Dollar amounts in thousands, except for per share data)
For the nine months ended
September 30,
------------------------- %
2000 1999 Change
-------- -------- ------
Net operating income:
Amount $271,606 $254,280 6.8
Per Share:
Basic 2.11 1.90 11.1
Diluted 2.11 1.89 11.6
Net income:
Amount
Per Share: $269,912 $204,992 31.7
Basic 2.10 1.53 37.3
Diluted 2.09 1.52 37.5
Torchmark's operating revenues exclude realized investment gains and losses
and also exclude the one-time gain in 1999 from the sale of corporate equipment
in the amount of $5.1 million. Operating revenues rose 8% to $1.9 billion in
the first nine months of 2000 over the same period of 1999. Total premium
increased 8% to $1.5 billion and net
10
<PAGE>
investment income rose 6% to $353 million in the first nine months of 2000.
Torchmark's operating expenses increased 3% to $90 million in 2000. However,
operating expenses as a percentage of operating revenues decreased to 4.8% in
2000 from 5.0% in 1999. As a percentage of total premium, insurance
administrative expenses were 5.4% in 2000 compared with 5.6% in 1999.
The following table is a summary of Torchmark's net operating income from
continuing operations by component. Insurance underwriting income is premium
income less net policy obligations, commissions, acquisition expenses, and
insurance administrative expenses. Excess investment income is tax equivalent
net investment income reduced by the interest credited to net policy
liabilities, and the financing cost of Torchmark's debt and Monthly Income
Preferred Securities ("MIPS").
<TABLE>
<CAPTION>
Summary of Net Operating Income
(Dollar amounts in thousands)
Nine months
Ended September 30, Increase
---------------------- ---------------------
<S> <C> <C> <C> <C>
2000 1999 Amount %
--------- --------- --------- ---------
Insurance underwriting income before
other income and administrative expense:
Life $ 200,797 $ 198,743 $ 2,054 1
Health 120,305 106,648 13,657 13
Annuity 22,224 19,235 2,989 16
--------- --------- -------
Total 343,326 324,626 18,700 6
Other income 3,644 2,625 1,019 39
Administrative expense (82,552) (78,921) (3,631) 5
--------- --------- -------
Insurance underwriting income 264,418 248,330 16,088 6
Excess investment income 169,332 161,443 7,889 5
Corporate expense (7,055) (7,755) 700 (9)
Goodwill amortization (9,055) (9,055) 0 0
Tax equivalency adjustment (7,225) (8,689) 1,464 (17)
--------- --------- -------
Pretax insurance net operating income 410,415 384,274 26,141 7
Income tax (138,809) (129,994) (8,815) 7
--------- --------- -------
Net operating income $ 271,606 $ 254,280 $17,326 7
========= ========= ======= ===
Net operating income per diluted share $2.11 $1.89 12
========= ========= ===
</TABLE>
A discussion of Torchmark's operations by segment follows.
11
<PAGE>
Life insurance. Torchmark's life insurance premium income rose 6% to $809
million in the first nine months of 2000. 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)
Nine months ended September 30,
-------------------------------
2000 1999 Increase
------------------ ------------------ ----------------
% of % of
Amount Total Amount Total Amount %
------------------ ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Liberty National Exclusive Agency $221,034 27 $216,267 28 $ 4,767 2
Direct Response 200,064 25 184,792 24 15,272 8
American Income Exclusive Agency 172,270 21 161,873 21 10,397 6
United American Independent Agency 30,844 4 27,959 4 2,885 10
United American Exclusive Agency 14,621 2 14,532 2 89 1
Other 169,997 21 156,196 21 13,801 9
-------- --- -------- --- ------- --
Total life premium $808,830 100 $761,619 100 $47,211 6
======== === ======== === ======= ==
</TABLE>
Annualized life premium in force was $1.19 billion at September 30, 2000,
rising 7% over $1.11 billion in force a year earlier. Life insurance sales, in
terms of annualized premium issued, were $219 million in the 2000 nine-month
period, increasing 14% over 1999 same-period sales of $191 million. The third
quarter of 2000 marked the third consecutive quarter that life sales grew at a
double-digit rate over comparable prior-year periods. The following table
presents Torchmark's life insurance sales and in force data by distribution
method.
12
<PAGE>
Life Insurance
Annualized Premium Sales and In Force
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Sales In Force
--------------------------------------------- ---------------------------------------------------
Nine months
Ended September 30, Increase At September 30, Increase
---------------------- ----------------- -------------------------- ------------------
2000 1999 Amount % 2000 1999 Amount %
-------- -------- ------- ---- ---------- ----------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Direct Response $ 87,855 $ 72,147 $15,708 22 $ 300,341 $ 279,045 $21,296 8
Liberty National
Exclusive Agency 40,254 38,395 1,859 5 312,158 306,086 6,072 2
AI Exclusive Agency 42,066 39,815 2,251 6 241,737 227,109 14,628 6
UA Independent Agency 17,142 8,916 8,226 92 49,100 41,979 7,121 17
UA Exclusive Agency 3,578 4,136 (558) (13) 21,445 21,891 (446) (2)
Other Distribution 28,140 28,049 91 0 262,347 237,349 24,998 11
-------- -------- ------- ---- ---------- ----------- --------
Total $219,035 $191,458 $27,577 14 $1,187,128 $1,113,459 $73,669 7
======== ======== ======= ==== ========== ========== ======= ===
</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 22% to $88 million in the first nine months of 2000, compared with $72
million in the same period of 1999. Annualized premium in force for this
distribution method rose 8% over the prior year to $300 million at September 30,
2000. Premium income grew 8% to $200 million in the 2000 period. The $15
million growth in Direct Response premium income and the $16 million growth in
Direct Response sales were Torchmark's greatest increases in terms of dollar
amount. In addition to its own production and premium growth, the Direct
Response operation provides support to other Torchmark marketing agencies by
providing sales leads and assisting in agent recruiting. This marketing support
has contributed indirectly to premium growth in those agencies.
The Liberty National Exclusive Agency distribution system represented 27%
of Torchmark's life premium, the largest of any component distribution system.
Life premium was $221 million in the first nine months of 2000, up 2% over the
comparable 1999 period, and life insurance sales grew 5% to $40 million of
annualized premium issued. Annualized life premium in force was $312 million at
September 30, 2000, growing 2% over the prior-year period. The Liberty National
agency serves primarily low and middle-income customers in the Southeastern
United States. In the past year, this agency grew 7% with 2,017 agents at
September 30, 2000, compared with 1,885 a year earlier.
The American Income Agency markets to members of labor unions, credit
unions, and other associations. This agency produced premium income of $172
million in the first nine months of 2000, an increase of 6%. Life sales for this
agency rose 6% in the 2000 nine months to $42 million. Growth in sales of the
American Income Agency was largely attributable to the growth in the number of
agents, which rose 9% over the past twelve
13
<PAGE>
months to 1,331 at September 30, 2000. Annualized life premium in force was $242
million at September 30, 2000, up 6% compared to a year ago.
Life sales for the United American Independent Agency rose 92% in the 2000
nine months to $17 million. Annualized premium in force was $49 million at the
end of September, 2000.
Torchmark's Other distribution systems include the Military, United
Investors, and other less significant distribution channels. The 9% growth in
premium income in other distribution was a result of the 13% growth in Military
Agency premium to $88 million offset by lesser growth in other channels. Sales
in the Military Agency increased 18% to $15 million in the first nine months of
2000. This agency also had a 13% increase in annualized life premium in force
which was $123 million at September 30, 2000. This agency consists of former
military officers who sell exclusively to military officers and their families.
Life Insurance
Summary of Results
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
--------------------------------------------
2000 1999 Increase
------------------- ------------------ ---------------
% to % to
Amount Total Amount Total Amount %
-------- ----- ------ ----- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Premium and policy charges $808,830 100 $761,619 100 $47,211 6
Net policy obligations 351,408 43 325,731 43 25,677 8
Commissions and
acquisition expense 256,625 32 237,145 31 19,480 8
-------- --- -------- --- ------- ----
Insurance underwriting income before
other income and administrative
expense $200,797 25 $198,743 26 $ 2,054 1
======== === ======== === ======= ==
</TABLE>
Life insurance underwriting income before insurance administrative expenses
was $201 million in the first nine months of 2000, increasing 1% over the same
period of 1999. As a percentage of life premium, underwriting income was 25% in
the nine months of 2000, compared with 26% in the comparable 1999 period.
Contributing to this decline was a reduction in the underwriting income for
Direct Response from 28.5% to 26.5% of premium. This percentage is expected to
be near this level in 2001. In addition, underwriting income in the Other
distribution category declined due to an increase in policy obligations which
is believed to be temporary.
14
<PAGE>
Health insurance. Health insurance premium income rose 10% from $614
million in the first nine months of 1999 to $676 million in the same period of
2000. 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>
Nine months ended September 30,
-------------------------------
2000 1999 Increase
------------------ ------------------ ---------------
% to % to
Amount Total Amount Total Amount %
-------- ----- ------ ----- ------ --
<S> <C> <C> <C> <C> <C> <C>
United American Independent Agency $330,721 49 $320,786 52 $ 9,935 3
United American Exclusive Agency 184,276 27 141,507 23 42,769 30
Liberty National Exclusive Agency 113,575 17 107,521 18 6,054 6
American Income Exclusive Agency 36,043 5 35,592 6 451 1
Direct Response 11,068 2 8,706 1 2,362 27
-------- ---- -------- ---- -------
Total health premium $675,683 100 $614,112 100 $61,571 10
======== ==== ======== ==== ======= ==
</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
-------------------------------------- ----------------------------------------
Nine months
Ended September 30, Increase At September 30, Increase
--------------------- ------------- ------------------ --------------
2000 1999 Amount % 2000 1999 Amount %
-------- -------- ------- --- -------- -------- ------- ===
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UA Exclusive Agency $ 92,693 $ 70,946 $21,747 31 $278,547 $214,786 $63,761 30
UA Independent Agency 55,024 48,111 6,913 14 455,037 442,040 12,997 3
Liberty Exclusive Agency 7,519 7,302 217 3 156,064 151,914 4,150 3
AI Exclusive Agency 6,494 5,940 554 9 46,084 44,785 1,299 3
Direct Response 2,869 3,064 (195) (6) 15,654 12,358 3,296 27
-------- -------- ------- -------- -------- -------
Total $169,599 $135,363 $29,236 22 $951,386 $865,883 $85,503 10
======== ======== ======= == ======== ======== ======= ===
</TABLE>
Annualized health insurance premium in force was $951 million at September
30, 2000, up 10% over the in force premium at September 30, 1999. Sales of
health
15
<PAGE>
insurance, as measured by annualized premium issued, grew 22% to $165 million in
the 2000 nine months over the same period a year earlier. Medicare Supplement
sales rose 19% in the 2000 period to $127 million, accounting for 69% 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 experienced growth in health sales and annualized health premium in
force when compared with the prior-year period. The United American Exclusive
Agency has experienced rapid growth during the past twelve months, as the number
of agents has grown by over 900 agents or 38% to 3,378 at September 30, 2000.
This growth in the size of the agency contributed greatly to the growth in
Medicare Supplement sales. Annualized Medicare Supplement premium in force was
$687 million at September 30, 2000, rising 12% from a year earlier. Medicare
Supplement represented 72% of Torchmark's total health premium in force at the
end of September, 2000.
Cancer sales, produced primarily by the Liberty National Agency, were $7.5
million in the 2000 period, declining 6% from the prior-year period. Cancer
annualized premium in force rose 4% to $161 million. Cancer business represented
17% of Torchmark's annualized health premium in force at September 30, 2000.
Other health product sales, consisting primarily of accident and limited-benefit
hospital and surgical policies, rose 46% to $31 million in the 2000 period.
Other health annualized premium in force increased 6% to $104 million.
16
<PAGE>
The following table presents underwriting margin data for health insurance.
Health Insurance
Summary of Results
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------------------------------------------
2000 1999 Increase
------------------- ------------------- -----------------
% of % of
Amount Total Amount Total Amount %
-------- ----- -------- ----- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Premium and policy charges $675,683 100 $614,112 100 $61,571 10
Net policy obligations 425,784 63 386,407 63 39,377 10
Commissions and
acquisition expense 129,594 19 121,057 20 8,537 7
-------- --- -------- --- -------
Insurance underwriting income before
other income and administrative
expenses $120,305 18 $106,648 17 $13,657 13
======== === ======== === ======= ==
</TABLE>
Underwriting margins for health insurance increased 13% to $120 million in
the 2000 period over the prior-year period. As a percentage of health premium,
underwriting margins rose slightly from 17.4% in 1999 to 17.8% in 2000. The
increase in underwriting margin percentages was due primarily to an improvement
in the margins of the Liberty National cancer business. Medicare Supplement
underwriting margin percentages remained stable.
Annuities. The following table presents collection and deposit balance
information about Torchmark's annuities.
Annuities
Collections and Deposit Balances
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Collections Deposit Balances
---------------------------------------------- ------------------------------------------------------
Nine Months
Ended September 30, Increase At September 30, Increase
----------------------- ----------------- -------------------------- -------------------
2000 1999 Amount % 2000 1999 Amount %
-------- -------- -------- --- ---------- ---------- ---------- --
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed $ 33,714 $ 55,257 $(21,543) (39) $ 665,028 $ 669,470 $ (4,442) (1)
Variable 431,484 275,172 156,312 57 3,710,842 2,600,510 1,110,332 43
-------- -------- -------- --- ---------- ---------- ---------- --
Total $465,198 $330,429 $134,769 41 $4,375,870 $3,269,980 $1,105,890 34
======== ======== ======== === ========== ========== ========== ==
</TABLE>
17
<PAGE>
Annuities are sold on both a fixed and a variable basis. Fixed annuity
collections were $34 million in the first nine months of 2000, declining 39%
from $55 million collected in the prior-year period. Fixed annuities on deposit
with Torchmark declined 1% to $665 million. Collections of variable annuities
were $431 million in the first nine months of 2000, increasing 57% over variable
collections of $275 million in the first nine months of 1999. The variable
annuity balance on deposit rose 43% during the past twelve months. This balance
was $3.7 billion at September 30, 2000, $3.3 billion at December 31, 1999, and
$2.6 billion a year ago. Strong financial markets in the recent past have had a
positive impact on the variable account balance although some weakening was
experienced in the second and third quarters of 2000.
The following table presents underwriting margin data for Torchmark's
annuities.
Annuities
Summary of Results
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Nine months
Ended September 30, Increase
---------------------- -----------------
2000 1999 Amount %
------- ------- ------ ---
<S> <C> <C> <C> <C>
Policy charges $38,112 $28,893 $9,219 32
Net policy obligations (3,981) (4,844) 863 (18)
Commissions and
acquisition expense 19,869 14,502 5,367 37
------- ------- ------ ---
Insurance underwriting income before
other income and administrative
expenses $22,224 $19,235 $2,989 16
======= ======= ====== ===
</TABLE>
Policy charges for annuities for the first nine months of 2000 were $38
million, compared with $29 million for the 1999 period, an increase of 32%.
Policy charges are assessed against the annuity account balance periodically for
insurance risk, sales, administration, and cash surrender. Annuity underwriting
income improved 16% from $19 million in the 1999 nine-month period to $22
million in the same period of 2000. Increases in both policy charges and
underwriting income resulted primarily from the growth in the variable annuity
balance over the prior-year period.
18
<PAGE>
Investment. The following table summarizes Torchmark's investment income
and excess investment income.
Excess Investment Income
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine months
Ended September 30, Increase
---------------------------- -------------------
2000 1999 Amount %
--------- --------- ------- ---
<S> <C> <C> <C> <C>
Net investment income $ 352,611 $ 333,692 $18,919 6
Tax equivalency adjustment 7,225 8,689 (1,464) (17)
--------- --------- ------- ---
Tax equivalent investment income 359,836 342,381 17,455 5
Required interest on net insurance policy liabilities (137,462) (131,714) (5,748) 4
Financing costs (53,042) (49,224) (3,818) 8
--------- --------- ------- ---
Excess investment income $ 169,332 $ 161,443 $ 7,889 5
========= ========= ======= ===
</TABLE>
On a tax equivalent basis, net investment income increased 5% to $360
million in the first nine months of 2000, compared with $342 million during the
same 1999 period. The increase was caused primarily by the growth in the
investment portfolio. Average invested assets were $6.6 billion in the 2000
nine months with fixed maturities on an amortized cost basis, compared with $6.3
billion in the 1999 period, an increase of 4%. An improvement in overall
investment yield also contributed to the increase in income. The overall
increase in average invested assets of $263 million was achieved over the prior-
year quarter even though share purchases of $114 million were made under the
share repurchase program in the previous twelve months and short-term debt in
the net amount of $94 million was also repaid during the prior twelve months.
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. Financing costs rose 8% to $53 million in the
2000 period. While short-term debt was reduced at September 30, 2000 from the
prior-year period, the increase in borrowing cost resulted from an increase in
interest rates on short-term debt in 2000. Excess investment income for the
2000 nine months rose 5% to $169 million from $161 million for the same period
of 1999, due primarily to the increase in investment income. Because
significant cash flow has been used to purchase Torchmark stock, management
believes excess investment income should be considered on a per-share basis.
Excess investment income per share rose 9% in 2000 to $1.31 from $1.20.
19
<PAGE>
During the first nine months of 2000, Torchmark continued to emphasize
purchases of investment grade fixed-maturity bonds. Purchases totaled $814
million and had an average yield of 7.94%, equivalent to an effective annual
yield of 8.15%. For the comparable 1999 period, fixed-maturity acquisitions
totaled $1.7 billion, and had average and effective annual yields of 7.32% and
7.47%, respectively. The reduced purchases resulted primarily from a decline in
investable proceeds from sales in the first nine months of 2000, compared with
the same period in 1999. Sales were much higher in 1999 because of the effort
to generate capital losses to offset prior year taxable capital gains. The
average life of 2000 purchases was 7.5 years, compared with 16.5 years for the
same period of last year.
At the end of the third quarter, the fixed-maturity portfolio stood at $6.1
billion at amortized cost and had an unrealized loss of $299 million. At the
same quarter-end in 1999, the portfolio was $5.7 billion and the unrealized loss
was $153 million. The increase in unrealized loss reflects primarily the impact
of interest rate changes on market values.
At September 30, 2000, the portfolio had an estimated average life of 12.1
years and an average duration of 6.2 years. The overall quality of the
portfolio continues to be high, with an average quality rating of "A."
Approximately 94% of the portfolio was considered investment grade.
Torchmark sold 3.75 million shares of Vesta Insurance Group (Vesta) during
the second quarter of 2000. In early July, 2000, Torchmark sold the remaining
1.38 million shares of Vesta stock that it held. The sales provided proceeds of
$33 million and resulted in an after-tax loss of $1.5 million, of which $1
million was recorded in the second quarter of 2000. Torchmark no longer has any
ownership interest in Vesta.
Financial Condition
Liquidity. Torchmark's liquidity is indicated by its strong positive cash
flow, its marketable investments, and the availability of a line of credit
facility. Torchmark's insurance operations ordinarily generate cash flows in
excess of immediate requirements. Torchmark's net cash inflows from operations
were $384 million in the first nine months of 2000, compared with $295 million
in the same period of 1999, an increase of 30%. In addition to cash flows from
operations, Torchmark received $184 million in investment maturities or
repayments during the first nine months of 2000.
Torchmark's cash and short-term investments were $95 million at September
30, 2000, compared with $115 million of these assets at December 31, 1999. Cash
and short-term investments were $82 million at the end of September, 1999. In
addition to these liquid assets, Torchmark's entire portfolio of fixed-income
and equity securities, in the approximate amount of $5.8 billion at market value
on September 30, 2000, is available for sale should any need arise.
Torchmark has in place a line of credit facility, which is also designed as
a backup
20
<PAGE>
credit line for a commercial paper program. This program provides credit up to a
maximum amount of $600 million, and permits Torchmark to borrow from either the
credit line or issue commercial paper at any time up to the combined facility
maximum of $600 million. Terms of the facility permit borrowing up to the
maximum amount at variable interest rates. Torchmark is subject to certain
covenants regarding capitalization and earnings, with which Torchmark was in
full compliance at September 30, 2000. At that date, Torchmark had commercial
paper outstanding in the face amount of $311 million and no borrowings on the
line of credit. At December 31, 1999, $420 million face amount of commercial
paper was outstanding.
Capital resources. Torchmark's total debt outstanding was $681 million at
September 30, 2000, compared with $790 million at December 31, 1999 and $774
million at September 30, 1999. Long-term debt was $372 million at September 30,
2000, December 31, 1999, and September 30, 1999. Debt as a percentage of total
capitalization was 21.6% at September 30, 2000, 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
25.2% at year-end 1999 and at September 30, 1999. If the MIPS were counted as
debt, the debt to capitalization ratio would be 27.7% at September 30, 2000,
compared with 31.3% at year-end 1999. Interest coverage was 11.2 times for the
first nine months of 2000, compared with 8.7 times for the first nine months of
1999. Excluding realized losses, interest coverage would have been 11.2 in 2000
and 11.3 in 1999.
Torchmark acquired 5.1 million of its shares on the open market during the
first nine months of 2000. These share purchases were made at a cost of $114
million during the period. Share purchases were primarily funded by the sale of
investments. Torchmark intends to make additional purchases under its share
repurchase program on the open market when prices are attractive. However, share
purchases will not be made when such purchases jeopardize the excellent to
superior claims-paying ratings of its insurance subsidiaries or the debt ratings
of the parent company.
Torchmark's shareholders' equity was $2.11 billion at September 30, 2000,
compared with $1.99 billion at 1999 year end and $2.01 billion one year ago.
Book value per share was $16.60 at September 30, 2000, compared with $15.10 at
year-end 1999 and $15.28 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 $2.28 billion at September 30, 2000,
compared with $2.15 billion at 1999 year end and $2.10 billion a year ago. On a
per share basis, adjusted book value was $17.99 at the end of September, 2000,
compared with $16.32 at year-end 1999 and $15.96 at September 30, 1999. The
year-over-year growth in adjusted book value per share was 12.7%, and was
achieved during a period in which $114 million in share buybacks were made.
The annualized return on common equity, or net operating income from
continuing operations as a percentage of average equity excluding the effects of
interest rate fluctuations on securities, was 16.4% for the first nine months of
2000. Return on equity for the same period in 1999 was 16.2%.
21
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no quantitative or qualitative changes with respect to
market risk exposure during the nine months ended September 30, 2000.
22
<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. The
likelihood or extent of a punitive damage award in any given case is currently
impossible to predict. As of September 30, 2000, Liberty was a party to
approximately 107 active lawsuits (including 16 employment related cases and
excluding interpleaders and stayed cases), 80 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, Dismukes v. Torchmark Corporation (Case No.
---------------------------------
CV-94-1006-P-M), which was filed on December 30, 1994 in the U.S. District Court
for the Northern District of Alabama, was the only remaining purported class
action litigation brought by Torchmark shareholders alleging untimely and
inadequate disclosure of material contingent liabilities arising out of
insurance policy litigation involving Liberty. The U.S. District Court entered
an order granting partial summary judgment on behalf of the defendants on April
16, 1996. Claims for damages based on Section 10b-5 of the Securities Exchange
Act, on state securities laws and for common law fraud remained pending in the
case following the U.S. District Court's 1996 order. On September 28, 2000, the
District Court granted defendants' motions for summary judgment declaring
plaintiffs claims as time-barred by the statute of limitations and denying class
certification. Plaintiffs have appealed the District Court's orders to the
Eleventh Circuit Court of Appeals.
Previous reports have disclosed that in July 1998, a jury in the U.S.
District Court in the Middle District of Florida recommended an aggregate total
verdict amounting to $21.6 million against Liberty in Hipp v. Liberty National
------------------------
Life Insurance Company (Case No. 95-1332-CIV-17A). This case, originally filed
----------------------
in 1995 in the Florida court system, is a collective action under the Fair Labor
Standards Act, alleging age discrimination by Liberty in violation of the Age
Discrimination in Employment Act and the Florida Civil Rights Act. The
plaintiffs, ten present or former Liberty district managers, sought damages for
lost wages, loss of future earnings, lost health and retirement benefits and
lost raises and expenses. Three of these plaintiffs, Florida residents, also
sought compensatory and punitive damages allowable under Florida law. On
November 20, 1993, the District Court remitted the $10 million punitive damage
portion of the jury verdict to $0, thus reducing the total verdict to $11
million (including an advisory verdict of $3.2 million in front pay awards).
Additional revised front pay submissions were made by the plaintiffs to the
District Court in December 1998 and Liberty responded thereto in January 1999.
On March 11, 1999, the District Court reduced the Hipp verdict to $7 million by
----
denying the plaintiffs front pay damages and remitting the punitive damages
awarded to the Florida resident plaintiffs to the $100,000 limit allowable under
Florida law. Final judgment was entered by the District Court and Liberty filed
its appeal with the Circuit Court of Appeals for the Eleventh Circuit on
September 27, 1999. Oral arguments in this appeal were presented before the
Eleventh Circuit on September 18, 2000.
23
<PAGE>
As previously reported, on March 15, 1999, Torchmark was named as a
defendant in consolidated derivative securities class action litigation
involving Vesta Insurance Group, Inc. filed in the U.S. District Court for the
Northern District of Alabama (In re Vesta Insurance Group, Inc. Securities
--------------------------------------------
Litigation. Master File No. 98-AR-1407-S). The amended consolidated complaint in
----------
this litigation alleges violations of Section 10(b) of the Securities Exchange
Act of 1934 by the defendants Vesta, certain present and former Vesta officers
and directors, Vesta's former independent public accountants and Torchmark and
of Section 20(a) of the Exchange Act by certain former Vesta officers and
directors and Torchmark acting as "controlling persons" of Vesta in connection
with certain accounting irregularities in Vesta's reported financial results and
filed financial statements. Unspecified damages and equitable relief are sought
on behalf of a purported class of purchasers of Vesta equity securities between
June 2, 1995 and June 29, 1998. No class has yet been certified in this
litigation. On October 23, 2000, the District Court denied the defendants'
motions to dismiss the consolidated amended class action complaint in this
litigation and ordered the defendants to answer the amended class action
complaint.
It has been previously reported that purported class action litigation
was filed against Torchmark's subsidiary, American Income Life Insurance Company
and certain of its employee benefit plans (Peet v. American Income Life
----------------------------
Insurance Company, Case No. C 99-2283) on May 18, 1999 in the U.S. District
-----------------
Court for the Northern District of California, which was subsequently
transferred to the U.S. District Court for the Western District of Texas.
Plaintiffs on behalf of all current and former public relations representatives
of American Income asserted that they had been improperly classified as
independent contractors rather than employees and thus denied participation in
American Income's employee benefit plans. The lawsuit alleged breach of
fiduciary duty and wrongful denial of access to plan documents and other
information under the Employee Retirement Income Security Act. Declaratory and
injunctive relief together with restitution, disgorgement and statutory
penalties were sought. On September 12, 2000, the District Court granted the
defendants' motions for partial summary judgment and denied plaintiffs' motion
for class certification with leave to renew plaintiffs' class certification
motion if they provided the Court with information regarding additional benefit
plans from which they had been improperly excluded.
As previously reported, Liberty was served on October 28, 1999 with a
subpoena from the Florida Department of Insurance in connection with that
Department's investigation into Liberty's sales practices and disclosures in the
State of Florida regarding industrial life insurance and low coverage life
insurance policies. Liberty has also received similar subpoenas from the
Alabama, Georgia, Kentucky, Texas, South Carolina and Minnesota Insurance
Departments regarding its industrial life insurance and other low face-amount
life insurance policies sold in those states. Specific inquiry is made into the
historical use of race-based mortality, a practice discontinued by Liberty many
years ago. Liberty has been and continues responding to these subpoenas in a
timely fashion. In July 2000, the Florida and Georgia Insurance Departments
issued cease and desist orders to all companies reporting premium income from
industrial life insurance, including Liberty, stating that, to the extent that
any company is currently collecting any race-based insurance premiums from
Florida and Georgia residents, respectively, it immediately cease and desist
from collecting any premium differential based on the race of the policyholders.
On August 22, 2000, the Florida District Court of Appeals issued an order
staying the Florida Insurance Department's immediate final cease and desist
order, pending appeals to the Florida Supreme Court.
24
<PAGE>
On December 8, 1999, purported class action litigation was filed
against Liberty in the United States District Court for the Northern District of
Alabama (Moore v. Liberty National Life Insurance Company, Case No.
------------------------------------------------
CV-99-BU-3262-S), on behalf of all African-Americans who have or have had at the
time of policy termination an ownership interest in certain life insurance
policies ($25,000 face amount or less) marketed by Liberty and certain of its
former subsidiaries. The alleged class period covers virtually the entire
twentieth century. Plaintiffs allege racial discrimination in Liberty's premium
rates in violation of 42 U.S.C. ss. 1981, breach of fiduciary duty in sales and
administrative practices, receipt of excessive and unreasonable premium payments
by Liberty, improper hiring, supervision, retention and failure to monitor
actions of officers, agents and employees, breach of contract in dismantling the
debit premium collection system, fraudulent inducement and negligent
misrepresentation. Unspecified compensatory and punitive damages are sought
together with a declaratory judgment and equitable and/or injunctive relief,
including establishment of a constructive trust for the benefit of class
members. Defendants filed a motion for judgment on the pleadings or in the
alternative for summary judgment on January 27, 2000. On April 7, 2000, the
District Court entered an order granting Liberty's motion for judgment on the
pleadings and dismissing plaintiffs' claims under 42 U.S.C. ss. 1981 with
prejudice as time-barred and dismissing their state law claims without prejudice
to re-file in state court if desired. Plaintiffs subsequently filed motions with
the District Court to reconsider its April 17, 2000 order and for permission to
file an amended complaint adding similar claims under 24 U.S.C. ss. 1982.
Liberty opposed this motion. On June 22, 2000, purported class action litigation
with allegations comparable to those in the Moore case was filed against Liberty
-----
in the Circuit Court of Jefferson County, Alabama (Baldwin v. Liberty National
---------------------------
Life Insurance Company, Case No. CV 00-684). The Baldwin case is currently
---------------------- -------
stayed pending disposition of the Moore case.
-----
On July 3, 2000, the District Court issued an order in the Moore case
-----
granting in part and denying in part the plaintiffs' motions. The District Court
ordered the Moore plaintiffs to file an amended complaint setting forth their
-----
claims under 28 U.S.C. ss.ss. 1981 and 1982 and, if such claims are timely, any
state law claims for breach of contract related to the discontinuance of debit
collections, and dismissed with prejudice all remaining state law claims of the
plaintiffs as time-barred by the common law rule of repose. On July 14, 2000,
plaintiffs filed their amended complaint with the District Court and Liberty
filed a motion to alter or amend the District Court's July order or, in the
alternative, requested that the District Court certify for purposes of appeal
the issue whether the state law doctrine of repose should be applied to and bar
plaintiffs' actions under ss.ss. 1981 and 1982. The District Court entered such
an order on July 21, 2000 and stayed proceedings in Moore pending resolution of
-----
Liberty's petition to the U.S. Circuit Court of Appeals for the Eleventh
Circuit. Liberty filed a petition on July 30, 2000 with the Eleventh Circuit
seeking that Court's permission to appeal the portions of the District Court's
July order in Moore granting the plaintiffs the right to file the amended
-----
complaint. The Eleventh Circuit Court granted Liberty's motion and will consider
Liberty's arguments regarding the applicability of the state law of repose to
actions under ss.ss.1981 and 1982. Two individual cases with allegations
comparable to those in the Moore case were filed against Liberty in September
-----
2000 in the Circuit Courts of Shelby and Dallas Counties, Alabama, respectively.
Plaintiffs in the Shelby County case dismissed their litigation without
prejudice in September 2000 and the Dallas County litigation remains pending.
25
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(11) Statement re computation of per share earnings
(27) Financial Data Schedule
(b) Reports on Form 8-K
A report on form 8-K was filed August 23, 2000 reporting the Carter v.
---------
Liberty National Life Insurance Company litigation. No financial statements
---------------------------------------
were required to be filed.
26
<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: November 9, 2000 /s/ C. B. Hudson
-------------------------------------
C. B. Hudson, Chairman of the
Board, President, and Chief
Executive Officer
Date: November 9, 2000 /s/ Gary L. Coleman
-------------------------------------
Gary L. Coleman, Executive Vice
President and Chief Financial Officer
(Chief Accounting Officer)
27
