A Torchmark subsidiary, Torchmark Development Corporation ("TDC"), has completed three buildings consisting of 185,000 square feet, 90,000 square feet and 25,000 square feet of office space within a 100 acre commercial development known as Liberty Park along Interstate 459 in Birmingham, Alabama. Approximately 275,000 square feet of this total office area is currently leased. A 110,000 square foot office building is currently under construction in this development and is scheduled for completion in the Spring of 1997. TDC also owns and manages a 70,000 square foot office and retail complex adjacent to Liberty Park of which approximately 60% is leased by an affiliated party. As a part of a joint venture with unaffiliated entities, TDC is also developing 2,800 contiguous acres as a planned community development.
- ------------------------------------------------------------------------------- (1) Excludes realized investment gains (losses) and the related adjustment to deferred acquisition costs. (2) Includes accrued investment income. (3) Computed after deduction of preferred shareholders' equity. (4) 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.
Torchmark's net operating income from continuing operations excludes realized investment gains and losses and the related adjustment to deferred acquisition costs. Net operating income was $4.43 per share in 1996, rising 13% over $3.93 per share in 1995. This increase in net operating income for 1995 was 5% from 1994 per share net operating income of $3.74. Realized investment losses for 1995 included a $15 million after-tax, or $.21 per share, writedown of an investment in Southwestern Life Corporation, which filed for Chapter 11 bankruptcy protection in the third quarter of 1995.
Torchmark's net income, including discontinued operations, was $311 million in 1996 compared with $143 million in 1995 and $269 million in 1994. On a per- share basis, net income was $4.37, $2.00, and $3.72 in 1996, 1995, and 1994, respectively. Net income in 1995 was negatively affected by Torchmark's decision to dispose of its energy segment and to exit the energy industry. Accordingly, in 1995, Torchmark modified the presentation in its financial statements to set forth separately the net assets and results attributable to the discontinued energy segment as discontinued operations. Also in the fourth quarter of 1995, as a part of the decision to dispose of the energy segment, Torchmark wrote down its investment in a coalbed methane gas development in the Black Warrior Basin of Alabama to the investment's estimated realizable value. Torchmark had experienced disappointments in methane gas production through increased difficulties in obtaining significant gas production from lower coal seams, resulting in downward revisions to engineering estimates of reserves. In view of these production difficulties, Torchmark's desire to sell its energy segment, and the adoption of FASB Statement 121, an accounting rule regarding impairments, it was determined that a writedown of the investment was appropriate. The writedown amounted to an after-tax charge of $130 million, or $1.82 per share in 1995. The disposition of the energy segment was completed on September 30, 1996 and resulted in an after-tax loss of $7 million or $.10 per share. For more details on this transaction, see "Disposal of Energy Segment" on page 30 of this report.
Torchmark's 1996 revenues gained 7% over the prior year to $2.21 billion. 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 1995 increase after adjusting for lost investment income from the purchase. American Income added $225 million to total revenues in 1995, compared with $31 million in 1994. Premium income increased 4% in 1996 over the prior year to $1.61 billion. Premium in 1995 rose 11% to $1.55 billion from $1.39 billion. 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 19 through 27 of this report.
Life insurance. Life insurance premium increased 11% in 1996 to $855 million. Life premium grew 28% to $772 million for the year 1995. The 1995 versus 1994 comparison is distorted somewhat because of the American Income acquisition in late 1994. 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 insurance in terms of annualized premium were $215 million in 1996 and $218 million in 1995. This represents a 1% decline in 1996 when compared with 1995, a record year for Torchmark, but the 1995 increase was 45% over 1994 sales of $150 million. American Income accounted for $51 million of 1995 sales, or 64% of the 1995 increase.
Annualized life premium in force climbed 9% in 1996 to $947 million at December 31. Annualized life premium in force also grew 9% during 1995, rising to $869 million. Annualized premium in force data includes amounts collected on certain interest-sensitive life products which are not recorded as premium income but exclude single premium income and policy account charges.
Torchmark markets its life insurance products through a variety of different distribution channels. The following table presents life insurance premium income during each of the three years ended December 31, 1996 by distribution method.
The direct response operation has experienced premium growth, with premium revenue rising 15% in 1996 to $172 million, after having risen 17% in 1995. Annualized life premium in force was $202 million at December 31, 1996. Direct response marketing is conducted through direct mail, co-op mailings,
television and consumer magazine advertising, as well as direct mail solicitations endorsed by groups, unions and associations. The direct response operation accounted for 20% of Torchmark's life insurance premium in 1996.
Another Torchmark distribution system which experienced growth in life insurance operations was the American Income Agency. This agency targets members of labor unions, credit unions, and other associations for its life insurance sales. Life premium rose 13% in 1996 to $174 million. Annualized premium in force grew 11% to $188 million at December 31, 1996. Annualized premium in force was $170 million at year-end 1995, rising 15% over year-end 1994. Sales of annualized premium increased 6% to $54 million in 1996. American Income was acquired by Torchmark in late 1994.
Torchmark distributes life insurance through a nationwide independent agency whose sales force is comprised of former commissioned and non-commissioned military officers who sell exclusively to commissioned and non-commissioned military officers and their families. The quality of the business, which is comprised of whole life products with term insurance riders, produced by this agency is outstanding. Life premium income from this distribution system was $71 million in 1996, up $26 million from 1995. This increase resulted primarily from the acquisition from another carrier of a block of business with $21 million of annualized premium in force produced by the military agency. In the past, this agency has produced business through Liberty National, but beginning late in the first quarter of 1997, additional sales will be produced through Globe Life.
Torchmark's life insurance margins have remained stable, with insurance operating income at approximately 29%, throughout the three-year period presented. As a percentage of premium, operating expenses resumed their decline in 1996, dropping to 7.2%. This expense ratio was 8.6% five years ago and 11% ten years ago.
Health insurance. Health products sold by Torchmark include Medicare Supplement insurance, cancer insurance, long-term care, and other under-age 65 limited benefit supplemental medical and hospitalization products. As a percentage of annualized health premium in force at December 31, 1996, Medicare Supplement accounted for 70%, cancer 16%, and other products 14%. These products are marketed by exclusive and independent agents, by direct response, and through associations. The table below presents health insurance premium income during each of the three years ended December 31, 1996 by distribution method.
The following chart contains health insurance premium data from 1994 through 1996:
A major factor leading to the smaller decline in health sales over the three year period was the smaller decline in Medicare Supplement sales over the same period. In 1996, sales of Medicare Supplement insurance, the major component of Torchmark's health insurance, increased over the prior year sales for the first time since 1992.
Sales of cancer products declined 6% to $10.7 million in 1996 after rising 40% in 1995 to $11.3 million. In spite of the lower sales, annualized premium in force for cancer increased to $119 million at year-end 1996 from $115 million at December 31, 1995, due primarily to the implementation of rate increases for the first time in two years. Annualized premium in force for other health products experienced an 8% drop in 1996, from $114 million to $105 million at December 31, 1996. Sales also
declined 11% in 1996 to $25 million. Torchmark introduced a new series of long-term care products in late 1996, and intends to aggressively market this product line.
Annuities. Torchmark's annuity products serve a wide range of markets, such as providing retirement income, funding prearranged funerals, and offering long-term tax-deferred growth opportunities. Annuities are sold on both a fixed and variable basis. Fixed annuity deposits are held and invested by Torchmark and are obligations of the company. Variable annuity deposits are invested at the policyholder's direction into his choice among ten W&R managed mutual funds which vary in degree of investment risk and return. A fixed annuity investment account is also available as a variable annuity investment option. These investments pertaining to variable annuity deposits are reported as "Separate Account Assets" and the corresponding deposit balances for variable annuities are reported as "Separate Account Liabilities."
More than offsetting the decline in 1996 of fixed collections was an increase in 1996 of variable annuity collections of 31%. These collections were $247 million in 1996 as compared with $189 million in 1995. Strong financial markets in 1996 have contributed greatly to the growth in variable collections. Torchmark's variable annuities are issued by UILIC and sold by W&R sales representatives.
Insurance operating margins for annuities as measured by the mean reserve have remained fairly stable throughout the three years examined. Annuity policy charges have increased in each period. Policy charges increased 18% to $22 million in 1996. These charges were $19 million in 1995, gaining 37% over 1994 charges of $14 million. Growth in these policy charges resulted from the increase in size of the annuity account balance over each of the prior years, the increase in the number of annuity contracts in force, and the cumulative effect of growth in sales over the past few years on which the sales charge is based. The allocated investment income, or the investment income earned in excess of policy
Commission revenues are derived from the sales of both investment and insurance products, with investment product commissions representing 84% of total commission revenues in 1996. The commissions from insurance products and variable annuities are primarily received from Torchmark insurance subsidiaries, and are eliminated in consolidation. Investment product commissions rose 26% to $72 million in 1996, after having declined 4% to $57 million in 1995. Investment product sales climbed 27% in 1996 to $1.5 billion. Investment product sales in 1995 were level with the 1994 sales of $1.2 billion. In 1996, sales of the United Funds, a front-load product, increased 22% or $187 million while sales of the W&R Funds, a deferred-load product, grew 44% or $70 million. Insurance product commissions have grown steadily, with 1996 commissions of $13.9 million, as compared with $13.5 million in 1995 and $12.8 million in 1994.
- -------- * Financial services revenue includes $33.1 million in 1996, $27.5 million in 1995 and $25.9 million in 1994 representing revenues from other Torchmark segments which are eliminated in consolidation.
Commissions and selling expenses are the direct expenses associated with producing commission revenue. They consist of the commissions, bonuses, and other compensation paid to the sales force as well as other marketing and promotional costs. Because of the 1996 increase in sales volume, which causes an increase in sales incentive compensation, direct expenses as a percentage of commission revenue rose slightly, from 91% in 1995 to 92%. W&R also increased promotional efforts in 1995 and to an even greater extent in 1996. The 1996 increase in commission revenues resulted, at least in part, from these measures.
Torchmark's net investment income increased 6% to $405 million during the year, following an increase of 10% in 1995 and a decrease of 6% in 1994. When adjusted for the American Income acquisition in late 1994, however, the 1995 increase was 3%. The 1996 increase in investment income is principally due to the continued accumulation of invested assets, which rose to $5.9 billion by year end. When adjusted for disposition of Torchmark's energy operations, mean invested assets rose 6% in 1996, as compared with a similar 6% increase in 1995.
years, mortgage-backed securities declined because of repayments and the increase in other types of invested assets. Mortgage-backed securities were 25% of fixed income securities and 23% of invested assets at December 31, 1996. They were 27% of invested assets at year-end 1995 and 43% of invested assets at year-end 1994.
Presented below is a schedule of Torchmark's fixed-income portfolio by maturity.
Capital Resources. The carrying amount of Torchmark's long-term debt was $792 million at both year-ends 1996 and 1995. Major debt issues outstanding at December 31, 1996 were as follows:
Torchmark repaid $550 thousand of principal on the Senior Debentures in 1996 under the terms of a put provision.
(1) Beginning in August 1996, Torchmark renewed its share repurchase program, and acquired 2.3 million shares of its common stock at a cost of $107 million by year end 1996. Torchmark also intends to use excess cash flow to make additional open market purchases, as market conditions warrant, provided that its debt-to-capital ratio does not exceed 40% and that no opportunities for acquisition offering superior returns are available.
Monetization of Vesta Stock. Torchmark filed a registration statement with the Securities and Exchange Commission during the third quarter of 1996. The purpose of this statement was to monetize a substantial portion of Torchmark's holdings of Vesta Insurance Group, Inc. ("Vesta") common stock, by issuing a security mandatorily exchangeable for Vesta stock at the option of Torchmark. Torchmark currently holds approximately five million shares of Vesta stock. On November 7, 1996, Torchmark withdrew this registration statement because market conditions were not favorable for the monetization of Vesta stock at that time. Depending upon future market conditions, Torchmark may refile the registration statement or otherwise provide for the monetization of a portion of all of the Vesta stock, but currently has no plans to monetize this stock.
TORCHMARK CORPORATION CONSOLIDATED BALANCE SHEET (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
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, 1996, 1995 and 1994 included $298.4 million, $279.6 million, and $240.7 million, respectively, which was allocable to policyholder reserves or accounts. Realized investment gains and losses are not allocable to policyholders.
years ended December 31, 1996, 1995, and 1994 of $22.4 million, $19.0 million, and $13.9 million, respectively. Profits are also earned to the extent that investment income exceeds policy requirements. The related benefits and expenses are matched with revenues by means of the provision of future policy benefits and the amortization of deferred acquisition costs in a manner which recognizes profits as they are earned over the same period.
Treasury Stock: Torchmark accounts for purchases of treasury stock on the cost method.
A summary of fixed maturities available for sale and equity securities by amortized cost and estimated market value at December 31, 1996 and 1995 is as follows:
Torchmark had $39.2 million and $25.7 million in investment real estate at December 31, 1996 and 1995, 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 at December 31, 1995. There were no such investments at December 31, 1996.
Depreciation expense on property used in the business was $5.4 million, $5.7 million, and $7.6 million in each of the years 1996, 1995, and 1994, respectively.
The table below presents supplemental pro forma information for 1994 as if the American Income acquisition were made at January 1, 1993 at the same purchase price, based on estimates and assumptions considered appropriate:
Torchmark and most of its subsidiaries file a life-nonlife consolidated federal income tax return. Sentinel files its own federal income tax return and will not be eligible to join Torchmark's consolidated return group until 1997. American Income files its own consolidated federal income tax return and will not be eligible to join Torchmark's consolidated return group until 2000.
The valuation allowance for deferred tax assets as of December 31, 1996 and 1995 was $2.1 million. Subsequently recognized tax benefits of $2.1 million relating to the December 31, 1996 valuation allowance will be allocated to goodwill.
Cost for the defined benefit pension plans has been calculated on the projected unit credit actuarial cost method. Contributions are made to the pension plans subject to minimums required by regulation and maximums allowed for tax purposes. Accrued pension expense in excess of amounts contributed has been recorded as a liability in the financial statements and was $6.2 million and $9.5 million at December 31, 1996 and 1995, respectively. The plans covering the majority of employees are organized as trust funds whose assets consist primarily of investments in marketable long-term fixed maturities and equity securities which are valued at market.
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 $4.8 million and $5.5 million as of December 31, 1996 and 1995, respectively.
Torchmark accrues expense for the defined contribution plans based on a percentage of the employees' contributions. The plans are funded by the employee contributions and a Torchmark contribution equal to the amount of accrued expense.
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, provided the holder with an option to require Torchmark to repurchase the debentures on August 15, 1996 at principal amount plus accrued interest. Pursuant to this option, $550 thousand debentures were repurchased in 1996. The Senior Debentures have equal priority with other Torchmark unsecured indebtedness.
The Notes, due May 15, 2023, were issued in May, 1993 in the principal amount of $200 million. Proceeds of the issue, net of issue costs, were $196 million. Interest is payable on May 15 and November 15 of each year at a rate of 7 7/8%. These notes are not redeemable prior to maturity and have equal priority with other Torchmark unsecured indebtedness.
Interest in the amount of $1.4 million, $1.6 million and $1.8 million was capitalized during 1996, 1995, 1994, 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, 1996 and 1995 was $193 million.
Preferred Stock: One million shares of adjustable rate preferred stock were issued in 1983 at an issue price of $100 per share. Prior to 1993, Torchmark acquired 530 thousand shares which were reported as treasury stock and had a total cost basis of $47.8 million and a total redemption value of $52.9 million. During 1994, Torchmark acquired the remaining 470 thousand shares at a cost of $100 per share plus accrued dividends. The acquisition was completed at an aggregate price of $47 million. The preferred treasury stock was immediately retired.
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 $107 million for 2.3 million shares, and $59 million for 1.5 million shares were made in 1996 and 1994, 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--EMPLOYEE STOCK OPTIONS
In October, 1995, the Financial Accounting Standards Board ("FASB") issued Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), effective for Torchmark beginning January 1, 1996. SFAS 123 defines a "fair value method" of accounting for employee stock options. It 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 was applied. The effects of applying SFAS 123 in the pro forma disclosures are not necessarily indicative of future amounts because the pro forma disclosures do not take into account the amortization of the fair value of awards prior to 1995. Additionally, Torchmark is expected to grant additional awards in future years.
Torchmark has elected to account for its stock options under the intrinsic value method as outlined in APB 25. The fair value method requires use of the Black-Scholes option valuation model to value employee stock options, upon which a compensation expense is based. The Black-Scholes option valuation model was not developed for use in valuing employee stock options. Instead, this model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because Torchmark's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, it is management's opinion that the existing models do not provide a reliable measure of the fair value of its employee stock options. Under the intrinsic value method, compensation expense is only recognized if the exercise price of the employee stock option is less than the market price of the underlying stock on the date of grant.
The weighted average fair value of options granted during the years ended December 31, 1996 and 1995 were $49.61 and $43.14, respectively.
Insurance affiliates also assume insurance risks of other companies. Life reinsurance assumed represents 3.1% of life insurance in force at December 31, 1996 and reinsurance assumed on life and accident and health products represents 1.8% of premium income for 1996.
Leases: Torchmark leases office space and office equipment under a variety of operating lease arrangements. These leases contain various renewal options, purchase options, and escalation clauses. Rental expense for operating leases was $7.0 million, $6.3 million, and $7.9 million for 1996, 1995, and 1994, respectively. Future minimum rental commitments required under operating leases having remaining noncancelable lease terms in excess of one year at December 31, 1996 are as follows: 1997, $3.9 million; 1998, $2.4 million; 1999, $1.5 million; 2000, $726 thousand; 2001, $157 thousand; and in the aggregate, $8.7 million.
Concentrations of Credit Risk: Torchmark maintains a highly-diversified investment portfolio with limited concentration in any given region, industry, or economic characteristic. At December 31, 1996, the investment portfolio consisted of securities of the U.S. government or U.S. government-backed securities (22%); non government-guaranteed mortgage-backed securities (5%); short-term investments, which generally mature within one month (1%); securities of state and municipal governments (12%); securities of foreign governments (1%); and investment-grade corporate bonds (46%). The remainder of the portfolio was in oil and gas investments (1%) and real estate (3%), which are not considered financial instruments according to GAAP; policy loans (4%), which are secured by the underlying insurance policy values; and equity securities, mortgages, noninvestment grade corporate securities and other long-term investments (5%). Investments in municipal governments and corporations are made throughout the U.S. with no concentration in any given state. Most of the investments in foreign government securities are in Canadian government obligations. Corporate equity and debt investments are made in a wide range of industries. At December 31, 1996, 1% or more of the portfolio was invested in the following industries: Financial services (18%); regulated utilities (5%); chemicals and allied products (5%); food and kindred products (4%); transportation (4%); technology (3%); media (2%); paper and allied products (2%); petroleum (2%); and retailing (1%). Otherwise, no individual industry represented 1% or more of Torchmark's investments. At year-end 1996, 5% of the carrying value of fixed maturities was rated below investment grade (Ba or lower as rated by Moody's service or the equivalent NAIC designation). Par value of these investments was $237.7 million, amortized cost was $239.8 million, and market value was $243.4 million. While these investments could be subject to additional credit risk, such risk should generally be reflected in market value.
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 punitive damage award in any given case is virtually impossible to predict. As of December 31, 1996, Liberty was a party to approximately 282 active lawsuits (including 25 employment related cases and excluding interpleaders and stayed cases), more than 250 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 entry of an Order and Final Judgment by the Circuit Court of Barbour County, Alabama in Robertson v. Liberty National Life Insurance Company (Case No. CV-92-021) approving a cancer policy class action settlement involving legal and equitable relief valued at a total of $55 million. In July 1994, certain intervenors in the Robertson litigation filed a notice of appeal of the Order and Final Judgment with the Supreme Court of Alabama. On December 22, 1995, the Alabama Supreme Court unanimously affirmed the Robertson class action settlement and on February 16, 1996, issued a notice overruling the petition for a rehearing in Robertson filed by certain intervenors. A petition for writ of certiorari to the Supreme Court of the United States was then filed by intervenors. The U.S. Supreme Court granted certiorari in Robertson on October 1, 1996. Oral arguments on the intervenors' petition, which alleged that class members had not received due process in the class certification procedure and should be allowed to opt out of the class action settlement to pursue separate litigation, were heard by the U.S. Supreme Court on January 14, 1997. On March 3, 1997, the U.S. Supreme Court dismissed, as improvidently granted, the writ of certiorari previously granted in Robertson. The ruling effectively ends direct appeals from the Robertson class action settlement and Liberty will proceed with administration of benefits under the class settlement.
As previously reported, Liberty is subject to 76 individual cancer policy lawsuits pending in Alabama and Mississippi, which were stayed or otherwise held in abeyance pending final resolution of the Robertson case. Liberty will file motions to dismiss these lawsuits based upon the U.S. Supreme Court opinion in Robertson. If these cases are dismissed, no collateral attacks on the cancer class action settlement will remain at this time.
Prior filings have reported that in July 1994, a purported class action alleging fraudulent and deceitful practices in premium billing and lapses of coverage on a payroll deduction insurance plan was filed in the Superior Court for Gordon County, Georgia against Liberty (Bryant v. Liberty National Life Insurance Company, Civil Action No. 28979). The complaint alleged actual damages in excess of $10 million and punitive damages of not less than $50 million as well as premium reimbursements. Liberty removed this
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 16--COMMITMENTS AND CONTINGENCIES (CONTINUED) case to federal court, but the case was subsequently remanded to the state court. The Bryant case was settled on an individual basis by the parties on December 23, 1996. No class was ever certified.
Litigation was filed on April 26, 1995, in the Circuit Court of Houston County, Alabama against Liberty involving the sale of health insurance coverage alleged to be in conflict with provisions of the 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). The Stewart case has been dismissed with prejudice and the other cases remain pending.
It has been previously reported that Liberty is a party to individual lawsuits and a purported class action (Carlton v. Liberty National Life Insurance Company, Case No. CV-96-22) in the Circuit Court of Chambers County, Alabama, in which allegations are made that an interest sensitive life insurance policy would become paid-up or self-sustaining after a specified number of years. Currently, Liberty is a party to more than 100 individual interest sensitive cases, 53 of which were filed by a single lawyer in Chambers County, Alabama. Additionally, Torchmark has previously reported the case of Lawson v. Liberty National Life Insurance Company, filed in the Circuit Court of Jefferson County, Alabama (Civil Action No.: CV-96-01119), where the plaintiffs were seeking class certification on behalf of such policyholders including those who were allegedly induced to exchange life insurance policies or the existing policy's cash value was allegedly depleted. On May 14, 1996, the Circuit Court of Jefferson County, Alabama entered an order conditionally certifying a plaintiffs claim in Lawson in order to preserve the Court's jurisdiction over the class action question, subject to a full evidentiary hearing on class certification at a future date yet to be determined.
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. Although class actions are inherently subject to subsequent collateral attack by absent class members, the Battle decree 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.
Purported class action litigation was filed on January 2, 1996 against Torchmark, Torch Energy Advisors Incorporated ("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. On April 11, 1996, Torchmark's motion to change venue was granted and the case has been transferred to the Circuit Court of Tuscaloosa County, Alabama. The Company's motion to dismiss remains pending while discovery is proceeding.
On April 19, 1996, a $5 million punitive judgment was entered against LIberty by a jury in Mobile, Alabama in Strickland v. Liberty National Life Insurance Company (CV-95-1399). In the Strickland case, the plaintiff, who was in his sixties, cancelled several small life insurance policies and purchased a substantial amount of new coverage. The plaintiff contended that certain supplemental benefits which were present in the smaller policies were not included in the new coverage (i.e. accidental death and premium waiver). The trial judge held that Strickland was not entitled to recover compensatory damages. Nevertheless the jury awarded $100 in nominal damages in addition to the punitive award. Liberty has filed various motions for the post-trial relief with the Circuit Court, which held a post trial hearing on the propriety of the punitive damage award on February 12, 1997. On March 11, 1997, the Circuit Court judge reduced the Strickland judgment to $37,500.
A jury in Chambers County, Alabama Circuit Court returned a verdict of $333,000 compensatory damages and $17.2 million in punitive damages against Liberty on June 11, 1996, in McQuiston v. Liberty National Life Insurance Company (CV-94-234). The case arose out of a claim which had been denied due to an alleged misrepresentation in the application. There was a recorded telephone interview with the applicant in which a statement was given which Liberty alleges was a misrepresentation of the health of the proposed insured. After the litigation was filed, it was learned that one signature on the application was not that of the insured. Upon notice of this fact, Liberty paid the $20,000 claim proceeds into court. Liberty has filed motions for post-trial relief with the Court, subject to completion of post-trial discovery. A post-trial hearing on the propriety of the punitive damage award is scheduled for March 28, 1997.
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 $30.3 million and $26.2 million at December 31, 1996 and 1995, respectively. Investment income derived from these investments is included in net investment income.
Rental Income: Torchmark leases office space to Vesta Insurance Group, Inc. ("Vesta"), a 27% owned subsidiary. Total rental income received from Vesta was $508 thousand, $494 thousand, and $461 thousand, for the years ended December 31, 1996, 1995 and 1994, respectively.