FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2003
Commission File Number 1-8052
TORCHMARK CORPORATION
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
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). Yes x No ¨
Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of the last practicable date.
CLASS
OUTSTANDING AT OCTOBER 31, 2003
Index of Exhibits (Page 47)
Total number of pages included are 48.
INDEX
Part I.
FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
PART I – FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands except per share data)
Assets
Investments:
Fixed maturities, available for sale, at fair value (amortized cost: 2003 – $7,310,395; 2002 – $6,888,830)
Equity securities, at fair value (cost: 2003 – $51,349; 2002 – $24,260)
Mortgage loans, at cost (fair value: 2003 – $119,175; 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 – $799,712; 2002 – $612,172)
Separate account liabilities
Total liabilities
Trust preferred securities (fair value: 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 5,640,343 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 distributions
Income taxes
Preferred securities distributions (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
(Unaudited and 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
See accompanying Notes to Consolidated Financial Statements
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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
Net borrowings (repayments) of short-term debt
Redemption of long-term 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
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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 September 30, 2003, and the consolidated results of operations, comprehensive income and cash flows for the periods ended September 30, 2003 and 2002. Certain prior period amounts have been reclassified to conform with current period presentations.
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 were 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)
Note B – Earnings Per Share Giving Effect to Stock Options (continued)
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 – 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 insurance underwriting income before other income and insurance administrative expenses. It represents the profit margin on insurance products before administrative expenses, and is calculated by deducting net policy obligations, commissions, 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
Note D – Business Segments (continued)
Reconciliation of Segment Operating Information to the Consolidated Statement of Operations
Premium
Other income ***
Expenses
Policy benefits
Required interest onreserves
Amortization of acquisitioncosts
Commissions and premiumtax
Required interest onacquisition costs
Insurance administrative expense**
Parent expense***
Financing costs:
Debt and preferredsecurities ##
Benefit from interest rate swaps
Total expenses
Segment profits
Deduct applicable income taxes
Segment profits after tax
Add back income taxes applicable to segment profitability
Add back financing costs—preferred securities (reported on Statement of Operations after tax) ##
Remove benefit from interest rate swaps (included in realized investment gains (losses))
Add realized investment gains (losses)
Pretax income per Statement of Operations
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Revenue
Other income***
Required interest on reserves
Required interest on acquisition costs
Insurance administrativeexpense**
Parent expenses***
Benefit from interest rateswaps
Add back financing costs—preferred securities (reported on Statement of Operations after tax)##
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Note E – New Accounting Standards
Effective July 1, 2003, Torchmark adopted Financial Accounting Standards Board 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 Securities. Upon adoption of SFAS 150, Torchmark reclassified its Trust Preferred Securities as a component of long-term debt as of July 1, 2003, and the distributions on these instruments were included in interest expense subsequent to July 1, 2003. Restatement of prior periods for comparability is prohibited by the Standard. The book value of Torchmark’s Trust Preferred Securities was $144 million at September 30, 2003 and December 31, 2002. Pretax distributions were $8.7 million in each of the nine-month periods. However, net of the benefit of an interest rate swap to a floating rate, net distributions were $3.9 million and $4.5 million pretax in 2003 and 2002, respectively. Torchmark’s other debt instruments were unaffected by the adoption of this Standard.
The Securities and Exchange Commission has made known interpretive guidance concerning SFAS 133, Accounting for Derivative Instruments and Hedging Activities. They have concluded that all income and expenses related to a non-hedged derivative must be recorded in the same line item that the adjustment to fair value is recorded. This interpretation is effective immediately with prior periods to be reclassified accordingly for comparability. In order to comply with this interpretation, Torchmark will no longer reduce its interest expense on the Statement of Operations for the reduction in interest cost for swapping its fixed rate for a variable rate on non-hedged derivatives. Instead, this benefit will be reported as a component of realized investment gains (losses), the same line item where it reports the required fair value adjustment for non-hedged derivatives. Torchmark has also reported the interest cost benefit on hedged derivatives as a component of realized gains (losses), in order to report these items on a consistent basis. Torchmark’s pretax interest cost reduction from its swap derivatives that was included in realized investment gains was $20 million in the nine months of 2003 and $17 million in the same period of 2002.
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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 D—Business Segments. Torchmark’s segments consist of its insurance segments: life, health, annuity, and other; the investment segment; and the corporate segment. The insurance segments are responsible for marketing, underwriting, and administering their respective insurance products. The investment segment is responsible for managing Torchmark’s investments, debt, and cash flow. The measure of profitability for insurance segments is insurance underwriting income before other income and insurance administrative expenses. It represents the profit margin on insurance products before administrative expenses, and is calculated by deducting net policy obligations, commissions, 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 including preferred securities. Other income and the unallocated insurance administrative expense are classified in a separate “Other Insurance” segment. 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 tables in Note D—Business Segments demonstrate how the measures of profitability are determined. Those tables also reconcile Torchmark’s revenues and measures of profitability by segment to its major income statement line items for the nine-month periods ended September 30, 2003 and September 30, 2002. The table below summarizes the measures of profitability of Torchmark’s segments and reconciles them to net income.
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Analysis of Profitability by Segment
(Dollar amounts in thousands)
Life insurance
Health insurance
Annuity
Other insurance:
Administrative expense
Investment
Corporate and adjustments
Pre-tax total
Applicable taxes
After-tax total
Remove benefit from interest rate swaps (after tax) from Investment Segment
Realized gains (losses) (after-tax)*
*See the discussion of Realized gains (losses) in this report
The table below presents an analysis of Torchmark’s net income per share by segment.
Analysis of Net Income Per Share by Segment
Realized gains (losses) (after tax)*
A discussion of operations follows by each of Torchmark’s segments. The segment discussions are then followed by a discussion of realized investment gains and losses.
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Life insurance. Torchmark’s life insurance premium income increased 7% to $977 million in the first nine 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
American Income Exclusive Agency
Liberty National Exclusive Agency
Military
United American Independent Agency
United American Branch Office Agency
Other
Total life premium
Torchmark measures the size and growth of its monetary volume of insurance inventory as well as new sales through the statistical measures annualized premium in force and annualized premium issued (sold). An annualized premium is the amount of premium that would be received by Torchmark if a given policy is in force for an entire twelve-month period. Annualized premium in force is a measure of expected premium income to be collected in the next twelve months on active policies as of a given date, assuming all policies remain in force for that year. Annualized premium issued (sold) is that amount of annualized premium from new sales in a given period, and is a primary indicator of future premium growth. Annualized premium data refer to both life and health insurance sales and in force volumes. The following table presents Torchmark’s life insurance sales and in force data by distribution method.
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Annualized Premium Sales and In Force by Distribution Method
American Income
Exclusive Agency
Liberty National
UA Independent Agency
UA Branch Office Agency
Other Distribution
Total
Annualized life premium in force was $1.4 billion, 7% higher than the $1.3 billion in force a year earlier and in line with the 7% growth in premium collections. Life insurance sales, in terms of annualized premium issued, were $279 million in the first nine months of 2003, increasing 11% over 2002 nine-month sales of $251 million.
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 $262 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 28% from $91 million to $117 million in the 2003 nine months, the highest growth of any Torchmark distribution system both in terms of percentage and dollar amount. Annualized premium in force rose 12% over the past twelve months to $393 million at September 30, 2003. These increases have resulted largely from revisions to Direct Response policies sold in the juvenile market.
Sales of direct response life insurance to the juvenile market has long been a major market for Torchmark’s Direct Response channel. The product sold for many years was a modified-premium term product. Sales of this product historically resulted in an average face amount of about $7,500 with an average annual premium of $30. In recent years, rising acquisition costs restricted margins and limited marketing expansion. After testing a variety of other replacement products and pricing that would result in more favorable results, the Company, in mid-2001, began marketing a simple whole-life product with an average face amount of $14,000 and an average annual premium of $80. The higher annual premium has allowed Direct Response to reenter some juvenile markets that had previously become unprofitable with the old product. Not only is the juvenile market an important source of sales, but it also is a vehicle to reach the parents and grandparents of the juvenile policyholders. Parents and grandparents are more likely to respond favorably
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to a solicitation by Direct Response for life coverage on themselves than is the general adult population. Also, both the juveniles and their parents are low-acquisition cost targets for sales of additional coverage over time. Given the success of the change in product offering to the juvenile market and the parents, sales to this demographic group will continue as one of Direct Response’s premier markets.
The American Income Agency markets to members of labor unions, credit unions, and other associations. This agency produced premium income of $232 million in the 2003 nine-month period, an increase of 13% over the same 2002 period. This growth in life premium income was the strongest in both percentage and dollar amount of any Torchmark life insurance distribution method. American Income life premium represented 24% of Torchmark’s total life premium during the 2003 nine months. Life sales for this agency rose 13% in the 2003 nine months to $78 million. Growth in sales of the American Income Agency was largely attributable to the growth in the number of agents, which rose 19% over the prior twelve months to 2,348 at September 30, 2003. Annualized life premium in force was $334 million at September 30, 2003, up 14% compared with a year ago.
The Liberty National Agency markets life insurance to middle-income customers in the Southeastern United States. It represented 23% of Torchmark’s life premium in the 2003 nine months. Life premium was $229 million, increasing 1% over 2002 nine-month premium. Annualized life premium in force was $320 million at September 30, 2003, increasing 1% over the prior year. Life insurance sales declined 6% to $40 million of annualized life premium issued in the 2003 period from $42 million in the year-ago period. The decline in sales resulted primarily from a new procedure adopted in April, 2003 whereby agents no longer accept the initial premium in the form of cash, a type of business prone to higher lapse rates. Management believes that the lower life sales from this change in procedure will be temporary, and that over time the new procedure will result in sales of life policies with higher margins. In the third quarter of 2003, life sales were down by 10% compared with the same year-ago quarter, but the “cash with application” sales comprised 25% of life sales for the year-ago quarter, indicating sales are already recovering. Growth in sales in the Liberty National Agency is highly dependent on growth in the number of agents. Liberty’s total agent count rose 6% over the prior year to 2,126. However, the count of renewal agents, those agents that have been with Liberty for more than one year, declined 5% to 870. Renewal agents are generally higher producers than first-year agents. Liberty has recently restructured its bonus system to not only reward production, but also to encourage recruiting and retention of productive agents.
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 nine months to $123 million. Sales in this agency were $20 million in the first nine months of 2003, rising 13%. The Military Agency also had 12% growth in annualized life premium in force, which totalled $174 million at September 30, 2003.
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Torchmark’s Other Distribution systems offering life insurance include United Investors and various minor distribution channels. The Other Distribution group contributed $78 million of life premium to Torchmark, a decline of 4%. Other Distribution life premium represented 8% of Torchmark’s total life premium in the 2003 period. Other Distribution sales declined 17% to $4.9 million. Annualized premium in force was down 5% to $122 million. These declines were largely affected by surrender activity in the variable universal life policies sold by United Investors. Management believes that weak financial markets in recent years have resulted in a decline in customer interest in these products.
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 $241 million in the first nine months of 2003, increasing 9% over the same period of 2002. As a percentage of life premium, underwriting income rose from 24% to 25% in the 2003 nine-month period. The Direct Response Group has impacted life insurance margins by emphasizing sales of its juvenile policy, a higher margin product. Also contributing to the improved margins was American Income, which accounted for a higher percentage of total life premium in the 2003 nine months than in the nine months of 2002. American Income has the highest underwriting profit margin as a percentage of premium of any Torchmark distribution group.
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Health insurance. Health insurance premium income increased 1% to $774 million when comparing the first nine 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 $1.06 billion at September 30, 2003, increasing 2% over a year ago. Sales of health insurance, as measured by annualized premium issued, grew 11% to $166 million during the nine months of 2003 as compared with the year-ago period, overcoming the declines experienced earlier in 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 65% ($696 million) of the Company’s total $1.06 billion health annualized premium in force at September 30, 2003. A year ago, Medicare Supplement annualized premium in force was $728 million, or 70% 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 September 30, 2003. Since the third quarter of 2002, Medicare Supplement sales have not 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 nine months ended September 30, 2003, the total health sales of these two agencies were $136 million of annualized premium, of which the $89 million majority were from health plans other than Medicare Supplements. For the nine months of 2002, health sales of these agencies were $126 million, with $54 million from 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’s annual percentage rate increases are moderating to mid-single digits.
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Cancer sales, produced primarily by the Liberty National Agency, were $9.8 million in the first nine months of 2003, increasing 14% over the prior-year period. Cancer annualized premium in force, which represents 18% of Torchmark’s health premium in force at September 30, 2003, was $186 million, rising 6% over $176 million a year earlier. Approximately half of Liberty’s annualized health premium in force consists of a closed block of cancer business which arose from a class-action settlement in the mid-nineties. Significant rate increases on this block of business have contributed to the growth in cancer premium in force.
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 3% to $123 million in the first nine months of 2003 from the year-ago period. As a percentage of health premium, underwriting margins declined from 17% in the 2002 period to 16% in the 2003 period. The majority of the health margin decline results from the continuing margin pressure from increasing claims loss ratios on the previously-mentioned closed block of Liberty National cancer policies. Despite the semi-annual rate increases over the past several years, the high loss ratio (claim/premium) continues to impact underwriting margins. The Company is evaluating various non-rate increase alternatives to improve the underwriting margins on the block.
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Annuities. Torchmark markets both fixed and variable annuities. Torchmark measures the monetary volume of its inventory of annuity products and annuity sales on the basis of “deposit balance” and “collections,” respectively. Annuity collections are the deposits or annuity premium received from a customer, either as a new sale or as an addition to an existing deposit balance. Collections measure annuity growth through new deposits. Collections are not accounted for as revenue but are added to the deposit balance. The deposit balance is the liability due to customers for Torchmark’s annuities and is a measure of the size of the annuity inventory upon which annuity revenue is based. The variable annuity deposit balance is included in “Separate account liabilities” on Torchmark’s Balance Sheet. The fixed annuity balance is a component of Torchmark’s “Future policy benefits.” The deposit balance is increased by collections and interest credits, but is reduced by withdrawals and by the policy charge assessments that are revenue to Torchmark. The variable account balance is additionally increased or decreased by market growth or declines in the investments in the underlying funds. The following table presents collection and deposit balance information about Torchmark’s annuities.
Annuities
Collections and Deposit Balances
Increase
(Decrease)
Fixed
Variable
Fixed annuity collections were $117 million in the first nine months of 2003, compared with $45 million collected in the prior-year period. Fixed annuities on deposit with Torchmark at September 30, 2003 rose to $820 million, increasing 33% over $616 million a year ago. The increase in the fixed annuity balance 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 $14 million in the first nine months of 2003, declining from variable collections of $20 million in the same period of 2002. The variable annuity balance was $1.5 billion at September 30, 2003, compared with $1.5 billion at December 31, 2002 and $1.6 billion one year ago. The 5% 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 account balance resulting from the surrender activity has been partially offset by improvements in equity markets during the past twelve months, however.
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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 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. On September 5, 2003, the Supreme Court denied Waddell & Reed’s petition for rehearing and also vacated and remanded the case to the Jefferson County Alabama Circuit Court with a clarifying opinion. On September 25, 2003, United Investors filed a motion for summary judgment in this case with the Alabama Circuit Court. Subsequently, on October 22, 2003, Waddell & Reed delivered to United Investors $12.8 million, the amount of the disputed commissions Waddell & Reed had previously withheld from United Investors, plus interest. Based upon delivery of the $12.8 million, Waddell & Reed moved for summary judgment in the Alabama Circuit Court which United Investors opposed. A hearing on Waddell & Reed’s motion for summary judgment was held on October 24, 2003 and the parties are awaiting the Circuit Court’s ruling. United Investors will continue to pursue its remaining claims against Waddell & Reed pursuant to the Alabama Circuit Court’s direction. As of September 30, 2003, United Investors has not recorded any amount in its financial statements for the award or the related accrued interest. Torchmark does not believe that the recording of these proceeds will materially affect Torchmark’s net income in future periods.
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While Torchmark continues to sell annuity products, it does not expect to emphasize this product line in the future.
The following table presents underwriting margin results for Torchmark’s annuities.
Policy charges
Policy charges are assessed against the annuity account balance periodically for insurance risk, sales, administration, and cash surrender. Policy charges for annuities declined 24% in the first nine months of 2003 to $23 million, primarily as a result of the decline in the average variable annuity account balance compared with the prior year. Annuity underwriting income decreased 25% in the 2003 period to $9 million from $12 million in the 2002 period, primarily as a result of the decline in policy charges. Net policy obligations included $3.8 million in guaranteed minimum death benefits in the 2003 period, an increase of $1.2 million over the prior period.
Administrative expense. Torchmark’s administrative expense consists of its insurance administrative expense and its parent company expense. Insurance administrative expense rose 4.8% to $97 million in the 2003 nine months, compared with $93 million in the prior period. As a percentage of premium, insurance administrative expense increased from 5.4% in the 2002 nine months to 5.5% in the 2003 period. Total administrative expense, including parent expense, rose 4.1% to $105 million in the 2003 period. As a percentage of total revenue, total administrative expense declined in 2003 from 4.9% to 4.8%. Pension costs added approximately $1.7 million and litigation expense at Liberty rose $.9 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
Nine months ended
September 30,
Tax-equivalency adjustment*
Tax-equivalent investment income
Required interest on net insurance policy liabilities
Debt including 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. 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.
Financing costs include interest on debt, the pretax distributions 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 nine months rose 8% to $238 million from $220 million for the same period of 2002. Because significant cash flow that would otherwise be invested in fixed maturities 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 14% in the 2003 period to $2.06 from $1.81.
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The largest component of excess investment income is tax-equivalent net investment income, which increased 6% to $413 million in the first nine months of 2003, compared with $390 million during the same 2002 period. The increase was primarily the result of the 7% growth in the investment portfolio (based on average invested assets). Average invested assets, which include fixed maturities at amortized cost, were $7.8 billion in the 2003 nine-month period, compared with $7.3 billion in the 2002 period. The $517 million increase in average invested assets over the prior-year period was achieved even though Torchmark used $212 million to repurchase Torchmark shares under its share repurchase program during the prior twelve months.
Financing costs declined 15% to $22 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 93% of Torchmark’s investments at fair market value are in a diversified fixed-maturity portfolio. The balance of investments is in mortgages (1.4%), short-terms (0.5%), policy loans, which are secured by policy cash values (3.4%), and other investments (1.7%). At September 30, 2003, fixed maturities had a fair value of $8.0 billion, compared with $7.2 billion at December 31, 2002 and $7.1 billion at September 30, 2002. An analysis of Torchmark’s fixed-maturity portfolio by component at September 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
* At fair value
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Torchmark’s $8.0 billion fixed-maturity portfolio at fair market value had a net unrealized gain of $659 million at September 30, 2003. At the end of the third quarter last year, the $7.1 billion portfolio had a net unrealized gain of $292 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 September 30, 2003 resulted primarily from the continued reduction during the nine-month period in interest rates and in yields on competing assets.
An analysis of the fixed-maturity portfolio by quality rating at September 30, 2003 is as follows.
Fixed Maturities by Rating*
AAA
AA
A
BBB
BB
B
Below B
*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 September 30, 2003.
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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.
During the first nine 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. In the case of callable bonds, the average life is based on the call date 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
Total fixed-maturity acquisitions
Average yield *
Effective annual yield *
Average life (in years, to worst call)
*Tax equivalent basis
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While Torchmark had 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 6.3% in the third 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.
Additional information concerning the fixed-maturity portfolio is as follows.
Fixed Maturity Portfolio Selected Information
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)*
* A measure of the price sensitivity of a fixed-income security to a particular change in interest rates.
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.
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The following tables disclose certain information about unrealized losses in Torchmark’s fixed-maturity portfolio at September 30, 2003.
Analyses of Gross Unrealized Investment Losses on Fixed Maturities
At September 30, 2003
(Amounts in millions)
Fair valueless than80% of book
for less than6 months
Fair valueless than
80% of bookfrom 6 monthsto 1 year
for more than1 year
Investment grade securities:
U.S. government and agency
Redeemable preferred stock
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
General merchandise stores
Auto repair, services, parking
Food stores
U.S. Government
Industrial, comm machinery, computer equip
Rubber & miscellaneous plastics products
Municipal bonds
Metal mining
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Realized gains and losses. As presented in the table reconciling Torchmark’s segment results to itsConsolidated Statement of Operations in Note D – Business Segments, one component of net income which is not a component of segment operations is after-tax realized investment gains (losses). A realized gain (loss) is a recurring item that Torchmark does not consider to be a component of its core operations. Torchmark’s core operations consist of its business of providing insurance coverage. In the course of conducting this business, investments are made in assets, predominately fixed maturities, to support its insurance policy liabilities. Yields on these investments are expected to provide for the cost of carrying those insurance liabilities. While Torchmark’s fixed maturities are available for sale, Torchmark’s intent is generally to hold these investments to maturity. Torchmark is not in the business of trading investments for profit, and any gain or loss realized is only secondary to its operations. Further, realized investment gains (losses) are subject to interest rate levels and economic events outside the control of the Company.
Torchmark’s core insurance business is very long-term in nature, with the realization of actual profits emerging over many years. Realized gains and losses are not considered in determining premium rates or product profitability in Torchmark’s insurance products, nor are they considered to be part of investment income. Therefore, they have no bearing on segment results as management views Torchmark’s core operations. In the manner that Torchmark manages its insurance business, investment gains and losses do occur incidentally, usually as a result of investment sales for tax reasons or because of deterioration in investment quality. These temporary gains and losses can be substantial in relation to core segment results, and as a result, have a material positive or negative impact on net income.
Additionally, accounting rules require Torchmark to revalue its interest-rate swaps at 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 unrealized gains and losses from marking the swaps to market value from inception, will be zero when the swap agreements expire. The accounting rules require that these temporary unrealized changes in swap values be included as a component of realized gains (losses) on the Statement of Operations.
During September, 2003 the Securities and Exchange Commission made public its interpretation of SFAS 133, the GAAP rules concerning derivatives. Their interpretation concluded that all income and expenses related to a non-hedged derivative must be recorded in the same line item that the adjustment to fair value is recorded. This interpretation is effective immediately with prior periods to be reclassified accordingly for comparability. This interpretation no longer allows Torchmark to reduce interest expense on its Statement of Operations to reflect the reduction in interest expense resulting from its interest-rate swap agreements. Instead, this cash savings in interest cost must be combined with the non-cash unrealized fair value adjustment and has been included as a component of realized investment gains and losses. Torchmark’s pretax interest cost reduction from its swap derivatives that was included in realized investment gains was $20 million in the nine months of 2003 and $17 million in the same period of 2002.
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The table below presents after-tax realized gains (losses) along with net income so that investors and other financial statement users may determine their impact on net income for the nine-month periods ended September 30, 2003 and 2002.
Realized investment gains (losses) (after tax)
Per diluted share:
The following table summarizes Torchmark’s tax-effected realized gains (losses) for the nine-month period ended September 30, 2003 and the comparable prior-year period.
Analysis of Realized Gains (Losses)
(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
Cash from spread on interest rate swap agreements
Net realized capital losses from investments, excluding interest rate swaps, were $8.6 million after tax for the 2003 nine months, compared with net realized losses of $51.4 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 $2.3 million. During the first quarter of 2003, the book values of certain bonds were considered to be other-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 2002 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.
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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 $559 million in the first nine months of 2003, compared with $509 million in the same period of 2002. Additionally, Torchmark received $127 million from net deposit product collections in the nine-months of 2003, compared with $26 million in the same period of 2002. Torchmark also received $529 million in investment maturities or repayments during the first nine months of 2003.
Torchmark’s cash and short-term investments were $50 million at September 30, 2003, compared with $80 million at December 31, 2002 and $37 million at the end of September, 2002. In addition to these liquid assets, Torchmark’s entire portfolio of fixed-income and equity securities, in the approximate amount of $8.0 billion at fair value on September 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 September 30, 2003, Torchmark had $171 million face amount of commercial paper outstanding ($171 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 September 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 adopted the provisions of accounting rule SFAS 150 effective July 1, 2003, which required its mandatorily-redeemable preferred securities to be reclassified as a liability. As a result, Torchmark’s Trust Preferred Securities are now included as a component of long-term debt. The Standard does not allow reclassification in prior periods for comparison. Torchmark’s outstanding long-term debt at book value, including the Trust Preferreds, was $698 million at September 30, 2003. This compares with a total book value of $696 million at December 31, 2002, consisting of $552 million of long-term debt and $144 million of Trust Preferred Securities. At September 30, 2002, the book value of long-term debt and the Trust Preferreds totalled $697 million. An analysis of long-term debt issues outstanding is as follows at September 30, 2003.
Long Term Debt at September 30, 2003
Instrument
Senior Debentures
Notes
Senior Notes
Total funded debt
Trust Preferred Securities
Total long-term 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 $16.4 million, $15.1 million, and $15.8 million at September 30, 2003, December 31, 2002, and September 30, 2002, respectively.
Torchmark acquired 5.3 million of its outstanding common shares on the open market at a cost of $199 million during the first nine 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 34.2 million shares at a total cost of $1.2 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. Also on July 24, 2003, Torchmark announced that it will increase its quarterly dividend to $.11 per share, beginning in the fourth quarter of 2003.
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Shareholders’ equity was $3.17 billion at September 30, 2003. This compares with $2.85 billion at December 31, 2002 and $2.76 billion at September 30, 2002. The primary factors causing the growth in shareholders’ equity during the 2003 nine months were the addition of earnings of $318 million and unrealized gains of $229 million, offset by dividends of $33 million and Torchmark share purchases of $199 million.
Torchmark is required by an accounting rule (SFAS 115) to revalue its available-for-sale fixed-maturity 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. Changes in the fair value of the portfolio result from changes in interest rates in financial markets. While SFAS 115 requires invested assets to be revalued, it does not permit interest-bearing insurance policy liabilities to be valued at fair value in a consistent manner. If these liabilities were revalued in the same manner as the assets, the effect on equity would be largely offset. The size of both Torchmark’s investment portfolio and its policy liabilities are quite large in relation to its shareholders’ equity. Therefore, this inconsistency in measurement usually has a material impact in the reported value of shareholders’ equity. Fluctuations in interest rates cause undue volatility in the period-to-period presentation of Torchmark’s shareholders’ equity, capital structure, and financial ratios which would be essentially removed if interest-bearing liabilities were valued in the same manner as assets. 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)
Pension assets: The following chart presents assets at fair value for Torchmark’s defined-benefit pension plans at September 30, 2003 and the prior year end.
Pension Assets by Component
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 but also from a $9.6 million contribution during the period. The liability for qualified defined-benefit pension plans was $141 million at December 31, 2002.
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There have been no quantitative or qualitative changes with respect to market risk exposure during the three months ended September 30, 2003.
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 September 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 September 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 over financial reporting subsequent to the date of their evaluation. No significant deficiencies or material weaknesses in such internal controls 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
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 September 30, 2003, Liberty was a party to approximately 96 active lawsuits (including 7 employment related cases and excluding interpleaders and stayed cases), 67 of which were Alabama proceedings and 15 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 face amount coverage life insurance policies. In approximately the same time frame, Liberty 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 was 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
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convert to paid-up status those policies utilizing 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 was 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 were 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 Moore granting 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 in Moore was held by the District Court on September 16, 2003. The parties are awaiting the District Court’s ruling.
Also bearing on this issue, a panel of U.S. Circuit Court of Appeals for the Fifth Circuit has reversed and remanded denial of class certification in a similar race-distinct premium case involving other unaffiliated insurance company defendants. That Court stated that if liability was ultimately found, the class action plaintiffs would be entitled to a full refund of all excess premiums paid over the course of many years. This Fifth Circuit decision is subject to a motion for rehearing and a motion for an en banc rehearing.
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.
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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 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.
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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 Alabama, has been transferred to the U.S. District Court for the Northern District of Alabama and consolidated with the Moore case. The Baldwin and Edwardscases 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).
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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 Teague case. 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. 01-2372-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.
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On June 25, 2002, the Jefferson County Circuit Court entered an order in United Investors’ 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 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
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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 then filed a petition for rehearing regarding the Supreme Court’s July 2003 opinion which United Investors opposed.
On September 5, 2003, the Supreme Court denied Waddell & Reed’s petition for rehearing and also vacated and remanded the case to the Jefferson County Alabama Circuit Court with a clarifying opinion. On September 25, 2003, United Investors filed a motion for summary judgment in this case with the Alabama Circuit Court. Subsequently, on October 22, 2003, Waddell & Reed delivered to United Investors $12.8 million, the amount of the disputed commissions Waddell & Reed had previously withheld from United Investors, plus interest. Waddell & Reed then filed a motion to amend its complaint in the Kansas District Court litigation to claim this sum as additional damages in the Kansas proceeding. Based upon the delivery of such check, Waddell & Reed moved for summary judgment in the Alabama Circuit Court which United Investors opposed. A hearing on Waddell & Reed’s motion for summary judgment was held on October 24, 2003 and the parties are awaiting the Circuit Court’s ruling. United Investors will continue to pursue its remaining claims against Waddell & Reed pursuant to the Alabama Circuit Court’s direction.
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 theRobertson 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
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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. Oral arguments in the case have been scheduled by the Supreme Court on November 6, 2003.
On March 13, 2003, purported class action litigation was filed against United American Insurance Company in the Circuit Court of Duval County, Florida (Moore v. United American Insurance Company, Case No. 16-2003-CA-001955-XXXX-MA, Division CV-E). The plaintiff, representing a class with in excess of 8,000 members, asserts that the annual additional fee that United American charges him and its other Medicare Supplement insurance policyholders for electronic processing of claims is a premium or charge subject to filing with and approval by the State of Florida’s Department of Financial Services/Department of Insurance (Department) and that such charge has never been filed by United American with and approved by the Department. The plaintiff alleges claims for breach of contract and the implied covenant of good faith and fair dealing as well as for declaratory relief. Compensatory damages including the refund of all premium charges found to be illegal, a declaratory judgment, interest, costs, and attorney’s fees are sought.
United American filed a motion to dismiss this action, which was granted by the Circuit Court on July 14, 2003. The case was subsequently refilled by the plaintiff and United American filed another motion to dismiss the case, which was denied by the Circuit Court on October 22, 2003. United American will file appropriate responsive pleadings in this case with the Circuit Court.
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Item 6. Exhibits and Reports on Form 8-K.
A Form 8-K dated July 7, 2003 was filed in the third quarter of 2003 containing a press release announcing the withdrawal of a prior opinion and the issuance by the Alabama Supreme Court of their revised 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 July 22, 2003 was filed in the third quarter of 2003 furnishing a press release announcing Torchmark Corporation’s second 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.
Date: November 11, 2003
/s/ C. B. Hudson
C. B. Hudson, Chairman of the
Board and Chief Executive Officer
/s/ Gary L. Coleman
Gary L. Coleman, Executive Vice
President and Chief Financial Officer
(Chief Accounting Officer)
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