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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
December 31, 1997 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: $6,555,260,129
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON
STOCK, AS OF FEBRUARY 28, 1998: 140,219,468
DOCUMENTS INCORPORATED BY REFERENCE
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 22, 1998,
PART III
INDEX OF EXHIBITS (PAGES 68 THROUGH 70)
TOTAL NUMBER OF PAGES INCLUDED ARE 77
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. 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
- ---------------------------------------------------------------------------------------------------------
DIRECT RESPONSE GLOBE LIFE AND Individual life and health in- Direct response, television,
ACCIDENT surance including juvenile and magazine; nationwide.
INSURANCE COMPANY senior life coverage, Medicare
Oklahoma City, OK Supplement, long-term care.
- ---------------------------------------------------------------------------------------------------------
LIBERTY NATIONAL LIBERTY NATIONAL LIFE Individual life and 2,110 full-time sales repre-
EXCLUSIVE AGENCY INSURANCE COMPANY health insurance. sentatives and field manage-
Birmingham, Alabama ment; 108 district offices
in the Southeastern U.S.
- ---------------------------------------------------------------------------------------------------------
AMERICAN INCOME AMERICAN INCOME LIFE Individual life and health in- 1,360 agents.
EXCLUSIVE AGENCY INSURANCE COMPANY surance to union and credit
Waco, Texas union members and other
associations.
- ---------------------------------------------------------------------------------------------------------
UNITED INVESTORS WADDELL & REED, INC. United and Waddell & Reed 2,290 Waddell & Reed
EXCLUSIVE AGENCY Shawnee Mission, Groups of mutual funds, representatives; indepen-
Kansas institutional investment dent agents; 177 offices
UNITED INVESTORS LIFE management services includ- nationwide.
INSURANCE COMPANY ing assets of Torchmark.
Birmingham, Alabama Individual life insurance
and annuities.
- ---------------------------------------------------------------------------------------------------------
MILITARY LIBERTY NATIONAL LIFE Individual life insurance Independent Agency through
INSURANCE COMPANY career agents nationwide.
Birmingham, Alabama
GLOBE LIFE AND ACCIDENT
INSURANCE COMPANY
Oklahoma City, Oklahoma
- ---------------------------------------------------------------------------------------------------------
UNITED AMERICAN UNITED AMERICAN Senior life and health 45,000 independent agents
INDEPENDENT AGENCY INSURANCE COMPANY insurance including in the U.S., Puerto Rico and
AND EXCLUSIVE AGENCY McKinney, Texas Medicare Supplement Canada; 900 exclusive
coverage and long-term care. agents in 64 branch offices.
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's insurance subsidiaries write a variety of nonparticipating
ordinary life insurance products. These include traditional and interest
sensitive whole-life insurance, term life insurance, and other life insurance.
The following table presents selected information about Torchmark's life
products:
(AMOUNTS IN THOUSANDS)
ANNUALIZED ANNUALIZED
PREMIUM ISSUED PREMIUM IN FORCE
-------------------------- ----------------------------
1997 1996 1995 1997 1996 1995
-------- -------- -------- ---------- -------- --------
Whole life:
Traditional........... $114,934 $112,817 $107,288 $ 551,047 $521,015 $469,581
Interest-sensitive.... 14,981 16,638 29,287 163,058 167,912 174,675
Term................... 94,943 82,331 79,849 270,905 243,210 212,213
Other.................. 5,521 2,955 1,564 22,369 14,388 12,897
-------- -------- -------- ---------- -------- --------
$230,379 $214,741 $217,988 $1,007,379 $946,525 $869,366
======== ======== ======== ========== ======== ========
1
The distribution methods for life insurance products include sales efforts
conducted by direct response, exclusive agents and independent agents. These
methods are discussed in more depth under the heading "Marketing." The
following table presents life annualized premium issued by marketing method:
(AMOUNTS IN THOUSANDS)
ANNUALIZED ANNUALIZED
PREMIUM ISSUED PREMIUM IN FORCE
-------------------------- -----------------------------
1997 1996 1995 1997 1996 1995
-------- -------- -------- ---------- -------- --------
Direct response....... $ 79,412 $ 62,029 $ 63,900 $ 232,535 $202,370 $180,530
Exclusive Agents:
Liberty National..... 43,335 45,394 48,549 298,698 297,581 297,418
American Income...... 55,245 54,382 51,190 203,475 188,039 169,599
United Investors..... 10,261 10,715 10,609 88,842 84,495 78,666
United American...... 6,562 11,466 9,826 20,978 20,537 15,503
Independent Agents:
Military............. 15,781 8,165 8,268 86,209 74,150* 48,402
United American...... 15,225 18,182 16,392 42,725 40,130 34,281
Other................ 4,558 4,408 9,254 33,917 39,223 44,967
-------- -------- -------- ---------- -------- --------
$230,379 $214,741 $217,988 $1,007,379 $946,525 $869,366
======== ======== ======== ========== ======== ========
- --------
* Annualized premium in force for 1996 includes $21 million acquired from
another carrier originally produced by this agency.
Permanent insurance products sold by Torchmark insurance subsidiaries build
cash values which are available to policyholders. Policyholders may borrow
such funds using the policies as collateral. The aggregate value of policy
loans outstanding at December 31, 1997 was $222 million and the average
interest rate earned on these loans was 6.7% in 1997. Interest income earned
on policy loans was $14.4 million in 1997, $13.2 million in 1996, and $12.1
million in 1995. There were 196 thousand and 188 thousand policy loans
outstanding at year-end 1997 and 1996, respectively.
The availability of cash values contributes to voluntary policy terminations
by policyholders through surrenders. Life insurance products may be terminated
or surrendered at the election of the insured at any time, generally for the
full cash value specified in the policy. Specific surrender procedures vary
with the type of policy. For certain policies this cash value is based upon a
fund less a surrender charge which decreases with the length of time the
policy has been in force. This surrender charge is either based upon a
percentage of the fund or a charge per $1,000 of face amount of insurance. The
schedule of charges may vary by plan of insurance and, for some plans, by age
of the insured at issue. The ratio of aggregate face amount voluntary
terminations to the mean amount of life insurance in force was 16.5% in 1997,
17.1% in 1996, and 17.2% in 1995.
The following table presents an analysis of changes to the Torchmark
subsidiaries' life insurance business in force:
(AMOUNTS IN THOUSANDS)
1997 1996 1995
--------------------- --------------------- ---------------------
NUMBER OF AMOUNT OF NUMBER OF AMOUNT OF NUMBER OF AMOUNT OF
POLICIES INSURANCE POLICIES INSURANCE POLICIES INSURANCE
--------- ----------- --------- ----------- --------- -----------
In force at January 1,.. 9,392 $86,948,151 9,196 $80,391,376 8,913 $74,858,214
New issues.............. 1,441 20,267,520 1,320 18,718,479 1,413 19,359,923
Business acquired....... -0- -0- 38 2,573,996 -0- -0-
Other increases......... 1 96,788 1 104,490 1 64,128
Death benefits.......... (110) (307,752) (111) (289,687) (110) (271,451)
Lapses.................. (895) (13,358,973) (880) (13,008,065) (856) (12,185,540)
Surrenders.............. (149) (1,383,373) (140) (1,296,744) (135) (1,187,581)
Other decreases......... (50) (392,366) (32) (245,694) (30) (246,317)
----- ----------- ----- ----------- ----- -----------
In force at December
31,.................... 9,630 $91,869,995 9,392 $86,948,151 9,196 $80,391,376
===== =========== ===== =========== ===== ===========
Average policy size (in
dollar amounts):
Direct response--Juve-
nile.................. $ 6,725 $ 6,776 $ 6,854
Other.................. 10,689 10,246 9,491
2
HEALTH INSURANCE
Torchmark insurance subsidiaries offer supplemental health insurance
products. These are generally classified as (1) Medicare Supplement, (2)
cancer and (3) other health policies.
Medicare Supplement policies are offered on both an individual and group
basis through exclusive and independent agents, and direct response. These
guaranteed renewable policies provide reimbursement for certain expenses not
covered by the federal Medicare program. One popular feature is an automatic
claim filing system for Medicare Part B benefits whereby policyholders do not
have to file most claims because they are paid from claim records Medicare
sends directly to the Torchmark insurers.
Cancer policies are offered on an individual basis through exclusive and
independent agents as well as direct response. These guaranteed renewable
policies are designed to fill gaps in existing medical coverage. Benefits are
triggered by a diagnosis of cancer or health related events or medical
expenses related to the treatment of cancer. Benefits may be in the form of a
lump sum payment, stated amounts per diem, per medical procedure, or
reimbursement for certain medical expenses.
Other health policies include accident, long term care and limited benefit
hospital and surgical coverages. These policies are generally issued as
guaranteed-renewable and are offered on an individual basis through exclusive
and independent agents, and direct response. They are designed to supplement
existing medical coverages. Benefits are triggered by certain health related
events or incurred expenses. Benefit amounts are per diem, per health related
event or defined expenses incurred up to a stated maximum.
The following table presents supplemental health annualized premium for the
three years ended December 31, 1997 by marketing method:
(AMOUNTS IN THOUSANDS)
ANNUALIZED ANNUALIZED
PREMIUM ISSUED PREMIUM IN FORCE
-------------------------- --------------------------
1997 1996 1995 1997 1996 1995
-------- -------- -------- -------- -------- --------
Direct response........... 3,001 4,990 171 7,248 5,141 929
Exclusive agents:
Liberty National......... 11,541 11,258 16,701 138,179 122,305 122,147
American Income.......... 10,052 10,645 9,585 43,552 42,140 39,693
United American.......... 39,616 31,565 32,596 141,780 131,250 127,599
Independent agents:
United American.......... 42,643 42,523 44,438 431,293 447,317 468,691
-------- -------- -------- -------- -------- --------
$106,853 $100,981 $103,491 $762,052 $748,153 $759,059
======== ======== ======== ======== ======== ========
The following table presents supplemental health annualized premium
information for the three years ended December 31, 1997 by product category:
(AMOUNTS IN THOUSANDS)
ANNUALIZED ANNUALIZED
PREMIUM ISSUED PREMIUM IN FORCE
-------------------------- --------------------------
1997 1996 1995 1997 1996 1995
-------- -------- -------- -------- -------- --------
Medicare Supplement...... $ 65,161 $ 65,767 $ 64,638 $522,054 $523,902 $529,616
Cancer................... 10,757 10,676 11,338 137,640 119,428 114,972
Other health related pol-
icies................... 30,935 24,538 27,515 102,358 104,823 114,471
-------- -------- -------- -------- -------- --------
$106,853 $100,981 $103,491 $762,052 $748,153 $759,059
======== ======== ======== ======== ======== ========
3
ANNUITIES
Annuity products offered by Torchmark insurance susidiaries include single-
premium deferred annuities, flexible-premium deferred annuities, and variable
annuities. Single-premium and flexible-premium products are fixed annuities
where a portion of the interest credited is guaranteed. Additional interest
may be credited on certain contracts. Variable annuity policyholders may
select from a variety of mutual funds managed by 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,
-------------------------------- --------------------------
1997 1996 1995 1997 1996 1995
---------- ---------- ---------- -------- -------- --------
Fixed annuities......... $ 88,795 $ 87,133 $ 133,461 $1,010.4 $ 974.6 $ 927.9
Variable annuities...... 247,446 247,461 189,188 1,821.2 1,375.5 1,052.2
---------- ---------- ---------- -------- -------- --------
$336,241 $ 334,594 $322,649 $2,831.6 $2,350.1 $1,980.1
========== ========== ========== ======== ======== ========
INVESTMENTS
The nature, quality, and percentage mix of insurance company investments are
regulated by state laws that generally permit investments in qualified
municipal, state, and federal government obligations, corporate bonds,
preferred and common stock, real estate, and mortgages where the value of the
underlying real estate exceeds the amount of the loan. The investments of
Torchmark insurance subsidiaries consist predominantly of high-quality,
investment-grade securities. Fixed maturities represented 90% of total
investments at December 31, 1997. Approximately 20% 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 73% of these investments were in GNMA securities that
are backed by the full faith and credit of the United States government. The
remainder of these government investments were U.S. Treasuries, agency
securities or collateralized mortgage obligations ("CMO's") that are fully
backed by GNMA's. (see Note 3--Investment Operations in the Notes to
Consolidated Financial Statements and Management's Discussion and Analysis.)
The following table presents the market value of fixed maturity investments
at December 31, 1997 on the basis of ratings as determined primarily by
Standard & Poor's Corporation. Moody's Investors Services' bond ratings are
used when Standard & Poor's ratings are not available. Ratings of BBB and
higher (or their equivalent) are considered investment grade by the rating
services.
AMOUNT
RATING (IN THOUSANDS) %
------ -------------- -----
AAA................................................ $1,939,172 33.1%
AA................................................. 715,549 12.2
A.................................................. 2,174,876 37.2
BBB................................................ 705,543 12.0
BB................................................. 181,532 3.1
B.................................................. 17,644 0.3
Less than B........................................ 2,740 0.0
Not rated.......................................... 122,612 2.1
---------- -----
$5,859,668 100.0%
========== =====
4
The following table presents the market value of fixed maturity investments
of Torchmark's insurance subsidiaries at December 31, 1997 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.. $4,913,146 84.1%
2. High quality..... 669,587 11.5
3. Medium quality... 212,952 3.6
4. Low quality...... 39,660 0.7
5. Lower quality.... 5,927 0.1
6. In or near de-
fault.............. 0 0.0
---------- -----
$5,841,272 100.0%
========== =====
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 the experience of each insurance subsidiary,
and on projected investment earnings. Revenues for individual life and health
insurance products are primarily derived from premium income, and, to a lesser
extent, through policy charges to the policyholder account values on certain
individual life products. Profitability is affected to the extent actual
experience deviates from that which has been assumed in premium pricing and to
the extent investment income exceeds that which is required for policy
reserves.
Collections for annuity products and certain life products are not
recognized as revenues but are added to policyholder account values. Revenues
from these products are derived from charges to the account balances for
insurance risk and administrative costs. Profits are earned to the extent
these revenues exceed actual costs. Profits are also earned from investment
income on the deposits invested in excess of the amounts credited to policy
accounts.
UNDERWRITING
The underwriting standards of each Torchmark insurance subsidiary are
established by management. Each company uses information from the application
and, in some cases, telephone interviews with applicants, inspection reports,
doctors' statements and/or medical examinations to determine whether a policy
should be issued in accordance with the application, with a different rating,
with a rider, with reduced coverage or rejected.
For life insurance in excess of certain prescribed amounts, each insurance
company requires medical information or examinations of applicants. These are
graduated according to the age of the applicant and may vary with the kind of
insurance. The maximum amount of insurance issued without additional medical
information is $100,000 through age 40. Additional medical information is
requested of all applicants, regardless of age or amount, if information
obtained from the application or other sources indicates that such information
is warranted.
In recent years, there has been considerable concern regarding the impact of
the HIV virus associated with Acquired Immune Deficiency Syndrome ("AIDS").
The insurance companies have implemented certain underwriting tests to detect
the presence of the HIV virus and continues to assess the utility of other
appropriate underwriting tests to detect AIDS in light of medical developments
in this field. To date, AIDS claims have not had a material impact on claims
experience.
5
REINSURANCE
As is customary among insurance companies, Torchmark insurance subsidiaries
cede insurance to other unaffiliated insurance companies on policies they
issue in excess of retention limits. Reinsurance is an effective method for
keeping insurance risk within acceptable limits. In the event insurance
business is ceded, the Torchmark insurance subsidiaries remain contingently
liable with respect to ceded insurance should any reinsurer be unable to meet
the obligations it assumes (See Note 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 8--Future Policy Benefit Reserves in the
Notes to Consolidated Financial Statements). Reserves for annuity products
consist of the policyholders' account values and are increased by policyholder
deposits and interest credits and are decreased by policy charges and benefit
payments.
MARKETING
Torchmark insurance subsidiaries are licensed to sell insurance in all 50
states, the District of Columbia, Puerto Rico, the Virgin Islands, Guam, New
Zealand and Canada. Distribution is through direct response, independent and
exclusive agents.
Direct Response. Various Torchmark insurance companies offer life insurance
products directly to consumers through direct mail, co-op mailings, 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.
Exclusive Agents. Liberty National's 2,110 agents sell and service life and
health insurance, primarily in the seven state area of Alabama, Florida,
Georgia, Tennessee, Mississippi, South Carolina, and North Carolina. These
agents are employees of Liberty and are primarily compensated by commissions
based on sales. During the past several years this operation has emphasized
bank draft and direct bill collection of premium rather than agent collection,
because of the resulting lower cost and improved persistency. Agent collected
sales were discontinued in 1996.
Through the American Income Agency, individual life and fixed-benefit
accident and health insurance are sold through approximately 1,360 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 insurance companies sell life and health insurance as well as
fixed and variable annuity products through the 2,290 W&R financial planners.
It is currently contemplated that the W&R sales force will continue to market
Torchmark's insurance and variable annuity products after the proposed spin-
off of W&R (see Initial Public Offering and Planned Spin-off of Asset
Management Segment on page 30 of this report). (See Asset Management--Mutual
Funds for additional marketing information about the W&R sales force.)
United American offers life and health insurance targeted to various special
markets through approximately 900 United American exclusive agents in 64
branch offices throughout the United States.
Independent Agents. Torchmark insurance companies offer a variety of life
and health insurance policies through approximately 45,000 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.
6
Various Torchmark insurance subsidiaries distribute life insurance through a
nationwide independent agency whose sales force is comprised of former
commissioned and non-commissioned military officers who sell exclusively to
commissioned and non-commissioned military officers and their families.
RATINGS
The following list indicates the ratings currently held by Torchmark's five
largest insurance companies as rated by A.M. Best Company:
A.M. BEST
COMPANY
---------------
Liberty National Life Insurance Company A+ (Superior)
Globe Life And Accident Insurance Company A+ (Superior)
United Investors Life Insurance Company A+ (Superior)
United American Insurance Company A+ (Superior)
American Income Life Insurance Company A (Excellent)
A.M. Best states that it assigns A+ (Superior) ratings to those companies
which, in its opinion, have demonstrated superior overall performance when
compared to the norms of the life/health insurance industry. A+ (Superior)
companies have a superior ability to meet their obligations to policyholders
over a long period of time. A.M. Best states that it assigns A (Excellent)
ratings to those companies which, in its opinion, have demonstrated excellent
overall performance when compared to the norms of the life/health insurance
industry. A (Excellent) companies have an excellent ability to meet their
obligations to policyholders over a long period of time. Liberty, Globe,
United American, and UILIC have ratings of AA by Standard & Poor's
Corporation. This AA rating is assigned by Standard & Poor's Corporation to
those companies who offer excellent financial security on an absolute and
relative basis and whose capacity to meet policyholders obligations is
overwhelming under a variety of economic and underwriting conditions.
7
ASSET MANAGEMENT
Torchmark conducts its asset management and financial services businesses
through Waddell & Reed Financial Services, Inc. and its subsidiaries ("W&R").
This segment's activity is mutual fund distribution, management, and
servicing.
MUTUAL FUNDS
Torchmark's mutual fund operations are carried out by W&R, which markets and
manages the seventeen mutual funds in the United Group of Mutual Funds
("United Funds"), the eight mutual funds in the Waddell & Reed Fund, Inc.
("W&R Funds"), and the eleven mutual funds in the TMK/United Fund, Inc.
("TMK/United Funds") which are used exclusively as the investment funds for
variable annuities sold by UILIC. These funds were valued as follows at
December 31, 1997 and 1996:
(AMOUNTS IN
MILLIONS)
1997 1996
------- -------
United Funds $17,847 $15,130
W&R Funds 845 643
TMK/United Funds 1,894 1,435
------- -------
Total mutual fund assets under management 20,586 17,208
Institutional and private accounts 2,831 1,862
------- -------
Total assets under management $23,417 $19,070
======= =======
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.
The following table indicates W&R revenues by component for the three years
ending December 31, 1997:
(AMOUNTS IN THOUSANDS)
1997 1996 1995
-------- -------- --------
Asset management fees........................ $119,514 $103,127 $ 85,999
Investment product commissions*.............. 75,606 71,991 56,927
Insurance product commissions*............... 13,847 13,897 13,531
Service fees................................. 30,867 28,419 23,528
-------- -------- --------
$239,834 $217,434 $179,985
======== ======== ========
*Commissions received from affiliates for variable annuities and insurance
product sales are eliminated in consolidation.
Asset management activities are conducted by an experienced and qualified
staff. As of December 31, 1997, the average industry experience of the fund
managers for W&R was 20 years, and average company experience was 13.7 years.
W&R markets its mutual funds and other financial products, including life
insurance, through a sales force of approximately 2,290 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 177 sales offices at December 31, 1997.
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. 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 December 31, 1995; American Income
as of December 31, 1995; Globe, as of December 31, 1994; Liberty, as of
December 31, 1996; United American, as of December 31, 1996; and UILIC, as of
December 31, 1996.
NAIC Ratios. The NAIC developed the Insurance Regulatory Information System
("IRIS"), which is intended to assist state insurance regulators in monitoring
the financial condition of insurance companies. IRIS identifies twelve
insurance industry ratios from the statutory financial statements of insurance
companies, which are based on regulatory accounting principles and are not
based on generally accepted accounting principles ("GAAP"). IRIS specifies a
standard or "usual value" range for each ratio, and a company's variation from
this range may be either favorable or unfavorable. The following table
presents the IRIS ratios as determined by the NAIC for Torchmark's five
largest insurance subsidiaries, which varied unfavorably from the "usual
value" range for the years 1996 and 1995.
9
USUAL REPORTED
COMPANY RATIO NAME RANGE VALUE
- --------- ------------------------------------------------- --------- --------
1996:
United American Change in Capital and Surplus 50 to -10 -15
American Income Non-admitted to Admitted Assets 10 11
Liberty Investment in Affiliate to Capital and Surplus 0 to 100 240
Liberty Change in Reserving Ratio 20 to -20 -20
1995:
Liberty Investment in Affiliate to Capital and Surplus 0 to 100 238
Globe Change in Capital and Surplus 50 to -10 -18
United American Change in Capital and Surplus 50 to -10 -11
Liberty Change in Reserving Ratio 20 to -20 24
American Income Non-admitted to Admitted Assets 10 11
Explanation of Ratios:
Investment in Affiliate to Capital and Surplus--This ratio is determined by
measuring total investment in affiliates against the capital and surplus of
the company. The NAIC considers a ratio of more than 100% to be high, and to
possibly impact a company's liquidity, yield, and overall investment risk. The
large ratio in Liberty in 1996 and 1995 is brought about by its ownership of
other 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 financial condition or results. Furthermore, this intercompany
investment does not affect Liberty's ability to do business.
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. United American's ratios of minus 15%
in 1996 and minus 11% in 1995 and Globe's ratio of minus 18% in 1995 were
caused by the payment of dividends to Torchmark in excess of their statutory
net income. These transactions did not affect the consolidated equity of
Torchmark at December 31, 1996 or 1995. Also, these transactions do not affect
these companies' ability to do business.
Change in Reserving Ratio--The change in reserving ratio represents the
number of percentage points of difference between the reserving ratio for
current and prior years. Liberty's ratio was slightly over the usual range in
1995, returning to the normal range in 1996, as a result of purchasing a block
of business in late 1995. The assumption of this business caused an increase
in 1995 year-end reserves. No allowance is made for special transactions such
as this in the calculation of this ratio.
Non-admitted Assets to Admitted Assets--This ratio measures the degree to
which a company has acquired assets which cannot be carried on its statutory
balance sheet. American Income's ratio of 11% in 1996 and in 1995 was due to a
large amount of agent balances that arose from commissions that are advanced
to agents when a policy is submitted. Due to the growth of American Income's
business, these advances have grown and caused a variance in this particular
ratio. Agents balances due to American Income are fully recognized as assets
in Torchmark's consolidated financial statements.
Risk Based Capital. The NAIC requires a risk based capital formula be
applied to all life and health insurers. The risk based capital formula is a
threshold formula rather than a target capital formula. It is designed only to
identify companies that require regulatory attention and is not to be used to
rate or rank companies that are adequately capitalized. All of the insurance
subsidiaries of Torchmark are adequately capitalized under the risk based
capital formula.
Guaranty Assessments. State solvency or guaranty laws provide for
assessments from insurance companies into a fund which is used, in the event
of failure or insolvency of an insurance company, to fulfill the obligations
of that company to its policyholders. The amount which a company is assessed
for these state funds is determined according to the extent of these
unsatisfied obligations in each state. These assessments are recoverable to a
great extent as offsets against state premium taxes.
HOLDING COMPANY. States have enacted legislation requiring registration and
periodic reporting by insurance companies domiciled within their respective
jurisdictions that control or are controlled by other corporations so as to
constitute a holding company system. Torchmark and its subsidiaries have
registered as a holding company system pursuant to such legislation in
Alabama, Delaware, Missouri, New York, Texas, and Indiana.
10
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, and the TMK/United 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 1997, Torchmark had 2,307 employees and 2,474 licensed
employees under sales contracts. Additionally, approximately 52,000
independent and exclusive agents and brokers, who were not employees of
Torchmark, were associated with Torchmark's marketing efforts.
ITEM 2. REAL ESTATE
Torchmark, through its subsidiaries, owns or leases buildings that are used
in the normal course of business. Liberty owns a 487,000 square foot building
at 2001 Third Avenue South, Birmingham, Alabama which currently serves as
Liberty's, UILIC's, and Torchmark's home office. Liberty leases approximately
160,000 square feet of this building to unrelated tenants. Liberty also
operates from 60 company-owned district office buildings used for agency sales
personnel.
United American owns and is the sole occupant of a 140,000 square foot
facility, located in the Stonebridge Ranch development in McKinney, Texas (a
North Dallas suburb).
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.
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.
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"), as a part
of a joint venture with unaffiliated entities, is developing 3,300 acres as a
planned community development known as Liberty Park, which is located along
Interstate 459 in Birmingham, Alabama.
During 1997, the income producing office buildings owned by TDC, Globe and
W&R were contributed into TMK Income Properties, L.P. ("TIP"), a partnership
which is wholly-owned by Torchmark subsidiaries. These properties include: 1.)
a 300,000 square foot office building at 204 North Robinson, Oklahoma City, of
which Globe occupies 56,000 square feet as its home office and the remaining
space is either leased or available for lease; 2.) a 330,000 square foot
office building complex at 14000 Quail Springs Parkway Plaza Boulevard,
Oklahoma City, which is 100% leased; 3.) an 80,000 square foot office building
at 120 Robert S. Kerr Avenue, Oklahoma City, which is available for lease; 4.)
three office buildings in suburban Kansas City totaling 120,000 square feet
which are 99% leased; 5.) five office buildings in Liberty Park in suburban
Birmingham, Alabama containing approximately 450,000 square feet which are 90%
leased. In addition, TIP has the following development projects underway: 1.)
6329 Glenwood in suburban Kansas City, a 64,542 square foot office building
which is 75% pre-leased and scheduled for completion in May, 1998; 2.) River
Village, a 46,000 square foot expansion to an existing
11
facility in LIberty Park in Birmingham which is 100% pre-leased to an
affiliated party; 3.) Urban Center Building 1200, also in Liberty Park, a
184,000 square foot office building which is 90% pre-leased and scheduled for
completion in January, 1999.
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.
Year 2000 Compliance. Existing computer programs of many businesses were
developed with a two-digit year identification without consideration of the
upcoming change in century or millenium in the year 2000. Without addressing
this issue, many computer programs could fail or produce erroneous results,
creating considerable uncertainty and potentially adversely affecting the
operations of a business.
Torchmark has been in the process of modifying its computer system and
applications for the year 2000. It is expected that the project will be
substantially completed during 1998 and that final testing will be conducted
in 1999. Torchmark is utilizing primarily internal staff for this conversion
but is also using outside consultants where necessary. The cost of this
project, which is immaterial to Torchmark, has been and will be expensed in
each period in which it incurred.
As a part of its activities, Torchmark is engaged electronically with third-
party financial institutions and other various organizations which may have
computer systems which are not year 2000 compliant. To the degree possible,
Torchmark is verifying that these third party business systems are currently
compliant or are in the process of becoming compliant. To the extent these
systems are not compliant, there is no assurance that the potential
interruptions or cost to Torchmark may not be significant.
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. As of December 31, 1997,
Liberty was a party to approximately 198 active lawsuits (including 28
employment related cases and excluding interpleaders and stayed cases), more
than 170 of which were Alabama proceedings in which punitive damages were
sought. Liberty faces trial settings in these cases on an on-going basis.
As previously reported, Torchmark, its insurance subsidiaries Globe and
United American, and certain Torchmark officers were named as defendants in
purported class action litigation filed in the District Court of Oklahoma
County, Oklahoma (Moore v. Torchmark Corporation, Case No. CJ-94-2784-65,
subsequently amended and restyled Tabor v. Torchmark Corporation). This 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. This case remains in the
discovery proceeding status. On February 6, 1998, the defendants renewed their
motion to dismiss the class claims for failure to prosecute.
12
As previously reported, a purported class action was filed in 1995 against
Liberty in the Circuit Court of Jefferson County, Alabama on behalf of Liberty
cancer policyholders eligible for Medicare who submitted claims during an
approximate two month period in 1993 alleging improper payment practices
(Adkins v. Liberty National Life Insurance Company, Case No. CV-95-5634).
Liberty had discontinued the payment practices which were the subject of this
litigation after two months in 1993 and recalculated and repaid all claims in
full as it had prior to the two month period together with interest. In July,
1996, the Court entered a class certification order. Liberty subsequently
filed a petition for writ of mandamus or prohibition with the Alabama Supreme
Court asserting abuse of discretion by the trial court in certifying the
Adkins class. The Alabama Supreme Court issued the writ of mandamus on August
19, 1996. In January, 1998, Liberty filed a motion for summary judgment and a
motion to decertify the class in Adkins. On February 4, 1998, the Jefferson
County Circuit Court granted Liberty's motion for summary judgment.
It has been previously reported that Liberty was a party to 53 individual
cases filed in Chambers County, Alabama involving allegations that an
interest-sensitive life insurance policy would become paid-up or self-
sustaining after a specified number of years. Only four of these cases remain
pending with all others having been settled and dismissed by the Chambers
County Circuit Court.
Prior filings have reported that the Mobile County, Alabama Circuit Court
had ordered a reduction to $37,500 of the $5.0 million judgment against
Liberty in Strickland v. Liberty National Life Insurance Company, Case No. CV-
95-1399. This order was appealed by the plaintiffs to the Alabama Supreme
Court, which affirmed the lower court's decision on February 13, 1998.
It has been previously reported that Torchmark, its subsidiaries United
American and Globe and certain individual corporate officers are parties to
purported class action litigation filed in April, 1996 in the U.S. District
Court for the Northern District of Georgia (Crichlow v. Torchmark Corporation,
Case No. 4:96-CV-0086-HLM) involving certain hospital and surgical insurance
policies issued by Globe and United American. In September, 1997, the U.S.
District Court entered an order granting summary judgment against the
plaintiffs on certain issues and denying national class certification,
although indicating that plaintiffs could move for certification of a state
class of Georgia policyholders. In December 1997, plaintiffs moved for the
certification of a state class of Georgia policyholders. Discovery is
proceeding on the remaining claims for breach of contract and the duty of good
faith arising from closure of the block of business and certain post claim
matters as well as fraud and conspiracy relating to pricing and delay in
implementing rate increases.
As previously reported, Liberty is a party to two lawsuits alleging that a
class of persons were insured under Liberty cancer policies when Liberty knew
that such persons were not entitled to retain any benefits under these
policies, one of which was filed in 1996 in the Circuit Court of Jefferson
County, Alabama (Harris v. Liberty National Life Insurance Company, Case No.
CV-96-01836) and the other in the Circuit Court of St. Clair County, Alabama
(Gentry v. Liberty National Life Insurance Company, Case No. CV-97-61). The
St. Clair County Circuit Court conditionally certified a class in Gentry while
the Jefferson County Circuit Court stayed the Harris case pending resolution
of the Gentry case and did not certify a class in Harris. Plaintiffs in Harris
then filed a petition for a writ of mandamus with the Alabama Supreme Court in
Gentry seeking to preserve the class claims in their action in the Jefferson
County Circuit Court. On January 30, 1998, the Alabama Supreme Court issued
the writ of mandamus to the St. Clair County Circuit Court in the Gentry case.
On February 20, 1998, Liberty filed a motion to dismiss the class claims in
the Gentry case with the St. Clair County Circuit Court.
Based upon information presently available, and in light of legal and other
factual defenses available to Torchmark and its subsidiaries, contingent
liabilities arising from threatened and pending litigation are not presently
considered by management to be material. It should be noted, however, that
large punitive damage awards bearing little or no relation to actual damages
awarded by juries in jurisdictions in which Torchmark has substantial
business, particularly in Alabama, continue to occur, creating the potential
for unpredictable material adverse judgments in any given punitive damage
suit.
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 1997.
13
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 7,059 shareholders of record on December 31,
1997, excluding shareholder accounts held in nominee form. On August 1, 1997,
Torchmark paid a 100% stock dividend to its common shareholders of record on
July 1, 1997. All market prices and dividends per share have been adjusted to
reflect the 100% stock dividend. 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 14--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:
1997
MARKET PRICE
------------
DIVIDENDS
QUARTER HIGH LOW PER SHARE
------- -------- -------- ---------
1 $30.9375 $25.0000 $ .1450
2 36.7188 26.2500 .1450
3 41.6250 34.8125 .1450
4 42.8125 35.1875 .1500
Year-end closing
price.................$42.1875
1996
MARKET PRICE
------------
DIVIDENDS
QUARTER HIGH LOW PER SHARE
------- -------- -------- ---------
1 $24.9375 $21.2500 $ .1450
2 22.6250 20.5000 .1450
3 23.1250 20.1250 .1450
4 26.0625 22.7500 .1450
Year-end closing
price.................$25.2500
14
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)
1997 1996 1995 1994 1993
YEAR ENDED DECEMBER 31, ----------- ----------- ----------- ----------- -----------
Premium Revenue:
Life................... $ 909,992 $ 854,897 $ 772,257 $ 601,633 $ 555,859
Health................. 739,485 732,618 754,983 773,375 804,605
Other ................. 28,527 22,404 19,043 13,866 132,446
Total................. 1,678,004 1,609,919 1,546,283 1,388,874 1,492,910
Net investment income... 433,617 404,608 381,865 347,637 368,494
Financial services
revenue................ 206,785 184,295 152,482 139,276 137,422
Realized investment
gains (losses)......... (36,979) 5,829 (14,323) (2,551) 8,009
Total revenue........... 2,282,450 2,205,810 2,067,482 1,875,337 2,066,846
Net income from
continuing operations.. 337,743 318,509 271,945 263,814 242,298
Net income.............. 337,743 311,372 143,235 268,946 297,979
Net income available to
common shareholders.... 337,743 311,372 143,235 268,142 294,690
Annualized premium
issued:
Life................... 230,379 214,741 217,988 149,833 128,433
Health................. 106,853 100,981 103,491 122,663 177,701
Total................. 337,232 315,722 321,479 272,496 306,134
Mutual fund collections. 1,513,797 1,497,259 1,182,594 1,180,477 1,237,747
Per common share:
Basic:
Net income............ 2.43 2.19 1.00 1.86 2.00
Net operating
income(1)............ 2.60 2.21 1.97 1.87 1.72
Net income from
continuing
operations........... 2.43 2.24 1.90 1.82 1.63
Cash dividends paid... .59 .58 .57 .56 .54
Diluted:
Net income............ 2.39 2.17 .99 1.85 1.98
Net operating
income(1)............ 2.56 2.19 1.95 1.85 1.70
Net income from
continuing
operations........... 2.39 2.22 1.89 1.81 1.61
Return on average common
equity excluding effect
of SFAS 115 and
discontinued
operations............. 21.2% 20.5% 18.5% 19.7% 21.3%
Basic average shares
outstanding............ 139,202 142,460 143,188 144,191 147,003
Diluted average shares
outstanding............ 141,431 143,783 144,228 145,192 148,706
- -------------------------------------------------------------------------------
1997 1996 1995 1994 1993
AS OF DECEMBER 31, ----------- ----------- ----------- ----------- -----------
Cash and invested assets
(2).................... $ 6,664,566 $ 6,049,629 $ 5,874,037 $ 5,036,211 $ 5,200,588
Total assets............ 10,967,291 9,800,800 9,364,104 8,165,244 7,441,185
Short-term debt......... 347,152 40,910 189,372 250,116 107,108
Long-term debt.......... 564,298 791,880 791,988 791,518 791,090
Shareholders' equity.... 1,932,736 1,629,343 1,588,952 1,242,603 1,417,255
Per common share (3)... 13.80 11.69 11.09 8.69 9.40
Per common share
excluding effect of
SFAS 115.............. 12.90 11.42 10.16 9.65 8.65
Annualized premium in
force:
Life.................. 1,007,379 946,525 869,366 796,955(4) 612,656
Health................ 762,052 748,153 759,059 812,371(4) 828,332
Total................. 1,769,431 1,694,678 1,628,425 1,609,326 1,440,988
Assets under management
at W&R................. 23,417,200 19,069,700 18,489,200 14,497,700 14,439,800
- -------------------------------------------------------------------------------
(1) Excludes realized investment gains (losses), the related adjustment to
deferred acquisition costs, and discontinued operations.
(2) Includes accrued investment income.
(3) Computed after deduction of preferred shareholders' equity.
(4) Annualized life premium in force includes $144 million, and annualized
health premium in force includes $37 million, representing the business
acquired in the acquisition of American Income Life Insurance Company in
1994.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Torchmark cautions readers regarding certain forward-looking statements
contained in the following discussion and elsewhere in this document, and in
any other statements made by, or on behalf of Torchmark whether or not in
future filings with the Securities and Exchange Commission ("SEC"). Any
statement that is not a historical fact, or that might otherwise be considered
an opinion or projection concerning Torchmark or its business, whether express
or implied, is meant as and should be considered a forward-looking statement.
Such statements represent management's opinions concerning future operations,
strategies, financial results or other developments.
Forward-looking statements are based upon estimates and assumptions that are
subject to significant business, economic and competitive uncertainties, many
of which are beyond Torchmark's control. If these estimates or assumptions
prove to be incorrect, the actual results of Torchmark may differ materially
from the forward-looking statements made on the basis of such estimates or
assumptions. Whether or not actual results differ materially from forward-
looking statements may depend on numerous foreseeable and unforeseeable events
or developments, which may be national in scope, related to the insurance
industry generally, or applicable to Torchmark specifically. Such events or
developments could include, but are not necessarily limited to, deteriorating
general economic conditions leading to increased lapses and/or decreased sales
of Torchmark's policies, changes in governmental regulations (particularly
those impacting taxes and mandates for health insurance products), financial
markets trends that adversely affect sales of Torchmark's market-sensitive
products, interest rate changes that adversely affect product sales and/or
investment portfolio yield, increased pricing competition, adverse regulatory
developments and adverse litigation results. Readers are also directed to
consider other risks and uncertainties described in other documents filed by
Torchmark with the SEC.
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
Per share net operating income for Torchmark was $2.60 for the year 1997,
increasing 18% over 1996 per share earnings of $2.21, reflecting solid growth
in both Torchmark's insurance and asset management segments. Net operating
income is income from continuing operations excluding realized investment
gains and losses and the related adjustment to deferred acquisition costs. All
per share amounts have been restated for prior periods to reflect the two-for-
one stock split paid in the form of a dividend on Torchmark shares in the
third quarter of 1997. Net operating income rose 13% in 1996 over 1995 per-
share earnings.
Torchmark's net income from continuing operations grew 6% in the 1997
period. On a per-share basis, net income from continuing operations was $2.43
in 1997, compared with $2.24 in 1996 and $1.90 in 1995, rising 8% and 18% in
each of the years 1997 and 1996, respectively. Realized investment losses were
$37 million in 1997, compared with a gain of $6 million in 1996, resulting
primarily from the intentional sale of fixed-maturity investments at a loss to
offset current and prior year taxable gains. Realized investment losses for
1995 included a $15 million after-tax, or $.10 per share, writedown of an
investment in Southwestern Life Corporation, which filed for Chapter 11
bankruptcy protection in the third quarter of 1995.
Net income in both 1996 and 1995 were negatively affected by Torchmark's
decision to dispose of its energy segment and to exit the energy industry in
late 1995. In accordance with this decision, the net assets and results
attributable to this segment were reflected as discontinued operations in
Torchmark's financial statements. Disposition of the energy segment was
completed on September 30, 1996, and resulted in an after-tax loss of $7
million or $.05 per share. Additionally, in conjunction with Torchmark's
decision to dispose of this segment in 1995, Torchmark wrote down its
investment in a coalbed methane gas development to the investment's estimated
net realized value because increased production difficulties led to downward
revisions to engineering reserve estimates. The writedown amounted to an
after-tax charge of $130 million, or $.91 per share in 1995. For more
information on the disposition of the energy segment, see "Disposal of Energy
Segment" on page 30 of this report.
During 1997, the FASB issued Statement 128, Earnings per Share, which
requires all companies to report earnings per share on both a basic and
diluted basis. Per share net income and net operating income described herein
are reported as basic earnings per share unless specifically designated
otherwise. Diluted earnings per share takes into account Torchmark's
outstanding stock options and treats them as if they had been exercised and
converted to shares outstanding, with the proceeds from
16
the exercise used by Torchmark to buy shares. Diluted net income per share was
$2.39 in 1997, increasing 10% over 1996 net income per share of $2.17. Diluted
net operating income per share was $2.56 in 1997, compared with $2.19 in 1996,
an increase of 17%. Per share net operating income on a diluted basis was
$1.95 in 1995.
Revenues in 1997 were $2.28 billion, growing 3% over 1996 revenues of $2.21
billion. After adjustment for the above-mentioned realized investment gains
and losses in both 1997 and 1996, revenues gained 5% in 1997. Total premium
increased $68 million or 4% in 1997, accounting for 57% of the $119 million
increase in total revenues excluding realized gains and losses. Life insurance
premium increased $55 million, or 6%. Life premium accounted for 46% of the
increase in adjusted total revenues. Financial services revenue climbed 12%
and net investment income increased 7%. Financial services revenue is derived
from the asset management operations and activities of W&R.
Torchmark's revenues in 1996 gained 7% over 1995 revenues of $2.07 billion.
Again, life insurance premium income was the largest contributor to revenue
growth, rising 11% and accounting for $83 million of the $138 million in
revenue growth. Financial services revenues gained 21%, comprising 23% of
Torchmark's total revenue growth in 1996. Other operating expenses as a
percentage of total revenues continue to decline. These expense ratios were
6.95% in 1997, 6.99% in 1996, and 7.04% in 1995. Lower litigation costs at
Liberty, Torchmark's Alabama insurance subsidiary, have aided this decline. In
1997, expenses include a one-time $6.8 million charge related to system
outsourcing in the asset management operations. The components of Torchmark's
revenues and operations are described in more detail in the discussion of
segments and investments found on pages 17 through 28 of this report.
The effective tax rate for Torchmark was 35.0% in 1997, compared with 36.5%
in 1996 and 36.8% in 1995. The 1997 decline was the result of a recovery of
state income taxes from a unitary filing for 1997. Without this one-time
recovery, Torchmark's effective tax rate would have been 36.1% in 1997.
The equity in earnings of affiliate represents Torchmark's approximately 27%
ownership in Vesta Insurance Group, Inc. ("Vesta"), a property-casualty
insurance carrier formerly wholly-owned by Torchmark. Torchmark's earnings
from this investment have grown in each of the years presented and in 1997
rose 22%.
INSURANCE
Insurance operating income is the pretax income of Torchmark's insurance
segment, exclusive of realized investment gains and losses and the related
adjustment to deferred acquisition costs. Insurance operating income is
comprised of underwriting income and excess investment income, which is the
income from investment operations less the interest cost attributable to net
policy liabilities. The following table is a summary of Torchmark's insurance
operating income.
SUMMARY OF INSURANCE OPERATING INCOME
(Dollar amounts in thousands)
1997 1996 1995
---------------- ---------------- ----------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
--------- ----- --------- ----- --------- -----
Insurance underwriting
income before other
income and administra-
tive expenses:
Life................... $ 246,688 60.5% 227,693 58.0% 210,483 56.1%
Health................. 141,540 34.7 148,097 37.8 150,385 40.1
Annuity................ 19,330 4.8 16,480 4.2 13,812 3.7
Other.................. 7 0.0 18 0.0 229 0.1
--------- --------- ---------
Total .................. 407,565 100.0% 392,288 100.0% 374,909 100.0%
===== ===== =====
Other income............ 3,141 2,936 3,111
Administrative expenses. (104,220) (110,029) (110,850)
--------- --------- ---------
Insurance underwriting
income.................. 306,486 285,195 267,170
Excess investment income:
Net investment income*.. 455,077 413,917 396,208
Required interest on net
policy liabilities..... (208,536) (202,852) (189,787)
--------- --------- ---------
246,541 211,065 206,421
--------- --------- ---------
Insurance operating in-
come.................... $ 553,027 $ 496,260 $ 473,591
========= ========= =========
- --------
*Tax equivalent basis (Net investment income for insurance operations only,
before intercompany eliminations)
17
Torchmark's insurance operating income rose 11% in 1997 to $553 million from
$496 million, compared with a 5% gain in 1996. The 1997 acceleration in growth
was primarily caused by a $35 million increase in excess investment income and
a $19 million gain in life insurance underwriting income. A reduction in
operating expenses in 1997 of approximately $6 million was also a factor. The
expense decline was largely a result of lower legal and litigation costs at
Liberty.
In recent years, Torchmark has emphasized the sale of life insurance
products relative to health insurance because of higher profit margins
associated with life business. Also, the greater asset base from the higher
level of reserves required on life business allows Torchmark the opportunity
to increase investment income. This emphasis is evidenced by the growth in
life underwriting income relative to that of health. In 1997, life
underwriting income (before other income and administrative expenses) was 61%
of total underwriting income before expenses, compared with 58% in 1996 and
56% in 1995. Health insurance underwriting income declined from 40% in 1995 to
38% in 1996 and 35% in 1997.
Following is a discussion of each of Torchmark's major product groups and a
discussion of Torchmark's distribution channels.
Life insurance. Life insurance premium increased 6% in 1997 to $910 million
from $855 million in 1996. Life premium rose 11% for the year 1996. Sales of
life insurance, in terms of annualized premium, were $230 million in 1997,
growing 7% over 1996 sales of $215 million. This compares with a 1% decline in
1996 sales relative to 1995. Annualized premium sold in 1995 was $218 million.
Annualized life insurance premium in force was $1.01 billion at December 31,
1997, climbing over the $1 billion milestone for the first time in its
history. Annualized premium in force grew 6% in 1997 from $947 million at
year-end 1996. Annualized life premium in force rose 9% during 1996 from $869
million. Annualized premium in force and issued data includes amounts
collected on certain interest-sensitive life products which are not recorded
as premium income but excludes single-premium income and policy account
charges.
Life insurance products are marketed through a variety of different
distribution channels. The following table presents life insurance premium by
distribution method during each of the three years ended December 31, 1997.
LIFE INSURANCE
Premium by Distribution Method
(Dollar amounts in thousands)
1997 1996 1995
-------------- -------------- --------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- -----
United American Independent
Agency........................ $ 36,810 4.0% $ 33,404 3.9% $ 28,305 3.7%
United American Exclusive
Agency........................ 18,243 2.0 15,767 1.8 10,713 1.4
Direct Response................ 195,393 21.5 171,983 20.1 149,141 19.3
Liberty National Exclusive
Agency........................ 280,519 30.8 279,637 32.7 275,089 35.6
American Income Exclusive
Agency........................ 190,681 20.9 173,700 20.3 153,914 19.9
Military Independent Agency.... 79,631 8.8 71,223 8.3 45,512 5.9
United Investors Exclusive
Agency........................ 77,986 8.6 73,836 8.6 69,498 9.0
Other.......................... 30,729 3.4 35,347 4.3 40,085 5.2
-------- ----- -------- ----- -------- -----
$909,992 100.0% $854,897 100.0% $772,257 100.0%
======== ===== ======== ===== ======== =====
Direct response marketing is conducted through direct mail, co-op mailings,
television and consumer magazine advertising, and direct mail solicitations
endorsed by groups, unions and associations. The direct response operation is
a profitable distribution channel for Torchmark characterized by lower
acquisition costs than Torchmark's other agency-based marketing systems. This
operation has grown rapidly. In 1997, it had Torchmark's highest growth in
life insurance premium in both dollar amount and percentage increase, and
accounted for over 21% of Torchmark's life insurance premium. Direct response
premium was $195 million in 1997, increasing 14% over 1996 premium of $172
million. Direct response life premium in 1996 grew 15% over 1995 premium of
$149 million. Direct response annualized premium issued increased 28% in 1997
to $79 million. Annualized premium in force grew 15% in 1997 to $233 million,
after having increased 12% in 1996.
18
The increase in life insurance issued by direct response in 1997 was a
result of several expanded programs, including the expansion of the program
that solicits sales from previous inquirers who did not buy. Also, co-op
mailings were expanded.
The direct response operation is also testing new markets to increase future
sales. For example, the sale of policies with higher face amounts was tested
in early 1998 with favorable results.
The Liberty National Exclusive Agency distribution system accounted for the
largest portion of life insurance premium income in each of the three years
presented, with 1997 premium of $281 million representing 31% of Torchmark's
total life premium. Liberty's annualized life premium in force was $299
million at year-end 1997, compared with $298 million and $297 million at year-
ends 1996 and 1995, respectively. Life premium sales, in terms of annualized
premium issued, declined 5% during 1997 to $43 million and 6% during 1996 to
$45 million. This agency has completed the transition from a debit-style
renewal premium collection system to a direct bill or bank-draft collection
system. As a result, the transition away from debit-style sales led to a
decline in the number of sales agents during the transition period of 1994
through 1996. New agent recruiting programs were implemented late in 1996,
resulting in the number of sales agents increasing slightly from year-end 1996
to a total of 1,750 at year-end 1997. The number of first year agents
increased from 625 at year-end 1996 to 754 at year-end 1997. During 1997 new
training programs were implemented to improve the retention of newly recruited
agents beyond their first year anniversaries which should further enhance
sales growth. Management believes that continual recruiting of new agents and
retention of productive agents are critical to the continued growth of sales
in controlled agency distribution systems.
Life insurance is distributed through a nationwide independent agency whose
sales force is comprised of former commissioned and non-commissioned military
officers who sell exclusively to commissioned and non-commissioned military
officers and their families. This business is comprised of whole life products
with term insurance riders. The quality of the business produced by this
agency is outstanding, and is characterized by extremely low lapse rates. Life
premium income from this distribution system grew 12% to $80 million in 1997.
Premium in 1996 rose 56% to $71 million, up $26 million from 1995. The 1996
increase resulted primarily from the acquisition from another carrier of a
block of business with $21 million of annualized premium in force produced by
the military agency. In the past, this agency has produced business through
Liberty, but beginning in 1997, additional sales were produced by Globe.
Production in the military distribution system almost doubled in 1997, with
sales of annualized premium of $16 million, compared with $8 million in 1996.
Annualized premium in force was $86 million at year-end 1997, an increase of
16% over 1996 annualized premium of $74 million. Premium in force for 1996
rose 53% from $48 million in 1995, largely a result of the acquired block of
business.
The American Income Agency is a distribution system that focuses on members
of labor unions, credit unions, and other associations for its life insurance
sales. At December 31, 1997, premium from this system accounted for 21% of
Torchmark's total life premium. It is a high margin business characterized by
lower policy obligation ratios. American Income's premium rose 10% in 1997 to
$191 million, after having risen 13% in 1996 to $174 million. Annualized
premium was $203 million at year-end 1997, rising 8% in 1997 and 11% in 1996.
Sales in terms of annualized premium issued were $55 million in 1997, compared
with $54 million in 1996 and $51 million in 1995.
The United Investors exclusive agency is made up of W&R sales
representatives, and accounts for approximately 9% of Torchmark's life
premium. This agency markets the life insurance products of UILIC, and will
continue to do so after the planned spin-off of W&R. (See Initial Public
Offering and Planned Spin-off of the Asset Management Segment on page 30 of
this report). Premium income rose 6% in both 1997 and 1996, and was $78
million in 1997. Annualized premium in force was $89 million at year-end 1997,
growing 5%.
The United American independent and captive agencies represent about 6% of
Torchmark's life premium on a combined basis. The exclusive agency had 16%
growth in premium in 1997 to $18 million, but had 47% growth in premium in
1996. The independent agency experienced a premium increase of 10% in 1997
with premium of $37 million. Premium from this agency rose 18% in 1996.
19
LIFE INSURANCE
Summary of Results
(Dollar amounts in thousands)
1997 1996 1995
----------------- ----------------- -----------------
% OF % OF % OF
AMOUNT PREMIUM AMOUNT PREMIUM AMOUNT PREMIUM
-------- ------- -------- ------- -------- -------
Premium and policy
charges................ $909,992 100.0% $854,897 100.0% $772,257 100.0%
Policy obligations...... 591,867 65.0 558,436 65.3 507,444 65.7
Required reserve
interest............... (221,668) (24.4) (209,126) (24.4) (194,733) (25.2)
-------- ----- -------- ----- -------- -----
Net policy obligations. 370,199 40.6 349,310 40.9 312,711 40.5
Amortization of
acquisition costs...... 155,797 17.1 146,164 17.1 126,695 16.4
Commissions and premium
taxes.................. 55,348 6.1 54,182 6.3 50,994 6.6
Required interest on
deferred acquisition
costs.................. 81,960 9.0 77,548 9.1 71,374 9.2
-------- ----- -------- ----- -------- -----
Total expense.......... 663,304 72.8 627,204 73.4 561,774 72.7
-------- ----- -------- ----- -------- -----
Insurance underwriting
income before other
income and
administrative
expenses............... $246,688 27.2% $227,693 26.6% $210,483 27.3%
======== ===== ======== ===== ======== =====
Torchmark's insurance underwriting income as a percentage of premium was
approximately 27% in each of the years presented, with 1997 showing a slight
improvement over 1996. Stronger persistency has contributed to Torchmark's
life insurance profitability and stability in margins. Persistency is
beneficial to margins because it lowers the rate of amortization of
acquisition costs and increases profits as the premium life is extended.
Persistency improvements have resulted over the past few years from a variety
of factors, including the previously-mentioned changes in the Liberty National
Exclusive Agency marketing system. Another contributing factor to improved
persistency in life business is a higher proportion of premium from the
military distribution system, which has a very low lapse rate.
Health Insurance. Torchmark markets its health insurance products through
several of its distribution channels. The following table indicates health
insurance premium income during each of the three years ended December 31,
1997 by distribution method.
HEALTH INSURANCE
Premium by Distribution Method
(Dollar amounts in thousands)
1997 1996 1995
-------------- -------------- --------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- -----
United American Independent
Agency........................ $428,775 58.0% $440,862 60.2% $466,751 61.8%
United American Exclusive Agen-
cy............................ 132,426 17.9 124,037 16.9 123,264 16.3
Direct Response................ 6,467 0.9 3,519 0.5 956 0.1
Liberty National Exclusive
Agency........................ 125,701 17.0 120,028 16.4 122,722 16.3
American Income Exlusive Agen-
cy............................ 46,116 6.2 44,172 6.0 41,290 5.5
-------- ----- -------- ----- -------- -----
$739,485 100.0% $732,618 100.0% $754,983 100.0%
======== ===== ======== ===== ======== =====
Health insurance premium rose 1% in 1997 to $739 million, giving Torchmark
its first year-over-year increase in health premium since 1993. Health premium
declined 3% in 1996 from $755 million to $733 million. Annualized premium in
force for health insurance grew 2% to $762 million at December 31, 1997, over
the prior year-end balance of $748 million. Health premium in force declined
1% in 1996. Sales of health premium, in terms of annualized premium issued,
were $107 million in 1997, gaining 6% over 1996 sales of $101 million. The
1997 gains in both annualized health premium in force and annualized premium
issued were Torchmark's first year-over-year increases in each respective
category in five years.
20
Health products sold by Torchmark insurance companies include Medicare
Supplement insurance, cancer insurance, long-term care, and other under-age-65
limited-benefit supplemental medical and hospitalization products. As a
percentage of annualized health premium in force at December 31, 1996,
Medicare Supplement accounted for 69%, cancer 18%, and other health products
13%. Medicare Supplement's annualized premium in force was $522 million at
December 31, 1997. Torchmark's Medicare Supplement sales and premium in force
base have stabilized from the declines experienced in the last few years.
In recent years, pressure on Medicare Supplement sales has come from federal
mandates implemented in 1992 that substantially reduced allowable first year
agents' commissions. As a result, many independent agencies that previously
accounted for most of Torchmark's sales of this product left the Medicare
Supplement market, adversely affecting sales. Torchmark has implemented
certain measures to offset the decline. Medicare Supplement products are now
primarily sold by the United American exclusive agency, which is less subject
to the financing pressures of independent agencies. Further, very cost-
efficient sales leads for this agency are provided by Torchmark's direct
response operation. This agency also benefits from the low cost, highly
service-oriented back office administration which frees agents to devote full
time to sales. In the last few years the primary competition affecting
Medicare Supplement sales has come from Medicare health maintenance
organizations ("HMOs"), the managed care alternative to traditional fee-for-
service Medicare. However, during the last year, growing public
dissatisfaction with HMO service, and increased federal regulatory pressures
on HMOs, appear to be making Medicare HMOs a less attractive alternative.
While 1997 Medicare Supplement sales were down slightly, from $66 million in
1996 to $65 million, sales in the second half of 1997 increased 6% over the
first half of the year.
Cancer insurance had the greatest percentage growth in 1997 in terms of
annualized premium in force, gaining 15% from $119 million to $138 million.
This compared with 4% growth in 1996. Annualized premium issued for this
product line was $11 million in each of the years 1995 through 1997. Cancer
business is written primarily by the Liberty National Agency, which had $116
million, or 85% of total cancer annualized premium in force at December 31,
1997. Premium growth has been attained primarily through premium rate
increases to offset increased healthcare costs.
Annualized premium in force for other health products declined 2% in 1997 to
$102 million, after declining 8% in 1996. Sales increased in 1997, however,
with annualized premium issued rising 26% to $31 million. A large factor in
the 1997 sales increase is increased issue of a limited-benefit hospital-
surgical product sold by the United American Independent Agency.
HEALTH INSURANCE
Summary of Results
(Dollar amounts in thousands)
1997 1996 1995
----------------- ----------------- -----------------
% OF % OF % OF
AMOUNT PREMIUM AMOUNT PREMIUM AMOUNT PREMIUM
-------- ------- -------- ------- -------- -------
Premium.................. $739,485 100.0% $732,618 100.0% $754,983 100.0%
Policy obligations....... 462,967 62.6 448,346 61.2 454,107 60.2
Required reserve inter-
est..................... (21,644) (2.9) (26,137) (3.6) (26,139) (3.5)
-------- ----- -------- ----- -------- -----
Net policy obligations... 441,323 59.7 422,209 57.6 427,968 56.7
Amortization of acquisi-
tion costs.............. 58,473 7.9 63,150 8.6 69,698 9.2
Commissions and premium
taxes................... 87,069 11.8 87,687 12.0 94,624 12.5
Required interest on de-
ferred acquisition
costs................... 11,080 1.5 11,475 1.6 12,308 1.7
-------- ----- -------- ----- -------- -----
Total expense........... 597,945 80.9 584,521 79.8 604,598 80.1
-------- ----- -------- ----- -------- -----
Insurance underwriting
income before other
income and
administrative expenses. $141,540 19.1% $148,097 20.2% $150,385 19.9%
======== ===== ======== ===== ======== =====
21
Health insurance underwriting income before other income and administrative
expenses declined 4% in 1997, despite increased premium, due to increased net
policy obligations. As a percentage of health insurance premium, underwriting
income before other income and administrative expenses declined approximately
1% in 1997 after a slight increase in 1996. Fluctuations in health insurance
margins are common, resulting from inevitable short term timing differences
due to the periodic nature of obtaining rate increase approvals from
regulatory authorities and the pre-existing health care cost inflation that
justifies such rate increases. To the extent that management is able to obtain
timely and adequate rate increases, margin fluctuations will be minimized.
Inflationary cost increases in the cancer business negatively impacted margins
in 1997, but significant rate increases implemented during the year should
improve margins in 1998. Similarly, Medicare Supplement underwriting margins
have also experienced small declines. The Federal mandate of a 65% minimum
loss ratio on Medicare Supplement business and market competition make it
difficult to improve underwriting margins on this product. Nonetheless,
Medicare Supplement products are profitable to Torchmark because of the low
operating expenses associated with it.
Annuities. Annuity products are marketed by Torchmark to service a variety
of needs, including retirement income and long-term tax-deferred growth
opportunities. Annuities are sold on both a fixed and variable basis. Fixed-
annuity deposits are held and invested by Torchmark and are obligations of the
company. Variable-annuity deposits are invested at the policyholder's
direction into his choice among a variety of mutual funds managed by W&R,
which vary in degree of investment risk and return. A fixed- annuity
investment account is also available as a variable annuity investment option.
Investments pertaining to variable-annuity deposits are reported as "Separate
Account Assets" and the corresponding deposit balances for variable annuities
are reported as "Separate Account Liabilities."
Annuity premium is added to the annuity account balance as a deposit and is
not reflected in income. Revenues on both fixed and variable annuities are
derived from charges to the annuity account balances for insurance risk,
administration, and surrender, depending on the structure of the contract.
Variable accounts are also charged an investment fee and a sales charge.
Torchmark benefits to the extent these policy charges exceed actual costs and
to the extent actual investment income exceeds the investment income which is
credited to policyholders.
The following table presents the annuity account balance at each year end
and the annuity collections for each year for both fixed and variable
annuities.
ANNUITY DEPOSIT BALANCES ANNUITY COLLECTIONS
-------------------------- --------------------------
(DOLLAR AMOUNTS IN (DOLLAR AMOUNTS IN
MILLIONS) THOUSANDS)
1997 1996 1995 1997 1996 1995
-------- -------- -------- -------- -------- --------
Fixed..................... $1,010.4 $ 974.6 $ 927.9 $ 88,795 $ 87,133 $133,461
Variable.................. 1,821.2 1,375.5 1,052.2 247,446 247,461 189,188
-------- -------- -------- -------- -------- --------
Total.................... $2,831.6 $2,350.1 $1,980.1 $336,241 $334,594 $322,649
======== ======== ======== ======== ======== ========
Premium collections on fixed annuities were $89 million in 1997, compared
with $87 million in 1996 and $133 million in 1995. The 1996 decline in fixed
collections resulted from a $21 million decline in collections by the United
American general agency that markets to bank customers. These collections were
$76 million in 1995, a record year. Also, in 1996 Torchmark's collections on
preneed annuities declined $19 million. The sale of preneed products was
discontinued in late 1995. The fixed annuity balance rose in each of the
periods presented, primarily because of the additional collections.
Variable annuity collections were flat in 1997 when compared with 1996 at
$247 million, but grew 31% in 1996 over 1995 collections of $189 million. The
strength in financial market conditions in both 1996 and 1997 has had a
positive influence on collections. However, it is believed lower capital gains
rates implemented by Congress during 1997 may have been a negative factor in
1997 variable annuity sales. Torchmark's variable annuities are issued by
UILIC and are sold by W&R sales representatives. Under a marketing agreement,
Torchmark will continue to market its variable annuities through the W&R sales
force subsequent to the planned spin-off of W&R. (See Initial Public Offering
and Planned Spin-off of Asset Management Segment on page 30 of this report.)
Torchmark also plans to market variable annuities through its direct response
distribution system in 1998.
22
The variable account balance has climbed rapidly since 1995, rising 31% in
1996 to $1.4 billion at December 31, 1996, and 32% in 1997 to $1.8 billion at
year-end 1997. A strong financial market in both 1996 and 1997 was the major
factor in the rise in variable account values in those years. Variable
accounts are valued based on the market values of the underlying securities.
The additional collections in each year also added to the balances.
ANNUITIES
Summary of Results
(Dollar amounts in thousands)
1997 1996 1995
---------------- ---------------- ----------------
% OF % OF % OF
MEAN MEAN MEAN
AMOUNT RESERVE AMOUNT RESERVE AMOUNT RESERVE
------- ------- ------- ------- ------- -------
Policy charges.............. $28,528 1.1% $22,404 1.0% $19,049 1.1%
Investment spread........... 10,187 .4 10,957 .5 10,206 .6
------- ---- ------- ---- ------- ----
Total revenue.............. 38,715 1.5 33,361 1.5 29,255 1.7
Policy obligations.......... 54,074 2.1 51,320 2.4 48,012 2.8
Required reserve interest... (55,133) (2.1) (52,188) (2.4) (48,541) (2.8)
------- ---- ------- ---- ------- ----
Net policy obligations..... (1,059) -0- (868) -0- (529) -0-
Amortization of acquisition
costs...................... 12,326 .5 10,606 .5 9,125 .5
Commissions and premium
taxes...................... 1,062 -0- 610 -0- 699 -0-
Required interest on
deferred acquisition
costs...................... 7,056 .3 6,533 .3 6,148 .4
------- ---- ------- ---- ------- ----
Total expense.............. 19,385 .8 16,881 .8 15,443 .9
------- ---- ------- ---- ------- ----
Insurance underwriting
income before other income
and administrative
expenses................... $19,330 .7% $16,480 .7% $13,812 .8%
======= ==== ======= ==== ======= ====
Insurance operating margins for annuities, as measured by the mean reserve,
have shown a modest decline throughout the three years examined. Annuity
policy charges have increased in each period. Annuity policy charges rose 27%
in 1997 to $29 million, largely as a result of growth in the variable account
balance. Policy charges grew 18% in 1996 to $22 million. Growth in policy
charges results not only from the increase in size of the annuity account
balances, but is also attributable to the increase in the number of annuity
contracts in force and the cumulative effect of the growth in sales over the
past few years on which the sales charge is based. The investment spread is
the investment income earned in excess of policy requirements on fixed annuity
contracts. As a percentage of the mean reserve, the interest spread has
declined slightly in 1997 and 1996 because of the proportional decrease in
size of the fixed account balance relative to the total account balance.
23
ASSET MANAGEMENT
Torchmark's financial services operations include the marketing of 25 mutual
funds, including the United Group and the W&R Group of funds through exclusive
financial planners. These representatives also market a variety of insurance
products of Torchmark subsidiaries. Asset management 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 from the sale of investment and insurance products, fees for
management of investment asset portfolios, and fees for servicing the
accounts.
ASSET MANAGEMENT
Summary of Results
(Dollar amounts in thousands)
1997 1996 1995
---------------- ---------------- ---------------
% OF % OF % OF
AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
-------- ------- -------- ------- ------- -------
Asset management fees........ $119,514 49.0% $103,127 46.5% $85,999 46.9%
Distribution revenue......... 89,453 36.7 85,888 38.7 70,458 38.4
Service fees................. 30,867 12.6 28,419 12.8 23,528 12.8
-------- ----- -------- ----- ------- -----
Financial services reve-
nue*...................... 239,834 98.3 217,434 98.0 179,985 98.1
Investment income............ 4,062 1.7 4,423 2.0 3,573 1.9
-------- ----- -------- ----- ------- -----
Total revenue.............. 243,896 100.0 221,857 100.0 183,558 100.0
Commissions and selling ex-
penses...................... 80,342 32.9 78,797 35.5 63,882 34.8
Other expenses............... 41,080 16.9 30,365 13.7 26,014 14.2
-------- ----- -------- ----- ------- -----
Total expenses............. 121,422 49.8 109,162 49.2 89,896 49.0
-------- ----- -------- ----- ------- -----
Pretax income................ $122,474 50.2% $112,695 50.8% $93,662 51.0%
======== ===== ======== ===== ======= =====
- --------
* Financial services revenue includes $33.0 million in 1997, $33.1 million in
1996, and $27.5 million in 1995 representing revenues from other Torchmark
segments which are eliminated in consolidation.
Financial services revenues rose 10% to $240 million in 1997, compared with
1996 revenues of $217 million. These revenues grew 21% in 1996 from 1995
revenues of $180 million. Financial services revenues presented in Torchmark's
consolidated financial statements will not correspond to total revenues for
the financial services segment presented above in the Summary of Results table
because certain revenues as presented in the table are derived from other
Torchmark subsidiaries and are eliminated in consolidation.
Asset management fees of $120 million in 1997 were the largest component of
financial services revenues, representing 49% of 1997 segment revenues. Asset
management fees were up 16% in 1997, after having risen 20% to $103 million in
1996. Increases in these fees have occurred due to the growth in mutual fund
assets and institutional assets under management, on which asset management
fees are based. Average assets under management rose 12% in 1997 and 17% in
1996. Average mutual fund assets under management grew 19% in 1997. Growth in
average assets under management in 1997 and 1996 resulted from two factors.
First, strength in the financial markets caused increases in the values of
fund securities. Secondly, new investment product sales and reinvested
dividends in each period contributed to asset growth. Total assets under
management were $23.4 billion at December 31, 1997, an increase over the prior
year end of 23%. Total assets under management were $19.1 billion at December
31, 1996 and $18.5 billion at December 31, 1995. Mutual fund assets under
management rose 20% in 1997 to $20.6 billion at year-end 1997. They rose 14%
in 1996 to $17.2 billion at year end. The composition of the portfolios
managed has bearing on the relationship of asset management fees to assets
under management. Equity-oriented portfolios have higher fee rates than fixed-
income portfolios. Therefore, asset management fees grew at a higher rate than
assets under management in 1996 primarily because of a change in the type of
assets under management. The total increase in assets under management for the
1996 period of $.6 billion was the result of a $2.1 billion increase in mutual
fund assets partially offset by a $1.5 billion decrease in institutional
assets. The mutual fund assets that were added have a higher management fee
rate than the institutional assets that were lost.
24
Distribution revenues are derived from the sales of both investment and
insurance products and accounted for 37% of total asset management revenues.
Investment product commissions represented 85% of total distribution revenues
in 1997. Investment products consist of two different mutual fund groups, the
W&R Funds and the United Funds. The United Funds have a front-load sales
charge while the W&R Funds have a contingent deferred or back-load charge. The
W&R Funds also charge a Rule 12b-1 distribution fee based on a percentage of
assets under management. The commissions from insurance products and variable
annuities are primarily received from Torchmark insurance subsidiaries, and
are eliminated in consolidation. W&R and Torchmark have agreed that W&R will
continue to market the variable annuities and insurance products of certain
Torchmark insurance companies subsequent to the announced spin-off. See
Initial Public Offering and Planned Spin-off of Asset Management Segment on
page 30 of this report. Investment product commissions rose 5% to $76 million
in 1997, after having increased 26% to $72 million in 1996. Investment product
collections increased 1% in 1997 and were $1.5 billion during both 1996 and
1997. Investment product sales in 1996 climbed 27% from $1.2 billion. In 1997,
sales of the United Funds in terms of mutual fund collections were $1.1
billion, rising 7% from 1996 sales of $1.0 billion. These sales rose 22% in
1996. The W&R Funds experienced a decline in 1997 sales of 23% to $176
million, but had a 44% increase in 1996 sales volume. Insurance product
commission revenues were level in each year 1995 through 1997 at $14 million.
Service fees are charged based on the number of accounts serviced. They
include fees for transfer agency, custody, and accounting. Service fees rose
9% in 1997 to $31 million, after having increased 21% in 1996 to $28 million.
The number of accounts serviced was 1.38 million at December 31, 1997, an
increase of 5%. Accounts serviced were 1.31 million at year-end 1996 and 1.22
million at year-end 1995.
Pretax operating income for the asset management segment rose 9% in 1997 to
$122 million. Pretax income increased 20% in 1996 from $94 million. Margins
for this segment have exceeded 50% in each of the periods considered. Margin
improvements have resulted, in large part, from the increase in the proportion
of asset management fees, which has a higher margin than other revenue
sources.
Commissions and selling expenses are the direct expenses associated with
producing distribution revenue. They consist of the commissions, bonuses, and
other compensation paid to the sales force as well as other marketing and
promotional costs. These expenses correlate closely with distribution
revenues.
Other expenses, as a percentage of revenues, grew from 14% in 1996 to 17% in
1997. This increase was due primarily to a one-time charge in 1997 in the
amount of $6.8 million which was largely related to the outsourcing of some
data processing services and the discontinuance of internally-developed
systems. Had this charge not been incurred, 1997 expenses would have been 14%
of revenues, margins would have been 53%, and pretax income would have been
$129 million.
INVESTMENTS
Torchmark's net investment income increased 7% to $434 million during the
year, which follows an increase of 6% in 1996 and an increase of 10% in 1995.
When adjusted for the acquisition of American Income in late 1994, however,
the 1995 increase was 3%. As in the past several years, the increase in 1997
investment income primarily resulted from the continued accumulation of
invested assets, which rose 8% to $6.3 billion at amortized cost by year end.
Invested assets increased by 5% in 1996 and 6% in 1995. Mean invested assets
at amortized cost, adjusted for the disposition of Torchmark's energy
operations, were $6.1 billion in 1997, $5.7 billion in 1996, and $5.4 billion
in 1995.
Subsequent to the first quarter of 1997, interest rates declined steadily
throughout the remainder of the year. Investments during 1997 of $1.66 billion
were made at a tax-equivalent yield of 7.29%. This compares with investments
of $1.08 billion in 1996 acquired at a tax-equivalent yield of 7.12%.
Acquisitions during 1995, which were increased by several sale programs,
totaled $1.87 billion. The average life of 1997 acquisitions was 13.3 years as
compared with 7.8 years in the previous year and 13.4 years in 1995. Torchmark
varies its maturity selection based on a number of factors including the
prevailing yield curve.
Holdings of mortgage-backed securities continue to decline as a percentage
of the portfolio, due to repayments of mortgage-backs and acquisitions of
other types of fixed income investments. The holdings of mortgage-backed
securities represented 24% of the fixed-income portfolio at year-end 1997, as
compared with 25% at year-end 1996 and 30% at year-end 1995.
25
Torchmark considers its fixed-income portfolio available for sale.
Therefore, it is valued at market and is subject to fluctuations as interest
rates change. Falling rates during 1997 propelled the value of the fixed-
income portfolio higher during the year. At year-end 1997, the portfolio had
an unrealized gain of $213 million, compared with $63 million at year-end 1996
and $226 million at year-end 1995. During 1997, the portfolio yield declined
slightly to 7.49% at year-end 1997, compared with 7.55% at year-end 1996 and
7.66% at year-end 1995. With the purchase of longer maturities in 1997, the
average life of the portfolio increased slightly to 8.0 years at year-end
1997, compared with 7.8 years at year-end 1996 and 8.8 years at year-end 1995.
The quality of Torchmark's fixed-income portfolio remains high. The
portfolio consists of securities of which 94.5% were rated investment grade by
Standard & Poors and 95.6% were rated investment grade by NAIC classification.
With the quality and liquidity of its fixed-income investments, Torchmark
can minimize the level of its short-term investments, which totaled $123
million at year-end 1997 and $85 million at year-end 1996. The following table
presents investments by expected maturity.
1997 1996
----- -----
Short terms and under 1 year................................ 4.3% 5.9%
2-5 years................................................... 28.0 27.8
6-10 years.................................................. 44.3 44.5
11-15 years................................................. 11.3 10.8
16-20 years................................................. 3.7 4.2
Over 20 years............................................... 8.4 6.8
----- -----
100.0% 100.0%
===== =====
Fixed income investments continue to represent 90% of invested assets, which
causes the percentage holdings of the other types of investments to vary from
the latest industry averages. The following table presents Torchmark's
components of the investment portfolio compared with industry data.
TORCHMARK
--------------------
AMOUNT INDUSTRY %
(IN THOUSANDS) % (1)
-------------- ----- ----------
Investment grade and short-term bonds.......... $5,718,802 87.3% 69.0%
Noninvestment grade bonds...................... 258,405 4.0 3.8
Preferred and common stocks.................... 17,782 0.3 5.7
Mortgage loans................................. 78,974 1.2 12.1
Real estate.................................... 167,297 2.6 2.2
Policy loans................................... 221,703 3.4 5.8
Other invested assets.......................... 75,445 1.2 1.4
---------- ----- -----
$6,538,408 100.0% 100.0%
========== ===== =====
- --------
(1) Latest data available from the American Council of Life Insurance.
26
Torchmark profits to the extent that its net investment income exceeds the
interest cost attributable to its net insurance policy liabilities and
financing costs. The following table presents Torchmark's excess investment
income, or tax equivalent net investment income in excess of its net policy
reserve requirements and financing costs, as well as the related assets and
liabilities.
ANALYSIS OF EXCESS INVESTMENT INCOME AND RELATED ITEMS
(Dollar amounts in millions)
1997 1996 1995
-------- -------- --------
Net investment income............................ $ 433.6 $ 404.6 $ 381.9
Tax equivalency adjustment....................... 10.4 11.1 12.1
-------- -------- --------
Tax equivalent investment income................. 444.0 415.7 394.0
Required interest on net insurance policy liabil-
ities........................................... (208.5) (202.9) (189.8)
Financing costs.................................. (88.7) (89.8) (98.4)
-------- -------- --------
Excess investment income......................... $ 146.8 $ 123.0 $ 105.8
======== ======== ========
Average invested assets*......................... $6,109.7 $5,707.1 $5,414.0
Increase over prior year--dollars............... 402.6 293.1
- --percentage..................................... 7% 5%
Average net interest-bearing insurance policy li-
abilities....................................... $3,468.7 $3,312.6 3,168.0
Increase over prior year--dollars............... 156.1 144.6
- --percentage..................................... 5% 5%
- --------
* At amortized cost
Excess investment income increased 19% in 1997 and 16% in 1996, as compared
to increases in tax equivalent investment income of 7% and 6%, respectively.
The higher growth in excess investment income relative to tax equivalent
investment income resulted from greater growth in average invested assets than
in average net interest-bearing insurance policy liabilities. In addition,
financing costs, which consist of interest on debt and dividends on the
monthly income preferred securities, were 20% of tax equivalent investment
income in 1997, down from 22% in 1996 and 25% in 1995.
Market Risk Sensitivity. Market risk is a risk that the value of a security
will change because of a change in market conditions. Torchmark's primary
exposure to market risk is interest rate risk which is the risk that a change
in a securities' value could occur from a change in interest rates. This risk
is significant to Torchmark's investment portfolio because its fixed-income
holdings amount to 90% of total investments. The effects of these interest
rate fluctuations on fixed investments are reflected on an after-tax basis in
Torchmark's shareholders' equity from marking these investments to market as
required by SFAS 115.
The actual interest rate risk to Torchmark is greatly reduced because the
effect that changes in rates have on assets are offset by the effect they have
on insurance liabilities. Torchmark's insurance liabilities, in which interest
assumptions are a factor in their computation, were $3.5 billion at December
31, 1997, compared with fixed income investments of $5.9 billion at the same
date. Because of the long-term nature of insurance liabilities, temporary
changes in value caused by rate fluctuations have little bearing on ultimate
obligations. The marking of these liabilities to market is not addressed by
SFAS 115.
Market risk is managed in a manner consistent with Torchmark's investment
objectives of maintaining a high-quality fixed-maturity portfolio. No
derivative instruments are used to manage its exposure to market risk in the
investment portfolio. A swap instrument was entered into to allow Torchmark to
participate in the downward trend in interest rates in connection with its
Monthly Income Preferred Securities as discussed in the Notes to the
Consolidated Financial Statement on page 56 of this report and in Capital
Resources of page 29 of this report. A cap instrument was also entered into to
protect Torchmark from the market risk on an increase in rates associated with
the swap on this security. Volatility in the value of Torchmark's fixed-income
holdings is reduced by maintaining a relatively short-term portfolio, of which
77% matures within ten years. Also, the portfolio and market conditions are
constantly evaluated for appropriate action.
27
The liability for Torchmark's insurance policy obligations is computed using
interest assumptions, some of which are contractually guaranteed. A reduction
in market interest rates of a permanent nature could cause investment return
to fall below amounts guaranteed. Torchmark's insurance companies participate
in the cash flow testing procedures imposed by statutory insurance
regulations, the purpose of which is to insure that such liabilities are
adequate to meet the company's obligations under a variety of interest rate
scenarios. It has been determined from those procedures that Torchmark's
insurance policy liabilities, when considered in light of the assets held with
respect to such liabilities and the investment income expected to be received
on such assets, are adequate to meet the obligations and expenses of
Torchmark's insurance activities in all but the most extreme circumstances.
The following table illustrates the market risk sensitivity of Torchmark's
interest-rate sensitive fixed-maturity portfolio. This table measures the
effect of a change in interest rates (as represented by the U.S. Treasury
curve) on the fair value of Torchmark's fixed-maturity portfolio. The data is
prepared through a model that measures the change in fair value arising from
an immediate and sustained change in interest rates in increments of 100 basis
points. It takes into account the effect that special option features such as
call options, put options, and unscheduled repayments would have on the
portfolio, given the changes in rates. The valuation of these option features
is dependent upon assumptions about future interest rate volatility that are
based on past performance.
CHANGE
IN
INTEREST
RATES MARKET VALUE OF
(IN FIXED-MATURITY
BASIS PORTFOLIO
POINTS) (IN $ MILLIONS)
-------- ---------------
-200 $6,499
-100 6,167
0 5,860
100 5,565
200 5,282
FINANCIAL CONDITION
Liquidity. Torchmark's liquidity relates to its ability to meet on demand
the cash commitments required by its business operations and financial
obligations. Torchmark's liquidity is derived from three sources: its positive
cash flow from operations, its portfolio of short-term investments, and its
line of credit facility.
Torchmark's insurance and asset management operations generate positive cash
flows in excess of its immediate needs. Cash flows provided from operations,
including net cash provided from Torchmark's deposit-type insurance and
annuity products, were $568 million in 1997, rising 10% over $517 million in
1996. Operating cash flows for 1996 increased 8% over 1995 cash flows of $478
million. In addition to operating cash flows, Torchmark received $514 million
of investment maturities and repayments in 1997, further enhancing total
positive cash flow. Such repayments were $347 million in 1996 and $351 million
in 1995. Cash flows in excess of immediate requirements are used to build an
investment base to fund future requirements.
Torchmark's cash and short-term investments were $149 million at December
31, 1997, compared with $103 million at year-end 1996. These liquid assets
represented over 1% of total assets at December 31, 1997, approximately the
same percentage as 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 $5.9 billion at December 31, 1997.
Torchmark has in place a line of credit facility with a group of lenders
which allows unsecured borrowings up to a specified maximum amount. The
maximum amount was increased during 1996 to $600 million and was at this level
on December 31, 1997. Interest is charged at variable rates for borrowings.
This line of credit is further designated as a backup credit line for a
commercial paper program not to exceed $600 million, whereby Torchmark may
borrow from either the credit line or issue commercial paper at any time but
may not borrow in excess of a total of $600 million on the combined
facilities. At December 31, 1997, $139 million in commercial paper was
outstanding and there were no borrowings on the line of credit. A fee is
charged on the entire $600 million facility. In accordance with the
agreements, Torchmark is subject to certain covenants regarding capitalization
and earnings. At December 31, 1997, Torchmark was in full compliance with
these covenants.
28
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, excluding capital gains and losses, 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. During 1998,
a maximum amount of $333 million will be available to Torchmark from insurance
subsidiaries without regulatory approval.
Capital Resources. Torchmark's capital structure consists of its long and
short-term debt, its Cumulative Monthly Income Preferred Securities, Series A
("MIPS"), and its shareholders' equity. Torchmark's debt consists primarily of
its funded debt and its commercial paper facility. The carrying amount of
Torchmark's funded debt was $772 million at year-end 1997, compared with $792
million at year-end 1996. Major debt issues outstanding at December 31, 1997
were as follows:
PRINCIPAL
YEAR AMOUNT
INSTRUMENT DUE RATE ($ THOUSANDS)
---------- ---- ----- -------------
Sinking Fund Debentures......................... 2017 8 5/8% $180,000
Senior Notes.................................... 1998 9 5/8 200,000
Senior Debentures............................... 2009 8 1/4 99,450
Notes........................................... 2023 7 7/8 200,000
Notes........................................... 2013 7 3/8 100,000
--------
Total funded debt............................... 779,450
Current maturity of long-term debt.............. (208,000)
--------
Long-term debt.................................. $571,450
========
Torchmark repaid $550 thousand of principal on the Senior Debentures in 1996
under the terms of a put provision. In 1997, Torchmark repaid $20 million
principal amount on its Sinking Fund Debentures due in 2017, of which $8
million was a mandatory redemption and $12 million was an optional repayment
under the terms of the agreement. Torchmark intends to repay another $20
million on this indebtedness in the first quarter of 1998, and has notified
its transfer agent of its intent to call the remaining $160 million principal
balance of this debt on April 1, 1998 at the prevailing call price of $103.76,
or $166 million. Additionally, Torchmark's 9 5/8% Senior Notes, principal
amount $200 million, are due on May 1, 1998. Torchmark plans to use operating
cash flow, borrowings under the line of credit, and funds from the initial
public offering of the asset management segment to repay these debt issues.
See Initial Public Offering and Planned Spin-off of the Asset Management
Segment on page 30 of this report.
The MIPS were issued in November, 1994 at a redemption amount of $200
million with an annual dividend rate of 9.18%. They are subject to a mandatory
redemption in full at September 30, 2024, although Torchmark may elect to
extend the MIPS for up to an additional 20 years if certain conditions are
met. They are 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 has a ten-year interest-rate swap agreement with an unaffiliated
party to reduce financing costs. The swap agreement calls for Torchmark to pay
a variable rate on the $200 million face amount in exchange for payment of the
fixed dividend. Torchmark is at risk on this instrument for higher financing
costs to the extent interest rates rise during the remaining term. This risk
is limited, however, by a five-year interest-rate cap which Torchmark acquired
in conjunction with the swap agreement that insures the variable rate cannot
exceed 10.39%. At December 31, 1997, the variable rate was 7.36%. During 1997,
Torchmark's after-tax dividend cost for the MIPS was $9.9 million, compared
with $11.9 million that would have been incurred without the swap and cap
transactions. Torchmark's after-tax cost in 1996 was $9.7 million and in 1995
was $10.3 million, saving $2.2 million and $1.6 million, respectively.
Short-term debt consists of the current maturity of long-term debt,
amounting to $208 million at December 31, 1997, and Torchmark's commercial
paper outstanding, which was $139 million at year-end 1997. Short-term debt
was $41 million a year earlier, and consisted of commercial paper borrowings.
The additional short-term borrowings in 1997 were necessary for a pay down of
$20 million in long-term debt and for other corporate purposes. In 1996,
Torchmark paid down $148 million of this debt with internal cash flow.
29
On September 25, 1997, Torchmark executed a stock option exercise and reload
program through which over 100 Torchmark directors and employees exercised
vested stock options and received replacement options at current market price.
This program resulted in the issuance of 4.8 million shares, but over 3
million of the new shares were immediately sold by the directors and employees
through the open market to cover the cost of the purchased shares and related
taxes. As a result of the reload program, management's ownership interest
increased, and Torchmark received a significant current tax benefit from the
exercise of the options.
During 1997, Torchmark acquired 5.2 million shares of its common stock on
the open market at a cost of $183 million in conjunction with its ongoing
share repurchase program. Share purchases of 4.6 million shares were made in
1996 for $107 million. No shares were acquired in 1995.
Shareholders' equity increased 19% to $1.93 billion at December 31, 1997,
over December 31, 1996 shareholders' equity of $1.63 billion. Book value per
share was $13.80 at 1997 year end, compared with $11.69 at year-end 1996.
After adjusting for the impact of interest-rate fluctuations on shareholders'
equity required by accounting rules, book value per share was $12.90 at year-
end 1997, an increase of 13% over $11.42 at year-end 1996. Return on common
shareholders' equity was 21.2% in 1997, compared with 20.5% in 1996, even
though average shareholders' equity increased. The return on equity ratios
exclude the mark up or down of shareholders' equity for changes in market
interest rates required by accounting rules. They also exclude discontinued
operations and realized investment gains and losses.
Total debt as a percentage of total capitalization continues to decline and
was 31% at December 31, 1997. In the computation of this ratio, the MIPS are
counted as equity and the effect of the above-mentioned accounting rule is
excluded. This debt-to-capitalization ratio was 32% at year-end 1996 and 37%
at year-end 1995. Torchmark's ratio of earnings before interest, taxes and
discontinued operations to interest requirements also continues to improve and
was 8.1 for 1997, compared with 7.7 in 1996 and 6.3 in 1995.
OTHER ITEMS
Initial Public Offering and Planned Spin-off of Asset Management Segment: In
November 1997, Torchmark announced that W&R, its asset management subsidiary,
intended to make an initial public offering of common stock early in 1998,
subject to market conditions. It was also announced that Torchmark plans to
distribute to its shareholders its remaining W&R shares in a tax-free spin-off
late in 1998, subject to market conditions, regulatory approval, and tax-free
status. Torchmark believes that the separation of the asset management
business from the insurance businesses would allow the financial community to
more accurately value each company relative to its industry, thereby enhancing
total shareholder value.
On March 5, 1998, W&R sold 23.9 million shares of Class A Common Stock in a
public offering. Net proceeds were approximately $516 million after
underwriters' fees and expenses. W&R will use $481 million of the net proceeds
to repay existing notes owed to Torchmark and other subsidiaries. The
remaining $35 million will be used by W&R for general corporate purposes.
Torchmark will use the $481 million proceeds to pay down debt, invest in fixed
maturity investments, acquire stock, and for other corporate purposes.
W&R contributed $244 million in revenues and $122 million to Torchmark's
pretax income in 1997. At December 31, 1997, its assets were $447 million and
shareholders' equity was $250 million before giving effect to a $480 million
dividend to Torchmark. As a result of the spin-off, Torchmark's debt-to-
capitalization ratio should be improved and its interest coverage ratio
minimally affected. As more fully discussed in the notes to the financial
statements, the spin-off, if and when completed, will result in a current tax
expense of approximately $50 million.
Disposal of Energy Segment. On September 30, 1996, Torchmark completed the
sale of its energy business segment including its energy asset management
subsidiary, Torch Energy Advisors Incorporated ("TEAI"), and its Black Warrior
coalbed methane investment. These operations, which were reclassified as
discontinued operations in Torchmark's financial statements at December 31,
1995, were sold to a TEAI management group. After the sale, Torchmark had no
controlling ownership interest in any energy asset management organization.
In addition to previously transferred securities, warrants, and Section 29
energy-related tax credits, which approximated $112 million at closing,
Torchmark received subordinated debt and notes totaling
30
$32.5 million along with $15.5 million in cash. After closing costs and
retained liabilities, Torchmark recorded a pre-tax loss of $23 million and an
after-tax loss of $7 million from the sale, or $.05 per share.
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.
Year 2000 Compliance. Existing computer programs of many businesses were
developed with a two-digit year identification without consideration of the
upcoming change in century or millenium in the year 2000. Without addressing
this issue, many computer programs could fail or produce erroneous results,
creating considerable uncertainty and potentially adversely affecting the
operations of a business.
Torchmark has been in the process of modifying its computer system and
applications for the year 2000. It is expected that the project will be
substantially completed during 1998 and that final testing will be conducted
in 1999. Torchmark is utilizing primarily internal staff for this conversion
but is also using outside consultants where necessary. The cost of this
project, which is immaterial to Torchmark, is expensed as incurred.
As a part of its activities, Torchmark is engaged electronically with third-
party financial institutions and other various organizations which may have
computer systems which are not year 2000 compliant. To the degree possible,
Torchmark is verifying that these third party business systems are currently
compliant or are in the process of becoming compliant. To the extent these
systems are not compliant, there is no assurance that the potential
interruptions or cost to Torchmark may not be significant.
NEW ACCOUNTING RULES
Reporting Comprehensive Income (FASB Statement No. 130) is effective for
fiscal years beginning after December 15, 1997. Reclassification of prior
periods for comparative financial statements is required.
This document establishes standards for presentation of comprehensive
income, a concept of income which, in addition to net income, includes all
changes in the equity of a company other than contributions from or
distributions to shareholders. Comprehensive income is to be categorized into
certain components, each of which is to be displayed prominently in
Torchmark's basic financial statements.
The most significant aspect of this Statement on Torchmark is the separate
disclosure of the change in the unrealized gain or loss on its fixed
investments as a component of comprehensive income, rather than as a direct
adjustment of shareholders' equity.
Disclosures about Segments of an Enterprise and Related Information (FASB
Statement No. 131) is effective for periods beginning after December 15, 1997,
with comparative information for prior periods to be restated. It establishes
new standards for reporting information about a company's operating segments,
including disclosures regarding a company's products and services, geographic
areas, and major customers. It also requires that selected information about
segments be disclosed in interim financial statements. The new segment rules
include determination of segments on the same basis used internally by a
company for evaluating the performance of its operations and the allocation of
its resources. The content of the new disclosures are similar to existing
standards and include descriptive information, revenues, other components of
earnings, and assets by segment.
The new disclosures required by this Statement will not be significantly
different from Torchmark's current segment disclosures because current
segments as reported reflect the same operating data and results utilized by
management in evaluating the performance of Torchmark's business. Torchmark
will, however, be required to report additional segment information in its
interim financial statements.
31
Employers' Disclosure about Pensions and Other Postretirement Benefits (FAS
No. 132) is effective for fiscal years beginning after December 15, 1997. This
statement revises disclosures about pensions and other postretirement benefit
plans, requiring additional information on changes in benefit obligations and
the fair values of plan assets. It does not change the measurement or
recognition of these plans. Adoption of this statement by Torchmark will
result in some additional disclosures for its benefit plans.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
Independent Auditors' Report.............................................. 34
Consolidated Financial Statements:
Consolidated Balance Sheet at December 31, 1997 and 1996................. 35
Consolidated Statement of Operations for each of the years in the three-
year period
ended December 31, 1997................................................. 36
Consolidated Statement of Shareholders' Equity for each of the years in
the three-year
period ended December 31, 1997.......................................... 37
Consolidated Statement of Cash Flow for each of the years in the three-
year period
ended December 31, 1997................................................. 38
Notes to Consolidated Financial Statements............................... 39
33
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. In connection with our
audits of the consolidated financial statements, we have also audited the
financial statement schedules as listed in Item 14(a). These consolidated
financial statements and financial statement schedules are the responsibility
of Torchmark's management. Our responsibility is to express an opinion on
these consolidated financial statements and financial statement schedules
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial statement schedules are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Torchmark
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-
year period ended December 31, 1997, 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 to the consolidated financial statements, Torchmark
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in 1995.
KPMG PEAT MARWICK LLP
Birmingham, Alabama
February 2, 1998 except
for Note 16 which is
as of February 20, 1998 and
Note 6 which is as of
March 5, 1998
34
TORCHMARK CORPORATION
CONSOLIDATED BALANCE SHEET
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31,
-----------------------
1997 1996
----------- ----------
Assets:
Investments:
Fixed maturities--available for sale, at fair value
(cost: 1997--$5,646,397; 1996--$5,265,499)......... $ 5,859,668 $5,328,276
Equity securities, at fair value (cost: 1997--
$3,284; 1996--$3,799).............................. 12,404 8,858
Mortgage loans on real estate, at cost (estimated
fair value: 1997--$79,096; 1996--$61,970).......... 78,974 64,353
Investment real estate, at cost (less allowance for
depreciation: 1997--$46,329; 1996--$40,370)........ 167,297 150,490
Policy loans........................................ 221,703 206,959
Other long-term investments......................... 75,445 95,485
Short-term investments.............................. 122,917 85,099
----------- ----------
Total investments.................................. 6,538,408 5,939,520
Cash (includes restricted cash: 1997--$14,943; 1996--
$15,028)............................................ 25,766 18,272
Investment in unconsolidated subsidiaries............ 102,305 88,051
Accrued investment income............................ 100,392 91,837
Other receivables.................................... 126,599 112,291
Deferred acquisition costs........................... 1,371,131 1,253,727
Value of insurance purchased......................... 216,988 244,368
Property and equipment............................... 49,158 50,323
Goodwill............................................. 525,564 540,540
Other assets......................................... 34,541 41,846
Separate account assets.............................. 1,876,439 1,420,025
----------- ----------
Total assets....................................... $10,967,291 $9,800,800
=========== ==========
Liabilities:
Future policy benefits............................... $ 5,023,763 $4,797,738
Unearned and advance premiums........................ 83,722 83,670
Policy claims and other benefits payable............. 228,754 220,121
Other policyholders' funds........................... 82,224 80,812
----------- ----------
Total policy liabilities............................ 5,418,463 5,182,341
Accrued income taxes................................. 415,984 340,287
Other liabilities.................................... 219,020 202,869
Short-term debt...................................... 347,152 40,910
Long-term debt (estimated fair value: 1997--$600,319;
1996--$814,082)..................................... 564,298 791,880
Separate account liabilities......................... 1,876,439 1,420,025
----------- ----------
Total liabilities................................... 8,841,356 7,978,312
Commitments and contingencies
Monthly income preferred securities
(estimated fair value: 1997--$210,500; 1996--
$210,000)............................................ 193,199 193,145
Shareholders' equity:
Preferred stock, par value $1 per share--Authorized
5,000,000 shares; outstanding:
-0- in 1997 and in 1996............................. -0- -0-
Common stock, par value $1 per share--Authorized
320,000,000 shares; outstanding: 147,848,908 issued
less 7,808,468 shares held in treasury in 1997, and
147,568,456 issued less 8,176,506 shares held in
treasury in 1996 ................................... 143,220 73,784
Additional paid-in capital........................... 187,731 141,701
Unrealized gains, net of applicable taxes............ 136,926 46,581
Retained earnings.................................... 1,699,409 1,549,391
Treasury stock....................................... (234,550) (182,114)
----------- ----------
Total shareholders' equity.......................... 1,932,736 1,629,343
----------- ----------
Total liabilities and shareholders' equity.......... $10,967,291 $9,800,800
=========== ==========
See accompanying Notes to Consolidated Financial Statements.
35
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
--------- --------- ----------
Revenue:
Life premium................................ $ 909,992 $ 854,897 $ 772,257
Health premium.............................. 739,485 732,618 754,983
Other premium............................... 28,527 22,404 19,043
--------- --------- ----------
Total premium............................. 1,678,004 1,609,919 1,546,283
Net investment income....................... 433,617 404,608 381,865
Financial services revenue.................. 206,785 184,295 152,482
Realized investment gains (losses).......... (36,979) 5,829 (14,323)
Other income................................ 1,023 1,159 1,175
--------- --------- ----------
Total revenue............................. 2,282,450 2,205,810 2,067,482
Benefits and expenses:
Life policyholder benefits.................. 591,867 558,436 507,444
Health policyholder benefits................ 462,967 448,346 454,107
Other policyholder benefits................. 54,066 51,302 47,785
--------- --------- ----------
Total policyholder benefits............... 1,108,900 1,058,084 1,009,336
Amortization of deferred acquisition costs.. 224,738 218,826 204,067
Commissions and premium taxes............... 141,358 140,515 144,333
Financial services selling expense.......... 52,670 50,515 40,080
Other operating expense..................... 158,550 154,150 145,520
Amortization of goodwill.................... 14,977 14,977 14,977
Interest expense............................ 71,863 73,611 80,994
--------- --------- ----------
Total benefits and expenses............... 1,773,056 1,710,678 1,639,307
Income from continuing operations before
income taxes and equity in earnings of
unconsolidated subsidiaries................. 509,394 495,132 428,175
Income taxes................................. (178,490) (180,622) (157,539)
Equity in earnings of unconsolidated
subsidiaries................................ 16,714 13,654 11,626
Monthly income preferred securities dividend
(net of tax)................................ (9,875) (9,655) (10,317)
--------- --------- ----------
Net income from continuing operations..... 337,743 318,509 271,945
Discontinued operations of energy segment:
Loss from operations (less applicable income
tax benefit of: 1995--$86,050)............. -0- -0- (128,710)
Loss on disposal
(less applicable income tax benefit of:
1996--$15,813)............................. -0- (7,137) -0-
--------- --------- ----------
Net income................................ $ 337,743 $ 311,372 $ 143,235
========= ========= ==========
Basic net income per share:
Continuing operations....................... $ 2.43 $ 2.24 $ 1.90
Discontinued operations of energy segment:
Loss from operations....................... -0- -0- (.90)
Loss on disposal........................... -0- (.05) -0-
--------- --------- ----------
Net income per share...................... $ 2.43 $ 2.19 $ 1.00
========= ========= ==========
Diluted net income per share:
Continuing operations....................... $ 2.39 $ 2.22 $ 1.89
Discontinued operations of energy segment:
Loss from operations....................... -0- -0- (.90)
Loss on disposal........................... -0- (.05) -0-
--------- --------- ----------
Net income per share...................... $ 2.39 $ 2.17 $ 0.99
========= ========= ==========
See accompanying Notes to Consolidated Financial Statements.
36
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,
1995
Balance at January 1,
1995................... -0- 73,784 139,045 $(140,756) 1,267,545 $ (97,015) $1,242,603
Net income.............. 143,235 143,235
Common dividends
declared ($0.565 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
Year Ended December 31,
1996
Net income.............. 311,372 311,372
Common dividends
declared ($0.58 a
share)................. (82,320) (82,320)
Acquisition of treasury
stock--
common................. (106,996) (106,996)
Exercise of stock
options................ 1,947 (5,195) 15,340 12,092
Net change in unrealized
gains (losses)......... (93,757) (93,757)
---- -------- -------- --------- ---------- --------- ----------
Balance at December 31,
1996.................. $-0- $ 73,784 $141,701 $ 46,581 $1,549,391 $(182,114) $1,629,343
Year Ended December 31,
1997
Net income.............. 337,743 337,743
Common dividends
declared ($0.585 a
share)................. (81,793) (81,793)
Two-for-one stock split
in the form of a
dividend............... 69,156 (69,156) -0-
Acquisition of treasury
stock--common.......... (182,903) (182,903)
Exercise of stock
options................ 280 44,011 (36,776) 130,467 137,982
Grant of discounted
options................ 372 372
Grant of deferred
options................ 1,647 1,647
Net change in unrealized
gains (losses)......... 90,345 90,345
---- -------- -------- --------- ---------- --------- ----------
Balance at December 31,
1997.................. $-0- $143,220 $187,731 $ 136,926 $1,699,409 $(234,550) $1,932,736
==== ======== ======== ========= ========== ========= ==========
See accompanying Notes to Consolidated Financial Statements.
37
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
Net income................................ $ 337,743 $ 311,372 $ 143,235
Adjustments to reconcile net income to
cash provided from operations:
Increase in future policy benefits...... 147,207 136,375 178,850
Increase in other policy benefits....... 10,096 14,319 4,877
Deferral of policy acquisition costs.... (328,086) (300,461) (362,837)
Amortization of deferred policy
acquisition costs...................... 224,738 218,826 204,067
Change in accrued income taxes.......... 69,880 61,519 42,337
Depreciation............................ 9,329 9,056 9,603
Realized (gains) losses on sale of
investments,
subsidiaries, and properties........... 36,979 (5,829) 14,323
Change in accounts payable and other
liabilities............................ 2,255 9,091 (6,623)
Change in receivables................... (13,176) (15,501) (31,670)
Change in payables and receivables of
unconsolidated affiliates.............. 1,967 (3,350) (2,348)
Other accruals and adjustments.......... (10,099) (20,158) (2,951)
Discontinued operations of energy
segment................................ -0- 7,137 128,710
---------- ---------- ----------
Cash provided from operations............. 488,833 422,396 319,573
Cash used for investment activities:
Investments sold or matured:
Fixed maturities available for sale--
sold................................... 744,839 487,070 1,177,874
Fixed maturities available for sale--
matured, called, and repaid............ 514,325 347,116 351,246
Equity securities....................... 670 2,872 16,587
Mortgage loans.......................... 3,300 7,113 1,856
Real estate............................. 7,341 5,780 2,566
Other long-term investments............. 36,611 21,099 21,666
---------- ---------- ----------
Total investments sold or matured...... 1,307,086 871,050 1,571,795
Acquisition of investments:
Fixed maturities--available for sale.... (1,668,704) (1,080,793) (1,870,445)
Equity securities....................... -0- -0- (394)
Mortgage loans.......................... (17,826) (18,360) -0-
Real estate............................. (24,452) (9,690) (17,708)
Net increase in policy loans............ (14,744) (13,082) (11,889)
Other long-term investments............. (20,537) (15,891) (67,241)
---------- ---------- ----------
Total investments acquired............. (1,746,263) (1,137,816) (1,967,677)
Net (increase) decrease in short-term
investments............................. (37,848) (12,252) 35,514
Proceeds from sale of discontinued
operations.............................. -0- 15,500 -0-
Proceeds from sale of Nuevo Energy
Company stock........................... -0- 93,160 -0-
Loans repaid by unconsolidated
affiliates.............................. -0- -0- 28,000
Dispositions of properties............... 1,686 2,093 1,198
Additions to properties.................. (9,422) (15,412) (6,510)
Dividends from unconsolidated affiliates. 770 770 684
Other.................................... 15,711 -0- -0-
---------- ---------- ----------
Cash used for investment activities....... (468,280) (182,907) (336,996)
Cash provided from (used for) financing
activities:
Issuance of common stock................. 93,973 10,145 2,953
Additions to debt........................ 98,185 -0- -0-
Cash dividends paid to shareholders...... (80,999) (82,893) (80,887)
Repayments on debt....................... (20,132) (149,144) (60,867)
Acquisition of treasury stock............ (182,903) (106,996) -0-
Net receipts from deposit product
operations.............................. 78,817 94,513 158,084
---------- ---------- ----------
Cash provided from (used for) financing
activities............................... (13,059) (234,375) 19,283
---------- ---------- ----------
Increase in cash......................... 7,494 5,114 1,860
Cash at beginning of year................ 18,272 13,158 11,298
---------- ---------- ----------
Cash at end of year...................... $ 25,766 $ 18,272 $ 13,158
========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
38
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.
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 are carried at fair value. If an
investment becomes permanently impaired, such impairment is treated as a
realized loss and the investment is adjusted to net realizable value.
Gains and losses realized on the disposition of investments are recognized
as revenues and are determined on a specific identification basis.
Realized investment gains and losses and investment income attributable to
separate accounts are credited to the separate accounts and have no effect on
Torchmark's net income. Investment income attributable to all other insurance
policies and products is included in Torchmark's net investment income. Net
investment income for the years ended December 31, 1997, 1996, and 1995
included $308.6 million, $298.4 million, and $279.6 million, respectively,
which was allocable to policyholder reserves or accounts. Realized investment
gains and losses are not allocable to insurance policyholders' liabilities.
Determination of Fair Values of Financial Instruments: Fair value for cash,
short-term investments, short-term debt, receivables and payables approximates
carrying value. Fair values for investment securities are based on quoted
market prices, where available. Otherwise, fair values are based on quoted
market prices of comparable instruments. Mortgages are valued using discounted
cash flows. Substantially all of Torchmark's long-term debt, including the
monthly income preferred securities, is valued based on quoted market prices.
Cash: Cash consists of balances on hand and on deposit in banks and
financial institutions. Overdrafts arising from the overnight investment of
funds offset cash balances on hand and on deposit.
Recognition of Premium Revenue and Related Expenses: Premiums for insurance
contracts which are not defined as universal life-type according to Statement
of Financial Accounting Standards ("SFAS") No. 97 are recognized as revenue
over the premium-paying period of the policy. Profits for limited-payment life
insurance contracts as defined by SFAS 97 are recognized over the contract
period. Premiums for universal life-type and annuity contracts are added to
the policy account value, and revenues for such products are recognized as
charges to the policy account value for mortality, administration, and
surrenders (retrospective deposit method). Variable annuity products are also
assessed an investment management fee and a sales charge. Life premium
includes policy charges of $72.3 million, $72.8 million, and $72.7 million for
the years ended December 31, 1997, 1996, and 1995,
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
respectively. Other premium includes annuity policy charges for the years
ended December 31, 1997, 1996, and 1995 of $28.2 million, $22.4 million, and
$19.0 million, respectively. Profits are also earned to the extent that
investment income exceeds policy requirements. The related benefits and
expenses are matched with revenues by means of the provision of future policy
benefits and the amortization of deferred acquisition costs in a manner which
recognizes profits as they are earned over the same period.
Future Policy Benefits: The liability for future policy benefits for
universal life-type products according to SFAS 97 is represented by policy
account value. The liability for future policy benefits for all other life and
health products is provided on the net level premium method based on estimated
investment yields, mortality, morbidity, persistency and other assumptions
which were appropriate at the time the policies were issued. Assumptions used
are based on Torchmark's experience as adjusted to provide for possible
adverse deviation. These estimates are periodically reviewed and compared with
actual experience. If it is determined future experience will probably differ
significantly from that previously assumed, the estimates are revised.
Deferred Acquisition Costs and Value of Insurance Purchased: The costs of
acquiring new insurance business are deferred. Such costs consist of sales
commissions, underwriting expenses, and certain other selling expenses. The
costs of acquiring new business through the purchase of other companies and
blocks of insurance business are also deferred.
Deferred acquisition costs, including the value of life insurance purchased,
for policies other than universal life-type policies, are amortized with
interest over the estimated premium-paying period of the policies in a manner
which charges each year's operations in proportion to the receipt of premium
income. For limited-payment contracts, acquisition costs are amortized over
the contract period. For universal life-type policies, acquisition costs are
amortized with interest in proportion to estimated gross profits. The
assumptions used as to interest, persistency, morbidity and mortality are
consistent with those used in computing the liability for future policy
benefits and expenses. If it is determined that future experience will
probably differ significantly from that previously assumed, the estimates are
revised. Deferred acquisition costs are adjusted to reflect the amounts
associated with realized and unrealized investment gains and losses pertaining
to universal life-type products.
Income Taxes: Income taxes are accounted for under the asset and liability
method in accordance with SFAS 109. Under the asset and liability method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement book
values and tax bases of assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Property and Equipment: Property and equipment is reported at cost less
allowances for depreciation. Depreciation is recorded primarily on the
straight line method over the estimated useful lives of these assets which
range from two to ten years for equipment and 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 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 7, the adoption of this statement had
no material impact on Torchmark's operations or financial position for the
years ended December 31, 1997, 1996, and 1995.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill: The excess cost of businesses acquired over the fair value of
their net assets is reported as goodwill and is amortized on a straight-line
basis over a period not exceeding 40 years. Torchmark's unamortized goodwill
is periodically reviewed to ensure that conditions are present to indicate the
recorded amount of goodwill is recoverable from the estimated future
profitability of the related business. If events or changes in circumstances
indicate that future profits will not be sufficient to support the carrying
amount of goodwill, goodwill would be written down to the recoverable amount
and amortized over the original remaining period or a reduced period if
appropriate.
Treasury Stock: Torchmark accounts for purchases of treasury stock on the
cost method. Issuance of treasury stock is accounted for using the weighted-
average cost method.
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 brought 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.
Stock Split: On August 1, 1997, Torchmark distributed one share for every
one share owned by shareholders of record as of July 1, 1997 in the form of a
stock dividend. The dividend was accounted for as a stock split. All prior-
year share and per share data have been restated to give effect for this
split.
Earnings Per Share: Torchmark adopted SFAS 128, "Earnings per share,"
effective year end 1997. This standard requires the dual presentation of basic
and diluted earnings per share ("EPS") on the face of the income statement and
a reconciliation of basic EPS to diluted EPS. As required by SFAS 128, all
prior-period EPS data has been restated for comparability. Basic EPS is
computed by dividing income available to common stockholders by the weighted
average common shares outstanding for the period. Weighted average common
shares outstanding for each period are as follows: 1997--139,202,354, 1996--
142,459,783, 1995--143,187,547. Diluted EPS is calculated by adding to shares
outstanding the additional net effect of potentially dilutive securities or
contracts which could be exercised or converted into common shares. Weighted
average diluted shares outstanding for each period are as follows: 1997--
141,431,156, 1996--143,783,218, 1995--144,228,248.
41
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,
-------------------------- ---------------------
1997 1996 1995 1997 1996
-------- -------- -------- ---------- ----------
Life insurance subsidiar-
ies...................... $369,446 $283,881 $245,552 $ 798,265 $622,326
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,
---------------------------------
1997 1996 1995
---------- ---------- ---------
Statutory net income.................. $ 369,446 $ 283,881 $ 245,552
Deferral of acquisition costs......... 328,087 300,461 328,598
Amortization of acquisition costs..... (224,738) (218,826) (204,067)
Differences in insurance policy lia-
bilities............................. 44,117 39,762 1,407
Deferred income taxes................. (47,541) (20,496) (40,380)
Income of noninsurance affiliates..... (142,041) (108,257) (207,848)
Other................................. 10,413 34,847 19,973
---------- ---------- ---------
GAAP net income....................... $ 337,743 $ 311,372 $ 143,235
========== ========== =========
A reconciliation of Torchmark's insurance subsidiaries' statutory
shareholders' equity to Torchmark's consolidated GAAP shareholders' equity is
as follows:
YEAR ENDED
DECEMBER 31,
----------------------
1997 1996
---------- ----------
Statutory shareholders' equity........ $ 798,265 $ 622,326
Differences in insurance policy lia-
bilities............................. 543,365 440,204
Deferred acquisition costs............ 1,371,131 1,253,727
Value of insurance purchased.......... 216,988 244,368
Deferred income taxes................. (405,375) (329,609)
Debt of parent company................ (911,159) (832,367)
Monthly income preferred securities... (193,199) (193,145)
Asset valuation reserves.............. 101,057 133,118
Nonadmitted assets.................... 89,859 137,270
Goodwill.............................. 396,953 405,705
Market value adjustment on fixed matu-
rities............................... 196,369 37,679
Other................................. (271,518) (289,933)
---------- ----------
GAAP shareholders' equity............. $1,932,736 $1,629,343
========== ==========
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 3--INVESTMENT OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- --------- ---------
Investment income is summarized as fol-
lows:
Fixed maturities...................... $397,729 $ 373,110 $ 350,931
Equity securities..................... 367 373 818
Mortgage loans on real estate......... 7,127 6,525 4,343
Investment real estate................ 3,789 14,629 8,277
Policy loans.......................... 14,433 13,192 12,137
Other long-term investments........... 9,241 5,319 10,410
Short-term investments................ 7,882 6,397 8,890
-------- --------- ---------
440,568 419,545 395,806
Less investment expense............... (6,951) (14,937) (13,941)
-------- --------- ---------
Net investment income................. $433,617 $ 404,608 $ 381,865
======== ========= =========
An analysis of gains (losses) from
investments is as follows:
Realized investment gains (losses):
Fixed maturities..................... $(30,122) $ 3,760 $ 1,285
Equity securities.................... 155 1,913 (15,033)
Other................................ (7,012) 156 (575)
-------- --------- ---------
(36,979) 5,829 (14,323)
Adjustment to deferred acquisition
costs ............................... (198) (749) (236)
-------- --------- ---------
(37,177) 5,080 (14,559)
Applicable tax........................ 13,012 (1,778) 5,096
-------- --------- ---------
Gains (losses) from investments, net
of tax............................... $(24,165) $ 3,302 $ (9,463)
======== ========= =========
An analysis of the net change in
unrealized investment gains (losses) is
as follows:
Equity securities..................... $ 4,061 $ (734) $ 10,125
Fixed maturities available for sale... 150,494 (163,224) 468,336
Other long-term investments and
foreign exchange translation
adjustments.......................... (1,054) 1,907 5,514
Adjustment to deferred acquisition
costs................................ (13,324) 17,837 (51,739)
Applicable tax........................ (49,832) 50,457 (151,142)
-------- --------- ---------
Change in unrealized gains (losses),
net of tax........................... $ 90,345 $ (93,757) $ 281,094
======== ========= =========
43
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, 1997 and 1996 is as
follows:
GROSS GROSS AMOUNT PER % OF TOTAL
AMORTIZED UNREALIZED UNREALIZED MARKET THE BALANCE FIXED
COST GAINS LOSSES VALUE SHEET MATURITIES
---------- ---------- ---------- ---------- ----------- ----------
1997:
- -----
Fixed maturities avail-
able for sale:
Bonds:
U.S. Government direct
obligations and
agencies............. $ 189,708 $ 7,190 $ (45) $ 196,853 $ 196,853 3.4%
GNMAs................. 793,335 46,908 (1,180) 839,063 839,063 14.3
Mortgage-backed
securities, GNMA
collateral........... 97,740 2,695 (13) 100,422 100,422 1.7
Other mortgage-backed
securities........... 436,457 19,663 (2,054) 454,066 454,066 7.7
State, municipalities
and political
subdivisions......... 647,028 29,031 (1,165) 674,894 674,894 11.5
Foreign governments... 77,736 3,653 (3) 81,386 81,386 1.4
Public utilities...... 341,055 12,515 (512) 353,058 353,058 6.0
Industrial and
miscellaneous........ 3,058,468 100,596 (4,516) 3,154,548 3,154,548 53.9
Redeemable preferred
stocks................ 4,870 508 0 5,378 5,378 0.1
---------- -------- -------- ---------- ---------- -----
Total fixed
maturities........... 5,646,397 222,759 (9,488) 5,859,668 5,859,668 100.0%
Equity securities:
Common stocks:
Banks and insurance
companies............ 2,014 8,703 (10) 10,707 10,707
Industrial and all
others............... 242 2 (31) 213 213
Non-redeemable
preferred stocks...... 1,028 456 0 1,484 1,484
---------- -------- -------- ---------- ----------
Total equity
securities........... 3,284 9,161 (41) 12,404 12,404
---------- -------- -------- ---------- ----------
Total fixed maturities
and equity
securities........... $5,649,681 $231,920 $ (9,529) $5,872,072 $5,872,072
========== ======== ======== ========== ==========
1996:
- -----
Fixed maturities avail-
able for sale:
Bonds:
U.S. Government direct
obligations and
agencies............. $ 231,151 $ 2,260 $ (3,628) $ 229,783 $ 229,783 4.3%
GNMAs................. 882,036 49,647 (5,170) 926,513 926,513 17.4
Mortgage-backed
securities, GNMA
collateral........... 154,816 2,665 (134) 157,347 157,347 3.0
Other mortgage-backed
securities........... 266,776 6,931 (1,667) 272,040 272,040 5.1
State, municipalities
and political
subdivisions......... 709,980 14,721 (4,211) 720,490 720,490 13.5
Foreign governments... 76,298 3,789 (94) 79,993 79,993 1.5
Public utilities...... 265,248 5,036 (3,888) 266,396 266,396 5.0
Industrial and
miscellaneous........ 2,672,613 35,720 (39,796) 2,668,537 2,668,537 50.1
Redeemable preferred
stocks................ 6,581 596 0 7,177 7,177 0.1
---------- -------- -------- ---------- ---------- -----
Total fixed maturities
..................... 5,265,499 121,365 (58,588) 5,328,276 5,328,276 100.0%
Equity securities:
Common stocks:
Banks and insurance
companies............ 2,014 4,658 (3) 6,669 6,669
Industrial and all
others............... 287 62 (23) 326 326
Non-redeemable
preferred stocks...... 1,498 365 0 1,863 1,863
---------- -------- -------- ---------- ----------
Total equity
securities........... 3,799 5,085 (26) 8,858 8,858
---------- -------- -------- ---------- ----------
Total fixed maturities
and equity
securities........... $5,269,298 $126,450 $(58,614) $5,337,134 $5,337,134
========== ======== ======== ========== ==========
44
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, 1997
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... $ 72,068 $ 72,681
Due from one to five
years.................... 1,029,781 1,054,445
Due from five to ten
years.................... 1,977,263 2,048,865
Due after ten years....... 1,149,394 1,196,591
---------- ----------
4,228,506 4,372,582
Redeemable preferred
stocks................... 4,870 5,378
Mortgage-backed and asset-
backed securities........ 1,413,021 1,481,708
---------- ----------
$5,646,397 $5,859,668
========== ==========
Proceeds from sales of fixed maturities available for sale were $745 million
in 1997, $487 million in 1996, and $1.18 billion in 1995. Gross gains realized
on those sales were $1.3 million in 1997, $8.7 million in 1996, and $13.4
million in 1995. Gross losses were $32.2 million in 1997, $5.3 million in
1996, and $13.5 million in 1995.
Torchmark had $30.5 million and $39.2 million in investment real estate at
December 31, 1997 and 1996, respectively, which was nonincome producing during
the previous twelve months. These properties included primarily construction
in process and land. Torchmark had $107 thousand in non-income producing
mortgages as of year end 1997. There were no fixed maturity investments, or
other long-term investments which were nonincome producing at December 31,
1997.
Derivative investments were immaterial to Torchmark at December 31, 1997.
These investments consist of interest-only and principal-only collateralized
mortgage obligations and a foreign currency trading account. Torchmark's total
carrying value of these investments was $26.4 million and $26.3 million at
December 31, 1997 and 1996, respectively. Torchmark has no off-balance sheet
exposure in connection with these investments.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 4--PROPERTY AND EQUIPMENT
A summary of property and equipment used in the business is as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------- ---------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
-------- ------------ -------- ------------
Company occupied real estate........ $ 64,103 $26,744 $ 68,925 $27,960
Data processing equipment........... 26,059 22,314 23,179 20,942
Transportation equipment............ 11,857 7,545 11,396 7,492
Furniture and office equipment...... 39,729 35,987 38,047 34,830
-------- ------- -------- -------
$141,748 $92,590 $141,547 $91,224
======== ======= ======== =======
Depreciation expense on property used in the business was $5.9 million, $5.4
million, and $5.7 million, in each of the years 1997, 1996, and 1995,
respectively.
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:
1997 1996 1995
---------------------- ---------------------- ----------------------
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................... $1,253,727 $244,368 $1,121,325 $277,297 $1,017,467 $274,124
Additions:
Deferred during peri-
od:
Commissions........... 199,177 0 185,197 -0- 192,427 -0-
Other expenses........ 128,909 0 115,264 -0- 136,170 -0-
---------- -------- ---------- -------- ---------- --------
Total deferred....... 328,086 0 300,461 -0- 328,597 -0-
Value of Insurance
purchased............ 0 -0- -0- -0- 34,240
Adjustment
attributable to
unrealized investment
losses(1)............ 0 0 17,838 -0- -0- -0-
---------- -------- ---------- -------- ---------- --------
Total additions...... 328,086 0 318,299 -0- 328,597 34,240
---------- -------- ---------- -------- ---------- --------
Deductions:
Amortized during peri-
od................... (197,160) (27,380) (185,148) (32,929) (172,764) (31,067)
Adjustment
attributable to
unrealized investment
gains(1)............. (13,324) 0 -0- -0- (51,739) -0-
Adjustment
attributable to
realized investment
gains(1)............. (198) 0 (749) -0- (236) -0-
---------- -------- ---------- -------- ---------- --------
Total deductions..... (210,682) (27,380) (185,897) (32,929) (224,739) (31,067)
---------- -------- ---------- -------- ---------- --------
Balance at end of year.. $1,371,131 $216,988 $1,253,727 $244,368 $1,121,325 $277,297
========== ======== ========== ======== ========== ========
- --------
(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 $16.6 million, $18.9 million, and $20.0 million, for
the years ended December 31, 1997, 1996, and 1995, respectively. The average
interest rates used for the years ended December 31, 1997, 1996, and 1995 were
7.19%, 7.26%, and 7.26%, respectively. The estimated amount of the unamortized
balance at December 31, 1997 to be amortized during each of the next five
years is: 1998, $22.7 million; 1999, $19.9 million; 2000, $17.4 million; 2001,
$15.2 million, and 2002, $13.5 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.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 6--INITIAL PUBLIC OFFERING AND PLANNED SPIN-OFF OF ASSET MANAGEMENT
SEGMENT
In November 1997, Torchmark announced that W&R, its asset management
subsidiary, intended to make an initial public offering of common stock early
in 1998, subject to market conditions. It was also announced that Torchmark
plans to distribute to its shareholders its remaining W&R shares in a tax-free
spin-off late in 1998, subject to market conditions, regulatory approval and
tax-free status.
On March 5, 1998, W&R sold 23.9 million shares of Class A Common Stock in a
public offering. Net proceeds were approximately $516 million after
underwriters' fees and expenses. W&R will use $481 million of the net proceeds
to repay existing notes owed to Torchmark and other subsidiaries. The
remaining $35 million will be used by W&R for general corporate purposes.
Torchmark will use the $481 million proceeds to pay down debt, invest in fixed
maturity investments, acquire stock, and for other corporate purposes.
W&R contributed $244 million in revenues and $117 million to Torchmark's
pretax income in 1997. At December 31, 1997, its assets were $447 million and
shareholders' equity was $250 million before giving effect to a $480 million
dividend to Torchmark. As a result of the planned spin-off, Torchmark's debt-
to-capitalization ratio should be improved and its interest coverage ratio
minimally affected. As more fully discussed in Note 10, the spin-off, if and
when completed, will constitute the distribution of a portion of the
policyholders' surplus account resulting in the recognition of a current tax
expense of approximately $50 million.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 7--DISPOSAL OF ENERGY SEGMENT
On September 30, 1996, Torchmark completed the sale of its energy business
segment including its energy asset management subsidiary, Torch Energy
Advisors Incorporated ("TEAI"), and its Black Warrior coalbed methane
investment. These operations, which were reclassified as discontinued
operations in Torchmark's financial statements at December 31, 1995, were sold
to a TEAI management group. After the sale, Torchmark had no controlling
ownership interest in any energy asset management organization.
In addition to previously transferred securities, warrants, and Section 29
energy-related tax credits, which approximated $112 million at closing,
Torchmark received subordinated debt and notes totaling $32.5 million along
with $15.5 million in cash. After closing costs and retained liabilities,
Torchmark recorded a pretax loss of $23 million and an after-tax loss of $7
million from the sale, or $.05 per share.
In the first quarter of 1996, TEAI sold 1.5 million of its shares in Nuevo
Energy Company ("Nuevo") common stock for proceeds of $35.6 million. These
proceeds were transferred to Torchmark in the form of a dividend prior to the
sale of TEAI. Additionally, included in the above mentioned transferred
marketable securities were 1.3 million shares of Nuevo common stock which were
sold in the fourth quarter of 1996 for proceeds of $57.6 million.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 8--FUTURE POLICY BENEFIT RESERVES
A summary of the assumptions used in determining the liability for future
policy benefits at December 31, 1997 is as follows:
INDIVIDUAL LIFE INSURANCE
INTEREST ASSUMPTIONS:
PERCENT OF
YEARS OF ISSUE INTEREST RATES LIABILITY
-------------- --------------------- ----------
1917-1997 3.00% 3%
1947-1954 3.25% 1
1927-1989 3.50% 1
1955-1961 3.75% 1
1925-1997 4.00% 12
1962-1969 4.50% graded to 4.00% 2
1970-1980 5.50% graded to 4.00% 4
1970-1997 5.50% 1
1929-1997 6.00% 11
1986-1994 7.00% graded to 6.00% 11
1954-1997 8.00% graded to 6.00% 11
1951-1985 8.50% graded to 6.00% 10
1980-1987 8.50% graded to 7.00% 1
1975-1991 9.50% graded to 8.00% 6
1984-1997 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.
INDIVIDUAL HEALTH INSURANCE
INTEREST ASSUMPTIONS:
PERCENT OF
YEARS OF ISSUE INTEREST RATES LIABILITY
-------------- --------------------- ----------
1962-1997 3.00% 2%
1969-1980 5.50% graded to 4.00% 4
1982-1997 4.50% 1
1993-1997 6.00% 23
1986-1992 7.00% graded to 6.00% 48
1955-1997 8.00% graded to 6.00% 12
1951-1986 8.50% graded to 6.00% 10
---
100%
===
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 8--FUTURE POLICY BENEFIT RESERVES (CONTINUED)
MORBIDITY ASSUMPTIONS:
For individual health, the morbidity assumptions are based on either
Torchmark's experience or the assumptions used in calculating statutory
reserves.
TERMINATION ASSUMPTIONS:
Termination assumptions are based on Torchmark's experience.
OVERALL INTEREST ASSUMPTIONS
The overall average interest assumption for determining the liability for
future life and health insurance benefits in 1997 was 6.2%.
NOTE 9--LIABILITY FOR UNPAID HEALTH CLAIMS
Activity in the liability for unpaid health claims is summarized as follows:
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- -------- --------
Balance at beginning of year:.................. $173,900 $170,566 $166,731
Incurred related to:
Current year.................................. 503,948 495,642 502,018
Prior year.................................... 15,280 179 (8,295)
-------- -------- --------
Total incurred................................. 519,228 495,821 493,723
Paid related to:
Current year.................................. 349,815 340,310 342,905
Prior year.................................... 164,324 152,177 146,983
-------- -------- --------
Total paid..................................... 514,139 492,487 489,888
-------- -------- --------
Balance at end of year......................... $178,989 $173,900 $170,566
======== ======== ========
The liability for unpaid health claims is included with "Policy claims and
other benefits payable" on the Balance Sheet.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 10--INCOME TAXES
Torchmark and most of its subsidiaries file a life-nonlife consolidated
federal income tax return. American Income files its own consolidated federal
income tax return and will not be eligible to join Torchmark's consolidated
return group until 2000.
Total income taxes were allocated as follows:
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
Income from continuing operations............. $178,490 $180,622 $157,539
Discontinued operations....................... -0- (15,813) (86,050)
Monthly income preferred securities dividend.. (5,318) (5,199) (5,555)
Shareholders' equity:
Unrealized gains (losses).................... 49,832 (50,457) 151,142
Tax basis compensation expense (from the
exercise of stock options) in excess of
amounts recognized for financial reporting
purposes.................................... (44,011) (1,947) (709)
Other......................................... 1,514 (898) (6,169)
-------- -------- --------
$180,507 $106,308 $210,198
======== ======== ========
Income tax expense attributable to income from continuing operations
consists of:
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
--------- -------- --------
Current income tax expense...................... $ 132,976 $130,624 $110,652
Deferred income tax expense..................... 45,514 49,998 46,887
--------- -------- --------
$ 178,490 $180,622 $157,539
========= ======== ========
In 1997, 1996, and 1995, deferred income tax expense was incurred because of
certain differences between net operating income before income taxes as
reported on the consolidated statement of operations and taxable income as
reported on Torchmark's income tax returns. As explained in Note 1, these
differences caused the financial statement book values of some assets and
liabilities to be different from their respective tax bases.
The effective income tax rate differed from the expected 35% rate as shown
below:
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 % 1996 % 1995 %
-------- --- -------- --- -------- ---
Expected income taxes............ $178,288 35% $173,296 35% $149,861 35%
Increase (reduction) in income
taxes
resulting from:
Tax-exempt investment income.... (6,408) (1) (7,014) (1) (7,965) (2)
Other........................... 6,610 1 14,340 3 15,643 4
-------- --- -------- --- -------- ---
Income taxes..................... $178,490 35% $180,622 37% $157,539 37%
======== === ======== === ======== ===
The reduction in Torchmark's 1997 effective tax rate was a result of a
recovery of state income taxes from a unitary filing in 1997. Without this
one-time recovery, Torchmark's effective tax rate would have been 36.1% in
1997.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 10--INCOME TAXES (CONTINUED)
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
DECEMBER 31,
------------------
1997 1996
-------- --------
Deferred tax assets:
Investments, principally due to (in the acquisition of a
subsidiary) the use of market value in recording the cost
of fixed maturities for financial reporting purposes but
not for tax purposes..................................... $ 1,062 $ 2,996
Future policy benefits, unearned and advance premiums, and
policy claims............................................ -0- 9,264
Present value of future policy surrender charges.......... 13,925 9,636
Other assets and other liabilities, principally due to the
current nondeductibility of certain accrued expenses for
tax purposes............................................. 40,104 30,025
-------- --------
Total gross deferred tax assets........................... 55,091 51,921
Less valuation allowance.................................. (2,111) (2,111)
-------- --------
Net deferred tax assets................................... 52,980 49,810
-------- --------
Deferred tax liabilities:
Unconsolidated affiliates, principally due to the use of
equity method accounting for financial reporting purposes
but not for tax purposes................................. 19,208 24,368
Deferred acquisition costs................................ 363,077 333,640
Unrealized investment gains............................... 73,784 23,952
Future policy benefits, unearned and advance premiums, and
policy claims............................................ 15,911 -0-
Other..................................................... 16,162 12,625
-------- --------
Total gross deferred tax liabilities...................... 488,142 394,585
-------- --------
Net deferred tax liability................................. $435,162 $344,775
======== ========
The valuation allowance for deferred tax assets as of December 31, 1997 and
1996 was $2.1 million. Subsequently recognized tax benefits of $2.1 million
relating to the December 31, 1997 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.
As more fully discussed in Note 6, Torchmark plans to spin off its asset
management segment subject to market conditions, to receipt of a ruling from
the IRS that the spin-off is a tax-free transaction, and to regulatory
approval. The spin-off, if and when completed, will constitute the
distribution of a portion of the policyholders' surplus account resulting in a
tax expense of approximately $50 million.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 11--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
------------ ------------ ------- -------
1997.................... $ 2,402 $ 4,788 $ 526
1996.................... 2,595 4,804 467
1995.................... 3,208 6,820 524
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 $8.8 million
and $6.2 million at December 31, 1997 and 1996, respectively. The plans
covering the majority of employees are organized as trust funds whose assets
consist primarily of investments in marketable long-term fixed maturities and
equity securities which are valued at market.
The excess benefit pension plan provides the benefits that an employee would
have otherwise received from a defined benefit pension plan in the absence of
the Internal Revenue Code's limitation on benefits payable under a qualified
plan. Although this plan is unfunded, pension cost is determined in a similar
manner as for the funded plans. Liability for the excess benefit plan was $5.4
million and $4.8 million as of December 31, 1997 and 1996, respectively.
Net periodic pension cost for the defined benefit plans by expense component
was as follows:
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------- -------- --------
Service cost--benefits earned during the
period................................... $ 6,243 $ 6,581 $ 7,190
Interest cost on projected benefit obliga-
tion..................................... 9,537 9,097 8,867
Actual return on assets................... (21,117) (17,798) (17,927)
Net amortization and deferral............. 10,651 7,391 9,214
------- -------- --------
Net periodic pension cost................. $ 5,314 $ 5,271 $ 7,344
======= ======== ========
A reconciliation of the funded status of the defined benefit plans with
Torchmark's pension liability was as follows:
AT DECEMBER 31,
------------------
1997 1996
-------- --------
Fair market value of assets available for benefits. $134,631 $123,288
Projected benefit obligation:
Vested............................................ 97,512 90,189
Nonvested......................................... 3,133 3,453
-------- --------
Accumulated benefit obligation................... 100,645 93,642
Effect of projected future salary increases....... 26,457 25,710
-------- --------
Total projected benefit obligation............... 127,102 119,352
-------- --------
Funded status...................................... 7,529 3,936
Unamortized prior service costs.................... 1,624 1,433
Unamortized transition asset....................... (487) (725)
Unrecognized (gain) or loss........................ (22,859) (15,669)
-------- --------
Accrued pension costs included in liabilities.... $(14,193) $(11,025)
======== ========
The weighted average assumed discount rates used in determining the
actuarial benefit obligations were 7.5% in 1997 and 1996. The rate of assumed
compensation increase was 4.5% in 1997 and 1996 and the expected long-term
rate of return on plan assets was 9.25% in 1997 and 1996.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 11--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 reach age
sixty-five. Eligibility for this benefit was generally achieved at age fifty-
five with at least fifteen years of service. This subsidy is minimal to
retired employees who did not retire before February 1, 1993. This plan is
unfunded.
Net periodic postretirement benefit cost included the following components:
YEAR ENDED
DECEMBER 31,
-----------------
1997 1996 1995
---- ---- -----
Service cost......................................... $296 $297 $ 284
Interest cost on accumulated postretirement benefit
obligation.......................................... 558 617 678
Actual return on plan assets......................... -0- -0- -0-
Net amortization and deferral........................ (396) (252) (559)
---- ---- -----
Net periodic postretirement benefit cost............. $458 $662 $ 403
==== ==== =====
The following table sets forth the plans' combined benefit obligation which
is a component of other liabilities:
AT DECEMBER 31,
----------------
1997 1996
------- --------
Accumulated postretirement benefit obligation:
Retirees............................................... $ 3,345 $ 3,622
Fully eligible active plan participants................ 1,465 1,613
Other active plan participants......................... 2,762 2,395
------- --------
Total accumulated postretirement benefit obligation... 7,572 7,630
Plan assets at fair value............................... -0- -0-
------- --------
Accumulated postretirement benefit obligation in excess
of plan assets......................................... 7,572 7,630
Unrecognized net gain from past experience different
from that assumed and from changes in assumptions...... 1,667 1,717
Prior service cost not yet recognized in net periodic
post retirement benefit cost........................... 754 993
------- --------
Accrued postretirement benefit cost included in
liabilities.......................................... $ 9,993 $ 10,340
======= ========
For measurement purposes, a 7.0% to 9.0% annual rate of increase in per
capita cost of covered healthcare benefits was assumed for 1997. These rates
grade to ranges of 4.5% to 6.5% by the year 2006. 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, 1997 by $1.3 million and would increase the net periodic
postretirement cost for the year ended December 31, 1997 by approximately $176
thousand.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.39% in 1997 and 7.5% in 1996.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 12--DEBT
An analysis of debt is as follows:
DECEMBER 31,
-----------------------------------------
1997 1996
-------------------- --------------------
SHORT-TERM LONG-TERM SHORT-TERM LONG-TERM
DEBT DEBT DEBT DEBT
---------- --------- ---------- ---------
Sinking Fund Debentures........... $ 8,000 $170,354 $198,134
Senior Notes, due 1998............ 199,898 199,607
Senior Debentures, due 2009....... 99,450 99,450
Notes, due 2023................... 195,969 195,921
Notes, due 2013................... 98,525 98,477
Commercial paper.................. 138,963 $40,778
Other notes and mortgages payable
at various interest rates;
collateralized by buildings ..... 291 132 291
-------- -------- ------- --------
$347,152 $564,298 $40,910 $791,880
======== ======== ======= ========
The amount of debt that becomes due during each of the next five years is:
1998, $347,152; 1999, $0; 2000, $0; and 2001, $0, and 2002, $0. Also in 1998,
Torchmark intends to call $160 million principal amount of its Sinking Fund
Debentures.
The Sinking Fund Debentures, due March 1, 2017, are carried at remaining
principal amount of $180 million less unamortized issue expenses and bear
interest at 8 5/8%, payable on March 1 and September 1. A sinking fund
provides for mandatory principal repayment at par of not less than $8 million
per year each year during the twelve months preceding 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 104.59% to 100.0% of par,
subject to certain restrictions. The Sinking Fund Debentures have equal
priority with other Torchmark unsecured indebtedness. During the third quarter
of 1997, Torchmark repaid the mandatory $8 million principal amount and the
optional $12 million principal amount. Torchmark intends to repay another $20
million, $8 million of which is mandatory, in the first quarter of 1998, and
has notified its transfer agent of its intent to call the remaining $160
million principal balance of this debt on April 1, 1998 at the prevailing call
price of 103.76% of par or $166 million.
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, remaining principal amount of $99 million, are due
August 15, 2009. They bear interest at a rate of 8 1/4%, with interest payable
on February 15 and August 15 of each year. The Senior Debentures, which are
not redeemable at the option of Torchmark prior to maturity, provided the
holder with an option to require Torchmark to repurchase the debentures on
August 15, 1996 at principal amount plus accrued interest. Pursuant to this
option, $550 thousand debentures were repurchased in 1996. The Senior
Debentures have equal priority with other Torchmark unsecured indebtedness.
The Notes, due May 15, 2023, were issued in May, 1993 in the principal
amount of $200 million. Proceeds of the issue, net of issue costs, were $196
million. Interest is payable on May 15 and November 15 of each year at a rate
of 7 7/8%. These notes are not redeemable prior to maturity and have equal
priority with other Torchmark unsecured indebtedness.
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 a revolving credit agreement with a group of
lenders under which it may borrow on an unsecured basis up to $600 million.
The commitment matures October 22, 2002.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 12--NOTES PAYABLE (CONTINUED)
Borrowings are at interest rates selected by Torchmark based on either the
corporate base rate or the Eurodollar rate at the time of borrowings. At
December 31, 1997 and December 31, 1996 there were no borrowings under the
revolving credit agreement. The revolving credit agreement is designed to back
up a commercial paper program which began in 1995. The short-term borrowings
under the revolving credit agreements and in the commercial paper market
averaged $89 million during 1997, and were made at an average yield of 5.61%.
At December 31, 1997, commercial paper was outstanding in the face amount of
$139 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, 1997, and pays a facility fee based on size of the
line.
Interest in the amount of $1.7 million, $1.4 million, and $1.6 million was
capitalized during 1997, 1996, and 1995, respectively.
NOTE 13--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 7.36% at December 31, 1997 and 6.95% at December
31, 1996. Torchmark pays a yearly fee of $860 thousand for the cap agreement.
The market value of the swap agreement was a benefit of $18.7 million December
31, 1997 and $14.7 million at December 31, 1996. The market value of the cap
agreement, net of the present value of future annual payments, was an
obligation of $.8 million at December 31, 1997 and $1.3 million at December
31, 1996. Except as otherwise described in "Note 3--Investments" on page 43 of
this report, Torchmark is a party to no other derivative instruments as
defined by SFAS 119.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 14--SHAREHOLDERS' EQUITY
Share Data: A summary of preferred and common share activity which has been
restated to give effect for the two-for-one stock split in the form of a
dividend is as follows:
PREFERRED STOCK COMMON STOCK
--------------- ----------------------
TREASURY TREASURY
ISSUED STOCK ISSUED STOCK
------ -------- ----------- ----------
1995:
Balance at January 1, 1995............ -0- -0- 147,568,456 (4,500,386)
Issuance of common stock due to
exercise of stock options............ 266,204
--- --- ----------- ----------
Balance at December 31, 1995.......... -0- -0- 147,568,456 (4,234,182)
1996:
Issuance of common stock due to
exercise of stock options............ 676,376
Other treasury stock acquired......... (4,618,700)
--- --- ----------- ----------
Balance at December 31, 1996.......... -0- -0- 147,568,456 (8,176,506)
1997:
Issuance of common stock due to
exercise of stock options............ 280,452 5,539,596
Other treasury stock acquired......... (5,171,558)
--- --- ----------- ----------
-0- -0- 147,848,908 (7,808,468)
=== === =========== ==========
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
--------------------- ---------------------
PREFERRED COMMON PREFERRED COMMON
STOCK STOCK STOCK STOCK
--------- ----------- --------- -----------
Par value per share................ $1.00 $1.00 $1.00 $1.00
Authorized shares.................. 5,000,000 320,000,000 5,000,000 320,000,000
Acquisition of Common Shares: Torchmark shares are acquired from time to
time through open market purchases under the Torchmark stock repurchase
program when it is believed to be the best use of Torchmark's funds and for
future employee stock option exercises. Share repurchases under this program
were 5.2 million shares at a cost of $183 million in 1997, and 4.6 million
shares at a cost of $107 million in 1996.
Grant of Restricted Stock: A grant of 120,000 Torchmark shares was made on
May 1, 1991 to a Torchmark senior officer. The shares are restricted as to
resale, vesting 12,000 shares per year for 10 years on the anniversary date of
the grant. The market value of Torchmark stock was $17.46 per share on the
grant date. On January 1, 1998, 117,500 shares were granted to four executive
officers of Torchmark or its subsidiaries. These shares vest over eight years
in accordance with the following schedule: 16% on the first anniversary, with
the vesting percentage declining one percent each year thereafter until the
eighth anniversary. The market value of Torchmark stock was $42.1875 per share
on the grant date.
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 1998, $333 million
will be available to Torchmark for dividends from insurance subsidiaries in
compliance with statutory regulations without prior regulatory approval.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 14--SHAREHOLDERS' EQUITY (CONTINUED)
Earnings Per Share: A reconciliation of basic and diluted weighted-average
shares outstanding, in accordance with SFAS 128, is as follows:
1997 1996 1995
----------- ----------- -----------
Basic weighted average shares outstanding.. 139,202,354 142,459,783 143,187,547
Weighted average dilutive options
outstanding............................... 2,228,802 1,323,435 1,040,701
----------- ----------- -----------
Diluted weighted average shares
outstanding............................... 141,431,156 143,783,218 144,228,248
=========== =========== ===========
Weighted average options outstanding considered to be anti-dilutive under
SFAS 128 totaled 742,472, 598,342 and 1,637,402 as of December 31,1997, 1996
and 1995, respectively, and are excluded from the calculation of diluted
earnings per share. Income available to common shareholders for basic earnings
per share is equivalent to income available to common shareholders for diluted
earnings per share.
NOTE 15--EMPLOYEE STOCK OPTIONS
Certain employees and directors have been granted options to buy shares of
Torchmark stock generally at the market value of the stock on the date of
grant under the provisions of the Torchmark Corporation 1987 Stock Incentive
Plan ("1987 Option Plan"). The options are exercisable during the period
commencing from the date they vest until expiring ten years or ten years and
two days after grant. Employee stock options granted under the 1987 Option
Plan generally vest one-half in two years and one-half in three years.
Director grants generally vest in six months. A grant in September, 1997
vested immediately. Deferred executive and director grants vest over ten
years. Torchmark generally issues shares for the exercise of stock options out
of treasury stock.
An analysis of shares available for grant in terms of shares adjusted for
the stock dividend is as follows:
AVAILABLE FOR GRANT
----------------------------------
1997 1996 1995
---------- ---------- ----------
Balance at January 1..................... 1,345,080 2,499,778 3,996,268
Amendment of 1987 Plan................... 4.800,000
Granted.................................. (3,743,972) (1,448,200) (1,522,200)
Expired.................................. 32,896 293,502 25,710
---------- ---------- ----------
Balance on December 31................... 2,434,004 1,345,080 2,499,778
========== ========== ==========
Torchmark accounts for its employee stock options in accordance with SFAS
123 "Accounting for Stock-Based Compensation", which defines a "fair value
method" of measuring and accounting for employee stock options. It also allows
accounting for such options under the "intrinsic value method" in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25") and related interpretations. If a company elects to
use the intrinsic value method, then pro forma disclosures of earnings and
earnings per share are required as if the fair value method of accounting was
applied. The effects of applying SFAS 123 in the pro forma disclosures are not
necessarily indicative of future amounts.
Torchmark has elected to account for its stock options under the intrinsic
value method as outlined in APB 25. The fair value method requires the use of
an option valuation model, such as the Black-Scholes option valuation model,
to value employee stock options, upon which a compensation expense is based.
The Black-Scholes option valuation model was not developed for use in valuing
employee stock options. Instead, this model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because Torchmark's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, it is management's opinion that the existing models do not provide a
reliable measure of the fair value of its employee stock options. Under the
intrinsic value method, compensation expense is only recognized if the
exercise price of the employee stock option is less than the market price of
the underlying stock on the date of grant.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 15--EMPLOYEE STOCK OPTIONS (CONTINUED)
The fair value for Torchmark's employee stock options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted average assumptions for 1997, 1996 and 1995:
1997 1996 1995
-------- -------- --------
Risk-free interest rate........................... 6.1% 6.4% 5.4%
Dividend yield.................................... 1.7% 3.7% 3.7%
Volatility factor................................. 23.7 22.8 22.8
Weighted average expected life (in years)......... 3.93 4.17 4.17
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Torchmark's
pro forma information follows (in thousands except for earnings per share
information):
1997 1996 1995
-------- -------- --------
Pro forma net income............................. $318,671 $309,657 $143,148
Pro forma basic net income per share............. 2.29 2.17 1.00
Pro forma diluted net income per share........... 2.25 2.15 .99
On September 25, 1997, Torchmark executed a stock option exercise and
"reload" program through which over 100 Torchmark directors and employees
exercised vested stock options and received replacement options at current
market price. This program resulted in the issuance of 4.8 million shares, of
which over 3 million shares were immediately sold by the directors and
employees through the open market to cover the cost of the purchased shares
and related taxes. As a result of the "reload" program, management's ownership
interest increased, and Torchmark received a significant current tax benefit
from the exercise of the options.
A summary of Torchmark's stock option activity adjusted for the stock
dividend, and related information for the years ended December 31, 1997, 1996,
and 1995 follows:
1997 1996 1995
---------------------------- --------------------------- ---------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- ---------------- --------- ---------------- --------- ----------------
Outstanding-beginning of
year................... 9,350,022 $18.52 8,871,700 $17.31 7,641,414 $16.25
Granted................. 3,743,972 36.70 1,448,200 24.55 1,522,200 21.57
Exercised............... (5,820,048) 16.17 (676,376) 15.00 (266,204) 11.09
Expired................. (32,896) 29.69 (293,502) 19.63 (25,710) 20.12
---------- --------- ---------
Outstanding-end of year. 7,241,050 29.76 9,350,022 18.52 8,871,700 17.31
========== ========= =========
Exercisable at end of
year................... 4,189,238 32.82 6,188,622 16.47 6,487,294 16.33
The weighted average fair value of options granted during the years ended
December 31, 1997, 1996 and 1995 were $8.43, $5.08, and $3.95, respectively.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 15--EMPLOYEE STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock options outstanding at
December 31, 1997:
CONTRACT
EXERCISE NUMBER NUMBER TERMINATION
PRICE GRANT DATE OUTSTANDING EXERCISABLE DATE
-------- ------------------ ----------- ----------- ------------------
5.6500 October 1, 1993 6,416 6,416 October 3, 2003
6.5550 October 1, 1993 5,016 5,016 October 3, 2003
11.3000 October 1, 1993 7,080 7,080 October 3, 2003
14.2400 October 1, 1993 6,196 6,196 October 3, 2003
15.5625 January 15, 1991 12,582 12,582 January 17, 2001
16.2500 January 2, 1991 18,000 18,000 January 4, 2001
16.5625 January 25, 1990 18,000 18,000 January 27, 2000
17.0000 December 16, 1994 265,050 265,050 December 18, 2004
17.0000 December 7, 1992 9,146 9,146 December 9, 2002
17.0000 December 14, 1993 32,718 32,718 December 16, 2003
17.0000 October 1, 1993 15,074 15,074 October 3, 2003
17.1750 October 1, 1993 6,624 6,624 October 3, 2003
17.1875 December 12, 1991 29,376 29,376 December 14, 2001
17.4375 January 3, 1995 6,000 6,000 January 5, 2005
18.3050 October 1, 1993 5,190 5,190 October 3, 2003
18.6100* December 18, 1996 60,000 6,000 December 20, 2006
19.1875 January 2, 1992 36,000 36,000 January 4, 2002
21.6875 December 20, 1995 1,450,180 721,640 December 22, 2005
21.7500 December 14, 1993 54,092 54,092 December 16, 2003
22.5000 January 3, 1994 12,000 12,000 January 5, 2004
22.5000 January 2, 1996 6,000 6,000 January 4, 2006
23.2800 October 1, 1993 3,920 3,920 October 3, 2003
24.8750 December 16, 1996 1,339,800 0 December 18, 2006
25.1250 January 2, 1997 24,168 6,000 January 4, 2007
25.8750 January 31, 1997 615,504 0 February 2, 2007
26.0000 December 7, 1992 104,618 104,618 December 9, 2002
28.8750 January 4, 1993 24,000 24,000 January 6, 2003
38.8750 December 24, 1997 295,800 0 December 26, 2007
39.1250 September 25, 1997 2,772,500 2,772,500 September 27, 2007
--------- ---------
7,241,050 4,189,238
========= =========
- --------
* Issued when the market price was $24.8125.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
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 1.0% of total life insurance in force at December
31, 1997. Insurance ceded on life and accident and health products represents
.8% of premium income for 1997. Torchmark would be liable for the reinsured
risks ceded to other companies to the extent that such reinsuring companies
are unable to meet their obligations.
Insurance affiliates also assume insurance risks of other companies. Life
reinsurance assumed represents 2.8% of life insurance in force at December 31,
1997 and reinsurance assumed on life and accident and health products
represents 1.8% of premium income for 1997.
Leases: Torchmark leases office space and office equipment under a variety
of operating lease arrangements. These leases contain various renewal options,
purchase options, and escalation clauses. Rental expense for operating leases
was $7.6 million, $7.0 million, and $6.3 million for 1997, 1996, and 1995,
respectively. Future minimum rental commitments required under operating
leases having remaining noncancelable lease terms in excess of one year at
December 31, 1997 are as follows: 1998, $4.4 million; 1999, $3.0 million;
2000, $1.7 million; 2001, $586 thousand; 2002, $205 thousand; and in the
aggregate, $9.9 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
$14.9 million at December 31, 1997 and $15.0 million at December 31, 1996.
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, 1997, the investment portfolio
consisted of securities of the U.S. government or U.S. government-backed
securities (18%); non government-guaranteed mortgage-backed securities (7%);
short-term investments, which generally mature within one month (2%);
securities of state and municipal governments (10%); securities of foreign
governments (1%); and investment-grade corporate bonds (50%). The remainder of
the portfolio was in real estate (3%), which is not considered a financial
instrument according to GAAP; policy loans (3%), which are secured by the
underlying insurance policy values; and equity securities, mortgages,
noninvestment grade securities, and other long-term investments (6%).
Investments in municipal governments and corporations are made throughout the
U.S. with no concentration in any given state. Most of the investments in
foreign government securities are in Canadian government obligations.
Corporate equity and debt investments are made in a wide range of industries.
At December 31, 1997, 1% or more of the portfolio was invested in the
following industries: Financial services (18%); regulated utilities (6%);
chemicals and allied products (5%); consumer goods (5%); transportation (5%);
machinery and equipment (4%); manufacturing (3%); petroleum (2%);
media/communications (2%); services (2%); retailing (2%); and asset-backed
securities (1%). Otherwise, no individual industry represented 1% or more of
Torchmark's investments. At year-end 1997, 4% of the carrying value of fixed
maturities was rated below investment grade (BB or lower as rated by Standard
& Poor's or the equivalent NAIC designation). Par value of these investments
was $253.4 million, amortized cost was $255.3 million, and market value was
$258.4 million. While these investments could be subject to additional credit
risk, such risk should generally be reflected in market value.
Collateral Requirements: Torchmark requires collateral for investments in
instruments where collateral is available and is typically required because of
the nature of the investment. Since the majority of Torchmark's investments is
in government, government-secured, or corporate securities, the requirement
for collateral is rare. Torchmark's mortgages are secured by collateral.
Litigation: Torchmark and its subsidiaries continue to be named as parties
to pending or threatened legal proceedings. These lawsuits involve tax
matters, alleged breaches of contract, torts, including bad faith and fraud
claims based on alleged wrongful or fraudulent acts of agents of Torchmark's
subsidiaries, employment discrimination, and miscellaneous other causes of
action. Many of these lawsuits involve claims for punitive damages in state
courts of Alabama, a jurisdiction particularly recognized for its large
punitive damage verdicts. A number of such actions involving Liberty also name
Torchmark as a defendant. As a practical matter, a jury's discretion regarding
the amount of a punitive damage award is not limited by any clear, objective
criteria under Alabama law. Accordingly, the likelihood or extent of a
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 16--COMMITMENTS AND CONTINGENCIES (CONTINUED)
punitive damage award in any given case is virtually impossible to predict. As
of December 31, 1997, Liberty was a party to approximately 198 active lawsuits
(including 28 employment related cases and excluding interpleaders and stayed
cases), more than 170 of which were Alabama proceedings in which punitive
damages were sought. Liberty faces trial settings in these cases on an on-
going basis.
As previously reported, Torchmark, its insurance subsidiaries Globe and
United American, and certain Torchmark officers were named as defendants in
purported class action litigation filed in the District Court of Oklahoma
County, Oklahoma (Moore v. Torchmark Corporation, Case No. CJ-94-2784-65,
subsequently amended and restyled Tabor v. Torchmark Corporation). This 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. This case remains in the
discovery proceeding status. On February 6, 1998, the defendants renewed their
motion to dismiss the class claims for failure to prosecute.
As previously reported, a purported class action was filed in 1995 against
Liberty in the Circuit Court of Jefferson County, Alabama on behalf of Liberty
cancer policyholders eligible for Medicare who submitted claims during an
approximate two month period in 1993 alleging improper payment practices
(Adkins v. Liberty National Life Insurance Company, Case No. CV-95-5634).
Liberty had discontinued the payment practices which were the subject of this
litigation after two months in 1993 and recalculated and repaid all claims in
full as it had prior to the two month period together with interest. In July,
1996, the Court entered a class certification order. Liberty subsequently
filed a petition for writ of mandamus or prohibition with the Alabama Supreme
Court asserting abuse of discretion by the trial court in certifying the
Adkins class. The Alabama Supreme Court issued the writ of mandamus on August
19, 1996. In January, 1998, Liberty filed a motion for summary judgment and a
motion to decertify the class in Adkins. On February 4, 1998, the Jefferson
County Circuit Court granted Liberty's motion for summary judgment.
It has been previously reported that Liberty was a party to 53 individual
cases filed in Chambers County, Alabama involving allegations that an
interest-sensitive life insurance policy would become paid-up or self-
sustaining after a specified number of years. Only four of these cases remain
pending with all others having been settled and dismissed by the Chambers
County Circuit Court.
Prior filings have reported that the Mobile County, Alabama Circuit Court
had ordered a reduction to $37,500 of the $5.0 million judgment against
Liberty in Strickland v. Liberty National Life Insurance Company, Case No. CV-
95-1399. This order was appealed by the plaintiffs to the Alabama Supreme
Court, which affirmed the lower court's decision on February 13, 1998.
It has been previously reported that Torchmark, its subsidiaries United
American and Globe and certain individual corporate officers are parties to
purported class action litigation filed in April, 1996 in the U.S. District
Court for the Northern District of Georgia (Crichlow v. Torchmark Corporation,
Case No. 4:96-CV-0086-HLM) involving certain hospital and surgical insurance
policies issued by Globe and United American. In September, 1997, the U.S.
District Court entered an order granting summary judgment against the
plaintiffs on certain issues and denying national class certification,
although indicating that plaintiffs could move for certification of a state
class of Georgia policyholders. In December 1997, plaintiffs moved for the
certification of a state class of Georgia policyholders. Discovery is
proceeding on the remaining claims for breach of contract and the duty of good
faith arising from closure of the block of business and certain post claim
matters as well as fraud and conspiracy relating to pricing and delay in
implementing rate increases.
As previously reported, Liberty is a party to two lawsuits alleging that a
class of persons were insured under Liberty cancer policies when Liberty knew
that such persons were not entitled to retain any benefits under these
policies, one of which was filed in 1996 in the Circuit Court of Jefferson
County, Alabama (Harris v. Liberty National Life Insurance Company, Case No.
CV-96-01836) and the other in the Circuit Court of St. Clair County, Alabama
(Gentry v. Liberty National Life Insurance Company, Case No. CV-97-61). The
St. Clair County Circuit Court conditionally certified a class in Gentry while
the Jefferson County Circuit Court stayed the Harris case pending resolution
of the Gentry case and did not certify a class in Harris. Plaintiffs in Harris
then filed a petition for a writ of mandamus with the Alabama Supreme Court in
Gentry seeking to preserve the class claims in their action in the Jefferson
County Circuit Court. On January 30, 1998, the Alabama Supreme Court issued
the writ of mandamus to the St. Clair County
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 16--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Circuit Court in the Gentry case. On February 20, 1998, Liberty filed a motion
to dismiss the class claims in the Gentry case with the St. Clair County
Circuit Court.
Based upon information presently available, and in light of legal and other
factual defenses available to Torchmark and its subsidiaries, contingent
liabilities arising from threatened and pending litigation are not presently
considered by management to be material. It should be noted, however, that
large punitive damage awards bearing little or no relation to actual damages
awarded by juries in jurisdictions in which Torchmark has substantial
business, particularly in Alabama, continue to occur, creating the potential
for unpredictable material adverse judgments in any given punitive damage
suit.
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
----------- ---------- --------- ------------ ------------
1997:
Revenues--unaffiliated.. $ 2,123,835 $210,846 $ (44,435) $ (7,796) $ 2,282,450
Intersegment revenues... 12,387 33,050 (2,290) (43,147) $ -0-
----------- -------- --------- ----------- -----------
Total revenues.......... $ 2,136,222 $243,896 $ (46,725) $ (50,943) $ 2,282,450
=========== ======== ========= =========== ===========
Pretax income........... $ 553,027 $122,474 $(146,764) $ (19,343) $ 509,394
Depreciation............ 5,045 1,308 2,976 -0- 9,329
Capital expenditures.... 7,119 3,401 23,520 -0- 34,040
Identifiable assets at
year end............... 11,071,408 273,451 879,026 (1,256,594) 10,967,291
1996:
Revenues--unaffiliated.. $ 2,019,211 $188,718 $ 6,543 $ (8,662) $ 2,205,810
Intersegment revenues... 7,561 33,139 (2,310) (38,390) -0-
----------- -------- --------- ----------- -----------
Total revenues.......... $ 2,026,772 $221,857 $ 4,233 $ (47,052) $ 2,205,810
=========== ======== ========= =========== ===========
Pretax income........... $ 496,260 $112,695 $ (98,089) $ (15,734) $ 495,132
Depreciation............ 5,468 1,760 1,828 -0- 9,056
Capital expenditures.... 15,236 1,987 7,746 -0- 24,969
Identifiable assets at
year end............... 9,649,488 270,267 483,586 (602,541) 9,800,800
1995:
Revenues--unaffiliated.. $ 1,938,105 $156,052 $ (15,402) $ (11,273) $ 2,067,482
Intersegment revenues... 7,497 27,503 (2,174) (32,826) -0-
----------- -------- --------- ----------- -----------
Total revenues.......... $ 1,945,602 $183,555 $ (17,576) $ (44,099) $ 2,067,482
=========== ======== ========= =========== ===========
Pretax income........... $ 473,591 $ 93,662 $(121,984) $ (17,094) $ 428,175
Depreciation............ 6,135 1,915 1,553 -0- 9,603
Capital expenditures.... 7,094 1,699 13,721 -0- 22,514
Identifiable assets at
year end............... 8,933,970 127,001 496,858 (193,725) 9,364,104
63
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 $30.7 million and $30.3 million at December 31, 1997 and
1996, respectively. Investment income derived from these investments is
included in net investment income.
Rental Income: Torchmark leases office space to Vesta Insurance Group, Inc.
("Vesta"), a 27% owned subsidiary. Total rental income received from Vesta was
$585 thousand, $508 thousand, and $494 thousand, for the years ended December
31, 1997, 1996 and 1995, 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:
YEAR ENDED
DECEMBER 31,
--------------------
1997 1996 1995
------- ------- ----
Paid-in capital from tax benefit for stock option
exercises........................................... $44,011 $ 1,947 $709
Discounted/deferred option grants.................... 2,019 -0- -0-
Non-cash assets received from sale of energy
operations.......................................... -0- 79,289 -0-
Non-cash liabilities assumed from sale of energy
operations.......................................... -0- 48,942 -0-
The following table summarizes certain amounts paid during the period:
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
------- -------- -------
Interest paid...................................... $73,537 $ 74,433 $82,642
Income taxes paid.................................. $96,210 $108,496 $99,298
64
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, 1997. 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,
--------- -------- ------------- ------------
1997:
- -----
Premium and policy charges...... $415,690 $419,887 $420,227 $422,200
Financial services revenue...... 48,363 49,915 53,482 55,025
Net investment income........... 103,634 106,895 110,615 112,473
Realized investment gains
(losses)....................... (10,831) (22,948) (390) (2,810)
Total revenues.................. 557,070 554,197 584,064 587,119
Policy benefits................. 273,081 279,797 279,311 276,711
Amortization of acquisition
expenses....................... 56,523 55,128 56,736 56,351
Pretax income from continuing
operations..................... 119,691 114,285 142,025 133,393
Income (loss) from discontinued
operations..................... -0- -0- -0- -0-
Net income (loss)............... 77,328 74,590 92,974 92,851
Basic net income per common
share from continuing
operations..................... .55 .54 .67 .66
Basic net income per common
share.......................... .55 .54 .67 .66
Basic net income per common
share excluding realized gains,
related DPAC adjustment, and
discontinued operations........ .60 .65 .67 .68
Diluted net income per common
share from continuing
operations..................... .55 .53 .66 .66
Diluted net income per common
share.......................... .55 .53 .66 .66
Diluted net income per common
share excluding realized gains,
related DPAC adjustment, and
discontinued operations........ .60 .63 .66 .67
1996:
- -----
Premium and policy charges...... $402,188 $403,534 $402,585 $401,612
Financial services revenue...... 44,337 47,157 45,529 47,272
Net investment income........... 99,417 100,700 101,576 102,915
Realized investment gains....... 4,713 379 498 239
Total revenues.................. 550,823 551,983 550,597 552,407
Policy benefits................. 264,302 265,971 263,612 264,199
Amortization of acquisition
expenses....................... 55,457 54,277 54,788 54,304
Pretax income from continuing
operations..................... 119,296 123,200 125,094 127,542
Loss from discontinued
operations..................... -0- -0- (7,137) -0-
Net income...................... 76,274 79,039 73,693 82,366
Basic net income per common
share from continuing
operations..................... .53 .55 .57 .59
Basic net income per common
share from discontinued
operations:
Loss on disposal.............. -0- -0- (.05) -0-
Basic net income per common
share.......................... .53 .55 .52 .59
Basic net income per common
share excluding realized gains,
related DPAC adjustment, and
discontinued operations........ .51 .55 .56 .59
Diluted net income per common
share from continuing
operations..................... .53 .55 .56 .58
Diluted net income per common
share from discontinued
operations:
Loss on disposal.............. -0- -0- (.05) -0-
Diluted net income per common
share.......................... .53 .55 .51 .58
Diluted net income per common
share excluding realized gains,
related DPAC adjustment, and
discontinued operations........ .51 .54 .56 .58
65
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 Section 16(a) "Beneficial Ownership
Reporting Compliance" of the Securities Exchange Act in the Proxy Statement
for the Annual Meeting of Stockholders to be held April 22, 1998 (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.
66
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.................................... 34
Consolidated Balance Sheet at December 31, 1997 and 1996........ 35
Consolidated Statement of Operations for each of the years in
the three-year period ended December 31, 1997.................. 36
Consolidated Statement of Shareholders' Equity for each of the
years in the three-year period ended December 31, 1997......... 37
Consolidated Statement of Cash Flow for each of the years in the
three-year period ended December 31, 1997...................... 38
Notes to Consolidated Financial Statements...................... 39
Schedules Supporting Financial Statements for each of the years
in the three-year period ended December 31, 1997:
II.Condensed Financial Information of Registrant (Parent Compa-
ny)............................................................. 72
III.Supplementary Insurance Information (Consolidated).......... 75
IV.Reinsurance (Consolidated)................................... 76
Schedules not referred to have been omitted as inapplicable or not required by
Regulation S-X.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the registrant during the fourth
quarter of 1997.
(c) Exhibits
67
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 and
Providing Retirement Benefits for Directors
(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) 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)
(h) 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)
(i) 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)
(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 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)
(k) 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)
68
Page of
this
Report
-------
(l) 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)
(m) 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)
(n) 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)
(o) 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)
(p) The Torchmark Corporation Savings and Investment Plan (in-
corporated by reference from Exhibit 10(s) to Form 10-K for
the fiscal year ended December 31, 1992)
(q) 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)
(r) Credit Agreements dated as of October 24, 1996 among
Torchmark Corporation, the Lenders and The First National
Bank of Chicago, as Agent (364 Day and Five Year)
(s) Coinsurance and Servicing Agreement between Security Benefit
Life Insurance Company and Liberty National Life Insurance
Company, effective as of December 31, 1995 (incorporated by
reference from Exhibit 10(u) to Form 10-K for the fiscal
year ended December 31, 1995)
(t) 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)
(u) Torchmark Corporation 1996 Non-Employee Director Stock Op-
tion Plan (incorporated by reference from Exhibit 10(w) to
Form 10-K for the fiscal year ended December 31, 1996)
(v) Torchmark Corporation 1996 Executive Deferred Compensation
Stock Option Plan (incorporated by reference from Exhibit
10(x) to Form 10-K for the fiscal year ended December 31,
1996)
(11) Statement re computation of per share earnings 71
(20) Proxy Statement for Annual Meeting of Stockholders to be
held April 23, 1998
(21) Subsidiaries of the registrant 71
(23)(a) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report dated February 2, 1998, except
for Note 16, which is as of February 20, 1998 and Note 6,
which is as of March 5, 1998 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 February 2, 1998, except
for Note 16, which is as of February 20, 1998 and Note 6,
which is as of March 5, 1998 into Form S-8 of The United In-
vestors Management Company Savings and Investment Plan (Reg-
istration No. 2-76912)
69
Page of
this
Report
-------
(c) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report dated February 2, 1998, except for
Note 16, which is as of February 20, 1998 and Note 6, which
is as of March 5, 1998 into Form S-8 and the accompanying
Form S-3 Prospectus of the Torchmark Corporation 1996 Non-Em-
ployee Stock Option Plan (Registration No. 2-93760)
(d) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report dated February 2, 1998, except for
Note 16, which is as of February 20, 1998 and Note 6, which
is as of March 5, 1998 into Form S-8 and the accompanying
Form S-3 Prospectus of the Torchmark Corporation 1987 Stock
Incentive Plan (Registration No. 33-23580)
(e) Consent of KPMG Peat Marwick LLP to incorporation by
reference of their audit report dated February 2, 1998,
except for Note 16, which is as of February 20, 1998 and
Note 6, which is as of March 5, 1998 into Form S-8 and the
accompanying Form S-3 Prospectus of The Capital Accumulation
and Bonus Plan of Torchmark Corporation (Registration No. 33-
1032)
(f) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report dated February 2, 1998, except for
Note 16, which is as of February 20, 1998 and Note 6, which
is as of March 5, 1998 into Form S-8 of the Liberty National
Life Insurance Company 401(k) Plan (Registration No. 33-
65507)
(24) Powers of attorney
(27) Financial Data Schedule
70
Exhibit 11. Statement re computation of per share earnings
TORCHMARK CORPORATION COMPUTATION OF EARNINGS PER SHARE
1997 1996 1995
------------ ------------ -------------
Net income from continuing opera-
tions............................... $337,742,863 $318,508,976 $ 271,945,720
Discontinued operations of energy
segment:
Loss from operations................ -0- -0- (128,710,390)
Loss on disposal.................... -0- (7,137,124) -0-
------------ ------------ -------------
Net income........................... $337,742,863 $311,371,852 $ 143,235,330
Basic weighted average shares out-
standing............................ 139,202,354 142,459,783 143,187,547
============ ============ =============
Diluted weighted average shares out-
standing............................ 141,431,156 143,783,218 144,228,248
============ ============ =============
Basic earnings per share:
From continuing operations.......... $ 2.43 $ 2.24 $ 1.90
From discontinued operations of en-
ergy segment:
Loss from operations............... -0- -0- (.90)
Loss on disposal................... -0- (.05) -0-
------------ ------------ -------------
Net income......................... $ 2.43 $ 2.19 $ 1.00
============ ============ =============
Diluted earnings per share:
From continuing operations.......... $ 2.39 $ 2.22 $ 1.89
From discontinued operations of en-
ergy segment:
Loss from operations............... -0- -0- (.90)
Loss on disposal................... -0- (.05) -0-
------------ ------------ -------------
Net income......................... $ 2.39 $ 2.17 $ .99
============ ============ =============
Exhibit 21. Subsidiaries of the Registrant
The following table lists subsidiaries of the registrant which meet the
definition of "significant subsidiary" according to Regulation S-X:
STATE OF NAME UNDER WHICH
COMPANY INCORPORATION COMPANY DOES BUSINESS
----------------------- ------------- ---------------------
American Income Life American Income Life
Insurance Company Indiana Insurance Company
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 Waddell & Reed
Investors Management Investors Management
Company, Inc. Delaware Company, Inc.
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 68 through 70 of
this report. Exhibits not referred to have been omitted as inapplicable or not
required.
71
TORCHMARK CORPORATION (PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
(AMOUNTS IN THOUSANDS)
DECEMBER 31,
----------------------
1997 1996
---------- ----------
Assets:
Investments:
Long-term investments............................ $ 23,917 $ 11,182
Short-term investments........................... 336 5,940
---------- ----------
Total investments................................. 24,253 17,122
Cash.............................................. 7,272 156
Investment in affiliates.......................... 3,277,785 2,949,625
Due from affiliates............................... 204,775 104,146
Accrued investment income......................... 132 84
Other assets...................................... 18,961 5,154
---------- ----------
Total assets..................................... $3,533,178 $3,076,287
========== ==========
Liabilities and shareholders' equity:
Liabilities:
Short-term debt.................................. $ 346,861 $ 40,778
Long-term debt................................... 564,298 791,589
Taxes payable.................................... 11,905 -0-
Due to affiliates................................ 373,792 330,527
Other liabilities................................ 110,387 90,905
---------- ----------
Total liabilities................................ 1,407,243 1,253,799
Monthly income preferred securities............... 193,199 193,145
Shareholders' equity:
Preferred stock.................................. -0- -0-
Common stock..................................... 143,220 73,784
Additional paid-in capital....................... 187,731 141,701
Unrealized investment gains ..................... 136,926 46,581
Retained earnings................................ 1,699,409 1,549,391
Treasury stock................................... (234,550) (182,114)
---------- ----------
Total shareholders' equity....................... 1,932,736 1,629,343
---------- ----------
Total liabilities and shareholders' equity....... $3,533,178 $3,076,287
========== ==========
See accompanying Independent Auditors' Report
72
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
CONDENSED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
Net investment income............................ $ 5,275 $ 931 $ 1,261
Realized investment losses....................... (19,706) (5,738) (23,516)
Other income..................................... -0- 1 11
-------- -------- --------
Total revenue.................................. (14,431) (4,806) (22,244)
General operating expenses....................... 13,880 13,958 7,823
Non-operating expenses--related to affiliates.... -0- -0- -0-
Reimbursements from affiliates................... (13,956) (13,332) (13,260)
Interest expense................................. 96,402 88,916 91,825
-------- -------- --------
Total expenses................................. 96,326 89,542 86,388
-------- -------- --------
Operating loss before income taxes and equity in
earnings of affiliates.......................... (110,757) (94,348) (108,632)
Income taxes .................................... 38,189 23,102 37,363
-------- -------- --------
Net operating loss before equity in earnings of
affiliates...................................... (72,568) (71,246) (71,269)
Equity in earnings of affiliates................. 420,186 420,900 326,822
Monthly income preferred securities dividend (net
of tax)......................................... (9,875) (9,655) (10,317)
-------- -------- --------
Net income from continuing operations.......... 337,743 339,999 245,236
Discontinued operations of energy segment:
Loss from operations (net of tax)............... -0- -0- (102,001)
Loss on disposal (net of tax)................... -0- (28,627) -0-
-------- -------- --------
Net income..................................... $337,743 $311,372 $143,235
======== ======== ========
See accompanying Independent Auditors' Report.
73
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(continued)
CONDENSED STATEMENT OF CASH FLOW
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
-------- -------- ---------
Cash provided from operations before dividends
from subsidiaries.............................. $(35,284) $(77,291) $ (86,764)
Cash dividends from subsidiaries............... 370,032 265,688 185,500
-------- -------- ---------
Cash provided from operations................... 334,748 188,397 98,736
Cash provided from (used for) investing activi-
ties:
Disposition of investments..................... -0- -0- 116
Acquisition of investments..................... (2,150) (1,667) (1,556)
Investment in subsidiaries..................... (174,799) -0- (83,211)
Loans to subsidiaries.......................... (117,392) (12,508) (49,043)
Repayments on loans to subsidiaries............ 28,242 -0- -0-
Net decrease (increase) in temporary invest-
ments......................................... 5,604 (4,946) (188)
Additions to properties........................ (454) (49) (146)
Other.......................................... (7,460) -0- -0-
-------- -------- ---------
Cash used for investing activities.............. (268,409) (19,170) (134,028)
Cash provided from (used for) financing activi-
ties:
Issuance of debt............................... 98,185 -0- -0-
Issuance of monthly income preferred securi-
ties.......................................... -0- -0- -0-
Repayments of debt............................. (20,000) (149,020) (60,752)
Issuance of stock to subsidiaries.............. -0- -0- 77,766
Issuance of stock.............................. 93,973 10,145 2,808
Redemption of preferred stock.................. (2,767) -0- -0-
Acquisitions of treasury stock................. (182,904) (106,996) -0-
Borrowed from subsidiaries..................... 133,880 153,959 101,857
Repayment on borrowings from subsidiaries...... (93,060) 8,500 (5,500)
Payment of dividends........................... (86,530) (85,659) (80,887)
-------- -------- ---------
Cash provided from (used for) financing activi-
ties........................................... (59,223) (169,071) 35,292
Net increase in cash............................ 7,116 156 -0-
Cash balance at beginning of period............. 156 -0- -0-
-------- -------- ---------
Cash balance at end of period................... $ 7,272 $ 156 $ -0-
======== ======== =========
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:
1997 1996 1995
-------- -------- --------
Consolidated subsidiaries..................... $370,032 $265,688 $185,500
======== ======== ========
See accompanying Independent Auditors' Report.
74
TORCHMARK CORPORATION
SCHEDULE III. SUPPLEMENTARY INSURANCE INFORMATION (CONSOLIDATED)
(AMOUNTS IN THOUSANDS)
AMORTIZATION
OF DEFERRED
PREMIUM NET POLICY OTHER
AND POLICY INVESTMENT OTHER BENEFITS ACQUISITION OPERATING
CHARGES INCOME INCOME AND CLAIMS COSTS EXPENSES
---------- ---------- -------- ---------- ------------ ---------
FOR THE YEAR ENDED DE-
CEMBER 31, 1997:
- ----------------------
Insurance.............. $1,678,004 $455,076 $ 3,142 $1,108,900 $226,596 $247,699
Asset management....... 4,062 239,834 121,422
Corporate.............. (9,746) (36,979) 100,039
Eliminations and ad-
justments............. (15,775) (35,168) (1,858) (29,742)
---------- -------- -------- ---------- -------- --------
Total................. $1,678,004 $433,617 $170,829 $1,108,900 $224,738 $439,418
========== ======== ======== ========== ======== ========
FOR THE YEAR ENDED DE-
CEMBER 31, 1996:
- ----------------------
Insurance.............. $1,609,919 $413,917 $ 2,936 $1,058,084 $219,917 $252,511
Asset management....... 4,423 217,434 109,162
Corporate.............. (1,809) 6,042 102,322
Eliminations and ad-
justments............. (11,923) (35,129) (1,091) (30,227)
---------- -------- -------- ---------- -------- --------
Total................. $1,609,919 $404,608 $191,283 $1,058,084 $218,826 $433,768
========== ======== ======== ========== ======== ========
FOR THE YEAR ENDED DE-
CEMBER 31, 1995:
- ----------------------
Insurance.............. $1,546,283 $396,209 $ 3,110 $1,009,336 $205,509 $257,166
Asset management....... 3,570 179,985 89,893
Corporate.............. (3,267) (14,309) 104,408
Eliminations and ad-
justments............. (14,647) (29,452) (1,442) (25,563)
---------- -------- -------- ---------- -------- --------
Total................. $1,546,283 $381,865 $139,334 $1,009,336 $204,067 $425,904
========== ======== ======== ========== ======== ========
See accompanying Independent Auditors' Report.
75
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, 1997:
- ----------------------
Life insurance in force. $89,372,206 $728,843 $2,497,790 $91,141,153 2.7%
=========== ======== ========== =========== ====
Premiums:*
Life insurance......... $ 813,918 $ 4,232 $ 28,363 $ 838,049 3.4%
Health insurance....... 748,375 8,889 -0- 739,486 0%
----------- -------- ---------- -----------
Total premiums........ $ 1,562,293 $ 13,121 $ 28,363 $ 1,577,535 1.8%
=========== ======== ========== =========== ====
FOR THE YEAR ENDED DE-
CEMBER 31, 1996:
- ----------------------
Life insurance in force. $84,360,821 $655,574 $2,587,330 $86,292,577 3.0%
=========== ======== ========== =========== ====
Premiums:*
Life insurance......... $ 759,321 $ 3,472 $ 26,511 $ 782,360 3.4%
Health insurance....... 742,319 9,835 135 732,619 0%
----------- -------- ---------- -----------
Total premiums........ $ 1,501,640 $ 13,307 $ 26,646 $ 1,514,979 1.8%
=========== ======== ========== =========== ====
FOR THE YEAR ENDED DE-
CEMBER 31, 1995:
- ----------------------
Life insurance in force. $80,377,021 $636,961 $ 14,355 $79,754,415 0%
=========== ======== ========== =========== ====
Premiums:*
Life insurance......... $ 702,993 $ 3,305 $ 4,283 $ 703,971 .6%
Health insurance....... 761,573 10,985 -0- 750,588 0%
----------- -------- ---------- -----------
Total premiums........ $ 1,464,566 $ 14,290 $ 4,283 $ 1,454,559 .3%
=========== ======== ========== =========== ====
- --------
* Excludes policy charges
See accompanying Independent Auditors' Report.
76
SIGNATURES
Pursuant to the requirements of Section 12 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Torchmark Corporation
/s/ C.B. Hudson
By: ________________________________
C.B. HUDSON, CHAIRMAN CHIEF EXECUTIVE
OFFICER AND DIRECTOR (PRINCIPAL
FINANCIAL OFFICER)
/s/ Gary L. Coleman
By: ________________________________
GARY L. COLEMAN, VICE PRESIDENT
AND CHIEF ACCOUNTING OFFICER
Date: March 13, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ David L. Boren* /s/ Harold T. McCormick*
By: ________________________________ By: ________________________________
DAVID L. BOREN DIRECTOR HAROLD T. MCCORMICK DIRECTOR
/s/ Joseph M. Farley* /s/ George J. Records*
By: ________________________________ By: ________________________________
JOSEPH M. FARLEY DIRECTOR GEORGE J. RECORDS DIRECTOR
/s/ Louis T. Hagopian* /s/ R.K. Richey*
By: ________________________________ By: ________________________________
LOUIS T. HAGOPIAN DIRECTOR R.K. RICHEY DIRECTOR
/s/ Joseph L. Lanier, Jr.*
By: ________________________________
JOSEPH L. LANIER, JR. DIRECTOR
Date: March 13, 1998
/s/ Gary L. Coleman
*By: _______________________________
GARY L. COLEMAN ATTORNEY-IN-FACT
77