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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
TORCHMARK CORPORATION
-----------------------------------------------------
(Name of Registrant as Specified In Its Charter)
--Enter Company Name Here--
-----------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-
6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange ActRule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
Notes:
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, 1995 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 CUSIP NUMBER:
CLASS:
8 5/8% Sinking Fund 891027 AB 0
Debentures due 2017
9 5/8% Senior Notes 891027 AD 6
due 1998
8 1/4% Senior 891027 AE 4
Debentures due 2009
7 7/8% Notes due 891027 AF 1
2023
7 3/8% Notes due 891027 AG 9
2013
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: $3,326,119,112
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON
STOCK, AS OF FEBRUARY 29, 1996: 71,722,245
DOCUMENTS INCORPORATED BY REFERENCE
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 25, 1996,
PART III
INDEX OF EXHIBITS (PAGES 63 THROUGH 65)
TOTAL NUMBER OF PAGES INCLUDED ARE 72
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. ("W&R") 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 ("Famlico") was
purchased in July, 1990, and American Income Life Insurance Company ("American
Income") was purchased in November, 1994.
The following table presents Torchmark's business by primary distribution
method:
PRIMARY
DISTRIBUTION METHOD COMPANY PRODUCTS SALES FORCE
- --------------------------------------------------------------------------------------------------------------
HOME SERVICE LIBERTY NATIONAL LIFE Individual life and 2,400 full-time sales repre-
INSURANCE COMPANY health insurance. sentatives; 115 district offices
Birmingham, Alabama in the Southeastern United States.
- --------------------------------------------------------------------------------------------------------------
UNITED AMERICAN UNITED AMERICAN Senior life and health 51,000 independent agents
GENERAL AGENCY INSURANCE COMPANY insurance including in the U.S., Puerto Rico and
AND CAPTIVE AGENCY Dallas, Texas Medicare Supplement Canada; 1,000 career
coverage and long-term care. agents in 67 branch offices.
- --------------------------------------------------------------------------------------------------------------
DIRECT RESPONSE GLOBE LIFE AND Individual life and health in- Direct response, television,
ACCIDENT surance including special senior magazine; nationwide.
INSURANCE COMPANY life coverage, Medicare
Oklahoma City, OK Supplement, long-term care.
- --------------------------------------------------------------------------------------------------------------
AMERICAN INCOME AMERICAN INCOME Individual life and health in- 1,400 agents.
CAPTIVE AGENCY INSURANCE COMPANY surance to union and credit
Waco, Texas union members.
- --------------------------------------------------------------------------------------------------------------
UNITED INVESTORS WADDELL & REED, INC. United and Waddell & Reed 2,450 Waddell & Reed
CAPTIVE AGENCY Shawnee Mission, Groups of mutual funds, representatives; indepen-
Kansas institutional investment dent agents; 165 offices
UNITED INVESTORS LIFE management services includ- nationwide.
INSURANCE COMPANY ing assets of Torchmark.
Birmingham, Alabama Individual life insurance
and annuities.
- --------------------------------------------------------------------------------------------------------------
PRENEED FAMILY SERVICE LIFE Individual life insurance General Agency with 1,000
CAPTIVE AGENCY INSURANCE COMPANY to fund prearranged independent career agents
Dallas, Texas funerals. nationwide.
Additional information concerning industry segments may be found in
Management's Discussion and Analysis and in Note 17--Industry Segments in the
Notes to Consolidated Financial Statements.
INSURANCE
LIFE INSURANCE
Torchmark writes a variety of nonparticipating ordinary life insurance
products. These include whole-life insurance in the form of traditional and
interest-sensitive, 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
-------------------------- --------------------------
1995 1994 1993 1995 1994 1993
-------- -------- -------- -------- -------- --------
Whole life:
Traditional.............. $107,288 $ 63,108 $ 55,265 $469,581 $445,025 $312,905
Interest-sensitive....... 29,287 34,633 34,211 174,675 171,264 160,824
Term...................... 79,849 48,392 36,303 212,213 167,973 129,815
Other..................... 1,564 3,700 2,654 12,897 12,693 9,112
-------- -------- -------- -------- -------- --------
$217,988 $149,833 $128,433 $869,366 $796,955 $612,656
======== ======== ======== ======== ======== ========
1
Life insurance products are sold through a variety of distribution channels,
including home service agents, independent agents, exclusive agents, and
direct response. These methods are discussed in more depth under the heading
"Marketing." The following table presents life annualized premium issued by
marketing method:
(AMOUNTS IN THOUSANDS)
ANNUALIZED ANNUALIZED
PREMIUM ISSUED PREMIUM IN FORCE
-------------------------- --------------------------
1995 1994 1993 1995 1994 1993
-------- -------- -------- -------- -------- --------
Direct response........... $ 63,900 $ 48,267 $ 36,031 $180,530 $154,130 $133,782
Home service.............. 48,549 51,461 48,474 297,418 291,813 282,059
Independent agents........ 31,630 24,894 22,335 112,797 101,721 94,392
Exclusive agents.......... 73,909 25,211 21,593 278,621 249,291 102,423
-------- -------- -------- -------- -------- --------
$217,988 $149,833 $128,433 $869,366 $796,955 $612,656
======== ======== ======== ======== ======== ========
Permanent insurance products sold by Torchmark 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, 1995 was $194 million and the average interest rate earned on
these loans was 6.46% in 1995. Interest income earned on policy loans was
$12.1 million in 1995, $10.0 million in 1994, and $9.1 million in 1993.
Torchmark had 182 thousand and 154 thousand policy loans outstanding at year-
end 1995 and 1994, respectively.
The availability of cash values contributes to voluntary policy terminations
by policyholders through surrenders. Torchmark's 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. Torchmark's ratio of aggregate face
amount voluntary terminations to the mean amount of life insurance in force
was 17.2% in 1995, 14.7% in 1994 and 14.9% in 1993. Excluding American Income,
the 1995 and 1994 ratios would have been 16.1% and 15.2%, respectively.
The following table presents an analysis of changes to Torchmark's life
insurance business in force:
(AMOUNTS IN THOUSANDS)
1995 1994 1993
--------------------- --------------------- ---------------------
NUMBER OF AMOUNT OF NUMBER OF AMOUNT OF NUMBER OF AMOUNT OF
POLICIES INSURANCE POLICIES INSURANCE POLICIES INSURANCE
--------- ----------- --------- ----------- --------- -----------
In force at January 1,.. 8,913 $74,858,214 8,110 $61,366,933 8,028 $58,306,295
New issues.............. 1,413 19,359,923 1,147 14,958,141 944 12,240,245
Business acquired....... -0- -0- 595 8,983,055 -0- -0-
Other increases......... 1 64,128 1 10,961 -0- 35,530
Death benefits.......... (110) (271,451) (105) (228,354) (102) (213,785)
Lapses.................. (856) (12,185,540) (688) (8,940,980) (625) (7,817,201)
Surrenders.............. (135) (1,187,581) (106) (1,048,117) (106) (1,082,962)
Other decreases......... (30) (246,317) (41) (243,425) (29) (101,189)
----- ----------- ----- ----------- ----- -----------
In force at December
31,.................... 9,196 $80,391,376 8,913 $74,858,214 8,110 $61,366,933
===== =========== ===== =========== ===== ===========
Average policy size (in
dollar amounts)........ $ 8,742 $ 8,399 $ 7,567
=========== =========== ===========
2
HEALTH INSURANCE
Torchmark offers an assortment of supplemental health insurance products.
These are generally classified as (1) Medicare Supplement, (2) cancer and (3)
other health related 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 available under
Torchmark's Medicare Supplements is an automatic claim filing system for
Medicare Part B benefits whereby policyholders do not have to file most claim
forms because they are paid directly by Torchmark from Medicare records.
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 and 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 related policies include accident, long term care and limited
benefit hospital and surgical coverages. These generally guaranteed renewable
policies are offered on an individual basis through exclusive and independent
agents, and direct response. These policies 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 stated maximum.
The following table presents supplemental health annualized premium for the
three years ended December 31, 1995 by marketing method:
ANNUALIZED ANNUALIZED
PREMIUM ISSUED PREMIUM IN FORCE
-------------------------- --------------------------
1995 1994 1993 1995 1994 1993
-------- -------- -------- -------- -------- --------
Home service.............. $ 15,728 $ 23,423 $ 31,288 $117,846 $123,178 $128,000
Independent agents........ 44,438 62,088 98,946 468,691 516,294 555,320
Exclusive agents.......... 42,181 34,997 44,083 167,292 166,953 138,900
Direct response........... 171 674 1,711 929 1,162 1,162
-------- -------- -------- -------- -------- --------
$102,518 $121,182 $176,028 $754,758 $807,587 $823,382
======== ======== ======== ======== ======== ========
The following table presents supplemental health annualized premium
information for the three years ended December 31, 1995 by product category:
ANNUALIZED ANNUALIZED
PREMIUM ISSUED PREMIUM IN FORCE
-------------------------- --------------------------
1995 1994 1993 1995 1994 1993
-------- -------- -------- -------- -------- --------
Medicare Supplement...... $ 64,638 $ 87,547 $136,050 $529,616 $572,221 $600,536
Cancer................... 11,338 8,101 10,012 114,972 114,495 105,773
Other health related pol-
icies................... 26,542 25,534 29,966 110,170 120,871 117,073
-------- -------- -------- -------- -------- --------
$102,518 $121,182 $176,028 $754,758 $807,587 $823,382
======== ======== ======== ======== ======== ========
ANNUITIES
Annuity products offered by Torchmark include single-premium deferred
annuities, flexible-premium deferred annuities, and variable annuities.
Single-premium and flexible-premium annuities 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 W&R 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:
(AMOUNTS IN THOUSANDS) (AMOUNTS IN MILLIONS)
COLLECTIONS DEPOSIT BALANCE
FOR THE YEAR ENDED DECEMBER 31, AT DECEMBER 31,
-------------------------------- --------------------------
1995 1994 1993 1995 1994 1993
---------- ---------- ---------- -------- -------- --------
Fixed annuities......... $ 130,115 $ 43,339 $ 46,573 $ 927.9 $ 801.2 $ 782.8
Variable annuities...... 189,188 196,105 213,982 1,052.2 692.8 529.7
---------- ---------- ---------- -------- -------- --------
$319,303 $239,444 $260,555 $1,980.1 $1,494.0 $1,312.5
========== ========== ========== ======== ======== ========
3
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. Torchmark's investments
consist predominantly of high-quality, investment-grade securities. Fixed
maturities represented 90% of total investments at December 31, 1995.
Approximately 29% 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. More than 74% 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 or collateralized mortgage obligations
("CMO's") that are fully backed by GNMA's. (See Note 3--Investment Operations
in the Notes to Consolidated Financial Statements and Management's Discussion
and Analysis.)
The following table presents an analysis of Torchmark's fixed maturity
investments at December 31, 1995. All of the securities are classified as
available for sale and are, therefore, reported at fair market value.
AMOUNT
(IN THOUSANDS) %
-------------- -----
Securities of U.S. Government...................... $ 116,686 2.2%
GNMA and MBS backed by GNMA collateral............. 1,339,125 25.7
Other U.S. Government guaranteed................... 48,645 0.9
Other investment grade............................. 3,541,184 68.0
Non-investment grade corporates.................... 164,584 3.2
---------- -----
$5,210,224 100.0%
========== =====
The following table presents Torchmark's fixed maturity investments at
December 31, 1995 on the basis of ratings as determined primarily by Moody's
Investors Services. Standard and Poor's bond ratings are used when Moody's
ratings are not available. Ratings of BAA and higher (or their equivalent) are
considered investment grade by the rating services.
AMOUNT
RATING (IN THOUSANDS) %
------ -------------- -----
AAA................................................ $2,258,689 43.3%
AA................................................. 665,309 12.7
A.................................................. 1,921,875 36.9
BAA................................................ 169,016 3.2
BA................................................. 139,481 2.7
B.................................................. 13,191 0.3
Less than B........................................ 3,092 0.1
Not rated.......................................... 39,571 0.8
---------- -----
$5,210,224 100.0%
========== =====
4
The following table presents the fixed maturity investments of Torchmark's
insurance subsidiaries at December 31, 1995 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.. $4,772,568 92.0%
2. High quality..... 252,152 4.8
3. Medium quality... 141,131 2.7
4. Low quality...... 20,249 0.4
5. Lower quality.... 3,167 0.1
6. In or near de-
fault.............. 37 -0-
---------- -----
$5,189,304 100.0%
========== =====
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 Torchmark's experience, 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 Torchmark are established by management.
Torchmark uses information from the application and, in some cases, 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.
Torchmark requires medical information or examinations of applicants for
life insurance in excess of certain prescribed amounts. 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 medical information is $100,000
through age 40. Torchmark requests medical information 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").
Torchmark has implemented certain underwriting tests to detect the presence of
the HIV virus and continue 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 cedes 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,
Torchmark remains contingently liable with respect to ceded insurance should
any reinsurer be unable to meet the obligations it assumes (See Note 16--
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 the addition of premiums
to be received 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 is 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, home service agents, independent
agents, and exclusive agents.
Direct Response. Torchmark offers life insurance products directly to
consumers through the use of direct mail, co-op mailings, national cable and
local spot 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.
Home Service. Torchmark sells and services life and health insurance through
home service agents primarily in the seven state area of Alabama, Florida,
Georgia, Tennessee, MIssissippi, South Carolina, and North Carolina. Home
service agents are employees of Liberty and are primarily compensated by
commissions based on sales and by a salary based on the amount of premium
collected on policies assigned to them for servicing. During the past several
years the home service operation has emphasized bank draft and direct bill
collection of premium rather than agent collection. This trend will be
encouraged in the future because of its lower cost and improved persistency.
Agent collected sales will be discontinued in 1996.
Independent Agents. Torchmark offers a variety of life and health insurance
policies through approximately 51 thousand independent agents, brokers, and
licensed sales representatives. 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.
Exclusive Agents. Torchmark sells individual life and fixed-benefit accident
and health insurance through approximately 1,400 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.
Torchmark sells life insurance as well as fixed and variable annuity
products through the W&R sales force in conjunction with W&R's financial
planning services. (See Asset Management--Mutual Funds for additional
marketing information about the W&R sales force.)
6
Torchmark offers life and health insurance through approximately 1,500
exclusive agents, of which approximately 1,000 exclusive agents work out of 67
branch offices throughout the United States. These policies are targeted to
various special markets.
Torchmark also markets insurance products through a variety of other methods
such as brokers and other special markets.
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 STANDARD
COMPANY & POOR'S
--------------- ---------
Liberty National Life Insurance Company A+ (Superior) Not rated
Globe Life And Accident Insurance Company A+ (Superior) AA+
United Investors Life Insurance Company A+ (Superior) AA+
United American Insurance Company A+ (Superior) AA+
American Income Life Insurance Company A (Excellent) Not rated
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 very strong 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.
Standard & Poor's Corporation assigns a superior or AA rating to those
companies who offer excellent financial security on an absolute and relative
basis and whose capacity to meet policyholder obligations is overwhelming
under a variety of economic and underwriting conditions.
7
ASSET MANAGEMENT
Torchmark conducts its asset management and financial services businesses
through United Investors Management Company ("United Management") and its
subsidiaries. This segment's activity is mutual fund distribution and
management.
MUTUAL FUNDS
Torchmark's mutual fund operations are carried out by a subsidiary of United
Management, W&R, which markets and manages the seventeen mutual funds in the
United Group of Mutual Funds, the six mutual funds in the Waddell & Reed Fund,
Inc. ("W&R Funds"), and the ten mutual funds in the TMK/United Fund, Inc.
("TMK/United Funds"). Until 1995, two mutual funds in the Torchmark Fund
("Torchmark Funds") were also marketed. In 1995, the Torchmark Funds were
discontinued and liquidated. These funds were valued as follows at December
31, 1995 and 1994:
(AMOUNTS IN
MILLIONS)
1995 1994
------- -------
United Funds $13,569 $10,947
W&R Funds 419 219
TMK/United Funds 1,099 725
Torchmark Funds -- 3
------- -------
Total mutual fund assets under management 15,087 11,894
Institutional and private accounts 3,201 2,608
------- -------
Total assets under management $18,288 $14,502
======= =======
W&R's revenues consist of the following: (1) fees for managing the assets,
which are based on the value of the assets managed, (2) commissions for the
sale of products, and (3) fees for accounting and administration, which are
based primarily on an annual charge per account. In addition to its mutual
fund management and distribution activities, W&R manages accounts for
individual and institutional investors for which asset management fees are
received.
Asset management activities are conducted by an experienced and qualified
staff. As of December 31, 1995, the average industry experience of the fund
managers for W&R was 21 years, and average company experience was 13 years.
The following table indicates W&R revenues by component for the three years
ending December 31, 1995:
(AMOUNTS IN THOUSANDS)
1995 1994 1993
-------- -------- --------
Investment product commissions*.............. $ 56,927 $ 59,450 $ 65,950
Insurance product commissions*............... 13,531 12,773 12,117
Asset management fees........................ 85,999 70,651 64,181
Service fees................................. 23,528 22,297 21,273
-------- -------- --------
$179,985 $165,171 $163,521
======== ======== ========
*Commissions paid to W&R by affiliates for variable annuities and insurance
products are eliminated in consolidation.
W&R markets its mutual funds and other financial products, including life
insurance and Medicare Supplement insurance, through a sales force of
approximately 2,450 registered representatives in 50 states and the District
of Columbia. These representatives concentrate on product sales of W&R and
other Torchmark affiliates. W&R maintained 165 sales offices at December 31,
1995.
W&R conducts money management seminars on a national scale to reach numerous
potential clients every year. Individual financial plans are developed for
clients through one-on-one consultations with the W&R sales representatives.
Emphasis is placed on a long-term relationship with a client rather than a
one-time sale.
8
COMPETITION
The insurance industry is highly competitive. Torchmark competes with other
insurance carriers through policyholder service, price, product design, and
sales effort. In addition to competition with other insurance companies,
Torchmark also faces increasing competition from other financial services
organizations. While there are a number of larger insurance companies
competing with Torchmark that have greater resources and have considerable
marketing forces, there is no individual company dominating 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 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 direct response business are a valuable
asset in designing direct response products. Similarly, Torchmark's home
service concentration of business has been considered a competitive advantage
in hiring and retaining agents. On the other hand, Torchmark's insurance
subsidiaries do not have the same degree of national name recognition as some
other companies with which they compete.
W&R competes with hundreds of other registered institutional investment
advisers and mutual fund management and distribution companies which
distribute their fund shares through a variety of methods including affiliated
and unaffiliated sales forces, broker-dealers, and direct sales to the public.
Although no one company or group of companies dominates the mutual fund
industry, some are larger than W&R and have greater resources. Competition is
based on the methods of distribution of fund shares, tailoring investment
products to meet certain segments of the market, the changing needs of
investors, the ability to achieve superior investment management performance,
the type and quality of shareholder services, and the success of sales
promotion efforts.
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: Famlico, as of September 30, 1990; American
Income as of December 31, 1990; Globe, as of December 31, 1991; Liberty, as of
December 31, 1991; United American, as of December 31, 1993; and UILIC, as of
December 31, 1993.
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 statements 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
9
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 1994 and 1993.
USUAL REPORTED
COMPANY RATIO NAME RANGE VALUE
- --------- ------------------------------------------------- ---------- --------
1994:
Liberty Investment in Affiliate to Capital and Surplus 0 to 100 202
Liberty Change in Capital and Surplus 50 to -10 -29
Globe Change in Capital and Surplus 50 to -10 -12
1993:
Liberty Investment in Affiliate to Capital and Surplus 0 to 100 126
Globe Adequacy of Investment Income 125 to 900 959
Globe Change in Asset Mix 0 to 5 5.8
Globe Change in Capital and Surplus 50 to -10 -65
United American Change in Capital and Surplus 50 to -10 -13
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 1994 and 1993 is brought about by its ownership of
other large Torchmark insurance companies and the ownership of 81% of the
stock of United Management. Profitability and growth in these subsidiaries
have caused this ratio to gradually rise. All intercompany investment is
eliminated in consolidation, and the internal organizational structure has no
bearing on consolidated results.
Adequacy of Investment Income--This ratio indicates that an insurer's
investment income is adequate to meet interest requirements of policy reserves
and is measured as a percentage of investment income to required interest. A
ratio higher than 900% is considered to be too high and a ratio lower than
125% is considered to be too low by the NAIC. Globe's 959% ratio in 1993 was
brought about by the NAIC's inclusion of dividends of various Torchmark
subsidiaries in Globe's investment income. These dividends are generally
passed through Globe to the parent company and should not be considered in
meeting interest requirements. Intercorporate dividends are eliminated in
consolidation and have no effect on consolidated results. Had these dividends
been excluded, Globe's ratio would have been 220% in 1993, which was within
the usual range.
Change in Asset Mix--This ratio measures the average change in the
percentage of total cash and invested assets. The NAIC considers a ratio
greater than 5.0% to be unusual. The 5.8% ratio of Globe was caused by Globe
dividending one of its subsidiaries, United American, to Torchmark. This
dividend did not affect consolidated net equity of Torchmark at December 31,
1993.
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 minus
10% and greater than 50% to be unusual. Liberty's ratio of minus 29 in 1994
was due to the payment of a large dividend by United Management, an 81% owned
subsidiary, directly to Torchmark. Because Liberty waived its interest in this
dividend, it reduced Liberty's capital and surplus. This transaction did not
affect the consolidated equity of Torchmark at December 31, 1994. United
American's ratio of minus 13% in 1993 was due primarily to the payment of a
$112 million dividend to its parent, which was used by Torchmark to pay part
of the purchase price of United Management. The payment of this dividend did
not affect the consolidated equity of Torchmark at December 31, 1993. Globe's
ratio of minus 65% in 1993 was caused by Globe dividending United American to
Torchmark. The internal organizational structure has no bearing on
consolidated results.
Risk Based Capital: In December 1992, the NAIC adopted a model act that
requires a risk based capital formula be applied to all life and health
insurers. The requirement began in 1994 for information based on the 1993
annual statements. 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.
10
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.
MUTUAL FUNDS. Torchmark's mutual fund management and distribution
activities, as well as its investment advisory services, are subject to state
and federal regulation and oversight by the National Association of Securities
Dealers, Inc. Each of the funds in the United Group of Mutual Funds, the W&R
Funds, the TMK/United Funds and the Torchmark Funds is or was a registered
investment company under the Investment Company Act of 1940. W&R and Waddell &
Reed Asset Management Company ("WRAM") are registered pursuant to the
Investment Advisers Act of 1940. Additionally, W&R is regulated as a broker-
dealer under the Securities Exchange Act of 1934.
PERSONNEL
At the end of 1995, Torchmark had 2,880 employees and 2,856 licensed
employees under sales contracts. Additionally, approximately 61,000
independent 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. Liberty leases approximately
160,000 square feet of this building to unrelated tenants and has another
5,000 square feet available for lease. Liberty also operates from 64 company-
owned district office buildings used for agency sales personnel.
Globe owns a 300,000 square foot office building at 204 North Robinson,
Oklahoma City, Oklahoma, of which it occupies 56,138 square feet as its home
office and the balance is available for lease. Globe also owns a 330,000
square foot office building complex at 14000 Quail Springs Parkway Plaza
Boulevard, Oklahoma City, Oklahoma, and an 80,000 square foot office building
at 120 Robert S. Kerr Avenue, Oklahoma City, which are available for lease to
other tenants.
United American owns and occupies a 125,000 square foot home office building
at 2909 North Buckner Boulevard, Dallas, Texas. United American has purchased
a 20 acre site in the Stonebridge Ranch development in McKinney, Texas (a
north Dallas suburb) and is currently constructing a new 140,000 square foot
facility on that site into which its home office will be relocated in 1996.
The current home office building on Buckner will be sold.
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. In
addition, American Income leases office space in various cities throughout the
United States.
W&R owns and occupies a 116,000 square foot office building utilized as its
corporate headquarters located in United Investors Park, a commercial
development at 6300 Lamar Avenue, Shawnee Mission, Kansas. In addition, W&R
owns three other office buildings in this development, each containing
approximately 48,000 square feet, which are leased or are available for lease.
11
Liberty, Globe and W&R also lease district office space for their agency
sales personnel. All of the other Torchmark companies lease their office space
in various cities in the U.S.
A Torchmark subsidiary, Torchmark Development Corporation ("TDC"), has
completed two buildings consisting of 185,000 square feet and 90,000 square
feet of office space within a 100 acre commercial development known as Liberty
Park along Interstate 459 in Birmingham, Alabama. Approximately 250,000 square
feet of this total office area is currently leased. A 25,000 square foot
office building is currently under construction in this development and is
scheduled for completion in the Spring of 1996. TDC also owns and manages a
70,000 square foot office and retail complex adjacent to Liberty Park of which
approximately 60% is leased by an affiliated party. As a part of a joint
venture with unaffiliated entities, TDC is also developing 2,800 contiguous
acres as a planned community development.
DATA PROCESSING EQUIPMENT
Torchmark and its primary subsidiaries have significant automated
information processing capabilities, supported by centralized computer
systems. Torchmark also uses personal computers to support the user-specific
information processing needs of its professional and administrative staffs.
All centralized computer software support, information processing schedules
and computer-readable data management requirements are supported by company-
specific policies and procedures which ensure that required information
processing results are produced and distributed in a timely manner. These
policies and procedures provide for the copying, off-site physical storage and
retention of significant company computer programs and business data files for
backup purposes.
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.
As a practical matter, a jury's discretion regarding the amount of a punitive
damage award is not limited by any clear, objective criteria under Alabama
law. Accordingly, the likelihood or extent of a punitive damage award in any
given case is virtually impossible to predict. Furthermore, the Alabama
Supreme Court has recently ruled that one half of all punitive damage awards,
after the deduction of attorneys fees, should go to the State of Alabama. This
same ruling also provides for a bifurcated trial, with the first stage devoted
to this issue of liability and the second stage relating to damages. The
hearing on damages will enable the jury to hear evidence of the financial
worth of the defendant. This potentially damaging evidence has not been
previously admissible in Alabama courts. The Alabama Supreme Court has been
asked to reconsider this ruling and this petition is still pending. As of
December 31, 1995, Liberty was a party to approximately 185 active lawsuits
(including 31 employment related cases and excluding interpleaders and stayed
cases), more than 160 of which were Alabama proceedings in which punitive
damages were sought. Liberty faces trial settings in these cases on an on-
going basis.
Torchmark has previously reported the entry of an Order and Final Judgment
by the Circuit Court of Barbour County, Alabama in Robertson v. Liberty
National Life Insurance Company (Case No. CV-92-021) approving a cancer policy
class action settlement involving legal and equitable relief valued at a total
of $55 million. The cost of this settlement increases over time as Liberty is
prohibited from increasing the premium rates on this block of business for one
year from final binding affirmance by the Alabama Supreme Court. This aspect
of the settlement is expected to cost Torchmark an additional $2.5 million
before tax in each quarter going forward until one year after final binding
affirmance by the Alabama Supreme Court. In July 1994, certain intervenors in
the Robertson litigation filed a notice of appeal of the Order and Final
Judgment approving class certification and the settlement with the Supreme
Court of Alabama. Oral argument on the appeal was held July 17, 1995 and on
December 22, 1995, the Supreme Court unanimously affirmed the Robertson class
action settlement. On February 16, 1996, the Alabama Supreme Court issued a
notice overruling the petition for a rehearing in Robertson filed by certain
intervenors.
12
On March 17, 1994, litigation was filed against Liberty, certain officers
and present and former directors of Torchmark and KPMG Peat Marwick LLP,
independent public accountants of Torchmark and its subsidiaries, in the
Circuit Court of Marion County, Alabama (Miles v. Liberty National Life
Insurance Company, Civil Action No. CV-94-67). The lawsuit asserted that it
was brought on behalf of a class comprised of the shareholders of Torchmark.
The complaint alleged a failure to timely and adequately report allegedly
material contingent liabilities arising out of insurance policy litigation
involving Liberty. Compensatory and punitive damages in an unspecified amount
were sought.
In April 1994, the complaint in Miles was amended to add an additional
shareholder plaintiff and to name Torchmark as a defendant. The Miles case was
dismissed upon the joint motion of all parties in September 1995. A second
similar action (Oakley v. Torchmark Corporation, Case No. CV-94-47), filed on
August 16, 1994 in the Circuit Court for Bibb County, Alabama, was dismissed
by the plaintiff without prejudice. A third such action was filed on December
30, 1994, in the United States District Court for the Southern District of
Alabama. This action, which seeks punitive damages, was subsequently
transferred to the United States District Court for the Northern District of
Alabama (Dismukes v. Torchmark Corporation, Case No. CV-94-1006-P-M). A class
certification hearing in Dismukes was held on January 29, 1996, and the
parties are awaiting the District Court's ruling on that motion and on
defendant's motion for partial summary judgment.
As previously reported, Torchmark, its insurance subsidiaries Globe and
United American, and certain Torchmark officers were named as defendants in
litigation filed April 22, 1994, as a purported class action in the District
Court of Oklahoma County, Oklahoma (Moore v. Torchmark Corporation, Case No.
CJ-94-2784-65). The suit claims damages on behalf of individual health
policyholders who are alleged to have been induced to terminate such policies
and to purchase Medicare Supplement and/or other insurance coverages. The
complaint seeks actual and punitive damages for each class member in excess of
$10,000. Subsequent to the filing of this case, one of the plaintiffs was
dismissed and the named plaintiff died. The complaint was amended to include
new plaintiffs purporting to represent the class and restyled Tabor v.
Torchmark Corporation. No class has been certified. A motion to dismiss filed
by the defendants was denied and limited discovery as permitted by the
Oklahoma Supreme Court is proceeding. The defendants intend to vigorously
defend the action.
Prior filings have reported that in July 1994, a purported class action
alleging fraudulent and deceitful practices in premium billing and lapses of
coverage on a payroll deduction insurance plan was filed in the Superior Court
for Gordon County, Georgia against Liberty (Bryant v. Liberty National Life
Insurance Company, Civil Action No. 28979). The complaint alleges actual
damages in excess of $10 million and punitive damages of not less than $50
million as well as premium reimbursements. No class has been certified and no
material proceedings have occurred in this case. Liberty removed this case to
federal court, but the case has subsequently been remanded to the state court.
Liberty intends to vigorously defend this action.
Litigation was filed on April 26, 1995, in the Circuit Court of Houston
County, Alabama against Liberty involving the sale of health insurance
coverage and Omnibus Budget Reconciliation Act of 1990 (Stewart v. Liberty
National Life Insurance Company, Case No. CV-95-345L; Tolar v. Liberty
National Life Insurance Company, Case No. CV-95-346J; Ingram v. Liberty
National Life Insurance Company, Case No. CV-95-348L; Burkett v. Liberty
National Life Insurance Company, Case No. CV-95-347H). Liberty intends to
vigorously defend these cases.
On August 3, 1995, a $5.404 million verdict was rendered against Liberty in
Allen v. Liberty National Life Insurance Company (Case No. CV-94-3634), by a
jury in the Circuit Court of Jefferson County, Alabama. For a two month period
beginning in September 1993, in reliance on federal law concerning the amount
health care providers could collect from Medicare eligible individuals,
Liberty limited the payment of benefits to such individuals to the amounts
collectible under federal law. In November 1993, Liberty discontinued this
practice and recalculated and repaid all claims as it had prior to September
1993. Mr. Allen nevertheless later brought suit against Liberty alleging the
reduction in claims payments pursuant to his cancer policy was improper. He
had been repaid in full with interest prior to filing suit, as had all other
affected claimants. After reconsideration, the trial judge remitted the
verdict to $2.7 million. An appeal was filed with the Alabama Supreme Court in
January 1996.
A purported class action was filed on August 8, 1995, against Liberty in the
Circuit Court of Jefferson County, Alabama on behalf of Liberty cancer
policyholders eligible for Medicare who submitted claims
13
during the approximately two month period in 1993 described in the foregoing
paragraph (Adkins v. Liberty National Life Insurance Company, Case No. CV-95-
05634). The claims made in Adkins are identical to the individual claims in
the Allen case above. More than 400 (and perhaps as many as 1,000) individuals
appear to fit the proposed class definition in Adkins. Punitive damages and
damages for mental anguish appear to be sought on behalf of the class. A class
certification hearing is set in May 1996. The Company intends to oppose class
certification and to vigorously defend the case.
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 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 does not go to the merit of the allegations in the complaint.
The companies intend to vigorously defend this action.
Much attention has been generated nationally with regard to so-called
"vanishing premium" cases, where allegations that an interest sensitive life
policy was sold with a projection that the policy would become paid-up or
self-sustaining after a period of years. Plaintiffs in these cases typically
assert that the projection amounted to a promise or misrepresentation. Liberty
currently is a party to several individual lawsuits in the state courts of
Alabama and was a party to one purported class action filed November 16, 1995
in the Circuit Court of Chambers County, Alabama (Mitcham v. Liberty National
Life Insurance Company, Case No. CV-95-290), involving such claims. The
Mitcham case was settled on a non-class basis on December 27, 1995. Another
interest sensitive case (Carlton v. Liberty National Life Insurance Company,
Case No. CV-96-22) filed on February 1, 1996, in the Circuit Court for
Chambers County, Alabama, was amended on February 9, 1996, to allege a
purported class action. Compensatory and punitive damages are sought. Liberty
believes that appropriate projections were made in connection with the sale of
the policies involved and intends to vigorously defend these cases.
In 1978, the United States District Court for the Northern District of
Alabama entered a final judgment in Battle v. Liberty National Life Insurance
Company, et al. (CV-70-H-752-S), class action litigation involving Liberty, a
class composed of all owners of funeral homes in Alabama and a class composed
of all insureds (Alabama residents only) under burial or vault policies
issued, assumed or reinsured by Liberty. The final judgment fixed the rights
and obligations of Liberty and the funeral directors authorized to handle
Liberty burial and vault policies as well as reforming the benefits available
to the policyholders under the policies. It remains in effect to date. A
motion filed in February 1990 to challenge the final judgment under Federal
Rule of Civil Procedure 60(b) was rejected by both the District Court in 1991
and the Eleventh Circuit Court of Appeals in 1992 and a Writ of Certiorari was
denied by the U.S. Supreme Court in 1993.
In November 1993, an attorney (purporting to represent the funeral director
class) filed a petition in the District Court seeking "alternative relief"
under the final judgment. This petition was voluntarily withdrawn on November
8, 1995, by petitioners. On February 23, 1996, Liberty filed a petition with
the District Court requesting that it order certain contract funeral directors
to comply with their obligations under the Final Judgment in Battle and their
funeral service contracts.
Purported class action litigation was filed on January 2, 1996 against
Torchmark, Torch Energy Advisors Incorporated ("Torch Energy"), and certain
Torch Energy subsidiaries and affiliated limited partnerships in the Circuit
Court of Pickens County, Alabama (Pearson v. Torchmark Corporation, Case No.
CV-95-140). Plaintiff alleges improper payment of royalties and overriding
royalties on coalbed methane gas produced and sold from wells in Robinson's
Bend Coal Degasification Field, seeks certification of a class and claims
unspecified compensatory and punitive damages on behalf of such class. A
motion to dismiss and in the alternative to change venue, has been filed by
Torchmark, and is awaiting a hearing. Torchmark intends to vigorously defend
this action.
Based upon information presently available, and in light of legal and other
defenses available to Torchmark and its subsidiaries, contingent liabilities
arising from threatened and pending litigation are not presently considered by
management to be material. It should be noted, however, that the frequency of
14
large punitive damage awards bearing little or no relation to actual damages
awarded by juries in jurisdictions in which Torchmark has substantial
business, particularly in Alabama, continues to increase universally, creating
the potential for unpredictable material adverse judgments in any given
punitive damage suit.
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 1995.
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 7,727 shareholders of record on December 31,
1995, excluding shareholder accounts held in nominee form. 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 15--
Shareholders' Equity in the Notes to the Consolidated Financial Statements.
The market price and cash dividends paid by calendar quarter for the past two
years are as follows:
1995
MARKET PRICE
------------
DIVIDENDS
QUARTER HIGH LOW PER SHARE
------- ------- ------- ---------
1 $42.625 $34.875 $ .28
2 41.875 37.625 .28
3 42.250 37.375 .28
4 45.250 40.875 .29
Year-end closing
price..................$45.250
1994
MARKET PRICE
------------
DIVIDENDS
QUARTER HIGH LOW PER SHARE
------- ------- ------- ---------
1 $49.500 $39.500 $ .28
2 42.750 36.750 .28
3 44.125 38.000 .28
4 44.500 32.375 .28
Year-end closing
price..................$34.875
15
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)
1995 1994 1993 1992 1991
YEAR ENDED DECEMBER 31, ---------- ---------- ---------- ---------- ----------
Life premium............ $ 772,257 $ 601,633 $ 555,859 $ 544,467 $ 524,052
Health premium.......... 750,588 768,714 799,835 797,855 769,821
Other premium........... 23,438 18,527 137,216 111,640 71,940
Total premium........... 1,546,283 1,388,874 1,492,910 1,453,962 1,365,813
Net investment income... 381,865 347,637 368,494 370,617 355,158
Financial services reve-
nue.................... 152,482 139,276 137,422 133,462 114,326
Realized investment
gains (losses)......... (14,323) (2,551) 8,009 (948) 4,195
Total revenue........... 2,067,482 1,875,337 2,066,846 1,959,668 1,843,641
Net income from continu-
ing operations......... 271,945 263,814 242,298 247,647 235,777
Net income.............. 143,235 268,946 297,979 265,477 246,489
Net income available to
common
shareholders........... 143,235 268,142 294,690 262,024 240,373
Annualized premium is-
sued:
Life.................. 217,988 149,833 128,433 131,726 133,741
Health................ 102,518 121,182 176,028 224,905 216,962
Total................. 320,506 271,015 304,461 356,631 350,703
Mutual fund collections. 1,182,594 1,180,477 1,237,747 1,141,928 813,737
Per common share:
Net income from contin-
uing operations....... 3.80 3.65 3.25 3.33 2.99
Net income............. 2.00 3.72 4.01 3.58 3.13
Net income excluding
realized
investment gains
(losses), the related
acquisition cost ad-
justment, and discon-
tinued operations..... 3.93 3.74 3.50 3.34 2.96
Cash dividends paid.... 1.13 1.12 1.08 1.07 1.00
Return on average common
equity excluding
effect of SFAS 115 and
discontinued opera-
tions.................. 18.5% 19.7% 21.3% 24.6% 24.4%
Average shares outstand-
ing.................... 71,594 72,096 73,502 73,237 76,728
- -------------------------------------------------------------------------------
1995 1994 1993 1992 1991
AS OF DECEMBER 31, ---------- ---------- ---------- ---------- ----------
Cash and invested assets
(2).................... $5,874,037 $5,036,211 $5,200,588 $4,675,577 $4,348,111
Total assets............ 9,364,104 8,165,244 7,441,185 6,544,617 5,898,148
Short-term debt......... 189,372 250,116 107,108 195,102 5,825
Long-term debt.......... 791,988 791,518 791,090 496,622 496,332
Shareholders' equity.... 1,588,952 1,242,603 1,417,255 1,115,660 1,079,251
Per common share (3)... 22.17 17.37 18.80 14.54 13.11
Per common share ex-
cluding effect of SFAS
115................... 20.33 19.31 17.29 14.54 13.11
Annualized premium in
force:
Life................... 869,366 796,955(1) 612,656 588,084 562,550
Health................. 754,758 807,587(1) 823,382 832,488 798,142
Total.................. 1,624,124 1,604,542 1,436,038 1,420,572 1,360,692
Assets under management
at W&R................. 18,288,000 14,502,000 14,470,000 12,144,000 10,692,000
- -------------------------------------------------------------------------------
(1) Annualized life premium in force includes $144 million, and annualized
health premium in force includes $37 million, representing the business
acquired in the acquisition of American Income Life Insurance Company in
1994.
(2) Includes accrued investment income.
(3) Computed after deduction of preferred shareholders' equity.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with the Selected Financial Data
and Torchmark's Consolidated Financial Statements and Notes thereto appearing
elsewhere in this report.
RESULTS OF OPERATIONS
In the fourth quarter of 1995, Torchmark decided to dispose of its coalbed
methane gas development in the Black Warrior Basin of Alabama due to
disappointments in production. During 1995, Torchmark experienced increased
difficulties in obtaining significant gas production from the lower coal seams
from this development, resulting in revisions to engineering estimates of
reserves. Accordingly, the Black Warrior investment was written down to its
estimated realizable value. The writedown amounted to an after-tax charge of
$130 million, or $1.82 per share for 1995. Please refer to "Black Warrior
Writedown" on page 24 of this report for more information.
In addition to the Black Warrior disposal, Torchmark also determined earlier
in 1995 to sell Torch Energy, its energy management subsidiary. Torchmark is
currently negotiating the disposal of Torch Energy through a management-led
buyout. It is anticipating that the transaction will result in total
consideration of approximately $108 million, consisting of cash and other
securities. A small gain is expected on the sale. As a result of the proposed
sale of Torch Energy and the decision to dispose of Black Warrior, Torchmark
has elected to exit the energy industry, accounting for such as a disposal of
a segment. Therefore, Torchmark has modified the presentation in its financial
statements for 1995 and all prior periods to set forth separately the net
assets and results attributable to the discontinued energy segment as
discontinued operations.
Net income from continuing operations for 1995 was $272 million, increasing
3% over $264 million in 1994. On a per share basis, income from continuing
operations was $3.80 in 1995, gaining 4% from $3.65. Net income was $143
million, or $2.00 per share in 1995, compared with $269 million or $3.72 per
share in 1994. Excluding realized investment gains and losses and the
associated adjustment to deferred acquisition costs, net income from
continuing operations was $3.93 per share, rising 5% over the prior period
amount of $3.74. In 1994, net income per share from continuing operations,
excluding realized investment gains and the associated adjustment to deferred
acquisition costs, rose 9% over $3.43 per share in 1993. The adjustment to
deferred acquisition costs was made because of an accounting rule requiring
that deferred acquisition costs on interest-sensitive insurance products be
amortized in accordance with expected gross profits. Since realized investment
gains or losses on assets backing such products change profit expectations,
the adjustment is required. Realized investment losses for 1995 included a $15
million after-tax, or $.21 per share, writedown of an investment in
Southwestern Life Corporation, which filed for Chapter 11 bankruptcy
protection in the third quarter of 1995.
In a comparison of 1995 results with those of 1994, attention should be
given to the acquisition of American Income on November 3, 1994 for total
consideration of $552 million. American Income's results were consolidated
with Torchmark's after the acquisition date, being included for a full year in
1995 for the first time. American Income added approximately $17 million to
Torchmark's net income, after taking into account goodwill amortization and
financing costs. In comparison with 1993, a number of nonrecurring items
should be considered. (1) In November, 1993, Torchmark sold 73% of its
interest in Vesta Insurance Group, Inc. ("Vesta"), which was a wholly-owned
property and casualty subsidiary prior to the sale. Such interest was sold for
proceeds of $161 million and a $57 million pretax gain from the sale was
recognized as other income. Vesta's operations were consolidated with
Torchmark's in 1993 prior to the sale. (2) Results for 1993 included an $82
million pretax charge for nonoperating expenses, compared with $25 million for
1994. These charges related to legal costs, guaranty assessments, and other
contingencies, some of which are discussed in more depth in "Item 3--Legal
Proceedings" on page 12 of this report. The $25 million charge in 1994 was
offset, however, by a reclassification of nonoperating expense to health
benefits, since actual payments will be made in the form of health benefits.
(3) Two new accounting standards which dealt with postretirement benefits and
income taxes were implemented in 1993, increasing earnings $18.4 million. (4)
Corporate tax legislation was enacted in 1993 which increased tax rates from
34% to 35%, resulting in an additional charge to 1993 earnings of $9.4 million
to adjust the deferred tax liability relating to prior years.
17
Revenues increased 10% in 1995 to $2.07 billion from $1.88 billion in 1994,
an increase of $192 million. The American Income acquisition accounted for the
increase when adjusting for lost investment income from the purchase, adding
$225 million to total revenues in 1995, compared with $31 million in 1994. In
comparison with 1993, 1994 revenues decreased 9%. After exclusion of Vesta
revenues and the one-time gain from the Vesta sale in 1993, the decrease in
1994 revenues would have been 2%. Premium income rose 11% in 1995 over the
prior year to $1.55 billion, after having increased 1.4% in 1994 over the
prior period, adjusting to exclude Vesta premium in 1993. The $157 million
gain in premium in 1995 was caused by the inclusion of American Income premium
for a full year, which increased $168 million over 1994. The components of
Torchmark's revenues and operations are described in more detail in the
discussion of segments and investment operations found on pages 18 through 26
of this report.
Other operating expenses rose $27 million in 1995 over the prior year or
23%. The inclusion of American Income's expenses for a full year accounted for
$7 million of the increase. After adjusting for American Income and Vesta,
1994 expenses declined 10% from 1993. Increases in goodwill amortization,
interest expense, and the MIPS dividend were caused by the American Income
acquisition in 1994 and the United Management acquisition in 1993. The
American Income purchase added $10 million and the United Management purchase
added $3 million in annual goodwill amortization. Please refer to the
following sections of this report for a more complete discussion of these
purchases and the related financing costs: "Acquisition of American Income" on
page 27, "Capital Resources" on page 27, and "Merger with United Management"
on page 28.
The following is a discussion of Torchmark's operations by segment.
INSURANCE
Life insurance: Torchmark markets life insurance under a variety of
different distribution channels. The following table presents life insurance
premium income during each of the three years ended December 31, 1995 by
distribution method:
LIFE INSURANCE
Premium by Distribution Method
(Dollar amounts in thousands)
1995 1994 1993
-------------- -------------- --------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- -----
United American General
Agency................. $ 28,305 3.7% $ 25,971 4.3% $ 25,625 4.6%
United American Captive
Agency................. 10,706 1.4 7,966 1.3 7,285 1.3
Direct Response......... 149,141 19.3 127,661 21.2 111,303 20.0
Home Service............ 275,089 35.6 268,460 44.6 261,741 47.1
American Income Captive
Agency................. 153,914 19.9 21,055 3.5 0 0.0
Preneed Captive Agency.. 17,188 2.2 23,983 4.0 33,396 6.0
Waddell & Reed Captive
Agency................. 69,498 9.0 64,940 10.8 60,666 10.9
Other................... 68,416 8.9 61,597 10.3 55,843 10.1
-------- ----- -------- ----- -------- -----
$772,257 100.0% $601,633 100.0% $555,859 100.0%
======== ===== ======== ===== ======== =====
Life insurance premium, including policy charges, grew 28% to $772 million
for the year 1995. Life premium in 1994 was $602 million, increasing 8% over
1993. The American Income acquisition in late 1994 had a considerable impact
on life insurance operations subsequent to the acquisition date. American
Income life premium was $154 million in 1995, compared with $21 million in
1994, accounting for $133 million of the $171 million increase in life premium
for 1995. Sales of life premium were strong in both 1994 and 1995. In terms of
annualized premium in force issued, 1995 sales were $218 million and 1994
sales were $150 million, increasing 45% in 1995 and 17% in 1994. American
Income, however, accounted for $51 million of 1995 sales, or 64% of the 1995
increase.
18
Annualized life premium in force climbed 9% in 1995 to $869 million at
December 31. Annualized life premium in force was $797 million at December 31,
1994, rising 30% over 1993 year end. The 1994 increase was 7% after adjusting
for the inclusion for American Income's annualized life premium in force of
$141 million at the acquisition date. Annualized premium in force data
includes amounts collected on certain interest-sensitive life products which
are not recorded as premium income but exclude single premium income and
policy charges.
Torchmark's life annualized premium in force exceeded its health annualized
premium in force at year-end 1995 for the first time since 1982 year end,
underscoring Torchmark's emphasis on life insurance sales. Torchmark has
emphasized increases in sales of life insurance product lines relative to
health and other insurance products because profit margins for life insurance
are superior. Additionally, assets backing the higher reserves required for
life products allow Torchmark to increase investment income. Profit margins
for life insurance operations, as measured by insurance operating income as a
percentage of premium, has approximated 29% in each of the three years
presented.
LIFE INSURANCE
Summary of Results
(Dollar amounts in thousands)
1995 1994 1993
----------------- ----------------- -----------------
% OF % OF % OF
AMOUNT PREMIUM AMOUNT PREMIUM AMOUNT PREMIUM
-------- ------- -------- ------- -------- -------
Premium and policy
charges................. $772,257 100.0% $601,633 100.0% $555,859 100.0%
Policy obligations....... 507,444 65.7 412,799 68.6 377,017 67.8
Required reserve inter-
est..................... (194,733) (25.2) (163,637) (27.2) (151,203) (27.2)
-------- ----- -------- ----- -------- -----
Net policy obligations.. 312,711 40.5 249,162 41.4 225,814 40.6
Amortization of acquisi-
tion costs.............. 126,695 16.4 90,573 15.1 86,098 15.5
Commissions and premium
taxes................... 50,994 6.6 39,845 6.6 36,697 6.6
Other expense............ 60,767 7.9 46,814 7.8 43,790 7.9
-------- ----- -------- ----- -------- -----
Total expense........... 551,167 71.4 426,394 70.9 392,399 70.6
-------- ----- -------- ----- -------- -----
Insurance operating in-
come.................... $221,090 28.6% $175,239 29.1% $163,460 29.4%
======== ===== ======== ===== ======== =====
As a percentage of premium, insurance operating income has remained constant
in both 1995 and 1994 over the prior period. Excluding American Income,
insurance margins have remained stable with a slight increase in policy
obligations offset by lower amortization of acquisition costs. A major factor
in maintaining stable margins is improved persistency.
Improvements in persistency are beneficial to operating income margins
because they lower the rate of amortization of acquisition costs and certain
other expenses. In addition, improved persistency increases profits because
the premium life is extended. Persistency improvements have resulted, at least
in part, from revisions in agents' compensation formulas to encourage lower
lapses. Improvements have also been attributable to the conversion of a large
portion of agent-collected home service business to bank draft and direct
billing premium, which have higher persistency. In fact, Torchmark will no
longer sell agent-collected business starting in 1996. Agent-collected premium
as a percentage of total home service premium was approximately 15% at year-
end 1995, compared with 48% five years earlier.
American Income's life business has an insurance operating income margin of
approximately 26%, similar to other Torchmark life insurance products.
However, as a percentage of premium, the American Income business is
characterized by lower policy obligations and higher amortization of
acquisition costs. The higher acquisition cost ratio is a result of the higher
amortization of the value of insurance purchased relative to deferred
acquisition costs.
19
The above presentation of life insurance results excludes a $22.8 million
benefit in 1994 from the review of reserving assumptions on a block of burial
reserves. An evaluation of assumptions regarding mortality, interest, and
inflation pressures on burial costs indicated that sufficient experience
existed to support a change in the level of reserves held on this block.
Torchmark will continue to monitor its reserving assumptions for this block on
an annual basis to ensure that reserves are adequate to meet contractual
liabilities. Had this item been included, the 1994 ratio of policy obligations
to premium would have been reduced and overall margin would have been
increased 3.8%.
Health insurance: Health products sold by Torchmark include Medicare
Supplement insurance, cancer insurance, long-term care, and other under-age 65
medical and hospitalization products. As a percentage of annualized health
premium in force at December 31, 1995, Medicare Supplement accounted for 70%,
cancer accounted for 15%, and other products accounted for 15%. These products
are marketed by general, captive, and home service agents, direct response,
and through associations. The table below presents health insurance premium
income during each of the three years ended December 31, 1995 by distribution
method:
HEALTH INSURANCE
Premium by Distribution Method
(Dollar amounts in thousands)
1995 1994 1993
-------------- -------------- --------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- -----
United American General Agen-
cy............................ $466,751 62.2% $509,972 66.4% $537,232 67.2%
United American Captive Agen-
cy............................ 123,264 16.4 128,538 16.7 133,223 16.7
Direct Response................ 956 0.1 1,106 0.1 1,118 0.1
Home Service................... 118,327 15.8 123,011 16.0 128,262 16.0
American Income Captive Agen-
cy............................ 41,290 5.5 6,087 0.8 0 0.0
-------- ----- -------- ----- -------- -----
$750,588 100.0% $768,714 100.0% $799,835 100.0%
======== ===== ======== ===== ======== =====
Health premium was $751 million in 1995, falling 2% from $769 million in
1994. Health premium declined 4% in 1994. Annualized premium in force stood at
$755 million at December 31, 1995, declining 7% from 1994 year-end premium in
force of $808 million. Annualized health premium in force declined 2% in 1994.
Sales of health insurance products in terms of annualized premium issued
declined 15% to $103 million in 1995, after having declined 31% in 1994. These
declines in sales resulted in the diminished base of annualized health premium
in force.
The declines in sales of health annualized premium in both years were
primarily due to decreases in Medicare Supplement product sales. Sales of
Medicare Supplement insurance were $65 million in 1995, compared with $88
million in 1994. They declined 26% in 1995 and 36% in 1994. These sales
declines caused annualized premium in force for Medicare Supplement to
decrease from $601 million at year-end 1993 to $572 million at 1994 year end
to $530 million at December 31, 1995. In the past few years, Torchmark has
encountered considerable competition in the Medicare Supplement market with
regard to price and "attained-age" pricing, whereby premium may be increased
on a basis of increased age as well as increased medical costs. The increased
price competition has had a negative impact on sales. Also, in recent years,
there has been increased competition from health maintenance organizations in
the Medicare Supplement market. Uncertainty has also been a factor negatively
affecting sales. Particularly in 1993 and 1994, there was considerable
uncertainty regarding various health care reforms proposed by both the Clinton
Administration and Congress which had bearing on the Medicare Supplement
market. Additionally, in recent years, this market has experienced a great
deal of increased regulation including government mandated policy forms, a
required minimum loss ratio of 65% on policies sold, and a required leveling
of agents' commissions. The mandated loss ratio and leveling of commissions
have put significant pressure on margins for Torchmark as well as the rest of
the industry, thus discouraging sales.
20
Torchmark is implementing a number of measures to increase its sales of
Medicare Supplement business. Torchmark's price increases on these products
have not been as great as certain major competitors, which should give
Torchmark the opportunity to compete more effectively on the basis of price.
Torchmark has also obtained approval in a number of states to sell the
"attained-age" product, thereby allowing Torchmark to compete on this basis.
Also, Torchmark is continually developing new Medicare Supplement products and
markets. One such new product is a group Medicare Supplement product targeted
at employees, unions, and associations.
While non-Medicare Supplement product sales also declined in 1994, this
trend reversed in 1995. Non-Medicare Supplement health annualized premium
issued rose 13% to $38 million in 1995 from $34 million in 1994. Cancer
insurance annualized premium in force was $115 million at December 31, 1995,
gaining slightly over the prior year end. Cancer sales in terms of annualized
premium issued rose 40% to $11 million in 1995, compared with $8 million in
1994. Cancer sales were $10 million in 1993. Other health product annualized
premium issued increased 4% to $27 million for 1995, after declining 15% in
1994.
HEALTH INSURANCE
Summary of Results
(Dollar amounts in thousands)
1995 1994 1993
----------------- ----------------- -----------------
% OF % OF % OF
AMOUNT PREMIUM AMOUNT PREMIUM AMOUNT PREMIUM
-------- ------- -------- ------- -------- -------
Premium.................. $750,588 100.0% $768,714 100.0% $799,835 100.0%
Other income............. 3,001 0.4 3,349 0.4 3,268 0.4
-------- ----- -------- ----- -------- -----
Total revenue........... 753,589 100.4 772,063 100.4 803,103 100.4
Policy obligations....... 453,127 60.3 458,066 59.5 486,855 60.9
Required reserve inter-
est..................... (26,138) (3.5) (25,710) (3.3) (24,573) (3.1)
-------- ----- -------- ----- -------- -----
Net policy obligations.. 426,989 56.8 432,356 56.2 462,282 57.8
Amortization of acquisi-
tion costs.............. 68,448 9.1 74,701 9.7 83,385 10.4
Commissions and premium
taxes................... 94,286 12.6 102,224 13.3 107,317 13.4
Other expense............ 47,207 6.3 42,673 5.6 44,194 5.6
-------- ----- -------- ----- -------- -----
Total expense........... 636,930 84.8 651,954 84.8 697,178 87.2
-------- ----- -------- ----- -------- -----
Insurance operating in-
come.................... $116,659 15.6% $120,109 15.6% $105,925 13.2%
======== ===== ======== ===== ======== =====
As a percentage of premium, insurance operating income for Torchmark's
health insurance grew from 13.2% in 1993 to 15.6% in 1994, where it stabilized
at 15.6% in 1995. A primary reason for the increases in margins is the decline
in the amortization of acquisition costs due to improved persistency.
Improvement in the persistency of Torchmark's health business has continued
throughout each of the years considered, resulting in lower ratios of
acquisition costs to premium. These improvements have been brought about, at
least in part, by the requirement in many states to level agents' commissions
on Medicare Supplement products instead of paying a larger first-year
commission. This leveling of commissions has encouraged persistency through
the payment of a higher renewal commission. It has also encouraged persistency
through the payment of a lower first-year commission, which discourages
replacement. Excluded from the above presentation of health results in 1994
were increases in cancer policy benefits arising from the reclassification
described on page 17 of this report.
Annuities: Torchmark's annuity products serve a wide range of markets, such
as providing retirement income, funding prearranged funerals, and offering
long-term tax-deferred growth opportunities. Annuities are sold on both a
fixed and variable basis. Fixed annuity deposits are held and invested by
Torchmark and are obligations of the company. Amounts deposited for variable
annuities are invested at the policyholder's direction into his choice among
nine W&R managed mutual funds which vary in degree of investment risk and
return. A fixed investment account is also available as a variable annuity
investment option. These investments for variable annuity deposits are
reported as "Separate Account Assets" and the corresponding deposit balances
for variable annuities are reported as "Separate Account Liabilities."
21
Annuity premium is accounted for as a deposit and is not reflected in
income. Revenues on both fixed and variable annuities are derived from charges
to the annuity account balances for insurance risk, administration, and
surrender, depending on the structure of the contract. Variable accounts are
also charged an investment fee and a sales charge. Torchmark benefits to the
extent these policy charges exceed actual costs and to the extent actual
investment income exceeds the investment income which is credited to
policyholders on fixed annuities.
The following table presents the annuity account balance at each year end
and the annuity collections for each year for both fixed and variable
annuities:
ANNUITY DEPOSIT BALANCES ANNUITY COLLECTIONS
-------------------------- --------------------------
(DOLLAR AMOUNTS IN (DOLLAR AMOUNTS IN
MILLIONS) THOUSANDS)
1995 1994 1993 1995 1994 1993
-------- -------- -------- -------- -------- --------
Fixed..................... $ 927.9 $ 801.2 $ 782.8 $130,115 $ 43,339 $ 46,573
Variable.................. 1,052.2 692.8 529.7 189,188 196,105 213,982
-------- -------- -------- -------- -------- --------
Total.................... $1,980.1 $1,494.0 $1,312.5 $319,303 $239,444 $260,555
======== ======== ======== ======== ======== ========
Annuity premium collections rose 33% to $319 million in 1995 over the prior
year. Fixed annuity collections of $130 million were up over three times the
1994 collections of $43 million. The increase in fixed annuity collections
resulted largely from the entry of the United American agents into annuity
markets during the fourth quarter of 1994. These agents work primarily through
banks and market annuity products to bank customers. These sales generated $76
million of collections in 1995. Fixed annuity collections declined 7% in 1994
from the prior year. Variable annuity collections declined 4% to $189 million
in the 1995 period, after having fallen 8% in 1994. Weaker financial markets
in 1994 and early 1995 were thought to have caused the declines in sales of
variable annuities. Sales of these products recovered in the second half of
1995. Variable annuity sales rose 45% to $112 million in the second half of
1995 over $77 million in the first half.
The variable annuity balance on deposit was $1.05 billion at 1995 year end,
growing 52% over the prior year end. Growth was largely attributable to the
strength of financial markets in mid and late 1995, but was also due to the
additional deposit collections. The fixed annuity balance gained 16% to $928
million at December 31, 1995, as a result of the increased sales.
ANNUITIES
Summary of Results
(Dollar amounts in thousands)
1995 1994 1993
---------------- ---------------- ----------------
% OF % OF % OF
MEAN MEAN MEAN
AMOUNT RESERVE AMOUNT RESERVE AMOUNT RESERVE
------- ------- ------- ------- ------- -------
Policy charges.............. $19,049 1.1% $13,888 1.0% $9,454 0.7%
Allocated investment in-
come....................... 10,206 0.6 8,576 0.6 8,387 0.6
------- ---- ------- ---- ------- ----
Total revenue.............. 29,255 1.7 22,464 1.6 17,841 1.3
Policy obligations.......... 48,012 2.8 42,275 3.0 43,032 3.3
Required reserve interest... (48,541) (2.8) (42,765) (3.0) (43,090) (3.3)
------- ---- ------- ---- ------- ----
Net policy obligations..... (529) 0.0 (490) 0.0 (58) 0.0
Amortization of acquisition
costs...................... 9,125 0.5 5,772 0.4 4,596 0.3
Commissions and premium tax-
es......................... 699 0.0 605 0.0 708 0.1
Other expense............... 2,573 0.2 2,345 0.2 663 0.0
------- ---- ------- ---- ------- ----
Total expense.............. 11,868 0.7 8,232 0.6 5,909 0.4
------- ---- ------- ---- ------- ----
Insurance operating income.. $17,387 1.0% $14,232 1.0% $11,932 0.9%
======= ==== ======= ==== ======= ====
Insurance operating margins for annuities as measured by the mean reserve
have remained fairly stable throughout the three years examined. Annuity
policy charges have increased in each period.
22
These charges were $19 million in 1995, gaining 37% over 1994 charges of $14
million, which in turn rose 47% over the prior year. Growth in these policy
charges resulted from the increase in size of the annuity account balance over
each of the prior years, the increase in the number of annuity contracts in
force, and the cumulative effect of growth in sales over the past few years on
which the sales charge is based. The allocated investment income, or the
investment income earned in excess of policy requirements, also grew in each
of the periods 1993 through 1995. These increases resulted from the growth in
the fixed annuity deposit balances.
ASSET MANAGEMENT
Financial Services. Torchmark's financial services operations consist of the
exclusive marketing, through professional financial planners, of 23 mutual
funds, including the United Group and the W&R Group of funds. These
representatives also market a variety of insurance products of Torchmark
subsidiaries. Financial services operations also involve the management of
mutual fund portfolios, the management of institutional portfolios, and the
servicing of customer accounts. Revenues are derived from commissions for the
sale of investment and insurance products, fees for management of investment
asset portfolios, and fees for servicing the accounts.
Financial services revenues climbed 9% to $152 million for the year 1995
from the prior year amount of $139 million. These revenues grew 1% in 1994.
Asset management fees of $86 million in 1995 were the largest component of
financial services revenues, gaining 22% over 1994 fees of $71 million. Asset
management fees grew 10% in 1994 over 1993. Increases in these fees have
occurred due to the growth in average mutual fund assets and institutional
assets under management, on which asset management fees are based. Average
assets under management rose 14% in 1995 and 10% in 1994. Growth in average
assets under management resulted from added investment product sales in both
the 1995 and 1994 periods. Additionally, 1995 asset growth was boosted by the
strength in the financial markets. Assets under management were $18.3 billion
at December 31, 1995 and $14.5 billion at December 31, 1994, rising 26% in
1995. The 1994 increase in assets under management was less than 1%.
Commission revenues are derived from the sale of both investment and
insurance products, with investment product commissions representing 81% of
total commission revenues and insurance product commissions the balance. The
commissions from insurance products and variable annuities are primarily from
Torchmark insurance subsidiaries, and are eliminated in consolidation.
Investment product commissions declined 4% to $57 million in 1995, after
declining 10% in 1994. Investment product sales for 1995 and 1994 were level
at $1.18 billion, after having declined 5% in 1994 from $1.24 billion in 1993.
In 1995, sales of United Funds, a front-load product, declined 5% to $838
million, while sales of the W&R Funds, a deferred-load product, rose 47% to
$158 million. Service fees grew 6% in 1995, after rising 5% in 1994. The
number of accounts serviced were 1.22 million at December 31, 1995, compared
with 1.15 million at year-end 1994 and 1.09 at year-end 1993.
FINANCIAL SERVICES
Summary of Results
(Dollar amounts in thousands)
1995 1994 1993
---------------- --------------- ----------------
% OF % OF % OF
AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
-------- ------- ------- ------- -------- -------
Commission revenue........... $ 70,458 38.5% $72,223 43.1% $ 78,067 46.8%
Asset management fees........ 85,999 47.0 70,651 42.2 64,181 38.5
Service fees................. 23,528 12.9 22,297 13.3 21,273 12.7
-------- ----- ------- ----- -------- -----
Financial services reve-
nue*....................... 179,985 98.4 165,171 98.6 163,521 98.0
Investment and other income.. 2,947 1.6 2,264 1.4 3,293 2.0
-------- ----- ------- ----- -------- -----
Total revenue............... 182,932 100.0 167,435 100.0 166,814 100.0
Commissions and selling
expenses.................... 63,882 34.9 62,285 37.2 70,735 42.4
Other expenses............... 24,708 13.5 21,252 12.7 23,265 14.0
-------- ----- ------- ----- -------- -----
Total expenses.............. 88,590 48.4 83,537 49.9 94,000 56.4
-------- ----- ------- ----- -------- -----
Pretax income................ $ 94,342 51.6% $83,898 50.1% $ 72,814 43.6%
======== ===== ======= ===== ======== =====
- --------
* Financial services revenue includes $27.5 million in 1995, $25.9 million in
1994 and $26.2 million in 1993 representing revenues from other Torchmark
segments which are eliminated in consolidation.
23
Pretax operating margins improved in both 1995 and 1994 over the prior year,
growing 12% in 1995 to $94 million after a 15% rise in 1994 to $84 million. As
a percentage of financial services revenues, pretax income stood at 52% for
1995. The primary cause for the margin improvements has been the rapid growth
in asset management fees in proportion to commission revenues. Asset
management fees have a significantly greater profit margin than commissions.
Commissions and selling expenses as a percentage of commission revenues
declined from 91% in 1993 to 86% in 1994 but rose to 91% in 1995. The 1994
decline was caused by the implementation of a 12-b service fee which offsets
certain direct expenses. While this fee increased in 1995, the decrease in
expense was more than offset by additional expense from product promotion and
efforts to expand the sales force. It is anticipated that these additional
expenditures will result in increased product sales in future periods.
Energy: As previously discussed on page 17 of this report, Torchmark intends
to dispose of its energy operations and has classified such operations as
discontinued operations in the financial statements. These energy operations
involved the management of proven producing oil and gas properties for both
Torchmark affiliates and unrelated parties by Torch Energy. Energy operations
also included drilling of developmental wells, acquisition of properties and
facilities, and marketing of oil and gas products by Torch Energy. They also
involved the extraction and production of energy products through direct
energy investments.
Black Warrior Writedown: Torchmark has maintained an investment in a coalbed
methane gas development since 1990 in the Black Warrior Basin of Alabama. The
development was completed in 1993. During 1993 and 1994, production results
were below expectations and losses were experienced in both years. Prior to
1995, Torchmark reviewed its investment quarterly and determined there were no
impairments for reserves under successful efforts accounting. SFAS 121 was
adopted by Torchmark at issuance of the Standard in March, 1995, and there
were no impairments under the provisions of that Standard at the time of
adoption. In the fourth quarter of 1995, production problems accelerated, and
it became apparent that it was not cost-effective to incur the additional cost
required to produce gas from the deeper coal seams. As a result, certain
reserves of the Black Warrior investment were reclassified from proved to
possible, causing an approximate 55 percent decline in the estimated proved
gas reserves. Because of these factors, a decision was made by Torchmark in
the fourth quarter of 1995 to sell the Black Warrior investment.
As a result of these events, a review was made for impairment under the
provisions of SFAS 121. In accordance with the requirements of SFAS 121 and in
view of Torchmark's desire to dispose of Black Warrior, Torchmark wrote down
its investment to its estimated net realizable value, resulting in an after-
tax charge of $130 million, or $1.82 per share in 1995. Net realizable value
was determined using a discounted cash flow model. Even though gas prices
improved in 1995, the significant decline in proved reserves resulted in the
impairment of Black Warrior's estimated net realizable value.
Investments: Because Torchmark's Black Warrior coalbed methane investment
and certain other energy investments are included in the disposed energy
segment, these investments and the associated investment income are presented
in the financial statements as discontinued operations. Therefore, all
previously-reported amounts of invested assets and investment income have been
reclassified accordingly.
Net investment income increased 10% to $382 million in 1995, after having
experienced a 6% decline from $368 million in 1993 to $348 million in 1994. In
comparison of net investment income between these three periods, the
acquisition of American Income and the disposition of Vesta must be taken into
account. After adjusting for the effect of the American Income acquisition,
1995 net investment income rose 3% from $344 million in 1994 to $354 million.
When excluding the effect of both transactions, 1994 investment income
declined 4% from $357 million in 1993.
In addition to the larger invested asset base caused by the American Income
purchase, the increase in 1995 income over the prior year was also caused by
certain other factors. First, nonrecurring investment income was received in
the fourth quarter of 1995 on passive energy investments retained by Torchmark
in the amount of $4.3 million from a legal settlement. Additionally, there was
a slight improvement in yield on the portfolio.
24
The effects of accelerated mortgage-backed prepayments need to be considered
when making a comparison with 1993 net investment income. The decline in
interest rates in 1993 encouraged refinancing of mortgages, causing increased
GNMA prepayments in 1993 and early 1994. These funds were reinvested at lower
prevailing rates, causing a reduction in Torchmark's investment income in 1993
and an even greater reduction in subsequent years. It is estimated that GNMA
repayments reduced 1994 investment income $16.1 million from 1993. As rates
rose in 1994, the refinancing trend reversed and Torchmark was able to
reinvest repayment proceeds in higher yielding securities. Torchmark reduced
its exposure to GNMA securities during 1994 and, to a greater extent, during
1995, so that at December 31, 1995, GNMA investments represented 19% of
invested assets, compared with 55% of the portfolio three years earlier. For
this reason, the decline in rates during 1995 and the related increase in
refinancings had little impact on Torchmark's 1995 net investment income.
In 1995, a persistent easing of inflationary expectations helped create a
significant bond market rally which more than offset the weakness of 1994.
Yields available on fixed investments declined throughout the year, falling
approximately 200 basis points when measured by the ten and thirty-year
Treasury bond. In this environment, Torchmark emphasized the acquisition of
call-protected corporate bonds, while continuing to reduce mortgage-backed
investments and municipal holdings. During 1995, investment acquisitions in
the amount of $1.87 billion were made at an average yield of 7.28%, compared
with acquisitions of $1.29 billion yielding 7.13% in 1994. Corporate
obligations represented 84% of total 1995 new purchases. The increased
acquisition activity in 1995 resulted from (1) the inclusion of American
Income's investment operations for the full year of 1995; and, (2) the
reinvestment of proceeds from two sale programs executed during 1995 designed
to lessen exposure to mortgage-backed holdings.
The decline in rates in 1995 caused an increase in the market value of fixed
maturity assets. During the year, the market value of these assets increased
$818 million or 19% to $5.2 billion, exceeding $5 billion for the first time
in 1995. At December 31, 1995, market value exceeded book value on fixed
investments by $226 million. This is in contrast to year-end 1994 when book
value exceeded market by $242 million. At year-end 1993, there was an
unrealized gain of $192 million. The unrealized loss in 1994 resulted from the
rise in rates in that year.
With the decrease in GNMA holdings, the percentage of government and
government-guaranteed holdings within Torchmark's fixed-income portfolio
continued to decline. This percentage was 29% at year-end 1995, 47% at year-
end 1994, and 59% at year-end 1993. Torchmark's preference for quality is
demonstrated, however, by the fact that at December 31, 1995, 43% of the fixed
income holdings were rated "AAA" by rating agencies and 96% were considered to
be investment grade.
Repayment of investment assets is a function of both maturity and the
changing interest rate environment. The reduction in cash flow which resulted
from GNMA sales during the year was more than offset by the acquisition of
shorter maturity corporate bonds and the increased probability of early calls
as rates declined. Accordingly, at year-end 1995, an estimated 37% of the
fixed maturity portfolio should repay within five years, compared with 30% at
year-end 1994 and 46% at year-end 1993. The following table is a presentation
of the percentages of Torchmark's fixed investment portfolio by estimated
maturity.
1995 1994
----- -----
Short terms and under 1 year.. 8.6% 8.4%
2-5 years..................... 28.9 21.7
6-10 years.................... 38.3 44.0
11-15 years................... 10.8 18.9
16-20 years................... 2.5 3.9
Over 20 years................. 10.9 3.1
----- -----
100.0% 100.0%
===== =====
Because Torchmark's investment program is based upon high quality fixed
maturity bonds, Torchmark's percentage ownership of other types of investments
varies significantly from other companies in the industry. The following table
presents Torchmark's holdings by asset type as of December 31, 1995 as
contrasted with the industry averages prepared by the American Council of Life
Insurance.
25
TORCHMARK
---------------- INDUSTRY %
$ AMOUNTS % (1)
---------- ----- ----------
Investment grade bonds & short terms............... $5,109,870 88.4% 67.6%
Noninvestment grade bonds.......................... 164,584 2.8 3.8
Equities........................................... 19,168 0.3 5.1
Mortgage loans..................................... 52,274 0.9 13.8
Real estate........................................ 143,356 2.5 2.8
Policy loans....................................... 193,877 3.4 5.5
Other.............................................. 95,744 1.7 1.4
---------- ----- -----
$5,778,873 100.0% 100.0%
========== ===== =====
- --------
(1) Latest data available from the American Council of Life Insurance
At year-end 1995, average life of the portfolio increased to 8.8 years,
compared with 8.0 years at year-end 1994 and 6.0 years at year-end 1993.
FINANCIAL CONDITION
Liquidity: Torchmark is highly liquid, as evidenced by its positive cash
flows, its marketable investments, and its credit facilities. Its insurance
and asset management operations generate strong positive cash flows, well in
excess of its immediate needs. Cash flows provided from operations, including
deposit-product operations, were $478 million in 1995, compared with $337
million in 1994, an increase of 42%. This increase was primarily caused by
increased deposit-product sales in 1995 and a one-time $48 million tax
settlement paid in 1994 related to prior periods. Operating cash flows were
$470 million in 1993. In addition to operating cash flows, Torchmark received
$351 million in 1995 of scheduled investment maturities and repayments,
further enhancing total positive cash flow. Such repayments were $796 million
in 1994 and $485 million in 1993. Cash flows in excess of immediate
requirements are used to build an investment base to fund future requirements.
Cash and short-term investments were $86 million at December 31, 1995,
compared with $120 million at year-end 1994. These liquid assets represented
approximately 1% of total assets at December 31, 1995, compared with 1.5% at
the end of the previous year. In addition to Torchmark's 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 $5.2
billion at December 31, 1995.
Torchmark has in place a line of credit facility with a group of lenders
which allowed unsecured borrowings up to $400 million at December 31, 1995.
This line of credit is further designed as a backup credit line for a
commercial paper program not to exceed $400 million, whereby Torchmark may
borrow from either the credit line or issue commercial paper at any time but
may not borrow in excess of a total of $400 million on the combined
facilities. At December 31, 1995, $189 million in commercial paper was
outstanding and there were no borrowings on the line of credit. A facility fee
is charged on the entire $400 million balance. In accordance with the
agreements, Torchmark is subject to certain covenants regarding capitalization
and earnings. At December 31, 1995, Torchmark was in full compliance with
these covenants.
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. Dividends from insurance
subsidiaries of Torchmark are limited to the greater of statutory net gain
from operations on an annual noncumulative basis or 10% of surplus, in the
absence of special approval, and 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. At December 31, 1995, a maximum amount of $237 million was
available to Torchmark from insurance subsidiaries without regulatory
approval.
26
Capital Resources: The carrying amount of Torchmark's long-term debt was
$792 million at both year-ends 1995 and 1994. Major debt issues outstanding at
December 31, 1995 were as follows:
PRINCIPAL
AMOUNT
INSTRUMENT DUE RATE ($ MILLIONS)
---------- ---- ----- ------------
Sinking Fund Debentures......................... 2017 8 5/8% $200
Senior Notes.................................... 1998 9 5/8 200
Senior Debentures............................... 2009 8 1/4 100
Notes........................................... 2023 7 7/8 200
Notes........................................... 2013 7 3/8 100
----
$800
====
In connection with the American Income purchase in November, 1994, Torchmark
issued eight million shares or $200 million face amount Cumulative Monthly
Income Preferred Securities, Series A ("MIPS") in October, 1994. The MIPS were
issued at 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 redeemable at Torchmark's option at any time after September 30,
1999. While Torchmark is obligated to pay dividends at a fixed rate of 9.18%,
Torchmark subsequently entered into a ten-year interest-rate 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.
Additionally, Torchmark acquired a five-year interest-rate cap on the swap
agreement that insures the variable rate cannot exceed 10.39%. At December 31,
1995, the variable rate was 5.86%. During 1995, Torchmark's after-tax dividend
cost for the MIPS was $10.3 million, compared with $11.9 million that would
have been incurred without the swap and cap transactions.
Short-term debt was $189 million at year-end 1995, compared with $250
million at the end of the previous year. Torchmark paid down a net of $61
million on its above-mentioned credit facility during 1995.
Shareholders' equity rose to $1.59 billion at December 31, 1995, an increase
of 28% from December 31, 1994 shareholders' equity of $1.24 billion. Book
value per share was $22.17 at 1995 year end, compared with $17.37 and $18.80
at year-ends 1994 and 1993, respectively. After adjusting for the impact of
interest-rate fluctuations on shareholders' equity required by accounting
rules, book value per share was $20.33 at year-end 1995, an increase of 5%
over $19.31 at year-end 1994. Comparative book value per share was $17.29 at
year-end 1993. Return from continuing operations on common shareholders'
equity was 18.5% in 1995, compared with 19.7% in 1994, declining in large part
due to the growth in shareholders' equity. The return on equity ratio excludes
the mark up or down of shareholders' equity for changes in interest rates
required by accounting rules. Total debt as a percentage of total
capitalization was 37% at December 31, 1995, with the MIPS counted as equity
and excluding the effect of the above-mentioned accounting rule. This debt to
capitalization ratio was 40% at year-end 1994 and 41% at year-end 1993.
Torchmark's multiple of earnings before interest, taxes, and discontinued
operations to interest requirements was 6.3 for 1995, compared with 6.2 in
1994 and 7.7 in 1993.
OTHER ITEMS
Acquisition of American Income: On November 3, 1994, Torchmark acquired
American Income for a total cash purchase price of approximately $552 million.
American Income sells life insurance to union and credit union members through
exclusive agents. The addition of American Income's quality line of products
and low-cost operation fits well with Torchmark's strategy of growing life
insurance operations in niche markets. The results of operations of American
Income were consolidated with those of Torchmark after the purchase date.
Funds for the purchase were provided through a $200 million preferred stock
offering which is discussed in more detail in the capital resources section
above, a $175 million bridge loan from a group of banks, the sale of
investments available for sale, and internal cash flow.
27
Restructure: Torchmark is exploring a strategic restructuring for the
purpose of enhancing shareholder value. Many alternatives will be examined.
One alternative includes the possibility that Torchmark could be divided into
separate publicly-traded operating companies. Because there are many complex
tax, accounting, business, operational, and capital issues to be resolved,
should such a restructuring be undertaken, it is unknown at this time what the
ultimate form of this restructuring might take .
Litigation: Torchmark and its subsidiaries continue to be named as parties
to pending or threatened litigation, most of which involve punitive damage
claims based upon allegations of agent misconduct at Liberty in Alabama. Such
punitive damage claims are tried in Alabama state courts where any punitive
damage litigation has 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 the amount of punitive damages in
Alabama is left largely to the discretion of the jury in each case. 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.
Also, the class action litigation in Alabama over an exchange of Liberty's
cancer policies continued in 1995. In May, 1994, a settlement was approved
involving both equitable and monetary relief, valued by the court at $55
million. An appeal from the trial court's final approval of the settlement was
taken to the Alabama Supreme Court, and final briefs in the case were
submitted to the Supreme Court in February, 1995. The Supreme Court affirmed
the trial court's decision in December, 1995. In February, 1996, the Alabama
Supreme Court issued a notice overruling a petition for a rehearing.
Merger with United Management: On October 1, 1993, Torchmark acquired the
approximately 16% of United Management that it did not already own through the
payment of $31.25 per share in cash for the remaining outstanding shares.
Accordingly, United Management was merged into Torchmark. Including share
purchases made in 1993, the total amount of consideration paid to the
remaining United Management shareholders was approximately $230 million.
Divestiture of Vesta: During 1993, Torchmark entered into a transaction
whereby it disposed of approximately 73% of its common stock in Vesta, its
wholly-owned subsidiary, which was at that time the holding company for
Torchmark's property and casualty operations. On November 11, 1993, Vesta sold
nine million shares of common stock in a public offering of which 6.8 million
shares were owned by Torchmark prior to the sale and 2.2 million were newly
issued shares. Torchmark's 6.8 million shares were sold for $25 per share less
expenses, amounting to proceeds of approximately $161 million and resulting in
a $57 million pretax gain. After the transaction, Torchmark continued to own
3.4 million shares of Vesta outstanding common stock or approximately 27% of
the company. Torchmark also loaned Vesta $28 million in December, 1993, which
was repaid in full in 1995 with interest. In January, 1996, Vesta declared and
paid a three for two share stock dividend. After this dividend, Torchmark
owned 5.1 million shares of Vesta stock, still representing approximately 27%
of the company.
NEW ACCOUNTING RULES
Accounting for Stock-Based Compensation (FASB Statement No. 123) is
effective for fiscal years beginning after December 15, 1995, with earlier
adoption encouraged. This statement establishes and encourages a new
accounting method for employee stock options based on a presumed fair market
value of the option at the time of grant. Previously, accounting standards
required these options to be valued at intrinsic value, or the difference
between the market value of the stock and the option price. The cost of the
options are to be charged to earnings generally over the option's vesting
period. The new method of valuation of options is not required, but if the new
method is not elected, disclosure of its impact on earnings on a pro forma
basis is required. Additional disclosures are also required.
Torchmark intends to continue to account for options using the accounting
rules currently in effect. Therefore, while there will be no effect on future
reported earnings and earnings per share, disclosure will be made giving the
pro forma effect of valuing options at estimated fair value. No determination
of fair value for Torchmark's options has been made, but such valuation should
not have material impact on pro forma results. In 1995, Torchmark granted to
employees stock options to purchase 739 thousand shares at a price of $43 3/8
per share.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
Independent Auditors' Report.............................................. 30
Consolidated Financial Statements:
Consolidated Balance Sheet at December 31, 1995 and 1994................. 31
Consolidated Statement of Operations for each of the years in the three-
year period
ended December 31, 1995................................................. 32
Consolidated Statement of Shareholders' Equity for each of the years in
the three-year
period ended December 31, 1995.......................................... 33
Consolidated Statement of Cash Flow for each of the years in the three-
year period
ended December 31, 1995................................................. 34
Notes to Consolidated Financial Statements............................... 35
29
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 and the supporting schedules
as listed in Item 14(a). These financial statements and financial statement
schedules are the responsibility of Torchmark's management. Our responsibility
is to express an opinion on these 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 at December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, 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.
As discussed in Note 1, Torchmark adopted the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards
(Statement) No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, in 1995. Also, as discussed in Notes
1, 11, and 12 to the consolidated financial statements, Torchmark adopted the
provisions of the Financial Accounting Standards Board's Statement No. 109,
Accounting for Income Taxes, and Statement No. 106, Employers' Accounting for
Postretirement Benefits Other than Pensions, in 1993. Also, Torchmark adopted
the provisions of the Financial Accounting Standards Board's Statement No.
115, Accounting for Certain Investments in Debt and Equity Securities, in
1993.
KPMG PEAT MARWICK LLP
Birmingham, Alabama
January 31, 1996 except for
Note 16 which is as
of February 26, 1996
30
TORCHMARK CORPORATION
CONSOLIDATED BALANCE SHEET
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31,
----------------------
1995 1994
---------- ----------
Assets:
Investments:
Fixed maturities--available for sale, at fair value
(cost: 1995--$4,984,223;
1994--$4,634,594)................................... $5,210,224 $4,392,259
Equity securities, at fair value (cost: 1995--$4,758;
1994--$35,985)...................................... 10,551 31,547
Mortgage loans on real estate, at cost (estimated
fair value: 1995--$50,686;
1994--$17,956)...................................... 52,274 17,997
Investment real estate, at cost (less allowance for
depreciation: 1995--$32,463; 1994--$28,620)......... 143,356 132,554
Policy loans......................................... 193,877 181,988
Other long-term investments.......................... 95,744 93,090
Short-term investments............................... 72,847 108,362
---------- ----------
Total investments................................... 5,778,873 4,957,797
Cash (includes restricted cash: 1995--$11,838; 1994--
$13,091)............................................. 13,158 11,298
Investment in unconsolidated subsidiaries............. 76,101 63,672
Accrued investment income............................. 82,006 67,116
Other receivables..................................... 122,108 125,671
Deferred acquisition costs............................ 1,121,325 1,017,467
Value of insurance purchased.......................... 277,297 274,124
Property and equipment................................ 47,185 47,368
Goodwill.............................................. 555,517 570,455
Other assets.......................................... 30,304 27,324
Discontinued operations assets........................ 174,386 287,749
Separate account assets............................... 1,085,844 715,203
---------- ----------
Total assets........................................ $9,364,104 $8,165,244
========== ==========
Liabilities:
Future policy benefits................................ $4,566,850 $4,229,916
Unearned and advance premiums......................... 83,473 90,871
Policy claims and other benefits payable.............. 209,773 201,754
Other policyholders' funds............................ 77,039 72,783
---------- ----------
Total policy liabilities............................. 4,937,135 4,595,324
Accrued income taxes.................................. 362,005 173,003
Other liabilities..................................... 215,712 204,425
Short-term debt....................................... 189,372 250,116
Long-term debt (estimated fair value: 1995--$860,258;
1994--$751,603)...................................... 791,988 791,518
Separate account liabilities.......................... 1,085,844 715,203
---------- ----------
Total liabilities.................................... 7,582,056 6,729,589
Commitments and contingencies
Monthly income preferred securities (estimated fair
value: 1995--$217,040;
1994--$200,000)....................................... 193,096 193,052
Shareholders' equity:
Preferred stock, par value $1 per share--Authorized
5,000,000 shares; outstanding:
-0- in 1995 and in 1994.............................. -0- -0-
Common stock, par value $1 per share--Authorized
160,000,000 shares; outstanding: 73,784,228 issued in
1995 and in 1994, less 2,117,091 and 2,250,193 shares
held in treasury in 1995 and 1994, respectively...... 73,784 73,784
Additional paid-in capital............................ 139,754 139,045
Unrealized gains (losses), net of applicable taxes.... 140,338 (140,756)
Retained earnings..................................... 1,325,534 1,267,545
Treasury stock........................................ (90,458) (97,015)
---------- ----------
Total shareholders' equity........................... 1,588,952 1,242,603
---------- ----------
Total liabilities and shareholders' equity........... $9,364,104 $8,165,244
========== ==========
See accompanying Notes to Consolidated Financial Statements.
31
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
Revenue:
Life premium............................. $ 772,257 $ 601,633 $ 555,859
Health premium........................... 750,588 768,714 799,835
Other premium............................ 23,438 18,527 137,216
---------- ---------- ----------
Total premium.......................... 1,546,283 1,388,874 1,492,910
Net investment income.................... 381,865 347,637 368,494
Financial services revenue............... 152,482 139,276 137,422
Realized investment gains (losses)....... (14,323) (2,551) 8,009
Gain from sale of Vesta shares........... -0- -0- 57,234
Other income............................. 1,175 2,101 2,777
---------- ---------- ----------
Total revenue.......................... 2,067,482 1,875,337 2,066,846
Benefits and expenses:
Life policyholder benefits............... 507,444 389,976 377,017
Health policyholder benefits............. 453,127 488,066 486,855
Other policyholder benefits.............. 48,765 43,235 107,684
---------- ---------- ----------
Total policyholder benefits............ 1,009,336 921,277 971,556
Amortization of deferred acquisition
costs................................... 204,067 178,107 187,073
Commissions and premium taxes............ 144,333 141,158 172,801
Financial services selling expense....... 40,080 39,962 47,055
Other operating expense.................. 145,520 118,353 137,039
Nonoperating expenses.................... -0- -0- 82,000
Amortization of goodwill................. 14,977 6,584 2,917
Interest expense......................... 80,994 75,922 64,447
---------- ---------- ----------
Total benefits and expenses............ 1,639,307 1,481,363 1,664,888
Income from continuing operations before
income taxes and equity in earnings of
unconsolidated subsidiaries.............. 428,175 393,974 401,958
Income taxes.............................. (157,539) (135,994) (149,506)
Equity in earnings of unconsolidated sub-
sidiaries................................ 11,626 7,971 542
Minority interests in consolidated subsid-
iaries................................... -0- -0- (10,696)
Monthly income preferred securities divi-
dend..................................... (10,317) (2,137) -0-
---------- ---------- ----------
Net income from continuing operations.. 271,945 263,814 242,298
Income (loss) from discontinued operations
of energy segment (less applicable income
taxes of: 1995--$86,050, 1994--$11,677,
1993--($3,580)).......................... (128,710) 5,132 37,278
Cumulative effect of changes in accounting
principles............................... -0- -0- 18,403
---------- ---------- ----------
Net income............................. 143,235 268,946 297,979
Dividends to preferred shareholders....... -0- (804) (3,289)
---------- ---------- ----------
Net income available to common share-
holders............................... $ 143,235 $ 268,142 $ 294,690
========== ========== ==========
Net income per share:
Continuing operations.................... $ 3.80 $ 3.65 $ 3.25
Discontinued operations of energy seg-
ment.................................... (1.80) 0.07 0.51
Cumulative effect of changes in account-
ing principles.......................... 0.00 0.00 0.25
---------- ---------- ----------
Net income per share................... $ 2.00 $ 3.72 $ 4.01
========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
32
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
ADDITIONAL UNREALIZED TOTAL
PREFERRED COMMON PAID-IN GAINS RETAINED TREASURY SHAREHOLDERS'
STOCK STOCK CAPITAL (LOSSES) EARNINGS STOCK EQUITY
--------- ------- ---------- ---------- ---------- -------- -------------
Year Ended December 31,
1993
Balance at January 1,
1993................... $1,000 $73,512 $212,021 $ 9,182 $ 867,698 $(47,753) $1,115,660
Net income.............. 297,979 297,979
Common dividends de-
clared ($1.09 a share). (80,357) (80,357)
Preferred dividends
declared and accrued... (3,289) (3,289)
Issuance of common
stock.................. 272 15,290 312 15,874
Grant of stock options.. 5,121 5,121
Acquisition of treasury
stock--common.......... (44,689) (44,689)
Net change in unrealized
gains (losses)......... 110,956 110,956
------ ------- -------- -------- ---------- -------- ----------
Balance at December 31,
1993.................. 1,000 73,784 232,432 120,138 1,082,031 (92,130) 1,417,255
Year Ended December 31,
1994
Net income.............. 268,946 268,946
Common dividends de-
clared ($1.12 a share). (80,602) (80,602)
Preferred dividends
declared and accrued... (804) (804)
Acquisition of treasury
stock--preferred....... (46,982) (46,982)
Acquisition of treasury
stock--common.......... (59,072) (59,072)
Retirement of treasury
stock--preferred....... (1,000) (93,736) 94,736 -0-
Exercise of stock op-
tions.................. 349 (2,026) 6,433 4,756
Net change in unrealized
gains (losses)......... (260,894) (260,894)
------ ------- -------- -------- ---------- -------- ----------
Balance at December 31,
1994.................. -0- 73,784 139,045 (140,756) 1,267,545 (97,015) 1,242,603
Year Ended December 31,
1995
Net income.............. 143,235 143,235
Common dividends de-
clared ($1.14 a share). (81,643) (81,643)
Exercise of stock
options................ 709 (3,603) 6,557 3,663
Net change in unrealized
gains (losses)......... 281,094 281,094
------ ------- -------- -------- ---------- -------- ----------
Balance at December 31,
1995.................. $ -0- $73,784 $139,754 $140,338 $1,325,534 $(90,458) $1,588,952
====== ======= ======== ======== ========== ======== ==========
See accompanying Notes to Consolidated Financial Statements.
33
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- ----------- -----------
Net income.............................. $ 143,235 $ 268,946 $ 297,979
Adjustments to reconcile net income to
cash provided from operations:
Increase in future policy benefits.... 178,850 81,062 140,867
Increase in other policy benefits..... 4,877 23,990 7,548
Deferral of policy acquisition costs.. (362,837) (225,409) (214,318)
Amortization of deferred policy acqui-
sition costs......................... 204,067 178,107 187,073
Change in accrued income taxes........ 42,337 (39,942) (13,034)
Depreciation and depletion............ 9,603 11,271 10,852
Realized (gains) losses on sale of in-
vestments,
subsidiaries, and properties......... 14,323 2,551 (8,009)
Change in accounts payable and other
liabilities.......................... (6,623) (45,093) 65,244
Change in receivables................. (31,670) (2,237) (14,742)
Change in payables and receivables of
unconsolidated affiliates............ (2,348) (1,251) 4,502
Other accruals and adjustments........ (2,951) 2,483 (45,554)
Discontinued operations of energy seg-
ment................................. 128,710 (5,132) (37,278)
---------- ----------- -----------
Cash provided from operations........... 319,573 249,346 381,130
Cash used for investment activities:
Investments sold or matured:
Fixed maturities available for sale--
sold................................. 1,177,874 582,611 245,689
Fixed maturities available for sale--
matured, called, and repaid.......... 351,246 796,064 485,112
Fixed maturities held to maturity--
sold................................. -0- -0- 58,028
Fixed maturities held to maturity--ma-
tured, called, and repaid............ -0- -0- 669,998
Equity securities..................... 16,587 23,179 9,909
Mortgage loans........................ 1,856 1,128 2,654
Real estate........................... 2,566 1,292 7,351
Other long-term investments........... 21,666 16,552 17,179
---------- ----------- -----------
Total investments sold or matured.... 1,571,795 1,420,826 1,495,920
Acquisition of investments:
Fixed maturities--available for sale.. (1,870,445) (1,264,056) (99,453)
Fixed maturities--held to maturity.... -0- -0- (1,761,776)
Equity securities..................... (394) (23,739) (830)
Real estate........................... (17,708) (20,587) (10,129)
Net increase in policy loans.......... (11,889) (8,305) (5,093)
Other long-term investments........... (67,241) (15,333) (9,048)
---------- ----------- -----------
Total investments acquired........... (1,967,677) (1,332,020) (1,886,329)
Net (increase) decrease in short-term
investments........................... 35,514 76,457 (120,000)
Purchase of American Income............ -0- (551,501) -0-
Purchase of Minority Interest.......... -0- -0- (229,063)
Proceeds from sale of stock in subsidi-
aries................................. -0- -0- 187,220
Loans made to unconsolidated affili-
ates.................................. -0- (20,186) (109,954)
Loans repaid by unconsolidated affili-
ates.................................. 28,000 -0- 91,537
Dispositions of properties............. 1,198 1,332 978
Additions to properties................ (6,510) (5,632) (4,029)
Dividends from unconsolidated affili-
ates.................................. 684 513 620
---------- ----------- -----------
Cash used for investment activities..... (336,996) (410,211) (573,100)
Cash provided from (used for) financing
activities:
Issuance of common stock............... 2,953 4,408 5,461
Issuance of monthly income preferred
securities............................ -0- 193,046 -0-
Additions to debt...................... -0- 143,000 294,110
Cash dividends paid to shareholders.... (80,887) (82,336) (82,932)
Cash distributions to minority inter-
ests.................................. -0- -0- (1,968)
Repayments on debt..................... (60,867) (70,108) (88,102)
Loans repaid to unconsolidated affili-
ates.................................. -0- -0- (10,000)
Acquisition of treasury stock.......... -0- (106,054) (41,897)
Net receipts from deposit product oper-
ations................................ 158,084 87,701 88,675
---------- ----------- -----------
Cash provided from financing activities. 19,283 169,657 163,347
---------- ----------- -----------
Increase (decrease) in cash............ 1,860 8,792 (28,623)
Cash at beginning of year.............. 11,298 2,506 31,129
---------- ----------- -----------
Cash at end of year.................... $ 13,158 $ 11,298 $ 2,506
========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
34
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
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 and
United Investors Management Company ("United Management"). United Management
was approximately 83% owned through October 1, 1993 at which time Torchmark
acquired all of the publicly held shares. Subsidiaries which are not majority-
owned are reported on the equity method. All significant intercompany accounts
and transactions have been eliminated in consolidation.
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
shareholders' equity. 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 shareholders'
equity. 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. Other long-term investments consist of investments in mutual funds
managed by a Torchmark subsidiary. They are carried at fair value. Other long-
term investments also include passive energy limited-partnership investments
which are valued at partnership equity. 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 other policyholders
is included in Torchmark's net investment income. Net investment income for
the years ended December 31, 1995, 1994 and 1993 included $279.6 million,
$240.7 million, and $229.5 million, respectively, which was allocable to
policyholder reserves or accounts. Realized investment gains and losses are
not allocable to policyholders.
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 SFAS 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
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
includes policy charges of $72.7 million, $74.2 million, and $76.2 million for
the years ended December 31, 1995, 1994 and 1993, respectively. Other premium
includes annuity policy charges for the years ended December 31, 1995, 1994,
and 1993 of $19.0 million, $13.9 million, and $9.5 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 according to SFAS 97 are
amortized with interest over an estimate of the premium-paying period of the
policies in a manner which charges each year's operations in proportion to the
receipt of premium income. 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 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.
Effective January 1, 1993, Torchmark adopted SFAS 109 and has reported the
cumulative effect of that change in the method of accounting for income taxes
in the 1993 consolidated statement of operations.
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 twenty years for equipment and two to forty years for
buildings and improvements. Ordinary maintenance and repairs are charged to
income as incurred.
Impairments: Torchmark adopted the provisions of SFAS 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, effective at the issuance of the standard in March, 1995. This standard
requires that certain long-lived assets used in Torchmark's business as well
as certain intangible assets be reviewed for impairment when circumstances
indicate that these assets may not be recoverable, and further provides how
such impairment shall be determined and
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 the writedown of the energy investment described in
Note 8, the adoption of this statement had no material impact on Torchmark's
operations or financial position.
Goodwill: The excess cost of businesses acquired over the fair value of
their net assets is reported as goodwill and is amortized on a straight-line
basis over a period not exceeding 40 years. Torchmark's unamortized goodwill
is periodically reviewed to ensure that conditions are present to indicate the
recorded amount of goodwill is recoverable from the estimated future
profitability of the related business. If events or changes in circumstances
indicate that future profits will not be sufficient to support the carrying
amount of goodwill, goodwill is written down to the recoverable amount and is
amortized over the original remaining period or a reduced period if
appropriate.
Treasury Stock: Torchmark accounts for purchases of treasury stock on the
cost method.
Reclassification: 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 sought in
Alabama, a jurisdiction known for excessive 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.
Earnings Per Share: Earnings available to holders of common stock are
computed after deducting dividends on the Adjustable Rate Cumulative Preferred
Stock. Primary earnings per share are then calculated by dividing the earnings
available to holders of common stock by the weighted average number of common
shares outstanding during the period. The weighted average numbers of common
shares outstanding for each period are as follows: 1995--71,593,774, 1994--
72,095,657, 1993--73,501,654.
37
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,
-------------------------- ---------------------
1995 1994 1993 1995 1994
-------- -------- -------- ---------- ----------
Life....................... $245,552 $228,754 $364,421* $ 618,557 $552,906
Property and casualty...... -0- -0- 6,449 -0- -0-
*Includes equity in earnings of property and casualty subsidiaries
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,
--------------------------------
1995 1994 1993
---------- ---------- --------
Statutory net income................... $ 245,552 $228,754 $364,421
Deferral of acquisition costs.......... 328,598 225,409 214,318
Amortization of acquisition costs...... (204,067) (178,107) (187,073)
Differences in insurance policy liabil-
ities................................. 1,407 30,271 (42,364)
Deferred income taxes.................. (40,380) (2,052) (22,281)
Inter-affiliate dividends.............. (684) -0- (194,442)
Income of noninsurance affiliates...... (207,164) 11,372 136,748
Other.................................. 19,973 (18,229) 28,652
Pre-acquisition adjustments............ -0- (28,472) -0-
---------- ---------- --------
GAAP net income........................ $ 143,235 $268,946 $297,979
========== ========== ========
A reconciliation of Torchmark's insurance subsidiaries' statutory
shareholders' equity to Torchmark's consolidated GAAP shareholders' equity is
as follows:
YEAR ENDED
DECEMBER 31,
----------------------
1995 1994
---------- ----------
Statutory shareholders' equity......... $ 618,557 $ 552,906
Differences in insurance policy liabil-
ities................................. 371,599 321,084
Deferred acquisition costs............. 1,121,325 1,017,467
Value of insurance purchased........... 277,297 274,124
Deferred income taxes.................. (407,267) (223,385)
Debt of parent company................. (980,814) (1,040,972)
Asset valuation reserves............... 161,573 96,814
Nonadmitted assets..................... 85,240 43,610
Net assets of noninsurance affiliates . 158,259 230,671
Other.................................. 183,183 (29,716)
---------- ----------
GAAP shareholders' equity.............. $1,588,952 $1,242,603
========== ==========
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 3--INVESTMENT OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
--------- --------- --------
Investment income is summarized as follows:
Fixed maturities.......................... $ 350,931 $ 329,626 $349,403
Equity securities......................... 818 1,323 2,214
Mortgage loans on real estate............. 4,343 631 1,163
Investment real estate.................... 8,277 7,778 6,804
Policy loans.............................. 12,137 10,003 9,070
Other long-term investments............... 10,410 4,958 7,744
Short-term investments.................... 8,890 7,046 4,824
--------- --------- --------
395,806 361,365 381,222
Less investment expense................... (13,941) (13,728) (12,728)
--------- --------- --------
Net investment income..................... $ 381,865 $ 347,637 $368,494
========= ========= ========
An analysis of gains (losses) from invest-
ments is as follows:
Realized investment gains (losses):
Fixed maturities......................... $ 1,285 $ (5,049) $ 12,387
Equity securities........................ (15,033) 1,610 702
Other.................................... (575) 888 (5,080)
--------- --------- --------
$ (14,323) $ (2,551) $ 8,009
========= ========= ========
Net change in unrealized investment gains
(losses) on
equity securities before tax............. $ 10,125 $ (15,064) $ (1,855)
Net change in unrealized investment gains
on fixed maturities available for sale
before tax............................... 468,336 (434,340) 192,007
Net change in unrealized investment gains
on other long-term investments or foreign
exchange translation adjustments......... 5,514 (4,088) 4,834
Adjustment to deferred acquisition costs.. (51,739) 52,334 (23,264)
Applicable tax............................ (151,142) 140,264 (60,766)
--------- --------- --------
Net change in unrealized gains (losses) on
equity and fixed maturity securities
available for sale....................... $ 281,094 $(260,894) $110,956
========= ========= ========
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 3--INVESTMENT OPERATIONS (CONTINUED)
A summary of fixed maturities available for sale and equity securities by
amortized cost and estimated market value at December 31, 1995 and 1994 is as
follows:
GROSS GROSS AMOUNT PER
AMORTIZED UNREALIZED UNREALIZED MARKET THE BALANCE
COST GAINS LOSSES VALUE SHEET
---------- ---------- ---------- ---------- -----------
1995:
- -----
Fixed maturities avail-
able for sale:
Bonds:
U.S. Government direct
obligations and
agencies............. $ 152,210 $ 4,645 $ (22) $ 156,833 $ 156,833
GNMAs................. 1,050,034 68,053 (1,221) 1,116,866 1,116,866
Mortgage-backed
securities, GNMA
collateral........... 214,186 8,136 (62) 222,260 222,260
Other mortgage-backed
securities........... 230,981 11,527 (2,960) 239,548 239,548
State, municipalities
and political
subdivisions......... 762,943 21,383 (3,677) 780,649 780,649
Foreign governments... 71,489 5,303 (3) 76,789 76,789
Public utilities...... 258,840 13,276 (308) 271,808 271,808
Industrial and
miscellaneous........ 2,235,811 103,443 (2,400) 2,336,854 2,336,854
Redeemable preferred
stocks................ 7,729 888 0 8,617 8,617
---------- -------- --------- ---------- ----------
Total fixed
maturities........... 4,984,223 236,654 (10,653) 5,210,224 5,210,224
Equity securities:
Common stocks:
Banks and insurance
companies............ 2,945 5,304 (10) 8,239 8,239
Industrial and all
others............... 264 151 (7) 408 408
Non-redeemable
preferred stocks...... 1,549 355 0 1,904 1,904
---------- -------- --------- ---------- ----------
Total equity
securities........... 4,758 5,810 (17) 10,551 10,551
---------- -------- --------- ---------- ----------
Total fixed maturities
and equity
securities........... $4,988,981 $242,464 $ (10,670) $5,220,775 $5,220,775
========== ======== ========= ========== ==========
1994:
- -----
Fixed maturities avail-
able for sale:
Bonds:
U.S. Government direct
obligations and
agencies............. $ 105,239 $ 502 $ (3,985) $ 101,756 $ 101,756
GNMAs................. 1,775,852 18,007 (78,796) 1,715,063 1,715,063
Mortgage-backed
securities, GNMA
collateral........... 242,567 1,661 (7,676) 236,552 236,552
Other mortgage-backed
securities........... 161,216 804 (2,441) 159,579 159,579
State, municipalities
and political
subdivisions......... 835,740 1,693 (69,078) 768,355 768,355
Foreign governments... 104,478 190 (3,702) 100,966 100,966
Public utilities...... 243,776 247 (20,168) 223,855 223,855
Industrial and
miscellaneous........ 1,155,968 2,377 (82,255) 1,076,090 1,076,090
Redeemable preferred
stocks................ 9,758 290 (5) 10,043 10,043
---------- -------- --------- ---------- ----------
Total fixed maturities
..................... 4,634,594 25,771 (268,106) 4,392,259 4,392,259
Equity securities:
Common stocks:
Banks and insurance
companies............ 33,272 6,852 (11,542) 28,582 28,582
Industrial and all
others............... 1,165 65 (103) 1,127 1,127
Non-redeemable
preferred stocks...... 1,548 291 (1) 1,838 1,838
---------- -------- --------- ---------- ----------
Total equity
securities........... 35,985 7,208 (11,646) 31,547 31,547
---------- -------- --------- ---------- ----------
Total fixed maturities
and equity
securities........... $4,670,579 $ 32,979 $(279,752) $4,423,806 $4,423,806
========== ======== ========= ========== ==========
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 3--INVESTMENT OPERATIONS (CONTINUED)
A schedule of fixed maturities by contractual maturity at December 31, 1995
is shown below on an amortized cost basis and on a market value basis. Actual
maturities could differ from contractual maturities due to call or prepayment
provisions.
AMORTIZED MARKET
COST VALUE
---------- ----------
Fixed maturities available
for sale:
Due in one year or less... $ 42,759 $ 43,167
Due from one to five
years.................... 615,081 640,534
Due from five to ten
years.................... 1,669,975 1,735,945
Due after ten years....... 1,121,792 1,170,951
---------- ----------
3,449,607 3,590,597
Redeemable preferred
stocks................... 7,729 8,617
Mortgage- and asset-backed
securities............... 1,526,887 1,611,010
---------- ----------
$4,984,223 $5,210,224
========== ==========
Proceeds from sales of fixed maturities available for sale were $1.18
billion in 1995, $583 million in 1994, and $246 million in 1993. Gross gains
realized on those sales were $13.4 million in 1995, $14.6 million in 1994, and
$8.3 million in 1993. Gross losses were $13.5 million in 1995, $20.8 million
in 1994, and $176 thousand in 1993. Proceeds from sales of fixed investments
held to maturity were $58 million in 1993. Gross gains and losses realized on
those sales were $2.6 million and $138 thousand, respectively. The 1993 sales
of fixed investments held to maturity were made for various reasons including
changes in regulatory requirements, credit deterioration, and sales within 90
days of maturity.
Torchmark had $25.7 million and $26.3 million in investment real estate at
December 31, 1995 and 1994, respectively, which was nonincome producing during
the previous twelve months. These properties included primarily construction
in process and land. Fixed maturity investments, mortgage loans, and other
long-term investments which were nonincome producing during the previous
twelve months were $0.3 million and $0.6 million at December 31, 1995 and
1994, respectively.
Derivative investments are immaterial to Torchmark at December 31, 1995.
Torchmark's total carrying value of these investments was $23.9 million and
$24.5 million at December 31, 1995 and 1994, respectively. Torchmark has no
off-balance sheet exposure in connection with these investments.
NOTE 4--PROPERTY AND EQUIPMENT
A summary of property and equipment used in the business is as follows:
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------- ---------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
-------- ------------ -------- ------------
Company occupied real estate........ $67,528 $31,040 $65,584 $29,742
Data processing equipment........... 24,507 22,198 24,611 21,760
Transportation equipment............ 12,802 8,005 13,574 7,656
Furniture and office equipment...... 36,979 33,388 35,447 32,690
Other............................... 3,697 3,697 3,697 3,697
-------- ------- -------- -------
$145,513 $98,328 $142,913 $95,545
======== ======= ======== =======
Depreciation expense on property used in the business was $5.7 million, $7.6
million, and $7.3 million in each of the years 1995, 1994, and 1993,
respectively.
41
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:
1995 1994 1993
---------------------- ---------------------- ---------------------
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................... $1,017,467 $274,124 $ 901,565 $131,602 $904,147 $152,421
Additions:
Deferred during peri-
od:
Commissions........... 192,427 -0- 134,032 -0- 142,869 -0-
Other expenses........ 136,170 -0- 91,377 -0- 71,449 -0-
---------- -------- ---------- -------- -------- --------
Total deferred....... 328,597 -0- 225,409 -0- 214,318 -0-
Value of Insurance
purchased -0- 34,240 -0- 158,788 -0- -0-
Adjustment
attributable to
unrealized investment
losses(1)............ -0- -0- 52,334 -0- -0- -0-
Reassumed business.... -0- -0- -0- -0- -0- -0-
---------- -------- ---------- -------- -------- --------
Total additions...... 328,597 34,240 277,743 158,788 214,318 -0-
---------- -------- ---------- -------- -------- --------
Deductions:
Amortized during peri-
od................... (172,764) (31,067) (154,697) (16,266) (166,863) (20,210)
Adjustment
attributable to
unrealized investment
gains(1)............. (51,739) -0- -0- -0- (23,264) -0-
Adjustment attribut-
able to realized in-
vestment gains(1).... (236) -0- (7,144) -0- -0- -0-
Business disposed..... -0- -0- -0- -0- (26,773) (609)
---------- -------- ---------- -------- -------- --------
Total deductions..... (224,739) (31,067) (161,841) (16,266) (216,900) (20,819)
---------- -------- ---------- -------- -------- --------
Balance at end of year.. $1,121,325 $277,297 $1,017,467 $274,124 $901,565 $131,602
========== ======== ========== ======== ======== ========
- --------
(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 $20.0 million, $11.7 million, and $10.8 million, for
the years ended December 31, 1995, 1994 and 1993, respectively. The average
interest accrual rates used for the years ended December 31, 1995, 1994 and
1993 were 7.26%, 7.72% and 7.57%, respectively. The estimated amount of the
unamortized balance at December 31, 1995 to be amortized during each of the
next five years is: 1996, $32.3 million; 1997, $27.7 million; 1998, $22.3
million; 1999, $20.5 million; and 2000, $19.2 million.
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--SALE OF VESTA SHARES
In November, 1993, Torchmark sold approximately 73% of Vesta Insurance
Group, Inc. ("Vesta"), Torchmark's holding company for its property and
casualty insurance operations. The sale was made through an initial public
offering of common stock for net proceeds of $161 million for a pretax gain of
$57.2 million. Torchmark maintains a 27% interest in Vesta and accounts for
its investment on the equity method, recording its investment as an
unconsolidated subsidiary. In connection with the public offering, Torchmark
loaned Vesta $28 million at an interest rate of 6.1% for a term of five
years, which was outstanding at both December 31, 1994 and 1993. In July,
1995, this note was repaid in full.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 7--ACQUISITIONS
On October 1, 1993, the United Management public shareholders approved
Torchmark's offer to acquire the remaining approximately 17% of United
Management which it did not already own for cash consideration of $31.25 per
share. The transaction was completed for a total purchase price of $234
million resulting in goodwill of $126 million which will be amortized over
approximately 40 years on a straight line basis. All other purchase accounting
adjustments were immaterial.
On November 3, 1994, Torchmark acquired all of the outstanding common stock
of American Income Holding, Inc., whose primary operating subsidiary is
American Income Life Insurance Company ("American Income") for $35 per share
or a total purchase price of $552 million, including expenses. American Income
is a life insurance company which sells individual supplemental life and
fixed-benefit accident and health insurance through labor union locals, credit
unions, and other employment related associations. The purchase was financed
with a combination of internal funds, sales of securities, bank borrowings,
and the issuance by a finance subsidiary of 9.18% Cumulative Monthly Income
Preferred Securities, Series A ("MIPS"). The transaction resulted in goodwill
of approximately $403 million which will be amortized on a straight line basis
over 40 years. The acquisition was accounted for as a purchase, and the
results of operations since the acquisition date have been consolidated.
A summary of the net assets acquired is as follows:
Assets acquired:
Investments.................................................. $ 434,677
Cash......................................................... 0
Value of insurance purchased................................. 158,788
Goodwill..................................................... 402,791
Other assets................................................. 62,808
---------
Total....................................................... 1,059,064
Liabilities assumed:
Policy liabilities........................................... 397,184
Other liabilities............................................ 110,379
---------
Total....................................................... 507,563
---------
Total purchase price.......................................... $ 551,501
=========
The table below presents supplemental pro forma information for 1994 and
1993 as if the American Income acquisition were made at January 1, 1993 at the
same purchase price, based on estimates and assumptions considered
appropriate:
YEAR ENDED DECEMBER
31,
---------------------
1994 1993
---------- ----------
Revenues.......................................... $2,086,987 $2,350,691
Net income before extraordinary items............. 278,533 301,209
Net income........................................ 277,014 301,209
Net income per common share before extraordinary
items............................................ 3.86 4.10
Net income per common share....................... 3.84 4.10
NOTE 8--DISCONTINUED OPERATIONS OF ENERGY SEGMENT
During 1995, Torchmark decided to dispose of Torch Energy Advisors
Incorporated ("Torch Energy"), its energy management subsidiary. At year end
1995, Torchmark was negotiating to sell Torch Energy to an unaffiliated party.
Also in 1995, Torchmark decided to dispose of its coalbed methane gas
development in the Black Warrior basin of Alabama due to disappointments in
production. Torchmark intends to sell this development, and implemented a plan
to dispose of this investment in the fourth quarter of 1995. In view of the
proposed sale of the Black Warrior investment, and in accordance with the
provisions of SFAS 121, Torchmark wrote this investment down to its estimated
net realizable value, resulting in an after-tax charge of $130 million or
$1.82 per share. Since, on a combined basis, the activities of Torch Energy
and the Black Warrior investment represent Torchmark's energy management and
development activities, the disposition of these operations qualify for
disposal of a segment
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 8--DISCONTINUED OPERATIONS OF ENERGY SEGMENT (CONTINUED)
accounting treatment. Therefore, Torchmark has modified the presentation in
its financial statements for 1995 and all prior periods to set forth
separately the net assets and results attributable to the discontinued energy
segment as discontinued operations.
At December 31, 1995, discontinued operations assets consisted of:
Trade and other receivables.................................. $118,266
Energy properties and investments............................ 158,238
Other assets................................................. 74,639
--------
Total assets................................................ 351,143
Trade and other payables..................................... (157,827)
Other liabilities............................................ (18,930)
--------
Total liabilities........................................... (176,757)
--------
Net discontinued assets................................... $174,386
========
No proceeds for disposal of discontinued assets have been received.
NOTE 9--FUTURE POLICY BENEFIT RESERVES
A summary of the assumptions used in determining the liability for future
policy benefits at December 31, 1995 is as follows:
INDIVIDUAL LIFE INSURANCE
INTEREST ASSUMPTIONS:
PERCENT OF
YEARS OF ISSUE INTEREST RATES LIABILITY
-------------- --------------------- ----------
1917-1995 3.00% 3%
1947-1954 3.25% 1
1927-1989 3.50% 1
1955-1961 3.75% 2
1925-1995 4.00% 13
1962-1969 4.50% graded to 4.00% 3
1970-1980 5.50% graded to 4.00% 5
1970-1995 5.50% 1
1929-1995 6.00% 7
1986-1994 7.00% graded to 6.00% 10
1943-1992 7.50% graded to 6.00% 1
1954-1995 8.00% graded to 6.00% 10
1951-1985 8.50% graded to 6.00% 11
1980-1987 8.50% graded to 7.00% 1
1975-1991 9.50% graded to 8.00% 6
1984-1995 Interest Sensitive 25
---
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
1979-81 United States Life Table
1975-80 Select and Ultimate Table
X-18 Ultimate Table
WITHDRAWAL ASSUMPTIONS:
Withdrawal assumptions are based on Torchmark's experience.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 9--FUTURE POLICY BENEFIT RESERVES (CONTINUED)
HEALTH INSURANCE
INTEREST ASSUMPTIONS:
PERCENT OF
YEARS OF ISSUE INTEREST RATES LIABILITY
-------------- --------------------- ----------
1962-1995 3.00% 1%
1969-1980 5.50% graded to 4.00% 5
1982-1995 4.50% 1
1993-1995 6.00% 14
1986-1992 7.00% graded to 6.00% 55
1955-1995 8.00% graded to 6.00% 8
1951-1986 8.50% graded to 6.00% 16
---
100%
===
MORBIDITY ASSUMPTIONS:
For 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 1995 was 6.3%.
NOTE 10--LIABILITY FOR UNPAID HEALTH CLAIMS
Activity in the liability for unpaid health claims is summarized as follows:
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
Balance at beginning of year: $166,731 $131,161 $137,350
Addition due to acquisition of American In-
come....................................... -0- 9,185 -0-
Incurred related to:
Current year............................... 502,018 514,814 471,615
Prior year................................. (8,295) (14,985) (25,052)
-------- -------- --------
Total incurred.............................. 493,723 499,829 446,563
-------- -------- --------
Paid related to:
Current year............................... 342,905 332,273 321,196
Prior year................................. 146,983 141,171 131,556
-------- -------- --------
Total paid.................................. 489,888 473,444 452,752
-------- -------- --------
Balance at end of year...................... $170,566 $166,731 $131,161
======== ======== ========
The liability for unpaid health claims is included with "Policy claims and
other benefits payable" on the Balance Sheet.
Health benefits for 1994 include a $30 million charge resulting from a
reclassification of nonoperating expense to health benefits, since actual
payments will be made in the form of health benefits.
45
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. Famlico and Sentinel file their own consolidated
federal income tax return and will not be eligible to join Torchmark's
consolidated return group until 1996 and 1997, respectively. American Income
and Trust Life Insurance Company file their own consolidated federal income
tax return and will not be eligible to join Torchmark's consolidated return
group until 2000.
As discussed in Note 1, Torchmark adopted Statement 109 on January 1, 1993.
The cumulative effect of this change in accounting for income taxes was a
$26.1 million addition to net income for the year ended December 31, 1993.
This amount is included in the cumulative effect of changes in accounting
principles line on the consolidated statement of operations.
Total income taxes were allocated as follows:
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
Income from continuing operations............. $157,539 $135,994 $149,506
Discontinued operations....................... (86,050) (11,677) 3,580
Change in accounting standards for post-re-
tirement benefits other than pensions........ -0- -0- (4,124)
Monthly income preferred securities dividend.. (5,555) (1,148) -0-
Shareholders' equity
Unrealized gains (losses).................... 157,200 (147,520) 60,768
Tax basis compensation expense in excess of
amounts recognized for financial reporting
purposes from the exercise of stock options. (709) (349) (5,637)
Other........................................ (6,169) 9,424 (5,163)
-------- -------- --------
$216,256 $(15,276) $198,930
======== ======== ========
Income tax expense attributable to income from continuing operations
consists of:
YEAR ENDED DECEMBER 31,
--------------------------
1995 1994 1993
-------- -------- --------
Current income tax expense...................... $110,652 $113,215 $188,004
Increase in January 1, 1993 deferred income tax
liability due to increase in corporate income
tax rate to 35%................................ -0- -0- 8,763
Deferred income tax expense (benefit)........... 46,887 22,779 (47,261)
-------- -------- --------
$157,539 $135,994 $149,506
======== ======== ========
The effective income tax rate differed from the expected 35% rate in 1995,
1994, and 1993 as shown below:
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 % 1994 % 1993 %
-------- --- -------- --- -------- ---
Expected income taxes............. $149,861 35% $137,891 35% $140,685 35%
Increase (reduction) in income
taxes
resulting from:
Tax-exempt investment income..... (7,965) (2) (10,625) (2) (4,404) (1)
Effect of tax rate change on de-
ferred liability................ -0- 0 -0- 0 8,763 2
Other............................ 15,643 4 8,728 2 4,462 1
-------- --- -------- --- -------- ---
Income taxes...................... $157,539 37% $135,994 35% $149,506 37%
======== === ======== === ======== ===
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 11--INCOME TAXES (CONTINUED)
The significant components of deferred income tax expense before the
cumulative effect of the change in accounting principles and adjustments to
shareholders' equity are as follows:
YEAR ENDED DECEMBER 31,
------------------------
1995 1994 1993
------- ------- --------
Deferred income tax expense (exclusive of
the effect of the component listed below).. $46,887 $22,779 $(47,261)
Adjustments to deferred tax assets and lia-
bilities for the increase in the corporate
income tax rate from 34% to 35%............ -0- -0- 8,763
------- ------- --------
$46,887 $22,779 $(38,498)
======= ======= ========
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,
------------------
1995 1994
-------- --------
Deferred tax assets:
Fixed maturities, equity securities, and investment real
estate, principally due to write-downs of investments to
net realizable value for financial reporting purposes.... $ 6,897 $ 13,754
Future policy benefits, unearned and advance premiums, and
policy claims............................................ 27,432 20,628
Other liabilities, principally due to the current nonde-
ductibility for tax purposes of certain accrued expenses. 18,344 35,715
Unrealized investment losses.............................. -0- 82,792
-------- --------
Total gross deferred tax assets........................... 52,673 152,889
Less valuation allowance.................................. (2,111) (2,111)
-------- --------
Net deferred tax assets................................... 50,562 150,778
-------- --------
Deferred tax liabilities:
Energy investments and other unconsolidated affiliates,
principally due to
accelerated depletion deductions for tax purposes........ 11,305 27,424
Deferred acquisition costs................................ 322,900 286,444
Unrealized investment gains............................... 74,408 -0-
Other..................................................... 8,321 9,921
-------- --------
Total gross deferred tax liabilities...................... 416,934 323,789
-------- --------
Net deferred tax liability................................. $366,372 $173,011
======== ========
The valuation allowance for deferred tax assets as of December 31, 1994 and
1995 was $2.1 million. Subsequently recognized tax benefits of $2.1 million
relating to the December 31, 1995 valuation allowance will be allocated to
goodwill.
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 $60 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.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 12--POSTRETIREMENT BENEFITS
Pension Plans: Torchmark has retirement benefit plans and savings plans
which cover substantially all employees. There is also a nonqualified excess
benefit 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
------------ ------------ ------- -------
1995.................... $3,208 $6,820 $ 524
1994.................... $3,201 $6,922 $1,800
1993.................... $ 740 $6,733 $1,450
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 $9.5 million
and $11.8 million at December 31, 1995 and 1994, respectively. The plans 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 $5.5
million and $3.2 million as of December 31, 1995 and 1994, respectively.
Net periodic pension cost for the defined benefit plans by expense component
was as follows:
YEAR ENDED DECEMBER 31,
--------------------------
1995 1994 1993
-------- -------- -------
Service cost--benefits earned during the
period.................................... $ 7,190 $ 8,323 $ 8,298
Interest cost on projected benefit obliga-
tion...................................... 8,867 8,242 7,711
Actual return on assets.................... (17,927) (2,302) (8,697)
Net amortization and deferral.............. 9,214 (5,541) 871
-------- -------- -------
Net periodic pension cost.................. $ 7,344 $ 8,722 $ 8,183
======== ======== =======
A reconciliation of the funded status of the defined benefit plans with
Torchmark's pension liability was as follows:
AT DECEMBER 31,
------------------
1995 1994
-------- --------
Fair market value of assets available for benefits. $113,193 $ 94,207
Projected benefit obligation:
Vested............................................ 89,170 72,119
Nonvested......................................... 5,441 4,141
-------- --------
Accumulated benefit obligation................... 94,611 76,260
Effect of projected future salary increases 27,003 27,195
-------- --------
Total projected benefit obligation............... 121,614 103,455
-------- --------
Funded status...................................... (8,421) (9,248)
Unamortized prior service costs.................... 147 (1,531)
Unamortized transition asset....................... (1,220) (2,183)
Unrecognized (gain) or loss........................ (5,462) (2,061)
-------- --------
Accrued pension costs included in liabilities.... $(14,956) $(15,023)
======== ========
The weighted average assumed discount rates used in determining the
actuarial benefit obligations were 7.25% in 1995 and 8.0% in 1994. The rate of
assumed compensation increase was 4.25% in 1995 and 5.0% in 1994 and the
expected long-term rate of return on plan assets was 8.0% in 1995 and 1994.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 12--POSTRETIREMENT BENEFITS (CONTINUED)
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.
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 reached
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
employees who did not retire before February 1, 1993. This plan is unfunded.
Torchmark adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," effective January 1, 1993. This statement
requires that the expected cost of providing future benefits to employees be
accrued during the employees' service period until each employee reaches full
eligibility. Torchmark elected to recognize the effect of the adoption of this
standard immediately as a change in accounting principle as permitted by SFAS
106. The cumulative effect of this change in accounting resulted in a $7.7
million after-tax charge to net income in 1993. It was reported as part of the
cumulative effect of changes in accounting principles. In accordance with the
provisions of SFAS 106, prior years' financial statements were not restated to
apply the provisions of this statement.
Net periodic postretirement benefit cost included the following components:
YEAR ENDED
DECEMBER 31,
---------------------
1995 1994 1993
----- ------ ------
Service cost............................................ $ 284 $ 444 $ 411
Interest cost on accumulated postretirement benefit ob-
ligation............................................... 678 831 954
Actual return on plan assets............................ -0- -0- -0-
Net amortization and deferral........................... (559) (237) (14)
----- ------ ------
Net periodic postretirement benefit cost................ $ 403 $1,038 $1,351
===== ====== ======
The following table sets forth the plans' combined benefit obligation with
the amount shown in Torchmark's balance sheet:
AT DECEMBER 31,
---------------
1995 1994
------- -------
Accumulated postretirement benefit obligation:
Retirees....................................................... $ 4,880 $ 5,811
Fully eligible active plan participants........................ 1,231 1,386
Other active plan participants................................. 3,145 3,546
------- -------
Total accumulated postretirement benefit obligation........... 9,256 10,743
Plan assets at fair value....................................... -0- -0-
------- -------
Accumulated postretirement benefit obligation in excess of plan
assets......................................................... 9,256 10,743
Unrecognized net gain from past experience different from that
assumed and from changes in assumptions........................ 1,423 734
Prior service cost not yet recognized in net periodic post re-
tirement benefit cost.......................................... 262 280
------- -------
Accrued postretirement benefit cost included in liabilities..... $10,941 $11,757
======= =======
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 12--POSTRETIREMENT BENEFITS (CONTINUED)
For measurement purposes, a 11% to 14% annual rate of increase in a per
capita cost of covered health care benefits was assumed for 1995; the rate was
assumed to decrease gradually to 4.5% by the year 2008 and remain at that
level thereafter. The health care cost trend rate assumption has a significant
effect on the amounts reported. To illustrate, increasing the health care cost
trend by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1995 by $855 million and
would increase the net periodic postretirement cost for the year ended
December 31, 1995 by approximately $146 thousand.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% to 8.0% in 1995 and 8.0% in 1994.
NOTE 13--NOTES PAYABLE
An analysis of notes payable is as follows:
DECEMBER 31,
-----------------------------------------
1995 1994
-------------------- --------------------
SHORT-TERM LONG-TERM SHORT-TERM LONG-TERM
DEBT DEBT DEBT DEBT
---------- --------- ---------- ---------
Sinking Fund Debentures........... $198,033 $197,941
Senior Notes, due 1998............ 199,343 199,103
Senior Debentures, due 2009....... 99,881 99,703
Notes, due 2023................... 195,877 195,836
Notes, due 2013................... 98,432 98,390
Borrowings under Torchmark line of
credit........................... $250,000
Commercial paper.................. $189,248
Other notes and mortgages payable
at various interest rates;
collateralized by buildings ..... 124 422 116 545
-------- -------- -------- --------
$189,372 $791,988 $250,116 $791,518
======== ======== ======== ========
The amount of debt that becomes due during each of the next five years is:
1996, $189 million; 1997, $132 thousand; 1998, $200 million; 1999, $150
thousand; and 2000, $-0-. Additionally, during the thirty-day period beginning
June 15, 1996, senior debenture debt holders have the option to require
Torchmark to repay $100 million.
The Sinking Fund Debentures, due March 1, 2017, are carried at $200 million
principal amount less unamortized issue expenses and bear interest at 8 5/8%,
payable on March 1 and September 1. A sinking fund provides for mandatory
repayment at par of not less than $8 million principal amount per year from
March 1, 1998 through March 1, 2016. At Torchmark's option, an additional $12
million principal amount per year may be redeemed at par according to the same
schedule. The option to make such additional repayments is not cumulative and
if not availed of in any year will terminate. Furthermore, Torchmark may, at
its option, redeem the entire issue at prices ranging from 107.9% to 100.0% of
par, subject to certain restrictions. The Sinking Fund Debentures have equal
priority with other Torchmark unsecured indebtedness.
The Senior Notes, due May 1, 1998, are not redeemable prior to maturity.
They were issued in the principal amount of $200 million. Interest is payable
on May 1 and November 1 of each year at a rate of 9 5/8%. These notes have
equal priority with other Torchmark unsecured indebtedness.
The Senior Debentures, principal amount of $100 million, are due August 15,
2009. They bear interest at a rate of 8 1/4%, with interest payable on
February 15 and August 15 of each year. The Senior Debentures, which are not
redeemable at the option of Torchmark prior to maturity, provide the holder
with an option to require Torchmark to repurchase the debentures on August 15,
1996 at principal amount plus accrued interest. The Senior Debentures have
equal priority with other Torchmark unsecured indebtedness.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 13--NOTES PAYABLE (CONTINUED)
The Notes, due May 15, 2023, were issued in May, 1993 in the principal
amount of $200 million. Proceeds of the issue, net of issue costs, were $196
million. Interest is payable on May 15 and November 15 of each year at a rate
of 7 7/8%. These notes are not redeemable prior to maturity and have equal
priority with other Torchmark unsecured indebtedness.
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%. These notes are not
redeemable prior to maturity and have equal priority with other Torchmark
unsecured indebtedness.
Torchmark has entered into revolving credit agreements with a group of
lenders under which it may borrow on an unsecured basis up to $400 million.
One-half of the commitment matures December 3, 1996 and the balance matures
December 6, 1999. Borrowings, pro rata under each facility, are at interest
rates selected by Torchmark based on either the prime rate or the Eurodollar
rate at the time of borrowings. At December 31, 1994, borrowings totalled $250
million and were made at an average rate of 6.40%. There were no borrowings
outstanding at December 31, 1995. The revolving credit agreements are designed
to back up a commercial paper program which began in March, 1995. The short-
term borrowings under the revolving credit agreements and in the commercial
paper market averaged $221 million during 1995, and were made at an average
yield of 5.97%. At December 31, 1995, commercial paper was outstanding in the
face amount of $190.4 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, 1995, and pays a facility fee based
on size of the lines.
Interest in the amount of $1.6 million, $1.8 million and $10.5 million was
capitalized during 1995, 1994, 1993, 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 are redeemable at Torchmark's option after 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 insures that the variable rate cannot exceed 10.39% through September 30,
1999. The interest rate was 5.86% at December 31, 1995 and 7.02% at December
31, 1994. Torchmark pays a yearly fee of $860 thousand for the cap agreement.
The market value of the swap agreement was a benefit of $26.5 million at
December 31, 1995 and an obligation of $4.1 million at December 31, 1994. The
market value of the cap agreement, net of the present value of future annual
payments, was an obligation of $2.1 million at December 31, 1995 and a benefit
of $517 thousand at December 31, 1994. Except as otherwise described in "Note
3--Investments" on page 42 of this report, Torchmark is a party to no other
derivative instruments as defined by SFAS 119.
Net proceeds from the MIPS offering of approximately $193 million were
loaned from Torchmark Capital to Torchmark to provide part of the financing of
the acquisition of American Income Holding, Inc. The carrying value of the
MIPS at December 31, 1995 and 1994 was $193 million.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 15--SHAREHOLDERS' EQUITY
Share Data: A summary of preferred and common share activity is as follows:
PREFERRED STOCK COMMON STOCK
--------------------- ---------------------
TREASURY TREASURY
ISSUED STOCK ISSUED STOCK
---------- --------- ---------- ----------
1993:
Balance at January 1, 1993....... 1,000,000 (530,180) 73,512,034 -0-
Issuance of common stock due to
exercise of stock options...... 272,194 6,341
Other treasury stock acquired... (895,475)
---------- --------- ---------- ----------
Balance at December 31, 1993.... 1,000,000 (530,180) 73,784,228 (889,134)
1994:
Issuance of common stock due to
exercise of stock options...... 130,641
Other treasury stock acquired... (469,820) (1,491,700)
Retirement of preferred treasury
stock.......................... (1,000,000) 1,000,000
---------- --------- ---------- ----------
Balance at December 31, 1994.... -0- -0- 73,784,228 (2,250,193)
1995:
Issuance of common stock due to
exercise of stock options...... 133,102
---------- --------- ---------- ----------
Balance at December 31, 1995.... -0- -0- 73,784,228 (2,117,091)
========== ========= ========== ==========
AT DECEMBER 31, 1995 AT DECEMBER 31, 1994
--------------------- ---------------------
PREFERRED COMMON PREFERRED COMMON
STOCK STOCK STOCK STOCK
--------- ----------- --------- -----------
Par value per share................ $1.00 $1.00 $1.00 $1.00
Authorized shares.................. 5,000,000 160,000,000 5,000,000 160,000,000
Adjustable Rate Preferred Stock: One million shares of adjustable rate
preferred stock were issued in 1983 at an issue price of $100 per share. Prior
to 1993, Torchmark acquired 530 thousand shares which were reported as
treasury stock and had a total cost basis of $47.8 million and a total
redemption value of $52.9 million. During 1994, Torchmark acquired the
remaining 470 thousand shares at a cost of $100 per share plus accrued
dividends. The acquisition was completed at an aggregate price of $47 million.
The preferred treasury stock was immediately retired.
Acquisition of Common Shares: Torchmark shares are acquired from time to
time for the following reasons: (1) open market purchases under the Torchmark
stock repurchase program, in which share purchases in the amount of $106
million for 1.5 million shares and $42 million for 850 thousand shares were
made in 1994 and 1993, respectively, (2) for future employee stock option
exercises, and (3) for payment of the option price and taxes upon exercise of
stock options by employees.
Stock Options: Under the provisions of the 1984 Torchmark Corporation Stock
Option Plan ("1984 Option Plan") and the Torchmark Corporation 1987 Stock
Incentive Plan ("1987 Option Plan"), certain employees and directors have been
granted options to buy shares of Torchmark stock at the market value of the
stock on the date of grant. In conjunction with the buyback of the minority
interest of United Management, the United Investors Management Company 1986
Employee Stock Incentive Plan was amended to allow the granting of Torchmark
stock options. The options are exercisable during the period commencing from
three months to three years after grant until expiring ten years or ten years
and two days after grant. In October, 1993, Torchmark implemented a policy to
issue shares for the exercise of stock options out of treasury stock.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 15--SHAREHOLDERS' EQUITY (CONTINUED)
A summary of option activity in terms of shares is as follows:
AVAILABLE FOR GRANT OUTSTANDING
------------------------------ -------------------------------
1995 1994 1993 1995 1994 1993
--------- --------- -------- --------- --------- ---------
Balance at January 1.... 1,998,134 289,091 533,175 3,820,707 3,660,391 3,051,883
Additional shares
available due to United
Management merger...... 642,959
Additional shares
available due to
amendment of plan ..... 2,000,000
Granted................. (760,200) (316,600) (910,789) 760,200 316,600 910,789
Exercised............... (133,102) (130,641) (278,535)
Expired................. 12,855 25,643 23,746 (12,855) (25,643) (23,746)
--------- --------- -------- --------- --------- ---------
Balance at December 31.. 1,250,789 1,998,134 289,091 4,434,950 3,820,707 3,660,391
========= ========= ======== ========= ========= =========
Option information by exercise price is listed in the following table. Those
options shown as granted on October 1, 1993 represent United Management
options which were converted to Torchmark options in conjunction with the
merger.
OUTSTANDING AT DECEMBER 31, EXERCISED DURING
EXERCISE ----------------------------- -----------------------
PRICE GRANT DATE 1995 1994 1993 1995 1994 1993
-------- -------------------- --------- --------- --------- ------- ------- -------
$11.300 October 1, 1993(3) 16,893 18,393 18,393 1,500 -0- -0-
12.625 October 4, 1985 -0- 33,004 34,004 33,004 1,000 2,141
13.110 October 1, 1993(3) 13,828 13,828 13,828 -0- -0- -0-
14.000 March 26, 1985 -0- 11,246 15,746 11,246 4,500 5,250
14.125 January 30, 1986 12,375 16,875 16,875 4,500 -0- 1,000
15.000 December 3, 1987 -0- 854 854 854 -0- 400
16.000 December 16, 1987 7,500 7,500 7,500 -0- -0- -0-
19.875 February 25, 1988 5,217 5,217 5,217 -0- -0- -0-
20.375 January 3, 1989 30,003 30,003 30,003 -0- -0- -0-
22.600 October 1, 1993(3) 35,981 35,981 35,981 -0- -0- -0-
24.410 October 1, 1993(3) 5,532 5,532 5,532 -0- -0- -0-
25.625 October 11, 1990(1) 779,396 840,055 852,955 60,659 12,900 7,313
28.480 October 1, 1993(3) 85,158 85,158 85,158 -0- -0- -0-
31.125 January 15, 1991 532,926 532,926 538,856 -0- 5,930 97,118
32.500 January 2, 1991 63,000 63,000 63,000 -0- -0- -0-
33.125 January 25, 1990(1) 63,000 63,000 63,000 -0- -0- -0-
34.000 October 1, 1993(4) 58,567 60,682 207 -0- -0-
34.000 December 14, 1993(4) 295,006 301,881 3,875 -0- -0-
34.000 December 7, 1992(4) 138,403 142,433 3,530 -0- -0-
34.000 December 16, 1994 292,600 292,600 -0- -0-
34.350 October 1, 1993(3) 35,611 35,611 35,611 13,727 -0- -0-
34.375 December 12, 1991 658,278 673,666 679,977 -0- 6,311 27,869
34.875 January 3, 1995 21,000 -0-
36.000 February 7, 1991 -0- -0- 100,000 -0- 100,000 137,444
36.610 October 1, 1993(3) 27,997 27,997 65,774 -0- -0- -0-
38.375 January 2, 1992 63,000 63,000 63,000 -0- -0- -0-
43.375 December 20, 1995 739,200 -0-
43.500 December 14, 1993(2) 251,004 253,900 567,781 -0- -0- -0-
45.000 January 3, 1994 24,000 24,000 -0- -0-
46.560 October 1, 1993(3) 33,651 33,651 57,130 -0- -0- -0-
52.000 December 7, 1992 121,824 124,714 280,216 -0- -0- -0-
57.750 January 3, 1993 24,000 24,000 24,000 -0- -0- -0-
--------- --------- --------- ------- ------- ------- ---
4,434,950 3,820,707 3,660,391 133,102 130,641 278,535
========= ========= ========= ======= ======= ======= ===
Exercisable at December 31, 3,243,647 2,936,867 2,668,264
========= ========= =========
(1) Options to purchase 1,098,090 shares previously granted December 31, 1989
at $37.13 per share, 521,100 shares previously granted January 25, 1990 at
$33.13 per share, and 389,870 shares originally granted August 1, 1990 at
$33.88 per share were allowed by recipients to expire voluntarily and were
reissued October 11, 1990 along with 675,200 additional shares at $25.63 per
share.
(2) Includes 173,650 shares granted under the United Investors Management
Company 1986 Employee Stock Incentive Plan.
(3) Issued from the United Investors Management Company 1986 Employee Stock
incentive plan.
(4) Options to purchase 37,777 shares previously granted at $36.61, options to
purchase 301,881 shares previously granted at $43.50, options to purchase
22,905 shares previously granted at $46.56, and options to purchase 142,433
shares previously granted at $52.00 were repriced to $34.00 per share on
December 16, 1994. The vesting schedules of these options did not change.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 15--SHAREHOLDERS' EQUITY (CONTINUED)
Grant of Restricted Stock: A grant of 60,000 Torchmark shares was made on
May 1, 1991 to a Torchmark senior officer. The shares are restricted as to
resale, vesting 6,000 shares per year for 10 years on the anniversary date of
the grant. The market value of Torchmark stock was $34.92 per share on the
grant date.
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 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 1996, $237 million
will be available to Torchmark for dividends from insurance subsidiaries in
compliance with statutory regulations without prior regulatory approval.
NOTE 16--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% of total life insurance in force at December 31,
1995. Insurance ceded on life and accident and health products represents 1.0%
of premium income for 1995. Torchmark would be liable for the reinsured risks
ceded to other companies to the extent that such reinsuring companies are
unable to meet their obligations.
Insurance affiliates also assume insurance risks of other companies. Life
reinsurance assumed represents less than 0.1% of life insurance in force at
December 31, 1995 and reinsurance assumed on life and accident and health
products represents 0.3% of premium income for 1995.
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 $6.3 million, $7.9 million, and $7.6 million for 1995, 1994, and 1993,
respectively. Future minimum rental commitments required under operating
leases having remaining noncancelable lease terms in excess of one year at
December 31, 1995 are as follows: 1996, $4.3 million; 1997, $2.4 million;
1998, $1.4 million; 1999, $851 thousand; 2000, $440 thousand; and in the
aggregate, $9.4 million.
Restrictions on cash: A portion of the cash held in financial service
subsidiaries that function as broker-dealers has been segregated for the
benefit of customers in compliance with security regulations. This amount was
$11.8 million at December 31, 1995 and $13.1 million at December 31, 1994.
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, 1995, the investment portfolio
consisted of securities of the U.S. government or U.S. government-backed
securities (26%); non government-guaranteed mortgage-backed securities (4%);
short-term investments, which generally mature within one month (1%);
securities of state and municipal governments (14%); securities of foreign
governments (1%); and investment-grade corporate bonds (42%). The remainder of
the portfolio was in oil and gas investments (1%) and real estate (3%), which
are not considered financial instruments according to GAAP; policy loans (3%),
which are secured by the underlying insurance policy values; and equity
securities, mortgages, noninvestment grade corporate securities and other
long-term investments (5%). Investments in municipal governments and
corporations are made throughout the U.S. with no concentration in any given
state. Substantially all investments in foreign government securities are in
Canadian government obligations. Corporate equity and debt investments are
made in a wide range of industries. At December 31, 1995, 1% or more of the
portfolio was invested in the following industries or security types:
Financial services (15%); regulated utilities (5%); chemicals (5%);
transportation (4%); miscellaneous manufacturing (3%); foods (3%); petroleum
(2%); retailing (2%); electronics (1%); media (1%); and paper and allied
products (1%). Otherwise, no individual industry represented 1% or more of
Torchmark's investments. At year-end 1995, 3% of the carrying value of fixed
maturities was rated below investment grade (Ba or lower as rated by Moody's
service or the equivalent
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 16--COMMITMENTS AND CONTINGENCIES (CONTINUED)
NAIC designation). Par value of these investments was $162.1 million,
amortized cost was $160.3 million, and market value was $164.6 million. While
these investments could be subject to additional credit risk, such risk should
generally be reflected in market value.
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
are in government, government-secured, or corporate securities, the
requirement for collateral is rare. Torchmark's mortgages are secured by
collateral, although new mortgages are no longer being acquired.
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 National
Life Insurance Company ("Liberty") also name Torchmark as a defendant. As a
practical matter, a jury's discretion regarding the amount of a punitive
damage award is not limited by any clear, objective criteria under Alabama
law. Accordingly, the likelihood or extent of a punitive damage award in any
given case is virtually impossible to predict. Furthermore, the Alabama
Supreme Court has recently ruled that one half of all punitive damage awards,
after the deduction of attorneys fees, should go to the State of Alabama. This
same ruling also provides for a bifurcated trial, with the first stage devoted
to this issue of liability and the second stage relating to damages. The
hearing on damages will enable the jury to hear evidence of the financial
worth of the defendant. This potentially damaging evidence has not been
previously admissible in Alabama courts. The Alabama Supreme Court has been
asked to reconsider this ruling and this petition is still pending. As of
December 31, 1995, Liberty was a party to approximately 185 active lawsuits
(including 31 employment related cases and excluding interpleaders and stayed
cases), more than 160 of which were Alabama proceedings in which punitive
damages were sought. Liberty faces trial settings in these cases on an on-
going basis.
Torchmark has previously reported the entry of an Order and Final Judgment
by the Circuit Court of Barbour County, Alabama in Robertson v. Liberty
National Life Insurance Company (Case No. CV-92-021) approving a cancer policy
class action settlement involving legal and equitable relief valued at a total
of $55 million. The cost of this settlement increases over time as Liberty is
prohibited from increasing the premium rates on this block of business for one
year from final binding affirmance by the Alabama Supreme Court. This aspect
of the settlement is expected to cost Torchmark an additional $2.5 million
before tax in each quarter going forward until one year after final binding
affirmance by the Alabama Supreme Court. In July 1994, certain intervenors in
the Robertson litigation filed a notice of appeal of the Order and Final
Judgment approving class certification and the settlement with the Supreme
Court of Alabama. Oral argument on the appeal was held July 17, 1995 and on
December 22, 1995, the Supreme Court unanimously affirmed the Robertson class
action settlement. On February 16, 1996, the Alabama Supreme Court issued a
notice overruling the petition for a rehearing in Robertson filed by certain
intervenors.
On March 17, 1994, litigation was filed against Liberty, certain officers
and present and former directors of Torchmark and KPMG Peat Marwick LLP,
independent public accountants of Torchmark and its subsidiaries, in the
Circuit Court of Marion County, Alabama (Miles v. Liberty National Life
Insurance Company, Civil Action No. CV-94-67). The lawsuit asserted that it
was brought on behalf of a class comprised of the shareholders of Torchmark.
The complaint alleged a failure to timely and adequately report allegedly
material contingent liabilities arising out of insurance policy litigation
involving Liberty. Compensatory and punitive damages in an unspecified amount
were sought.
In April 1994, the complaint in Miles was amended to add an additional
shareholder plaintiff and to name Torchmark as a defendant. The Miles case was
dismissed upon the joint motion of all parties in September 1995. A second
similar action (Oakley v. Torchmark Corporation, Case No. CV-94-47), filed on
August 16, 1994 in the Circuit Court for Bibb County, Alabama, was dismissed
by the plaintiff without
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 16--COMMITMENTS AND CONTINGENCIES (CONTINUED)
prejudice. A third such action was filed on December 30, 1994, in the United
States District Court for the Southern District of Alabama. This action, which
seeks punitive damages, was subsequently transferred to the United States
District Court for the Northern District of Alabama (Dismukes v. Torchmark
Corporation, Case No. CV-94-1006-P-M). A class certification hearing in
Dismukes was held on January 29, 1996, and the parties are awaiting the
District Court's ruling on that motion and on defendant's motion for partial
summary judgment.
As previously reported, Torchmark, its insurance subsidiaries Globe Life And
Accident Insurance Company ("Globe") and United American Insurance Company
("United American"), and certain Torchmark officers were named as defendants
in litigation filed April 22, 1994, as a purported class action in the
District Court of Oklahoma County, Oklahoma (Moore v. Torchmark Corporation,
Case No. CJ-94-2784-65). The suit claims damages on behalf of individual
health policyholders who are alleged to have been induced to terminate such
policies and to purchase Medicare Supplement and/or other insurance coverages.
The complaint seeks actual and punitive damages for each class member in
excess of $10,000. Subsequent to the filing of this case, one of the
plaintiffs was dismissed and the named plaintiff died. The complaint was
amended to include new plaintiffs purporting to represent the class and
restyled Tabor v. Torchmark Corporation. No class has been certified. A motion
to dismiss filed by the defendants was denied and limited discovery as
permitted by the Oklahoma Supreme Court is proceeding. The defendants intend
to vigorously defend the action.
Prior filings have reported that in July 1994, a purported class action
alleging fraudulent and deceitful practices in premium billing and lapses of
coverage on a payroll deduction insurance plan was filed in the Superior Court
for Gordon County, Georgia against Liberty (Bryant v. Liberty National Life
Insurance Company, Civil Action No. 28979). The complaint alleges actual
damages in excess of $10 million and punitive damages of not less than $50
million as well as premium reimbursements. No class has been certified and no
material proceedings have occurred in this case. Liberty removed this case to
federal court, but the case has subsequently been remanded to the state court.
Liberty intends to vigorously defend this action.
Litigation was filed on April 26, 1995, in the Circuit Court of Houston
County, Alabama against Liberty involving the sale of health insurance
coverage and Omnibus Budget Reconciliation Act of 1990 (Stewart v. Liberty
National Life Insurance Company, Case No. CV-95-345L; Tolar v. Liberty
National Life Insurance Company, Case No. CV-95-346J; Ingram v. Liberty
National Life Insurance Company, Case No. CV-95-348L; Burkett v. Liberty
National Life Insurance Company, Case No. CV-95-347H). Liberty intends to
vigorously defend these cases.
On August 3, 1995, a $5.404 million verdict was rendered against Liberty in
Allen v. Liberty National Life Insurance Company (Case No. CV-94-3634), by a
jury in the Circuit Court of Jefferson County, Alabama. For a two month period
beginning in September 1993, in reliance on federal law concerning the amount
health care providers could collect from Medicare eligible individuals,
Liberty limited the payment of benefits to such individuals to the amounts
collectible under federal law. In November 1993, Liberty discontinued this
practice and recalculated and repaid all claims as it had prior to September
1993. Mr. Allen nevertheless later brought suit against Liberty alleging the
reduction in claims payments pursuant to his cancer policy was improper. He
had been repaid in full with interest prior to filing suit, as had all other
affected claimants. After reconsideration, the trial judge remitted the
verdict to $2.7 million. An appeal was filed with the Alabama Supreme Court in
January 1996.
A purported class action was filed on August 8, 1995, against Liberty in the
Circuit Court of Jefferson County, Alabama on behalf of Liberty cancer
policyholders eligible for Medicare who submitted claims during the
approximately two month period in 1993 described in the foregoing paragraph
(Adkins v. Liberty National Life Insurance Company, Case No. CV-95-05634). The
claims made in Adkins are identical to the individual claims in the Allen case
above. More than 400 (and perhaps as many as 1,000) individuals appear to fit
the proposed class definition in Adkins. Punitive damages and damages for
mental anguish appear to be sought on behalf of the class. A class
certification hearing is set in May 1996. The Company intends to oppose class
certification and to vigorously defend the case.
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
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 16--COMMITMENTS AND CONTINGENCIES (CONTINUED)
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
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 does not go to the
merit of the allegations in the complaint. The companies intend to vigorously
defend this action.
Much attention has been generated nationally with regard to so-called
"vanishing premium" cases, where allegations that an interest sensitive life
policy was sold with a projection that the policy would become paid-up or
self-sustaining after a period of years. Plaintiffs in these cases typically
assert that the projection amounted to a promise or misrepresentation. Liberty
currently is a party to several individual lawsuits in the state courts of
Alabama and was a party to one purported class action filed November 16, 1995
in the Circuit Court of Chambers County, Alabama (Mitcham v. Liberty National
Life Insurance Company, Case No. CV-95-290), involving such claims. The
Mitcham case was settled on a non-class basis on December 27, 1995. Another
interest sensitive case (Carlton v. Liberty National Life Insurance Company,
Case No. CV-96-22) filed on February 1, 1996, in the Circuit Court for
Chambers County, Alabama, was amended on February 9, 1996, to allege a
purported class action. Compensatory and punitive damages are sought. Liberty
believes that appropriate projections were made in connection with the sale of
the policies involved and intends to vigorously defend these cases.
In 1978, the United States District Court for the Northern District of
Alabama entered a final judgment in Battle v. Liberty National Life Insurance
Company, et al. (CV-70-H-752-S), class action litigation involving Liberty, a
class composed of all owners of funeral homes in Alabama and a class composed
of all insureds (Alabama residents only) under burial or vault policies
issued, assumed or reinsured by Liberty. The final judgment fixed the rights
and obligations of Liberty and the funeral directors authorized to handle
Liberty burial and vault policies as well as reforming the benefits available
to the policyholders under the policies. It remains in effect to date. A
motion filed in February 1990 to challenge the final judgment under Federal
Rule of Civil Procedure 60(b) was rejected by both the District Court in 1991
and the Eleventh Circuit Court of Appeals in 1992 and a Writ of Certiorari was
denied by the U.S. Supreme Court in 1993.
In November 1993, an attorney (purporting to represent the funeral director
class) filed a petition in the District Court seeking "alternative relief"
under the final judgment. This petition was voluntarily withdrawn on November
8, 1995, by petitioners. On February 23, 1996, Liberty filed a petition with
the District Court requesting that it order certain contract funeral directors
to comply with their obligations under the Final Judgment in Battle and their
funeral service contracts.
Purported class action litigation was filed on January 2, 1996 against
Torchmark, Torch Energy and certain Torch Energy subsidiaries and affiliated
limited partnerships in the Circuit Court of Pickens County, Alabama (Pearson
v. Torchmark Corporation, Case No. CV-95-140). Plaintiff alleges improper
payment of royalties and overriding royalties on coalbed methane gas produced
and sold from wells in Robinson's Bend Coal Degasification Field, seeks
certification of a class and claims unspecified compensatory and punitive
damages on behalf of such class. A motion to dismiss and in the alternative to
change venue, has been filed by Torchmark, and is awaiting a hearing.
Torchmark intends to vigorously defend this action.
Based upon information presently available, and in light of legal and other
defenses available to Torchmark and its subsidiaries, contingent liabilities
arising from threatened and pending litigation are not presently considered by
management to be material. It should be noted, however, that the frequency of
large punitive damage awards bearing little or no relation to actual damages
awarded by juries in jurisdictions in which Torchmark has substantial
business, particularly in Alabama, continues to increase universally, creating
the potential for unpredictable material adverse judgments in any given
punitive damage suit.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 17--INDUSTRY SEGMENTS
Torchmark operates primarily in two industry segments, insurance and asset
management. Operations in the insurance industry involve the sale and
administration of life insurance, health insurance and annuities. It also
includes investment operations related to insurance segment investments.
Operations in the asset management industry include the management,
distribution, and servicing of various mutual funds. Torchmark markets its
products in all fifty states.
Certain insurance company investments are managed by the asset management
segment. Additionally, the asset management segment markets certain insurance
products for the insurance segment and manages the mutual funds for the
insurance segment's variable products.
Total revenues by segment include revenues from other segments in addition
to unaffiliated parties. Intersegment revenues include commission revenue and
investment income which eliminate in consolidation. Pre-tax income for
operating segments is total revenue less operating costs and expenses for the
segment. Corporate pre-tax income includes transactions which are nonoperating
in nature and are not related to the activities of a segment. Such items
include parent company interest expense, goodwill amortization, and similar
items.
A summary of segment data is as follows:
ADJUSTMENTS
ASSET AND CONSOLIDATED
INSURANCE MANAGEMENT CORPORATE ELIMINATIONS TOTAL
---------- ---------- --------- ------------ ------------
1995:
Revenues--unaffiliated.. $1,926,516 $156,519 $ (15,553) $ -0- $2,067,482
Intersegment revenues... 7,497 27,503 (2,174) (32,826) -0-
---------- -------- --------- -------- ----------
Total revenues.......... $1,934,013 $184,022 $ (17,727) $(32,826) $2,067,482
========== ======== ========= ======== ==========
Pretax income........... $ 462,001 $ 96,371 $(124,380) $ (5,817) $ 428,175
Depreciation............ 6,135 3,327 141 9,603
Capital expenditures.... 7,094 15,227 193 22,514
Identifiable assets at
year end............... 8,933,970 244,003 379,856 (193,725) 9,364,104
1994:
Revenues--unaffiliated.. $1,721,650 $141,807 $ 11,880 $ -0- $1,875,337
Intersegment revenues... 2,724 25,895 (6,302) (22,317) -0-
---------- -------- --------- -------- ----------
Total revenues.......... $1,724,374 $167,702 $ 5,578 $(22,317) $1,875,337
========== ======== ========= ======== ==========
Pretax income........... $ 402,562 $ 84,975 $ (89,582) $ (3,981) $ 393,974
Depreciation............ 8,260 2,869 142 11,271
Capital expenditures.... 5,117 20,952 160 26,229
Identifiable assets at
year end............... 7,697,456 180,881 442,639 (155,732) 8,165,244
1993:
Revenues--unaffiliated.. $1,836,347 $140,827 $ 89,672 $ -0- $2,066,846
Intersegment revenues... 2,167 27,624 (2,782) (27,009) -0-
---------- -------- --------- -------- ----------
Total revenues.......... $1,838,514 $168,451 $ 86,890 $(27,009) $2,066,846
========== ======== ========= ======== ==========
Pretax income........... $ 325,842 $ 73,385 $ 730 $ 2,001 $ 401,958
Depreciation............ 8,111 2,584 157 10,852
Capital expenditures.... 4,311 9,613 233 14,157
Identifiable assets at
year end............... 6,809,570 185,057 510,879 (64,321) 7,441,185
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 18--RELATED PARTY TRANSACTIONS
Investment in Related Parties: Other long-term investments include
investment by Torchmark subsidiaries in the United Group of Mutual Funds and
certain other funds for which Waddell & Reed, Inc. is sole advisor. These
investments were $26.2 million and $24.4 million at December 31, 1995 and
1994, respectively. Investment income derived from these investments is
included in net investment income.
Rental Income: Torchmark leases office space to Vesta, a 27% owned
subsidiary. Total rental income received from Vesta was $494 thousand, $461
thousand, and $66 thousand, for the years ended December 31, 1995, 1994 and
1993, respectively.
NOTE 19--SUPPLEMENTAL DISCLOSURES FOR CASH FLOW STATEMENT
The following table summarizes Torchmark's noncash transactions, which are
not reflected on the Statement of Cash Flow as required by GAAP:
YEAR ENDED
DECEMBER 31,
-----------------
1995 1994 1993
----- ---- ------
Treasury stock accepted for exercise of stock options.... $ -0- $-0- $2,480
Paid in capital from tax benefit for stock option exer-
cises................................................... 709 349 6,412
Grant of options in conjunction with United Management
merger.................................................. -0- -0- 5,122
The following table summarizes certain amounts paid during the period:
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
------- -------- --------
Interest paid..................................... $82,642 $ 77,114 $ 64,193
Income taxes paid................................. $99,298 $182,052 $133,392
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 20--SELECTED QUARTERLY DATA (UNAUDITED)
The following is a summary of quarterly results for the two years ended
December 31, 1995. 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,
--------- -------- ------------- ------------
1995:
- -----
Premium and policy charges...... $390,834 $384,759 $383,962 $386,728
Financial services revenue...... 34,774 37,223 39,108 41,377
Net investment income........... 92,808 92,883 93,762 102,412
Realized investment gains (loss-
es)............................ (920) 304 (15,700) 1,993
Total revenues.................. 517,688 515,597 501,383 532,814
Policy benefits................. 253,369 252,640 252,547 250,780
Amortization of acquisition ex-
penses......................... 50,185 49,936 51,150 52,796
Pretax income from continuing
operations..................... 107,362 108,530 94,457 117,826
Income (loss) from discontinued
operations..................... 288 569 2,017 (131,584)
Net income...................... 68,621 70,023 60,974 (56,383)
Net income per common share from
continuing operations.......... 0.96 0.97 0.82 1.05
Net income per common share from
discontinued operations........ 0.00 0.01 0.03 (1.84)
Net income per common share..... 0.96 0.98 0.85 (0.79)
Net income per common share ex-
cluding realized gains, the re-
lated DPAC adjustment, and dis-
continued operations........... 0.96 0.97 0.97 1.03
1994:
- -----
Premium and policy charges...... $348,148 $340,166 $336,533 $364,027
Financial services revenue...... 36,544 35,572 33,747 33,413
Net investment income........... 88,281 85,236 85,226 88,894
Realized investment gains (loss-
es)............................ 12,595 (9,304) (1,278) (4,564)
Total revenues.................. 485,858 452,426 454,637 482,416
Policy benefits................. 232,482 222,924 223,757 242,114
Amortization of acquisition ex-
penses......................... 49,822 40,106 41,327 46,852
Pretax income from continuing
operations..................... 108,912 94,829 94,536 95,697
Income (loss) from discontinued
operations..................... 2,606 461 421 1,644
Net income...................... 75,572 64,903 64,698 63,773
Net income per common share from
continuing operations.......... 0.99 0.89 0.90 0.87
Net income per common share from
discontinued operations........ 0.04 0.00 0.01 0.02
Net income per common share..... 1.03 0.89 0.91 0.89
Net income per common share ex-
cluding realized gains, the re-
lated DPAC adjustment, and dis-
continued operations........... 0.94 0.98 0.91 0.91
60
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No disagreements with accountants on any matter of accounting principles or
practices or financial statement disclosure have been reported on a Form 8-K
within the twenty-four months prior to the date of the most recent 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 "Compliance with Section 16(a) of the
Securities Exchange Act" in the Proxy Statement for the Annual Meeting of
Stockholders to be held April 25, 1996 (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.
61
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' Report.................................... 30
Consolidated Balance Sheet at December 31, 1995 and 1994........ 31
Consolidated Statement of Operations for each of the years in
the three-year period ended December 31, 1995.................. 32
Consolidated Statement of Shareholders' Equity for each of the
years in the three-year period ended December 31, 1995......... 33
Consolidated Statement of Cash Flow for each of the years in the
three-year period ended December 31, 1995...................... 34
Notes to Consolidated Financial Statements...................... 35
Schedules Supporting Financial Statements for each of the years
in the three-year period ended December 31, 1995................
II.Condensed Financial Information of Registrant (Parent Compa-
ny)............................................................. 67
III.Supplementary Insurance Information (Consolidated).......... 70
IV.Reinsurance (Consolidated)................................... 71
Schedules not referred to have been omitted as inapplicable or not required by
Regulation S-X.
62
EXHIBITS
Page of
this
Report
-------
(3)(i) Restated Certificate of Incorporation of Torchmark Corpora-
tion, as amended
(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,
Providing for Advisory Directors, and Providing Retirement
Benefits for Directors (incorporated by reference from Ex-
hibit 10(e) to Form 10-K for the fiscal year ended December
31, 1989)
(e) 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)
(f) The Torchmark Corporation 1987 Stock Incentive Plan
(g) The 1984 Torchmark Corporation Stock Option Plan (incorpo-
rated by reference from Form S-8 for The 1984 Torchmark Cor-
poration Stock Option Plan (Registration No. 2-93760))
(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)
63
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) United Investors Management Company Retirement Income Plan
(incorporated by reference from Exhibit 10(p) to Form 10-K
for the fiscal year ended December 31, 1992)
(p) Waddell & Reed, Inc. Career Field Retirement Plan (incorpo-
rated by reference from Exhibit 10(q) to Form 10-K for the
fiscal year ended December 31, 1992)
(q) United Investors Management Company 1986 Employee Stock In-
centive Plan (incorporated by reference from Exhibit 10(r)
to Form 10-K for the fiscal year ended December 31, 1993)
(r) 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)
(s) United Investors Management Company Savings and Investment
Plan (incorporated by reference from Exhibit 10(t) to Form
10-K for the fiscal year ended December 31, 1992)
(t) Credit Agreements dated as of December 6, 1994 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, 1995)
(u) Coinsurance and Servicing Agreement between Security Benefit
Life Insurance Company and Liberty National Life Insurance
Company, effective as of December 31, 1995
(v) 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)
(11) Statement re computation of per share earnings 66
(20) Proxy Statement for Annual Meeting of Stockholders to be
held April 25, 1996
(21) Subsidiaries of the registrant 66
(23)(a) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report dated January 31, and February
26, 1996 into Form S-8 of The Torchmark Corporation Savings
and Investment Plan (Registration No. 2-76378)
(b) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report dated January 31, and February
26, 1996 into Form S-8 of The United Investors Management
Company Savings and Investment Plan (Registration No. 2-
76912)
(c) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report dated January 31, and February
26, 1996 into Form S-8 and the accompanying Form S-3 Pro-
spectus of The 1984 Torchmark Corporation Stock Option Plan
(Registration No. 2-93760)
64
Page of
this
Report
-------
(d) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report dated January 31, and February
26, 1996 into Form S-8 and the accompanying Form S-3 Pro-
spectus of the Torchmark Corporation 1987 Stock Incentive
Plan (Registration No. 33-23580)
(e) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report dated January 31, and February
26, 1996 into Form S-8 and the accompanying Form S-3 Pro-
spectus of The Capital Accumulation and Bonus Plan of
Torchmark Corporation (Registration No. 33-1032)
(f) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report dated January 31, and February
26, 1996 into Form S-8 of the Liberty National Life Insur-
ance Company 401(k) Plan
(24) Powers of attorney
(27) Financial Data Schedule
(99)(a) Form 11-K for The Torchmark Corporation Savings and Invest-
ment Plan for the fiscal year ended December 31, 1995*
(b) Form 11-K for The United Investors Management Company Sav-
ings and Investment Plan for the fiscal year ended December
31, 1995*
(c) Form 11-K for The Liberty National Life Insurance Company
401(k) Plan for the fiscal year ended December 31, 1995*
- --------
*To be filed under cover of a Form 10K-A as an Amendment to Form 10-K for the
fiscal year ended December 31, 1995.
65
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the registrant during the fourth
quarter of 1995.
(c) Exhibits
Exhibit 11. Statement re computation of per share earnings
TORCHMARK CORPORATION COMPUTATION OF EARNINGS PER SHARE
1995 1994 1993
------------- ------------ ------------
Net income from continuing opera-
tions.............................. $271,945,720 $263,814,601 $242,297,802
Income/(loss) of discontinued energy
segment............................ (128,710,390) 5,131,667 37,278,339
Cumulative effect of changes in ac-
counting principles................ 0 0 18,402,739
------------- ------------ ------------
Net income.......................... 143,235,330 268,946,268 297,978,880
Preferred dividends................. 0 (804,130) (3,289,568)
------------- ------------ ------------
Adjusted net income................. $143,235,330 $268,142,138 $294,689,312
============= ============ ============
Weighted average shares outstanding. 71,593,774 72,095,657 73,501,654
============= ============ ============
Primary earnings per share:
From continuing operations......... $ 3.80 $ 3.65 $ 3.25
From discontinued operations....... (1.80) 0.07 0.51
From cumulative effect of account-
ing change........................ 0.00 0.00 0.25
------------- ------------ ------------
Net income........................ $ 2.00 $ 3.72 $ 4.01
============= ============ ============
There were no common stock equivalents included in weighted average shares
outstanding.
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
----------------------- ------------- ---------------------
Family Service Life Family Service Life
Insurance Company Texas 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
Waddell & Reed, Inc. Delaware Waddell & Reed, Inc.
American Income Life American Income Life
Insurance Company Indiana 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 63 through 65 of
this report. Exhibits not referred to have been omitted as inapplicable or not
required.
66
TORCHMARK CORPORATION (PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
(AMOUNTS IN THOUSANDS)
DECEMBER 31,
----------------------
1995 1994
---------- ----------
Assets:
Investments:
Long-term investments--available for sale........ $ 9,655 $ 21,448
Short-term investments........................... 994 806
---------- ----------
Total investments................................. 10,649 22,254
Investment in affiliates.......................... 2,820,323 2,404,431
Due from affiliates............................... 105,887 85,387
Accrued investment income......................... 94 83
Other assets...................................... 3,636 3,822
Discontinued operations assets.................... 61,109 108,467
---------- ----------
Total assets..................................... $3,001,698 $2,624,444
========== ==========
Liabilities and shareholders' equity:
Liabilities:
Short-term debt.................................. $ 189,248 $ 250,000
Long-term debt................................... 791,566 790,972
Due to affiliates................................ 195,193 97,523
Other liabilities................................ 43,643 50,294
---------- ----------
Total liabilities................................ 1,219,650 1,188,789
Monthly income preferred securities............... 193,096 193,052
Shareholders' equity:
Preferred stock.................................. -0- -0-
Common stock..................................... 73,784 73,784
Additional paid-in capital....................... 139,754 139,045
Unrealized investment gains (losses)............. 140,338 (140,756)
Retained earnings................................ 1,325,534 1,267,545
Treasury stock................................... (90,458) (97,015)
---------- ----------
Total shareholders' equity....................... 1,588,952 1,242,603
---------- ----------
Total liabilities and shareholders' equity....... $3,001,698 $2,624,444
========== ==========
See accompanying Notes to Condensed Financial Statements.
67
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
CONDENSED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
Net investment income............................ $ 1,261 $ 5,183 $ 8,540
Realized investment gains (losses)............... (23,516) (4,422) 9,301
Other income..................................... 11 11 27,435
-------- -------- --------
Total revenue.................................. (22,244) 772 45,276
General operating expenses....................... 7,823 14,442 15,174
Non-operating expenses--related to affiliates.... 0 (71,417) 67,718
Reimbursements from affiliates................... (13,260) (15,218) (18,599)
Interest expense................................. 91,825 79,762 64,859
-------- -------- --------
Total expenses................................. 86,388 7,569 129,152
-------- -------- --------
Operating loss before income taxes and equity in
earnings
of affiliates................................... (108,632) (6,797) (83,876)
Income taxes .................................... 37,363 2,022 29,391
-------- -------- --------
Net operating loss before equity in earnings of
affiliates...................................... (71,269) (4,775) (54,485)
Equity in earnings of affiliates................. 326,822 271,992 360,991
Minority interests............................... 0 0 (11,073)
Monthly income preferred securities dividend..... (10,317) (2,137) 0
-------- -------- --------
Net income from continuing operations.......... 245,236 265,080 295,433
Income (loss) from discontinued operations of en-
ergy segment.................................... (102,001) 3,866 4,797
Cumulative effect of changes in accounting prin-
ciples.......................................... -0- -0- (2,251)
-------- -------- --------
Net income..................................... $143,235 $268,946 $297,979
======== ======== ========
See accompanying Notes to Condensed Financial Statements.
68
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(continued)
CONDENSED STATEMENT OF CASH FLOW
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
Cash provided from operations before dividends
from subsidiaries............................ $ (86,764) $ (48,378) $ (20,435)
Cash dividends from subsidiaries............. 185,500 270,500 188,709
--------- --------- ---------
Cash provided from operations................. 98,736 222,122 168,274
Cash provided from (used for) investing activ-
ities:
Disposition of investments................... 116 225,573 478,859
Acquisition of investments................... (1,556) (202,579) (526,421)
Sale of subsidiaries......................... -0- -0- 76,744
Investment in subsidiaries................... (83,211) (70,000) (55,651)
Purchase of minority interest................ -0- -0- (229,063)
Purchase of American Income.................. -0- (476,501) -0-
Loans to subsidiaries........................ (49,043) (28,916) (8,881)
Repayment of loans by subsidiaries........... -0- -0- 31,924
Net decrease (increase) in temporary invest-
ments....................................... (188) 1,529 (799)
Additions to properties...................... (146) (113) (74)
--------- --------- ---------
Cash used for investing activities............ (134,028) (551,007) (233,362)
Cash provided from (used for) financing activ-
ities:
Issuance of debt............................. -0- 143,000 294,110
Issuance of monthly income preferred securi-
ties........................................ -0- 193,046 -0-
Repayments of debt........................... (60,752) -0- (88,000)
Issuance of stock to subsidiaries............ 77,766 -0- -0-
Issuance of stock............................ 2,808 4,408 6,670
Acquisitions of treasury stock............... -0- (106,054) (41,897)
Borrowed from subsidiaries................... 101,857 176,821* -0-
Repayment on borrowings from subsidiaries.... (5,500) -0- (24,000)
Payment of dividends......................... (80,887) (82,336) (83,646)
--------- --------- ---------
Cash provided from financing activities....... 35,292 328,885 63,237
Net increase in cash.......................... -0- -0- (1,851)
Cash balance at beginning of period........... -0- -0- 1,851
--------- --------- ---------
Cash balance at end of period................. $ -0- $ -0- $ -0-
========= ========= =========
* Includes an $80.3 million note payable to subsidiary which was forgiven in
1994 in the form of a dividend from the subsidiary.
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:
1995 1994 1993
-------- -------- --------
Consolidated subsidiaries..................... $185,500 $270,500 $188,709
======== ======== ========
69
TORCHMARK CORPORATION
SCHEDULE III. SUPPLEMENTARY INSURANCE INFORMATION (CONSOLIDATED)
(AMOUNTS IN THOUSANDS)
AMORTIZATION
OF DEFERRED
PREMIUM AND NET POLICY OTHER
POLICY INVESTMENT OTHER BENEFITS ACQUISITION OPERATING
CHARGES INCOME INCOME AND CLAIMS COSTS EXPENSES
----------- ---------- -------- ---------- ------------ ---------
FOR THE YEAR ENDED DE-
CEMBER 31, 1995:
- ------------------------
Insurance.............. $1,546,283 $384,619 $ 3,111 $1,009,336 $205,509 $257,167
Asset management....... 4,021 180,001 87,651
Corporate.............. (3,418) (14,309) 106,653
Eliminations and ad-
justments............. (3,357) (29,469) (1,442) (25,567)
---------- -------- -------- ---------- -------- --------
Total................. $1,546,283 $381,865 $139,334 $1,009,336 $204,067 $425,904
========== ======== ======== ========== ======== ========
FOR THE YEAR ENDED DE-
CEMBER 31, 1994:
- ------------------------
Insurance.............. $1,388,874 $331,679 $ 3,821 $921,277 $172,493 $228,042
Asset management....... 2,443 165,259 82,727
Corporate.............. 8,103 (2,525) 95,160
Eliminations and ad-
justments............. 5,412 (27,729) 5,614 (23,950)
---------- -------- -------- ---------- -------- --------
Total................. $1,388,874 $347,637 $138,826 $921,277 $178,107 $381,979
========== ======== ======== ========== ======== ========
FOR THE YEAR ENDED DE-
CEMBER 31, 1993:
- ------------------------
Insurance.............. $1,492,910 $341,659 $ 3,945 $971,556 $188,283 $352,833
Asset management....... 4,620 163,831 95,066
Corporate.............. 21,589 65,301 86,160
Eliminations and ad-
justments............. 626 (27,635) (1,210) (27,800)
---------- -------- -------- ---------- -------- --------
Total................. $1,492,910 $368,494 $205,442 $971,556 $187,073 $506,259
========== ======== ======== ========== ======== ========
70
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 DE-
CEMBER 31, 1995:
- ----------------------
Life insurance in force $80,377,021 $636,961 $ 14,355 $79,754,415 0.0%
=========== ======== ======== =========== =====
Premiums:*
Life insurance......... $ 702,993 $ 3,305 $ 4,283 $ 703,971 0.6%
Health insurance....... 761,573 10,985 -0- 750,588 0.0%
----------- -------- -------- -----------
Total premiums........ $ 1,464,566 $ 14,290 $ 4,283 $ 1,454,559 0.3%
=========== ======== ======== =========== =====
FOR THE YEAR ENDED DE-
CEMBER 31, 1994:
- ----------------------
Life insurance in force $74,834,644 $633,485 $ 23,570 $74,224,729 0.0%
=========== ======== ======== =========== =====
Premiums:*
Life insurance......... $ 535,141 $ 4,386 $ 1,316 $ 532,071 0.2%
Health insurance....... 781,207 12,493 -0- 768,714 0.0%
----------- -------- -------- -----------
Total premiums........ $ 1,316,348 $ 16,879 $ 1,316 $ 1,300,785 0.1%
=========== ======== ======== =========== =====
FOR THE YEAR ENDED DE-
CEMBER 31, 1993:
- ----------------------
Life insurance in force $61,349,446 $594,416 $ 17,487 $60,772,517 0.0%
=========== ======== ======== =========== =====
Premiums:*
Life insurance......... $ 488,632 $ 4,862 $ 576 $ 484,346 0.1%
Health insurance....... 814,456 14,621 -0- 799,835 0.0%
Property and liability
insurance............. 78,512 60,245 104,790 123,057 85.2%
----------- -------- -------- -----------
Total premiums........ $ 1,381,600 $ 79,728 $105,366 $ 1,407,238 7.5%
=========== ======== ======== =========== =====
- --------
* Excludes policy charges
71
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/ R.K. Richey
By: ________________________________
R.K. RICHEY, CHAIRMAN,
CHIEF EXECUTIVE OFFICER AND DIRECTOR
/s/ Keith A. Tucker
By: ________________________________
KEITH A. TUCKER, VICE CHAIRMAN AND DIRECTOR
(PRINCIPAL FINANCIAL OFFICER)
/s/ Gary L. Coleman
By: ________________________________
GARY L. COLEMAN, VICE PRESIDENT
AND CHIEF ACCOUNTING OFFICER
(PRINCIPAL ACCOUNTING OFFICER)
Date: March 20, 1996
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/ J.P. Bryan* /s/ Harold T. McCormick*
By: ________________________________ By: ________________________________
J.P. BRYAN HAROLD T. MCCORMICK
DIRECTOR DIRECTOR
/s/ Joseph M. Farley* /s/ Joseph W. Morris*
By: ________________________________ By: ________________________________
JOSEPH M. FARLEY JOSEPH W. MORRIS
DIRECTOR DIRECTOR
/s/ Louis T. Hagopian* /s/ George J. Records*
By: ________________________________ By: ________________________________
LOUIS T. HAGOPIAN GEORGE J. RECORDS
DIRECTOR DIRECTOR
/s/ C.B. Hudson* /s/ Yetta G. Samford, Jr.*
By: ________________________________ By: ________________________________
C.B. HUDSON YETTA G. SAMFORD, JR.
DIRECTOR DIRECTOR
/s/ Joseph L. Lanier, Jr.*
By: ________________________________
JOSEPH L. LANIER, JR.
DIRECTOR
Date: March 20, 1996
/s/ Gary L. Coleman
*By: _______________________________
GARY L. COLEMAN ATTORNEY-IN-FACT
Date: March 20, 1996
72