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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
December 31, 1999 1-8052
TORCHMARK CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 63-0780404
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR IDENTIFICATION NO.)
ORGANIZATION)
2001 Third Ave. South, 35233
Birmingham, AL
(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
Registrant's telephone number, including area code:
(205) 325-4200
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS CUSIP NUMBER: ON WHICH REGISTERED:
Common Stock, $1.00 Par 891027104 New York Stock Exchange
Value The International Stock
Exchange, London,
England
Securities registered pursuant to Section 12(g) of the Act:
None
Securities reported pursuant to Section 15(d) of the Act:
TITLE OF EACH CLASS: CUSIP NUMBER:
8 1/4% Senior Debentures due 2009 891027 AE 4
7 7/8% Notes due 2023 891027 AF 1
7 3/8% Notes due 2013 891027 AG 9
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH) AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [_]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K ((S)229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN, AND
WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE
PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [_]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT $2,571,835,000
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON
STOCK, AS OF FEBRUARY 29, 2000: 129,808,697
DOCUMENTS INCORPORATED BY REFERENCE
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 27, 2000,
PART III
INDEX OF EXHIBITS (PAGES 83 through 85)
TOTAL NUMBER OF PAGES INCLUDED ARE 92
PART 1
Item 1. Business
Torchmark Corporation ("Torchmark"), an insurance and diversified financial
services holding company, was incorporated in Delaware on November 19, 1979,
as Liberty National Insurance Holding Company. Through a plan of
reorganization effective December 30, 1980, it became the parent company for
the businesses operated by Liberty National Life Insurance Company ("Liberty")
and Globe Life And Accident Insurance Company ("Globe"). United American
Insurance Company ("United American"), Waddell & Reed, Inc. ("Waddell & Reed")
and United Investors Life Insurance Company ("UILIC") along with their
respective subsidiaries were acquired in 1981. The name Torchmark Corporation
was adopted on July 1, 1982. Family Service Life Insurance Company ("Family
Service") was purchased in July, 1990, and American Income Life Insurance
Company ("American Income") was purchased in November, 1994. Torchmark
disposed of Family Service and Waddell & Reed during 1998.
The following table presents Torchmark's business by primary distribution
method:
Primary
Distribution Method Company Products Sales Force
- ------------------------------------------------------------------------------------------------------------------
Direct Response Globe Life And Individual life and supplemental health Direct response, television,
Accident insurance including juvenile and magazine; nationwide.
Insurance Company senior life coverage, Medicare
Oklahoma City, OK Supplement, long-term care.
- ------------------------------------------------------------------------------------------------------------------
Liberty National Liberty National Life Individual life and 1,902 full-time sales repre-
Exclusive Agency Insurance Company supplemental health insurance. sentatives; 108 district
Birmingham, Alabama offices in the Southeastern
U.S.
- ------------------------------------------------------------------------------------------------------------------
American Income American Income Life Individual life and supplemental health 1,197 agents in the U.S.,
Exclusive Agency Insurance Company insurance to union and credit Canada, and New Zealand.
Waco, Texas union members and other
associations.
- ------------------------------------------------------------------------------------------------------------------
United Investors United Investors Life Individual life insurance 2,611 Waddell & Reed
Agency Insurance Company and annuities. representatives; indepen-
Birmingham, Alabama dent agents; 212 offices
nationwide.
- ------------------------------------------------------------------------------------------------------------------
Military Liberty National Life Individual life insurance Independent Agency
Insurance Company through career agents
Birmingham, Alabama nationwide.
Globe Life And Accident
Insurance Company
Oklahoma City, Oklahoma
- ------------------------------------------------------------------------------------------------------------------
United American United American Senior life and supplemental health 42,600 independent agents
Independent Agency Insurance Company insurance including in the U.S., Puerto Rico and
and Exclusive Agency McKinney, Texas Medicare Supplement Canada; 2,354 exclusive
coverage and long-term care. agents in 78 branch offices.
Additional information concerning industry segments may be found in
Management's Discussion and Analysis and in Note 19--Business Segments in the
Notes to Consolidated Financial Statements.
Insurance
Life Insurance
Torchmark's insurance subsidiaries write a variety of nonparticipating
ordinary life insurance products. These include traditional and interest
sensitive whole-life insurance, term life insurance, and other life insurance.
The following table presents selected information about Torchmark's life
products:
(Amounts in thousands)
Annualized Annualized
Premium Issued Premium in Force
-------------------------- --------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- ---------- ---------- ----------
Whole life:
Traditional............ $119,799 $115,154 $114,934 $ 612,964 $ 575,888 $ 551,047
Interest-sensitive..... 18,348 17,131 14,981 168,805 162,046 163,058
Term.................... 115,592 108,469 94,943 330,533 306,785 270,905
Other................... 3,468 3,713 5,521 18,307 17,928 22,369
-------- -------- -------- ---------- ---------- ----------
$257,207 $244,467 $230,379 $1,130,609 $1,062,647 $1,007,379
======== ======== ======== ========== ========== ==========
1
The distribution methods for life insurance products include sales efforts
conducted by direct response, exclusive agents and independent agents. These
methods are discussed in more depth under the heading Marketing. The following
table presents life annualized premium issued by distribution method:
(Amounts in thousands)
Annualized Annualized
Premium Issued Premium in Force
-------------------------- --------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- ---------- ---------- ----------
Direct response.... $ 96,091 $ 93,500 $ 79,412 $ 283,406 $ 260,320 $ 232,535
Exclusive Agents:
Liberty National.. 51,467 45,532 43,335 307,495 298,082 298,698
American Income... 54,045 53,576 55,245 231,490 216,291 203,475
United American... 5,315 5,481 6,562 21,800 21,390 20,978
Independent Agents:
Military.......... 17,110 16,891 15,781 111,318 98,902 86,209
United American... 13,319 9,401 15,225 43,394 41,078 42,725
United Investors.. 15,616 15,386 10,261 105,523 99,775 88,842
Other............. 4,244 4,700 4,558 26,183 26,809 33,917
-------- -------- -------- ---------- ---------- ----------
$257,207 $244,467 $230,379 $1,130,609 $1,062,647 $1,007,379
======== ======== ======== ========== ========== ==========
Permanent insurance products sold by Torchmark insurance subsidiaries build
cash values which are available to policyholders. Policyholders may borrow
such funds using the policies as collateral. The aggregate value of policy
loans outstanding at December 31, 1999 was $245 million and the average
interest rate earned on these loans was 6.8% in 1999. Interest income earned
on policy loans was $16.3 million in 1999, $15.3 million in 1998, and $14.4
million in 1997. There were 200 thousand and 198 thousand policy loans
outstanding at year-end 1999 and 1998, respectively.
The availability of cash values contributes to voluntary policy terminations
by policyholders through surrenders. Life insurance products may be terminated
or surrendered at the election of the insured at any time, generally for the
full cash value specified in the policy. Specific surrender procedures vary
with the type of policy. For certain policies this cash value is based upon a
fund less a surrender charge which decreases with the length of time the
policy has been in force. This surrender charge is either based upon a
percentage of the fund or a charge per $1,000 of face amount of insurance. The
schedule of charges may vary by plan of insurance and, for some plans, by age
of the insured at issue. The ratio of aggregate face amount voluntary
terminations to the mean amount of life insurance in force was 17.0% in 1999,
17.0% in 1998, and 16.5% in 1997.
The following table presents an analysis of changes to the Torchmark
subsidiaries' life insurance business in force:
(Amounts in thousands)
1999 1998 1997
---------------------- ---------------------- ----------------------
Number of Amount of Number of Amount of Number of Amount of
policies Insurance policies Insurance policies Insurance
--------- ------------ --------- ------------ --------- ------------
In force at January 1,.. 9,622 $ 96,339,059 9,630 $ 91,869,995 9,392 $ 86,948,151
New issues.............. 1,332 22,846,100 1,452 21,448,243 1,441 20,267,520
Business acquired....... -0- -0- -0- -0- -0- -0-
Other increases......... -0- 105,271 1 75,849 1 96,788
Death benefits.......... (105) (327,733) (107) (323,393) (110) (307,752)
Lapses.................. (1,023) (15,352,225) (1,006) (14,589,649) (895) (13,358,973)
Surrenders.............. (145) (1,505,248) (151) (1,438,085) (149) (1,383,373)
Other decreases......... (27) (258,763) (197) (703,901) (50) (392,366)
------ ------------ ------ ------------ ----- ------------
In force at December
31,.................... 9,654 $101,846,461 9,622 $ 96,339,059 9,630 $ 91,869,995
====== ============ ====== ============ ===== ============
Average policy size (in
dollar amounts):
Direct response--Juve-
nile.................. $ 6,690 $ 6,688 $ 6,725
Other.................. 12,146 11,411 10,689
2
Health insurance
Torchmark insurance subsidiaries offer supplemental health insurance
products. These are generally classified as (1) Medicare Supplement, (2)
cancer and (3) other health policies.
Medicare Supplement policies are offered on both an individual and group
basis through exclusive and independent agents, and direct response. These
guaranteed renewable policies provide reimbursement for certain expenses not
covered by the federal Medicare program. One popular feature is an automatic
claim filing system for Medicare Part B benefits whereby policyholders do not
have to file most claims because they are paid from claim records sent
directly to the Torchmark insurers by Medicare.
Cancer policies are offered on an individual basis through exclusive and
independent agents as well as direct response. These guaranteed renewable
policies are designed to fill gaps in existing medical coverage. Benefits are
triggered by a diagnosis of cancer or health related events or medical
expenses related to the treatment of cancer. Benefits may be in the form of a
lump sum payment, stated amounts per diem, per medical procedure, or
reimbursement for certain medical expenses.
Other health policies include accident, long term care and limited benefit
hospital and surgical coverages. These policies are generally issued as
guaranteed-renewable and are offered on an individual basis through exclusive
and independent agents, and direct response. They are designed to supplement
existing medical coverages. Benefits are triggered by certain health related
events or incurred expenses. Benefit amounts are per diem, per health related
event or defined expenses incurred up to a stated maximum.
The following table presents supplemental health annualized premium for the
three years ended December 31, 1999 by marketing method:
(Amounts in thousands)
Annualized Annualized
Premium Issued Premium in Force
-------------------------- --------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
Direct response........... $ 4,323 $ 3,884 $ 3,001 $ 12,785 $ 9,617 $ 7,248
Exclusive agents:
Liberty National......... 9,859 11,124 11,541 149,447 143,668 138,179
American Income.......... 8,039 9,138 10,052 46,691 44,300 43,552
United American.......... 102,583 64,245 39,616 231,034 172,927 141,780
Independent agents:
United American.......... 68,022 50,508 42,643 444,401 426,351 431,293
-------- -------- -------- -------- -------- --------
$192,826 $138,899 $106,853 $884,358 $796,863 $762,052
======== ======== ======== ======== ======== ========
The following table presents supplemental health annualized premium
information for the three years ended December 31, 1999 by product category:
(Amounts in thousands)
Annualized Annualized
Premium Issued Premium in Force
-------------------------- --------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
Medicare Supplement...... $152,518 $102,421 $ 65,161 $630,915 $553,737 $522,054
Cancer................... 10,637 10,248 10,757 153,777 144,900 137,640
Other health related
policies................ 29,671 26,230 30,935 99,666 98,226 102,358
-------- -------- -------- -------- -------- --------
$192,826 $138,899 $106,853 $884,358 $796,863 $762,052
The number of individual health policies in force were 1.09 million, 1.09
million and 1.16 million at December 31, 1999, 1998, and 1997, respectively.
3
Annuities
Annuity products offered by Torchmark insurance subsidiaries include single-
premium deferred annuities, flexible-premium deferred annuities, and variable
annuities. Single-premium and flexible-premium products are fixed annuities
where a portion of the interest credited is guaranteed. Additional interest
may be credited on certain contracts. Variable annuity policyholders may
select from a variety of mutual funds managed by Waddell & Reed which offer
different degrees of risk and return. The ultimate benefit on a variable
annuity results from the account performance. The following table presents
Torchmark subsidiaries' annuity collections and deposit balances by product
type excluding Family Service:
(Amounts in thousands)
Collections (Amounts in millions)
For the year ended Deposit Balance
December 31, At December 31,
-------------------------- --------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
Fixed annuities........... $ 71,696 $ 64,687 $ 76,930 $ 677.5 $ 647.3 $ 611.0
Variable annuities........ 392,769 299,005 247,446 3,274.9 2,343.5 1,821.2
-------- -------- -------- -------- -------- --------
$464,465 $363,692 $324,376 $3,952.4 $2,990.8 $2,432.2
======== ======== ======== ======== ======== ========
Investments
The nature, quality, and percentage mix of insurance company investments are
regulated by state laws that generally permit investments in qualified
municipal, state, and federal government obligations, corporate bonds,
preferred and common stock, real estate, and mortgages where the value of the
underlying real estate exceeds the amount of the loan. The investments of
Torchmark insurance subsidiaries consist predominantly of high-quality,
investment-grade securities. Fixed maturities represented 92% of total
investments at December 31, 1999. Approximately 9% of fixed maturity
investments were securities guaranteed by the United States Government or its
agencies or investments that were collateralized by U.S. government
securities. Approximately 79% of these investments were in GNMA securities
that are backed by the full faith and credit of the United States government.
The remainder of these government investments were U.S. Treasuries, agency
securities or collateralized mortgage obligations ("CMO's") that are fully
backed by GNMA's. (See Note 3--Investments in the Notes to Consolidated
Financial Statements and Management's Discussion and Analysis.)
The following table presents the market value of fixed maturity investments
at December 31, 1999 on the basis of ratings as determined primarily by
Standard & Poor's Corporation. Moody's Investors Services' bond ratings are
used when Standard & Poor's ratings are not available. Ratings of BBB and
higher (or their equivalent) are considered investment grade by the rating
services.
Amount
Rating (in thousands) %
------ -------------- -----
AAA................................................ $1,038,734 18.3%
AA................................................. 484,439 8.5
A.................................................. 2,690,891 47.5
BBB................................................ 1,113,956 19.6
BB................................................. 251,400 4.4
B.................................................. 13,279 0.2
Less than B........................................ 766 0.0
Not rated.......................................... 86,330 1.5
---------- -----
$5,679,795 100.0%
========== =====
4
The following table presents the market value of fixed maturity investments
of Torchmark's insurance subsidiaries at December 31, 1999 on the basis of
ratings as determined by the National Association of Insurance Commissioners
("NAIC"). Categories one and two are considered investment grade by the NAIC.
Amount
Rating (in thousands) %
---------------------- -------------- -----
1. Highest quality*... $4,251,595 76.3%
2. High quality....... 1,038,060 18.6
3. Medium quality..... 236,016 4.2
4. Low quality........ 47,828 0.9
5. Lower quality...... 1,997 0.0
6. In or near default. 0 0.0
---------- -----
$5,575,496 100.0%
========== =====
* Includes $463 million of exempt securities or 8.3% of the portfolio. Exempt
securities are exempt for valuation reserve purposes, and consist of U.S.
Government guaranteed securities.
Securities are assigned ratings when acquired. All ratings are reviewed and
updated at least annually. Specific security ratings are updated as
information becomes available during the year.
Pricing
Premium rates for life and health insurance products are established using
assumptions as to future mortality, morbidity, persistency, and expenses, all
of which are generally based on the experience of each insurance subsidiary,
and on projected investment earnings. Revenues for individual life and health
insurance products are primarily derived from premium income, and, to a lesser
extent, through policy charges to the policyholder account values on certain
individual life products. Profitability is affected to the extent actual
experience deviates from that which has been assumed in premium pricing and to
the extent investment income exceeds that which is required for policy
reserves.
Collections for annuity products and certain life products are not
recognized as revenues but are added to policyholder account values. Revenues
from these products are derived from charges to the account balances for
insurance risk and administrative costs. Profits are earned to the extent
these revenues exceed actual costs. Profits are also earned from investment
income on the deposits invested in excess of the amounts credited to policy
accounts.
Underwriting
The underwriting standards of each Torchmark insurance subsidiary are
established by management. Each company uses information from the application
and, in some cases, telephone interviews with applicants, inspection reports,
doctors' statements and/or medical examinations to determine whether a policy
should be issued in accordance with the application, with a different rating,
with a rider, with reduced coverage or rejected.
For life insurance in excess of certain prescribed amounts, each insurance
company requires medical information or examinations of applicants. These are
graduated according to the age of the applicant and may vary with the kind of
insurance. The maximum amount of insurance issued without additional medical
information is $200,000 through age 35. Additional medical information is
requested of all applicants, regardless of age or amount, if information
obtained from the application or other sources indicates that such information
is warranted.
In recent years, there has been considerable concern regarding the impact of
the HIV virus associated with Acquired Immune Deficiency Syndrome ("AIDS").
The insurance companies have implemented certain underwriting tests to detect
the presence of the HIV virus and continues to assess the utility of other
appropriate underwriting tests to detect AIDS in light of medical developments
in this field. To date, AIDS claims have not had a material impact on claims
experience.
5
Reinsurance
As is customary among insurance companies, Torchmark insurance subsidiaries
cede insurance to other unaffiliated insurance companies on policies they
issue in excess of retention limits. Reinsurance is an effective method for
keeping insurance risk within acceptable limits. In the event insurance
business is ceded, the Torchmark insurance subsidiaries remain contingently
liable with respect to ceded insurance should any reinsurer be unable to meet
the obligations it assumes. (See Note 18--Commitments and Contingencies in the
Notes to Consolidated Financial Statements and Schedule IV--Reinsurance
[Consolidated].)
Reserves
The life insurance policy reserves reflected in Torchmark's financial
statements as future policy benefits are calculated based on generally
accepted accounting principles. These reserves, with premiums to be received
in the future and the interest thereon compounded annually at assumed rates,
must be sufficient to cover policy and contract obligations as they mature.
Generally, the mortality and persistency assumptions used in the calculations
of reserves are based on company experience. Similar reserves are held on most
of the health policies written by Torchmark's insurance subsidiaries, since
these policies generally are issued on a guaranteed-renewable basis. A list of
the assumptions used in the calculation of Torchmark's reserves are reported
in the financial statements. (See Note 9--Future Policy Benefit Reserves in
the Notes to Consolidated Financial Statements.) Reserves for annuity products
consist of the policyholders' account values and are increased by policyholder
deposits and interest credits and are decreased by policy charges and benefit
payments.
Marketing
Torchmark insurance subsidiaries are licensed to sell insurance in all 50
states, the District of Columbia, Puerto Rico, the Virgin Islands, Guam, New
Zealand and Canada. Distribution is through direct response, independent and
exclusive agents.
Direct Response. Various Torchmark insurance companies offer life insurance
products directly to consumers through direct mail, co-op mailings,
television, national newspaper supplements and national magazines. Torchmark
operates a full service letterpress which enables the direct response
operation to maintain high quality standards while producing materials much
more efficiently than they could be purchased from outside vendors.
Exclusive Agents. Liberty National's 1,902 agents sell life and health
insurance, primarily in the seven state area of Alabama, Florida, Georgia,
Tennessee, Mississippi, South Carolina, and North Carolina. These agents are
employees of Liberty and are primarily compensated by commissions based on
sales. During the past several years this operation has emphasized bank draft
and direct bill collection of premium rather than agent collection, because of
the resulting lower cost and improved persistency. Agent collected sales were
discontinued in 1996.
Through the American Income Agency, individual life and fixed-benefit
accident and health insurance are sold through approximately 1,197 exclusive
agents who target moderate income wage earners through the cooperation of
labor unions, credit unions, and other associations. These agents are
authorized to use the "union label" because this sales force is represented by
organized labor.
United American offers life and health insurance targeted to various special
markets through 2,354 United American exclusive agents in 78 branch offices
throughout the United States.
The Waddell & Reed sales force, consisting of 2,611 sales representatives,
markets the life insurance products, fixed annuities, and variable annuities
of United Investors Life. This sales force continues to market Torchmark's
insurance products subsequent to the spin-off of Waddell & Reed under a
general agents' contract.
Independent Agents. Torchmark insurance companies offer a variety of life
and health insurance policies through approximately 42,600 independent agents,
brokers, and licensed sales representatives.
6
Torchmark is not committed or obligated in any way to accept a fixed portion
of the business submitted by any independent agent. All policy applications,
both new and renewal, are subject to approval and acceptance by Torchmark.
Torchmark is not dependent on any single agent or any small group of
independent agents, the loss of which would have a materially adverse effect
on insurance sales.
Various Torchmark insurance subsidiaries distribute life insurance through a
nationwide independent agency whose sales force is comprised of former
commissioned and noncommissioned military officers who sell exclusively to
commissioned and noncommissioned military officers and their families.
Ratings
The following list indicates the ratings currently held by Torchmark's five
largest insurance companies as rated by A.M. Best Company:
A.M. Best
Company
---------------
Liberty National Life Insurance Company A+ (Superior)
Globe Life And Accident Insurance Company A+ (Superior)
United Investors Life Insurance Company A+ (Superior)
United American Insurance Company A+ (Superior)
American Income Life Insurance Company A (Excellent)
A.M. Best states that it assigns A+ (Superior) ratings to those companies
which, in its opinion, have demonstrated superior overall performance when
compared to the norms of the life/health insurance industry. A+ (Superior)
companies have a superior ability to meet their obligations to policyholders
over a long period of time. A.M. Best states that it assigns A (Excellent)
ratings to those companies which, in its opinion, have demonstrated excellent
overall performance when compared to the norms of the life/health insurance
industry. A (Excellent) companies have an excellent ability to meet their
obligations to policyholders over a long period of time.
Liberty, Globe, United American, and UILIC have ratings of AA by Standard &
Poor's Corporation. This AA rating is assigned by Standard & Poor's
Corporation to those companies who offer excellent financial security on an
absolute and relative basis and whose capacity to meet policyholders
obligations is overwhelming under a variety of economic and underwriting
conditions.
Competition
The insurance industry is highly competitive. Torchmark competes with other
insurance carriers through policyholder service, price, product design, and
sales efforts. In addition to competition with other insurance companies,
Torchmark faces competition from other financial services organizations. While
there are insurance companies competing with Torchmark, no individual company
dominates any of Torchmark's life or health markets.
Torchmark's health insurance products compete with, in addition to the
products of other health insurance carriers, health maintenance organizations,
preferred provider organizations, and other health care related institutions
which provide medical benefits based on contractual agreements.
Generally, Torchmark companies operate at lower administrative expense
levels than its peer companies, allowing Torchmark to have competitive rates
while maintaining underwriting margins, or, in the case of Medicare Supplement
business, to remain in the business while some companies have ceased new
writings. Torchmark's years of experience in the direct response business are
a valuable asset in designing direct response products.
7
Regulation
Insurance. Insurance companies are subject to regulation and supervision in
the states in which they do business. The laws of the various states establish
agencies with broad administrative and supervisory powers which include, among
other things, granting and revoking licenses to transact business, regulating
trade practices, licensing agents, approving policy forms, approving certain
premium rates, setting minimum reserve and loss ratio requirements,
determining the form and content of required financial statements, and
prescribing the type and amount of investments permitted. Insurance companies
can also be required under the solvency or guaranty laws of most states in
which they do business to pay assessments up to prescribed limits to fund
policyholder losses or liabilities of insolvent insurance companies. They are
also required to file detailed annual reports with supervisory agencies, and
records of their business are subject to examination at any time. Under the
rules of the NAIC, insurance companies are examined periodically by one or
more of the supervisory agencies. The most recent examinations of Torchmark's
insurance subsidiaries were: American Income as of December 31, 1995; Globe,
as of December 31, 1997; Liberty, as of December 31, 1996; United American, as
of December 31, 1996; and UILIC, as of December 31, 1996.
NAIC Ratios. The NAIC developed the Insurance Regulatory Information System
("IRIS"), which is intended to assist state insurance regulators in monitoring
the financial condition of insurance companies. IRIS identifies twelve
insurance industry ratios from the statutory financial statements of insurance
companies, which are based on regulatory accounting principles and are not
based on generally accepted accounting principles ("GAAP"). IRIS specifies a
standard or "usual value" range for each ratio, and a company's variation from
this range may be either favorable or unfavorable. The following table
presents the IRIS ratios as determined by the NAIC for Torchmark's five
largest insurance subsidiaries, which varied unfavorably from the "usual
value" range for the years 1998 and 1997.
Usual Reported
Company Ratio Name Range Value
- --------- ---------------------------------------------- --------- --------
1998:
American Income Nonadmitted to Admitted Assets 0 to 10 10
Globe Life and Accident Net change in Capital and Surplus 50 to -10 -10
Gross change in Capital and Surplus 50 to -10 60
1997:
Liberty Investment in Affiliate to Capital and Surplus 0 to 100 199
American Income Nonadmitted to Admitted Assets 0 to 10 11
Explanation of Ratios:
Investment in Affiliate to Capital and Surplus--This ratio is determined by
measuring total investment in affiliates against the capital and surplus of
the company. The NAIC considers a ratio of more than 100% to be high, and to
possibly impact a company's liquidity, yield, and overall investment risk. The
large ratio in Liberty in 1997 was the result of its ownership of other
Torchmark insurance companies and the ownership of 81% of the stock of Waddell
& Reed. Liberty disposed of its investment in Waddell & Reed during 1998 in
connection with Torchmark's spin-off of that company to its shareholders. All
intercompany investment is eliminated in consolidation, and the internal
organizational structure has no bearing on Torchmark's consolidated financial
condition or results. Furthermore, this intercompany investment did not affect
Liberty's ability to do business.
Nonadmitted Assets to Admitted Assets--This ratio measures the degree to
which a company has acquired assets which cannot be carried on its statutory
balance sheet. American Income's ratio of 10% in 1998 and 11% in 1997 was due
to a large amount of agent balances that arose from commissions that are
advanced to agents when a policy is submitted. Due to the growth of American
Income's business, these advances have grown and caused a variance in this
particular ratio. Agents balances due to American Income are recognized as
assets in Torchmark's consolidated financial statements. A significant amount
of these balances was sold to an unaffiliated financial institution during
1999.
Change in Capital and Surplus--These ratios, calculated on both a gross and
net basis, are a measure of improvement or deterioration in the company's
financial position during the year. The NAIC considers ratios less than or
equal to minus 10% and greater than or equal to 50% to be unusual. Globe's
ratio of 60% in 1998 was caused by the establishment of American Income as a
subsidiary of Globe.
8
Previously, American Income was a direct subsidiary of Torchmark. This
transaction did not affect the consolidated equity of Torchmark at December
31, 1998. Also, this transaction did not affect Globe's ability to do
business.
Risk Based Capital. The NAIC requires a risk based capital formula be
applied to all life and health insurers. The risk based capital formula is a
threshold formula rather than a target capital formula. It is designed only to
identify companies that require regulatory attention and is not to be used to
rate or rank companies that are adequately capitalized. All of the insurance
subsidiaries of Torchmark are adequately capitalized under the risk based
capital formula.
Guaranty Assessments. State solvency or guaranty laws provide for
assessments from insurance companies into a fund which is used, in the event
of failure or insolvency of an insurance company, to fulfill the obligations
of that company to its policyholders. The amount which a company is assessed
for these state funds is determined according to the extent of these
unsatisfied obligations in each state. These assessments are recoverable to a
great extent as offsets against state premium taxes.
Holding Company. States have enacted legislation requiring registration and
periodic reporting by insurance companies domiciled within their respective
jurisdictions that control or are controlled by other corporations so as to
constitute a holding company system. Torchmark and its subsidiaries have
registered as a holding company system pursuant to such legislation in
Alabama, Delaware, Missouri, New York, Texas, and Indiana.
Insurance holding company system statutes and regulations impose various
limitations on investments in subsidiaries, and may require prior regulatory
approval for the payment of certain dividends and other distributions in
excess of statutory net gain from operations on an annual noncumulative basis
by the registered insurer to the holding company or its affiliates.
Personnel
At the end of 1999, Torchmark had 1,915 employees and 2,345 licensed
employees under sales contracts. Additionally, approximately 49,000
independent and exclusive agents and brokers, who were not employees of
Torchmark, were associated with Torchmark's marketing efforts.
Item 2. Real Estate
Torchmark, through its subsidiaries, owns or leases buildings that are used
in the normal course of business. Liberty owns a 487,000 square foot building
at 2001 Third Avenue South, Birmingham, Alabama which currently serves as
Liberty's, UILIC's, and Torchmark's home office. Approximately 160,000 square
feet of this building is available for lease to unrelated tenants by Liberty.
Liberty also operates from 58 company-owned district office buildings used for
agency sales personnel.
United American owns and is the sole occupant of a 140,000 square foot
facility, located in the Stonebridge Ranch development in McKinney, Texas (a
north Dallas suburb).
Globe owns a 300,000 square foot office building at 204 N. Robinson,
Oklahoma City, of which Globe occupies 56,000 square feet as its home office
and the remaining space is either leased or available for lease. Globe also
owns an 80,000 square foot office building at 120 Robert S. Kerr Avenue,
Oklahoma City, which is available for lease. Further, Globe owns a 112,000
square foot facility located at 133 NW 122 Street in Oklahoma City which
houses the Direct Response operation.
American Income owns and is the sole occupant of an office building located
at 1200 Wooded Acres Drive, Waco, Texas. The building is a two-story structure
containing approximately 72,000 square feet of usable floor space.
Liberty and Globe also lease district office space for their agency sales
personnel.
9
During 1999, Torchmark sold the majority of its investment real estate
holdings for total consideration of $123 million. These sold investments
included its TMK Income Properties limited partnership and its joint venture
investment in Liberty Park, a planned community in Birmingham, Alabama. As of
December 31, 1999, Torchmark retained $16 million of investment real estate,
which included $8 million of properties that were partially occupied by
Torchmark subsidiaries, $7 million of undeveloped land in Liberty Park, and $1
million of undeveloped land in north Texas.
Information Technology Computing Equipment
Torchmark, and its primary subsidiaries, have significant information
technology capabilities at their disposal. The corporation uses centralized
mainframe computer systems, company-specific local-area networks,
workstations, and personal computers to meet its ongoing information
processing requirements. Torchmark and its primary subsidiaries also use data
communications hardware and software to support their remote data
communications networks, intranets, and internet-related telecommunications
capabilities.
Torchmark's computer hardware, data communications equipment, and associated
software programs are managed by information technology staff. All of the
corporation's computer hardware and software support, information processing
schedules, and computer-readable data-management requirements are met through
company-specific policies and procedures. These company-specific policies and
procedures also provide for the off-site storage and retention of backup
computer software, financial, and business data files.
Item 3. Legal Proceedings
Torchmark and its subsidiaries continue to be named as parties to pending or
threatened legal proceedings. These lawsuits involve tax matters, alleged
breaches of contract, torts, including bad faith and fraud claims based on
alleged wrongful or fraudulent acts of agents of Torchmark's subsidiaries,
employment discrimination, and miscellaneous other causes of action. Many of
these lawsuits involve claims for punitive damages in state courts of Alabama,
a jurisdiction particularly recognized for its large punitive damage verdicts.
A number of such actions involving Liberty also name Torchmark as a defendant.
In 1999, Alabama enacted legislation limiting punitive damages in non-physical
injury cases to the greater of $500,000 or three times compensatory damages.
Since this legislation has not undergone scrutiny by appellate courts
regarding its constitutionality and a jury's discretion regarding the amount
of compensatory damages (including mental anguish) awarded in any given case
is not precisely defined, the effect of this legislation on Torchmark's
litigation remains unclear. Thus, the likelihood or extent of a punitive
damage award in any given case is currently impossible to predict. As of
December 31, 1999, Liberty was a party to approximately 135 active lawsuits
(including 17 employment related cases and excluding interpleaders and stayed
cases), 126 of which were Alabama proceedings in which punitive damages were
sought. Liberty faces trial settings in these cases on an on-going basis.
Based upon information presently available, and in light of legal and other
factual 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
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, continue to occur, creating the potential
for unpredictable material adverse judgments in any given punitive damage
suit.
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 Missouri on behalf of all
former agents of Globe (Smith v. Torchmark Corporation, Case No. :95-3304-CV-
S-4). This action alleges that the defendants breached independent agent
contracts with the plaintiffs by treating them as captive agents and engaged
in a pattern of racketeering activity wrongfully denying income and renewal
commissions to the agents, restricting insurance sales, mandating the purchase
of worthless leads, terminating agents without cause and inducing the
execution of independent agent contracts based on misrepresentations of fact.
Monetary damages in an unspecified amount are sought. A plaintiff class was
certified by the District Court on February 26, 1996, although the
certification did not go to the merit of the allegations in the complaint. On
December 31, 1996, the plaintiffs filed an amended complaint in Smith to
allege violations of various provisions of the Employment Retirement Income
Security Act of 1974. Extensive discovery was then conducted. In October 1998,
defendants filed a
10
motion to decertify the presently defined class in Smith. On March 23, 1999,
the District Court granted defendants' motion to decertify the Smith class in
part and decertified all but the ERISA claims of a more narrowly defined Smith
class. In May 1999, the defendants filed motions to dismiss the claims
certified by the Court's March 23, 1999 order. On December 14, 1999, the
District Court granted defendants' motion for summary judgment. That Court
denied a motion for reconsideration on January 21, 2000.
It has been previously reported that Torchmark, its subsidiaries United
American and Globe and certain individual corporate officers are parties to
purported class action litigation filed in April, 1996 in the U.S. District
Court for the Northern District of Georgia (Crichlow v. Torchmark Corporation,
Case No. 4:96-CV-0086-HLM) involving certain hospital and surgical insurance
policies issued by Globe and United American. In September 1997, the U.S.
District Court entered an order granting summary judgment against the
plaintiffs on certain issues and denying national class certification,
although indicating that plaintiffs could move for the certification of a
state class of Georgia policyholders. Discovery then proceeded on the
remaining claims for breach of contract and the duty of good faith arising
from closure of the block of business and certain post-claim matters as well
as fraud and conspiracy relating to pricing and delay in implementing rate
increases. On June 17, 1998, the U.S. District Court entered an order which
denied the plaintiffs' motion to certify a Georgia policyholders class, denied
reconsideration of the previously entered motion for summary judgment on
certain issues, denied reconsideration of the denial of national certification
of a class of policyholders and severed and transferred claims of Mississippi
policyholders to the U.S. District Court for the Northern District of
Mississippi (Greco v. Torchmark Corporation, Case No. 1:98CV196-D-D). The U.S.
District Court granted defendants' motion for summary judgment on all
remaining issues in Crichlow on February 4, 1999. Plaintiffs in Greco then
moved to certify a class of persons purchasing Globe hospital and surgical
insurance policies in Mississippi. On February 1, 1999, defendants filed a
motion for summary judgment in Greco.
Defendants' motion for summary judgment on all remaining issues in Crichlow
was granted by the District Court on February 4, 1999. The Crichlow plaintiffs
have appealed and Crichlow defendants have cross-appealed various orders of
the District Court to the United States Court of Appeals for the Eleventh
Circuit.
On October 29, 1999, the District Court dismissed all of the plaintiffs'
claims in Greco in their entirety and entered a final judgment dismissing
Greco with prejudice. This October 29, 1999 order in Greco has been appealed
by plaintiffs to the Fifth Circuit Court of Appeals.
As previously reported, Liberty has been a party to two lawsuits alleging
that a class of persons were insured under Liberty policies when Liberty knew
that such persons were not entitled to retain any benefits under these
policies, one of which was filed in 1996 in the Circuit Court of Jefferson
County, Alabama (Harris v. Liberty National Life Insurance Company, Case No.
CV-96-01836) and the other in the Circuit Court of St. Clair County, Alabama
(Gentry v. Liberty National Life Insurance Company, Case No. CV-97-61). The
Gentry case was dismissed by the St. Clair County Circuit Court on June 16,
1998 and subsequently the Harris case was amended to add former plaintiff
Gentry as an additional class representative in that case. On December 28,
1999, the Jefferson County Circuit Court entered an order in Harris granting
summary judgment for Liberty on all plaintiffs' claims except unjust
enrichment. The only remaining claim in the Harris plaintiffs' motion for
class certification, one of unjust enrichment, was denied by the Circuit Court
in an order denying the motion for class certification entered February 10,
2000.
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 (Case No. 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.
11
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. A petition was filed on April 8, 1996 on behalf of
a group of funeral directors seeking to modify the 1978 decree in Battle in
light of changed economic circumstances. All parties made extensive
submissions to the District Court and a hearing on the opposing petitions was
held by the District Court on February 9, 1999. On March 8, 1999, the District
Court entered an order granting Liberty's petition to enforce the obligations
of contract funeral directors under their funeral service contracts and
denying the funeral directors' petition for review of the Battle Final
Judgment and alternative relief. On July 29, 1999, the funeral director class
filed an appeal with the U.S. Court of Appeals of the Eleventh Circuit seeking
to have the March 8, 1999 order vacated on the merits. Liberty filed a joint
motion in the Eleventh Circuit Court seeking remand to the District Court for
purposes of appointment of class counsel for burial policyholders, who are
currently not formally represented in these preceedings. The Circuit Court
issued an order denying Liberty's joint motion on September 15, 1999 and the
funeral director class' appeal remains pending. On January 24, 2000, Liberty
and the funeral director class filed a joint motion for remand in order to
allow the District Court to evaluate a proposed settlement of the funeral
directors' appeal.
On October 28, 1999, Liberty was served with a subpoena from the Florida
Department of Insurance in connection with that Department's investigation
into Liberty's sales practices and disclosures in the State of Florida
regarding industrial life insurance and low coverage life insurance policies.
Subsequently, on December 8, 1999, purported class action litigation was filed
against Liberty in the United States District Court for the Northern District
of Alabama (Moore v. Liberty National Life Insurance Company, Case No. CV-99-
BU-3262-S), on behalf of all African-Americans who have or have had at the
time of policy termination an ownership interest in certain life insurance
policies ($25,000 face amount or less) marketed by Liberty and certain of its
former subsidiaries. Plaintiffs allege racial discrimination in Liberty's
premium rates in violation of 42 U.S.C (S)1981, breach of fiduciary duty in
sales and administrative practices, receipt of excessive and unreasonable
premium payments by Liberty, improper hiring, supervision, retention and
failure to monitor actions of officers, agents and employees, breach of
contract in dismantling the debit premium collection system, fraudulent
inducement and negligent misrepresentation. Unspecified compensatory and
punitive damages are sought together with a declaratory judgment and equitable
and/or injunctive relief, including establishment of a constructive trust for
the benefit of class members. Defendants filed a motion for judgment on the
pleadings or in the alternative for summary judgment on January 27, 2000.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of shareholders, through the solicitation
of proxies or otherwise, during the fourth quarter of 1999.
12
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
The principal market in which Torchmark's common stock is traded is the New
York Stock Exchange. There were 6,378 shareholders of record on December 31,
1999, excluding shareholder accounts held in nominee form. On November 6,
1998, Torchmark distributed its approximately 64% ownership of Waddell & Reed
to its shareholders at a ratio of .3018 Waddell & Reed shares to one share of
Torchmark. All market prices and dividends per share have been adjusted to
reflect the Waddell & Reed distribution. Information concerning restrictions
on the ability of Torchmark's subsidiaries to transfer funds to Torchmark in
the form of cash dividends is set forth in Note 16--Shareholders' Equity in
the Notes to the Consolidated Financial Statements. The market prices and cash
dividends paid by calendar quarter for the past two years are as follows:
1999
Market Price
------------
Dividends
Quarter High Low Per Share
------- -------- -------- ---------
1 $36.6250 $30.6875 $ .0900
2 37.1875 31.2500 .0900
3 36.1250 24.6250 .0900
4 35.9375 25.5625 .0900
Year-end closing
price.................$29.0625
1998
Market Price
------------
Dividends
Quarter High Low Per Share
------- -------- -------- ---------
1 $41.2813 $33.0156 $ .1500
2 43.0000 34.5781 .1500
3 40.7344 30.5313 .1500
4 40.2500 27.4688 .1300
Year-end closing
price.................$35.3125
13
Item 6. Selected Financial Data
The following information should be read in conjunction with Torchmark's
Consolidated Financial Statements and related notes reported elsewhere in this
Form 10-K:
(Amounts in thousands except per share and percentage data)
1999 1998 1997 1996 1995
Year ended December 31, ----------- ----------- ----------- ---------- ----------
Premium revenue:
Life................... $ 1,018,301 $ 959,766 $ 909,992 $ 854,897 $ 772,257
Health................. 824,816 759,910 739,485 732,618 750,588
Other ................. 40,969 33,954 28,527 22,404 23,438
Total................. 1,884,086 1,753,630 1,678,004 1,609,919 1,546,283
Net investment income... 447,337 459,558 429,116 399,551 377,338
Realized investment
gains (losses)......... (110,971) (57,637) (36,979) 5,830 (14,323)
Total revenue........... 2,226,895 2,157,876 2,071,103 2,016,416 1,910,454
Net operating income(1). 341,167 324,315 273,730 240,637 219,864
Net income from
continuing operations.. 258,930 255,776 260,429 252,815 217,958
Net income.............. 273,956 244,441 337,743 311,372 143,235
Annualized premium
issued:
Life................... 257,207 244,467 230,379 214,741 217,988
Health................. 192,826 138,899 106,853 100,981 103,491
Total................. 450,033 383,366 337,232 315,722 321,479
Per common share:
Basic earnings:
Net operating
income(1)............ 2.56 2.32 1.97 1.69 1.54
Net income from
continuing
operations........... 1.95 1.83 1.87 1.78 1.52
Net income............ 2.06 1.75 2.43 2.19 1.00
Diluted earnings:
Net operating
income(1)............ 2.55 2.29 1.94 1.67 1.52
Net income from
continuing
operations........... 1.93 1.81 1.84 1.76 1.51
Net income............ 2.04 1.73 2.39 2.17 0.99
Cash dividends paid.... 0.36 0.58 0.59 0.58 0.57
Return on average common
equity, excluding
effect of SFAS 115,
Vesta earnings,
discontinued
operations, and
nonrecurring charge.... 16.2% 15.1% 18.2% 18.4% 18.3%
Basic average shares
outstanding............ 133,197 139,999 139,202 142,460 143,188
Diluted average shares
outstanding............ 133,986 141,352 141,431 143,783 144,228
- -------------------------------------------------------------------------------
1999 1998 1997 1996 1995
As of December 31, ----------- ----------- ----------- ---------- ----------
Cash and invested
assets................. $ 6,202,251 $ 6,417,511 $ 6,473,096 $5,863,163 $5,724,180
Total assets............ 12,131,664 11,249,028 11,127,648 9,893,964 9,445,623
Short-term debt......... 418,394 355,392 347,152 40,910 189,372
Long-term debt.......... 371,555 383,422 564,298 791,880 791,988
Shareholders' equity.... 1,993,337 2,259,528 1,932,736 1,629,343 1,588,952
Per common share (2)... 15.10 16.51 13.80 11.69 11.09
Per common share
excluding effect of
SFAS 115.............. 16.32 15.43 12.90 11.42 10.16
Annualized premium in
force:
Life................... 1,130,609 1,062,647(3) 1,007,379 946,525 869,366
Health................. 884,358 796,863 762,052 748,153 759,059
Total................. 2,014,967 1,859,510(3) 1,769,431 1,694,678 1,628,425
- -------------------------------------------------------------------------------
(1) Net income from continuing operations, excluding realized investment gains
(losses), the related adjustment to deferred acquisition costs, equity in
Vesta earnings for periods prior to 1999, a one-time gain on the sale of
equipment, and the nonrecurring charge.
(2) Computed after deduction of preferred shareholders' equity.
(3) Annualized life premium in force excludes $5.3 million representing the
Family Service business sold in 1998.
14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Statements. Torchmark cautions readers regarding certain forward-
looking statements contained in the following discussion and elsewhere in this
document, and in any other statements made by, or on behalf of Torchmark
whether or not in future filings with the Securities and Exchange Commission.
Any statement that is not a historical fact, or that might otherwise be
considered an opinion or projection concerning Torchmark or its business,
whether express or implied, is meant as and should be considered a forward-
looking statement. Such statements represent management's opinions concerning
future operations, strategies, financial results or other developments.
Forward-looking statements are based upon estimates and assumptions that are
subject to significant business, economic and competitive uncertainties, many
of which are beyond Torchmark's control. If these estimates or assumptions
prove to be incorrect, the actual results of Torchmark may differ materially
from the forward-looking statements made on the basis of such estimates or
assumptions. Whether or not actual results differ materially from forward-
looking statements may depend on numerous foreseeable and unforeseeable events
or developments, which may be national in scope, related to the insurance
industry generally, or applicable to Torchmark specifically. Such events or
developments could include, but are not necessarily limited to:
1) Deteriorating general economic conditions leading to increased lapses
and/or decreased sales of Torchmark's policies;
2) Changes in governmental regulations (particularly those impacting
taxes and changes to the federal Medicare program that would affect
Medicare Supplement insurance);
3) Financial markets trends that adversely affect sales of Torchmark's
market-sensitive products;
4) Increased pricing competition;
5) Adverse levels of mortality, morbidity, and utilization of healthcare
services relative to Torchmark's assumptions;
6) The inability of Torchmark to obtain timely and appropriate premium
rate increases;
7) Adverse regulatory developments;
8) Interest rate changes that adversely affect product sales and/or
investment portfolio yield;
9) Adverse litigation results;
10) Developments involving Vesta Insurance Group, Inc., ("Vesta")
described more fully elsewhere in this document under the caption
"Transactions involving Vesta Insurance Group" on page of this report;
11) The inability of Torchmark to achieve the anticipated levels of
administrative and operational efficiencies; and
12) The customer response to new products and marketing initiatives.
Readers are also directed to consider other risks and uncertainties described
in other documents filed by Torchmark with the Securities and Exchange
Commission.
The following discussion should be read in conjunction with the Selected
Financial Data and Torchmark's Consolidated Financial Statements and Notes
thereto appearing elsewhere in this report.
15
RESULTS OF OPERATIONS
The following is a discussion of Torchmark's operations for the three years
ended December 31, 1999. In the analysis and comparison of Torchmark's
operating results with 1998 and 1997, two divestitures that occurred in 1998
should be taken into account:
a) the divestiture of Waddell & Reed
b) the sale of Family Service
Divestiture of Waddell & Reed. In March, 1998, Waddell & Reed, Torchmark's
asset management subsidiary, completed an initial public offering of
approximately 24 million shares of its common stock. The offering represented
approximately 36% of Waddell & Reed's shares. Net proceeds from the offering
were approximately $516 million after underwriters' fees and expenses. Waddell
& Reed used $481 million of the proceeds to repay existing notes owed to
Torchmark and other Torchmark subsidiaries and retained the remaining $35
million. Torchmark's $481 million proceeds from the note repayments were
invested or used to pay down debt. (See the discussion on Investments on page
28, Liquidity on page 32, and Capital Resources on page 32 of this report.)
The initial public offering resulted in a $426 million gain which was added to
Torchmark's additional paid-in capital. Torchmark retained the remaining 64%
of the Waddell & Reed stock.
On November 6, 1998, Torchmark distributed its remaining 64% investment in
Waddell & Reed through a tax-free spin-off to Torchmark shareholders. Each
Torchmark shareholder of record on October 23, 1998 received a total of .3018
Waddell & Reed shares per Torchmark share. After the spin-off, Torchmark
retained no further ownership interest in Waddell & Reed. As a result of the
transaction, Torchmark incurred $54 million in expenses related to the spin-
off, the majority of which was $50 million of corporate Federal income tax
resulting from the distribution of a portion of the policyholder surplus
account of a Torchmark life subsidiary.
Torchmark has accounted for the spin-off of Waddell & Reed as a disposal of
a segment. Accordingly, Torchmark's financial statements for 1998 and all
prior periods were modified to present the net assets and operating results of
Waddell & Reed as discontinued operations of the disposed segment. The $54
million expense of the spin-off is included in discontinued operations under
the caption "Loss on Disposal." The distribution of the Waddell & Reed shares
resulted in a reduction in Torchmark's shareholders' equity in the approximate
amount of $174 million, consisting of the equity in Waddell & Reed, net of the
36% minority interest.
Torchmark's share of Waddell & Reed's earnings for 1998 was $48 million
after reduction for the minority interest during the period subsequent to the
initial public offering but before the spin-off. This compares with $77
million for 1997, when Torchmark owned 100% of Waddell & Reed for the entire
period.
Sale of Family Service. On June 1, 1998, Torchmark sold Family Service to an
unaffiliated insurance carrier. Family Service, which was acquired in 1990, is
a preneed funeral insurer but has not issued any new policies since 1995.
Consideration for the sale was $140 million in cash. Torchmark recorded a
pretax realized loss on the sale of approximately $14 million, but incurred a
tax expense on the transaction of $9 million for a total after-tax loss of $23
million. In connection with the sale, Torchmark agreed to continue to service
the policies in force of Family Service for five years from the sale date for
a fee of $2 million per year plus certain variable processing costs. During
1997, Family Service accounted for $57 million in revenues and $7.7 million in
pretax income. Through May, 1998, Family Service contributed $25 million in
revenues and $5.8 million in pretax income. Invested assets were $778 million
and total assets were $828 million at the date of the sale.
Summary of Operating Results. Torchmark's management computes a
classification of income called "net operating income." Net operating income
is the measure of income Torchmark's management focuses on to evaluate the
performance of the operations of the company. It differs from net income as
reported in the financial statements in that it excludes unusual and
nonrecurring income or loss items which distort operating trends. It also
excludes discontinued operations.
16
The following items were excluded from net income as reported in Torchmark's
financial statements in order to compute net operating income:
1) Realized investment gains and losses and the related adjustment to
deferred acquisition costs, net of tax;
2) Net income or loss from the discontinued operations of Waddell & Reed,
including the $54 million nonrecurring expenses of the spin-off;
3) Torchmark's pro rata share of the income or losses related to Vesta;
4) The nonrecurring loss from the redemption by Torchmark of its debt in
the second quarter of 1998 in the amount of $5 million net of tax;
5) A one-time gain on the sale of equipment (included in other income) in
the after-tax amount of $3.3 million; and
6) The effect of a change in accounting principle which modified the
accounting for an interest rate swap instrument, increasing net income
in the after-tax amount of $16.1 million.
Additionally, in 1999, Torchmark entered into a life insurance marketing
arrangement with a third party, discussed more fully under the caption Life
Insurance on page 20 of this report. This agreement contained certain cash
guarantees to the third party which would not be recoverable by Torchmark
based on test marketing results. Accordingly, Torchmark recorded a
nonrecurring after-tax operating charge of $13 million, or $.10 per diluted
share in 1999. Because this was an unusual one-time charge, net operating
income has been presented before the charge for comparability.
A reconciliation of net operating income to net income on a per diluted
share basis is as follows:
Reconciliation of Per Share Net Operating
Income to Reported Net Income*
1999 1998 1997
----- ----- -----
Net operating income before nonrecurring charge........ $2.55 $2.29 $1.94
Nonrecurring charge.................................... (.10) -- --
----- ----- -----
Net operating income.................................. 2.45 2.29 1.94
Realized investment losses, net of tax................. (.54) (.36) (.17)
Gain on sale of equipment, net of tax.................. .02 -- --
Equity in Vesta earnings (losses), net of tax.......... -- (.12) .07
Discontinued operations of Waddell & Reed, net of tax.. (.01) (.04) .55
Loss on redemption of debt, net of tax................. -- (.04) --
Change in accounting principle, net of tax............. .12 -- --
----- ----- -----
Net income............................................ $2.04 $1.73 $2.39
===== ===== =====
- --------
* Diluted share basis
Realized investment losses in 1999 in the after-tax amount of $72 million
included a $41 million after- tax loss from the sale of real estate and a $19
million after-tax loss from the sale of fixed maturities, which are discussed
on page 29 of this report under the caption Investments. Realized losses in
1999 also included a $12 million after-tax loss from the reduction in value of
Torchmark's interest rate swap relating to its MIPS, as discussed under the
caption Capital Resources on page 32 of this report.
Realized investment losses in 1998, which were $51 million net of tax,
included a $23 million after-tax loss from the sale of Family Service, a $24
million after-tax loss on the writedown of Torchmark's Vesta holdings, and a
$3 million after-tax loss from the sale of a portion of the Vesta holdings.
Losses in 1997, in the after-tax amount of $24 million, were primarily a
result of intentional sales of fixed-maturity investments at a loss to offset
current and prior-year taxable gains.
The Vesta transactions are discussed on page 35 and the redemption of
Torchmark debt is discussed under the caption Capital Resources on page 32 of
this report. The change in accounting principle is discussed in Note 15--
Change in Accounting Principle to the Consolidated Financial Statements on
page 64 of this report.
17
Torchmark reports earnings per share data as basic and diluted. Basic
earnings per share are based on average shares outstanding during the period.
Diluted earnings per share assume the exercise of Torchmark's employee stock
options for which the exercise price was lower than the market price during
the year and their impact on shares outstanding. Diluted earnings per share
differ from basic earnings per share in that they are influenced by changes in
the market price of Torchmark stock and the number of options as well as the
number of shares outstanding. Unless otherwise indicated, all references to
per share data in this report are on the basis of diluted shares.
A comparison of Torchmark's basic and diluted earnings per share is as
follows:
Earnings and Earnings Per Share
(Dollar amounts in thousands, except for per share data)
For the Year Ended
December 31,
--------------------------
1999 1998 1997
-------- -------- --------
Net operating income before nonrecurring charge:
Amount.......................................... $341,167 $324,315 $273,730
Per Share:
Basic........................................... 2.56 2.32 1.97
Diluted......................................... 2.55 2.29 1.94
Net operating income:
Amount.......................................... 327,744 324,315 273,730
Per Share:
Basic........................................... 2.46 2.32 1.97
Diluted......................................... 2.45 2.29 1.94
Net income:
Amount.......................................... 273,956 244,441 337,743
Per Share:
Basic........................................... 2.06 1.75 2.43
Diluted......................................... 2.04 1.73 2.39
Torchmark's revenues were $2.23 billion in 1999, an increase of 3% over 1998
revenues of $2.16 billion. Revenues rose 4% in 1998 over 1997 revenues of
$2.07 million. After adjustment for realized investment gains and losses in
each year, revenues grew 5% in 1999 from $2.22 billion in 1998 to $2.33
billion. They also rose 5% in 1998 over the prior year. Total premium rose
$130 million, or 7%, to $1.88 billion in 1999. Total premium increased 5% in
1998 to $1.75 billion. Life insurance premium rose 6% in 1999 to $1.02
billion, an increase of $59 million. Health premium in 1999 rose 9%, an
increase of $65 million to $825 million. Net investment income declined $12
million, or 3%, in 1999 due primarily to the sale of Family Service. Life
premium increased 5% to $960 million and health premium grew 3% to $760
million in 1998. Net investment income increased 7% in 1998 to $460 million.
Other operating expenses have declined in each of the years 1997 through
1999. They declined from $120 million in 1997 to $117 million in 1998 and to
$115 million in 1999. Other operating expenses as a percentage of revenues,
excluding realized gains and losses, declined in each period and were 4.9% in
1999, 5.3% in 1998, and 5.7% in 1997. Other operating expenses consist of
insurance administrative expenses and expenses of the parent company. The
components of Torchmark's revenues and operations are described in more detail
in the discussion of Insurance and Investment segments found on pages 20
through 31 of this report.
18
The following table is a summary of Torchmark's continuing net operating
income. Insurance underwriting income is defined by Torchmark management as
premium income less net policy obligations, commissions, acquisition expenses,
and insurance administrative expenses plus other income. Excess investment
income is defined as tax-equivalent net investment income reduced by the
interest credited to net policy liabilities and financing costs. Financing
costs include the interest on Torchmark's debt and the net cost of the Monthly
Income Preferred Securities ("MIPS").
Summary of Net Operating Income
(Dollar amounts in thousands)
1999 1998 1997
---------------- ---------------- ----------------
% of % of % of
Amount Total Amount Total Amount Total
--------- ----- --------- ----- --------- -----
Insurance underwriting
income before other
income and administra-
tive expenses:
Life................... $ 263,269 60.5% $ 252,556 60.8% $ 241,038 60.0%
Health................. 144,632 33.3 139,445 33.6 141,540 35.3
Annuity................ 26,831 6.2 23,423 5.6 19,025 4.7
Other.................. -0- -0- 7
--------- ----- --------- ----- --------- -----
Total .................. 434,732 100.0% 415,424 100.0% 401,610 100.0%
===== ===== =====
Other income............ 3,348 4,488 3,141
Administrative expenses. (104,903) (102,559) (101,950)
--------- --------- ---------
Insurance underwriting
income excluding
Family Service.......... 333,177 317,353 302,801
Insurance underwriting
income--Family Service.. -0- 1,393 3,685
Excess investment income
(tax equivalent basis).. 215,387 206,119 143,476
Corporate expense........ (10,166) (12,061) (13,953)
Goodwill amortization.... (12,075) (12,075) (12,074)
Tax equivalency adjust-
ment.................... (11,487) (11,143) (9,951)
--------- --------- ---------
Pretax net operating in-
come................... 514,836 489,586 413,984
Income tax............... (173,669) (165,271) (140,254)
--------- --------- ---------
Net operating income be-
fore nonrecurring
charge................. 341,167 324,315 273,730
Nonrecurring charge, net
of tax.................. (13,423) -0- -0-
--------- --------- ---------
Net operating income.... $ 327,744 $ 324,315 $ 273,730
========= ========= =========
Net operating income be-
fore nonrecurring
charge per diluted
share.................. $ 2.55 $ 2.29 $ 1.94
========= ========= =========
Net operating income per
diluted share.......... $ 2.45 $ 2.29 $ 1.94
========= ========= =========
On a per share basis, Torchmark's net operating income before nonrecurring
charge grew 11% in 1999 and 18% in 1998. Excluding the proceeds from the
public offering of Waddell & Reed, the increase for 1998 would have been 10%.
In total dollars, Torchmark's net operating income before nonrecurring
charge rose 5% in 1999 after an 18% increase in 1998. Contributing to the
growth in net operating income were gains in insurance underwriting income and
excess investment income. Excluding Family Service, insurance underwriting
income rose 5% in 1999 to $333 million and 5% in 1998 to $317 million. Excess
investment income also rose in both 1998 and 1999 as a result of lower policy
requirements in 1999, increased investment income in 1998, and lower financing
costs in both years. Torchmark's core operations are segmented into insurance
underwriting operations and investment operations. Insurance underwriting
activities are further segmented into life insurance, health insurance, and
annuity product groups. A detailed discussion of each of Torchmark's segments
follows.
19
Life insurance. Life insurance is Torchmark's largest segment, with life
premium representing 54% of total premium and with life underwriting income
before other income, administrative expense, and nonrecurring charge,
representing 61% of the total. Life insurance products provide higher
underwriting margins and a larger asset base resulting from higher reserve
levels. A larger asset base provides Torchmark the opportunity to increase
investment income.
Family Service was sold on June 1, 1998. Comparisons of 1997 through 1999 in
the following discussions of Torchmark's life insurance operations exclude
Family Service.
Life insurance premium rose 6% in 1999 to $1.02 billion from $957 million in
1998. Life premium increased 6% in 1998. Sales of life insurance, in terms of
annualized premium, were $257 million in 1999, increasing 5% over 1998 sales
of $244 million. This compares with 6% growth in 1998 sales over 1997.
Annualized life premium in force was $1.13 billion at December 31, 1999,
compared with $1.06 billion at 1998 year end, an increase of 6%. Annualized
premium in force grew 6% in 1998 from $1.00 billion at year-end 1997.
Annualized premium in force and issued data includes amounts collected on
certain interest-sensitive life products which are not recorded as premium
income but excludes single-premium income and policy account charges.
Life insurance products are marketed through a variety of distribution
channels. The following table presents life insurance premium by distribution
method during each of the three years ended December 31, 1999.
LIFE INSURANCE
Premium by Distribution Method
(Dollar amounts in thousands)
1999 1998 1997
---------------- -------------- --------------
% of % of % of
Amount Total Amount Total Amount Total
---------- ----- -------- ----- -------- -----
Liberty National Exclusive
Agency...................... $ 288,330 28.3% $282,389 29.5% $280,519 31.1%
Direct Response.............. 245,824 24.1 221,371 23.1 195,393 21.7
American Income Exclusive
Agency...................... 217,367 21.3 204,310 21.3 190,681 21.2
Military Independent Agency.. 104,590 10.3 92,204 9.6 79,631 8.8
United Investors Agency...... 84,098 8.3 80,376 8.4 77,986 8.7
United American Independent
Agency...................... 37,375 3.7 36,925 3.9 36,810 4.1
United American Exclusive
Agency...................... 19,318 1.9 18,798 2.0 18,243 2.0
Other........................ 21,399 2.1 20,901 2.2 21,924 2.4
---------- ----- -------- ----- -------- -----
$1,018,301 100.0% $957,274 100.0% $901,187 100.0%
========== ===== ======== ===== ======== =====
20
Direct Response marketing is conducted through direct mail, co-op mailings,
television and consumer magazine advertising, and direct mail solicitations
endorsed by groups, unions and associations. It markets a line of life
products primarily to juveniles and adults with face amounts of less than
$10 thousand on average. The Direct Response operation is characterized by
lower acquisition costs than Torchmark's agency-based marketing systems. In
each of the three years 1997 through 1999, this distribution center had
Torchmark's highest growth in life insurance premium in dollar amount. It
accounted for over 24% of Torchmark's life insurance premium during 1999.
Direct Response premium was $246 million in 1999, increasing 11% over 1998
premium of $221 million. Direct Response life premium in 1998 grew 13% over
1997 premium of $195 million.
Annualized premium sold by the Direct Response operation was $96 million in
1999, increasing 3% over 1998 sales of $94 million. Sales in 1998 rose 18%
over 1997 sales of $79 million. Sales growth declined as compared with
previous years due in part to the withdrawal from the under-age 40 adult
direct mail market because of unfavorable financial results from that segment.
Direct mail sales to ages 40 to 50 were interrupted for part of the year while
those products were repriced to improve their financial results. The
annualized life premium issued by the Direct Response group represented over
37% of Torchmark's total life sales in 1999. Direct Response annualized life
premium in force rose 9% to $283 million at December 31, 1999 from $260
million a year earlier. At December 31, 1999, Direct Response life annualized
premium in force was second only to that of the Liberty National Exclusive
Agency. Direct Response life insurance annualized premium in force grew 12% in
1998.
In addition to growth in life insurance sales and premium, the Direct
Response operation has promoted growth in some of Torchmark's agent-based
distribution channels through marketing support. This support includes
providing sales leads and assisting in agent recruiting. This assistance has
contributed indirectly to the growth in premium in other Torchmark
distribution agencies. For example, Direct Response marketing support
indirectly contributed to the increase in health sales by the United American
Exclusive Agency through its assistance in the agent recruiting process and by
providing leads to the agents.
The Liberty National Exclusive Agency distribution system represented
Torchmark's largest contribution to life insurance premium income in each of
the three years presented, with 1999 premium of $288 million representing 28%
of total life premium. The annualized life premium in force of the Liberty
Agency was $307 million at year-end 1999, compared with $298 million and $299
million at year-end 1998 and 1997, respectively. Life premium sales, in terms
of annualized premium issued, grew 13% during 1999 to $51 million. This $6
million increase in annualized life premium sales by the Liberty National
Agency was Torchmark's largest in dollar amount, accounting for 47% of the
growth in annualized life premium issued. Life sales in this agency rose 5% in
1998 to $46 million, representing a turnaround in sales growth from a 5%
decline in sales in 1997. The turnaround in sales growth in the Liberty Agency
was largely attributable to growth in the number of agents. Liberty's agents
rose from a count of 1,750 agents at year-end 1997 to 1,829 agents at year-end
1998, an increase of 5%. They further increased 4% to 1,902 at year-end 1999.
Improved agent recruitment efforts and training programs which help improve
agent retention have been responsible for the new agent growth. Additionally,
training programs have been employed to improve the retention of recruited
agents. Agency productivity has also increased in 1999, as average sales per
agent rose 9% over the prior year. Management believes that the continued
recruiting of new agents and the retention of productive agents are critical
to the continued growth of sales in controlled agency distribution systems.
21
The American Income Exclusive Agency is a distribution system that focuses
on members of labor unions, credit unions, and other associations for its life
insurance sales. It is a high margin business characterized by lower policy
obligation ratios. At December 31, 1999, premium from this system accounted
for 21% of Torchmark's total life premium. In 1999, American Income's premium
increased 6% to $217 million, after having risen 7% in 1998 to $204 million.
Annualized life premium in force was $231 million at year-end 1999, an
increase of 7% over 1998 premium in force of $216 million. Annualized life
premium in force rose 6% in 1998 and 8% in 1997. Sales, in terms of annualized
premium issued, were $54 million in 1999, $54 million in 1998, and $55 million
in 1997, declining 3% in 1998 but increasing 1% in 1999. Growth in sales of
this agency is dependent on the growth in the number of agents. An 8% decline
in agent count was experienced in 1998 to 1,222 agents at December 31, 1998,
and a further decline in the first half of 1999 resulted in 1,160 agents at
June 30, 1999. However, changes in American Income's marketing organization
were implemented in 1999 to reverse the decline in the number of agents. As a
result, the American Income agency had 1,197 agents at year-end 1999, an
increase of 3% in agents over June, 1999. Management continues to make changes
to American Income's marketing organization to improve agent recruiting,
retention, and productivity in order to increase the size of this agency.
Another of Torchmark's distribution channels for life insurance is a
nationwide independent agency whose sales force is comprised of former
commissioned and noncommissioned military officers who sell exclusively to
commissioned and noncommissioned military officers and their families. This
business consists of whole life products with term insurance riders and is
characterized by extremely low lapse rates. Life premium income from this
distribution system grew 13% to $105 million in 1999. Premium for this agency
rose 16% to $92 million in 1998. These premium increases represented the
largest percentage growth in life premium of any Torchmark distribution
channel in 1999 or 1998. Annualized life premium in force for the Military
distribution system grew 13% in 1999 to $111 million, after having increased
15% to $99 million in 1998. In both years this distribution system produced
the greatest amount of growth in annualized life premium in force on a
percentage basis. A major factor in this growth of in-force premium relates to
the very high persistency associated with this business. Annualized premium
sold during 1999 by this agency was $17 million, flat with 1998 sales of $17
million. Sales in 1998 gained 7% over sales of $16 million in 1997.
The United Investors Agency is made up of Waddell & Reed sales
representatives, who market the life insurance products of United Investors
Life under a marketing agreement with Waddell & Reed. This agency accounted
for 8% of Torchmark's life premium in 1999. Premium income rose 5% in 1999 to
$84 million, following a 3% increase in 1998 to $80 million. Sales, in terms
of annualized premium issued, were $16 million in 1999, increasing 1% over
1998 sales. However, 1998 sales of $15 million rose 50% over 1997 sales of $10
million. Annualized life premium in force increased 6% to $106 million at
December 31, 1999, representing 9% of Torchmark's total life premium in force.
In addition to the growth in life insurance sales, this agency has also
increased production of variable life collections in 1999 from $18 million in
1998 to $32 million in 1999, an increase of 77%. Variable life collections
rose almost fourfold in 1998. Although variable life collections are not
included in premium in force data, they are indicative of growth in the
variable life account balance. Indirectly, they add to premium revenue through
the policy account charges for insurance coverage and administration as the
account balance grows.
The United American Independent and Exclusive Agencies represented about 6%
of total life premium in 1999. On a combined basis, life premium rose 2% to
$57 million in 1999 after a 1% increase in 1998. Premium for these agencies
increased 12% in 1997 to $55 million. Annualized life premium issued in 1999
was $19 million, increasing 25% over 1998 issues of $15 million.
22
LIFE INSURANCE
Summary of Results
(Dollar amounts in thousands)
1999 1998 1997
------------------- ------------------ ------------------
% of % of % of
Amount Premium Amount Premium Amount Premium
---------- ------- --------- ------- --------- -------
Premium and policy
charges................ $1,018,301 100.0% $ 957,274 100.0% $ 901,187 100.0%
Policy obligations...... 666,122 65.4 618,867 64.7 574,139 63.7
Required reserve
interest............... (229,287) (22.5) (215,185) (22.5) (199,339) (22.1)
---------- ----- --------- ----- --------- -----
Net policy obligations. 436,835 42.9 403,682 42.2 374,800 41.6
Commissions and premium
taxes.................. 56,341 5.5 57,364 6.0 55,019 6.1
Amortization of
acquisition costs...... 170,444 16.7 158,298 16.5 149,358 16.6
Required interest on
deferred acquisition
costs.................. 91,412 9.0 85,374 8.9 80,972 9.0
---------- ----- --------- ----- --------- -----
Total expense.......... 755,032 74.1 704,718 73.6 660,149 73.3
---------- ----- --------- ----- --------- -----
Insurance underwriting
income before other
income and
administrative
expenses, excluding
Family Service and
nonrecurring charge.... 263,269 25.9% 252,556 26.4% 241,038 26.7%
===== ===== =====
Family Service insurance
underwriting income
before other income and
administrative
expenses............... -0- 2,187 5,650
---------- --------- ---------
Nonrecurring charge..... (20,650) -0- -0-
Insurance underwriting
income before other
income and
administrative
expenses............... $ 242,619 $ 254,743 $ 246,688
========== ========= =========
In the third quarter of 1999, Reader's Digest Association and Torchmark
entered into an agreement to market Torchmark life insurance products to
certain Reader's Digest customers. These products were marketed through
Torchmark's Direct Response operation, and required Torchmark to guarantee
specified compensation to Reader's Digest, regardless of marketing success.
Test marketing began in the fourth quarter of 1999. The less than favorable
results from these tests indicated that it would be unlikely that Torchmark
would recover the full amount of compensation guaranteed to Reader's Digest
under the terms of the agreement. As a result, Torchmark recorded a
nonrecurring operating charge of $21 million in the fourth quarter of 1999.
This charge represented $13 million after tax or $.10 per diluted share.
Torchmark intends to maintain its relationship with Reader's Digest and to use
its subscriber lists in selective marketing of Torchmark insurance products.
Because of the nonrecurring charge, Torchmark will only incur its normal
solicitation costs on future business and will have no further costs related
to the guaranteed compensation.
Life insurance gross margins have been presented in the above table to
remove the effect of Family Service underwriting income and the nonrecurring
charge, which distort comparisons. Excluding these items, gross margins, as
indicated by insurance underwriting income before other income and
administrative expense, increased 4% in 1999 to $263 million after having
risen 5% in 1998 to $253 million. As a percentage of life insurance premium,
life insurance gross margins were 26% in both 1999 and 1998, as compared with
27% in 1997. Slight increases in mortality have been experienced in both 1999
and 1998 over the prior year, resulting in increased obligation ratios.
Fluctuations in mortality are normal in the life insurance industry and are
not indicative of a trend.
23
Health Insurance. Torchmark markets its supplemental health insurance
products through a number of distribution channels. The following table
indicates health insurance premium income during each of the three years ended
December 31, 1999 by distribution method.
HEALTH INSURANCE
Premium by Distribution Method
(Dollar amounts in thousands)
1999 1998 1997
--------------- -------------- --------------
% of % of % of
Amount Total Amount Total Amount Total
--------- ----- -------- ----- -------- -----
United American Independent
Agency....................... $ 427,023 51.8% $417,556 54.9% $428,775 58.0%
United American Exclusive
Agency....................... 194,594 23.6 150,602 19.8 132,426 17.9
Liberty National Exclusive
Agency....................... 143,857 17.4 135,861 17.9 125,701 17.0
American Income Exclusive
Agency....................... 47,564 5.8 47,074 6.2 46,116 6.2
Direct Response............... 11,778 1.4 8,817 1.2 6,467 0.9
--------- ----- -------- ----- -------- -----
$ 824,816 100.0% $759,910 100.0% $739,485 100.0%
========= ===== ======== ===== ======== =====
Premium for the health insurance segment increased 9% to $825 million in
1999 over 1998 premium of $760 million. In 1998, health premium rose 3%.
Annualized health premium in force grew 11% to $884 million at December 31,
1999 over the previous year-end balance of $797 million. Health premium in
force rose 5% during 1998. Sales of health insurance, in terms of annualized
premium issued, were $193 million in 1999, increasing 39% over 1998 sales of
$139 million. Sales in 1998 grew 30% over the prior year. Sales of health
insurance have accelerated greatly in the past three years due to increases in
sales of Medicare Supplement policies. Prior to 1997, Torchmark had not
experienced year-over-year sales growth in health insurance for five years.
Health products sold by Torchmark insurance companies include Medicare
Supplement, cancer, 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, 1999, Medicare Supplement
accounted for 71%, cancer 17%, and other health products 11%. The table below
presents Torchmark's health insurance annualized premium in force by major
product category at December 31, 1999 and for the two preceding years.
HEALTH INSURANCE
Annualized Premium in Force by Product
(Dollar amounts in thousands)
At December 31,
-----------------------------------------------
1999 1998 1997
--------------- -------------- --------------
% of % of % of
Amount Total Amount Total Amount Total
--------- ----- -------- ----- -------- -----
Medicare Supplement............ $ 630,915 71.3% $553,737 69.5% $522,054 68.5%
Cancer......................... 153,777 17.4 144,900 18.2 137,640 18.1
Other.......................... 99,666 11.3 98,226 12.3 102,358 13.4
--------- ----- -------- ----- -------- -----
Total........................ $ 884,358 100.0% $796,863 100.0% $762,052 100.0%
========= ===== ======== ===== ======== =====
24
Medicare Supplement insurance is sold primarily by the United American
Exclusive Agency and the United American Independent Agency. Health sales in
both agencies have grown significantly in the past three years. The Exclusive
Agency sold $103 million in annualized health premium in 1999, a 60% increase
over the prior year. Health sales for this agency rose 62% in 1998 to $64
million. This agency accounted for $44 million of the $65 million in health
premium growth in 1999. It also was instrumental in health annualized premium
growth in both 1999 and 1998, accounting for $58 million of the $87 million
growth during 1999 in in-force premium and adding $31 million to annualized
health premium in force in 1998. The United American Exclusive Agency
represented 26% of Torchmark's annualized health premium in force at December
31, 1999, compared with 22% a year earlier. One factor in the growth in
Medicare Supplement sales in the United American Exclusive Agency is the
targeted marketing support provided by the Direct Response operation.
The United American Independent Agency continues to represent the largest
amount of Torchmark's health premium in force. The agency's $444 million of
annualized health premium in force at December 31, 1999, of which $418 million
was Medicare Supplement premium in force, was 50% of Torchmark's total health
premium in force. This agency increased annualized health premium in force
over the previous year for the first time at year-end 1999 since 1992. Health
sales by the United American Independent Agency, in terms of annualized
premium issued, were $68 million in 1999, a 35% increase over 1998. Sales rose
18% to $51 million in 1998.
Medicare Supplement policies are highly regulated at both the federal and
state levels with standardized benefit plans, limits on first year agent
compensation, and mandated minimum loss ratios. However, they remain a popular
supplemental health policy with the country's large and growing group of
Medicare beneficiaries. About 85% of all Medicare beneficiaries have Medicare
Supplements to cover at least some of the deductibles and coinsurance for
which the federal Medicare program does not pay. During the last few years,
Torchmark has focused on developing its United American Exclusive Agency to
serve this market. Using the Direct Response operation, targeted marketing
support and increased agent recruiting have led to increased sales. Because of
loss ratio regulation, underwriting margins on Medicare Supplements are less
than on Torchmark's life business. However, due to United American's low cost,
service-oriented customer service and claims administration, as well as its
economies of scale, it is a profitable line of business.
Until recently the primary competition for Medicare Supplement sales had
come from Medicare health maintenance organizations (HMO's), the managed care
alternative to traditional fee-for-service Medicare which eliminated the need
for a supplemental policy. However, in the last few years, growing public
dissatisfaction with managed care, increased medical cost inflation and
increased Federal Government regulatory pressures on Medicare HMO's have
caused an increasing number of HMO's to withdraw from the market, reducing
that competition. Other regulatory issues continue to affect the Medicare
Supplement market. Medical cost inflation and changes to the Medicare program
cause the need for annual rate increases, which generally require state
insurance department approval. In addition, Congress and the Federal
Administration have begun studying ways to restructure the Medicare program in
the future as it is anticipated that the program could be insolvent within the
next decade. This would occur because of the growth in the number of "baby
boomers" becoming eligible for Medicare during that period and increasing
medical cost inflation generally due to increased utilization. Therefore, it
is likely that changes will be made to the Medicare program at sometime in the
future. However, regardless of proposed changes, it appears that there will
continue to be an important role for private insurers in helping senior
citizens cover their healthcare costs. As a result, Medicare Supplements
should continue as a popular product for senior-age consumers.
25
Cancer insurance premium in force grew 6% in 1999 to $154 million, compared
with 5% growth in 1998. Sales of this product rose 4% in 1999 to $11 million
from $10 million. Sales in 1997 were also $11 million. Growth in cancer
annualized premium in force has been partially attributable to premium rate
increases to offset increased health care costs. Cancer insurance products are
sold primarily by the Liberty National Exclusive Agency. This agency
represented 85% of Torchmark's total cancer annualized premium in force at
December 31, 1999.
Annualized premium in force for other health products gained 1% in 1999 to
$100 million, after declining 4% in 1998. Other health sales rose 13% in 1999
to $30 million, after having declined 15% in 1998.
HEALTH INSURANCE
Summary of Results
(Dollar amounts in thousands)
1999 1998 1997
----------------- ----------------- -----------------
% of % of % of
Amount Premium Amount Premium Amount Premium
-------- ------- -------- ------- -------- -------
Premium.................. $824,816 100.0% $759,910 100.0% $739,485 100.0%
Policy obligations....... 535,901 65.0 482,496 63.5 462,967 62.6
Required reserve inter-
est..................... (17,383) (2.1) (20,440) (2.7) (21,644) (2.9)
-------- ----- -------- ----- -------- -----
Net policy obligations... 518,518 62.9 462,056 60.8 441,323 59.7
Commissions and premium
taxes................... 84,913 10.3 87,828 11.5 87,069 11.8
Amortization of acquisi-
tion costs.............. 64,046 7.8 59,208 7.8 58,473 7.9
Required interest on de-
ferred acquisition
costs................... 12,707 1.5 11,373 1.5 11,080 1.5
-------- ----- -------- ----- -------- -----
Total expense........... 680,184 82.5 620,465 81.6 597,945 80.9
-------- ----- -------- ----- -------- -----
Insurance underwriting
income before other
income and
administrative expenses. $144,632 17.5% $139,445 18.4% $141,540 19.1%
======== ===== ======== ===== ======== =====
Health insurance underwriting income before other income and administrative
expense rose 4% in 1999 to $145 million, after having declined 1% in 1998. As
a percentage of premium, underwriting income before other income and
administrative expense declined 1% in both of the years 1999 and 1998 from the
prior year, respectively. Margins have lagged premium growth because of higher
obligation costs. Medicare Supplement margins are restrained by the federally
mandated minimum loss ratio of 65% and by competition. Cancer obligation
ratios have increased in each year because of healthcare inflationary
pressures. To the extent management is able to obtain timely and adequate
premium rate increases from regulatory authorities to offset these cost
increases, margins may be stabilized on cancer business. Torchmark continues
to seek such rate increases.
26
Annuities. Annuity products are marketed by Torchmark to service a variety
of needs, including retirement income and long-term, tax-deferred growth
opportunities. Torchmark's annuities are sold almost entirely by the United
Investors Agency. This Agency consists of the Waddell & Reed sales force which
markets United Investors annuities and other products under a marketing
agreement. In 1999, this Agency collected $403 million of Torchmark's total
$464 million in annuity collections, or 87%. The United Investors Agency
accounted for almost 99% of total annuity policy charges in 1999. Annuities
are also marketed by the United American Independent Agency, which collected
$56 million in annuity deposits in 1999.
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 a variety of mutual funds managed by Waddell &
Reed, which vary in degree of investment risk and return. A fixed annuity
investment account is also available as a variable annuity investment option.
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."
Annuity premium is added to the annuity account balance 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 fixed annuity policyholders.
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, excluding Family Service.
Annuity Deposit Balances Annuity Collections
-------------------------- --------------------------
(Dollar amounts in (Dollar amounts in
millions) thousands)
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
Fixed..................... $ 677.5 $ 647.3 $ 611.0 $ 71,696 $ 64,687 $ 76,930
Variable.................. 3,274.9 2,343.5 1,821.2 392,769 299,005 247,446
-------- -------- -------- -------- -------- --------
Total.................... $3,952.4 $2,990.8 $2,432.2 $464,465 $363,692 $324,376
======== ======== ======== ======== ======== ========
Collections of fixed annuity premium were $72 million in 1999, compared with
$65 million in 1998, an increase of 11%. Fixed annuity premium collections
declined 16% in 1998 from $77 million in 1997. Management believes that the
interest-rate environment is a primary factor in the sales of fixed annuities.
The low-interest rate environment of 1998 contributed to the lower sales as
alternative investments grew more attractive. In 1999, as interest rates
increased, fixed annuities became more desirable relative to alternative
investments. The fixed annuity deposit balance increased 5% in 1999 to $677
million at year end. It rose 6% in the prior year from $611 million at year-
end 1997 to $647 million at the end of 1998.
During 1998, Torchmark sold Family Service, a wholly-owned provider of
funeral preneed annuities. While the sale of these preneed annuities had been
discontinued in 1995, this block of fixed annuities remained on deposit until
Family was sold. At the date of sale, this deposit balance was approximately
$396 million.
Variable annuity collections were $393 million in 1999, increasing 31% over
the prior year. Variable collections rose 21% to $299 million in 1998. The
strength in financial markets has had a positive influence on sales of
variable annuities in all of the years 1997 through 1999.
The variable annuity account balance continues to experience rapid growth.
The variable account balance rose 40% in 1999 from $2.3 billion at December
31, 1998 to $3.3 billion at year-end 1999. This balance had previously
increased 29% in 1998 and 32% in 1997. Strong financial markets in all of
these periods contributed greatly to the growth. Variable accounts are valued
based on the market values of the underlying securities. The additional
collections in each year also added to the balances.
27
ANNUITIES
Summary of Results
(Dollar amounts in thousands)
1999 1998 1997
-------- -------- --------
Policy charges................................ $ 40,969 $ 33,594 $ 27,426
Policy obligations............................ 34,524 34,662 34,631
Required reserve interest..................... (40,991) (42,171) (41,551)
-------- -------- --------
Net policy obligations...................... (6,467) (7,509) (6,920)
Commissions and premium taxes................. 759 510 710
Amortization of acquisition costs............. 13,310 11,561 9,660
Required interest on deferred acquisition
costs........................................ 6,536 5,609 4,951
-------- -------- --------
Total expense............................... 14,138 10,171 8,401
-------- -------- --------
Insurance underwriting income before other
income
and administrative expenses, excluding Family
Service...................................... 26,831 23,423 19,025
Family Service insurance underwriting income
before
other income and administrative expenses..... -0- 98 305
-------- -------- --------
Insurance underwriting income before other
income
and administrative expenses.................. $ 26,831 $ 23,521 $ 19,330
======== ======== ========
Annuity underwriting income excluding Family Service and before other income
and administrative expense has grown steadily throughout each of the years
1997 through 1999, increasing 15% to $27 million in 1999 and 23% to
$23 million in 1998 over the respective prior year. Policy charges have also
grown in each period, rising 22% in both 1999 and 1998. Growth in policy
charges is primarily related to the growth in the size of the account balance,
but is also attributable to the increase in the number of annuity contracts in
force and the cumulative effect of the growth in sales over the past few years
upon which the sales charge is based.
Investments. The following table summarizes Torchmark's investment income
and excess investment income.
Analysis of Excess Investment Income
(Dollar amounts in thousands)
1999 1998 1997
---------- ---------- ----------
Net investment income.................. $ 447,337 $ 459,558 $ 429,116
Tax equivalency adjustment............. 11,487 11,143 9,951
---------- ---------- ----------
Tax equivalent investment income...... 458,824 470,701 439,067
Required interest on net insurance
policy liabilities:
Interest on reserves.................. (287,661) (296,696) (308,632)
Interest on deferred acquisition
costs................................ 110,655 103,481 100,096
---------- ---------- ----------
Net required........................ (177,006) (193,215) (208,536)
Financing costs........................ (66,431) (71,367) (87,055)
---------- ---------- ----------
Excess investment income............... $ 215,387 $ 206,119 $ 143,476
========== ========== ==========
Mean invested assets (at amortized
cost)................................. $6,319,465 $6,353,279 $6,058,037
Average net insurance policy
liabilities........................... 3,066,351 3,261,982 3,468,702
Average debt (including MIPS).......... 965,728 1,000,063 1,062,543
28
Excess investment income represents the profit margin attributable to
investment operations and cash flow management. It is defined as tax-
equivalent investment income reduced by the interest cost credited to net
policy liabilities and the interest cost associated with capital funding or
"financing costs." Excess investment income is increased in a number of ways:
an increase in investment yields over the rates credited to policyholders'
liabilities or in relationship to the rates applicable to Torchmark debt,
growth in invested assets in relation to policy liabilities and debt, and the
efficient use of capital resources and cash flow.
Net investment income declined 3% in 1999 to $447 million after rising 7% to
$460 million in 1998 and 7% to $429 million in 1997. On a tax-equivalent
basis, in which the yield on tax-exempt securities is adjusted to produce a
yield equivalent to the pretax yield on taxable securities, investment income
declined 3% in 1999 after rising 7% in both 1998 and 1997. The 1999 decline in
investment income was a result of the sale of Family Service in the second
quarter of 1998 and repurchases of Torchmark Stock since late 1998. The Family
Service sale resulted in the investment of approximately $140 million
proceeds, producing an additional $10 million of investment income in 1999,
compared with incremental investment income of $6 million in 1998. However,
the 1998 tax-equivalent net investment income also included $22 million earned
on Family Service assets which were not includable in 1999. The Family Service
sale also negatively impacted 1998 net investment income as 1997 tax-
equivalent net investment income included $54 million on Family Service assets
held for the entire year.
Mean invested assets, computed based on book values, were flat in 1999,
compared with the year 1998. The growth in 1999 invested assets from
reinvested cash flows were essentially offset by the loss of Family Service's
$778 million in invested assets when compared with the prior year. In spite of
the loss of Family Service's invested assets in 1998, mean invested assets
increased 5% during 1998 over the prior year. This increase was largely due to
the receipt of $481 million in proceeds from the Waddell & Reed stock offering
in early 1998, offset to some extent by the sale of investments to repay debt
and to acquire Torchmark stock.
Excess investment income increased 5% in 1999 and 44% in 1998 because the
increases in excess investment income were greater than the growth in net
investment income. While the 1998 sale of Family Service caused a reduction in
1998 and 1999 investment income, it had little effect on excess investment
income comparisons in either 1999 or 1998. The reduction in required interest
on Family Service's policy liabilities offset the loss in investment income.
The 1999 increase in excess investment income resulted primarily from
decreased financing costs. The $63 million increase in 1998 excess investment
income resulted primarily from the proceeds of the Waddell & Reed offering
which provided Torchmark with additional funds to invest or to apply to
outstanding debt. Additionally, there was $7 million of interest income on an
internal financing with Waddell & Reed included in 1998 income. Also in 1998,
Torchmark essentially refinanced $380 million principal amount of its long-
term debt with either short-term debt or with sales of lower-yielding
investments, saving an average of 350 basis points in 1998 financing costs.
During 1999, Torchmark entered into two transactions to dispose of the
majority of its investment real estate. The first transaction closed in July,
1999 and the other closed in October, 1999. Total consideration for the
combined transactions was $123 million of which $111 million was cash. The
real estate dispositions resulted in an after-tax loss of $41 million. After
the sales, Torchmark retained $16 million in investment real estate, of which
$8 million was represented by properties partially occupied by Torchmark
subsidiaries.
In addition to the real estate capital losses, Torchmark has also generated
$19 million in after-tax losses during 1999 from the planned sale of fixed
maturities. These losses allowed Torchmark to carry back and recover capital
gains taxes paid in prior years. Realized losses also included a $12 million
after-tax loss from the decline in market value on the interest-rate swap
associated with Torchmark's MIPS, discussed in more depth under the caption
Capital Resources found on page 33 of this discussion.
With the steady increase in interest rates during 1999, new investments of
corporate bonds afforded higher returns each successive quarter, and the 1999
average yield on fixed maturity purchases was the highest it had been since
1992. Acquisitions in fixed maturity securities totaled $2.1 billion in 1999
and $1.8 billion in 1998. The 1999 acquisitions were made at an effective
compounded yield of 7.54%, compared with an effective compounded yield of
7.26% for the prior year. The yields equate to nominal yields on acquisitions
of 7.38% and 7.13% for 1999 and 1998, respectively.
29
During 1999, the yield curve "flattened" with short-term yields approaching
long-term yields. In fact, the yield curve "inverted" in early 2000, with
short-term yields exceeding long-term yields. This flattening allowed the
purchase of new investments at higher yields with shorter maturities as
compared with 1998. The average life of acquired securities was 14.9 years in
1999, compared with 20.7 years in 1998 and 13.3 years in 1997. In the fourth
quarter of 1999, the average life of acquired securities was 8.8 years.
Although 1999 acquisitions were made at a higher average yield than in the
past six years, the new investment yield was slightly below the average yield
of the portfolio, resulting in a 3 basis point decline in the nominal
portfolio yield at year-end 1999. At December 31, 1999, the fixed-maturity
portfolio had an estimated nominal yield of 7.39%, compared with 7.42% in 1998
and 7.49% in 1997. The average life of the portfolio was 12.7 years at year-
end 1999, increasing from 8.8 years at year-end 1998 and 8.0 years at the
year-end 1997. Duration also rose at 1999 year end to 6.2 years from the 5.7
year level at the end of 1998 and 5.1 year level at the end of 1997. The
increase in average life and duration was impacted primarily by the purchase
of securities with longer maturities than the prior year average maturity.
Emphasis continues to be on marketable, high and medium quality investments.
Approximately 92% of invested assets are fixed-maturity securities, and 94% of
these holdings are rated investment grade by Standard & Poor's. The NAIC
considers 95% of the portfolio investment grade. While the portfolio is highly
marketable, its value fluctuates with changes in interest rates. The
portfolio's unrealized loss of $275 million at year-end 1999 compares with
unrealized gains of $249 million and $213 million at year ends 1998 and 1997,
respectively. A considerable portion of the portfolio is expected to repay or
mature within the next several years, as indicated by the following table.
1999 1998
----- -----
Short terms and under 1 year................................ 4.2% 7.8%
2-5 years................................................... 13.6 23.8
6-10 years.................................................. 39.7 31.8
11-15 years................................................. 11.0 9.0
16-20 years................................................. 5.8 3.8
Over 20 years............................................... 25.7 23.8
----- -----
100.0% 100.0%
===== =====
Because Torchmark emphasizes fixed-maturity investments, the percentage
holdings of Torchmark's investments by type vary considerably from industry
averages. The following table presents Torchmark's components of invested
assets compared with the latest industry data:
Torchmark
--------------------
Amount Industry %
(in thousands) % (1)
-------------- ----- ----------
Bonds & short terms......................... $5,779,982 93.3% 74.5%
Equities.................................... 29,189 .5 5.0
Mortgage loans.............................. 94,599 1.5 11.5
Real estate................................. 16,379 .3 1.5
Policy loans................................ 244,607 4.0 5.6
Other invested assets....................... 23,054 .4 1.9
---------- ----- -----
$6,187,810 100.0% 100.0%
========== ===== =====
- --------
(1) Latest data available from the American Council of Life Insurance.
30
Market Risk Sensitivity. Market risk is a risk that the value of a security
will change because of a change in market conditions. Torchmark's primary
exposure to market risk is interest rate risk which is the risk that a change
in a security's value could occur because of a change in interest rates. This
risk is significant to Torchmark's investment portfolio because its fixed-
income holdings amount to 92% of total investments. The effects of these
interest rate fluctuations on fixed investments are reflected on an after-tax
basis in Torchmark's shareholders' equity because these investments are marked
to market.
The actual interest rate risk to Torchmark is reduced because the effect
that changes in rates have on assets is offset by the effect they have on
insurance liabilities and on debt. Interest assumptions are used to compute
the majority of Torchmark's insurance liabilities. These liabilities, net of
deferred acquisition costs, were $3.4 billion at December 31, 1999, compared
with fixed-income investments of $6.0 billion at amortized cost at the same
date. Because of the long-term nature of insurance liabilities, temporary
changes in value caused by rate fluctuations have little bearing on ultimate
obligations. These liabilities are not marked to market.
Market risk is managed in a manner consistent with Torchmark's investment
objectives. Torchmark seeks to maintain a portfolio of high-quality fixed-
maturity assets that may be sold in response to changing market conditions. A
significant change in the level of interest rates, changes in credit quality
of individual securities, or changes in the relative values of a security or
asset sector are the primary factors that influence such sales. Occasionally,
the need to raise cash for various operating commitments may also necessitate
the sale of a security. Volatility in the value of Torchmark's fixed-income
holdings is reduced by maintaining a relatively short-term portfolio, of which
18% matures within five years and 58% matures within ten years. Also, the
portfolio and market conditions are constantly evaluated for appropriate
action.
No derivative instruments are used to manage Torchmark's exposure to market
risk in the investment portfolio. An interest-rate swap instrument was entered
into to allow Torchmark to participate in the downward trend in interest rates
in connection with its MIPS as discussed in the Notes to the Consolidated
Financial Statements on page 64 of this report and in Capital Resources on
page 33 of this report. A cap instrument was also entered into to protect
Torchmark from the market risk on an increase in rates associated with the
swap on this security. This cap expired during 1999.
The liability for Torchmark's insurance policy obligations is computed using
interest assumptions, some of which are contractually guaranteed. A reduction
in market interest rates of a permanent nature could cause investment return
to fall below amounts guaranteed. Torchmark's insurance companies participate
in the cash flow testing procedures imposed by statutory insurance
regulations, the purpose of which is to insure that such liabilities are
adequate to meet the company's obligations under a variety of interest rate
scenarios. Those procedures indicate that Torchmark's insurance policy
liabilities, when considered in light of the assets held with respect to such
liabilities and the investment income expected to be received on such assets,
are adequate to meet the obligations and expenses of Torchmark's insurance
activities in all but the most extreme circumstances.
The following table illustrates the market risk sensitivity of Torchmark's
interest-rate sensitive fixed-maturity portfolio at December 31, 1999 and
December 31, 1998. This table measures the effect of a change in interest
rates (as represented by the U.S. Treasury curve) on the fair value of
Torchmark's fixed-maturity portfolio. The data is prepared through a model
that measures the change in fair value arising from an immediate and sustained
change in interest rates in increments of 100 basis points. It takes into
account the effect that special option features such as call options, put
options, and unscheduled repayments would have on the portfolio, given the
changes in rates. The valuation of these option features is dependent upon
assumptions about future interest rate volatility that are based on past
performance.
Market Value of
Fixed-Maturity Portfolio
($ millions)
-------------------------
Change
in
Interest
Rates
(in At At
basis December 31, December 31,
points) 1999 1998
-------- ------------ ------------
-200 $6,455 $6,476
-100 6,055 6,108
0 5,680 5,768
100 5,332 5,450
200 5,012 5,147
31
FINANCIAL CONDITION
Liquidity. Torchmark's liquidity relates to its ability to meet on demand
the cash commitments required by its business operations and financial
obligations. Torchmark's liquidity is very strong, as evidenced by its three
sources of liquidity: its positive cash flow from operations, its portfolio of
marketable securities, and its line of credit facility.
Torchmark's insurance operations generate positive cash flows in excess of
its immediate needs. Cash flows provided from operations were $512 million in
1999, compared with $389 million in 1998 and $410 million in 1997. In addition
to operating cash flows, Torchmark received $413 million in investment
maturities and repayments during 1999, adding to available cash flows. Such
repayments were $474 million in 1998 and $513 million in 1997. Cash flows in
excess of immediate requirements are used to build an investment base to fund
future requirements.
Torchmark's cash and short-term investments were $115 million at December
31, 1999, compared with $81 million at year-end 1998. In addition to these
highly liquid assets, Torchmark has a portfolio of marketable fixed and equity
securities, which are available for sale should the need arise. These
securities had a value of $5.7 billion at December 31, 1999.
Torchmark has a line of credit facility with a group of lenders which allows
unsecured borrowings up to a specified maximum amount. The maximum amount on
this facility was $600 million at December 31, 1999. Interest is charged at
variable rates for borrowings. This line of credit is further designated as a
backup credit line for a commercial paper program not to exceed $600 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 $600 million on
the combined facilities. At December 31, 1999, $420 million in face amount of
commercial paper was outstanding and there were no borrowings on the line of
credit. A fee is charged on the entire $600 million facility. In accordance
with the agreements, Torchmark is subject to certain covenants regarding
capitalization and earnings. At December 31, 1999, Torchmark was in full
compliance with these covenants.
Liquidity of the parent company is affected by the ability of the
subsidiaries to pay dividends. Dividends are paid by subsidiaries to the
parent in order to meet its dividend payments on common and preferred stock,
interest and principal repayment requirements on parent-company debt, and
operating expenses of the parent company. These requirements have declined in
both 1999 and 1998 from the respective prior year. Dividends from insurance
subsidiaries of Torchmark are limited to the greater of statutory net gain
from operations, excluding capital gains and losses, on an annual
noncumulative basis, or 10% of surplus, in the absence of special approval.
Distributions are not permitted in excess of statutory net worth. Subsidiaries
are also subject to certain minimum capital requirements. Although these
restrictions exist, dividend availability from subsidiaries has been and is
expected to be more than adequate for parent company operations. During the
year 2000, a maximum amount of $192 million will be available to Torchmark
from insurance subsidiaries without regulatory approval.
Capital Resources. Torchmark's capital structure consists of long and short-
term debt, MIPS, and shareholders' equity. Torchmark's debt consists primarily
of its funded debt and its commercial paper facility. An analysis of
Torchmark's funded debt outstanding at year-ends 1999 and 1998 on the basis of
par value was as follows:
1999 1998
------------- -------------
Principal Principal
Year Amount Amount
Instrument Due Rate ($ thousands) ($ thousands)
---------- ---- ----- ------------- -------------
Senior Debentures..................... 2009 8 1/4 $ 99,450 $ 99,450
Notes................................. 2023 7 7/8 200,000 200,000
Notes................................. 2013 7 3/8 100,000 100,000
-------- --------
Total funded debt..................... 399,450 399,450
Debt held by subsidiaries............. (22,318) (10,828)
-------- --------
Long-term debt........................ $377,132 $388,622
======== ========
32
The carrying value of the funded debt was $372 million at December 31, 1999,
compared with $383 million a year earlier.
Through its insurance subsidiaries, Torchmark has reacquired a portion of
its funded debt in the open market. In 1999, $7.5 million principal amount of
its 7 7/8% Notes due 2023 were acquired at a cost of $7.9 million. Also in
1999, $4.0 million principal amount of its 7 3/8% Notes due 2013 were
purchased for $4.1 million. In 1998, Torchmark bought $10.8 million of its 7
7/8% Notes at a price of $10.6 million. Insurance company holdings in the
funded debt reduce consolidated debt outstanding.
During 1998, Torchmark received approximately $481 million in intercompany
note repayments from Waddell & Reed as a result of their initial public
offering. Torchmark utilized a portion of these funds to pay down funded debt.
It also took advantage of the lower interest rate environment in 1998 to
refinance existing funded debt at lower short-term rates. In early 1998,
Torchmark repaid $20 million principal amount on its 8 5/8% Sinking Fund
Debentures due in 2017, of which $8 million was a mandatory redemption and $12
million was an optional repayment under the terms of the agreement. On April
1, 1998, Torchmark called the remaining $160 million principal balance of this
debt at the prevailing call price of 103.76, or $166 million. A loss on the
redemption of debt was recorded in the second quarter of 1998 in the after-tax
amount of $5 million, representing the difference between the total call price
and the carrying value of $158 million. In addition to the call, Torchmark's 9
5/8% Senior Notes, principal amount $200 million, matured on May 1, 1998.
Torchmark borrowed on its commercial paper facility to repay the Sinking Fund
Debentures that were called and to repay its Senior Notes upon maturity with
accrued interest, in the combined amount of $377 million.
During 1997, Torchmark repaid $20 million principal amount on its Sinking
Fund Debentures due in 2017, of which $8 million was a mandatory redemption
and $12 million was an optional repayment under the terms of the agreement.
The MIPS were issued in November, 1994 at a redemption amount of $200
million with an annual dividend rate of 9.18%. They are subject to a mandatory
redemption in full at September 30, 2024, although Torchmark may elect to
extend the MIPS for up to an additional 20 years if certain conditions are
met. They are currently redeemable at Torchmark's option at any time. While
Torchmark is obligated to pay dividends at a fixed rate of 9.18%, Torchmark
has in place a ten-year interest-rate swap agreement with an unaffiliated
party. The swap agreement calls for Torchmark to pay a variable rate on the
$200 million face amount in exchange for payment of the fixed dividend by the
other party. The swap expires in 2004. Torchmark is at risk on this instrument
for higher financing costs to the extent interest rates rise during the
remaining term. At December 31, 1999, the variable rate was 7.0%. During 1999,
Torchmark's after-tax dividend cost for the MIPS was $9.2 million, compared
with $11.9 million that would have been incurred without the swap. Torchmark's
after-tax cost in 1998 was $9.8 million and in 1997 was $9.9 million, saving
$2.1 million and $2.0 million in each of those years, respectively.
Effective January 1, 1999, Torchmark changed its method of accounting for
the swap agreement to recognize changes in its fair value, net of tax, as
realized investment gains or losses. This method of accounting for such
instruments was believed to be preferable under the guidance established by
Statement of Financial Accounting Standards No. 80, Accounting for Futures
Contracts ("SFAS 80") and the Securities and Exchange Commission. Previously,
Torchmark accounted for the swap using hedge accounting under SFAS 80. The
after-tax cumulative effect of the change at January 1, 1999 was $16.1 million
(net of income taxes of $8.7 million). The effect of the change on the twelve
months ended December 31, 1999 was to increase realized losses by $11.7
million ($.09 per diluted share), excluding the cumulative effect of the
change in accounting principal. Market value of the swap at December 31, 1999
was $6.7 million.
During July, 1999, Torchmark filed with the Securities and Exchange
Commission a Form S-3 Registration Statement for the shelf registration of
capital securities in an aggregate face amount of $300 million. Proceeds from
the issuance of any such capital securities could be used for the possible
purchase of Torchmark securities, for working capital, for the repayment of
debt, for acquisitions, or for any other general corporate purpose or business
opportunity.
33
Short-term debt consists primarily of Torchmark's commercial paper
outstanding. The commercial paper balance outstanding at December 31, 1999 was
$418 million at carrying value, compared with a balance of $355 million a year
earlier. The commercial paper borrowing balance fluctuates based on
Torchmark's current cash needs. As previously noted, Torchmark essentially
refinanced $360 million face amount of funded debt in 1998 with additional
short-term borrowings. These borrowings were offset somewhat by the use of $82
million in Waddell & Reed offering proceeds for repayment.
Total debt as a percentage of total capitalization was 25% at December 31,
1999. In the computation of this ratio, the MIPS are counted as equity and the
effect of fluctuations in security values based on changes in interest rates
in financial markets are excluded. This debt-to-capitalization ratio was 24%
at year-end 1998 and 31% at year-end 1997. The increase in the debt-to-
capitalization ratio at year-end 1999 was caused by the increase in short-term
borrowings. The 1998 decline in this ratio resulted primarily from the funded
debt paydowns, net of the increase in short-term debt. The debt-to-
capitalization ratio was also favorably impacted by the net increase in
Torchmark's shareholders' equity resulting from the Waddell & Reed offering
and spin-off. Torchmark's ratio of earnings before interest, taxes and
discontinued operations to interest requirements was 8.7 in 1999, compared
with 8.9 in 1998 and 6.5 in 1997. Torchmark's interest expense declined 7% to
$52 million in 1999, largely as a result of lower average debt than in 1998.
There was also a larger proportion of short-term debt in 1999 compared with
the prior year, resulting in lower borrowing costs. In 1998, interest expense
declined 22% to $56 million primarily because of the funded debt paydowns.
Torchmark resumed its share buyback program in November, 1998 after
completion of the Waddell & Reed spin-off. Torchmark purchased 6.7 million
shares on the open market at a cost of $222 million in 1999. Purchases of 3.4
million shares were made in late 1998 at a cost of $126 million. During 1997,
Torchmark acquired 5.2 million shares at a cost of $183 million. Torchmark
will continue to make share purchases under its share repurchase program on
the open market when prices are attractive. Share purchases could have a
favorable impact on earnings per share and return on equity, but negatively
affect book value per share.
On November 15, 1999, Torchmark executed a stock option exercise and
restoration program through which 80 Torchmark directors and employees
exercised vested stock options and received a reduced number of replacement
options at the current market price. This program resulted in the issuance of
1.8 million shares, but over 1.3 million of the new shares were immediately
sold by the directors and employees through the open market to cover the cost
of the purchased shares and the related taxes. As a result of the restoration
program, management's ownership interest increased, and Torchmark received a
significant current tax benefit from the exercise of the options.
Shareholders' equity declined 12% to $1.99 billion at December 31, 1999.
Shareholders' equity rose 17% in 1998, from $1.93 billion at year-end 1997 to
$2.26 billion at year-end 1998. The 1999 decrease was impacted by the decrease
in the value of the fixed-maturity portfolio due to increases in interest
rates in the financial markets. The 1998 growth in shareholders' equity was
greatly impacted by the Waddell & Reed offering and spin-off in that year.
Proceeds from the March, 1998 offering added $516 million to Torchmark's
shareholders' equity, but equity was reduced by $90 million of minority
interest at the time of the offering representing the 36% of Waddell & Reed
that Torchmark no longer owned. Additionally, the November, 1998 spin-off
caused a reduction in Torchmark's equity of $174 million, representing its
carrying value of Waddell & Reed at the time of the spin. Book value per share
was $15.10 at 1999 year end, compared with $16.51 at year-end 1998. After
adjusting for the impact on shareholders' equity for security value
fluctuations due to changes in interest rates in financial markets,
shareholders' equity rose from $2.11 billion at year-end 1998 to $2.15 billion
at year-end 1999. Book value per share was $16.32 at year-end 1999, an
increase of 6% over $15.43 at year-end 1998. Return on common shareholders'
equity was 16.2% in 1999, compared with 15.1% in 1998. The return-on-equity
ratios exclude the mark up or down of shareholders' equity for changes in
security values caused by fluctuations in market interest rates. They are also
computed on a basis of net operating income before nonrecurring charge, as
defined on page 16 through 17 of this report.
34
OTHER ITEMS
Transactions Regarding Vesta Insurance Group. Since 1993, Torchmark has held
a passive investment in Vesta, a property insurance carrier. Torchmark held
5.1 million shares of Vesta stock, or approximately 28% of the outstanding
shares of Vesta, until December, 1998. Torchmark carried its investment in
Vesta during this period on the equity method of accounting. In June, 1998,
Vesta announced that (a) an investigation of accounting irregularities that
occurred during the fourth quarter of 1997 and the first quarter of 1998 would
result in an aggregate $14 million net after-tax reduction in previously
reported net income, and, in addition, that (b) it would restate its
historical financial statements for the period of 1993 through the first
quarter of 1998, reflecting reductions in reported net after-tax earnings of
$49 million for the period of 1993 through 1997 and $10 million for the first
quarter of 1998. To reflect its pro rata share of Vesta's cumulative reported
financial corrections, Torchmark recorded a pre-tax charge of $20 million ($13
million after tax) or $.09 per diluted share in the second quarter of 1998. As
a result of the announcements relating to Vesta and the decline in value of
Vesta stock, Vesta is currently subject to numerous class action lawsuits in
state and Federal courts filed subsequent to such announcements.
In the fourth quarter of 1998, Torchmark announced its intention to dispose
of its holdings in Vesta and to sell Vesta shares under satisfactory terms. In
December, 1998, Torchmark sold 680 thousand Vesta shares at a price of $4.75
per share, recording a loss of $3 million after tax. In 1999, Vesta filed a
registration statement with the Securities and Exchange Commission for the
public offering of its shares held by Torchmark. To facilitate the
registration of Vesta shares, Torchmark reacquired the previously sold 680
thousand shares at a price of $5 per share. On November 5, 1999, the
registration statement was filed by Vesta to offer all of Torchmark's holdings
in Vesta.
Because of its intention to dispose of Vesta, Torchmark wrote its carrying
value of Vesta down to net realizable amount effective September 30, 1998. The
adjustment produced an after-tax realized loss of $24 million, or $.17 per
diluted Torchmark share. Net realizable value was $32 million at December 31,
1998. During 1998, Torchmark recorded a pretax loss of $27 million ($18
million after tax or $.13 per diluted share) on Vesta operations, including
its pro rata share of Vesta's cumulative accounting corrections.
During the first quarter of 1999, the two Torchmark directors who occupied
seats on the Vesta Board of Directors resigned from those Vesta seats. Due to
the vacating of the Vesta board seats and the absence of significant influence
regarding Vesta, Torchmark discontinued the equity method of accounting for
Vesta and has included Vesta in equity securities at market value subsequent
to December 31, 1998. Torchmark carried Vesta at a value of $20 million at
December 31, 1999.
Litigation. Torchmark and its subsidiaries continue to be named as parties
to pending or threatened litigation, most of which involves punitive damage
claims based upon allegations of agent misconduct at Liberty National in
Alabama. Such punitive damage claims are tried in Alabama state courts where
any punitive damage litigation may have the potential for significant adverse
results. It is impossible to predict the extent of punitive damages that may
be awarded if liability is found in any given case, since punitive damages in
Alabama are based upon the compensatory damages (including mental anguish)
awarded and the discretion of the jury in awarding compensatory damages is not
precisely defined. It is thus difficult to predict with certainty the
liability of Torchmark or its subsidiaries in any given case because of the
unpredictable nature of this type of litigation. Based upon information
presently available, and in light of legal and other factual defenses
available to Torchmark and its subsidiaries, contingent liabilities arising
from threatened and pending litigation are not presently considered by
management to be material.
35
NEW ACCOUNTING RULES
Accounting for Derivative Instruments and Hedging Activities (FASB Statement
No. 133), as amended by FASB Statement No. 137, is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000, with earlier
application of all of the provisions of this statement encouraged. Early
adoption of selective provisions is prohibited. Prior periods may not be
restated for comparability.
This statement establishes standards for the accounting and reporting of
derivative instruments. It requires that all derivatives be recognized as
assets or liabilities on the balance sheet and be measured at fair value.
Changes in the values of derivatives for the reporting period are reflected as
adjustments to earnings through realized gains and losses. If certain
conditions are met, a derivative may be designated as a hedge against exposure
to market risks of other instruments or commitments, cash flow risks, or
foreign currency risks. If a derivative is classified as a hedge, the
adjustment to earnings is offset by a corresponding change in the value of the
item hedged. Hedging relationships may be designated anew upon adoption of
this statement.
Management believes that Statement 133 will have an immaterial impact on
Torchmark's financial statements. Other than the interest rate swap on its
MIPs, which is carried at fair market value, Torchmark's use of derivatives is
limited.
36
Item 8. Financial Statements and Supplementary Data
Page
----
Independent Auditors' Reports............................................. 38
Consolidated Financial Statements:
Consolidated Balance Sheet at December 31, 1999 and 1998................. 40
Consolidated Statement of Operations for each of the years in the three-
year period ended December 31, 1999..................................... 41
Consolidated Statement of Comprehensive Income for each of the years in
the three-year period ended December 31, 1999........................... 43
Consolidated Statement of Shareholders' Equity for each of the years in
the three-year period ended December 31, 1999........................... 44
Consolidated Statement of Cash Flow for each of the years in the three-
year period ended December 31, 1999..................................... 45
Notes to Consolidated Financial Statements............................... 47
37
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Torchmark Corporation
Birmingham, Alabama
We have audited the accompanying consolidated balance sheet of Torchmark
Corporation and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, comprehensive income, shareholders'
equity, and cash flow for the year then ended. Our audit also included the
financial statement schedules listed in the Index at Item 14 as of and for the
year ended December 31, 1999. These financial statements and financial
statement schedules are the responsibility of Torchmark's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedules based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such 1999 consolidated financial statements present fairly,
in all material respects, the financial position of Torchmark Corporation and
subsidiaries as of December 31, 1999, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles. Also, in our opinion, such 1999 financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Dallas, Texas
January 28, 2000
38
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Torchmark Corporation
Birmingham, Alabama
We have audited the consolidated financial statements of Torchmark
Corporation and subsidiaries as listed in Item 8 as of and for the years ended
December 31, 1998 and December 31, 1997. In connection with our audits of the
consolidated financial statements, we have also audited the financial
statement schedules as listed in Item 14(a) as of and for the years ended
December 31, 1998 and December 31, 1997. These consolidated financial
statements and financial statement schedules are the responsibility of
Torchmark's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial statement schedules are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Torchmark
Corporation and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the two-year
period ended December 31, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
KPMG LLP
Birmingham, Alabama
January 29, 1999 except
for Note 18 which is
as of February 10, 1999
39
TORCHMARK CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands except per share data)
December 31,
------------------------
1999 1998
----------- -----------
Assets:
Investments:
Fixed maturities--available for sale, at fair value
(cost: 1999--$5,954,697; 1998--$5,519,772) ....... $ 5,679,795 $ 5,768,447
Equity securities, at fair value (cost: 1999--
$37,121; 1998--$2,256)............................ 29,189 9,843
Mortgage loans on real estate, at cost (estimated
fair value: 1999--$94,716; 1998--$124,191)........ 94,599 124,072
Investment real estate, at cost (less allowance for
depreciation: 1999--$19,490; 1998--$40,828)....... 16,379 164,644
Policy loans....................................... 244,607 233,765
Other long-term investments........................ 23,054 35,976
Short-term investments............................. 100,187 75,844
----------- -----------
Total investments................................. 6,187,810 6,412,591
Cash ............................................... 14,441 4,920
Investment in unconsolidated subsidiaries........... -0- 31,510
Accrued investment income........................... 112,475 99,279
Other receivables................................... 53,458 130,279
Deferred acquisition costs.......................... 1,741,570 1,502,511
Value of insurance purchased........................ 151,752 170,640
Property and equipment, net of accumulated
depreciation....................................... 38,761 39,080
Goodwill............................................ 402,584 414,658
Other assets........................................ 15,138 18,298
Separate account assets............................. 3,413,675 2,425,262
----------- -----------
Total assets...................................... $12,131,664 $11,249,028
=========== ===========
Liabilities:
Future policy benefits.............................. $ 4,869,241 $ 4,595,567
Unearned and advance premiums....................... 85,344 85,923
Policy claims and other benefits payable............ 215,923 194,965
Other policyholders' funds.......................... 81,919 81,568
----------- -----------
Total policy liabilities.......................... 5,252,427 4,958,023
Accrued income taxes................................ 309,271 511,311
Other liabilities................................... 179,681 162,831
Short-term debt..................................... 418,394 355,392
Long-term debt (estimated fair value: 1999--
$378,046; 1998--$430,431).......................... 371,555 383,422
Separate account liabilities........................ 3,413,675 2,425,262
----------- -----------
Total liabilities................................. 9,945,003 8,796,241
Monthly income preferred securities
(estimated fair value: 1999--$193,040; 1998--
$205,040)........................................... 193,324 193,259
Shareholders' equity:
Preferred stock, par value $1 per share--Authorized
5,000,000 shares; outstanding: -0- in 1999 and in
1998............................................... -0- -0-
Common stock, par value $1 per share--Authorized
320,000,000 shares; outstanding: 147,800,908
issued, less 15,804,640 held in treasury in 1999
and 10,951,933 held in treasury in 1998 ........... 147,801 147,801
Additional paid-in capital.......................... 622,318 610,925
Accumulated other comprehensive income (loss)....... (174,222) 144,501
Retained earnings................................... 1,910,487 1,707,933
Treasury stock...................................... (513,047) (351,632)
----------- -----------
Total shareholders' equity........................ 1,993,337 2,259,528
----------- -----------
Total liabilities and shareholders' equity........ $12,131,664 $11,249,028
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
40
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in thousands except per share data)
Year Ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
Revenue:
Life premium.............................. $1,018,301 $ 959,766 $ 909,992
Health premium............................ 824,816 759,910 739,485
Other premium............................. 40,969 33,954 28,527
---------- ---------- ----------
Total premium........................... 1,884,086 1,753,630 1,678,004
Net investment income..................... 447,337 459,558 429,116
Realized investment losses................ (110,971) (57,637) (36,979)
Other income.............................. 6,443 2,325 962
---------- ---------- ----------
Total revenue........................... 2,226,895 2,157,876 2,071,103
Benefits and expenses:
Life policyholder benefits................ 666,122 625,272 591,867
Health policyholder benefits.............. 535,901 482,496 462,967
Other policyholder benefits............... 34,524 42,508 54,066
---------- ---------- ----------
Total policyholder benefits............. 1,236,547 1,150,276 1,108,900
Amortization of deferred acquisition
costs.................................... 247,800 231,024 224,738
Commissions and premium taxes............. 160,655 143,747 141,296
Other operating expense................... 115,069 117,438 120,233
Amortization of goodwill.................. 12,075 12,075 12,074
Interest expense.......................... 52,341 56,325 71,863
---------- ---------- ----------
Total benefits and expenses............. 1,824,487 1,710,885 1,679,104
Income from continuing operations before
income taxes, equity in earnings of Vesta,
extraordinary item, and cumulative effect
of change in accounting principle......... 402,408 446,991 391,999
Income taxes............................... (134,320) (154,338) (138,409)
Equity in earnings (losses) of Vesta....... -0- (6,866) 16,714
Adjustment to carrying value of Vesta...... -0- (20,234) -0-
Monthly income preferred securities
dividend (net of tax)..................... (9,158) (9,777) (9,875)
---------- ---------- ----------
Net income from continuing operations... 258,930 255,776 260,429
Discontinued operations of Waddell & Reed:
Income from operations (less applicable
income tax expense of $42,932 in 1998 and
$40,081 in 1997)......................... -0- 47,868 77,314
Loss on disposal (less applicable income
tax benefit of $571 in 1999 and including
income tax of $49,840 in 1998)........... (1,060) (54,241) -0-
---------- ---------- ----------
Net income before extraordinary item and
cumulative effect of change in
accounting principle................... 257,870 249,403 337,743
Loss on redemption of debt (less applicable
income tax benefit of $2,672)............. -0- (4,962) -0-
---------- ---------- ----------
Net income before cumulative effect of
change in accounting principle......... 257,870 244,441 337,743
Cumulative effect of change in accounting
principle (less applicable income tax
expense of $8,661)........................ 16,086 -0- -0-
---------- ---------- ----------
Net income.............................. $ 273,956 $ 244,441 $ 337,743
========== ========== ==========
(Continued)
See accompanying Notes to Consolidated Financial Statements.
41
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS--(Continued)
(Amounts in thousands except per share data)
Year Ended
December 31,
-------------------
1999 1998 1997
----- ----- -----
Basic net income per share:
Continuing operations..................................... $1.95 $1.83 $1.87
Discontinued operations of Waddell & Reed:
Net income from operations............................... -0- .34 .56
Loss on disposal......................................... (.01) (.39) -0-
----- ----- -----
Net income before extraordinary item and cumulative effect
of change in accounting principle........................ 1.94 1.78 2.43
Loss on redemption of debt............................... -0- (.03) -0-
----- ----- -----
Net income before cumulative effect of change in
accounting principle..................................... 1.94 1.75 2.43
Cumulative effect of change in accounting principle...... .12 -0- -0-
----- ----- -----
Net income.............................................. $2.06 $1.75 $2.43
===== ===== =====
Diluted net income per share:
Continuing operations..................................... $1.93 $1.81 $1.84
Discontinued operations of Waddell & Reed:
Net income from operations............................... -0- .34 .55
Loss on disposal......................................... (.01) (.38) -0-
----- ----- -----
Net income before extraordinary item and cumulative effect
of change in accounting principle........................ 1.92 1.77 2.39
Loss on redemption of debt............................... -0- (.04) -0-
----- ----- -----
Net income before cumulative effect of change in
accounting principle..................................... 1.92 1.73 2.39
Cumulative effect of change in accounting principle...... .12 -0- -0-
----- ----- -----
Net income.............................................. $2.04 $1.73 $2.39
===== ===== =====
See accompanying Notes to Consolidated Financial Statements.
42
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Amounts in thousands)
Year Ended December 31,
-----------------------------
1999 1998 1997
--------- -------- --------
Net income...................................... $ 273,956 $244,441 $337,743
Other comprehensive income:
Unrealized investment gains (losses):
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period.............................. (568,398) 54,217 125,820
Reclassification adjustment for (gains)
losses on securities included in net
income..................................... 29,930 8,519 29,967
Reclassification adjustment for amortization
of (discount) and premium.................. (1,266) (2,999) (2,751)
Foreign exchange adjustment on securities
marked to market........................... (1,159) 1,958 1,373
--------- -------- --------
Unrealized gains (losses) on securities...... (540,893) 61,695 154,409
Unrealized gains (losses) on other
investments................................. 81 (7,551) (398)
Unrealized gains (losses) on deferred
acquisition costs........................... 48,380 (3,092) (13,324)
--------- -------- --------
Total unrealized investment gains (losses).. (492,432) 51,052 140,687
Applicable tax.............................. 171,760 (17,524) (49,447)
--------- -------- --------
Unrealized investment gains (losses), net of
tax.......................................... (320,672) 33,528 91,240
Foreign exchange translation adjustments,
other than securities........................ 1,949 (2,081) (1,585)
Applicable tax.............................. -0- -0- -0-
--------- -------- --------
Foreign exchange translation adjustments, net
of tax....................................... 1,949 (2,081) (1,585)
Unrealized gains (losses) on discontinued
operations................................... -0- (12,100) 1,062
Applicable tax.............................. -0- 4,235 (372)
--------- -------- --------
Unrealized gains (losses) on discontinued
operations, net of tax....................... -0- (7,865) 690
--------- -------- --------
Other comprehensive income (loss)............... (318,723) 23,582 90,345
--------- -------- --------
Comprehensive income (loss)................. $ (44,767) $268,023 $428,088
========= ======== ========
See accompanying Notes to Consolidated Financial Statements.
43
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Amounts in thousands except per share data)
Accumulated
Additional Other Total
Preferred Common Paid-in Comprehensive Retained Treasury Shareholders'
Stock Stock Capital Income (Loss) Earnings Stock Equity
--------- -------- ---------- ------------- ---------- --------- -------------
Year Ended December 31, 1997
Balance at January 1, 1997..... $ -0- $ 73,784 $141,701 $ 46,581 $1,549,391 $(182,114) $1,629,343
Comprehensive income........... 90,345 337,743 428,088
Common dividends declared
($0.585 a share).............. (81,793) (81,793)
Two-for-one stock split in the
form of a dividend............ 73,784 (73,784) -0-
Acquisition of treasury stock--
common........................ (182,903) (182,903)
Exercise of stock options...... 281 44,011 (36,776) 130,466 137,982
Grant of discounted options.... 372 372
Grant of deferred options...... 1,647 1,647
----- -------- -------- --------- ---------- --------- ----------
Balance at December 31, 1997.. -0- 147,849 187,731 136,926 1,694,781 (234,551) 1,932,736
Year Ended December 31, 1998
Comprehensive income........... 23,582 244,441 268,023
Common dividends declared
($0.58 a share)............... (73,304) (73,304)
Proceeds from Waddell & Reed
initial public offering....... 516,138 516,138
Distribution of Waddell & Reed. (174,113) (174,113)
Minority interest--Waddell
& Reed initial public
offering...................... (90,484) (90,484)
Sale of Family Service......... (16,007) 16,007 -0-
Acquisition of treasury stock--
common........................ (125,875) (125,875)
Grant of deferred stock
options....................... 319 319
Grant of restricted stock...... (4,958) 1,428 3,530 -0-
Conversion of restricted stock
to Waddell & Reed shares...... (48) 48 -0-
Expense of restricted stock
grants and options............ 865 865
Exercise of stock options...... 1,266 (1,307) 5,264 5,223
----- -------- -------- --------- ---------- --------- ----------
Balance at December 31, 1998.. -0- 147,801 610,925 144,501 1,707,933 (351,632) 2,259,528
Year Ended December 31, 1999
Comprehensive loss............. (318,723) 273,956 (44,767)
Common dividends declared
($0.36 a share)............... (47,739) (47,739)
Acquisition of treasury stock--
common........................ (221,878) (221,878)
Grant of deferred stock
options....................... 482 482
Lapse of restricted stock
grant......................... 364 (364) -0-
Expense of restricted stock
grants and options............ 797 797
Exercise of stock options...... 9,750 (23,663) 60,827 46,914
----- -------- -------- --------- ---------- --------- ----------
Balance at December 31, 1999.. $ -0- $147,801 $622,318 $(174,222) $1,910,487 $(513,047) $1,993,337
===== ======== ======== ========= ========== ========= ==========
See accompanying Notes to Consolidated Financial Statements.
44
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW
(Amounts in thousands)
Year ended December 31,
------------------------------
1999 1998 1997
-------- --------- ---------
Net income..................................... $273,956 $ 244,441 $ 337,743
Adjustments to reconcile net income to cash
provided from operations:
Increase in future policy benefits........... 206,724 173,593 147,207
Increase (decrease) in other policy benefits. 20,730 (30,593) 10,096
Deferral of policy acquisition costs......... (419,590) (356,493) (328,086)
Amortization of deferred policy acquisition
costs....................................... 247,800 231,024 224,738
Change in accrued income taxes............... (30,434) 86,670 87,590
Depreciation................................. 8,840 7,934 8,038
Realized (gains) losses on sale of
investments,
subsidiaries, and properties................ 110,971 57,637 36,979
Change in accounts payable and other
liabilities................................. 43,930 3,753 (6,119)
Change in receivables........................ 70,119 (20,331) (14,368)
Change in payables and receivables of
unconsolidated affiliates................... (5,931) 2,021 1,385
Other accruals and adjustments............... 9,245 17,452 (17,825)
Adjustment to carrying value of Vesta........ -0- 20,234 -0-
Minority interest in income of Waddell &
Reed........................................ -0- 20,869 -0-
Discontinued operations of Waddell & Reed.... -0- (68,737) (77,314)
Change in accounting principle............... (24,747) -0- -0-
-------- --------- ---------
Cash provided from operations................ $511,613 $ 389,474 $ 410,064
======== ========= =========
(Continued)
See accompanying Notes to Consolidated Financial Statements.
45
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW--(Continued)
(Amounts in thousands)
Year ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Cash provided from operations........... $ 511,613 $ 389,474 $ 410,064
Cash provided from (used for) investment
activities:
Investments sold or matured:
Fixed maturities available for sale--
sold................................. 1,240,652 757,649 744,839
Fixed maturities available for sale--
matured, called, and repaid.......... 413,264 474,386 512,512
Equity securities..................... 260 3,056 670
Mortgage loans........................ 26,496 8,589 3,300
Real estate........................... 124,173 12,220 7,341
Other long-term investments........... 11,338 51,903 28,082
----------- ----------- -----------
Total investments sold or matured... 1,816,183 1,307,803 1,296,744
Acquisition of investments:
Fixed maturities--available for sale.. (2,118,362) (1,872,040) (1,668,301)
Equity securities..................... (3,400) -0- -0-
Mortgage loans........................ (5,421) (52,921) (17,826)
Real estate........................... (29,639) (35,944) (24,452)
Net increase in policy loans.......... (10,842) (13,445) (14,744)
Other long-term investments........... (10,949) (20,298) (6,082)
----------- ----------- -----------
Total investments acquired.......... (2,178,613) (1,994,648) (1,731,405)
Net (increase) decrease in short-term
investments........................... (24,343) (19,168) (18,067)
Funds borrowed from affiliates......... -0- -0- 42,210
Repayment of loans to affiliates....... -0- (1,390) -0-
Sale of Family Service................. -0- 140,388 -0-
Dispositions of properties............. 8,091 1,033 1,407
Additions to properties................ (8,494) (6,170) (6,204)
Dividends from Waddell & Reed.......... -0- 16,814 52,977
----------- ----------- -----------
Cash used for investment activities..... (387,176) (555,338) (362,338)
Cash provided from (used for) financing
activities:
Issuance of common stock............... 37,164 3,957 93,973
Additions to debt...................... 63,152 216,429 98,185
Cash dividends paid to shareholders.... (48,175) (82,601) (107,097)
Repayments of debt..................... (12,129) (390,917) (20,132)
Acquisition of treasury stock.......... (221,878) (125,875) (182,903)
Proceeds from Waddell & Reed offering.. -0- 516,138 -0-
Offering proceeds retained by Waddell
& Reed................................ -0- (35,251) -0-
Net receipts from deposit product
operations............................ 66,950 57,819 78,817
----------- ----------- -----------
Cash provided from (used for) financing
activities............................. (114,916) 159,699 (39,157)
Increase (decrease) in cash............ 9,521 (6,165) 8,569
Cash at beginning of year.............. 4,920 11,085 2,516
----------- ----------- -----------
Cash at end of year.................... $ 14,441 $ 4,920 $ 11,085
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
46
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars amounts in thousands except per share data)
Note 1--Significant Accounting Policies
Business: Torchmark Corporation ("Torchmark") through its subsidiaries
provides a variety of life and health insurance products and annuities to a
broad base of customers.
Basis of Presentation: The accompanying financial statements have been
prepared in conformity with generally accepted accounting principles ("GAAP").
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Principles of Consolidation: The financial statements include the results of
Torchmark Corporation ("Torchmark") and its wholly-owned subsidiaries.
Subsidiaries which are not majority-owned are reported on the equity method.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Investments: Torchmark classifies all of its fixed maturity investments,
which include bonds and redeemable preferred stocks, as available for sale.
Investments classified as available for sale are carried at fair value with
unrealized gains and losses, net of deferred taxes, reflected directly in
other comprehensive income. Investments in equity securities, which include
common and nonredeemable preferred stocks, are reported at fair value with
unrealized gains and losses, net of deferred taxes, reflected directly in
other comprehensive income. Policy loans are carried at unpaid principal
balances. Mortgage loans are carried at amortized cost. Investments in real
estate are reported at cost less allowances for depreciation, which are
calculated on the straight line method. Short-term investments include
investments in certificates of deposit and other interest-bearing time
deposits with original maturities within three months. If an investment
becomes permanently impaired, such impairment is treated as a realized loss
and the investment is adjusted to net realizable value.
Gains and losses realized on the disposition of investments are recognized
as revenues and are determined on a specific identification basis.
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 all other insurance
policies and products is included in Torchmark's net investment income. Net
investment income for the years ended December 31, 1999, 1998, and 1997,
included $287.6 million, $296.7 million, and $308.6 million, respectively,
which was allocable to policyholder reserves or accounts. Realized investment
gains and losses are not allocable to insurance policyholders' liabilities.
Determination of Fair Values of Financial Instruments: Fair value for cash,
short-term investments, short-term debt, receivables and payables approximates
carrying value. Fair values for investment securities are based on quoted
market prices, where available. Otherwise, fair values are based on quoted
market prices of comparable instruments. Mortgages are valued using discounted
cash flows. Substantially all of Torchmark's long-term debt, including the
monthly income preferred securities, is valued based on quoted market prices.
Cash: Cash consists of balances on hand and on deposit in banks and
financial institutions. Overdrafts arising from the overnight investment of
funds offset cash balances on hand and on deposit.
Recognition of Premium Revenue and Related Expenses: Premiums for insurance
contracts which are not defined as universal life-type according to Statement
of Financial Accounting Standards ("SFAS") No. 97 are recognized as revenue
over the premium-paying period of the policy. Profits for limited-payment life
insurance contracts as defined by SFAS 97 are recognized over the contract
period. Premiums for universal life-type and annuity contracts are added to
the policy account value, and revenues for such products are recognized as
charges to the policy account value for mortality, administration, and
surrenders (retrospective deposit method). Variable annuity products are also
assessed an investment management fee and a sales charge. Life premium
includes policy charges of $71.9 million, $71.7 million, and $72.3 million for
the years ended December 31, 1999, 1998, and 1997,
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1--Significant Accounting Policies (continued)
respectively. Other premium includes annuity policy charges for the years
ended December 31, 1999, 1998 and 1997, of $40.5 million, $33.5 million, and
$28.2 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.
Future Policy Benefits: The liability for future policy benefits for
universal life-type products according to SFAS 97 is represented by policy
account value. The liability for future policy benefits for all other life and
health products is provided on the net level premium method based on estimated
investment yields, mortality, morbidity, persistency and other assumptions
which were appropriate at the time the policies were issued. Assumptions used
are based on Torchmark's experience as adjusted to provide for possible
adverse deviation. These estimates are periodically reviewed and compared with
actual experience. If it is determined future experience will probably differ
significantly from that previously assumed, the estimates are revised.
Deferred Acquisition Costs and Value of Insurance Purchased: The costs of
acquiring new insurance business are deferred. Such costs consist of sales
commissions, underwriting expenses, and certain other selling expenses. The
costs of acquiring new business through the purchase of other companies and
blocks of insurance business are also deferred.
Deferred acquisition costs, including the value of life insurance purchased,
for policies other than universal life-type policies, are amortized with
interest over the estimated premium-paying period of the policies in a manner
which charges each year's operations in proportion to the receipt of premium
income. For limited-payment contracts, acquisition costs are amortized over
the contract period. For universal life-type policies, acquisition costs are
amortized with interest in proportion to estimated gross profits. The
assumptions used as to interest, persistency, morbidity and mortality are
consistent with those used in computing the liability for future policy
benefits and expenses. If it is determined that future experience will
probably differ significantly from that previously assumed, the estimates are
revised. Deferred acquisition costs are adjusted to reflect the amounts
associated with realized and unrealized investment gains and losses pertaining
to universal life-type products.
Income Taxes: Income taxes are accounted for under the asset and liability
method in accordance with SFAS 109. Under the asset and liability method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement book
values and tax bases of assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Property and Equipment: Property and equipment is reported at cost less
allowances for depreciation. Depreciation is recorded primarily on the
straight line method over the estimated useful lives of these assets which
range from two to ten years for equipment and five to forty years for
buildings and improvements. Ordinary maintenance and repairs are charged to
income as incurred.
Impairments: Torchmark accounts for impairments in accordance with the
provisions of SFAS 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. This standard requires that certain
long-lived assets used in Torchmark's business as well as certain intangible
assets, including goodwill, be reviewed for impairment when circumstances
indicate that these assets may not be recoverable, and further provides how
such impairment shall be determined and measured. It also requires that long-
lived assets and intangibles to be disposed of be reported at the lower of
carrying amount or fair value less cost to sell. Except for Torchmark's
writedown of real estate in 1999, as discussed in Note 3--Investments on page
53 of this report, and Torchmark's writedown of its investment in Vesta
Insurance Group ("Vesta") in 1998, as discussed in Note 20--Related Party
Transactions on page 79 of this report, there were no significant impairments
in the three years ending 1999.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1--Significant Accounting Policies (continued)
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 would be written down to the recoverable amount
and amortized over the original remaining period or a reduced period if
appropriate.
Treasury Stock: Torchmark accounts for purchases of treasury stock on the
cost method. Issuance of treasury stock is accounted for using the weighted-
average cost method.
Reclassifications: Certain amounts in the financial statements presented
have been reclassified from amounts previously reported in order to be
comparable between years. These reclassifications have no effect on previously
reported shareholders' equity or net income during the periods involved.
Litigation: Torchmark and its subsidiaries continue to be named as parties
to legal proceedings. Because much of Torchmark's litigation is brought in
Alabama, a jurisdiction known for large punitive damage verdicts bearing
little or no relationship to actual damages, the ultimate outcome of any
particular action cannot be predicted. It is reasonably possible that changes
in the expected outcome of these matters could occur in the near term, but
such changes should not be material to Torchmark's reported results or
financial condition.
Stock Split: On August 1, 1997, Torchmark distributed one share for every
one share owned by shareholders of record as of July 1, 1997 in the form of a
stock dividend. The dividend was accounted for as a stock split.
Earnings Per Share: Torchmark presents basic and diluted earnings per share
("EPS") on the face of the income statement and a reconciliation of basic EPS
to diluted EPS. Basic EPS is computed by dividing income available to common
stockholders by the weighted average common shares outstanding for the period.
Weighted average common shares outstanding for each period are as follows:
1999--133,197,023, 1998--139,998,671, 1997--139,202,354. Diluted EPS is
calculated by adding to shares outstanding the additional net effect of
potentially dilutive securities or contracts which could be exercised or
converted into common shares. Weighted average diluted shares outstanding for
each period are as follows: 1999--133,985,943, 1998--141,351,912, 1997--
141,431,156.
Comprehensive Income: Torchmark adopted SFAS 130, Reporting Comprehensive
Income, effective January 1, 1998. This standard defines comprehensive income
as the change in equity of a business enterprise during a period from
transactions from all nonowner sources. It requires the company to display
comprehensive income for the period, consisting of net income and other
comprehensive income. In compliance with SFAS 130, a Consolidated Statement of
Comprehensive Income is included as an integral part of the financial
statements.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 2--Statutory Accounting
Insurance subsidiaries of Torchmark are required to file statutory financial
statements with state insurance regulatory authorities. Accounting principles
used to prepare these statutory financial statements differ from GAAP.
Consolidated net income and shareholders' equity on a statutory basis for the
insurance subsidiaries were as follows:
Net Income Shareholders' Equity
Year Ended December 31, At December 31,
-------------------------- ---------------------
1999 1998 1997 1999 1998
-------- -------- -------- ---------- ----------
Life insurance subsidiar-
ies...................... $193,253 $260,847 $369,446 $667,168 $640,034
During 1998, Liberty National Life Insurance Company paid an extraordinary
dividend to Torchmark in the amount of $213 million. In 1999, Liberty paid $61
million and Globe Life And Accident Insurance Company paid $34.5 million in
extraordinary dividends.
The excess, if any, of shareholders' equity of the insurance subsidiaries on
a GAAP basis over that determined on a statutory basis is not available for
distribution to Torchmark without regulatory approval.
A reconciliation of Torchmark's insurance subsidiaries' statutory net income
to Torchmark's consolidated GAAP net income is as follows:
Year Ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
Statutory net income.................... $ 193,253 $ 260,847 $ 369,446
Deferral of acquisition costs........... 419,590 356,493 328,086
Amortization of acquisition costs....... (247,800) (231,024) (224,738)
Differences in insurance policy liabili-
ties................................... 80,088 96,412 44,117
Deferred income taxes................... (63,576) (107,384) (47,541)
Income of noninsurance affiliates....... (62,711) (100,758) (142,041)
Other................................... (44,888) (30,145) 10,414
--------- --------- ---------
GAAP net income....................... $ 273,956 $ 244,441 $ 337,743
========= ========= =========
A reconciliation of Torchmark's insurance subsidiaries' statutory
shareholders' equity to Torchmark's consolidated GAAP shareholders' equity is
as follows:
Year Ended
December 31,
----------------------
1999 1998
---------- ----------
Statutory shareholders' equity.................... $ 667,168 $ 640,034
Differences in insurance policy liabilities....... 587,619 585,680
Deferred acquisition costs........................ 1,741,570 1,502,511
Value of insurance purchased...................... 151,752 170,640
Deferred income taxes............................. (367,994) (467,023)
Debt of parent company............................ (789,949) (749,290)
Monthly income preferred securities............... (193,324) (193,259)
Asset valuation reserves.......................... 53,364 68,674
Nonadmitted assets................................ 15,983 84,826
Goodwill.......................................... 402,584 414,658
Market value adjustment on fixed maturities....... (268,598) 200,087
Other............................................. (6,838) 1,990
---------- ----------
GAAP shareholders' equity........................ $1,993,337 $2,259,528
========== ==========
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 3--Investments
Year Ended December 31,
-----------------------------
1999 1998 1997
--------- -------- --------
Investment income is summarized as fol-
lows:
Fixed maturities....................... $ 409,695 $410,528 $396,489
Equity securities...................... 488 301 367
Mortgage loans on real estate.......... 7,720 9,247 7,127
Investment real estate................. 7,889 8,332 3,379
Policy loans........................... 16,308 15,301 14,433
Other long-term investments............ 11,245 19,755 9,279
Short-term investments................. 4,066 6,089 5,762
--------- -------- --------
457,411 469,553 436,836
Less investment expense................ (10,074) (9,995) (7,720)
--------- -------- --------
Net investment income.................. $ 447,337 $459,558 $429,116
========= ======== ========
An analysis of gains (losses) from
investments is as follows:
Realized investment gains (losses):
Fixed maturities...................... $ (30,145) $ (8,519) $(30,122)
Equity securities..................... 215 -0- 155
Other................................. (81,041) (49,118) (7,012)
--------- -------- --------
(110,971) (57,637) (36,979)
Adjustment to deferred acquisition
costs ................................ -0- -0- (198)
--------- -------- --------
(110,971) (57,637) (37,177)
Applicable tax......................... 38,840 20,173 13,012
--------- -------- --------
Gains (losses) from investments, net of
tax................................... $ (72,131) $(37,464) $(24,165)
========= ======== ========
An analysis of the net change in
unrealized investment gains (losses) is
as follows:
Equity securities...................... $ (15,519) $ (1,080) $ 4,061
Fixed maturities available for sale.... (525,374) 66,526 150,494
Other long-term investments and foreign
exchange translation adjustments...... 2,028 (46,018) (1,054)
Adjustment to deferred acquisition
costs................................. 48,382 (3,091) (13,324)
--------- -------- --------
(490,483) 16,337 140,177
Applicable tax......................... 171,760 (8,762) (49,832)
--------- -------- --------
Change in unrealized gains (losses),
net of tax............................ $(318,723) $ 7,575 $ 90,345
========= ======== ========
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 3--Investments (continued)
A summary of fixed maturities available for sale and equity securities by
amortized cost and estimated market value at December 31, 1999 and 1998 is as
follows:
Cost or Gross Gross Amount per % of Total
Amortized Unrealized Unrealized Fair the Balance Fixed
Cost Gains Losses Value Sheet Maturities
---------- ---------- ---------- ---------- ----------- ----------
1999:
- -----
Fixed maturities
available for sale:
Bonds:
U.S. Government direct
obligations and
agencies............. $ 82,550 $ 228 $ (1,885) $ 80,893 $ 80,893 1.4%
GNMAs................. 371,374 13,325 (4,027) 380,672 380,672 6.7
Mortgage-backed
securities, GNMA
collateral........... 20,617 99 (41) 20,675 20,675 0.4
Other mortgage-backed
securities........... 322,092 1,773 (6,320) 317,545 317,545 5.6
State, municipalities
and political
subdivisions......... 557,250 8,947 (4,972) 561,225 561,225 9.9
Foreign governments... 57,495 1,338 (317) 58,516 58,516 1.0
Public utilities...... 613,494 1,421 (31,828) 583,087 583,087 10.3
Industrial and
miscellaneous........ 3,927,294 6,633 (259,339) 3,674,588 3,674,588 64.7
Redeemable preferred
stocks................ 2,531 63 -0- 2,594 2,594 0.0
---------- -------- --------- ---------- ---------- -----
Total fixed
maturities........... 5,954,697 33,827 (308,729) 5,679,795 5,679,795 100.0%
Equity securities:
Common stocks:
Banks and insurance
companies............ 36,879 7,289 (15,042) 29,126 29,126
Industrial and all
others............... 242 -0- (179) 63 63
Non-redeemable
preferred stocks...... -0- -0- -0- -0- -0-
---------- -------- --------- ---------- ----------
Total equity
securities........... 37,121 7,289 (15,221) 29,189 29,189
---------- -------- --------- ---------- ----------
Total fixed maturities
and equity
securities........... $5,991,818 $ 41,116 $(323,950) $5,708,984 $5,708,984
========== ======== ========= ========== ==========
1998:
- -----
Fixed maturities avail-
able for sale:
Bonds:
U.S. Government direct
obligations and
agencies............. $ 145,902 $ 9,527 $ (13) $ 155,416 $ 155,416 2.7%
GNMAs................. 494,859 29,205 (481) 523,583 523,583 9.1
Mortgage-backed
securities, GNMA
collateral........... 60,724 566 (15) 61,275 61,275 1.1
Other mortgage-backed
securities........... 355,419 14,968 (837) 369,550 369,550 6.4
State, municipalities
and political
subdivisions......... 615,125 36,730 (233) 651,622 651,622 11.3
Foreign governments... 50,882 2,744 (296) 53,330 53,330 .9
Public utilities...... 411,624 24,972 (11) 436,585 436,585 7.6
Industrial and
miscellaneous........ 3,382,689 152,510 (20,844) 3,514,355 3,514,355 60.9
Redeemable preferred
stocks................ 2,548 183 -0- 2,731 2,731 -0-
---------- -------- --------- ---------- ---------- -----
Total fixed maturities
..................... 5,519,772 271,405 (22,730) 5,768,447 5,768,447 100%
Equity securities:
Common stocks:
Banks and insurance
companies............ 2,013 7,756 (8) 9,761 9,761
Industrial and all
others............... 243 -0- (161) 82 82
---------- -------- --------- ---------- ----------
Total equity
securities........... 2,256 7,756 (169) 9,843 9,843
---------- -------- --------- ---------- ----------
Total fixed maturities
and equity
securities........... $5,522,028 $279,161 $ (22,899) $5,778,290 $5,778,290
========== ======== ========= ========== ==========
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 3--Investments (continued)
A schedule of fixed maturities by contractual maturity at December 31, 1999
is shown below on an amortized cost basis and on a fair value basis. Actual
maturities could differ from contractual maturities due to call or prepayment
provisions.
Amortized Fair
Cost Value
----------- -----------
Fixed maturities avail-
able for sale:
Due in one year or less. $ 64,588 $ 65,172
Due from one to five
years.................. 618,342 622,551
Due from five to ten
years.................. 1,998,061 1,947,724
Due after ten years..... 2,391,480 2,179,271
----------- -----------
5,072,471 4,814,718
Redeemable preferred
stocks................. 2,530 2,594
Mortgage-backed and
asset-
backed securities...... 879,696 862,483
----------- -----------
$ 5,954,697 $ 5,679,795
=========== ===========
Proceeds from sales of fixed maturities available for sale were $1.24
billion in 1999, $758 million in 1998, and $745 million in 1997. Gross gains
realized on those sales were $4.3 million in 1999, $6.1 million in 1998, and
$1.3 million in 1997. Gross losses were $36.5 million in 1999, $20.1 million
in 1998, and $32.2 million in 1997.
Torchmark had $7.0 million and $24.7 million in investment real estate at
December 31, 1999 and 1998, respectively, which was nonincome producing during
the previous twelve months. These properties included primarily construction
in process and land. Torchmark had $118 thousand in nonincome producing
mortgages as of year end 1999. There were no fixed maturity investments, or
other long-term investments which were nonincome producing at December 31,
1999.
During 1999, Torchmark determined to dispose of most of its investment real
estate. In the second quarter of 1999, efforts to dispose of these properties
revealed that the carrying value of the real estate exceeded its estimated
realizable value. For this reason Torchmark wrote down its investment real
estate portfolio to its estimated realizable value as of June 30, 1999. This
write down resulted in a pretax loss of $64 million, or $41 million after tax.
The majority of the investment real estate was sold in two transactions in the
latter half of 1999 for total consideration of $123 million, of which $111
million was in cash and the remainder in a ten-year collaterized note. After
the sales, Torchmark retained $16 million in investment real estate, of which
$8 million was included with properties partially occupied by Torchmark
subsidiaries.
Note 4--Property and Equipment
A summary of property and equipment used in the business is as follows:
December 31, 1999 December 31, 1998
--------------------- ---------------------
Accumulated Accumulated
Cost Depreciation Cost Depreciation
-------- ------------ -------- ------------
Company occupied real estate........ $ 58,042 $28,440 $ 59,417 $28,697
Data processing equipment........... 20,823 19,185 19,915 18,743
Transportation equipment............ 7,128 2,525 11,157 7,551
Furniture and office equipment...... 17,083 14,165 35,777 32,195
-------- ------- -------- -------
$103,076 $64,315 $126,266 $87,186
======== ======= ======== =======
Depreciation expense on property used in the business was $5.6 million, $4.2
million, and $4.6 million in each of the years 1999, 1998, and 1997,
respectively.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 5--Deferred Acquisition Costs and Value of Insurance Purchased
An analysis of deferred acquisition costs and the value of insurance
purchased is as follows:
1999 1998 1997
---------------------- ---------------------- ----------------------
Deferred Value of Deferred Value of Deferred Value of
Acquisition Insurance Acquisition Insurance Acquisition Insurance
Costs Purchased Costs Purchased Costs Purchased
----------- --------- ----------- --------- ----------- ---------
Balance at beginning of
year................... $1,502,512 $170,640 $1,371,131 $216,988 $1,253,727 $244,368
Additions:
Deferred during peri-
od:
Commissions........... 246,174 -0- 207,864 -0- 199,177 -0-
Other expenses........ 173,416 -0- 148,629 -0- 128,909 -0-
---------- -------- ---------- -------- ---------- --------
Total deferred....... 419,590 -0- 356,493 -0- 328,086 -0-
Adjustment attributable
to unrealized invest-
ment losses(1)........ 48,380 -0- -0- -0- -0- -0-
---------- -------- ---------- -------- ---------- --------
Total additions...... 467,970 -0- 356,493 -0- 328,086 -0-
Deductions:
Amortized during peri-
od................... (228,912) (18,888) (210,287) (20,737) (197,160) (27,380)
Adjustment
attributable to
unrealized investment
gains(1)............. -0- -0- (3,092) -0- (13,324) -0-
Adjustment
attributable to
realized investment
gains(1)............. -0- -0- -0- -0- (198) -0-
Business disposed..... -0- -0- (11,734) (25,611) -0- -0-
---------- -------- ---------- -------- ---------- --------
Total deductions..... (228,912) (18,888) (225,113) (46,348) (210,682) (27,380)
---------- -------- ---------- -------- ---------- --------
Balance at end of year.. $1,741,570 $151,752 $1,502,511 $170,640 $1,371,131 $216,988
========== ======== ========== ======== ========== ========
- --------
(1) Represents amounts pertaining to investments relating to universal life-
type products.
The amount of interest accrued on the unamortized balance of value of
insurance purchased was $10.5 million, $13.2 million, and $16.6 million, for
the years ended December 31, 1999, 1998, and 1997, respectively. The average
interest rates used for the years ended December 31, 1999, 1998, and 1997 were
6.5%, 6.8%, and 7.19%, respectively. The estimated amortization, net of
interest accrued, on the unamortized balance at December 31, 1999 during each
of the next five years is: 2000, $16.7 million; 2001, $14.1 million; 2002,
$12.5 million; 2003, $11.0 million; and 2004, $9.7 million.
In the event of lapses or early withdrawals in excess of those assumed,
deferred acquisition costs and the value of insurance purchased may not be
recoverable.
Note 6--Initial Public Offering and Divestiture of Asset Management Segment
Divestiture of Waddell & Reed. Waddell & Reed, Torchmark's asset management
subsidiary, completed an initial public offering in March, 1998 of
approximately 24 million shares of its common stock. The offering represented
approximately 36% of Waddell & Reed's shares. Net proceeds from the offering
were approximately $516 million after underwriters' fees and expenses. Waddell
& Reed used $481 million of the proceeds to repay existing notes owed to
Torchmark and other Torchmark subsidiaries and retained the remaining $35
million. Torchmark's $481 million proceeds from the note repayments were
invested or used to pay down debt. The initial public offering resulted in a
$426 million gain which was added to Torchmark's additional paid-in capital in
accordance with Staff Accounting Bulletin 51. Torchmark retained the remaining
64% of the Waddell & Reed stock.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 6--Initial Public Offering and Divestiture of Asset Management Segment
(continued)
On November 6, 1998, Torchmark distributed the remaining 64% investment in
Waddell & Reed through a tax-free spin-off to Torchmark shareholders. Each
Torchmark shareholder of record on October 23, 1998 received a total of .3018
Waddell & Reed shares per Torchmark share. After the spin-off, Torchmark
retained no further ownership interest in Waddell & Reed. As a result of the
transaction, Torchmark incurred $54 million in expense related to the spin-
off, the majority of which was $50 million of corporate Federal income tax
resulting from the distribution of a portion of the policyholder surplus
account of a Torchmark life subsidiary.
Torchmark has accounted for the spin-off of Waddell & Reed as a disposal of
a segment. Accordingly, Torchmark's financial statements for 1998 and all
prior periods have been modified to present the net assets and operating
results of Waddell & Reed as discontinued operations of the disposed segment.
The $54 million expense of the spin-off is included in discontinued operations
under the caption "Loss on Disposal." The distribution of the Waddell & Reed
shares resulted in a reduction in Torchmark's shareholders' equity in the
approximate amount of $174 million, consisting of the equity in Waddell & Reed
net of the 36% minority Interest.
Note 7--Sale of Family Service
On June 1, 1998, Torchmark sold Family Service to an unaffiliated insurance
carrier. Family Service, which was acquired in 1990, is a preneed funeral
insurer but has not issued any new policies since 1995. Consideration for the
sale was $140 million in cash. Torchmark recorded a pretax realized loss on
the sale of approximately $14 million, but incurred a tax expense on the
transaction of $9 million. In connection with the sale, Torchmark will
continue to service the policies in force of Family Service for the next five
years for a fee of $2 million per year plus certain variable processing costs.
During 1997, Family Service accounted for $57 million in revenues and $7.7
million in pretax income. Through May, 1998, Family Service contributed $25
million in revenues and $5.8 million in pretax income. Invested assets were
$778 million and total assets were $828 million at the date of the sale.
Note 8--Supplemental Disclosures for Cash Flow Statement
The following table summarizes Torchmark's noncash transactions, which are
not reflected on the Statement of Cash Flow:
Year Ended December 31,
-----------------------
1999 1998 1997
------ -------- -------
Paid-in capital from tax benefit for stock option
exercises........................................ $9,750 $ 933 $39,873
Discounted/deferred option grants................. 482 582 2,020
Distribution of Waddell & Reed stock.............. -0- 174,113 -0-
The following table summarizes certain amounts paid during the period:
Year Ended December 31,
-------------------------
1999 1998 1997
-------- -------- -------
Interest paid..................................... $ 52,704 $ 66,911 $73,537
Income taxes paid................................. 148,223 102,753 31,422
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9--Future Policy Benefit Reserves
A summary of the assumptions used in determining the liability for future
policy benefits at December 31, 1999 is as follows:
Individual Life Insurance
Interest assumptions:
Percent of
Years of Issue Interest Rates Liability
-------------- --------------------- ----------
1917-1999 3.00% 3%
1947-1954 3.25% 1
1927-1989 3.50% 1
1955-1961 3.75% 1
1925-1999 4.00% 11
1962-1969 4.50% graded to 4.00% 2
1970-1980 5.50% graded to 4.00% 3
1970-1999 5.50% 1
1929-1999 6.00% 17
1986-1994 7.00% graded to 6.00% 12
1954-1999 8.00% graded to 6.00% 12
1951-1985 8.50% graded to 6.00% 9
1980-1987 8.50% graded to 7.00% 1
1984-1999 Interest Sensitive 26
---
100%
===
Mortality assumptions:
For individual life, the mortality tables used are various statutory
mortality tables and modifications of:
1950-54 Select and Ultimate Table
1954-58 Industrial Experience Table
1955-60 Ordinary Experience Table
1965-70 Select and Ultimate Table
1955-60 Inter-Company Table
1970 United States Life Table
1975-80 Select and Ultimate Table
X-18 Ultimate Table
Withdrawal assumptions:
Withdrawal assumptions are based on Torchmark's experience.
Individual Health Insurance
Interest assumptions:
Percent of
Years of Issue Interest Rates Liability
-------------- --------------------- ----------
1962-1999 3.00% 2%
1982-1999 4.50% 3
1993-1999 6.00% 23
1986-1992 7.00% graded to 6.00% 47
1955-1999 8.00% graded to 6.00% 18
1951-1986 8.50% graded to 6.00% 7
---
100%
===
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9--Future Policy Benefit Reserves (continued)
Morbidity assumptions:
For individual health, the morbidity assumptions are based on either
Torchmark's experience or the assumptions used in calculating statutory
reserves.
Termination assumptions:
Termination assumptions are based on Torchmark's experience.
Overall Interest Assumptions
The overall average interest assumption for determining the liability for
future life and health insurance benefits in 1999 was 6.1%.
Note 10--Liability for Unpaid Health Claims
Activity in the liability for unpaid health claims is summarized as follows:
Year ended December 31,
---------------------------
1999 1998 1997
-------- -------- --------
Balance at beginning of year:................. $145,802 $178,989 $173,900
Incurred related to:
Current year................................. 555,595 518,993 503,948
Prior year................................... 8,297 (2,670) 15,280
-------- -------- --------
Total incurred................................ 563,892 516,323 519,228
Paid related to:
Current year................................. 364,623 342,084 349,815
Prior year................................... 182,934 207,426 164,324
-------- -------- --------
Total paid.................................... 547,557 549,510 514,139
-------- -------- --------
Balance at end of year........................ $162,137 $145,802 $178,989
======== ======== ========
The liability for unpaid health claims is included with "Policy claims and
other benefits payable" on the Balance Sheet.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 11--Income Taxes
Torchmark and most of its subsidiaries file a life-nonlife consolidated
federal income tax return. American Income files its own consolidated federal
income tax return and will not be eligible to join Torchmark's consolidated
return group until 2000.
Total income taxes were allocated as follows:
Year Ended December 31,
-----------------------------
1999 1998 1997
--------- -------- --------
Income from continuing operations............ $ 134,320 $154,338 $138,409
Discontinued operations...................... (571) 92,772 40,081
Monthly income preferred securities dividend. (4,932) (5,265) (5,318)
Shareholders' equity:
Unrealized gains (losses)................... (171,757) 8,540 49,832
Tax basis compensation expense (from the
exercise of stock options) in excess of
amounts recognized for financial reporting
purposes................................... (9,751) (933) (44,011)
Other........................................ (1,274) (1,964) 1,514
--------- -------- --------
$ (53,965) $247,488 $180,507
========= ======== ========
Income tax expense attributable to income from continuing operations
consists of:
Year ended December 31,
--------------------------
1999 1998 1997
-------- -------- --------
Current income tax expense....................... $ 85,917 $118,827 $ 92,989
Deferred income tax expense...................... 48,403 35,511 45,420
-------- -------- --------
$134,320 $154,338 $138,409
======== ======== ========
In 1999, 1998, and 1997, deferred income tax expense was incurred because of
certain differences between net operating income before income taxes as
reported on the consolidated statement of operations and taxable income as
reported on Torchmark's income tax returns. As explained in Note 1, these
differences caused the financial statement book values of some assets and
liabilities to be different from their respective tax bases.
The effective income tax rate differed from the expected 35% rate as shown
below:
Year ended December 31,
-------------------------------------------
1999 % 1998 % 1997 %
-------- --- -------- --- -------- ---
Expected income taxes............ $140,843 35% $156,447 35% $137,200 35%
Increase (reduction) in income
taxes resulting from:
Tax-exempt investment income.... (8,798) (2) (7,111) (2) (6,165) (2)
Equity in earnings of Vesta..... -0- (9,485) (2) 5,850 1
Sale of Family Service.......... -0- 13,460 3 -0-
Other........................... 2,275 1 1,027 1 1,524 1
-------- --- -------- --- -------- ---
Income taxes..................... $134,320 34% $154,338 35% $138,409 35%
======== === ======== === ======== ===
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 11--Income Taxes (continued)
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
December 31,
-----------------
1999 1998
-------- --------
Deferred tax assets:
Unrealized investment losses................................ $ 89,433 $ -0-
Present value of future policy surrender charges............ 28,534 20,153
Carryover of nonlife net operating losses and life-nonlife
capital losses............................................. 18,044 8,364
Other assets and other liabilities, principally due to the
current nondeductibility of certain accrued expenses for
tax purposes............................................... 42,458 22,241
-------- --------
Total gross deferred tax assets............................. 178,469 50,758
Deferred tax liabilities:
Deferred acquisition costs.................................. 445,266 381,415
Unrealized investment gains................................. -0- 82,324
Future policy benefits, unearned and advance premiums, and
policy claims.............................................. 69,314 46,621
Other....................................................... 12,553 17,060
-------- --------
Total gross deferred tax liabilities........................ 527,133 527,420
-------- --------
Net deferred tax liability................................... $348,664 $476,662
======== ========
Torchmark has not recognized a deferred tax liability for the undistributed
earnings of its wholly-owned subsidiaries because such earnings are remitted
to Torchmark on a tax-free basis. A deferred tax liability will be recognized
in the future if the remittance of such earnings becomes taxable to Torchmark.
In addition, Torchmark has not recognized a deferred tax liability of
approximately $10 million that arose prior to 1984 on temporary differences
related to the policyholders' surplus accounts in the life insurance
subsidiaries. A current tax expense will be recognized in the future if and
when these amounts are distributed.
As more fully discussed in Note 6, Torchmark completed the spin-off of its
asset management segment in 1998, which resulted in a distribution of the
policyholder surplus account of a Torchmark life insurance subsidiary. This
caused a current tax expense of $50 million.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 12--Postretirement Benefits
Pension Plans: Torchmark has noncontributory retirement benefit plans and
contributory savings plans which cover substantially all employees. There is
also a nonqualified noncontributory excess benefit pension plan which covers
certain employees. The total cost of these retirement plans charged to
operations was as follows:
Defined Excess
Defined Benefit Benefit
Year Ended Contribution Pension Pension
December 31, Plans Plans Plan
------------ ------------ ------- -------
1999.................... $2,775 $2,889 $480
1998.................... 1,530 2,875 399
1997.................... 2,123 3,244 526
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. Plan contributions are both mandatory and discretionary,
depending on the terms of the plan.
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 $7.5 million
and $7.2 million at December 31, 1999 and 1998, 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 $4.7
million at both December 31, 1999 and 1998.
Net periodic pension cost for the defined benefit plans by expense component
was as follows:
Year Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
Service cost--benefits earned during the
period................................... $ 5,133 $ 4,555 $ 4,732
Interest cost on projected benefit obliga-
tion..................................... 8,260 7,595 7,389
Actual return on assets................... (20,381) (21,572) (17,014)
Net amortization and deferral............. 10,357 12,696 8,663
-------- -------- --------
Net periodic pension cost................ $ 3,369 $ 3,274 $ 3,770
======== ======== ========
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 12--Postretirement Benefits (continued)
Torchmark adopted FASB Statement No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits, effective for year-end 1998 with
comparative periods restated. In accordance with this Standard, the following
table presents a reconciliation from the beginning to the end of the year of
the benefit obligation and plan assets. This table also presents a
reconciliation of the plans' funded status with the amounts recognized on
Torchmark's balance sheet.
Pension Benefits
For the year
ended
December 31,
------------------
1999 1998
-------- --------
Changes in benefit obligation:
Obligation at beginning of year..................... $109,720 $ 98,078
Service cost........................................ 5,133 4,555
Interest cost....................................... 8,260 7,595
Amendments.......................................... 74 -0-
Actuarial loss (gain)............................... (5,430) 7,823
Benefits paid....................................... (13,176) (8,331)
-------- --------
Obligation at end of year........................... 104,581 109,720
Changes in plan assets:
Fair value at beginning of year..................... 123,289 108,942
Return on assets.................................... 20,381 21,572
Contributions....................................... 2,285 1,106
Benefits paid....................................... (13,176) (8,331)
-------- --------
Fair value at end of year........................... 132,779 123,289
-------- --------
Funded status at year end........................... 28,198 13,569
Unrecognized amounts at year end:
Unrecognized actuarial loss (gain).................. (40,764) (25,016)
Unrecognized prior service cost..................... 865 851
Unrecognized transition obligation.................. (115) (356)
-------- --------
Net amount recognized at year end................... $(11,816) $(10,952)
======== ========
Amounts recognized consist of:
Prepaid benefit cost................................ $ 243 $ 212
Accrued benefit liability........................... (12,418) (12,083)
Intangible asset.................................... 359 919
-------- --------
Net amount recognized at year end................... $(11,816) $(10,952)
======== ========
The weighted average assumed discount rates used in determining the
actuarial benefit obligations were 7.5% in 1999 and 7.0% in 1998. The rate of
assumed compensation increase was 4.5% in 1999 and 4.0% in 1998 while the
expected long-term rate of return on plan assets was 9.2% in both 1999 and
1998.
Postretirement Benefit Plans Other Than Pensions: Torchmark provides
postretirement life insurance benefits for most retired employees, and also
provides additional postretirement life insurance benefits for certain key
employees. The majority of the life insurance benefits are accrued over the
working lives of active employees.
For retired employees over age sixty-five, Torchmark does not provide
postretirement benefits other than pensions. Torchmark does provide a portion
of the cost for health insurance benefits for employees who retired before
February 1, 1993 and before age sixty-five, covering them until they reach age
sixty-five. Eligibility for this benefit was generally achieved at age fifty-
five with at least fifteen years of service. This subsidy is minimal to
retired employees who did not retire before February 1, 1993. This plan is
unfunded.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 12--Postretirement Benefits (continued)
The components of net periodic postretirement benefit cost for plans other
than pensions are as follows:
Year Ended
December 31,
-------------------
1999 1998 1997
----- ----- -----
Service cost....................................... $ 239 $ 249 $ 248
Interest cost on accumulated postretirement benefit
obligation........................................ 380 493 490
Actual return on plan assets....................... -0- -0- -0-
Net amortization and deferral...................... (450) (281) (377)
----- ----- -----
Net periodic postretirement benefit cost........... $ 169 $ 461 $ 361
===== ===== =====
The following table presents a reconciliation of the benefit obligation and
plan assets from the beginning to the end of the year and a reconciliation of
the funded status to the accrued benefit liability:
Benefits Other Than Pensions
For the year ended December 31,
1999 1998
--------------- ---------------
Changes in benefit obligation:
Obligation at beginning of year....... $ 6,849 $ 6,431
Service cost.......................... 239 249
Interest cost......................... 380 493
Amendments............................ -0- (149)
Actuarial loss (gain)................. (1,324) 435
Benefits paid......................... (529) (610)
--------------- ---------------
Obligation at end of year............. 5,615 6,849
Changes in plan assets:
Fair value at beginning of year....... -0- -0-
Return on assets...................... -0- -0-
Contributions......................... 529 610
Benefits paid......................... (529) (610)
--------------- ---------------
Fair value at end of year............. -0- -0-
--------------- ---------------
Funded status at year end............ (5,615) (6,849)
Unrecognized amounts at year end:
Unrecognized actuarial loss (gain).... (2,349) (1,259)
Unrecognized prior service cost....... (290) (506)
--------------- ---------------
Net amount recognized at year end as
accrued benefit liability........... $ (8,254) $ (8,614)
=============== ===============
For measurement purposes, an 8.0% annual rate of increase in per capita cost
of covered healthcare benefits was assumed for 1999. These rates grade to
ranges of 4.5% to 5.5% by the year 2010. The health care cost trend rate
assumption has a significant effect on the amounts reported, as illustrated in
the following table which presents the effect of a one percentage point
increase and decrease on the service and interest cost components and the
benefit obligation:
Change in Trend Rate
-----------------------
1% 1%
Effect on: Increase Decrease
---------- ---------- ----------
Service and interest cost components............... $ 62 $ 54
Benefit obligation................................. 431 386
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.15% in 1999 and 7.38% in 1998.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13--Debt
An analysis of debt at carrying value is as follows:
December 31,
-----------------------------------------
1999 1998
-------------------- --------------------
Short-term Long-term Short-term Long-term
Debt Debt Debt Debt
---------- --------- ---------- ---------
Senior Debentures, due 2009........ $ 99,450 $ 99,450
Notes, due 2023.................... 177,540 185,394
Notes, due 2013.................... 94,565 98,578
Commercial paper................... $418,394 $355,242
Other notes and mortgages payable
at various interest rates;
collateralized by buildings ...... 150
-------- -------- -------- --------
$418,394 $371,555 $355,392 $383,422
======== ======== ======== ========
The amount of debt that becomes due during each of the next five years is:
2000, $418,394, and 2001-2004, $0.
The Senior Debentures, remaining principal amount of $99 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 are not
redeemable at the option of Torchmark prior to maturity and 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%. In 1998 and 1999, $10.8 million and $7.5 million principal amount
were purchased in the open market at a cost of $10.6 million and $7.9 million
respectively. These notes are not redeemable prior to maturity and have equal
priority with other Torchmark unsecured indebtedness.
The Notes, due August 1, 2013, were issued in July, 1993 in the principal
amount of $100 million for net proceeds of $98 million. Interest is payable on
February 1 and August 1 of each year at a rate of 7 3/8%. In March, 1999, $4.0
million principal amount were purchased in the open market at a cost of
$4.1 million. These notes are not redeemable prior to maturity and have equal
priority with other Torchmark unsecured indebtedness.
Torchmark has entered into a revolving credit agreement with a group of
lenders under which it may borrow on an unsecured basis up to $600 million.
The commitment matures October 22, 2002. Borrowings are at interest rates
selected by Torchmark based on either the corporate base rate or the
Eurodollar rate at the time of borrowing. At December 31, 1999 and December
31, 1998 there were no borrowings under the revolving credit agreement. The
revolving credit agreement is also designed to back up a commercial paper
program. The short-term borrowings under the revolving credit agreements and
in the commercial paper market averaged $411 million during 1999, and were
made at an average yield of 5.43%. At December 31, 1999, commercial paper was
outstanding in the face amount of $420 million. Torchmark is subject to
certain covenants for the revolving credit agreements regarding capitalization
and earnings, for which it was in compliance at December 31, 1999, and pays a
facility fee based on size of the line. Including fees, the average borrowing
cost during 1999 was 5.61%.
In the first quarter of 1998, Torchmark repaid $20 million principal amount
of its 8 5/8% Sinking Fund Debentures due March 1, 2017, through a sinking
fund payment of which $8 million was mandatory and $12 million was elective
under the terms of the issue. An identical payment was made in the third
quarter of 1997. The remaining $160 million principal amount was called on
April 1, 1998, at a prevailing call price of 103.76, or $166 million. An
after-tax loss on the redemption of debt of $5 million was recorded in the
second quarter of 1998. These payments were made from additional commercial
paper borrowings.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13--Debt (continued)
The 9 5/8% Senior Notes Torchmark previously had outstanding matured on May
1, 1998. The principal amount of $200 million with accrued interest was repaid
from additional commercial paper borrowings.
Interest in the amount of $284 thousand, $2.4 million, and $1.7 million was
capitalized during 1999, 1998, and 1997, respectively.
Note 14--Monthly Income Preferred Securities
In October, 1994, Torchmark, through its wholly-owned finance subsidiary,
Torchmark Capital L.L.C., completed a public offering of eight million shares
of 9.18% MIPS at a face amount of $200 million. The securities are subject to
a mandatory redemption in full at September 30, 2024, although Torchmark may
elect to extend the MIPS for up to an additional 20 years if certain
conditions are met. They have been redeemable at Torchmark's option since
September 30, 1999. Torchmark subsequently entered into a ten-year swap
agreement with an unaffiliated party whereby Torchmark agreed to pay a
variable rate on the $200 million face amount in exchange for payment of the
fixed dividend. In a related transaction, Torchmark purchased a five-year cap
on the swap agreement that expired on September 30, 1999. The interest rate
was 7.00% at December 31, 1999 and 6.44% at December 31, 1998. The market
value of the swap agreement was a benefit of $6.7 million at December 31, 1999
and $24.7 million at December 31, 1998. Torchmark changed its method of
accounting for this swap agreement during 1999. Refer to Note 15--Change in
Accounting Principle below for more information on this change in accounting
principle.
Note 15--Change in Accounting Principle
Torchmark has in place a swap agreement with an unaffiliated party whereby
Torchmark pays a variable dividend rate on its $200 million face amount
outstanding MIPS in exchange for payment of a 9.18% fixed dividend. Effective
January 1, 1999, Torchmark changed its method of accounting for this swap
agreement to recognize changes in its fair value, net of tax, as realized
investment gains or losses. This method of accounting for such instruments is
believed to be preferable under the guidance established by Statement of
Financial Accounting Standards No. 80, "Accounting for Futures Contracts
("SFAS 80") and the Securities and Exchange Commission. Previously, Torchmark
accounted for the swap using hedge accounting under SFAS 80. The after-tax
cumulative effect of the change at January 1, 1999 of $16.1 million (net of
income taxes of $8.7 million) is included in income for the twelve months
ended December 31, 1999. The effect of the change on the twelve months ended
December 31, 1999 was to increase realized losses by $11.7 million ($.09 per
diluted share) excluding the cumulative effect of the change in accounting
principle. The pro forma effect of the retroactive application of the new
accounting method to the twelve month period ended December 31, 1998 would be
to increase net income by $4.4 million ($.03 per diluted share).
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 16--Shareholders' Equity
Share Data: A summary of preferred and common share activity which has been
restated to give effect for the two-for-one stock split in the form of a
dividend is as follows:
Preferred Stock Common Stock
--------------- ------------------------
Treasury Treasury
Issued Stock Issued Stock
------ -------- ----------- -----------
1997:
Balance at January 1, 1997.......... -0- -0- 147,568,456 (8,176,506)
Issuance of common stock due to
exercise of stock options.......... 280,452 5,539,596
Other treasury stock acquired....... (5,171,558)
--- --- ----------- -----------
Balance at December 31, 1997........ -0- -0- 147,848,908 (7,808,468)
1998:
Issuance of common stock due to
exercise of stock options.......... 175,240
Issuance of common stock due to
restricted stock grant............. 117,500
Other treasury stock acquired....... (3,436,205)
Restricted shares converted to
Waddell & Reed shares.............. (48,000)
--- --- ----------- -----------
Balance at December 31, 1998........ -0- -0- 147,800,908 (10,951,933)
1999:
Issuance of common stock due to
exercise of stock options.......... 1,898,524
Other treasury stock acquired....... (6,742,606)
Lapse of unvested stock grant....... (8,625)
--- --- ----------- -----------
Balance at December 31, 1999........ -0- -0- 147,800,908 (15,804,640)
=== === =========== ===========
At December 31, 1999 At December 31, 1998
--------------------- ---------------------
Preferred Common Preferred Common
Stock Stock Stock Stock
--------- ----------- --------- -----------
Par value per share................ $1.00 $1.00 $1.00 $1.00
Authorized shares.................. 5,000,000 320,000,000 5,000,000 320,000,000
Acquisition of Common Shares: Torchmark shares are acquired from time to
time through open market purchases under the Torchmark stock repurchase
program when it is believed to be the best use of Torchmark's funds and for
future employee stock option exercises. Share repurchases under this program
were 6.7 million shares at a cost of $222 million in 1999, 3.4 million shares
at a cost of $126 million in 1998, and 5.2 million shares at a cost of
$183 million in 1997.
Grant of Restricted Stock: On January 1, 1998, 117,500 shares were granted
to four executive officers of Torchmark or its subsidiaries. These shares vest
over eight years in accordance with the following schedule: 16% on the first
anniversary, with the vesting percentage declining one percent each year
thereafter until the eighth anniversary. The market value of Torchmark stock
was $42.1875 per share on the grant date. In the fourth quarter of 1999, 8,625
restricted shares lapsed under the terms of the grant and were returned to the
company.
Restrictions: Restrictions exist on the flow of funds to Torchmark from its
insurance subsidiaries. Statutory regulations require life insurance
subsidiaries to maintain certain minimum amounts of capital and surplus. These
restrictions generally limit the payment of dividends by insurance
subsidiaries to statutory net gain from operations before realized capital
gains or losses on an annual noncumulative basis in the absence of special
approval. Additionally, insurance companies are not permitted to distribute
the excess of shareholders' equity as determined on a GAAP basis over that
determined on a statutory basis. In 2000, 192 million will be available to
Torchmark for dividends from insurance subsidiaries in compliance with
statutory regulations without prior regulatory approval.
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 16--Shareholders' Equity (continued)
Earnings Per Share: A reconciliation of basic and diluted weighted-average
shares outstanding is as follows:
1999 1998 1997
----------- ----------- -----------
Basic weighted average shares outstanding.. 133,197,023 139,998,671 139,202,354
Weighted average dilutive options
outstanding............................... 788,920 1,353,241 2,228,802
----------- ----------- -----------
Diluted weighted average shares
outstanding............................... 133,985,943 141,351,912 141,431,156
=========== =========== ===========
Options outstanding considered to be anti-dilutive totaled 5,013,990, 0, and
0 as of December 31, 1999, 1998 and 1997, respectively, and are excluded from
the calculation of diluted earnings per share. Income available to common
shareholders for basic earnings per share is equivalent to income available to
common shareholders for diluted earnings per share.
Note 17--Employee Stock Options
Certain employees, directors, and consultants have been granted options to
buy shares of Torchmark stock generally at the market value of the stock on
the date of grant under the provisions of the various Torchmark stock option
plans. The options are exercisable during the period commencing from the date
they vest until expiring ten years and two days or eleven years after grant.
Employee and consultant stock options generally vest one-half in two years and
one-half in three years. Formula-based director grants generally vest in six
months. Grants in September, 1997 and November, 1999 vested immediately. Stock
options awarded in connection with compensation deferrals by certain directors
and executives vest over ten years. Torchmark generally issues shares for the
exercise of stock options out of treasury stock.
An analysis of shares available for grant in terms of shares adjusted for
the stock dividend is as follows:
Available for Grant
----------------------------------
1999 1998 1997
---------- ---------- ----------
Balance at January 1.................... 13,192,506 2,434,004 1,345,080
Amendment of 1987 Plan.................. 4,800,000
1998 Stock Incentive Plan............... 14,000,000
Approval of Executive Deferred and
Director Plan grants................... (216,481) (633,672)
Grant of restricted stock(1)............ (117,500)
Lapse of restricted stock grants(1)..... 8,625
Expired................................. 70,760 13,700 32,896
Closure of option plans(2).............. (2,113,723)
Other grants............................ (2,402,671) (807,494) (3,110,300)
---------- ---------- ----------
Balance at December 31.................. 10,869,220 13,192,506 2,434,004
========== ========== ==========
- --------
(1) This stock grant was made from the 1987 Stock Incentive Plan. The
retirement of an employee during 1999 resulted in the lapse of unvested
grants.
(2) The 1987 Stock Incentive Plan, the 1998 Directors' Stock Option Plan, and
the 1998 Executive Deferred Compensation Stock Option Plan were closed in
1998.
Torchmark accounts for its employee stock options in accordance with SFAS
123 Accounting for Stock-Based Compensation, which defines a "fair value
method" of measuring and 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.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 17--Employee Stock Options (continued)
Torchmark has elected to account for its stock options under the intrinsic
value method as outlined in APB 25. The fair value method requires the use of
an option valuation model, such as 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 fair value for Torchmark's employee stock options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted average assumptions for 1999, 1998, and 1997:
1999 1998 1997
-------- -------- --------
Risk-free interest rate........................... 6.0% 4.8% 6.1%
Dividend yield.................................... 1.2% 1.1% 1.7%
Volatility factor................................. 25.6 22.8 23.7
Weighted average expected life (in years)......... 4.66 4.71 3.93
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Torchmark's
pro forma information follows (in thousands except for earnings per share
information):
1999 1998 1997
-------- -------- --------
Pro forma net income............................. $262,433 $245,383 $318,671
Pro forma basic net income per share............. 1.97 1.75 2.29
Pro forma diluted net income per share........... 1.96 1.74 2.25
On September 25, 1997, Torchmark executed a stock option exercise and
restoration program through which over 100 Torchmark directors and employees
exercised vested stock options and received a reduced number of replacement
options at current market price. This program resulted in the issuance of 4.8
million shares, of which over 3 million shares were immediately sold by the
directors and employees through the open market to cover the cost of the
purchased shares and related taxes. Another restoration program was effected
on November 15, 1999. The 1999 program involved 80 directors and employees who
exercised vested options for 1.8 million shares, resulting in the net issuance
to employees of 523 thousand shares and 1.2 million replacement options for
the shares sold by the employee to pay the exercise price and minimum
withholding taxes. As a result of these restoration programs, management's
ownership interest increased, and Torchmark received a significant current tax
benefit from the exercise of the options.
On November 6, 1998, in connection with its spin-off of Waddell & Reed,
Torchmark adjusted the number and exercise price of its employee stock options
so that the options' value after the spin would be equivalent to its value
before the spin. Additionally, every eligible optionee was given the
opportunity to elect to convert a portion of their Torchmark options into
equivalent Waddell & Reed options in accordance with the same spin ratio that
was applicable to all Torchmark shareholders. Also, employees of Waddell &
Reed and directors were allowed to convert all of their Torchmark options into
equivalent Waddell & Reed options. In every case, the employee or director
maintained the same value after the spin-off as was held prior to the
transaction.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 17--Employee Stock Options (continued)
As a result of the adjustment and conversion of these options, 7.2 million
outstanding Torchmark options with an aggregate exercise price of $219 million
on November 6, 1998 were replaced with 6.4 million adjusted Torchmark options
with an aggregate exercise price of $167 million. Also 3.7 million Waddell &
Reed options were granted with an aggregate exercise price of $51.6 million.
A summary of Torchmark's stock option activity and related information for
the years ended December 31, 1999, 1998, and 1997 follows:
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
Weighted Average Weighted Average Weighted Average
Options Exercise Price Options Exercise Price Options Exercise Price
---------- ---------------- ---------- ---------------- ---------- ----------------
Outstanding-beginning
of year................ 7,228,400 $27.04 7,241,050 $29.76 9,350,022 $18.52
Granted................. 2,402,671 31.36 1,023,975 34.97 3,743,972 36.70
Exercised............... (1,898,524) 19.80 (175,240) 22.58 (5,820,048) 16.17
Expired................. (70,760) 32.98 (13,700) 29.19 (32,896) 29.81
Reduction due to Waddell
& Reed spinoff......... (7,249,129) 30.20
Addition due to Waddell
& Reed spinoff......... 6,401,444 26.16
---------- ---------- ----------
Outstanding-end of year. 7,661,787 30.14 7,228,400 27.04 7,241,050 29.76
========== ========== ==========
Exercisable at end of
year................... 4,243,254 29.37 5,038,081 26.24 4,189,238 32.82
The weighted average fair value of options granted during the years ended
December 31, 1999, 1998, and 1997 were $9.29, $8.88, and $8.43, respectively.
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 17--Employee Stock Options (continued)
The following table summarizes information about stock options outstanding at
December 31, 1999:
Contract
Exercise Number Number Termination
Price Grant Date Outstanding Exercisable Date
-------- ---------- ----------- ----------- -----------
4.86419 October 1, 1993 6,416 6,416 October 3, 2003
5.63977 October 1, 1993 5,016 5,016 October 3, 2003
13.91029 January 2, 1991 21,029 21,029 January 4, 2001
14.17778 January 25, 1990 21,029 21,029 January 27, 2000
14.55172-14.58579 December 16, 1994 65,969 65,969 December 18, 2004
14.55222 December 7, 1992 1,694 1,694 December 9, 2002
14.55659-14.57130 December 14, 1993 6,337 6,337 December 16, 2003
14.57232-14.57573 October 1, 1993 6,552 6,552 October 3, 2003
14.7127 December 12, 1991 13,802 13,802 December 14, 2001
14.92781 January 3, 1995 7,010 7,010 January 5, 2005
15.94885* December 18, 1996 48,000 6,000 December 18, 2007
16.42468 January 2, 1992 21,029 21,029 January 4, 2002
18.56413-18.5922 December 20, 1995 394,519 394,519 December 22, 2005
18.61765-18.618 December 14, 1993 56,427 56,427 December 16, 2003
19.26091 January 2, 1996 7,010 7,010 January 4, 2006
19.26091-19.276 January 3, 1994 13,010 13,010 January 5, 2004
21.29257-21.30859 December 16, 1996 528,913 528,913 December 18, 2006
21.50657-21.52056 January 2, 1997 79,956 7,010 January 4, 2007
22.14864-22.16198 January 31, 1997 140,927 19,444 January 31, 2008
22.25559-22.25570 December 7, 1992 48,429 48,429 December 9, 2002
24.7174-24.72794 January 4, 1993 19,010 19,010 January 6, 2003
27.8125 December 21, 1999 1,135,713 0 December 23, 2009
33.27631-33.28237 December 24, 1997 315,243 158,241 December 26, 2007
33.4375 December 16, 1998 648,800 500 December 18, 2008
33.4375 December 16, 1998 115,590 11,559 December 16, 2009
33.4903-33.497 September 25, 1997 2,427,422 2,427,422 September 27, 2007
33.54382 January 9, 1998 12,984 1,298 January 9, 2009
33.9375 January 11, 1999 51,025 0 January 11, 2010
34.50 November 15, 1999 1,173,733 283,130 November 17, 2009
34.75 December 30, 1998 39,659 3,966 December 30, 2009
35.63037 February 16, 1998 12,056 1,206 February 16, 2009
36.11175-36.11284 January 2, 1998 152,709 36,000 January 4, 2008
36.37928 February 10, 1998 11,357 1,136 February 10, 2009
36.43278 February 4, 1998 11,412 1,141 February 4, 2009
36.50 January 4, 1999 42,000 42,000 January 4, 2010
--------- ---------
7,661,787 4,243,254
========= =========
- --------
* Issued when the market price was $24.8125. Option price at that time (prior
to the Waddell & Reed spin-off adjustment) was $18.61.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 18--Commitments and Contingencies
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 1.0% of total life insurance in force at December
31, 1999. Insurance ceded on life and accident and health products represents
.7% of premium income for 1999. 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 2.3% of life insurance in force at December 31,
1999 and reinsurance assumed on life and accident and health products
represents 1.9% of premium income for 1999.
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 $3.4 million in 1999 and $3.2 million in 1998 and 1997. Future minimum
rental commitments required under operating leases having remaining
noncancelable lease terms in excess of one year at December 31, 1999 are as
follows: 2000, $2.0 million; 2001, $1.2 million; 2002, $845 thousand; 2003,
$438 thousand; 2004, $189 thousand and in the aggregate, $4.9 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, 1999, the investment portfolio
consisted of the following:
Percent of
Type of Investment Portfolio
------------------ ----------
Investment-grade corporate bonds 64%
Securities of state and municipal governments 9
Securities of the U.S. government or U.S. government-backed
securities 8
Nongovernment-guaranteed mortgage-backed securities 5
Noninvestment-grade securities 5
Policy loans, which are secured by the underlying insurance
policy values 4
Short-term investments, which generally mature within one
month 2
Mortgages 1
Securities of foreign governments 1
Equity securities, real estate, and other long-term
investments 1
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 debt and equity investments are made in a wide range of industries.
At December 31, 1999, 4% or more of the portfolio was invested in the
following industries:
Percent of
Industry Portfolio
-------- ----------
Depository institutions 10%
Electric, gas, and sanitary services 10
Insurance carriers 5
Chemicals and allied products 4
Communications 4
Food and kindred products 4
Nondepository credit institutions 4
Otherwise, no individual industry represented 4% or more of Torchmark's
investments. At year-end 1999, 5% of the carrying value of fixed maturities
was rated below investment grade (BB or lower as rated by Standard & Poor's or
the equivalent NAIC designation). Par value of these investments was $313
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 18--Commitments and Contingencies (continued)
million, amortized cost was $314 million, and market value was $295 million.
While these investments could be subject to additional credit risk, such risk
should generally be reflected in market value.
Collateral Requirements: Torchmark requires collateral for investments in
instruments where collateral is available and is typically required because of
the nature of the investment. Since the majority of Torchmark's investments is
in government, government-secured, or corporate securities, the requirement
for collateral is rare. Torchmark's mortgages are secured by collateral.
Guarantees: In the fourth quarter of 1999, Torchmark issued a full financial
guaranty of all obligations, receivables, and recovery of capital on behalf of
its subsidiaries American Income and AILIC Receivable Corporation up to $100
million. The guarantee was made to an unaffiliated third party as agent for
the purchasers of certain agent receivables of American Income.
Litigation: Torchmark and its subsidiaries continue to be named as parties
to pending or threatened legal proceedings. These lawsuits involve tax
matters, alleged breaches of contract, torts, including bad faith and fraud
claims based on alleged wrongful or fraudulent acts of agents of Torchmark's
subsidiaries, employment discrimination, and miscellaneous other causes of
action. Many of these lawsuits involve claims for punitive damages in state
courts of Alabama, a jurisdiction particularly recognized for its large
punitive damage verdicts. A number of such actions involving Liberty also name
Torchmark as a defendant. In 1999, Alabama enacted legislation limiting
punitive damages in non-physical injury cases to the greater of $500,000 or
three times compensatory damages. Since this legislation has not undergone
scrutiny by appellate courts regarding its constitutionality and a jury's
discretion regarding the amount of compensatory damages (including mental
anguish) awarded in any given case is not precisely defined, the effect of
this legislation on Torchmark's litigation remains unclear. Thus, the
likelihood or extent of a punitive damage award in any given case is currently
impossible to predict. As of December 31, 1999, Liberty was a party to
approximately 135 active lawsuits (including 17 employment related cases and
excluding interpleaders and stayed cases), 126 of which were Alabama
proceedings in which punitive damages were sought. Liberty faces trial
settings in these cases on an on-going basis.
Based upon information presently available, and in light of legal and other
factual 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
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, continue to occur, creating the potential
for unpredictable material adverse judgments in any given punitive damage
suit.
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 Missouri on behalf of all
former agents of Globe (Smith v. Torchmark Corporation, Case No. :95-3304-CV-
S-4). This action alleges that the defendants breached independent agent
contracts with the plaintiffs by treating them as captive agents and engaged
in a pattern of racketeering activity wrongfully denying income and renewal
commissions to the agents, restricting insurance sales, mandating the purchase
of worthless leads, terminating agents without cause and inducing the
execution of independent agent contracts based on misrepresentations of fact.
Monetary damages in an unspecified amount are sought. A plaintiff class was
certified by the District Court on February 26, 1996, although the
certification did not go to the merit of the allegations in the complaint. On
December 31, 1996, the plaintiffs filed an amended complaint in Smith to
allege violations of various provisions of the Employment Retirement Income
Security Act of 1974. Extensive discovery was then conducted. In October 1998,
defendants filed a motion to decertify the presently defined class in Smith.
On March 23, 1999, the District Court granted defendants' motion to decertify
the Smith class in part and decertified all but the ERISA claims of a more
narrowly defined Smith class. In May 1999, the defendants filed motions to
dismiss the claims certified by the Court's March 23, 1999 order. On December
14, 1999, the District Court granted defendants' motion for summary judgment.
That Court denied a motion for reconsideration on January 21, 2000.
It has been previously reported that Torchmark, its subsidiaries United
American and Globe and certain individual corporate officers are parties to
purported class action litigation filed in April, 1996 in
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 18--Commitments and Contingencies (continued)
the U.S. District Court for the Northern District of Georgia (Crichlow v.
Torchmark Corporation, Case No. 4:96-CV-0086-HLM) involving certain hospital
and surgical insurance policies issued by Globe and United American. In
September 1997, the U.S. District Court entered an order granting summary
judgment against the plaintiffs on certain issues and denying national class
certification, although indicating that plaintiffs could move for the
certification of a state class of Georgia policyholders. Discovery then
proceeded on the remaining claims for breach of contract and the duty of good
faith arising from closure of the block of business and certain post-claim
matters as well as fraud and conspiracy relating to pricing and delay in
implementing rate increases. On June 17, 1998, the U.S. District Court entered
an order which denied the plaintiffs' motion to certify a Georgia
policyholders class, denied reconsideration of the previously entered motion
for summary judgment on certain issues, denied reconsideration of the denial
of national certification of a class of policyholders and severed and
transferred claims of Mississippi policyholders to the U.S. District Court for
the Northern District of Mississippi (Greco v. Torchmark Corporation, Case No.
1:98CV196-D-D). The U.S. District Court granted defendants' motion for summary
judgment on all remaining issues in Crichlow on February 4, 1999. Plaintiffs
in Greco then moved to certify a class of persons purchasing Globe hospital
and surgical insurance policies in Mississippi. On February 1, 1999,
defendants filed a motion for summary judgment in Greco.
Defendants' motion for summary judgment on all remaining issues in Crichlow
was granted by the District Court on February 4, 1999. The Crichlow plaintiffs
have appealed and Crichlow defendants have cross-appealed various orders of
the District Court to the United States Court of Appeals for the Eleventh
Circuit.
On October 29, 1999, the District Court dismissed all of the plaintiffs'
claims in Greco in their entirety and entered a final judgment dismissing
Greco with prejudice. This October 29, 1999 order in Greco has been appealed
by plaintiffs to the Fifth Circuit Court of Appeals.
As previously reported, Liberty has been a party to two lawsuits alleging
that a class of persons were insured under Liberty policies when Liberty knew
that such persons were not entitled to retain any benefits under these
policies, one of which was filed in 1996 in the Circuit Court of Jefferson
County, Alabama (Harris v. Liberty National Life Insurance Company, Case No.
CV-96-01836) and the other in the Circuit Court of St. Clair County, Alabama
(Gentry v. Liberty National Life Insurance Company, Case No. CV-97-61). The
Gentry case was dismissed by the St. Clair County Circuit Court on June 16,
1998 and subsequently the Harris case was amended to add former plaintiff
Gentry as an additional class representative in that case. On December 28,
1999, the Jefferson County Circuit Court entered an order in Harris granting
summary judgment for Liberty on all plaintiffs' claims except unjust
enrichment. The only remaining claim in the Harris plaintiffs' motion for
class certification, one of unjust enrichment, was denied by the Circuit Court
in an order denying the motion for class certification entered February 10,
2000.
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 (Case No. 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.
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
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 18--Commitments and Contingencies (continued)
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. A petition was filed on April 8, 1996 on behalf of
a group of funeral directors seeking to modify the 1978 decree in Battle in
light of changed economic circumstances. All parties made extensive
submissions to the District Court and a hearing on the opposing petitions was
held by the District Court on February 9, 1999. On March 8, 1999, the District
Court entered an order granting Liberty's petition to enforce the obligations
of contract funeral directors under their funeral service contracts and
denying the funeral directors' petition for review of the Battle Final
Judgment and alternative relief. On July 29, 1999, the funeral director class
filed an appeal with the U.S. Court of Appeals of the Eleventh Circuit seeking
to have the March 8, 1999 order vacated on the merits. Liberty filed a joint
motion in the Eleventh Circuit Court seeking remand to the District Court for
purposes of appointment of class counsel for burial policyholders, who are
currently not formally represented in these proceedings. The Circuit Court
issued an order denying Liberty's joint motion on September 15, 1999 and the
funeral director class' appeal remains pending. On January 24, 2000, Liberty
and the funeral director class filed a joint motion for remand in order to
allow the District Court to evaluate a proposed settlement of the funeral
directors' appeal.
On October 28, 1999, Liberty was served with a subpoena from the Florida
Department of Insurance in connection with that Department's investigation
into Liberty's sales practices and disclosures in the State of Florida
regarding industrial life insurance and low value life insurance policies.
Subsequently, on December 8, 1999, purported class action litigation was filed
against Liberty in the United States District Court for the Northern District
of Alabama (Moore v. Liberty National Life Insurance Company, Case No. CV-99-
BU-3262-S), on behalf of all African-Americans who have or have had at the
time of policy termination an ownership interest in certain life insurance
policies ($25,000 face amount or less) marketed by Liberty and certain of its
former subsidiaries. Plaintiffs allege racial discrimination in Liberty's
premium rates in violation of 42 U.S.C (S)1981, breach of fiduciary duty in
sales and administrative practices, receipt of excessive and unreasonable
premium payments by Liberty, improper hiring, supervision, retention and
failure to monitor actions of officers, agents and employees, breach of
contract in dismantling the debit premium collection system, fraudulent
inducement and negligent misrepresentation. Unspecified compensatory and
punitive damages are sought together with a declaratory judgment and equitable
and/or injunctive relief, including establishment of a constructive trust for
the benefit of class members. Defendants filed a motion for judgment on the
pleadings or in the alternative for summary judgment on January 27, 2000.
Note 19--Business Segments
Torchmark's segments are based on the insurance product lines it markets and
administers, life insurance, health insurance, and annuities. These major
product lines are set out as segments because of the common characteristics of
products within these categories, comparability of margins, and the similarity
in regulatory environment and management techniques. There is also an
investment segment which manages the investment portfolio, debt, and cash flow
for the insurance segments and the corporate function. Torchmark's management
evaluates the overall performance of the operations of the company in
accordance with these segments.
Life insurance products include traditional and interest-sensitive whole
life insurance as well as term life insurance. Health products are generally
guaranteed-renewable and include Medicare Supplement, cancer, accident, long-
term care, and limited hospital and surgical coverages. Annuities include both
fixed-benefit and variable contracts. Variable contracts allow policyholders
to choose from a variety of mutual funds in which to direct their deposits.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 19--Business Segments (continued)
Torchmark markets its insurance products through a number of distribution
channels, each of which sells the products of one or more of Torchmark's
insurance segments. The tables below present segment premium revenue by each
of Torchmark's marketing groups.
For the Year 1999
-----------------------------------------------------------------
Life Health Annuity Total
---------------- -------------- ------------- ----------------
% of % of % of % of
Distribution Channel Amount Total Amount Total Amount Total Amount Total
- -------------------- ---------- ----- -------- ----- ------- ----- ---------- -----
United American
Independent............ $ 37,375 3.7% $427,023 51.8% $ 508 1.2% $ 464,906 24.7%
Liberty National
Exclusive.............. 288,330 28.3 143,857 17.4 60 0.2 432,247 22.9
American Income
Exclusive.............. 217,367 21.3 47,564 5.8 264,931 14.1
Direct Response......... 245,824 24.1 11,778 1.4 257,602 13.7
United American
Exclusive.............. 19,318 1.9 194,594 23.6 213,912 11.4
United Investors
Exclusive.............. 84,098 8.3 40,401 98.6 124,499 6.6
Military Independent.... 104,590 10.3 104,590 5.5
Other................... 21,399 2.1 21,399 1.1
---------- ----- -------- ----- ------- ----- ---------- -----
$1,018,301 100.0% $824,816 100.0% $40,969 100.0% $1,884,086 100.0%
========== ===== ======== ===== ======= ===== ========== =====
For the Year 1998
-----------------------------------------------------------------
Life Health Annuity Total
---------------- -------------- ------------- ----------------
% of % of % of % of
Distribution Channel Amount Total Amount Total Amount Total Amount Total
- -------------------- ---------- ----- -------- ----- ------- ----- ---------- -----
United American
Independent............ $ 36,925 3.8% $417,556 54.9% $ 445 1.3% $ 454,926 25.9%
Liberty National
Exclusive.............. 282,389 29.4 135,861 17.9 $ 84 0.2 418,334 23.9
American Income
Exclusive.............. 204,310 21.3 47,074 6.2 251,384 14.3
Direct Response......... 221,371 23.1 8,817 1.2 230,188 13.1
United American
Exclusive.............. 18,798 2.0 150,602 19.8 169,400 9.7
United Investors
Exclusive.............. 80,376 8.4 33,065 97.4 113,441 6.4
Military Independent.... 92,204 9.6 92,204 5.3
Other................... 23,393 2.4 360 1.1 23,753 1.4
---------- ----- -------- ----- ------- ----- ---------- -----
$ 959,766 100.0% $759,910 100.0% $33,954 100.0% $1,753,630 100.0%
========== ===== ======== ===== ======= ===== ========== =====
For the Year 1997
-----------------------------------------------------------------
Life Health Annuity Total
---------------- -------------- ------------- ----------------
% of % of % of % of
Distribution Channel Amount Total Amount Total Amount Total Amount Total
- -------------------- ---------- ----- -------- ----- ------- ----- ---------- -----
United American
Independent............ $ 36,810 4.0% $428,775 58.0% $ 333 1.2% $ 465,918 27.8%
Liberty National
Exclusive.............. 280,519 30.8 125,701 17.0 84 0.3 406,304 24.2
American Income
Exclusive.............. 190,681 20.9 46,116 6.2 236,797 14.1
Direct Response......... 195,393 21.5 6,467 0.9 201,860 12.0
United American
Exclusive.............. 18,243 2.0 132,426 17.9 150,669 9.0
United Investors
Exclusive.............. 77,986 8.6 27,009 94.7 104,995 6.3
Military Independent.... 79,631 8.8 79,631 4.7
Other................... 30,729 3.4 1,101 3.8 31,830 1.9
---------- ----- -------- ----- ------- ----- ---------- -----
$ 909,992 100.0% $739,485 100.0% $28,527 100.0% $1,678,004 100.0%
========== ===== ======== ===== ======= ===== ========== =====
Because of the nature of the insurance industry, Torchmark has no individual
or group which would be considered a major customer. Substantially all of
Torchmark's business is conducted in the United States, primarily in the
Southeastern and Southwestern regions.
The measure of profitability established by management for insurance
segments is underwriting income before other income and administrative
expenses, in accordance with the manner the segments are managed. It
essentially represents gross profit margin on insurance products before
insurance administrative expenses and consists of premium, less net policy
obligations, acquisition expenses, and commissions. It differs from GAAP
pretax operating income before other income and administrative expense for two
primary reasons. First, there is a reduction to policy obligations for
interest credited by
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 19--Business Segments (continued)
contract to policyholders because this interest is earned and credited by the
investment segment. Second, interest is also added to acquisition expense
which represents the implied interest cost of deferred acquisition costs,
which is funded by and is attributed to the investment segment.
The measure of profitability for the investment segment is excess investment
income, which represents the income earned on the investment portfolio in
excess of net policy requirements and financing costs associated with debt and
Torchmark's MIPS. The investment segment is measured on a tax-equivalent
basis, equating the return on tax-exempt investments to the pretax return on
taxable investments. Other than the above-mentioned interest allocations,
there are no other intersegment revenues or expenses. Expenses directly
attributable to corporate operations are included in the "Corporate" category.
All other unallocated revenues and expenses on a pretax basis, including
insurance administrative expense, are included in the "Other" segment
category. The table below sets forth a reconciliation of Torchmark's revenues
and operations by segment to its major income statement line items.
For the year 1999
-----------------------------------------------------------------------------------------
Life Health Annuity Investment Other Corporate Adjustments Consolidated
---------- -------- -------- ---------- --------- --------- ----------- ------------
Revenue:
Premium................ $1,018,301 $824,816 $ 40,969 $1,884,086
Net Investment income.. $458,824 $(11,487) 447,337
Other income........... $ 3,348 (2,008) 1,340
---------- -------- -------- -------- --------- -------- -------- ----------
Total revenue........ 1,018,301 824,816 40,969 458,824 3,348 (13,495) 2,332,763
Expenses:
Policy benefits........ 666,122 535,901 34,524 1,236,547
Required reserve
interest.............. (229,287) (17,383) (40,991) 287,661 -0-
Amortization of
acquisition costs..... 170,444 64,046 13,310 247,800
Commissions and premium
tax................... 56,341 84,913 759 18,642 160,655
Required interest on
acquisition costs..... 91,412 12,707 6,536 (110,655) -0-
Financing costs*....... 66,431 (14,090) 52,341
---------- -------- -------- -------- --------- -------- -------- ----------
Total expenses....... 755,032 680,184 14,138 243,437 4,552 1,697,343
---------- -------- -------- -------- --------- -------- -------- ----------
Underwriting income
before other income and
administrative expense
and nonrecurring
charge................. 263,269 144,632 26,831 434,732
Nonrecurring charge..... (20,650) 20,650 -0-
---------- -------- -------- -------- --------- -------- -------- ----------
Underwriting income
before other income
and administrative
expense**............. 242,619 144,632 26,831 20,650 434,732
Excess investment
income................. 215,387 215,387
Subtotal adjustments.... 3,348 (18,047) (14,699)
---------- -------- -------- -------- --------- -------- -------- ----------
Subtotal............. 242,619 144,632 26,831 215,387 3,348 2,603 635,420
Administrative expense.. (104,903) (104,903)
Parent expense.......... $(10,166) (10,166)
Goodwill amortization... (12,075) (12,075)
---------- -------- -------- -------- --------- -------- -------- ----------
Pretax operating
income.............. $ 242,619 $144,632 $ 26,831 $215,387 $(101,555) $(22,241) $ 2,603 508,276
========== ======== ======== ======== ========= ======== ========
Deduct realized investment losses, deferred acquisition cost adjustment, and gain on sale of
equipment...................................................................................... (105,868)
----------
Pretax income................................................................................ $ 402,408
==========
- --------
* Investment segment includes MIPS dividend on a pretax basis.
** Insurance segments exclude Family Service.
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 19--Business Segments (continued)
For the year 1998
------------------------------------------------------------------------------------------------------
Family
Service
Underwriting
Life Health Annuity Investment Other Corporate Income Adjustments Consolidated
--------- -------- -------- ---------- --------- --------- ------------ ----------- ------------
Revenue:
Premium........... $ 957,274 $759,910 $ 33,594 $ 2,852 $1,753,630
Net investment
income........... $ 470,701 $(11,143) 459,558
Other income...... $ 4,488 (2,163) 2,325
--------- -------- -------- --------- --------- -------- -------- -------- ----------
Total revenue... 957,274 759,910 33,594 470,701 4,488 2,852 (13,306) 2,215,513
Expenses:
Policy benefits... 618,867 482,496 34,662 14,251 1,150,276
Required reserve
interest......... (215,185) (20,440) (42,171) 296,696 (18,900) -0-
Amortization of
acquisition
costs............ 158,298 59,208 11,561 3,883 (1,926) 231,024
Commissions and
premium tax...... 57,364 87,828 510 208 (2,163) 143,747
Required interest
on acquisition
costs............ 85,374 11,373 5,609 (103,481) 1,125 -0-
Financing costs*.. 71,367 (15,042) 56,325
--------- -------- -------- --------- --------- -------- -------- -------- ----------
Total expenses.. 704,718 620,465 10,171 264,582 567 (19,131) 1,581,372
--------- -------- -------- --------- --------- -------- -------- -------- ----------
Underwriting income
before other
income and
administrative
expense**......... 252,556 139,445 23,423 2,285 417,709
Reclass of Family
Service........... 2,187 98 (2,285) -0-
--------- -------- -------- --------- --------- -------- -------- -------- ----------
Underwriting income
before other
income and
administrative
expense........... 254,743 139,445 23,521 417,709
Excess investment
income............ 206,119 206,119
Subtotal
adjustments....... 4,488 5,825 10,313
--------- -------- -------- --------- --------- -------- -------- -------- ----------
Subtotal........ 254,743 139,445 23,521 206,119 4,488 5,825 634,141
Administrative
expense........... (103,451) (103,451)
Parent expense..... $(10,406) (3,581) (13,987)
Goodwill
amortization...... (12,075) (12,075)
--------- -------- -------- --------- --------- -------- -------- -------- ----------
Pretax operating
income......... $ 254,743 $139,445 $ 23,521 $ 206,119 $ (98,963) $(22,481) $ -0- $ 2,244 504,628
========= ======== ======== ========= ========= ======== ======== ========
Deduct realized investment losses and deferred acquisition cost adjustment............................. (57,637)
----------
Pretax income....................................................................................... $ 446,991
==========
- -------
* Investment segment includes MIPS dividend on a pretax basis.
** Insurance segments exclude Family Service.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 19--Business Segments (continued)
For the year 1997
------------------------------------------------------------------------------------------------------
Family
Service
Underwriting
Life Health Annuity Investment Other Corporate Income Adjustments Consolidated
--------- -------- -------- ---------- --------- --------- ------------ ----------- ------------
Revenue:
Premium........... $ 901,187 $739,485 $ 27,426 $ 9,906 $1,678,004
Net investment
income........... $ 439,067 $(9,951) 429,116
Other income...... $ 3,141 (2,179) 962
--------- -------- -------- --------- --------- -------- ------- ------- ----------
Total revenue... 901,187 739,485 27,426 439,067 3,141 9,906 (12,130) 2,108,082
Expenses:
Policy benefits... 574,139 462,967 34,631 (7) 37,170 1,108,900
Required reserve
interest......... (199,339) (21,644) (41,551) 308,632 (46,098) -0-
Amortization of
acquisition
costs............ 149,358 58,473 9,660 9,105 (1,858) 224,738
Commissions and
premium tax...... 55,019 87,069 710 681 (2,183) 141,296
Required interest
on acquisition
costs............ 80,972 11,080 4,951 (100,096) 3,093 -0-
Financing costs*.. 87,055 (15,192) 71,863
--------- -------- -------- --------- --------- -------- ------- ------- ----------
Total expenses.. 660,149 597,945 8,401 295,591 (7) 3,951 (19,233) 1,546,797
--------- -------- -------- --------- --------- -------- ------- ------- ----------
Underwriting income
before other
income and
administrative
expense**......... 241,038 141,540 19,025 7 5,955 407,565
Reclass of Family
Service........... 5,650 305 (5,955) -0-
--------- -------- -------- --------- --------- -------- ------- ------- ----------
Underwriting income
before other
income and
administrative
expense........... 246,688 141,540 19,330 7 407,565
Excess investment
income............ 143,476 143,476
Subtotal
adjustments....... 3,141 7,103 10,244
--------- -------- -------- --------- --------- -------- ------- ------- ----------
Subtotal........... 246,688 141,540 19,330 143,476 3,148 7,103 561,285
Administrative
expense........... (104,220) (104,220)
Parent expense..... $(13,879) (2,134) (16,013)
Goodwill
amortization...... (12,074) (12,074)
Deferred
acquisition cost
adjustment for
realized gains.... 198 198
--------- -------- -------- --------- --------- -------- ------- ------- ----------
Pretax operating
income............ $ 246,688 $141,540 $ 19,330 $ 143,476 $(101,072) $(25,953) $ 0 $ 5,167 429,176
========= ======== ======== ========= ========= ======== ======= =======
Deduct realized investment losses and deferred acquisition cost adjustment............................. (37,177)
----------
Pretax income.......................................................................................... $ 391,999
==========
- -------
* Investment segment includes MIPS dividend on a pretax basis.
** Insurance segments exclude Family Service.
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 19--Business Segments (continued)
Assets for each segment are reported based on a specific identification
basis. The insurance segments' assets contain deferred acquisition costs,
value of insurance purchased, and separate account assets. The investment
segment includes the investment portfolio, cash, and accrued investment
income. Goodwill is assigned to corporate operations. All other assets,
representing less than 2% of total assets, are included in the other category.
The table below reconciles segment assets to total assets as reported in the
consolidated financial statements.
At December 31, 1999
-------------------------------------------------------------------------------------
Life Health Annuity Investment Other Corporate Adjustments Consolidated
---------- -------- ---------- ---------- -------- --------- ----------- ------------
Cash and invested
assets................. $6,202,251 $ 6,202,251
Accrued investment
income................. 112,475 112,475
Deferred acquisition
costs.................. $1,547,934 $225,637 $ 119,751 1,893,322
Goodwill................ $402,584 402,584
Separate account assets. 3,413,675 3,413,675
Other assets............ $107,357 107,357
---------- -------- ---------- ---------- -------- -------- -----------
Total assets............ $1,547,934 $225,637 $3,533,426 $6,314,726 $107,357 $402,584 $12,131,664
========== ======== ========== ========== ======== ======== ===========
At December 31, 1998
-------------------------------------------------------------------------------------
Life Health Annuity Investment Other Corporate Adjustments Consolidated
---------- -------- ---------- ---------- -------- --------- ----------- ------------
Cash and invested
assets................. $6,449,021 $ 6,449,021
Accrued investment
income................. 99,279 99,279
Deferred acquisition
costs.................. $1,390,030 $190,285 $ 92,836 1,673,151
Goodwill................ $414,658 414,658
Separate account assets. 2,425,262 2,425,262
Other assets............ $187,657 187,657
---------- -------- ---------- ---------- -------- -------- -----------
Total assets............ $1,390,030 $190,285 $2,518,098 $6,548,300 $187,657 $414,658 $11,249,028
========== ======== ========== ========== ======== ======== ===========
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 20--Related Party Transactions
Transactions Regarding Vesta: Since 1993, Torchmark has held a passive
investment in Vesta, a property insurance carrier. Torchmark held 5.1 million
shares of Vesta stock, or approximately 28% of the outstanding shares of
Vesta, until December, 1998. Torchmark carried its investment in Vesta during
this period on the equity method of accounting. In June, 1998, Vesta announced
that (a) an investigation of accounting irregularities that occurred during
the fourth quarter of 1997 and the first quarter of 1998 would result in an
aggregate $14 million net after-tax reduction in previously reported net
income, and, in addition, that (b) it would restate its historical financial
statements for the period of 1993 through the first quarter of 1998,
reflecting reductions in reported net after-tax earnings of $49 million for
the period of 1993 through 1997 and $10 million for the first quarter of 1998.
To reflect its pro rata share of Vesta's cumulative reported financial
corrections, Torchmark recorded a pre-tax charge of $20 million ($13 million
after tax) or $.09 per diluted share in the second quarter of 1998. As a
result of the announcements relating to Vesta and the decline in value of
Vesta stock, Vesta is currently subject to numerous class action lawsuits in
state and Federal courts filed subsequent to such announcements.
In the fourth quarter of 1998, Torchmark announced its intention to dispose
of its holdings in Vesta and to sell Vesta shares under satisfactory terms. In
December, 1998, Torchmark sold 680 thousand Vesta shares at a price of $4.75
per share, recording a loss of $3 million after tax. In 1999, Vesta filed a
registration statement with the Securities and Exchange Commission for the
public offering of its shares held by Torchmark. To facilitate the
registration of Vesta shares, Torchmark reacquired the previously sold 680
thousand shares at a price of $5 per share. On November 5, 1999, the
registration statement was filed by Vesta to offer all of Torchmark's holdings
in Vesta.
Because of its intention to dispose of Vesta, Torchmark wrote its carrying
value of Vesta down to net realizable amount effective September 30, 1998. The
adjustment produced an after-tax realized loss of $24 million, or $.17 per
diluted Torchmark share. Net realizable value was $32 million at December 31,
1998. During 1998, Torchmark recorded a pretax loss of $27 million ($18
million after tax or $.13 per diluted share) on Vesta operations, including
its pro rata share of Vesta's cumulative accounting corrections.
During the first quarter of 1999, the two Torchmark directors who occupied
seats on the Vesta Board of Directors resigned from those Vesta seats. Due to
the vacating of the Vesta board seats and the absence of significant influence
regarding Vesta, Torchmark discontinued the equity method of accounting for
Vesta and has included Vesta in equity securities at market value subsequent
to December 31, 1998. Torchmark carried Vesta at a value of $20 million at
December 31, 1999.
Transactions with Directors and Officers: Lamar C. Smith, elected a director
of Torchmark in October 1999, is an officer, director and 15% owner of
Independent Research Agency for Life Insurance, Inc. (IRA), which receives
commissions as the Military Agency distribution system for selling certain
life insurance products offered by Torchmark's insurance subsidiaries.
On October 1, 1999, Torchmark sold the majority of its investment real
estate in two transactions. One transaction involved sales to Elgin
Development Company and other investors for total consideration of
$97.4 million. The Chairman of the Executive Committee of Torchmark is a one-
third investor in Elgin Development Company. His investment in Elgin
Development was approximately $1.5 million.
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 21--Selected Quarterly Data (Unaudited)
The following is a summary of quarterly results for the two years ended
December 31, 1999. The information is unaudited but includes all adjustments
(consisting of normal accruals) which management considers necessary for a
fair presentation of the results of operations for these periods.
Three Months Ended
-----------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
1999:
- -----
Premium and policy charges...... $462,764 $470,010 $471,850 $479,462
Net investment income........... 111,396 110,538 111,758 113,645
Realized investment losses...... (7,116) (78,803) (18,128) (6,924)
Total revenues.................. 567,510 507,228 565,779 586,378
Policy benefits................. 303,446 308,718 309,113 315,270
Amortization of acquisition
expenses....................... 59,570 62,082 62,921 63,227
Pretax income from continuing
operations..................... 125,042 57,171 113,688 106,507
Income (Loss) from discontinued
operations..................... -0- (1,060) -0- -0-
Net income...................... 96,434 35,246 73,312 68,964
Basic net income per common
share from continuing
operations..................... .59 .27 .55 .52
Basic net income per common
share.......................... .71 .26 .55 .52
Diluted net income per common
share from continuing
operations..................... .59 .27 .55 .52
Diluted net income per common
share.......................... .71 .26 .55 .52
Diluted net income per common
share from continuing
operations excluding realized
losses, related acquisition
cost adjustment, and equity in
earnings of Vesta.............. .62 .63 .64 .56
1998:
- -----
Premium and policy charges...... $433,017 $439,364 $437,964 $443,285
Net investment income........... 119,800 117,881 112,165 109,712
Realized investment losses...... (3,173) (1,854) (39,750) (12,860)
Total revenues.................. 550,032 556,048 511,271 540,525
Policy benefits................. 287,024 291,826 285,217 286,209
Amortization of acquisition
expenses....................... 57,334 57,755 57,248 58,687
Pretax income from continuing
operations..................... 117,799 123,856 87,054 118,282
Income (Loss) from discontinued
operations..................... 14,766 15,222 (38,607) 2,246
Net income...................... 92,918 63,142 14,546 73,835
Basic net income per common
share from continuing
operations..................... .56 .34 .38 .51
Basic net income per common
share.......................... .66 .45 .10 .53
Diluted net income per common
share from continuing
operations..................... .55 .34 .38 .51
Diluted net income per common
share.......................... .66 .45 .10 .53
Diluted net income per common
share from continuing
operations excluding realized
losses, related acquisition
cost adjustment, and equity in
earnings of Vesta.............. .55 .57 .58 .60
80
Item 9. Disagreements on Accounting and Financial Disclosure
On October 21, 1998, with the approval of the Audit Committee of the Board
of Directors of Torchmark, Torchmark engaged Deloitte & Touche LLP as its
principal accountants as of January 1, 1999, effective upon the issuance of
KPMG Peat Marwick LLP's ("KPMG") reports on the consolidated financial
statements of Torchmark and subsidiaries and the separately issued financial
statements of Torchmark's subsidiaries, unit investment trust accounts and
benefit plans as of and for the year ending December 31, 1998. (KPMG completed
its engagement as Torchmark's principal accountants on October 14, 1999, the
date upon which the last of the audit reports as of and for the year ended
December 31, 1998 for the entities noted above were issued.) The reports of
KPMG on the financial statements of Torchmark for either of the two most
recent fiscal years did not contain any adverse opinion or disclaimer of
opinion. Such reports were not qualified or modified as to uncertainty, audit
scope or accounting principles. During such years and during the period
between December 31, 1998 and the date of the completion of KPMG's engagement,
there was no disagreement between KPMG and Torchmark on any matter of
accounting principals or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of KPMG, would have caused that firm to make reference to the
subject matter of such disagreement in connection with its report on
Torchmark's financial statements.
PART III
Item 10. Directors and Executive Officers of Registrant
Information required by this item is incorporated by reference from the
sections entitled "Election of Directors," "Profiles of Directors and
Nominees," "Executive Officers" and Section 16(a) "Beneficial Ownership
Reporting Compliance" of the Securities Exchange Act in the Proxy Statement
for the Annual Meeting of Stockholders to be held April 27, 2000 (the "Proxy
Statement"), which is to be filed with the Securities and Exchange Commission.
Item 11. Executive Compensation
Information required by this item is incorporated by reference from the
section entitled Compensation and Other Transactions with Executive Officers
and Directors in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners of Management
(a) Security ownership of certain beneficial owners:
Information required by this item is incorporated by reference from the
section entitled "Principal Stockholders" in the Proxy Statement.
(b) Security ownership of management:
Information required by this item is incorporated by reference from the
section entitled "Stock Ownership" in the Proxy Statement.
(c) Changes in control:
Torchmark knows of no arrangements, including any pledges by any person
of its securities, the operation of which may at a subsequent date
result in a change of control.
Item 13. Certain Relationships and Related Transactions
Information required by this item is incorporated by reference from the
section entitled Compensation and Other Transactions with Executive Officers
and Directors in the Proxy Statement.
81
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K
(a) Index of documents filed as a part of this report:
Page of
this report
-----------
Financial Statements:
Torchmark Corporation and Subsidiaries:
Independent Auditors' Reports................................... 38
Consolidated Balance Sheet at December 31, 1999 and 1998........ 40
Consolidated Statement of Operations for each of the years in
the three-year period ended December 31, 1999.................. 41
Consolidated Statement of Comprehensive Income for each of the
years in the three-year period ended December 31, 1999......... 43
Consolidated Statement of Shareholders' Equity for each of the
years in the three-year period ended December 31, 1999......... 44
Consolidated Statement of Cash Flow for each of the years in the
three-year period ended December 31, 1999...................... 45
Notes to Consolidated Financial Statements...................... 47
Schedules Supporting Financial Statements for each of the years
in the three-year period ended December 31, 1999:
II.Condensed Financial Information of Registrant (Parent Compa-
ny)............................................................. 88
IV.Reinsurance (Consolidated)................................... 91
Schedules not referred to have been omitted as inapplicable or not required by
Regulation S-X.
(b) Reports on Form 8-K.
The following Form 8-K was filed by the registrant during the fourth
quarter of 1999:
(1) Form 8-K dated October 21, 1999, reporting completion of the change
of Registrant's certifying accountant.
No financial statements were required in the Form 8-K.
(c) Exhibits
82
EXHIBITS
Page of
this
Report
-------
(3)(i) Restated Certificate of Incorporation of Torchmark Corpora-
tion, as amended (incorporated by reference from Exhibit
3(i) to Form 10-K for the fiscal year ended December 31,
1998)
(ii) By-Laws of Torchmark Corporation, as amended (incorporated
by reference from Exhibit 3(b) to Form 10-K for the fiscal
year ended December 31, 1989)
(4)(a) Specimen Common Stock Certificate (incorporated by reference
from Exhibit 4(a) to Form 10-K for the fiscal year ended De-
cember 31, 1989)
(b) Trust Indenture dated as of February 1, 1987 between
Torchmark Corporation and Morgan Guaranty Trust Company of
New York, as Trustee (incorporated by reference from Exhibit
4(b) to Form S-3 for $300,000,000 of Torchmark Corporation
Debt Securities and Warrants (Registration No. 33-11816))
(10)(a) Torchmark Corporation and Affiliates Retired Lives Reserve
Agreement, as amended, and Trust (incorporated by reference
from Exhibit 10(b) to Form 10-K for the fiscal year ended
December 31, 1991)
(b) Capital Accumulation and Bonus Plan of Torchmark Corpora-
tion, as amended, (incorporated by reference from Exhibit
10(c) to Form 10-K for the fiscal year ended December 31,
1988)
(c) Torchmark Corporation Supplementary Retirement Plan (incor-
porated by reference from Exhibit 10(c) to Form 10-K for the
fiscal year ended December 31, 1992)
(d) Certified Copies of Resolutions Establishing Retirement Pol-
icy for Officers and Directors of Torchmark Corporation and
Providing Retirement Benefits for Directors (incorporated by
reference from Exhibit 10(d) to Form 10-K for the fiscal
year ended December 31, 1998)
(e) Certified Copy of Resolution Regarding Director Retirement
Benefit Program
(f) Torchmark Corporation Restated Deferred Compensation Plan
for Directors, Advisory Directors, Directors Emeritus and
Officers, as amended (incorporated by reference from Exhibit
10(e) to Form 10-K for the fiscal year ended December 31,
1992)
(g) The Torchmark Corporation 1987 Stock Incentive Plan (incor-
porated by reference from Exhibit 10(f) to Form 10-K for the
fiscal year ended December 31, 1998)
(h) General Agency Contract between Liberty National Life Insur-
ance Company and Independent Research Agency For Life Insur-
ance, Inc. (incorporated by reference from Exhibit 10(i) to
Form 10-K for the fiscal year ended December 31, 1990)
(i) Form of Marketing and Administrative Services Agreement be-
tween Liberty National Fire Insurance Company, Liberty Na-
tional Insurance Corporation and Liberty National Life In-
surance Company (incorporated by reference from Exhibit 10.2
to Form S-1 Registration Statement No. 33-68114)
(j) Form of Deferred Compensation Agreement Between Torchmark
Corporation or Subsidiary and Officer at the Level of Vice
President or Above Eligible to Participate in the Torchmark
Corporation and Affiliates Retired Lives Reserve Agreement
and to Retire Prior to December 31, 1986 (incorporated by
reference from Exhibit 10(k) to Form 10-K for the fiscal
year ended December 31, 1991)
83
Page of
this
Report
-------
(k) Form of Deferred Compensation Agreement between Torchmark
Corporation or Subsidiary and Officer at the Level of Vice
President or Above Eligible to Participate in the Torchmark
Corporation and Affiliates Retired Lives Reserve Agreement
and Not Eligible to Retire Prior to December 31, 1986 (in-
corporated by reference from Exhibit 10(l) to Form 10-K for
the fiscal year ended December 31, 1991)
(l) Torchmark Corporation Supplemental Savings and Investment
Plan (incorporated by reference from Exhibit 10(m) to Form
10-K for the fiscal year ended December 31, 1992)
(m) Service Agreement, dated as of January 1, 1991, between
Torchmark Corporation and Liberty National Life Insurance
Company (prototype for agreements between Torchmark Corpora-
tion and other principal operating subsidiaries) (incorpo-
rated by reference from Exhibit 10(n) to Form 10-K for the
fiscal year ended December 31, 1992)
(n) The Torchmark Corporation Pension Plan (incorporated by ref-
erence from Exhibit 10(o) to Form 10-K for the fiscal year
ended December 31, 1992)
(o) The Torchmark Corporation 1998 Stock Incentive Plan (incor-
porated by reference from Exhibit 10(n) to Form 10-K for the
fiscal year ended December 31, 1998)
(p) The Torchmark Corporation Savings and Investment Plan (in-
corporated by reference from Exhibit 10(s) to Form 10-K for
the fiscal year ended December 31, 1992)
(q) Credit Agreements dated as of October 24, 1996 among
Torchmark Corporation, the Lenders and The First National
Bank of Chicago, as Agent (364 Day and Five Year) (incorpo-
rated by reference from Exhibit 10(t) to Form 10-K for the
fiscal year ended December 31, 1996)
(r) Coinsurance and Servicing Agreement between Security Benefit
Life Insurance Company and Liberty National Life Insurance
Company, effective as of December 31, 1995 (incorporated by
reference from Exhibit 10(u) to Form 10-K for the fiscal
year ended December 31, 1995)
(s) Form of Deferred Compensation Agreement Between Torchmark
Corporation or Subsidiary and Officer at the Level of Vice
President or Above Not Eligible to Participate in Torchmark
Corporation and Affiliates Retired Lives Reserve Agreement
(incorporated by reference from Exhibit 10(j) to Form 10-K
for the fiscal year ended December 31, 1991)
(t) Torchmark Corporation 1996 Non-Employee Director Stock Op-
tion Plan (incorporated by reference from Exhibit 10(w) to
Form 10-K for the fiscal year ended December 31, 1996)
(u) Torchmark Corporation 1996 Executive Deferred Compensation
Stock Option Plan (incorporated by reference from Exhibit
10(x) to Form 10-K for the fiscal year ended December 31,
1996)
(v) The Liberty National Life Insurance Company Pension Plan for
Non-Commissioned Employees
(x) Receivables Purchase Agreement dated as of December 21, 1999
among AILIC Receivables Corporation, American Income Life
Insurance Company, Preferred Receivables Funding Corporation
and BankOne, NA
(11) Statement re computation of per share earnings 86
(20) Proxy Statement for Annual Meeting of Stockholders to be
held April 27, 2000
(21) Subsidiaries of the registrant 87
(23)(a) Consent of Deloitte & Touche LLP to incorporation by refer-
ence of their audit report dated January 28, 2000, into
Form S-8 of The Torchmark Corporation Savings and Investment
Plan (Registration No. 2-76378)
84
Page of
this
Report
-------
(b) Consent of Deloitte & Touche LLP to incorporation by
reference of their audit report dated January 28, 2000, into
Form S-8 and the accompanying Form S-3 Prospectus of the
Torchmark Corporation 1996 Non-Employee Director Stock Option
Plan (Registration No. 2-93760)
(c) Consent of Deloitte & Touche LLP to incorporation by
reference of their audit report dated January 28, 2000, into
Form S-8 and the accompanying Form S-3 Prospectus of the
Torchmark Corporation 1987 Stock Incentive Plan (Registration
No. 33-23580)
(d) Consent of Deloitte & Touche LLP to incorporation by
reference of their audit report dated January 28, 2000, into
Form S-8 and the accompanying Form S-3 Prospectus of The
Capital Accumulation and Bonus Plan of Torchmark Corporation
(Registration No. 33-1032)
(e) Consent of Deloitte & Touche LLP to incorporation by
reference of their audit report dated January 28, 2000, into
Form S-8 of the Liberty National Life Insurance Company
401(k) Plan (Registration No. 33-65507)
(f) Consent of Deloitte & Touche LLP to incorporation by
reference of their audit report dated January 28, 2000, into
Form S-8 and accompanying Form S-3 Prospectus of the
Torchmark Corporation 1996 Executive Deferred Compensation
Stock Option Plan (Registration No. 333-27111)
(g) Consent of KPMG LLP to incorporation by reference of their
audit report dated January 29, 1999, except for Note 18,
which is as of February 10, 1999, into Form S-8 and The
Torchmark Corporation Savings and Investment Plan
(Registration No. 2-76378)
(h) Consent of KPMG LLP to incorporation by reference of their
audit report dated January 29, 1999, except for Note 18,
which is as of February 10, 1999, into Form S-8 and the
accompanying Form S-3 Prospectus of the Torchmark Corporation
1996 Non-Employee Stock Option Plan (Registration No. 2-
93760)
(i) Consent of KPMG LLP to incorporation by reference of their
audit report dated January 29, 1999, except for Note 18,
which is as of February 10, 1999, into Form S-8 and the
accompanying Form S-3 Prospectus of the Torchmark Corporation
1987 Stock Incentive Plan (Registration No. 33-23580)
(j) Consent of KPMG LLP to incorporation by reference of their
audit report dated January 29, 1999, except for Note 18,
which is as of February 10, 1999, into Form S-8 and the
accompanying Form S-3 Prospectus of the Capital Accumulation
and Bonus Plan of Torchmark Corporation (Registration No. 33-
1032)
(k) Consent of KPMG LLP to incorporation by reference of their
audit report dated January 29, 1999, except for Note 18,
which is as of February 10, 1999, into Form S-8 and the
Liberty National Life Insurance Company 401(k) Plan
(Registration No. 33-65507)
(l) Consent of KPMG LLP to incorporation by reference of their
audit report dated January 29, 1999, except for Note 18,
which is as of February 10, 1999, into Form S-8 and
accompanying Form S-3 Prospectus of the Torchmark Corporation
1996 Executive Deferred Compensation Stock Plan (Registration
No. 333-27111)
(24) Powers of attorney
(27) Financial Data Schedule
85
Exhibit 11. Statement re computation of per share earnings
TORCHMARK CORPORATION COMPUTATION OF EARNINGS PER SHARE
Twelve months ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Net income from continuing operations. $258,930,000 $255,776,000 $260,429,000
Discontinued operations of Waddell &
Reed:
Net income from operations........... -0- 47,868,000 77,314,000
Loss on disposal..................... (1,060,000) (54,241,000) -0-
------------ ------------ ------------
Net income before extraordinary item
and cumulative effect of change in
accounting principle................. 257,870,000 249,403,000 337,743,000
Loss on redemption of debt ........... -0- (4,962,000) -0-
------------ ------------ ------------
Net income before cumulative effect of
change in accounting principle....... 257,870,000 244,441,000 337,743,000
Cumulative effect of change in ac-
counting principle................... 16,086,000 -0- -0-
------------ ------------ ------------
Net income............................ $273,956,000 $244,441,000 $337,743,000
============ ============ ============
Basic weighted average shares out-
standing............................. 133,197,023 139,998,671 139,202,354
Diluted weighted average shares out-
standing............................. 133,985,943 141,351,912 141,431,156
Basic earnings per share:
Net income from continuing operations. $ 1.95 $ 1.83 $ 1.87
Discontinued operations of Waddell &
Reed:
Net income from operations........... -0- .34 .56
Loss on disposal..................... (.01) (.39) -0-
------------ ------------ ------------
Net income before extraordinary item
and cumulative effect of change in
accounting principle................. 1.94 1.78 2.43
Loss on redemption of debt............ -0- (.03) -0-
------------ ------------ ------------
Net income before cumulative effect of
change in accounting principle....... 1.94 1.75 2.43
Cumulative effect of change in ac-
counting principle................... .12 -0- -0-
------------ ------------ ------------
Net income............................ $ 2.06 $ 1.75 $ 2.43
============ ============ ============
Diluted earnings per share:
Net income from continuing operations. $ 1.93 $ 1.81 $ 1.84
Discontinued operations of Waddell &
Reed:
Net income from operations........... -0- .34 .55
Loss on disposal..................... (.01) (.38) -0-
------------ ------------ ------------
Net income before extraordinary item
and cumulative effect of change in
accounting principle................. 1.92 1.77 2.39
Loss on redemption of debt............ -0- (.04) -0-
------------ ------------ ------------
Net income before cumulative effect of
change in accounting principle....... 1.92 1.73 2.39
Cumulative effect of change in ac-
counting principle................... .12 -0- -0-
------------ ------------ ------------
Net income............................ $ 2.04 $ 1.73 $ 2.39
============ ============ ============
86
Exhibit 21. Subsidiaries of the Registrant
The following table lists subsidiaries of the registrant which meet the
definition of "significant subsidiary" according to Regulation S-X:
State of Name Under Which
Company Incorporation Company Does Business
----------------------- ------------- ---------------------
American Income Life American Income Life
Insurance Company Indiana Insurance Company
Globe Life And Accident Globe Life And Accident
Insurance Company Delaware Insurance Company
Liberty National Life Liberty National Life
Insurance Company Alabama Insurance Company
United American United American
Insurance Company Delaware Insurance Company
United Investors Life United Investors Life
Insurance Company Missouri Insurance Company
All other exhibits required by Regulation S-K are listed as to location in the
"Index of documents filed as a part of this report" on pages 83 through 85 of
this report. Exhibits not referred to have been omitted as inapplicable or not
required.
87
TORCHMARK CORPORATION (PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
(Amounts in thousands)
December 31,
----------------------
1999 1998
---------- ----------
Assets:
Investments:
Long-term investments................................ $ 200,843 $ 105,703
Short-term investments............................... 2,899 1,714
---------- ----------
Total investments..................................... 203,742 107,417
Cash.................................................. 1,059 7,724
Investment in affiliates.............................. 2,851,913 3,156,322
Due from affiliates................................... -0- 53,207
Accrued investment income............................. 2,360 1,731
Other assets.......................................... 44,404 35,377
---------- ----------
Total assets........................................ $3,103,478 $3,361,778
========== ==========
Liabilities and shareholders' equity:
Liabilities:
Short-term debt...................................... $ 418,394 $ 355,242
Long-term debt....................................... 394,160 394,048
Taxes payable........................................ -0- 8,683
Due to affiliates.................................... 51,724 61,542
Other liabilities.................................... 52,539 89,476
---------- ----------
Total liabilities.................................... 916,817 908,991
Monthly income preferred securities................... 193,324 193,259
Shareholders' equity:
Preferred stock...................................... 279 299
Common stock......................................... 147,801 147,801
Additional paid-in capital........................... 901,532 910,119
Accumulated other comprehensive income .............. (174,222) 144,501
Retained earnings.................................... 1,910,487 1,707,933
Treasury stock....................................... (792,540) (651,125)
---------- ----------
Total shareholders' equity........................... 1,993,337 2,259,528
---------- ----------
Total liabilities and shareholders' equity........... $3,103,478 $3,361,778
========== ==========
See accompanying Independent Auditors' Report.
88
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
CONDENSED STATEMENT OF OPERATIONS
(Amounts in thousands)
Year Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
Net investment income............................ $ 17,747 $ 20,024 $ 5,275
Realized investment losses....................... (24,179) (54,855) (19,706)
-------- -------- --------
Total revenue.................................. (6,432) (34,831) (14,431)
General operating expenses....................... 10,169 10,406 13,880
Reimbursements from affiliates................... (10,800) (13,653) (13,956)
Interest expense................................. 58,119 65,871 96,402
-------- -------- --------
Total expenses................................. 57,488 62,624 96,326
-------- -------- --------
Operating loss before income taxes and equity in
earnings of affiliates.......................... (63,920) (97,455) (110,757)
Income taxes .................................... 22,834 44,132 38,189
-------- -------- --------
Net operating loss before equity in earnings of
affiliates...................................... (41,086) (53,323) (72,568)
Equity in earnings of affiliates................. 308,114 327,984 420,186
Adjustment to carrying value of Vesta............ -0- (20,234) -0-
Monthly income preferred securities dividend (net
of tax)......................................... (9,158) (9,777) (9,875)
-------- -------- --------
Net income from continuing operations.......... 257,870 244,650 337,743
Discontinued operations of Waddell & Reed:
Income from operations.......................... -0- 9,154 -0-
Loss on disposal................................ -0- (4,401) -0-
-------- -------- --------
Net income before extraordinary item and
cumulative effect of change in accounting
principle....................................... 257,870 249,403 337,743
Loss on redemption of debt (net of tax).......... -0- (4,962) -0-
-------- -------- --------
Net income before cumulative effect of change in
accounting principle............................ 257,870 244,441 337,743
Cumulative effect of change in accounting princi-
ple............................................. 16,086 -0- -0-
-------- -------- --------
Net Income..................................... $273,956 $244,441 $337,743
======== ======== ========
See accompanying Independent Auditors' Report.
89
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(continued)
CONDENSED STATEMENT OF CASH FLOW
(Amounts in thousands)
Year Ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
Cash provided from operations before dividends
from subsidiaries............................ $ (60,364) $ (46,825) $ (35,284)
Cash dividends from subsidiaries............. 284,881 462,267 370,032
--------- --------- ---------
Cash provided from operations................. 224,517 415,442 334,748
Cash provided from (used for) investing activ-
ities:
Disposition of investments................... 43,436 217,323 -0-
Acquisition of investments................... (49,260) (311,784) (2,150)
Investment in subsidiaries................... (172) (710) (174,799)
Loans to subsidiaries........................ (77,476) (48,723) (117,392)
Repayments on loans to subsidiaries.......... 75,400 120,079 28,242
Net decrease (increase) in temporary invest-
ments....................................... (1,185) (1,378) 5,604
Additions to properties...................... (1,298) (48) (454)
Other........................................ 13 -0- (7,460)
--------- --------- ---------
Cash used for investing activities............ (10,542) (25,241) (268,409)
Cash provided from (used for) financing activ-
ities:
Issuance of debt............................. 63,152 216,279 98,185
Sale of Vesta shares......................... -0- 3,056 -0-
Repayments of debt........................... -0- (380,000) (20,000)
Issuance of stock............................ 37,163 3,957 93,973
Redemption of preferred stock................ (20,000) -0- (2,767)
Acquisitions of treasury stock............... (221,878) (125,875) (182,904)
Borrowed from subsidiaries................... 138,800 -0- 133,880
Repayment on borrowings from subsidiaries.... (150,885) -0- (93,060)
Payment of dividends......................... (66,992) (107,166) (86,530)
--------- --------- ---------
Cash provided from (used for) financing activ-
ities........................................ (220,640) (389,749) (59,223)
Net increase in cash.......................... (6,665) 452 7,116
Cash balance at beginning of period........... 7,724 7,272 156
--------- --------- ---------
Cash balance at end of period................. $ 1,059 $ 7,724 $ 7,272
========= ========= =========
TORCHMARK CORPORATION
(PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Amounts in thousands)
Note A--Dividends from Subsidiaries
Cash dividends paid to Torchmark from the consolidated subsidiaries were as
follows:
1999 1998 1997
-------- -------- --------
Consolidated subsidiaries..................... $284,881 $462,267 $370,032
======== ======== ========
See accompanying Independent Auditors' Report.
90
TORCHMARK CORPORATION
SCHEDULE IV. REINSURANCE (CONSOLIDATED)
(Amounts in thousands)
Percentage
Ceded Assumed of Amount
Gross to Other from Other Net Assumed
Amount Companies Companies Amount to Net
----------- --------- ---------- ------------ ----------
For the Year Ended
December 31, 1999:
- -------------------
Life insurance in force. $99,741,126 $872,720 $2,377,705 $101,246,111 2.3 %
=========== ======== ========== ============ ===
Premiums:*
Life insurance......... $ 919,779 $ 5,622 $ 32,713 $ 946,870 3.5 %
Health insurance....... 831,984 7,180 12 824,816 0 %
----------- -------- ---------- ------------
Total premiums........ $ 1,751,763 $ 12,802 $ 32,725 $ 1,771,686 1.8 %
=========== ======== ========== ============ ===
For the Year Ended De-
cember 31, 1998:
- ----------------------
Life insurance in force. $93,904,622 $718,777 $2,434,438 $ 95,620,283 2.5 %
=========== ======== ========== ============ ===
Premiums:*
Life insurance......... $ 862,101 $ 5,090 $ 31,503 $ 888,514 3.5 %
Health insurance....... 768,874 7,873 (1,092) 759,909 (.1)%
----------- -------- ---------- ------------
Total premiums........ $ 1,630,975 $ 12,963 $ 30,411 $ 1,648,423 1.8 %
=========== ======== ========== ============ ===
For the Year Ended De-
cember 31, 1997:
- ----------------------
Life insurance in force. $89,372,206 $728,843 $2,497,790 $ 91,141,153 2.7 %
=========== ======== ========== ============ ===
Premiums:*
Life insurance......... $ 813,918 $ 4,232 $ 28,363 $ 838,049 3.4 %
Health insurance....... 748,375 8,889 -0- 739,486 0 %
----------- -------- ---------- ------------
Total premiums........ $ 1,562,293 $ 13,121 $ 28,363 $ 1,577,535 1.8 %
=========== ======== ========== ============ ===
- --------
* Excludes policy charges
See accompanying Independent Auditors' Report.
91
SIGNATURES
Pursuant to the requirements of Section 12 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Torchmark Corporation
/s/ C.B. Hudson
By: ________________________________
C.B. Hudson, Chairman, President, Chief
Executive Officer and Director
/s/ Gary L. Coleman
By: ________________________________
Gary L. Coleman, Executive Vice
President and Chief Financial
Officer (Principal Accounting
Officer)
Date: March 9, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ David L. Boren * /s/ Mark S. McAndrew *
By: ________________________________ By: ________________________________
David L. Boren Director Mark S. McAndrew Director
/s/ Joseph M. Farley *
By: ________________________________ /s/ Harold T. McCormick *
Joseph M. Farley Director By: ________________________________
Harold T. McCormick Director
/s/ Louis T. Hagopian *
By: ________________________________ /s/ George J. Records *
Louis T. Hagopian Director By: ________________________________
George J. Records Director
/s/ Joseph L. Lanier, Jr. *
By: ________________________________ /s/ R.K. Richey *
Joseph L. Lanier, Jr. Director By: ________________________________
R.K. Richey Director
/s/ Lamar C. Smith *
By: ________________________________
Lamar C. Smith Director
Date: March 9, 2000
/s/ Gary L. Coleman
*By: _______________________________
Gary L. Coleman Attorney-in-fact
92