Business Context and Reporting Period
This Form 10-Q covers Torchmark Corporation (the registrant) for the quarter and six months ended June 30, 1998. Torchmark is a diversified financial services company operating primarily in life and health insurance, annuities, and asset management. The filing notes that the company's asset management subsidiary, Waddell & Reed Financial, Inc. ("W&R"), completed an initial public offering (IPO) in March 1998, resulting in Torchmark retaining a 64% interest. The company also sold its Family Service subsidiary in June 1998.
Key Financial Metrics
| Metric | Six Months Ended June 30, 1998 | Six Months Ended June 30, 1997 |
|---|---|---|
| Total Revenue | $1,223,485,000 | $1,110,868,000 |
| Net Income | $156,060,000 | $151,918,000 |
| Net Income (Diluted EPS) | $1.10 | $1.07 |
| Net Operating Income | $191,000,000 | $173,636,000 (implied) |
| Cash Flow from Operations | $217,388,000 | $240,968,000 |
| Total Assets | $11,323,146,000 | $10,967,291,000 |
| Total Debt | $812,499,000 | $911,450,000 |
| Shareholders' Equity | $2,487,286,000 | $1,932,736,000 |
Note: Debt figures are derived from the sum of short-term and long-term debt on the balance sheet. Net Operating Income is stated in the MD&A as $191 million for the 1998 period.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 10% to $1.22 billion. Operating revenues (excluding realized gains/losses) rose 7% to $1.23 billion. Financial services revenue grew 22% to $120 million, driven by a 28% increase in assets under management.
- Profitability: Net income increased 3% to $156 million. However, this was impacted by a $5 million after-tax extraordinary loss on debt redemption and a $13 million after-tax charge related to an investment in Vesta Insurance Group.
- Insurance Operations: Life premium income rose 6% to $477 million. Health premium income increased 2% to $379 million, though underwriting margins declined from 20% to 19% due to increased cancer benefit costs.
- Investment Portfolio: Mean invested assets increased 12% to $6.7 billion. Excess investment income surged 52% to $98 million, aided by the W&R IPO proceeds and refinancing of debt at lower rates.
- Capital Structure: Shareholders' equity increased significantly to $2.49 billion, largely due to the $516 million proceeds from the W&R IPO. Total debt decreased to $812 million as proceeds were used to pay down short-term debt and refinance long-term obligations.
Guidance, Outlook, Risks, and Unusual Items
- W&R Spin-off: Torchmark plans to distribute its remaining 64% interest in W&R to shareholders in a tax-free spin-off late in 1998. This transaction is expected to result in a tax expense of approximately $50 million.
- Vesta Investment Charge: Torchmark recorded a $20 million pre-tax charge ($13 million after-tax) in Q2 1998 due to accounting irregularities at its affiliate, Vesta Insurance Group. Vesta is currently subject to numerous class-action lawsuits, creating uncertainty regarding future earnings.
- Sale of Family Service: The company sold Family Service for $140 million in cash, recording a $14 million pre-tax loss. Torchmark will continue to service these policies for five years.
- Legal Risks: The company faces significant litigation risks, particularly in Alabama where punitive damages are uncapped. There are approximately 187 active lawsuits against Liberty National, including class actions regarding cancer policies and age discrimination. A recent jury verdict in Florida recommended $21.6 million in damages against Liberty.
- Interest Rate Sensitivity: Management notes that a lower interest-rate environment has reduced yields on new investments (6.98% in 1998 vs. 7.34% in 1997) and increased the unrealized gains in the fixed maturity portfolio.
Investor Verification Checklist
- Vesta Exposure: Verify the current status of Vesta Insurance Group's restatement and litigation, as Torchmark's earnings are sensitive to Vesta's reported results.
- W&R Spin-off Timing: Confirm the regulatory approval status and expected closing date for the W&R spin-off to assess the timing of the anticipated $50 million tax expense.
- Health Insurance Margins: Monitor the approval of premium rate increases for cancer and Medicare Supplement products to determine if underwriting margins can recover from the 19% level.
- Legal Contingencies: Review updates on the Alabama punitive damage cases and the Florida age discrimination verdict to assess potential liability exposure.
- Debt Refinancing: Confirm the stability of the company's liquidity position given the shift from long-term debt to short-term commercial paper ($418 million outstanding).