Globe Life
Annual Report 2000

Plain-text annual report

Financial Highlights (In thousands except percent and per share amounts) TORCHMARK CORPORATION Operations: 2000 1999 % Change Total Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,046,210 $ 1,884,086 Total Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,515,894 2,226,895 Net Operating Income* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365,292 341,167 Annualized Life Premium In Force . . . . . . . . . . . . . . . . . . . . . 1,200,144 1,130,609 Annualized Health Premium In Force . . . . . . . . . . . . . . . . . . . 1,004,299 884,358 Diluted Average Shares Outstanding . . . . . . . . . . . . . . . . . . . 128,353 133,986 Net Operating Income As A Return On Average Common Equity** . . . . . . . . . . . . . . . . . . . . . . . . 16.3% 16.2% Per Common Share: Net Operating Income* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.85 $ 2.55 Shareholders’ Equity At Year End ** . . . . . . . . . . . . . . . . . . . . 18.53 16.32 8.6 13.0 7.1 6.2 13.6 (4.2) 11.8 13.5 Net Operating Income Per Common Share* $2.85 $2.55 $2.29 $1.94 $1.67 $3.00 $2.00 $1.00 ‘96 ‘97 ‘98 ‘99 ‘00 * Excludes realized investment gains and losses and the related adjustment to deferred acquisition costs, equity in Vesta earnings for periods prior to 1999, discontinued operations, a 1999 nonrecurring charge and other nonoperating items as described on page 10. ** Includes fixed maturity investments at amortized cost. Letter To Shareholders 2000 was an excellent year for Torchmark. We achieved two significant milestones: (1) our annu- alized premium issued (new sales) surpassed the $.5 billion mark; and (2) our premium income surpassed the $2 billion mark. On a per-share basis, we met our goals of double-digit growth in underwriting income and excess investment income, as well as earnings from operations. We attained these goals by remaining focused on providing protection-type insurance products to our target markets in middle income America, by grow- ing the sales and premium income in all of our distribution systems, by remaining expense and service conscious and by managing our capital to include the repurchase of our stock. FINANCIAL REVIEW Key Components of Net Operating Income Per Diluted Share Insurance Underwriting Income $2.77 2000 Excess Investment Income Other Income Tax 1 .77 ( .23) (1.46) Net Operating Income, Excluding Nonrecurring Charge 2.85 Nonrecurring Charge 1999 $2.49 1.61 ( .25) (1.30) 2.55 (.10) Net Operating Income $2.85 $2.45 % 11 10 (8) 12 12 For 2000, our net operating income per share increased 12% to $2.85 compared with $2.55 in 1999. Annualized premium issued increased 21% to $543 million. Premium income increased 9% to $2.046 billion. Underwriting margins (premium income less policy obligations and acquisition expenses) increased 6% to $463 million; underwriting income (underwriting margins plus other income less administrative expenses) increased 7% to $356 million. On a per-share basis, underwriting income increased 11% to $2.77. Our excess investment income, which is our net investment income less the interest we credit or pay on our net interest-bearing liabilities, increased 5% to $227 million. Excess investment income would have been higher were it not for our stock repurchase program where we acquired 5.8 million shares during the year at a total cost of $135 million. On a per-share basis, excess investment income increased 10% to $1.77. Net operating income as a return on equity was 16.3%. Book value per share (excluding the effect of reporting the investment portfolio at market value) increased 14% to $18.53. 2 INSURANCE DISTRIBUTION United American Exclusive Agency Operation ___________________________ (in millions, except %) Life _____________________________ Health ___________________________ 2000 ____________ $ ____ * ____ 1999 ___________ $ ____ * ____ 2000 ___________ $ ____ * ____ 1999 ___________ $ ____ * ____ Annualized Premium: Sales In Force 5 21 Underwriting Margin: Premium Policy Obligations Acquisition Expenses 7 19 10 51% 34% 5 22 19 10 6 53% 33% 145 311 254 162 49 64% 19% 103 231 195 120 40 62% 20% Underwriting Margin 3 15% 3 14% 43 17% 35 18% * % of Premium Our Branch Office operation had an outstanding year. Annualized premium issued increased 39% to $150 million. Premium income increased 28% to $274 million, and underwriting margins increased 22% to $46 million. The primary reason for our sales growth was the growth in our sales force. Our branch managers increased 10% to 85, middle management increased 22% to 243, and the total sales force increased 56% to 3,661. Over 80% of our sales force has been with the company less than one year. We will continue in our efforts to recruit and train new agents, but we also look forward to continued growth in the number of our mature agents (agents who have been with the company over one year) and the higher level of individual production that comes with tenure. With respect to health insurance, over 95% of the issued business and over 90% of the premium income were from Medicare supplements. Medicare supplement coverage is the only time-proven means that financially enables seniors to receive high quality medical care with freedom of choice as to the provider of care. Record numbers of seniors are voluntarily and involuntarily leaving HMOs (health main- tenance organizations). The HMOs have experienced difficulty in controlling the costs related to care. The growing senior population and their demand for better health care services ensures the continuing need for Medicare supplement coverages. 3 United American General Agency Operation _________________________ (in millions, except %) Annualized Premium: Sales In Force Underwriting Margin: Premium Policy Obligations Acquisition Expenses Life ____________________________ Health _____________________________ 2000 ____________ $ ____ * ____ 1999 __________ * ___ $ ____ 2000 ___________ $ ____ * ____ 1999 ___________ $ ____ * ____ 26 53 43 19 17 44% 41% 13 43 38 17 15 46% 40% 85 467 442 276 86 62% 20% 68 444 427 266 83 62% 20% Underwriting Margin 7 15% 5 14% 80 18% 77 18% * % of Premium Annualized premium issued through our independent General Agency operation increased 36% to $111 million. Premium income increased 4% to $485 million, and underwriting margins increased 5% to $87 million. Unlike prior years when health insurance dominated both sales and sales growth, 2000 was a year in which both our life and our health insurance operations experienced impressive results. Health insurance annualized premium issued increased 25% to $85 million, and premium income increased 4% to $442 million. Almost 70% of the issued business and over 90% of the premium income were from Medicare supplements. Annualized life insurance premium issued was $26 million, almost twice as much as in the prior year. Premium income increased 14% to $43 million. Furthermore, the percentage of premium margins in our life insurance operations is growing. Several years ago our margins were too low as a result of high- er than expected mortality experience. We repriced our products and altered our underwriting methods. The net result is that the business we are currently issuing has higher expected underwriting margins. Therefore, as we continue to grow our premium income, we can expect greater growth in underwriting margins. We have always welcomed general agencies of all sizes to represent our products, and we will continue to do so. But in recent years we have put additional efforts into developing relationships with larg- er and more experienced agencies that may write even larger volumes of new business with the aid of our marketing support. In addition, these larger agencies have learned the advantages of representing an underwriter that is both financially strong and less likely to make abrupt changes that could disrupt their businesses. United American has such a reputation. 4 Liberty National Agency Operation _________________________________ (in millions, except %) Life ____________________________ Health ____________________________ 2000 ____________ $ ____ * ____ 1999 ___________ $ ____ * ____ 2000 ___________ $ ____ * ____ 1999 ___________ $ ____ * ____ Annualized Premium: Sales In Force 54 312 Underwriting Margin: 294 Premium 134 Policy Obligations Acquisition Expenses 88 46% 30% 51 307 288 133 83 46% 29% 10 163 151 106 27 70% 18% 10 149 144 103 27 72% 19% Underwriting Margin 71 24% 72 25% 18 12% 14 10% * % of Premium Annualized premium issued through our Liberty National Agency operation increased 4% to $64 million. Premium income increased 3% to $446 million, and underwriting margins increased 4% to $90 million. We ended the year with 2,032 agents in our 107 district offices located in six states in the south- eastern part of the country. Although we grew our sales force by 7% during the year, which was more growth in agents than in any of the last ten years, our life insurance sales only grew 4% to $54 million of annualized premium issued. As a result, our objective for 2001 is to grow our agent count by at least 10% to well over 2,200 agents. For the past several years our health insurance margins have suffered from a block of cancer busi- ness that was subject to a class action settlement in 1994. As a result of the settlement, benefits were increased substantially, but the Company was prohibited from increasing premiums until 1997. This block of business, which represented about 50% of Liberty’s health premiums for 2000, has experienced very high claims loss ratios and reduced health underwriting margins to a low of 10% of premium in 1999. Fortunately, 2000 was a reversal of the downward trend as the underwriting margins increased to 12% of premium income. We will continue to monitor this business and implement rate increases that should gradually increase our underwriting margins to more acceptable levels. 5 American Income Agency Operation _______________________________ (in millions, except %) Life ____________________________ Health ____________________________ 2000 ____________ $ ____ * ____ 1999 ___________ $ ____ * ____ 2000 ___________ $ ____ * ____ 1999 ___________ $ ____ * ____ Annualized Premium: Sales In Force 57 245 Underwriting Margin: 231 Premium 81 Policy Obligations Acquisition Expenses 86 35% 37% 54 231 217 76 80 35% 37% Underwriting Margin 65 28% 62 28% * % of Premium 9 48 48 19 12 18 39% 24% 37% 8 47 48 19 11 17 40% 24% 36% Annualized premium issued through the American Income Agency operation increased 5% to $65 million. Premium income and underwriting margins increased 5% to $279 million and $83 million, respec- tively. American Income is a "union label" company. The sales force, with the endorsement of unions at the local level, sells life and supplemental health insurance to union members. During the year, we increased our sales force 13% to 1,352 agents. The growth in agents was a reversal of a downward trend that began in 1998. The turnaround in agent count is the result of imple- menting recruiting standards similar to those in the United American Branch Office operation. Going forward into 2001, we believe that our operation is not only positioned for another double-digit growth rate in agents, but also for a double-digit growth rate in sales. Direct Response Operations ______________________________________ (in millions, except %) Life ____________________________ Health ____________________________ 2000 ____________ $ ____ * ____ 1999 ___________ $ ____ * ____ 2000 ___________ $ ____ * ____ 1999 ___________ $ ____ * ____ Annualized Premium: Sales In Force 113 306 Underwriting Margin: 268 Premium Policy Obligations 122 Acquisition Expenses 75 46% 28% 96 283 246 112 65 46% 26% 4 16 15 12 1 82% 6% 4 13 12 10 1 82% 6% Underwriting Margin 71 26% 69 28% 2 12% 1 12% * % of Premium 6 Annualized premium issued through our Direct Response operations increased 16% to $116 million. Premium income increased 10% to $283 million, and underwriting margins increased 3% to $72 million. In recent years, including 2000, we have aggressively expanded our life insurance sales. As a result, we put some business on the books that has not generated acceptable returns on investment – not by design, it just worked out that way. But in 2000, our objective was to produce new life business that, in total, generated underwriting margins of no less than 26% of premium and returns on investment of no less than 20%. We believe we accomplished this objective. Late in the year we implemented some simple underwriting changes. (They must be simple considering that we are issuing just under 900,000 policies per year.) We believe these changes may have a significant impact on the mortality experience of our new life business. Although these changes will reduce our ratio of issued policies to applications received, we believe the rejected business would have produced future claims well in excess of the premium income that would have been generated had we issued those policies. Although a few years must pass before we can confirm our expectations, these changes may not only increase our underwriting margins, but also allow us to enter target markets which we had previously abandoned. Going forward into 2001, we will expand our sales efforts in those areas that produce high returns, and continue to identify and withdraw from areas that produce unacceptable returns on investment. Our objective for the coming year is to generate new sales that have overall margins and returns on investment greater than those generated in 2000. Other Independent Agency Operations _____________________________ (in millions, except %) Annualized Premium: Sales In Force Underwriting Margin: Premium Policy Obligations Acquisition Expenses Life ____________________________ 1999 2000 ___________ ___________ $ ____ * ____ $ ____ * ____ 37 262 227 96 76 42% 34% 37 243 210 85 71 40% 34% Underwriting Margin 55 24% 54 26% * % of Premium Annualized premium issued through our Other Independent Agency operations increased 1% to $37 million. Premium income increased 8% to $227 million, and underwriting margins increased 2% to $55 million. Our primary independent agency relationship is our military operation which is comprised of a large agency that sells exclusively to commissioned and noncommissioned military officers and their families. 7 This agency is responsible for over 50% of the sales, premiums, and underwriting margins of our Other Independent Agency operations. The military agency writes for several other insurers, but over the past ten years we have earned an increasingly larger portion of this agency's life production. From receiving about 20% of their total production in the early 90's, our share was in excess of 50% of their total produc- tion in 2000. We will strive to earn more of their production and the production of our other independent partners in the future. In addition, we will continue to seek new partners for the sale of life insurance. ADMINISTRATIVE EXPENSES Insurance administrative expenses increased 7% to $112 million. However, as a percentage of premium income, administrative expenses declined from 5.6% in 1999 to 5.5% in 2000. Torchmark has long been recognized as a low cost administrator of business. Our efficiency is derived from our dedication to simplifying procedures and then automating them. These actions not only reduce costs, but also improve service to customers, both policyholders and agents. The new technology available to us today is more user-friendly and more flexible – and it is dramatically less expensive. We intend to utilize this new technology to make even greater strides in improving service and reducing costs. INVESTMENTS 2000 Investment Income (in millions, except % and per share amounts) (1) Invested Assets Supporting: Total * Required Excess Net Interest-Bearing Policy Liabilities: Life and Health Insurance Annuities Debt (2) Remaining Invested Assets $190 39 $149 35 $ 41 4 68 184 70** (2) -- 184 $481 $254 $227 Per Diluted Share $3.75 $1.98 $1.77 Increase Over 1999 10% 9% 10% * For illustrative purposes only, total investment income has been allocated pro rata based upon the net liabilities. Torchmark does not specifically allocate assets to liabilities. ** Consists of interest on debt and dividends on monthly income preferred securities. Our investment strategy is to maximize the positive difference between investment yield and required yield on our net liabilities, and to avoid uncompensated risk. Our investment portfolio is concen- trated in high quality fixed-maturity assets, which represented 86% of our invested assets at year-end. The average credit rating quality of the fixed-maturity portfolio was A- as rated by Standard & Poor's and A2 as rated by Moody's. 8 On a tax equivalent basis (i.e., recognizing that certain bonds are subject to lower federal taxes), our net investment income was $481 million. Excess investment income is the difference between our net investment income and the interest required on our net interest-bearing liabilities. Required investment income was $254 million, resulting in excess investment income of $227 million. Because of our stock repurchase program and our debt reduction efforts, comparing the change in excess investment income from one year to the next is misleading. A better comparison is on a per-share basis. Although excess investment income increased 5% in 2000, the increase was 10% on a per-share basis. As a general rule, the operating results of insurance companies are adversely affected by rising interest rates. This rule does not apply to Torchmark. Our cash generating abilities and the characteris- tics of our liabilities and invested assets assures us of continued growth in excess investment income, especially in periods of rising interest rates. SHARE REPURCHASE PROGRAM During the year we repurchased 5.8 million shares or 4% of our outstanding stock for a total of $135 million. Since 1986, we have repurchased 47% of our outstanding stock, and we expect to continue our repurchase program into the future as a means of enhancing shareholder intrinsic value. OUTLOOK In 2001, we expect that all six of our distribution systems will experience continued growth in premium income and underwriting margins, we expect administrative expenses to decline as a percent- age of premium income and we expect continued growth in our underwriting income. The cash that we generate within our operations will also grow, and we will utilize the cash to increase our invested assets, to reduce our higher cost debt and/or to repurchase our stock. Our goal will be to continue to increase the intrinsic value of our shareholders’ stock. We expect 2001 to be another excellent year for Torchmark. C. B. Hudson Chairman, President and Chief Executive Officer Torchmark cautions you that the Letter to Shareholders above contains forward-looking statements provided for general guidance purposes only. Accordingly, you are referred to the Company’s cautionary statement regarding forward-looking statements contained in our Form 10-K for the fiscal year ended December 31, 2000, which is on file with the Securities and Exchange Commission and is a matter of public record. 9 Condensed Consolidated Statement of Net Operating Income (Unaudited and in thousands except per share amounts) Revenue: Life premium Health premium Other premium Total Investment income: Taxable equivalent basis Taxable equivalent adjustment Other income Total revenue Benefits and expenses: Policy obligations: Life Health Other Commissions and acquisition expenses: Life Health Other Interest on net policy liabilities: Life Health Other Insurance administrative expenses Corporate expenses Interest on debt and dividends on MIPS Amortization of goodwill Income taxes Total benefits and expenses Twelve months ended December 31, 2000 1999 $1,082,904 911,156 52,150 _________ 2,046,210 $ 1,018,869 824,816 40,401 _________ 1,884,086 481,081 (8,655) 4,650 _________ 2,523,286 458,824 (11,487) 3,348 _________ 2,334,771 461,720 575,286 (2,937) 349,437 174,754 25,212 434,182 518,518 (3,814) 320,282 161,666 18,520 148,393 829 34,564 111,817 9,369 70,309 12,075 187,166 _________ 2,157,994 137,875 4,676 34,455 104,903 10,166 66,431 12,075 173,669 _________ 1,993,604 Net operating income, excluding the 1999 nonrecurring charge $ 365,292 _________ _________ $ 341,167 _________ _________ % Incr (Decr) 6 % 10 29 ____ 9 5 ____ 8 6 11 (23) 9 8 36 8 (82) -- 7 (8) 6 -- 8 ____ 8 % 7 % Net operating income, excluding the 1999 nonrecurring charge, per diluted share $ 2.85 $ 2.55 12 % Diluted average shares outstanding 128,353 133,986 Net operating income, excluding the 1999 nonrecurring charge Nonrecurring charge, net of tax Non operating items, net of tax: Realized losses and related DAC adjustment Gain on sale of equipment Discontinued operations - Waddell & Reed Gain on redemption of debt Change in accounting principle Net income $ 365,292 -- $ 341,167 (13,423) (3,459) -- -- 202 -- _________ $ 362,035 _________ _________ (72,131) 3,317 (1,060) -- 16,086 _________ $ 273,956 _________ _________ The Condensed Consolidated Statement of Net Operating Income has been prepared in the manner Torchmark management uses to evaluate the operating results of the company. It differs from the Consolidated Statement of Operations found in the attached SEC Form 10-K, primarily by the reclassification of interest on net policy liabilities and the exclusion of the nonoperating items listed above. 10 Condensed Consolidated Balance Sheet (Amounts in thousands) At December 31, 2000 1999 $ 5,949,515 135,635 134,125 287,017 2,075,319 390,509 249,023 3,741,415 ___________ $ 12,962,558 ___________ ___________ $ 5,679,795 114,628 110,978 296,850 1,893,322 402,584 219,832 3,413,675 ___________ $ 12,131,664 ___________ ___________ Assets: Fixed maturities Cash and short-term investments Mortgages and real estate Other investments Deferred acquisition costs Goodwill Other assets Separate account assets Total assets Liabilities and shareholders' equity: Policy liabilities Accrued income taxes Short-term debt Long-term debt Other liabilities Separate account liabilities Monthly income preferred securities (MIPS) Shareholders' equity Total liabilities and shareholders’ equity $ 5,523,016 423,327 329,148 365,989 183,908 3,741,415 193,395 2,202,360 ___________ $ 12,962,558 ___________ ___________ $ 5,252,427 309,271 418,394 371,555 179,681 3,413,675 193,324 1,993,337 ___________ $ 12,131,664 ___________ ___________ Actual shares outstanding: Basic Diluted 126,389 127,339 131,996 132,348 Excluding the fair value adjustment under Accounting Standard FAS 115: $ 2,154,386 Shareholders’ equity Book value per common share $16.32 Return on equity 16.3% 16.2% Debt to capital ratio 21.5% 25.2% $ 2,341,584 $18.53 Annualized life and health premium in force: Life Health Total $ 1,200,144 1,004,299 ___________ $ 2,204,443 $ 1,130,609 884,358 ___________ $ 2,014,967 The complete financial statements are found in the attached SEC Form 10-K with additional schedules and footnotes thereto. 11 Directors Officers David L. Boren President of the University of Oklahoma Norman, OK Joseph M. Farley Of Counsel in the Birmingham, Alabama law firm of Balch & Bingham LLP Louis T. Hagopian Retired Chairman of the Board and Chief Executive Officer of NW Ayer, Inc. New York, NY C.B. Hudson Chairman, President and Chief Executive Officer of Torchmark Joseph L. Lanier, Jr. Chairman of the Board and Chief Executive Officer of Dan River Incorporated, Danville, VA Mark S. McAndrew Chairman, President and Chief Executive Officer of United American, Globe and American Income Harold T. McCormick Chairman and Chief Executive Officer of Bay Point Yacht and Country Club Panama City, FL George J. Records Chairman of Midland Financial Co. Oklahoma City, OK C.B. Hudson - Chairman , President and Chief Executive Officer Tony G. Brill - Executive Vice President and Chief Administrative Officer Gary L. Coleman - Executive Vice President and Chief Financial Officer Michael K. Fagin - Vice President Larry M. Hutchison - Executive Vice President and General Counsel Michael J. Klyce - Vice President and Treasurer Joyce L. Lane - Vice President, Investor Relations Mark S. McAndrew - Executive Vice President Carol A. McCoy - Associate Counsel and Corporate Secretary Anthony L. McWhorter - Executive Vice President Rosemary J. Montgomery - Executive Vice President and Chief Actuary Spencer H. Stone - Controller David F. Thorndike - Vice President Russell B. Tucker - Vice President SUBSIDIARY OFFICERS American Income Life Mark S. McAndrew - Chairman, President and Chief Executive Officer Roger Smith - Executive Vice President and Sales Director Globe Life Mark S. McAndrew - Chairman, President and Chief Executive Officer George B. Burke - Executive Vice President Glenn D. Williams - Executive Vice President Liberty National Life Anthony L. McWhorter - Chairman, President and Chief Executive Officer Vurl E. Duce - Executive Vice President and Chief Marketing Officer R.K. Richey Chairman of the Executive Committee of the Board of Directors of Torchmark United American Mark S. McAndrew - Chairman, President and Chief Executive Officer Lamar C. Smith Chairman and Chief Executive Officer of United Services Planning Association and Independent Research Agency Fort Worth, TX Gene P. Grimland - President of General Agency Marketing Division Andrew W. King - President of Branch Office Marketing Division United Investors Life Anthony L. McWhorter - Chairman, President and Chief Executive Officer 12 

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