8) The inability of Torchmark to achieve the anticipated levels of administrative and operational efficiencies;
The Vesta transactions are discussed on page 36 and the redemption of Torchmark debt is discussed under the caption Capital Resources on page 34 of this report. The change in accounting principle is discussed in Note 15-- Change in Accounting Principle in the Notes to the Consolidated Financial Statements on page 65 of this report.
Life insurance premium rose 6% in 2000 to $1.08 billion from $1.02 billion in 1999. Life premium increased 6% in 1999 from $957 million. Sales of life insurance, in terms of annualized premium, were $291 million in 2000, increasing 13% over 1999 sales of $257 million. This compares with 5% growth in 1999 sales over 1998 sales of $244 million. Annualized life premium in force was $1.20 billion at December 31, 2000, compared with $1.13 billion at 1999 year end, an increase of 6%. Annualized premium in force grew 6% in 1999 from $1.06 billion at year-end 1998. Annualized premium in force and issued data includes amounts collected on certain interest-sensitive life products which are not recorded as premium income but excludes single-premium income and policy account charges.
The carrying value of the funded debt was $366 million at December 31, 2000, compared with $372 million a year earlier.
During 1998 and 1999, Torchmark acquired a portion of its funded debt in the open market, through its insurance subsidiaries. In 1999, $7.5 million principal amount of its 7 7/8% Notes due 2023 was acquired at a cost of $7.9 million. Also in 1999, $4.0 million principal amount of its 7 3/8% Notes due 2013 was purchased for $4.1 million. In 1998, Torchmark bought $10.8 million of its 7 7/8% Notes at a price of $10.6 million. Insurance company holdings in the funded debt reduce consolidated debt outstanding.
The amount of interest accrued on the unamortized balance of value of insurance purchased was $9.1 million, $10.5 million, and $13.2 million, for the years ended December 31, 2000, 1999, and 1998, respectively. The average interest rates used for the years ended December 31, 2000, 1999, and 1998, were 6.4%, 6.5%, and 6.8%, respectively. The estimated amortization, net of interest accrued, on the unamortized balance at December 31, 2000 during each of the next five years is: 2001, $16.3 million; 2002, $13.7 million; 2003, $11.8 million; 2004, $10.2 million; and 2005, $8.9 million.
As a result of the adjustment and conversion of these options, 7.2 million outstanding Torchmark options with an aggregate exercise price of $219 million on November 6, 1998 were replaced with 6.4 million adjusted Torchmark options with an aggregate exercise price of $167 million. Also 3.7 million Waddell & Reed options were granted with an aggregate exercise price of $51.6 million.
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. 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. 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 December 31, 2000, Liberty was a party to approximately 80 active lawsuits (including 10 employment related cases and excluding interpleaders and stayed cases), 71 of which were Alabama proceedings in which punitive damages were sought. Liberty faces trial settings in these cases on an on-going basis.
Torchmark has previously reported the filing of purported class action litigation on January 2, 1996 against Torchmark, Torch Energy Advisors Incorporated, and certain Torch Energy subsidiaries and affiliated limited partnerships in the Circuit Court of Pickens County, Alabama (Pearson v. Torchmark Corporation, Case No. CV-95-140). The plaintiff alleged improper payment of royalties and overriding royalties on coalbed methane gas produced and sold from wells in Robinson's Bend Coal Degasification Field, sought certification of a class and claimed unspecified compensatory and punitive damages on behalf of such class. On April 11, 1996, Torchmark's motion to change venue was granted and the case was transferred to the Circuit Court of Tuscaloosa County, Alabama. Torchmark filed a motion to dismiss, which remained pending while discovery proceeded. On February 10, 1999, the plaintiffs filed a request for a class certification hearing and to set a trial date for the Pearson case. After extensive negotiations, a tentative settlement was reached by the parties. On January 8, 2001 the Circuit Court held a settlement and fairness hearing on the stipulation and agreement of compromise and settlement executed by counsel for all parties. The Circuit Court approved this settlement and entered an order and final judgment of dismissal with prejudice on January 10, 2001. The settlement fund of $6 million, to which Torchmark contributed pursuant to a litigation indemnity given at the time of its 1996 sale of Torch Enery, was distributed in March 2001.
Torchmark's segments are based on the insurance product lines it markets and administers: life insurance, health insurance, and annuities. These major product lines are set out as segments because of the common characteristics of products within these categories, comparability of margins, and the similarity in regulatory environment and management techniques. There is also an investment segment which manages the investment portfolio, debt, and cash flow for the insurance segments and the corporate function. Torchmark's management evaluates the overall performance of the operations of the company in accordance with these segments.