Liberty and Globe also lease district office space for their agency sales personnel.
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:
5) The effect of the required change to a new accounting principle revising the method for valuing certain asset-backed security investments, which resulted in an after-tax charge of $26.6 million in 2001;
Summary of Net Operating Income (Dollar amounts in thousands except per share data)
yields obtained on alternative investments such as fixed maturities were significantly greater. Total consideration for the combined transactions was $123 million of which $111 million was cash. The real estate dispositions resulted in an after-tax loss of $41 million. After the sales, Torchmark retained $16 million in investment real estate, of which $8 million was represented by properties partially occupied by Torchmark subsidiaries. At December 31, 2001, Torchmark held $14 million in investment real estate.
Torchmark's emphasis continues to be on marketable, high quality fixed maturity investments. While yields have fluctuated somewhat, the nominal yield on the $6.5 billion portfolio remained at 7.47% during 2001, equal to the 2000 level and above the 7.39% 1999 level. At December 31, 2001, approximately 92% of invested assets were fixed-maturity securities, and 92% of these holdings were classified
Torchmark has in place a swap agreement originally entered into when the MIPS were issued to exchange a monthly fixed payment based on an annual rate of 9.18% for a floating rate based on the one-month LIBOR rate on a notional amount of $200 million. While the MIPS have been redeemed, the swap is still in place and does not expire until September 30, 2004. At December 31, 2001, Torchmark was obligated to pay at a floating rate of 3.47% on this agreement, while collecting at a rate of 9.18%. Torchmark's after-tax earnings benefited $4.6 million in 2001, $1.6 million in 2000, and $2.7 million in 1999 because of this swap agreement.
Short-term debt consists of Torchmark's commercial paper outstanding. The commercial paper balance outstanding at December 31, 2001 was $204 million at carrying value, compared with a balance of $329 million a year earlier. The commercial paper borrowing balance fluctuates based on Torchmark's current cash needs.
Total debt as a percentage of total capitalization was 21.9% at December 31, 2001. In the computation of this ratio, the preferred securities outstanding are counted as equity and the effect of fluctuations in security values based on changes in interest rates in financial markets are excluded. This debt-to- capitalization ratio was 21.5% at year-end 2000 and 25.2% at year-end 1999. The decline in the debt-to-capitalization ratio at year-end 2000 was caused primarily by short-term debt paydowns. Torchmark's ratio of earnings before interest, taxes and discontinued operations to interest requirements was 14.5 in 2001, compared with 11.3 in 2000 and 8.7 in 1999. Torchmark's interest expense declined 18% to $44.5 million in 2001, primarily as a result of much lower interest rates in financial markets and a reduction in average debt outstanding. Interest expense rose 4% to $54.5 million in 2000. The increase in 2000 was due primarily to an increase in short-term borrowing costs which offset the lower amount of average debt outstanding.
Waddell & Reed. In 1998, Torchmark spun off to its stockholders its remaining interest in Waddell & Reed, Inc. (Waddell & Reed). Waddell & Reed is an asset management institution which prior to 1998 was a wholly-owned Torchmark subsidiary. The spin off was accounted for as a disposal of a segment. In connection with the transaction, Torchmark incurred a tax in 1999 which has been included as discontinued operations in the after-tax amount of $1 million. Waddell & Reed continued to market certain products on behalf of a Torchmark subsidiary after the transaction under various sales agreements. In 2001, all of these agreements were terminated. As of December 31, 2001, there is no longer any significant affiliation with Waddell & Reed.
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.
On October 16, 2001, defendant Torchmark filed a motion to dismiss and to stay discovery in the Bomar action, asserting plaintiff's lack of standing, failure to make a legally-required demand on the Board of Directors of Torchmark and failure to comply with certain Alabama Rules of Civil Procedure. On October 17, 2001, the Board of Directors created a special litigation committee comprised of two independent, disinterested directors to review and make determinations and a report with regard to the transactions involved in such suit. Defendant Torchmark's motion was amended on October 19, 2001 to include as further grounds for dismissal and stay the creation of that special litigation committee and the delegation of complete authority to said committee to review the transaction and determine whether prosecution of the Bomar action is in the interests of Torchmark and its shareholders and what action Torchmark should take with regard to the Bomar action. The committee, through its separately retained counsel, advised the Court that it concurred in Torchmark's motions. The plaintiff subsequently amended her complaint to delete the request for establishment of a constructive trust. A hearing on Torchmark's amended motion to dismiss and stay discovery was held November 13, 2001 and on November 26, 2001, the Circuit Court issued an order staying all proceedings in Bomar for 150 days during which the special litigation committee was charged with investigating, reviewing and analyzing the asserted claims, completing its written report and filing the same with the Circuit Court. The special litigation committee has obtained from Torchmark the documentary evidence it requested from the company and in February, 2002 commenced its witness interview process.