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.
<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>
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
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
<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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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