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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, 1996 1-8052
TORCHMARK CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 63-0780404
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
2001 Third Ave. South, 35233
Birmingham, AL (ZIP CODE)
(ADDRESS OF PRINCIPAL
EXECUTIVE OFFICES)
Registrant's telephone number, including area code:
(205) 325-4200
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS CUSIP NUMBER: ON WHICH REGISTERED:
Common Stock, $1.00 Par 891027104 New York Stock Exchange
Value The International Stock
Exchange, London,
England
Securities registered pursuant to Section 12(g) of the Act:
None
Securities reported pursuant to Section 15(d) of the Act:
TITLE OF EACH CUSIP NUMBER:
CLASS:
8 5/8% Sinking Fund 891027 AB 0
Debentures due 2017
9 5/8% Senior Notes 891027 AD 6
due 1998
8 1/4% Senior 891027 AE 4
Debentures due 2009
7 7/8% Notes due 891027 AF 1
2023
7 3/8% Notes due 891027 AG 9
2013
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH) AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [_]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K ((S)229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN, AND
WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE
PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [_]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT: $4,181,248,001
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON
STOCK, AS OF FEBRUARY 28, 1997: 69,832,952
DOCUMENTS INCORPORATED BY REFERENCE
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 24, 1997,
PART III
INDEX OF EXHIBITS (PAGES 67 THROUGH 69)
TOTAL NUMBER OF PAGES INCLUDED ARE 76
PART 1
ITEM 1. BUSINESS
Torchmark Corporation ("Torchmark"), an insurance and diversified financial
services holding company, was incorporated in Delaware on November 19, 1979,
as Liberty National Insurance Holding Company. Through a plan of
reorganization effective December 30, 1980, it became the parent company for
the businesses operated by Liberty National Life Insurance Company ("Liberty")
and Globe Life And Accident Insurance Company ("Globe"). United American
Insurance Company ("United American"), Waddell & Reed, Inc. ("W&R") and United
Investors Life Insurance Company ("UILIC") along with their respective
subsidiaries were acquired in 1981. The name Torchmark Corporation was adopted
on July 1, 1982. Family Service Life Insurance Company ("Famlico") was
purchased in July, 1990, and American Income Life Insurance Company ("American
Income") was purchased in November, 1994.
The following table presents Torchmark's business by primary distribution
method:
PRIMARY
DISTRIBUTION METHOD COMPANY PRODUCTS SALES FORCE
- -----------------------------------------------------------------------------------------------------------------
DIRECT RESPONSE GLOBE LIFE AND Individual life and health in- Direct response, television,
ACCIDENT surance including special senior magazine; nationwide.
INSURANCE COMPANY life coverage, Medicare
Oklahoma City, OK Supplement, long-term care.
- -----------------------------------------------------------------------------------------------------------------
LIBERTY NATIONAL LIBERTY NATIONAL LIFE Individual life and 1,750 full-time sales repre-
EXCLUSIVE AGENCY INSURANCE COMPANY health insurance. sentatives; 111 district offices
Birmingham, Alabama in the Southeastern U.S.
- -----------------------------------------------------------------------------------------------------------------
AMERICAN INCOME AMERICAN INCOME LIFE Individual life and health in- 1,450 agents.
EXCLUSIVE AGENCY INSURANCE COMPANY surance to union and credit
Waco, Texas union members and other
associations.
- -----------------------------------------------------------------------------------------------------------------
UNITED INVESTORS WADDELL & REED, INC. United and Waddell & Reed 2,170 Waddell & Reed
EXCLUSIVE AGENCY Shawnee Mission, Groups of mutual funds, representatives; indepen-
Kansas institutional investment dent agents; 172 offices
UNITED INVESTORS LIFE management services includ- nationwide.
INSURANCE COMPANY ing assets of Torchmark.
Birmingham, Alabama Individual life insurance
and annuities.
- -----------------------------------------------------------------------------------------------------------------
MILITARY LIBERTY NATIONAL LIFE Individual life insurance Independent Agency through
INSURANCE COMPANY career agents nationwide.
Birmingham, Alabama
GLOBE LIFE AND ACCIDENT
INSURANCE COMPANY
Oklahoma City, Oklahoma
- -----------------------------------------------------------------------------------------------------------------
UNITED AMERICAN UNITED AMERICAN Senior life and health 46,000 independent agents
INDEPENDENT AGENCY INSURANCE COMPANY insurance including in the U.S., Puerto Rico and
AND EXCLUSIVE INDEPEN- McKinney, Texas Medicare Supplement Canada; 1,100 exclusive
DENT AGENCY coverage and long-term care. agents in 73 branch offices.
Additional information concerning industry segments may be found in
Management's Discussion and Analysis and in Note 17--Industry Segments in the
Notes to Consolidated Financial Statements.
INSURANCE
LIFE INSURANCE
Torchmark writes a variety of nonparticipating ordinary life insurance
products. These include traditional and interest sensitive whole-life
insurance, term life insurance, and other life insurance. The following table
presents selected information about Torchmark's life products:
(AMOUNTS IN THOUSANDS)
ANNUALIZED ANNUALIZED
PREMIUM ISSUED PREMIUM IN FORCE
-------------------------- --------------------------
1996 1995 1994 1996 1995 1994
-------- -------- -------- -------- -------- --------
Whole life:
Traditional.............. $112,817 $107,288 $ 63,108 $521,015 $469,581 $445,025
Interest-sensitive....... 16,638 29,287 34,633 167,912 174,675 171,264
Term...................... 82,331 79,849 48,392 243,210 212,213 167,973
Other..................... 2,955 1,564 3,700 14,388 12,897 12,693
-------- -------- -------- -------- -------- --------
$214,741 $217,988 $149,833 $946,525 $869,366 $796,955
======== ======== ======== ======== ======== ========
1
The distribution methods for life insurance products include sales efforts
conducted by direct response, exclusive agents and independent agents. These
methods are discussed in more depth under the heading "Marketing." The
following table presents life annualized premium issued by marketing method:
(AMOUNTS IN THOUSANDS)
ANNUALIZED ANNUALIZED
PREMIUM ISSUED PREMIUM IN FORCE
-------------------------- ---------------------------
1996 1995 1994 1996 1995 1994
-------- -------- -------- -------- -------- --------
Direct response......... $ 62,029 $ 63,900 $ 48,267 $202,370 $180,530 $154,130
Exclusive Agents:
Liberty National....... 45,394 48,549 51,461 297,581 297,418 291,813
American Income........ 54,382 51,190 7,393 188,039 169,599 147,008
United Investors....... 10,715 10,609 8,674 84,495 78,666 73,148
United American........ 15,874 19,080 18,175 59,760 60,470 59,459
Independent Agents:
Military............... 8,165 8,268 7,292 74,150* 48,402 42,595
United American........ 18,182 16,392 8,571 40,130 34,281 28,802
-------- -------- -------- -------- -------- --------
$214,741 $217,988 $149,833 $946,525 $869,366 $796,955
======== ======== ======== ======== ======== ========
- --------
* Annualized premium in force for 1996 includes $21 million acquired from
another carrier originally produced by this agency.
Permanent insurance products sold by Torchmark build cash values which are
available to policyholders. Policyholders may borrow such funds using the
policies as collateral. The aggregate value of policy loans outstanding at
December 31, 1996 was $207 million and the average interest rate earned on
these loans was 6.58% in 1996. Interest income earned on policy loans was
$13.2 million in 1996, $12.1 million in 1995, and $10.0 million in 1994.
Torchmark had 188 thousand and 182 thousand policy loans outstanding at year-
end 1996 and 1995, respectively.
The availability of cash values contributes to voluntary policy terminations
by policyholders through surrenders. Torchmark's life insurance products may
be terminated or surrendered at the election of the insured at any time,
generally for the full cash value specified in the policy. Specific surrender
procedures vary with the type of policy. For certain policies this cash value
is based upon a fund less a surrender charge which decreases with the length
of time the policy has been in force. This surrender charge is either based
upon a percentage of the fund or a charge per $1,000 of face amount of
insurance. The schedule of charges may vary by plan of insurance and, for some
plans, by age of the insured at issue. Torchmark's ratio of aggregate face
amount voluntary terminations to the mean amount of life insurance in force
was 17.1% in 1996, 17.2% in 1995 and 14.7% in 1994.
The following table presents an analysis of changes to Torchmark's life
insurance business in force:
(AMOUNTS IN THOUSANDS)
1996 1995 1994
--------------------- --------------------- ---------------------
NUMBER OF AMOUNT OF NUMBER OF AMOUNT OF NUMBER OF AMOUNT OF
POLICIES INSURANCE POLICIES INSURANCE POLICIES INSURANCE
--------- ----------- --------- ----------- --------- -----------
In force at January 1,.. 9,196 $80,391,376 8,913 $74,858,214 8,110 $61,366,933
New issues.............. 1,320 18,718,479 1,413 19,359,923 1,147 14,958,141
Business acquired....... 38 2,573,996 -0- -0- 595 8,983,055
Other increases......... 1 104,490 1 64,128 1 10,961
Death benefits.......... (111) (289,687) (110) (271,451) (105) (228,354)
Lapses.................. (880) (13,008,065) (856) (12,185,540) (688) (8,940,980)
Surrenders.............. (140) (1,296,744) (135) (1,187,581) (106) (1,048,117)
Other decreases......... (32) (245,694) (30) (246,317) (41) (243,425)
----- ----------- ----- ----------- ----- -----------
In force at December
31,.................... 9,392 $86,948,151 9,196 $80,391,376 8,913 $74,858,214
===== =========== ===== =========== ===== ===========
Average policy size (in
dollar amounts):
Direct response--Juve-
nile.................. $ 6,776 $ 6,854 $ 6,933
Other.................. 10,246 9,491 9,039
2
HEALTH INSURANCE
Torchmark offers an assortment of supplemental health insurance products.
These are generally classified as (1) Medicare Supplement, (2) cancer and (3)
other health policies.
Medicare Supplement policies are offered on both an individual and group
basis through exclusive and independent agents, and direct response. These
guaranteed renewable policies provide reimbursement for certain expenses not
covered by the federal Medicare program. One popular feature available under
Torchmark's Medicare Supplements is an automatic claim filing system for
Medicare Part B benefits whereby policyholders do not have to file most claims
because they are paid directly by Torchmark from Medicare records.
Cancer policies are offered on an individual basis through exclusive and
independent agents as well as direct response. These guaranteed renewable
policies are designed to fill gaps in existing medical coverage. Benefits are
triggered by a diagnosis of cancer or health related events or medical
expenses related to the treatment of cancer. Benefits may be in the form of a
lump sum payment, stated amounts per diem, per medical procedure, or
reimbursement for certain medical expenses.
Other health policies include accident, long term care and limited benefit
hospital and surgical coverages. These policies are generally issued as
guaranteed-renewable and are offered on an individual basis through exclusive
and independent agents, and direct response. They are designed to supplement
existing medical coverages. Benefits are triggered by certain health related
events or incurred expenses. Benefit amounts are per diem, per health related
event or defined expenses incurred up to a stated maximum.
The following table presents supplemental health annualized premium for the
three years ended December 31, 1996 by marketing method:
(AMOUNTS IN THOUSANDS)
ANNUALIZED ANNUALIZED
PREMIUM ISSUED PREMIUM IN FORCE
-------------------------- --------------------------
1996 1995 1994 1996 1995 1994
-------- -------- -------- -------- -------- --------
Direct response........... 4,990 171 674 5,141 929 1,162
Exclusive agents:
Liberty National......... 11,258 16,701 24,904 122,305 122,147 127,962
American Income.......... 10,645 9,585 1,232 42,140 39,693 36,215
United American.......... 31,565 32,596 33,765 131,250 127,599 130,738
Independent agents:
United American.......... 42,523 44,438 62,088 447,317 468,691 516,294
-------- -------- -------- -------- -------- --------
$100,981 $103,491 $122,663 $748,153 $759,059 $812,371
======== ======== ======== ======== ======== ========
The following table presents supplemental health annualized premium
information for the three years ended December 31, 1996 by product category:
(AMOUNTS IN THOUSANDS)
ANNUALIZED ANNUALIZED
PREMIUM ISSUED PREMIUM IN FORCE
-------------------------- --------------------------
1996 1995 1994 1996 1995 1994
-------- -------- -------- -------- -------- --------
Medicare Supplement...... $ 65,767 $ 64,638 $ 87,547 $523,902 $529,616 $572,221
Cancer................... 10,676 11,338 8,101 119,428 114,972 114,495
Other health related pol-
icies................... 24,538 27,515 27,015 104,823 114,471 125,655
-------- -------- -------- -------- -------- --------
$100,981 $103,491 $122,663 $748,153 $759,059 $812,371
======== ======== ======== ======== ======== ========
3
ANNUITIES
Annuity products offered by Torchmark include single-premium deferred
annuities, flexible-premium deferred annuities, and variable annuities.
Single-premium and flexible-premium products are fixed annuities where a
portion of the interest credited is guaranteed. Additional interest may be
credited on certain contracts. Variable annuity policyholders may select from
a variety of mutual funds managed by W&R which offer different degrees of risk
and return. The ultimate benefit on a variable annuity results from the
account performance. The following table presents Torchmark subsidiaries'
annuity collections and deposit balances by product type:
(AMOUNTS IN THOUSANDS) (AMOUNTS IN MILLIONS)
COLLECTIONS DEPOSIT BALANCE
FOR THE YEAR ENDED DECEMBER 31, AT DECEMBER 31,
-------------------------------- --------------------------
1996 1995 1994 1996 1995 1994
---------- ---------- ---------- -------- -------- --------
Fixed annuities......... $ 87,133 $ 133,461 $ 43,339 $ 974.6 $ 927.9 $ 801.2
Variable annuities...... 247,461 189,188 196,105 1,375.5 1,052.2 692.8
---------- ---------- ---------- -------- -------- --------
$ 334,594 $322,649 $239,444 $2,350.1 $1,980.1 $1,494.0
========== ========== ========== ======== ======== ========
INVESTMENTS
The nature, quality, and percentage mix of insurance company investments are
regulated by state laws that generally permit investments in qualified
municipal, state, and federal government obligations, corporate bonds,
preferred and common stock, real estate, and mortgages where the value of the
underlying real estate exceeds the amount of the loan. Torchmark's investments
consist predominantly of high-quality, investment-grade securities. Fixed
maturities represented 90% of total investments at December 31, 1996.
Approximately 25% 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 70% of these
investments were in GNMA securities that are backed by the full faith and
credit of the United States government. The remainder of these government
investments were U.S. Treasuries, agency securities or collateralized mortgage
obligations ("CMO's") that are fully backed by GNMA's. (See Note 3--Investment
Operations in the Notes to Consolidated Financial Statements and Management's
Discussion and Analysis.)
The following table presents an analysis of Torchmark's fixed maturity
investments at December 31, 1996. 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...................... $ 179,178 3.4%
GNMA and MBS backed by GNMA collateral............. 1,083,860 20.3
Other U.S. Government guaranteed................... 58,035 1.1
Other investment grade............................. 3,763,846 70.6
Non-investment grade corporates.................... 243,357 4.6
---------- -----
$5,328,276 100.0%
========== =====
The following table presents Torchmark's fixed maturity investments at
December 31, 1996 on the basis of ratings as determined primarily by Standard
& Poor's Corporation. Moody's Investors Services' bond ratings are used when
Standard & Poor's ratings are not available. Ratings of BBB and higher (or
their equivalent) are considered investment grade by the rating services.
AMOUNT
RATING (IN THOUSANDS) %
------ -------------- -----
AAA................................................ $2,098,390 39.4%
AA................................................. 787,542 14.8
A.................................................. 1,910,726 35.9
BBB................................................ 277,915 5.2
BB................................................. 170,522 3.2
B.................................................. 6,991 0.1
Less than B........................................ 88 0.0
Not rated.......................................... 76,102 1.4
---------- -----
$5,328,276 100.0%
========== =====
4
The following table presents the fixed maturity investments of Torchmark's
insurance subsidiaries at December 31, 1996 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.. $4,788,405 90.2%
2. High quality..... 277,087 5.2
3. Medium quality... 211,316 4.0
4. Low quality...... 31,372 0.6
5. Lower quality.... 669 0.0
6. In or near de-
fault.............. 0 0.0
---------- -----
$5,308,849 100.0%
========== =====
Securities are assigned ratings when acquired. All ratings are reviewed and
updated at least annually. Specific security ratings are updated as
information becomes available during the year.
PRICING
Premium rates for life and health insurance products are established using
assumptions as to future mortality, morbidity, persistency, and expenses, all
of which are generally based on Torchmark's experience, and on projected
investment earnings. Revenues for individual life and health insurance
products are primarily derived from premium income, and, to a lesser extent,
through policy charges to the policyholder account values on certain
individual life products. Profitability is affected to the extent actual
experience deviates from that which has been assumed in premium pricing and to
the extent investment income exceeds that which is required for policy
reserves.
Collections for annuity products and certain life products are not
recognized as revenues but are added to policyholder account values. Revenues
from these products are derived from charges to the account balances for
insurance risk and administrative costs. Profits are earned to the extent
these revenues exceed actual costs. Profits are also earned from investment
income on the deposits invested in excess of the amounts credited to policy
accounts.
UNDERWRITING
The underwriting standards of Torchmark are established by management.
Torchmark uses information from the application and, in some cases, inspection
reports, doctors' statements and/or medical examinations to determine whether
a policy should be issued in accordance with the application, with a different
rating, with a rider, with reduced coverage or rejected.
Torchmark requires medical information or examinations of applicants for
life insurance in excess of certain prescribed amounts. These are graduated
according to the age of the applicant and may vary with the kind of insurance.
The maximum amount of insurance issued without medical information is $100,000
through age 40. Torchmark requests medical information of all applicants,
regardless of age or amount, if information obtained from the application or
other sources indicates that such information is warranted.
In recent years, there has been considerable concern regarding the impact of
the HIV virus associated with Acquired Immune Deficiency Syndrome ("AIDS").
Torchmark has implemented certain underwriting tests to detect the presence of
the HIV virus and continues to assess the utility of other appropriate
underwriting tests to detect AIDS in light of medical developments in this
field. To date, AIDS claims have not had a material impact on claims
experience.
5
REINSURANCE
As is customary among insurance companies, Torchmark cedes insurance to
other unaffiliated insurance companies on policies they issue in excess of
retention limits. Reinsurance is an effective method for keeping insurance
risk within acceptable limits. In the event insurance business is ceded,
Torchmark remains contingently liable with respect to ceded insurance should
any reinsurer be unable to meet the obligations it assumes (See Note 16--
Commitments and Contingencies in the Notes to Consolidated Financial
Statements and Schedule IV--Reinsurance [Consolidated]).
RESERVES
The life insurance policy reserves reflected in Torchmark's financial
statements as future policy benefits are calculated based on generally
accepted accounting principles. These reserves, with the addition of premiums
to be received and the interest thereon compounded annually at assumed rates,
must be sufficient to cover policy and contract obligations as they mature.
Generally, the mortality and persistency assumptions used in the calculations
of reserves are based on company experience. Similar reserves are held on most
of the health policies written by Torchmark's insurance subsidiaries, since
these policies generally are issued on a guaranteed-renewable basis. A list of
the assumptions used in the calculation of Torchmark's reserves are reported
in the financial statements (See Note 8--Future Policy Benefit Reserves in the
Notes to Consolidated Financial Statements). Reserves for annuity products
consist of the policyholders' account values and are increased by policyholder
deposits and interest credits and are decreased by policy charges and benefit
payments.
MARKETING
Torchmark is licensed to sell insurance in all 50 states, the District of
Columbia, Puerto Rico, the Virgin Islands, Guam, New Zealand and Canada.
Distribution is through direct response, independent and exclusive agents.
Direct Response. Torchmark offers life insurance products directly to
consumers through direct mail, co-op mailings, national cable and local spot
television, national newspaper supplements and national magazines. Torchmark
operates a full service letterpress which enables the direct response
operation to maintain high quality standards while producing materials much
more efficiently than they could be purchased from outside vendors.
Exclusive Agents. Torchmark sells and services life and health insurance
through 1,750 Liberty National agents primarily in the seven state area of
Alabama, Florida, Georgia, Tennessee, Mississippi, South Carolina, and North
Carolina. These agents are employees of Liberty and are primarily compensated
by commissions based on sales. During the past several years this operation
has emphasized bank draft and direct bill collection of premium rather than
agent collection, because of the resulting lower cost and improved
persistency. Agent collected sales were discontinued in 1996.
Through the American Income Agency, Torchmark sells individual life and
fixed-benefit accident and health insurance through approximately 1,450
exclusive agents who target moderate income wage earners through the
cooperation of labor unions, credit unions, and other associations. These
agents are authorized to use the "union label" because this sales force is
represented by organized labor.
Torchmark sells life insurance as well as fixed and variable annuity
products through the 2,170 W&R financial planners. (See Asset Management--
Mutual Funds for additional marketing information about the W&R sales force.)
Torchmark offers life and health insurance targeted to various special
markets through approximately 1,100 United American exclusive independent
agents in 73 branch offices throughout the United States.
Independent Agents. Torchmark offers a variety of life and health insurance
policies through approximately 46 thousand independent agents, brokers, and
licensed sales representatives. Torchmark is not committed or obligated in any
way to accept a fixed portion of the business submitted by any independent
agent. All policy applications, both new and renewal, are subject to approval
and acceptance by Torchmark. Torchmark is not dependent on any single agent or
any small group of independent agents, the loss of which would have a
materially adverse effect on insurance sales.
6
Torchmark distributes life insurance through a nationwide independent agency
whose sales force is comprised of former commissioned and non-commissioned
military officers who sell exclusively to commissioned and non-commissioned
military officers and their families.
RATINGS
The following list indicates the ratings currently held by Torchmark's five
largest insurance companies as rated by A.M. Best Company:
A.M. BEST
COMPANY
---------------
Liberty National Life Insurance Company A+ (Superior)
Globe Life And Accident Insurance Company A+ (Superior)
United Investors Life Insurance Company A+ (Superior)
United American Insurance Company A+ (Superior)
American Income Life Insurance Company A (Excellent)
A.M. Best states that it assigns A+ (Superior) ratings to those companies
which, in its opinion, have demonstrated superior overall performance when
compared to the norms of the life/health insurance industry. A+ (Superior)
companies have a very strong ability to meet their obligations to
policyholders over a long period of time. A.M. Best states that it assigns A
(Excellent) ratings to those companies which, in its opinion, have
demonstrated excellent overall performance when compared to the norms of the
life/health insurance industry. A (Excellent) companies have an excellent
ability to meet their obligations to policyholders over a long period of time.
United Investors Life Insurance Company also has a rating of AA by Standard &
Poor's Corporation. This AA rating is assigned by Standard & Poor's
Corporation to those companies who offer excellent financial security on an
absolute and relative basis and whose capacity to meet policyholders
obligations is overwhelming under a variety of economic and underwriting
conditions.
7
ASSET MANAGEMENT
Torchmark conducts its asset management and financial services businesses
through Waddell & Reed Financial Services, Inc. and its subsidiaries. This
segment's activity is mutual fund distribution, management, and servicing.
MUTUAL FUNDS
Torchmark's mutual fund operations are carried out by a subsidiary of United
Management, W&R, which markets and manages the seventeen mutual funds in the
United Group of Mutual Funds, the six mutual funds in the Waddell & Reed Fund,
Inc. ("W&R Funds"), and the ten mutual funds in the TMK/United Fund, Inc.
("TMK/United Funds") which are used exclusively as the investment funds for
variable annuities sold by UILIC. These funds were valued as follows at
December 31, 1996 and 1995:
(AMOUNTS IN
MILLIONS)
1996 1995
------- -------
United Funds $15,130 $13,569
W&R Funds 643 419
TMK/United Funds 1,434 1,099
------- -------
Total mutual fund assets under management 17,207 15,087
Institutional and private accounts 1,651 3,201
------- -------
Total assets under management $18,858 $18,288
======= =======
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, 1996, the average industry experience of the fund
managers for W&R was 20 years, and average company experience was 13 years.
The following table indicates W&R revenues by component for the three years
ending December 31, 1996:
(AMOUNTS IN THOUSANDS)
1996 1995 1994
-------- -------- --------
Asset management fees........................ $103,127 $ 85,999 $ 70,651
Investment product commissions*.............. 71,991 56,927 59,450
Insurance product commissions*............... 13,897 13,531 12,773
Service fees................................. 28,419 23,528 22,297
-------- -------- --------
$217,434 $179,985 $165,171
======== ======== ========
*Commissions received from affiliates for variable annuities and insurance
product sales are eliminated in consolidation.
W&R markets its mutual funds and other financial products, including life
insurance, through a sales force of approximately 2,170 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 172 sales offices at December 31, 1996.
W&R conducts money management seminars on a national scale to reach numerous
potential clients every year. Individual financial plans are developed for
clients through one-on-one consultations with the W&R sales representatives.
Emphasis is placed on a long-term relationship with a client rather than a
one-time sale.
8
COMPETITION
The insurance industry is highly competitive. Torchmark competes with other
insurance carriers through policyholder service, price, product design, and
sales effort. In addition to competition with other insurance companies,
Torchmark also faces increasing competition from other financial services
organizations. While there are a number of larger insurance companies
competing with Torchmark that have greater resources and have considerable
marketing forces, there is no individual company dominating any of Torchmark's
life or health markets.
Torchmark's health insurance products compete with, in addition to the
products of other health insurance carriers, health maintenance organizations,
preferred provider organizations, and other health care related institutions
which provide medical benefits based on contractual agreements.
Generally, Torchmark companies operate at lower administrative expense
levels than its peer companies, allowing Torchmark to have competitive rates
while maintaining margins, or, in the case of Medicare Supplement business, to
remain in the business while some companies have ceased new writings.
Torchmark's years of experience in direct response business are a valuable
asset in designing direct response products. On the other hand, Torchmark's
insurance subsidiaries do not have the same degree of national name
recognition as some other companies with which they compete.
W&R competes with hundreds of other registered institutional investment
advisers and mutual fund management and distribution companies which
distribute their fund shares through a variety of methods including affiliated
and unaffiliated sales forces, broker-dealers, and direct sales to the public.
Although no one company or group of companies dominates the mutual fund
industry, some are larger than W&R and have greater resources. Competition is
based on the methods of distribution of fund shares, tailoring investment
products to meet certain segments of the market, the changing needs of
investors, the ability to achieve superior investment management performance,
the type and quality of shareholder services, and the success of sales
promotion efforts.
REGULATION
INSURANCE. Insurance companies are subject to regulation and supervision in
the states in which they do business. The laws of the various states establish
agencies with broad administrative and supervisory powers which include, among
other things, granting and revoking licenses to transact business, regulating
trade practices, licensing agents, approving policy forms, approving certain
premium rates, setting minimum reserve and loss ratio requirements,
determining the form and content of required financial statements, and
prescribing the type and amount of investments permitted. Insurance companies
can also be required under the solvency or guaranty laws of most states in
which they do business to pay assessments up to prescribed limits to fund
policyholder losses or liabilities of insolvent insurance companies. They are
also required to file detailed annual reports with supervisory agencies, and
records of their business are subject to examination at any time. Under the
rules of the NAIC, insurance companies are examined periodically by one or
more of the supervisory agencies. The most recent examinations of Torchmark's
insurance subsidiaries were: Famlico, as of December 31, 1995; American Income
as of December 31, 1990; Globe, as of December 31, 1994; Liberty, as of
December 31, 1991; United American, as of December 31, 1993; and UILIC, as of
December 31, 1993.
NAIC Ratios. The NAIC developed the Insurance Regulatory Information System
("IRIS"), which is intended to assist state insurance regulators in monitoring
the financial condition of insurance companies. IRIS identifies twelve
insurance industry ratios from the statutory financial statements of insurance
companies, which 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
9
presents the IRIS ratios as determined by the NAIC for Torchmark's five
largest insurance subsidiaries, which varied unfavorably from the "usual
value" range for the years 1995 and 1994.
USUAL REPORTED
COMPANY RATIO NAME RANGE VALUE
- --------- ------------------------------------------------- --------- --------
1995:
- -----
Liberty Investment in Affiliate to Capital and Surplus 0 to 100 238
Globe Change in Capital and Surplus 50 to -10 -18
United American Change in Capital and Surplus 50 to -10 -11
Liberty Change in Reserving Ratio 20 to -20 24
American Income Non-admitted to Admitted Assets 10 11
1994:
- -----
Liberty Investment in Affiliate to Capital and Surplus 0 to 100 202
Liberty Change in Capital and Surplus 50 to -10 -29
Globe Change in Capital and Surplus 50 to -10 -12
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 1995 and 1994 is brought about by its ownership of
other large Torchmark insurance companies and the ownership of 81% of the
stock of United Management. Profitability and growth in these subsidiaries
have caused this ratio to gradually rise. All intercompany investment is
eliminated in consolidation, and the internal organizational structure has no
bearing on consolidated results.
Change in Capital and Surplus--These ratios, calculated on both a gross and
net basis, are a measure of improvement or deterioration in the company's
financial position during the year. The NAIC considers ratios less than minus
10% and greater than 50% to be unusual. Liberty's ratio of minus 29% in 1994
was due to the payment of a large dividend by United Management, an 81% owned
subsidiary, directly to Torchmark. Because Liberty waived its interest in this
dividend, it reduced Liberty's capital and surplus. United American's ratio of
minus 11% in 1995 and Globe's ratios of minus 18% in 1995 and minus 12% in
1994 were caused by the payment of dividends to Torchmark in excess of their
statutory net income. These transactions did not affect the consolidated
equity of Torchmark at December 31, 1995 and 1994.
Change in Reserving Ratio--The change in reserving ratio represents the
number of percentage points of difference between the reserving ratio for
current and prior years. Liberty's ratio was slightly over the usual range
because it assumed a block of business in late 1995. The assumption of this
business caused an increase in year-end reserves. No allowance is made for
special transactions such as this in the calculation.
Non-admitted Assets to Admitted Assets--This ratio measures the degree to
which a company has acquired assets which cannot be carried on its statutory
balance sheet. American Income's ratio of 11% in 1995 was due to a large
amount of agent balances that arose from comissions that are advanced to
agents when a policy is submitted. Due to the growth of American Income's
business, these advances have grown and caused a variance in this particular
ratio.
Risk Based Capital. In December 1992, the NAIC adopted a model act that
requires a risk based capital formula be applied to all life and health
insurers. The requirement began in 1994 for information based on the 1993
annual statements. The risk based capital formula is a threshold formula
rather than a target capital formula. It is designed only to identify
companies that require regulatory attention and is not to be used to rate or
rank companies that are adequately capitalized. All of the insurance
subsidiaries of Torchmark are adequately capitalized under the risk based
capital formula.
10
Guaranty Assessments. State solvency or guaranty laws provide for
assessments from insurance companies into a fund which is used, in the event
of failure or insolvency of an insurance company, to fulfill the obligations
of that company to its policyholders. The amount which a company is assessed
for these state funds is determined according to the extent of these
unsatisfied obligations in each state. These assessments are recoverable to a
great extent as offsets against state premium taxes.
HOLDING COMPANY. States have enacted legislation requiring registration and
periodic reporting by insurance companies domiciled within their respective
jurisdictions that control or are controlled by other corporations so as to
constitute a holding company system. Torchmark and its subsidiaries have
registered as a holding company system pursuant to such legislation in
Alabama, Delaware, Missouri, New York, Texas, and Indiana.
Insurance holding company system statutes and regulations impose various
limitations on investments in subsidiaries, and may require prior regulatory
approval for the payment of certain dividends and other distributions in
excess of statutory net gain from operations on an annual noncumulative basis
by the registered insurer to the holding company or its affiliates.
MUTUAL FUNDS. Torchmark's mutual fund management and distribution
activities, as well as its investment advisory services, are subject to state
and federal regulation and oversight by the National Association of Securities
Dealers, Inc. Each of the funds in the United Group of Mutual Funds, the W&R
Funds, and the TMK/United Funds is or was a registered investment company
under the Investment Company Act of 1940. W&R and Waddell & Reed Asset
Management Company ("WRAM") are registered pursuant to the Investment Advisers
Act of 1940. Additionally, W&R is regulated as a broker-dealer under the
Securities Exchange Act of 1934.
PERSONNEL
At the end of 1996, Torchmark had 2,312 employees and 2,516 licensed
employees under sales contracts. Additionally, approximately 54,000
independent and exclusive agents and brokers, who were not employees of
Torchmark, were associated with Torchmark's marketing efforts.
ITEM 2. REAL ESTATE
Torchmark, through its subsidiaries, owns or leases buildings that are used
in the normal course of business. Liberty owns a 487,000 square foot building
at 2001 Third Avenue South, Birmingham, Alabama which currently serves as
Liberty's, UILIC's, and Torchmark's home office. Liberty leases approximately
160,000 square feet of this building to unrelated tenants. Liberty also
operates from 61 company-owned district office buildings used for agency sales
personnel.
Globe owns a 300,000 square foot office building at 204 North Robinson,
Oklahoma City, Oklahoma, of which it occupies 56,138 square feet as its home
office and the balance is available for lease. Globe also owns a 330,000
square foot office building complex at 14000 Quail Springs Parkway Plaza
Boulevard, Oklahoma City, Oklahoma, and an 80,000 square foot office building
at 120 Robert S. Kerr Avenue, Oklahoma City, which are available for lease to
other tenants.
In 1996, United American relocated to a new home office building. United
American owns and is the sole occupant of this 140,000 square foot facility,
located in the Stonebridge Ranch development in McKinney, Texas (a North
Dallas suburb). The former home office building on Buckner Boulevard in
Dallas, Texas is under contract to be sold.
American Income owns and is the sole occupant of an office building located
at 1200 Wooded Acres Drive, Waco, Texas. The building is a two story structure
containing approximately 72,000 square feet of usable floor space. In
addition, American Income leases office space in various cities throughout the
United States.
W&R owns and occupies a 116,000 square foot office building utilized as its
corporate headquarters located in United Investors Park, a commercial
development at 6300 Lamar Avenue, Shawnee Mission, Kansas. In addition, W&R
owns three other office buildings in this development, each containing
approximately 48,000 square feet, which are leased or are available for lease.
11
Liberty, Globe and W&R also lease district office space for their agency
sales personnel. All of the other Torchmark companies lease their office space
in various cities in the U.S.
A Torchmark subsidiary, Torchmark Development Corporation ("TDC"), has
completed three buildings consisting of 185,000 square feet, 90,000 square
feet and 25,000 square feet of office space within a 100 acre commercial
development known as Liberty Park along Interstate 459 in Birmingham, Alabama.
Approximately 275,000 square feet of this total office area is currently
leased. A 110,000 square foot office building is currently under construction
in this development and is scheduled for completion in the Spring of 1997. TDC
also owns and manages a 70,000 square foot office and retail complex adjacent
to Liberty Park of which approximately 60% is leased by an affiliated party.
As a part of a joint venture with unaffiliated entities, TDC is also
developing 2,800 contiguous acres as a planned community development.
DATA PROCESSING EQUIPMENT
Torchmark and its primary subsidiaries have significant automated
information processing capabilities, supported by centralized computer
systems. Torchmark also uses personal computers to support the user-specific
information processing needs of its professional and administrative staffs.
All centralized computer software support, information processing schedules
and computer-readable data management requirements are supported by company-
specific policies and procedures which ensure that required information
processing results are produced and distributed in a timely manner. These
policies and procedures provide for the copying, off-site physical storage and
retention of significant company computer programs and business data files for
backup purposes.
ITEM 3. LEGAL PROCEEDINGS
Torchmark and its subsidiaries continue to be named as parties to pending or
threatened legal proceedings. These lawsuits involve tax matters, alleged
breaches of contract, torts, including bad faith and fraud claims based on
alleged wrongful or fraudulent acts of agents of Torchmark's subsidiaries,
employment discrimination, and miscellaneous other causes of action. Many of
these lawsuits involve claims for punitive damages in state courts of Alabama,
a jurisdiction particularly recognized for its large punitive damage verdicts.
A number of such actions involving Liberty also name Torchmark as a defendant.
As a practical matter, a jury's discretion regarding the amount of a punitive
damage award is not limited by any clear, objective criteria under Alabama
law. Accordingly, the likelihood or extent of a punitive damage award in any
given case is virtually impossible to predict. As of December 31, 1996,
Liberty was a party to approximately 282 active lawsuits (including 25
employment related cases and excluding interpleaders and stayed cases), more
than 250 of which were Alabama proceedings in which punitive damages were
sought. Liberty faces trial settings in these cases on an on-going basis.
Torchmark has previously reported the entry of an Order and Final Judgment
by the Circuit Court of Barbour County, Alabama in Robertson v. Liberty
National Life Insurance Company (Case No. CV-92-021) approving a cancer policy
class action settlement involving legal and equitable relief valued at a total
of $55 million. In July 1994, certain intervenors in the Robertson litigation
filed a notice of appeal of the Order and Final Judgment with the Supreme
Court of Alabama. On December 22, 1995, the Alabama Supreme Court unanimously
affirmed the Robertson class action settlement and on February 16, 1996,
issued a notice overruling the petition for a rehearing in Robertson filed by
certain intervenors. A petition for writ of certiorari to the Supreme Court of
the United States was then filed by intervenors. The U.S. Supreme Court
granted certiorari in Robertson on October 1, 1996. Oral arguments on the
intervenors' petition, which alleged that class members had not received due
process in the class certification procedure and should be allowed to opt out
of the class action settlement to pursue separate litigation, were heard by
the U.S. Supreme Court on January 14, 1997. On March 3, 1997, the U.S. Supreme
Court dismissed, as improvidently granted, the writ of certiorari previously
granted in Robertson. The ruling effectively ends direct appeals from the
Robertson class action settlement and Liberty will proceed with administration
of benefits under the class settlement.
As previously reported, Liberty is subject to 76 individual cancer policy
lawsuits pending in Alabama and Mississippi, which were stayed or otherwise
held in abeyance pending final resolution of the Robertson case. Liberty will
file motions to dismiss these lawsuits based upon the U.S. Supreme Court
opinion in Robertson. If these cases are dismissed, no collateral attacks on
the cancer class action settlement will remain at this time.
As previously reported, Dismukes v. Torchmark Corporation (Case No. CV-94-
1006-P-M), which was filed on December 30, 1994 and is presently pending in
the U.S. District Court for the Northern District of
12
Alabama, is the only remaining purported class action litigation brought by
Torchmark shareholders alleging untimely and inadequate disclosure of material
contingent liabilities arising out of insurance policy litigation involving
Liberty. The U.S. District Court entered an order granting partial summary
judgment on behalf of the defendants on April 16, 1996. Claims for damages
based on Section 10b-5 of the Securities Exchange Act, on state securities
laws and for common law fraud remain pending in the case.
As previously reported, Torchmark, its insurance subsidiaries Globe and
United American, and certain Torchmark officers were named as defendants in
litigation filed April 22, 1994, as a purported class action in the District
Court of Oklahoma County, Oklahoma (Moore v. Torchmark Corporation, Case No.
CJ-94-2784-65). The suit claims damages on behalf of individual health
policyholders who are alleged to have been induced to terminate such policies
and to purchase Medicare Supplement and/or other insurance coverages. The
complaint seeks actual and punitive damages for each class member in excess of
$10,000. Subsequent to the filing of this case, one of the plaintiffs was
dismissed and the named plaintiff died. The complaint was amended to include
new plaintiffs purporting to represent the class and restyled Tabor v.
Torchmark Corporation. No class has been certified. A motion to dismiss filed
by the defendants was denied and limited discovery as permitted by the
Oklahoma Supreme Court is proceeding.
Prior filings have reported that in July 1994, a purported class action
alleging fraudulent and deceitful practices in premium billing and lapses of
coverage on a payroll deduction insurance plan was filed in the Superior Court
for Gordon County, Georgia against Liberty (Bryant v. Liberty National Life
Insurance Company, Civil Action No. 28979). The complaint alleged actual
damages in excess of $10 million and punitive damages of not less than $50
million as well as premium reimbursements. Liberty removed this case to
federal court, but the case was subsequently remanded to the state court. The
Bryant case was settled on an individual basis by the parties on December 23,
1996. No class was ever certified.
Litigation was filed on April 26, 1995, in the Circuit Court of Houston
County, Alabama against Liberty involving the sale of health insurance
coverage alleged to be in conflict with provisions of the Omnibus Budget
Reconciliation Act of 1990 (Stewart v. Liberty National Life Insurance
Company, Case No. CV-95-345L; Tolar v. Liberty National Life Insurance
Company, Case No. CV-95-346J; Ingram v. Liberty National Life Insurance
Company, Case No. CV-95-348L; Burkett v. Liberty National Life Insurance
Company, Case No. CV-95-347H). The Stewart case has been dismissed with
prejudice and the other cases remain pending.
A purported class action was filed on August 8, 1995, against Liberty in the
Circuit Court of Jefferson County, Alabama on behalf of Liberty cancer
policyholders eligible for Medicare who submitted claims during an
approximately two month period in 1993 (Adkins v. Liberty National Life
Insurance Company, Case No. CV-95-5634). Beginning in September 1993, in
reliance on federal law concerning the amount health care providers could
collect from Medicare eligible individuals, Liberty limited the payment of
benefits to such individuals to the amounts collectible by the providers under
federal law. In November, 1993 Liberty discontinued this practice and
recalculated and repaid all claims in full as it had prior to September 1993
together with interest. Nearly two years after this refund, the Adkins case
was filed. The claims made in Adkins are identical to the individual claims in
Allen v. Liberty National Life Insurance Company (Case No. CV-94-3634), an
individual case reversed and remanded by the Alabama Supreme Court on March 7,
1997 after an appeal regarding the remitted verdict of $2.7 million. A class
certification order, which does not address the merits of the litigation, was
entered by the Court in Adkins on July 26, 1996. Liberty filed a petition for
writ of mandamus or prohibition with the Alabama Supreme Court in August 1996
asserting abuse of discretion by the trial court in certifying the Adkins
class. The Alabama Supreme Court has stayed further proceedings as to the
class issues in Adkins pending its ruling on the propriety of class
certification.
On August 25, 1995, a purported class action was filed against Torchmark,
Globe, United American and certain officers of these companies in the United
States District Court for the Western District of Missouri on behalf of all
former agents of Globe (Smith v. Torchmark Corporation, Case No.: 95-3304-CV-
S-4). This action alleges that the defendants breached independent agent
contracts with the plaintiffs by treating them as captive agents and engaged
in a pattern of racketeering activity wrongfully denying income and renewal
commissions to the agents, restricting insurance sales, mandating the purchase
of worthless leads, terminating agents without cause and inducing the
execution of independent contracts based on misrepresentations of fact.
Monetary damages in an unspecified amount are sought. A plaintiff class was
certified by the District Court on February 26, 1996, although the
certification does not go to
13
the merit of the allegations in the complaint. On December 31, 1996, the
plaintiffs filed an amended complaint in Smith to allege violations of various
provisions of the Employment Retirement Income Security Act of 1974. Discovery
is presently proceeding in this case.
It has been previously reported that Liberty is a party to individual
lawsuits and a purported class action (Carlton v. Liberty National Life
Insurance Company, Case No. CV-96-22) in the Circuit Court of Chambers County,
Alabama, in which allegations are made that an interest sensitive life
insurance policy would become paid-up or self-sustaining after a specified
number of years. Currently, Liberty is a party to more than 100 individual
interest sensitive cases, 53 of which were filed by a single lawyer in
Chambers County, Alabama. Additionally, Torchmark has previously reported the
case of Lawson v. Liberty National Life Insurance Company, filed in the
Circuit Court of Jefferson County, Alabama (Civil Action No.: CV-96-01119),
where the plaintiffs were seeking class certification on behalf of such
policyholders including those who were allegedly induced to exchange life
insurance policies or the existing policy's cash value was allegedly depleted.
On May 14, 1996, the Circuit Court of Jefferson County, Alabama entered an
order conditionally certifying a plaintiffs claim in Lawson in order to
preserve the Court's jurisdiction over the class action question, subject to a
full evidentiary hearing on class certification at a future date yet to be
determined.
In 1978, the United States District Court for the Northern District of
Alabama entered a final judgment in Battle v. Liberty National Life Insurance
Company, et al. (CV-70-H-752-S), class action litigation involving Liberty, a
class composed of all owners of funeral homes in Alabama and a class composed
of all insureds (Alabama residents only) under burial or vault policies
issued, assumed or reinsured by Liberty. The final judgment fixed the rights
and obligations of Liberty and the funeral directors authorized to handle
Liberty burial and vault policies as well as reforming the benefits available
to the policyholders under the policies. Although class actions are inherently
subject to subsequent collateral attack by absent class members, the Battle
decree remains in effect to date. A motion filed in February 1990 to challenge
the final judgment under Federal Rule of Civil Procedure 60(b) was rejected by
both the District Court in 1991 and the Eleventh Circuit Court of Appeals in
1992 and a Writ of Certiorari was denied by the U.S. Supreme Court in 1993.
In November 1993, an attorney (purporting to represent the funeral director
class) filed a petition in the District Court seeking "alternative relief"
under the final judgment. This petition was voluntarily withdrawn on November
8, 1995, by petitioners. On February 23, 1996, Liberty filed a petition with
the District Court requesting that it order certain contract funeral directors
to comply with their obligations under the Final Judgment in Battle and their
funeral service contracts. A petition was filed on April 8, 1996 on behalf of
a group of funeral directors seeking to modify the 1978 decree in Battle in
light of changed economic circumstances. Liberty is actively opposing this
petition.
Purported class action litigation was filed on January 2, 1996 against
Torchmark, Torch Energy Advisors Incorporated ("Torch Energy"), and certain
Torch Energy subsidiaries and affiliated limited partnerships in the Circuit
Court of Pickens County, Alabama (Pearson v. Torchmark Corporation, Case No.
CV-95-140). Plaintiff alleges improper payment of royalties and overriding
royalties on coalbed methane gas produced and sold from wells in Robinson's
Bend Coal Degasification Field, seeks certification of a class and claims
unspecified compensatory and punitive damages on behalf of such class. On
April 11, 1996, Torchmark's motion to change venue was granted and the case
has been transferred to the Circuit Court of Tuscaloosa County, Alabama. The
Company's motion to dismiss remains pending while discovery is proceeding.
It has been previously reported that the Company, its subsidiaries United
American and Globe and certain individual corporate officers are parties to
purported class action litigation filed April 5, 1996 in the U.S. District
Court for the Northern District of Georgia (Crichlow v. Torchmark Corporation,
Case No.: 4:96-CV 0086-HLM). The complaint alleged RICCO violations, fraud,
breach of contract, conspiracy, violations of the Oklahoma Consumer Protection
Act and breach of the duty of good faith and fair dealing on behalf of all
persons who purchased, at any time between 1987 and the present, certain
hospitalization and surgical insurance policies issued by Globe and United
American. The plaintiffs asserted that they purchased these policies and
subsequently incurred improper claim denials, wrongful recision and "rate-ups"
and post-claim underwriting. On December 4, 1996, the U.S. District Court
dismissed the RICCO counts, the Oklahoma Consumer Protection Act and contract
counts as to certain defendants and ordered plaintiffs to file an amended
complaint. On December 23, 1996, the plaintiffs filed
14
the amended complaint as ordered, alleging breach of contract, fraud,
conspiracy and breach of the duty of good faith and fair dealing on behalf of
a purported class of persons who purchased Globe, but not United American,
policies from 1987 to the present. Defendants have filed motions to dismiss
and for partial summary judgment.
On April 19, 1996, a $5 million punitive judgment was entered against
LIberty by a jury in Mobile, Alabama in Strickland v. Liberty National Life
Insurance Company (CV-95-1399). In the Strickland case, the plaintiff, who was
in his sixties, cancelled several small life insurance policies and purchased
a substantial amount of new coverage. The plaintiff contended that certain
supplemental benefits which were present in the smaller policies were not
included in the new coverage (i.e. accidental death and premium waiver). The
trial judge held that Strickland was not entitled to recover compensatory
damages. Nevertheless the jury awarded $100 in nominal damages in addition to
the punitive award. Liberty has filed various motions for the post-trial
relief with the Circuit Court, which held a post-trial hearing on the
propriety of the punitive damage award on February 12, 1997. On March 11,
1997, the Circuit Court judge reduced the Strickland judgment to $37,500.
A jury in Chambers County, Alabama Circuit Court returned a verdict of
$333,000 compensatory damages and $17.2 million in punitive damages against
Liberty on June 11, 1996, in McQuiston v. Liberty National Life Insurance
Company (CV-94-234). The case arose out of a claim which had been denied due
to an alleged misrepresentation in the application. There was a recorded
telephone interview with the applicant in which a statement was given which
Liberty alleges was a misrepresentation of the health of the proposed insured.
After the litigation was filed, it was learned that one signature on the
application was not that of the insured. Upon notice of this fact, Liberty
paid the $20,000 claim proceeds into court. Liberty has filed motions for
post-trial relief with the Court, subject to completion of post trial
discovery. A post-trial hearing on the propriety of the punitive damage award
is scheduled for March 28, 1997.
Based upon information presently available, and in light of legal and other
factual defenses available to Torchmark and its subsidiaries, contingent
liabilities arising from threatened and pending litigation are not presently
considered by management to be material. It should be noted, however, that the
frequency of large punitive damage awards bearing little or no relation to
actual damages awarded by juries in jurisdictions in which Torchmark has
substantial business, particularly in Alabama, continues to increase
universally, creating the potential for unpredictable material adverse
judgments in any given punitive damage suit.
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 1996.
15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The principal market in which Torchmark's common stock is traded is the New
York Stock Exchange. There were 7,262 shareholders of record on December 31,
1996, 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:
1996
MARKET PRICE
------------
DIVIDENDS
QUARTER HIGH LOW PER SHARE
------- ------- ------- ---------
1 $49.875 $42.500 $ .29
2 45.250 41.000 .29
3 46.250 40.250 .29
4 52.125 45.500 .29
Year-end closing
price..................$50.500
1995
MARKET PRICE
------------
DIVIDENDS
QUARTER HIGH LOW PER SHARE
------- ------- ------- ---------
1 $42.875 $34.250 $ .28
2 42.000 37.375 .28
3 42.250 36.750 .28
4 45.250 40.875 .29
Year-end closing
price..................$45.250
16
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)
1996 1995 1994 1993 1992
YEAR ENDED DECEMBER 31, ---------- ---------- ---------- ---------- -----------
Premium Revenue:
Life................... $ 854,897 $ 772,257 $ 601,633 $ 555,859 $ 544,745
Health................. 732,618 754,983 773,375 804,605 802,536
Other ................. 22,404 19,043 13,866 132,446 106,681
Total................. 1,609,919 1,546,283 1,388,874 1,492,910 1,453,962
Net investment income... 404,608 381,865 347,637 368,494 370,617
Financial services
revenue................ 184,295 152,482 139,276 137,422 133,462
Realized investment
gains (losses)......... 5,829 (14,323) (2,551) 8,009 (948)
Total revenue........... 2,205,810 2,067,482 1,875,337 2,066,846 1,959,668
Net income from
continuing operations.. 318,509 271,945 263,814 242,298 247,647
Net income.............. 311,372 143,235 268,946 297,979 265,477
Net income available to
common
shareholders........... 311,372 143,235 268,142 294,690 262,024
Annualized premium
issued:
Life................... 214,741 217,988 149,833 128,433 131,726
Health................. 100,981 103,491 122,663 177,701 227,134
Total................. 315,722 321,479 272,496 306,134 358,860
Mutual fund collections. 1,497,259 1,182,594 1,180,477 1,237,747 1,141,928
Per common share:
Net income............. 4.37 2.00 3.72 4.01 3.58
Net operating
income(1)............. 4.43 3.93 3.74 3.50 3.34
Net income from
continuing operations. 4.47 3.80 3.65 3.25 3.33
Cash dividends paid.... 1.16 1.13 1.12 1.08 1.07
Return on average common
equity excluding
effect of SFAS 115 and
discontinued
operations............. 20.5% 18.5% 19.7% 21.3% 24.6%
Average shares
outstanding............ 71,230 71,594 72,096 73,502 73,237
- -------------------------------------------------------------------------------
1996 1995 1994 1993 1992
AS OF DECEMBER 31, ---------- ---------- ---------- ---------- -----------
Cash and invested assets
(2).................... $6,049,629 $5,874,037 $5,036,211 $5,200,588 $ 4,675,577
Total assets............ 9,800,800 9,364,104 8,165,244 7,441,185 6,544,617
Short-term debt......... 40,910 189,372 250,116 107,108 195,102
Long-term debt.......... 791,880 791,988 791,518 791,090 496,622
Shareholders' equity.... 1,629,343 1,588,952 1,242,603 1,417,255 1,115,660
Per common share (3)... 23.38 22.17 17.37 18.80 14.54
Per common share
excluding effect of
SFAS 115.............. 22.84 20.33 19.31 17.29 14.54
Annualized premium in
force:
Life.................. 946,525 869,366 796,955(4) 612,656 588,084
Health................ 748,153 759,059 812,371(4) 828,332 837,628
Total................. 1,694,678 1,628,425 1,609,326 1,440,988 1,425,712
Assets under management
at W&R................. 18,858,000 18,288,000 14,502,000 14,470,000 12,144,000
- -------------------------------------------------------------------------------
(1) Excludes realized investment gains (losses) and the related adjustment to
deferred acquisition costs.
(2) Includes accrued investment income.
(3) Computed after deduction of preferred shareholders' equity.
(4) Annualized life premium in force includes $144 million, and annualized
health premium in force includes $37 million, representing the business
acquired in the acquisition of American Income Life Insurance Company in
1994.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with the Selected Financial Data
and Torchmark's Consolidated Financial Statements and Notes thereto appearing
elsewhere in this report.
RESULTS OF OPERATIONS
Torchmark's net operating income from continuing operations excludes
realized investment gains and losses and the related adjustment to deferred
acquisition costs. Net operating income was $4.43 per share in 1996, rising
13% over $3.93 per share in 1995. This increase in net operating income for
1995 was 5% from 1994 per share net operating income of $3.74. Realized
investment losses for 1995 included a $15 million after-tax, or $.21 per
share, writedown of an investment in Southwestern Life Corporation, which
filed for Chapter 11 bankruptcy protection in the third quarter of 1995.
Torchmark's net income, including discontinued operations, was $311 million
in 1996 compared with $143 million in 1995 and $269 million in 1994. On a per-
share basis, net income was $4.37, $2.00, and $3.72 in 1996, 1995, and 1994,
respectively. Net income in 1995 was negatively affected by Torchmark's
decision to dispose of its energy segment and to exit the energy industry.
Accordingly, in 1995, Torchmark modified the presentation in its financial
statements to set forth separately the net assets and results attributable to
the discontinued energy segment as discontinued operations. Also in the fourth
quarter of 1995, as a part of the decision to dispose of the energy segment,
Torchmark wrote down its investment in a coalbed methane gas development in
the Black Warrior Basin of Alabama to the investment's estimated realizable
value. Torchmark had experienced disappointments in methane gas production
through increased difficulties in obtaining significant gas production from
lower coal seams, resulting in downward revisions to engineering estimates of
reserves. In view of these production difficulties, Torchmark's desire to sell
its energy segment, and the adoption of FASB Statement 121, an accounting rule
regarding impairments, it was determined that a writedown of the investment
was appropriate. The writedown amounted to an after-tax charge of $130
million, or $1.82 per share in 1995. The disposition of the energy segment was
completed on September 30, 1996 and resulted in an after-tax loss of $7
million or $.10 per share. For more details on this transaction, see "Disposal
of Energy Segment" on page 30 of this report.
In a comparison of 1996 and 1995 results with those of 1994, attention
should be given to the acquisition of American Income on November 3, 1994 for
total consideration of $552 million. American Income's results were
consolidated with Torchmark's after the acquisition date, being included for a
full year in 1995 for the first time. American Income added approximately $17
million and $22 million to Torchmark's 1995 and 1996 net income, respectively,
after taking into account goodwill amortization and financing costs.
Torchmark's 1996 revenues gained 7% over the prior year to $2.21 billion.
Revenues increased 10% in 1995 to $2.07 billion from $1.88 billion in 1994, an
increase of $192 million. The American Income acquisition accounted for the
1995 increase after adjusting for lost investment income from the purchase.
American Income added $225 million to total revenues in 1995, compared with
$31 million in 1994. Premium income increased 4% in 1996 over the prior year
to $1.61 billion. Premium in 1995 rose 11% to $1.55 billion from $1.39
billion. The $157 million gain in premium in 1995 was caused by the inclusion
of American Income premium for a full year, which increased $168 million over
1994. The components of Torchmark's revenues and operations are described in
more detail in the discussion of segments and investment operations found on
pages 19 through 27 of this report.
Operating expenses, as a percentage of total revenues, were stable at 7% in
both 1996 and 1995. This expense ratio increased from 6.3% in 1994. The higher
expense ratios in 1995 and 1996 are related to increased legal and litigation
costs at Liberty. In 1995, the increases in goodwill amortization, interest
expense, and the MIPS dividend were the result of financing the American
Income acquisition in late 1994. Please refer to the following sections of
this report for a more complete discussion of this purchase
18
and the related financing costs: "Acquisition of American Income" on page 30,
and "Capital Resources" on page 28. Interest expense declined 9% in 1996 due
to debt paydowns. For a more complete discussion of Torchmark's debt, please
see the "Capital Resources" discussion.
The following is a discussion of Torchmark's operations by segment.
INSURANCE
Life insurance. Life insurance premium increased 11% in 1996 to $855
million. Life premium grew 28% to $772 million for the year 1995. The 1995
versus 1994 comparison is distorted somewhat because of the American Income
acquisition in late 1994. American Income life premium was $154 million in
1995, compared with $21 million in 1994, accounting for $133 million of the
$171 million increase in life premium for 1995. Sales of life insurance in
terms of annualized premium were $215 million in 1996 and $218 million in
1995. This represents a 1% decline in 1996 when compared with 1995, a record
year for Torchmark, but the 1995 increase was 45% over 1994 sales of $150
million. American Income accounted for $51 million of 1995 sales, or 64% of
the 1995 increase.
Life insurance premium is Torchmark's largest component of revenue,
representing 39% of total revenue and 53% of total premium. In 1995,
Torchmark's life annualized premium in force at year end exceeded its health
premium for the first time since 1982. In 1996, the gap between life and
health premium increased, as annualized life premium in force grew to 56% of
total as opposed to health premium's 44%. Torchmark has emphasized increases
in sales of life insurance product lines relative to health and other
insurance products because profit margins for life insurance are superior.
Additionally, assets backing the higher reserves required for life products
provide the potential for Torchmark to increase investment income. Profit
margins for life insurance operations, as measured by insurance operating
income as a percentage of premium, have approximated 29% in each of the three
years presented. By contrast, health margins have not exceeded 16% during the
same three years.
Annualized life premium in force climbed 9% in 1996 to $947 million at
December 31. Annualized life premium in force also grew 9% during 1995, rising
to $869 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 account charges.
Torchmark markets its life insurance products through a variety of different
distribution channels. The following table presents life insurance premium
income during each of the three years ended December 31, 1996 by distribution
method.
LIFE INSURANCE
Premium by Distribution Method
(Dollar amounts in thousands)
1996 1995 1994
-------------- -------------- --------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- -----
United American Independent
Agency........................ $ 33,404 3.9% $ 28,305 3.7% $ 25,971 4.3%
United American Exclusive
Agency........................ 15,767 1.8 10,713 1.4 7,988 1.3
Direct Response................ 171,983 20.1 149,141 19.3 127,661 21.2
Liberty National Exclusive
Agency........................ 279,637 32.7 275,089 35.6 268,460 44.6
American Income Exclusive
Agency........................ 173,700 20.3 153,914 19.9 21,055 3.5
Military....................... 71,223 8.3 45,512 5.9 39,802 6.6
United Investors Exclusive
Agency........................ 73,836 8.6 69,498 9.0 64,940 10.8
Other.......................... 35,347 4.3 40,085 5.2 45,756 7.7
-------- ----- -------- ----- -------- -----
$854,897 100.0% $772,257 100.0% $601,633 100.0%
======== ===== ======== ===== ======== =====
The direct response operation has experienced premium growth, with premium
revenue rising 15% in 1996 to $172 million, after having risen 17% in 1995.
Annualized life premium in force was $202 million at December 31, 1996. Direct
response marketing is conducted through direct mail, co-op mailings,
19
television and consumer magazine advertising, as well as direct mail
solicitations endorsed by groups, unions and associations. The direct response
operation accounted for 20% of Torchmark's life insurance premium in 1996.
The Liberty National Agency distribution system accounted for the most life
insurance premium income in each of the three years presented, with 1996
premium representing 33% of Torchmark's total life premium. Annualized life
premium in force grew from $297 million at year-end 1995 to $299 million at
the end of 1996. Life premium sales, in terms of annualized premium issued,
declined 6% during 1996 to $45 million. During the past two years, this agency
has completed the transition from a debit-style renewal premium collection
system to a direct bill or bank-draft collection system. At the beginning of
1996, debit or home collection sales were discontinued. Under the new system,
agents spend more time developing new customers. As expected, a number of
agents did not make the transition. During the two year period, the agency
force declined 31% to 1,750 agents. However, life insurance production only
declined 12%, which is evidence of the strength of the existing sales force.
In the fourth quarter of 1996, emphasis was placed on hiring and training new
agents under the new system. The agency expects a growth in the number of
productive agents, and in turn, growth in sales and in force.
Another Torchmark distribution system which experienced growth in life
insurance operations was the American Income Agency. This agency targets
members of labor unions, credit unions, and other associations for its life
insurance sales. Life premium rose 13% in 1996 to $174 million. Annualized
premium in force grew 11% to $188 million at December 31, 1996. Annualized
premium in force was $170 million at year-end 1995, rising 15% over year-end
1994. Sales of annualized premium increased 6% to $54 million in 1996.
American Income was acquired by Torchmark in late 1994.
Torchmark distributes life insurance through a nationwide independent agency
whose sales force is comprised of former commissioned and non-commissioned
military officers who sell exclusively to commissioned and non-commissioned
military officers and their families. The quality of the business, which is
comprised of whole life products with term insurance riders, produced by this
agency is outstanding. Life premium income from this distribution system was
$71 million in 1996, up $26 million from 1995. This increase resulted
primarily from the acquisition from another carrier of a block of business
with $21 million of annualized premium in force produced by the military
agency. In the past, this agency has produced business through Liberty
National, but beginning late in the first quarter of 1997, additional sales
will be produced through Globe Life.
Torchmark's other three distribution channels each experienced premium
growth in 1996. The United Investors Exclusive Agency, made up of W&R sales
representatives, recorded premium income of $74 million, increasing 6% over
1995. Premium for the United American Exclusive Agency rose 47% to $16
million. Annualized premium sold was $11 million in 1996, gaining 17%. The
United American Independent Agency had life premium income growth of 19% to
$33 million, and sales growth of 11% to $18 million. The United Investors
Agency represents 9% of Torchmark's life premium, while the two United
American Agencies represent 6%.
20
LIFE INSURANCE
Summary of Results
(Dollar amounts in thousands)
1996 1995 1994
----------------- ----------------- -----------------
% OF % OF % OF
AMOUNT PREMIUM AMOUNT PREMIUM AMOUNT PREMIUM
-------- ------- -------- ------- -------- -------
Premium and policy
charges................. $854,897 100.0% $772,257 100.0% $601,633 100.0%
Policy obligations....... 558,436 65.3 507,444 65.7 412,799 68.6
Required reserve
interest................ (209,126) (24.4) (194,733) (25.2) (163,637) (27.2)
-------- ----- -------- ----- -------- -----
Net policy obligations.. 349,310 40.9 312,711 40.5 249,162 41.4
Amortization of
acquisition costs....... 146,164 17.1 126,695 16.4 90,573 15.1
Commissions and premium
taxes................... 54,182 6.3 50,994 6.6 39,845 6.6
Other expenses........... 61,865 7.2 60,767 7.9 46,814 7.8
-------- ----- -------- ----- -------- -----
Total expense........... 611,521 71.5 551,167 71.4 426,394 70.9
-------- ----- -------- ----- -------- -----
Insurance operating
income.................. $243,376 28.5% $221,090 28.6% $175,239 29.1%
======== ===== ======== ===== ======== =====
Torchmark's life insurance margins have remained stable, with insurance
operating income at approximately 29%, throughout the three-year period
presented. As a percentage of premium, operating expenses resumed their
decline in 1996, dropping to 7.2%. This expense ratio was 8.6% five years ago
and 11% ten years ago.
One major factor in maintaining stable operating income margins in the life
insurance business is improved persistency. Persistency is beneficial to
margins because it lowers the rate of amortization of acquisition costs, and
increases profits because the premium life is extended. Persistency
improvements have resulted, at least in part, from previously-mentioned
changes in the Liberty National Agency marketing system, including revisions
in agents' compensation formulas to encourage lower lapses and changing the
premium collection method from agent-collected to bank draft and direct bill
methods which are characterized by higher persistency. Another contributing
factor to improved persistency in life business is a higher proportion of
premium from the military distribution system, which has an extremely low
lapse rate.
Even though improvements in persistency have occurred in Torchmark's major
life insurance lines, acquisition cost ratios rose in each of the years
reported. In a comparison of 1996 and 1995 ratios with 1994, the American
income purchase must be taken into account. While American Income's life
business is very profitable and has a total insurance operating income margin
similar to other Torchmark products, it is characterized by lower policy
obligations and higher amortization of acquisition costs. The higher
acquisition cost ratio is a result of the higher amortization of the value of
insurance purchased relative to deferred acquisition costs. Torchmark's
discontinuance of active marketing of pre-need funeral insurance has caused
the amortization of acquisition cost on this business to increase relative to
premium, although the impact on total margins are more than offset by a
reduction in policy benefits ratios.
The above presentation of life insurance results excludes a $22.8 million
benefit in 1994 from the review of reserving assumptions on a block of burial
reserves. An evaluation of assumptions regarding mortality, interest, and
inflation pressures on burial costs indicated that sufficient experience
existed to support a change in the level of reserves held on this block.
Torchmark will continue to monitor its reserving assumptions for this block on
an annual basis to ensure that reserves are adequate to meet contractual
liabilities. Had this item been included, the 1994 ratio of policy obligations
to premium would have been reduced and overall margin would have been
increased 3.8%.
Health insurance. Health products sold by Torchmark include Medicare
Supplement insurance, cancer insurance, long-term care, and other under-age 65
limited benefit supplemental medical and hospitalization products. As a
percentage of annualized health premium in force at December 31, 1996,
Medicare Supplement accounted for 70%, cancer 16%, and other products 14%.
These products are marketed by exclusive and independent agents, by direct
response, and through associations. The table below presents health insurance
premium income during each of the three years ended December 31, 1996 by
distribution method.
21
HEALTH INSURANCE
Premium by Distribution Method
(Dollar amounts in thousands)
1996 1995 1994
-------------- -------------- --------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- ----- -------- -----
United American Independent
Agency........................ $440,862 60.2% $466,751 61.8% $509,972 65.9%
United American Exclusive
Agency........................ 124,037 16.9 123,264 16.3 128,538 16.6
Direct Response................ 3,519 0.5 956 0.1 1,106 0.2
Liberty National Exclusive
Agency........................ 120,028 16.4 122,722 16.3 127,672 16.5
American Income Exclusive
Agency........................ 44,172 6.0 41,290 5.5 6,087 0.8
-------- ----- -------- ----- -------- -----
$732,618 100.0% $754,983 100.0% $773,375 100.0%
======== ===== ======== ===== ======== =====
The following chart contains health insurance premium data from 1994 through
1996:
($ MILLIONS)
% % %
HEALTH PREMIUM 1996 CHANGE 1995 CHANGE 1994 CHANGE
- -------------- ---- ------ ---- ------ ---- ------
Revenue..................................... $733 (3)% $755 (2)% $773 (4)%
Annualized Premium Sales.................... $101 (2)% $103 (16)% $123 (31)%
A major factor leading to the smaller decline in health sales over the three
year period was the smaller decline in Medicare Supplement sales over the same
period. In 1996, sales of Medicare Supplement insurance, the major component
of Torchmark's health insurance, increased over the prior year sales for the
first time since 1992.
The following chart demonstrates the smaller declines over the past three
years for Medicare Supplement annualized premium sales and in force:
($ MILLIONS)
% % %
MEDICARE SUPPLEMENT 1996 CHANGE 1995 CHANGE 1994 CHANGE
- ------------------- ---- ------ ---- ------ ---- ------
Sales....................................... $ 66 2% $ 65 (26)% $ 88 (36)%
In Force.................................... $524 (1)% $530 (7)% $572 (5)%
The leveling of Medicare Supplement sales as compared to the prior year is
due in part to $4 million annualized premium sold through Direct response, a
distribution system not previously marketing this product. In addition to
higher sales than the previous year, 1996 Medicare Supplement in force
benefited from premium rate increases implemented during the year, the first
increase in three years.
In recent years, declines in Medicare Supplement premium issued and premium
in force were the result of 1990 regulatory requirements that reduced
allowable agents commissions on new sales, as well as uncertainties regarding
health care reform by the Clinton Administration and Congress. Further,
regulatory standardization of policy benefits to 10 standardized plans
increased competition because consumers now see these products as a
"commodity", differentiated only by price. Increased competition by Health
Maintenance Organizations that substitute for traditional Medicare also have
dampened sales.
Torchmark is using several strategies to maintain sales of new policies and
the persistency of existing in force Medicare Supplement policies. Torchmark's
premium rate increases year to year have been less than certain competitors,
making Torchmark's rates more price competitive. In addition, new markets such
as employer and association groups, and distribution methods such as Direct
response are being tested.
Sales of cancer products declined 6% to $10.7 million in 1996 after rising
40% in 1995 to $11.3 million. In spite of the lower sales, annualized premium
in force for cancer increased to $119 million at year-end 1996 from $115
million at December 31, 1995, due primarily to the implementation of rate
increases for the first time in two years. Annualized premium in force for
other health products experienced an 8% drop in 1996, from $114 million to
$105 million at December 31, 1996. Sales also
22
declined 11% in 1996 to $25 million. Torchmark introduced a new series of
long-term care products in late 1996, and intends to aggressively market this
product line.
HEALTH INSURANCE
Summary of Results
(Dollar amounts in thousands)
1996 1995 1994
----------------- ----------------- -----------------
% OF % OF % OF
AMOUNT PREMIUM AMOUNT PREMIUM AMOUNT PREMIUM
-------- ------- -------- ------- -------- -------
Premium.................. $732,618 100.0% $754,983 100.0% $773,375 100.0%
Other income............. 2,994 0.4 3,001 0.4 3,349 0.4
-------- ----- -------- ----- -------- -----
Total revenues.......... 735,612 100.4 757,984 100.4 776,724 100.4
Policy obligations....... 448,346 61.2 454,107 60.2 459,163 59.4
Required reserve
interest................ (26,137) (3.6) (26,139) (3.5) (25,710) (3.4)
-------- ----- -------- ----- -------- -----
Net policy obligations.. 422,209 57.6 427,968 56.7 433,453 56.0
Amortization of
acquisition costs....... 63,150 8.6 69,698 9.2 76,170 9.8
Commissions and premium
taxes................... 87,688 12.0 94,624 12.5 102,603 13.3
Other expense............ 45,812 6.3 47,510 6.3 43,007 5.6
-------- ----- -------- ----- -------- -----
Total expense........... 618,859 84.5 639,800 84.7 655,233 84.7
-------- ----- -------- ----- -------- -----
Insurance operating
income.................. $116,753 15.9% $118,184 15.7% $121,491 15.7%
======== ===== ======== ===== ======== =====
As a percentage of premium, insurance operating income for Torchmark's
health insurance was stable, approximating 16% in each of the three years
considered. While policy obligations as a percentage of premium have risen
each year, these increases have been more than offset by the declines in
amortization of acquisition costs and commissions. The decline in the
amortization of acquisition costs ratio has been caused by improvements in
persistency in Torchmark's health business. Excluded from the above
presentation of health results in 1994 is a $30 million charge for cancer
policy benefits resulting from a reclassification of non-operating expense to
health benefits, since actual payments will be made in the form of health
benefits.
Annuities. Torchmark's annuity products serve a wide range of markets, such
as providing retirement income, funding prearranged funerals, and offering
long-term tax-deferred growth opportunities. Annuities are sold on both a
fixed and variable basis. Fixed annuity deposits are held and invested by
Torchmark and are obligations of the company. Variable annuity deposits are
invested at the policyholder's direction into his choice among ten W&R managed
mutual funds which vary in degree of investment risk and return. A fixed
annuity investment account is also available as a variable annuity investment
option. These investments pertaining to variable annuity deposits are reported
as "Separate Account Assets" and the corresponding deposit balances for
variable annuities are reported as "Separate Account Liabilities."
Annuity premium is accounted for as a deposit and is not reflected in
income. Revenues on both fixed and variable annuities are derived from charges
to the annuity account balances for insurance risk, administration, and
surrender, depending on the structure of the contract. Variable accounts are
also charged an investment fee and a sales charge. Torchmark benefits to the
extent these policy charges exceed actual costs and to the extent actual
investment income exceeds the investment income which is credited to
policyholders on fixed annuities.
23
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)
1996 1995 1994 1996 1995 1994
-------- -------- -------- -------- -------- --------
Fixed..................... $ 974.6 $ 927.9 $ 801.2 $ 87,133 $133,461 $ 43,339
Variable.................. 1,375.5 1,052.2 692.8 247,461 189,188 196,105
-------- -------- -------- -------- -------- --------
Total.................... $2,350.1 $1,980.1 $1,494.0 $334,594 $322,649 $239,444
======== ======== ======== ======== ======== ========
Annuity premium collections increased 4% in 1996 to $335 million over the
prior year. Annuity collections rose 35% to $323 million in 1995. Fixed
annuity premium collections declined 35% in 1996 to $87 million from $133
million in 1995, after having risen over three times 1994 collections of $43
million. The 1995 increase was caused by the entry of a United American
general agency in the fourth quarter of 1994 that markets to bank customers.
These sales generated $76 million in 1995 collections. In 1996, however, these
sales declined to $55 million. Additionally, Torchmark's preneed annuity
collections declined $19 million in 1996, contributing to the decline in 1996
fixed annuity collections.
More than offsetting the decline in 1996 of fixed collections was an
increase in 1996 of variable annuity collections of 31%. These collections
were $247 million in 1996 as compared with $189 million in 1995. Strong
financial markets in 1996 have contributed greatly to the growth in variable
collections. Torchmark's variable annuities are issued by UILIC and sold by
W&R sales representatives.
The variable annuity account balance also gained 31% over the 1995 period,
standing at $1.4 billion at December 31, 1996. The deposit account balance is
positively affected by additional deposits resulting from heightened investor
interest and by the accounts being valued based on the higher market values of
the underlying investments.
ANNUITIES
Summary of Results
(Dollar amounts in thousands)
1996 1995 1994
---------------- ---------------- ----------------
% OF % OF % OF
MEAN MEAN MEAN
AMOUNT RESERVE AMOUNT RESERVE AMOUNT RESERVE
------- ------- ------- ------- ------- -------
Policy charges.............. $22,404 1.0% $19,049 1.1% $13,888 1.0%
Allocated investment
income..................... 12,957 0.6 10,206 0.6 8,576 0.6
------- ---- ------- ---- ------- ----
Total revenue.............. 35,361 1.6 29,255 1.7 22,464 1.6
Policy obligations.......... 51,320 2.3 48,012 2.8 42,275 3.0
Required reserve interest... (50,188) (2.3) (48,541) (2.8) (42,765) (3.0)
------- ---- ------- ---- ------- ----
Net policy obligations..... 1,132 0.0 (529) 0.0 (490) 0.0
Amortization of acquisition
costs...................... 10,606 0.5 9,125 0.5 5,772 0.4
Commissions and premium
taxes...................... 610 0.0 699 0.0 605 0.0
Other expense............... 2,352 0.1 2,573 0.2 2,345 0.2
------- ---- ------- ---- ------- ----
Total expense.............. 14,700 0.6 11,868 0.7 8,232 0.6
------- ---- ------- ---- ------- ----
Insurance operating income.. $20,661 1.0% $17,387 1.0% $14,232 1.0%
======= ==== ======= ==== ======= ====
Insurance operating margins for annuities as measured by the mean reserve
have remained fairly stable throughout the three years examined. Annuity
policy charges have increased in each period. Policy charges increased 18% to
$22 million in 1996. These charges were $19 million in 1995, gaining 37% over
1994 charges of $14 million. Growth in these policy charges resulted from the
increase in size of the annuity account balance over each of the prior years,
the increase in the number of annuity contracts in force, and the cumulative
effect of growth in sales over the past few years on which the sales charge is
based. The allocated investment income, or the investment income earned in
excess of policy
24
requirements, also grew in each of the periods 1994 through 1996. These
increases resulted from the growth in the fixed annuity deposit balances.
ASSET MANAGEMENT
Financial Services. Torchmark's financial services operations consist of the
marketing of 23 mutual funds, including the United Group and the W & R Group
of funds through exclusive financial planners. These representatives also
market a variety of insurance products of Torchmark subsidiaries. Financial
services operations also involve the management of mutual fund portfolios, the
management of institutional portfolios, and the servicing of customer
accounts. Revenues are derived from commissions from the sale of investment
and insurance products, fees for management of investment asset portfolios,
and fees for servicing the accounts.
Financial services revenues rose 21% to $221 million in 1996 compared with
1995 revenues of $183 million. These revenues grew 9% in 1995 from 1994
revenues of $167 million. Financial services revenues presented in Torchmark's
consolidated financial statements will not correspond to total revenues for
the financial services segment presented below in the Summary of Results table
because certain revenues are eliminated in consolidation.
Asset management fees of $103 million in 1996 were the largest component of
financial services revenues, representing 47% of 1996 segment revenues. Asset
management fees grew 20% in 1996, after having gained 22% to $86 million in
1995. Increases in these fees have occurred due to the daily growth in mutual
fund assets and institutional assets under management, on which asset
management fees are based. Average assets under management rose 17% in 1996
and 14% in 1995. Growth in average assets under management in 1995 and 1996
resulted from two factors. First, strength in the financial markets caused
increases in the values of fund securities. Secondly, new net investment
product sales and reinvested dividends in each period contributed to asset
growth. Total assets under management were $18.9 billion at December 31, 1996,
an increase over the prior year end of 3%. Total assets under management were
$18.3 billion at December 31, 1995 and $14.5 billion at December 31, 1994,
rising 26% in 1995. Mutual fund assets under management rose 14% in 1996 to
$17.2 billion at year-end 1996. Asset management fees grew at a higher rate
than assets under management in 1996 primarily because of a change in the type
of assets under management. The total increase in assets under management for
the period of $.6 billion was the result of a $2.1 billion increase in mutual
fund assets partially offset by a $1.5 billion decrease in institutional
assets. The mutual fund assets that were added have a higher management fee
rate than the institutional assets that were lost.
Commission revenues are derived from the sales of both investment and
insurance products, with investment product commissions representing 84% of
total commission revenues in 1996. The commissions from insurance products and
variable annuities are primarily received from Torchmark insurance
subsidiaries, and are eliminated in consolidation. Investment product
commissions rose 26% to $72 million in 1996, after having declined 4% to $57
million in 1995. Investment product sales climbed 27% in 1996 to $1.5 billion.
Investment product sales in 1995 were level with the 1994 sales of $1.2
billion. In 1996, sales of the United Funds, a front-load product, increased
22% or $187 million while sales of the W&R Funds, a deferred-load product,
grew 44% or $70 million. Insurance product commissions have grown steadily,
with 1996 commissions of $13.9 million, as compared with $13.5 million in 1995
and $12.8 million in 1994.
Services fees grew 21% in 1996, after rising 6% in 1995. Service fees are
charged based on the number of accounts serviced. The number of accounts
serviced was 1.31 million at December 31, 1996, an increase of 7%. Accounts
serviced were 1.22 million at year-end 1995 and 1.15 million at year-end 1994.
The 1996 fees grew at a rate greater than the number of accounts because of an
increase in fees.
25
FINANCIAL SERVICES
Summary of Results
(Dollar amounts in thousands)
1996 1995 1994
---------------- ---------------- ---------------
% OF % OF % OF
AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
-------- ------- -------- ------- ------- -------
Commission revenue........... $ 85,888 38.9% $ 70,458 38.5% $72,223 43.1%
Asset management fees........ 103,127 46.6 85,999 47.0 70,651 42.2
Service fees................. 28,419 12.9 23,528 12.9 22,297 13.3
-------- ----- -------- ----- ------- -----
Financial services
revenue*................... 217,434 98.4 179,985 98.4 165,171 98.6
Investment and other income.. 3,642 1.6 2,947 1.6 2,264 1.4
-------- ----- -------- ----- ------- -----
Total revenue............... 221,076 100.0 182,932 100.0 167,435 100.0
Commissions and selling
expenses.................... 78,797 35.6 63,882 34.9 62,285 37.2
Other expenses............... 28,959 13.1 24,708 13.5 21,252 12.7
-------- ----- -------- ----- ------- -----
Total expenses.............. 107,756 48.7 88,590 48.4 83,537 49.9
-------- ----- -------- ----- ------- -----
Pretax income................ $113,320 51.3% $ 94,342 51.6% $83,898 50.1%
======== ===== ======== ===== ======= =====
- --------
* Financial services revenue includes $33.1 million in 1996, $27.5 million in
1995 and $25.9 million in 1994 representing revenues from other Torchmark
segments which are eliminated in consolidation.
Pretax income for Torchmark's financial services operations has grown very
rapidly, rising 20% to $113 million in 1996. This growth follows a 12%
increase in 1995 to $94 million and a 15% increase in 1994 to $84 million. As
a percentage of total financial services revenues, pretax income rose above
51% in 1995 and remained comparable in 1996. The 1995 margin improvement
resulted from a greater percentage of financial services revenues coming from
asset management fees. Asset management fees have a significantly greater
profit margin than commissions and service fees. The proportion of asset
management fees to total revenues remained constant in 1996, contributing to
the flat margin ratios. While other expenses as a percentage of revenues
declined, asset management fees were up about 17% over 1995.
Commissions and selling expenses are the direct expenses associated with
producing commission revenue. They consist of the commissions, bonuses, and
other compensation paid to the sales force as well as other marketing and
promotional costs. Because of the 1996 increase in sales volume, which causes
an increase in sales incentive compensation, direct expenses as a percentage
of commission revenue rose slightly, from 91% in 1995 to 92%. W&R also
increased promotional efforts in 1995 and to an even greater extent in 1996.
The 1996 increase in commission revenues resulted, at least in part, from
these measures.
INVESTMENTS
Torchmark's net investment income increased 6% to $405 million during the
year, following an increase of 10% in 1995 and a decrease of 6% in 1994. When
adjusted for the American Income acquisition in late 1994, however, the 1995
increase was 3%. The 1996 increase in investment income is principally due to
the continued accumulation of invested assets, which rose to $5.9 billion by
year end. When adjusted for disposition of Torchmark's energy operations, mean
invested assets rose 6% in 1996, as compared with a similar 6% increase in
1995.
The overall level of interest rates rose sharply during the first half of
1996, then retracted approximately one-half of the advance by year end. In
this environment, Torchmark's investment program continued to emphasize
investment grade, call-protected corporate securities. New investment
acquisitions of fixed income securities totaled $1.08 billion, compared with
1995 acquisitions of $1.87 billion. Acquisitions in 1995, however, were
inflated by several sales programs implemented to reduce exposure to
prepayments on mortgage-backed securities. During 1996, acquisitions were made
at an average yield of 7.12% and an average life of 7.8 years compared with
7.28% and 13.4 years, respectively, for 1995. While there were no significant
sales of GNMA holdings as in the past several
26
years, mortgage-backed securities declined because of repayments and the
increase in other types of invested assets. Mortgage-backed securities were
25% of fixed income securities and 23% of invested assets at December 31,
1996. They were 27% of invested assets at year-end 1995 and 43% of invested
assets at year-end 1994.
Torchmark's fixed maturity portfolio is subject to market risk caused by
changes in interest rates in financial markets. Because this portfolio is
classified as available for sale, it is valued at market. While the portfolio
is sensitive to market fluctuations, these temporary changes in market value
have no bearing on the ultimate proceeds at maturity. Torchmark limits its
market risk by maintaining a high quality portfolio with a relatively short
average life.
The moderate increase in rates in 1996 caused the unrealized gain of the
fixed income portfolio to decline. At December 31, 1996, the market value of
fixed income investments exceeded book value by $63 million, compared with an
unrealized gain of $226 million at the end of 1995 and an unrealized loss of
$242 million at year-end 1994. Despite the fluctuation in market values, the
portfolio yield remained relatively stable at 7.55%, compared with 7.66% at
year-end 1995 and 7.73% at year-end 1994. With shorter maturity acquisitions,
the average life of the bond portfolio decreased from 8.8 years at year-end
1995 to 7.8 years currently. At year end, an estimated 38% of the fixed income
portfolio will maturity within five years, and 80% will mature within 10
years. This compares with estimates of 38% and 76%, respectively, at year-end
1995.
Presented below is a schedule of Torchmark's fixed-income portfolio by
maturity.
1996 1995
----- -----
Short terms and under 1 year...................................... 8.7% 8.6%
2-5 years......................................................... 29.0 28.9
6-10 years........................................................ 42.0 38.3
11-15 years....................................................... 10.0 10.8
16-20 years....................................................... 3.1 2.5
Over 20 years..................................................... 7.2 10.9
----- -----
100.0% 100.0%
===== =====
Torchmark's emphasis on fixed maturity bonds, which represented 90% of
invested assets at 1996 year end, caused percentage holdings of other type
investments to vary widely with latest industry averages prepared by the
American Council of Life Insurance.
TORCHMARK
---------------- INDUSTRY %
AMOUNT % (1)
---------- ----- ----------
Investment grade and short-term bonds.......... $5,162,841 86.9% 68.3%
Noninvestment grade bonds...................... 243,357 4.1 3.7
Preferred and common stocks.................... 16,035 0.3 5.4
Mortgage loans................................. 64,353 1.1 12.8
Real estate.................................... 150,490 2.5 2.5
Policy loans................................... 206,959 3.5 5.8
Other invested assets.......................... 95,485 1.6 1.5
---------- ----- -----
$5,939,520 100.0% 100.0%
========== ===== =====
- --------
(1) Latest data available from the American Council of Life Insurance.
The quality of fixed income holdings remains very high, with 95% rated
investment grade by Standard & Poor's and the NAIC.
27
FINANCIAL CONDITION
Liquidity. Liquidity pertains to Torchmark's ability to meet on demand the
cash commitments required by its business operations and financial
obligations. Torchmark's liquidity is obtained from three sources: its
positive cash flow from operations, its portfolio of short-term investments,
and its line of credit facility.
Torchmark's insurance and asset management operations generate positive cash
flows in excess of its immediate needs. Cash flows provided from operations,
including deposit-product operations, were $517 million in 1996, compared with
$478 million in 1995, an increase of 8%. Operating cash flows grew 42% in 1995
over 1994 cash flows of $337 million. The 1995 increase was primarily caused
by increased deposit-product sales in 1995 and a one-time $48 million tax
settlement paid in 1994 related to prior periods. In addition to operating
cash flows, Torchmark received $347 million of investment maturities and
repayments in 1996, further enhancing total positive cash flow. Such
repayments were $351 million in 1995 and $796 million in 1994. Cash flows in
excess of immediate requirements are used to build an investment base to fund
future requirements.
Torchmark's cash and short-term investments were $103 million at December
31, 1996, compared with $86 million at year-end 1995. These liquid assets
represented approximately 1% of total assets at December 31, 1996, the same as
at the end of the previous year. In addition to Torchmark's liquid assets,
Torchmark has a portfolio of marketable fixed and equity securities which are
available for sale should the need arise. These securities had a value of $5.3
billion at December 31, 1996.
Torchmark has in place a line of credit facility with a group of lenders
which allows unsecured borrowings up to a specified maximum amount. The
maximum amount was increased during 1996 to $600 million at December 31, 1996.
Interest is charged at variable rates for borrowings. This line of credit is
further designated as a backup credit line for a commercial paper program not
to exceed $600 million, whereby Torchmark may borrow from either the credit
line or issue commercial paper at any time but may not borrow in excess of a
total of $600 million on the combined facilities. At December 31, 1996,
$41 million in commercial paper was outstanding and there were no borrowings
on the line of credit. A facility fee is charged on the entire $600 million
balance. In accordance with the agreements, Torchmark is subject to certain
covenants regarding capitalization and earnings. At December 31, 1996,
Torchmark was in full compliance with these covenants.
Liquidity of the parent company is affected by the ability of the
subsidiaries to pay dividends. Dividends are paid by subsidiaries to the
parent in order to meet its dividend payments on common and preferred stock,
interest and principal repayment requirements on parent company debt, and
operating expenses of the parent company. Dividends from insurance
subsidiaries of Torchmark are limited to the greater of statutory net gain
from operations on an annual noncumulative basis or 10% of surplus, in the
absence of special approval, and distributions are not permitted in excess of
statutory net worth. Subsidiaries are also subject to certain minimum capital
requirements. Although these restrictions exist, dividend availability from
subsidiaries has been and is expected to be more than adequate for parent
company operations. During 1997, a maximum amount of $275 million will be
available to Torchmark from insurance subsidiaries without regulatory
approval.
Capital Resources. The carrying amount of Torchmark's long-term debt was
$792 million at both year-ends 1996 and 1995. Major debt issues outstanding at
December 31, 1996 were as follows:
PRINCIPAL
AMOUNT
INSTRUMENT DUE RATE ($ THOUSANDS)
---------- ---- ----- -------------
Sinking Fund Debentures............................... 2017 8 5/8% $200,000
Senior Notes.......................................... 1998 9 5/8 200,000
Senior Debentures..................................... 2009 8 1/4 99,450
Notes................................................. 2023 7 7/8 200,000
Notes................................................. 2013 7 3/8 100,000
--------
$799,450
========
28
Torchmark repaid $550 thousand of principal on the Senior Debentures in 1996
under the terms of a put provision.
In connection with the American Income purchase in November, 1994, Torchmark
issued eight million shares or $200 million face amount Cumulative Monthly
Income Preferred Securities, Series A ("MIPS") in October, 1994. The MIPS were
issued at an annual dividend rate of 9.18%. They are subject to a mandatory
redemption in full at September 30, 2024, although Torchmark may elect to
extend the MIPS for up to an additional 20 years if certain conditions are
met. They are redeemable at Torchmark's option at any time after September 30,
1999. While Torchmark is obligated to pay dividends at a fixed rate of 9.18%,
Torchmark subsequently entered into a ten-year interest-rate swap agreement
with an unaffiliated party to reduce financing costs. The swap agreement calls
for Torchmark to pay a variable rate on the $200 million face amount in
exchange for payment of the fixed dividend. Torchmark is at risk on this
instrument for higher financing costs to the extent interest rates rise during
the remaining term. This risk is limited, however, by a five-year interest-
rate cap which Torchmark acquired in conjunction with the swap agreement that
insures the variable rate cannot exceed 10.39%. At December 31, 1996, the
variable rate was 6.95%. During 1996, Torchmark's after-tax dividend cost for
the MIPS was $9.7 million, compared with $11.9 million that would have been
incurred without the swap and cap transactions. Torchmark's after-tax cost in
1995 was $10.3 million, saving $1.6 million.
Short-term debt was $41 million at year-end 1996, compared with $189 million
at the end of the previous year. Torchmark repaid $148 million principal
amount on this debt in 1996, with funds from internal cash flow. Torchmark
paid down a net of $61 million on the credit facility during 1995.
During 1996, the Torchmark Board of Directors and its financial advisor,
Morgan Stanley, reviewed a number of restructuring options to possibly enhance
shareholder value, including splitting the operations into separate publicly
traded entities and selling all or portions thereof. However, none of the
reasonably achievable restructuring options provided sufficient likelihood of
creating more long term shareholder value than the current structure.
Accordingly, the following actions were agreed to and accomplished to the
extent described in the following sections.
(1) Beginning in August 1996, Torchmark renewed its share repurchase
program, and acquired 2.3 million shares of its common stock at a
cost of $107 million by year end 1996. Torchmark also intends to use
excess cash flow to make additional open market purchases, as market
conditions warrant, provided that its debt-to-capital ratio does not
exceed 40% and that no opportunities for acquisition offering
superior returns are available.
(2) Monetization of Vesta stock (see discussion below under Other
items).
(3) Complete the sale of the energy related discontinued operations (see
discussion below under Other Items).
Shareholders' equity rose to $1.63 billion at December 31, 1996, an increase
of 3% from December 31, 1995 shareholders' equity of $1.59 billion. Book value
per share was $23.38 at 1996 year end, compared with $22.17 and $17.37 at
year-ends 1995 and 1994, respectively. After adjusting for the impact of
interest-rate fluctuations on shareholders' equity required by accounting
rules, book value per share was $22.84 at year-end 1996, an increase of 12%
over $20.33 at year-end 1995. Comparative book value per share was $19.31 at
year-end 1994. Return from continuing operations on common shareholders'
equity was 20.5% in 1996, compared with 18.5% in 1995, even though average
shareholders' equity increased. The return on equity ratios excludes the mark
up or down of shareholders' equity for changes in market interest rates
required by accounting rules. Total debt as a percentage of total
capitalization continues to decline, and was 32% at December 31, 1996. In the
computation of this ratio, the MIPS are counted as equity and the effect of
the above-mentioned accounting rule is excluded. This debt-to-capitalization
ratio was 37% at year-end 1995 and 40% at year-end 1994. Torchmark's ratio of
earnings before interest, taxes and discontinued operations to interest
requirements was 7.7 for 1996, compared with 6.3 in 1995 and 6.2 in 1994.
29
OTHER ITEMS
Acquisition of American Income. On November 3, 1994, Torchmark acquired
American Income for a total cash purchase price of approximately $552 million.
American Income sells life insurance to union, credit union, and other
association members through exclusive agents. The results of operations of
American Income were consolidated with those of Torchmark after the purchase
date. Funds for the purchase were provided through a $200 million preferred
security offering which is discussed in more detail in the capital resources
section above, a $175 million bridge loan from a group of banks, the sale of
investments available for sale, and internal cash flow.
Disposal of Energy Segment. On September 30, 1996, Torchmark completed the
sale of its energy business segment including its energy asset management
subsidiary, Torch Energy Advisors Incorporated ("TEAI"), and its Black Warrior
coalbed methane investment. These operations, which were reclassified as
discontinued operations in Torchmark's financial statements at December 31,
1995, were sold to a TEAI management group. After the sale, Torchmark had no
controlling ownership interest in any energy asset management organization.
In addition to previously transferred securities, warrants, and Section 29
energy-related tax credits, which approximated $112 million at closing,
Torchmark received subordinated debt and notes totalling $32.5 million along
with $15.5 million in cash. After closing costs and retained liabilities,
Torchmark recorded a pre-tax loss of $23 million and an after-tax loss of $7
million from the sale, or $.10 per share.
Monetization of Vesta Stock. Torchmark filed a registration statement with
the Securities and Exchange Commission during the third quarter of 1996. The
purpose of this statement was to monetize a substantial portion of Torchmark's
holdings of Vesta Insurance Group, Inc. ("Vesta") common stock, by issuing a
security mandatorily exchangeable for Vesta stock at the option of Torchmark.
Torchmark currently holds approximately five million shares of Vesta stock. On
November 7, 1996, Torchmark withdrew this registration statement because
market conditions were not favorable for the monetization of Vesta stock at
that time. Depending upon future market conditions, Torchmark may refile the
registration statement or otherwise provide for the monetization of a portion
of all of the Vesta stock, but currently has no plans to monetize this stock.
Litigation. Torchmark and its subsidiaries continue to be named as parties
to pending or threatened litigation, most of which involve punitive damage
claims based upon allegations of agent misconduct at Liberty in Alabama. Such
punitive damage claims are tried in Alabama state courts where any punitive
damage litigation has the potential for significant adverse results. It is
impossible to predict the extent of punitive damages that may be awarded if
liability is found in any given case, since the amount of punitive damages in
Alabama is left largely to the discretion of the jury in each case. It is thus
difficult to predict with certainty the liability of Torchmark or its
subsidiaries in any given case because of the unpredictable nature of this
type of litigation.
Also, the cancer policy class action litigation in Alabama continued in
1996. In February 1996, the Alabama Supreme Court issued a notice overruling a
petition for rehearing of its decision affirming the trial court's final
approval of the May 1994 settlement of this litigation. Certain intervenors
then filed a petition for writ of certiorari to the U.S. Supreme Court, which
granted certiorari in October 1996. Oral arguments were heard on the
intervenors' petition in January 1997. On March 3, 1997, the U.S. Supreme
Court dismissed, as improvidently granted, the writ of certiorari it had
previously granted, effectively ending direct appeals of the cancer policy
class action settlement.
NEW ACCOUNTING RULES
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (FASB Statement No. 125) is effective for
transactions occurring after December 31, 1996, applied prospectively. Earlier
or retrospective application is not permitted. This statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities, based on the concept of control.
The adoption of this standard will have no material impact on Torchmark's
financial condition or results.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
Independent Auditors' Report.............................................. 32
Consolidated Financial Statements:
Consolidated Balance Sheet at December 31, 1996 and 1995................. 33
Consolidated Statement of Operations for each of the years in the three-
year period
ended December 31, 1996................................................. 34
Consolidated Statement of Shareholders' Equity for each of the years in
the three-year
period ended December 31, 1996.......................................... 35
Consolidated Statement of Cash Flow for each of the years in the three-
year period
ended December 31, 1996................................................. 36
Notes to Consolidated Financial Statements............................... 37
31
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, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
As discussed in Note 1 to the consolidated financial statements, Torchmark
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in 1995.
KPMG PEAT MARWICK LLP
Birmingham, Alabama
January 31, 1997, except for
Note 16, which is as
of March 11, 1997
32
TORCHMARK CORPORATION
CONSOLIDATED BALANCE SHEET
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31,
----------------------
1996 1995
---------- ----------
Assets:
Investments:
Fixed maturities--available for sale, at fair value
(cost: 1996--$5,265,499; 1995--$4,984,223).......... $5,328,276 $5,210,224
Equity securities, at fair value (cost: 1996--$3,799;
1995--$4,758)....................................... 8,858 10,551
Mortgage loans on real estate, at cost (estimated
fair value: 1996--$61,970; 1995--$50,686)........... 64,353 52,274
Investment real estate, at cost (less allowance for
depreciation: 1996--$40,370; 1995--$32,463)......... 150,490 143,356
Policy loans......................................... 206,959 193,877
Other long-term investments.......................... 95,485 95,744
Short-term investments............................... 85,099 72,847
---------- ----------
Total investments................................... 5,939,520 5,778,873
Cash (includes restricted cash: 1996--$15,028; 1995--
$11,838)............................................. 18,272 13,158
Investment in unconsolidated subsidiaries............. 88,051 76,101
Accrued investment income............................. 91,837 82,006
Other receivables..................................... 112,291 122,108
Deferred acquisition costs............................ 1,253,727 1,121,325
Value of insurance purchased.......................... 244,368 277,297
Property and equipment................................ 50,323 47,185
Goodwill.............................................. 540,540 555,517
Other assets.......................................... 41,846 30,304
Discontinued operations assets........................ -0- 174,386
Separate account assets............................... 1,420,025 1,085,844
---------- ----------
Total assets........................................ $9,800,800 $9,364,104
========== ==========
Liabilities:
Future policy benefits................................ $4,797,738 $4,566,850
Unearned and advance premiums......................... 83,670 83,473
Policy claims and other benefits payable.............. 220,121 209,773
Other policyholders' funds............................ 80,812 77,039
---------- ----------
Total policy liabilities............................ 5,182,341 4,937,135
Accrued income taxes.................................. 340,287 362,005
Other liabilities..................................... 202,869 215,712
Short-term debt....................................... 40,910 189,372
Long-term debt (estimated fair value: 1996--$814,082;
1995--$860,258)...................................... 791,880 791,988
Separate account liabilities.......................... 1,420,025 1,085,844
---------- ----------
Total liabilities................................... 7,978,312 7,582,056
Commitments and contingencies
Monthly income preferred securities
(estimated fair value: 1996--$210,000; 1995--
$217,040)............................................. 193,145 193,096
Shareholders' equity:
Preferred stock, par value $1 per share--Authorized
5,000,000 shares; outstanding:
-0- in 1996 and in 1995.............................. -0- -0-
Common stock, par value $1 per share--Authorized
160,000,000 shares; outstanding: 73,784,228 issued in
1996 and in 1995, less 4,088,253 and 2,117,091 shares
held in treasury in 1996 and 1995, respectively...... 73,784 73,784
Additional paid-in capital............................ 141,701 139,754
Unrealized gains, net of applicable taxes............. 46,581 140,338
Retained earnings..................................... 1,549,391 1,325,534
Treasury stock........................................ (182,114) (90,458)
---------- ----------
Total shareholders' equity.......................... 1,629,343 1,588,952
---------- ----------
Total liabilities and shareholders' equity.......... $9,800,800 $9,364,104
========== ==========
See accompanying Notes to Consolidated Financial Statements.
33
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- ---------- ----------
Revenue:
Life premium............................... $ 854,897 $ 772,257 $ 601,633
Health premium............................. 732,618 754,983 773,375
Other premium.............................. 22,404 19,043 13,866
--------- ---------- ----------
Total premium............................ 1,609,919 1,546,283 1,388,874
Net investment income...................... 404,608 381,865 347,637
Financial services revenue................. 184,295 152,482 139,276
Realized investment gains (losses)......... 5,829 (14,323) (2,551)
Other income............................... 1,159 1,175 2,101
--------- ---------- ----------
Total revenue............................ 2,205,810 2,067,482 1,875,337
Benefits and expenses:
Life policyholder benefits................. 558,436 507,444 389,976
Health policyholder benefits............... 448,346 454,107 489,163
Other policyholder benefits................ 51,302 47,785 42,138
--------- ---------- ----------
Total policyholder benefits.............. 1,058,084 1,009,336 921,277
Amortization of deferred acquisition costs. 218,826 204,067 178,107
Commissions and premium taxes.............. 140,515 144,333 141,158
Financial services selling expense......... 50,515 40,080 39,962
Other operating expense.................... 154,150 145,520 118,353
Amortization of goodwill................... 14,977 14,977 6,584
Interest expense........................... 73,611 80,994 75,922
--------- ---------- ----------
Total benefits and expenses.............. 1,710,678 1,639,307 1,481,363
Income from continuing operations before
income taxes and equity in earnings of
unconsolidated subsidiaries................ 495,132 428,175 393,974
Income taxes................................ (180,622) (157,539) (135,994)
Equity in earnings of unconsolidated
subsidiaries............................... 13,654 11,626 7,971
Monthly income preferred securities
dividend................................... (9,655) (10,317) (2,137)
--------- ---------- ----------
Net income from continuing operations.... 318,509 271,945 263,814
Discontinued operations of energy segment:
Income (loss) from operations (less
applicable income taxes of: 1995--$86,050,
1994--$11,677)............................ -0- (128,710) 5,132
Loss on disposal
(less applicable income tax benefit of:
1996--$15,813)............................ (7,137) -0- -0-
--------- ---------- ----------
Net income............................... 311,372 143,235 268,946
Dividends to preferred shareholders......... -0- -0- (804)
--------- ---------- ----------
Net income available to common
shareholders............................ $ 311,372 $ 143,235 $ 268,142
========= ========== ==========
Net income per share:
Continuing operations...................... $ 4.47 $ 3.80 $ 3.65
Discontinued operations of energy segment:
Income (loss) from operations............. 0.00 (1.80) 0.07
Loss on disposal.......................... (0.10) 0.00 0.00
--------- ---------- ----------
Net income per share..................... $ 4.37 $ 2.00 $ 3.72
========= ========== ==========
See accompanying Notes to Consolidated Financial Statements.
34
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,
1994
- -----------------------
Balance at January 1,
1994................... $1,000 $73,784 $232,432 $120,138 $1,082,031 $ (92,130) $1,417,255
Net income.............. 268,946 268,946
Common dividends
declared ($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
options................ 349 (2,026) 6,433 4,756
Net change in unrealized
gains (losses)......... (260,894) (260,894)
------ ------- -------- -------- ---------- --------- ----------
Balance at December 31,
1994.................. -0- 73,784 139,045 (140,756) 1,267,545 (97,015) 1,242,603
Year Ended December 31,
1995
- -----------------------
Net income.............. 143,235 143,235
Common dividends
declared ($1.14 a
share)................. (81,643) (81,643)
Exercise of stock
options................ 709 (3,603) 6,557 3,663
Net change in unrealized
gains (losses)......... 281,094 281,094
------ ------- -------- -------- ---------- --------- ----------
Balance at December 31,
1995.................. -0- 73,784 139,754 140,338 1,325,534 (90,458) 1,588,952
Year Ended December 31,
1996
- -----------------------
Net income.............. 311,372 311,372
Common dividends
declared ($1.16 a
share)................. (82,320) (82,320)
Acquisition of treasury
stock--
common................. (106,996) (106,996)
Exercise of stock
options................ 1,947 (5,195) 15,340 12,092
Net change in unrealized
gains (losses)......... (93,757) (93,757)
------ ------- -------- -------- ---------- --------- ----------
Balance at December 31,
1996.................. $ -0- $73,784 $141,701 $ 46,581 $1,549,391 $(182,114) $1,629,343
====== ======= ======== ======== ========== ========= ==========
See accompanying Notes to Consolidated Financial Statements.
35
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
Net income................................ $ 311,372 $ 143,235 $ 268,946
Adjustments to reconcile net income to
cash provided from operations:
Increase in future policy benefits...... 136,375 178,850 81,062
Increase in other policy benefits....... 14,319 4,877 23,990
Deferral of policy acquisition costs.... (300,461) (362,837) (225,409)
Amortization of deferred policy
acquisition costs...................... 218,826 204,067 178,107
Change in accrued income taxes.......... 61,519 42,337 (39,942)
Depreciation............................ 9,056 9,603 11,271
Realized (gains) losses on sale of
investments,
subsidiaries, and properties........... (5,829) 14,323 2,551
Change in accounts payable and other
liabilities............................ 9,091 (6,623) (45,093)
Change in receivables................... (15,501) (31,670) (2,237)
Change in payables and receivables of
unconsolidated affiliates.............. (3,350) (2,348) (1,251)
Other accruals and adjustments.......... (20,158) (2,951) 2,483
Discontinued operations of energy
segment................................ 7,137 128,710 (5,132)
---------- ---------- ----------
Cash provided from operations............. 422,396 319,573 249,346
Cash used for investment activities:
Investments sold or matured:
Fixed maturities available for sale--
sold................................... 487,070 1,177,874 582,611
Fixed maturities available for sale--
matured, called, and repaid............ 347,116 351,246 796,064
Equity securities....................... 2,872 16,587 23,179
Mortgage loans.......................... 7,113 1,856 1,128
Real estate............................. 5,780 2,566 1,292
Other long-term investments............. 21,099 21,666 16,552
---------- ---------- ----------
Total investments sold or matured...... 871,050 1,571,795 1,420,826
Acquisition of investments:
Fixed maturities--available for sale.... (1,080,793) (1,870,445) (1,264,056)
Equity securities....................... -0- (394) (23,739)
Mortgage loans.......................... (18,360) -0- -0-
Real estate............................. (9,690) (17,708) (20,587)
Net increase in policy loans............ (13,082) (11,889) (8,305)
Other long-term investments............. (15,891) (67,241) (15,333)
---------- ---------- ----------
Total investments acquired............. (1,137,816) (1,967,677) (1,332,020)
Net (increase) decrease in short-term
investments............................. (12,252) 35,514 76,457
Purchase of American Income.............. -0- -0- (551,501)
Proceeds from sale of discontinued
operations.............................. 15,500 -0- -0-
Proceeds from sale of Nuevo Energy
Company stock........................... 93,160 -0- -0-
Loans made to unconsolidated affiliates.. -0- -0- (20,186)
Loans repaid by unconsolidated
affiliates.............................. -0- 28,000 -0-
Dispositions of properties............... 2,093 1,198 1,332
Additions to properties.................. (15,412) (6,510) (5,632)
Dividends from unconsolidated affiliates. 770 684 513
---------- ---------- ----------
Cash used for investment activities....... (182,907) (336,996) (410,211)
Cash provided from (used for) financing
activities:
Issuance of common stock................. 10,145 2,953 4,408
Issuance of monthly income preferred
securities.............................. -0- -0- 193,046
Additions to debt........................ -0- -0- 143,000
Cash dividends paid to shareholders...... (82,893) (80,887) (82,336)
Repayments on debt....................... (149,144) (60,867) (70,108)
Acquisition of treasury stock............ (106,996) -0- (106,054)
Net receipts from deposit product
operations.............................. 94,513 158,084 87,701
---------- ---------- ----------
Cash provided from (used for) financing
activities............................... (234,375) 19,283 169,657
---------- ---------- ----------
Increase in cash......................... 5,114 1,860 8,792
Cash at beginning of year................ 13,158 11,298 2,506
---------- ---------- ----------
Cash at end of year...................... $ 18,272 $ 13,158 $ 11,298
========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
36
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying financial statements have been
prepared in conformity with generally accepted accounting principles ("GAAP").
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Principles of Consolidation: The financial statements include the results of
Torchmark Corporation ("Torchmark") and its wholly-owned subsidiaries.
Subsidiaries which are not majority-owned are reported on the equity method.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Investments. Torchmark classifies all of its fixed maturity investments,
which include bonds and redeemable preferred stocks, as available for sale.
Investments classified as available for sale are carried at fair value with
unrealized gains and losses, net of deferred taxes, reflected directly in
shareholders' equity. Investments in equity securities, which include common
and nonredeemable preferred stocks, are reported at fair value with unrealized
gains and losses, net of deferred taxes, reflected directly in shareholders'
equity. Policy loans are carried at unpaid principal balances. Mortgage loans
are carried at amortized cost. Investments in real estate are reported at cost
less allowances for depreciation, which are calculated on the straight line
method. Short-term investments include investments in certificates of deposit
and other interest-bearing time deposits with original maturities within three
months. Other long-term investments consist of investments in mutual funds
managed by a Torchmark subsidiary. They are carried at fair value. Other long-
term investments also include passive energy limited-partnership investments
which are valued at partnership equity. If an investment becomes permanently
impaired, such impairment is treated as a realized loss and the investment is
adjusted to net realizable value.
Gains and losses realized on the disposition of investments are recognized
as revenues and are determined on a specific identification basis.
Realized investment gains and losses and investment income attributable to
separate accounts are credited to the separate accounts and have no effect on
Torchmark's net income. Investment income attributable to other policyholders
is included in Torchmark's net investment income. Net investment income for
the years ended December 31, 1996, 1995 and 1994 included $298.4 million,
$279.6 million, and $240.7 million, respectively, which was allocable to
policyholder reserves or accounts. Realized investment gains and losses are
not allocable to policyholders.
Determination of Fair Values of Financial Instruments: Fair value for cash,
short-term investments, short-term debt, receivables and payables approximates
carrying value. Fair values for investment securities are based on quoted
market prices, where available. Otherwise, fair values are based on quoted
market prices of comparable instruments. Mortgages are valued using discounted
cash flows. Substantially all of Torchmark's long-term debt, including the
monthly income preferred securities, is valued based on quoted market prices.
Cash: Cash consists of balances on hand and on deposit in banks and
financial institutions. Overdrafts arising from the overnight investment of
funds offset cash balances on hand and on deposit.
Recognition of Premium Revenue and Related Expenses: Premiums for insurance
contracts which are not defined as universal life-type according to SFAS 97
are recognized as revenue over the premium-paying period of the policy.
Profits for limited-payment life insurance contracts as defined by SFAS 97 are
recognized over the contract period. Premiums for universal life-type and
annuity contracts are added to the policy account value, and revenues for such
products are recognized as charges to the policy account value for mortality,
administration, and surrenders (retrospective deposit method). Variable
annuity products are also assessed an investment management fee and a sales
charge. Life premium includes policy charges of $72.8 million, $72.7 million,
and $74.2 million for the years ended December 31, 1996, 1995 and 1994,
respectively. Other premium includes annuity policy charges for the
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
years ended December 31, 1996, 1995, and 1994 of $22.4 million, $19.0 million,
and $13.9 million, respectively. Profits are also earned to the extent that
investment income exceeds policy requirements. The related benefits and
expenses are matched with revenues by means of the provision of future policy
benefits and the amortization of deferred acquisition costs in a manner which
recognizes profits as they are earned over the same period.
Future Policy Benefits: The liability for future policy benefits for
universal life-type products according to SFAS 97 is represented by policy
account value. The liability for future policy benefits for all other life and
health products is provided on the net level premium method based on estimated
investment yields, mortality, morbidity, persistency and other assumptions
which were appropriate at the time the policies were issued. Assumptions used
are based on Torchmark's experience as adjusted to provide for possible
adverse deviation. These estimates are periodically reviewed and compared with
actual experience. If it is determined future experience will probably differ
significantly from that previously assumed, the estimates are revised.
Deferred Acquisition Costs and Value of Insurance Purchased: The costs of
acquiring new insurance business are deferred. Such costs consist of sales
commissions, underwriting expenses, and certain other selling expenses. The
costs of acquiring new business through the purchase of other companies and
blocks of insurance business are also deferred.
Deferred acquisition costs, including the value of life insurance purchased,
for policies other than universal life-type policies according to SFAS 97 are
amortized with interest over an estimate of the premium-paying period of the
policies in a manner which charges each year's operations in proportion to the
receipt of premium income. For universal life-type policies, acquisition costs
are amortized with interest in proportion to estimated gross profits. The
assumptions used as to interest, persistency, morbidity and mortality are
consistent with those used in computing the liability for future policy
benefits and expenses. If it is determined that future experience will
probably differ significantly from that previously assumed, the estimates are
revised. Deferred acquisition costs are adjusted to reflect the amounts
associated with unrealized investment gains and losses pertaining to universal
life-type products.
Income Taxes: Income taxes are accounted for under the asset and liability
method in accordance with SFAS 109. Under the asset and liability method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement book
values and tax bases of assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Property and Equipment: Property and equipment is reported at cost less
allowances for depreciation. Depreciation is recorded primarily on the
straight line method over the estimated useful lives of these assets which
range from two to twenty years for equipment and two to forty years for
buildings and improvements. Ordinary maintenance and repairs are charged to
income as incurred.
Impairments: Torchmark adopted the provisions of SFAS 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, effective at the issuance of the standard in March, 1995. This standard
requires that certain long-lived assets used in Torchmark's business as well
as certain intangible assets be reviewed for impairment when circumstances
indicate that these assets may not be recoverable, and further provides how
such impairment shall be determined and measured. It also requires that long-
lived assets and intangibles to be disposed of be reported at the lower of
carrying amount or fair value less cost to sell. Except for the writedown of
the energy investment described in Note 7, the adoption of this statement had
no material impact on Torchmark's operations or financial position for the
years ended December 31, 1996 and 1995.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill: The excess cost of businesses acquired over the fair value of
their net assets is reported as goodwill and is amortized on a straight-line
basis over a period not exceeding 40 years. Torchmark's unamortized goodwill
is periodically reviewed to ensure that conditions are present to indicate the
recorded amount of goodwill is recoverable from the estimated future
profitability of the related business. If events or changes in circumstances
indicate that future profits will not be sufficient to support the carrying
amount of goodwill, goodwill is written down to the recoverable amount and is
amortized over the original remaining period or a reduced period if
appropriate.
Treasury Stock: Torchmark accounts for purchases of treasury stock on the
cost method.
Reclassification: Certain amounts in the financial statements presented have
been reclassified from amounts previously reported in order to be comparable
between years. These reclassifications have no effect on previously reported
shareholders' equity or net income during the periods involved.
Litigation: Torchmark and its subsidiaries continue to be named as parties
to legal proceedings. Because much of Torchmark's litigation is brought in
Alabama, a jurisdiction known for excessive punitive damage verdicts bearing
little or no relationship to actual damages, the ultimate outcome of any
particular action cannot be predicted. It is reasonably possible that changes
in the expected outcome of these matters could occur in the near term, but
such changes should not be material to Torchmark's reported results or
financial condition.
Earnings Per Share: Earnings available to holders of common stock are
computed after deducting dividends on the Preferred Stock in 1994. 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: 1996--71,229,892, 1995--
71,593,774, 1994--72,095,657.
39
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,
-------------------------- ---------------------
1996 1995 1994 1996 1995
-------- -------- -------- ---------- ----------
Life insurance subsidiar-
ies...................... $283,881 $245,552 $228,754 $622,326 $ 618,557
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,
--------------------------------
1996 1995 1994
---------- ---------- --------
Statutory net income................... $ 283,881 $ 245,552 $228,754
Deferral of acquisition costs.......... 300,461 328,598 225,409
Amortization of acquisition costs...... (218,826) (204,067) (178,107)
Differences in insurance policy liabil-
ities................................. 48,396 1,407 30,271
Deferred income taxes.................. (20,496) (40,380) (2,052)
Inter-affiliate dividends.............. (137,200) (684) -0-
Income of noninsurance affiliates...... 28,943 (207,164) 11,372
Other.................................. 26,213 19,973 (18,229)
Pre-acquisition adjustments............ -0- -0- (28,472)
---------- ---------- --------
GAAP net income........................ $ 311,372 $ 143,235 $268,946
========== ========== ========
A reconciliation of Torchmark's insurance subsidiaries' statutory
shareholders' equity to Torchmark's consolidated GAAP shareholders' equity is
as follows:
YEAR ENDED
DECEMBER 31,
----------------------
1996 1995
---------- ----------
Statutory shareholders' equity......... $ 622,326 $ 618,557
Differences in insurance policy liabil-
ities................................. 440,204 371,599
Deferred acquisition costs............. 1,253,727 1,121,325
Value of insurance purchased........... 244,368 277,297
Deferred income taxes.................. (329,609) (407,267)
Debt of parent company................. (832,367) (980,814)
Monthly income preferred securities.... (193,145) (193,096)
Asset valuation reserves............... 133,118 161,573
Nonadmitted assets..................... 137,270 85,240
Net assets of noninsurance affiliates . 69,776 351,355
Other.................................. 83,675 183,183
---------- ----------
GAAP shareholders' equity.............. $1,629,343 $1,588,952
========== ==========
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 3--INVESTMENT OPERATIONS
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
Investment income is summarized as fol-
lows:
Fixed maturities..................... $ 373,110 $ 350,931 $ 329,626
Equity securities.................... 373 818 1,323
Mortgage loans on real estate........ 6,525 4,343 631
Investment real estate............... 14,629 8,277 7,778
Policy loans......................... 13,192 12,137 10,003
Other long-term investments.......... 5,319 10,410 4,958
Short-term investments............... 6,397 8,890 7,046
--------- --------- ---------
419,545 395,806 361,365
Less investment expense.............. (14,937) (13,941) (13,728)
--------- --------- ---------
Net investment income................ $ 404,608 $ 381,865 $ 347,637
========= ========= =========
An analysis of gains (losses) from
investments is as follows:
Realized investment gains (losses):
Fixed maturities.................... $ 3,760 $ 1,285 $ (5,049)
Equity securities................... 1,913 (15,033) 1,610
Other............................... 156 (575) 888
--------- --------- ---------
$ 5,829 $ (14,323) $ (2,551)
========= ========= =========
An analysis of the net change in
unrealized investment gains (losses)
is as follows:
Equity securities before tax......... $ (734) $ 10,125 $ (15,064)
Fixed maturities available for sale
before tax.......................... (163,224) 468,336 (434,340)
Other long-term investments and
foreign exchange translation
adjustments......................... 1,907 5,514 (4,088)
Adjustment to deferred acquisition
costs............................... 17,837 (51,739) 52,334
Applicable tax....................... 50,457 (151,142) 140,264
--------- --------- ---------
Net change in unrealized gains
(losses)............................ $ (93,757) $ 281,094 $(260,894)
========= ========= =========
41
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, 1996 and 1995 is as
follows:
GROSS GROSS AMOUNT PER
AMORTIZED UNREALIZED UNREALIZED MARKET THE BALANCE
COST GAINS LOSSES VALUE SHEET
---------- ---------- ---------- ---------- -----------
1996:
- -----
Fixed maturities avail-
able for sale:
Bonds:
U.S. Government direct
obligations and
agencies............. $ 231,151 $ 2,260 $ (3,628) $ 229,783 $ 229,783
GNMAs................. 882,036 49,647 (5,170) 926,513 926,513
Mortgage-backed
securities, GNMA
collateral........... 154,816 2,665 (134) 157,347 157,347
Other mortgage-backed
securities........... 266,776 6,931 (1,667) 272,040 272,040
State, municipalities
and political
subdivisions......... 709,980 14,721 (4,211) 720,490 720,490
Foreign governments... 76,298 3,789 (94) 79,993 79,993
Public utilities...... 265,248 5,036 (3,888) 266,396 266,396
Industrial and
miscellaneous........ 2,672,613 35,720 (39,796) 2,668,537 2,668,537
Redeemable preferred
stocks................ 6,581 596 0 7,177 7,177
---------- -------- -------- ---------- ----------
Total fixed maturities 5,265,499 121,365 (58,588) 5,328,276 5,328,276
Equity securities:
Common stocks:
Banks and insurance
companies............ 2,014 4,658 (3) 6,669 6,669
Industrial and all
others............... 287 62 (23) 326 326
Non-redeemable
preferred stocks...... 1,498 365 0 1,863 1,863
---------- -------- -------- ---------- ----------
Total equity
securities........... 3,799 5,085 (26) 8,858 8,858
---------- -------- -------- ---------- ----------
Total fixed maturities
and equity
securities........... $5,269,298 $126,450 $(58,614) $5,337,134 $5,337,134
========== ======== ======== ========== ==========
1995:
- -----
Fixed maturities available
for sale:
Bonds:
U.S. Government direct
obligations and
agencies................ $ 152,210 $ 4,645 $ (22) $ 156,833 $ 156,833
GNMAs.................... 1,050,034 68,053 (1,221) 1,116,866 1,116,866
Mortgage-backed
securities, GNMA
collateral.............. 214,186 8,136 (62) 222,260 222,260
Other mortgage-backed
securities.............. 230,981 11,527 (2,960) 239,548 239,548
State, municipalities and
political subdivisions.. 762,943 21,383 (3,677) 780,649 780,649
Foreign governments...... 71,489 5,303 (3) 76,789 76,789
Public utilities......... 258,840 13,276 (308) 271,808 271,808
Industrial and
miscellaneous........... 2,235,811 103,443 (2,400) 2,336,854 2,336,854
Redeemable preferred
stocks................... 7,729 888 0 8,617 8,617
---------- -------- -------- ---------- ----------
Total fixed maturities... 4,984,223 236,654 (10,653) 5,210,224 5,210,224
Equity securities:
Common stocks:
Banks and insurance
companies............... 2,945 5,304 (10) 8,239 8,239
Industrial and all
others.................. 264 151 (7) 408 408
Non-redeemable preferred
stocks................... 1,549 355 0 1,904 1,904
---------- -------- -------- ---------- ----------
Total equity securities.. 4,758 5,810 (17) 10,551 10,551
---------- -------- -------- ---------- ----------
Total fixed maturities
and equity securities... $4,988,981 $242,464 $(10,670) $5,220,775 $5,220,775
========== ======== ======== ========== ==========
42
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, 1996
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... $ 98,491 $ 99,442
Due from one to five
years.................... 913,734 929,238
Due from five to ten
years.................... 1,878,153 1,881,091
Due after ten years....... 1,010,817 1,001,220
---------- ----------
3,901,195 3,910,991
Redeemable preferred
stocks................... 6,581 7,177
Mortgage-backed and asset-
backed securities........ 1,357,723 1,410,108
---------- ----------
$5,265,499 $5,328,276
========== ==========
Proceeds from sales of fixed maturities available for sale were $487 million
in 1996, $1.18 billion in 1995, and $583 million in 1994. Gross gains realized
on those sales were $8.7 million in 1996, $13.4 million in 1995, and $14.6
million in 1994. Gross losses were $5.3 million in 1996, $13.5 million in
1995, and $20.8 million in 1994.
Torchmark had $39.2 million and $25.7 million in investment real estate at
December 31, 1996 and 1995, respectively, which was nonincome producing during
the previous twelve months. These properties included primarily construction
in process and land. Fixed maturity investments, mortgage loans, and other
long-term investments which were nonincome producing during the previous
twelve months were $0.3 million at December 31, 1995. There were no such
investments at December 31, 1996.
Derivative investments were immaterial to Torchmark at December 31, 1996.
These investments consist of interest-only and principal-only collateralized
mortgage obligations and a foreign currency trading account. Torchmark's total
carrying value of these investments was $26.3 million and $23.9 million at
December 31, 1996 and 1995, respectively. Torchmark has no off-balance sheet
exposure in connection with these investments.
NOTE 4--PROPERTY AND EQUIPMENT
A summary of property and equipment used in the business is as follows:
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------- ---------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
-------- ------------ -------- ------------
Company occupied real estate........ $ 68,925 $27,960 $ 67,528 $31,040
Data processing equipment........... 23,179 20,942 24,507 22,198
Transportation equipment............ 11,396 7,492 12,802 8,005
Furniture and office equipment...... 38,047 34,830 36,979 33,388
-------- ------- -------- -------
$141,547 $91,224 $141,816 $94,631
======== ======= ======== =======
Depreciation expense on property used in the business was $5.4 million, $5.7
million, and $7.6 million in each of the years 1996, 1995, and 1994,
respectively.
43
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:
1996 1995 1994
---------------------- ---------------------- ----------------------
DEFERRED VALUE OF DEFERRED VALUE OF DEFERRED VALUE OF
ACQUISITION INSURANCE ACQUISITION INSURANCE ACQUISITION INSURANCE
COSTS PURCHASED COSTS PURCHASED COSTS PURCHASED
----------- --------- ----------- --------- ----------- ---------
Balance at beginning of
year................... $1,121,325 $277,297 $1,017,467 $274,124 $ 901,565 $131,602
Additions:
Deferred during peri-
od:
Commissions........... 185,197 -0- 192,427 -0- 134,032 -0-
Other expenses........ 115,264 -0- 136,170 -0- 91,377 -0-
---------- -------- ---------- -------- ---------- --------
Total deferred....... 300,461 -0- 328,597 -0- 225,409 -0-
Value of Insurance
purchased -0- -0- -0- 34,240 -0- 158,788
Adjustment
attributable to
unrealized investment
losses(1)............ 17,838 -0- -0- -0- 52,334 -0-
---------- -------- ---------- -------- ---------- --------
Total additions...... 318,299 -0- 328,597 34,240 277,743 158,788
---------- -------- ---------- -------- ---------- --------
Deductions:
Amortized during peri-
od................... (185,148) (32,929) (172,764) (31,067) (154,697) (16,266)
Adjustment
attributable to
unrealized investment
gains(1)............. -0- -0- (51,739) -0- -0- -0-
Adjustment attribut-
able to realized in-
vestment gains(1).... (749) -0- (236) -0- (7,144) -0-
---------- -------- ---------- -------- ---------- --------
Total deductions..... (185,897) (32,929) (224,739) (31,067) (161,841) (16,266)
---------- -------- ---------- -------- ---------- --------
Balance at end of year.. $1,253,727 $244,368 $1,121,325 $277,297 $1,017,467 $274,124
========== ======== ========== ======== ========== ========
- --------
(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 $18.9 million, $20.0 million, and $11.7 million, for
the years ended December 31, 1996, 1995 and 1994, respectively. The average
interest accrual rates used for the years ended December 31, 1996, 1995 and
1994 were 7.26%, 7.26% and 7.72%, respectively. The estimated amount of the
unamortized balance at December 31, 1996 to be amortized during each of the
next five years is: 1997, $27.8 million; 1998, $24.5 million; 1999, $21.6
million; 2000, $18.9 million; and 2001, $16.7 million.
In the event of lapses or early withdrawals in excess of those assumed,
deferred acquisition costs and the value of insurance purchased may not be
recoverable.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 6--ACQUISITIONS
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 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
------------
Revenues................................................. $2,086,987
Net income before extraordinary items.................... 278,533
Net income............................................... 277,014
Net income per common share before extraordinary items... 3.86
Net income per common share.............................. 3.84
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 7--DISPOSAL OF ENERGY SEGMENT
On September 30, 1996, Torchmark completed the sale of its energy business
segment including its energy asset management subsidiary, Torch Energy
Advisors Incorporated ("TEAI"), and its Black Warrior coalbed methane
investment. These operations, which were reclassified as discontinued
operations in Torchmark's financial statements at December 31, 1995, were sold
to a TEAI management group. After the sale, Torchmark had no controlling
ownership interest in any energy asset management organization.
In addition to previously transferred securities, warrants, and Section 29
energy-related tax credits, which approximated $112 million at closing,
Torchmark received subordinated debt and notes totaling $32.5 million along
with $15.5 million in cash. After closing costs and retained liabilities,
Torchmark recorded a pretax loss of $23 million and an after-tax loss of $7
million from the sale, or $.10 per share.
In the first quarter of 1996, TEAI sold 1.5 million of its shares in Nuevo
Energy Company ("Nuevo") common stock for proceeds of $35.6 million. These
proceeds were transferred to Torchmark in the form of a dividend prior to the
sale of TEAI. Additionally, included in the above mentioned transferred
marketable securities were 1.3 million shares of Nuevo common stock which were
sold in the fourth quarter of 1996 for proceeds of $57.6 million.
At December 31, 1995, discontinued operations assets consisted of:
Trade and other receivables.................................. $118,266
Energy properties and investments............................ 158,238
Other assets................................................. 74,639
--------
Total assets................................................ 351,143
Trade and other payables..................................... (157,827)
Other liabilities............................................ (18,930)
--------
Total liabilities........................................... (176,757)
--------
Net discontinued assets................................... $174,386
========
46
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, 1996 is as follows:
INDIVIDUAL LIFE INSURANCE
INTEREST ASSUMPTIONS:
PERCENT OF
YEARS OF ISSUE INTEREST RATES LIABILITY
-------------- --------------------- ----------
1917-1996 3.00% 3%
1947-1954 3.25% 1
1927-1989 3.50% 1
1955-1961 3.75% 1
1925-1995 4.00% 13
1962-1969 4.50% graded to 4.00% 3
1970-1980 5.50% graded to 4.00% 5
1970-1996 5.50% 1
1929-1996 6.00% 9
1986-1994 7.00% graded to 6.00% 11
1954-1996 8.00% graded to 6.00% 10
1951-1985 8.50% graded to 6.00% 10
1980-1987 8.50% graded to 7.00% 1
1975-1991 9.50% graded to 8.00% 6
1984-1996 Interest Sensitive 25
---
100%
===
MORTALITY ASSUMPTIONS:
For individual life, the mortality tables used are various statutory
mortality tables and modifications of:
1950-54 Select and Ultimate Table
1954-58 Industrial Experience Table
1955-60 Ordinary Experience Table
1965-70 Select and Ultimate Table
1955-60 Inter-Company Table
1970 United States Life Table
1979-81 United States Life Table
1975-80 Select and Ultimate Table
X-18 Ultimate Table
WITHDRAWAL ASSUMPTIONS:
Withdrawal assumptions are based on Torchmark's experience.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 8--FUTURE POLICY BENEFIT RESERVES (CONTINUED)
INDIVIDUAL HEALTH INSURANCE
INTEREST ASSUMPTIONS:
PERCENT OF
YEARS OF ISSUE INTEREST RATES LIABILITY
-------------- --------------------- ----------
1962-1996 3.00% 2%
1969-1980 5.50% graded to 4.00% 4
1982-1996 4.50% 1
1993-1996 6.00% 16
1986-1992 7.00% graded to 6.00% 54
1955-1996 8.00% graded to 6.00% 9
1951-1986 8.50% graded to 6.00% 14
---
100%
===
MORBIDITY ASSUMPTIONS:
For individual health, the morbidity assumptions are based on either
Torchmark's experience or the assumptions used in calculating statutory
reserves.
TERMINATION ASSUMPTIONS:
Termination assumptions are based on Torchmark's experience.
OVERALL INTEREST ASSUMPTIONS
The overall average interest assumption for determining the liability for
future life and health insurance benefits in 1996 was 6.3%.
NOTE 9--LIABILITY FOR UNPAID HEALTH CLAIMS
Activity in the liability for unpaid health claims is summarized as follows:
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
-------- -------- --------
Balance at beginning of year: $170,566 $166,731 $131,161
Addition due to acquisition of American
Income...................................... -0- -0- 9,185
Incurred related to:
Current year................................ 495,642 502,018 514,814
Prior year.................................. 179 (8,295) (14,985)
-------- -------- --------
Total incurred............................... 495,821 493,723 499,829
-------- -------- --------
Paid related to:
Current year................................ 340,310 342,905 332,273
Prior year.................................. 151,859 146,983 141,171
-------- -------- --------
Total paid................................... 492,169 489,888 473,444
-------- -------- --------
Balance at end of year....................... $174,218 $170,566 $166,731
======== ======== ========
The liability for unpaid health claims is included with "Policy claims and
other benefits payable" on the Balance Sheet.
Health benefits for 1994 include a $30 million charge resulting from a
reclassification of nonoperating expense to health benefits, since actual
payments will be made in the form of health benefits.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 10--INCOME TAXES
Torchmark and most of its subsidiaries file a life-nonlife consolidated
federal income tax return. Sentinel files its own federal income tax return
and will not be eligible to join Torchmark's consolidated return group until
1997. American Income files its own consolidated federal income tax return and
will not be eligible to join Torchmark's consolidated return group until 2000.
Total income taxes were allocated as follows:
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
Income from continuing operations............. $180,622 $157,539 $135,994
Discontinued operations....................... (15,813) (86,050) (11,677)
Monthly income preferred securities dividend.. (5,199) (5,555) (1,148)
Shareholders' equity:
Unrealized gains (losses).................... (50,457) 157,200 (147,520)
Tax basis compensation expense (from the
exercise of stock options) in excess of
amounts recognized for financial reporting
purposes.................................... (1,947) (709) (349)
Other......................................... (898) (6,169) 9,424
-------- -------- --------
$106,308 $216,256 $(15,276)
======== ======== ========
Income tax expense attributable to income from continuing operations
consists of:
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
Current income tax expense....................... $130,624 $110,652 $113,215
Deferred income tax expense...................... 49,998 46,887 22,779
-------- -------- --------
$180,622 $157,539 $135,994
======== ======== ========
In 1996, 1995, and 1994, deferred income tax expense was incurred because of
the difference between net operating income before income taxes as reported on
the consolidated statement of operations and taxable income as reported on
Torchmark's income tax returns. As explained in Note 1, this difference caused
the financial statement book values of some assets and liabilities to be
different from their respective tax bases.
The effective income tax rate differed from the expected 35% rate as shown
below:
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 % 1995 % 1994 %
-------- --- -------- --- -------- ---
Expected income taxes............ $173,296 35% $149,861 35% $137,891 35%
Increase (reduction) in income
taxes
resulting from:
Tax-exempt investment income.... (7,014) (1) (7,965) (2) (10,625) (2)
Other........................... 14,340 3 15,643 4 8,728 2
-------- --- -------- --- -------- ---
Income taxes..................... $180,622 37% $157,539 37% $135,994 35%
======== === ======== === ======== ===
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 10--INCOME TAXES (CONTINUED)
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
DECEMBER 31,
------------------
1996 1995
-------- --------
Deferred tax assets:
Investments, principally due to (in the acquisition of a
subsidiary) the use of market value in recording the cost
of fixed maturities for financial reporting purposes but
not for tax purposes..................................... $ 2,996 $ 6,897
Future policy benefits, unearned and advance premiums, and
policy claims............................................ 9,264 27,432
Present value of future policy surrender charges.......... 9,636 4,083
Other assets and other liabilities, principally due to the
current nondeductibility of certain accrued expenses for
tax purposes............................................. 30,025 18,344
-------- --------
Total gross deferred tax assets........................... 51,921 56,756
Less valuation allowance.................................. (2,111) (2,111)
-------- --------
Net deferred tax assets................................... 49,810 54,645
-------- --------
Deferred tax liabilities:
Unconsolidated affiliates, principally due to the use of
equity method accounting for financial reporting purposes
but not for tax purposes................................. 24,368 11,305
Deferred acquisition costs................................ 333,640 322,900
Unrealized investment gains............................... 23,952 74,408
Other..................................................... 12,625 12,404
-------- --------
Total gross deferred tax liabilities...................... 394,585 421,017
-------- --------
Net deferred tax liability................................. $344,775 $366,372
======== ========
The valuation allowance for deferred tax assets as of December 31, 1996 and
1995 was $2.1 million. Subsequently recognized tax benefits of $2.1 million
relating to the December 31, 1996 valuation allowance will be allocated to
goodwill.
Torchmark has not recognized a deferred tax liability for the undistributed
earnings of its wholly-owned subsidiaries because such earnings are remitted
to Torchmark on a tax-free basis. A deferred tax liability will be recognized
in the future if the remittance of such earnings becomes taxable to Torchmark.
In addition, Torchmark has not recognized a deferred tax liability of
approximately $60 million that arose prior to 1984 on temporary differences
related to the policyholders' surplus accounts in the life insurance
subsidiaries. A current tax expense will be recognized in the future if and
when these amounts are distributed.
50
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
------------ ------------ ------- -------
1996.................... $2,595 $4,804 $ 467
1995.................... 3,208 6,820 524
1994.................... 3,201 6,922 1,800
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 $6.2 million
and $9.5 million at December 31, 1996 and 1995, respectively. The plans
covering the majority of employees are organized as trust funds whose assets
consist primarily of investments in marketable long-term fixed maturities and
equity securities which are valued at market.
The excess benefit pension plan provides the benefits that an employee would
have otherwise received from a defined benefit pension plan in the absence of
the Internal Revenue Code's limitation on benefits payable under a qualified
plan. Although this plan is unfunded, pension cost is determined in a similar
manner as for the funded plans. Liability for the excess benefit plan was $4.8
million and $5.5 million as of December 31, 1996 and 1995, respectively.
Net periodic pension cost for the defined benefit plans by expense component
was as follows:
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- --------- --------
Service cost--benefits earned during the
period.................................. $ 6,581 $ 7,190 $ 8,323
Interest cost on projected benefit obli-
gation.................................. 9,097 8,867 8,242
Actual return on assets.................. (17,798) (17,927) (2,302)
Net amortization and deferral............ 7,391 9,214 (5,541)
-------- --------- --------
Net periodic pension cost................ $ 5,271 $ 7,344 $ 8,722
======== ========= ========
A reconciliation of the funded status of the defined benefit plans with
Torchmark's pension liability was as follows:
AT DECEMBER 31,
------------------
1996 1995
-------- --------
Fair market value of assets available for benefits. $123,288 $113,193
Projected benefit obligation:
Vested............................................ 90,189 89,170
Nonvested......................................... 3,453 5,441
-------- --------
Accumulated benefit obligation................... 93,642 94,611
Effect of projected future salary increases 25,710 27,003
-------- --------
Total projected benefit obligation............... 119,352 121,614
-------- --------
Funded status...................................... 3,936 (8,421)
Unamortized prior service costs.................... 1,433 147
Unamortized transition asset....................... (725) (1,220)
Unrecognized (gain) or loss........................ (15,669) (5,462)
-------- --------
Accrued pension costs included in liabilities.... $(11,025) $(14,956)
======== ========
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 11--POSTRETIREMENT BENEFITS (CONTINUED)
The weighted average assumed discount rates used in determining the
actuarial benefit obligations were 7.5% in 1996 and 7.25% in 1995. The rate of
assumed compensation increase was 4.5% in 1996 and 4.25% in 1995 and the
expected long-term rate of return on plan assets was 9.25% in 1996 and 8.0% in
1995.
Torchmark accrues expense for the defined contribution plans based on a
percentage of the employees' contributions. The plans are funded by the
employee contributions and a Torchmark contribution equal to the amount of
accrued expense.
Postretirement Benefit Plans Other Than Pensions: Torchmark provides
postretirement life insurance benefits for most retired employees, and also
provides additional postretirement life insurance benefits for certain key
employees. The majority of the life insurance benefits are accrued over the
working lives of active employees.
For retired employees over age sixty-five, Torchmark does not provide
postretirement benefits other than pensions. Torchmark does provide a portion
of the cost for health insurance benefits for employees who retired before
February 1, 1993 and before age sixty-five, covering them until they reach age
sixty-five. Eligibility for this benefit was generally achieved at age fifty-
five with at least fifteen years of service. This subsidy is minimal to
employees who did not retire before February 1, 1993. This plan is unfunded.
Net periodic postretirement benefit cost included the following components:
YEAR ENDED
DECEMBER 31,
-------------------
1996 1995 1994
---- ----- ------
Service cost....................................... $297 $ 284 $ 444
Interest cost on accumulated postretirement benefit
obligation........................................ 617 678 831
Actual return on plan assets....................... -0- -0- -0-
Net amortization and deferral...................... (252) (559) (237)
---- ----- ------
Net periodic postretirement benefit cost........... $662 $ 403 $1,038
==== ===== ======
The following table sets forth the plans' combined benefit obligation with
the amount shown in Torchmark's balance sheet:
AT DECEMBER 31,
---------------
1996 1995
------- -------
Accumulated postretirement benefit obligation:
Retirees............................................... $ 3,622 $ 4,880
Fully eligible active plan participants................ 1,613 1,231
Other active plan participants......................... 2,395 3,145
------- -------
Total accumulated postretirement benefit obligation... 7,630 9,256
Plan assets at fair value............................... -0- -0-
------- -------
Accumulated postretirement benefit obligation in excess
of plan assets......................................... 7,630 9,256
Unrecognized net gain from past experience different
from that assumed and from changes in assumptions...... 1,717 1,423
Prior service cost not yet recognized in net periodic
post retirement benefit cost........................... 993 262
------- -------
Accrued postretirement benefit cost included in
liabilities.......................................... $10,340 $10,941
======= =======
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 11--POSTRETIREMENT BENEFITS (CONTINUED)
For measurement purposes, a 7.5% to 10.0% annual rate of increase in a per
capita cost of covered healthcare benefits was assumed for 1996. These rates
were assumed to decrease gradually to ranges of 4.5% to 6.5% by the year 2005.
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, 1996 by $1.3 million and would increase
the net periodic postretirement cost for the year ended December 31, 1996 by
approximately $425 thousand.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% in 1996 and 7.0% to 8.0% in 1995.
NOTE 12--NOTES PAYABLE
An analysis of notes payable is as follows:
DECEMBER 31,
-----------------------------------------
1996 1995
-------------------- --------------------
SHORT-TERM LONG-TERM SHORT-TERM LONG-TERM
DEBT DEBT DEBT DEBT
---------- --------- ---------- ---------
Sinking Fund Debentures........... $198,134 $198,033
Senior Notes, due 1998............ 199,607 199,343
Senior Debentures, due 2009....... 99,450 99,881
Notes, due 2023................... 195,921 195,877
Notes, due 2013................... 98,477 98,432
Commercial paper.................. $40,778 $189,248
Other notes and mortgages payable
at various interest rates;
collateralized by buildings ..... 132 291 124 422
------- -------- -------- --------
$40,910 $791,880 $189,372 $791,988
======= ======== ======== ========
The amount of debt that becomes due during each of the next five years is:
1997, $40.9 million; 1998, $200.1 million; 1999, $150 thousand; 2000, $-0-;
and 2001, $-0-.
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 104.59% 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, provided the holder
with an option to require Torchmark to repurchase the debentures on August 15,
1996 at principal amount plus accrued interest. Pursuant to this option, $550
thousand debentures were repurchased in 1996. The Senior Debentures have equal
priority with other Torchmark unsecured indebtedness.
53
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 $600 million.
One-third of the commitment matures October 23, 1997 and the balance matures
October 24, 2001. Borrowings, pro rata under each facility, are at interest
rates selected by Torchmark based on either the corporate base rate or the
Eurodollar rate at the time of borrowings. At December 31, 1996 and December
31, 1995 there were no borrowings under the revolving credit agreements. The
revolving credit agreements are designed to back up a commercial paper program
which began in 1995. The short-term borrowings under the revolving credit
agreements and in the commercial paper market averaged $103 million during
1996, and were made at an average yield of 5.42%. At December 31, 1996,
commercial paper was outstanding in the face amount of $41.0 million.
Torchmark is subject to certain covenants for the revolving credit agreements
regarding capitalization and earnings, for which it was in compliance at
December 31, 1996, and pays a facility fee based on size of the lines.
Interest in the amount of $1.4 million, $1.6 million and $1.8 million was
capitalized during 1996, 1995, 1994, respectively.
NOTE 13--MONTHLY INCOME PREFERRED SECURITIES
In October, 1994, Torchmark, through its wholly-owned finance subsidiary,
Torchmark Capital L.L.C., completed a public offering of eight million shares
of 9.18% MIPS at a face amount of $200 million. The securities are subject to
a mandatory redemption in full at September 30, 2024, although Torchmark may
elect to extend the MIPS for up to an additional 20 years if certain
conditions are met. They are redeemable at Torchmark's option after September
30, 1999. Torchmark subsequently entered into a ten-year swap agreement with
an unaffiliated party whereby Torchmark agreed to pay a variable rate on the
$200 million face amount in exchange for payment of the fixed dividend. In a
related transaction, Torchmark purchased a five-year cap on the swap agreement
that insures that the variable rate cannot exceed 10.39% through September 30,
1999. The interest rate was 6.95% at December 31, 1996 and 7.25% at December
31, 1995. Torchmark pays a yearly fee of $860 thousand for the cap agreement.
The market value of the swap agreement was a benefit of $14.7 million at
December 31, 1996 and a benefit of $26.5 million at December 31, 1995. The
market value of the cap agreement, net of the present value of future annual
payments, was an obligation of $1.3 million at December 31, 1996 and an
obligation of $2.1 million at December 31, 1995. Except as otherwise described
in "Note 3--Investments" on page 43 of this report, Torchmark is a party to no
other derivative instruments as defined by SFAS 119.
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, 1996 and 1995 was $193 million.
54
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
---------- --------- ---------- ----------
1994:
Balance at January 1, 1994....... 1,000,000 (530,180) 73,784,228 (889,134)
Issuance of common stock due to
exercise of stock options...... 130,641
Other treasury stock acquired... (469,820) (1,491,700)
Retirement of preferred treasury
stock.......................... (1,000,000) 1,000,000
---------- --------- ---------- ----------
Balance at December 31, 1994.... -0- -0- 73,784,228 (2,250,193)
1995:
Issuance of common stock due to
exercise of stock options...... 133,102
---------- --------- ---------- ----------
Balance at December 31, 1995.... -0- -0- 73,784,228 (2,117,091)
1996:
Issuance of common stock due to
exercise of stock options...... 338,188
Other treasury stock acquired... (2,309,350)
---------- --------- ---------- ----------
Balance at December 31, 1996.... -0- -0- 73,784,228 (4,088,253)
========== ========= ========== ==========
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
--------------------- ---------------------
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
Preferred Stock: One million shares of adjustable rate preferred stock were
issued in 1983 at an issue price of $100 per share. Prior to 1993, Torchmark
acquired 530 thousand shares which were reported as treasury stock and had a
total cost basis of $47.8 million and a total redemption value of $52.9
million. During 1994, Torchmark acquired the remaining 470 thousand shares at
a cost of $100 per share plus accrued dividends. The acquisition was completed
at an aggregate price of $47 million. The preferred treasury stock was
immediately retired.
Acquisition of Common Shares: Torchmark shares are acquired from time to
time for the following reasons: (1) open market purchases under the Torchmark
stock repurchase program, in which share purchases in the amount of $107
million for 2.3 million shares, and $59 million for 1.5 million shares were
made in 1996 and 1994, respectively, (2) for future employee stock option
exercises, and (3) for payment of the option price and taxes upon exercise of
stock options by employees.
Grant of Restricted Stock: A grant of 60,000 Torchmark shares was made on
May 1, 1991 to a Torchmark senior officer. The shares are restricted as to
resale, vesting 6,000 shares per year for 10 years on the anniversary date of
the grant. The market value of Torchmark stock was $34.92 per share on the
grant date.
Restrictions: Restrictions exist on the flow of funds to Torchmark from its
insurance subsidiaries. Statutory regulations require life insurance
subsidiaries to maintain certain minimum amounts of capital and surplus. These
restrictions generally limit the payment of dividends by insurance
subsidiaries to statutory net gain on an annual noncumulative basis in the
absence of special approval. Additionally, insurance companies are not
permitted to distribute the excess of shareholders' equity as determined on a
GAAP basis over that determined on a statutory basis. In 1997, $275 million
will be available to Torchmark for dividends from insurance subsidiaries in
compliance with statutory regulations without prior regulatory approval.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 15--EMPLOYEE STOCK OPTIONS
Certain employees and directors have been granted options to buy shares of
Torchmark stock generally at the market value of the stock on the date of
grant under the provisions of the Torchmark Corporation 1987 Stock Incentive
Plan ("1987 Option Plan"). The options are exercisable during the period
commencing from three months to three years after grant until expiring ten
years or ten years and two days after grant. Employee stock options granted
under the 1987 Option Plan generally vest one-half in two years and one-half
in three years. Director grants generally vest in six months. At December 31,
1996, approximately 11.4 million shares were authorized for grants of options
under this plan. In October, 1993, Torchmark implemented a policy to issue
shares for the exercise of stock options out of treasury stock.
In October, 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
effective for Torchmark beginning January 1, 1996. SFAS 123 defines a "fair
value method" of accounting for employee stock options. It also allows
accounting for such options under the "intrinsic value method" in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25") and related interpretations. If a company elects to
use the intrinsic value method, then pro forma disclosures of earnings and
earnings per share are required as if the fair value method of accounting was
applied. The effects of applying SFAS 123 in the pro forma disclosures are not
necessarily indicative of future amounts because the pro forma disclosures do
not take into account the amortization of the fair value of awards prior to
1995. Additionally, Torchmark is expected to grant additional awards in future
years.
Torchmark has elected to account for its stock options under the intrinsic
value method as outlined in APB 25. The fair value method requires use of the
Black-Scholes option valuation model to value employee stock options, upon
which a compensation expense is based. The Black-Scholes option valuation
model was not developed for use in valuing employee stock options. Instead,
this model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because Torchmark's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, it is management's opinion that the
existing models do not provide a reliable measure of the fair value of its
employee stock options. Under the intrinsic value method, compensation expense
is only recognized if the exercise price of the employee stock option is less
than the market price of the underlying stock on the date of grant.
In accordance with SFAS 123, the fair value for Torchmark's employee stock
options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions for 1996 and
1995.
1996 1995
-------- --------
Risk-free interest rate.................................... 6.4% 5.4%
Dividend yield............................................. 3.7% 3.7%
Volatility factor.......................................... 22.8 22.8
Weighted average expected life (in years).................. 4.17 4.17
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Torchmark's
pro forma information follows (in thousands except for earnings per share
information):
1996 1995
-------- --------
Pro forma net income...................................... $309,657 $143,148
Pro forma net income per share............................ 4.35 2.00
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 15--EMPLOYEE STOCK OPTIONS (CONTINUED)
A summary of Torchmark's stock option activity, and related information for
the years ended December 31, 1996 and 1995 follows:
1996 1995 1994
--------------------------- --------------------------- ---------
WEIGHTED AVERAGE WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS
--------- ---------------- --------- ---------------- ---------
Outstanding-beginning of
year................... 4,435,850 34.61 3,820,707 $32.50 3,660,391
Granted................. 724,100 49.09 761,100 43.14 316,600
Exercised............... (338,188) 30.00 (133,102) 22.18 (130,641)
Expired................. (146,751) 39.26 (12,855) 40.24 (25,643)
--------- --------- ---------
Outstanding-end of year. 4,675,011 37.04 4,435,850 34.61 3,820,707
========= ========= =========
Exercisable at end of
year................... 3,094,311 32.93 3,243,647 32.66 2,936,867
The weighted average fair value of options granted during the years ended
December 31, 1996 and 1995 were $49.61 and $43.14, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1996:
CONTRACT
EXERCISE NUMBER NUMBER TERMINATION
PRICE GRANT DATE OUTSTANDING EXERCISABLE DATE
-------- ----------------- ----------- ----------- -----------------
11.300 October 1, 1993 13,906 13,906 October 3, 2003
13.110 October 1, 1993 13,828 13,828 October 3, 2003
16.000 December 16, 1987 7,500 7,500 December 18, 1997
19.875 February 25, 1988 5,217 5,217 February 27, 1998
20.375 January 3, 1989 30,003 30,003 January 5, 1999
22.600 October 1, 1993 31,041 31,041 October 3, 2003
24.410 October 1, 1993 2,766 2,766 October 3, 2003
25.625 October 11, 1990 692,155 692,155 October 13, 2000
28.480 October 1, 1993 42,670 42,670 October 3, 2003
31.125 January 15, 1991 445,930 445,930 January 17, 2001
32.500 January 2, 1991 63,000 63,000 January 4, 2001
33.125 January 25, 1990 63,000 63,000 January 27, 2000
34.000 December 16, 1994 265,600 146,300 December 18, 2004
34.000 December 7, 1992 123,863 96,863 December 9, 2002
34.000 December 14, 1993 258,522 258,522 December 16, 2003
34.000 October 1, 1993 47,497 47,497 October 3, 2003
34.350 October 1, 1993 26,539 26,539 October 3, 2003
34.375 December 12, 1991 606,757 606,757 December 14, 2001
34.875 January 3, 1995 21,000 21,000 January 5, 2005
36.610 October 1, 1993 27,997 27,997 October 3, 2003
37.220* December 18, 1996 30,000 0 December 20, 2006
38.375 January 2, 1992 63,000 63,000 January 4, 2002
43.375 December 20, 1995 731,300 0 December 22, 2005
43.500 December 14, 1993 189,824 189,824 December 16, 2003
45.000 January 3, 1994 24,000 24,000 January 5, 2004
45.000 January 2, 1996 21,000 21,000 January 4, 2006
46.560 October 1, 1993 12,745 12,745 October 3, 2003
49.750 December 16, 1996 673,100 0 December 18, 2006
52.000 December 7, 1992 117,251 117,251 December 9, 2002
57.750 January 3, 1993 24,000 24,000 January 5, 2003
--------- ---------
4,675,011 3,094,311
========= =========
- --------
* Issued when the market price was $49.625.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 16--COMMITMENTS AND CONTINGENCIES
Reinsurance: Insurance affiliates of Torchmark reinsure that portion of
insurance risk which is in excess of their retention limits. Retention limits
for ordinary life insurance range up to $2.5 million per life. Life insurance
ceded represents less than 1.0% of total life insurance in force at December
31, 1996. Insurance ceded on life and accident and health products represents
1.0% of premium income for 1996. 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 3.1% of life insurance in force at December 31,
1996 and reinsurance assumed on life and accident and health products
represents 1.8% of premium income for 1996.
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 $7.0 million, $6.3 million, and $7.9 million for 1996, 1995, and 1994,
respectively. Future minimum rental commitments required under operating
leases having remaining noncancelable lease terms in excess of one year at
December 31, 1996 are as follows: 1997, $3.9 million; 1998, $2.4 million;
1999, $1.5 million; 2000, $726 thousand; 2001, $157 thousand; and in the
aggregate, $8.7 million.
Restrictions on cash: A portion of the cash held in financial service
subsidiaries that function as broker-dealers has been segregated for the
benefit of customers in compliance with security regulations. This amount was
$15.0 million at December 31, 1996 and $11.8 million at December 31, 1995.
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, 1996, the investment portfolio
consisted of securities of the U.S. government or U.S. government-backed
securities (22%); non government-guaranteed mortgage-backed securities (5%);
short-term investments, which generally mature within one month (1%);
securities of state and municipal governments (12%); securities of foreign
governments (1%); and investment-grade corporate bonds (46%). The remainder of
the portfolio was in oil and gas investments (1%) and real estate (3%), which
are not considered financial instruments according to GAAP; policy loans (4%),
which are secured by the underlying insurance policy values; and equity
securities, mortgages, noninvestment grade corporate securities and other
long-term investments (5%). Investments in municipal governments and
corporations are made throughout the U.S. with no concentration in any given
state. Most of the investments in foreign government securities are in
Canadian government obligations. Corporate equity and debt investments are
made in a wide range of industries. At December 31, 1996, 1% or more of the
portfolio was invested in the following industries: Financial services (18%);
regulated utilities (5%); chemicals and allied products (5%); food and kindred
products (4%); transportation (4%); technology (3%); media (2%); paper and
allied products (2%); petroleum (2%); and retailing (1%). Otherwise, no
individual industry represented 1% or more of Torchmark's investments. At
year-end 1996, 5% of the carrying value of fixed maturities was rated below
investment grade (Ba or lower as rated by Moody's service or the equivalent
NAIC designation). Par value of these investments was $237.7 million,
amortized cost was $239.8 million, and market value was $243.4 million. While
these investments could be subject to additional credit risk, such risk should
generally be reflected in market value.
Collateral Requirements: Torchmark requires collateral for investments in
instruments where collateral is available and is typically required because of
the nature of the investment. Since the majority of Torchmark's investments
are in government, government-secured, or corporate securities, the
requirement for collateral is rare. Torchmark's mortgages are secured by
collateral.
Litigation: Torchmark and its subsidiaries continue to be named as parties
to pending or threatened legal proceedings. These lawsuits involve tax
matters, alleged breaches of contract, torts, including bad faith and fraud
claims based on alleged wrongful or fraudulent acts of agents of Torchmark's
subsidiaries, employment discrimination, and miscellaneous other causes of
action. Many of these lawsuits involve claims for punitive damages in state
courts of Alabama, a jurisdiction particularly recognized for its large
punitive damage verdicts. A number of such actions involving Liberty also name
Torchmark as a
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 16--COMMITMENTS AND CONTINGENCIES (CONTINUED)
defendant. As a practical matter, a jury's discretion regarding the amount of
a punitive damage award is not limited by any clear, objective criteria under
Alabama law. Accordingly, the likelihood or extent of a punitive damage award
in any given case is virtually impossible to predict. As of December 31, 1996,
Liberty was a party to approximately 282 active lawsuits (including 25
employment related cases and excluding interpleaders and stayed cases), more
than 250 of which were Alabama proceedings in which punitive damages were
sought. Liberty faces trial settings in these cases on an on-going basis.
Torchmark has previously reported the entry of an Order and Final Judgment
by the Circuit Court of Barbour County, Alabama in Robertson v. Liberty
National Life Insurance Company (Case No. CV-92-021) approving a cancer policy
class action settlement involving legal and equitable relief valued at a total
of $55 million. In July 1994, certain intervenors in the Robertson litigation
filed a notice of appeal of the Order and Final Judgment with the Supreme
Court of Alabama. On December 22, 1995, the Alabama Supreme Court unanimously
affirmed the Robertson class action settlement and on February 16, 1996,
issued a notice overruling the petition for a rehearing in Robertson filed by
certain intervenors. A petition for writ of certiorari to the Supreme Court of
the United States was then filed by intervenors. The U.S. Supreme Court
granted certiorari in Robertson on October 1, 1996. Oral arguments on the
intervenors' petition, which alleged that class members had not received due
process in the class certification procedure and should be allowed to opt out
of the class action settlement to pursue separate litigation, were heard by
the U.S. Supreme Court on January 14, 1997. On March 3, 1997, the U.S. Supreme
Court dismissed, as improvidently granted, the writ of certiorari previously
granted in Robertson. The ruling effectively ends direct appeals from the
Robertson class action settlement and Liberty will proceed with administration
of benefits under the class settlement.
As previously reported, Liberty is subject to 76 individual cancer policy
lawsuits pending in Alabama and Mississippi, which were stayed or otherwise
held in abeyance pending final resolution of the Robertson case. Liberty will
file motions to dismiss these lawsuits based upon the U.S. Supreme Court
opinion in Robertson. If these cases are dismissed, no collateral attacks on
the cancer class action settlement will remain at this time.
As previously reported, Dismukes v. Torchmark Corporation (Case No. CV-94-
1006-P-M), which was filed on December 30, 1994 and is presently pending in
the U.S. District Court for the Northern District of
Alabama, is the only remaining purported class action litigation brought by
Torchmark shareholders alleging untimely and inadequate disclosure of material
contingent liabilities arising out of insurance policy litigation involving
Liberty. The U.S. District Court entered an order granting partial summary
judgment on behalf of the defendants on April 16, 1996. Claims for damages
based on Section 10b-5 of the Securities Exchange Act, on state securities
laws and for common law fraud remain pending in the case.
As previously reported, Torchmark, its insurance subsidiaries Globe and
United American, and certain Torchmark officers were named as defendants in
litigation filed April 22, 1994, as a purported class action in the District
Court of Oklahoma County, Oklahoma (Moore v. Torchmark Corporation, Case No.
CJ-94-2784-65). The suit claims damages on behalf of individual health
policyholders who are alleged to have been induced to terminate such policies
and to purchase Medicare Supplement and/or other insurance coverages. The
complaint seeks actual and punitive damages for each class member in excess of
$10,000. Subsequent to the filing of this case, one of the plaintiffs was
dismissed and the named plaintiff died. The complaint was amended to include
new plaintiffs purporting to represent the class and restyled Tabor v.
Torchmark Corporation. No class has been certified. A motion to dismiss filed
by the defendants was denied and limited discovery as permitted by the
Oklahoma Supreme Court is proceeding.
Prior filings have reported that in July 1994, a purported class action
alleging fraudulent and deceitful practices in premium billing and lapses of
coverage on a payroll deduction insurance plan was filed in the Superior Court
for Gordon County, Georgia against Liberty (Bryant v. Liberty National Life
Insurance Company, Civil Action No. 28979). The complaint alleged actual
damages in excess of $10 million and punitive damages of not less than $50
million as well as premium reimbursements. Liberty removed this
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 16--COMMITMENTS AND CONTINGENCIES (CONTINUED)
case to federal court, but the case was subsequently remanded to the state
court. The Bryant case was settled on an individual basis by the parties on
December 23, 1996. No class was ever certified.
Litigation was filed on April 26, 1995, in the Circuit Court of Houston
County, Alabama against Liberty involving the sale of health insurance
coverage alleged to be in conflict with provisions of the Omnibus Budget
Reconciliation Act of 1990 (Stewart v. Liberty National Life Insurance
Company, Case No. CV-95-345L; Tolar v. Liberty National Life Insurance
Company, Case No. CV-95-346J; Ingram v. Liberty National Life Insurance
Company, Case No. CV-95-348L; Burkett v. Liberty National Life Insurance
Company, Case No. CV-95-347H). The Stewart case has been dismissed with
prejudice and the other cases remain pending.
A purported class action was filed on August 8, 1995, against Liberty in the
Circuit Court of Jefferson County, Alabama on behalf of Liberty cancer
policyholders eligible for Medicare who submitted claims during an
approximately two month period in 1993 (Adkins v. Liberty National Life
Insurance Company, Case No. CV-95-5634). Beginning in September 1993, in
reliance on federal law concerning the amount health care providers could
collect from Medicare eligible individuals, Liberty limited the payment of
benefits to such individuals to the amounts collectible by the providers under
federal law. In November, 1993 Liberty discontinued this practice and
recalculated and repaid all claims in full as it had prior to September 1993
together with interest. Nearly two years after this refund, the Adkins case
was filed. The claims made in Adkins are identical to the individual claims in
Allen v. Liberty National Life Insurance Company (Case No. CV-94-3634), an
individual case reversed and remanded by the Alabama Supreme Court on March 7,
1997 after an appeal regarding the remitted verdict of $2.7 million. A class
certification order, which does not address the merits of the litigation, was
entered by the Court in Adkins on July 26, 1996. Liberty filed a petition for
writ of mandamus or prohibition with the Alabama Supreme Court in August 1996
asserting abuse of discretion by the trial court in certifying the Adkins
class. The Alabama Supreme Court has stayed further proceedings as to the
class issues in Adkins pending its ruling on the propriety of class
certification.
On August 25, 1995, a purported class action was filed against Torchmark,
Globe, United American and certain officers of these companies in the United
States District Court for the Western District of Missouri on behalf of all
former agents of Globe (Smith v. Torchmark Corporation, Case No.: 95-3304-CV-
S-4). This action alleges that the defendants breached independent agent
contracts with the plaintiffs by treating them as captive agents and engaged
in a pattern of racketeering activity wrongfully denying income and renewal
commissions to the agents, restricting insurance sales, mandating the purchase
of worthless leads, terminating agents without cause and inducing the
execution of independent contracts based on misrepresentations of fact.
Monetary damages in an unspecified amount are sought. A plaintiff class was
certified by the District Court on February 26, 1996, although the
certification does not go to
the merit of the allegations in the complaint. On December 31, 1996, the
plaintiffs filed an amended complaint in Smith to allege violations of various
provisions of the Employment Retirement Income Security Act of 1974. Discovery
is presently proceeding in this case.
It has been previously reported that Liberty is a party to individual
lawsuits and a purported class action (Carlton v. Liberty National Life
Insurance Company, Case No. CV-96-22) in the Circuit Court of Chambers County,
Alabama, in which allegations are made that an interest sensitive life
insurance policy would become paid-up or self-sustaining after a specified
number of years. Currently, Liberty is a party to more than 100 individual
interest sensitive cases, 53 of which were filed by a single lawyer in
Chambers County, Alabama. Additionally, Torchmark has previously reported the
case of Lawson v. Liberty National Life Insurance Company, filed in the
Circuit Court of Jefferson County, Alabama (Civil Action No.: CV-96-01119),
where the plaintiffs were seeking class certification on behalf of such
policyholders including those who were allegedly induced to exchange life
insurance policies or the existing policy's cash value was allegedly depleted.
On May 14, 1996, the Circuit Court of Jefferson County, Alabama entered an
order conditionally certifying a plaintiffs claim in Lawson in order to
preserve the Court's jurisdiction over the class action question, subject to a
full evidentiary hearing on class certification at a future date yet to be
determined.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 16--COMMITMENTS AND CONTINGENCIES (CONTINUED)
In 1978, the United States District Court for the Northern District of
Alabama entered a final judgment in Battle v. Liberty National Life Insurance
Company, et al. (CV-70-H-752-S), class action litigation involving Liberty, a
class composed of all owners of funeral homes in Alabama and a class composed
of all insureds (Alabama residents only) under burial or vault policies
issued, assumed or reinsured by Liberty. The final judgment fixed the rights
and obligations of Liberty and the funeral directors authorized to handle
Liberty burial and vault policies as well as reforming the benefits available
to the policyholders under the policies. Although class actions are inherently
subject to subsequent collateral attack by absent class members, the Battle
decree remains in effect to date. A motion filed in February 1990 to challenge
the final judgment under Federal Rule of Civil Procedure 60(b) was rejected by
both the District Court in 1991 and the Eleventh Circuit Court of Appeals in
1992 and a Writ of Certiorari was denied by the U.S. Supreme Court in 1993.
In November 1993, an attorney (purporting to represent the funeral director
class) filed a petition in the District Court seeking "alternative relief"
under the final judgment. This petition was voluntarily withdrawn on November
8, 1995, by petitioners. On February 23, 1996, Liberty filed a petition with
the District Court requesting that it order certain contract funeral directors
to comply with their obligations under the Final Judgment in Battle and their
funeral service contracts. A petition was filed on April 8, 1996 on behalf of
a group of funeral directors seeking to modify the 1978 decree in Battle in
light of changed economic circumstances. Liberty is actively opposing this
petition.
Purported class action litigation was filed on January 2, 1996 against
Torchmark, Torch Energy Advisors Incorporated ("Torch Energy"), and certain
Torch Energy subsidiaries and affiliated limited partnerships in the Circuit
Court of Pickens County, Alabama (Pearson v. Torchmark Corporation, Case No.
CV-95-140). Plaintiff alleges improper payment of royalties and overriding
royalties on coalbed methane gas produced and sold from wells in Robinson's
Bend Coal Degasification Field, seeks certification of a class and claims
unspecified compensatory and punitive damages on behalf of such class. On
April 11, 1996, Torchmark's motion to change venue was granted and the case
has been transferred to the Circuit Court of Tuscaloosa County, Alabama. The
Company's motion to dismiss remains pending while discovery is proceeding.
It has been previously reported that the Company, its subsidiaries United
American and Globe and certain individual corporate officers are parties to
purported class action litigation filed April 5, 1996 in the U.S. District
Court for the Northern District of Georgia (Crichlow v. Torchmark Corporation,
Case No.: 4:96-CV 0086-HLM). The complaint alleged RICCO violations, fraud,
breach of contract, conspiracy, violations of the Oklahoma Consumer Protection
Act and breach of the duty of good faith and fair dealing on behalf of all
persons who purchased, at any time between 1987 and the present, certain
hospitalization and surgical insurance policies issued by Globe and United
American. The plaintiffs asserted that they purchased these policies and
subsequently incurred improper claim denials, wrongful recision and "rate-ups"
and post-claim underwriting. On December 4, 1996, the U.S. District Court
dismissed the RICCO counts, the Oklahoma Consumer Protection Act and contract
counts as to certain defendants and ordered plaintiffs to file an amended
complaint. On December 23, 1996, the plaintiffs filed
the amended complaint as ordered, alleging breach of contract, fraud,
conspiracy and breach of the duty of good faith and fair dealing on behalf of
a purported class of persons who purchased Globe, but not United American,
policies from 1987 to the present. Defendants have filed motions to dismiss
and for partial summary judgment.
On April 19, 1996, a $5 million punitive judgment was entered against
LIberty by a jury in Mobile, Alabama in Strickland v. Liberty National Life
Insurance Company (CV-95-1399). In the Strickland case, the plaintiff, who was
in his sixties, cancelled several small life insurance policies and purchased
a substantial amount of new coverage. The plaintiff contended that certain
supplemental benefits which were present in the smaller policies were not
included in the new coverage (i.e. accidental death and premium waiver). The
trial judge held that Strickland was not entitled to recover compensatory
damages. Nevertheless the jury awarded $100 in nominal damages in addition to
the punitive award. Liberty has filed various motions for the post-trial
relief with the Circuit Court, which held a post trial hearing on the
propriety of the punitive damage award on February 12, 1997. On March 11,
1997, the Circuit Court judge reduced the Strickland judgment to $37,500.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 16--COMMITMENTS AND CONTINGENCIES (CONTINUED)
A jury in Chambers County, Alabama Circuit Court returned a verdict of
$333,000 compensatory damages and $17.2 million in punitive damages against
Liberty on June 11, 1996, in McQuiston v. Liberty National Life Insurance
Company (CV-94-234). The case arose out of a claim which had been denied due
to an alleged misrepresentation in the application. There was a recorded
telephone interview with the applicant in which a statement was given which
Liberty alleges was a misrepresentation of the health of the proposed insured.
After the litigation was filed, it was learned that one signature on the
application was not that of the insured. Upon notice of this fact, Liberty
paid the $20,000 claim proceeds into court. Liberty has filed motions for
post-trial relief with the Court, subject to completion of post-trial
discovery. A post-trial hearing on the propriety of the punitive damage award
is scheduled for March 28, 1997.
Based upon information presently available, and in light of legal and other
factual defenses available to Torchmark and its subsidiaries, contingent
liabilities arising from threatened and pending litigation are not presently
considered by management to be material. It should be noted, however, that the
frequency of large punitive damage awards bearing little or no relation to
actual damages awarded by juries in jurisdictions in which Torchmark has
substantial business, particularly in Alabama, continues to increase
universally, creating the potential for unpredictable material adverse
judgments in any given punitive damage suit.
NOTE 17--INDUSTRY SEGMENTS
Torchmark operates primarily in two industry segments, insurance and asset
management. Operations in the insurance industry involve the sale and
administration of life insurance, health insurance and annuities. It also
includes investment operations related to insurance segment investments.
Operations in the asset management industry include the management,
distribution, and servicing of various mutual funds. Torchmark markets its
products in all fifty states.
Certain insurance company investments are managed by the asset management
segment. Additionally, the asset management segment markets certain insurance
products for the insurance segment and manages the mutual funds for the
insurance segment's variable products.
Total revenues by segment include revenues from other segments in addition
to unaffiliated parties. Intersegment revenues include commission revenue and
investment income which eliminate in consolidation. Pre-tax income for
operating segments is total revenue less operating costs and expenses for the
segment. Corporate pre-tax income includes transactions which are nonoperating
in nature and are not related to the activities of a segment. Such items
include parent company interest expense, goodwill amortization, and similar
items.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 17--INDUSTRY SEGMENTS (CONTINUED)
A summary of segment data is as follows:
ADJUSTMENTS
ASSET AND CONSOLIDATED
INSURANCE MANAGEMENT CORPORATE ELIMINATIONS TOTAL
---------- ---------- --------- ------------ ------------
1996:
Revenues--unaffiliated.. $2,008,594 $192,414 $ 4,802 $ -0- $2,205,810
Intersegment revenues... 7,561 33,139 (2,310) (38,390) -0-
---------- -------- --------- -------- ----------
Total revenues.......... $2,016,155 $225,553 $ 2,492 $(38,390) $2,205,810
========== ======== ========= ======== ==========
Pretax income........... $ 485,646 $118,082 $(101,521) $ (7,075) $ 495,132
Depreciation............ 5,468 3,451 137 9,056
Capital expenditures.... 15,236 9,671 62 24,969
Identifiable assets at
year end............... 9,649,488 396,061 357,792 (602,541) 9,800,800
1995:
Revenues--unaffiliated.. $1,926,516 $156,519 $ (15,553) $ -0- $2,067,482
Intersegment revenues... 7,497 27,503 (2,174) (32,826) -0-
---------- -------- --------- -------- ----------
Total revenues.......... $1,934,013 $184,022 $ (17,727) $(32,826) $2,067,482
========== ======== ========= ======== ==========
Pretax income........... $ 462,001 $ 96,371 $(124,380) $ (5,817) $ 428,175
Depreciation............ 6,135 3,327 141 9,603
Capital expenditures.... 7,094 15,227 193 22,514
Identifiable assets at
year end............... 8,933,970 244,003 379,856 (193,725) 9,364,104
1994:
Revenues--unaffiliated.. $1,721,650 $141,807 $ 11,880 $ -0- $1,875,337
Intersegment revenues... 2,724 25,895 (6,302) (22,317) -0-
---------- -------- --------- -------- ----------
Total revenues.......... $1,724,374 $167,702 $ 5,578 $(22,317) $1,875,337
========== ======== ========= ======== ==========
Pretax income........... $ 402,562 $ 84,975 $ (89,582) $ (3,981) $ 393,974
Depreciation............ 8,260 2,869 142 11,271
Capital expenditures.... 5,117 20,952 160 26,229
Identifiable assets at
year end............... 7,697,456 180,881 442,639 (155,732) 8,165,244
NOTE 18--RELATED PARTY TRANSACTIONS
Investment in Related Parties: Other long-term investments include
investment by Torchmark subsidiaries in the United Group of Mutual Funds and
certain other funds for which Waddell & Reed, Inc. is sole advisor. These
investments were $30.3 million and $26.2 million at December 31, 1996 and
1995, respectively. Investment income derived from these investments is
included in net investment income.
Rental Income: Torchmark leases office space to Vesta Insurance Group, Inc.
("Vesta"), a 27% owned subsidiary. Total rental income received from Vesta was
$508 thousand, $494 thousand, and $461 thousand, for the years ended December
31, 1996, 1995 and 1994, respectively.
NOTE 19--SUPPLEMENTAL DISCLOSURES FOR CASH FLOW STATEMENT
The following table summarizes Torchmark's noncash transactions, which are
not reflected on the Statement of Cash Flow as required by GAAP:
YEAR ENDED
DECEMBER 31,
-----------------
1996 1995 1994
------- ---- ----
Paid-in capital from tax benefit for stock option
exercises.............................................. $ 1,947 $709 $349
Non-cash assets received from sale of energy operations. 79,289 -0- -0-
Non-cash liabilities assumed from sale of energy
operations............................................. 48,942 -0- -0-
The following table summarizes certain amounts paid during the period:
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
-------- ------- --------
Interest paid..................................... $ 74,433 $82,642 $ 77,114
Income taxes paid................................. $108,496 $99,298 $182,052
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 20--SELECTED QUARTERLY DATA (UNAUDITED)
The following is a summary of quarterly results for the two years ended
December 31, 1996. 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,
--------- -------- ------------- ------------
1996:
- -----
Premium and policy charges....... $402,188 $403,534 $402,585 $401,612
Financial services revenue....... 44,337 47,157 45,529 47,272
Net investment income............ 99,417 100,700 101,576 102,915
Realized investment gains........ 4,713 379 498 239
Total revenues................... 550,823 551,983 550,597 552,407
Policy benefits.................. 264,302 265,971 263,612 264,199
Amortization of acquisition
expenses........................ 55,457 54,277 54,788 54,304
Pretax income from continuing
operations...................... 119,296 123,200 125,094 127,542
Loss from discontinued
operations...................... -0- -0- (7,137) -0-
Net income....................... 76,274 79,039 73,693 82,366
Net income per common share from
continuing operations........... 1.06 1.10 1.13 1.17
Net income per common share from
discontinued operations:
Loss on disposal............... 0.00 0.00 (0.10) 0.00
Net income per common share...... 1.06 1.10 1.03 1.17
Net income per common share
excluding realized gains, the
related DPAC adjustment, and
discontinued operations......... 1.03 1.10 1.13 1.17
1995:
- -----
Premium and policy charges....... $390,834 $384,759 $383,962 $386,728
Financial services revenue....... 34,774 37,223 39,108 41,377
Net investment income............ 92,808 92,883 93,762 102,412
Realized investment gains
(losses)........................ (920) 304 (15,700) 1,993
Total revenues................... 517,688 515,597 501,383 532,814
Policy benefits.................. 253,369 252,640 252,547 250,780
Amortization of acquisition
expenses........................ 50,185 49,936 51,150 52,796
Pretax income from continuing
operations...................... 107,362 108,530 94,457 117,826
Income (loss) from discontinued
operations...................... 288 569 2,017 (131,584)
Net income (loss)................ 68,621 70,023 60,974 (56,383)
Net income per common share from
continuing operations........... 0.96 0.97 0.82 1.05
Net income per common share from
discontinued operations:
Income (loss) from operations.. 0.00 0.01 0.03 (1.84)
Net income (loss) per common
share........................... 0.96 0.98 0.85 (0.79)
Net income per common share
excluding realized gains, the
related DPAC adjustment, and
discontinued operations......... 0.96 0.97 0.97 1.03
64
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No disagreements with accountants on any matter of accounting principles or
practices or financial statement disclosure have been reported on a Form 8-K
within the twenty-four months prior to the date of the most recent financial
statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information required by this item is incorporated by reference from the
sections entitled "Election of Directors," "Profiles of Directors and
Nominees," "Executive Officers" and Section 16(a) "Beneficial Ownership
Reporting Compliance" of the Securities Exchange Act in the Proxy Statement
for the Annual Meeting of Stockholders to be held April 24, 1997 (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.
65
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.................................... 32
Consolidated Balance Sheet at December 31, 1996 and 1995........ 33
Consolidated Statement of Operations for each of the years in
the three-year period ended December 31, 1996.................. 34
Consolidated Statement of Shareholders' Equity for each of the
years in the three-year period ended December 31, 1996......... 35
Consolidated Statement of Cash Flow for each of the years in the
three-year period ended December 31, 1996...................... 36
Notes to Consolidated Financial Statements...................... 37
Schedules Supporting Financial Statements for each of the years
in the three-year period ended December 31, 1996................
II.Condensed Financial Information of Registrant (Parent Compa-
ny)............................................................. 71
III.Supplementary Insurance Information (Consolidated).......... 74
IV.Reinsurance (Consolidated)................................... 75
Schedules not referred to have been omitted as inapplicable or not required by
Regulation S-X.
66
EXHIBITS
Page of
this
Report
-------
(3)(i) Restated Certificate of Incorporation of Torchmark Corpora-
tion, as amended (incorporated by reference from Exhibit
3(i) to Form 10-K for the fiscal year ended December 31,
1995)
(ii) By-Laws of Torchmark Corporation, as amended (incorporated
by reference from Exhibit 3(b) to Form 10-K for the fiscal
year ended December 31, 1989)
(4)(a) Specimen Common Stock Certificate (incorporated by reference
from Exhibit 4(a) to Form 10-K for the fiscal year ended De-
cember 31, 1989)
(b) Trust Indenture dated as of February 1, 1987 between
Torchmark Corporation and Morgan Guaranty Trust Company of
New York, as Trustee (incorporated by reference from Exhibit
4(b) to Form S-3 for $300,000,000 of Torchmark Corporation
Debt Securities and Warrants (Registration No. 33-11816))
(10)(a) Torchmark Corporation and Affiliates Retired Lives Reserve
Agreement, as amended, and Trust (incorporated by reference
from Exhibit 10(b) to Form 10-K for the fiscal year ended
December 31, 1991)
(b) Capital Accumulation and Bonus Plan of Torchmark Corpora-
tion, as amended, (incorporated by reference from Exhibit
10(c) to Form 10-K for the fiscal year ended December 31,
1988)
(c) Torchmark Corporation Supplementary Retirement Plan (incor-
porated by reference from Exhibit 10(c) to Form 10-K for the
fiscal year ended December 31, 1992)
(d) Certified Copies of Resolutions Establishing Retirement Pol-
icy for Officers and Directors of Torchmark Corporation,
Providing for Advisory Directors, and Providing Retirement
Benefits for Directors (incorporated by reference from Ex-
hibit 10(e) to Form 10-K for the fiscal year ended December
31, 1989)
(e) Torchmark Corporation Restated Deferred Compensation Plan
for Directors, Advisory Directors, Directors Emeritus and
Officers, as amended (incorporated by reference from Exhibit
10(e) to Form 10-K for the fiscal year ended December 31,
1992)
(f) The Torchmark Corporation 1987 Stock Incentive Plan
(g) The 1984 Torchmark Corporation Stock Option Plan (incorpo-
rated by reference from Form S-8 for The 1984 Torchmark Cor-
poration Stock Option Plan (Registration No. 2-93760))
(h) General Agency Contract between Liberty National Life Insur-
ance Company and Independent Research Agency For Life Insur-
ance, Inc. (incorporated by reference from Exhibit 10(i) to
Form 10-K for the fiscal year ended December 31, 1990)
(i) Form of Marketing and Administrative Services Agreement be-
tween Liberty National Fire Insurance Company, Liberty Na-
tional Insurance Corporation and Liberty National Life In-
surance Company (incorporated by reference from Exhibit 10.2
to Form S-1 Registration Statement No. 33-68114)
(j) Form of Deferred Compensation Agreement Between Torchmark
Corporation or Subsidiary and Officer at the Level of Vice
President or Above Eligible to Participate in the Torchmark
Corporation and Affiliates Retired Lives Reserve Agreement
and to Retire Prior to December 31, 1986 (incorporated by
reference from Exhibit 10(k) to Form 10-K for the fiscal
year ended December 31, 1991)
67
Page of
this
Report
-------
(k) Form of Deferred Compensation Agreement between Torchmark
Corporation or Subsidiary and Officer at the Level of Vice
President or Above Eligible to Participate in the Torchmark
Corporation and Affiliates Retired Lives Reserve Agreement
and Not Eligible to Retire Prior to December 31, 1986 (in-
corporated by reference from Exhibit 10(l) to Form 10-K for
the fiscal year ended December 31, 1991)
(l) Torchmark Corporation Supplemental Savings and Investment
Plan (incorporated by reference from Exhibit 10(m) to Form
10-K for the fiscal year ended December 31, 1992)
(m) Service Agreement, dated as of January 1, 1991, between
Torchmark Corporation and Liberty National Life Insurance
Company (prototype for agreements between Torchmark Corpora-
tion and other principal operating subsidiaries) (incorpo-
rated by reference from Exhibit 10(n) to Form 10-K for the
fiscal year ended December 31, 1992)
(n) The Torchmark Corporation Pension Plan (incorporated by ref-
erence from Exhibit 10(o) to Form 10-K for the fiscal year
ended December 31, 1992)
(o) United Investors Management Company Retirement Income Plan
(incorporated by reference from Exhibit 10(p) to Form 10-K
for the fiscal year ended December 31, 1992)
(p) Waddell & Reed, Inc. Career Field Retirement Plan (incorpo-
rated by reference from Exhibit 10(q) to Form 10-K for the
fiscal year ended December 31, 1992)
(q) United Investors Management Company 1986 Employee Stock In-
centive Plan (incorporated by reference from Exhibit 10(r)
to Form 10-K for the fiscal year ended December 31, 1993)
(r) The Torchmark Corporation Savings and Investment Plan (in-
corporated by reference from Exhibit 10(s) to Form 10-K for
the fiscal year ended December 31, 1992)
(s) United Investors Management Company Savings and Investment
Plan (incorporated by reference from Exhibit 10(t) to Form
10-K for the fiscal year ended December 31, 1992)
(t) Credit Agreements dated as of October 24, 1996 among
Torchmark Corporation, the Lenders and The First National
Bank of Chicago, as Agent (364 Day and Five Year)
(u) Coinsurance and Servicing Agreement between Security Benefit
Life Insurance Company and Liberty National Life Insurance
Company, effective as of December 31, 1995 (incorporated by
reference from Exhibit 10(u) to Form 10-K for the fiscal
year ended December 31, 1995)
(v) Form of Deferred Compensation Agreement Between Torchmark
Corporation or Subsidiary and Officer at the Level of Vice
President or Above Not Eligible to Participate in Torchmark
Corporation and Affiliates Retired Lives Reserve Agreement
(incorporated by reference from Exhibit 10(j) to Form 10-K
for the fiscal year ended December 31, 1991)
(w) Torchmark Corporation 1996 Non-Employee Directors Stock Op-
tion Plan
(x) Torchmark Corporation 1996 Executive Deferred Compensation
Stock Option Plan
(11) Statement re computation of per share earnings 70
(20) Proxy Statement for Annual Meeting of Stockholders to be
held April 24, 1997
(21) Subsidiaries of the registrant 70
(23)(a) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report dated January 31, 1997, except
for Note 16, which is as of March 11, 1997, into Form S-8 of
The Torchmark Corporation Savings and Investment Plan (Reg-
istration No. 2-76378)
(b) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report dated January 31, 1997, except
for Note 16, which is as of March 11, 1997, into Form S-8 of
The United Investors Management Company Savings and Invest-
ment Plan (Registration No. 2-76912)
68
Page of
this
Report
-------
(c) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report dated January 31, 1997, except for
Note 16, which is as of March 11, 1997, into Form S-8 and the
accompanying Form S-3 Prospectus of The 1984 Torchmark Corpo-
ration Stock Option Plan (Registration No. 2-93760)
(d) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report dated January 31, 1997, except for
Note 16, which is as of March 11, 1997, into Form S-8 and the
accompanying Form S-3 Prospectus of the Torchmark Corporation
1987 Stock Incentive Plan (Registration No. 33-23580)
(e) Consent of KPMG Peat Marwick LLP to incorporation by
reference of their audit report dated January 31, 1997,
except for Note 16, which is as of March 11, 1997, into Form
S-8 and the accompanying Form S-3 Prospectus of The Capital
Accumulation and Bonus Plan of Torchmark Corporation
(Registration No. 33-1032)
(f) Consent of KPMG Peat Marwick LLP to incorporation by refer-
ence of their audit report dated January 31, 1997, except for
Note 16, which is as of March 11, 1997, into Form S-8 of the
Liberty National Life Insurance Company 401(k) Plan (Regis-
tration No. 33-65507)
(24) Powers of attorney
(27) Financial Data Schedule
69
(b) Reports on Form 8-K.
A Form 8-K dated October 2, 1996 was filed to report the United States
Supreme Court's grant of intervenors' petition for writ of certiorari in
Robertson v. Liberty National Life Insurance Company. No exhibits were
required to be filed.
(c) Exhibits
Exhibit 11. Statement re computation of per share earnings
TORCHMARK CORPORATION COMPUTATION OF EARNINGS PER SHARE
1996 1995 1994
------------ ------------- ------------
Net income from continuing opera-
tions.............................. $318,508,976 $ 271,945,720 $263,814,601
Discontinued operations of energy
segment:
Income (loss) from operations...... -0- (128,710,390) 5,131,667
Loss on disposal................... (7,137,124) -0- -0-
------------ ------------- ------------
Net income.......................... 311,371,852 143,235,330 268,946,268
Preferred dividends................. -0- 0 (804,130)
------------ ------------- ------------
Adjusted net income................. $311,371,852 $ 143,235,330 $268,142,138
============ ============= ============
Weighted average shares outstanding. 71,229,892 71,593,774 72,095,657
============ ============= ============
Primary earnings per share:
From continuing operations......... $ 4.47 $ 3.80 $ 3.65
From discontinued operations of en-
ergy segment:
Income (loss) from operations..... -0- (1.80) 0.07
Loss on disposal.................. (0.10) -0- -0-
------------ ------------- ------------
Net income........................ $ 4.37 $ 2.00 $ 3.72
============ ============= ============
There were no common stock equivalents included in weighted average shares
outstanding.
Exhibit 21. Subsidiaries of the Registrant
The following table lists subsidiaries of the registrant which meet the
definition of "significant subsidiary" according to Regulation S-X:
STATE OF NAME UNDER WHICH
COMPANY INCORPORATION COMPANY DOES BUSINESS
----------------------- ------------- ---------------------
American Income Life American Income Life
Insurance Company Indiana Insurance Company
Family Service Life Family Service Life
Insurance Company Texas Insurance Company
Globe Life And Accident Globe Life And Accident
Insurance Company Delaware Insurance Company
Liberty National Life Liberty National Life
Insurance Company Alabama Insurance Company
United American United American
Insurance Company Delaware Insurance Company
United Investors Life United Investors Life
Insurance Company Missouri Insurance Company
Waddell & Reed Waddell & Reed
Investors Management Investors Management
Company, Inc. Delaware Company, Inc.
Waddell & Reed Waddell & Reed
Services Company, Inc. Delaware Services Company, Inc.
All other exhibits required by Regulation S-K are listed as to location in the
"Index of documents filed as a part of this report" on pages 67 through 69 of
this report. Exhibits not referred to have been omitted as inapplicable or not
required.
70
TORCHMARK CORPORATION (PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
(AMOUNTS IN THOUSANDS)
DECEMBER 31,
----------------------
1996 1995
---------- ----------
Assets:
Investments:
Long-term investments--available for sale........ $ 11,182 $ 9,655
Short-term investments........................... 5,940 994
---------- ----------
Total investments................................. 17,122 10,649
Cash.............................................. 156 -0-
Investment in affiliates.......................... 2,949,625 2,820,323
Due from affiliates............................... 104,146 105,887
Accrued investment income......................... 84 94
Other assets...................................... 5,154 3,636
Discontinued operations assets.................... -0- 61,109
---------- ----------
Total assets..................................... $3,076,287 $3,001,698
========== ==========
Liabilities and shareholders' equity:
Liabilities:
Short-term debt.................................. $ 40,778 $ 189,248
Long-term debt................................... 791,589 791,566
Due to affiliates................................ 330,527 195,193
Other liabilities................................ 90,904 43,643
---------- ----------
Total liabilities................................ 1,253,798 1,219,650
Monthly income preferred securities............... 193,146 193,096
Shareholders' equity:
Preferred stock.................................. -0- -0-
Common stock..................................... 73,784 73,784
Additional paid-in capital....................... 141,701 139,754
Unrealized investment gains ..................... 46,581 140,338
Retained earnings................................ 1,549,391 1,325,534
Treasury stock................................... (182,114) (90,458)
---------- ----------
Total shareholders' equity....................... 1,629,343 1,588,952
---------- ----------
Total liabilities and shareholders' equity....... $3,076,287 $3,001,698
========== ==========
See accompanying Independent Auditors' Report
71
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
CONDENSED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
Net investment income............................ $ 931 $ 1,261 $ 5,183
Realized investment losses....................... (5,738) (23,516) (4,422)
Other income..................................... 1 11 11
-------- -------- --------
Total revenue.................................. (4,806) (22,244) 772
General operating expenses....................... 13,958 7,823 14,442
Non-operating expenses--related to affiliates.... -0- -0- (71,417)
Reimbursements from affiliates................... (13,332) (13,260) (15,218)
Interest expense................................. 88,916 91,825 79,762
-------- -------- --------
Total expenses................................. 89,542 86,388 7,569
-------- -------- --------
Operating loss before income taxes and equity in
earnings of affiliates.......................... (94,348) (108,632) (6,797)
Income taxes .................................... 23,102 37,363 2,022
-------- -------- --------
Net operating loss before equity in earnings of
affiliates...................................... (71,246) (71,269) (4,775)
Equity in earnings of affiliates................. 420,900 326,822 271,992
Monthly income preferred securities dividend..... (9,655) (10,317) (2,137)
-------- -------- --------
Net income from continuing operations.......... 339,999 245,236 265,080
Discontinued operations of energy segment:
Income (loss) from operations................... -0- (102,001) 3,866
Loss on disposal................................ (28,627) -0- -0-
-------- -------- --------
Net income..................................... $311,372 $143,235 $268,946
======== ======== ========
See accompanying Independent Auditors' Report.
72
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(continued)
CONDENSED STATEMENT OF CASH FLOW
(AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- --------- ---------
Cash provided from operations before dividends
from subsidiaries............................. $(77,291) $ (86,764) $ (48,378)
Cash dividends from subsidiaries.............. 265,688 185,500 270,500
-------- --------- ---------
Cash provided from operations.................. 188,397 98,736 222,122
Cash provided from (used for) investing activi-
ties:
Disposition of investments.................... -0- 116 225,573
Acquisition of investments.................... (1,667) (1,556) (202,579)
Investment in subsidiaries.................... -0- (83,211) (70,000)
Purchase of American Income................... -0- -0- (476,501)
Loans to subsidiaries......................... (12,508) (49,043) (28,916)
Net decrease (increase) in temporary invest-
ments........................................ (4,946) (188) 1,529
Additions to properties....................... (49) (146) (113)
-------- --------- ---------
Cash used for investing activities............. (19,170) (134,028) (551,007)
Cash provided from (used for) financing activi-
ties:
Issuance of debt.............................. -0- -0- 143,000
Issuance of monthly income preferred securi-
ties......................................... -0- -0- 193,046
Repayments of debt............................ (149,020) (60,752) -0-
Issuance of stock to subsidiaries............. -0- 77,766 -0-
Issuance of stock............................. 10,145 2,808 4,408
Acquisitions of treasury stock................ (106,996) -0- (106,054)
Borrowed from subsidiaries.................... 153,959 101,857 176,821*
Repayment on borrowings from subsidiaries..... 8,500 (5,500) -0-
Payment of dividends.......................... (85,659) (80,887) (82,336)
-------- --------- ---------
Cash provided from (used for) financing activi-
ties.......................................... (169,071) 35,292 328,885
Net increase in cash........................... 156 -0- -0-
Cash balance at beginning of period............ -0- -0- -0-
-------- --------- ---------
Cash balance at end of period.................. $ 156 $ -0- $ -0-
======== ========= =========
* Includes an $80.3 million note payable to subsidiary which was forgiven in
1994 in the form of a dividend from the subsidiary.
TORCHMARK CORPORATION
(PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
NOTE A--DIVIDENDS FROM SUBSIDIARIES
Cash dividends paid to Torchmark from the consolidated subsidiaries were as
follows:
1996 1995 1994
-------- -------- --------
Consolidated subsidiaries..................... $265,688 $185,500 $270,500
======== ======== ========
See accompanying Independent Auditors' Report.
73
TORCHMARK CORPORATION
SCHEDULE III. SUPPLEMENTARY INSURANCE INFORMATION (CONSOLIDATED)
(AMOUNTS IN THOUSANDS)
AMORTIZATION
OF DEFERRED
PREMIUM NET POLICY OTHER
AND POLICY INVESTMENT OTHER BENEFITS ACQUISITION OPERATING
CHARGES INCOME INCOME AND CLAIMS COSTS EXPENSES
---------- ---------- -------- ---------- ------------ ---------
FOR THE YEAR ENDED DE-
CEMBER 31, 1996:
- ----------------------
Insurance.............. $1,609,919 $403,300 $ 2,936 $1,058,084 $219,917 $252,508
Asset management....... 8,077 217,476 107,471
Corporate.............. (3,550) 6,042 104,013
Eliminations and ad-
justments............. (3,219) (35,171) (1,091) (30,224)
---------- -------- -------- ---------- -------- --------
Total................. $1,609,919 $404,608 $191,283 $1,058,084 $218,826 $433,768
========== ======== ======== ========== ======== ========
FOR THE YEAR ENDED DE-
CEMBER 31, 1995:
- ----------------------
Insurance.............. $1,546,283 $384,619 $ 3,111 $1,009,336 $205,509 $257,167
Asset management....... 4,021 180,001 87,651
Corporate.............. (3,418) (14,309) 106,653
Eliminations and ad-
justments............. (3,357) (29,469) (1,442) (25,567)
---------- -------- -------- ---------- -------- --------
Total................. $1,546,283 $381,865 $139,334 $1,009,336 $204,067 $425,904
========== ======== ======== ========== ======== ========
FOR THE YEAR ENDED DE-
CEMBER 31, 1994:
- ----------------------
Insurance.............. $1,388,874 $331,679 $ 3,821 $ 921,277 $172,493 $228,042
Asset management....... 2,443 165,259 82,727
Corporate.............. 8,103 (2,525) 95,160
Eliminations and ad-
justments............. 5,412 (27,729) 5,614 (23,950)
---------- -------- -------- ---------- -------- --------
Total................. $1,388,874 $347,637 $138,826 $ 921,277 $178,107 $381,979
========== ======== ======== ========== ======== ========
See accompanying Independent Auditors' Report.
74
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, 1996:
- ----------------------
Life insurance in force. $84,360,821 $655,574 $2,587,330 $86,292,577 3.0%
=========== ======== ========== =========== ====
Premiums:*
Life insurance......... 759,321 3,472 26,511 782,360 3.4%
Health insurance....... 742,319 9,835 135 732,619 0.0%
----------- -------- ---------- -----------
Total premiums........ $ 1,501,640 $ 13,307 $ 26,646 $ 1,514,979 1.8%
=========== ======== ========== =========== ====
FOR THE YEAR ENDED DE-
CEMBER 31, 1995:
- ----------------------
Life insurance in force. $80,377,021 $636,961 $ 14,355 $79,754,415 0.0%
=========== ======== ========== =========== ====
Premiums:*
Life insurance......... $ 702,993 $ 3,305 $ 4,283 $ 703,971 0.6%
Health insurance....... 761,573 10,985 -0- 750,588 0.0%
----------- -------- ---------- -----------
Total premiums........ $ 1,464,566 $ 14,290 $ 4,283 $ 1,454,559 0.3%
=========== ======== ========== =========== ====
FOR THE YEAR ENDED DE-
CEMBER 31, 1994:
- ----------------------
Life insurance in force. $74,834,644 $633,485 $ 23,570 $74,224,729 0.0%
=========== ======== ========== =========== ====
Premiums:*
Life insurance......... $ 535,141 $ 4,386 $ 1,316 $ 532,071 0.2%
Health insurance....... 781,207 12,493 -0- 768,714 0.0%
----------- -------- ---------- -----------
Total premiums........ $ 1,316,348 $ 16,879 $ 1,316 $ 1,300,785 0.1%
=========== ======== ========== =========== ====
- --------
* Excludes policy charges
See accompanying Independent Auditors' Report.
75
SIGNATURES
Pursuant to the requirements of Section 12 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Torchmark Corporation
By: ________________________________
R.K. RICHEY, CHAIRMAN, CHIEF
EXECUTIVE OFFICER AND DIRECTOR
By: ________________________________
KEITH A. TUCKER, VICE CHAIRMAN
AND DIRECTOR (PRINCIPAL FINANCIAL
OFFICER)
By: ________________________________
GARY L. COLEMAN, VICE PRESIDENT
AND CHIEF ACCOUNTING OFFICER
(PRINCIPAL ACCOUNTING OFFICER)
Date: March 20, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: ________________________________ By: ________________________________
DAVID L. BOREN DIRECTOR HAROLD T. MCCORMICK DIRECTOR
By: ________________________________ By: ________________________________
JOSEPH M. FARLEY DIRECTOR GEORGE J. RECORDS DIRECTOR
By: ________________________________ By: ________________________________
LOUIS T. HAGOPIAN DIRECTOR YETTA G. SAMFORD, JR. DIRECTOR
By: ________________________________
C.B. HUDSON DIRECTOR
By: ________________________________
JOSEPH L. LANIER, JR. DIRECTOR
Date: March 20, 1997
*By: _______________________________
GARY L. COLEMAN ATTORNEY-IN-FACT
76