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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, 1993 1-8052
TORCHMARK CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 63-0780404
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2001 Third Ave. South, Birmingham, AL 35233
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code:
(205) 325-4200
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS CUSIP NUMBER: WHICH REGISTERED:
Common Stock, $1.00 Par Value 891027104 New York Stock Exchange
The International Stock Exchange,
Adjustable Rate Cumulative London, England
Preferred Stock, Series A 891027203
$1.00 Par Valued New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Securities reported pursuant to Section 15(d) of the Act:
TITLE OF EACH CLASS: CUSIP NUMBER:
8 5/8% Sinking Fund Debentures due 2017 891027 AB 0
9 5/8% Senior Notes due 1998 891027 AD 6
8 1/4% Senior Debentures due 2009 891027 AE 4
7 7/8% Notes due 2023 891027 AF 1
7 3/8% Notes due 2013 891027 AG 9
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH) AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [_]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K ((S)229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN, AND
WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE
PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [_]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT: $3,262,270,615
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON
STOCK, AS OF FEBRUARY 22, 1994: 72,899,902
DOCUMENTS INCORPORATED BY REFERENCE
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 28, 1994,
PART III
INDEX OF EXHIBITS (PAGES 60 THROUGH 62)
TOTAL NUMBER OF PAGES INCLUDED ARE 72
PART 1
ITEM 1. BUSINESS
Torchmark Corporation ("Torchmark"), an insurance and diversified financial
services holding company, was incorporated in Delaware on November 19, 1979,
as Liberty National Insurance Holding Company. Through a plan of
reorganization effective December 30, 1980, it became the parent company for
the businesses operated by Liberty National Life Insurance Company ("Liberty")
and Globe Life And Accident Insurance Company ("Globe"). United American
Insurance Company ("United American"), Waddell & Reed, Inc. ("W&R") and United
Investors Life Insurance Company ("UILIC") along with their respective
subsidiaries were acquired in 1981. The name Torchmark Corporation was adopted
on July 1, 1982. Family Service Life Insurance Company ("Famlico") was
purchased in July, 1990.
The following list itemizes Torchmark's principal subsidiaries and a
description of the subsidiaries' business:
Liberty--offers individual life and health insurance and annuities through
a home service sales force.
Globe--offers individual life and health insurance through direct response
and independent agents.
United American--offers Medicare Supplement and other individual health and
life products through independent agents.
Famlico--markets life insurance and annuities to fund prearranged funerals.
Liberty Fire--offers industrial fire insurance, collateral protection
insurance, personal and commercial property and casualty insurance, and
domestic reinsurance. In 1993, 73% of this subsidiary was sold through an
initial public offering of Vesta Insurance Group, Inc. ("Vesta").
United Investors Management Company ("United Management")--owns UILIC, W&R,
and Torch Energy Advisors Incorporated ("Torch Energy").
W&R--engages in institutional investment management services, and offers
individual financial planning and products, including life insurance,
annuities, and mutual funds through an exclusive sales force.
UILIC--offers individual life and annuity products sold by W&R agents.
Torch Energy--provides management services with respect to oil and gas
production and development; and engages in energy property acquisitions and
dispositions, oil and gas product marketing, and well operations
Additional information concerning industry segments may be found in
Management's Discussion and Analysis and in Note 16--Industry Segments in the
Notes to Consolidated Financial Statements.
INSURANCE
LIFE INSURANCE
Torchmark's insurance subsidiaries; Liberty, Globe, United American, UILIC,
and Famlico, write a variety of nonparticipating ordinary life insurance
products. These include whole-life insurance in the form of traditional, and
interest-sensitive, trusteed group products, term life insurance, and other
life insurance. The following tables present selected information about
Torchmark's life products:
(AMOUNTS IN THOUSANDS)
ANNUALIZED ANNUALIZED
PREMIUM ISSUED PREMIUM IN FORCE
-------------------------- --------------------------
1993 1992 1991 1993 1992 1991
-------- -------- -------- -------- -------- --------
Whole life:
Traditional............ $ 55,265 $ 59,441 $ 63,265 $312,905 $311,605 $312,197
Interest-sensitive..... 34,211 39,087 40,814 160,824 154,518 142,560
Trusteed group.......... 2,467 2,546 1,690 8,924 6,942 4,879
Term.................... 36,303 30,652 28,522 129,815 115,014 102,905
Other................... 187 -0- (550) 188 5 9
-------- -------- -------- -------- -------- --------
$128,433 $131,726 $133,741 $612,656 $588,084 $562,550
======== ======== ======== ======== ======== ========
1
(AMOUNTS IN THOUSANDS)
AMOUNT OF AMOUNT OF
INSURANCE ISSUED INSURANCE IN FORCE
----------------------------------- -----------------------------------
1993 1992 1991 1993 1992 1991
----------- ----------- ----------- ----------- ----------- -----------
Whole life:
Traditional............ $ 4,952,061 $ 3,977,819 $ 3,727,165 $25,203,790 $23,734,328 $23,455,332
Interest-sensitive..... 2,419,345 2,797,667 3,415,437 11,622,963 11,332,526 10,749,318
Trusteed group.......... 400,074 435,568 303,510 1,509,404 1,226,306 874,341
Term.................... 4,444,837 3,851,383 3,773,700 22,963,213 21,957,385 20,937,381
Variable................ 7,515 4,904 2,495 35,443 27,978 24,922
Other................... 16,412 -0- -0- 32,120 27,772 69,457
----------- ----------- ----------- ----------- ----------- -----------
$12,240,244 $11,067,341 $11,222,307 $61,366,933 $58,306,295 $56,110,751
=========== =========== =========== =========== =========== ===========
Mean amount of insurance in force............... $59,836,614 $57,208,523 $55,442,943
=========== =========== ===========
Average policy size (in dollar amounts)......... $ 7,567 $ 7,263 $ 7,038
=========== =========== ===========
Life insurance products are sold through a variety of distribution channels,
including home service agents, independent agents, exclusive agents, and
direct response. These methods are discussed in more depth under the heading
"Marketing." The following table presents life annualized premium issued by
marketing method:
(AMOUNTS IN THOUSANDS)
ANNUALIZED ANNUALIZED
PREMIUM ISSUED PREMIUM IN FORCE
-------------------------- --------------------------
1993 1992 1991 1993 1992 1991
-------- -------- -------- -------- -------- --------
Home service.............. $ 48,474 $ 54,161 $ 61,658 $282,059 $278,738 $271,625
Independent agents........ 24,320 23,316 18,483 114,993 109,622 101,808
Exclusive agents.......... 19,634 28,799 31,810 82,832 83,854 83,492
Direct response........... 36,005 25,450 21,790 132,772 115,870 105,625
-------- -------- -------- -------- -------- --------
$128,433 $131,726 $133,741 $612,656 $588,084 $562,550
======== ======== ======== ======== ======== ========
Permanent insurance products sold by Torchmark affiliates 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, 1993 was $150 million and the average interest
rate earned on these loans was 6.16% in 1993. Interest income earned on policy
loans was $9.1 million in 1993, $8.6 million in 1992 and $8.2 million in 1991.
Torchmark had 140 thousand and 143 thousand policy loans outstanding at year-
end 1993 and 1992, respectively.
The availability of cash values contributes to voluntary policy terminations
by policyholders through surrenders. Torchmark's life insurance products may
be terminated or surrendered at the election of the insured at any time,
generally for the full cash value specified in the policy. Specific surrender
procedures vary with the type of policy. For certain policies this cash value
is based upon a fund less a surrender charge which decreases with the length
of time the policy has been in force. This surrender charge is either based
upon a percentage of the fund or a charge per $1,000 of face amount of
insurance. The schedule of charges may vary by plan of insurance and, for some
plans, by age of the insured at issue. Torchmark's ratio of aggregate face
amount voluntary terminations to the mean amount of individual life insurance
in force was 14.9% in 1993, 15.4% in 1992, and 17.2% in 1991.
The following table presents an analysis of changes to Torchmark's life
insurance business in force:
(AMOUNTS IN THOUSANDS)
1993 1992 1991
--------------------- --------------------- ---------------------
NUMBER OF AMOUNT OF NUMBER OF AMOUNT OF NUMBER OF AMOUNT OF
POLICIES INSURANCE POLICIES INSURANCE POLICIES INSURANCE
--------- ----------- --------- ----------- --------- -----------
In force at January 1,.. 8,028 $58,306,295 7,972 $56,110,751 7,998 $54,775,134
New issues.............. 944 12,240,245 827 11,067,341 800 11,222,307
Business acquired....... -0- -0- -0- -0- 37 55,205
Other increases......... -0- 35,530 -0- 204,094 25 151,185
Death benefits.......... (102) (213,785) (99) (199,131) (102) (189,159)
Lapses.................. (625) (7,817,201) (549) (7,743,902) (594) (8,331,758)
Surrenders.............. (106) (1,082,962) (113) (1,091,863) (134) (1,247,357)
Other decreases......... (29) (101,189) (10) (40,995) (58) (324,806)
----- ----------- ----- ----------- ----- -----------
In force at December
31,.................... 8,110 $61,366,933 8,028 $58,306,295 7,972 $56,110,751
===== =========== ===== =========== ===== ===========
2
HEALTH INSURANCE
Liberty, Globe, and United American offer an assortment of health insurance
products. These products are generally classified into three categories: (1)
Medicare Supplement, (2) cancer and (3) hospital, surgical, accident, and
other. United American Medicare Supplement products are sold by United
American, Globe, Liberty and W&R agents. They provide reimbursement for
certain expenses not covered under the national Medicare program. One feature
available under United American's policy is an automatic claim processing
system for Medicare Part B benefits, whereby policyholders do not have to file
claim forms because they are paid directly by United American from Medicare
records.
Liberty, Globe and United American offer cancer policies on a guaranteed-
renewable basis. These policies provide benefits for hospital stay, radiation,
chemotherapy, surgery, physician, medication, and other expenses related to
cancer. There are certain per diem, per procedure, and other payment
limitations.
A variety of hospital, surgical, and other medical expense policies are
issued on a guaranteed-renewable basis by Liberty, Globe, and United American.
In addition, certain accident policies are issued by Liberty and Globe.
The following table presents health annualized premium information for the
three years ending December 31, 1993 by product category:
(AMOUNTS IN THOUSANDS)
ANNUALIZED ANNUALIZED
PREMIUM ISSUED PREMIUM IN FORCE
-------------------------- --------------------------
1993 1992 1991 1993 1992 1991
-------- -------- -------- -------- -------- --------
Medicare Supplement....... $136,050 $156,170 $109,395 $600,536 $580,509 $523,774
Cancer.................... 10,012 18,353 18,316 105,773 109,483 103,371
Hospital, surgical,
accident, and other...... 29,966 50,382 89,251 117,073 142,496 170,997
-------- -------- -------- -------- -------- --------
$176,028 $224,905 $216,962 $823,382 $832,488 $798,142
======== ======== ======== ======== ======== ========
ANNUITIES
Annuity products are offered through UILIC, Liberty, Famlico, and United
American. These products include single-premium deferred annuities, flexible-
premium deferred annuities, and variable annuities. Single-premium and
flexible-premium annuities are fixed annuities where a portion of the interest
credited is guaranteed. Additional interest may be credited on certain
contracts. Variable annuity policyholders may select from a variety of mutual
funds managed by W&R which offer different degrees of risk and return. The
ultimate benefit on a variable annuity results from the account performance.
The following table presents Torchmark subsidiaries' annuity collections and
deposit balances by product type:
(AMOUNTS IN THOUSANDS) (AMOUNTS IN MILLIONS)
COLLECTIONS DEPOSIT BALANCE
FOR THE YEAR ENDED DECEMBER 31, AT DECEMBER 31,
-------------------------------- ------------------------
1993 1992 1991 1993 1992 1991
---------- ---------- ---------- -------- -------- ------
Fixed annuities...... $ 46,573 $ 69,381 $ 89,282 $ 782.8 $ 755.7 $702.2
Variable annuities... 213,982 125,688 52,524 529.7 282.0 137.6
---------- ---------- ---------- -------- -------- ------
$ 260,555 $195,069 $141,806 $1,312.5 $1,037.7 $839.8
========== ========== ========== ======== ======== ======
3
OTHER INSURANCE
Until November, 1993, Torchmark offered, through Liberty Fire and its
subsidiaries, property and casualty insurance, consisting of both primary and
reinsurance business. The following table presents an analysis of property and
casualty insurance premium earned in each of the years 1991 through 1993.
YEAR ENDED DECEMBER 31,
------------------------
1993 1992 1991
-------- ------- -------
Reinsurance..................................... $ 76,462 $54,490 $23,666
Primary:
Personal....................................... 23,400 16,378 13,079
Commercial..................................... 15,520 19,196 16,932
Financial services............................. 7,675 8,318 7,028
-------- ------- -------
Total primary................................ 46,595 43,892 37,039
-------- ------- -------
Total........................................ $123,057 $98,382 $60,705
======== ======= =======
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's insurance subsidiaries, which are substantially all of Torchmark's
investments, consist predominantly of high-quality, investment-grade
securities. Fixed maturities represented 84% of total investments at December
31, 1993. Approximately 59% 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 75% of these
investments were in GNMA securities that are backed by the full faith and
credit of the United States government. Practically all of the remainder of
these government investments were collateralized mortgage obligations
("CMO's") that are fully collateralized by GNMA's or by United States agency
securities. (See Note 3--Investment Operations in Notes to Consolidated
Financial Statements and Management's Discussion and Analysis.)
The following table presents an analysis of the fixed maturity investments
of Torchmark's insurance subsidiaries at December 31, 1993. All of the
securities are classified as held for sale and are, therefore, reported at
market value.
(AMOUNTS IN THOUSANDS)
AMOUNT %
------------- --------
Securities of U.S. Government.................... $ 183,927 4.1%
GNMA and MBS backed by GNMA collateral........... 2,445,867 54.1
Other U.S. Government guaranteed................. 22,473 0.5
Other investment grade........................... 1,851,678 41.0
Non-investment grade corporates.................. 14,428 0.3
------------- --------
$ 4,518,373 100.0%
============= ========
The following table presents the fixed maturity investments of Torchmark's
insurance subsidiaries at December 31, 1993 on the basis of ratings as
determined primarily by Moody's Investors Services. Standard and Poor's Bond
Ratings are used where Moody's ratings were not available.
(AMOUNTS IN THOUSANDS)
RATING AMOUNT %
------ ---------- -----
AAA........................................ $3,059,490 67.7%
AA......................................... 292,013 6.5
A.......................................... 1,102,057 24.4
BAA........................................ 44,572 1.0
BA......................................... 3,442 0.1
B.......................................... 9,443 0.2
Less than B................................ 10 --
Not rated.................................. 7,346 0.1
---------- -----
$4,518,373 100.0%
========== =====
4
Ratings of BAA and higher (or their equivalent) are considered to be
investment grade by rating services.
The following table presents the investment of Torchmark's insurance
subsidiaries in fixed maturities at December 31, 1993 on the basis of ratings
as determined by the National Association of Insurance Commissioners ("NAIC"):
(AMOUNTS IN THOUSANDS)
RATING AMOUNT %
------------------------- ------------- --------
1. Highest quality....... $4,460,181 98.7%
2. High quality.......... 43,765 1.0
3. Medium quality........ 4,256 0.1
4. Low quality........... 9,774 0.2
5. Lower quality......... 143 -0-
6. In or near default.... 254 -0-
------------- --------
$4,518,373 100.0%
============= ========
Categories one and two are considered investment grade by the NAIC.
Securities in Torchmark's investment portfolio are assigned their ratings
when acquired. They are reviewed and updated at least annually. Additionally,
when Torchmark learns that the rating of a specific security has been changed,
that security's rating is updated promptly.
PRICING
Premium rates for life and health insurance products are established by each
subsidiary company's management using assumptions as to future mortality,
morbidity, persistency, and expenses, all of which are generally based on that
company's experience, and on projected investment earnings. Revenues for
individual life and health insurance products are primarily derived from
premium income, and, to a lesser extent, through policy charges to the
policyholder account values on certain individual life products. Profitability
is affected to the extent actual experience deviates from that which has been
assumed in premium pricing and to the extent investment income exceeds that
which is required for policy reserves.
Collections for annuity products 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 annuity funds invested in
excess of the amounts credited to policy accounts.
UNDERWRITING
The underwriting standards of Torchmark's life insurance subsidiaries are
established by each subsidiary's respective management. The companies use
information from the application and, in some cases, inspection reports,
doctors' statements and/or medical examinations to determine whether a policy
should be issued in accordance with the application, with a different rating,
with a rider, with reduced coverage or rejected.
Each life insurance subsidiary requires medical examinations of applicants
for life insurance in excess of certain prescribed amounts. These are
graduated according to the age of the applicant and may vary with the kind of
insurance. The maximum amount of insurance issued without medical examination
varies by company: for Globe, it is $150,000 through age 40; and for Liberty
and UILIC, it is $99,999 through age 50. These maximums decrease at higher
ages, with medical examinations becoming mandatory at the respective companies
at ages 51, 61, and 80. The companies request medical examinations of all
applicants, regardless of age or amount, if information obtained from the
application or other sources indicates that such an examination is warranted.
5
In recent years, there has been considerable concern regarding the impact of
the HIV virus associated with Acquired Immune Deficiency Syndrome ("AIDS").
Liberty and UILIC have implemented certain underwriting tests to detect the
presence of the HIV virus and continue to assess the utility of other
appropriate underwriting tests to detect AIDS in light of medical developments
in this field. To date, AIDS claims have not had a material impact on claims
experience.
REINSURANCE
As is customary among insurance companies, Torchmark's insurance
subsidiaries cede insurance to other unaffiliated insurance companies on
policies they issue in excess of the companies' retention limits. Reinsurance
is an effective method for keeping insurance risk within acceptable limits. In
the event insurance business is ceded, the insurance subsidiary remains
contingently liable with respect to ceded insurance should any reinsurer be
unable to meet the obligations it assumes (See Note 13--Commitments and
Contingencies in Notes to Consolidated Financial Statements and Schedule VI--
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
complete 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
Collectively, the insurance subsidiaries of Torchmark are licensed to sell
insurance in all 50 states, the District of Columbia, Puerto Rico, the Virgin
Islands, Guam, and Canada. Distribution is through home service agents,
independent agents, exclusive agents and direct response methods. Home service
agents of Liberty are employees and are primarily compensated by commissions
based on sales and by a salary based on the amount of premiums collected on
policies assigned to them for servicing. All other agents are independent
contractors and are compensated by commission only.
Torchmark's insurance subsidiaries are not committed or obligated in any way
to accept a fixed portion of the business submitted by any independent agents.
All policy applications, both new and renewal, are subject to approval and
acceptance by the particular subsidiary. Torchmark is not dependent on any
single or any small group of independent agents, the loss of which would have
a materially adverse effect on insurance sales.
Liberty markets its products through home service agents operating in
Alabama, Florida, Georgia, Mississippi, South Carolina and Tennessee. Home
service agents are responsible for sales in a geographical area and remain in
contact with policyholders to provide continuing service. Within these states,
Liberty maintained 110 district offices which employed approximately 3,100
agency personnel as of December 31, 1993. Almost all of the Liberty agency
personnel are also licensed to sell property insurance issued by Liberty Fire.
Globe's agents, who primarily sell health insurance, are independent
contractors working out of branch offices. Globe's sales organization consists
of 71 branch sales offices from which approximately 1,100 licensed agents
operate and approximately 4,200 agents sell life insurance in special markets.
Globe markets modified whole-life and term insurance primarily through direct
response solicitation. In 1993, over $4.9 billion or 92% of the face amount of
life insurance sold by Globe was sold through direct response methods.
6
UILIC's sales are generated principally through the W&R sales force under a
general agency contract in conjunction with W&R's financial planning services.
In addition, UILIC sells through unaffiliated brokers. In 1993 W&R sales
representatives produced 93% of UILIC's annualized life insurance premium and
99% of annuity deposits.
United American markets its products through approximately 57,000 licensed
representatives in 49 states, the District of Columbia, Puerto Rico and
Canada. United American's Medicare Supplement insurance products are also
marketed by Globe, W&R and Liberty.
Famlico markets its life insurance and annuity products to fund prearranged
funeral agreements through a force of approximately 725 independent career
agents representing approximately 300 funeral homes in 22 states.
RATINGS
The following list indicates the ratings currently held by Torchmark's four
largest insurance companies as rated by 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)
These same four insurance companies are each rated by Standard & Poor's
Corporation as AAA(Superior), which is their highest rating. A.M. Best states
that it assigns A++ and A+ (Superior) ratings to those companies which, in its
opinion, have achieved superior overall performance when compared to the norms
of the life/health insurance industry. A++ and A+ (Superior) companies have a
very strong ability to meet their policyholder and other contractual
obligations over a long period of time. Standard & Poor's Corporation assigns
a superior or AAA rating to those companies who have superior financial
security on an absolute and relative basis and whose capacity to meet
policyholder obligations is overwhelming under a variety of economic and
underwriting conditions.
ASSET MANAGEMENT
Torchmark conducts its asset management and financial services businesses
through United Management and its subsidiaries. This segment consists of two
primary activities: (1) mutual fund distribution and management and (2) energy
operations.
MUTUAL FUNDS
Torchmark's mutual fund operations are carried out by W&R, a subsidiary of
United Management, which markets and manages the sixteen mutual funds in the
United Group of Mutual Funds, the five mutual funds in the Waddell & Reed
Fund, Inc. ("W&R Funds"), the five mutual funds in the TMK/United Fund
("TMK/United Funds"), and the two mutual funds in the Torchmark Fund
("Torchmark Funds"). These funds were valued as follows at December 31, 1993
and 1992:
7
FUND ASSETS UNDER MANAGEMENT
(AMOUNTS IN
MILLIONS)
1993 1992
--------- ---------
United Funds:
United Income Fund $ 3,060.1 $ 2,537.2
United Accumulative Fund 1,033.8 992.9
United High Income Fund 1,053.0 945.6
United Municipal Bond Fund 1,060.9 915.6
United Vanguard Fund 948.8 902.8
United Bond Fund 641.7 589.9
United Science and Energy Fund 446.6 428.8
United Cash Management Fund 321.6 393.3
United Continental Income Fund 418.1 370.6
United High Income II Fund 396.0 347.7
United Retirement Shares 431.6 313.8
United International Growth Fund 494.5 306.7
United Municipal High Income Fund 342.5 273.7
United New Concepts Fund 215.9 181.7
United Government Securities Fund 189.4 168.6
United Gold and Government Fund 47.8 27.1
W&R Funds:
W&R Total Return Fund 47.4 6.3
W&R Global Income Fund 10.4 6.0
W&R Growth Fund 33.0 4.8
W&R Municipal Bond Fund 22.5 4.4
W&R Limited-Term Bond Fund 10.9 3.6
TMK/United Funds:
Money Market Portfolio 26.0 24.0
Bond Portfolio 81.7 49.4
High Income Portfolio 71.3 41.5
Growth Portfolio 220.6 122.4
Income Portfolio 155.1 65.0
Torchmark Funds:
Torchmark Government 1.6 0.0
Torchmark Tax-Free 2.3 0.0
--------- ---------
Total mutual fund assets under management 11,785.1 10,023.4
Institutional and private accounts 2,670.0 2,121.0
--------- ---------
Total assets under management $14,455.1 $12,144.4
========= =========
W&R's revenues consist of the following: (1) fees for managing the assets,
which are based on the value of the assets managed, (2) commissions for the
sale of products, and (3) fees for accounting and administration, which are
based primarily on an annual charge per account. In addition to its mutual
fund management and distribution activities, W&R manages accounts for
individual and institutional investors for which asset management fees are
received.
Asset management activities are conducted by an experienced and qualified
staff. As of December 31, 1993, the average industry experience of the fund
managers for W&R was 20 years, and average company experience was 13 years.
The following table indicates W&R revenues by component for the three years
ending December 31, 1993:
(AMOUNTS IN THOUSANDS)
1993 1992 1991
-------- -------- --------
Investment product commissions*.............. $ 66,034 $ 64,749 $ 48,708
Insurance product commissions*............... 12,117 12,044 12,333
Asset management fees........................ 64,181 56,056 48,341
Service fees................................. 21,273 19,890 18,812
-------- -------- --------
$163,605 $152,739 $128,194
======== ======== ========
*Commissions paid to W&R by affiliates for variable annuities and insurance
products are eliminated in consolidation.
8
W&R markets its mutual funds and other financial products, including life
insurance issued by UILIC and Medicare Supplement insurance issued by United
American, through a sales force of approximately 2,800 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 169 sales offices at December 31, 1993.
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.
ENERGY
Torchmark engages in energy operations through Torch Energy and its
subsidiaries. Torch Energy is a wholly-owned subsidiary of United Management.
Torch Energy manages oil and gas properties and investments, primarily in the
form of limited partnerships, for affiliated Torchmark companies as well as
for unrelated institutions. Additionally, Torch Energy manages energy
properties for Nuevo Energy Company ("Nuevo"), a publicly-traded corporation
which was 14% owned by Torch Energy at December 31, 1993. Torch Energy also
makes direct investments in energy properties from time to time and markets
production for the properties it manages and for unrelated third parties. The
following table presents an analysis of the $1.2 billion in energy properties
under management:
(AMOUNTS IN MILLIONS)
1993 1992
---------- ----------
Direct ownership................................ $ 24 $ 121
Other energy investments of Torchmark........... 339 393
Other affiliated*............................... 43 77
Unaffiliated parties............................ 750 565
---------- ----------
$ 1,156 $ 1,156
========== ==========
* Includes Nuevo and general partnership interests
Torch Energy manages investments which are made primarily in proven
producing properties. These properties consist of oil and gas working and
royalty interests in approximately 4,500 wells and are primarily located in
seven states and offshore in the Gulf of Mexico. Included in other energy
investments of Torchmark is a coalbed methane development in Alabama's Black
Warrior Basin in the amount of approximately $234 million.
In addition to energy asset management, Torch Energy also engages in energy
property acquisition, energy product marketing, and operates approximately
1,200 wells. Energy product marketing involves the sale of oil and gas
production, which is acquired through purchase agreements with affiliates and
unrelated third parties.
The following table presents revenues for energy operations by component:
(AMOUNTS IN THOUSANDS)
1993 1992 1991
-------- ------- -------
Product marketing revenue.................... $174,080 $98,352 $27,674
Less: product marketing costs................ (165,068) (91,356) (24,532)
-------- ------- -------
Net product marketing revenue................ 9,012 6,996 3,142
Management fees*............................. 15,233 15,057 13,555
Production revenue........................... 45,427 38,155 27,918
Operating fees............................... 14,310 13,806 10,226
Other revenue................................ 24,705 1,525 772
-------- ------- -------
$108,687 $75,539 $55,613
======== ======= =======
* Includes fees from affiliates
9
COMPETITION
The insurance industry is highly competitive. Torchmark's insurance
subsidiaries compete with other insurance carriers through policyholder
service, price, product design, and sales effort. In addition to competition
with other insurance companies, Torchmark's insurance subsidiaries also face
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's insurance companies operate at lower administrative
expense levels than their peer companies, allowing Torchmark companies to have
competitive rates while maintaining margins, or, in the case of Medicare
Supplement business, to remain in the business while some companies have
ceased new writings. Torchmark's years of experience in direct response
business are a valuable asset in designing direct response products.
Similarly, Liberty's concentration of business has been considered a
competitive advantage in hiring and retaining agents. On the other hand,
Torchmark's insurance subsidiaries do not have the same degree of national
name recognition as some other companies with which they compete.
W&R competes with hundreds of other registered institutional investment
advisers and mutual fund management and distribution companies which
distribute their fund shares through a variety of methods including affiliated
and unaffiliated sales forces, broker-dealers, and direct sales to the public.
Although no one company or group of companies dominates the mutual fund
industry, some are larger than W&R and have greater resources. Competition is
based on the methods of distribution of fund shares, tailoring investment
products to meet certain segments of the market, 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.
Torchmark's energy subsidiaries compete with a large number of institutional
investment advisors in the asset management business, although only a limited
number of these institutions manage energy assets. There is very little
competition from other specialized energy asset managers in terms of
institutional assets under management. These energy subsidiaries also face
strong competition in their businesses of well operations, product marketing,
and energy asset direct ownership. Competitors include independent producers
and major oil and gas companies, some of which are quite large and well
established with substantial capital, resources, and capabilities exceeding
those of Torchmark's energy subsidiaries.
REGULATION
INSURANCE. Insurance companies are subject to regulation and supervision in
the states in which they do business. The laws of the various states establish
agencies with broad administrative and supervisory powers which include, among
other things, granting and revoking licenses to transact business, regulating
trade practices, licensing agents, approving policy forms, approving certain
premium rates, setting minimum reserve and loss ratio requirements,
determining the form and content of required financial statements, and
prescribing the type and amount of investments permitted. Insurance companies
can also be required under the solvency or guaranty laws of most states in
which they do business to pay assessments up to prescribed limits to fund
policyholder losses or liabilities of insolvent insurance companies. They are
also required to file detailed annual reports with supervisory agencies, and
records of their business are subject to examination at any time. Under the
rules of the NAIC, insurance companies are examined periodically by one or
more of the supervisory agencies. The most recent examinations of Torchmark's
insurance subsidiaries were: Famlico, as of September 30, 1990; Globe, as of
December 31, 1991; Liberty and Liberty Fire, as of December 31, 1991; and
UILIC and United American, as of December 31, 1990.
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.
10
IRIS identifies twelve insurance industry ratios from the statutory financial
statements of insurance companies, which statements are based on regulatory
accounting principles and are not based on generally accepted accounting
principles ("GAAP"). IRIS specifies a standard or "usual value" range for each
ratio, and a company's variation from this range may be either favorable or
unfavorable. Departure from this "usual value" on four or more ratios leads to
inquiries from state regulators. None of Torchmark's primary insurance
subsidiaries have exceeded the "usual values" on more than three ratios for
the periods considered. The following table presents the IRIS ratios for three
of Torchmark's four largest insurance subsidiaries, which varied unfavorably
from the "usual value" range for the years 1992 and 1991.
USUAL REPORTED
COMPANY RATIO NAME RANGE VALUE
- --------- ---------------------------------------------------- ---------- --------
1992:
- -----
UILIC Change in Reserving 20 to -20 22
Liberty Investment in Affiliate to Capital and Surplus 0 to 100 177
Globe Adequacy of investment income 125 to 900 999
1991:
- -----
Liberty Investment in Affiliate to Capital and Surplus 0 to 100 168
Globe Investment in Affiliate to Capital and Surplus 0 to 100 103
UILIC Change in Reserving 20 to -20 -21
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 ratios in Liberty and Globe are brought about by their ownership of
other large Torchmark insurance companies and the ownership by Liberty of 83%
of the stock of United Management. Profitability and growth in these
subsidiaries have caused this ratio to gradually rise. All intercompany
investment is eliminated in consolidation, and the internal organizational
structure has no bearing on consolidated results. Intercompany ownership by
Liberty and Globe were reduced during 1993 due to restructuring and the sale
of Vesta.
Change in Reserving--The change in reserving ratio is computed as the
aggregate increase in statutory reserves for individual life insurance taken
as a percentage of individual life renewal and single premium. The reserving
ratio is then measured against the same ratio for the prior year to determine
the degree of change. The NAIC considers a variance of more than 20% to be
unusual. The 21% variance in 1991 and the 22% offsetting variance in 1992 for
United Investors Life Insurance Company was caused by the one-time correction
of reserves in 1991 on a block of individual life policies to recognize their
decreasing guaranteed death benefits. These ratios are computed utilizing
regulatory reserving techniques and not on the basis of calculating policy
reserves as determined by GAAP. Because the modifications to statutory
reserves had no bearing on reserves calculated in accordance with GAAP, those
modifications had no effect on Torchmark's consolidated financial statements.
Adequacy of Investment Income--This ratio indicates that an insurer's
investment income is adequate to meet interest requirements of policy reserves
and is measured as a percentage of investment income to required interest. A
ratio higher than 900% is considered to be too high and a ratio lower than
125% is considered to be too low by the NAIC. The 999% ratio in Globe for 1992
was brought about by the NAIC's inclusion of dividends of various Torchmark
subsidiaries in Globe's investment income. These dividends are generally
passed through Globe to the parent company and should not be considered in
meeting interest requirements. Intercorporate dividends are eliminated in
consolidation and have no effect on consolidated results. Had these dividends
been excluded, Globe's 1992 ratio would have been 246%, which was within the
usual range.
Risk Based Capital: In December 1992, the NAIC adopted a model act that
requires a risk based capital formula be applied to all life and health
insurers. The requirement begins in 1994 for information based on the 1993
annual statements. The risk based capital formula is a threshold formula
rather than a target capital formula. It is designed only to identify
companies that require regulatory attention and is not
11
to be used to rate or rank companies that are adequately capitalized. All of
the insurance subsidiaries of Torchmark are adequately capitalized under the
risked based capital formula.
Guaranty Assessments. State solvency or guaranty laws provide for the
assessment of insurance companies into a fund which is used, in the event of
failures or insolvency of an insurance company, to fulfill the obligations of
that company to its policyholders. The amount by 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, and Texas.
Insurance holding company system statutes and regulations impose various
limitations on investments in subsidiaries, and may require prior regulatory
approval for the payment of certain dividends and other distributions in
excess of statutory net gain from operations on an annual noncumulative basis
by the registered insurer to the holding company or its affiliates.
MUTUAL FUNDS. Torchmark's mutual fund management and distribution
activities, as well as its investment advisory services, are subject to state
and federal regulation and oversight by the National Association of Securities
Dealers, Inc. Each of the funds in the United Group of Mutual Funds, the W&R
Funds, the TMK/United Funds and the Torchmark Funds is a registered investment
company under the Investment Company Act of 1940. W&R and 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.
ENERGY. Torch Energy, on behalf of itself as well as its affiliated
insurance clients and unrelated institutions, is engaged in oil and gas
leasing and production activities which are regulated by the Federal Energy
Regulatory Commission and the appropriate state authorities in the states in
which Torch Energy does business. These governmental authorities regulate
production, the drilling and spacing of wells, conservation, environmental
concerns, and various other matters affecting oil and gas production. Torch
Energy is also registered under the Investment Advisers Act of 1940.
HEALTH CARE REFORM. The Clinton Administration has recently made proposals
in the area of health insurance and health care reform. These proposals, along
with various alternative proposals, are currently being considered by
Congress. At this time, it is not possible to ascertain whether these reform
initiatives will negatively impact Torchmark or will positively impact
Torchmark's operations by increasing demand for supplemental coverages
marketed by Torchmark subsidiaries. Based on the Administration's current
proposals, it does not appear that Torchmark's Medicare Supplement business
will be affected.
PERSONNEL
At the end of 1993, Torchmark had 2,653 employees and 3,399 licensed
employees under sales contracts. Additionally, approximately 68,000
independent agents and brokers, who were not employees of Torchmark, were
associated with Torchmark's marketing efforts.
ITEM 2. PROPERTIES
Torchmark, through its subsidiaries, owns or leases buildings that are used
in the normal course of business. Liberty owns a 487,000 sq. ft. building at
2001 Third Avenue South, Birmingham, Alabama, which currently serves as
Liberty's, UILIC's, and Torchmark's home office. Liberty leases approximately
143,000 sq. ft. of this building to unrelated tenants and has another 15,000
sq. ft. available for lease. Liberty also operates from 69 company-owned
district office buildings used for agency sales personnel.
Globe owns a 300,000 sq. ft. office building at 204 North Robinson, Oklahoma
City, Oklahoma, of which it occupies 85,647 sq. ft. as its home office and the
balance is available for lease. Globe also owns
12
a 330,000 sq. ft. office building complex at 14000 Quail Springs Parkway Plaza
Boulevard, Oklahoma City, and a 110,000 sq. ft. office building at 120 Robert
S. Kerr Avenue, Oklahoma City, which are available for lease to other tenants.
United American owns and occupies a 125,000 sq. ft. home office building at
2909 North Buckner Boulevard, Dallas, Texas.
W&R owns and occupies a 116,000 sq. ft. office building located in United
Investors Park, a commercial development at 6300 Lamar Avenue, Shawnee
Mission, Kansas. In addition, W&R owns three other office buildings in this
development, each containing approximately 48,000 sq. ft., which are leased or
are available for lease.
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 has completed a 185,000 sq. ft. office building as
the initial phase of a 100-acre commercial development at Liberty Park along
I-459 in Birmingham, Alabama of which a total of approximately 180,000 sq. ft.
is currently leased. It also owns and manages a 70,000 sq. ft. office and
retail complex adjacent to Liberty Park, of which 30,000 sq. ft. are leased to
Liberty Fire. As a part of a joint venture with unaffiliated entities, it is
also developing 2,200 contiguous acres.
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 staff.
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 and provide
for the copying, off-site physical storage and retention of significant
company computer programs and business data files for backup purposes.
ITEM 3. LEGAL PROCEEDINGS
Torchmark and Torchmark's subsidiaries continuously are parties to pending
or threatened legal proceedings. These suits 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. Most of
these lawsuits include claims for punitive damages in addition to other
specified relief.
In May 1992, litigation was filed against Liberty in the Circuit Court for
Barbour County, Alabama (Robertson v. Liberty National Life Insurance Company,
Case No.: CV-92-021). This suit was amended in October 1992 to include claims
on behalf of a class of Liberty policyholders alleging fraud in the exchange
of certain cancer insurance policies. It seeks substantial equitable and
injunctive relief together with unspecified compensatory and punitive damages.
A policyholder class was certified by the Barbour County Court in March 1993.
Additionally, subsequent to the class certification, a number of separate
lawsuits based on substantially the same allegations as in Robertson were
filed by plaintiffs in Alabama, Georgia, Florida and Mississippi. Additional
class action suits also based upon substantially the same allegations as in
Robertson were filed after the class certification in Mobile County, Alabama
(Adair v. Liberty National Life Insurance Company, Case No.: CV-93-958 and
Lamey v. Liberty National Life Insurance Company, Case No.: CV-93-1256) and in
Polk County, Florida (Howell v. Liberty National Life Insurance Company, Case
No.: GC-G 93-2023 and Scott v. Liberty National Life Insurance Company, Case
No.: GC-G 93-2415).
On October 25, 1993, a jury in the Circuit Court for Mobile County rendered
a one million dollar verdict against Liberty in McAllister v. Liberty National
Life Insurance Company (Case No.: CV-82-4085), one of twenty-five suits
involving cancer policy exchanges which were filed prior to class
certification in the Barbour County litigation. Liberty has filed appropriate
post-judgment motions and, if necessary, will appeal the McAllister verdict.
Previously, another judge in the Mobile Circuit Court had granted a summary
judgment in favor of Liberty in another substantially similar suit, which is
on appeal.
13
The Robertson litigation was tentatively settled pending a fairness
determination by the Court after a hearing. The fairness hearing took place
January 20, 1994. Class members were previously mailed notice of the hearing
and the proposed settlement.
On February 4, 1994, the Circuit Court for Barbour County, Alabama ruled
that with a $16 million increase in the value of the proposed Robertson
settlement from approximately $39 million to $55 million, the settlement would
be fair and would be approved, provided that the parties to the litigation
accepted the amended settlement within fourteen days of the issuance of the
ruling. On February 17, 1994, the Court extended for two weeks the period for
filing objections to or accepting the court's order conditionally approving
the class action settlement. On February 22, 1994, the Court entered an order
in the Robertson litigation, which delayed any final decision on the proposed
class action settlement and various motions to modify it (including motions to
delete Torchmark from the settlement release), pending certain specified
discovery to be completed within 90 days from the date the order was entered.
In the order, the Court directed limited additional discovery regarding
whether Torchmark had any active involvement in the cancer policy exchanges.
Pending completion of limited additional discovery, the Court has reserved
jurisdiction and extended the deadline for acceptance or rejection of the
modifications set forth in the February 4, 1994 order.
Torchmark has provided for the $55 million proposed amended settlement
charge in its 1993 financial reports, although it believes that it is highly
likely that intervenors will pursue an appeal of the ruling to the Supreme
Court of Alabama. In the event a settlement is not agreed to and approved,
Torchmark and Liberty intend to aggressively defend the various cases.
In June 1993, a purported class action alleging fraud in the replacement of
certain hospital intensive care policies with policies alleged to have less
value with lower benefits was filed seeking unspecified compensatory and
punitive damages against Liberty and Torchmark in the Circuit Court for Mobile
County, Alabama (Smith v. Liberty National Life Insurance Company, Case No.:
CV-93-2066). A second purported class action with substantially the same
allegations as in the Smith litigation was also filed in the Mobile County
Circuit Court in December 1993 (Maples v. Liberty National Life Insurance
Company, Case No.: CV-93-3694). Three other separate lawsuits based upon the
replacement of certain hospital intensive care policies have also been filed.
The Smith litigation has been settled, while a class has not yet been
certified and discovery is proceeding in the Maples case.
Purported class action litigation was filed in December 1993 against Liberty
in the Circuit Court for Mobile County, Alabama asserting fraud and
misrepresentation in connection with exclusionary provisions of accident and
hospital accident policies sold to persons holding multiple accident type
policies (Cofield v. Liberty National Life Insurance Company, Case No.: CV-93-
3667 and Kelly v. Liberty National Life Insurance Company, Case No.: CV-93-
3759). The Kelly case has been settled. No class has been certified in Cofield
although discovery is proceeding.
In 1978, the United States District Court for the Northern District of
Alabama entered a final judgement in Battle v. Liberty National Insurance
Company, et al (CV-70-H-752-S), class action litigation involving Liberty, a
class composed of all owners of funeral homes in Alabama and a class composed
of all insureds (Alabama residents only) under burial or vault policies
issued, assumed or reinsured by Liberty. The final judgement fixed the rights
and obligations of Liberty and the funeral directors authorized to handle
Liberty burial and vault policies as well as reforming the benefits available
to the policyholders under the policies. It remains in effect to date. A
motion was filed to challenge the final judgement under Federal Rule of Civil
Procedure 60(b) in February of 1990, but the final judgement was upheld and
the Rule 60(b) challenge was rejected by both the District Court and the
Eleventh Circuit Court of Appeals.
In November, 1993, an attorney (purporting to represent the funeral director
class) filed a petition in the District Court seeking "alternative relief"
under the final judgement. The relief sought is unclear, but includes a
request that the District Court rule that the final judgement no longer has
prospective application. Liberty has filed discovery requests seeking the
identity of the funeral directors involved in the petition and information and
materials necessary to evaluate the funeral directors' allegations and to
clarify the relief sought.
Based upon information presently available, and in light of legal and other
defenses available to Torchmark and its subsidiaries, contingent liabilities
arising from threatened and pending litigation are not considered material. It
should be noted, however, that the frequency of large punitive damage awards
bearing little or no relation to actual damages awarded by juries in
jurisdictions in which Torchmark has substantial business, particularly
Alabama, and continues to increase universally.
14
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 1993.
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 8,160 shareholders of record on December 31,
1993, excluding shareholder accounts held in nominee form. On August 19, 1992,
Torchmark effected a 3 for 2 stock split in the form of a stock dividend to
its common shareholders of record on August 5, 1992. Accordingly, all market
prices and dividends per share have been adjusted. 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 12--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:
1993
MARKET PRICE
------------
DIVIDENDS
QUARTER HIGH LOW PER SHARE
------- ------- ------- ---------
1 $64.750 $55.500 $ .2667
2 61.875 50.250 .2667
3 59.750 51.625 .2667
4 56.625 41.125 .2800
Year-end closing price..................$45.000
1992
MARKET PRICE
------------
DIVIDENDS
QUARTER HIGH LOW PER SHARE
------- ------- ------- ---------
1 $41.000 $36.333 $ .2667
2 45.250 36.000 .2667
3 53.375 43.417 .2667
4 58.375 49.375 .2667
Year-end closing price..................$57.125
15
ITEM 6. SELECTED FINANCIAL DATA
The following information should be read in conjunction with Torchmark's
Consolidated Financial Statements and related notes reported elsewhere in this
Form 10-K:
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AND PERCENTAGE DATA)
1993 1992 1991 1990 1989
YEAR ENDED DECEMBER 31, ----------- ----------- ----------- ----------- -----------
Life premium.......................... $ 555,859 $ 544,467 $ 524,052 $ 487,991 $ 432,235
Health premium........................ 799,835 797,855 769,821 738,431 682,680
Other premium......................... 137,216 111,640 71,940 64,830 69,521
Total premium......................... 1,492,910 1,453,962 1,365,813 1,291,252 1,184,436
Net investment income................. 372,470 382,735 364,318 348,412 308,019
Financial services revenue............ 137,422 133,462 114,326 108,561 108,255
Energy operations revenue............. 106,013 74,014 54,841 32,218 22,239
Realized investment
gains (losses)....................... 8,009 (948) 4,195 4,081 547
Total revenue......................... 2,176,835 2,045,810 1,907,441 1,787,148 1,629,326
Net income............................ 297,979 265,477 246,489 229,177 211,308
Net income available to common
shareholders......................... 294,690 262,024 240,373 222,279 203,641
Life insurance sales.................. 12,240,244 11,067,341 11,222,307 11,257,778 11,024,758
Increase in life insurance in force... 3,060,638 2,195,544 1,280,412(1) 694,733(2) 842,605
Annualized life and health premium
issued:
Life................................. 128,433 131,726 133,741 129,233 119,629
Health............................... 176,028 224,905 216,962 273,290 232,336
Total................................ 304,461 356,631 350,703 402,523 351,965
Increase (decrease) in annualized
life and health premium in force:
Life................................. 24,572 25,534 16,098(1) 16,849(2) 28,797
Health............................... (9,106) 34,346 11,749 56,456 12,228
Total................................ 15,466 59,880 27,847 73,305 41,025
Mutual fund collections............... 1,249,084 1,141,928 813,737 742,142 744,284
Per common share:
Net income........................... 4.01 3.58 3.13 2.85 2.59
Net income excluding realized
investment gains.................... 3.94 3.59 3.10 2.82 2.59
Cash dividends paid.................. 1.08 1.07 1.00 .93 .83
Return on average common equity....... 24.2% 26.4% 25.5% 26.6% 27.9%
Average shares outstanding............ 73,502 73,237 76,728 77,950 78,634
- -----------------------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
AS OF DECEMBER 31, ----------- ----------- ----------- ----------- -----------
Cash and invested assets (3).......... $ 5,550,931 $ 4,994,828 $ 4,605,446 $ 4,155,577 $ 3,559,948
Total assets.......................... 7,646,242 6,770,115 6,160,742 5,535,895 4,921,404
Short-term debt....................... 107,108 276,819 11,499 779 125,977
Long-term debt........................ 792,335 497,867 667,125 529,294 498,235
Shareholders' equity.................. 1,417,255 1,115,660 1,079,251 943,787 894,544
Per common share (4)................. 18.80 14.54 13.11 11.13 10.02
Life insurance in force............... 61,366,933 58,306,295 56,110,751 54,775,134 53,743,362
Annualized life and health premium in
force:
Life................................. 612,656 588,084 562,550 543,738 498,777
Health............................... 823,382 832,488 798,142 786,393 729,937
Total................................ 1,436,038 1,420,572 1,360,692 1,330,131 1,228,714
Assets under management at W&R........ 14,455,000 12,144,000 10,692,000 8,212,000 8,542,000
- -----------------------------------------------------------------------------------------------------------
(1) The increase in individual life insurance in force is adjusted by $55
million, and the increase in individual life annualized premium in force
is adjusted by $2.7 million, representing the business acquired in the
acquisition of Sentinel American Life Insurance Company.
(2) The increase in individual life insurance in force is adjusted by $337
million, and the increase in individual life annualized premium in force
is adjusted by $28.1 million, representing the business acquired in the
Family Service Life Insurance Company acquisition.
(3) Includes accrued investment income.
(4) Computed after deduction of preferred shareholders' equity.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with the Selected Financial Data
and Torchmark's Consolidated Financial Statements and Notes thereto appearing
elsewhere in this report.
RESULTS OF OPERATIONS
Torchmark's net income for 1993 was $298 million, increasing 12.2% over the
$265 million reported in 1992. On a per share basis, net income was $4.01,
rising 12% over 1992 net income per share of $3.58. Per share earnings for
1992 also rose 14% over the prior year from $3.13 per share. Excluding the
after-tax effect of realized investment gains (and losses), per share earnings
were $3.94 in 1993 compared to $3.59 in 1992, an increase of 9.7%. The 1992
increase in per share earnings excluding realized investment gains and losses
was 16%.
In a comparison of 1993 results with those of 1992, several nonrecurring
items should be considered. In November, 1993 Torchmark sold 73% of its
interest in Vesta, which was Torchmark's wholly-owned property and casualty
subsidiary prior to the sale, retaining an approximate 27% interest. Such
interest was sold for proceeds of $161 million and a $57 million pretax gain
from the sale was recognized. Results for 1993 include an $82 million pretax
charge for nonoperating expenses, compared to $5.7 million for 1992. This
charge relates to legal and litigation expenses, guaranty assessments, and
directors' and officers' liability. Two new accounting standards which dealt
with postretirement benefits and accounting for income taxes were implemented,
increasing 1993 earnings to $18.4 million. Enactment of the Administration's
tax reform package, which increased corporate tax rates in 1993 from 34% to
35%, resulted in an additional charge to 1993 earnings of $13.7 million. Of
this charge, $4.3 million related to 1993 earnings and $9.4 million was the
effect of a one-time adjustment to the deferred tax liability relating to
prior years. Adjusting for these nonrecurring items, Torchmark's 1993 per
share earnings after realized capital gains and losses would have been $4.04,
compared to $3.64 for 1992, an increase of 11%.
Revenues climbed 6.4% in 1993 to $2.18 billion, up from $2.05 billion for
the previous year. After adjusting for the above-mentioned gain on the sale of
Vesta, the increase in revenues for 1993 would have been 3.6%. Revenues for
1992 increased 7.3% over 1991 revenues of $1.91 billion. Premium income for
1993 grew 2.7% or $39 million, largely accounted for by the $25 million growth
in premium at Vesta. Financial services revenues rose 3% in 1993 and 17% in
1992 as a result of strong financial markets and increased investor demand.
The lower rate of growth in 1993 was attributable to decreased front-end load
mutual funds and the increase in the sale of funds with deferred sales
charges. Lower investment yields available on new investments and the
increased use of tax advantaged investments have had a negative effect on
growth in net investment income in recent periods. Net investment income grew
5% in 1992 and declined 2.7% in 1993. On a tax equivalent basis, investment
income increased 1.5%. Energy operations experienced strong growth in both
periods, rising 43% in 1993 after gaining 35% in 1992. A more in-depth
discussion of each of Torchmark's segments and investment operations is found
on pages 18 through 25 of this report.
Other operating expenses increased 3% in 1993, after excluding the above-
mentioned nonoperating expense charges in both 1993 and 1992. As a percentage
of total revenues, adjusting for the previously-mentioned gain from the Vesta
sale, adjusted operating expenses were 8.2% of revenues in 1993, compared to
8.3% in both 1992 and 1991. Interest expense rose 21% in 1993 to $67.3
million, primarily as a result of $300 million in new debt issues in 1993,
which also caused average indebtedness to rise in 1993. These new issues were
used mainly to fund the 1993 acquisition of the remaining 18% of United
Management which Torchmark did not own. These debt issuances and the United
Management transaction are discussed further as a part of the capital
resources discussion found on pages 26 through 27 of this report. Average
indebtedness also rose in 1992, resulting in increased interest expense of 11%
or $55.7 million. The increase in 1992 debt was primarily the result of
borrowings to fund common and preferred share purchases through line-of-credit
borrowings. Capitalized interest deducted from interest expense was $.9
million in 1993, $4.3 million in 1992, and $9.1 million in 1991.
The following is a discussion of Torchmark's operations by segment.
17
INSURANCE OPERATIONS
LIFE INSURANCE
Summary of Results
(DOLLAR AMOUNTS IN THOUSANDS)
1993 1992 1991
------------------ ------------------ ------------------
% OF % OF % OF
AMOUNT PREMIUM AMOUNT PREMIUM AMOUNT PREMIUM
--------- ------- --------- ------- --------- -------
Premium and policy
charges................ $ 555,859 100.0% $ 544,467 100.0% $ 524,052 100.0%
Policy obligations...... 377,018 67.8 366,214 67.3 344,817 65.8
Required reserve inter-
est.................... (151,203) (27.2) (143,171) (26.3) (133,882) (25.5)
--------- ----- --------- ----- --------- -----
Net policy obligations. 225,815 40.6 223,043 41.0 210,935 40.3
Amortization of acquisi-
tion costs............. 86,098 15.5 87,375 16.0 94,123 18.0
Commissions and premium
taxes.................. 36,697 6.6 35,718 6.6 35,868 6.8
Other expense........... 43,790 7.9 46,330 8.5 45,198 8.6
--------- ----- --------- ----- --------- -----
Total.................. 392,400 70.6 392,466 72.1 386,124 73.7
--------- ----- --------- ----- --------- -----
Insurance operating in-
come................... $ 163,459 29.4% $ 152,001 27.9% $ 137,928 26.3%
========= ===== ========= ===== ========= =====
Life Insurance. Life insurance premium, including policy charges, increased
2.1% to $556 million in 1993, after having risen 3.9% to $544 million in 1992.
Annualized life premium in force was $613 million at December 31, 1993,
gaining 4.2% over the prior year end amount of $588 million. In 1992,
annualized life premium grew 4.5% from $563 million. Annualized premium in
force data includes amounts collected on certain interest-sensitive life
products which are not recorded as premium income but excludes single premium
income and policy charges. Sales of life products, as measured by annualized
premium issued, were $128 million in 1993, compared to $132 million in 1992
and $134 million in 1991.
Profitability in the life product line has increased in each of the years
considered, as evidenced by the growth in insurance operating income as a
percentage of premium. This percentage grew from 26.3% in 1991 to 27.9% in
1992 to 29.4% in 1993. The primary reason for the improvement in both years
was improved persistency. Persistency improvements have resulted, at least in
part, from revisions in agents' compensation formulas to encourage
persistency. Lower lapses have also been attributable to a large portion of
agent-collected home service business having been converted to bank draft
premium, which has higher persistency. The proportion of bank draft premium to
total home service premium increased from 61% in 1991 to 69% in 1992 to 78% in
1993.
One factor in the 1992 increase in the policy obligations to premium ratio
was increased mortality over the prior period. Fluctuations in mortality are
normal and such an increase is not indicative of a pattern. Other expense
margins have improved in each of the years considered, which have had the
effect of further improving margins.
HEALTH INSURANCE
Summary of Results
(DOLLAR AMOUNTS IN THOUSANDS)
1993 1992 1991
----------------- ----------------- -----------------
% OF % OF % OF
AMOUNT PREMIUM AMOUNT PREMIUM AMOUNT PREMIUM
-------- ------- -------- ------- -------- -------
Premium.................. $799,835 100.0% $797,855 100.0% $769,821 100.0%
Other income............. 3,268 0.4 2,538 0.3 2,275 0.3
-------- ----- -------- ----- -------- -----
Total revenues.......... 803,103 100.4 800,393 100.3 772,096 100.3
Policy obligations....... 486,856 60.9 491,343 61.6 474,468 61.6
Required reserve inter-
est..................... (24,572) (3.1) (22,712) (2.9) (22,484) (2.9)
-------- ----- -------- ----- -------- -----
Net policy obligations.. 462,284 57.8 468,631 58.7 451,984 58.7
Amortization of acquisi-
tion costs.............. 83,385 10.4 89,766 11.3 98,596 12.8
Commissions and premium
taxes................... 107,317 13.4 108,105 13.5 106,223 13.8
Other expense............ 44,194 5.6 44,298 5.6 39,111 5.1
-------- ----- -------- ----- -------- -----
Total................... 697,180 87.2 710,800 89.1 695,914 90.4
-------- ----- -------- ----- -------- -----
Insurance operating in-
come.................... $105,923 13.2% $ 89,593 11.2% $ 76,182 9.9%
======== ===== ======== ===== ======== =====
18
Health Insurance: Torchmark's health products include Medicare Supplement
insurance, cancer insurance, and other under-age 65 medical and
hospitalization products. As a percentage of annualized health premium in
force at December 31, 1993, Medicare Supplement accounted for 73%, cancer
accounted for 13%, and other products accounted for 14%.
Total health premium was $800 million in 1993, compared to $798 million in
1992, after having grown 3.6% over 1991 premium of $770 million. Annualized
health premium in force stood at $823 million at December 31, 1993, declining
1.1% over the 1992 amount of $832 million. The 1992 annualized health premium
in force rose 4.3% over the December 31, 1991 amount of $798 million. Sales of
health products in terms of annualized premium issued declined 22% to $176
million in 1993 after having increased 3.7% in 1992 to $225 million from $217
million in 1991. The decline in 1993 sales was affected by the uncertainty
surrounding the Administration's and other health care reform proposals during
the year. Medicare Supplement sales were also impacted by competition which
offered products with a premium that increases with age as well as medical
costs, while Torchmark's premium is increased with medical costs only. This
resulted in Torchmark's product being initially more expensive while the
competing products would have substantially larger premium increases in the
future.
In terms of annualized premium issued, sales of Medicare Supplement
insurance declined 13% to $136 million in 1993. Sales rose 43% to $156 million
in 1992 over the prior year. In addition to the previously-mentioned
uncertainty regarding various health care reforms which might have bearing on
the Medicare Supplement market, this market has also experienced a great deal
of regulatory change in recent years. These changes include increased
government regulation in the form of mandated policy forms, a required minimum
65% loss ratio on products sold, and a required leveling of agents'
commissions. Implementation of the stringent loss ratio and policy form
regulations in 1992 has put pressure on margins for all Medicare Supplement
providers. Medicare Supplement annualized premium in force grew 3.4% in 1993
and stood at $601 million at December 31, 1993. In 1992, Medicare Supplement
annualized premium in force grew almost 11% and was $581 million at December
31, 1992.
Cancer insurance annualized premium in force declined 3.4% to $106 million
at December 31, 1993 from $109 million at December 31, 1992. Cancer annualized
premium in force grew 5.9% in 1992. Sales of this product in 1992 of $18
million were level, compared with the prior year but declined 45% in 1993 to
$10 million. Under age 65 health insurance annualized premium in force
declined 19% in 1993 to $113 million after having declined 17% in 1992 to $141
million. Sales of a number of these products were discontinued in 1992 because
of poor margins, causing the premium in force to decline in both years.
Margins have improved in each of the years considered. As a percentage of
premium, insurance operating income for individual health grew from 9.9% in
1991 to 11.2% in 1992 to 13.2% in 1993, representing an increase of 13% in
1992 and 18% in 1993. There were two primary reasons for this improvement.
First, improved persistency has contributed to the decline in amortization of
acquisition costs. One reason for the improvement in persistency is that many
states now require levelized commissions on Medicare Supplement products. This
has encouraged persistency through the payment of a higher renewal commission.
In addition, the payment of a lower first-year commission discourages
replacement. Also, net policy obligations for individual health products as a
percentage of premium were stable in each of the years 1991 and 1992, but
declined .9% in 1993. This decline was a result of the decline in lower margin
non-Medicare business in 1993.
The Clinton Administration has recently made various proposals in the area
of health insurance and health care reform. These proposals, along with
various alternative proposals, are currently being considered by Congress.
Based on the Administration's current proposals, it does not appear that
Torchmark's Medicare Supplement business will be affected.
19
ANNUITIES
Summary of Results
(DOLLAR AMOUNTS IN THOUSANDS)
1993 1992 1991
------------------- ------------------- -------------------
% OF MEAN % OF MEAN % OF MEAN
AMOUNT RESERVE AMOUNT RESERVE AMOUNT RESERVE
-------- --------- -------- --------- -------- ---------
Policy charges.......... $ 9,454 0.7% $ 8,771 0.9% $ 7,377 1.0%
Allocated investment in-
come*.................. 8,387 0.6 8,903 1.0 8,452 1.1
-------- ---- -------- ---- -------- ----
Total revenue.......... 17,841 1.3 17,674 1.9% 15,829 2.1%
Policy obligations...... 43,032 3.3 43,187 4.6 42,208 5.5
Required reserve inter-
est.................... (43,090) (3.3) (43,513) (4.6) (41,764) (5.5)
-------- ---- -------- ---- -------- ----
Net policy obligations. (58) 0.0 (326) 0.0 444 0.0
Amortization of acquisi-
tion costs............. 4,596 0.3 6,133 0.6 5,736 0.8
Commissions and premium
taxes.................. 708 0.1 848 0.1 826 0.1
Other expense........... 663 0.0 994 0.1 820 0.1
-------- ---- -------- ---- -------- ----
Total.................. 5,909 0.4 7,649 0.8 7,826 1.0
-------- ---- -------- ---- -------- ----
Insurance operating in-
come................... $ 11,932 0.9% $ 10,025 1.1% $ 8,003 1.1%
======== ==== ======== ==== ======== ====
- --------
*Investment income in excess of required.
Annuities: Torchmark's annuity products serve a wide range of markets, such
as providing retirement income, funding prearranged funerals, and offering
long-term tax deferred growth opportunities. Annuity products are sold on both
a fixed and a variable basis. The premium is accounted for as a deposit and is
not reflected in income. Amounts deposited for variable annuities are invested
at the policyholder's direction into his choice among five W&R managed mutual
funds which vary in degree of risk and return. These investments are reported
as Separate Account Assets and the corresponding deposit balances for variable
annuities are reported as Separate Account Liabilities.
Fixed annuity deposits are added to policy reserves and the funds collected
are invested by Torchmark. Revenues on fixed and variable annuity products are
derived from charges to the annuity account balances for insurance risk,
administration, and surrender, depending on the contract's structure. Variable
accounts are also charged an investment management fee and a sales charge.
Torchmark profits to the extent these policy charges exceed actual costs and
to the extent actual investment income exceeds the investment income which is
credited to policyholders on fixed annuities. Since investment yields have
decreased on fixed annuity funds, margins have also decreased.
Growth in the annuity account balance in each year is illustrated below:
ANNUITY DEPOSIT BALANCES
(DOLLAR AMOUNTS IN MILLIONS)
1993 1992 1991
-------- -------- ------
Fixed.................. $ 782.8 $ 755.7 $702.2
Variable............... 529.7 282.0 137.6
-------- -------- ------
Total................. $1,312.5 $1,037.7 $839.8
======== ======== ======
Annuity collections on a combined basis for both fixed and variable
annuities have grown in each of the last three years and were as follows:
ANNUITY COLLECTIONS
(DOLLAR AMOUNTS IN THOUSANDS)
1993 1992 1991
-------- -------- --------
Fixed................ $ 46,573 $ 69,381 $ 89,282
Variable............. 213,982 125,688 52,524
-------- -------- --------
Total............... $260,555 $195,069 $141,806
======== ======== ========
20
Growth in the variable annuity collections has been a result of increased
customer interest in these investment-type products, due, at least in part, to
lower interest rates on fixed investments. Greater sales efforts were also
made through compensation incentives and sales promotional activities. Sales
of fixed annuities have declined in each year primarily because of the pattern
of falling interest rates available in recent years and to the switch to
variable annuities.
Annuity policy charges, which are included in other premium in the financial
statements, rose 8% in 1993 to $9.5 million after having grown 19% in 1992 to
$8.8 million. Allocated investment income, or investment income earned in
excess of policy requirements, was $8.4 million in 1993, a slight decline.
Allocated investment income gained 5% in 1992 to $8.9 million over $8.5
million in 1991. Because of the difference in structure in the various annuity
contracts, whereby certain policy charges relate to account value and others
relate to annuity collections, the policy charges and allocated investment
income remained relatively stable in 1993. Charges relating to the growth in
the policy account value were offset somewhat in 1993 by the decline in
charges based on fixed annuity sales.
Insurance operating income for the annuity line has grown in each of the
years 1991 through 1993, increasing 25% to $10 million in 1992 and 19% to
$11.9 million in 1993. Profitability margins as measured by the mean reserve
were stable in 1992 as compared to 1991 but declined slightly in 1993. The
primary factor in this decline was the reduction in allocated investment
income assigned to fixed products, even though the fixed annuity reserve grew
3.6%. The 1993 decline was offset by a decline in acquisition expense.
PROPERTY AND CASUALTY INSURANCE
Summary of Results
(DOLLAR AMOUNTS IN THOUSANDS)
1993* 1992 1991
----------------- ---------------- ----------------
% OF % OF % OF
AMOUNT PREMIUM AMOUNT PREMIUM AMOUNT PREMIUM
-------- ------- ------- ------- ------- -------
Premium income............. $123,057 100.0% $98,382 100.0% $60,705 100.0%
Other income............... 353 0.3 581 0.6 605 1.0
-------- ----- ------- ----- ------- -----
Total revenue............. 123,410 100.3 98,963 100.6 61,310 101.0
Policy obligations......... 63,527 51.6 51,853 52.7 31,596 52.0
Required reserve interest.. (2,214) (1.8) (2,847) (2.9) (2,871) (4.7)
-------- ----- ------- ----- ------- -----
Net policy obligations..... 61,313 49.8 49,006 49.8 28,725 47.3
Amortization of acquisition
expense................... 12,728 10.4 11,760 12.0 7,985 13.2
Commissions and premium
taxes..................... 29,061 23.6 21,543 21.9 12,232 20.1
Other expenses............. 7,501 6.1 8,548 8.7 7,341 12.1
-------- ----- ------- ----- ------- -----
Total..................... 110,603 89.9 90,857 92.4 56,283 92.7
-------- ----- ------- ----- ------- -----
Insurance operating income. $ 12,807 10.4% $ 8,106 8.2% $ 5,027 8.3%
======== ===== ======= ===== ======= =====
- --------
*Includes operations through November 11, 1993.
Property and Casualty: Torchmark sold a 73% interest in its property and
casualty operations as of November 11, 1993. It reports its 27% remaining
interest as equity in the earnings of affiliates after November 10. Property
and casualty premium rose 25% in 1993 to $123 million even though 73% of
Torchmark's property and casualty operations were sold in November, 1993.
Property and casualty premium gained 62% in 1992 to $98.4 million. Additional
writings in the reinsurance line accounted for most of the growth in both
years. In 1993, reinsurance premium growth accounted for 80% of total premium
growth, compared to 82% of total premium growth in 1992. Growth in reinsurance
premium was a result of Liberty Fire's increased emphasis in sales of quota-
share reinsurance business. Quota-share business is a higher quality and less
volatile type of business. Loss ratios have remained stable on quota-share
reinsurance and even declined from 51% in 1991 to 50% in both 1992 and 1993.
Insurance underwriting income before excess investment income for property and
casualty gained 58% to $12.8 million in 1993 and 61% to $8.1 million in 1992,
primarily as a result of the increased reinsurance volume.
21
ASSET MANAGEMENT
FINANCIAL SERVICES
Summary of Results
(DOLLAR AMOUNTS IN THOUSANDS)
1993 1992 1991
---------------- ---------------- ---------------
% OF % OF % OF
AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
-------- ------- -------- ------- ------- -------
Commission revenue........... $ 78,151 46.8% $ 76,793 49.2% $61,041 45.9%
Asset management fees........ 64,181 38.5 56,056 36.0 48,341 36.3
Service fees................. 21,273 12.7 19,890 12.8 18,812 14.1
Real estate fees............. -0- 0.0 436 0.3 1,261 1.0
-------- ----- -------- ----- ------- -----
Financial services revenue*. 163,605 98.0 153,175 98.3 129,455 97.3
Investment and other income.. 3,293 2.0 2,736 1.7 3,624 2.7
-------- ----- -------- ----- ------- -----
Total revenue............... 166,898 100.0 155,911 100.0 133,079 100.0
Commissions and selling
expenses.................... 70,819 42.4 70,005 44.9 56,768 42.7
Other expenses............... 23,265 14.0 21,619 13.9 20,563 15.4
-------- ----- -------- ----- ------- -----
Total expenses.............. 94,084 56.4 91,624 58.8 77,331 58.1
-------- ----- -------- ----- ------- -----
Pretax income................ $ 72,814 43.6% $ 64,287 41.2% $55,748 41.9%
======== ===== ======== ===== ======= =====
- --------
*Financial services revenue includes $26.2 million in 1993, $19.7 million in
1992, and $15.1 million in 1991 representing revenues from other Torchmark
segments which are eliminated in consolidation.
Financial services: Total revenues for financial services operations grew 7%
in 1993 to $167 million from the prior-year amount of $156 million, which
reflected a 17% increase over 1991. Financial services revenue consists of
commission revenue derived primarily from the sale of mutual funds, insurance,
and variable and fixed annuity products by the W&R sales representatives. It
is also comprised of asset management and service fees.
Commission revenue from sales of investment products, which include mutual
funds and variable annuity products, represented 84% of total commission
revenue. The remaining source of commission revenue is from insurance product
sales, which are derived primarily from UILIC. Insurance and variable annuity
product commissions are eliminated in consolidation. Investment product
commissions rose 2% in 1993 to $66 million, after having increased 33% in 1992
to $65 million from $49 million. Investment product sales were $1.25 billion
in 1993, climbing 9% over 1992 sales of $1.14 billion. Sales of these products
rose 40% in 1992. Investment product sales for 1993 consisted of United Funds
(75%), variable annuities (16%), Waddell & Reed Funds (8%), and other products
(1%). Sales of the United Funds declined 5% to $939 million in 1993, while
sales of the Waddell & Reed Funds, which were introduced in 1992 as a
deferred-load product to give investors five new mutual funds as additional
investment alternatives, almost tripled to $94 million. Sales of variable
annuities grew 74% to $204 million. Growth in 1993 commission revenue for
investment products has been less than the growth in sales because 1993 sales
of the United Funds, for which commission revenue is earned at the point of
sale, declined from 1992 while sales of the Waddell & Reed Funds, for which
distribution revenues are earned subsequent to the point of sale, increased.
Waddell & Reed Funds' distribution fees are derived from an annual asset-based
charge. In addition, the maximum sales charge on the United Funds was reduced
in August, 1993 to improve their competitive position partially offset by an
increased annual fee. As of October 1, 1993, the United Fund instituted a
Section 12b-(1) service fee to reimburse W & R for expenses it incurs in
servicing shareholder accounts.
Asset management fees increased 14% in 1993 to $64 million, after an
increase of 16% in 1992 to $56 million. Growth in management fees in both
periods was caused by the increase in average mutual fund and institutional
assets under management. The increase in assets under management resulted from
the stronger financial markets experienced in 1993 and 1992 over the prior
periods, and from additional product sales. Assets under management were $14.5
billion at December 31, 1993, $12.1 billion at December 31, 1992, and $10.7
billion at December 31, 1991. Service fees grew 7% to $21.2 million in 1993.
Service fees were $19.9 million in 1992, increasing 6% over 1991 fees of $18.8
million. The number of accounts serviced was 1.09 million at December 31,
1993, compared to 1.03 million a year earlier.
22
Commissions and selling expenses as a percentage of commission revenue were
stable at 91% in both 1993 and 1992, after having declined from 93% in 1991.
The 1992 decline was a result of the fixed nature of a large portion of these
expenses which remained constant while commission revenues grew in 1992.
Margin improvement in 1993 was mainly caused by the increase in proportion of
asset management fees to total revenues, which have a significantly higher
margin than commission revenues.
ENERGY
Summary of Results
(DOLLAR AMOUNTS IN THOUSANDS)
1993 1992 1991
-------------------- ------------------- -------------------
% OF % OF % OF
RECURRING RECURRING RECURRING
AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
--------- --------- -------- --------- -------- ---------
Recurring energy reve-
nues:
Product marketing reve-
nues.................. $ 174,080 200.9% $ 98,352 130.2% $ 27,674 49.7%
Less product costs..... (165,068) (190.5) (91,356) (120.9) (24,532) (44.1)
--------- ------ -------- ------ -------- -----
Net product marketing
revenues.............. 9,012 10.4 6,996 9.3 3,142 5.6
Production revenues.... 45,427 52.4 38,155 50.5 27,918 50.2
Asset management reve-
nues.................. 15,233 17.6 15,057 19.9 13,555 24.4
Well operations reve-
nues.................. 14,310 16.5 13,806 18.3 10,226 18.4
--------- ------ -------- ------ -------- -----
Total recurring operat-
ing revenues.......... 83,982 96.9 74,014 98.0 54,841 98.6
Investment income....... 2,674 3.1 1,525 2.0 772 1.4
--------- ------ -------- ------ -------- -----
Total recurring reve-
nue................... 86,656 100.0 75,539 100.0 55,613 100.0
--------- ------ -------- ------ -------- -----
Depletion............... 22,328 25.8 19,450 25.8 12,532 22.5
Direct expenses......... 10,494 12.1 10,353 13.7 7,536 13.6
--------- ------ -------- ------ -------- -----
Energy operations ex-
pense................. 32,822 37.9 29,803 39.5 20,068 36.1
Administrative expenses. 34,905 40.2 29,920 39.6 22,424 40.3
Interest................ 7,591 8.8 5,365 7.1 7,356 13.2
--------- ------ -------- ------ -------- -----
Total expense.......... 75,318 86.9 65,088 86.2 49,848 89.6
--------- ------ -------- ------ -------- -----
Pretax operating income. 11,338 13.1 10,451 13.8 5,765 10.4
Gain from sale of prop-
erties*................ 22,030 25.4 0 0.0 0 0.0
--------- ------ -------- ------ -------- -----
Pretax income........... $ 33,368 38.5% $ 10,451 13.8% $ 5,765 10.4%
========= ====== ======== ====== ======== =====
- --------
*Included in energy operations revenues.
Energy operations: The energy operations of Torchmark include the management
of proven producing oil and gas properties for both affiliates and unrelated
parties by its subsidiary Torch Energy. Energy operations also include
drilling of developmental wells, acquisition of properties and facilities, and
marketing of oil and gas products by Torch Energy. A further discussion of the
energy property investments of Torchmark's insurance subsidiaries, which are
are not included in the above table, is included under "Investment
operations."
Energy operations revenues rose $32 million or 43% in 1993 over the prior
year to $106 million. Included in 1993 revenue was a one-time gain from the
sale of a large offshore producing property in the amount of $22 million.
Excluding this gain, the revenue increase was 13.5%. Revenues for 1992 were
$74 million, increasing 35% over 1991. Profitability in energy operations
improved in each of the periods considered, with recurring pretax income
rising from $5.8 million in 1991 to $10.5 million in 1992 and $11.3 million in
1993, an increase of 81% in 1992 and 8% in 1993.
All phases of energy operations have grown consistently in each of the years
1991 through 1993. The largest percentage growth in revenues in 1993 was
derived from product-marketing activities, which grew by 29% in 1993 after
having more than doubled in 1992. Product marketing was also the major
contributor to recurring energy profit margins in 1993. This activity involves
selling certain energy products, which were acquired through purchase
agreements with affiliated and unaffiliated parties. Net product revenues are
computed after deducting the costs of the production sold from the gross
marketing revenues.
23
Production properties were another source of energy operation profits
throughout the period 1991 through 1993. Torch Energy's participation as a
working interest owner, in properties purchased for certain institutional
clients as well as drilling and workover activities in directly-owned
properties, contributed to the increases in production revenues for 1993 and
1992. These activities have generally been centered around offshore producing
properties acquired from Placid Oil Company ("Placid") in 1991. These
properties were sold in late 1993, resulting in the previously-mentioned $22
million gain. Higher interest rates associated with the refinancing of
property-related debt resulted in approximately $2.2 million in additional
interest expense in 1993 as compared to 1992 amounts. A general decline in
interest rates during 1992 and principal payments resulted in the decrease in
interest expense from 1992 to 1991.
Torch Energy and its subsidiaries are also involved in asset management and
well operations. Revenues in these categories also increased in each period.
Assets under management increased from $929 million at year-end 1991 to $1.2
million at year-end 1992 and 1993.
Investment operations: Torchmark's investment strategy continues to
emphasize high-quality fixed income securities. Attractive investment
opportunities in the municipal sector of the bond market in 1993 resulted in
significant purchases of insured municipal bonds during the year,
complementing purchases of government-guaranteed GNMA securities and high-
quality corporate bonds, the traditional backbone of the Torchmark investment
program. Fixed income acquisitions for insurance companies totalled $1.7
billion, evenly divided between mortgage-backed securities, municipals and
corporates. With its emphasis on fixed-income assets, the distribution of
Torchmark investments varies substantially with the industry, as evidenced by
the latest information provided by the ACLI:
TORCHMARK
------------------- INDUSTRY %
($ MILLIONS) % (1)
------------ ------ ----------
Government bonds (2)............................. $3,440.6 63.2% 20.0%
Investment grade bonds (3)....................... 1,292.1 23.7% 32.7%
Noninvestment grade bonds........................ 14.4 0.3% 7.4%
Equities......................................... 56.0 1.0% 12.7%
Mortgage loans................................... 4.2 0.1% 12.9%
Real estate...................................... 110.7 2.0% 3.1%
Policy loans..................................... 149.9 2.8% 4.1%
Other............................................ 372.8 6.9% 7.1%
-------- ------ ------
$5,440.7 100.0% 100.0%
======== ====== ======
- --------
(1) Estimated December 31, 1993 percentages provided by ACLI
(2) Includes private label CMO's with GNMA collateral
(3) Includes $183 million in short-term investments
At 1993 year end, government or government-guaranteed securities and
invested cash totalled $2.9 billion, 61% of the bond and short-term portfolio.
Investment-grade holdings represented 99.7% of fixed income portfolio and
68.7% were rated "AAA" by Moody's or Standard & Poor's. Investments in
noninvestment-grade bonds, which continue to decline, totalled only $13.7
million at year end with a market value of $14.4 million.
The considerable volatility in GNMA prepayments experienced over the past
several years continued throughout 1993. As a result, emphasis was placed on
the acquisition of noncallable medium-term fixed income investments. With the
continued decline in long-term rates, the slightly longer average life of
newly acquired investments generally offset the shortening of GNMA holdings.
The estimated average life of the total fixed income portfolio has remained
stable at 6.0, 6.1, and 5.9 years for December 31, 1993, 1992, and 1991,
respectively.
The emphasis on medium-term maturities has impacted the estimated repayment
of the portfolio only slightly. The following table presents an estimated
maturity schedule as of December 31, 1993, incorporating unscheduled
repayments on mortgage-backed securities:
24
YEAR % OF TOTAL
---- ----------
Short-terms..................... 2.2%
Under 1 year.................... 13.2
From 2 to 5 years............... 31.7
From 5 to 10 years.............. 42.2
From 10 to 20 years............. 10.2
Over 20 years................... 0.5
-----
100.0%
=====
Net investment income declined 2.7% in 1993 to $372 million, after having
risen 5.1% in 1992 to $383 million. Several factors were involved in the 1993
decrease. Energy investment income accounted for $18.7 million of the total
decline, caused primarily by completion of development of Torchmark's coalbed
methane development discussed below for which earnings are derived primarily
from tax credits. Also, lower energy prices were a factor. A second major
factor in the decline was the lower rates available on new investments in 1993
when compared to prior years. Additionally, the increased GNMA prepayment
activity resulted in substantial reinvestments at prevailing lower rates. The
increased investments in tax-advantaged products also contributed to the lower
investment income. On a tax-equivalent basis, net investment income actually
increased 1.5%. At book value, average invested assets grew 9.9% in 1993,
compared to an increase of 9.4% in 1992. With the continuing decline in
interest rates during 1993, acquisition of new investments had an expected
taxable equivalent yield of 6.68%, compared with 7.75% in 1992 and 8.60% in
1991.
In 1992, Torchmark designated approximately 26% of its total bond portfolio
as "available for sale." In order to preserve total flexibility, it was
decided to designate the entire fixed income portfolio as "available for
sale." These securities, with a book value of $4.4 billion and a market value
of $4.6 billion, will be available for active investment management in the
future.
Torchmark's holdings in energy investments declined 12% to $346 million at
December 31, 1993, representing 6.4% of total investments, compared to $393
million or 8% of total investments at December 31, 1992. Energy investments
were $335 million at year-end 1991. The 1992 increase was in large part a
result of additional investment and capitalized development costs in the
coalbed methane gas development in the Black Warrior Basin in Alabama. The
decrease in 1993 primarily resulted from the sale of property to a royalty
trust and the disposition of $13 million of Nuevo stock.
Wells in the Black Warrior Basin produce methane gas from coal seam
formations. This production increases as wells are dewatered and for a period
thereafter, after which time gas production declines. Prior to 1993, all the
wells were being dewatered and development costs including interest were
capitalized. During 1993, production increased and the capitalization of
interest was phased out. Gas production from wells in the Black Warrior Basin
qualify for a Federal income tax credit which is estimated to be $.97 per
thousand cubic feet of gas produced for 1993 and will continue through 2003.
The credit phases out if the price of crude oil exceeds $43.58 per barrel,
which was substantially higher than the price of crude oil at December 31,
1993. Credits were recognized as a reduction in taxes in the amount of $6.5
million in 1993, $2.9 million in 1992 and $.4 million in 1991. An additional
$4.4 million in tax credits were recognized in 1993 on other energy
investments.
25
LIQUIDITY AND CAPITAL RESOURCES
Liquidity: Torchmark's high level of liquidity is represented by its strong
positive cash flow, its liquid assets, and the availability of a line of
credit facility. As is typical of established life insurance companies,
Torchmark generates cash flow from premium, investment, and other income
generally well in excess of its immediate needs for policy obligations,
expenses, and other requirements. Additionally, because of the nature of the
life insurance business, cash flow is also quite stable and predictable.
Torchmark's cash flow has been strong and more than adequate to meet current
needs. Cash provided from operations, including cash provided from deposit-
product operations, was $488 million in 1993, compared to $554 million in
1992, and $479 million in 1991. In addition, Torchmark received $1.16 billion
in 1993, $808 million in 1992, and $392 million in 1991 from scheduled
investment maturities as well as unscheduled GNMA and other principal
repayments. Cash flow from operations and investment repayments in excess of
debt service and shareholder dividends are generally invested to enhance
return.
Cash and short-term investments were $237 million at December 31, 1993,
compared to $139 million at December 31, 1992, an increase of 70%. These
liquid assets represented over 3% of total assets at December 31, 1993,
compared to 2% at the prior year end. In addition to Torchmark's liquid
assets, Torchmark has marketable fixed and equity securities with a value of
$4.6 billion at December 31, 1993 which are available for sale should the need
arise.
Torchmark maintains a line of credit facility with a group of banks which
allows borrowings up to $250 million, of which $107 million was borrowed at
year-end 1993. This line is available to Torchmark at any time up to the
maximum amount, although Torchmark is subject to certain covenants regarding
capitalization and earnings. At December 31, 1993, Torchmark was in full
compliance with these covenants.
Liquidity of the parent company is affected by the ability of the
subsidiaries to pay dividends. Dividends are paid by subsidiaries to the
parent in order to meet its dividend payments on common and preferred stock,
interest and principal repayment requirements on parent company debt, and
operating expenses of the parent company. Dividends from insurance
subsidiaries of Torchmark are limited to the greater of statutory net gain
from operations on an annual noncumulative basis or 10% of surplus, not to
exceed earned surplus, in the absence of special approval. Although these
restrictions exist, dividend availability from subsidiaries has been and is
expected to be more than adequate for parent-company operations. At December
31, 1993 a maximum amount of $388 million was available to Torchmark from
insurance subsidiaries without regulatory approval.
Capital Resources: Torchmark's long-term debt stood at $792 million at
December 30, 1993, compared to $498 million at December 31, 1992. Two new
major debt issuances in 1993 accounted for this increase. In May, 1993,
Torchmark issued $200 million principal amount 7 7/8% Notes due 2023 for net
proceeds of $196 million after issue costs. This issue was registered in a
1992 shelf registration. In July, 1993, Torchmark issued notes with a
principal amount of $100 million due in the year 2013 which bear interest at a
rate of 7 3/8%. Proceeds of this issue, net of issue costs, were $98.3
million. A substantial portion of the proceeds from these new debt issuances
was used to acquire the remaining interest in United Management.
In addition to these new issues outstanding at December 31, 1993, Torchmark
had three other major debt issues outstanding at both year-end 1993 and 1992.
These issues consisted of: (1) 8 5/8% Sinking Fund Debentures due 2017, $200
million principal amount; (2) 9 5/8% Senior Notes due 1998, $200 million
principal amount; and (3) 8 1/4% Senior Debentures due 2009, $100 million
principal amount. All major debt issues, including the newly-issued 1993
Notes, were carried at a balance of $790 million at December 31, 1993, after
deducting the unamortized discount, compared to $496 million at December 31,
1992.
During 1993, Torchmark's short-term debt declined from $277 million at year-
end 1992 to $107 million at December 31, 1993. Torchmark paid down $88 million
on its line of credit facility, net of borrowings. Additionally, energy
subsidiaries repaid $82 million of debt related to previously-acquired energy
properties which has been repaid in full.
26
In 1993, Torchmark acquired 850 thousand shares of its common stock on the
open market at an aggregate cost of $42 million. While Torchmark is not
actively acquiring shares of its common stock at the current time, it may do
so from time to time at favorable prices. Torchmark acquired 4.2 million
shares at a cost of $158 million in 1992 and 1.3 million shares at a cost of
$44 million in 1991.
In early 1992, Torchmark acquired $33.7 million face amount of its
adjustable-rate preferred stock at a cost of $31.5 million. In 1991, Torchmark
also acquired $6.1 million face value at a cost of $5.3 million, and in 1990,
$13.1 million face value of the preferred stock was acquired at a price of $11
million. This stock is reported in the financial statements as treasury stock
at a cost of $47.8 million. No preferred shares were acquired in 1993.
Torchmark has announced it will acquire the balance of its adjustable-rate
preferred stock outstanding at face amount plus accrued dividends of $1.13 per
share on March 31, 1994.
In January, 1994, Torchmark filed with the Securities and Exchange
Commission a Form S-3 registering up to $200 million in securities in the form
of preferred stock, depository shares, or some combination thereof. The net
proceeds from the sale of these securities will be used for general corporate
purposes, which may include repayment of bank debt, additional capitalization
of insurance subsidiaries, the repurchase of shares of Torchmark's adjustable-
rate preferred stock and common stock, and possible acquisitions.
Shareholders' equity was $1.42 billion at December 31, 1993, an increase of
27% over the $1.12 billion at December 31, 1992. Approximately 10% of this
increase was due to Torchmark's election to classify all fixed maturities as
available for sale. Book value per share was $18.80 at December 31, 1993,
compared to $14.54 at December 31, 1992. Return on common shareholders' equity
was 24.2% in 1993, compared to 26.4% in 1992. Long-term debt as a percentage
of equity was 56% at December 31, 1993, compared to 45% at December 31, 1992,
as a result of the new debt issuances. Total debt as a percentage of total
capitalization was 39% at December 31, 1993 versus 41% at year-end 1992. The
multiple of earnings before interest and taxes to interest requirements was
7.5 for 1993, compared to 8.0 for 1992 and 7.4 for 1991.
Purchase of United Management Minority Interest. In February, 1993,
Torchmark submitted a merger proposal to the United Management Board of
Directors to acquire the approximately 17% of the nonvoting common stock of
United Management then held by the public in exchange for a new issue of
Torchmark convertible debentures, subject to an evaluation by a committee
comprised of the independent members of the United Management Board (the
"Special Committee") and to approval by a majority vote of the holders of the
publicly-held nonvoting common shares. In May, 1993, Torchmark modified its
proposal to provide that United Management shareholders would receive $31.25
per share in cash in exchange for their shares if the transaction were to be
completed. In May, 1993, the Special Committee recommended proceeding with the
merger to the United Management Board of Directors, who then approved the
merger. Accordingly, United Management and Torchmark executed an Agreement and
Plan of Merger which was to be completed on October 1, 1993. During the third
quarter of 1993, Torchmark acquired 306 thousand United Management shares on
the open market at an aggregate price of $9.4 million.
On October 1, 1993, United Management was merged into a wholly-owned
subsidiary of Torchmark. As a result of the merger, Torchmark acquired the
approximately 16% of United Management that it did not already own through the
payment of $31.25 per share in cash for the remaining outstanding shares.
Including the third quarter purchases, the total amount of consideration paid
for the publicly held shares of the United Management shareholders was
approximately $234 million.
Divestiture of Vesta Insurance Group. On July 23, 1993, Torchmark announced
that it was considering a public offering of shares of common stock of its
wholly-owned subsidiary, Vesta Insurance Group, Inc. ("Vesta"), which had been
recently formed to be the holding company for Torchmark's property and
casualty operations. On August 31, 1993, a Form S-1 registration statement was
filed by Vesta with the Securities and Exchange Commission. On October 20,
1993, Vesta filed an amendment to this Form S-1 to offer for sale up to 9.9
million shares of its common stock at an estimated price of $24.50 to $26.50
per share, of which 2.2 million would be newly issued shares and the balance
would be shares previously owned by Torchmark. On November 10, 1993, the Form
S-1 registration statement became effective and on November 11, 1993, a total
of 9 million shares of Vesta common stock was sold. Of the total number of
Vesta shares sold, Torchmark sold 6.8 million shares for net proceeds of
approximately
27
$161 million or $25 per share less expenses, resulting in a $57 million gain.
After the transaction, Torchmark continued to own 3.4 million shares of Vesta
outstanding common stock or approximately 27% of the company. Torchmark also
loaned Vesta $28 million in December, 1993.
NEW ACCOUNTING RULES
Accounting by Creditors for Impairment of a Loan (FASB Statement No. 114)
for fiscal years beginning after December 15, 1994. This Statement addresses
the accounting by creditors for impairment of certain loans. It essentially
requires that impaired loans that are within the scope of this Statement be
measured based on the present value of expected future cash flows discounted
at the loan's effective interest rate or at the loan's observable market price
or the fair value of the collateral if the loan is collateral dependent. The
effect of adoption of this Standard will be immaterial to Torchmark.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
Independent Auditors' Report.............................................. 30
Consolidated Financial Statements:
Consolidated Balance Sheet at December 31, 1993 and 1992................. 31
Consolidated Statement of Operations for the three years ended December
31, 1993................................................................ 32
Consolidated Statement of Shareholders' Equity for the three years ended
December 31, 1993....................................................... 33
Consolidated Statement of Cash Flow for the three years ended December
31, 1993................................................................ 34
Notes to Consolidated Financial Statements............................... 35
29
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Torchmark Corporation
Birmingham Alabama
We have audited the consolidated financial statements of Torchmark
Corporation and subsidiaries as listed in item 8 and the supporting schedules
as listed in Item 14(a). These financial statements and financial statement
schedules are the responsibility of Torchmark's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial statement schedules are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Torchmark
Corporation and subsidiaries at December 31, 1993 and 1992, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1993, 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 Notes 1 and 9 to the consolidated financial statements,
Torchmark changed its method of accounting for income taxes to adopt the
provisions of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards (Statement) No. 109, Accounting for Income
Taxes, in 1993. As discussed in Note 3, Torchmark adopted the provisions of
the Financial Accounting Standards Board's Statement No. 115, Accounting for
Certain Investments in Debt and Equity Securities at December 31, 1993. Also,
as discussed in Note 11, Torchmark adopted the provisions of the Financial
Accounting Standards Board's Statement No. 106, Employers' Accounting for
Postretirement Benefits Other than Pensions, in 1993.
KPMG PEAT MARWICK
Birmingham, Alabama
February 4, 1994
30
TORCHMARK CORPORATION
CONSOLIDATED BALANCE SHEET
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31,
----------------------
1993 1992
---------- ----------
Assets:
Investments:
Fixed maturities held to maturity, at amortized cost
(estimated market value:
1992--$3,168,452)................................... $ -0- $3,005,469
Fixed maturities--available for sale, at market value
in 1993 and at lower of cost or market value in 1992
(cost: 1993--$4,387,026; estimated market value:
1992--$1,118,211)................................... 4,579,034 1,066,477
Equity securities, at market (cost: 1993--$31,221;
1992--$39,856)...................................... 40,961 53,519
Mortgage loans on real estate, at cost (estimated
market value: 1993--$4,024; 1992--$7,367); 4,147 7,464
Investment real estate, at cost (less allowance for
depreciation: 1993--$24,250; 1992--$25,055)......... 110,730 114,813
Policy loans......................................... 149,890 144,797
Energy investments................................... 345,805 393,085
Other long-term investments (at market value)........ 26,989 19,726
Short-term investments............................... 183,166 120,609
---------- ----------
Total investments................................... 5,440,722 4,925,959
Cash (includes restricted cash: 1993--$18,191; 1992--
$13,240)............................................. 53,408 18,706
Investment in unconsolidated subsidiaries............. 79,319 35,235
Accrued investment income............................. 56,801 50,163
Other receivables..................................... 152,910 130,874
Deferred acquisition costs............................ 901,565 904,147
Value of insurance purchased.......................... 131,602 152,421
Property and equipment................................ 80,511 183,114
Goodwill.............................................. 178,645 50,841
Other assets.......................................... 26,432 25,499
Separate account assets............................... 544,327 293,156
---------- ----------
Total assets........................................ $7,646,242 $6,770,115
========== ==========
Liabilities:
Future policy benefits................................ $3,745,416 $3,515,874
Unearned and advance premiums......................... 96,206 138,993
Policy claims and other benefits payable.............. 159,451 188,270
Other policyholders' funds............................ 4,313 3,777
---------- ----------
Total policy liabilities............................. 4,005,386 3,846,914
Accrued income taxes.................................. 413,072 376,018
Other liabilities..................................... 366,759 275,722
Short-term debt....................................... 107,108 276,819
Long-term debt (estimated market value: 1993--
$857,715; 1992--$531,845)............................ 792,335 497,867
Separate account liabilities.......................... 544,327 293,156
---------- ----------
Total liabilities.................................... 6,228,987 5,566,496
Commitments and contingencies
Minority interests in consolidated subsidiaries........ -0- 87,959
Shareholders' equity:
Preferred stock, par value $1 per share--Authorized
5,000,000 shares; outstanding: 1,000,000 issued less
530,180 shares held in treasury in 1993 and 1992..... 1,000 1,000
Common stock, par value $1 per share--Authorized
160,000,000 shares; outstanding 141,014,540 issued in
1993 and 140,742,346 issued in 1992, less 67,230,312
shares held by subsidiaries in both years............ 73,784 73,512
Additional paid-in capital............................ 232,432 212,021
Unrealized gains, net of applicable taxes............. 120,138 9,182
Retained earnings..................................... 1,082,031 867,698
Treasury stock........................................ (92,130) (47,753)
---------- ----------
Total shareholders' equity........................... 1,417,255 1,115,660
---------- ----------
Total liabilities and shareholders' equity........... $7,646,242 $6,770,115
========== ==========
See accompanying Notes to Consolidated Financial Statements.
31
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1992 1991
---------- ---------- ----------
Revenue:
Life premium.............................. $ 555,859 $ 544,745 $ 524,303
Health premium............................ 799,835 797,855 769,821
Other premium............................. 137,216 111,362 71,689
---------- ---------- ----------
Total premium........................... 1,492,910 1,453,962 1,365,813
Net investment income..................... 372,470 382,744 364,114
Financial services revenue................ 137,422 133,462 114,327
Energy operations revenue................. 106,013 74,014 54,841
Realized investment gains (losses)........ 8,009 (948) 4,195
Gain from sale of Vesta shares............ 57,234 -0- -0-
Other income.............................. 2,777 2,576 4,147
---------- ---------- ----------
Total revenue........................... 2,176,835 2,045,810 1,907,437
Benefits and expenses:
Life policyholder benefits................ 377,017 366,194 344,844
Health policyholder benefits.............. 486,855 491,343 474,468
Other policyholder benefits............... 107,684 96,011 74,001
---------- ---------- ----------
Total policyholder benefits............. 971,556 953,548 893,313
Amortization of deferred acquisition
costs.................................... 187,073 195,434 207,747
Commissions and premium taxes............. 172,801 165,932 154,440
Financial services selling expense........ 47,055 51,902 43,403
Energy operations expense................. 32,822 29,803 20,068
Other operating expense................... 174,861 170,008 157,497
Nonoperating expenses..................... 82,000 5,652 -0-
Interest expense.......................... 67,261 55,661 50,212
---------- ---------- ----------
Total benefits and expenses............. 1,735,429 1,627,940 1,526,680
Net income before income taxes and equity
in earnings of
unconsolidated subsidiaries............... 441,406 417,870 380,757
Income taxes............................... (153,086) (140,844) (125,449)
Equity in earnings of unconsolidated sub-
sidiaries................................. 1,952 828 1,140
Minority interests in consolidated subsidi-
aries..................................... (10,696) (12,377) (9,959)
---------- ---------- ----------
Net income before cumulative effect of
changes in accounting
principles............................. 279,576 265,477 246,489
Cumulative effect of changes in accounting
principles................................ 18,403 -0- -0-
---------- ---------- ----------
Net income.............................. 297,979 265,477 246,489
Dividends to preferred shareholders........ (3,289) (3,453) (6,116)
---------- ---------- ----------
Net income available to common share-
holders................................ $ 294,690 $ 262,024 $ 240,373
========== ========== ==========
Net income per share before cumulative ef-
fect of changes in
accounting principles..................... $ 3.76 $ 3.58 $ 3.13
Cumulative effect of changes in accounting
principles................................ .25 -0- -0-
---------- ---------- ----------
Net income per share....................... $ 4.01 $ 3.58 $ 3.13
========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
32
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
ADDITIONAL UNREALIZED TOTAL
PREFERRED COMMON PAID-IN GAINS RETAINED TREASURY SHAREHOLDERS'
STOCK STOCK CAPITAL (LOSSES) EARNINGS STOCK EQUITY
--------- ------- ---------- ---------- ---------- -------- -------------
Year Ended December 31,
1991
Balance at January 1,
1991................... $1,000 $51,315 $152,825 $ (6,940) $756,548 $(10,961) $ 943,787
Net income for the year. 246,489 246,489
Common dividends de-
clared ($1.00 a share). (79,123) (79,123)
Preferred dividends
declared and accrued... (6,116) (6,116)
Issuance of common
stock.................. 487 19,933 20,420
Acquisition of treasury
stock.................. (58,286) (58,286)
Retirement of treasury
stock.................. (1,039) (6,779) (45,143) 52,961 -0-
Net change in unrealized
gains (losses)......... 12,080 12,080
------ ------- -------- -------- ---------- -------- ----------
Balance at December 31,
1991.................. 1,000 50,763 165,979 5,140 872,655 (16,286) 1,079,251
Year Ended December 31,
1992
Net income for the year. 265,477 265,477
Common dividends de-
clared ($1.07 a share). (77,961) (77,961)
Preferred dividends
declared and accrued... (3,453) (3,453)
Three-for-two stock
split in the form of a
dividend............... 24,175 (24,175) -0-
Issuance of common
stock.................. 2,192 81,867 84,059
Acquisition of treasury
stock.................. (235,755) (235,755)
Retirement of treasury
stock.................. (3,618) (35,825) (164,845) 204,288 -0-
Net change in unrealized
gains (losses)......... 4,042 4,042
------ ------- -------- -------- ---------- -------- ----------
Balance at December 31,
1992.................. 1,000 73,512 212,021 9,182 867,698 (47,753) 1,115,660
Year Ended December 31,
1993
Net income for the year. 297,979 297,979
Common dividends de-
clared ($1.09 a share). (80,357) (80,357)
Preferred dividends
declared and accrued... (3,289) (3,289)
Issuance of common
stock.................. 272 15,290 312 15,874
Grant of stock options.. 5,121 5,121
Acquisition of treasury
stock.................. (44,689) (44,689)
Net change in unrealized
gains (losses)......... 110,956 110,956
------ ------- -------- -------- ---------- -------- ----------
Balance at December 31,
1993.................. $1,000 $73,784 $232,432 $120,138 $1,082,031 $(92,130) $1,417,255
====== ======= ======== ======== ========== ======== ==========
See accompanying Notes to Consolidated Financial Statements.
33
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1992 1991
---------- ---------- ----------
Net income................................. $ 297,979 $ 265,477 $ 246,489
Adjustments to reconcile net income to cash
provided from operations:
Increase in future policy benefits....... 140,867 114,335 68,992
Increase in other policy benefits........ 7,548 26,435 260
Deferral of policy acquisition costs..... (214,318) (220,630) (202,111)
Amortization of deferred acquisition
costs................................... 187,073 195,434 207,747
Change in accrued income taxes........... (9,411) (2,505) 15,573
Depreciation and depletion............... 35,607 33,481 25,562
Realized (gains) losses on sale of in-
vestments,
subsidiaries, and properties............ (65,243) 948 (4,195)
Change in accounts payable and other lia-
bilities................................ 91,635 66,445 19,100
Change in receivables.................... (18,528) (43,580) (10,138)
Change in payables and receivables of un-
consolidated affiliates................. (28,506) 5,430 (30,435)
Other accruals and adjustments........... (25,596) (5,803) 1,440
---------- ---------- ----------
Cash provided from operations.............. 399,107 435,467 338,284
Cash used for investment activities:
Investments sold or matured:
Fixed maturities available for sale--
sold.................................... 245,689 -0- -0-
Fixed maturities available for sale--ma-
tured, called, and repaid............... 485,112 -0- -0-
Fixed maturities held to maturity--sold.. 58,028 403,034 631,114
Fixed maturities held to maturity--ma-
tured, called, and repaid............... 669,998 808,132 391,667
Equity securities........................ 9,909 11,302 33,202
Mortgage loans........................... 2,654 1,685 1,552
Real estate.............................. 7,351 3,987 1,961
Other long-term investments.............. 49,776 17,062 16,644
---------- ---------- ----------
Total investments sold or matured....... 1,528,517 1,245,202 1,076,140
Acquisition of investments:
Fixed maturities--available for sale..... (99,453) -0- -0-
Fixed maturities--held to maturity....... (1,761,776) (1,540,775) (1,855,182)
Equity securities........................ (830) (19,786) (3,810)
Real estate.............................. (10,129) (19,560) (13,835)
Net increase in policy loans............. (5,093) (3,185) (1,061)
Energy investments....................... (11,642) (59,764) (131,879)
Other long-term investments.............. (6,287) (9,085) (3,685)
---------- ---------- ----------
Total acquisition of investments........ (1,895,210) (1,652,155) (2,009,452)
Net (increase) decrease in short-term in-
vestments................................ (119,815) 39,309 569,133
Investment in subsidiaries and affiliates. (229,063) -0- (19,265)
Proceeds from sale of stock in subsidiar-
ies...................................... 187,220 -0- -0-
Loans made to affiliates.................. (28,000) (34,854) -0-
Loans repaid by affiliates................ 550 49,704 -0-
Dispositions of properties................ 68,650 957 10,760
Additions to properties................... (15,849) (40,366) (122,191)
Dividends from unconsolidated affiliates.. 620 -0- -0-
---------- ---------- ----------
Cash used for investment activities........ (502,380) (392,203) (494,875)
Cash provided from (used for) financing ac-
tivities:
Issuance of common stock.................. 6,669 15,472 5,834
Additions to debt......................... 359,110 237,261 172,015
Cash dividends paid to shareholders....... (82,932) (82,373) (83,063)
Cash distributions to minority interests.. (1,968) (1,830) (1,739)
Repayments on debt........................ (189,682) (137,048) (23,823)
Acquisition of treasury stock............. (41,897) (189,144) (49,487)
Net receipts from deposit product opera-
tions.................................... 88,675 118,385 140,863
---------- ---------- ----------
Cash provided from (used for) financing ac-
tivities.................................. 137,975 (39,277) 160,600
---------- ---------- ----------
Increase in cash.......................... 34,702 3,987 4,009
Cash at beginning of year................. 18,706 14,719 10,710
---------- ---------- ----------
Cash at end of year....................... $ 53,408 $ 18,706 $ 14,719
========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
34
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATE)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying financial statements have been
prepared in conformity with generally accepted accounting principles ("GAAP").
Principles of Consolidation: The financial statements include the results of
Torchmark Corporation ("Torchmark") and its wholly-owned subsidiaries and
United Investors Management Company ("United Management"). United Management
was approximately 83% owned through October 1, 1993 at which time Torchmark
acquired all of the publicly held shares. Torchmark deducts the interests of
minority shareholders from its shareholders' equity and operating results.
Subsidiaries which are not majority-owned are reported on the equity method.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Investments. Investments in fixed maturities include bonds and redeemable
preferred stocks. These fixed maturity investments are segregated as to those
which are available for sale and those which are held to maturity. In 1993,
Torchmark chose to classify all of its fixed maturity investments as available
for sale. These investments are carried at market value with unrealized gains
and losses, net of deferred taxes, reflected directly in shareholders' equity.
In 1992, the investments which were classified as available for sale were
carried at the lower of cost or market with unrealized losses, net of deferred
taxes, reflected in shareholders' equity. Fixed maturities held to maturity
are carried at amortized cost.
Investments in equity securities, which include common and nonredeemable
preferred stocks, are reported at market value. 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 one year. 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. Unrealized
gains and losses on equity securities and fixed maturities available for sale,
net of deferred income taxes, are reflected directly in shareholders' equity.
Realized investment gains and losses and investment income attributable to
separate accounts are credited to the separate accounts and have no effect on
Torchmark's net income. Investment income attributable to other policyholders
is included in Torchmark's net investment income. Net investment income for
the years ended December 31, 1993, 1992 and 1991 included $229.5 million,
$221.2 million, and $209.5 million, respectively, which was allocable to
policyholder reserves or accounts. Realized investment gains and losses are
not allocable to policyholders.
Determination of Fair Values of Financial Instruments: Fair value for cash,
short-term investments, 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. The
carrying amounts of short-term borrowings approximate their fair value.
Substantially all of Torchmark's long-term debt is valued based on quoted
market prices.
Cash: Cash consists of balances on hand and on deposit in banks and
financial institutions.
Recognition of Premium Revenue and Related Expenses: Premiums for insurance
contracts which are not defined as universal life-type according to SFAS 97
are recognized as revenue over the premium-paying period of the policy.
Profits for limited-payment life insurance contracts as defined by SFAS 97 are
recognized over the contract period. Premiums for universal life-type and
annuity contracts are added to the policy account value, and revenues for such
products are recognized as charges to the policy account value for mortality,
administration, and surrenders (retrospective deposit method). Life premium
includes policy charges of $76.2 million, $79.8 million, and $83.4
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
million for the years ended December 31, 1993, 1992 and 1991, respectively.
Other premium includes annuity policy charges for the years ended December 31,
1993, 1992 and 1991 of $9.5 million, $8.8 million and $7.4 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: The costs of acquiring new insurance business
are deferred. Such costs consist of sales commissions, underwriting expenses,
and certain other selling expenses. The costs of acquiring new business
through the purchase of other companies and blocks of insurance business are
also deferred.
Deferred acquisition costs, including the value of life insurance purchased,
for policies other than universal life-type policies according to SFAS 97 are
amortized with interest over an estimate of the premium-paying period of the
policies in a manner which charges each year's operations in proportion to the
receipt of premium income. For universal life-type policies, acquisition costs
are amortized with interest in proportion to estimated gross profits. The
assumptions used as to interest, persistency, morbidity and mortality are
consistent with those used in computing the liability for future policy
benefits and expenses. If it is determined that future experience will
probably differ significantly from that previously assumed, the estimates are
revised. Deferred acquisition costs are adjusted to reflect the amounts
associated with unrealized investment gains and losses pertaining to universal
life-type products.
Income Taxes: In February 1992, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes. Statement 109 requires a change from the deferred method of
accounting for income taxes of APB Opinion 11 to the asset and liability
method of accounting for income taxes. Under the asset and liability method of
Statement 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. 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. Under
Statement 109, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment
date.
Effective January 1, 1993, Torchmark adopted Statement 109 and has reported
the cumulative effect of that change in the method of accounting for income
taxes in the 1993 consolidated statement of operations. Prior years' financial
statements have not been restated to reflect Statement 109's provisions.
Pursuant to the deferred method under APB Opinion 11, which was applied in
1992 and prior years, deferred income taxes were recognized for revenue and
expense items that were reported in different years for financial reporting
purposes and income tax purposes using the tax rate applicable for the year of
the calculation. Under the deferred method, deferred taxes were not adjusted
for subsequent changes in tax rates.
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 twelve years for equipment and five to forty years for
buildings. Ordinary maintenance and repairs are charged to income as incurred.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Energy: Torchmark uses the successful-efforts method of accounting for its
energy operations. All costs associated with property acquisitions and
development of proved oil and gas reserves are capitalized. Capitalized costs
are amortized by the unit-of-production method based on estimated proved oil
and gas reserves. All costs relating to production activities are charged to
income as incurred. Energy properties owned by Torchmark's energy subsidiaries
are accounted for as "properties" and revenue therefrom is accounted for as
"energy operations revenues." Investments in oil and gas properties by
Torchmark's insurance subsidiaries are accounted for as "investments" and
income therefrom is accounted for as "investment income."
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.
Treasury Stock: Torchmark accounts for purchases of treasury stock on the
cost method.
Reclassification: Certain amounts in the financial statements presented have
been reclassified from amounts previously reported in order to be comparable
between years. These reclassifications have no effect on previously reported
shareholders' equity or net income during the periods involved.
Stock Split: On August 19, 1992, Torchmark distributed one share for every
two shares owned by shareholders on record as of August 5, 1992 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: Earnings available to holders of common stock are
computed after deducting dividends on the Adjustable Rate Cumulative Preferred
Stock. Primary earnings per share are then calculated by dividing the earnings
available to holders of common stock by the weighted average number of common
shares outstanding during the period. The weighted average numbers of common
shares outstanding for each period are as follows: 1993--73,501,654, 1992--
73,236,849, 1991--76,728,267
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 2--STATUTORY ACCOUNTING
Insurance subsidiaries of Torchmark are required to file statutory financial
statements with state insurance regulatory authorities. Accounting principles
used to prepare these statutory financial statements differ from GAAP.
Consolidated net income and shareholders' equity on a statutory basis for the
insurance subsidiaries were as follows:
NET INCOME SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, AT DECEMBER 31,
---------------------------- ---------------------
1993 1992 1991 1993 1992
-------- -------- -------- ---------- ----------
Life..................... $364,421* $268,807* $269,879* $ 653,403 $ 595,379
Property and casualty.... 6,449 3,049 4,476 0 68,335
*Includes equity in earnings of property and casualty subsidiaries
The excess, if any, of shareholders' equity of the insurance subsidiaries on
a GAAP basis over that determined on a statutory basis is not available for
distribution to Torchmark without regulatory approval.
A reconciliation of Torchmark's insurance subsidiaries' statutory net income
to Torchmark's consolidated GAAP net income is as follows:
YEAR ENDED DECEMBER 31,
---------------------------------
1993 1992 1991
---------- ---------- ---------
Statutory net income.................. $ 364,421 $ 268,807 $ 269,879
Deferral of acquisition costs......... 214,318 220,630 202,111
Amortization of acquisition costs..... (187,073) (195,434) (207,747)
Differences in insurance policy lia-
bilities............................. (42,364) (6,796) (12,385)
Deferred income taxes................. (22,281) (18,502) 17,987
Inter-affiliate dividends............. (194,442) (10,583) (9,601)
Income of noninsurance affiliates..... 136,748 (2,147) (11,278)
Other................................. 28,652 9,502 (2,477)
---------- ---------- ---------
GAAP net income....................... $ 297,979 $ 265,477 $ 246,489
========== ========== =========
A reconciliation of Torchmark's insurance subsidiaries' statutory
shareholders' equity to Torchmark's consolidated GAAP shareholders' equity is
as follows:
YEAR ENDED
DECEMBER 31,
----------------------
1993 1992
---------- ----------
Statutory shareholders' equity........ $ 653,403 $ 595,379
Differences in insurance policy lia-
bilities............................. 236,181 256,436
Deferred acquisition costs............ 908,065 904,022
Value of insurance purchased.......... 131,602 152,546
Deferred income taxes................. (343,843) (367,260)
Debt of parent company................ (897,429) (690,852)
Asset valuation reserves.............. 103,520 81,064
Nonadmitted assets.................... 15,199 21,480
Net assets of noninsurance affiliates
..................................... 533,978 433,786
Other................................. 76,579 (270,941)
---------- ----------
GAAP shareholders' equity............. $1,417,255 $1,115,660
========== ==========
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 3--INVESTMENT OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------
1993 1992 1991
-------- -------- --------
Investment income is summarized as follows:
Fixed maturities........................... $349,403 $354,963 $315,878
Equity securities.......................... 2,214 2,378 2,132
Mortgage loans on real estate.............. 1,163 742 814
Investment real estate..................... 6,804 9,354 5,778
Policy loans............................... 9,070 8,581 8,181
Energy investments......................... (3,585) 15,097 10,892
Other long-term investments................ 10,110 997 2,265
Short-term investments..................... 10,019 5,374 29,896
-------- -------- --------
385,198 397,486 375,836
Less investment expense.................... (12,728) (14,751) (11,518)
-------- -------- --------
Net investment income...................... 372,470 $382,735 $364,318
======== ======== ========
An analysis of gains (losses) from invest-
ments is as follows:
Realized investment gains (losses):
Fixed maturities.......................... $ 12,387 $ 7,837 $ 6,995
Equity securities......................... 702 513 (2,331)
Other..................................... (5,080) (9,298) (469)
-------- -------- --------
$ 8,009 $ (948) $ 4,195
======== ======== ========
Net change in unrealized investment gains
(losses) on
equity securities before tax.............. $ (1,855) $ 6,682 $ 13,075
Net change in unrealized investment gains
on fixed maturities available for sale
before tax................................ 192,380 0 0
Adjustment to deferred acquisition costs... (23,264) 0 0
Applicable tax............................. (59,055) (2,271) (2,010)
-------- -------- --------
Net change in unrealized gains (losses) on
equity and fixed maturity securities
available for sale........................ $108,206 $ 4,411 $ 11,065
======== ======== ========
Net increase (decrease) in market value
relative to carrying value of fixed matu-
rities during the year.................... $ 0 $(41,436) $198,367
======== ======== ========
In May, 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities. Statement 115 requires that investments be
classified in three categories and accounted for as follows: (i) Debt
securities which are purchased with the positive intent and ability to hold to
maturity should be classified as held-to-maturity and should be reported at
amortized cost; (ii) Debt and equity securities which are bought and held
principally for the purpose of selling them in the near term should be
classified as trading securities and should be reported at fair value, with
unrealized gains and losses included in earnings; and (iii) Debt and equity
securities which are not classified as either held-to-maturity or trading
securities should be classified as available for sale and should be reported
at fair value, with unrealized gains and losses excluded from earnings and
reported in a separate component of shareholders' equity.
Torchmark adopted Statement 115 at December 31, 1993 and chose to classify
all of its fixed maturity investments as available for sale. Prior year
financial statements have not been restated. At December 31, 1992, fixed
maturities held-to-maturity were carried at amortized cost and fixed
maturities available for sale were carried at the lower of amortized cost or
market.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 3--INVESTMENT OPERATIONS (CONTINUED)
A summary of fixed maturities held for investment and available for sale and
equity securities by amortized cost and estimated market value at December 31,
1993 and 1992 is as follows:
GROSS GROSS AMOUNT PER
AMORTIZED UNREALIZED UNREALIZED MARKET THE BALANCE
1993: COST GAINS LOSSES VALUE SHEET
- ----- ---------- ---------- ---------- ---------- -----------
Fixed maturities avail-
able for sale:
Bonds:
U.S. Government direct
obligations and
agencies............. $ 190,239 $ 7,916 $ 123 $ 198,032 $ 198,032
Mortgage-backed
securities........... 1,979,602 97,838 1,599 2,075,841 2,075,841
Mortgage-backed
securities, GNMA
collateral........... 424,828 24,393 80 449,141 449,141
State, municipalities
and political
subdivisions......... 624,037 18,518 1,827 640,728 640,728
Foreign governments... 75,127 5,894 0 81,021 81,021
Public utilities...... 315,872 15,623 976 330,519 330,519
Industrial and
miscellaneous........ 763,965 29,788 5,000 788,753 788,753
Redeemable preferred
stocks................ 13,356 1,643 0 14,999 14,999
---------- -------- ------- ---------- ----------
Total fixed maturities
available for sale... 4,387,026 201,613 9,605 4,579,034 4,579,034
---------- -------- ------- ---------- ----------
Equity securities:
Common stocks:
Banks and insurance
companies............ 7,264 7,610 0 14,874 14,874
Industrial and all
others............... 10,471 555 736 10,290 10,290
Nonredeemable preferred
stocks................ 13,486 2,311 0 15,797 15,797
---------- -------- ------- ---------- ----------
Total equity
securities........... 31,221 10,476 736 40,961 40,961
---------- -------- ------- ---------- ----------
Total fixed maturities
and equity
securities........... $4,418,247 $212,089 $10,341 $4,619,995 $4,619,995
========== ======== ======= ========== ==========
1992:
- -----
Fixed maturities held to
maturity:
Bonds:
U.S. Government direct
obligations and agen-
cies................. $ 241,266 $ 11,276 $ 306 $ 252,236 $ 241,266
Mortgage-backed
securities........... 1,487,720 107,963 1,607 1,594,076 1,487,720
Mortgage-backed
securities, GNMA
collateral........... 543,620 20,539 1,587 562,572 543,620
State, municipalities
and political
subdivisions......... 81,684 6,100 416 87,368 81,684
Foreign governments... 67,179 2,753 81 69,851 67,179
Public utilities...... 123,951 1,746 485 125,212 123,951
Industrial and
miscellaneous........ 445,297 16,895 1,330 460,862 445,297
Redeemable preferred
stocks................ 14,752 1,542 19 16,275 14,752
---------- -------- ------- ---------- ----------
Total fixed maturities
held to maturity..... 3,005,469 168,814 5,831 3,168,452 3,005,469
Fixed maturities avail-
able for sale:
Bonds:
Mortgage-backed
securities........... 1,022,246 49,725 -0- 1,071,971 1,022,246
Public utilities...... 512 16 -0- 528 512
Industrial and
miscellaneous........ 43,719 1,993 -0- 45,712 43,719
---------- -------- ------- ---------- ----------
Total fixed maturities
availabe for sale.... 1,066,477 51,734 -0- 1,118,211 1,066,477
Equity securities:
Common stocks:
Banks and insurance
companies............ 7,611 9,442 1 17,052 17,052
Industrial and all
others............... 11,428 1,728 31 13,125 13,125
Nonredeemable preferred
stocks................ 20,817 2,525 -0- 23,342 23,342
---------- -------- ------- ---------- ----------
Total equity
securities........... 39,856 13,695 32 53,519 53,519
---------- -------- ------- ---------- ----------
Total fixed maturities
and equity
securities........... $4,111,801 $234,244 $ 5,863 $4,340,182 $4,125,465
========== ======== ======= ========== ==========
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 3--INVESTMENT OPERATIONS (CONTINUED)
A schedule of fixed maturities by contractual maturity at December 31, 1993
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... $ 99,717 $ 101,264
Due from one to five
years.................... 193,032 204,197
Due from five to ten
years.................... 1,408,064 1,467,708
Due after ten years....... 268,427 265,884
---------- ----------
1,969,240 2,039,053
Redeemable preferred
stocks................... 13,356 14,999
Mortgage-backed securi-
ties..................... 2,404,430 2,524,982
---------- ----------
$4,387,026 $4,579,034
========== ==========
Proceeds from sales of fixed investments held to maturity were $63 million
in 1993, $403 million in 1992, and $631 million in 1991. Gross gains realized
on those sales were $2.6 million in 1993, $8.6 million in 1992, and $12.7
million in 1991. Gross losses on those sales were $138 thousand in 1993, $1.7
million in 1992, and $6.4 million in 1991. The 1993 sales of fixed investments
held to maturity were made for various reasons including changes in regulatory
requirements, credit deterioration, and sales within 90 days of maturity.
Proceeds from sales of fixed maturities available for sale were $241 million
in 1993. Gross gains realized on those sales were $8.3 million and gross
losses were $176 thousand.
Torchmark had $22.0 million and $38.5 million in investment real estate at
December 31, 1993 and 1992, respectively, which was nonincome producing during
the previous twelve months. These properties included primarily construction
in process and land. Fixed investments and mortgage loans which were nonincome
producing during the previous twelve months were $.4 million at both December
31, 1993 and 1992.
NOTE 4--PROPERTY AND EQUIPMENT
A summary of property and equipment used in the business is as follows:
DECEMBER 31, 1993 DECEMBER 31, 1992
--------------------- ---------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
-------- ------------ -------- ------------
Company occupied real estate........ $65,037 $28,792 $63,616 $26,871
Data processing equipment........... 25,417 20,719 28,710 24,219
Transportation equipment............ 16,812 8,634 17,179 7,148
Furniture and office equipment...... 39,668 31,910 42,142 31,275
Energy properties................... 49,695 26,063 157,738 36,758
-------- -------- -------- --------
$196,629 $116,118 $309,385 $126,271
======== ======== ======== ========
Depreciation expense on property and equipment used in the business was $9.6
million, $10.4 million, and $10.3 million in each of the years 1993, 1992 and
1991. Depletion of energy properties was $22.4 million, $19.6 million, and
$12.6 million in 1993, 1992 and 1991, respectively.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 5--DEFERRED ACQUISITION COSTS AND VALUE OF INSURANCE PURCHASED
An analysis of deferred acquisition costs and the value of insurance
purchased is as follows:
1993 1992 1991
--------------------- --------------------- ---------------------
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................... $904,147 $152,421 $855,498 $172,193 $ 840,546 $183,885
Additions:
Deferred during peri-
od:
Commissions........... 142,869 -0- 154,939 -0- 142,886 -0-
Other expenses........ 71,449 -0- 65,691 -0- 59,225 -0-
-------- -------- -------- -------- --------- --------
Total deferred....... 214,318 -0- 220,630 -0- 202,111 -0-
Value of Insurance
purchased -0- -0- -0- -0- -0- 8,896
Reassumed business.... -0- -0- 3,681 -0- -0-
-------- -------- -------- -------- --------- --------
Total additions...... 214,318 -0- 224,311 -0- 202,111 8,896
-------- -------- -------- -------- --------- --------
Deductions:
Amortized during peri-
od................... (166,863) (20,210) (175,662) (19,772) (187,159) (20,588)
Adjustment
attributable to
unrealized investment
gains(1)............. (23,264) -0- -0- -0- -0- -0-
Business disposed..... (26,773) (609) -0- -0- -0- -0-
-------- -------- -------- -------- --------- --------
Total deductions..... (216,900) (20,819) (175,662) (19,772) (187,159) (20,588)
-------- -------- -------- -------- --------- --------
Balance at end of year.. $901,565 $131,602 $904,147 $152,421 $ 855,498 $172,193
======== ======== ======== ======== ========= ========
- --------
(1)Represents amounts pertaining to universal life-type products.
The amount of interest accrued on the unamortized balance of value of
insurance purchased was $10.8 million, $12.7 million, and $14.1 million for
the years ended December 31, 1993, 1992 and 1991, respectively. The average
interest accrual rates used for the years ended December 31, 1993, 1992 and
1991 were 7.57%, 7.81% and 7.92%, respectively. The estimated amount of the
unamortized balance of the value of business purchased balance at December 31,
1993 to be amortized during each of the next five years is: 1994, $15.8
million; 1995, $15.0 million; 1996, $12.7 million; 1997, $11.0 million; and
1998, $9.3 million.
In the event of lapses or early withdrawals in excess of those assumed,
deferred acquisition costs and the value of insurance purchased may not be
recoverable.
NOTE 6--SALE OF SUBSIDIARY
In July, 1993, Torchmark created a new company called Vesta Insurance Group,
Inc. ("Vesta") for the purpose of becoming the new holding company of
Torchmark's property and casualty insurance subsidiaries, principally Liberty
Fire. In November, 1993, Torchmark sold approximately 73% of its ownership in
Vesta through an initial public offering of common stock for net proceeds of
$160.7 million or a pretax gain of $57.2 million. Torchmark maintained a 27%
interest in Vesta and accounts for its investment on the equity method. In
connection with the public offering, Torchmark loaned Vesta $28 million at an
interest rate of 6.1% for a term of five years. Torchmark's remaining
investment in Vesta was recorded as an investment in unconsolidated
subsidiary.
NOTE 7--PURCHASE OF UNITED MANAGEMENT MINORITY INTEREST
On October 1, 1993, the United Management public shareholders approved
Torchmark's offer to acquire the remaining approximately 17% of United
Management which it did not already own for cash consideration of $31.25 per
share. The transaction was completed for a total purchase price of $234
million resulting in goodwill of $130.7 million which will be amortized over
approximately 28 years, which is the period remaining for the amortization of
the goodwill originated in the 1981 acquisition of United Management. All
other purchase accounting adjustments were immaterial.
42
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, 1993 is as follows:
INDIVIDUAL LIFE INSURANCE
INTEREST ASSUMPTIONS:
PERCENT OF
YEARS OF ISSUE INTEREST RATES LIABILITY
-------------- --------------------- ----------
1917-1993 3.00% 3%
1947-1954 3.25% 1
1927-1989 3.50% 2
1955-1961 3.75% 2
1925-1993 4.00% 17
1962-1969 4.50% graded to 4.00% 4
1970-1980 5.50% graded to 4.00% 7
1970-1993 5.50% 1
1929-1993 6.00% 8
1986-1993 7.00% graded to 6.00% 4
1943-1992 7.50% graded to 6.00% 1
1992-1993 8.00% graded to 6.00% 1
1951-1985 8.50% graded to 6.00% 14
1980-1987 8.50% graded to 7.00% 1
1975-1991 9.50% graded to 8.00% 8
1984-1993 Interest Sensitive 26
---
100%
===
MORTALITY ASSUMPTIONS:
For individual life, the mortality tables used are various statutory
mortality tables and modifications of:
1950-54 Select and Ultimate Table
1954-68 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.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 8--FUTURE POLICY BENEFIT RESERVES (CONTINUED)
HEALTH INSURANCE
INTEREST ASSUMPTIONS:
PERCENT OF
YEARS OF ISSUE INTEREST RATES LIABILITY
-------------- --------------------- ----------
1962-1982 3.00% 1%
1969-1980 5.50% graded to 4.00% 4
1982-1993 4.50% 1
1993- 6.00% 8
1985-1993 7.00% graded to 6.00% 67
1951-1986 8.50% graded to 6.00% 19
---
100%
===
MORBIDITY ASSUMPTIONS:
For health, the morbidity assumptions are based on either Torchmark's
experience or the assumptions used in calculating statutory reserves.
TERMINATION ASSUMPTIONS:
Termination assumptions are based on Torchmark's experience.
OVERALL INTEREST ASSUMPTIONS:
The overall average interest assumption for determining the liability for
future life and health insurance benefits in 1993 was 6.1%.
NOTE 9--INCOME TAXES
Torchmark and its eligible subsidiaries file a life-nonlife consolidated
federal income tax return. Famlico and Sentinel file a separate federal income
tax return and will not be eligible to join the consolidated return group
until 1996 and 1997, respectively.
As discussed in Note 1, Torchmark adopted Statement 109 on January 1, 1993.
The cumulative effect of this change in accounting for income taxes is a $26.1
million addition to net income for the year ended December 31, 1993. This
amount is included in the cumulative effect of changes in accounting
principles line on the consolidated statement of operations.
Total income tax expense for the year ended December 31, 1993 was allocated
as follows:
Income before equity in earnings of unconsolidated subsidi-
aries...................................................... $153,086
Change in accounting standards for post-retirement benefits
other than pensions........................................ (4,124)
Shareholders' equity, for unrealized gains.................. 60,768
Shareholders' equity, for compensation expense for tax pur-
poses in excess of amounts recognized for financial report-
ing purposes............................................... (6,845)
--------
$202,885
========
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 9--INCOME TAXES (CONTINUED)
Income tax expense before the cumulative effect of the change in accounting
principles and adjustments to shareholders' equity is summarized as follows:
YEAR ENDED DECEMBER 31,
---------------------------
1993 1992 1991
-------- -------- --------
Current income tax expense............... $152,154 $124,782 $129,121
Increase in January 1, 1993 deferred in-
come tax liability due to increase in
corporate income tax rate to 35%........ 9,411 -- --
Deferred income tax expense (benefit).... (8,479) 16,062 (3,672)
-------- -------- --------
Total.................................. $153,086 $140,844 $125,449
======== ======== ========
The effective income tax rate differed from the expected 35% rate in 1993
and 34% rate in 1992 and 1991 as shown below:
YEAR ENDED DECEMBER 31,
-------------------------------------------
1993 % 1992 % 1991 %
-------- --- -------- --- -------- ---
Expected income taxes............. $154,492 35% $142,076 34% $129,457 34%
Increase (reduction) in income
taxes
resulting from:
Tax-exempt investment income..... (4,404) (1) (1,955) -- (2,358) (1)
Tax credits...................... (11,203) (2) (2,903) (1) (400) --
Effect of tax rate change on de-
ferred liability................ 9,411 2 -- -- -- --
Other............................ 4,790 1 3,626 1 (1,250) --
-------- --- -------- --- -------- ---
Income taxes...................... $153,086 35% $140,844 34% $125,449 33%
======== === ======== === ======== ===
The significant components of deferred income tax expense before the
cumulative effect of the change in accounting principles and adjustments to
shareholders' equity for the year ended December 31, 1993 are as follows:
Deferred income tax expense (exclusive of the effect of the com-
ponent listed below)........................................... $(8,479)
Adjustments to deferred tax assets and liabilities for the in-
crease in the corporate income tax rate from 34% to 35%........ 9,411
-------
$ 932
=======
For the years ended December 31, 1992 and 1991, deferred income tax expense
(benefit) of $16,062 and ($3,672), respectively, resulted from timing
differences in the recognition of revenue and expense for financial reporting
and income tax purposes. The sources and tax effect of those timing
differences are presented below:
YEAR ENDED DECEMBER 31,
------------------------
1992 1991
----------- -----------
Deferred acquisition costs................... $(16,914) $(28,349)
Reserve and premium adjustments.............. 16 (2,705)
Oil and gas costs............................ 37,094 22,554
Other........................................ (4,134) 4,828
----------- -----------
$ 16,062 $ (3,672)
=========== ===========
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 9-- INCOME TAXES (CONTINUED)
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1993 are presented below:
Deferred tax assets:
Fixed maturities, equity securities, and investment real estate,
principally due to write-downs of investments to net realizable
value for financial reporting purposes......................... $ 7,471
Future policy benefits, unearned and advance premiums, and pol-
icy claims..................................................... 27,634
Other liabilities, principally due to the current nondeductibil-
ity for tax purposes of certain accrued expenses............... 46,278
--------
Total gross deferred tax assets................................. 81,383
Less valuation allowance........................................ -0-
--------
Net deferred tax assets......................................... 81,383
--------
Deferred tax liabilities:
Energy investments and other unconsolidated affiliates, princi-
pally due to
accelerated depletion deductions for tax purposes.............. 95,760
Deferred acquisition costs...................................... 238,114
Unrealized investment gains..................................... 64,728
Other........................................................... 64,590
--------
Total gross deferred tax liabilities............................ 463,192
--------
Net deferred tax liability....................................... $381,809
========
In Torchmark's opinion, all deferred tax assets will be recoverable.
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 $58 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.
NOTE 10--NOTES PAYABLE
An analysis of notes payable is as follows:
DECEMBER 31,
-----------------------------------------
1993 1992
-------------------- --------------------
SHORT-TERM LONG-TERM SHORT-TERM LONG-TERM
DEBT DEBT DEBT DEBT
---------- --------- ---------- ---------
Sinking Fund Debentures.......... $197,856 $197,778
Senior Notes, due 1998........... 198,885 198,687
Senior Debentures, due 2009...... 99,539 99,387
Notes, due 2023.................. 195,798
Notes, due 2013.................. 98,351
Borrowings under Torchmark line
of credit....................... $107,000 $195,000
Borrowings under energy credit
facilities...................... 81,717
Other notes, installment debt,
and mortgages payable at various
interest rates; collateralized
by buildings, equipment, and
energy properties............... 108 1,906 102 2,015
-------- -------- -------- --------
$107,108 $792,335 $276,819 $497,867
======== ======== ======== ========
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 10--NOTES PAYABLE (CONTINUED)
The amount of debt that becomes due during each of the next five years is:
1994, $107.1 million; 1995, $116 thousand; 1996, $123 thousand; 1997, $132
thousand; and 1998, $199 million. Additionally, during the thirty-day period
beginning June 15, 1996, senior debenture debt holders have the option to
require Torchmark to repay $100 million.
The Sinking Fund Debentures, due March 1, 2017, are carried at $200 million
principal amount less unamortized issue expenses and bear interest at 8 5/8%,
payable on March 1 and September 1. A sinking fund provides for mandatory
repayment at par of not less than $8 million principal amount per year from
March 1, 1998 through March 1, 2016. At Torchmark's option, an additional $12
million principal amount per year may be redeemed at par according to the same
schedule. The option to make such additional repayments is not cumulative and
if not availed of in any year will terminate. Furthermore, Torchmark may, at
its option, redeem the entire issue at prices ranging from 107.9% to 100.0% of
par, subject to certain restrictions. The Sinking Fund Debentures have equal
priority with other Torchmark unsecured indebtedness.
The Senior Notes, due May 1, 1998, are not redeemable prior to maturity.
They were issued in May, 1988 in the principal amount of $200 million.
Interest is payable on May 1 and November 1 of each year at a rate of 9 5/8%.
These notes have equal priority with other Torchmark unsecured indebtedness.
The Senior Debentures, principal amount of $100 million, are due August 15,
2009. They were issued in August, 1989, bearing interest at the rate of 8
1/4%, with interest payable on February 15 and August 15 of each year. The
Senior Debentures, which are not redeemable at the option of Torchmark prior
to maturity, provide the holder with an option to require Torchmark to
repurchase the debentures on August 15, 1996 at principal amount plus accrued
interest. The Senior Debentures have equal priority with other Torchmark
unsecured indebtedness.
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 maintains a line of credit agreement which is unsecured and at
December 31, 1993 and 1992 allowed borrowings up to $250 million from
participating banks. The agreement terminates in December, 1994. The interest
rate is determined at the option of Torchmark utilizing a formula based on
either prime, Libor or secondary certificate of deposit rates and was 3.51% at
December 31, 1993 and 4.21% at December 31, 1992. A commitment fee on the
unused balance is charged for its availability. There was $107 million and
$195 million in borrowings outstanding under the line of credit as of December
31, 1993 and December 31, 1992, respectively. Torchmark is subject to certain
covenants regarding capitalization and earnings, for which Torchmark was in
compliance at December 31, 1993.
Torch Energy Advisors Incorporated ("Torch Energy"), a wholly-owned
subsidiary of Torchmark, also maintains a line of credit agreement which at
December 31, 1993 allowed borrowings up to $30 million. The interest rate is
charged at variable rates and is based on the prime or Libor rates, and a
commitment fee is charged for the unused balance. The agreement terminates in
September, 1994 and is secured by any acquired assets and by the approximately
1.5 million shares of Nuevo common stock owned by Torch Energy. There were no
borrowings outstanding on this line of credit at December 31, 1993.
At December 31, 1992 Torch Energy had another line of credit available up to
$95 million, of which $81.7 million was outstanding at December 31, 1992.
Interest was charged at a variable rate based on the prime or Libor rates, and
was approximately 5.99% at December 31, 1992. It was repaid and
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 10--NOTES PAYABLE (CONTINUED)
terminated on January 31, 1993, with $15 million financed by another energy
credit facility. The note was collateralized by properties and was guaranteed
up to $54.1 million by United Management.
Interest in the amount of $10.5 million, $20.4 million, and $16.8 million
was capitalized during 1993, 1992, and 1991, respectively.
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
------------ ------------ ------- -------
1993.................... $ 740 $6,733 $1,450
1992.................... $3,293 $3,143 $3,732
1991.................... $3,112 $6,931 $1,298
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 $10.1 million
and $11.0 million at December 31, 1993 and 1992, respectively. The plans are
organized as trust funds whose assets consist primarily of investments in
marketable long-term fixed maturities and equity securities which are valued
at market.
The excess benefit pension plan provides the benefits that an employee would
have otherwise received from a defined benefit pension plan in the absence of
the Internal Revenue Code's limitation on benefits payable under a qualified
plan. Although this plan is unfunded, pension cost is determined in a similar
manner as for the funded plans. Liability for the excess benefit plan was $1.5
million and $1.1 million as of December 31, 1993 and 1992, respectively.
Net periodic pension cost for the defined benefit plans by expense component
was as follows:
1993 1992 1991
------- ------- --------
Service cost--benefits earned during the
period.................................... $ 8,298 $ 7,415 $ 7,542
Interest cost on projected benefit obliga-
tion...................................... 7,711 7,228 7,665
Actual return on assets.................... (8,697) (6,831) (14,310)
Net amortization and deferral.............. 871 (937) 7,332
------- ------- --------
Net periodic pension cost.................. $ 8,183 $ 6,875 $ 8,229
======= ======= ========
A reconciliation of the funded status of the defined benefit plans with
Torchmark's pension liability was as follows:
1993 1992
--------- -------- ---
Fair market value of assets available for ben-
efits........................................ $ 95,191 $ 90,367
Projected benefit obligation:
Vested....................................... 78,477 55,159
Nonvested.................................... 4,878 5,067
--------- --------
Accumulated benefit obligation.............. 83,355 60,226
Effect of projected future salary increases 27,875 24,456
--------- --------
Total projected benefit obligation.......... 111,230 84,682
--------- --------
Funded status................................. (16,039) 5,685
Unamortized prior service costs............... 1,616 1,878
Unamortized transition asset.................. (2,774) (3,692)
Unrecognized (gain) or loss................... 3,278 (15,994)
--------- --------
Accrued pension costs included in liabili-
ties....................................... $ (13,919) $(12,123)
========= ========
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 11--POSTRETIREMENT BENEFITS (CONTINUED)
The weighted average assumed discount rates used in determining the
actuarial benefit obligations were 7.25% in 1993 and 8.5% in 1992. The rate of
assumed compensation increase was 5.0% in 1993 and 5.5% in 1992 and the
expected long-term rate of return on plan assets was 8.0% in 1993 and 8.5% in
1992.
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.
Post Retirement Benefit Plans Other Than Pensions; Torchmark provides
postretirement life insurance benefits for most retired employees, and also
provides additional postretirement life insurance benefits for certain key
employees. The majority of the life insurance benefits are accrued over the
working lives of active employees.
For retired employees over age sixty-five, Torchmark does not provide
postretirement benefits other than pensions. Torchmark does provide a portion
of the cost for health insurance benefits for employees who retired before
February 1, 1993 and before age sixty-five, covering them until they reached
age sixty-five. Eligibility for this benefit was generally achieved at age
fifty-five with at least fifteen years of service. This subsidy is minimal to
employees who did not retire before February 1, 1993. This plan is unfunded.
Torchmark adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," in 1993. This statement requires that the
expected cost of providing future benefits to employees be accrued during the
employees' service period until each employee reaches full eligibility. Two
options for recognizing the accumulated benefit obligation are provided upon
adoption of Statement 106 for participants. The employer can either recognize
the transition obligation immediately as the effect of an accounting change,
or it can recognize the obligation in the financial statements on a delayed
basis, amortizing the obligation on a straight-line basis over the greater of
the participants' future service period or twenty years. Torchmark elected to
recognize the effect of the obligation immediately as a change in accounting
principle. The cumulative effect of this change in accounting resulted in a
$7.7 million after-tax charge to net income. It was reported as part of the
cumulative effect of changes in accounting principles. In accordance with the
provisions of SFAS 106, prior years' financial statements have not been
restated to apply the provisions of this statement.
Net periodic postretirement benefit cost for 1993 included the following
components:
Service cost..................................................... $ 411
Interest cost on accumulated postretirement benefit obligation... 954
Actual return on plan assets..................................... -0-
Net amortization and deferral.................................... (14)
------
Net periodic postretirement benefit cost......................... $1,351
======
The following table sets forth the plans' combined funded status with the
amount shown in Torchmark's balance sheet at December 31, 1993:
Accumulated postretirement benefit obligation:
Retirees........................................................ $ 6,919
Fully eligible active plan participants......................... 1,354
Other active plan participants.................................. 3,348
-------
Total accumulated postretirement benefit obligation............ 11,621
Plan assets at fair value........................................ -0-
-------
Accumulated postretirement benefit obligation in excess of plan
assets.......................................................... 11,621
Unrecognized net gain from past experience different from that
assumed and from changes in assumptions......................... 327
Prior service cost not yet recognized in net periodic post re-
tirement benefit cost........................................... -0-
-------
Accrued postretirement benefit cost.............................. $11,948
=======
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 11--POSTRETIREMENT BENEFITS (CONTINUED)
For measurement purposes, a 12% to 14% annual rate of increase in a per
capita cost of covered health care benefits was assumed for 1994; the rate was
assumed to decrease gradually to 4.5% by the year 2008 and remain at that
level thereafter. The health care cost trend rate assumption has a significant
effect on the amounts reported. To illustrate, increasing the health care cost
trend by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1993 by $1.1 million and
would increase the net periodic postretirement cost for the year ended
December 31, 1993 by approximately $260 thousand.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25%.
NOTE 12--SHAREHOLDERS' EQUITY
Share Data: A summary of preferred and common share activity is as follows:
COMMON STOCK
--------------------------------------
PREFERRED HELD BY TREASURY
STOCK ISSUED SUBSIDIARIES STOCK
--------- ----------- ------------ -----------
1991:
Balance at January 1,
1991................... 868,600 144,202,679 (67,230,312)
Issuance of common stock
due to exercise of
stock options.......... 670,784
Grant of restricted
stock.................. 60,000
Treasury stock acquired
in Repurchase Program.. (1,314,111)
Other treasury stock
acquired............... (61,160) (244,403)
Retirement of treasury
stock.................. (1,558,514) 1,558,514
--------- ----------- ----------- -----------
Balance at December 31,
1991................... 807,440 143,374,949 (67,230,312) -0-
1992:
Issuance of common stock
due to exercise of
stock options.......... 2,396,100
Treasury stock acquired
in Repurchase Program.. (4,200,937)
Other treasury stock
acquired............... (337,620) (827,766)
Retirement of treasury
stock.................. (5,028,703) 5,028,703
--------- ----------- ----------- -----------
Balance at December 31,
1992................... 469,820 140,742,346 (67,230,312) -0-
1993:
Issuance of common stock
due to exercise of
stock options.......... 272,194 6,341
Treasury stock acquired
in Repurchase Program.. (850,010)
Other treasury stock
acquired............... (45,465)
--------- ----------- ----------- -----------
Balance at December 31,
1993................... 469,820 141,014,540 (67,230,312) (889,134)
========= =========== =========== ===========
AT DECEMBER 31, 1993 AT DECEMBER 31, 1992
---------------------- -------------------------
PREFERRED COMMON PREFERRED COMMON
STOCK STOCK STOCK STOCK
--------- ----------- ------------ -----------
Par value per share..... $1.00 $1.00 $1.00 $1.00
Authorized shares....... 5,000,000 160,000,000 5,000,000 160,000,000
Adjustable Rate Preferred Stock: One million shares of adjustable rate
preferred stock were issued in 1983 at an issue price of $100 per share.
Dividends are cumulative and are payable quarterly. The dividend rate is
adjustable, being determined in advance of each period at 1.25% less than the
highest of the treasury bill rate, the ten year constant maturity rate, or the
twenty year constant maturity rate. However, the dividend rate will never be
less than 7% nor greater than 13%. The January 31, 1994 dividend was paid at a
rate of 7.00%. The preferred stock is redeemable, at Torchmark's option, from
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 12--SHAREHOLDERS' EQUITY (CONTINUED)
January 1, 1989 through December 31, 1993 at a price of $103 per share, and
thereafter at $100 per share. Torchmark has announced that it will redeem all
of the outstanding preferred stock on March 31, 1994. The price will be $100 a
share plus accrued dividends. The preferred shareholders have preference and
priority over common shareholders in the event of liquidation equal to $100
per share plus accrued and unpaid dividends.
During the first quarter of 1990, Torchmark acquired 131 thousand shares of
this preferred stock, redemption value $13.1 million, at a purchase price of
$11 million. In 1991, an additional 61 thousand shares or $6.1 million
redemption value were acquired at a price of $5.3 million. Torchmark acquired
an additional 338 thousand shares in 1992 at a cost of $31.5 million,
representing a redemption value of $33.7 million. These shares are reported as
treasury stock and have a total cost basis of $47.8 million and a total
redemption value of $52.9 million. Additional shares may be acquired from time
to time at favorable prices.
Acquisition of Common Shares: Torchmark commenced a program in 1986 to
purchase shares of its common stock from time to time. Under this program,
Torchmark purchased 1.3 million shares in 1991 at a cost of $44 million, 4.2
million shares in 1992 at a cost of $157.7 million and 850 thousand shares in
1993 at a cost of $41.9 million. The other common treasury stock acquired was
primarily received by Torchmark from employees for the exercise proceeds and
payment of taxes for stock options. In October, 1993, Torchmark implemented a
policy to issue shares in conjunction with the exercise of stock options out
of treasury stock.
Stock Options: Under the provisions of the 1984 Torchmark Corporation Stock
Option Plan ("1984 Option Plan") and the Torchmark Corporation 1987 Stock
Incentive Plan ("1987 Option Plan"), certain employees and directors have been
granted options to buy shares of Torchmark stock at the market value of the
stock on the date of grant. In conjunction with the buyback of the minority
interest of United Management, the United Investors Management Company 1986
Employee Stock Incentive Plan was amended to allow the granting of Torchmark
stock options. The options are exercisable during the period commencing from
three months to three years after grant until expiring ten years or ten years
and two days after grant.
A summary of option activity in terms of shares is as follows:
AVAILABLE FOR GRANT OUTSTANDING
------------------------------ --------------------------------
1993 1992 1991 1993 1992 1991
-------- -------- ---------- --------- ---------- ---------
Balance at January 1.... 533,175 890,278 3,000,240 3,051,883 5,090,880 3,651,702
Additional shares avail-
able due to United Man-
agement merger......... 642,959
Granted................. (910,789) (357,052) (2,109,962) 910,789 357,052 2,109,962
Exercised............... (278,535) (2,396,100) (670,784)
Expired................. 23,746 (23,746)
Adjustment due to stock
dividend............... (51) 51
-------- -------- ---------- --------- ---------- ---------
Balance at December 31.. 289,091 533,175 890,278 3,660,391 3,051,883 5,090,880
======== ======== ========== ========= ========== =========
Option information by exercise price is listed in the following table. Those
options shown as granted on October 1, 1993 represent United Management
options which were converted to Torchmark options in conjunction with the
merger.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 12--SHAREHOLDERS' EQUITY (CONTINUED)
OUTSTANDING AT DECEMBER 31, EXERCISED DURING
EXERCISE ----------------------------- -------------------------
PRICE GRANT DATE 1993 1992 1991 1993 1992 1991
-------- -------------------- --------- --------- --------- ------- --------- -------
$10.125 January 9, 1985 -0- -0- -0- -0- -0- 1,500
11.300 October 1, 1993(3) 18,393 -0-
12.625 October 4, 1985 34,004 36,145 66,094 2,141 29,950 5,250
13.110 October 1, 1993(3) 13,828 -0-
14.000 March 26, 1985 15,746 20,996 20,996 5,250 -0-
14.125 January 30, 1986 16,875 17,875 21,000 1,000 3,125 5,625
15.000 December 3, 1987 854 1,254 7,254 400 6,000 16,554
16.000 December 16, 1987 7,500 7,500 69,372 -0- 61,872 70,311
17.625 October 28, 1987 -0- -0- -0- -0- -0- 7,500
19.875 February 25, 1988 5,217 5,217 5,217 -0- -0- -0-
20.375 December 15, 1988 -0- -0- 202,382 -0- 202,384 336,386
20.375 January 3, 1989 30,003 30,003 50,003 -0- 20,000 10,000
22.600 October 1, 1993(3) 35,981 -0-
24.410 October 1, 1993(3) 5,532 -0-
25.625 October 11, 1990(1) 852,955 873,120 2,527,684 7,313 1,654,575 156,575
28.480 October 1, 1993(3) 85,158 -0-
31.125 January 15, 1991 538,856 640,896 857,136 97,118 216,258 61,083
32.500 January 2, 1991 63,000 63,000 72,000 -0- 9,000 -0-
33.125 January 25, 1990(1) 63,000 63,000 72,000 -0- 9,000 -0-
34.350 October 1, 1993(3) 35,611 -0-
34.375 December 12, 1991 679,977 712,618 882,298 27,869 183,936 -0-
36.000 February 7, 1991 100,000 237,444 237,444 137,444 -0- -0-
36.610 October 1, 1993(3) 65,774 -0-
38.375 January 4, 1992 63,000 63,000 -0- -0-
43.500 December 14, 1993(2) 567,781 -0-
46.560 October 1, 1993(3) 57,130 -0-
52.000 December 7, 1992 280,216 279,815 -0- -0-
57.750 January 3, 1993 24,000 -0-
--------- --------- --------- ------- --------- -------
3,660,391 3,051,883 5,090,880 278,535 2,396,100 670,784
========= ========= ========= ======= ========= =======
Exercisable at December 31, 2,668,264 2,772,068 4,208,582
========= ========= =========
(1) Options to purchase 1,098,090 shares previously granted December 31, 1989
at $37.13 per share, 521,100 shares previously granted January 25, 1990 at
$33.13 per share, and 389,870 shares originally granted August 1, 1990 at
$33.88 per share were allowed by recipients to expire voluntarily and were
reissued October 11, 1990 along with 675,200 additional shares at $25.63 per
share.
(2) Includes 173,650 shares granted under the United Investors Management
Company 1986 Employee Stock Incentive Plan.
(3) Issued from the United Investors Management Company 1986 Employee Stock
incentive plan.
Grant of Restricted Stock: A grant of 60,000 Torchmark shares was made on
May 1, 1991 to a Torchmark senior officer. The shares are restricted as to
resale, vesting 6,000 shares per year for 10 years on the anniversary date of
the grant. The market value of Torchmark stock was $34.92 per share on the
grant date.
Restrictions: Restrictions exist on the flow of funds to Torchmark from its
insurance subsidiaries. Statutory regulations require life insurance
subsidiaries to maintain certain minimum amounts of capital and surplus. These
restrictions generally limit the payment of dividends by insurance
subsidiaries to statutory net gain from operations 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 1994,
$388 million will be available to Torchmark for dividends from insurance
subsidiaries in compliance with statutory regulations without prior regulatory
approval.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 13--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 million per life. Life insurance
ceded represents 1% of total life insurance in force at December 31, 1993.
Insurance ceded on life and accident and health products represents 1.5% of
premium income for 1993. Torchmark would be liable for the reinsured risks
ceded to other companies to the extent that such reinsuring companies are
unable to meet their obligations.
Insurance affiliates also assume insurance risks of other companies. Life
reinsurance assumed represents less than 0.1% of life insurance in force at
December 31, 1993 and reinsurance assumed on life and accident and health
products represents less than 0.1% of premium income for 1993.
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, $8.2 million, and $7.6 million for 1993, 1992, and 1991,
respectively. Future minimum rental commitments required under operating
leases having remaining noncancelable lease terms in excess of one year at
December 31, 1993 are as follows: 1994, $5.6 million; 1995, $4.1 million;
1996, $3.1 million; 1997, $2.5 million; 1998, $1.4 million; and in the
aggregate, $16.7 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
$18.2 million at December 31, 1993 and $13.2 million at December 31, 1992.
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, 1993, the investment portfolio
consisted of securities of the U.S. government or U.S. government-backed
securities (50%); short-term investments, which generally mature within one
month (3%); securities of state and municipal governments (12%); securities of
foreign governments (1%); and investment-grade corporate bonds (21%). The
remainder of the portfolio was in oil and gas investments (6%) and real estate
(2%), which are not considered financial instruments according to GAAP; equity
securities (1%); policy loans (3%), which are secured by the underlying
insurance policy values; and mortgages, noninvestment grade corporate
securities and other long-term investments (1%). Investments in municipal
governments and corporations are made throughout the U.S. with no
concentration in any given state. All investments in foreign government
securities are in Canadian government issues. Corporate equity and debt
investments are made in a wide range of industries. At December 31, 1993,
approximately 6% of the portfolio was invested in regulated utilities; 4% was
invested in financial institutions; 3% was invested in finance companies; 2%
was invested in oil and gas companies; 1% was invested in the transportation
industry, and 1% was invested in retail companies. Otherwise, no individual
industry represented more than 1% of Torchmark's investments. Of Torchmark's
investments at year-end 1993, less than 1% of the carrying value of securities
was rated below investment grade (Ba or lower as rated by Moody's serivce or
the equivalent NAIC designation). Par value of these investments was $14.9
million, amortized cost was $13.7 million, and market value was $14.4 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
are in government, government-secured, or corporate securities, the
requirement for collateral is rare. Torchmark's mortgages are secured by
collateral, although new mortgages are no longer being acquired.
Litigation: Torchmark and Torchmark's subsidiaries are continuously parties
to pending or threatened legal proceedings. These suits 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. Most of these lawsuits include claims for punitive damages in addition
to other specified relief.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 13--COMMITMENTS AND CONTINGENCIES (CONTINUED)
A class action lawsuit has been filed against Liberty (Robertson v. Liberty
National Life Insurance Company) in the Circuit Court of Barbour County,
Alabama alleging fraud in the exchange of certain cancer insurance policies.
It seeks substantial equitable and injunctive relief together with
compensatory and punitive damages. Also, a number of separate lawsuits as well
as additional class action suits have been filed which are based upon
substantially the same allegations.
On October 25, 1993, a jury in the Circuit Court of Mobile County, Alabama
rendered a one million dollar verdict against Liberty, one of twenty-five
suits involving cancer policy exchanges which were filed prior to class
certification. Liberty has filed appropriate post-judgment motions and, if
necessary, will appeal the verdict. Previously, another judge in the same
state court system had granted a summary judgment in favor of Liberty in
another substantially similar suit which is on appeal.
The Robertson litigation was tentatively settled pending a fairness
determination by the Barbour County Court after a hearing. The fairness
hearing took place on January 20, 1994. Class members were previously mailed
notice of the hearing and the proposed settlement. On February 4, 1994, the
court ruled that with a $16 million increase in the value of the proposed
Robertson settlement from approximately $39 million to $55 million, the
settlement would be fair and would be approved, provided that the parties to
the litigation accepted the amended settlement within fourteen days of the
issuance of the ruling. On February 17, 1994, the Barbour County Court
extended for two weeks the period for filing objections to or accepting the
Court's order conditionally approving the class action settlement. On February
22, 1994, the Court entered an order in the Robertson litigation which delayed
any final decision on the proposed class action settlement and various motions
to modify it (including motions to delete Torchmark from the settlement
release), pending certain specified discovery to be completed within 90 days
from the date the order was entered. In the order, the Barbour County Court
directed limited additional discovery regarding whether Torchmark had any
active involvement in the cancer policy exchange. Pending completion of
limited additional discovery, the Barbour County Court has reversed
jurisdiction and extended the deadline for acceptance or rejection of the
modifications set forth in the February 4, 1994 order.
Torchmark has provided for the $55 million proposed amended settlement
charge in its 1993 financial reports, although it believes that it is highly
likely that intervenors will pursue an appeal of the ruling to the Supreme
Court of Alabama. In the event a settlement is not agreed to and approved,
Torchmark and Liberty intend to aggressively defend the various cases.
In June, 1993, a purported class action alleging fraud in the replacement of
certain hospital intensive care policies with policies alleged to have less
value with lower benefits was filed seeking unspecified compensatory and
punitive damages against Liberty and Torchmark in the state court system of
Alabama (Smith v. Liberty National Life Insurance Company). A second purported
class action (Maples v. Liberty National Life Insurance Company) with
substantially the same allegations as in the Smith litigation was also filed
in state court in December, 1993. Three other separate lawsuits based upon the
replacement of certain hospital intensive care policies have also been filed.
The Smith litigation has been settled, while a class has not yet been
certified and discovery is proceeding in the Maples case.
Two purported class action lawsuits were filed in December, 1993, against
Liberty in the state court system of Alabama asserting fraud and
misrepresentation in connection with exclusionary provisions of accident and
hospital accident policies sold to persons holding multiple accident-type
policies. One of the cases has been settled. In the other case, no class has
been certified although discovery is proceeding.
In 1978, the United States District Court for the Northern District of
Alabama entered a final judgement in Battle v. Liberty National Insurance
Company, et al., (CV-70-H-752-S), class action litigation involving Liberty, a
class composed of all owners of funeral homes in Alabama and a class composed
of all insureds (Alabama residents only) under burial or vault policies
issued, assumed or reinsured by Liberty. The final judgement fixed the rights
and obligations of Liberty and the funeral directors authorized to handle
Liberty burial and vault policies as well as reforming the benefits available
to the policyholders under the policies. It remains in effect to date. A
motion was filed to challenge the final judgement under Federal Rule of Civil
Procedure 60(b) in February of 1990, but the final judgement was upheld and
the Rule 60(b) challenge was rejected by both the District Court and the
Eleventh Circuit Court of Appeals.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
In November, 1993, an attorney (purporting to represent the funeral director
class) filed a petition in the District Court seeking "alternative relief"
under the final judgement. The relief sought is unclear, but includes a
request that the District Court rule that the final judgement no longer has
prospective application. Liberty has filed discovery requests seeking the
identity of the funeral directors involved in the petition and information and
materials necessary to evaluate the funeral directors' allegations and to
clarify the relief sought.
Based upon information presently available, and in light of legal and other
defenses available to Torchmark and its subsidiaries, contingent liabilities
arising from threatened and pending litigation are not considered material. It
should be noted, however, that the frequency of large punitive damage awards
bearing little or no relation to actual damages awarded by juries in
jurisdictions in which Torchmark has substantial business, particularly
Alabama, continues to increase.
NOTE 14--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., a wholly-owned subsidiary
of United Management, is sole advisor. These investments were $26.2 million
and $18.8 million at December 31, 1993 and 1992, respectively. Investment
income derived from these investments is included in net investment income.
Ownership of Nuevo Stock: Torchmark, through United Management, made open
market purchases of the outstanding common stock of Nuevo Energy Company
("Nuevo") during the period from October, 1990 to July, 1991. Nuevo is a
public company formed by energy subsidiaries during 1990 for the purpose of
gaining operating efficiencies, enhancing liquidity for investors, and
providing greater investment opportunity and diversification. Purchases of 230
thousand shares at a cost of $2 million were made during 1990 and purchases of
419 thousand shares at a cost of $4 million were made during 1991. In 1993,
Torchmark sold 1.3 million shares of Nuevo stock in the open market resulting
in a net gain of $14.3 million. Torchmark, through its subsidiaries, owned
approximately 14% and 32% of the outstanding Nuevo stock at December 31, 1993
and 1992, respectively. Torchmark's investment in Nuevo is recorded as an
investment in unconsolidated subsidiaries.
NOTE 15--SUPPLEMENTAL DISCLOSURES FOR CASH FLOW STATEMENT
The following table summarizes Torchmark's noncash transactions, which are
not reflected on the Statement of Cash Flow as required by GAAP:
YEAR ENDED DECEMBER
31,
----------------------
1993 1992 1991
------ -------- ------
Treasury stock accepted for exercise of stock op-
tions.............................................. $2,480 $ 46,612 $8,800
Paid in capital from tax benefit for stock option
exercises.......................................... 6,412 21,976 3,692
Value of insurance purchased for assumption of pol-
icy reserve........................................ -0- -0- 2,835
Grant of restricted shares.......................... -0- -0- 2,095
Grant of options in conjunction with United Manage-
ment merger........................................ 5,122 -0- -0-
Investment in subsidiaries and affiliates is itemized as follows:
YEAR ENDED DECEMBER 31,
--------------------------
1993 1992 1991
-------- --------- -------
Sentinel......................................... $ -0- $ -0- $11,479
Energy Assets.................................... -0- -0- 3,356
Nuevo............................................ -0- -0- 4,430
United Management................................ 229,063 -0- -0-
-------- --------- -------
$229,063 $ -0- $19,265
======== ========= =======
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 16--INDUSTRY SEGMENTS
The following table summarizes certain amounts paid during the period as
required by GAAP:
YEAR ENDED DECEMBER 31,
--------------------------
1993 1992 1991
-------- -------- --------
Interest paid.................................... $ 64,193 $ 62,543 $ 58,772
Income taxes paid................................ $133,392 $142,045 $117,477
Torchmark operates primarily in two industry segments, insurance and asset
management. Operations in the insurance industry involve the sale and
administration of individual life, individual health, annuities, and property
and casualty insurance. 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,
the management of energy properties, the direct ownership of energy
properties, and other energy related activities.
Certain insurance company investments are managed by the asset management
segment. Included in these investments are energy investments in the amount of
$346 million and $393 million at December 31, 1993 and 1992, respectively.
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 non-
operating in nature such as parent company interest expense, goodwill
amortization, and similar items not related to the activities of a segment.
A summary of segment data is as follows:
ADJUSTMENTS
ASSET AND CONSOLIDATED
INSURANCE MANAGEMENT CORPORATE ELIMINATIONS TOTAL
---------- ---------- --------- ------------ ------------
1993:
Revenues--unaffiliated.. $1,821,314 $250,666 $104,855 $ $2,176,835
Intersegment revenues... 24,385 26,392 (2,196) (48,581) -0-
---------- -------- -------- -------- ----------
Total revenues.......... $1,845,699 $277,058 $102,659 $(48,581) $2,176,835
========== ======== ======== ======== ==========
Pre-tax income.......... $ 415,028 $106,674 $(48,302) $(31,994) $ 441,406
Depreciation............ 5,544 26,006 157 31,707
Capital expenditures.... 2,599 13,133 116 15,848
Identifiable assets at
year end............... 6,809,570 414,298 510,879 (88,505) 7,646,242
1992:
Revenues--unaffiliated.. $1,817,253 $210,886 $ 17,671 $ $2,045,810
Intersegment revenues... 8,356 21,108 3,798 (33,262) -0-
---------- -------- -------- -------- ----------
Total revenues.......... $1,825,609 $231,994 $ 21,469 $(33,262) $2,045,810
========== ======== ======== ======== ==========
Pre-tax income.......... $ 408,551 $ 72,387 $(53,268) $ (9,800) $ 417,870
Depreciation............ 6,479 3,750 153 10,382
Capital expenditures.... 5,687 34,473 206 40,366
Identifiable assets at
year end............... 6,073,602 406,292 381,776 (91,555) 6,770,115
1991:
Revenues--unaffiliated.. $1,722,936 $173,678 $ 10,827 $ $1,907,441
Intersegment revenues... 4,124 16,025 3,231 (23,380) -0-
---------- -------- -------- -------- ----------
Total revenues.......... $1,727,060 $189,703 $ 14,058 $(23,380) $1,907,441
========== ======== ======== ======== ==========
Pre-tax income.......... $ 376,316 $ 60,117 $(50,207) $ (5,469) $ 380,757
Depreciation............ 7,305 2,647 346 10,298
Capital expenditures.... 6,852 105,739 694 113,285
Identifiable assets at
year end............... 5,629,790 356,522 158,304 16,126 6,160,742
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 17--SELECTED QUARTERLY DATA (UNAUDITED)
The following is a summary of quarterly results for the two years ended
December 31, 1993. 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,
--------- -------- ------------- ------------
1993:
- -----
Premium and policy charges....... $371,440 $381,636 $382,659 $357,175
Financial services revenue....... 34,013 34,831 33,652 34,926
Energy operations revenue........ 21,414 24,064 19,662 40,873
Net investment income............ 96,643 101,467 93,983 80,377
Realized investment gains........ 1,070 416 778 5,745
Total revenues................... 525,276 543,302 531,201 577,056
Policy benefits.................. 240,900 248,251 249,960 232,445
Amortization of acquisition ex-
penses.......................... 46,655 46,891 47,492 46,035
Pretax operating income.......... 81,042 119,156 114,359 126,849
Cumulative effect of changes in
accounting principles........... 22,444 -0- -0- (4,041)
Net income....................... 73,489 78,246 64,412 81,832
Net income per common share...... 0.99 1.05 0.86 1.11
Net income per common share ex-
cluding realized gains.......... 0.98 1.05 0.86 1.06
Net income per common share ex-
cluding cumulative effect of
changes in accounting princi-
ples............................ 0.68 1.05 0.86 1.16
1992:
- -----
Premium and policy charges....... $364,663 $363,804 $361,758 $363,737
Financial services revenue....... 34,192 34,261 32,052 32,957
Energy operations revenue........ 14,986 15,637 19,813 23,578
Net investment income............ 92,928 96,498 97,137 96,172
Realized investment gains (loss-
es)............................. 1,161 708 293 (3,110)
Total revenues 508,625 511,480 511,719 513,986
Policy benefits.................. 237,523 236,404 241,254 238,367
Amortization of acquisition ex-
penses.......................... 49,265 48,759 48,296 49,114
Pretax operating income.......... 101,316 104,662 107,496 104,396
Net income....................... 64,022 66,449 68,098 66,908
Net income per common share...... 0.84 0.90 0.93 0.91
Net income per common share ex-
cluding realized gains.......... 0.83 0.90 0.92 0.94
57
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No disagreements with accountants on any matter of accounting principles or
practices or financial statement disclosure have been reported on a Form 8-K
within the twenty-four months prior to the date of the most recent financial
statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information required by this item is incorporated by reference from the
sections entitled "Election of Directors," "Profiles of Directors and
Nominees," "Executive Officers" and "Compliance with Section 16(a) of the
Securities Exchange Act" in the Proxy Statement for the Annual Meeting of
Stockholders to be held April 28, 1994 (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.
58
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a)Index of documents filed as a part of this report:
PAGE OF
THIS REPORT
-----------
Financial Statements:
Torchmark Corporation and Subsidiaries:
Independent Auditors' Report.................................... 30
Consolidated Balance Sheet at December 31, 1993 and 1992........ 31
Consolidated Statement of Operations for the three years ended
December 31, 1993.............................................. 32
Consolidated Statement of Shareholders' Equity for the three
years ended
December 31, 1993.............................................. 33
Consolidated Statement of Cash Flow for the three years ended
December 31, 1993.............................................. 34
Notes to Consolidated Financial Statements...................... 35
Schedules Supporting Financial Statements for the three years
ended December 31, 1993
II. Amounts Receivable from Related Parties, Underwriters, Pro-
moters, and Employes Other Than Related Parties (Consoli-
dated)........................................................ 65
III.Condensed Financial Information of Registrant (Parent Compa-
ny)............................................................. 66
V.Supplementary Insurance Information (Consolidated)............ 69
VI.Reinsurance (Consolidated)................................... 70
IX.Short-term Borrowings (Consolidated)......................... 71
Schedules not referred to have been omitted as inapplicable or not required by
Regulation S-X.
59
EXHIBITS
Page of
this
Report
-------
(3)(a) Restated Certificate of Incorporation of Torchmark Corpora-
tion, as amended (incorporated by reference from Exhibit
19(a) to Form 10-Q for the quarter ended September 30, 1987)
(b) 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) Specimen Preferred Stock Certificate (incorporated by refer-
ence from Exhibit 4(a) to Amendment No. 1 to Form S-1 for
Torchmark Corporation Adjustable Rate Cumulative Preferred
Stock, Series A (Registration No. 2-86812))
(c) Certificate of Designations, Powers and Preferences for Ad-
justable Rate Cumulative Preferred Stock, Series A
(d) Trust Indenture dated as of February 1, 1987 between
Torchmark Corporation and Morgan Guaranty Trust Company of
New York, as Trustee (incorporated by reference from Exhibit
4(b) to Form S-3 for $300,000,000 of Torchmark Corporation
Debt Securities and Warrants (Registration No. 33-11816))
(10)(a) Torchmark Corporation and Affiliates Retired Lives Reserve
Agreement, as amended, and Trust (incorporated by reference
from Exhibit 10(b) to Form 10-K for the fiscal year ended
December 31, 1991)
(b) Capital Accumulation and Bonus Plan of Torchmark Corpora-
tion, as amended, (incorporated by reference from Exhibit
10(c) to Form 10-K for the fiscal year ended December 31,
1988)
(c) Torchmark Corporation Supplementary Retirement Plan (incor-
porated by reference from Exhibit 10(c) to Form 10-K for the
fiscal year ended December 31, 1992)
(d) Certified Copies of Resolutions Establishing Retirement Pol-
icy for Officers and Directors of Torchmark Corporation,
Providing for Advisory Directors, and Providing Retirement
Benefits for Directors (incorporated by reference from Ex-
hibit 10(e) to Form 10-K for the fiscal year ended December
31, 1989)
(e) Torchmark Corporation Restated Deferred Compensation Plan
for Directors, Advisory Directors, Directors Emeritus and
Officers, as amended (incorporated by reference from Exhibit
10(e) to Form 10-K for the fiscal year ended December 31,
1992)
(f) The Torchmark Corporation 1987 Stock Incentive Plan (incor-
porated by reference from Exhibit 10(g) to Form 10-K for the
fiscal year ended December 31, 1991)
(g) The 1984 Torchmark Corporation Stock Option Plan (incorpo-
rated by reference from Form S-8 for The 1984 Torchmark Cor-
poration Stock Option Plan (Registration No. 2-93760))
(h) General Agency Contract between Liberty National Life Insur-
ance Company and Independent Research Agency For Life Insur-
ance, Inc. (incorporated by reference from Exhibit 10(i) to
Form 10-K for the fiscal year ended December 31, 1990)
60
Page of
this
Report
-------
(i) Form of Marketing and Administrative Services Agreement be-
tween Liberty National Fire Insurance Company, Liberty Na-
tional Insurance Corporation and Liberty National Life In-
surance Company (incorporated by reference from Exhibit 10.2
to Form S-1 Registration Statement No. 33-68114)
(i) 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)
(j) Form of Deferred Compensation Agreement Between Torchmark
Corporation or Subsidiary and Officer at the Level of Vice
President or Above Eligible to Participate in the Torchmark
Corporation and Affiliates Retired Lives Reserve Agreement
and to Retire Prior to December 31, 1986 (incorporated by
reference from Exhibit 10(k) to Form 10-K for the fiscal
year ended December 31, 1991)
(k) Form of Deferred Compensation Agreement between Torchmark
Corporation or Subsidiary and Officer at the Level of Vice
President or Above Eligible to Participate in the Torchmark
Corporation and Affiliates Retired Lives Reserve Agreement
and Not Eligible to Retire Prior to December 31, 1986 (in-
corporated by reference from Exhibit 10(l) to Form 10-K for
the fiscal year ended December 31, 1991)
(l) Credit Agreement dated as of June 30, 1992 among Torchmark
Corporation and The First National Bank of Chicago (incorpo-
rated by reference from Exhibit 19 to Form 10-Q for the
quarter ended June 30, 1992)
(m) 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)
(n) 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)
(o) 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)
(p) 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)
(q) 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)
(r) United Investors Management Company 1986 Employee Stock In-
centive Plan
(s) 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)
(t) 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)
(11) Statement recomputation of per share earnings 63
(21) Proxy Statement for Annual Meeting of Stockholders to be
held April 28, 1994
(22) Subsidiaries of the registrant 64
(24)(a) Consent of KPMG Peat Marwick to incorporation by reference
of their audit report of February 4, 1994 into Form S-8 of
The Torchmark Corporation Savings and Investment Plan (Reg-
istration No. 2-76378)
61
Page of
this
Report
-------
(b) Consent of KPMG Peat Marwick to incorporation by reference
of their audit report of February 4, 1994 into Form S-8 of
The United Investors Management Company Savings and Invest-
ment Plan (Registration No. 2-76912)
(c) Consent of KPMG Peat Marwick to incorporation by reference
of their audit report of February 4, 1994 into Form S-8 and
the accompanying Form S-3 Prospectus of The 1984 Torchmark
Corporation Stock Option Plan (Registration No. 2-93760)
(d) Consent of KPMG Peat Marwick to incorporation by reference
of their audit report of February 4, 1994 into Form S-8 and
the accompanying Form S-3 Prospectus of the Torchmark Corpo-
ration 1987 Stock Incentive Plan (Registration No. 33-23580)
(e) Consent of KPMG Peat Marwick to incorporation by reference
of their audit report of February 4, 1994 into Form S-8 and
the accompanying Form S-3 Prospectus of The Capital Accumu-
lation and Bonus Plan of Torchmark Corporation (Registration
No. 33-1032)
(25) Powers of attorney
(28)(a) Form 11-K for The Torchmark Corporation Savings and Invest-
ment Plan for the fiscal year ended December 31, 1993*
(b) Form 11-K for The United Investors Management Company Sav-
ings and Investment Plan for the fiscal year ended December
31, 1993*
- --------
*To be filed under cover of a Form 8 as an Amendment to Form 10-K for the
fiscal year ended December 31, 1992.
62
(b) Reports on Form 8-K
During the fourth quarter of 1993, Torchmark filed a Form 8-K dated
October 14, 1993 reporting consumation of the merger of United Investors
Management Company with and into a wholly-owned subsidiary of Torchmark. The
following financial statements were incorporated by reference into the Form
8-K from the Schedule 14A, as amended filing the definitive proxy materials
for the special meeting of holders of nonvoting common stock of United
Investors Management Company held September 29, 1993:
Audited Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheet of United Investors Management Company at
December 31, 1992 and 1991
Consolidated Statement of Operations of United Investors Management
Company for the years ended December 31, 1992, 1991 and 1990
Consolidated Statement of Shareholders' Equity of United Investors
Management Company for the years ended December 31, 1992, 1991 and 1990
Consolidated Statement of Cash Flow of United Investors Management Company
for the years ended December 31, 1992, 1991 and 1990
Notes to Consolidated Financial Statements
Unaudited Financial Statements:
Consolidated Balance Sheet of United Investors Management Company at
June 30, 1993 and December 31, 1992
Consolidated Statement of Operations of United Investors Management
Company for the six months and the three months ended June 30, 1993
and 1992
Consolidated Statement of Cash Flow of United Investors Management Company
for the six months ended June 30, 1993 and 1992
Consolidated Statement of Cash Flow of United Investors Management Company
for the six months ended June 30, 1993 and 1992
Notes to Consolidated Financial Statements
(c) Exhibits
Exhibit 11. Statement re computation of per share earnings
TORCHMARK CORPORATION COMPUTATION OF EARNINGS PER SHARE
1993 1992 1991
------------ ------------ ------------
Net income......................... $297,978,880 $265,477,484 $246,489,067
Preferred dividends................ (3,289,568) (3,453,976) (6,115,677)
------------ ------------ ------------
Adjusted net income................ $294,689,312 $262,023,508 $240,373,390
============ ============ ============
Weighted average share outstanding. 73,501,654 73,236,849 76,728,267(1)
============ ============ ============
Primary earnings per share:
Net income........................ $ 4.01 $ 3.58 $ 3.13(1)
============ ============ ============
(1) Restated to give effect for the three-for-two stock split in the form of a
dividend which was effective August 5, 1992.
63
Exhibit 22. Subsidiaries of the Registrant
The following table lists subsidiaries of the registrant which meet the
definition of "significant subsidiary" according to Regulation S-X:
STATE OF NAME UNDER WHICH
COMPANY INCORPORATION COMPANY DOES BUSINESS
----------------------- ------------- ---------------------
Family Service Life Family Service Life
Insurance Company Texas Insurance Company
Globe Life And Accident Globe Life And Accident
Insurance Company Delaware Insurance Company
Liberty National Life Liberty National Life
Insurance Company Alabama Insurance Company
United American United American
Insurance Company Delaware Insurance Company
United Investors Life United Investors Life
Insurance Company Missouri Insurance Company
Waddell & Reed, Inc. Delaware Waddell & Reed, Inc.
Torch Operating Torch Operating
Company Texas Company
All other exhibits required by Regulation S-K are listed as to location in the
"Index of documents filed as a part of this report" on pages 60 through 62 of
this report. Exhibits not referred to have been omitted as inapplicable or not
required.
64
TORCHMARK CORPORATION
SCHEDULE II. AMOUNTS RECEIVABLE FROM RELATED PARTIES, UNDERWRITERS, PROMOTERS,
AND EMPLOYEES OTHER THAN RELATED PARTIES (CONSOLIDATED)
(AMOUNTS IN THOUSANDS)
DEDUCTIONS BALANCE AT END
DURING PERIOD OF PERIOD
BALANCE AT ----------------- ---------------
BEGINNING ADDITIONS AMOUNTS
OF DURING AMOUNTS WRITTEN NOT
NAME OF DEBTOR PERIOD PERIOD COLLECTED OFF CURRENT CURRENT
- -------------- ---------- --------- --------- ------- ------- -------
FOR THE YEAR ENDED DECEMBER 31, 1993
------------------------------------
Pershing Limited Partnership II (1)...... $ 551 $ 4 $ 555 $ -0- $ -0- $ -0-
Pershing Limited Partnership II (2)...... -0- 252 252 -0- -0- -0-
Pershing Limited Partnership II (3)...... -0- 231 231 -0- -0- -0-
Pershing Limited Partnership II (4)...... -0- 90 90 -0- -0- -0-
------ ------ ------ ------- ------ ------
$ 551 $ 577 $1,128 $ -0- $ -0- $ -0-
====== ====== ====== ======= ====== ======
FOR THE YEAR ENDED DECEMBER 31, 1992
------------------------------------
Pershing Limited Partnership II.......... $ 323 $ -0- $ 323 $ -0- $ -0- $ -0-
Pershing Limited Partnership II.......... -0- 641 90 -0- 551 -0-
------ ------ ------ ------- ------ ------
$ 323 $ 641 $ 413 $ -0- $ 551 $ -0-
====== ====== ====== ======= ====== ======
FOR THE YEAR ENDED DECEMBER 31, 1991
------------------------------------
William T. Graves........................ $ 134 $ -0- $ 134 $ -0- $ -0- $ -0-
C.B. Hudson.............................. 99 -0- 99 -0- -0- -0-
Ronald K. Richey......................... 84 -0- 84 -0- -0- -0-
Pershing Limited Partnership I........... -0- 7,187 7,187 -0- -0- -0-
Pershing Limited Partnership II.......... -0- 323 -0- -0- 323 -0-
------ ------ ------ ------- ------ ------
$ 317 $7,510 $7,504 $ -0- $ 323 $ -0-
====== ====== ====== ======= ====== ======
- --------
(1) Advance to a limited partnership managed by a Torchmark subsidiary which
was repaid on November 4, 1993. Interest was charged at a rate of 6.00% with
no collateral.
(2) Advance to a limited partnership managed by a Torchmark subsidiary which
was repaid on June 15, 1993. Interest was charged at a rate of 6.00%.
(3) Advance to a limited partnership managed by a Torchmark subsidiary which
was repaid on July 14, 1993. Interest was charged at a rate of 6.00%.
(4) Advance to a limited partnership managed by a Torchmark subsidiary which
was repaid October 5, 1993. Interest was charged at a rate of 6.00%.
65
TORCHMARK CORPORATION (PARENT COMPANY)
SCHEDULE III. CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
(AMOUNTS IN THOUSANDS)
DECEMBER 31,
---------------------
1993 1992
---------- ----------
Assets:
Investments:
Long-term investments--available for sale......... $ 61,931 $ 13,667
Short-term investments............................ 2,335 1,536
---------- ----------
Total investments.................................. 64,266 15,203
Cash............................................... -0- 1,851
Investment in affiliates........................... 2,188,902 1,760,659
Due from affiliates................................ 152,112 160,708
Accrued investment income.......................... 386 32
Receivables........................................ 1 17,429
Other assets....................................... 25,543 3,770
---------- ----------
Total assets...................................... $2,431,210 $1,959,652
========== ==========
Liabilities and shareholders' equity:
Liabilities:
Short-term debt................................... $ 107,000 $ 195,000
Long-term debt.................................... 790,429 495,852
Due to affiliates................................. -- 25,092
Other liabilities................................. 121,386 40,089
---------- ----------
Total liabilities................................. 1,018,815 756,033
Minority interests................................. -- 87,959
Shareholders' equity:
Preferred stock................................... 1,000 1,000
Common stock...................................... 141,015 140,742
Additional paid-in capital........................ 437,055 416,644
Unrealized investment gains....................... 120,138 9,182
Retained earnings................................. 1,037,211 822,878
Subsidiaries' investment in parent................ (227,032) (253,763)
Treasury stock.................................... (96,992) (21,023)
---------- ----------
Total shareholders' equity........................ 1,412,395 1,115,660
---------- ----------
Total liabilities and shareholders' equity........ $2,431,210 $1,959,652
========== ==========
See accompanying Notes to Condensed Financial Statements.
66
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE III. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
CONDENSED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------
1993 1992 1991
-------- -------- --------
Net investment income............................ $ 8,705 $ 11,067 $ 4,409
Realized investment gains ....................... 9,301 1,859 547
Other income..................................... 27,435 0 0
-------- -------- --------
Total revenue.................................. 45,441 12,926 4,956
General operating expenses....................... 64,293 2,630 4,003
Interest expense................................. 64,859 52,278 47,055
-------- -------- --------
Total expenses................................. 129,152 54,908 51,058
-------- -------- --------
Net operating loss before income taxes and equity
in earnings
of affiliates................................... (83,711) (41,982) (46,102)
Income taxes .................................... 34,023 13,901 15,446
-------- -------- --------
Net operating loss before equity in earnings of
affiliates...................................... (49,688) (28,081) (30,656)
Equity in earnings of affiliates................. 360,991 305,934 287,104
Minority interests............................... (11,073) (12,376) (9,959)
-------- -------- --------
Net income before cumulative effect of changes
in accounting
principles.................................... 300,230 265,477 246,489
Cumulative effect of changes in accounting prin-
ciples.......................................... (2,251) -0- -0-
-------- -------- --------
Net income..................................... $297,979 $265,477 $246,489
======== ======== ========
67
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE III. CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(continued)
CONDENSED STATEMENT OF CASH FLOW
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
Cash provided from operations before dividends
from subsidiaries............................ $ (20,435) $ (35,115) $ (26,851)
Cash dividends from subsidiaries............. 188,709 194,128 195,991
--------- --------- ---------
Cash provided from operations................. 168,274 159,013 169,140
Cash provided from (used for) investing activ-
ities:
Disposition of investments................... 478,859 190,559 50,467
Acquisition of investments................... (526,421) (199,119) (50,241)
Sale of subsidiaries......................... 76,744 -0- -0-
Investment in subsidiaries................... (284,714) -0- -0-
Loans to subsidiaries........................ (8,881) (114,931) -0-
Repayment of loans by subsidiaries........... 31,924 5,450 -0-
Net decrease (increase) in temporary invest-
ments....................................... (799) 2,709 (1,354)
Additions to properties...................... (74) (124) (181)
--------- --------- ---------
Cash used for investing activities............ (233,362) (115,456) (1,309)
Cash provided from (used for) financing activ-
ities:
Issuance of debt............................. 294,110 190,000 7,500
Repayments of debt........................... (88,000) -0- (2,500)
Issuance of stock............................ 6,670 7,175 5,834
Acquisitions of treasury stock............... (41,897) (178,698) (44,163)
Borrowed from subsidiaries................... -0- 24,000 41,500
Repayment on borrowings from subsidiaries.... (24,000) -0- (91,500)
Payment of dividends......................... (83,646) (84,485) (84,451)
--------- --------- ---------
Cash provided from (used for) financing activ-
ities........................................ 63,237 (42,008) (167,780)
Net increase in cash.......................... (1,851) 1,549 51
Cash balance at beginning of period........... 1,851 302 251
--------- --------- ---------
Cash balance at end of period................. $ -0- $ 1,851 $ 302
========= ========= =========
See accompanying Notes to Condensed Financial Statements.
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:
1993 1992 1991
-------- -------- --------
Consolidated subsidiaries..................... $188,709 $194,128 $195,991
======== ======== ========
68
TORCHMARK CORPORATION
SCHEDULE V. SUPPLEMENTARY INSURANCE INFORMATION (CONSOLIDATED)
(AMOUNTS IN THOUSANDS)
AMORTIZATION
OF DEFERRED
PREMIUM AND NET BENEFITS POLICY OTHER
POLICY INVESTMENT OTHER AND ACQUISITION OPERATING
CHARGES INCOME INCOME CLAIMS COSTS EXPENSES
----------- ---------- -------- -------- ------------ ---------
For the year ended De-
cember 31, 1993:
Insurance.............. $1,492,910 $348,844 $ 3,945 $971,556 $188,283 $270,832
Asset management....... 7,215 269,843 170,384
Corporate.............. 37,358 65,301 150,961
Eliminations and ad-
justments............. (20,947) (27,634) (1,210) (15,377)
---------- -------- -------- -------- -------- --------
Total................. $1,492,910 $372,470 $311,455 $971,556 $187,073 $576,800
========== ======== ======== ======== ======== ========
For the year ended De-
cember 31, 1992:
Insurance.............. $1,453,962 $368,220 $ 3,427 $953,548 $196,406 $269,104
Asset management....... 4,765 227,229 159,607
Corporate.............. 22,414 (945) 72,737
Eliminations and ad-
justments............. (12,664) (20,598) (972) (22,490)
---------- -------- -------- -------- -------- --------
Total................. $1,453,962 $382,735 $209,113 $953,548 $195,434 $478,958
========== ======== ======== ======== ======== ========
For the year ended De-
cember 31, 1991:
Insurance.............. $1,365,813 $357,127 $ 3,496 $893,313 $208,535 $248,272
Asset management....... 5,517 184,186 129,586
Corporate.............. 8,843 5,215 64,265
Eliminations and ad-
justments............. (7,169) (15,587) (788) (16,499)
---------- -------- -------- -------- -------- --------
Total................. $1,365,813 $364,318 $177,310 $893,313 $207,747 $425,624
========== ======== ======== ======== ======== ========
69
TORCHMARK CORPORATION
SCHEDULE VI. 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, 1993:
Life insurance in force $61,349,446 $594,416 $ 17,487 $60,772,517 0.0%
=========== ======== ======== =========== =====
Premiums:*
Life insurance......... $ 488,632 $ 4,862 $ 576 $ 484,346 0.1%
Health insurance....... 814,456 14,619 -0- 799,837 0.0%
Property and liability
insurance............. 78,512 60,245 104,790 123,057 85.2%
----------- -------- -------- -----------
Total premiums........ $ 1,381,600 $ 79,726 $105,366 $ 1,407,240 7.5%
=========== ======== ======== =========== =====
FOR THE YEAR ENDED DE-
CEMBER 31, 1992
Life insurance in force $58,286,641 $688,880 $ 19,654 $57,617,415 0.0%
=========== ======== ======== =========== =====
Premiums:*
Life insurance......... $ 474,516 $ 5,350 $ 275 $ 469,441 0.1%
Health insurance....... 813,547 15,693 -0- 797,854 0.0%
Property and liability
insurance............. 73,523 51,472 76,332 98,383 77.6%
----------- -------- -------- -----------
Total premiums........ $ 1,361,586 $ 72,515 $ 76,607 $ 1,365,678 5.6%
=========== ======== ======== =========== =====
FOR THE YEAR ENDED DE-
CEMBER 31, 1991
Life insurance in force $56,093,560 $628,375 $ 17,191 $55,482,376 0.0%
=========== ======== ======== =========== =====
Premiums:*
Life insurance......... $ 453,651 $ 9,212 $ 320 $ 444,759 0.1%
Health insurance....... 783,106 13,285 -0- 769,821 0.0%
Property and liability
insurance............. 58,760 50,236 52,180 60,704 86.0%
----------- -------- -------- -----------
Total premiums........ $ 1,295,517 $ 72,733 $ 52,500 $ 1,275,284 4.1%
=========== ======== ======== =========== =====
- --------
* Excludes policy charges
70
TORCHMARK CORPORATION
SCHEDULE IX. SHORT-TERM BORROWINGS (CONSOLIDATED)
(AMOUNTS IN THOUSANDS)
BALANCE MAXIMUM AVERAGE
AT WEIGHTED AMOUNT AMOUNT WEIGHTED
END AVERAGE OUTSTANDING OUTSTANDING AVERAGE
OF INTEREST DURING DURING INTEREST RATE
PERIOD RATE PERIOD PERIOD/1/ DURING PERIOD/2/
-------- -------- ----------- ----------- ---------------
FOR THE YEAR ENDED DECEMBER 31, 1993:
- -------------------------------------
Payable to banks:
Torchmark line of credit............... $107,000 3.5100% $227,000 $172,199 3.5900%
Energy line of credit.................. -0- N/A 7,200 6,267 5.2000%
Current maturity of long-term debt...... 108
--------
$107,108
========
FOR THE YEAR ENDED DECEMBER 31, 1992:
- -------------------------------------
Payable to banks:
Torchmark line of credit............... $195,000 4.2136% $239,000 $158,901 4.1980%
Energy line of credit.................. -0- N/A 18,100 6,492 6.3900
Current maturity of long-term debt...... 81,819
--------
$276,819
========
FOR THE YEAR ENDED DECEMBER 31, 1991:
- -------------------------------------
Payable to banks:
Torchmark line of credit............... $ 5,000 4.9375% $ 7,500 $ 794 6.0455%
Energy line of credit.................. -0- N/A 6,700 5,954 8.5406
Energy line of credit.................. -0- N/A 3,000 2,996 7.8103
Current maturity of long-term debt...... 6,499
--------
$ 11,499
========
- --------
/1/Weighted average daily balance.
/2/Annualized weighted average daily interest rate.
71
SIGNATURES
Pursuant to the requirements of Section 12 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Torchmark Corporation
By: /s/ R.K. Richey
---------------------------------------------
R.K. RICHEY, CHAIRMAN,
CHIEF EXECUTIVE OFFICER AND DIRECTOR
By: /s/ Keith A. Tucker
---------------------------------------------
KEITH A. TUCKER, VICE CHAIRMAN AND DIRECTOR
(PRINCIPAL FINANCIAL OFFICER)
By: /s/ William T. Graves
---------------------------------------------
WILLIAM T. GRAVES, EXECUTIVE VICE PRESIDENT
(PRINCIPAL ACCOUNTING OFFICER)
Date: March 15, 1994
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.
By: /s/ J.P. Bryan* By: /s/ Joseph L. Lanier, Jr.*
------------------------------ ------------------------------
J.P. BRYAN JOSEPH L. LANIER, JR.
DIRECTOR DIRECTOR
By: /s/ Robert P. Davison* By: /s/ Harold T. McCormick*
------------------------------ ------------------------------
ROBERT P. DAVISON HAROLD T. MCCORMICK
DIRECTOR DIRECTOR
By: /s/ Joseph M. Farley* By: /s/ Joseph W. Morris*
------------------------------ ------------------------------
JOSEPH M. FARLEY JOSEPH W. MORRIS
DIRECTOR DIRECTOR
By: /s/ Louis T. Hagopian* By: /s/ George J. Records*
------------------------------ ------------------------------
LOUIS T. HAGOPIAN GEORGE J. RECORDS
DIRECTOR DIRECTOR
By: /s/ C.B. Hudson* By: /s/ Yetta G. Samford, Jr.*
------------------------------ ------------------------------
C.B. HUDSON YETTA G. SAMFORD, JR.
DIRECTOR DIRECTOR
Date: March 15, 1994
*By: /s/ William T. Graves
------------------------------
WILLIAM T. GRAVES
ATTORNEY-IN-FACT
Date: March 15, 1994
72