W&R owns and occupies a 116,000 square foot office building utilized as its corporate headquarters located in United Investors Park, a commercial development at 6300 Lamar Avenue, Shawnee Mission, Kansas. In addition, W&R owns three other office buildings in this development, each containing approximately 48,000 square feet, which are leased or are available for lease.
- ------------------------------------------------------------------------------- (1) Annualized life premium in force includes $144 million, and annualized health premium in force includes $37 million, representing the business acquired in the acquisition of American Income Life Insurance Company in 1994. (2) Includes accrued investment income. (3) Computed after deduction of preferred shareholders' equity.
The following should be read in conjunction with the Selected Financial Data and Torchmark's Consolidated Financial Statements and Notes thereto appearing elsewhere in this report.
In addition to the Black Warrior disposal, Torchmark also determined earlier in 1995 to sell Torch Energy, its energy management subsidiary. Torchmark is currently negotiating the disposal of Torch Energy through a management-led buyout. It is anticipating that the transaction will result in total consideration of approximately $108 million, consisting of cash and other securities. A small gain is expected on the sale. As a result of the proposed sale of Torch Energy and the decision to dispose of Black Warrior, Torchmark has elected to exit the energy industry, accounting for such as a disposal of a segment. Therefore, Torchmark has modified the presentation in its financial statements for 1995 and all prior periods to set forth separately the net assets and results attributable to the discontinued energy segment as discontinued operations.
Revenues increased 10% in 1995 to $2.07 billion from $1.88 billion in 1994, an increase of $192 million. The American Income acquisition accounted for the increase when adjusting for lost investment income from the purchase, adding $225 million to total revenues in 1995, compared with $31 million in 1994. In comparison with 1993, 1994 revenues decreased 9%. After exclusion of Vesta revenues and the one-time gain from the Vesta sale in 1993, the decrease in 1994 revenues would have been 2%. Premium income rose 11% in 1995 over the prior year to $1.55 billion, after having increased 1.4% in 1994 over the prior period, adjusting to exclude Vesta premium in 1993. The $157 million gain in premium in 1995 was caused by the inclusion of American Income premium for a full year, which increased $168 million over 1994. The components of Torchmark's revenues and operations are described in more detail in the discussion of segments and investment operations found on pages 18 through 26 of this report.
Life insurance: Torchmark markets life insurance under a variety of different distribution channels. The following table presents life insurance premium income during each of the three years ended December 31, 1995 by distribution method:
Life insurance premium, including policy charges, grew 28% to $772 million for the year 1995. Life premium in 1994 was $602 million, increasing 8% over 1993. The American Income acquisition in late 1994 had a considerable impact on life insurance operations subsequent to the acquisition date. American Income life premium was $154 million in 1995, compared with $21 million in 1994, accounting for $133 million of the $171 million increase in life premium for 1995. Sales of life premium were strong in both 1994 and 1995. In terms of annualized premium in force issued, 1995 sales were $218 million and 1994 sales were $150 million, increasing 45% in 1995 and 17% in 1994. American Income, however, accounted for $51 million of 1995 sales, or 64% of the 1995 increase.
Torchmark's life annualized premium in force exceeded its health annualized premium in force at year-end 1995 for the first time since 1982 year end, underscoring Torchmark's emphasis on life insurance sales. Torchmark has emphasized increases in sales of life insurance product lines relative to health and other insurance products because profit margins for life insurance are superior. Additionally, assets backing the higher reserves required for life products allow Torchmark to increase investment income. Profit margins for life insurance operations, as measured by insurance operating income as a percentage of premium, has approximated 29% in each of the three years presented.
American Income's life business has an insurance operating income margin of approximately 26%, similar to other Torchmark life insurance products. However, as a percentage of premium, the American Income business is characterized by lower policy obligations and higher amortization of acquisition costs. The higher acquisition cost ratio is a result of the higher amortization of the value of insurance purchased relative to deferred acquisition costs.
The above presentation of life insurance results excludes a $22.8 million benefit in 1994 from the review of reserving assumptions on a block of burial reserves. An evaluation of assumptions regarding mortality, interest, and inflation pressures on burial costs indicated that sufficient experience existed to support a change in the level of reserves held on this block. Torchmark will continue to monitor its reserving assumptions for this block on an annual basis to ensure that reserves are adequate to meet contractual liabilities. Had this item been included, the 1994 ratio of policy obligations to premium would have been reduced and overall margin would have been increased 3.8%.
Health insurance: Health products sold by Torchmark include Medicare Supplement insurance, cancer insurance, long-term care, and other under-age 65 medical and hospitalization products. As a percentage of annualized health premium in force at December 31, 1995, Medicare Supplement accounted for 70%, cancer accounted for 15%, and other products accounted for 15%. These products are marketed by general, captive, and home service agents, direct response, and through associations. The table below presents health insurance premium income during each of the three years ended December 31, 1995 by distribution method:
While non-Medicare Supplement product sales also declined in 1994, this trend reversed in 1995. Non-Medicare Supplement health annualized premium issued rose 13% to $38 million in 1995 from $34 million in 1994. Cancer insurance annualized premium in force was $115 million at December 31, 1995, gaining slightly over the prior year end. Cancer sales in terms of annualized premium issued rose 40% to $11 million in 1995, compared with $8 million in 1994. Cancer sales were $10 million in 1993. Other health product annualized premium issued increased 4% to $27 million for 1995, after declining 15% in 1994.
As a percentage of premium, insurance operating income for Torchmark's health insurance grew from 13.2% in 1993 to 15.6% in 1994, where it stabilized at 15.6% in 1995. A primary reason for the increases in margins is the decline in the amortization of acquisition costs due to improved persistency. Improvement in the persistency of Torchmark's health business has continued throughout each of the years considered, resulting in lower ratios of acquisition costs to premium. These improvements have been brought about, at least in part, by the requirement in many states to level agents' commissions on Medicare Supplement products instead of paying a larger first-year commission. This leveling of commissions has encouraged persistency through the payment of a higher renewal commission. It has also encouraged persistency through the payment of a lower first-year commission, which discourages replacement. Excluded from the above presentation of health results in 1994 were increases in cancer policy benefits arising from the reclassification described on page 17 of this report.
Annuity premium is accounted for as a deposit and is not reflected in income. Revenues on both fixed and variable annuities are derived from charges to the annuity account balances for insurance risk, administration, and surrender, depending on the structure of the contract. Variable accounts are also charged an investment fee and a sales charge. Torchmark benefits to the extent these policy charges exceed actual costs and to the extent actual investment income exceeds the investment income which is credited to policyholders on fixed annuities.
The following table presents the annuity account balance at each year end and the annuity collections for each year for both fixed and variable annuities:
The variable annuity balance on deposit was $1.05 billion at 1995 year end, growing 52% over the prior year end. Growth was largely attributable to the strength of financial markets in mid and late 1995, but was also due to the additional deposit collections. The fixed annuity balance gained 16% to $928 million at December 31, 1995, as a result of the increased sales.
Financial Services. Torchmark's financial services operations consist of the exclusive marketing, through professional financial planners, of 23 mutual funds, including the United Group and the W&R Group of funds. These representatives also market a variety of insurance products of Torchmark subsidiaries. Financial services operations also involve the management of mutual fund portfolios, the management of institutional portfolios, and the servicing of customer accounts. Revenues are derived from commissions for the sale of investment and insurance products, fees for management of investment asset portfolios, and fees for servicing the accounts.
Commission revenues are derived from the sale of both investment and insurance products, with investment product commissions representing 81% of total commission revenues and insurance product commissions the balance. The commissions from insurance products and variable annuities are primarily from Torchmark insurance subsidiaries, and are eliminated in consolidation. Investment product commissions declined 4% to $57 million in 1995, after declining 10% in 1994. Investment product sales for 1995 and 1994 were level at $1.18 billion, after having declined 5% in 1994 from $1.24 billion in 1993. In 1995, sales of United Funds, a front-load product, declined 5% to $838 million, while sales of the W&R Funds, a deferred-load product, rose 47% to $158 million. Service fees grew 6% in 1995, after rising 5% in 1994. The number of accounts serviced were 1.22 million at December 31, 1995, compared with 1.15 million at year-end 1994 and 1.09 at year-end 1993.
- -------- * Financial services revenue includes $27.5 million in 1995, $25.9 million in 1994 and $26.2 million in 1993 representing revenues from other Torchmark segments which are eliminated in consolidation.
Pretax operating margins improved in both 1995 and 1994 over the prior year, growing 12% in 1995 to $94 million after a 15% rise in 1994 to $84 million. As a percentage of financial services revenues, pretax income stood at 52% for 1995. The primary cause for the margin improvements has been the rapid growth in asset management fees in proportion to commission revenues. Asset management fees have a significantly greater profit margin than commissions. Commissions and selling expenses as a percentage of commission revenues declined from 91% in 1993 to 86% in 1994 but rose to 91% in 1995. The 1994 decline was caused by the implementation of a 12-b service fee which offsets certain direct expenses. While this fee increased in 1995, the decrease in expense was more than offset by additional expense from product promotion and efforts to expand the sales force. It is anticipated that these additional expenditures will result in increased product sales in future periods.
Black Warrior Writedown: Torchmark has maintained an investment in a coalbed methane gas development since 1990 in the Black Warrior Basin of Alabama. The development was completed in 1993. During 1993 and 1994, production results were below expectations and losses were experienced in both years. Prior to 1995, Torchmark reviewed its investment quarterly and determined there were no impairments for reserves under successful efforts accounting. SFAS 121 was adopted by Torchmark at issuance of the Standard in March, 1995, and there were no impairments under the provisions of that Standard at the time of adoption. In the fourth quarter of 1995, production problems accelerated, and it became apparent that it was not cost-effective to incur the additional cost required to produce gas from the deeper coal seams. As a result, certain reserves of the Black Warrior investment were reclassified from proved to possible, causing an approximate 55 percent decline in the estimated proved gas reserves. Because of these factors, a decision was made by Torchmark in the fourth quarter of 1995 to sell the Black Warrior investment.
The effects of accelerated mortgage-backed prepayments need to be considered when making a comparison with 1993 net investment income. The decline in interest rates in 1993 encouraged refinancing of mortgages, causing increased GNMA prepayments in 1993 and early 1994. These funds were reinvested at lower prevailing rates, causing a reduction in Torchmark's investment income in 1993 and an even greater reduction in subsequent years. It is estimated that GNMA repayments reduced 1994 investment income $16.1 million from 1993. As rates rose in 1994, the refinancing trend reversed and Torchmark was able to reinvest repayment proceeds in higher yielding securities. Torchmark reduced its exposure to GNMA securities during 1994 and, to a greater extent, during 1995, so that at December 31, 1995, GNMA investments represented 19% of invested assets, compared with 55% of the portfolio three years earlier. For this reason, the decline in rates during 1995 and the related increase in refinancings had little impact on Torchmark's 1995 net investment income.
The decline in rates in 1995 caused an increase in the market value of fixed maturity assets. During the year, the market value of these assets increased $818 million or 19% to $5.2 billion, exceeding $5 billion for the first time in 1995. At December 31, 1995, market value exceeded book value on fixed investments by $226 million. This is in contrast to year-end 1994 when book value exceeded market by $242 million. At year-end 1993, there was an unrealized gain of $192 million. The unrealized loss in 1994 resulted from the rise in rates in that year.
At year-end 1995, average life of the portfolio increased to 8.8 years, compared with 8.0 years at year-end 1994 and 6.0 years at year-end 1993.
Liquidity: Torchmark is highly liquid, as evidenced by its positive cash flows, its marketable investments, and its credit facilities. Its insurance and asset management operations generate strong positive cash flows, well in excess of its immediate needs. Cash flows provided from operations, including deposit-product operations, were $478 million in 1995, compared with $337 million in 1994, an increase of 42%. This increase was primarily caused by increased deposit-product sales in 1995 and a one-time $48 million tax settlement paid in 1994 related to prior periods. Operating cash flows were $470 million in 1993. In addition to operating cash flows, Torchmark received $351 million in 1995 of scheduled investment maturities and repayments, further enhancing total positive cash flow. Such repayments were $796 million in 1994 and $485 million in 1993. Cash flows in excess of immediate requirements are used to build an investment base to fund future requirements.
Torchmark has in place a line of credit facility with a group of lenders which allowed unsecured borrowings up to $400 million at December 31, 1995. This line of credit is further designed as a backup credit line for a commercial paper program not to exceed $400 million, whereby Torchmark may borrow from either the credit line or issue commercial paper at any time but may not borrow in excess of a total of $400 million on the combined facilities. At December 31, 1995, $189 million in commercial paper was outstanding and there were no borrowings on the line of credit. A facility fee is charged on the entire $400 million balance. In accordance with the agreements, Torchmark is subject to certain covenants regarding capitalization and earnings. At December 31, 1995, Torchmark was in full compliance with these covenants.
Also, the class action litigation in Alabama over an exchange of Liberty's cancer policies continued in 1995. In May, 1994, a settlement was approved involving both equitable and monetary relief, valued by the court at $55 million. An appeal from the trial court's final approval of the settlement was taken to the Alabama Supreme Court, and final briefs in the case were submitted to the Supreme Court in February, 1995. The Supreme Court affirmed the trial court's decision in December, 1995. In February, 1996, the Alabama Supreme Court issued a notice overruling a petition for a rehearing.
Divestiture of Vesta: During 1993, Torchmark entered into a transaction whereby it disposed of approximately 73% of its common stock in Vesta, its wholly-owned subsidiary, which was at that time the holding company for Torchmark's property and casualty operations. On November 11, 1993, Vesta sold nine million shares of common stock in a public offering of which 6.8 million shares were owned by Torchmark prior to the sale and 2.2 million were newly issued shares. Torchmark's 6.8 million shares were sold for $25 per share less expenses, amounting to proceeds of approximately $161 million and resulting in a $57 million pretax gain. After the transaction, Torchmark continued to own 3.4 million shares of Vesta outstanding common stock or approximately 27% of the company. Torchmark also loaned Vesta $28 million in December, 1993, which was repaid in full in 1995 with interest. In January, 1996, Vesta declared and paid a three for two share stock dividend. After this dividend, Torchmark owned 5.1 million shares of Vesta stock, still representing approximately 27% of the company.
Accounting for Stock-Based Compensation (FASB Statement No. 123) is effective for fiscal years beginning after December 15, 1995, with earlier adoption encouraged. This statement establishes and encourages a new accounting method for employee stock options based on a presumed fair market value of the option at the time of grant. Previously, accounting standards required these options to be valued at intrinsic value, or the difference between the market value of the stock and the option price. The cost of the options are to be charged to earnings generally over the option's vesting period. The new method of valuation of options is not required, but if the new method is not elected, disclosure of its impact on earnings on a pro forma basis is required. Additional disclosures are also required.
Torchmark intends to continue to account for options using the accounting rules currently in effect. Therefore, while there will be no effect on future reported earnings and earnings per share, disclosure will be made giving the pro forma effect of valuing options at estimated fair value. No determination of fair value for Torchmark's options has been made, but such valuation should not have material impact on pro forma results. In 1995, Torchmark granted to employees stock options to purchase 739 thousand shares at a price of $43 3/8 per share.
As discussed in Note 1, Torchmark adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards (Statement) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in 1995. Also, as discussed in Notes 1, 11, and 12 to the consolidated financial statements, Torchmark adopted the provisions of the Financial Accounting Standards Board's Statement No. 109, Accounting for Income Taxes, and Statement No. 106, Employers' Accounting for Postretirement Benefits Other than Pensions, in 1993. Also, Torchmark adopted the provisions of the Financial Accounting Standards Board's Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, in 1993.
Birmingham, Alabama January 31, 1996 except for Note 16 which is as of February 26, 1996
TORCHMARK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
Principles of Consolidation: The financial statements include the results of Torchmark Corporation ("Torchmark") and its wholly-owned subsidiaries and United Investors Management Company ("United Management"). United Management was approximately 83% owned through October 1, 1993 at which time Torchmark acquired all of the publicly held shares. Subsidiaries which are not majority- owned are reported on the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation.
Realized investment gains and losses and investment income attributable to separate accounts are credited to the separate accounts and have no effect on Torchmark's net income. Investment income attributable to other policyholders is included in Torchmark's net investment income. Net investment income for the years ended December 31, 1995, 1994 and 1993 included $279.6 million, $240.7 million, and $229.5 million, respectively, which was allocable to policyholder reserves or accounts. Realized investment gains and losses are not allocable to policyholders.
Impairments: Torchmark adopted the provisions of SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, effective at the issuance of the standard in March, 1995. This standard requires that certain long-lived assets used in Torchmark's business as well as certain intangible assets be reviewed for impairment when circumstances indicate that these assets may not be recoverable, and further provides how such impairment shall be determined and
Goodwill: The excess cost of businesses acquired over the fair value of their net assets is reported as goodwill and is amortized on a straight-line basis over a period not exceeding 40 years. Torchmark's unamortized goodwill is periodically reviewed to ensure that conditions are present to indicate the recorded amount of goodwill is recoverable from the estimated future profitability of the related business. If events or changes in circumstances indicate that future profits will not be sufficient to support the carrying amount of goodwill, goodwill is written down to the recoverable amount and is amortized over the original remaining period or a reduced period if appropriate.
Earnings Per Share: Earnings available to holders of common stock are computed after deducting dividends on the Adjustable Rate Cumulative Preferred Stock. Primary earnings per share are then calculated by dividing the earnings available to holders of common stock by the weighted average number of common shares outstanding during the period. The weighted average numbers of common shares outstanding for each period are as follows: 1995--71,593,774, 1994-- 72,095,657, 1993--73,501,654.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 2--STATUTORY ACCOUNTING
A reconciliation of Torchmark's insurance subsidiaries' statutory net income to Torchmark's consolidated GAAP net income is as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 3--INVESTMENT OPERATIONS
A schedule of fixed maturities by contractual maturity at December 31, 1995 is shown below on an amortized cost basis and on a market value basis. Actual maturities could differ from contractual maturities due to call or prepayment provisions.
Proceeds from sales of fixed maturities available for sale were $1.18 billion in 1995, $583 million in 1994, and $246 million in 1993. Gross gains realized on those sales were $13.4 million in 1995, $14.6 million in 1994, and $8.3 million in 1993. Gross losses were $13.5 million in 1995, $20.8 million in 1994, and $176 thousand in 1993. Proceeds from sales of fixed investments held to maturity were $58 million in 1993. Gross gains and losses realized on those sales were $2.6 million and $138 thousand, respectively. The 1993 sales of fixed investments held to maturity were made for various reasons including changes in regulatory requirements, credit deterioration, and sales within 90 days of maturity.
Torchmark had $25.7 million and $26.3 million in investment real estate at December 31, 1995 and 1994, respectively, which was nonincome producing during the previous twelve months. These properties included primarily construction in process and land. Fixed maturity investments, mortgage loans, and other long-term investments which were nonincome producing during the previous twelve months were $0.3 million and $0.6 million at December 31, 1995 and 1994, respectively.
The amount of interest accrued on the unamortized balance of value of insurance purchased was $20.0 million, $11.7 million, and $10.8 million, for the years ended December 31, 1995, 1994 and 1993, respectively. The average interest accrual rates used for the years ended December 31, 1995, 1994 and 1993 were 7.26%, 7.72% and 7.57%, respectively. The estimated amount of the unamortized balance at December 31, 1995 to be amortized during each of the next five years is: 1996, $32.3 million; 1997, $27.7 million; 1998, $22.3 million; 1999, $20.5 million; and 2000, $19.2 million.
A summary of the assumptions used in determining the liability for future policy benefits at December 31, 1995 is as follows:
Torchmark and most of its subsidiaries file a life-nonlife consolidated federal income tax return. Famlico and Sentinel file their own consolidated federal income tax return and will not be eligible to join Torchmark's consolidated return group until 1996 and 1997, respectively. American Income and Trust Life Insurance Company file their own consolidated federal income tax return and will not be eligible to join Torchmark's consolidated return group until 2000.
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 12--POSTRETIREMENT BENEFITS
The excess benefit pension plan provides the benefits that an employee would have otherwise received from a defined benefit pension plan in the absence of the Internal Revenue Code's limitation on benefits payable under a qualified plan. Although this plan is unfunded, pension cost is determined in a similar manner as for the funded plans. Liability for the excess benefit plan was $5.5 million and $3.2 million as of December 31, 1995 and 1994, respectively.
The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.0% to 8.0% in 1995 and 8.0% in 1994.
The amount of debt that becomes due during each of the next five years is: 1996, $189 million; 1997, $132 thousand; 1998, $200 million; 1999, $150 thousand; and 2000, $-0-. Additionally, during the thirty-day period beginning June 15, 1996, senior debenture debt holders have the option to require Torchmark to repay $100 million.
The Senior Debentures, principal amount of $100 million, are due August 15, 2009. They bear interest at a rate of 8 1/4%, with interest payable on February 15 and August 15 of each year. The Senior Debentures, which are not redeemable at the option of Torchmark prior to maturity, provide the holder with an option to require Torchmark to repurchase the debentures on August 15, 1996 at principal amount plus accrued interest. The Senior Debentures have equal priority with other Torchmark unsecured indebtedness.
Interest in the amount of $1.6 million, $1.8 million and $10.5 million was capitalized during 1995, 1994, 1993, respectively.
Net proceeds from the MIPS offering of approximately $193 million were loaned from Torchmark Capital to Torchmark to provide part of the financing of the acquisition of American Income Holding, Inc. The carrying value of the MIPS at December 31, 1995 and 1994 was $193 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 15--SHAREHOLDERS' EQUITY
Acquisition of Common Shares: Torchmark shares are acquired from time to time for the following reasons: (1) open market purchases under the Torchmark stock repurchase program, in which share purchases in the amount of $106 million for 1.5 million shares and $42 million for 850 thousand shares were made in 1994 and 1993, respectively, (2) for future employee stock option exercises, and (3) for payment of the option price and taxes upon exercise of stock options by employees.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 15--SHAREHOLDERS' EQUITY (CONTINUED)
Grant of Restricted Stock: A grant of 60,000 Torchmark shares was made on May 1, 1991 to a Torchmark senior officer. The shares are restricted as to resale, vesting 6,000 shares per year for 10 years on the anniversary date of the grant. The market value of Torchmark stock was $34.92 per share on the grant date.
Reinsurance: Insurance affiliates of Torchmark reinsure that portion of insurance risk which is in excess of their retention limits. Retention limits for ordinary life insurance range up to $2.5 million per life. Life insurance ceded represents less than 1% of total life insurance in force at December 31, 1995. Insurance ceded on life and accident and health products represents 1.0% of premium income for 1995. Torchmark would be liable for the reinsured risks ceded to other companies to the extent that such reinsuring companies are unable to meet their obligations.
Insurance affiliates also assume insurance risks of other companies. Life reinsurance assumed represents less than 0.1% of life insurance in force at December 31, 1995 and reinsurance assumed on life and accident and health products represents 0.3% of premium income for 1995.
NAIC designation). Par value of these investments was $162.1 million, amortized cost was $160.3 million, and market value was $164.6 million. While these investments could be subject to additional credit risk, such risk should generally be reflected in market value.
prejudice. A third such action was filed on December 30, 1994, in the United States District Court for the Southern District of Alabama. This action, which seeks punitive damages, was subsequently transferred to the United States District Court for the Northern District of Alabama (Dismukes v. Torchmark Corporation, Case No. CV-94-1006-P-M). A class certification hearing in Dismukes was held on January 29, 1996, and the parties are awaiting the District Court's ruling on that motion and on defendant's motion for partial summary judgment.
As previously reported, Torchmark, its insurance subsidiaries Globe Life And Accident Insurance Company ("Globe") and United American Insurance Company ("United American"), and certain Torchmark officers were named as defendants in litigation filed April 22, 1994, as a purported class action in the District Court of Oklahoma County, Oklahoma (Moore v. Torchmark Corporation, Case No. CJ-94-2784-65). The suit claims damages on behalf of individual health policyholders who are alleged to have been induced to terminate such policies and to purchase Medicare Supplement and/or other insurance coverages. The complaint seeks actual and punitive damages for each class member in excess of $10,000. Subsequent to the filing of this case, one of the plaintiffs was dismissed and the named plaintiff died. The complaint was amended to include new plaintiffs purporting to represent the class and restyled Tabor v. Torchmark Corporation. No class has been certified. A motion to dismiss filed by the defendants was denied and limited discovery as permitted by the Oklahoma Supreme Court is proceeding. The defendants intend to vigorously defend the action.
Litigation was filed on April 26, 1995, in the Circuit Court of Houston County, Alabama against Liberty involving the sale of health insurance coverage and Omnibus Budget Reconciliation Act of 1990 (Stewart v. Liberty National Life Insurance Company, Case No. CV-95-345L; Tolar v. Liberty National Life Insurance Company, Case No. CV-95-346J; Ingram v. Liberty National Life Insurance Company, Case No. CV-95-348L; Burkett v. Liberty National Life Insurance Company, Case No. CV-95-347H). Liberty intends to vigorously defend these cases.
On August 3, 1995, a $5.404 million verdict was rendered against Liberty in Allen v. Liberty National Life Insurance Company (Case No. CV-94-3634), by a jury in the Circuit Court of Jefferson County, Alabama. For a two month period beginning in September 1993, in reliance on federal law concerning the amount health care providers could collect from Medicare eligible individuals, Liberty limited the payment of benefits to such individuals to the amounts collectible under federal law. In November 1993, Liberty discontinued this practice and recalculated and repaid all claims as it had prior to September 1993. Mr. Allen nevertheless later brought suit against Liberty alleging the reduction in claims payments pursuant to his cancer policy was improper. He had been repaid in full with interest prior to filing suit, as had all other affected claimants. After reconsideration, the trial judge remitted the verdict to $2.7 million. An appeal was filed with the Alabama Supreme Court in January 1996.
On August 25, 1995, a purported class action was filed against Torchmark, Globe, United American and certain officers of these companies in the United States District Court for the Western District of
Much attention has been generated nationally with regard to so-called "vanishing premium" cases, where allegations that an interest sensitive life policy was sold with a projection that the policy would become paid-up or self-sustaining after a period of years. Plaintiffs in these cases typically assert that the projection amounted to a promise or misrepresentation. Liberty currently is a party to several individual lawsuits in the state courts of Alabama and was a party to one purported class action filed November 16, 1995 in the Circuit Court of Chambers County, Alabama (Mitcham v. Liberty National Life Insurance Company, Case No. CV-95-290), involving such claims. The Mitcham case was settled on a non-class basis on December 27, 1995. Another interest sensitive case (Carlton v. Liberty National Life Insurance Company, Case No. CV-96-22) filed on February 1, 1996, in the Circuit Court for Chambers County, Alabama, was amended on February 9, 1996, to allege a purported class action. Compensatory and punitive damages are sought. Liberty believes that appropriate projections were made in connection with the sale of the policies involved and intends to vigorously defend these cases.
In 1978, the United States District Court for the Northern District of Alabama entered a final judgment in Battle v. Liberty National Life Insurance Company, et al. (CV-70-H-752-S), class action litigation involving Liberty, a class composed of all owners of funeral homes in Alabama and a class composed of all insureds (Alabama residents only) under burial or vault policies issued, assumed or reinsured by Liberty. The final judgment fixed the rights and obligations of Liberty and the funeral directors authorized to handle Liberty burial and vault policies as well as reforming the benefits available to the policyholders under the policies. It remains in effect to date. A motion filed in February 1990 to challenge the final judgment under Federal Rule of Civil Procedure 60(b) was rejected by both the District Court in 1991 and the Eleventh Circuit Court of Appeals in 1992 and a Writ of Certiorari was denied by the U.S. Supreme Court in 1993.
In November 1993, an attorney (purporting to represent the funeral director class) filed a petition in the District Court seeking "alternative relief" under the final judgment. This petition was voluntarily withdrawn on November 8, 1995, by petitioners. On February 23, 1996, Liberty filed a petition with the District Court requesting that it order certain contract funeral directors to comply with their obligations under the Final Judgment in Battle and their funeral service contracts.
Purported class action litigation was filed on January 2, 1996 against Torchmark, Torch Energy 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). Plaintiff alleges improper payment of royalties and overriding royalties on coalbed methane gas produced and sold from wells in Robinson's Bend Coal Degasification Field, seeks certification of a class and claims unspecified compensatory and punitive damages on behalf of such class. A motion to dismiss and in the alternative to change venue, has been filed by Torchmark, and is awaiting a hearing. Torchmark intends to vigorously defend this action.
Based upon information presently available, and in light of legal and other 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 the frequency of large punitive damage awards bearing little or no relation to actual damages awarded by juries in jurisdictions in which Torchmark has substantial business, particularly in Alabama, continues to increase universally, creating the potential for unpredictable material adverse judgments in any given punitive damage suit.
Investment in Related Parties: Other long-term investments include investment by Torchmark subsidiaries in the United Group of Mutual Funds and certain other funds for which Waddell & Reed, Inc. is sole advisor. These investments were $26.2 million and $24.4 million at December 31, 1995 and 1994, respectively. Investment income derived from these investments is included in net investment income.
Rental Income: Torchmark leases office space to Vesta, a 27% owned subsidiary. Total rental income received from Vesta was $494 thousand, $461 thousand, and $66 thousand, for the years ended December 31, 1995, 1994 and 1993, respectively.