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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, 1994 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
TITLE OF EACH CLASS CUSIP NUMBER: ON WHICH REGISTERED:
Common Stock, $1.00 Par 891027104 New York Stock Exchange
Value The International Stock
Exchange, London, England
Securities registered pursuant to Section 12(g) of the Act:
None
Securities reported pursuant to Section 15(d) of the Act:
TITLE OF EACH CLASS: CUSIP NUMBER
8 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: $2,986,844,056
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON
STOCK, AS OF FEBRUARY 21, 1995: 71,541,175
DOCUMENTS INCORPORATED BY REFERENCE
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 27, 1995,
PART III
INDEX OF EXHIBITS (PAGES 64 THROUGH 66)
TOTAL NUMBER OF PAGES INCLUDED ARE 73
PART 1
ITEM 1. BUSINESS
Torchmark Corporation ("Torchmark"), an insurance and diversified financial
services holding company, was incorporated in Delaware on November 19, 1979,
as Liberty National Insurance Holding Company. Through a plan of
reorganization effective December 30, 1980, it became the parent company for
the businesses operated by Liberty National Life Insurance Company ("Liberty")
and Globe Life And Accident Insurance Company ("Globe"). United American
Insurance Company ("United American"), Waddell & Reed, Inc. ("W&R") and United
Investors Life Insurance Company ("UILIC") along with their respective
subsidiaries were acquired in 1981. The name Torchmark Corporation was adopted
on July 1, 1982. Family Service Life Insurance Company ("Famlico") was
purchased in July, 1990, and American Income Holding, Inc., whose primary
insurance subsidiary is American Income Life Insurance Company ("American
Income") was purchased in November, 1994.
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,
life and annuity products through independent agents.
American Income--offers individual supplemental life and fixed-benefit
accident and health insurance through sponsored marketing programs with
labor union locals, credit unions and other associations.
Famlico--markets life insurance and annuities to fund prearranged funerals.
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,
American Income, 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, term life insurance, and other
life insurance. The following table presents selected information about
Torchmark's life products:
(AMOUNTS IN THOUSANDS)
ANNUALIZED ANNUALIZED
PREMIUM ISSUED PREMIUM IN FORCE
-------------------------- --------------------------
1994 1993 1992 1994 1993 1992
-------- -------- -------- -------- -------- --------
Whole life:
Traditional.............. $ 63,108 $ 55,265 $ 59,441 $445,025 $312,905 $311,605
Interest-sensitive....... 34,633 34,211 39,087 171,264 160,824 154,518
Term...................... 48,392 36,303 30,652 167,973 129,815 115,014
Other..................... 3,700 2,654 2,546 12,693 9,112 6,947
-------- -------- -------- -------- -------- --------
$149,833 $128,433 $131,726 $796,955 $612,656 $588,084
======== ======== ======== ======== ======== ========
1
Life insurance products are sold through a variety of distribution channels,
including home service agents, independent agents, exclusive agents, and
direct response. These methods are discussed in more depth under the heading
"Marketing." The following table presents life annualized premium issued by
marketing method:
(AMOUNTS IN THOUSANDS)
ANNUALIZED ANNUALIZED
PREMIUM ISSUED PREMIUM IN FORCE
-------------------------- --------------------------
1994 1993 1992 1994 1993 1992
-------- -------- -------- -------- -------- --------
Direct response........... $ 48,267 $ 36,031 $ 26,228 $154,130 $133,782 $117,950
Home service.............. 51,461 48,474 54,161 291,813 282,059 278,738
Independent agents........ 24,894 22,335 20,199 101,721 94,392 87,109
Exclusive agents.......... 25,211 21,593 31,138 249,291 102,423 104,287
-------- -------- -------- -------- -------- --------
$149,833 $128,433 $131,726 $796,955 $612,656 $588,084
======== ======== ======== ======== ======== ========
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, 1994 was $182 million and the average interest
rate earned on these loans was 6.03% in 1994. Interest income earned on policy
loans was $10.0 million in 1994, $9.1 million in 1993 and $8.6 million in
1992. Torchmark had 154 thousand and 140 thousand policy loans outstanding at
year-end 1994 and 1993, respectively.
The availability of cash values contributes to voluntary policy terminations
by policyholders through surrenders. Torchmark's life insurance products may
be terminated or surrendered at the election of the insured at any time,
generally for the full cash value specified in the policy. Specific surrender
procedures vary with the type of policy. For certain policies this cash value
is based upon a fund less a surrender charge which decreases with the length
of time the policy has been in force. This surrender charge is either based
upon a percentage of the fund or a charge per $1,000 of face amount of
insurance. The schedule of charges may vary by plan of insurance and, for some
plans, by age of the insured at issue. Torchmark's ratio of aggregate face
amount voluntary terminations to the mean amount of life insurance in force
was 14.7% in 1994, 14.9% in 1993, and 15.4% in 1992.
The following table presents an analysis of changes to Torchmark's life
insurance business in force:
(AMOUNTS IN THOUSANDS)
1994 1993 1992
--------------------- --------------------- ---------------------
NUMBER OF AMOUNT OF NUMBER OF AMOUNT OF NUMBER OF AMOUNT OF
POLICIES INSURANCE POLICIES INSURANCE POLICIES INSURANCE
--------- ----------- --------- ----------- --------- -----------
In force at January 1,.. 8,110 $61,366,933 8,028 $58,306,295 7,972 $56,110,751
New issues.............. 1,147 14,958,141 944 12,240,245 827 11,067,341
Business acquired....... 595 8,983,055 -0- -0- -0- -0-
Other increases......... 1 10,961 -0- 35,530 -0- 204,094
Death benefits.......... (105) (228,354) (102) (213,785) (99) (199,131)
Lapses.................. (688) (8,940,980) (625) (7,817,201) (549) (7,743,902)
Surrenders.............. (106) (1,048,117) (106) (1,082,962) (113) (1,091,863)
Other decreases......... (41) (243,425) (29) (101,189) (10) (40,995)
----- ----------- ----- ----------- ----- -----------
In force at December
31,.................... 8,913 $74,858,214 8,110 $61,366,933 8,028 $58,306,295
===== =========== ===== =========== ===== ===========
Average policy size (in
dollar amounts)........ $ 8,399 $ 7,567 $ 7,263
=========== =========== ===========
2
HEALTH INSURANCE
Liberty, Globe, United American and American Income 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 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, Globe and
American Income.
The following table presents health annualized premium information for the
three years ending December 31, 1994 by product category:
(AMOUNTS IN THOUSANDS)
ANNUALIZED ANNUALIZED
PREMIUM ISSUED PREMIUM IN FORCE
-------------------------- --------------------------
1994 1993 1992 1994 1993 1992
-------- -------- -------- -------- -------- --------
Medicare Supplement....... $ 87,547 $136,050 $156,170 $572,221 $600,536 $580,509
Cancer.................... 8,101 10,012 18,353 114,495 105,773 109,483
Hospital, surgical,
accident, and other...... 25,534 29,966 50,382 120,871 117,073 142,496
-------- -------- -------- -------- -------- --------
$121,182 $176,028 $224,905 $807,587 $823,382 $832,488
======== ======== ======== ======== ======== ========
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,
-------------------------------- --------------------------
1994 1993 1992 1994 1993 1992
---------- ---------- ---------- -------- -------- --------
Fixed annuities......... $ 43,339 $ 46,573 $ 69,381 $ 801.2 $ 782.8 $ 755.7
Variable annuities...... 196,105 213,982 125,688 692.8 529.7 282.0
---------- ---------- ---------- -------- -------- --------
$239,444 $260,555 $195,069 $1,494.0 $1,312.5 $1,037.7
========== ========== ========== ======== ======== ========
3
INVESTMENTS
The nature, quality, and percentage mix of insurance company investments are
regulated by state laws that generally permit investments in qualified
municipal, state, and federal government obligations, corporate bonds,
preferred and common stock, real estate, and mortgages where the value of the
underlying real estate exceeds the amount of the loan. 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, 1994. Approximately 47% 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 83% of these
investments were in GNMA securities that are backed by the full faith and
credit of the United States government. The remainder of these government
investments were U.S. Treasuries or collateralized mortgage obligations
("CMO's") that are fully backed by GNMA's. (See Note 3--Investment Operations
---------------------------------
in Notes to Consolidated Financial Statements and Management's Discussion and
- -----------------------------------------------------------------------------
Analysis.)
- ---------
The following table presents an analysis of Torchmark's fixed maturity
investments at December 31, 1994. All of the securities are classified as
available for sale and are, therefore, reported at fair market value.
AMOUNT
(IN THOUSANDS) %
-------------- -----
Securities of U.S. Government...................... $ 84,626 1.9%
GNMA and MBS backed by GNMA collateral............. 1,951,615 44.4
Other U.S. Government guaranteed................... 17,130 0.4
Other investment grade............................. 2,313,398 52.7
Non-investment grade corporates.................... 25,490 0.6
---------- -----
$4,392,259 100.0%
========== =====
The following table presents Torchmark's fixed maturity investments at
December 31, 1994 on the basis of ratings as determined primarily by Moody's
Investors Services. Standard and Poor's bond ratings are used when Moody's
ratings are not available. Ratings of BAA and higher (or their equivalent) are
considered investment grade by the rating services.
AMOUNT
RATING (IN THOUSANDS) %
------ -------------- -----
AAA................................................ $2,695,344 61.3%
AA................................................. 416,523 9.5
A.................................................. 1,084,678 24.7
BAA................................................ 145,985 3.3
BA................................................. 13,273 0.3
B.................................................. 2,708 0.1
Less than B........................................ 3,995 0.1
Not rated.......................................... 29,753 0.7
---------- -----
$4,392,259 100.0%
========== =====
4
The following table presents the fixed maturity investments of Torchmark's
insurance subsidiaries at December 31, 1994 on the basis of ratings as
determined by the National Association of Insurance Commissioners ("NAIC").
Categories one and two are considered investment grade by the NAIC.
AMOUNT
RATING (IN THOUSANDS) %
-------------------- -------------- -----
1. Highest quality......$4,196,392 96.0%
2. High quality......... 150,925 3.4
3. Medium quality....... 16,236 0.4
4. Low quality.......... 5,145 0.1
5. Lower quality........ 3,314 0.1
6. In or near default... 195 -0-
---------- -----
$4,372,207 100.0%
========== =====
Securities are assigned ratings when acquired. All ratings are reviewed and
updated at least annually. Specific security ratings are updated as
information becomes available during the year.
PRICING
Premium rates for life and health insurance products are established 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 and American Income, it is $100,000 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 except American Income at ages 65, 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.
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.
5
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 15--Commitments and
-----------------------------
Contingencies in Notes to Consolidated Financial Statements and Schedule IV--
- -----------------------------------------------------------------------------
Reinsurance [Consolidated]).
- ---------------------------
RESERVES
The life insurance policy reserves reflected in Torchmark's financial
statements as future policy benefits are calculated based on generally
accepted accounting principles. These reserves, with the addition of premiums
to be received and the interest thereon compounded annually at assumed rates,
must be sufficient to cover policy and contract obligations as they mature.
Generally, the mortality and persistency assumptions used in the calculations
of reserves are based on company experience. Similar reserves are held on most
of the health policies written by Torchmark's insurance subsidiaries, since
these policies generally are issued on a guaranteed-renewable basis. A
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 agent 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 118 district offices which employed approximately 3,000
agency personnel as of December 31, 1994.
Globe's agents, who primarily sell health insurance, are independent
contractors working out of branch offices. Globe's sales organization consists
of 64 branch sales offices from which approximately 800 licensed agents
operate and approximately 4,500 agents that sell life insurance in special
markets. Globe markets modified whole-life and term insurance primarily
through direct response solicitation. In 1994, over $6.1 billion or 93% 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 1994 W&R sales
representatives produced 90% of UILIC's annualized life insurance premium and
99% of annuity deposits.
United American markets its products through approximately 53,000 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.
American Income markets its products through approximately 1,300 exclusive
agents in 49 states and Canada.
Famlico markets its life insurance and annuity products to fund prearranged
funeral agreements through a force of approximately 1,000 independent career
agents representing approximately 310 funeral homes in 21 states.
RATINGS
The following list indicates the ratings currently held by Torchmark's five
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)
American Income Life Insurance Company A (Excellent)
These same insurance companies with the exception of American Income are
each rated by Standard & Poor's Corporation as AAA(Superior), which is their
highest rating. American Income is not rated by Standard & Poor's Corporation.
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. A.M. Best states
that it assigns A (Excellent) ratings to those companies which, in its
opinion, have demonstrated excellent overall performance when compared to the
norms of the life/health insurance industry. A (Excellent) companies have a
very strong ability to meet their obligations to policyholders 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. In
September, 1994, A.M. Best announced that it had placed the ratings of Liberty
National, Globe, United Investors, and United American under review.
7
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 nine mutual funds in the TMK/United Fund, Inc.
("TMK/United Funds"), and the two mutual funds in the Torchmark Fund
("Torchmark Funds"). These funds were valued as follows at December 31, 1994
and 1993:
(AMOUNTS IN
MILLIONS)
1994 1993
--------- ---------
United Funds $10,946.2 $11,102.3
W&R Funds 219.0 124.2
TMK/United Funds 725.3 554.7
Torchmark Funds 3.4 3.9
--------- ---------
Total mutual fund assets under management 11,893.9 11,785.1
Institutional and private accounts 2,608.1 2,684.7
--------- ---------
Total assets under management $14,502.0 $14,469.8
========= =========
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, 1994, the average industry experience of the fund
managers for W&R was 20 years, and average company experience was 12 years.
The following table indicates W&R revenues by component for the three years
ending December 31, 1994:
(AMOUNTS IN THOUSANDS)
1994 1993 1992
-------- -------- --------
Investment product commissions*.............. $ 59,450 $ 65,950 $ 64,749
Insurance product commissions*............... 12,773 12,117 12,044
Asset management fees........................ 70,651 64,181 56,056
Service fees................................. 22,297 21,273 19,890
-------- -------- --------
$165,171 $163,521 $152,739
======== ======== ========
*Commissions paid to W&R by affiliates for variable annuities and insurance
products are eliminated in consolidation.
W&R markets its mutual funds and other financial products, including life
insurance issued by UILIC and Medicare Supplement insurance issued by United
American, through a sales force of approximately 2,400 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 167 sales offices at December 31, 1994.
W&R conducts money management seminars on a national scale to reach numerous
potential clients every year. Individual financial plans are developed for
clients through one-on-one consultations with the W&R sales representatives.
Emphasis is placed on a long-term relationship with a client rather than a
one-time sale.
8
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 13.6% owned by Torch Energy at December 31, 1994. 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 energy properties under management at
December 31, 1994 and 1993:
(AMOUNTS IN MILLIONS)
1994 1993
---------- ----------
Direct ownership................................ $ 102 $ 24
Other energy investments of Torchmark........... 324 339
Other affiliated*............................... 51 43
Unaffiliated parties............................ 794 750
---------- ----------
$1,271 $ 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 5,000 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 $235 million.
In addition to energy asset management, Torch Energy also engages in energy
property acquisition, energy product marketing, and operates approximately
1,500 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 for
the three years ended December 31, 1994:
(AMOUNTS IN THOUSANDS)
1994 1993 1992
-------- -------- -------
Product marketing revenue................... $350,034 $174,080 $98,352
Less: product marketing costs............... (332,550) (165,068) (91,356)
-------- -------- -------
Net product marketing revenue............... 17,484 9,012 6,996
Management fees*............................ 17,105 15,233 15,057
Production revenue.......................... 19,008 45,427 38,155
Operating fees.............................. 10,768 14,310 13,806
Other revenue............................... 2,657 24,705 1,525
-------- -------- -------
$ 67,022 $108,687 $75,539
======== ======== =======
* Includes fees from affiliates
Torchmark is presently evaluating various alternatives concerning the
possible sale of Torch Energy.
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; American
Income as of December 31, 1990; Globe, as of December 31, 1991; Liberty, as of
December 31, 1991; United American, as of December 31, 1990; and UILIC, as of
December 31, 1993.
NAIC Ratios. The NAIC developed the Insurance Regulatory Information System
("IRIS"), which is intended to assist state insurance regulators in monitoring
the financial condition of insurance companies.
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. The following table presents the IRIS ratios as determined by the
NAIC for four of Torchmark's five largest insurance subsidiaries, which varied
unfavorably from the "usual value" range for the years 1993 and 1992.
USUAL REPORTED
COMPANY RATIO NAME RANGE VALUE
- --------- ------------------------------------------------- ---------- --------
1993:
Liberty Investment in Affiliate to Capital and Surplus 0 to 100 126
Globe Adequacy of Investment Income 125 to 900 959
Globe Change in Asset Mix 0 to 5 5.8
Globe Change in Capital and Surplus 50 to -10 -65
United American Change in Capital and Surplus 50 to -10 -13
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
Explanation of Ratios:
Investment in Affiliate to Capital and Surplus--This ratio is determined by
measuring total investment in affiliates against the capital and surplus of
the company. The NAIC considers a ratio of more than 100% to be high, and to
possibly impact a company's liquidity, yield, and overall investment risk. The
large ratio in Liberty in 1993 and 1992 is brought about by its ownership of
other large Torchmark insurance companies and the ownership 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.
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 22% 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
and the 959% ratio in 1993 was brought about by the NAIC's inclusion of
dividends of various Torchmark subsidiaries in Globe's investment income.
These dividends are generally passed through Globe to the parent company and
should not be considered in meeting interest requirements. Intercorporate
dividends are eliminated in consolidation and have no effect on consolidated
results. Had these dividends been excluded, Globe's ratios would have been
246% in 1992 and 220% in 1993, which were within the usual range.
Change in Asset Mix--This ratio measures the average change in the
percentage of total cash and invested assets. The NAIC considers a ratio
greater than 5.0% to be unusual. The 5.8% ratio of Globe was caused by Globe
dividending one of its subsidiaries, United American, to Torchmark. This
dividend did not affect consolidated net equity of Torchmark at December 31,
1993.
Change in Capital and Surplus--These ratios, calculated on both a gross and
net basis, are a measure of improvement or deterioration in the company's
financial position during the year. The NAIC considers ratios less than minus
10% and greater than 50% to be unusual. United American's ratio of minus 13%
in 1993 was due primarily to the payment of a $112 million dividend to its
parent, which was used by Torchmark to pay part of the purchase price of
United Management. The payment of this dividend did not affect the
consolidated equity of Torchmark at December 31, 1993. Globe's ratio of minus
11
65% in 1993 was caused by Globe dividending United American to Torchmark. The
internal organizational structure has no bearing on consolidated results.
Risk Based Capital: In December 1992, the NAIC adopted a model act that
------------------
requires a risk based capital formula be applied to all life and health
insurers. The requirement began in 1994 for information based on the 1993
annual statements. The risk based capital formula is a threshold formula
rather than a target capital formula. It is designed only to identify
companies that require regulatory attention and is not to be used to rate or
rank companies that are adequately capitalized. All of the insurance
subsidiaries of Torchmark are adequately capitalized under the risk based
capital formula.
Guaranty Assessments. State solvency or guaranty laws provide for
--------------------
assessments from 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 which a company is assessed
for these state funds is determined according to the extent of these
unsatisfied obligations in each state. These assessments are recoverable to a
great extent as offsets against state premium taxes.
HOLDING COMPANY. States have enacted legislation requiring registration and
periodic reporting by insurance companies domiciled within their respective
jurisdictions that control or are controlled by other corporations so as to
constitute a holding company system. Torchmark and its subsidiaries have
registered as a holding company system pursuant to such legislation in
Alabama, Delaware, Missouri, New York, Texas, and Indiana.
Insurance holding company system statutes and regulations impose various
limitations on investments in subsidiaries, and may require prior regulatory
approval for the payment of certain dividends and other distributions in
excess of statutory net gain from operations on an annual noncumulative basis
by the registered insurer to the holding company or its affiliates.
MUTUAL FUNDS. Torchmark's mutual fund management and distribution
activities, as well as its investment advisory services, are subject to state
and federal regulation and oversight by the National Association of Securities
Dealers, Inc. Each of the funds in the United Group of Mutual Funds, the W&R
Funds, the TMK/United Funds and the Torchmark Funds is 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.
Environmental Regulation: Torchmark's energy subsidiaries' operations are
------------------------
subject to existing federal, state, and local laws and regulations governing
environmental quality and pollution control. Energy subsidiaries' activities
with respect to oil and gas production are subject to stringent environmental
regulation by state and federal authorities including the Environmental
Protection Agency involving the release of materials into the environment or
relating to the protection of the environment. In most instances, the
regulatory requirements relate to water and air pollution control measures.
Such regulation can increase the cost of operating production facilities.
Torchmark believes that energy subsidiaries are in substantial compliance
with current applicable environmental laws and regulations and that continued
compliance with existing requirements will not have a material adverse impact
upon operations, capital expenditures, earnings, or competitive position.
HEALTH CARE REFORM. Various health care reform proposals are currently being
considered by Congress. While such proposals are not as comprehensive as the
1994 proposals by the Clinton Administration, the current proposals cover
insurance issues such as guaranteed renewability and portability,
administrative simplification, and fraud.
12
PERSONNEL
At the end of 1994, Torchmark had 2,889 employees and 3,381 licensed
employees under sales contracts. Additionally, approximately 64,000
independent agents and brokers, who were not employees of Torchmark, were
associated with Torchmark's marketing efforts.
ITEM 2. REAL ESTATE
Torchmark, through its subsidiaries, owns or leases buildings that are used
in the normal course of business. Liberty owns a 487,000 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
150,000 sq. ft. of this building to unrelated tenants and has another 15,000
sq. ft. available for lease. Liberty also operates from 67 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 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.
American Income owns and is the sole occupant of an office building located
at 1200 Wooded Acres Drive, Waco, Texas. The building is a two-story structure
containing approximately 72,000 square feet of usable floor space. In
addition, American Income leases office space in various cities throughout the
United States.
W&R owns and occupies a 116,000 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, Torchmark Development Corporation (TDC), 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. A 90,000
sq. ft. office building is under construction in this development and is
scheduled for completion in May, 1995, which is 60% preleased. TDC also owns
and manages a 70,000 sq. ft. office and retail complex adjacent to Liberty
Park. As a part of a joint venture with unaffiliated entities, it is also
developing 2,800 contiguous acres as a planned community development.
DATA PROCESSING EQUIPMENT
Torchmark and its primary subsidiaries have significant automated
information processing capabilities, supported by centralized computer
systems. Torchmark also uses personal computers to support the user-specific
information processing needs of its professional and administrative staffs.
All centralized computer software support, information processing schedules
and computer-readable data management requirements are supported by company
specific policies and procedures which ensure that required information
processing results are produced and distributed in a timely manner and provide
for the copying, off-site physical storage and retention of significant
company computer programs and business data files for backup purposes.
13
ITEM 3. LEGAL PROCEEDINGS
Torchmark and its subsidiaries continue to be named as 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. Many of
these lawsuits involve claims for punitive damages. In particular, Torchmark's
subsidiary Liberty is a party to a number of such actions which seek punitive
damages in state courts of Alabama, a jurisdiction particularly recognized for
its large punitive damage verdicts. Some of such actions involving Liberty
also name Torchmark as a defendant. As a practical matter, a jury's discretion
regarding the amount of a punitive damage award is virtually unlimited under
Alabama law. Accordingly, the likelihood or extent of a punitive damage award
in any given case is virtually impossible to predict. As of December 31, 1994,
Liberty was a party to approximately 172 active lawsuits (excluding
interpleaders and stayed cases), more than 120 of which were Alabama
proceedings in which punitive damages were sought.
As previously reported, litigation was filed in May 1992 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. The complaint
sought substantial equitable and injunctive relief and 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 individual lawsuits based on substantially the same
allegations as in Robertson were filed by plaintiffs in Alabama, Georgia,
---------
Florida and Mississippi. Four additional class action suits also based upon
substantially the same allegations as in Robertson were filed 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) after the class certification.
- -----------------
Adair, Lamey, Howell and Scott have been settled on an individual basis.
- -------------------- -----
On October 25, 1993, a jury in the Circuit Court for Mobile County, Alabama
rendered a one million dollar verdict ($1,000 actual damages) against Liberty
in McAllister v. Liberty National Life Insurance Company (Case No.: CV-92-
-----------------------------------------------------
4085) one of twenty-five suits involving cancer policy exchanges which were
filed prior to class certification in the Barbour County litigation and
therefore were excluded from the Robertson class section. The McAllister
----------
decision was appealed to the Alabama Supreme Court. On February 25, 1995, the
judgment was affirmed. A petition for rehearing has been filed by Liberty.
Previously, another judge in the Mobile County Court had granted a summary
judgment in favor of Liberty in another substantially similar suit in which no
cancer claims had been submitted (Boswell v. Liberty National Life Insurance
------------------------------------------
Company, Case No.: CV-92-3342), which was appealed to the Alabama Supreme
- -------
Court. On May 13, 1994, the Alabama Supreme Court reversed and remanded
Boswell. The Court held the plaintiffs had alleged injury or damages in the
- -------
form of the additional policy premium payments and these allegations were
sufficient to withstand a motion to dismiss the complaint. Following this
order and pending a petition for rehearing, the Boswell case was settled.
-------
Excluding the McAllister case, no pre-class certification individual cancer
----------
exchange cases remain active, all having been settled or stayed.
As reported previously, a fairness hearing was held on January 20, 1994, in
the Robertson cancer policy exchange class action. Prior to that hearing,
class members had been 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 total value of the equitable and
monetary relief contained in the proposed Robertson settlement (from
---------
approximately $39 million to $55 million in total value), 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 reserved
jurisdiction and
14
extended the deadline for acceptance or rejection of the modifications set
forth in the February 4, 1994, Order. On May 6, 1994, the Court entered an
order in the Robertson litigation setting a hearing on May 19, 1994, on all
---------
outstanding motions in that case.
On May 26, 1994, the Barbour County Court entered an Order and Final
Judgment in the Robertson litigation, making final the findings and
---------
conclusions of its February 4, 1994 Order. That Order has been accepted by the
parties to the action. The discovery regarding the propriety of Torchmark's
release by the settlement agreement was concluded prior to the entry of the
Order and Final Judgment, and Torchmark was included in the release given on
behalf of the class.
The $55 million proposed amended settlement charge was provided for in
Torchmark's 1993 financial reports.
On July 5, 1994, certain intervenors in the Robertson litigation filed a
---------
notice of appeal of the Order and Final Judgment approving class certification
and the settlement with the Supreme Court of Alabama. The appeal is currently
pending.
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 policies
(Cofield v. Liberty National Life Insurance Company, Case No.: CV-93-3667). A
--------------------------------------------------
hearing on class certification in Cofield has been postponed and has not been
-------
rescheduled.
On March 17, 1994, litigation was filed against Liberty, a subsidiary of
Torchmark, certain officers and present and former directors of Torchmark, and
KPMG Peat Marwick LLP, independent public accountants of Torchmark and its
subsidiaries, in the Circuit Court for Marion County, Alabama (Miles v.
--------
Liberty National Life Insurance Company, Civil Action No. CV-94-67). The
- ---------------------------------------
lawsuit asserts that it is brought on behalf of a class composed of the
shareholders of Torchmark. The complaint alleges a failure to timely and
adequately report allegedly material contingent liabilities arising out of
insurance policy litigation involving Liberty. Compensatory and punitive
damages in an unspecified amount are sought.
In April 1994, the complaint in Miles was amended to add an additional
-----
shareholder plaintiff and to name Torchmark as a defendant. A second similar
action (Oakley v. Torchmark Corporation Case No. CV-94-47) was filed on August
-------------------------------
16, 1994 in the Circuit Court for Bibb County, Alabama, but plaintiff has
moved to dismiss that action without prejudice. Thereafter, a third such
action was filed in the United States District Court for the Southern District
of Alabama. (Dismukes v. Torchmark Corporation, Case No. 94-1006-P-M.) The
---------------------------------
Dismukes case was subsequently transferred to the United States District Court
- --------
for the Northern District of Alabama. No class has been certified in any of
these cases, all of which seek punitive damages. Torchmark, Liberty and the
individual defendants intend to vigorously defend these actions.
Torchmark, its insurance subsidiaries Globe and United American, and certain
Torchmark officers were named as defendants in litigation filed April 22, 1994
as a purported class action in the District Court of Oklahoma County, Oklahoma
(Moore v. Torchmark Corporation, Case No. CJ-94-2784-65). The suit claims
------------------------------
damages on behalf of individual health policyholders who are alleged to have
been induced to terminate such policies and to purchase Medicare Supplement
and/or other insurance coverages. The complaint seeks actual and punitive
damages for each class member in excess of $10,000. Subsequent to the filing
of this case, one of the plaintiffs was dismissed and the named plaintiff
died. The complaint has been amended to include new plaintiffs purporting to
represent the class. No class has been certified, however, and a motion to
dismiss has been filed by the defendants, who intend to vigorously defend the
action.
In July 1994, a purported class action alleging fraudulent and deceitful
practices in premium billing and lapses of coverage on a payroll deduction
insurance plan was filed in the Superior Court for Gordon County, Georgia
against Liberty (Bryant v. Liberty National Life Insurance Company, Civil
-------------------------------------------------
Action No. 28979). The complaint alleges actual damages in excess of $10
million and punitive damages of not less than $50 million as well as premium
reimbursements. No class has been certified and no proceedings of any
materiality have occurred in this case. Liberty has removed this case to
federal court. Additionally, Liberty had filed a declaratory judgment action
essentially seeking an accounting in this matter in the U.S. District Court
for the Northern District of Georgia on the same day Bryant was filed. Liberty
------
intends to vigorously defend the Bryant action.
------
Also in July 1994, a purported class action (Bosarge v. Liberty National
---------------------------
Life Insurance Company, Case No.: CV-94-2177) was filed against Liberty and
- ----------------------
Torchmark in the Circuit Court for Mobile County, Alabama which alleges that
Liberty agents have made misrepresentations in connection with converting
policyholder accounts to bank budget from other modes of premium payment. The
lawsuit claims that agents have represented that insureds would receive
additional "free insurance" if they changed to bank
15
budget payment while charges for such "free insurance" were actually made
through bank budget payments. Injunctive relief and unspecified actual and
punitive damages are sought. No class has been certified and no proceedings of
any materiality have occurred in this case. Liberty intends to vigorously
defend this action.
On November 17, 1994, a Circuit Court jury in Mobile County, Alabama
returned a $4.6 million verdict against Liberty in Coram v. Liberty National
-------------------------
Life Insurance Company (Case No. 93-2100). This case involved allegations of
- ----------------------
fraud by an agent of Liberty and was consolidated for trial with another case
involving the same sales agent. A verdict was returned in favor of Liberty in
the companion case. Liberty plans to vigorously pursue post-trial motions for
relief and, if necessary, an appeal. The $4.6 million verdict was provided for
in the 1994 financial reports.
In 1978, the United States District Court for the Northern District of
Alabama entered a final judgement in Battle v. Liberty National Life Insurance
-----------------------------------------
Company, et al. (CV-70-H-752-S), class action litigation involving Liberty, a
- -------
class composed of all owners of funeral homes in Alabama and a class composed
of all insureds (Alabama residents only) under burial or vault policies
issued, assumed or reinsured by Liberty. The final 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.
Provision has been made in the financial statements for certain anticipated
litigation costs. 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 universally.
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 1994.
16
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 8,205 shareholders of record on December 31,
1994, excluding shareholder accounts held in nominee form. Information
concerning restrictions on the ability of Torchmark's subsidiaries to transfer
funds to Torchmark in the form of cash dividends is set forth in Note 14--
---------
Shareholders' Equity in the Notes to the Consolidated Financial Statements.
- --------------------
The market price and cash dividends paid by calendar quarter for the past two
years are as follows:
1994
MARKET PRICE
------------
DIVIDENDS
QUARTER HIGH LOW PER SHARE
------- ------- ------- ---------
1 $49.500 $39.500 $ .2800
2 42.750 36.750 .2800
3 44.125 38.000 .2800
4 44.500 32.375 .2800
Year-end closing price..................$34.875
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
17
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)
1994 1993 1992 1991 1990
YEAR ENDED DECEMBER 31, ---------- ---------- ---------- ---------- ----------
Life premium............ $ 601,633 $ 555,859 $ 544,467 $ 524,052 $ 487,991
Health premium.......... 768,714 799,835 797,855 769,821 738,431
Other premium........... 18,527 137,216 111,640 71,940 64,830
Total premium........... 1,388,874 1,492,910 1,453,962 1,365,813 1,291,252
Net investment income... 330,492 372,470 382,735 364,318 348,412
Financial services reve-
nue.................... 139,276 137,422 133,462 114,326 108,561
Energy operations reve-
nue.................... 64,365 106,013 74,014 54,841 32,218
Realized investment
gains (losses)......... (2,551) 8,009 (948) 4,195 4,081
Total revenue........... 1,922,557 2,176,835 2,045,810 1,907,441 1,787,148
Net income.............. 268,946 297,979 265,477 246,489 229,177
Net income available to
common
shareholders........... 268,142 294,690 262,024 240,373 222,279
Annualized premium is-
sued:
Life.................. 149,833(1) 128,433 131,726 133,741(2) 129,233(3)
Health................ 121,182(1) 176,028 224,905 216,962 273,290
Total................. 271,015 304,461 356,631 350,703 402,523
Mutual fund collections. 1,180,477 1,237,747 1,141,928 813,737 742,142
Per common share:
Net income............. 3.72 4.01 3.58 3.13 2.85
Net income excluding
realized
investment gains
(losses) and the re-
lated
acquisition cost ad-
justment.............. 3.81 3.94 3.59 3.10 2.82
Cash dividends paid.... 1.12 1.08 1.07 1.00 .93
Return on average common
equity................. 20.8% 24.2% 26.4% 25.5% 26.6%
Return on average common
equity excluding
effect of SFAS 115..... 20.0% 24.4% 26.4% 25.5% 26.6%
Average shares outstand-
ing.................... 72,096 73,502 73,237 76,728 77,950
- -------------------------------------------------------------------------------
1994 1993 1992 1991 1990
AS OF DECEMBER 31, ---------- ---------- ---------- ---------- ----------
Cash and invested assets
(4).................... $5,305,471 $5,550,931 $4,994,828 $4,605,446 $4,155,577
Total assets............ 8,403,634 7,646,242 6,770,115 6,160,742 5,535,895
Short-term debt......... 255,116 107,108 276,819 11,499 779
Long-term debt.......... 792,763 792,335 497,867 667,125 529,294
Shareholders' equity.... 1,242,603 1,417,255 1,115,660 1,079,251 943,787
Per common share (5)... 17.37 18.80 14.54 13.11 11.13
Per common share ex-
cluding effect of SFAS
115................... 19.31 17.29 14.54 13.11 11.13
Annualized premium in
force:
Life................... 796,955(1) 612,656 588,084 562,550(2) 543,738(3)
Health................. 807,587(1) 823,382 832,488 798,142 786,393
Total.................. 1,604,542 1,436,038 1,420,572 1,360,692 1,330,131
Assets under management
at W&R................. 14,502,000 14,470,000 12,144,000 10,692,000 8,212,000
- -------------------------------------------------------------------------------
(1) Annualized life premium in force includes $144 million, and annualized
health premium in force includes $37 million, representing the business
acquired in the acquisition of American Income Life Insurance Company in
1994.
(2) Annualized life premium in force includes $2.7 million, representing the
business acquired in the acquisition of Sentinel American Life Insurance
Company in 1991.
(3) Annualized life premium in force includes $28.1 million, representing the
business acquired in the acquisition of Family Service Life Insurance
Company in 1990.
(4) Includes accrued investment income.
(5) Computed after deduction of preferred shareholders' equity.
18
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
Net income for Torchmark in 1994 was $269 million, declining 9.7% from $298
million in 1993. On a per share basis, net income was $3.72, decreasing 7.2%
from 1993 per share net income of $4.01. Per share earnings for 1993 rose
12.0% over 1992 earnings of $3.58 per share. Excluding the after-tax effect of
realized investment gains and losses and the associated adjustment to deferred
acquisition costs, per share earnings were $3.81 in 1994 compared to $3.94 in
1993, a decrease of 3.3%. The adjustment to deferred acquisition costs, which
was $7.1 million of additional amortization before tax, was made because of an
accounting rule requiring that deferred acquisition costs on interest-
sensitive insurance products be amortized in accordance with expected gross
profits. Since realized investment gains or losses on assets backing such
products change profit expectations, the adjustment is required. The 1993
increase in per share earnings, excluding realized investment gains and
losses, was 9.7% over 1992 adjusted per share earnings of $3.59.
In a comparison of 1994 results with those of 1993 and 1992, consideration
should be given to a number of nonrecurring items. On November 3, 1994,
Torchmark acquired American Income, and those results were consolidated with
Torchmark's after the acquisition date. American Income added approximately
$2.2 million to Torchmark's net income, after taking into account goodwill
amortization and financing costs. The purchase was made at a total cost of
$552 million. 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 included an $82 million pretax charge for
nonoperating expenses, compared to $25.1 million for 1994 and $5.7 million for
1992. These charges relate to legal costs, guaranty assessments, and other
contingencies which are discussed in more depth in "Item 3--Legal Proceedings"
-------------------------
on page 14 of this report. The $25.1 million charge in 1994 was principally
offset, however, by a reclassification of nonoperating expense to health
benefits, since actual payments will be made in the form of health benefits.
Two new accounting standards which dealt with postretirement benefits and
accounting for income taxes were implemented in 1993, increasing 1993 earnings
by $18.4 million. Enactment of corporate tax legislation in mid-1993, which
increased tax rates from 34% to 35%, resulted in an additional charge to 1993
earnings of $9.4 million to adjust the deferred tax liability relating to
prior years. It also caused an increase in 1994 and 1993 income taxes when
compared to 1992.
Revenues declined 12% to $1.9 billion in 1994, after having increased 6.4%
in 1993 to $2.2 billion. After excluding Vesta's revenues in 1993 and the
above-mentioned gain on the sale of Vesta, the decline in 1994 revenues would
have been 3.3%. Excluding Vesta, premium income for 1994 grew 1.4% or $19
million to $1.4 billion. Financial services revenues rose 1.4% in 1994 and
3.0% in 1993 primarily because of increased average assets under management.
Energy operations revenues declined 39% to $64 million from $106 million after
having risen 43% in 1993, because of the sale of a large producing property in
late 1993. The $22 million gain from the property sale as well as its
production revenues were included in 1993 revenues. Net investment income,
which declined 2.7% in 1993, dropped $35 million or 9.5% in 1994. Two
significant events caused the decline in net investment income in 1994 and, to
a lesser extent, in 1993. First, capitalization of developmental costs in
Torchmark's Black Warrior methane gas investment were phased out in 1993 and
discontinued in 1994 as the project became operational, causing rising expense
recognition while gas prices softened. Additionally, the low interest rate
environment in 1993 and early 1994 caused an acceleration of GNMA repayments,
requiring Torchmark to reinvest such funds at lower prevailing rates. A more
in-depth discussion of each of Torchmark's segments and investment operations
is found on pages 20 through 28 of this report.
Other operating expenses declined 7% in 1994 after having increased 3% in
1993. When comparing 1994 operating expenses to 1993, three items should be
considered. Vesta expenses of $7.5 million should be excluded from 1993,
American Income expenses of $1.2 million should be excluded from 1994, and
goodwill amortization from the purchases of American Income and United
Investors Management Company ("United Management") of $1.6 million and $1.9
million, respectively, should be excluded from 1994. After such adjustments
are made, operating expenses declined 6% to $158 million in 1994. As a
percentage of total revenues, operating expenses declined to 8.3% in 1994 from
8.5% in 1993, adjusting revenues for the previously-mentioned gains from the
Vesta sale of $57 million and the large energy
19
property in the amount of $22 million, and adjusting expenses to exclude Vesta
in 1993 and the new amortization of goodwill in 1994. Although operating
expenses rose in 1993 over 1992 from $157 million to $170 million, a
comparison of operating expenses as a percentage of revenues reveals they were
level at 8.3%, adjusting for the one-time Vesta and energy gains but including
Vesta operations. Interest expense rose 21% in 1993 to $67.3 million and then
rose an additional 13.5% to $76.4 million in 1994, primarily as a result of
$300 million in new debt issued during 1993, which caused average indebtedness
to rise in both 1993 and 1994. These new issues were used mainly to fund the
1993 acquisition of the remaining shares of United Management. These debt
issuances and the United Management transaction are discussed further as a
part of the capital resources discussion found on page 29 of this report.
Increased borrowings on Torchmark's line of credit and rising rates were also
minor factors in the 1994 increase. The line of credit is discussed in more
depth in the liquidity discussion found on page 28 of this report.
The following is a discussion of Torchmark's operations by segment.
INSURANCE OPERATIONS
LIFE INSURANCE
Summary of Results
(DOLLAR AMOUNTS IN THOUSANDS)
1994 1993 1992
------------------ ------------------ ------------------
% OF % OF % OF
AMOUNT PREMIUM AMOUNT PREMIUM AMOUNT PREMIUM
--------- ------- --------- ------- --------- -------
Premium and policy
charges................ $ 601,633 100.0% $ 555,859 100.0% $ 544,467 100.0%
Policy obligations...... 412,799 68.6 377,018 67.8 366,214 67.3
Required reserve inter-
est.................... (163,637) (27.2) (151,203) (27.2) (143,171) (26.3)
--------- ----- --------- ----- --------- -----
Net policy obligations. 249,162 41.4 225,815 40.6 223,043 41.0
Amortization of acquisi-
tion costs............. 90,573 15.1 86,098 15.5 87,375 16.0
Commissions and premium
taxes.................. 39,845 6.6 36,697 6.6 35,718 6.6
Other expense........... 46,814 7.8 43,790 7.9 46,330 8.5
--------- ----- --------- ----- --------- -----
Total.................. 426,394 70.9 392,400 70.6 392,466 72.1
--------- ----- --------- ----- --------- -----
Insurance operating in-
come................... $ 175,239 29.1% $ 163,459 29.4% $ 152,001 27.9%
========= ===== ========= ===== ========= =====
Life Insurance: Torchmark's life insurance premium, including policy
---------------
charges, increased 8.2% to $602 million in 1994, after having risen 2.0% to
$556 million in 1993. Sales of life products were strong in 1994 with
annualized life premium issued increasing 17% to $150 million in 1994.
Approximately 57% of the growth in life premium issued was in the direct mail
marketing area. Direct mail sales grew 34% in 1994 to $48 million. Annualized
life premium in force rose to $797 million at December 31, 1994, growing 30%
over the prior year-end amount of $613 million. Annualized life premium in
force grew 4% in 1993 from $588 million. Annualized premium in force data
includes amounts collected on certain interest-sensitive life products which
are not recorded as premium income but exclude single premium income and
policy charges.
Torchmark has emphasized increased sales in life insurance product lines
relative to health and other insurance products because profit margins are
superior. Additionally, assets backing the higher reserves required for life
products allow Torchmark to increase investment income. Profit margin for life
insurance, as measured by insurance operating income as a percentage of
premium, was in excess of 29% in both 1994 and 1993, improving over 27.9% in
1992. One factor in the improvement over 1992 was increased 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 the conversion of a large portion of agent-collected home
service business to bank draft premium, which has higher persistency. The
proportion of bank draft premium to total home service premium increased from
69% in 1992 to 78% in 1993 to 81% in 1994. Improvements in persistency reduce
the amortization of acquisition expenses and positively affect overall
profitability margins but may cause some increases in the ratio of policy
obligations to premium.
20
The primary cause of the increase in the ratio of policy obligations to
premium in 1994 was higher mortality when compared to 1993. Fluctuations in
mortality are normal, however, and such increase is not indicative of a
pattern. The above presentation of life insurance results excludes a $22.8
million benefit in 1994 from the re-evaluation of reserving assumptions on a
block of burial reserves. A review of assumptions regarding mortality,
interest and inflation pressures on burial costs indicated that sufficient
experience existed to support a change in the level of reserves held on this
block. Torchmark will continue to monitor the reserving assumptions for this
block on an annual basis to ensure that reserves are sufficient to meet
contractual liabilities. Had this item been included, the 1994 ratio of policy
obligations to premium would have been reduced and overall margin would have
been increased 3.8%.
Other expense margins have improved in each of the years considered. These
improvements have had the effect of further improving margins.
HEALTH INSURANCE
Summary of Results
(DOLLAR AMOUNTS IN THOUSANDS)
1994 1993 1992
----------------- ----------------- -----------------
% OF % OF % OF
AMOUNT PREMIUM AMOUNT PREMIUM AMOUNT PREMIUM
-------- ------- -------- ------- -------- -------
Premium.................. $768,714 100.0% $799,835 100.0% $797,855 100.0%
Other income............. 3,349 0.4 3,268 0.4 2,538 0.3
-------- ----- -------- ----- -------- -----
Total revenues.......... 772,063 100.4 803,103 100.4 800,393 100.3
Policy obligations....... 458,066 59.5 486,856 60.9 491,343 61.6
Required reserve inter-
est..................... (25,710) (3.3) (24,572) (3.1) (22,712) (2.9)
-------- ----- -------- ----- -------- -----
Net policy obligations.. 432,356 56.2 462,284 57.8 468,631 58.7
Amortization of acquisi-
tion costs.............. 74,701 9.7 83,385 10.4 89,766 11.3
Commissions and premium
taxes................... 102,224 13.3 107,317 13.4 108,105 13.5
Other expense............ 42,673 5.6 44,194 5.6 44,298 5.6
-------- ----- -------- ----- -------- -----
Total................... 651,954 84.8 697,180 87.2 710,800 89.1
-------- ----- -------- ----- -------- -----
Insurance operating in-
come.................... $120,109 15.6% $105,923 13.2% $ 89,593 11.2%
======== ===== ======== ===== ======== =====
Health Insurance: Torchmark's individual health products include Medicare
-----------------
Supplement insurance, cancer insurance, and other under-age 65 medical and
hospitalization products. As a percentage of annualized individual health
premium in force at December 31, 1994, Medicare Supplement accounted for 71%,
cancer accounted for 14%, and other products accounted for 15%.
Health premium was $769 million in 1994, declining 4% over premium of $800
million in 1993. Health premium increased slightly in 1993 over the prior
year. Annualized health premium in force stood at $808 million at December 31,
1994, decreasing 2% from 1994 premium in force of $823 million. Year-end 1993
annualized health premium in force declined 1% from the December 31, 1992
amount of $832 million. The declines in health premium in force resulted from
falling sales of most health products. Sales of health insurance products in
terms of annualized premium issued declined 31% to $121 million in 1994 after
having declined 22% to $176 million in 1993.
The declines in premium sales in both years and the 1994 decline in premium
in force are primarily attributable to Torchmark's Medicare Supplement
product. Annualized premium in force for this product rose from $581 million
at year-end 1992 to $601 million for year-end 1993, but fell 5% to $572
million in 1994. In terms of annualized premium issued, sales of Medicare
Supplement insurance declined 13% to $136 million in 1993 and further declined
36% in 1994 to $88 million. Throughout all of 1993 and most of 1994, there was
considerable uncertainty regarding various health care reforms proposed by
both the Clinton Administration and Congress which had bearing on the Medicare
Supplement market. Additionally, this market has also experienced a great deal
of regulatory change in recent years, including 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. The
mandated loss ratio and policy forms have put significant pressure on margins
for Torchmark as well as the rest of the industry, discouraging sales.
Torchmark has also encountered considerable competition in this market with
regard to price and "attained-age" pricing, whereby premium may be increased
on a basis of increased age as well as increased medical costs. This increased
competition has negatively affected sales.
21
Torchmark intends to continue its efforts to increase Medicare Supplement
production. It is seeking approval in certain key states to sell the
"attained-age" policy in order to compete more effectively and expects to
receive approval in these states during 1995. Additionally, Torchmark plans to
market a new group Medicare Supplement product and a variety of other new life
and health products directed at the senior citizen market.
Cancer insurance annualized premium in force declined 3.4% to $106 million
at year-end 1993 but rose 8% in 1994 to $114 million at year-end 1994. Sales
of this product declined 45% in 1993 to $10 million and further declined 19%
in 1994 to $8 million. Annualized premium in force for under age 65 health
insurance stabilized in 1994, standing at $113 million at both year-end 1994
and 1993. Annualized premium in force for under age 65 declined 19% in 1993
from $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
1992 and 1993.
Margins have improved in each of the years considered. As a percentage of
premium, insurance operating income for health insurance grew from 11.2% in
1992 to 13.2% in 1993 to 15.6% in 1994, representing an increase of 18% in
both 1993 and 1994 over the prior year. There were two primary reasons for
this improvement. First, the amortization of acquisition costs declined in
each period due to improved persistency. The improvements were caused at least
in part by the requirement in many states to level agents' commissions on
Medicare Supplement products instead of paying a larger first-year commission.
This leveling of commissions has encouraged persistency through the payment of
a higher renewal commission. It has also encouraged persistency through the
payment of a lower first-year commission, which discourages replacement.
Additionally, policy obligations for health products as a percentage of
premium declined .7% in 1993 and 1.4% in 1994. These declines were a result of
the decline in lower margin non-Medicare business in 1993 and in 1994, as well
as favorable experience in certain Medicare and other non-Medicare blocks of
business. Not included in the above 1994 presentation of health results was a
one-time increase in health benefits resulting primarily from the
reclassification described on page 19.
ANNUITIES
Summary of Results
(DOLLAR AMOUNTS IN THOUSANDS)
1994 1993 1992
------------------- ------------------- -------------------
% OF MEAN % OF MEAN % OF MEAN
AMOUNT RESERVE AMOUNT RESERVE AMOUNT RESERVE
-------- --------- -------- --------- -------- ---------
Policy charges.......... $ 13,888 1.0% $ 9,454 0.7% $ 8,771 0.9%
Allocated investment in-
come*.................. 8,576 0.6 8,387 0.6 8,903 1.0
-------- ---- -------- ---- -------- ----
Total revenue.......... 22,464 1.6 17,841 1.3 17,674 1.9
Policy obligations...... 42,275 3.0 43,032 3.3 43,187 4.6
Required reserve inter-
est.................... (42,765) (3.0) (43,090) (3.3) (43,513) (4.6)
-------- ---- -------- ---- -------- ----
Net policy obligations. (490) 0.0 (58) 0.0 (326) 0.0
Amortization of acquisi-
tion costs............. 5,772 0.4 4,596 0.3 6,133 0.6
Commissions and premium
taxes.................. 605 0.0 708 0.1 848 0.1
Other expense........... 2,345 0.2 663 0.0 994 0.1
-------- ---- -------- ---- -------- ----
Total.................. 8,232 0.6 5,909 0.4 7,649 0.8
-------- ---- -------- ---- -------- ----
Insurance operating in-
come................... $ 14,232 1.0% $ 11,932 0.9% $ 10,025 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 nine 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.
22
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.
The following table presents the annuity account balance at each year end
and the annuity collections for each year for both fixed and variable
annuities:
ANNUITY DEPOSIT BALANCES ANNUITY COLLECTIONS
-------------------------- --------------------------
(DOLLAR AMOUNTS IN (DOLLAR AMOUNTS IN
MILLIONS) THOUSANDS)
1994 1993 1992 1994 1993 1992
-------- -------- -------- -------- -------- --------
Fixed..................... $ 801.2 $ 782.8 $ 755.7 $ 43,339 $ 46,573 $ 69,381
Variable.................. 692.8 529.7 282.0 196,105 213,982 125,688
-------- -------- -------- -------- -------- --------
Total.................... $1,494.0 $1,312.5 $1,037.7 $239,444 $260,555 $195,069
======== ======== ======== ======== ======== ========
Variable annuity collections declined from $214 million in 1993 to $196
million in 1994, the first year of lower year-over-year collections since
these products were introduced in 1987. The rapid growth experienced in
variable annuities prior to 1994 resulted from increased customer interest in
these investment-type products, due at least in part to stronger financial
markets. Weaker financial markets in 1994 are thought to have caused decreased
demand. Sales of fixed annuities have declined in each year in large part
because of the increased interest in variable annuities. Although sales
declined in 1994, the combined annuity account balance grew 14% in 1994 over
the prior year end to $1.4 billion.
Annuity policy charges, which are included in other premium in the financial
statements, climbed 47% to $13.9 million, after having risen 8% in 1993 to
$9.5 million. The large increase in policy charges in 1994 was attributable to
the increase in size of the variable annuity account balance over the prior
year, the increase in the number of variable annuity contracts in force, and
the cumulative effect of growth in sales over the past few years on which the
sales charge is based. Allocated investment income, or investment income
earned in excess of policy requirements, was $8.6 million in 1994, a slight
increase over 1993, due to the increase in deposit balance size for fixed
annuities. Insurance operating income for the annuity line has grown in each
of the years 1992 through 1994, increasing 19% to $14 million in 1994 and also
19% to $11.9 million in 1993. Profitability margins as measured by the mean
reserve have been relatively stable, declining slightly in 1993 but increasing
slightly in 1994.
23
ASSET MANAGEMENT
FINANCIAL SERVICES
Summary of Results
(DOLLAR AMOUNTS IN THOUSANDS)
1994 1993 1992
--------------- ---------------- ----------------
% OF % OF % OF
AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
------- ------- -------- ------- -------- -------
Commission revenue........... $72,223 43.1% $ 78,067 46.8% $ 76,793 49.2%
Asset management fees........ 70,651 42.2 64,181 38.5 56,056 36.0
Service fees................. 22,297 13.3 21,273 12.7 19,890 12.8
Real estate fees............. -0- -0- -0- 0.0 436 0.3
------- ----- -------- ----- -------- -----
Financial services revenue*. 165,171 98.6 163,521 98.0 153,175 98.3
Investment and other income.. 2,264 1.4 3,293 2.0 2,736 1.7
------- ----- -------- ----- -------- -----
Total revenue............... 167,435 100.0 166,814 100.0 155,911 100.0
Commissions and selling
expenses.................... 62,285 37.2 70,735 42.4 70,005 44.9
Other expenses............... 21,252 12.7 23,265 14.0 21,619 13.9
------- ----- -------- ----- -------- -----
Total expenses.............. 83,537 49.9 94,000 56.4 91,624 58.8
------- ----- -------- ----- -------- -----
Pretax income................ $83,898 50.1% $ 72,814 43.6% $ 64,287 41.2%
======= ===== ======== ===== ======== =====
- --------
*Financial services revenue includes $25.9 million in 1994, $26.2 million in
1993, and $19.7 million in 1992 representing revenues from other Torchmark
segments which are eliminated in consolidation.
Financial services: Torchmark's financial services revenues increased 1% in
-------------------
1994 to $165 million from the prior-year amount of $164 million, which
reflected a 7% increase over 1992. Financial services revenue consists of
commission revenue derived primarily from the sale of mutual funds and other
investment products, insurance, and annuity products by the W&R sales
representatives. It is also comprised of asset management and service fees for
mutual fund management and administration. Financial services revenues were
comprised of the following at December 31, 1994: asset management fees 43%,
commissions 44%, and service fees 13%.
Asset management fees rose 10% in 1994 to $71 million, after having risen
14% in 1993 to $64 million. Growth in management fees in both periods was
caused by the increase in average mutual fund and institutional assets under
management, to which the fees correlate. The 1994 growth in average assets
under management resulted from additional product sales. This growth was
achieved even though financial markets weakened somewhat during the year as a
result of rising interest rates. The 1993 increase in assets under management
resulted largely from the stronger financial markets experienced in 1993 over
prior periods as well as from additional product sales. Average assets under
management grew 9% over the prior year. Assets under management were $14.5
billion at both December 31, 1993 and 1994, and $12.1 billion at December 31,
1992.
Commission revenue from sales of investment products, which include mutual
funds and variable annuity products, represented 82% of total commission
revenue. The remaining source of commission revenue was from insurance product
sales. Commissions from the sale of insurance products and variable annuity
products are derived primarily from UILIC, and are eliminated in
consolidation. Investment product commissions declined 10% to $59 million,
after having risen 2% in 1993 to $66 million. Investment product sales were
$1.18 billion in 1994, decreasing 5% over 1993 sales of $1.24 billion. Sales
of these products climbed 10% in 1993 from $1.13 billion. Investment product
sales for 1994 consisted of United Funds (75%), variable annuities (16%), and
Waddell & Reed Funds (9%). Sales of the United Funds declined 5% to $939
million in 1993, and further declined 6% in 1994 to $881 million. On the other
hand, 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 in 1993 and grew
another 13% in 1994 to $107 million. W&R sales of variable annuities declined
6% in 1994 to $192 million, after experiencing a 74% increase in 1993 to $204
million. Growth in 1993 commission revenue for investment products was less
than the growth in sales and the decline in 1994 commission revenue was
greater than the decline in sales. These effects in both years were caused by
declines in the sales of the
24
United Funds, for which commission revenue is earned at the point of sale, and
increases in sales of the Waddell & Reed Funds, for which distribution
revenues are deferred and earned subsequent to the point of sale. 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. This reduction in revenue
was partially offset by an increased annual fee.
Service fees were $22.3 million in 1994, rising 5% over the prior year.
Service fees grew 7% to $21.3 million in 1993. The number of accounts serviced
was 1.15 million at December 31, 1994, compared to 1.09 million a year
earlier, increasing 6%.
Commissions and selling expenses as a percentage of commission revenue were
stable at 91% in both 1993 and 1992, but declined to 86% in 1994. The 1994
decline resulted from an increase in the 12-b service fee which offsets
certain direct expenses. Margin improvement for financial services operations
was mainly caused by a larger proportion of asset management fees to revenues
than commissions to revenues in each year over the prior year. The asset
management fees have a significantly higher profit margin than commission
revenues.
ENERGY
Summary of Results
(DOLLAR AMOUNTS IN THOUSANDS)
1994 1993 1992
-------------------- -------------------- -------------------
% OF % OF % OF
RECURRING RECURRING RECURRING
AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
--------- --------- --------- --------- -------- ---------
Recurring energy reve-
nues:
Product marketing reve-
nues.................. $ 350,034 $ 174,080 $ 98,352
Less product costs..... (332,550) (165,068) (91,356)
--------- --------- --------
Net product marketing
revenues.............. 17,484 26.1% 9,012 10.4% 6,996 9.3%
Production revenues.... 19,008 28.4 45,427 52.4 38,155 50.5
Asset management reve-
nues.................. 17,105 25.5 15,233 17.6 15,057 19.9
Well operations reve-
nues.................. 10,768 16.0 14,310 16.5 13,806 18.3
--------- ----- --------- ----- -------- -----
Total recurring operat-
ing revenues.......... 64,365 96.0 83,982 96.9 74,014 98.0
Investment income....... 2,657 4.0 2,674 3.1 1,525 2.0
--------- ----- --------- ----- -------- -----
Total recurring reve-
nue................... 67,022 100.0 86,656 100.0 75,539 100.0
--------- ----- --------- ----- -------- -----
Depletion............... 11,700 17.5 22,328 25.8 19,450 25.8
Direct expenses......... 4,515 6.7 10,494 12.1 10,353 13.7
--------- ----- --------- ----- -------- -----
Energy operations ex-
pense................. 16,215 24.2 32,822 37.9 29,803 39.5
Administrative expenses. 37,623 56.1 34,905 40.2 29,920 39.6
Interest................ 1,279 1.9 7,591 8.8 5,365 7.1
--------- ----- --------- ----- -------- -----
Total expense.......... 55,117 82.2 75,318 86.9 65,088 86.2
--------- ----- --------- ----- -------- -----
Pretax operating income. 11,905 17.8 11,338 13.1 10,451 13.8
Gain from sale of prop-
erties*................ 0 0.0 22,030 25.4 0 0.0
--------- ----- --------- ----- -------- -----
Pretax income........... $ 11,905 17.8% $ 33,368 38.5% $ 10,451 13.8%
========= ===== ========= ===== ======== =====
- --------
*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. Additionally, Torchmark and
its insurance subsidiaries have invested in energy properties. While these
investments are not included in the above table, they are discussed in this
report under the caption "Investment Operations."
25
Energy operations revenues for 1993 included a one-time gain from the sale
of an offshore producing property in the amount of $22 million. Excluding this
gain, energy revenues declined 23% from $84 million in 1993 to $64 million in
1994. In 1993, revenues excluding the one-time gain rose 13% over 1992.
Profitability in energy operations improved in each of the years 1992 through
1994, with recurring pretax income rising from $10.5 million in 1992 to $11.3
million in 1993 and to $11.9 million in 1994, an increase of 8% in 1993 and 5%
in 1994.
The component of energy operations which has grown the most in the past two
years was product marketing activities. These activities involve 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.
Net product marketing revenues grew 94% in 1994 after having gained 29% in
1993. These activities were the largest contributor to recurring energy
profits in both 1993 and 1994, adding $5.5 million to pre-tax operating income
in 1993 and $11.3 million in 1994.
Although producing properties were another source of energy operation
profits in 1992 and 1993, production activity declined due to the sale of the
previously-mentioned offshore property. Production revenues are derived from
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. Prior to 1994, production activities
generally were 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. Depletion and
direct expenses are related to production activities and declined as
production declined. The interest expense reported for energy operations is
also associated with producing activities, because of the cost of financing
properties. The sharp decline in 1994 interest expense resulted from the 1993
property sale, although replacement properties were acquired in the amount of
$24 million in 1994.
Torch Energy and its subsidiaries are also involved in asset management and
well operations. Assets under management were $1.2 billion at year-end 1992
and 1993, and $1.3 billion at year-end 1994. A total of 7,500 wells were
operated at December 31, 1994, compared to 1,200 at year-end 1993 and 1,800 at
year-end 1992.
Torchmark is presently evaluating various alternatives concerning the
possible sale of Torch Energy.
Investment operations: Net investment income declined 9.5% in 1994 to $330
----------------------
million from $365 million in 1993, after adjustment for Vesta's investment
income. It declined 2.7% in 1993 (including Vesta). The three main factors
causing the 1994 decrease were increased losses in energy investment income,
accelerated GNMA repayments which caused increased acquisition of lower
yielding securities, and increased investment in municipal securities which
involve lower pretax yields. These factors also affected the decline in 1993
net investment income to a lesser extent. Additionally, the low yields
available in 1993 on new investments for Torchmark's cash flow negatively
affected 1993 and 1994 investment income growth.
Torchmark's energy investments, which were valued at $331 million at
December 31, 1994 and $346 million at the same date in 1993, resulted in a
loss of $24 million in 1994, compared to a loss of $4 million in 1993 and a
gain of $15 million in 1992. While lower gas prices were a factor in the
decline in both years, the primary cause for the decrease in earnings in both
years was the completion during 1993 of the Black Warrior Basin development in
Alabama. This development, for which Torchmark had a total investment of $235
million at December 31, 1994, involves wells which produce methane gas from
coal seam formations. Prior to 1993, during the development process,
development costs including interest were capitalized. As wells were dewatered
and production of gas was phased in during 1993, capitalization of costs was
phased out. There was no capitalization in 1994. Therefore, rising costs were
recognized during a period of time when gas prices were trending lower. The
effect of the capitalization of costs resulted in a $12 million, or $.17 per
share, reduction in net investment income between 1993 and 1994. Earnings from
the production of methane gas in the Black Warrior Basin development are
primarily derived from Federal income tax credits available estimated to be
$1.00 per thousand cubic feet of gas produced for 1994 and will continue
through 2003. Torchmark's tax credits are reported as a reduction of income
tax expense and do not increase investment income. Credits were recognized in
the amounts of $8.0 million in 1994, $10.5 million in 1993, and $2.9 million
in 1992.
26
The decline in interest rates during 1993 encouraged refinancing of
mortgages, causing increased GNMA prepayments in 1993 and early 1994. These
funds were reinvested at lower prevailing rates, causing a reduction in
Torchmark's investment income in both 1993 and 1994. It is estimated that GNMA
repayments reduced investments income $26.4 million in 1994 and $10.3 million
in 1993, resulting in an after-tax decline of $.24 per share in 1994 and $.09
per share in 1993. Because of rising interest rates in 1994, however,
refinancings have declined and Torchmark has been able to invest repayments as
well as new cash flow in slightly higher yielding securities, reversing this
trend. Torchmark has also reduced its exposure to GNMA's during 1994,
decreasing the portfolio from $2.05 billion at year-end 1993 to $1.72 billion
at year-end 1994.
The relative attractiveness of tax-exempt securities improved in late 1993
because of the increase in corporate tax rates. While pretax returns on tax-
exempt securities are lower than taxables, net after-tax returns are higher.
Torchmark's holdings in tax-exempt securities represented 13.6% of total
investments at December 31, 1994, compared to 11% at year-end 1993 and 1.7% at
year-end 1992. Tax-equivalent investment income, excluding energy income and
Vesta, was $370 million in 1994, compared to $376 million in 1993 and $374
million in 1992.
Torchmark made fixed-maturity acquisitions at an average tax-equivalent
yield of 7.27% in 1994 compared to 6.71% in 1993 and 7.75% in 1992. Principal
components of 1994 acquisitions were noncallable corporate obligations,
mortgage-backed securities, and to a lesser degree, insured municipal bonds.
The rise in interest rates in 1994 caused the market value of Torchmark's
fixed-maturity investments to decline, resulting in a $248 million decline in
shareholders' equity, net of related taxes and deferred acquisition costs. At
December 31, 1994, the book value of Torchmark's fixed maturities was $4.6
billion, compared to $4.4 billion at year-end 1993. At December 31, 1994, book
value exceeded market by $242 million, compared to an excess of market over
book at year-end 1993 of $192 million. Torchmark's fixed-maturities are
reported at market value because they have been designated "available for
sale."
Torchmark's investments are very high quality and are primarily in U.S.
Government or U.S. Government-backed securities and other investment-grade
bonds. Torchmark's emphasis on such investments varies significantly with the
insurance industry, which is demonstrated in the following table at December
31, 1994 including information provided by the American Council of Life
Insurance:
TORCHMARK
---------------- INDUSTRY %
$ AMOUNTS % (1)
---------- ----- ----------
Investment Grade Bonds & Short Terms............... $4,469,502 85.4% 63.9%
Noninvestment Grade Bonds.......................... 25,490 0.5 5.7
Equities........................................... 41,590 0.8 5.3
Mortgage loans..................................... 17,997 0.3 15.3
Real estate........................................ 132,554 2.5 2.9
Policy loans....................................... 181,988 3.5 5.3
Other.............................................. 366,476 7.0 1.6
---------- ----- -----
$5,235,597 100.0% 100.0%
========== ===== =====
- --------
(1) Latest data available from the American Council of Life Insurance
Torchmark's investment strategy continues to concentrate on high quality,
medium-term, fixed income securities. At 1994 year-end, government or
government-guaranteed securities totalled $2.05 billion, approximately 46% of
the bond and short-term portfolio. This represents a decrease from 61% at
year-end 1993 due to a reduction in holdings of GNMA securities. Despite the
reduction, a substantial portion of the fixed-income portfolio was represented
by U.S. Government obligations. The quality of Torchmark's portfolio is
evidenced by the fact that rating agencies rated 61.3% of the fixed income
portfolio "AAA" and 98.8% were considered to be investment grade.
Torchmark's mortgage-backed holdings have resulted in a bond portfolio which
provides substantial cash flow but one in which the principal repayments are
impacted by interest rate changes. As indicated
27
by the following table, 30% of the fixed income portfolio should repay within
five years, and almost 75% within ten years. This compares with 46% and almost
90%, respectively, for year-end 1993. The table presents maturities determined
by schedule or by estimated repayment in the case of mortgaged-backed
securities.
DECEMBER 31,
------------
1994 1993
----- -----
Short-terms................... 2.4% 1.4%
Under 1 year.................. 6.0 13.2
2-5 years..................... 21.7 31.7
6-10 years.................... 44.0 43.1
11-15 years................... 18.9 8.8
16-20 years................... 3.9 1.3
Over 20 years................. 3.1 .5
----- -----
Total......................... 100.0% 100.0%
===== =====
Because of rising rates in 1994, the average life of the investment
portfolio was extended as a result of a reduction in expected prepayments of
mortgage-backed holdings and the acquisition of longer-term securities. At
December 31, 1994, the average life of Torchmark's investment portfolio was
estimated to be 8.0 years, compared with 6.0 years at year-end 1993 and 6.1
years at year-end 1992. The year-end duration of the portfolio increased to
5.2 years from 4.2 years at year-end 1993.
ACQUISITION
On November 3, 1994, Torchmark acquired American Income for a total cash
purchase price of approximately $552 million. American Income sells life
insurance to union and credit union members through exclusive agents. The
addition of American Income's quality line of products and low-cost operation
fits well with Torchmark's strategy of growing life insurance operations in
niche markets. The results of operations of American Income were consolidated
with those of Torchmark after the purchase date, adding $33.1 million to
Torchmark's 1994 revenues and $2.2 million or $.03 per share to net income,
after deduction of charges for goodwill amortization and the cost of funds for
the purchase. Funds for the purchase were provided through a $200 million
preferred stock offering which is discussed in more detail in the capital
resources section found on page 29 of this report, a $175 million bridge loan
from a group of banks, the sale of investments available for sale, and
internal cash flow.
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 and a commercial paper program. 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 $370 million in 1994, compared to $488 million in 1993
and $554 million in 1992. In addition, Torchmark received $838 billion in
1994, $1.16 billion in 1993, and $808 million in 1992 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 $116 million at December 31, 1994,
compared to $237 million at December 31, 1993. These liquid assets represented
1.4% of total assets at December 31, 1994, compared to 3.1% at the prior year
end. In addition to Torchmark's liquid assets, Torchmark has marketable fixed
and equity securities with a value of $4.4 billion at December 31, 1994, which
are available for sale should the need arise.
At year-end 1994, Torchmark had in place a line of credit facility with a
group of banks which allowed borrowings up to $400 million. This line of
credit agreement was entered into in December, 1994 and
28
replaced a then existing $250 million credit line and the previously-mentioned
$175 million bridge loan associated with the American Income purchase. The
$400 million credit line is further designed as a backup credit line for a
commercial paper program not to exceed $400 million, whereby Torchmark may
borrow from either the credit line or issue commercial paper at any time but
may not borrow in excess of a total of $400 million on the combined
facilities. At December 31, 1994, $250 million was borrowed on the line of
credit and no commercial paper was outstanding. A facility fee is charged on
the entire $400 million balance. In accordance with the agreements, Torchmark
is subject to certain covenants regarding capitalization and earnings. At
December 31, 1994, 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, and distributions
are not permitted in excess of statutory net worth. Subsidiaries are also
subject to certain minimum capital requirements. Although these restrictions
exist, dividend availability from subsidiaries has been and is expected to be
more than adequate for parent-company operations. At December 31, 1994, a
maximum amount of $213 million was available to Torchmark from insurance
subsidiaries without regulatory approval.
Capital Resources: On October 11, 1994, a wholly-owned finance subsidiary of
------------------
Torchmark issued 8 million shares or $200 million face amount Cumulative
Monthly Income Preferred Securities, Series A ("MIPS") at an annual dividend
rate of 9.18%. These securities were issued pursuant to a registration with
the Securities and Exchange Commission in January, 1994. The MIPS are subject
to a mandatory redemption in full at September 30, 2024, although Torchmark
may elect to extend the MIPS for up to an additional 20 years if certain
conditions are met. They are redeemable at Torchmark's option after September
30, 1999. While obligated to pay dividends at a fixed rate of 9.18%, Torchmark
subsequently entered into a ten-year interest-rate swap agreement with an
unaffiliated party whereby Torchmark agreed to pay a variable rate on the $200
million face amount in exchange for payment of the fixed dividend.
Additionally, Torchmark acquired a five-year interest-rate cap on the swap
agreement that insures the variable rate cannot exceed 10.39%. At December 31,
1994, the variable rate was 7.0%. Net proceeds from the issue, which were $193
million after issue expenses, were used to acquire American Income.
Torchmark's long-term debt stood at $793 million at December 31, 1994,
compared to $792 million at December 31, 1993. Torchmark's major debt issues
outstanding at both December 31, 1994 and December 31, 1993 consisted of the
following: (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; (3) 8
1/4% Senior Debentures due 2009, $100 million principal amount; (4) 7 7/8%
Notes due 2023, $200 million principal amount; and (5) 7 3/8% Notes due 2013,
$100 million principal amount. The latter two issues were issued in 1993,
proceeds of which were used primarily to fund the United Management purchase.
All major debt issues were carried at a balance of $791 million at December
31, 1994, after deducting the unamortized discount, compared to $790 million
at December 31, 1993.
During 1994, Torchmark's short-term debt rose to $255 million at December
31, 1994 from $107 million at year-end 1993. Torchmark increased its line of
credit borrowings from $107 million to $250 million during 1994. Also, at
year-end 1994, there was an additional $5 million outstanding in energy short-
term debt.
In 1994, Torchmark acquired 1.5 million shares of its common stock on the
open market at an aggregate cost of $59 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 850 thousand
shares at a cost of $42 million in 1993 and 4.2 million shares at a cost of
$158 million in 1992.
In March, 1994, Torchmark acquired the remaining outstanding shares of its
adjustable-rate preferred stock at its face amount of $47 million. Prior to
1994, Torchmark had acquired $53 million face amount of this stock on the open
market at an aggregate cost of $48 million. These shares were retired
immediately.
29
Shareholders' equity was $1.2 billion at December 31, 1994, a decrease of
12% when compared to the $1.4 billion at December 31, 1993. Book value per
share was $17.37 at December 31, 1994, compared to $18.80 at December 31 1993.
After adjusting the fixed-maturity portfolio to remove the market value
fluctuation required by accounting rules, book value was $19.31 at year-end
1994, compared to $17.29 at year-end 1993, an increase of 12%. Return on
common shareholders' equity was 21% in 1994, compared to 24% in 1993. Total
debt as a percentage of total capitalization was 40% at December 31, 1994,
compared to 41% at December 31, 1993, with the MIPS counted as equity and
excluding the mark up or down of fixed investments. The multiple of earnings
before interest and taxes to interest requirements was 5.9 for 1994, compared
to 7.5 for 1993 and 8.0 for 1992.
OTHER ITEMS
Litigation: Torchmark and its subsidiaries continue to be named as parties
-----------
to pending or threatened litigation, most of which involve punitive damage
claims based upon allegations of agent misconduct at Liberty in Alabama. Such
punitive damage claims are tried in Alabama state courts where any punitive
damage litigation has the potential for significant adverse results. It is
impossible to predict the extent of punitive damages that may be awarded if
liability is found in any given case, since the amount of punitive damages in
Alabama is left largely to the discretion of the jury in each case. While
provision has been made in the financial statements for litigation costs, it
is thus difficult to predict with certainty the liability of Torchmark or its
subsidiaries in any given case because of the unpredictable nature of this
type of litigation.
Also, the class action litigation in Alabama over an exchange of Liberty's
cancer policies continued in 1994. Although in May, 1994, a settlement was
approved involving both equitable and monetary relief, valued by the court at
$55 million, the appeal from the trial court's final approval is pending
before the Alabama Supreme Court. Final briefs in the case were submitted to
the Court in February, 1995. It is impossible to determine when a ruling will
be issued.
Merger with United Management: On October 1, 1993, Torchmark acquired the
------------------------------
approximately 16% of United Management that it did not already own through the
payment of $31.25 per share in cash for the remaining outstanding shares.
Accordingly, United Management was merged into Torchmark. Including share
purchases made in 1993, the total amount of consideration paid to the
remaining United Management shareholders was approximately $230 million.
Divestiture of Vesta Insurance Group: During 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 was at that
time the holding company for Torchmark's property and casualty operations. On
November 11, 1993, Vesta sold 9 million shares of common stock in a public
offering of which 6.8 million shares were owned by Torchmark prior to the sale
and 2.2 million were newly issued shares. Torchmark's 6.8 million shares were
sold for $25 per share less expenses, amounting to proceeds of approximately
$161 million and resulting in a $57 million pretax gain. After the
transaction, Torchmark continued to own 3.4 million shares of Vesta
outstanding common stock or approximately 27% of the company. Torchmark also
loaned Vesta $28 million in December, 1993, which continued to be outstanding
at December 31, 1994.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
Independent Auditors' Report.............................................. 31
Consolidated Financial Statements:
Consolidated Balance Sheet at December 31, 1994 and 1993................. 32
Consolidated Statement of Operations for each of the years in the three-
year period ended December 31, 1994..................................... 33
Consolidated Statement of Shareholders' Equity for each of the years in
the three-year period ended December 31, 1994........................... 34
Consolidated Statement of Cash Flow for each of the years in the three-
year period ended December 31, 1994..................................... 35
Notes to Consolidated Financial Statements............................... 36
30
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, 1994 and 1993, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1994, 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 10 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 1, 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 LLP
Birmingham, Alabama
February 1, 1995
31
TORCHMARK CORPORATION
CONSOLIDATED BALANCE SHEET
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31,
----------------------
1994 1993
---------- ----------
Assets:
Investments:
Fixed maturities--available for sale, at market value
1992 (cost: 1994--$4,634,594; 1993--$4,387,026)..... $4,392,259 $4,579,034
Equity securities, at market value (cost: 1994--
$35,985; 1993--$31,221)............................. 31,547 40,961
Mortgage loans on real estate, at cost (estimated
market value: 1994--$17,956; 1993--$4,024).......... 17,997 4,147
Investment real estate, at cost (less allowance for
depreciation: 1994--$28,620; 1993--$24,250)......... 132,554 110,730
Policy loans......................................... 181,988 149,890
Energy investments................................... 330,543 345,805
Other long-term investments (at market value)........ 35,933 26,989
Short-term investments............................... 112,776 183,166
---------- ----------
Total investments................................... 5,235,597 5,440,722
Cash (includes restricted cash: 1994--$13,091; 1993--
$18,191)............................................. 2,758 53,408
Investment in unconsolidated subsidiaries............. 86,386 79,319
Accrued investment income............................. 67,116 56,801
Other receivables..................................... 223,811 152,910
Deferred acquisition costs............................ 1,017,467 901,565
Value of insurance purchased.......................... 274,124 131,602
Property and equipment................................ 103,806 80,511
Goodwill.............................................. 570,455 178,645
Other assets.......................................... 106,911 26,432
Separate account assets............................... 715,203 544,327
---------- ----------
Total assets........................................ $8,403,634 $7,646,242
========== ==========
Liabilities:
Future policy benefits................................ $4,229,916 $3,745,416
Unearned and advance premiums......................... 90,871 96,206
Policy claims and other benefits payable.............. 201,754 159,451
Other policyholders' funds............................ 72,783 4,313
---------- ----------
Total policy liabilities............................. 4,595,324 4,005,386
Accrued income taxes.................................. 235,124 413,072
Other liabilities..................................... 374,449 366,759
Short-term debt....................................... 255,116 107,108
Long-term debt (estimated market value: 1994--
$751,603; 1993--$857,715)............................ 792,763 792,335
Separate account liabilities.......................... 715,203 544,327
---------- ----------
Total liabilities.................................... 6,967,979 6,228,987
Commitments and contingencies
Monthly income preferred securities.................... 193,052 -0-
Shareholders' equity:
Preferred stock, par value $1 per share--Authorized
5,000,000 shares; outstanding:
0 in 1994 and 1,000,000 issued less 530,180 shares
held in treasury in 1993............................. -0- 1,000
Common stock, par value $1 per share--Authorized
160,000,000 shares; outstanding: 74,384,228 issued in
1994 and 1993, less 2,850,193 shares and 1,489,134
shares held in treasury in 1994 and 1993, respective-
ly................................................... 73,784 73,784
Additional paid-in capital............................ 139,045 232,432
Unrealized gains (losses), net of applicable taxes.... (140,756) 120,138
Retained earnings..................................... 1,267,545 1,082,031
Treasury stock........................................ (97,015) (92,130)
---------- ----------
Total shareholders' equity........................... 1,242,603 1,417,255
---------- ----------
Total liabilities and shareholders' equity........... $8,403,634 $7,646,242
========== ==========
See accompanying Notes to Consolidated Financial Statements.
32
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
---------- ---------- ----------
Revenue:
Life premium.............................. $ 601,633 $ 555,859 $ 544,745
Health premium............................ 768,714 799,835 797,855
Other premium............................. 18,527 137,216 111,362
---------- ---------- ----------
Total premium........................... 1,388,874 1,492,910 1,453,962
Net investment income..................... 330,492 372,470 382,744
Financial services revenue................ 139,276 137,422 133,462
Energy operations revenue................. 64,365 106,013 74,014
Realized investment gains (losses)........ (2,551) 8,009 (948)
Gain from sale of Vesta shares............ -0- 57,234 -0-
Other income.............................. 2,101 2,777 2,576
---------- ---------- ----------
Total revenue........................... 1,922,557 2,176,835 2,045,810
Benefits and expenses:
Life policyholder benefits................ 389,976 377,017 366,194
Health policyholder benefits.............. 488,066 486,855 491,343
Other policyholder benefits............... 43,235 107,684 96,011
---------- ---------- ----------
Total policyholder benefits............. 921,277 971,556 953,548
Amortization of deferred acquisition
costs.................................... 178,107 187,073 195,434
Commissions and premium taxes............. 141,158 172,801 165,932
Financial services selling expense........ 39,962 47,055 51,902
Energy operations expense................. 16,214 32,822 29,803
Other operating expense................... 162,560 174,861 170,008
Nonoperating expenses..................... -0- 82,000 5,652
Interest expense.......................... 76,355 67,261 55,661
---------- ---------- ----------
Total benefits and expenses............. 1,535,633 1,735,429 1,627,940
Income before income taxes and equity in
earnings of
unconsolidated subsidiaries............... 386,924 441,406 417,870
Income taxes............................... (124,317) (153,086) (140,844)
Equity in earnings of unconsolidated sub-
sidiaries................................. 8,476 1,952 828
Minority interests in consolidated subsidi-
aries..................................... -0- (10,696) (12,377)
Monthly income preferred securities divi-
dend...................................... (2,137) -0- -0-
---------- ---------- ----------
Net income before cumulative effect of
changes in accounting
principles............................. 268,946 279,576 265,477
Cumulative effect of changes in accounting
principles................................ -0- 18,403 -0-
---------- ---------- ----------
Net income.............................. 268,946 297,979 265,477
Dividends to preferred shareholders........ (804) (3,289) (3,453)
---------- ---------- ----------
Net income available to common share-
holders................................ $ 268,142 $ 294,690 $ 262,024
========== ========== ==========
Net income per share before cumulative ef-
fect of changes in
accounting principles..................... $ 3.72 $ 3.76 $ 3.58
Cumulative effect of changes in accounting
principles................................ -0- .25 -0-
---------- ---------- ----------
Net income per share....................... $ 3.72 $ 4.01 $ 3.58
========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
33
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,
1992
Balance at January 1,
1992................... $1,000 $50,763 $165,979 $ 5,140 $ 872,655 $ (16,286) $1,079,251
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--common.......... (204,288) (204,288)
Acquisition of treasury
stock--
preferred.............. (31,467) (31,467)
Retirement of treasury
stock--common.......... (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--common.......... (44,689) (44,689)
Net change in unrealized
gains (losses)......... 110,956 110,956
------ ------- -------- --------- ---------- --------- ----------
Balance at December 31,
1993.................. 1,000 73,784 232,432 120,138 1,082,031 (92,130) 1,417,255
Year Ended December 31,
1994
Net income for the year. 268,946 268,946
Common dividends de-
clared ($1.12 a share). (80,602) (80,602)
Preferred dividends
declared and accrued... (804) (804)
Acquisition of treasury
stock--preferred....... (46,982) (46,982)
Acquisition of treasury
stock--common.......... (59,072) (59,072)
Retirement of treasury
stock--preferred....... (1,000) (93,736) 94,736 -0-
Exercise of stock op-
tions.................. 349 (2,026) 6,433 4,756
Net change in unrealized
gains (losses)......... (260,894) (260,894)
------ ------- -------- --------- ---------- --------- ----------
Balance at December 31,
1994.................. $ -0- $73,784 $139,045 $(140,756) $1,267,545 $ (97,015) $1,242,603
====== ======= ======== ========= ========== ========= ==========
See accompanying Notes to Consolidated Financial Statements.
34
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1993 1992
----------- ----------- -----------
Net income.............................. $ 268,946 $ 297,979 $ 265,477
Adjustments to reconcile net income to
cash
provided from operations:
Increase in future policy benefits.... 81,062 140,867 114,335
Increase in other policy benefits..... 23,990 7,548 26,435
Deferral of policy acquisition costs.. (225,409) (214,318) (220,630)
Amortization of deferred acquisition
costs................................ 178,107 187,073 195,434
Change in accrued income taxes........ (70,121) (9,411) (2,505)
Depreciation and depletion............ 25,335 35,607 33,481
Realized (gains) losses on sale of in-
vestments,
subsidiaries, and properties......... 2,551 (65,243) 948
Change in accounts payable and other
liabilities.......................... (12,395) 91,635 66,445
Change in receivables................. (41,382) (18,528) (43,580)
Change in payables and receivables of
unconsolidated affiliates............ 31,997 (28,506) 5,430
Other accruals and adjustments........ 18,750 (25,596) (5,803)
----------- ----------- -----------
Cash provided from operations........... 281,431 399,107 435,467
Cash used for investment activities:
Investments sold or matured:
Fixed maturities available for sale--
sold................................. 582,611 245,689 -0-
Fixed maturities available for sale--
matured, called, and repaid.......... 796,064 485,112 -0-
Fixed maturities held to maturity--
sold................................. -0- 58,028 403,034
Fixed maturities held to maturity--ma-
tured, called, and repaid............ -0- 669,998 808,132
Equity securities..................... 23,179 9,909 11,302
Mortgage loans........................ 1,128 2,654 1,685
Real estate........................... 1,292 7,351 3,987
Other long-term investments........... 51,696 49,776 17,062
----------- ----------- -----------
Total investments sold or matured.... 1,455,970 1,528,517 1,245,202
Acquisition of investments:
Fixed maturities--available for sale.. (1,264,056) (99,453) -0-
Fixed maturities--held to maturity.... -0- (1,761,776) (1,540,775)
Equity securities..................... (23,739) (830) (19,786)
Real estate........................... (20,587) (10,129) (19,560)
Net increase in policy loans.......... (8,305) (5,093) (3,185)
Energy investments.................... (58,466) (11,642) (59,764)
Other long-term investments........... (12,655) (6,287) (9,085)
----------- ----------- -----------
Total acquisition of investments..... (1,387,808) (1,895,210) (1,652,155)
Net (increase) decrease in short-term
investments........................... 94,873 (119,815) 39,309
Purchase of American Income............ (551,501) -0- -0-
Purchase of Minority Interest.......... -0- (229,063) -0-
Proceeds from sale of stock in subsidi-
aries................................. -0- 187,220 -0-
Loans made to affiliates............... -0- (28,000) (34,854)
Loans repaid by affiliates............. -0- 550 49,704
Dispositions of properties............. 4,436 68,650 957
Additions to properties................ (48,988) (15,849) (40,366)
Additions to properties held for re-
sale.................................. (74,233) -0- -0-
Dividends from unconsolidated affili-
ates.................................. 513 620 -0-
----------- ----------- -----------
Cash used for investment activities..... (506,738) (502,380) (392,203)
Cash provided from (used for) financing
activities:
Issuance of common stock............... 4,408 6,669 15,472
Issuance of monthly income preferred
securities............................ 193,046 -0- -0-
Additions to debt...................... 148,000 359,110 237,261
Cash dividends paid to shareholders.... (82,336) (82,932) (82,373)
Cash distributions to minority inter-
ests.................................. -0- (1,968) (1,830)
Repayments on debt..................... (70,108) (189,682) (137,048)
Acquisition of treasury stock.......... (106,054) (41,897) (189,144)
Net receipts from deposit product oper-
ations................................ 87,701 88,675 118,385
----------- ----------- -----------
Cash provided from (used for) financing
activities............................. 174,657 137,975 (39,277)
----------- ----------- -----------
Increase (decrease) in cash............ (50,650) 34,702 3,987
Cash at beginning of year.............. 53,408 18,706 14,719
----------- ----------- -----------
Cash at end of year.................... $ 2,758 $ 53,408 $ 18,706
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
35
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. Torchmark adopted the provisions of SFAS 115 at December 31,
-----------
1993. This standard prescribes the accounting for investments in debt and
equity securities. Also at December 31, 1993, Torchmark elected to classify
all of its fixed maturity investments, which include bonds and redeemable
preferred stocks, as available for sale. The Standard requires that
investments classified as available for sale be carried at market value with
unrealized gains and losses, net of deferred taxes, reflected directly in
shareholders' equity.
Investments in equity securities, which include common and nonredeemable
preferred stocks, are reported at 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 three months. Other
long-term investments consist primarily of investments in mutual funds managed
by a Torchmark subsidiary. They are carried at market value. If an investment
becomes permanently impaired, such impairment is treated as a realized loss
and the investment is adjusted to net realizable value.
Gains and losses realized on the disposition of investments are recognized
as revenues and are determined on a specific identification basis. 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, 1994, 1993 and 1992 included $240.7 million,
$229.5 million, and $221.2 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. Overdrafts arising from the overnight investment of
funds offset cash balances on hand and on deposit.
Recognition of Premium Revenue and Related Expenses: Premiums for insurance
---------------------------------------------------
contracts which are not defined as universal life-type according to SFAS 97
are recognized as revenue over the premium-paying period of the policy.
Profits for limited-payment life insurance contracts as defined by SFAS 97 are
recognized over the contract period. Premiums for universal life-type and
annuity contracts are added to the policy account value, and revenues for such
products are recognized as charges to the policy account value for mortality,
administration, and surrenders (retrospective deposit method). Variable
annuity products are also assessed an investment management fee and a sales
charge. Life premium includes
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
policy charges of $74.2 million, $76.2 million, and $79.8 million for the
years ended December 31, 1994, 1993 and 1992, respectively. Other premium
includes annuity policy charges for the years ended December 31, 1994, 1993,
and 1992 of $13.9 million, $9.5 million, and $8.8 million, respectively.
Profits are also earned to the extent that investment income exceeds policy
requirements. The related benefits and expenses are matched with revenues by
means of the provision of future policy benefits and the amortization of
deferred acquisition costs in a manner which recognizes profits as they are
earned over the same period.
Future Policy Benefits: The liability for future policy benefits for
----------------------
universal life-type products according to SFAS 97 is represented by policy
account value. The liability for future policy benefits for all other life and
health products is provided on the net level premium method based on estimated
investment yields, mortality, morbidity, persistency and other assumptions
which were appropriate at the time the policies were issued. Assumptions used
are based on Torchmark's experience as adjusted to provide for possible
adverse deviation. These estimates are periodically reviewed and compared with
actual experience. If it is determined future experience will probably differ
significantly from that previously assumed, the estimates are revised.
Deferred Acquisition Costs and Value of Insurance Purchased: The costs of
-----------------------------------------------------------
acquiring new insurance business are deferred. Such costs consist of sales
commissions, underwriting expenses, and certain other selling expenses. The
costs of acquiring new business through the purchase of other companies and
blocks of insurance business are also deferred.
Deferred acquisition costs, including the value of life insurance purchased,
for policies other than universal life-type policies according to SFAS 97 are
amortized with interest over an estimate of the premium-paying period of the
policies in a manner which charges each year's operations in proportion to the
receipt of premium income. For universal life-type policies, acquisition costs
are amortized with interest in proportion to estimated gross profits. The
assumptions used as to interest, persistency, morbidity and mortality are
consistent with those used in computing the liability for future policy
benefits and expenses. If it is determined that future experience will
probably differ significantly from that previously assumed, the estimates are
revised. Deferred acquisition costs are adjusted to reflect the amounts
associated with unrealized investment gains and losses pertaining to universal
life-type products.
Income Taxes: Income taxes are accounted for under the asset and liability
------------
method in accordance with SFAS 109. Under the asset and liability method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
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 SFAS 109 and has reported the
cumulative effect of that change in the method of accounting for income taxes
in the 1993 consolidated statement of operations. Prior years' financial
statements have not been restated to reflect Statement 109's provisions.
Prior to the adoption of SFAS 109, income taxes were accounted for under APB
Opinion 11, which required the deferred method. Under this method, 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. 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 twenty years for equipment and two to forty years for
buildings and improvements. Ordinary maintenance and repairs are charged to
income as incurred.
37
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. Torchmark's unamortized goodwill
is periodically reviewed to ensure that conditions are present to indicate the
recorded amount of goodwill is recoverable from the estimated future
profitability of the related business. If events or changes in circumstances
indicate that future profits will not be sufficient to support the carrying
amount of goodwill, goodwill is written down to the recoverable amount and is
amortized over the original period or a reduced period if appropriate.
Treasury Stock: Torchmark accounts for purchases of treasury stock on the
--------------
cost method.
Reclassification: Certain amounts in the financial statements presented have
----------------
been reclassified from amounts previously reported in order to be comparable
between years. These reclassifications have no effect on previously reported
shareholders' equity or net income during the periods involved.
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.
Litigation: Provision has been made for litigation in the financial
----------
statements. Torchmark reports litigation costs as operating expenses except
for large and unusual awards for actual and punitive damages, which are
reported as nonoperating expense.
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: 1994--72,095,657, 1993--
73,501,654, 1992--73,236,849.
38
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,
--------------------------- ---------------------
1994 1993 1992 1994 1993
-------- -------- -------- ---------- ----------
Life...................... $228,754 $364,421* $268,807* $552,906 $ 653,403
Property and casualty..... -0- 6,449 3,049 -0- -0-
*Includes equity in earnings of property and casualty subsidiaries
The excess, if any, of shareholders' equity of the insurance subsidiaries on
a GAAP basis over that determined on a statutory basis is not available for
distribution to Torchmark without regulatory approval.
A reconciliation of Torchmark's insurance subsidiaries' statutory net income
to Torchmark's consolidated GAAP net income is as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1993 1992
---------- ---------- --------
Statutory net income................... $228,754 $ 364,421 $268,807
Deferral of acquisition costs.......... 225,409 214,318 220,630
Amortization of acquisition costs...... (178,107) (187,073) (195,434)
Differences in insurance policy liabil-
ities................................. 30,271 (42,364) (6,796)
Deferred income taxes.................. (2,052) (22,281) (18,502)
Inter-affiliate dividends.............. -0- (194,442) (10,583)
Income of noninsurance affiliates...... 11,372 136,748 (2,147)
Other.................................. (18,229) 28,652 9,502
Pre-acquisition adjustments............ (28,472) -0- -0-
---------- ---------- --------
GAAP net income........................ $268,946 $ 297,979 $265,477
========== ========== ========
A reconciliation of Torchmark's insurance subsidiaries' statutory
shareholders' equity to Torchmark's consolidated GAAP shareholders' equity is
as follows:
YEAR ENDED
DECEMBER 31,
----------------------
1994 1993
---------- ----------
Statutory shareholders' equity......... $ 552,906 $ 653,403
Differences in insurance policy liabil-
ities................................. 321,084 236,181
Deferred acquisition costs............. 1,017,467 908,065
Value of insurance purchased........... 274,124 131,602
Deferred income taxes.................. (223,385) (343,843)
Debt of parent company................. (1,040,972) (897,429)
Asset valuation reserves............... 96,814 103,520
Nonadmitted assets..................... 43,610 15,199
Net assets of noninsurance affiliates . 230,671 533,978
Other.................................. (29,716) 76,579
---------- ----------
GAAP shareholders' equity.............. $1,242,603 $1,417,255
========== ==========
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 3--INVESTMENT OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1993 1992
--------- -------- --------
Investment income is summarized as follows:
Fixed maturities.......................... $ 329,626 $349,403 $354,972
Equity securities......................... 1,323 2,214 2,378
Mortgage loans on real estate............. 631 1,163 742
Investment real estate.................... 7,778 6,804 9,354
Policy loans.............................. 10,003 9,070 8,581
Energy investments........................ (24,371) (3,585) 15,097
Other long-term investments............... 10,244 10,110 997
Short-term investments.................... 8,986 10,019 5,374
--------- -------- --------
344,220 385,198 397,495
Less investment expense................... (13,728) (12,728) (14,751)
--------- -------- --------
Net investment income..................... $ 330,492 $372,470 $382,744
========= ======== ========
An analysis of gains (losses) from invest-
ments is as follows:
Realized investment gains (losses):
Fixed maturities......................... $ (5,049) $ 12,387 $ 7,837
Equity securities........................ 1,610 702 513
Other.................................... 888 (5,080) (9,298)
--------- -------- --------
$ (2,551) $ 8,009 $ (948)
========= ======== ========
Net change in unrealized investment gains
(losses) on
equity securities before tax............. $ (16,240) $ (1,855) $ 6,682
Net change in unrealized investment gains
on fixed maturities available for sale
before tax............................... (434,365) 192,380 0
Adjustment to deferred acquisition costs.. 52,334 (23,264) 0
Applicable tax............................ 139,456 (59,055) (2,271)
--------- -------- --------
Net change in unrealized gains (losses) on
equity and fixed maturity securities
available for sale....................... $(258,815) $108,206 $ 4,411
========= ======== ========
Net increase (decrease) in market value
relative to carrying value of fixed matu-
rities during the year................... $ 0 $ 0 $(41,436)
========= ======== ========
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 3--INVESTMENT OPERATIONS (CONTINUED)
A summary of fixed maturities available for sale and equity securities by
amortized cost and estimated market value at December 31, 1994 and 1993 is as
follows:
GROSS GROSS AMOUNT PER
AMORTIZED UNREALIZED UNREALIZED MARKET THE BALANCE
1994: COST GAINS LOSSES VALUE SHEET
- ----- ---------- ---------- ---------- ---------- -----------
Fixed maturities avail-
able for sale:
Bonds:
U.S. Government direct
obligations and
agencies............. $ 105,239 $ 502 $ (3,985) $ 101,756 $ 101,756
GNMAs................. 1,775,852 18,007 (78,796) 1,715,063 1,715,063
Mortgage-backed
securities, GNMA
collateral........... 242,567 1,661 (7,676) 236,552 236,552
Other mortgage-backed
securities........... 161,216 804 (2,441) 159,579 159,579
State, municipalities
and political
subdivisions......... 835,740 1,693 (69,078) 768,355 768,355
Foreign governments... 104,478 190 (3,702) 100,966 100,966
Public utilities...... 243,776 247 (20,168) 223,855 223,855
Industrial and
miscellaneous........ 1,155,968 2,377 (82,255) 1,076,090 1,076,090
Redeemable preferred
stocks................ 9,758 290 (5) 10,043 10,043
---------- -------- --------- ---------- ----------
Total fixed maturities
..................... 4,634,594 25,771 (268,106) 4,392,259 4,392,259
Equity securities:
Common stocks:
Banks and insurance
companies............ 33,272 6,852 (11,542) 28,582 28,582
Industrial and all
others............... 1,165 65 (103) 1,127 1,127
Non-redeemable
preferred stocks...... 1,548 291 (1) 1,838 1,838
---------- -------- --------- ---------- ----------
Total equity
securities........... 35,985 7,208 (11,646) 31,547 31,547
---------- -------- --------- ---------- ----------
Total fixed maturities
and equity
securities........... $4,670,579 $ 32,979 $(279,752) $4,423,806 $4,423,806
========== ======== ========= ========== ==========
1993:
- -----
Fixed maturities avail-
able for sale:
Bonds:
U.S. Government direct
obligations and
agencies............. $ 190,239 $ 7,916 $ (123) $ 198,032 $ 198,032
GNMAs................. 1,954,912 96,385 (1,599) 2,049,698 2,049,698
Mortgage-backed
securities, GNMA
collateral........... 424,828 24,393 (80) 449,141 449,141
Other mortgage-backed
securities........... 24,690 1,453 0 26,143 26,143
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........... 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
Non-redeemable
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
========== ======== ========= ========== ==========
41
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, 1994
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... $ 35,877 $ 36,184
Due from one to five
years.................... 263,098 258,971
Due from five to ten
years.................... 1,472,151 1,368,106
Due after ten years....... 611,477 545,769
---------- ----------
2,382,603 2,209,030
Redeemable preferred
stocks................... 9,758 10,043
Mortgage- and asset-backed
securities............... 2,242,233 2,173,186
---------- ----------
$4,634,594 $4,392,259
========== ==========
Proceeds from sales of fixed maturities available for sale were $583 million
in 1994 and $246 million in 1993. Gross gains realized on those sales were
$14.6 million in 1994 and $8.3 million in 1993. Gross losses were $20.8
million in 1994 and $176 thousand in 1993. Proceeds from sales of fixed
investments held to maturity were $58 million in 1993 and $403 million in
1992. Gross gains realized on those sales were $2.6 million in 1993 and $8.6
million in 1992. Gross losses on those sales were $138 thousand in 1993 and
$1.7 million in 1992. The 1993 sales of fixed investments held to maturity
were made for various reasons including changes in regulatory requirements,
credit deterioration, and sales within 90 days of maturity.
Torchmark had $26.3 million and $22.0 million in investment real estate at
December 31, 1994 and 1993, 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 $0.6 million, and $.4 million
at December 31, 1994 and 1993, respectively.
Derivative investments are immaterial to Torchmark at December 31, 1994.
Torchmark's total carrying value of these investments was $26.5 million at
December 31, 1994 and Torchmark has no off-balance sheet exposure in
connection with these investments.
NOTE 4--PROPERTY AND EQUIPMENT
A summary of property and equipment used in the business is as follows:
DECEMBER 31, 1994 DECEMBER 31, 1993
--------------------- ---------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
-------- ------------ -------- ------------
Company occupied real estate........ $65,584 $29,742 $65,037 $28,792
Data processing equipment........... 31,556 23,878 25,417 20,719
Transportation equipment............ 17,281 9,903 16,812 8,634
Furniture and office equipment...... 43,804 37,006 39,668 31,910
Energy properties................... 82,131 36,021 49,695 26,063
-------- -------- -------- --------
$240,356 $136,550 $196,629 $116,118
======== ======== ======== ========
Depreciation expense on property used in the business was $9.9 million, $9.6
million, and $10.4 million in each of the years 1994, 1993 and 1992. Depletion
of energy properties was $11.7 million, $22.4 million, and $19.6 million in
1994, 1993 and 1992, respectively.
42
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:
1994 1993 1992
---------------------- --------------------- ---------------------
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................... $ 901,565 $131,602 $904,147 $152,421 $855,498 $172,193
Additions:
Deferred during peri-
od:
Commissions........... 134,032 -0- 142,869 -0- 154,939 -0-
Other expenses........ 91,377 -0- 71,449 -0- 65,691 -0-
----------- -------- -------- -------- -------- --------
Total deferred....... 225,409 -0- 214,318 -0- 220,630 -0-
Value of Insurance
purchased -0- 158,788 -0- -0- -0- -0-
Adjustment
attributable to
unrealized investment
losses(1)............ 52,334 -0- -0- -0- -0- -0-
Reassumed business.... -0- -0- -0- -0- 3,681 -0-
----------- -------- -------- -------- -------- --------
Total additions...... 277,743 158,788 214,318 -0- 224,311 -0-
----------- -------- -------- -------- -------- --------
Deductions:
Amortized during peri-
od................... (154,697) (16,266) (166,863) (20,210) (175,662) (19,772)
Adjustment
attributable to
unrealized investment
gains(1)............. -0- -0- (23,264) -0- -0- -0-
Adjustment attribut-
able to realized in-
vestment gains(1).... (7,144) -0- -0- -0- -0- -0-
Business disposed..... -0- -0- (26,773) (609) -0- -0-
----------- -------- -------- -------- -------- --------
Total deductions..... (161,841) (16,266) (216,900) (20,819) (175,662) (19,772)
----------- -------- -------- -------- -------- --------
Balance at end of year.. $ 1,017,467 $274,124 $901,565 $131,602 $904,147 $152,421
=========== ======== ======== ======== ======== ========
- --------
(1)Represents amounts pertaining to investments relating to universal life-
type products.
The amount of interest accrued on the unamortized balance of value of
insurance purchased was $11.7 million, $10.8 million, and $12.7 million for
the years ended December 31, 1994, 1993 and 1992, respectively. The average
interest accrual rates used for the years ended December 31, 1994, 1993 and
1992 were 7.72%, 7.57% and 7.81%, respectively. The estimated amount of the
unamortized balance at December 31, 1994 to be amortized during each of the
next five years is: 1995, $29.3 million; 1996, $25.9 million; 1997, $22.9
million; 1998, $19.4 million; and 1999, $17.8 million.
In the event of lapses or early withdrawals in excess of those assumed,
deferred acquisition costs and the value of insurance purchased may not be
recoverable.
NOTE 6--SALE OF VESTA SHARES
In November, 1993, Torchmark sold approximately 73% of Vesta Insurance
Group, Inc. ("Vesta"), Torchmark's holding company for its property and
casualty insurance operations. The sale was made through an initial public
offering of common stock for net proceeds of $161 million for a pretax gain of
$57.2 million. Torchmark maintains a 27% interest in Vesta and accounts for
its investment on the equity method, recording its investment as an
unconsolidated subsidiary. In connection with the public offering, Torchmark
loaned Vesta $28 million at an interest rate of 6.1 % for a term of five
years, which was outstanding at both December 31, 1994 and 1993.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 7--ACQUISITIONS
On October 1, 1993, the United Management public shareholders approved
Torchmark's offer to acquire the remaining approximately 17% of United
Management which it did not already own for cash consideration of $31.25 per
share. The transaction was completed for a total purchase price of $234
million resulting in goodwill of $126 million which will be amortized over
approximately 40 years on a straight line basis. All other purchase accounting
adjustments were immaterial.
On November 3, 1994, Torchmark acquired all of the outstanding common stock
of American Income Holding, Inc., whose primary operating subsidiary is
American Income Life Insurance Company ("American Income") for $35 per share
or a total purchase price of $552 million, including expenses. American Income
is a life insurance company which sells individual supplemental life and
fixed-benefit accident and health insurance through labor union locals, credit
unions, and other employment related associations. The purchase was financed
with a combination of internal funds, sales of securities, bank borrowings,
and the issuance by a finance subsidiary of 9.18% Cumulative Monthly Income
Preferred Securities, Series A ("MIPS"). The transaction resulted in goodwill
of approximately $403 million which will be amortized on a straight line basis
over 40 years. The acquisition was accounted for as a purchase, and the
results of operations since the acquisition date have been consolidated.
A summary of the net assets acquired is as follows:
Assets acquired:
Investments.................................................. $ 434,677
Cash......................................................... 0
Value of insurance purchased................................. 158,788
Goodwill..................................................... 402,791
Other assets................................................. 62,808
---------
Total....................................................... 1,059,064
Liabilities assumed:
Policy liabilities........................................... 397,184
Other liabilities............................................ 110,379
---------
Total....................................................... 507,563
---------
Total purchase price.......................................... $ 551,501
=========
The table below presents supplemental pro forma information for 1994 and
1993 as if the American Income acquisition were made at January 1, 1993 at the
same purchase price, based on estimates and assumptions considered
appropriate:
YEAR ENDED DECEMBER
31,
---------------------
1994 1993
---------- ----------
Revenues.......................................... $2,086,987 $2,350,691
Net income before extraordinary items............. 278,533 301,209
Net income........................................ 277,014 301,209
Net income per common share before extraordinary
items............................................ 3.86 4.10
Net income per common share....................... 3.84 4.10
44
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, 1994 is as follows:
INDIVIDUAL LIFE INSURANCE
INTEREST ASSUMPTIONS:
PERCENT OF
YEARS OF ISSUE INTEREST RATES LIABILITY
-------------- --------------------- ----------
1917-1994 3.00% 3%
1947-1954 3.25% 1
1927-1989 3.50% 1
1955-1961 3.75% 2
1925-1994 4.00% 14
1962-1969 4.50% graded to 4.00% 3
1970-1980 5.50% graded to 4.00% 6
1970-1994 5.50% 1
1929-1994 6.00% 4
1986-1994 7.00% graded to 6.00% 10
1943-1992 7.50% graded to 6.00% 1
1954-1994 8.00% graded to 6.00% 10
1951-1985 8.50% graded to 6.00% 12
1980-1987 8.50% graded to 7.00% 1
1975-1991 9.50% graded to 8.00% 7
1984-1993 Interest Sensitive 24
---
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.
45
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
1982-1994 4.50% 1
1993-1994 6.00% 11
1986-1992 7.00% graded to 6.00% 59
1955-1994 8.00% graded to 6.00% 8
1951-1986 8.50% graded to 6.00% 16
---
100%
===
MORBIDITY ASSUMPTIONS:
For health, the morbidity assumptions are based on either Torchmark's
experience or the assumptions used in calculating statutory reserves.
TERMINATION ASSUMPTIONS:
Termination assumptions are based on Torchmark's experience.
OVERALL INTEREST ASSUMPTIONS
The overall average interest assumption for determining the liability for
future life and health insurance benefits in 1994 was 6.0%.
NOTE 9--LIABILITY FOR UNPAID HEALTH CLAIMS
Activity in the liability for unpaid health claims is summarized as follows:
YEAR ENDED DECEMBER 31,
----------------------------
1994 1993 1992
-------- -------- --------
Balance at beginning of year: $130,639 $136,540 $127,717
Addition due to acquisition of American In-
come....................................... 9,185 -0- -0-
Incurred related to:
Current year............................... 514,672 471,375 473,875
Prior year................................. (14,823) (24,865) (8,285)
-------- -------- --------
Total incurred.............................. 499,849 446,510 465,590
-------- -------- --------
Paid related to:
Current year............................... 332,266 321,175 316,476
Prior year................................. 141,016 131,236 140,291
-------- -------- --------
Total paid.................................. 473,282 452,411 456,767
-------- -------- --------
Balance at end of year...................... $166,391 $130,639 $136,540
======== ======== ========
The liability for unpaid health claims is included with "Policy claims and
other benefits payable" on the Balance Sheet.
Health benefits include a $30 million charge for 1994 resulting from a
reclassification of nonoperating expense to health benefits, since actual
payments will be made in the form of health benefits.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 10--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. American Income and its parent, Trust Life
Insurance Company, will file a separate federal income tax return and will not
be eligible to join the consolidated return group until 2000.
As discussed in Note 1, Torchmark adopted Statement 109 on January 1, 1993.
The cumulative effect of this change in accounting for income taxes 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 taxes were allocated as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993
------------ -----------
Income before equity in earnings of unconsoli-
dated affiliates.............................. $ 124,317 $153,086
Change in accounting standards for post-retire-
ment benefits other than pensions............. -0- (4,124)
Monthly income preferred securities dividend... (1,148) -0-
Shareholders' equity
Unrealized gains (losses)..................... (147,520) 60,768
Tax basis compensation expense in excess of
amounts recognized for financial reporting
purposes from the exercise of stock options.. (348) (6,845)
Deferred intercompany transactions............ (3,886) -0-
Other......................................... 8,848 -0-
------------ -----------
$ (19,737) $202,885
============ ===========
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,
---------------------------
1994 1993 1992
-------- -------- --------
Current income tax expense................ $ 98,228 $152,154 $124,782
Increase in January 1, 1993 deferred in-
come tax liability due to increase in
corporate income tax rate to 35%......... -0- 9,411 -0-
Deferred income tax expense (benefit)..... 26,089 (8,479) 16,062
-------- -------- --------
Total................................... $124,317 $153,086 $140,844
======== ======== ========
The effective income tax rate differed from the expected 35% rate in 1994
and 1993 and 34% rate in 1992 as shown below:
YEAR ENDED DECEMBER 31,
-------------------------------------------
1994 % 1993 % 1992 %
-------- --- -------- --- -------- ---
Expected income taxes............. $135,423 35% $154,492 35% $142,076 34%
Increase (reduction) in income
taxes
resulting from:
Tax-exempt investment income..... (10,625) (3) (4,404) (1) (1,955) 0
Tax credits...................... (9,366) (2) (11,203) (2) (2,903) (1)
Effect of tax rate change on de-
ferred liability................ -0- 0 9,411 2 -0- 0
Other............................ 8,885 2 4,790 1 3,626 1
-------- --- -------- --- -------- ---
Income taxes...................... $124,317 32% $153,086 35% $140,844 34%
======== === ======== === ======== ===
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 10--INCOME TAXES (CONTINUED)
The significant components of deferred income tax expense before the
cumulative effect of the change in accounting principles and adjustments to
shareholders' equity are as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993
----------- ------------
Deferred income tax expense (exclusive of the
effect of the component listed below)....... $ 26,089 $ (8,479)
Adjustments to deferred tax assets and lia-
bilities for the increase in the corporate
income tax rate from 34% to 35%............. -0- 9,411
----------- ------------
$ 26,089 $ 932
=========== ============
For the year ended December 31, 1992, deferred income tax expense of $16,062
resulted from timing differences in the recognition of revenue and expense for
financial reporting versus income tax reporting. The sources and tax effect of
those timing differences are presented below:
Deferred acquisition costs.................................... $(16,914)
Reserve and premium adjustments............................... 16
Oil and gas costs............................................. 37,094
Other......................................................... (4,134)
--------
$ 16,062
========
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
DECEMBER 31,
------------------
1994 1993
-------- --------
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..... $ 13,754 $ 7,471
Future policy benefits, unearned and advance premiums, and
policy claims............................................. 20,628 27,634
Other liabilities, principally due to the current nonde-
ductibility for tax purposes of certain accrued expenses.. 35,715 46,278
Unrealized investment losses............................... 82,792 -0-
-------- --------
Total gross deferred tax assets............................ 152,889 81,383
Less valuation allowance................................... (2,111) -0-
-------- --------
Net deferred tax assets.................................... 150,778 81,383
-------- --------
Deferred tax liabilities:
Energy investments and other unconsolidated affiliates,
principally due to
accelerated depletion deductions for tax purposes......... 101,214 95,760
Deferred acquisition costs................................. 286,444 238,114
Unrealized investment gains................................ -0- 64,728
Other...................................................... 9,921 64,590
-------- --------
Total gross deferred tax liabilities....................... 397,579 463,192
-------- --------
Net deferred tax liability.................................. $246,801 $381,809
======== ========
The valuation allowance for deferred tax assets as of January 1, 1994 was $-
0-. The net change in the total valuation allowance for the year ended
December 31, 1993 was an increase of $2.1 million. Subsequently recognized tax
benefits of $2.1 million relating to the valuation allowance for deferred tax
assets as of December 31, 1994 will be allocated to goodwill.
Torchmark has not recognized a deferred tax liability for the undistributed
earnings of its wholly-owned subsidiaries because such earnings are remitted
to Torchmark on a tax-free basis. A deferred tax liability will be recognized
in the future if the remittance of such earnings becomes taxable to Torchmark.
In addition, Torchmark has not recognized a deferred tax liability of
approximately $60 million that arose prior to 1984 on temporary differences
related to the policyholders' surplus accounts in the life insurance
subsidiaries. A current tax expense will be recognized in the future if and
when these amounts are distributed.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 11--POSTRETIREMENT BENEFITS
Pension Plans: Torchmark has retirement benefit plans and savings plans
-------------
which cover substantially all employees. There is also a nonqualified excess
benefit plan which covers certain employees. The total cost of these
retirement plans charged to operations was as follows:
DEFINED EXCESS
DEFINED BENEFIT BENEFIT
YEAR ENDED CONTRIBUTION PENSION PENSION
DECEMBER 31, PLANS PLANS PLAN
------------ ------------ ------- -------
1994.................... $3,201 $6,922 $1,800
1993.................... $ 740 $6,733 $1,450
1992.................... $3,293 $3,143 $3,732
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 $11.8 million
and $12.4 million at December 31, 1994 and 1993, 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 $3.2
million and $1.5 million as of December 31, 1994 and 1993, respectively.
Net periodic pension cost for the defined benefit plans by expense component
was as follows:
YEAR ENDED DECEMBER 31,
--------------------------
1994 1993 1992
-------- ------- -------
Service cost--benefits earned during the
period.................................... $ 8,323 $ 8,298 $ 7,415
Interest cost on projected benefit obliga-
tion...................................... 8,242 7,711 7,228
Actual return on assets.................... (2,302) (8,697) (6,831)
Net amortization and deferral.............. (5,541) 871 (937)
-------- ------- -------
Net periodic pension cost.................. $ 8,722 $ 8,183 $ 6,875
======== ======= =======
A reconciliation of the funded status of the defined benefit plans with
Torchmark's pension liability was as follows:
AT DECEMBER 31,
-------------------
1994 1993
-------- ---------
Fair market value of assets available for bene-
fits............................................. $ 94,207 $ 95,191
Projected benefit obligation:
Vested........................................... 72,119 78,477
Nonvested........................................ 4,141 4,878
-------- ---------
Accumulated benefit obligation.................. 76,260 83,355
Effect of projected future salary increases 27,195 27,875
-------- ---------
Total projected benefit obligation.............. 103,455 111,230
-------- ---------
Funded status..................................... (9,248) (16,039)
Unamortized prior service costs................... (1,531) 1,616
Unamortized transition asset...................... (2,183) (2,774)
Unrecognized (gain) or loss....................... (2,061) 3,278
-------- ---------
Accrued pension costs included in liabilities... $(15,023) $ (13,919)
======== =========
The weighted average assumed discount rates used in determining the
actuarial benefit obligations were 8.0% in 1994 and 7.25% in 1993. The rate of
assumed compensation increase was 5.0% in 1994 and 1993 and the expected long-
term rate of return on plan assets was 8.0% in 1994 and 1993.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 11--POSTRETIREMENT BENEFITS (CONTINUED)
Torchmark accrues expense for the defined contribution plans based on a
percentage of the employees' contributions. The plans are funded by the
employee contributions and a Torchmark contribution equal to the amount of
accrued expense.
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," effective January 1, 1993. This statement
requires that the expected cost of providing future benefits to employees be
accrued during the employees' service period until each employee reaches full
eligibility. Torchmark elected to recognize the effect of the adoption of this
standard immediately as a change in accounting principle as permitted by SFAS
106. The cumulative effect of this change in accounting resulted in a $7.7
million after-tax charge to net income in 1993. It was reported as part of the
cumulative effect of changes in accounting principles. In accordance with the
provisions of SFAS 106, prior years' financial statements were not restated to
apply the provisions of this statement.
Net periodic postretirement benefit cost included the following components:
YEAR ENDED
DECEMBER 31,
--------------
1994 1993
------ ------
Service cost............ $ 444 $ 411
Interest cost on accumu-
lated postretirement
benefit obligation..... 831 954
Actual return on plan
assets................. -0- -0-
Net amortization and de-
ferral................. (237) (14)
------ ------
Net periodic
postretirement benefit
cost................... $1,038 $1,351
====== ======
The following table sets forth the plans' combined benefit obligation with
the amount shown in Torchmark's balance sheet:
AT DECEMBER 31,
---------------
1994 1993
------- -------
Accumulated postretirement benefit obligation:
Retirees....................................................... $ 5,811 $ 6,919
Fully eligible active plan participants........................ 1,386 1,354
Other active plan participants................................. 3,546 3,348
------- -------
Total accumulated postretirement benefit obligation........... 10,743 11,621
Plan assets at fair value....................................... -0- -0-
------- -------
Accumulated postretirement benefit obligation in excess of plan
assets......................................................... 10,743 11,621
Unrecognized net gain from past experience different from that
assumed and from changes in assumptions........................ 734 327
Prior service cost not yet recognized in net periodic post re-
tirement benefit cost.......................................... 280 -0-
------- -------
Accrued postretirement benefit cost included in liabilities..... $11,757 $11,948
======= =======
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 11--POSTRETIREMENT BENEFITS (CONTINUED)
For measurement purposes, a 11% to 13% 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, 1994 by $3.1 million and
would increase the net periodic postretirement cost for the year ended
December 31, 1994 by approximately $486 thousand.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 8.00%.
NOTE 12--NOTES PAYABLE
An analysis of notes payable is as follows:
DECEMBER 31,
-----------------------------------------
1994 1993
-------------------- --------------------
SHORT-TERM LONG-TERM SHORT-TERM LONG-TERM
DEBT DEBT DEBT DEBT
---------- --------- ---------- ---------
Sinking Fund Debentures........... $197,941 $197,856
Senior Notes, due 1998............ 199,103 198,885
Senior Debentures, due 2009....... 99,703 99,539
Notes, due 2023................... 195,836 195,798
Notes, due 2013................... 98,390 98,351
Borrowings under Torchmark line of
credit........................... $250,000 $107,000
Borrowings under energy credit fa-
cilities......................... 5,000
Other notes and mortgages payable
at various interest rates;
collateralized by buildings and
energy properties................ 116 1,790 108 1,906
-------- -------- -------- --------
$255,116 $792,763 $107,108 $792,335
======== ======== ======== ========
The amount of debt that becomes due during each of the next five years is:
1995, $255 million; 1996, $123 thousand; 1997, $132 thousand; 1998, $200
million; and 1999, $150 thousand. Additionally, during the thirty-day period
beginning June 15, 1996, senior debenture debt holders have the option to
require Torchmark to repay $100 million.
The Sinking Fund Debentures, due March 1, 2017, are carried at $200 million
principal amount less unamortized issue expenses and bear interest at 8 5/8%,
payable on March 1 and September 1. A sinking fund provides for mandatory
repayment at par of not less than $8 million principal amount per year from
March 1, 1998 through March 1, 2016. At Torchmark's option, an additional $12
million principal amount per year may be redeemed at par according to the same
schedule. The option to make such additional repayments is not cumulative and
if not availed of in any year will terminate. Furthermore, Torchmark may, at
its option, redeem the entire issue at prices ranging from 107.9% to 100.0% of
par, subject to certain restrictions. The Sinking Fund Debentures have equal
priority with other Torchmark unsecured indebtedness.
The Senior Notes, due May 1, 1998, are not redeemable prior to maturity.
They were issued in the principal amount of $200 million. Interest is payable
on May 1 and November 1 of each year at a rate of 9 5/8%. These notes have
equal priority with other Torchmark unsecured indebtedness.
The Senior Debentures, principal amount of $100 million, are due August 15,
2009. They bear interest at a rate of 8 1/4%, with interest payable on
February 15 and August 15 of each year. The Senior Debentures, which are not
redeemable at the option of Torchmark prior to maturity, provide the holder
with an option to require Torchmark to repurchase the debentures on August 15,
1996 at principal amount plus accrued interest. The Senior Debentures have
equal priority with other Torchmark unsecured indebtedness.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 12--NOTES PAYABLE (CONTINUED)
The Notes, due May 15, 2023, were issued in May, 1993 in the principal
amount of $200 million. Proceeds of the issue, net of issue costs, were $196
million. Interest is payable on May 15 and November 15 of each year at a rate
of 7 7/8%. These notes are not redeemable prior to maturity and have equal
priority with other Torchmark unsecured indebtedness.
The Notes, due August 1, 2013, were issued in July, 1993 in the principal
amount of $100 million for net proceeds of $98 million. Interest is payable on
February 1 and August 1 of each year at a rate of 7 3/8%. These notes are not
redeemable prior to maturity and have equal priority with other Torchmark
unsecured indebtedness.
Torchmark has entered into revolving credit agreements with a group of
lenders under which it may borrow on an unsecured basis up to $400 million.
One-half of the commitment matures December 5, 1995 and the balance matures
December 6, 1999. Borrowings, pro rata under each facility, are at interest
rates selected by Torchmark based on either the prime rate or the Eurodollar
rate at the time of borrowing. At December 31, 1994, borrowings totalled $250
million and were made at an average rate of 6.40%. Torchmark is subject to
certain covenants regarding capitalization and earnings, for which it was in
compliance at December 31, 1994, and pays a facility fee based on size of the
lines. The revolving credit agreements are designed to back up a commercial
paper program with borrowings expected to begin in the first quarter of 1995.
Torch Energy Advisors Incorporated ("Torch Energy"), a wholly-owned
subsidiary of Torchmark, also maintains a line of credit agreement which at
December 31, 1994 allowed borrowings up to $50 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 matures on
January 1, 1996 and is secured by any assets acquired with the funds and by
the approximately 1.5 million shares of Nuevo common stock owned by Torch
Energy. There was $5 million outstanding on this line of credit at December
31, 1994.
Interest in the amount of $1.8 million, $10.5 million and $20.4 million was
capitalized during 1994, 1993, 1992, respectively.
NOTE 13--MONTHLY INCOME PREFERRED SECURITIES
In October, 1994, Torchmark through its wholly-owned finance subsidiary,
Torchmark Capital L.L.C., completed a public offering of eight million shares
of 9.18% MIPS at a face amount of $200 million through an underwriting
syndicate. The securities are subject to a mandatory redemption in full at
September 30, 2024, although Torchmark may elect to extend the MIPS for up to
an additional 20 years if certain conditions are met. They are redeemable at
Torchmark's option after September 30, 1999. Torchmark subsequently entered
into a ten-year swap agreement with an unaffiliated party whereby Torchmark
agreed to pay a variable rate on the $200 million face amount in exchange for
payment of the fixed dividend. In a related transaction, Torchmark purchased a
five-year cap on the swap agreement that insures that the variable rate cannot
exceed 10.39% through September 30, 1999. The interest rate was 7.02% at
December 31, 1994. Torchmark pays a yearly fee of $860 thousand for the cap
agreement. The market value of the swap agreement was an obligation of $4.1
million at December 31, 1994. The market value of the cap agreement, net of
the present value of future annual payments, was a benefit of $517 thousand at
December 31, 1994. Except as otherwise described in "Note 3--Investments" on
page 42 of this report, Torchmark is a party to no other derivative
instruments as defined by SFAS 119.
Net proceeds from the MIPS offering of approximately $193 million were
loaned from Torchmark Capital to Torchmark to provide part of the financing of
the acquisition of American Income Holding, Inc. The carrying value of the
MIPS at December 31, 1994 was $193 million.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 14--SHAREHOLDERS' EQUITY
Share Data: A summary of preferred and common share activity is as follows:
----------
PREFERRED STOCK COMMON STOCK
--------------------- ----------------------
TREASURY TREASURY
ISSUED STOCK ISSUED STOCK
---------- --------- ---------- ----------
1992:
Balance at January 1, 1992...... 1,000,000 (192,560) 76,744,637 (600,000)
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... 1,000,000 (530,180) 74,112,034 (600,000)
1993:
Issuance of common stock due to
exercise of stock options..... 272,194 6,341
Other treasury stock acquired.. (895,475)
---------- --------- ---------- ----------
Balance at December 31, 1993... 1,000,000 (530,180) 74,384,228 (1,489,134)
1994:
Issuance of common stock due to
exercise of stock options..... 130,641
Other treasury stock acquired.. (469,820) (1,491,700)
Retirement of treasury stock... (1,000,000) 1,000,000
---------- --------- ---------- ----------
-0- -0- 74,384,228 (2,850,193)
========== ========= ========== ==========
AT DECEMBER 31, 1994 AT DECEMBER 31, 1993
--------------------- ---------------------
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.
During 1992, Torchmark acquired 338 thousand shares of this preferred stock at
a cost of $31.5 million, representing a redemption value of $33.7 million.
Prior to 1992, Torchmark acquired 192 thousand shares at a cost of $16.3
million or a redemption value of $19.2 million. These shares were reported as
treasury stock and had a total cost basis of $47.8 million and a total
redemption value of $52.9 million. During 1994, Torchmark acquired the
remaining 470 thousand shares at a cost of $100 per share plus accrued
dividends. The acquisition was completed at an aggregate price of $47 million.
The preferred treasury stock was immediately retired.
Acquisition of Common Shares: Torchmark commenced a program in 1986 to
----------------------------
purchase shares of its common stock from time to time. Under this program,
Torchmark purchased 4.2 million shares in 1992 at a cost of $157.7 million.
The other common treasury stock acquired was shares received by Torchmark from
employees for the exercise proceeds and payment of taxes for stock options as
well as shares purchased in the open market for the issuance of shares in
conjunction with the exercise of stock options. In October, 1993, Torchmark
implemented a policy to issue shares for 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.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 14--SHAREHOLDERS' EQUITY (CONTINUED)
A summary of option activity in terms of shares is as follows:
AVAILABLE FOR GRANT OUTSTANDING
----------------------------- --------------------------------
1994 1993 1992 1994 1993 1992
--------- -------- -------- --------- --------- ----------
Balance at January 1.... 289,091 533,175 890,278 3,660,391 3,051,883 5,090,880
Additional shares avail-
able due to United Man-
agement merger......... 642,959
Additional shares avail-
able due to amendment
of plan ............... 2,000,000
Granted................. (316,600) (910,789) (357,052) 316,600 910,789 357,052
Exercised............... (130,641) (278,535) (2,396,100)
Expired................. 23,746 (23,746)
Adjustment due to stock
dividend............... 25,643 (51) (25,643) 51
--------- -------- -------- --------- --------- ----------
Balance at December 31.. 1,998,134 289,091 533,175 3,820,707 3,660,391 3,051,883
========= ======== ======== ========= ========= ==========
Option information by exercise price is listed in the following table. Those
options shown as granted on October 1, 1993 represent United Management
options which were converted to Torchmark options in conjunction with the
merger.
OUTSTANDING AT DECEMBER 31, EXERCISED DURING
EXERCISE ----------------------------- -------------------------
PRICE GRANT DATE 1994 1993 1992 1994 1993 1992
-------- -------------------- --------- --------- --------- ------- ------- ---------
$11.300 October 1, 1993(3) 18,393 18,393 -0- -0-
12.625 October 4, 1985 33,004 34,004 36,145 1,000 2,141 29,950
13.110 October 1, 1993(3) 13,828 13,828 -0- -0-
14.000 March 26, 1985 11,246 15,746 20,996 4,500 5,250 -0-
14.125 January 30, 1986 16,875 16,875 17,875 -0- 1,000 3,125
15.000 December 3, 1987 854 854 1,254 -0- 400 6,000
16.000 December 16, 1987 7,500 7,500 7,500 -0- -0- 61,872
19.875 February 25, 1988 5,217 5,217 5,217 -0- -0- -0-
20.375 December 15, 1988 -0- -0- -0- -0- -0- 202,384
20.375 January 3, 1989 30,003 30,003 30,003 -0- -0- 20,000
22.600 October 1, 1993(3) 35,981 35,981 -0- -0-
24.410 October 1, 1993(3) 5,532 5,532 -0- -0-
25.625 October 11, 1990(1) 840,055 852,955 873,120 12,900 7,313 1,654,575
28.480 October 1, 1993(3) 85,158 85,158 -0- -0-
31.125 January 15, 1991 532,926 538,856 640,896 5,930 97,118 216,258
32.500 January 2, 1991 63,000 63,000 63,000 -0- -0- 9,000
33.125 January 25, 1990(1) 63,000 63,000 63,000 -0- -0- 9,000
34.000 October 1, 1993(4) 60,682 -0- -0-
34.000 December 14, 1993(4) 301,881 -0- -0-
34.000 December 7, 1992(4) 142,433 -0- -0- -0-
34.000 December 16, 1994 292,600 -0-
34.350 October 1, 1993(3) 35,611 35,611 -0- -0-
34.375 December 12, 1991 673,666 679,977 712,618 6,311 27,869 183,936
36.000 February 7, 1991 -0- 100,000 237,444 100,000 137,444 -0-
36.610 October 1, 1993(3) 27,997 65,774 -0- -0-
38.375 January 2, 1992 63,000 63,000 63,000 -0- -0- -0-
43.500 December 14, 1993(2) 253,900 567,781 -0- -0-
45.000 January 3, 1994 24,000 -0-
46.560 October 1, 1993(3) 33,651 57,130 -0- -0-
52.000 December 7, 1992 124,714 280,216 279,815 -0- -0- -0-
57.750 January 3, 1993 24,000 24,000 -0- -0-
--------- --------- --------- ------- ------- ---------
3,820,707 3,660,391 3,051,883 130,641 278,535 2,396,100
========= ========= ========= ======= ======= =========
Exercisable at December 31, 2,936,867 2,668,264 2,772,068
========= ========= =========
(1) Options to purchase 1,098,090 shares previously granted December 31, 1989
at $37.13 per share, 521,100 shares previously granted January 25, 1990 at
$33.13 per share, and 389,870 shares originally granted August 1, 1990 at
$33.88 per share were allowed by recipients to expire voluntarily and were
reissued October 11, 1990 along with 675,200 additional shares at $25.63 per
share.
(2) Includes 173,650 shares granted under the United Investors Management
Company 1986 Employee Stock Incentive Plan.
(3) Issued from the United Investors Management Company 1986 Employee Stock
incentive plan.
(4) Options to purchase 37,777 shares previously granted at $36.61, options to
purchase 301,881 shares previously granted at $43.50, options to purchase
22,905 shares previously granted at $46.56, and options to purchase 142,433
shares previously granted at $52.00 were repriced to $34.00 per share on
December 16, 1994. The vesting schedules of these options did not change.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 14--SHAREHOLDERS' EQUITY (CONTINUED)
Grant of Restricted Stock: A grant of 60,000 Torchmark shares was made on
-------------------------
May 1, 1991 to a Torchmark senior officer. The shares are restricted as to
resale, vesting 6,000 shares per year for 10 years on the anniversary date of
the grant. The market value of Torchmark stock was $34.92 per share on the
grant date.
Restrictions: Restrictions exist on the flow of funds to Torchmark from its
------------
insurance subsidiaries. Statutory regulations require life insurance
subsidiaries to maintain certain minimum amounts of capital and surplus. These
restrictions generally limit the payment of dividends by insurance
subsidiaries to statutory net gain 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 1995,
$213 million will be available to Torchmark for dividends from insurance
subsidiaries in compliance with statutory regulations without prior regulatory
approval.
NOTE 15--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, 1994.
Insurance ceded on life and accident and health products represents 1.3% of
premium income for 1994. 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, 1994 and reinsurance assumed on life and accident and health
products represents 0.1% of premium income for 1994.
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 $7.9 million, $7.6 million, and $8.2 million for 1994, 1993, and 1992,
respectively. Future minimum rental commitments required under operating
leases having remaining noncancelable lease terms in excess of one year at
December 31, 1994 are as follows: 1995, $5.8 million; 1996, $4.1 million;
1997, $3.0 million; 1998, $1.8 million; 1999, $199 thousand; and in the
aggregate, $14.9 million.
Restrictions on cash: A portion of the cash held in financial service
--------------------
subsidiaries that function as broker-dealers has been segregated for the
benefit of customers in compliance with security regulations. This amount was
$13.1 million at December 31, 1994 and $18.2 million at December 31, 1993.
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, 1994, the investment portfolio
consisted of securities of the U.S. government or U.S. government-backed
securities (39%); short-term investments, which generally mature within one
month (2%); securities of state and municipal governments (14%); securities of
foreign governments (2%); and investment-grade corporate bonds (27%). The
remainder of the portfolio was in oil and gas investments (6%) and real estate
(3%), which are not considered financial instruments according to GAAP; equity
securities (1%); policy loans (4%), which are secured by the underlying
insurance policy values; and mortgages, noninvestment grade corporate
securities and other long-term investments (2%). Investments in municipal
governments and corporations are made throughout the U.S. with no
concentration in any given state. Substantially all investments in foreign
government securities are in Canadian government obligations. Corporate equity
and debt investments are made in a wide range of industries. At December 31,
1994, 1% or more of the portfolio was invested in the following industries or
security types: Financial services (8%); regulated utilities (5%);
nongovernment-guaranteed mortgage-backed securities (3%); chemicals (2%);
petroleum (2%); transportation (2%); asset-backed securities (1%); foods (1%);
and retailing (1%). Otherwise, no individual industry represented 1% or more
of Torchmark's investments. At year-end 1994, less than 1% of the carrying
value of fixed maturities was rated below investment grade (Ba or lower as
rated by
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 15--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Moody's service or the equivalent NAIC designation). Par value of these
investments was $29.8 million, amortized cost was $26.4 million, and market
value was $25.5 million. While these investments could be subject to
additional credit risk, such risk should generally be reflected in market
value.
Collateral Requirements: Torchmark requires collateral for investments in
-----------------------
instruments where collateral is available and is typically required because of
the nature of the investment. Since the majority of Torchmark's investments
are in government, government-secured, or corporate securities, the
requirement for collateral is rare. Torchmark's mortgages are secured by
collateral, although new mortgages are no longer being acquired.
Litigation: Torchmark and its subsidiaries continue to be named as parties
----------
to pending or threatened legal proceedings. These 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. Many of these lawsuits involve claims for punitive damages. In
particular, Torchmark's subsidiary Liberty is a party to a number of such
actions which seek punitive damages in state courts of Alabama, a jurisdiction
particularly recognized for its large punitive damage verdicts. Some of such
actions involving Liberty also name Torchmark as a defendant. As a practical
matter, a jury's discretion regarding the amount of a punitive damage award is
virtually unlimited under Alabama law. Accordingly, the likelihood or extent
of a punitive damage award in any given case is virtually impossible to
predict. As of December 31, 1994, Liberty was a party to approximately 172
active lawsuits (excluding interpleaders and stayed cases), more than 120 of
which were Alabama proceedings in which punitive damages were sought.
As previously reported, litigation was filed in May 1992 against Liberty in
the Circuit Court for Barbour County, Alabama (Robertson v. Liberty National
-----------------------------
Life Insurance Company). 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. The complaint sought
substantial equitable and injunctive relief and 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 individual lawsuits based on substantially the same allegations as
in Robertson were filed by plaintiffs in Alabama, Georgia, Florida and
---------
Mississippi. Four additional class action suits also based upon substantially
the same allegations as in Robertson were filed in Mobile County, Alabama
(Adair v. Liberty National Life Insurance Company and Lamey v. Liberty
------------------------------------------------ ----------------
National Life Insurance Company) and in Polk County, Florida (Howell v.
- ------------------------------- ---------
Liberty National Life Insurance Company and Scott v. Liberty National Life
- --------------------------------------- ------------------------------
Insurance Company) after the class certification. Adair, Lamey, Howell and
- ----------------- ----- ----- ------
Scott have been settled on an individual basis.
- -----
On October 25, 1993, a jury in the Circuit Court for Mobile County, Alabama
rendered a one million dollar verdict ($1,000 actual damages) against Liberty
in McAllister v. Liberty National Life Insurance Company, one of twenty-five
-----------------------------------------------------
suits involving cancer policy exchanges which were filed prior to class
certification in the Barbour County litigation and therefore were excluded
from the Robertson class action. The McAllister decision was appealed to the
----------
Alabama Supreme Court. On February 25, 1995, the verdict was affirmed. A
petition for rehearing has been filed by Liberty. Previously, another judge in
the Mobile County Court had granted a summary judgment in favor of Liberty in
another substantially similar suit in which no cancer claims had been
submitted (Boswell v. Liberty National Life Insurance Company), which was
--------------------------------------------------
appealed to the Alabama Supreme Court. On May 13, 1994, the Alabama Supreme
Court reversed and remanded Boswell. The Court held the plaintiffs had alleged
-------
injury or damages in the form of the additional policy premium payments and
these allegations were sufficient to withstand a motion to dismiss the
complaint. Following this order and pending a petition for rehearing, the
Boswell case was settled. Excluding the McAllister case, no pre-class
- ------- ----------
certification individual cancer exchange cases remain active, all having been
settled or stayed.
As reported previously, a fairness hearing was held on January 20, 1994, in
the Robertson cancer policy exchange class action. Prior to that hearing,
---------
class members had been 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 total value of the equitable and
monetary relief contained in the proposed Robertson
---------
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 15--COMMITMENTS AND CONTINGENCIES (CONTINUED)
settlement (from approximately $39 million to $55 million in total value), 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 reserved jurisdiction and extended the deadline for
acceptance or rejection of the modifications set forth in the February 4,
1994, Order. On May 6, 1994, the Court entered an order in the Robertson
litigation settling a hearing on May 19, 1994, on all outstanding motions in
that case.
On May 26, 1994, the Barbour County Court entered an Order and Final Judgment
in the Robertson litigation, making final the findings and conclusions of its
February 4, 1994 Order. That Order has been accepted by the parties to the
action. The discovery regarding the propriety of Torchmark's release by the
settlement agreement was concluded prior to the entry of the Order and Final
Judgment, and Torchmark was included in the release given on behalf of the
class. The $55 million proposed amended settlement charge was provided for in
Torchmark's 1993 financial reports.
On July 5, 1994, certain intervenors in the Robertson litigation filed a
---------
notice of appeal of the Order and Final Judgment approving class certification
and the settlement with the Supreme Court of Alabama. The appeal is currently
pending.
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 policies
(Cofield v. Liberty National Life Insurance Company). A hearing on class
--------------------------------------------------
certification in Cofield has been postponed and has not been rescheduled.
On March 17, 1994, litigation was filed against Liberty, a subsidiary of
Torchmark, certain officers and present and former directors of Torchmark, and
KPMG Peat Marwick LLP, independent public accountants of Torchmark and its
subsidiaries, in the Circuit Court for Marion County, Alabama (Miles v.
--------
Liberty National Life Insurance Company). The lawsuit asserts that it is
- ---------------------------------------
brought on behalf of a class composed of the shareholders of Torchmark. The
complaint alleges a failure to timely and adequately report allegedly material
contingent liabilities arising out of insurance policy litigation involving
Liberty. Compensatory and punitive damages in an unspecified amount are
sought.
In April 1994, the complaint in Miles was amended to add an additional
shareholder plaintiff and to name Torchmark as a defendant. A second similar
action (Oakley v. Torchmark Corporation) was filed on August 16, 1994 in the
-------------------------------
Circuit Court for Bibb County, Alabama, but plaintiff has moved to dismiss
that action without prejudice. Thereafter, a third such action was filed in
the United States District Court for the Southern District of Alabama
(Dismukes v. Torchmark Corporation), all of which seek punitive damages. The
---------------------------------
Dismukes case was subsequently transferred to the United States District Court
- --------
for the Northern District of Alabama. No class has been certified in any of
these cases, all of which seek punitive damages. Torchmark, Liberty and the
individual defendants intend to vigorously defend these actions.
Torchmark, its insurance subsidiaries Globe and United American, and certain
Torchmark officers were named as defendants in litigation filed April 22, 1994
as a purported class action in the District Court of Oklahoma County, Oklahoma
(Moore v. Torchmark Corporation). The suit claims damages on behalf of
------------------------------
individual health policyholders who are alleged to have been induced to
terminate such policies and to purchase Medicare Supplement and/or other
insurance coverages. The complaint seeks actual and punitive damages for each
class member in excess of $10,000. Subsequent to the filing of this case, one
of the plaintiffs was dismissed and the named plaintiff died. The complaint
has been amended to include
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 15--COMMITMENTS AND CONTINGENCIES (CONTINUED)
new plaintiffs purporting to represent the class. No class has been certified,
however, and a motion to dismiss has been filed by the defendants, who intend
to vigorously defend the action.
In July 1994, a purported class action alleging fraudulent and deceitful
practices in premium billing and lapses of coverage on a payroll deduction
insurance plan was filed in the Superior Court for Gordon County, Georgia
against Liberty (Bryant v. Liberty National Life Insurance Company). The
-------------------------------------------------
complaint alleges actual damages in excess of $10 million and punitive damages
of not less than $50 million as well as premium reimbursements. No class has
been certified and no proceedings of any materiality have occurred in this
case. Liberty has removed this case to federal court. Additionally, Liberty
had filed a declaratory judgment action essentially seeking an accounting in
this matter in the U.S. District Court for the Northern District of Georgia on
the same day Bryant was filed. Liberty intends to vigorously defend the Bryant
------ ------
action.
Also in July 1994, a purported class action (Bosarge v. Liberty National
---------------------------
Life Insurance Company) was filed against Liberty and Torchmark in the Circuit
- ----------------------
Court for Mobile County, Alabama which alleges that Liberty agents have made
misrepresentations in connection with converting policyholder accounts to bank
budget from other modes of premium payment. The lawsuit claims that agents
have represented that insureds would receive additional "free insurance" if
they changed to bank budget payment while charges for such "free insurance"
were actually made through bank budget payments. Injunctive relief and
unspecified actual and punitive damages are sought. No class has been
certified and no proceedings of any materiality have occurred in this case.
Liberty intends to vigorously defend this action.
On November 17, 1994, a Circuit Court jury in Mobile County, Alabama
returned a $4.6 million verdict against Liberty in Coram v. Liberty National
-------------------------
Life Insurance Company. This case involved allegations of fraud by an agent of
- ----------------------
Liberty and was consolidated for trial with another case involving the same
sales agent. A verdict was returned in favor of Liberty in the companion case.
Liberty plans to vigorously pursue post-trial motions for relief and, if
necessary, an appeal. The $4.6 million verdict was provided for in the 1994
financial statements.
In 1978, the United States District Court for the Northern District of
Alabama entered a final judgment in Battle v. Liberty National Life Insurance
-----------------------------------------
Company, et al., class action litigation involving Liberty, a class composed
- --------------
of all owners of funeral homes in Alabama and a class composed of all insureds
(Alabama residents only) under burial or vault policies issued, assumed or
reinsured by Liberty. The final judgment fixed the rights and obligations of
Liberty and the funeral directors authorized to handle Liberty burial and
vault policies as well as reforming the benefits available to the
policyholders under the policies. It remains in effect to date. A motion was
filed to challenge the final judgment under Federal Rule of Civil Procedure
60(b), in February of 1990, but the final judgment 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 judgment. The relief sought is unclear, but includes a request
that the District Court rule that the final judgment 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.
Provision has been made in the financial statements for certain anticipated
litigation costs. 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 universally.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 16--INDUSTRY SEGMENTS
Torchmark operates primarily in two industry segments, insurance and asset
management. Operations in the insurance industry involve the sale and
administration of life insurance, health insurance and annuities. It also
includes investment operations related to insurance segment investments.
Operations in the asset management industry include the management,
distribution, and servicing of various mutual funds, 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
$331 million and $346 million at December 31, 1994 and 1993, 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 nonoperating
in nature and are not related to the activities of a segment. Such items
include parent company interest expense, goodwill amortization, and similar
items.
A summary of segment data is as follows:
ADJUSTMENTS
ASSET AND CONSOLIDATED
INSURANCE MANAGEMENT CORPORATE ELIMINATIONS TOTAL
---------- ---------- --------- ------------ ------------
1994:
Revenues--unaffiliated.. $1,694,983 $208,829 $ 18,745 $ $1,922,557
Intersegment revenues... 29,909 25,883 (4,556) (51,236) -0-
---------- -------- -------- -------- ----------
Total revenues.......... $1,724,892 $234,712 $ 14,189 $(51,236) $1,922,557
========== ======== ======== ======== ==========
Pre-tax income.......... $ 403,080 $ 96,628 $(74,965) $(37,819) $ 386,924
Depreciation............ 6,059 15,425 142 21,626
Capital expenditures.... 2,940 45,888 160 48,988
Identifiable assets at
year end............... 7,697,454 456,971 442,639 (193,430) 8,403,634
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 23,308 153 29,940
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
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 17--RELATED PARTY TRANSACTIONS
Investment in Related Parties: Other long-term investments include
------------------------------
investment by Torchmark subsidiaries in the United Group of Mutual Funds and
certain other funds for which Waddell & Reed, Inc. is sole advisor. These
investments were $24.4 million and $26.2 million at December 31, 1994 and
1993, respectively. Investment income derived from these investments is
included in net investment income.
NOTE 18--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,
--------------------
1994 1993 1992
---- ------ --------
Treasury stock accepted for exercise of stock options. $-0- $2,480 $ 46,612
Paid in capital from tax benefit for stock option ex-
ercises.............................................. 349 6,412 21,976
Grant of options in conjunction with United Management
merger............................................... -0- 5,122 -0-
The following table summarizes certain amounts paid during the period:
YEAR ENDED DECEMBER 31,
--------------------------
1994 1993 1992
-------- -------- --------
Interest paid.................................... $ 77,114 $ 64,193 $ 62,543
Income taxes paid................................ $182,052 $133,392 $142,045
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 19--SELECTED QUARTERLY DATA (UNAUDITED)
The following is a summary of quarterly results for the two years ended
December 31, 1994. 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,
--------- -------- ------------- ------------
1994:
- -----
Premium and policy charges..... $348,148 $340,166 $336,533 $364,027
Financial services revenue..... 36,544 35,572 33,747 33,413
Energy operations revenue...... 17,303 16,147 14,293 16,622
Net investment income.......... 83,801 81,092 79,585 86,014
Realized investment gains
(losses)...................... 12,595 (9,304) (1,278) (4,564)
Total revenues................. 498,681 464,429 463,289 496,158
Policy benefits................ 232,482 222,924 223,757 242,114
Amortization of acquisition ex-
penses........................ 49,822 40,106 41,327 46,852
Pretax operating income........ 109,930 92,610 89,896 94,488
Net income..................... 75,572 64,903 64,698 63,773
Net income per common share.... 1.03 0.90 0.90 0.89
Net income per common share ex-
cluding realized gains and the
related DPAC adjustment....... 0.98 0.98 0.92 0.93
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
61
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 27, 1995 (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.
62
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.................................... 31
Consolidated Balance Sheet at December 31, 1994 and 1993........ 32
Consolidated Statement of Operations for each of the years in
the three-year period ended December 31, 1994.................. 33
Consolidated Statement of Shareholders' Equity for each of the
years in the three-year period ended December 31, 1994......... 34
Consolidated Statement of Cash Flow for each of the years in the
three-year period ended December 31, 1994...................... 35
Notes to Consolidated Financial Statements...................... 36
Schedules Supporting Financial Statements for each of the years
in the three-year period ended December 31, 1994
II. Condensed Financial Information of Registrant (Parent
Company)................................................... 68
III. Supplementary Insurance Information (Consolidated)......... 71
IV. Reinsurance (Consolidated)................................. 72
Schedules not referred to have been omitted as inapplicable or not required by
Regulation S-X.
63
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) 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 (incorporated
by reference from Definitive 14A File No. 001-08052)
(g) The 1984 Torchmark Corporation Stock Option Plan (incorpo-
rated by reference from Form S-8 for The 1984 Torchmark Cor-
poration Stock Option Plan (Registration No. 2-93760))
(h) General Agency Contract between Liberty National Life Insur-
ance Company and Independent Research Agency For Life Insur-
ance, Inc. (incorporated by reference from Exhibit 10(i) to
Form 10-K for the fiscal year ended December 31, 1990)
(i) Form of Marketing and Administrative Services Agreement be-
tween Liberty National Fire Insurance Company, Liberty Na-
tional Insurance Corporation and Liberty National Life In-
surance Company (incorporated by reference from Exhibit 10.2
to Form S-1 Registration Statement No. 33-68114)
(j) Form of Deferred Compensation Agreement Between Torchmark
Corporation or Subsidiary and Officer at the Level of Vice
President or Above 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)
64
Page of
this
Report
-------
(k) Form of Deferred Compensation Agreement Between Torchmark
Corporation or Subsidiary and Officer at the Level of Vice
President or Above Eligible to Participate in the Torchmark
Corporation and Affiliates Retired Lives Reserve Agreement
and 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)
(l) 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)
(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 (incorporated by reference from Exhibit 10(r)
to Form 10-K for the fiscal year ended December 31, 1993)
(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) Credit Agreements dated as of December 6, 1994 among
Torchmark Corporation, the Lenders and The First National
Bank of Chicago, as Agent (364 Day and Five Year)
(u) 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 re computation of per share earnings 67
(20) Proxy Statement for Annual Meeting of Stockholders to be
held April 27, 1995 (incorporated by reference from Definitive
14A Filing No. 001-08052)
(21) Subsidiaries of the registrant 67
(23)(a) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report of February 1, 1995 into Form S-8
of The Torchmark Corporation Savings and Investment Plan
(Registration No. 2-76378)
(b) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report of February 1, 1995 into Form S-8
of The United Investors Management Company Savings and In-
vestment Plan (Registration No. 2-76912)
(c) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report of February 1, 1995 into Form S-8
and the accompanying Form S-3 Prospectus of The 1984
Torchmark Corporation Stock Option Plan (Registration No. 2-
93760)
65
Page of
this
Report
-------
(d) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report of February 1, 1995 into Form S-8
and the accompanying Form S-3 Prospectus of the Torchmark
Corporation 1987 Stock Incentive Plan (Registration No. 33-
23580)
(e) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report of February 1, 1995 into Form S-8
and the accompanying Form S-3 Prospectus of The Capital Ac-
cumulation and Bonus Plan of Torchmark Corporation (Regis-
tration No. 33-1032)
(24) Powers of attorney
(27) Financial Data Schedule
(99)(a) Form 11-K for The Torchmark Corporation Savings and Invest-
ment Plan for the fiscal year ended December 31, 1994*
(b) Form 11-K for The United Investors Management Company Sav-
ings and Investment Plan for the fiscal year ended December
31, 1994*
- --------
*To be filed under cover of a Form 10-K/A as an Amendment to Form 10-K for the
fiscal year ended December 31, 1994.
66
(b) Reports on Form 8-K
A Form 8-K dated November 11, 1994 was filed during the fourth quarter of
1994 to report the acquisition of the common stock of American Income
Holding, Inc. ("AIH") in a cash tender offer and subsequent statutory
merger. The following financial statements were a part of the Form 8-K and
were incorporated by reference from the Form 8-K dated September 29, 1994:
(1) Consolidated Financial Statements of AIH as of December 31, 1992 and
1993 and for each of the three years ended December 31, 1993.
(2) Consolidated Financial Statements of AIH as of June 30, 1994 and for
the three-month and six-month periods ended June 30, 1994.
(3) Pro Forma Consolidated Condensed Financial Statements (Unaudited) of
Torchmark and AIH.
(c) Exhibits
Exhibit 11. Statement re computation of per share earnings
- ----------------------------------------------------------
TORCHMARK CORPORATION COMPUTATION OF EARNINGS PER SHARE
1994 1993 1992
------------ ------------ ------------
Net income............................ $268,946,268 $297,978,880 $265,477,484
Preferred dividends................... (804,130) (3,289,568) (3,453,976)
------------ ------------ ------------
Adjusted net income................... $268,142,138 $294,689,312 $262,023,508
============ ============ ============
Weighted average shares outstanding... 72,095,657 73,501,654 73,236,849
============ ============ ============
Primary earnings per share:
Net income........................... $ 3.72 $ 4.01 $ 3.58
============ ============ ============
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.
American Income Life American Income Life
Insurance Company Indiana Insurance Company
All other exhibits required by Regulation S-K are listed as to location in the
"Index of documents filed as a part of this report" on pages 64 through 66 of
this report. Exhibits not referred to have been omitted as inapplicable or not
required.
67
TORCHMARK CORPORATION (PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
(AMOUNTS IN THOUSANDS)
DECEMBER 31,
----------------------
1994 1993
---------- ----------
Assets:
Investments:
Long-term investments--available for sale......... $ 20,466 $ 61,931
Short-term investments............................ 806 2,335
---------- ----------
Total investments.................................. 21,272 64,266
Investment in affiliates........................... 2,404,431 2,193,764
Due from affiliates................................ 194,836 174,170
Accrued investment income.......................... 83 386
Other assets....................................... 3,822 3,484
---------- ----------
Total assets...................................... $2,624,444 $2,436,070
========== ==========
Liabilities and shareholders' equity:
Liabilities:
Short-term debt................................... $ 250,000 $ 107,000
Long-term debt.................................... 790,972 790,429
Due to affiliates................................. 97,523 --
Other liabilities................................. 50,294 121,386
---------- ----------
Total liabilities................................. 1,188,789 1,018,815
Monthly income preferred securities................ 193,052 -0-
Shareholders' equity:
Preferred stock................................... -0- 1,000
Common stock...................................... 73,784 73,784
Additional paid-in capital........................ 139,045 232,432
Unrealized investment gains (losses).............. (140,756) 120,138
Retained earnings................................. 1,267,545 1,082,031
Treasury stock.................................... (97,015) (92,130)
---------- ----------
Total shareholders' equity........................ 1,242,603 1,417,255
---------- ----------
Total liabilities and shareholders' equity........ $2,624,444 $2,436,070
========== ==========
See accompanying Notes to Condensed Financial Statements.
68
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
CONDENSED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------
1994 1993 1992
-------- -------- --------
Net investment income............................ $ 8,274 $ 8,705 $ 11,067
Realized investment gains (losses)............... (4,422) 9,301 1,859
Other income..................................... 11 27,435 -0-
-------- -------- --------
Total revenue.................................. 3,863 45,441 12,926
General operating expenses....................... 14,442 15,174 18,809
Non-operating expenses--related to affiliates.... (71,417) 67,718 --
Reimbursements from affiliates................... (15,218) (18,599) (16,179)
Interest expense................................. 79,762 64,859 52,278
-------- -------- --------
Total expenses................................. 7,569 129,152 54,908
-------- -------- --------
Operating loss before income taxes and equity in
earnings
of affiliates................................... (3,706) (83,711) (41,982)
Income taxes .................................... 2,797 34,023 13,901
-------- -------- --------
Net operating loss before equity in earnings of
affiliates...................................... (909) (49,688) (28,081)
Equity in earnings of affiliates................. 271,992 360,991 305,934
Minority interests............................... -0- (11,073) (12,376)
Monthly income preferred securities dividend..... (2,137) -0- -0-
-------- -------- --------
Net income before cumulative effect of changes
in accounting
principles.................................... 268,946 300,230 265,477
Cumulative effect of changes in accounting prin-
ciples.......................................... -0- (2,251) -0-
-------- -------- --------
Net income..................................... $268,946 $297,979 $265,477
======== ======== ========
See accompanying Notes to Condensed Financial Statements.
69
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(continued)
CONDENSED STATEMENT OF CASH FLOW
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
Cash provided from operations before dividends
from subsidiaries............................ $ (48,378) $ (20,435) $ (35,115)
Cash dividends from subsidiaries............. 270,500 188,709 194,128
--------- --------- ---------
Cash provided from operations................. 222,122 168,274 159,013
Cash provided from (used for) investing activ-
ities:
Disposition of investments................... 225,573 478,859 190,559
Acquisition of investments................... (202,579) (526,421) (199,119)
Sale of subsidiaries......................... -0- 76,744 -0-
Investment in subsidiaries................... (70,000) (55,651) -0-
Purchase of minority interest................ -0- (229,063) -0-
Purchase of American Income.................. (476,501) -0- -0-
Loans to subsidiaries........................ (28,916) (8,881) (114,931)
Repayment of loans by subsidiaries........... -0- 31,924 5,450
Net decrease (increase) in temporary invest-
ments....................................... 1,529 (799) 2,709
Additions to properties...................... (113) (74) (124)
--------- --------- ---------
Cash used for investing activities............ (551,007) (233,362) (115,456)
Cash provided from (used for) financing activ-
ities:
Issuance of debt............................. 143,000 294,110 190,000
Issuance of monthly income preferred securi-
ties........................................ 193,046 -0- -0-
Repayments of debt........................... -0- (88,000) -0-
Issuance of stock............................ 4,408 6,670 7,175
Acquisitions of treasury stock............... (106,054) (41,897) (178,698)
Borrowed from subsidiaries................... 176,821 -0- 24,000
Repayment on borrowings from subsidiaries.... -0- (24,000) -0-
Payment of dividends......................... (82,336) (83,646) (84,485)
--------- --------- ---------
Cash provided from (used for) financing activ-
ities........................................ 328,885 63,237 (42,008)
Net increase in cash.......................... -0- (1,851) 1,549
Cash balance at beginning of period........... -0- 1,851 302
--------- --------- ---------
Cash balance at end of period................. $ -0- $ -0- $ 1,851
========= ========= =========
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:
1994 1993 1992
-------- -------- --------
Consolidated subsidiaries..................... $270,500 $188,709 $194,128
======== ======== ========
70
TORCHMARK CORPORATION
SCHEDULE III. 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, 1994:
- ------------------------
Insurance.............. $1,388,874 $332,196 $ 3,822 $914,100 $172,493 $235,219
Asset management....... 5,088 229,624 138,084
Corporate.............. 16,714 (2,525) 89,154
Eliminations and ad-
justments............. (23,506) (27,730) 7,177 5,614 (26,208)
---------- -------- -------- -------- -------- --------
Total................. $1,388,874 $330,492 $203,191 $921,277 $178,107 $436,249
========== ======== ======== ======== ======== ========
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............. (12,655) (20,607) (972) (22,490)
---------- -------- -------- -------- -------- --------
Total................. $1,453,962 $382,744 $209,104 $953,548 $195,434 $478,958
========== ======== ======== ======== ======== ========
71
TORCHMARK CORPORATION
SCHEDULE IV. REINSURANCE (CONSOLIDATED)
(AMOUNTS IN THOUSANDS)
PERCENTAGE
CEDED ASSUMED OF AMOUNT
GROSS TO OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
----------- --------- ---------- ----------- ----------
FOR THE YEAR ENDED DE-
CEMBER 31, 1994:
- ----------------------
Life insurance in force $74,834,644 $633,485 $ 23,570 $74,224,729 0.0%
=========== ======== ======== =========== =====
Premiums:*
Life insurance......... $ 535,141 $ 4,386 $ 1,316 $ 532,071 0.2%
Health insurance....... 781,207 12,493 -0- 768,714 0.0%
----------- -------- -------- -----------
Total premiums........ $ 1,316,348 $ 16,879 $ 1,316 $ 1,300,785 0.1%
=========== ======== ======== =========== =====
FOR THE YEAR ENDED DE-
CEMBER 31, 1993:
- ----------------------
Life insurance in force $61,349,446 $594,416 $ 17,487 $60,772,517 0.0%
=========== ======== ======== =========== =====
Premiums:*
Life insurance......... $ 488,632 $ 4,862 $ 576 $ 484,346 0.1%
Health insurance....... 814,456 14,621 -0- 799,835 0.0%
Property and liability
insurance............. 78,512 60,245 104,790 123,057 85.2%
----------- -------- -------- -----------
Total premiums........ $ 1,381,600 $ 79,728 $105,366 $ 1,407,238 7.5%
=========== ======== ======== =========== =====
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%
=========== ======== ======== =========== =====
- --------
* Excludes policy charges
72
SIGNATURES
Pursuant to the requirements of Section 12 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Torchmark Corporation
/s/ R.K. Richey
By: -------------------------------
R.K. RICHEY, CHAIRMAN,
CHIEF EXECUTIVE OFFICER AND DIRECTOR
/s/ Keith A. Tucker
By: -------------------------------
KEITH A. TUCKER, VICE CHAIRMAN AND DIRECTOR
(PRINCIPAL FINANCIAL OFFICER)
/s/ Gary L. Coleman
By: -------------------------------
GARY L. COLEMAN, VICE PRESIDENT
AND CHIEF ACCOUNTING OFFICER
(PRINCIPAL ACCOUNTING OFFICER)
Date: March 9, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ J.P. Bryan* /s/ Harold T. McCormick*
By: --------------------------- By: ------------------------------
J.P. BRYAN HAROLD T. MCCORMICK
DIRECTOR DIRECTOR
/s/ Joseph M. Farley* /s/ Joseph W. Morris*
By: --------------------------- By: ------------------------------
JOSEPH M. FARLEY JOSEPH W. MORRIS
DIRECTOR DIRECTOR
/s/ Louis T. Hagopian* /s/ George J. Records*
By: --------------------------- By: ------------------------------
LOUIS T. HAGOPIAN GEORGE J. RECORDS
DIRECTOR DIRECTOR
/s/ C.B. Hudson* /s/ Yetta G. Samford, Jr.*
By: --------------------------- By: ------------------------------
C.B. HUDSON YETTA G. SAMFORD, JR.
DIRECTOR DIRECTOR
/s/ Joseph L. Lanier, Jr.*
By: ---------------------------
JOSEPH L. LANIER, JR.
DIRECTOR
Date: March 9, 1995
/s/ Gary L. Coleman
*By: --------------------------
GARY L. COLEMAN
ATTORNEY-IN-FACT
Date: March 9, 1995
73