SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2003
Commission File Number 1-8052
TORCHMARK CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
63-0780404
(I.R.S. Employer Identification No.)
2001 3rd Avenue South, Birmingham, Alabama
(Address of principal executive offices)
35233
(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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
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, 2003
Index of Exhibits (Page 51)
Total number of pages included are 52.
INDEX
Part I.
PART II.
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands except per share data)
Investments:
Fixed maturities, available for sale, at fair value (amortized cost: 2003—$7,057,873; 2002—$6,888,830)
Equity securities, at fair value (cost: 2003—$51,247; 2002—$24,260)
Mortgage loans, at cost (fair value: 2003—$121,233; 2002—$122,368)
Investment real estate, at depreciated cost
Policy loans
Other long-term investments, at fair value
Short-term investments
Total investments
Cash
Accrued investment income
Other receivables
Deferred acquisition costs
Value of insurance purchased
Property and equipment
Goodwill
Other assets
Separate account assets
Total assets
Liabilities and Shareholders’ Equity
Liabilities:
Future policy benefits
Unearned and advance premiums
Policy claims and other benefits payable
Other policyholders’ funds
Total policy liabilities
Accrued income taxes
Other liabilities
Short-term debt
Long-term debt (fair value: 2003—$652,404; 2002—$612,172)
Separate account liabilities
Total liabilities
Trust preferred securities (fair value: 2003—$165,350; 2002—$157,200)
Shareholders’ equity:
Preferred stock, par value $1 per share—Authorized 5,000,000 shares; outstanding: –0– in 2003 and in 2002
Common stock, par value $1 per share—Authorized 320,000,000 shares; outstanding: (2003—118,783,658 issued, less 4,183,417 held in treasury and 2002—126,800,908 issued, less 8,533,456 held in treasury)
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Treasury stock, at cost
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands except per share data)
Revenue:
Life premium
Health premium
Other premium
Total premium
Net investment income
Realized investment gains (losses)
Other income
Total revenue
Benefits and expenses:
Life policyholder benefits
Health policyholder benefits
Other policyholder benefits
Total policyholder benefits
Amortization of deferred acquisition costs
Commissions and premium taxes
Other operating expense
Interest expense
Total benefits and expenses
Income from continuing operations before income taxes and preferred securities dividends
Income taxes
Preferred securities dividends (net of tax)
Net income
Basic net income per share
Diluted net income per share
Dividends declared per common share
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollar amounts in thousands)
Other comprehensive income (loss):
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period
Less: reclassification adjustment for gains (losses) on securities included in net income
Less: reclassification adjustment for amortization of discount and premium
Less: foreign exchange adjustment on securities marked to market
Unrealized gains (losses) on securities
Unrealized gains (losses) on other investments
Unrealized gains (losses) adjustment to deferred acquisition costs
Foreign exchange translation adjustments
Other comprehensive income (loss), before tax
Income tax benefit (expense) related to other comprehensive income (loss)
Other comprehensive income (loss)
Comprehensive income
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
Cash provided from operations
Cash provided from (used for) investment activities:
Investments sold or matured:
Fixed maturities available for sale—sold
Fixed maturities available for sale—matured, called, and repaid
Other long-term investments
Total investments sold or matured
Investments acquired:
Fixed maturities
Total investments acquired
Net (increase) decrease in short-term investments
Net effect of change in payable or receivable for securities
Disposition of properties
Additions to properties
Cash used for investment activities
Cash provided from (used for) financing activities:
Issuance of common stock
Additions to debt
Repayments of debt
Acquisition of treasury stock
Cash dividends paid to shareholders
Net receipts (withdrawals) from deposit product operations
Cash used for financing activities
Net increase (decrease) in cash
Cash at beginning of year
Cash at end of period
4
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 accounting principles generally accepted in the United States of America. 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, 2003, and the consolidated results of operations, comprehensive income and cash flows for the periods ended June 30, 2003 and 2002. During the quarter ended June 30, 2003, Torchmark had no significant changes to its accounting policies.
Note B—Earnings Per Share Giving Effect to Stock Options
Torchmark accounts for its employee stock options in accordance with Statement of Financial Accounting Standards (SFAS) No. 123–Accounting for Stock-Based Compensation as amended by SFAS 148–Accounting for Stock-Based Compensation—Transition which defines a “fair value method” of measuring and accounting for compensation expense from employee stock options. This standard also allows accounting for such options under the “intrinsic value method” in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations. If a company elects to use the intrinsic value method, then pro forma disclosures of earnings and earnings per share are required as if the fair value method of accounting was applied.
Torchmark accounts for stock options under the intrinsic value method as outlined in APB 25, whereby compensation expense is recognized only if the exercise price of the employee stock option is less than the market price of the underlying stock on the date of grant. As required by SFAS 123, Torchmark has computed the required pro forma earnings disclosures utilizing the fair value method. The fair value method requires the use of an option valuation model, such as the Black-Scholes option valuation model, to value employee stock options. Compensation expense is based on these values. The expense is then charged to pro forma earnings over the option vesting period.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(UNAUDITED)
Torchmark’s pro forma earnings information giving effect to stock option expense is presented in the following table.
Net income as reported
After tax stock-based compensation, as reported
After tax effect of stock-based compensation, fair value method
Pro forma net income
Earnings per share:
Basic—as reported
Basic—pro forma
Diluted—as reported
Diluted—pro forma
Note C—Earnings Per Share
A reconciliation of basic and diluted weighted-average shares outstanding is as follows:
Basic weighted average shares outstanding
Weighted average dilutive options outstanding
Diluted weighted average shares outstanding
Antidilutive shares*
*Antidilutive shares are excluded from the calculation of diluted earnings per share.
For the periods presented, pro forma income available to common shareholders for basic earnings per share is equivalent to pro forma income available to common shareholders for diluted earnings per share.
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Note D—Related Party Information
In 1999, Torchmark sold certain of its investment real estate properties to an investor group of which Elgin Development Company was a 30% investor. R. K. Richey, a director and Chairman of the Executive Committee of the Board of Directors of Torchmark, was an investor in Elgin Development at the time of the transaction and currently is a 25% investor in the parent company of Elgin Development. As a part of the consideration received for the real estate transaction, Elgin Development issued to Torchmark a $12.4 million ten-year collateralized 8% note. At March 31, 2003, the outstanding balance on the collateralized note was $9.7 million. Elgin Development did not make the scheduled payment of principal and interest on the collateralized note that was due March 31, 2003, resulting in a default on the note. In June 2003, as a result of Elgin Development’s inability to cure the default within the notes’ defined grace period, Torchmark recovered from Elgin Development the real estate that was collateral for the note. This real estate had an estimated fair value of $5.7 million at June 30, 2003, resulting in a loss from the transaction of $4.0 million, pretax, and $2.6 million, after tax.
Note E—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 the investment segment, which manages the Company’s investment portfolio, debt, and cash flow. The measure of profitability for insurance segments is underwriting income before other income and administrative expenses. It represents the 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 Torchmark’s debt and preferred securities. Other income and the unallocated insurance administrative expense are classified in a separate “Other” segment. The tables below set forth reconcilations of Torchmark’s revenues and measures of profitability by segment to its major income statement line items for the six-month periods ended June 30, 2003 and June 30, 2002.
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Note E—Business Segments (continued)
Reconciliation of Segment Operating Information to the Consolidated Statement of Operations
Premium
Other income***
Expenses
Policy benefits
Required interest on reserves
Amortization of acquisition costs
Commissions and premium tax
Required interest on acquisition costs
Insurance administrative expense**
Parent expense***
Financing costs:
Debt
Preferred securities##
Total expenses
Measure of segment profitability (pretax adjusted operating income)
Deduct applicable income taxes
Adjusted net operating income
Add income taxes applicable to segment profitability
Add financing costs—preferred securities (reported on Statements of Operations after tax)##
Deduct realized investment losses
Pretax income per Statements of Operations
*
**
***
#
##
8
Revenue
Parent expenses***
Preferred securities ##
Add financing costs—preferred securities (reported on Statement of Operations after tax)##
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Note F—New Accounting Standard
The Financial Accounting Standards Board issued a new accounting standard during the second quarter of 2003, Statement 150— Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150). SFAS 150 requires the reclassification in the financial statements of certain financial instruments which have both characteristics of liabilities and equity as liabilities. Included in the scope of this Standard are mandatorily redeemable securities, such as Torchmark’s Trust Preferred shares. It is effective for Torchmark’s instruments as of July 1, 2003. Restatement of prior periods for comparability is prohibited. SFAS 150 requires an initial revaluation of any mandatorily redeemable instruments to market value upon adoption, with this value becoming the new cost basis. This market adjustment will be treated as the cumulative effect of a change in an accounting principle. Subsequently, these debt instruments will be amortized from this new cost basis to the price to be paid when the securities become manditorily redeemable as an adjustment to interest expense. Torchmark’s other debt instruments are unaffected by this Standard and will continue to be carried at amortized cost. Dividends on the Trust Preferred instruments will be reclassified as interest cost, and as required by the Standard, prior periods will not reflect this reclassification for comparability. The fair value of Torchmark’s Trust Preferred Securities at June 30, 2003 was $165 million, compared with the book value of $144 million.
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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:
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Results of Operations
Summary of Operations. Torchmark’s operations are segmented into its insurance underwriting and investment operations as described in Note E—Business Segments. The measures of profitability for each segment are defined in that note. Also included in this note are schedules indicating how the measures of profitability are calculated and how they reconcile to the major line items in Torchmark’s Consolidated Statements of Operations. These designated measures of profitability are highly useful to management in evaluating the performance of the segments and the underlying marketing groups within each insurance segment. These measures enable management to view period-to-period trends, and make informed decisions regarding future courses of action.
The sum of the measures of profitability for the segments is Torchmark’s pretax adjusted operating income, an important and very useful measure to Torchmark’s management, investors, and other interested parties in evaluating the overall operating performance of the Company. This adjusted operating income, after deducting the applicable income taxes, is referred to as adjusted net operating income, and has been consistently used over time by management to monitor Torchmark’s performance and growth trends, and is used as a basis for management compensation.
Adjusted net operating income is disclosed as required under accounting principles generally accepted in the United States of America (GAAP). It does not appear on the Consolidated Statements of Operations, but is disclosed in the note to the financial statements regarding Business Segments as required by SFAS 131 – Disclosures about Segments of an Enterprise and Related Information. Adjusted net operating income differs from net income as reported on the Statements of Operations because it excludes certain nonoperating items, nonrecurring items, and discontinued operations which are recorded on the GAAP Statements of Operations. These items can impact the comparability of current period operating results with prior period operating results if only net income is considered and financial statements are not taken as a whole.
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A reconciliation of adjusted net operating income to net income as reported in the Statements of Operations is as follows with per share data on a diluted basis.
Reconciliation of Adjusted Net Operating Income to Net Income
(Dollar amounts in thousands, except for per share data)
Realized gains (losses), net of tax, from:
Investment sales
Writedown of fixed maturities
Valuation of interest rate swap agreements
In comparing the first six months of 2003 with 2002, the difference between net income and adjusted net operating income is due to realized gains (losses). A realized gain (loss) is a recurring item, which Torchmark does not consider to be a component of its core operations and, accordingly, not a component of adjusted net operating income. Fixed maturities, which comprise 92% of the investment portfolio, are generally held to maturity, but are sometimes sold because of deteriorating credit quality, for tax purposes, or other reasons. These sales result in gains and losses which can be significant in relation to Torchmark’s core earnings. GAAP accounting rules also require Torchmark to revalue its interest-rate swaps to their fair value at the end of each accounting period. These fair values fluctuate with interest rates in financial markets. While period-to-period fluctuations can be substantial, the value of the swaps, and the cumulative gains and losses from marking the swaps to market value from inception, will be zero when the swap agreements expire. The GAAP rules require that these temporary changes in swap values be included as a component of realized gains (losses) on the Statements of Operations. Torchmark’s core insurance business is very long-term in nature, with the realization of actual profits emerging over many years. The inclusion of realized gains and losses in adjusted net operating income could affect the comparability of Torchmark’s period-to-period operating trends, and may not be indicative of future performance.
Net realized capital losses from investments, excluding interest rate swaps, were $10.1 million after tax for the 2003 six months, compared with net realized losses of $52.0 million in the year-ago period. The 2003 losses consist of a writedown of bonds in the amount of $6.3 million and losses on the sale of other investments of $3.8 million. During the first quarter of 2003, the book values of certain bonds were considered to be other-
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than-temporarily impaired and were written down from a total of $16.3 million to $6.6 million, resulting in the after-tax loss of $6.3 million. In the prior year second quarter, Torchmark wrote down bonds with a book value of $110 million determined to be other-than-temporarily impaired to their fair value at that time of $27 million. This writedown resulted in an after-tax loss of $54 million in 2002.
Torchmark’s segments consist of its insurance segments: life, health, annuity, and other; the investment segment; and the corporate segment. Insurance segment profitability is represented by insurance underwriting income before insurance administrative expense and other income. This insurance underwriting income consists of premium income less net policy obligations, commissions, and acquisition expenses. Investment segment profitability is indicated by excess investment income. Excess investment income is tax-equivalent net investment income reduced by the interest credited to net policy liabilities and the financing costs of Torchmark’s debt and preferred securities. Tax-equivalent investment income is the investment segment’s measure of net investment income. It includes an adjustment to the yield on tax-exempt securities to produce a yield equivalent to the pretax yield on taxable securities. Tax-equivalent investment income is useful because it places all fixed maturities on a comparable-yield basis, regardless of tax treatment.
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The following table is a summary of Torchmark’s adjusted net operating income indicating the contribution of each component segment.
Summary of Adjusted Net Operating Income
Increase
Insurance underwriting income before other income and administrative expense:
Life
Health
Annuity
Total
Other income (Other segment)
Administrative expense (Other segment)
Insurance underwriting income
Excess investment income (Investment segment)
Corporate expense (Corporate segment)
Tax equivalency adjustment (Investment segment)
Pretax adjusted operating income
Income tax applicable to adjusted operating income
Adjusted net operating income per diluted share
A discussion of operations follows by each of Torchmark’s segments.
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Life insurance. Torchmark’s life insurance premium income increased 7% to $647 million in the first six months of 2003. The following table presents Torchmark’s life insurance premium and policy charges by distribution method.
Life Insurance
Premium by Distribution Method
Direct Response
Liberty National Exclusive Agency
American Income Exclusive Agency
Military
United American Independent Agency
United American Branch Office Agency
Other
Total life premium
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Annualized life premium in force was $1.4 billion, 7% higher than the $1.3 billion in force a year earlier. Life insurance sales, in terms of annualized premium issued, were $183 million in the first six months of 2003, increasing 11% over 2002 six-month sales of $165 million. The following table presents Torchmark’s life insurance sales and in force data by distribution method.
Annualized Premium Sales and In Force by Distribution Method
UA Independent Agency
UA Branch Office Agency
Other Distribution
Torchmark’s Direct Response operation is conducted primarily through direct mail, but also through co-op mailings, television, and direct mail solicitations endorsed by groups, unions and associations. Direct Response’s life premium of $174 million in 2003 represented 27% of Torchmark’s total life premium, the largest percentage contribution of any Torchmark distribution system. Direct Response life premium increased 10% over the prior-year period. Direct Response life insurance sales rose 26% from $61 million to $77 million in the 2003 six months, the highest growth of any Torchmark distribution system both in terms of percentage and dollar amount. Annualized premium in force rose 11% over the past twelve months to $383 million at June 30, 2003.
The American Income Agency markets to members of labor unions, credit unions, and other associations. This agency produced premium income of $152 million in the 2003 six-month period, an increase of 13% over the same 2002 period. American Income life premium represented 23% of Torchmark’s total life premium. Life sales for this agency rose 13% in the 2003 six-months to $50 million. Growth in sales of the American Income Agency was largely attributable to the growth in the number of agents, which rose 15% over the prior year to 2,253 at June 30, 2003. Annualized life premium in force was $323 million at June 30, 2003, up 14% compared with a year ago. American Income’s growth in
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premium income was the strongest of any Torchmark life agency, in terms of both percentage and dollar amount.
The Liberty National Agency markets to middle-income customers in the Southeastern United States. It represented 24% of Torchmark’s life premium in the 2003 six-month period, the second largest percentage of any distribution system. Life premium was $153 million, increasing 1% over 2002 six-month premium. Annualized life premium in force was $321 million at June 30, 2003, increasing 1% over the prior year. Life insurance sales declined 4% to $27 million of annualized life premium issued in the 2003 period from $28 million in the year-ago period. The decline in sales resulted primarily from the discontinued practice of agents accepting the initial premium in the form of cash, a type of business prone to higher lapse rates. Management believes that the lower sales from this change in procedure will be temporary, and that over time the new procedure could produce higher margins. Liberty’s total agent count rose 5% over the prior year to 2,198, however, the count of renewal agents, those agents that have been with Liberty for more than one year, declined 1% to 917. Liberty has recently restructured its bonus system to not only reward production, but also to encourage agent recruiting and retention.
Torchmark’s Military Agency is an independent agency comprised of former military officers who sell exclusively to military officers and their families. Life premium in the Military Agency rose 12% in the 2003 six months to $81 million. Sales in the Military Agency were $13 million in the first six months of 2003, rising 12%. This agency also had 12% growth in annualized life premium in force, which totalled $169 million at June 30, 2003.
Torchmark’s Other Distribution systems offering life insurance include United Investors and various minor distribution channels. The Other Distribution group contributed $52 million of life premium to Torchmark, a decline of 5%. Other Distribution life premium represented 8% of Torchmark’s total life premium in the 2003 period. Other Distribution sales declined 18% to $3.2 million. Annualized premium in force was down 5% to $124 million. These declines were largely affected by surrender activity experienced by United Investors.
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Summary of Results
Premium and policy charges
Net policy obligations
Commissions and acquisition expense
Insurance underwriting income before other income and administrative expense
Life insurance underwriting income before insurance administrative expenses was $159 million in the first six months of 2003, increasing 10% over the same period of 2002. As a percentage of life premium, underwriting income rose from 24% to 25% in the 2003 six-month period. The Direct Response Group has impacted life insurance margins by emphasizing sales of its juvenile policy, a higher margin product. American Income, which has the highest underwriting profit margin as a percentage of premium, accounted for a higher percentage of total life premium than in the first half of 2002, contributing to the improved margins.
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Health insurance. Health insurance premium income was flat at approximately $519 million when comparing the first six months of 2003 with the same period of 2002. The table below is an analysis of Torchmark’s health premium by distribution method.
Health Insurance
Total health premium
The table below is a presentation of health insurance sales and in force data by distribution method.
Liberty Exclusive Agency
AI Exclusive Agency
Annualized health insurance premium in force was $1.04 billion at June 30, 2003, a slight increase over a year ago. Sales of health insurance, as measured by annualized premium issued, grew 5% to $107 million during the six months of 2003 as compared with the year-ago period, reversing the decline experienced in the first quarter of 2003.
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The following table presents health insurance sales and premium in force data by product type.
Annualized Premium Sales and In Force by Product Type
Medicare Supplement
Cancer
Other health-related policies
Torchmark’s health product offerings are limited to supplemental and limited-benefit plans. Historically, Torchmark’s predominant health insurance product has been Medicare Supplemental insurance, which comprises 68% ($706 million) of the Company’s total $1 billion health annualized premium in force at June 30, 2003. A year ago, Medicare Supplement annualized premium in force was $744 million, or 72% of all health insurance in force.
The United American Branch Office and Independent agencies are the predominant distributors of Torchmark’s health products, including Medicare Supplements, accounting for $798 million of annualized health premium in force at June 30, 2003. Beginning in the third quarter of 2002, Medicare Supplement sales have no longer been the predominant health product being sold by these two agencies as Medicare Supplement sales have been under pressure for the last several years from increased price competition. The UA Independent agency, followed by the UA Branch Office, have expanded their product focus to include limited-benefit hospital/surgical policies. Increased consumer demand for these type policies is the result of the growing unavailability of individual major medical plans and decreased coverage offered by employers. For the six months ended June 30, 2003, the total health sales of these two agencies were $88 million of annualized premium, of which 62% were health plans other than Medicare Supplements.
Medicare Supplements will continue to be a major health product offering of Torchmark. Price pressure is expected to ease as competitors implement needed rate increases and Torchmark implements several new marketing strategies in the coming year.
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Cancer sales, produced primarily by the Liberty National Agency, were $6.1 million in the first six months of 2003, increasing 13% over the prior-year period. Cancer annualized premium in force was $171 million, compared with $170 million a year earlier. Cancer insurance represented 16% of Torchmark’s annualized health premium in force at June 30, 2003.
The following table presents underwriting margin data for health insurance.
Commissons and acquisition expense
Insurance underwriting income before other income and administrative expenses
Underwriting margins for health insurance declined 5% to $82 million in the first six months of 2003 from the year-ago period. As a percentage of health premium, underwriting margins declined from 17% in 2002 period to 16% in the 2003 period. The majority of the health margin decline results from the continuing margin pressure from increasing medical cost inflation on a closed block of Liberty National cancer policies. The closed block is about $76 million of annualized premium in force, or about one half of Liberty’s in force cancer business, and arose from a class-action settlement in the mid-nineties. Despite semi-annual rate increases over the past several years, the high loss ratio (claims/premiums) continues to impair underwriting margins. The Company is evaluating various non-rate increase alternatives to improve the underwriting margins on the block.
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Annuities. The following table presents collection and deposit balance information about Torchmark’s annuities.
Annuities
Collections and Deposit Balances
Six Months
Ended
June 30,
(Decrease)
Fixed
Variable
Torchmark markets both fixed and variable annuities. Fixed annuity collections were $79 million in the first six months of 2003, compared to the $9 million collected in the prior-year period. Fixed annuities on deposit with Torchmark at June 30, 2003 rose to $707 million, increasing 18% over $602 million a year ago. The fixed annuity balance increased $79 million, or 13%, from $628 million at year-end 2002. This increase is due primarily to production by a general agency hired by United American in the fourth quarter of 2002, and by United Investors’ insureds transferring funds from variable annuity accounts to fixed annuities. Collections of variable annuities were $6 million in the first six months of 2003, declining from variable collections of $15 million in the same period of 2002. The variable annuity balance was $1.5 billion at June 30, 2003, $1.4 billion at March 31, 2003, $1.5 billion at December 31, 2002, and $1.9 billion one year ago. The variable annuity balance rose for the first time over the prior quarter since the fourth quarter of 2001, due primarily to improved equity markets. The 19% decline in the variable annuity balance during the prior twelve months was primarily the result of surrenders, in part because of replacement of Torchmark’s variable annuity products by the Waddell & Reed sales force with those of a competitor. Prior to the second quarter of 2001, Waddell & Reed was the primary distributor of the variable annuities of United Investors. Torchmark is now marketing the variable annuities of United Investors through other broker-dealers. The decline in equity markets during the prior twelve months has also been a contributing factor in the decline in account balance.
On March 19, 2002, an Alabama jury awarded to Torchmark’s subsidiary, United Investors, $50 million compensatory damages against Waddell & Reed. The dispute arose regarding certain compensation on United Investors’ in-force block of variable annuities and alleged a scheme by Waddell & Reed to improperly replace United Investors’ variable annuities with those of another company. On June 25, 2002, an order was issued by the Jefferson County Alabama Circuit Court entering the jury verdict. Interest on the $50 million award was scheduled to accrue at an annual rate of 12% from June 25, 2002 until
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the date paid. Waddell & Reed appealed the Circuit Court’s decision to the Alabama Supreme Court. In October 2002, the Alabama Supreme Court affirmed the dismissal of counterclaims against Torchmark and an individual defendant but Waddell & Reed’s appeal of the jury verdict and trial court judgment remained pending. On April 18, 2003, the Alabama Supreme Court reversed in part and remanded in part the $50 million jury verdict. The Supreme Court found that conversion, breach of contract and one claim of fraud and suppression were properly submitted to the jury but that two claims, tortious interference with contractual relations and fraud in connection with a promise by Waddell & Reed not to replace United Investors’ existing variable contracts, should not have been submitted to the jury. Under Alabama law, the Supreme Court’s finding that two claims should not have been sent to the jury requires a remand to the trial court on the remaining claims.
United Investors filed a petition for rehearing with the Alabama Supreme Court and the Supreme Court issued an opinion on July 3, 2003 withdrawing its prior April 18, 2003 opinion. The Supreme Court revised its original ruling by affirming the trial court jury’s verdict in favor of United Investors and against Waddell & Reed on Waddell & Reed’s claims for unjust enrichment, breach of contract and fraud and by affirming a separate ruling by the trial judge that there was no contract between United Investors and Waddell & Reed as alleged by Waddell & Reed. The Supreme Court left intact its earlier decisions to reverse and render the trial court jury’s verdict in favor of United Investors on its claims of tortious interference and fraud related to Waddell & Reed’s actions to replace United Investors’ existing annuity policies with those of another carrier and to reverse and remand United Investors’ other claims for conversion, breach of contract, fraud and concealment back to the trial court for a new trial. United Investors will pursue its claims for actual damages relating to conversion of funds by Waddell & Reed and for punitive damages. Waddell & Reed has filed petition for rehearing with the Supreme Court regarding its July 2003 opinion which United Investors has opposed. Accordingly, United Investors continues not to record the award or the related accrued interest as income since it has not been received and all appeals have not been completed.
While Torchmark continues to sell annuity products, it does not expect to emphasize this product line in the future.
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The following table presents underwriting margin results for Torchmark’s annuities.
Policy charges
Insurance underwriting income before other
income and administrative expenses
Policy charges are assessed against the annuity account balance periodically for insurance risk, sales, administration, and cash surrender. Policy charges for annuities declined 25% in the first half of 2003 to $16 million, primarily as a result of the decline in the variable annuity account balance compared with the prior year. Annuity underwriting income decreased 36% in the 2003 period to $5 million from $9 million in the 2002 period, primarily because of the decline in policy charges. Net policy obligations included $2.9 million in guaranteed minimum death benefits in the 2003 period, an increase of $1.7 million over the prior period.
Administrative expense. Torchmark administrative expense consists of its insurance administrative expense and its parent company expense. Insurance administrative expense rose 5.3% to $64.8 million in the 2003 six months, compared with $61.5 million in the prior period. As a percentage of premium, insurance administrative expense increased from 5.4% in the 2002 six months to 5.5% in the 2003 period. Total administrative expense, including parent expense, rose 4.7% to $70.1 million in the 2003 period. As a percentage of total revenue, total administrative expense was flat in both periods at 4.8%. Pension costs added approximately $1.4 million in the 2003 period.
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Investment. The following table summarizes Torchmark’s investment income and excess investment income.
Excess Investment Income
Tax-equivalency adjustment*
Tax equivalent investment income
Required interest on net insurance policy liabilities
Trust Preferred securities
Interest rate swaps
Total financing costs
Excess investment income
Excess investment income per share
*Adjusts the yield on tax-exempt securities so that all fixed-maturity investments are on a comparable yield basis, regardless of tax treatment.
Excess investment income is tax-equivalent net investment income reduced by the interest credited to net insurance policy liabilities and Torchmark’s financing costs. Financing costs include interest on debt, the pretax dividends on Torchmark’s preferred securities, and the difference between the fixed-rate and floating-rate payments on Torchmark’s swap instruments. Excess investment income for the 2003 six months rose 8% to $158 million from $146 million for the same period of 2002. 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 13% in the 2003 period to $1.35 from $1.19.
The largest component of excess investment income is tax-equivalent net investment income, which increased 6% to $274 million in the first six months of 2003, compared with $258 million during the same 2002 period. The increase was primarily the result of the 6% growth in the investment portfolio (based on average invested assets). Average invested assets, which include fixed maturities at amortized cost, were $7.7 billion in the 2003 six-month period, compared with $7.2 billion in the 2002 period. The $461 million increase in average invested assets over the prior-year period was achieved even though Torchmark used $199 million to repurchase Torchmark shares under its share repurchase program during the prior twelve months.
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Financing costs declined 14% to $15.1 million in the 2003 period. This decline in financing costs resulted from lower interest rates compared with the prior period and the favorable effect they have had on Torchmark’s swap instruments and commercial paper borrowings.
Approximately 92% of Torchmark’s investments at fair market value are in a diversified fixed-maturity portfolio. The balance of investments is in mortgages (1.5%), short-terms (1.5%), policy loans, which are secured by policy cash values (3%), and other investments (2%). At June 30, 2003, fixed maturities had a fair value of $7.8 billion, compared with $7.2 billion at December 31, 2002 and $6.7 billion at June 30, 2002. An analysis of Torchmark’s fixed-maturity portfolio by component at June 30, 2003 is as follows.
Fixed Maturities by Component
(Dollar amounts in millions)
Fixed maturities available for sale:
Bonds:
U. S. Government direct obligations & agencies
GNMA pools
Other mortgage-backed securities
States, municipalities and political subdivisions
Foreign governments
Corporates
Asset-backed securities
Redeemable preferred stocks
Total fixed maturities
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An analysis of the fixed-maturity portfolio by quality rating at June 30, 2003 is as follows.
Fixed Maturities by Rating*
AAA
AA
A
BBB
BB
B
Below B
Not Rated
* Rating based on Bloomberg composite
The portfolio has an average quality rating of “BBB+.” Approximately 90% of the portfolio at amortized cost was considered investment grade.
The majority of Torchmark’s fixed-maturity holdings are in corporate securities. Torchmark’s investments in corporate fixed maturities are highly diversified in a wide range of industry sectors. At fair value, the following table presents the highest ten percentage holdings of Torchmark’s corporate fixed maturities by industry sector at June 30, 2003.
Industry
Depository institutions
Electric, gas, sanitation services
Insurance carriers
Nondepository credit institutions (finance)
Communications
Chemicals & allied products
Food & kindred products
Transportation equipment
Petroleum refining & related industries
Industrial, commercial machinery, computer equipment
All other sectors *
* No other individual industry sector represented more than 2% of Torchmark’s corporate fixed maturities.
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During the first six months of 2003, Torchmark continued to make investments in investment-grade fixed-maturity corporate bonds and trust preferred securities (classified as redeemable preferred stocks) with a diversity of issuers and industry sectors. The chart below summarizes selected information for fixed maturity purchases. Both yield and average life calculations on new purchases of noncallable bonds are based on the maturity date, or, for callable bonds, the call or maturity date whichever produces the lowest yield (“yield to worst”).
Fixed Maturity Acquisitions Selected Information
Cost of acquisitions:
Investment-grade corporate securities
Other investment-grade securities
Below investment-grade securities
Short-term governments
Total fixed-maturity acquisitions
Average yield*
Effective annual yield*
Average life (in years, to worst call)
While Torchmark has been able to maintain a yield in excess of 7.25% on new investments over the last several years, the recent decline in rates in financial markets has caused such yields to become unavailable for investment-grade corporate purchases. As a result, new money was invested at an average effective yield of 6.0% in the second quarter of 2003. While the lower yields available to Torchmark are expected to reduce investment income in the near term, the impact of the lower rates on excess investment income and total net income is expected to be immaterial in the near term. This is because Torchmark has been able to reduce the crediting rates on the majority of its interest-sensitive and annuity products, offsetting a large portion of the reduction in income. Additionally, the lower interest rate environment reduces the cost of Torchmark’s commercial paper borrowings and enhances the benefits from its interest rate swaps, further reducing financing costs and minimizing the impact of lower investment rates on income.
At June 30, 2003, Torchmark had accumulated $126 million in short-term investments, compared with $73 million at year-end 2002. The majority of these funds will be invested in fixed-maturity securities in the future, consistent with Torchmark’s investment policies.
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Additional information concerning the fixed-maturity portfolio is as follows.
Fixed Maturity Portfolio Selected Information
At June 30,
2003
At December 31,
2002
Amortized cost (millions)
Gross unrealized gains (millions)
Gross unrealized losses (millions)
Fair market value (millions)
Average yield (tax-equivalent book basis)
Average life (in years, to maturity)
Effective duration (to worst call)*
Effective duration (to maturity)*
Torchmark calculates the average life and duration of the fixed maturity portfolio two ways: (1) based on the same date used to calculate the yield, which is the “worst call” date for callable bonds and the maturity date for all other bonds, and (2) based on the maturity date of all bonds, whether callable or not.
Torchmark’s $7.8 billion fixed-maturity portfolio at fair market value had a net unrealized gain of $734 million at June 30, 2003. At the end of the second quarter last year, the $6.7 billion portfolio had a net unrealized gain of $63 million. At year-end 2002, the $7.2 billion portfolio had a net unrealized gain of $306 million. The improvement in market valuation of the portfolio at June 30, 2003 resulted primarily from the continued reduction during the period in interest rates and in yields on competing assets.
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The following tables disclose certain information about unrealized losses in Torchmark’s fixed-maturity portfolio at June 30, 2003.
Analyses of Gross Unrealized Investment Losses on Fixed Maturities
At June 30, 2003
(Amounts in millions)
Investment grade securities:
U.S. government and agency
Non-investment grade securities:
States, municipals, & political subdivisions
Maturity distribution:
Due in one year or less
Due in more than 1 year through 5 years
Due in more than 5 years through 10 years
Due in more than 10 years through 20 years
Due in more than 20 years
Major sectors:
Electric, gas, water, sanitation services
Auto repair, services, parking
Rubber & miscellaneous plastics products
General merchandise stores
Industrial, comm machinery, computer equip
Food stores
Municipal bonds
Metal mining
Fab metal, excl machinery & transport equip
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Financial Condition
Liquidity. Torchmark’s liquidity is represented by its positive cash flow, a portfolio of marketable investments, and the availability of a line of credit facility. Torchmark’s insurance operations have historically generated cash flows well in excess of immediate requirements. Torchmark’s net cash inflows from operations were $387 million in the first six months of 2003, compared with $360 million in the same period of 2002. In addition to cash flows from operations, Torchmark received $310 million in investment maturities or repayments during the first half of 2003.
Torchmark’s cash and short-term investments were $134 million at June 30, 2003, compared with $80 million at December 31, 2002 and $28 million at the end of June, 2002. In addition to these liquid assets, Torchmark’s entire portfolio of fixed-income and equity securities, in the approximate amount of $7.8 billion at fair value on June 30, 2003, is available for sale should any need arise. Substantially all of Torchmark’s fixed-income and equity securities are publicly traded.
Torchmark has in place a line of credit facility with a group of lenders that allows unsecured borrowings and stand-by letters of credit up to $625 million. The facility consists of two parts: a $325 million 364-day tranche maturing November 27, 2003 and a $300 million five-year tranche maturing November 30, 2006. The company has the ability to request up to $200 million in letters of credit to be issued against the $300 million five-year tranche. Under either tranche, interest is charged at variable rates. The line of credit is further designated as a back-up credit line for a commercial paper program not to exceed $600 million, whereby Torchmark may borrow from either the credit line or issue commercial paper at any time, with total commercial paper outstanding not to exceed $600 million. Commercial paper borrowings and letters of credit on a combined basis may not exceed $625 million. At June 30, 2003, Torchmark had $134 million face amount of commercial paper outstanding ($133 million book value), $170 million letters of credit issued, and there were no borrowings under the line of credit. A facility fee is charged on the entire $625 million facility. The facility has no ratings-based acceleration triggers which would require early repayment. In accordance with the agreements, Torchmark is subject to certain covenants regarding capitalization and interest coverage. At June 30, 2003, Torchmark was in full compliance with these covenants.
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Capital resources. Torchmark’s capital structure consists of short-term debt (the commercial paper facility described above), long-term funded debt, trust preferred securities, and shareholders’ equity. Torchmark’s outstanding long-term debt at book value was $554 million at June 30, 2003, compared with $552 million at December 31, 2002 and $541 million at June 30, 2002. An analysis of funded debt issues outstanding is as follows at June 30, 2003.
Long Term Debt at June 30, 2003
Instrument
Senior debentures
Notes
Senior Notes
Total funded debt
The carrying value of Torchmark’s 6.25% Senior Note is adjusted each period to reflect the change in fair value of a swap instrument which hedges the value of the note. This instrument increased the value of long-term debt by $17.6 million, $15.1 million, and $4.6 million at June 30, 2003, December 31, 2002, and June 30, 2002, respectively.
The trust preferred securities were carried at approximately $144 million at the end of each period. Shareholders’ equity was $3.18 billion at June 30, 2003, $2.85 billion at December 31, 2002 and $2.56 billion at June 30, 2002.
Due to its large available-for-sale fixed-maturity portfolio, Torchmark is required by an accounting rule (SFAS 115) to revalue the portfolio to fair market value at the end of each accounting period. These changes, net of their associated impact on deferred acquisition costs and income tax, are reflected directly in shareholders’ equity. Without this SFAS 115 adjustment, fixed maturities would be reported at book value. The fair values of fixed maturities fluctuate with changes in interest rates in financial markets. Because the size of Torchmark’s fixed-maturity portfolio is large relative to its shareholders’ equity, and because small changes in interest rates can cause substantial swings in market value, Torchmark’s shareholders’ equity as reported in accordance with GAAP can be very volatile, and this volatility can have a significant impact on the period-to-period presentation of Torchmark’s capital structure. For this reason, Torchmark’s management, credit rating agencies, lenders, many industry analysts, and certain other financial statement users prefer to remove the effect of SFAS 115 when analyzing Torchmark’s balance sheet, capital structure, and financial ratios.
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The following tables present selected data related to Torchmark’s capital resources. Additionally, the tables present the effect of SFAS 115 on relevant line items, so that investors and other financial statement users may determine its impact on Torchmark’s capital structure.
Selected Financial Data
Fixed maturities (millions)
Deferred acquisition costs (millions) **
Total assets (millions)
Short-term debt (millions)
Long-term debt (millions)
Trust preferred securities (millions)
Shareholders’ equity (millions)
Book value per diluted share
Diluted shares outstanding (thousands)
Actual shares outstanding (thousands)
* Amount added to (deducted from) comprehensive income to produce the stated GAAP item
** Includes the value of insurance purchased
Torchmark acquired 3.8 million of its outstanding common shares on the open market at a cost of $137 million during the first six months of 2003 under its share repurchase program. On July 24, 2003, Torchmark’s Board reaffirmed its continued authorization of the Company’s stock repurchase program in amounts and timing that Company management, in consultation with the Board, determined to be in the best interest of the Company. Torchmark has repurchased its common stock every year since 1986, except for 1995, the year following the acquisition of American Income. Since 1998, the Company has repurchased 32.7 million shares at a total cost of $1.1 billion, and has acquired no fewer than 3.4 million shares in any one year. Torchmark intends to continue the repurchase of its common shares when financial markets are favorable.
The year-over-year growth in adjusted book value per diluted share was 13%, and was achieved during a twelve-month period in which $199 million in share buybacks were made under Torchmark’s share repurchase program and a writedown in the amount of $11 million after-tax was taken on investment securities.
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Pension assets: The following chart presents assets at fair value for Torchmark’s defined-benefit pension plans at June 30, 2003 and the prior year end.
Corporate debt
Other fixed maturities
Equity securities
Securities of Torchmark
Annuity contract issued by Torchmark
The increase in pension assets during 2003 resulted primarily from improved financial markets during the period. The liability for qualified defined-benefit pension plans was $141 million at December 31, 2002.
Related Party Information. In 1999, Torchmark sold certain of its investment real estate properties to an investor group of which Elgin Development Company was a 30% investor. R. K. Richey, a director and Chairman of the Executive Committee of the Board of Directors of Torchmark, was an investor in Elgin Development at the time of the transaction and currently is a 25% investor in the parent company of Elgin Development. As a part of the consideration received for the real estate transaction, Elgin Development issued to Torchmark a $12.4 million ten-year collateralized 8% note. At March 31, 2003, the outstanding balance on the collateralized note was $9.7 million. Elgin Development did not make the scheduled payment of principal and interest on the collateralized note that was due March 31, 2003, resulting in a default on the note. In June 2003, as a result of Elgin Development’s inability to cure the default within the notes’ defined grace period, Torchmark recovered from Elgin Development the real estate that was collateral for the note. This real estate had an estimated fair value of $5.7 million at June 30, 2003, resulting in a loss from the transaction of $4.0 million, pretax, and $2.6 million, after tax.
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New Accounting Standards. The Financial Accounting Standards Board issued two new accounting Standards during the second quarter of 2003:
SFAS 149 amends and clarifies previously issued rules regarding derivative financial instruments. With minor exceptions, it is effective for contracts entered into or modified after June 30, 2003 with prospective application required. The adoption of this Standard is not expected to significantly affect Torchmark.
SFAS 150 requires the reclassification in the financial statements of certain financial instruments which have both characteristics of liabilities and equity as liabilities. Included in the scope of this Standard are mandatorily redeemable securities, such as Torchmark’s Trust Preferred shares. It is effective for Torchmark’s instruments as of July 1, 2003. Restatement of prior periods for comparability is prohibited. SFAS 150 requires an initial revaluation of any mandatorily redeemable instruments to market value upon adoption, with this value becoming the new cost basis. This market adjustment will be treated as the cumulative effect of a change in an accounting principle. Subsequently, these debt instruments will be amortized from this new cost basis to the price to be paid when the securities become manditorily redeemable as an adjustment to interest expense. Torchmark’s other debt instruments are unaffected by this Standard and will continue to be carried at amortized cost. Dividends on the Trust Preferred instruments will be reclassified as interest cost, and as required by the Standard, prior periods will not reflect this reclassification for comparability. The fair value of Torchmark’s Trust Preferred Securities at June 30, 2003 was $165 million, compared with the book value of $144 million.
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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 three months ended June 30, 2003.
Item 4. Controls and Procedures
Torchmark, under the direction of the Chairman and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, has established disclosure controls and procedures that are designed to ensure that information required to be disclosed by Torchmark in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to Torchmark’s management, including the Chairman and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
As of the end of the fiscal quarter completed June 30, 2003, an evaluation was performed under the supervision and with the participation of Torchmark management, including the Chairman and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of Torchmark’s disclosure controls and procedures (as those terms are defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon their evaluation, the Chairman and Chief Executive Officer and the Executive Vice President and Chief Financial Officer have concluded that Torchmark’s disclosure controls and procedures are effective as of the date of this Form 10-Q. In compliance with Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350), each of these officers executed a Certification included as an exhibit to this Form 10-Q.
As of the date of this Form 10-Q for the quarter ended June 30, 2003, there have not been any significant changes in Torchmark’s internal control over financial reporting or in other factors that could significantly affect this control subsequent to the date of their evaluation. No significant deficiencies or material weaknesses in such internal control over financial reporting were identified in the evaluation and as a consequence, no corrective action was required to be taken.
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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. In 1999, Alabama enacted legislation limiting punitive damages in non-physical injury cases to the greater of $500,000 or three times compensatory damages. Since this legislation has not undergone scrutiny by appellate courts regarding its constitutionality and a jury’s discretion regarding the amount of compensatory damages (including mental anguish) awarded in any given case is not precisely defined, the effect of this legislation on Torchmark’s litigation remains unclear. Additionally, it should be noted that Torchmark subsidiaries actively market insurance in the State of Mississippi, a jurisdiction which is recognized nationally for large punitive damage verdicts. Bespeaking caution is the fact that the likelihood or extent of a punitive damage award in any given case is currently impossible to predict. As of June 30, 2003, Liberty was a party to approximately 94 active lawsuits (including 7 employment related cases and excluding interpleaders and stayed cases), 67 of which were Alabama proceedings and 12 of which were Mississippi 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 Alabama and Mississippi, continue to occur, creating the potential for unpredictable material adverse judgments in any given punitive damage suit.
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-distinct mortality in the design or pricing of industrial insurance, a practice believed to be actuarially sound, but nevertheless discontinued by Liberty many years ago. In 1988, Liberty endeavored to convert to paid-up status those policies utilizing
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race-distinct mortality that remained in premium-paying status at that time. Liberty responded 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-distinct 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. Upon receiving the Georgia order, Liberty informed the Georgia Insurance Department that Liberty did not interpret the Georgia Department’s directive as a cease and desist order since it did not afford Liberty the opportunity for a mandatory or voluntarily requested hearing thereunder. 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. The Florida Supreme Court subsequently reversed and rendered the District Court of Appeals’ order, and thus declared the cease and desist order null and void. Liberty, as an Alabama domestic company, was examined by representatives of the Alabama Department of Insurance with regard to issues parallel to those raised by the State of Florida. By order dated January 28, 2002, the Alabama Department finalized a report of its examination of Liberty. The report has now been turned over to the Alabama Department’s Legal Division for further consideration.
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. § 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. § 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. § 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.
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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. §§ 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 28 U.S.C. §§ 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 Mooregranting the plaintiffs the right to file the amended complaint. The Eleventh Circuit Court granted Liberty’s motion and agreed to consider Liberty’s arguments regarding the applicability of the state law of repose to actions under 28 U.S.C. §§1981 and 1982. Oral arguments were heard by the Eleventh Circuit Court on July 20, 2001. On September 28, 2001, the Eleventh Circuit Court ruled that the rule of repose was not a bar to the Moore claims in federal court and that there is no reverse pre-emption under the McCarrin Ferguson Act. Liberty filed a petition seeking an en banc rehearing in the Eleventh Circuit Court, which was subsequently denied. Liberty filed a petition for a writ of certiorari with the U.S. Supreme Court on February 21, 2002, which was denied. The plaintiffs filed their motion for class certification in Moore with the District Court on December 20, 2002 and Liberty filed its opposition to this motion on February 3, 2003. A class certification hearing has been scheduled in Moore by the District Court on September 16, 2003.
Four individual cases with similar allegations to those in the Moore case which were filed against Liberty in various state Circuit Courts in Alabama remain pending and have been removed and/or transferred to the U.S. District Court for the Northern District of Alabama. The Moore case and all cases transferred to the Northern District of Alabama have been assigned to Judge U.W. Clemon, a noted former civil rights attorney. In the earliest filed of the individual state court actions, Walter Moore v. Liberty National Life Insurance Company (Circuit Court of Dallas County, Alabama, CV 00-306) the Court entered an order granting summary judgment in favor of Liberty based upon the doctrine of repose and has subsequently denied a motion to reconsider its dismissal of this case.
Hudson v. Liberty National Life Insurance Company, one of the four individual cases referenced above, was filed in the Circuit Court of Bullock County, Alabama on February 28, 2001 (Case No. CV 2001-25) and contains similar allegations to those in Moore. After denials by the Bullock Circuit Court of Liberty’s motion to dismiss and request that certain questions arising in the litigation be certified to the Alabama Supreme Court, Liberty sought a writ of mandamus on the certified questions issue from the Alabama Supreme Court. The Alabama Supreme Court agreed to hear Liberty’s petition for writ of mandamus seeking to have the Supreme Court direct the trial court to grant Liberty’s motion to dismiss or for a summary judgment or to certify for interlocutory appeal the Circuit Court’s denial of
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such motion. On January 18, 2002, the Alabama Supreme Court denied Liberty’s request for the writ of mandamus but noted that Liberty’s motion for summary judgment based on the rule of repose remained pending in the trial court and was ripe for adjudication. Upon remand, plaintiff amended his complaint to add causes of action under federal law and this case has been removed to federal court as discussed above.
In the fifth individual state court action, (Edwards v. Liberty National Life Insurance Company, Case No. CV 0005872), the trial court denied Liberty’s motion seeking a summary judgment based upon the rule of repose but indicated that it would reconsider that motion after discovery. Liberty filed a motion to alter or amend the trial court’s order, or in the alternative, for an interlocutory appeal. In September 2001, the trial court in that case vacated its earlier order and stayed the litigation pending resolution of the Hudson case, which is discussed above. On February 22, 2002, the trial court held a hearing regarding the stay in Edwards. The trial court permitted the plaintiffs very limited discovery. The case is presently on the administrative docket, which temporarily stays the litigation.
On March 15, 2001, purported class action litigation was filed against Liberty in the United States District Court for the District of South Carolina (Hinton v. Liberty National Life Insurance Company, Civil Action No. 3-01-68078 19), containing allegations largely similar to the Moore case filed in the Federal District Court for the Northern District of Alabama. Liberty was described in the suit as successor in interest of New South Life Insurance Company (New South), an insurer acquired out of receivership by an entity which was subsequently acquired by Peninsular Life Insurance Company (Peninsular). In 1985, Liberty reinsured a block of insurance business from Peninsular, including business formerly written by New South. Liberty has requested indemnification in the Hinton litigation from Peninsular and its successors in interest. Liberty sought a writ of mandamus in Hinton from the Fourth Circuit Court of Appeals as well as a change of venue to consolidate the Hinton case with the Moore case currently pending in Federal District Court in Alabama. Both the change in venue and the writ of mandamus were denied. However, the South Carolina District Court issued an order inviting the parties to resubmit a motion for change of venue. Liberty National filed such a motion to transfer the case to the U.S. District Court for the Northern District of Alabama, which was granted by the South Carolina District Court on February 12, 2002.
Another action with similar allegations to Moore, which also includes claims for race discrimination under 24 U.S.C. §§1981 and 1982, was filed against Liberty in U.S. District Court for the Northern District of Alabama on January 28, 2002 (Hull v. Liberty National Life Insurance Company, Civil Action No. CV-02-C-0219-W).
There are a total of 16 race-distinct mortality cases pending in the U.S. District Court for the Northern District of Alabama (with two of such cases having been originally filed in the U.S. District Court for the Northern District of Georgia), including Sunday v. Liberty National Life Insurance Company, Case No. CV02-BE-0639-S), in which approximately 411 individuals assert that they had discriminatory insurance policies with Liberty. Bass v. Liberty National Life Insurance Company (Case No.: 03-5-574-N), a case with similar allegations which was filed May 28, 2003 in the U.S. District Court for the Middle District of
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Alabama, is currently the subject of a motion to transfer the case to the U.S. District Court for the Northern District of Alabama to be consolidated with the Moore case. Plaintiffs in Bass have been ordered to show cause why the motion should not be granted by August 15, 2003. The Baldwin and Edwards cases remain pending in Alabama Circuit Courts. Plaintiffs’ attorneys have actively advertised for additional plaintiffs to join these suits or file additional suits.
On December 23, 2002, seventy individual plaintiffs filed an action against Liberty and certain of its sales agents in the Circuit Court of Holmes County, Mississippi (Thurmond v. Liberty National Life Insurance Company, Cause No.: 2002-517). The plaintiffs, all African Americans, assert claims of fraudulent and reckless misrepresentation, innocent misrepresentation, fraudulent concealment and suppression, breach of contract in the dismantling of Liberty’s debit collection system and racial discrimination under various sections of the Mississippi Code Annotated in connection with the marketing, sale and administration by Liberty of plaintiffs’ industrial low value whole life, accident and/or burial insurance policies. Actual and punitive damages in an unspecified amount, interest and costs are sought.
On December 27, 2002, individual litigation involving 120 separate plaintiffs with substantially similar allegations, was filed against Liberty in the Circuit Courts of Holmes County, Mississippi (Billingsley v. Liberty National Life Insurance Company, Civil Action No.: 2002-532), of Bolivar County, Mississippi (Mary Hudson v. Liberty National Life Insurance Company, Civil Action No.: 2002-170) and of Leflore County, Mississippi (Teague v. Liberty National Life Insurance Company, Civil Action No.: 2002-0218-CICI). Plaintiffs in each action assert that Liberty and its sales agents marketed small value debit insurance policies at racially discriminatory rates to African Americans using racially discriminatory sales and administrative practices and collected premium payments which are alleged to be excessive and unconscionable in that such premiums exceeded the face amount of insurance issued. Unspecified actual and punitive damages, attorneys fees, costs and interest, as well as the imposition of a constructive trust or disgorgement are sought for claims of fraud and fraudulent inducement, breach of the duty of good faith and fair dealing, tortious breach of contract, breach of fiduciary duty, money had and received, unjust enrichment, negligence and/or gross negligence, violations of the Mississippi Consumer Protection Act, conversion and violations of Mississippi Code Ann. § 83-7-3 (prohibiting discrimination by life insurers in the assessment of premiums to policyholders). These three cases and the Thurmond case were removed to the United States District Court for the Northern District of Mississippi. After Liberty filed responsive pleadings with supporting affidavits in Mary Hudson, those plaintiffs agreed to voluntarily dismiss their case as have the plaintiffs in the Teaguecase. Since the cases are similar and the plaintiffs’ attorneys are the same, plaintiffs’ attorneys have agreed to consider a similar disposition of Billingsley though plaintiffs’ attorneys have not yet made a final decision to dismiss the case.
On July 26, 2001, litigation was filed against Torchmark and three current members of Torchmark’s Board of Directors in the United States District Court for the District of Kansas (Waddell & Reed Financial, Inc. v. Torchmark Corporation, Civil Action No. 01-
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2372-KHV). Plaintiffs assert that defendants engaged in a scheme to control and injure Waddell & Reed Financial, Inc. (Waddell & Reed) after it was spun-off by Torchmark in November 1998, to interfere with the business relationship between a Waddell & Reed subsidiary, Waddell & Reed, Inc. (W&R) and a Torchmark subsidiary, United Investors, and to injure Waddell & Reed as well as asserting that one of the individual defendants sought to interfere with Waddell & Reed’s relationship with the United Group of Mutual Funds. The litigation alleges RICO violations, breaches of fiduciary duty by the three individual defendants, knowing participation in such breaches of fiduciary duty by Torchmark and intentional interference with prospective business relations in connection with the relationship between W&R and United Investors. Plaintiffs seek actual, punitive and treble damages, interest, fees and costs under RICO of $29 million, $13.4 million plus punitive damages, interest and costs on the intentional interference allegations and a total of $58 million on the remaining two counts.
Defendants filed a motion to abstain or, in the alternative, to dismiss the Kansas District Court litigation on August 22, 2001, citing pending litigation filed in Jefferson County Alabama state circuit court by Torchmark and its subsidiary, United Investors against Waddell & Reed and W&R (United Investors Life Insurance Company v. Waddell & Reed Financial, Inc., et al, Case No. CV 00-2720), involving an alleged agreement dealing with existing in-force United Investors variable annuity business marketed by W&R as well as the prior dismissal by the Kansas District Court of litigation originally filed by W&R against United Investors in Kansas state court involving such variable annuity business. Defendant’s motion was denied but the Kansas District Court ruled that a judgment in the prior Alabama litigation would likely be res judicata as to the claims against Torchmark and one of the individual defendants in the current Kansas litigation. Trial of the Alabama state court litigation began February 19, 2002.
On March 19, 2002, a Jefferson County, Alabama Circuit Court jury awarded $50 million compensatory damages to Torchmark’s subsidiary, United Investors in the Alabama State Court litigation. United Investor’s claims in this litigation for additional injunctive relief prohibiting unlawful future policy replacements by W&R remained to be decided by the Circuit Court. Based upon the Alabama jury verdict, Torchmark filed a motion for summary judgment in the Kansas District Court.
On June 25, 2002, the Jefferson County Circuit Court entered an order in United Investor’s Alabama State Court litigation granting a declaratory judgment for United Investors against W&R. The Circuit Court refused to set aside or reduce the $50,000,000 compensatory damage verdict awarded against W&R by the trial jury in the original litigation. The Circuit Court’s order stated that there was no valid and binding contractual or other obligation requiring United Investors to pay certain additional compensation that W&R had sought in connection with United Investors’ in-force block of variable annuity business for which W&R had formerly been the distributor. Escrowed funds for the commissions owed by W&R to United Investors were ordered to be released to United Investors. The Circuit Court also denied W&R’s motions to set aside the jury’s verdict or to order a new trial and denied United Investors’ motion for additional injunctive relief to prohibit future replacements of United Investors policies by W&R since United Investors
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has an adequate remedy at law through additional litigation against W&R.
On July 25, 2002, W&R filed notice of appeal to the Alabama Supreme Court of the Jefferson County Circuit Court’s order, which notice of appeal was supplemented on July 31, 2002 and the record of the same was certified to the Alabama Supreme Court in September, 2002. On October 25, 2002, the Alabama Supreme Court affirmed the trial court’s judgment dismissing with prejudice all of W&R’s third party counterclaims against Torchmark and R. K. Richey. Oral arguments were heard by the Alabama Supreme Court on February 19, 2003 in W&R’s appeal from the jury verdict and trial court judgment against W&R on United Investors’ claims.
On February 4, 2003, an order was entered in the Kansas District Court litigation granting that portion of the defendants’ judgment as regarded claims against Torchmark and one individual defendant by Waddell & Reed and W&R. Other portions of the defendants’ motion were denied so that Waddell & Reed and W&R’s claims against the other two individual defendants as well as all claims of Waddell & Reed Investment Management Company, another Waddell & Reed subsidiary, remain pending. The order also lifted the discovery stay.
On April 18, 2003, the Alabama Supreme Court reversed in part and remanded in part the $50 million jury verdict awarded to United Investors in March 2002. The Supreme Court found that conversion, breach of contract and one claim of fraud and suppression were properly submitted to the jury but that two claims, tortuous interference in connection with contractual relations and fraud in connection with a promise by W&R not to replace United Investors’ existing variable contracts, should not have been submitted to the jury. Under Alabama law regarding general verdicts, the Supreme Court’s finding that two claims should not have been sent to the jury requires a remand to the trial court on United Investors’ remaining claims submitted to the jury.
United Investors filed a petition for rehearing with the Supreme Court seeking clarification of the Supreme Court’s opinion which did not address the jury’s verdict for United Investors on Waddell & Reed’s counterclaims. On July 3, 2003, the Supreme Court issued an opinion withdrawing its prior April 18, 2003 opinion. The revised opinion affirmed the trial jury’s verdict in favor of United Investors and against Waddell & Reed on Waddell & Reed’s claims for unjust enrichment, breach of contract and fraud and also affirmed a separate ruling by the trial judge that there was no contract between United Investors and Waddell & Reed as alleged by Waddell & Reed. The Supreme Court left intact its earlier decisions reversing and rendering the trial court jury’s verdict in favor of United Investors on its claims of tortious interference and fraud related to Waddell & Reed’s campaign to replace existing United Investors variable annuity policies with those of another carrier and reversing and remanding back to the trial court for a new trial United Investors’ other claims for conversion, breach of contract, fraud and concealment. Waddell & Reed has filed a petition for rehearing regarding the Supreme Court’s July 2003 opinion which United Investors has opposed. United Investors will also continue to pursue the claims relating to conversion of funds by Waddell & Reed and for punitive damages.
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On September 28, 2001, a shareholder derivative action was filed in the Circuit Court of Jefferson County, Alabama against Torchmark, two unaffiliated limited liability companies, and three individual defendants (Bomar v. Torchmark Corporation, Case No. CV 0105981). The derivative action arises from an October 1, 1999 transaction in which the three individual defendants (one of whom is a director and former Chairman of Torchmark and a second of whom is a former officer of a former real estate subsidiary of Torchmark) acting through two unaffiliated limited liability companies acquired the majority of the investment real estate of Torchmark together with other properties. Plaintiff alleges that, despite review and approval of the transaction by all independent and disinterested members of the Torchmark Board of Directors, the transaction was procedurally and substantively unfair to Torchmark and resulted from the breach of fiduciary duties of loyalty owed to Torchmark by two of the above described individual defendants and the knowing participation of the third individual defendant in the alleged breach of fiduciary duty. Establishment of a constructive trust for such assets for the benefit of Torchmark and its shareholders, an accounting for profits and unspecified compensatory and punitive damages were sought. The request for establishment of a constructive trust was subsequently deleted by the plaintiff.
On October 16, 2001, defendant Torchmark filed a motion to dismiss and to stay discovery in the Bomar action, asserting plaintiff’s lack of standing, failure to make a legally-required demand on the Board of Directors of Torchmark and failure to comply with certain Alabama Rules of Civil Procedure. On October 17, 2001, the Board of Directors created a special litigation committee comprised of two independent, disinterested directors to review and make determinations and a report with regard to the transactions involved in such suit. Defendant Torchmark’s motion was amended on October 19, 2001 to include as further grounds for dismissal and stay the creation of that special litigation committee and the delegation of complete authority to said committee to review the transaction and determine whether prosecution of the Bomar action was in the interests of Torchmark and its shareholders and what action Torchmark should take with regard to the Bomar action. The committee, through its separately retained counsel, advised the Court that it concurred in Torchmark’s motions. A hearing on Torchmark’s amended motion to dismiss and stay discovery was held November 13, 2001 and on November 26, 2001, the Circuit Court issued an order staying all proceedings in Bomar for 150 days during which the special litigation committee was charged with investigating, reviewing and analyzing the asserted claims, completing its written report and filing the same with the Circuit Court. The special litigation committee began its interview process in February, 2002. On April 24, 2002, the plaintiff filed a motion to modify the stay so as to permit the filing of a second amended complaint, which sought to assert that the transaction violated a 1982 Torchmark Board of Directors resolution relating to conflicts of interest as well as the Alabama Insurance Holding Company System Regulatory Act; that the consideration received by Torchmark was unfairly low and was the result of two of the defendants’ violations of their fiduciary duty of loyalty to Torchmark; and that defendants concealed and suppressed material facts intentionally, knowingly and wantonly. The Circuit Court, on May 6, 2002, ordered the special litigation committee to also consider the allegations made in plaintiff’s second amended complaint (although the same was never formally filed with the Court). The Circuit Court granted the Committee extensions of time for the filing of its report until
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August 1, 2002. On July 31, 2002, the special litigation committee released and filed its written report with the Circuit Court.
On October 3, 2002, the Circuit Court entered an order granting motions for summary judgment in favor of all defendants in Bomar. The Circuit Court stated in its order that demand on the Torchmark Board of Directors by the plaintiff was not excused, that a majority of the Board and all members of the special litigation committee were independent and disinterested, that the special litigation committee conducted its investigation thoroughly and inn good faith, that the special litigation committee’s findings and conclusion that theBomar action should be dismissed and that the real estate transaction in question was well within the scope of the business judgment rule was correct and such findings were adopted by the Circuit Court and that the special litigation committee’s conclusion that the transaction “was entirely fair to Torchmark” was fully supported by the record and the law. On November 13, 2002, the plaintiff filed a notice of appeal to the Alabama Supreme Court of the Circuit Court’s order. The Alabama Supreme Court affirmed without a written opinion the summary judgment in favor of all defendants in Bomar on June 13, 2003. The Supreme Court’s decision was not appealed and the Bomar case is thus concluded.
On January 22, 2002, purported class action litigation was filed against Liberty and Torchmark in the Circuit Court of Choctaw County, Alabama on behalf of all persons who currently or in the past were insured under Liberty cancer policies which are no longer marketed regardless of whether such policies remain in force or have lapsed (Roberts v. Liberty National Life Insurance Company, Case No. CV-2002-009-B). Plaintiffs in this action are alleged to have purchased guaranteed renewable cancer policies wherein Liberty reserved the right to change premium rates. They allege that Liberty ceased marketing certain cancer policies - “closed” the block of business, capping the potential pool of insureds and leading to increased premiums to the remaining insureds. They further allege that in instituting premium increases on cancer policies after the Robertson v. Liberty National Life Insurance Company class action settlement, Liberty misrepresented the reasons for such premium increases. This action asserts claims for breach of contract in implementing premium rate increases on a basis other than that set out in the policies, misrepresentation regarding the premium increases, fraud and suppression concerning the closed block of business and unjust enrichment. Unspecified compensatory and punitive damages, attorneys fees, costs and interest are sought by plaintiffs. Defendants filed a motion to dismiss or, in the alternative, for summary judgment on March 27, 2002 with the Circuit Court. A hearing on this motion was held on October 23, 2002. The Circuit Court subsequently denied the motion and a subsequent motion to reconsider, following which, on April 23, 2003, defendants filed a petition for a writ of mandamus with the Alabama Supreme Court or for a more definite statement. The Supreme Court directed the parties to brief the issues and all briefs have been submitted. The parties are awaiting the Supreme Court’s ruling.
On January 30, 2003, purported class action litigation was filed against Liberty in the Circuit Court of Lowndes County, Alabama (Gordon v. Liberty National Life Insurance Company, Civil Action No. CV03-13). Plaintiffs assert state law claims that Liberty
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breached the insurance contracts with them, engaged in intentional, willful and/or negligent conduct and was unjustly enriched when Liberty allowed them to pay premiums on insurance policies that exceeded the “face value” and/or “amount of insurance” of the insurance policies. Unspecified monetary damages, injunctive relief and return of all proceeds is sought. On March 3, 2003, Liberty filed a motion to dismiss this case. On July 18, 2003, the Circuit Court dismissed the Gordon case with prejudice on failure to state a claim, repose and limitations grounds.
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Item 4. Submission of Matters to a Vote of Security Holders
The matters listed below were submitted to a vote of security holders at the Annual Meeting of Shareholders held April 24, 2003:
Director
David L. Boren
Louis T. Hagopian
Harold T. McCormick
Paul J. Zucconi
Other directors whose terms continued after the meeting were Joseph M. Farley, C.B. Hudson, Joseph L. Lanier, Jr., Mark S. McAndrew, George J. Records, R.K. Richey and Lamar C. Smith.
For
99,236,351
97,062,252
4,549,804
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Item 5. Other Information
The following information is being provided under Item 11 of Form 8-K, “Temporary Suspension of Trading under Registrant’s Employee Benefit Plans.”
In the Form 10-Q for the quarter ended March 31, 2003, it was reported that the Torchmark Corporation Savings and Investment Plan (“TMK Thrift Plan”) and the Liberty National Life Insurance Company 401(K) Plan (“LNL 401(K) Plan”) would change their record keepers to Metavante 401(K) Services. These changes necessitated a blackout period for the participants in each of these plans where participants were temporarily unable to direct or diversify investments in their individual accounts or obtain a distribution from the plan. The class of equity securities that was subject to the blackout period was Torchmark Corporation’s common stock. This blackout period for both the TMK Thrift Plan and the LNL 401(K) Plan began at 4:00 p.m. EDT on May 23, 2003 and ended during the week beginning June 8, 2003 at 9:00 a.m. CDT on June 10, 2003 for the LNL 401(K) Plan and at 2:00 p.m. CDT on June 11, 2003 for the TMK Thrift Plan. Notices of this blackout period were sent to all the Plans’ participants and beneficiaries as required under Department of Labor regulations, as well as to all members of the Torchmark Board of Directors and all persons subject to Securities Exchange Act of 1934 Section 16 reporting on April 14, 2003.
Questions about Section 306(a) of the Sarbanes-Oxley Act were addressed to Larry Hutchison at Torchmark Corporation, 3700 South Stonebridge Drive, McKinney, Texas 75070 (972-569-3243) or Carol McCoy at Torchmark Corporation, 2001 Third Avenue South, Birmingham, Alabama 35233 (205-325-4243). Questions concerning the Blackout Period or the Blackout Period Notice were addressed to Dennis Luft at Liberty National Life Insurance Company, 2001 Third Avenue South, Birmingham, Alabama 35233 (205-325-2812).
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Statement re computation of per share earnings
(31.1) Rule 13a-14(a)/15d-14(a) Certification by C.B. Hudson
(31.2) Rule 13a-14(a)/15d-14(a) Certification by Gary L. Coleman
(32.1) Section 1350 Certification by C.B. Hudson and Gary L. Coleman
(b) Reports on Form 8-K
A Form 8-K dated April 21, 2003 was filed in the second quarter of 2003 containing a press release announcing the issuance by the Alabama Supreme Court of their opinion in the litigation by United Investors Life Insurance Company against Waddell & Reed. The Form 8-K contained no financial statements.
A Form 8-K dated April 22, 2003 was filed in the second quarter of 2003 containing a press release announcing Torchmark Corporation’s first quarter 2003 financial results. The Form 8-K contained no financial statements.
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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.
/s/ C. B. HUDSON
C. B. Hudson, Chairman of the
Board and Chief Executive Officer
Date: August 11, 2003
/s/ GARY L. COLEMAN
Gary L. Coleman, Executive Vice
President and Chief Financial Officer
(Chief Accounting Officer)
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