Cancer insurance had the greatest percentage growth in 1997 in terms of annualized premium in force, gaining 15% from $119 million to $138 million. This compared with 4% growth in 1996. Annualized premium issued for this product line was $11 million in each of the years 1995 through 1997. Cancer business is written primarily by the Liberty National Agency, which had $116 million, or 85% of total cancer annualized premium in force at December 31, 1997. Premium growth has been attained primarily through premium rate increases to offset increased healthcare costs.
Health insurance underwriting income before other income and administrative expenses declined 4% in 1997, despite increased premium, due to increased net policy obligations. As a percentage of health insurance premium, underwriting income before other income and administrative expenses declined approximately 1% in 1997 after a slight increase in 1996. Fluctuations in health insurance margins are common, resulting from inevitable short term timing differences due to the periodic nature of obtaining rate increase approvals from regulatory authorities and the pre-existing health care cost inflation that justifies such rate increases. To the extent that management is able to obtain timely and adequate rate increases, margin fluctuations will be minimized. Inflationary cost increases in the cancer business negatively impacted margins in 1997, but significant rate increases implemented during the year should improve margins in 1998. Similarly, Medicare Supplement underwriting margins have also experienced small declines. The Federal mandate of a 65% minimum loss ratio on Medicare Supplement business and market competition make it difficult to improve underwriting margins on this product. Nonetheless, Medicare Supplement products are profitable to Torchmark because of the low operating expenses associated with it.
The MIPS were issued in November, 1994 at a redemption amount of $200 million with an annual dividend rate of 9.18%. They are subject to a mandatory redemption in full at September 30, 2024, although Torchmark may elect to extend the MIPS for up to an additional 20 years if certain conditions are met. They are redeemable at Torchmark's option at any time after September 30, 1999. While Torchmark is obligated to pay dividends at a fixed rate of 9.18%, Torchmark has a ten-year interest-rate swap agreement with an unaffiliated party to reduce financing costs. The swap agreement calls for Torchmark to pay a variable rate on the $200 million face amount in exchange for payment of the fixed dividend. Torchmark is at risk on this instrument for higher financing costs to the extent interest rates rise during the remaining term. This risk is limited, however, by a five-year interest-rate cap which Torchmark acquired in conjunction with the swap agreement that insures the variable rate cannot exceed 10.39%. At December 31, 1997, the variable rate was 7.36%. During 1997, Torchmark's after-tax dividend cost for the MIPS was $9.9 million, compared with $11.9 million that would have been incurred without the swap and cap transactions. Torchmark's after-tax cost in 1996 was $9.7 million and in 1995 was $10.3 million, saving $2.2 million and $1.6 million, respectively.
Employers' Disclosure about Pensions and Other Postretirement Benefits (FAS No. 132) is effective for fiscal years beginning after December 15, 1997. This statement revises disclosures about pensions and other postretirement benefit plans, requiring additional information on changes in benefit obligations and the fair values of plan assets. It does not change the measurement or recognition of these plans. Adoption of this statement by Torchmark will result in some additional disclosures for its benefit plans.
The following table sets forth the plans' combined benefit obligation which is a component of other liabilities:
For measurement purposes, a 7.0% to 9.0% annual rate of increase in per capita cost of covered healthcare benefits was assumed for 1997. These rates grade to ranges of 4.5% to 6.5% by the year 2006. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the health care cost trend by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997 by $1.3 million and would increase the net periodic postretirement cost for the year ended December 31, 1997 by approximately $176 thousand.
Interest in the amount of $1.7 million, $1.4 million, and $1.6 million was capitalized during 1997, 1996, and 1995, respectively.
Litigation: Torchmark and its subsidiaries continue to be named as parties to pending or threatened legal proceedings. These lawsuits involve tax matters, alleged breaches of contract, torts, including bad faith and fraud claims based on alleged wrongful or fraudulent acts of agents of Torchmark's subsidiaries, employment discrimination, and miscellaneous other causes of action. Many of these lawsuits involve claims for punitive damages in state courts of Alabama, a jurisdiction particularly recognized for its large punitive damage verdicts. A number of such actions involving Liberty also name Torchmark as a defendant. As a practical matter, a jury's discretion regarding the amount of a punitive damage award is not limited by any clear, objective criteria under Alabama law. Accordingly, the likelihood or extent of a
Total revenues by segment include revenues from other segments in addition to unaffiliated parties. Intersegment revenues include commission revenue and investment income which eliminate in consolidation. Pre-tax income for operating segments is total revenue less operating costs and expenses for the segment. Corporate pre-tax income includes transactions which are nonoperating in nature and are not related to the activities of a segment. Such items include parent company interest expense, goodwill amortization, and similar items.
Rental Income: Torchmark leases office space to Vesta Insurance Group, Inc. ("Vesta"), a 27% owned subsidiary. Total rental income received from Vesta was $585 thousand, $508 thousand, and $494 thousand, for the years ended December 31, 1997, 1996 and 1995, respectively.