SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. ) Filed by the Registrant [X] Filed by a Party other than the Registrant [_] Check the appropriate box: [_] Preliminary Proxy Statement [X] Definitive Proxy Statement [_] Definitive Additional Materials [_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12 TORCHMARK CORPORATION ----------------------------------------------------- (Name of Registrant as Specified In Its Charter) --Enter Company Name Here-- ----------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or Item 22(a)(2) of Schedule 14A. [_] $500 per each party to the controversy pursuant to Exchange Act Rule 14a- 6(i)(3). [_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. (1) Title of each class of securities to which transaction applies: (2) Aggregate number of securities to which transaction applies: (3) Per unit price or other underlying value of transaction computed pursuant to Exchange ActRule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): (4) Proposed maximum aggregate value of transaction: (5) Total fee paid: [_] Fee paid previously with preliminary materials. [_] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: (2) Form, Schedule or Registration Statement No.: (3) Filing Party: (4) Date Filed: Notes:
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission file number December 31, 1995 1-8052 TORCHMARK CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 63-0780404 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR IDENTIFICATION NO.) ORGANIZATION) 2001 Third Ave. South, 35233 Birmingham, AL (ADDRESS OF PRINCIPAL (ZIP CODE) EXECUTIVE OFFICES) Registrant's telephone number, including area code: (205) 325-4200 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS CUSIP NUMBER: ON WHICH REGISTERED: Common Stock, $1.00 Par 891027104 New York Stock Exchange Value The International Stock Exchange, London, England Securities registered pursuant to Section 12(g) of the Act: None Securities reported pursuant to Section 15(d) of the Act: TITLE OF EACH CUSIP NUMBER: CLASS: 8 5/8% Sinking Fund 891027 AB 0 Debentures due 2017 9 5/8% Senior Notes 891027 AD 6 due 1998 8 1/4% Senior 891027 AE 4 Debentures due 2009 7 7/8% Notes due 891027 AF 1 2023 7 3/8% Notes due 891027 AG 9 2013 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH) AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [_] INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K ((S)229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [_] THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT: $3,326,119,112 THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK, AS OF FEBRUARY 29, 1996: 71,722,245 DOCUMENTS INCORPORATED BY REFERENCE PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 25, 1996, PART III INDEX OF EXHIBITS (PAGES 63 THROUGH 65) TOTAL NUMBER OF PAGES INCLUDED ARE 72
PART 1 ITEM 1. BUSINESS Torchmark Corporation ("Torchmark"), an insurance and diversified financial services holding company, was incorporated in Delaware on November 19, 1979, as Liberty National Insurance Holding Company. Through a plan of reorganization effective December 30, 1980, it became the parent company for the businesses operated by Liberty National Life Insurance Company ("Liberty") and Globe Life And Accident Insurance Company ("Globe"). United American Insurance Company ("United American"), Waddell & Reed, Inc. ("W&R") and United Investors Life Insurance Company ("UILIC") along with their respective subsidiaries were acquired in 1981. The name Torchmark Corporation was adopted on July 1, 1982. Family Service Life Insurance Company ("Famlico") was purchased in July, 1990, and American Income Life Insurance Company ("American Income") was purchased in November, 1994. The following table presents Torchmark's business by primary distribution method: <TABLE> <CAPTION> PRIMARY DISTRIBUTION METHOD COMPANY PRODUCTS SALES FORCE - -------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> HOME SERVICE LIBERTY NATIONAL LIFE Individual life and 2,400 full-time sales repre- INSURANCE COMPANY health insurance. sentatives; 115 district offices Birmingham, Alabama in the Southeastern United States. - -------------------------------------------------------------------------------------------------------------- UNITED AMERICAN UNITED AMERICAN Senior life and health 51,000 independent agents GENERAL AGENCY INSURANCE COMPANY insurance including in the U.S., Puerto Rico and AND CAPTIVE AGENCY Dallas, Texas Medicare Supplement Canada; 1,000 career coverage and long-term care. agents in 67 branch offices. - -------------------------------------------------------------------------------------------------------------- DIRECT RESPONSE GLOBE LIFE AND Individual life and health in- Direct response, television, ACCIDENT surance including special senior magazine; nationwide. INSURANCE COMPANY life coverage, Medicare Oklahoma City, OK Supplement, long-term care. - -------------------------------------------------------------------------------------------------------------- AMERICAN INCOME AMERICAN INCOME Individual life and health in- 1,400 agents. CAPTIVE AGENCY INSURANCE COMPANY surance to union and credit Waco, Texas union members. - -------------------------------------------------------------------------------------------------------------- UNITED INVESTORS WADDELL & REED, INC. United and Waddell & Reed 2,450 Waddell & Reed CAPTIVE AGENCY Shawnee Mission, Groups of mutual funds, representatives; indepen- Kansas institutional investment dent agents; 165 offices UNITED INVESTORS LIFE management services includ- nationwide. INSURANCE COMPANY ing assets of Torchmark. Birmingham, Alabama Individual life insurance and annuities. - -------------------------------------------------------------------------------------------------------------- PRENEED FAMILY SERVICE LIFE Individual life insurance General Agency with 1,000 CAPTIVE AGENCY INSURANCE COMPANY to fund prearranged independent career agents Dallas, Texas funerals. nationwide. </TABLE> Additional information concerning industry segments may be found in Management's Discussion and Analysis and in Note 17--Industry Segments in the Notes to Consolidated Financial Statements. INSURANCE LIFE INSURANCE Torchmark writes a variety of nonparticipating ordinary life insurance products. These include whole-life insurance in the form of traditional and interest-sensitive, term life insurance, and other life insurance. The following table presents selected information about Torchmark's life products: <TABLE> <CAPTION> (AMOUNTS IN THOUSANDS) ANNUALIZED ANNUALIZED PREMIUM ISSUED PREMIUM IN FORCE -------------------------- -------------------------- 1995 1994 1993 1995 1994 1993 -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> Whole life: Traditional.............. $107,288 $ 63,108 $ 55,265 $469,581 $445,025 $312,905 Interest-sensitive....... 29,287 34,633 34,211 174,675 171,264 160,824 Term...................... 79,849 48,392 36,303 212,213 167,973 129,815 Other..................... 1,564 3,700 2,654 12,897 12,693 9,112 -------- -------- -------- -------- -------- -------- $217,988 $149,833 $128,433 $869,366 $796,955 $612,656 ======== ======== ======== ======== ======== ======== </TABLE> 1
Life insurance products are sold through a variety of distribution channels, including home service agents, independent agents, exclusive agents, and direct response. These methods are discussed in more depth under the heading "Marketing." The following table presents life annualized premium issued by marketing method: <TABLE> <CAPTION> (AMOUNTS IN THOUSANDS) ANNUALIZED ANNUALIZED PREMIUM ISSUED PREMIUM IN FORCE -------------------------- -------------------------- 1995 1994 1993 1995 1994 1993 -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> Direct response........... $ 63,900 $ 48,267 $ 36,031 $180,530 $154,130 $133,782 Home service.............. 48,549 51,461 48,474 297,418 291,813 282,059 Independent agents........ 31,630 24,894 22,335 112,797 101,721 94,392 Exclusive agents.......... 73,909 25,211 21,593 278,621 249,291 102,423 -------- -------- -------- -------- -------- -------- $217,988 $149,833 $128,433 $869,366 $796,955 $612,656 ======== ======== ======== ======== ======== ======== </TABLE> Permanent insurance products sold by Torchmark build cash values which are available to policyholders. Policyholders may borrow such funds using the policies as collateral. The aggregate value of policy loans outstanding at December 31, 1995 was $194 million and the average interest rate earned on these loans was 6.46% in 1995. Interest income earned on policy loans was $12.1 million in 1995, $10.0 million in 1994, and $9.1 million in 1993. Torchmark had 182 thousand and 154 thousand policy loans outstanding at year- end 1995 and 1994, respectively. The availability of cash values contributes to voluntary policy terminations by policyholders through surrenders. Torchmark's life insurance products may be terminated or surrendered at the election of the insured at any time, generally for the full cash value specified in the policy. Specific surrender procedures vary with the type of policy. For certain policies this cash value is based upon a fund less a surrender charge which decreases with the length of time the policy has been in force. This surrender charge is either based upon a percentage of the fund or a charge per $1,000 of face amount of insurance. The schedule of charges may vary by plan of insurance and, for some plans, by age of the insured at issue. Torchmark's ratio of aggregate face amount voluntary terminations to the mean amount of life insurance in force was 17.2% in 1995, 14.7% in 1994 and 14.9% in 1993. Excluding American Income, the 1995 and 1994 ratios would have been 16.1% and 15.2%, respectively. The following table presents an analysis of changes to Torchmark's life insurance business in force: <TABLE> <CAPTION> (AMOUNTS IN THOUSANDS) 1995 1994 1993 --------------------- --------------------- --------------------- NUMBER OF AMOUNT OF NUMBER OF AMOUNT OF NUMBER OF AMOUNT OF POLICIES INSURANCE POLICIES INSURANCE POLICIES INSURANCE --------- ----------- --------- ----------- --------- ----------- <S> <C> <C> <C> <C> <C> <C> In force at January 1,.. 8,913 $74,858,214 8,110 $61,366,933 8,028 $58,306,295 New issues.............. 1,413 19,359,923 1,147 14,958,141 944 12,240,245 Business acquired....... -0- -0- 595 8,983,055 -0- -0- Other increases......... 1 64,128 1 10,961 -0- 35,530 Death benefits.......... (110) (271,451) (105) (228,354) (102) (213,785) Lapses.................. (856) (12,185,540) (688) (8,940,980) (625) (7,817,201) Surrenders.............. (135) (1,187,581) (106) (1,048,117) (106) (1,082,962) Other decreases......... (30) (246,317) (41) (243,425) (29) (101,189) ----- ----------- ----- ----------- ----- ----------- In force at December 31,.................... 9,196 $80,391,376 8,913 $74,858,214 8,110 $61,366,933 ===== =========== ===== =========== ===== =========== Average policy size (in dollar amounts)........ $ 8,742 $ 8,399 $ 7,567 =========== =========== =========== </TABLE> 2
HEALTH INSURANCE Torchmark offers an assortment of supplemental health insurance products. These are generally classified as (1) Medicare Supplement, (2) cancer and (3) other health related policies. Medicare Supplement policies are offered on both an individual and group basis through exclusive and independent agents, and direct response. These guaranteed renewable policies provide reimbursement for certain expenses not covered by the federal Medicare program. One popular feature available under Torchmark's Medicare Supplements is an automatic claim filing system for Medicare Part B benefits whereby policyholders do not have to file most claim forms because they are paid directly by Torchmark from Medicare records. Cancer policies are offered on an individual basis through exclusive and independent agents as well as direct response. These guaranteed renewable policies are designed to fill gaps in existing medical coverage and benefits are triggered by a diagnosis of cancer or health related events or medical expenses related to the treatment of cancer. Benefits may be in the form of a lump sum payment, stated amounts per diem, per medical procedure, or reimbursement for certain medical expenses. Other health related policies include accident, long term care and limited benefit hospital and surgical coverages. These generally guaranteed renewable policies are offered on an individual basis through exclusive and independent agents, and direct response. These policies are designed to supplement existing medical coverages. Benefits are triggered by certain health related events or incurred expenses. Benefit amounts are per diem, per health related event or defined expenses incurred up to stated maximum. The following table presents supplemental health annualized premium for the three years ended December 31, 1995 by marketing method: <TABLE> <CAPTION> ANNUALIZED ANNUALIZED PREMIUM ISSUED PREMIUM IN FORCE -------------------------- -------------------------- 1995 1994 1993 1995 1994 1993 -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> Home service.............. $ 15,728 $ 23,423 $ 31,288 $117,846 $123,178 $128,000 Independent agents........ 44,438 62,088 98,946 468,691 516,294 555,320 Exclusive agents.......... 42,181 34,997 44,083 167,292 166,953 138,900 Direct response........... 171 674 1,711 929 1,162 1,162 -------- -------- -------- -------- -------- -------- $102,518 $121,182 $176,028 $754,758 $807,587 $823,382 ======== ======== ======== ======== ======== ======== </TABLE> The following table presents supplemental health annualized premium information for the three years ended December 31, 1995 by product category: <TABLE> <CAPTION> ANNUALIZED ANNUALIZED PREMIUM ISSUED PREMIUM IN FORCE -------------------------- -------------------------- 1995 1994 1993 1995 1994 1993 -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> Medicare Supplement...... $ 64,638 $ 87,547 $136,050 $529,616 $572,221 $600,536 Cancer................... 11,338 8,101 10,012 114,972 114,495 105,773 Other health related pol- icies................... 26,542 25,534 29,966 110,170 120,871 117,073 -------- -------- -------- -------- -------- -------- $102,518 $121,182 $176,028 $754,758 $807,587 $823,382 ======== ======== ======== ======== ======== ======== </TABLE> ANNUITIES Annuity products offered by Torchmark include single-premium deferred annuities, flexible-premium deferred annuities, and variable annuities. Single-premium and flexible-premium annuities are fixed annuities where a portion of the interest credited is guaranteed. Additional interest may be credited on certain contracts. Variable annuity policyholders may select from a variety of mutual funds managed by W&R which offer different degrees of risk and return. The ultimate benefit on a variable annuity results from the account performance. The following table presents Torchmark subsidiaries' annuity collections and deposit balances by product type: <TABLE> <CAPTION> (AMOUNTS IN THOUSANDS) (AMOUNTS IN MILLIONS) COLLECTIONS DEPOSIT BALANCE FOR THE YEAR ENDED DECEMBER 31, AT DECEMBER 31, -------------------------------- -------------------------- 1995 1994 1993 1995 1994 1993 ---------- ---------- ---------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> Fixed annuities......... $ 130,115 $ 43,339 $ 46,573 $ 927.9 $ 801.2 $ 782.8 Variable annuities...... 189,188 196,105 213,982 1,052.2 692.8 529.7 ---------- ---------- ---------- -------- -------- -------- $319,303 $239,444 $260,555 $1,980.1 $1,494.0 $1,312.5 ========== ========== ========== ======== ======== ======== </TABLE> 3
INVESTMENTS The nature, quality, and percentage mix of insurance company investments are regulated by state laws that generally permit investments in qualified municipal, state, and federal government obligations, corporate bonds, preferred and common stock, real estate, and mortgages where the value of the underlying real estate exceeds the amount of the loan. Torchmark's investments consist predominantly of high-quality, investment-grade securities. Fixed maturities represented 90% of total investments at December 31, 1995. Approximately 29% of fixed maturity investments were securities guaranteed by the United States Government or its agencies or investments that were collateralized by U.S. government securities. More than 74% of these investments were in GNMA securities that are backed by the full faith and credit of the United States government. The remainder of these government investments were U.S. Treasuries or collateralized mortgage obligations ("CMO's") that are fully backed by GNMA's. (See Note 3--Investment Operations in the Notes to Consolidated Financial Statements and Management's Discussion and Analysis.) The following table presents an analysis of Torchmark's fixed maturity investments at December 31, 1995. All of the securities are classified as available for sale and are, therefore, reported at fair market value. <TABLE> <CAPTION> AMOUNT (IN THOUSANDS) % -------------- ----- <S> <C> <C> Securities of U.S. Government...................... $ 116,686 2.2% GNMA and MBS backed by GNMA collateral............. 1,339,125 25.7 Other U.S. Government guaranteed................... 48,645 0.9 Other investment grade............................. 3,541,184 68.0 Non-investment grade corporates.................... 164,584 3.2 ---------- ----- $5,210,224 100.0% ========== ===== </TABLE> The following table presents Torchmark's fixed maturity investments at December 31, 1995 on the basis of ratings as determined primarily by Moody's Investors Services. Standard and Poor's bond ratings are used when Moody's ratings are not available. Ratings of BAA and higher (or their equivalent) are considered investment grade by the rating services. <TABLE> <CAPTION> AMOUNT RATING (IN THOUSANDS) % ------ -------------- ----- <S> <C> <C> AAA................................................ $2,258,689 43.3% AA................................................. 665,309 12.7 A.................................................. 1,921,875 36.9 BAA................................................ 169,016 3.2 BA................................................. 139,481 2.7 B.................................................. 13,191 0.3 Less than B........................................ 3,092 0.1 Not rated.......................................... 39,571 0.8 ---------- ----- $5,210,224 100.0% ========== ===== </TABLE> 4
The following table presents the fixed maturity investments of Torchmark's insurance subsidiaries at December 31, 1995 on the basis of ratings as determined by the National Association of Insurance Commissioners ("NAIC"). Categories one and two are considered investment grade by the NAIC. <TABLE> <CAPTION> AMOUNT RATING (IN THOUSANDS) % -------------------- -------------- ----- <S> <C> <C> 1. Highest quality.. $4,772,568 92.0% 2. High quality..... 252,152 4.8 3. Medium quality... 141,131 2.7 4. Low quality...... 20,249 0.4 5. Lower quality.... 3,167 0.1 6. In or near de- fault.............. 37 -0- ---------- ----- $5,189,304 100.0% ========== ===== </TABLE> Securities are assigned ratings when acquired. All ratings are reviewed and updated at least annually. Specific security ratings are updated as information becomes available during the year. PRICING Premium rates for life and health insurance products are established using assumptions as to future mortality, morbidity, persistency, and expenses, all of which are generally based on Torchmark's experience, and on projected investment earnings. Revenues for individual life and health insurance products are primarily derived from premium income, and, to a lesser extent, through policy charges to the policyholder account values on certain individual life products. Profitability is affected to the extent actual experience deviates from that which has been assumed in premium pricing and to the extent investment income exceeds that which is required for policy reserves. Collections for annuity products and certain life products are not recognized as revenues but are added to policyholder account values. Revenues from these products are derived from charges to the account balances for insurance risk and administrative costs. Profits are earned to the extent these revenues exceed actual costs. Profits are also earned from investment income on the deposits invested in excess of the amounts credited to policy accounts. UNDERWRITING The underwriting standards of Torchmark are established by management. Torchmark uses information from the application and, in some cases, inspection reports, doctors' statements and/or medical examinations to determine whether a policy should be issued in accordance with the application, with a different rating, with a rider, with reduced coverage or rejected. Torchmark requires medical information or examinations of applicants for life insurance in excess of certain prescribed amounts. These are graduated according to the age of the applicant and may vary with the kind of insurance. The maximum amount of insurance issued without medical information is $100,000 through age 40. Torchmark requests medical information of all applicants, regardless of age or amount, if information obtained from the application or other sources indicates that such information is warranted. In recent years, there has been considerable concern regarding the impact of the HIV virus associated with Acquired Immune Deficiency Syndrome ("AIDS"). Torchmark has implemented certain underwriting tests to detect the presence of the HIV virus and continue to assess the utility of other appropriate underwriting tests to detect AIDS in light of medical developments in this field. To date, AIDS claims have not had a material impact on claims experience. 5
REINSURANCE As is customary among insurance companies, Torchmark cedes insurance to other unaffiliated insurance companies on policies they issue in excess of retention limits. Reinsurance is an effective method for keeping insurance risk within acceptable limits. In the event insurance business is ceded, Torchmark remains contingently liable with respect to ceded insurance should any reinsurer be unable to meet the obligations it assumes (See Note 16-- Commitments and Contingencies in the Notes to Consolidated Financial Statements and Schedule IV--Reinsurance [Consolidated]). RESERVES The life insurance policy reserves reflected in Torchmark's financial statements as future policy benefits are calculated based on generally accepted accounting principles. These reserves, with the addition of premiums to be received and the interest thereon compounded annually at assumed rates, must be sufficient to cover policy and contract obligations as they mature. Generally, the mortality and persistency assumptions used in the calculations of reserves are based on company experience. Similar reserves are held on most of the health policies written by Torchmark's insurance subsidiaries, since these policies generally are issued on a guaranteed-renewable basis. A list of the assumptions used in the calculation of Torchmark's reserves are reported in the financial statements (See Note 9--Future Policy Benefit Reserves in the Notes to Consolidated Financial Statements). Reserves for annuity products consist of the policyholders' account values and are increased by policyholder deposits and interest credits and are decreased by policy charges and benefit payments. MARKETING Torchmark is licensed to sell insurance in all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands, Guam, New Zealand and Canada. Distribution is through direct response, home service agents, independent agents, and exclusive agents. Direct Response. Torchmark offers life insurance products directly to consumers through the use of direct mail, co-op mailings, national cable and local spot television, national newspaper supplements and national magazines. Torchmark operates a full service letterpress which enables the direct response operation to maintain high quality standards while producing materials much more efficiently than they could be purchased from outside vendors. Home Service. Torchmark sells and services life and health insurance through home service agents primarily in the seven state area of Alabama, Florida, Georgia, Tennessee, MIssissippi, South Carolina, and North Carolina. Home service agents are employees of Liberty and are primarily compensated by commissions based on sales and by a salary based on the amount of premium collected on policies assigned to them for servicing. During the past several years the home service operation has emphasized bank draft and direct bill collection of premium rather than agent collection. This trend will be encouraged in the future because of its lower cost and improved persistency. Agent collected sales will be discontinued in 1996. Independent Agents. Torchmark offers a variety of life and health insurance policies through approximately 51 thousand independent agents, brokers, and licensed sales representatives. Torchmark is not committed or obligated in any way to accept a fixed portion of the business submitted by any independent agent. All policy applications, both new and renewal, are subject to approval and acceptance by Torchmark. Torchmark is not dependent on any single agent or any small group of independent agents, the loss of which would have a materially adverse effect on insurance sales. Exclusive Agents. Torchmark sells individual life and fixed-benefit accident and health insurance through approximately 1,400 exclusive agents who target moderate income wage earners through the cooperation of labor unions, credit unions, and other associations. These agents are authorized to use the "union label" because this sales force is represented by organized labor. Torchmark sells life insurance as well as fixed and variable annuity products through the W&R sales force in conjunction with W&R's financial planning services. (See Asset Management--Mutual Funds for additional marketing information about the W&R sales force.) 6
Torchmark offers life and health insurance through approximately 1,500 exclusive agents, of which approximately 1,000 exclusive agents work out of 67 branch offices throughout the United States. These policies are targeted to various special markets. Torchmark also markets insurance products through a variety of other methods such as brokers and other special markets. RATINGS The following list indicates the ratings currently held by Torchmark's five largest insurance companies as rated by A.M. Best Company: <TABLE> <CAPTION> A.M. BEST STANDARD COMPANY & POOR'S --------------- --------- <S> <C> <C> <C> Liberty National Life Insurance Company A+ (Superior) Not rated Globe Life And Accident Insurance Company A+ (Superior) AA+ United Investors Life Insurance Company A+ (Superior) AA+ United American Insurance Company A+ (Superior) AA+ American Income Life Insurance Company A (Excellent) Not rated </TABLE> A.M. Best states that it assigns A+ (Superior) ratings to those companies which, in its opinion, have demonstrated superior overall performance when compared to the norms of the life/health insurance industry. A+ (Superior) companies have a very strong ability to meet their obligations to policyholders over a long period of time. A.M. Best states that it assigns A (Excellent) ratings to those companies which, in its opinion, have demonstrated excellent overall performance when compared to the norms of the life/health insurance industry. A (Excellent) companies have an excellent ability to meet their obligations to policyholders over a long period of time. Standard & Poor's Corporation assigns a superior or AA rating to those companies who offer excellent financial security on an absolute and relative basis and whose capacity to meet policyholder obligations is overwhelming under a variety of economic and underwriting conditions. 7
ASSET MANAGEMENT Torchmark conducts its asset management and financial services businesses through United Investors Management Company ("United Management") and its subsidiaries. This segment's activity is mutual fund distribution and management. MUTUAL FUNDS Torchmark's mutual fund operations are carried out by a subsidiary of United Management, W&R, which markets and manages the seventeen mutual funds in the United Group of Mutual Funds, the six mutual funds in the Waddell & Reed Fund, Inc. ("W&R Funds"), and the ten mutual funds in the TMK/United Fund, Inc. ("TMK/United Funds"). Until 1995, two mutual funds in the Torchmark Fund ("Torchmark Funds") were also marketed. In 1995, the Torchmark Funds were discontinued and liquidated. These funds were valued as follows at December 31, 1995 and 1994: <TABLE> <CAPTION> (AMOUNTS IN MILLIONS) 1995 1994 ------- ------- <S> <C> <C> United Funds $13,569 $10,947 W&R Funds 419 219 TMK/United Funds 1,099 725 Torchmark Funds -- 3 ------- ------- Total mutual fund assets under management 15,087 11,894 Institutional and private accounts 3,201 2,608 ------- ------- Total assets under management $18,288 $14,502 ======= ======= </TABLE> W&R's revenues consist of the following: (1) fees for managing the assets, which are based on the value of the assets managed, (2) commissions for the sale of products, and (3) fees for accounting and administration, which are based primarily on an annual charge per account. In addition to its mutual fund management and distribution activities, W&R manages accounts for individual and institutional investors for which asset management fees are received. Asset management activities are conducted by an experienced and qualified staff. As of December 31, 1995, the average industry experience of the fund managers for W&R was 21 years, and average company experience was 13 years. The following table indicates W&R revenues by component for the three years ending December 31, 1995: <TABLE> <CAPTION> (AMOUNTS IN THOUSANDS) 1995 1994 1993 -------- -------- -------- <S> <C> <C> <C> Investment product commissions*.............. $ 56,927 $ 59,450 $ 65,950 Insurance product commissions*............... 13,531 12,773 12,117 Asset management fees........................ 85,999 70,651 64,181 Service fees................................. 23,528 22,297 21,273 -------- -------- -------- $179,985 $165,171 $163,521 ======== ======== ======== </TABLE> *Commissions paid to W&R by affiliates for variable annuities and insurance products are eliminated in consolidation. W&R markets its mutual funds and other financial products, including life insurance and Medicare Supplement insurance, through a sales force of approximately 2,450 registered representatives in 50 states and the District of Columbia. These representatives concentrate on product sales of W&R and other Torchmark affiliates. W&R maintained 165 sales offices at December 31, 1995. W&R conducts money management seminars on a national scale to reach numerous potential clients every year. Individual financial plans are developed for clients through one-on-one consultations with the W&R sales representatives. Emphasis is placed on a long-term relationship with a client rather than a one-time sale. 8
COMPETITION The insurance industry is highly competitive. Torchmark competes with other insurance carriers through policyholder service, price, product design, and sales effort. In addition to competition with other insurance companies, Torchmark also faces increasing competition from other financial services organizations. While there are a number of larger insurance companies competing with Torchmark that have greater resources and have considerable marketing forces, there is no individual company dominating any of Torchmark's life or health markets. Torchmark's health insurance products compete with, in addition to the products of other health insurance carriers, health maintenance organizations, preferred provider organizations, and other health care related institutions which provide medical benefits based on contractual agreements. Generally, Torchmark companies operate at lower administrative expense levels than its peer companies, allowing Torchmark to have competitive rates while maintaining margins, or, in the case of Medicare Supplement business, to remain in the business while some companies have ceased new writings. Torchmark's years of experience in direct response business are a valuable asset in designing direct response products. Similarly, Torchmark's home service concentration of business has been considered a competitive advantage in hiring and retaining agents. On the other hand, Torchmark's insurance subsidiaries do not have the same degree of national name recognition as some other companies with which they compete. W&R competes with hundreds of other registered institutional investment advisers and mutual fund management and distribution companies which distribute their fund shares through a variety of methods including affiliated and unaffiliated sales forces, broker-dealers, and direct sales to the public. Although no one company or group of companies dominates the mutual fund industry, some are larger than W&R and have greater resources. Competition is based on the methods of distribution of fund shares, tailoring investment products to meet certain segments of the market, the changing needs of investors, the ability to achieve superior investment management performance, the type and quality of shareholder services, and the success of sales promotion efforts. REGULATION INSURANCE. Insurance companies are subject to regulation and supervision in the states in which they do business. The laws of the various states establish agencies with broad administrative and supervisory powers which include, among other things, granting and revoking licenses to transact business, regulating trade practices, licensing agents, approving policy forms, approving certain premium rates, setting minimum reserve and loss ratio requirements, determining the form and content of required financial statements, and prescribing the type and amount of investments permitted. Insurance companies can also be required under the solvency or guaranty laws of most states in which they do business to pay assessments up to prescribed limits to fund policyholder losses or liabilities of insolvent insurance companies. They are also required to file detailed annual reports with supervisory agencies, and records of their business are subject to examination at any time. Under the rules of the NAIC, insurance companies are examined periodically by one or more of the supervisory agencies. The most recent examinations of Torchmark's insurance subsidiaries were: Famlico, as of September 30, 1990; American Income as of December 31, 1990; Globe, as of December 31, 1991; Liberty, as of December 31, 1991; United American, as of December 31, 1993; and UILIC, as of December 31, 1993. NAIC Ratios. The NAIC developed the Insurance Regulatory Information System ("IRIS"), which is intended to assist state insurance regulators in monitoring the financial condition of insurance companies. IRIS identifies twelve insurance industry ratios from the statutory financial statements of insurance companies, which statements are based on regulatory accounting principles and are not based on generally accepted accounting principles ("GAAP"). IRIS specifies a standard or "usual value" range for each ratio, and a company's variation from this range may be either favorable or unfavorable. The 9
following table presents the IRIS ratios as determined by the NAIC for Torchmark's five largest insurance subsidiaries, which varied unfavorably from the "usual value" range for the years 1994 and 1993. <TABLE> <CAPTION> USUAL REPORTED COMPANY RATIO NAME RANGE VALUE - --------- ------------------------------------------------- ---------- -------- <S> <C> <C> <C> 1994: Liberty Investment in Affiliate to Capital and Surplus 0 to 100 202 Liberty Change in Capital and Surplus 50 to -10 -29 Globe Change in Capital and Surplus 50 to -10 -12 1993: Liberty Investment in Affiliate to Capital and Surplus 0 to 100 126 Globe Adequacy of Investment Income 125 to 900 959 Globe Change in Asset Mix 0 to 5 5.8 Globe Change in Capital and Surplus 50 to -10 -65 United American Change in Capital and Surplus 50 to -10 -13 </TABLE> Explanation of Ratios: Investment in Affiliate to Capital and Surplus--This ratio is determined by measuring total investment in affiliates against the capital and surplus of the company. The NAIC considers a ratio of more than 100% to be high, and to possibly impact a company's liquidity, yield, and overall investment risk. The large ratio in Liberty in 1994 and 1993 is brought about by its ownership of other large Torchmark insurance companies and the ownership of 81% of the stock of United Management. Profitability and growth in these subsidiaries have caused this ratio to gradually rise. All intercompany investment is eliminated in consolidation, and the internal organizational structure has no bearing on consolidated results. Adequacy of Investment Income--This ratio indicates that an insurer's investment income is adequate to meet interest requirements of policy reserves and is measured as a percentage of investment income to required interest. A ratio higher than 900% is considered to be too high and a ratio lower than 125% is considered to be too low by the NAIC. Globe's 959% ratio in 1993 was brought about by the NAIC's inclusion of dividends of various Torchmark subsidiaries in Globe's investment income. These dividends are generally passed through Globe to the parent company and should not be considered in meeting interest requirements. Intercorporate dividends are eliminated in consolidation and have no effect on consolidated results. Had these dividends been excluded, Globe's ratio would have been 220% in 1993, which was within the usual range. Change in Asset Mix--This ratio measures the average change in the percentage of total cash and invested assets. The NAIC considers a ratio greater than 5.0% to be unusual. The 5.8% ratio of Globe was caused by Globe dividending one of its subsidiaries, United American, to Torchmark. This dividend did not affect consolidated net equity of Torchmark at December 31, 1993. Change in Capital and Surplus--These ratios, calculated on both a gross and net basis, are a measure of improvement or deterioration in the company's financial position during the year. The NAIC considers ratios less than minus 10% and greater than 50% to be unusual. Liberty's ratio of minus 29 in 1994 was due to the payment of a large dividend by United Management, an 81% owned subsidiary, directly to Torchmark. Because Liberty waived its interest in this dividend, it reduced Liberty's capital and surplus. This transaction did not affect the consolidated equity of Torchmark at December 31, 1994. United American's ratio of minus 13% in 1993 was due primarily to the payment of a $112 million dividend to its parent, which was used by Torchmark to pay part of the purchase price of United Management. The payment of this dividend did not affect the consolidated equity of Torchmark at December 31, 1993. Globe's ratio of minus 65% in 1993 was caused by Globe dividending United American to Torchmark. The internal organizational structure has no bearing on consolidated results. Risk Based Capital: In December 1992, the NAIC adopted a model act that requires a risk based capital formula be applied to all life and health insurers. The requirement began in 1994 for information based on the 1993 annual statements. The risk based capital formula is a threshold formula rather than a target capital formula. It is designed only to identify companies that require regulatory attention and is not to be used to rate or rank companies that are adequately capitalized. All of the insurance subsidiaries of Torchmark are adequately capitalized under the risk based capital formula. 10
Guaranty Assessments. State solvency or guaranty laws provide for assessments from insurance companies into a fund which is used, in the event of failure or insolvency of an insurance company, to fulfill the obligations of that company to its policyholders. The amount which a company is assessed for these state funds is determined according to the extent of these unsatisfied obligations in each state. These assessments are recoverable to a great extent as offsets against state premium taxes. HOLDING COMPANY. States have enacted legislation requiring registration and periodic reporting by insurance companies domiciled within their respective jurisdictions that control or are controlled by other corporations so as to constitute a holding company system. Torchmark and its subsidiaries have registered as a holding company system pursuant to such legislation in Alabama, Delaware, Missouri, New York, Texas, and Indiana. Insurance holding company system statutes and regulations impose various limitations on investments in subsidiaries, and may require prior regulatory approval for the payment of certain dividends and other distributions in excess of statutory net gain from operations on an annual noncumulative basis by the registered insurer to the holding company or its affiliates. MUTUAL FUNDS. Torchmark's mutual fund management and distribution activities, as well as its investment advisory services, are subject to state and federal regulation and oversight by the National Association of Securities Dealers, Inc. Each of the funds in the United Group of Mutual Funds, the W&R Funds, the TMK/United Funds and the Torchmark Funds is or was a registered investment company under the Investment Company Act of 1940. W&R and Waddell & Reed Asset Management Company ("WRAM") are registered pursuant to the Investment Advisers Act of 1940. Additionally, W&R is regulated as a broker- dealer under the Securities Exchange Act of 1934. PERSONNEL At the end of 1995, Torchmark had 2,880 employees and 2,856 licensed employees under sales contracts. Additionally, approximately 61,000 independent agents and brokers, who were not employees of Torchmark, were associated with Torchmark's marketing efforts. ITEM 2. REAL ESTATE Torchmark, through its subsidiaries, owns or leases buildings that are used in the normal course of business. Liberty owns a 487,000 square foot building at 2001 Third Avenue South, Birmingham, Alabama which currently serves as Liberty's, UILIC's, and Torchmark's home office. Liberty leases approximately 160,000 square feet of this building to unrelated tenants and has another 5,000 square feet available for lease. Liberty also operates from 64 company- owned district office buildings used for agency sales personnel. Globe owns a 300,000 square foot office building at 204 North Robinson, Oklahoma City, Oklahoma, of which it occupies 56,138 square feet as its home office and the balance is available for lease. Globe also owns a 330,000 square foot office building complex at 14000 Quail Springs Parkway Plaza Boulevard, Oklahoma City, Oklahoma, and an 80,000 square foot office building at 120 Robert S. Kerr Avenue, Oklahoma City, which are available for lease to other tenants. United American owns and occupies a 125,000 square foot home office building at 2909 North Buckner Boulevard, Dallas, Texas. United American has purchased a 20 acre site in the Stonebridge Ranch development in McKinney, Texas (a north Dallas suburb) and is currently constructing a new 140,000 square foot facility on that site into which its home office will be relocated in 1996. The current home office building on Buckner will be sold. American Income owns and is the sole occupant of an office building located at 1200 Wooded Acres Drive, Waco, Texas. The building is a two story structure containing approximately 72,000 square feet of usable floor space. In addition, American Income leases office space in various cities throughout the United States. W&R owns and occupies a 116,000 square foot office building utilized as its corporate headquarters located in United Investors Park, a commercial development at 6300 Lamar Avenue, Shawnee Mission, Kansas. In addition, W&R owns three other office buildings in this development, each containing approximately 48,000 square feet, which are leased or are available for lease. 11
Liberty, Globe and W&R also lease district office space for their agency sales personnel. All of the other Torchmark companies lease their office space in various cities in the U.S. A Torchmark subsidiary, Torchmark Development Corporation ("TDC"), has completed two buildings consisting of 185,000 square feet and 90,000 square feet of office space within a 100 acre commercial development known as Liberty Park along Interstate 459 in Birmingham, Alabama. Approximately 250,000 square feet of this total office area is currently leased. A 25,000 square foot office building is currently under construction in this development and is scheduled for completion in the Spring of 1996. TDC also owns and manages a 70,000 square foot office and retail complex adjacent to Liberty Park of which approximately 60% is leased by an affiliated party. As a part of a joint venture with unaffiliated entities, TDC is also developing 2,800 contiguous acres as a planned community development. DATA PROCESSING EQUIPMENT Torchmark and its primary subsidiaries have significant automated information processing capabilities, supported by centralized computer systems. Torchmark also uses personal computers to support the user-specific information processing needs of its professional and administrative staffs. All centralized computer software support, information processing schedules and computer-readable data management requirements are supported by company- specific policies and procedures which ensure that required information processing results are produced and distributed in a timely manner. These policies and procedures provide for the copying, off-site physical storage and retention of significant company computer programs and business data files for backup purposes. ITEM 3. LEGAL PROCEEDINGS Torchmark and its subsidiaries continue to be named as parties to pending or threatened legal proceedings. These lawsuits involve tax matters, alleged breaches of contract, torts, including bad faith and fraud claims based on alleged wrongful or fraudulent acts of agents of Torchmark's subsidiaries, employment discrimination, and miscellaneous other causes of action. Many of these lawsuits involve claims for punitive damages in state courts of Alabama, a jurisdiction particularly recognized for its large punitive damage verdicts. A number of such actions involving Liberty also name Torchmark as a defendant. As a practical matter, a jury's discretion regarding the amount of a punitive damage award is not limited by any clear, objective criteria under Alabama law. Accordingly, the likelihood or extent of a punitive damage award in any given case is virtually impossible to predict. Furthermore, the Alabama Supreme Court has recently ruled that one half of all punitive damage awards, after the deduction of attorneys fees, should go to the State of Alabama. This same ruling also provides for a bifurcated trial, with the first stage devoted to this issue of liability and the second stage relating to damages. The hearing on damages will enable the jury to hear evidence of the financial worth of the defendant. This potentially damaging evidence has not been previously admissible in Alabama courts. The Alabama Supreme Court has been asked to reconsider this ruling and this petition is still pending. As of December 31, 1995, Liberty was a party to approximately 185 active lawsuits (including 31 employment related cases and excluding interpleaders and stayed cases), more than 160 of which were Alabama proceedings in which punitive damages were sought. Liberty faces trial settings in these cases on an on- going basis. Torchmark has previously reported the entry of an Order and Final Judgment by the Circuit Court of Barbour County, Alabama in Robertson v. Liberty National Life Insurance Company (Case No. CV-92-021) approving a cancer policy class action settlement involving legal and equitable relief valued at a total of $55 million. The cost of this settlement increases over time as Liberty is prohibited from increasing the premium rates on this block of business for one year from final binding affirmance by the Alabama Supreme Court. This aspect of the settlement is expected to cost Torchmark an additional $2.5 million before tax in each quarter going forward until one year after final binding affirmance by the Alabama Supreme Court. In July 1994, certain intervenors in the Robertson litigation filed a notice of appeal of the Order and Final Judgment approving class certification and the settlement with the Supreme Court of Alabama. Oral argument on the appeal was held July 17, 1995 and on December 22, 1995, the Supreme Court unanimously affirmed the Robertson class action settlement. On February 16, 1996, the Alabama Supreme Court issued a notice overruling the petition for a rehearing in Robertson filed by certain intervenors. 12
On March 17, 1994, litigation was filed against Liberty, certain officers and present and former directors of Torchmark and KPMG Peat Marwick LLP, independent public accountants of Torchmark and its subsidiaries, in the Circuit Court of Marion County, Alabama (Miles v. Liberty National Life Insurance Company, Civil Action No. CV-94-67). The lawsuit asserted that it was brought on behalf of a class comprised of the shareholders of Torchmark. The complaint alleged a failure to timely and adequately report allegedly material contingent liabilities arising out of insurance policy litigation involving Liberty. Compensatory and punitive damages in an unspecified amount were sought. In April 1994, the complaint in Miles was amended to add an additional shareholder plaintiff and to name Torchmark as a defendant. The Miles case was dismissed upon the joint motion of all parties in September 1995. A second similar action (Oakley v. Torchmark Corporation, Case No. CV-94-47), filed on August 16, 1994 in the Circuit Court for Bibb County, Alabama, was dismissed by the plaintiff without prejudice. A third such action was filed on December 30, 1994, in the United States District Court for the Southern District of Alabama. This action, which seeks punitive damages, was subsequently transferred to the United States District Court for the Northern District of Alabama (Dismukes v. Torchmark Corporation, Case No. CV-94-1006-P-M). A class certification hearing in Dismukes was held on January 29, 1996, and the parties are awaiting the District Court's ruling on that motion and on defendant's motion for partial summary judgment. As previously reported, Torchmark, its insurance subsidiaries Globe and United American, and certain Torchmark officers were named as defendants in litigation filed April 22, 1994, as a purported class action in the District Court of Oklahoma County, Oklahoma (Moore v. Torchmark Corporation, Case No. CJ-94-2784-65). The suit claims damages on behalf of individual health policyholders who are alleged to have been induced to terminate such policies and to purchase Medicare Supplement and/or other insurance coverages. The complaint seeks actual and punitive damages for each class member in excess of $10,000. Subsequent to the filing of this case, one of the plaintiffs was dismissed and the named plaintiff died. The complaint was amended to include new plaintiffs purporting to represent the class and restyled Tabor v. Torchmark Corporation. No class has been certified. A motion to dismiss filed by the defendants was denied and limited discovery as permitted by the Oklahoma Supreme Court is proceeding. The defendants intend to vigorously defend the action. Prior filings have reported that in July 1994, a purported class action alleging fraudulent and deceitful practices in premium billing and lapses of coverage on a payroll deduction insurance plan was filed in the Superior Court for Gordon County, Georgia against Liberty (Bryant v. Liberty National Life Insurance Company, Civil Action No. 28979). The complaint alleges actual damages in excess of $10 million and punitive damages of not less than $50 million as well as premium reimbursements. No class has been certified and no material proceedings have occurred in this case. Liberty removed this case to federal court, but the case has subsequently been remanded to the state court. Liberty intends to vigorously defend this action. Litigation was filed on April 26, 1995, in the Circuit Court of Houston County, Alabama against Liberty involving the sale of health insurance coverage and Omnibus Budget Reconciliation Act of 1990 (Stewart v. Liberty National Life Insurance Company, Case No. CV-95-345L; Tolar v. Liberty National Life Insurance Company, Case No. CV-95-346J; Ingram v. Liberty National Life Insurance Company, Case No. CV-95-348L; Burkett v. Liberty National Life Insurance Company, Case No. CV-95-347H). Liberty intends to vigorously defend these cases. On August 3, 1995, a $5.404 million verdict was rendered against Liberty in Allen v. Liberty National Life Insurance Company (Case No. CV-94-3634), by a jury in the Circuit Court of Jefferson County, Alabama. For a two month period beginning in September 1993, in reliance on federal law concerning the amount health care providers could collect from Medicare eligible individuals, Liberty limited the payment of benefits to such individuals to the amounts collectible under federal law. In November 1993, Liberty discontinued this practice and recalculated and repaid all claims as it had prior to September 1993. Mr. Allen nevertheless later brought suit against Liberty alleging the reduction in claims payments pursuant to his cancer policy was improper. He had been repaid in full with interest prior to filing suit, as had all other affected claimants. After reconsideration, the trial judge remitted the verdict to $2.7 million. An appeal was filed with the Alabama Supreme Court in January 1996. A purported class action was filed on August 8, 1995, against Liberty in the Circuit Court of Jefferson County, Alabama on behalf of Liberty cancer policyholders eligible for Medicare who submitted claims 13
during the approximately two month period in 1993 described in the foregoing paragraph (Adkins v. Liberty National Life Insurance Company, Case No. CV-95- 05634). The claims made in Adkins are identical to the individual claims in the Allen case above. More than 400 (and perhaps as many as 1,000) individuals appear to fit the proposed class definition in Adkins. Punitive damages and damages for mental anguish appear to be sought on behalf of the class. A class certification hearing is set in May 1996. The Company intends to oppose class certification and to vigorously defend the case. On August 25, 1995, a purported class action was filed against Torchmark, Globe, United American and certain officers of these companies in the United States District Court for the Western District of Missouri on behalf of all former agents of Globe (Smith v. Torchmark Corporation, Case No.: 95-3304-CV- S-4). This action alleges that the defendants breached independent agent contracts with the plaintiffs by treating them as captive agents and engaged in a pattern of racketeering activity wrongfully denying income and renewal commissions to the agents, restricting insurance sales, mandating the purchase of worthless leads, terminating agents without cause and inducing the execution of independent contracts based on misrepresentations of fact. Monetary damages in an unspecified amount are sought. A plaintiff class was certified by the District Court on February 26, 1996, although the certification does not go to the merit of the allegations in the complaint. The companies intend to vigorously defend this action. Much attention has been generated nationally with regard to so-called "vanishing premium" cases, where allegations that an interest sensitive life policy was sold with a projection that the policy would become paid-up or self-sustaining after a period of years. Plaintiffs in these cases typically assert that the projection amounted to a promise or misrepresentation. Liberty currently is a party to several individual lawsuits in the state courts of Alabama and was a party to one purported class action filed November 16, 1995 in the Circuit Court of Chambers County, Alabama (Mitcham v. Liberty National Life Insurance Company, Case No. CV-95-290), involving such claims. The Mitcham case was settled on a non-class basis on December 27, 1995. Another interest sensitive case (Carlton v. Liberty National Life Insurance Company, Case No. CV-96-22) filed on February 1, 1996, in the Circuit Court for Chambers County, Alabama, was amended on February 9, 1996, to allege a purported class action. Compensatory and punitive damages are sought. Liberty believes that appropriate projections were made in connection with the sale of the policies involved and intends to vigorously defend these cases. In 1978, the United States District Court for the Northern District of Alabama entered a final judgment in Battle v. Liberty National Life Insurance Company, et al. (CV-70-H-752-S), class action litigation involving Liberty, a class composed of all owners of funeral homes in Alabama and a class composed of all insureds (Alabama residents only) under burial or vault policies issued, assumed or reinsured by Liberty. The final judgment fixed the rights and obligations of Liberty and the funeral directors authorized to handle Liberty burial and vault policies as well as reforming the benefits available to the policyholders under the policies. It remains in effect to date. A motion filed in February 1990 to challenge the final judgment under Federal Rule of Civil Procedure 60(b) was rejected by both the District Court in 1991 and the Eleventh Circuit Court of Appeals in 1992 and a Writ of Certiorari was denied by the U.S. Supreme Court in 1993. In November 1993, an attorney (purporting to represent the funeral director class) filed a petition in the District Court seeking "alternative relief" under the final judgment. This petition was voluntarily withdrawn on November 8, 1995, by petitioners. On February 23, 1996, Liberty filed a petition with the District Court requesting that it order certain contract funeral directors to comply with their obligations under the Final Judgment in Battle and their funeral service contracts. Purported class action litigation was filed on January 2, 1996 against Torchmark, Torch Energy Advisors Incorporated ("Torch Energy"), and certain Torch Energy subsidiaries and affiliated limited partnerships in the Circuit Court of Pickens County, Alabama (Pearson v. Torchmark Corporation, Case No. CV-95-140). Plaintiff alleges improper payment of royalties and overriding royalties on coalbed methane gas produced and sold from wells in Robinson's Bend Coal Degasification Field, seeks certification of a class and claims unspecified compensatory and punitive damages on behalf of such class. A motion to dismiss and in the alternative to change venue, has been filed by Torchmark, and is awaiting a hearing. Torchmark intends to vigorously defend this action. Based upon information presently available, and in light of legal and other defenses available to Torchmark and its subsidiaries, contingent liabilities arising from threatened and pending litigation are not presently considered by management to be material. It should be noted, however, that the frequency of 14
large punitive damage awards bearing little or no relation to actual damages awarded by juries in jurisdictions in which Torchmark has substantial business, particularly in Alabama, continues to increase universally, creating the potential for unpredictable material adverse judgments in any given punitive damage suit. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of shareholders, through the solicitation of proxies or otherwise, during the fourth quarter of 1995. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The principal market in which Torchmark's common stock is traded is the New York Stock Exchange. There were 7,727 shareholders of record on December 31, 1995, excluding shareholder accounts held in nominee form. Information concerning restrictions on the ability of Torchmark's subsidiaries to transfer funds to Torchmark in the form of cash dividends is set forth in Note 15-- Shareholders' Equity in the Notes to the Consolidated Financial Statements. The market price and cash dividends paid by calendar quarter for the past two years are as follows: <TABLE> <CAPTION> 1995 MARKET PRICE ------------ DIVIDENDS QUARTER HIGH LOW PER SHARE ------- ------- ------- --------- <S> <C> <C> <C> 1 $42.625 $34.875 $ .28 2 41.875 37.625 .28 3 42.250 37.375 .28 4 45.250 40.875 .29 </TABLE> Year-end closing price..................$45.250 <TABLE> <CAPTION> 1994 MARKET PRICE ------------ DIVIDENDS QUARTER HIGH LOW PER SHARE ------- ------- ------- --------- <S> <C> <C> <C> 1 $49.500 $39.500 $ .28 2 42.750 36.750 .28 3 44.125 38.000 .28 4 44.500 32.375 .28 </TABLE> Year-end closing price..................$34.875 15
ITEM 6. SELECTED FINANCIAL DATA The following information should be read in conjunction with Torchmark's Consolidated Financial Statements and related notes reported elsewhere in this Form 10-K: (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AND PERCENTAGE DATA) <TABLE> <CAPTION> 1995 1994 1993 1992 1991 YEAR ENDED DECEMBER 31, ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> Life premium............ $ 772,257 $ 601,633 $ 555,859 $ 544,467 $ 524,052 Health premium.......... 750,588 768,714 799,835 797,855 769,821 Other premium........... 23,438 18,527 137,216 111,640 71,940 Total premium........... 1,546,283 1,388,874 1,492,910 1,453,962 1,365,813 Net investment income... 381,865 347,637 368,494 370,617 355,158 Financial services reve- nue.................... 152,482 139,276 137,422 133,462 114,326 Realized investment gains (losses)......... (14,323) (2,551) 8,009 (948) 4,195 Total revenue........... 2,067,482 1,875,337 2,066,846 1,959,668 1,843,641 Net income from continu- ing operations......... 271,945 263,814 242,298 247,647 235,777 Net income.............. 143,235 268,946 297,979 265,477 246,489 Net income available to common shareholders........... 143,235 268,142 294,690 262,024 240,373 Annualized premium is- sued: Life.................. 217,988 149,833 128,433 131,726 133,741 Health................ 102,518 121,182 176,028 224,905 216,962 Total................. 320,506 271,015 304,461 356,631 350,703 Mutual fund collections. 1,182,594 1,180,477 1,237,747 1,141,928 813,737 Per common share: Net income from contin- uing operations....... 3.80 3.65 3.25 3.33 2.99 Net income............. 2.00 3.72 4.01 3.58 3.13 Net income excluding realized investment gains (losses), the related acquisition cost ad- justment, and discon- tinued operations..... 3.93 3.74 3.50 3.34 2.96 Cash dividends paid.... 1.13 1.12 1.08 1.07 1.00 Return on average common equity excluding effect of SFAS 115 and discontinued opera- tions.................. 18.5% 19.7% 21.3% 24.6% 24.4% Average shares outstand- ing.................... 71,594 72,096 73,502 73,237 76,728 - ------------------------------------------------------------------------------- <CAPTION> 1995 1994 1993 1992 1991 AS OF DECEMBER 31, ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> Cash and invested assets (2).................... $5,874,037 $5,036,211 $5,200,588 $4,675,577 $4,348,111 Total assets............ 9,364,104 8,165,244 7,441,185 6,544,617 5,898,148 Short-term debt......... 189,372 250,116 107,108 195,102 5,825 Long-term debt.......... 791,988 791,518 791,090 496,622 496,332 Shareholders' equity.... 1,588,952 1,242,603 1,417,255 1,115,660 1,079,251 Per common share (3)... 22.17 17.37 18.80 14.54 13.11 Per common share ex- cluding effect of SFAS 115................... 20.33 19.31 17.29 14.54 13.11 Annualized premium in force: Life................... 869,366 796,955(1) 612,656 588,084 562,550 Health................. 754,758 807,587(1) 823,382 832,488 798,142 Total.................. 1,624,124 1,604,542 1,436,038 1,420,572 1,360,692 Assets under management at W&R................. 18,288,000 14,502,000 14,470,000 12,144,000 10,692,000 </TABLE> - ------------------------------------------------------------------------------- (1) Annualized life premium in force includes $144 million, and annualized health premium in force includes $37 million, representing the business acquired in the acquisition of American Income Life Insurance Company in 1994. (2) Includes accrued investment income. (3) Computed after deduction of preferred shareholders' equity. 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following should be read in conjunction with the Selected Financial Data and Torchmark's Consolidated Financial Statements and Notes thereto appearing elsewhere in this report. RESULTS OF OPERATIONS In the fourth quarter of 1995, Torchmark decided to dispose of its coalbed methane gas development in the Black Warrior Basin of Alabama due to disappointments in production. During 1995, Torchmark experienced increased difficulties in obtaining significant gas production from the lower coal seams from this development, resulting in revisions to engineering estimates of reserves. Accordingly, the Black Warrior investment was written down to its estimated realizable value. The writedown amounted to an after-tax charge of $130 million, or $1.82 per share for 1995. Please refer to "Black Warrior Writedown" on page 24 of this report for more information. In addition to the Black Warrior disposal, Torchmark also determined earlier in 1995 to sell Torch Energy, its energy management subsidiary. Torchmark is currently negotiating the disposal of Torch Energy through a management-led buyout. It is anticipating that the transaction will result in total consideration of approximately $108 million, consisting of cash and other securities. A small gain is expected on the sale. As a result of the proposed sale of Torch Energy and the decision to dispose of Black Warrior, Torchmark has elected to exit the energy industry, accounting for such as a disposal of a segment. Therefore, Torchmark has modified the presentation in its financial statements for 1995 and all prior periods to set forth separately the net assets and results attributable to the discontinued energy segment as discontinued operations. Net income from continuing operations for 1995 was $272 million, increasing 3% over $264 million in 1994. On a per share basis, income from continuing operations was $3.80 in 1995, gaining 4% from $3.65. Net income was $143 million, or $2.00 per share in 1995, compared with $269 million or $3.72 per share in 1994. Excluding realized investment gains and losses and the associated adjustment to deferred acquisition costs, net income from continuing operations was $3.93 per share, rising 5% over the prior period amount of $3.74. In 1994, net income per share from continuing operations, excluding realized investment gains and the associated adjustment to deferred acquisition costs, rose 9% over $3.43 per share in 1993. The adjustment to deferred acquisition costs was made because of an accounting rule requiring that deferred acquisition costs on interest-sensitive insurance products be amortized in accordance with expected gross profits. Since realized investment gains or losses on assets backing such products change profit expectations, the adjustment is required. Realized investment losses for 1995 included a $15 million after-tax, or $.21 per share, writedown of an investment in Southwestern Life Corporation, which filed for Chapter 11 bankruptcy protection in the third quarter of 1995. In a comparison of 1995 results with those of 1994, attention should be given to the acquisition of American Income on November 3, 1994 for total consideration of $552 million. American Income's results were consolidated with Torchmark's after the acquisition date, being included for a full year in 1995 for the first time. American Income added approximately $17 million to Torchmark's net income, after taking into account goodwill amortization and financing costs. In comparison with 1993, a number of nonrecurring items should be considered. (1) In November, 1993, Torchmark sold 73% of its interest in Vesta Insurance Group, Inc. ("Vesta"), which was a wholly-owned property and casualty subsidiary prior to the sale. Such interest was sold for proceeds of $161 million and a $57 million pretax gain from the sale was recognized as other income. Vesta's operations were consolidated with Torchmark's in 1993 prior to the sale. (2) Results for 1993 included an $82 million pretax charge for nonoperating expenses, compared with $25 million for 1994. These charges related to legal costs, guaranty assessments, and other contingencies, some of which are discussed in more depth in "Item 3--Legal Proceedings" on page 12 of this report. The $25 million charge in 1994 was offset, however, by a reclassification of nonoperating expense to health benefits, since actual payments will be made in the form of health benefits. (3) Two new accounting standards which dealt with postretirement benefits and income taxes were implemented in 1993, increasing earnings $18.4 million. (4) Corporate tax legislation was enacted in 1993 which increased tax rates from 34% to 35%, resulting in an additional charge to 1993 earnings of $9.4 million to adjust the deferred tax liability relating to prior years. 17
Revenues increased 10% in 1995 to $2.07 billion from $1.88 billion in 1994, an increase of $192 million. The American Income acquisition accounted for the increase when adjusting for lost investment income from the purchase, adding $225 million to total revenues in 1995, compared with $31 million in 1994. In comparison with 1993, 1994 revenues decreased 9%. After exclusion of Vesta revenues and the one-time gain from the Vesta sale in 1993, the decrease in 1994 revenues would have been 2%. Premium income rose 11% in 1995 over the prior year to $1.55 billion, after having increased 1.4% in 1994 over the prior period, adjusting to exclude Vesta premium in 1993. The $157 million gain in premium in 1995 was caused by the inclusion of American Income premium for a full year, which increased $168 million over 1994. The components of Torchmark's revenues and operations are described in more detail in the discussion of segments and investment operations found on pages 18 through 26 of this report. Other operating expenses rose $27 million in 1995 over the prior year or 23%. The inclusion of American Income's expenses for a full year accounted for $7 million of the increase. After adjusting for American Income and Vesta, 1994 expenses declined 10% from 1993. Increases in goodwill amortization, interest expense, and the MIPS dividend were caused by the American Income acquisition in 1994 and the United Management acquisition in 1993. The American Income purchase added $10 million and the United Management purchase added $3 million in annual goodwill amortization. Please refer to the following sections of this report for a more complete discussion of these purchases and the related financing costs: "Acquisition of American Income" on page 27, "Capital Resources" on page 27, and "Merger with United Management" on page 28. The following is a discussion of Torchmark's operations by segment. INSURANCE Life insurance: Torchmark markets life insurance under a variety of different distribution channels. The following table presents life insurance premium income during each of the three years ended December 31, 1995 by distribution method: LIFE INSURANCE Premium by Distribution Method (Dollar amounts in thousands) <TABLE> <CAPTION> 1995 1994 1993 -------------- -------------- -------------- % OF % OF % OF AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL -------- ----- -------- ----- -------- ----- <S> <C> <C> <C> <C> <C> <C> United American General Agency................. $ 28,305 3.7% $ 25,971 4.3% $ 25,625 4.6% United American Captive Agency................. 10,706 1.4 7,966 1.3 7,285 1.3 Direct Response......... 149,141 19.3 127,661 21.2 111,303 20.0 Home Service............ 275,089 35.6 268,460 44.6 261,741 47.1 American Income Captive Agency................. 153,914 19.9 21,055 3.5 0 0.0 Preneed Captive Agency.. 17,188 2.2 23,983 4.0 33,396 6.0 Waddell & Reed Captive Agency................. 69,498 9.0 64,940 10.8 60,666 10.9 Other................... 68,416 8.9 61,597 10.3 55,843 10.1 -------- ----- -------- ----- -------- ----- $772,257 100.0% $601,633 100.0% $555,859 100.0% ======== ===== ======== ===== ======== ===== </TABLE> Life insurance premium, including policy charges, grew 28% to $772 million for the year 1995. Life premium in 1994 was $602 million, increasing 8% over 1993. The American Income acquisition in late 1994 had a considerable impact on life insurance operations subsequent to the acquisition date. American Income life premium was $154 million in 1995, compared with $21 million in 1994, accounting for $133 million of the $171 million increase in life premium for 1995. Sales of life premium were strong in both 1994 and 1995. In terms of annualized premium in force issued, 1995 sales were $218 million and 1994 sales were $150 million, increasing 45% in 1995 and 17% in 1994. American Income, however, accounted for $51 million of 1995 sales, or 64% of the 1995 increase. 18
Annualized life premium in force climbed 9% in 1995 to $869 million at December 31. Annualized life premium in force was $797 million at December 31, 1994, rising 30% over 1993 year end. The 1994 increase was 7% after adjusting for the inclusion for American Income's annualized life premium in force of $141 million at the acquisition date. Annualized premium in force data includes amounts collected on certain interest-sensitive life products which are not recorded as premium income but exclude single premium income and policy charges. Torchmark's life annualized premium in force exceeded its health annualized premium in force at year-end 1995 for the first time since 1982 year end, underscoring Torchmark's emphasis on life insurance sales. Torchmark has emphasized increases in sales of life insurance product lines relative to health and other insurance products because profit margins for life insurance are superior. Additionally, assets backing the higher reserves required for life products allow Torchmark to increase investment income. Profit margins for life insurance operations, as measured by insurance operating income as a percentage of premium, has approximated 29% in each of the three years presented. LIFE INSURANCE Summary of Results (Dollar amounts in thousands) <TABLE> <CAPTION> 1995 1994 1993 ----------------- ----------------- ----------------- % OF % OF % OF AMOUNT PREMIUM AMOUNT PREMIUM AMOUNT PREMIUM -------- ------- -------- ------- -------- ------- <S> <C> <C> <C> <C> <C> <C> Premium and policy charges................. $772,257 100.0% $601,633 100.0% $555,859 100.0% Policy obligations....... 507,444 65.7 412,799 68.6 377,017 67.8 Required reserve inter- est..................... (194,733) (25.2) (163,637) (27.2) (151,203) (27.2) -------- ----- -------- ----- -------- ----- Net policy obligations.. 312,711 40.5 249,162 41.4 225,814 40.6 Amortization of acquisi- tion costs.............. 126,695 16.4 90,573 15.1 86,098 15.5 Commissions and premium taxes................... 50,994 6.6 39,845 6.6 36,697 6.6 Other expense............ 60,767 7.9 46,814 7.8 43,790 7.9 -------- ----- -------- ----- -------- ----- Total expense........... 551,167 71.4 426,394 70.9 392,399 70.6 -------- ----- -------- ----- -------- ----- Insurance operating in- come.................... $221,090 28.6% $175,239 29.1% $163,460 29.4% ======== ===== ======== ===== ======== ===== </TABLE> As a percentage of premium, insurance operating income has remained constant in both 1995 and 1994 over the prior period. Excluding American Income, insurance margins have remained stable with a slight increase in policy obligations offset by lower amortization of acquisition costs. A major factor in maintaining stable margins is improved persistency. Improvements in persistency are beneficial to operating income margins because they lower the rate of amortization of acquisition costs and certain other expenses. In addition, improved persistency increases profits because the premium life is extended. Persistency improvements have resulted, at least in part, from revisions in agents' compensation formulas to encourage lower lapses. Improvements have also been attributable to the conversion of a large portion of agent-collected home service business to bank draft and direct billing premium, which have higher persistency. In fact, Torchmark will no longer sell agent-collected business starting in 1996. Agent-collected premium as a percentage of total home service premium was approximately 15% at year- end 1995, compared with 48% five years earlier. American Income's life business has an insurance operating income margin of approximately 26%, similar to other Torchmark life insurance products. However, as a percentage of premium, the American Income business is characterized by lower policy obligations and higher amortization of acquisition costs. The higher acquisition cost ratio is a result of the higher amortization of the value of insurance purchased relative to deferred acquisition costs. 19
The above presentation of life insurance results excludes a $22.8 million benefit in 1994 from the review of reserving assumptions on a block of burial reserves. An evaluation of assumptions regarding mortality, interest, and inflation pressures on burial costs indicated that sufficient experience existed to support a change in the level of reserves held on this block. Torchmark will continue to monitor its reserving assumptions for this block on an annual basis to ensure that reserves are adequate to meet contractual liabilities. Had this item been included, the 1994 ratio of policy obligations to premium would have been reduced and overall margin would have been increased 3.8%. Health insurance: Health products sold by Torchmark include Medicare Supplement insurance, cancer insurance, long-term care, and other under-age 65 medical and hospitalization products. As a percentage of annualized health premium in force at December 31, 1995, Medicare Supplement accounted for 70%, cancer accounted for 15%, and other products accounted for 15%. These products are marketed by general, captive, and home service agents, direct response, and through associations. The table below presents health insurance premium income during each of the three years ended December 31, 1995 by distribution method: HEALTH INSURANCE Premium by Distribution Method (Dollar amounts in thousands) <TABLE> <CAPTION> 1995 1994 1993 -------------- -------------- -------------- % OF % OF % OF AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL -------- ----- -------- ----- -------- ----- <S> <C> <C> <C> <C> <C> <C> United American General Agen- cy............................ $466,751 62.2% $509,972 66.4% $537,232 67.2% United American Captive Agen- cy............................ 123,264 16.4 128,538 16.7 133,223 16.7 Direct Response................ 956 0.1 1,106 0.1 1,118 0.1 Home Service................... 118,327 15.8 123,011 16.0 128,262 16.0 American Income Captive Agen- cy............................ 41,290 5.5 6,087 0.8 0 0.0 -------- ----- -------- ----- -------- ----- $750,588 100.0% $768,714 100.0% $799,835 100.0% ======== ===== ======== ===== ======== ===== </TABLE> Health premium was $751 million in 1995, falling 2% from $769 million in 1994. Health premium declined 4% in 1994. Annualized premium in force stood at $755 million at December 31, 1995, declining 7% from 1994 year-end premium in force of $808 million. Annualized health premium in force declined 2% in 1994. Sales of health insurance products in terms of annualized premium issued declined 15% to $103 million in 1995, after having declined 31% in 1994. These declines in sales resulted in the diminished base of annualized health premium in force. The declines in sales of health annualized premium in both years were primarily due to decreases in Medicare Supplement product sales. Sales of Medicare Supplement insurance were $65 million in 1995, compared with $88 million in 1994. They declined 26% in 1995 and 36% in 1994. These sales declines caused annualized premium in force for Medicare Supplement to decrease from $601 million at year-end 1993 to $572 million at 1994 year end to $530 million at December 31, 1995. In the past few years, Torchmark has encountered considerable competition in the Medicare Supplement market with regard to price and "attained-age" pricing, whereby premium may be increased on a basis of increased age as well as increased medical costs. The increased price competition has had a negative impact on sales. Also, in recent years, there has been increased competition from health maintenance organizations in the Medicare Supplement market. Uncertainty has also been a factor negatively affecting sales. Particularly in 1993 and 1994, there was considerable uncertainty regarding various health care reforms proposed by both the Clinton Administration and Congress which had bearing on the Medicare Supplement market. Additionally, in recent years, this market has experienced a great deal of increased regulation including government mandated policy forms, a required minimum loss ratio of 65% on policies sold, and a required leveling of agents' commissions. The mandated loss ratio and leveling of commissions have put significant pressure on margins for Torchmark as well as the rest of the industry, thus discouraging sales. 20
Torchmark is implementing a number of measures to increase its sales of Medicare Supplement business. Torchmark's price increases on these products have not been as great as certain major competitors, which should give Torchmark the opportunity to compete more effectively on the basis of price. Torchmark has also obtained approval in a number of states to sell the "attained-age" product, thereby allowing Torchmark to compete on this basis. Also, Torchmark is continually developing new Medicare Supplement products and markets. One such new product is a group Medicare Supplement product targeted at employees, unions, and associations. While non-Medicare Supplement product sales also declined in 1994, this trend reversed in 1995. Non-Medicare Supplement health annualized premium issued rose 13% to $38 million in 1995 from $34 million in 1994. Cancer insurance annualized premium in force was $115 million at December 31, 1995, gaining slightly over the prior year end. Cancer sales in terms of annualized premium issued rose 40% to $11 million in 1995, compared with $8 million in 1994. Cancer sales were $10 million in 1993. Other health product annualized premium issued increased 4% to $27 million for 1995, after declining 15% in 1994. HEALTH INSURANCE Summary of Results (Dollar amounts in thousands) <TABLE> <CAPTION> 1995 1994 1993 ----------------- ----------------- ----------------- % OF % OF % OF AMOUNT PREMIUM AMOUNT PREMIUM AMOUNT PREMIUM -------- ------- -------- ------- -------- ------- <S> <C> <C> <C> <C> <C> <C> Premium.................. $750,588 100.0% $768,714 100.0% $799,835 100.0% Other income............. 3,001 0.4 3,349 0.4 3,268 0.4 -------- ----- -------- ----- -------- ----- Total revenue........... 753,589 100.4 772,063 100.4 803,103 100.4 Policy obligations....... 453,127 60.3 458,066 59.5 486,855 60.9 Required reserve inter- est..................... (26,138) (3.5) (25,710) (3.3) (24,573) (3.1) -------- ----- -------- ----- -------- ----- Net policy obligations.. 426,989 56.8 432,356 56.2 462,282 57.8 Amortization of acquisi- tion costs.............. 68,448 9.1 74,701 9.7 83,385 10.4 Commissions and premium taxes................... 94,286 12.6 102,224 13.3 107,317 13.4 Other expense............ 47,207 6.3 42,673 5.6 44,194 5.6 -------- ----- -------- ----- -------- ----- Total expense........... 636,930 84.8 651,954 84.8 697,178 87.2 -------- ----- -------- ----- -------- ----- Insurance operating in- come.................... $116,659 15.6% $120,109 15.6% $105,925 13.2% ======== ===== ======== ===== ======== ===== </TABLE> As a percentage of premium, insurance operating income for Torchmark's health insurance grew from 13.2% in 1993 to 15.6% in 1994, where it stabilized at 15.6% in 1995. A primary reason for the increases in margins is the decline in the amortization of acquisition costs due to improved persistency. Improvement in the persistency of Torchmark's health business has continued throughout each of the years considered, resulting in lower ratios of acquisition costs to premium. These improvements have been brought about, at least in part, by the requirement in many states to level agents' commissions on Medicare Supplement products instead of paying a larger first-year commission. This leveling of commissions has encouraged persistency through the payment of a higher renewal commission. It has also encouraged persistency through the payment of a lower first-year commission, which discourages replacement. Excluded from the above presentation of health results in 1994 were increases in cancer policy benefits arising from the reclassification described on page 17 of this report. Annuities: Torchmark's annuity products serve a wide range of markets, such as providing retirement income, funding prearranged funerals, and offering long-term tax-deferred growth opportunities. Annuities are sold on both a fixed and variable basis. Fixed annuity deposits are held and invested by Torchmark and are obligations of the company. Amounts deposited for variable annuities are invested at the policyholder's direction into his choice among nine W&R managed mutual funds which vary in degree of investment risk and return. A fixed investment account is also available as a variable annuity investment option. These investments for variable annuity deposits are reported as "Separate Account Assets" and the corresponding deposit balances for variable annuities are reported as "Separate Account Liabilities." 21
Annuity premium is accounted for as a deposit and is not reflected in income. Revenues on both fixed and variable annuities are derived from charges to the annuity account balances for insurance risk, administration, and surrender, depending on the structure of the contract. Variable accounts are also charged an investment fee and a sales charge. Torchmark benefits to the extent these policy charges exceed actual costs and to the extent actual investment income exceeds the investment income which is credited to policyholders on fixed annuities. The following table presents the annuity account balance at each year end and the annuity collections for each year for both fixed and variable annuities: <TABLE> <CAPTION> ANNUITY DEPOSIT BALANCES ANNUITY COLLECTIONS -------------------------- -------------------------- (DOLLAR AMOUNTS IN (DOLLAR AMOUNTS IN MILLIONS) THOUSANDS) 1995 1994 1993 1995 1994 1993 -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> Fixed..................... $ 927.9 $ 801.2 $ 782.8 $130,115 $ 43,339 $ 46,573 Variable.................. 1,052.2 692.8 529.7 189,188 196,105 213,982 -------- -------- -------- -------- -------- -------- Total.................... $1,980.1 $1,494.0 $1,312.5 $319,303 $239,444 $260,555 ======== ======== ======== ======== ======== ======== </TABLE> Annuity premium collections rose 33% to $319 million in 1995 over the prior year. Fixed annuity collections of $130 million were up over three times the 1994 collections of $43 million. The increase in fixed annuity collections resulted largely from the entry of the United American agents into annuity markets during the fourth quarter of 1994. These agents work primarily through banks and market annuity products to bank customers. These sales generated $76 million of collections in 1995. Fixed annuity collections declined 7% in 1994 from the prior year. Variable annuity collections declined 4% to $189 million in the 1995 period, after having fallen 8% in 1994. Weaker financial markets in 1994 and early 1995 were thought to have caused the declines in sales of variable annuities. Sales of these products recovered in the second half of 1995. Variable annuity sales rose 45% to $112 million in the second half of 1995 over $77 million in the first half. The variable annuity balance on deposit was $1.05 billion at 1995 year end, growing 52% over the prior year end. Growth was largely attributable to the strength of financial markets in mid and late 1995, but was also due to the additional deposit collections. The fixed annuity balance gained 16% to $928 million at December 31, 1995, as a result of the increased sales. ANNUITIES Summary of Results (Dollar amounts in thousands) <TABLE> <CAPTION> 1995 1994 1993 ---------------- ---------------- ---------------- % OF % OF % OF MEAN MEAN MEAN AMOUNT RESERVE AMOUNT RESERVE AMOUNT RESERVE ------- ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> Policy charges.............. $19,049 1.1% $13,888 1.0% $9,454 0.7% Allocated investment in- come....................... 10,206 0.6 8,576 0.6 8,387 0.6 ------- ---- ------- ---- ------- ---- Total revenue.............. 29,255 1.7 22,464 1.6 17,841 1.3 Policy obligations.......... 48,012 2.8 42,275 3.0 43,032 3.3 Required reserve interest... (48,541) (2.8) (42,765) (3.0) (43,090) (3.3) ------- ---- ------- ---- ------- ---- Net policy obligations..... (529) 0.0 (490) 0.0 (58) 0.0 Amortization of acquisition costs...................... 9,125 0.5 5,772 0.4 4,596 0.3 Commissions and premium tax- es......................... 699 0.0 605 0.0 708 0.1 Other expense............... 2,573 0.2 2,345 0.2 663 0.0 ------- ---- ------- ---- ------- ---- Total expense.............. 11,868 0.7 8,232 0.6 5,909 0.4 ------- ---- ------- ---- ------- ---- Insurance operating income.. $17,387 1.0% $14,232 1.0% $11,932 0.9% ======= ==== ======= ==== ======= ==== </TABLE> Insurance operating margins for annuities as measured by the mean reserve have remained fairly stable throughout the three years examined. Annuity policy charges have increased in each period. 22
These charges were $19 million in 1995, gaining 37% over 1994 charges of $14 million, which in turn rose 47% over the prior year. Growth in these policy charges resulted from the increase in size of the annuity account balance over each of the prior years, the increase in the number of annuity contracts in force, and the cumulative effect of growth in sales over the past few years on which the sales charge is based. The allocated investment income, or the investment income earned in excess of policy requirements, also grew in each of the periods 1993 through 1995. These increases resulted from the growth in the fixed annuity deposit balances. ASSET MANAGEMENT Financial Services. Torchmark's financial services operations consist of the exclusive marketing, through professional financial planners, of 23 mutual funds, including the United Group and the W&R Group of funds. These representatives also market a variety of insurance products of Torchmark subsidiaries. Financial services operations also involve the management of mutual fund portfolios, the management of institutional portfolios, and the servicing of customer accounts. Revenues are derived from commissions for the sale of investment and insurance products, fees for management of investment asset portfolios, and fees for servicing the accounts. Financial services revenues climbed 9% to $152 million for the year 1995 from the prior year amount of $139 million. These revenues grew 1% in 1994. Asset management fees of $86 million in 1995 were the largest component of financial services revenues, gaining 22% over 1994 fees of $71 million. Asset management fees grew 10% in 1994 over 1993. Increases in these fees have occurred due to the growth in average mutual fund assets and institutional assets under management, on which asset management fees are based. Average assets under management rose 14% in 1995 and 10% in 1994. Growth in average assets under management resulted from added investment product sales in both the 1995 and 1994 periods. Additionally, 1995 asset growth was boosted by the strength in the financial markets. Assets under management were $18.3 billion at December 31, 1995 and $14.5 billion at December 31, 1994, rising 26% in 1995. The 1994 increase in assets under management was less than 1%. Commission revenues are derived from the sale of both investment and insurance products, with investment product commissions representing 81% of total commission revenues and insurance product commissions the balance. The commissions from insurance products and variable annuities are primarily from Torchmark insurance subsidiaries, and are eliminated in consolidation. Investment product commissions declined 4% to $57 million in 1995, after declining 10% in 1994. Investment product sales for 1995 and 1994 were level at $1.18 billion, after having declined 5% in 1994 from $1.24 billion in 1993. In 1995, sales of United Funds, a front-load product, declined 5% to $838 million, while sales of the W&R Funds, a deferred-load product, rose 47% to $158 million. Service fees grew 6% in 1995, after rising 5% in 1994. The number of accounts serviced were 1.22 million at December 31, 1995, compared with 1.15 million at year-end 1994 and 1.09 at year-end 1993. FINANCIAL SERVICES Summary of Results (Dollar amounts in thousands) <TABLE> <CAPTION> 1995 1994 1993 ---------------- --------------- ---------------- % OF % OF % OF AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE -------- ------- ------- ------- -------- ------- <S> <C> <C> <C> <C> <C> <C> Commission revenue........... $ 70,458 38.5% $72,223 43.1% $ 78,067 46.8% Asset management fees........ 85,999 47.0 70,651 42.2 64,181 38.5 Service fees................. 23,528 12.9 22,297 13.3 21,273 12.7 -------- ----- ------- ----- -------- ----- Financial services reve- nue*....................... 179,985 98.4 165,171 98.6 163,521 98.0 Investment and other income.. 2,947 1.6 2,264 1.4 3,293 2.0 -------- ----- ------- ----- -------- ----- Total revenue............... 182,932 100.0 167,435 100.0 166,814 100.0 Commissions and selling expenses.................... 63,882 34.9 62,285 37.2 70,735 42.4 Other expenses............... 24,708 13.5 21,252 12.7 23,265 14.0 -------- ----- ------- ----- -------- ----- Total expenses.............. 88,590 48.4 83,537 49.9 94,000 56.4 -------- ----- ------- ----- -------- ----- Pretax income................ $ 94,342 51.6% $83,898 50.1% $ 72,814 43.6% ======== ===== ======= ===== ======== ===== </TABLE> - -------- * Financial services revenue includes $27.5 million in 1995, $25.9 million in 1994 and $26.2 million in 1993 representing revenues from other Torchmark segments which are eliminated in consolidation. 23
Pretax operating margins improved in both 1995 and 1994 over the prior year, growing 12% in 1995 to $94 million after a 15% rise in 1994 to $84 million. As a percentage of financial services revenues, pretax income stood at 52% for 1995. The primary cause for the margin improvements has been the rapid growth in asset management fees in proportion to commission revenues. Asset management fees have a significantly greater profit margin than commissions. Commissions and selling expenses as a percentage of commission revenues declined from 91% in 1993 to 86% in 1994 but rose to 91% in 1995. The 1994 decline was caused by the implementation of a 12-b service fee which offsets certain direct expenses. While this fee increased in 1995, the decrease in expense was more than offset by additional expense from product promotion and efforts to expand the sales force. It is anticipated that these additional expenditures will result in increased product sales in future periods. Energy: As previously discussed on page 17 of this report, Torchmark intends to dispose of its energy operations and has classified such operations as discontinued operations in the financial statements. These energy operations involved the management of proven producing oil and gas properties for both Torchmark affiliates and unrelated parties by Torch Energy. Energy operations also included drilling of developmental wells, acquisition of properties and facilities, and marketing of oil and gas products by Torch Energy. They also involved the extraction and production of energy products through direct energy investments. Black Warrior Writedown: Torchmark has maintained an investment in a coalbed methane gas development since 1990 in the Black Warrior Basin of Alabama. The development was completed in 1993. During 1993 and 1994, production results were below expectations and losses were experienced in both years. Prior to 1995, Torchmark reviewed its investment quarterly and determined there were no impairments for reserves under successful efforts accounting. SFAS 121 was adopted by Torchmark at issuance of the Standard in March, 1995, and there were no impairments under the provisions of that Standard at the time of adoption. In the fourth quarter of 1995, production problems accelerated, and it became apparent that it was not cost-effective to incur the additional cost required to produce gas from the deeper coal seams. As a result, certain reserves of the Black Warrior investment were reclassified from proved to possible, causing an approximate 55 percent decline in the estimated proved gas reserves. Because of these factors, a decision was made by Torchmark in the fourth quarter of 1995 to sell the Black Warrior investment. As a result of these events, a review was made for impairment under the provisions of SFAS 121. In accordance with the requirements of SFAS 121 and in view of Torchmark's desire to dispose of Black Warrior, Torchmark wrote down its investment to its estimated net realizable value, resulting in an after- tax charge of $130 million, or $1.82 per share in 1995. Net realizable value was determined using a discounted cash flow model. Even though gas prices improved in 1995, the significant decline in proved reserves resulted in the impairment of Black Warrior's estimated net realizable value. Investments: Because Torchmark's Black Warrior coalbed methane investment and certain other energy investments are included in the disposed energy segment, these investments and the associated investment income are presented in the financial statements as discontinued operations. Therefore, all previously-reported amounts of invested assets and investment income have been reclassified accordingly. Net investment income increased 10% to $382 million in 1995, after having experienced a 6% decline from $368 million in 1993 to $348 million in 1994. In comparison of net investment income between these three periods, the acquisition of American Income and the disposition of Vesta must be taken into account. After adjusting for the effect of the American Income acquisition, 1995 net investment income rose 3% from $344 million in 1994 to $354 million. When excluding the effect of both transactions, 1994 investment income declined 4% from $357 million in 1993. In addition to the larger invested asset base caused by the American Income purchase, the increase in 1995 income over the prior year was also caused by certain other factors. First, nonrecurring investment income was received in the fourth quarter of 1995 on passive energy investments retained by Torchmark in the amount of $4.3 million from a legal settlement. Additionally, there was a slight improvement in yield on the portfolio. 24
The effects of accelerated mortgage-backed prepayments need to be considered when making a comparison with 1993 net investment income. The decline in interest rates in 1993 encouraged refinancing of mortgages, causing increased GNMA prepayments in 1993 and early 1994. These funds were reinvested at lower prevailing rates, causing a reduction in Torchmark's investment income in 1993 and an even greater reduction in subsequent years. It is estimated that GNMA repayments reduced 1994 investment income $16.1 million from 1993. As rates rose in 1994, the refinancing trend reversed and Torchmark was able to reinvest repayment proceeds in higher yielding securities. Torchmark reduced its exposure to GNMA securities during 1994 and, to a greater extent, during 1995, so that at December 31, 1995, GNMA investments represented 19% of invested assets, compared with 55% of the portfolio three years earlier. For this reason, the decline in rates during 1995 and the related increase in refinancings had little impact on Torchmark's 1995 net investment income. In 1995, a persistent easing of inflationary expectations helped create a significant bond market rally which more than offset the weakness of 1994. Yields available on fixed investments declined throughout the year, falling approximately 200 basis points when measured by the ten and thirty-year Treasury bond. In this environment, Torchmark emphasized the acquisition of call-protected corporate bonds, while continuing to reduce mortgage-backed investments and municipal holdings. During 1995, investment acquisitions in the amount of $1.87 billion were made at an average yield of 7.28%, compared with acquisitions of $1.29 billion yielding 7.13% in 1994. Corporate obligations represented 84% of total 1995 new purchases. The increased acquisition activity in 1995 resulted from (1) the inclusion of American Income's investment operations for the full year of 1995; and, (2) the reinvestment of proceeds from two sale programs executed during 1995 designed to lessen exposure to mortgage-backed holdings. The decline in rates in 1995 caused an increase in the market value of fixed maturity assets. During the year, the market value of these assets increased $818 million or 19% to $5.2 billion, exceeding $5 billion for the first time in 1995. At December 31, 1995, market value exceeded book value on fixed investments by $226 million. This is in contrast to year-end 1994 when book value exceeded market by $242 million. At year-end 1993, there was an unrealized gain of $192 million. The unrealized loss in 1994 resulted from the rise in rates in that year. With the decrease in GNMA holdings, the percentage of government and government-guaranteed holdings within Torchmark's fixed-income portfolio continued to decline. This percentage was 29% at year-end 1995, 47% at year- end 1994, and 59% at year-end 1993. Torchmark's preference for quality is demonstrated, however, by the fact that at December 31, 1995, 43% of the fixed income holdings were rated "AAA" by rating agencies and 96% were considered to be investment grade. Repayment of investment assets is a function of both maturity and the changing interest rate environment. The reduction in cash flow which resulted from GNMA sales during the year was more than offset by the acquisition of shorter maturity corporate bonds and the increased probability of early calls as rates declined. Accordingly, at year-end 1995, an estimated 37% of the fixed maturity portfolio should repay within five years, compared with 30% at year-end 1994 and 46% at year-end 1993. The following table is a presentation of the percentages of Torchmark's fixed investment portfolio by estimated maturity. <TABLE> <CAPTION> 1995 1994 ----- ----- <S> <C> <C> Short terms and under 1 year.. 8.6% 8.4% 2-5 years..................... 28.9 21.7 6-10 years.................... 38.3 44.0 11-15 years................... 10.8 18.9 16-20 years................... 2.5 3.9 Over 20 years................. 10.9 3.1 ----- ----- 100.0% 100.0% ===== ===== </TABLE> Because Torchmark's investment program is based upon high quality fixed maturity bonds, Torchmark's percentage ownership of other types of investments varies significantly from other companies in the industry. The following table presents Torchmark's holdings by asset type as of December 31, 1995 as contrasted with the industry averages prepared by the American Council of Life Insurance. 25
<TABLE> <CAPTION> TORCHMARK ---------------- INDUSTRY % $ AMOUNTS % (1) ---------- ----- ---------- <S> <C> <C> <C> Investment grade bonds & short terms............... $5,109,870 88.4% 67.6% Noninvestment grade bonds.......................... 164,584 2.8 3.8 Equities........................................... 19,168 0.3 5.1 Mortgage loans..................................... 52,274 0.9 13.8 Real estate........................................ 143,356 2.5 2.8 Policy loans....................................... 193,877 3.4 5.5 Other.............................................. 95,744 1.7 1.4 ---------- ----- ----- $5,778,873 100.0% 100.0% ========== ===== ===== </TABLE> - -------- (1) Latest data available from the American Council of Life Insurance At year-end 1995, average life of the portfolio increased to 8.8 years, compared with 8.0 years at year-end 1994 and 6.0 years at year-end 1993. FINANCIAL CONDITION Liquidity: Torchmark is highly liquid, as evidenced by its positive cash flows, its marketable investments, and its credit facilities. Its insurance and asset management operations generate strong positive cash flows, well in excess of its immediate needs. Cash flows provided from operations, including deposit-product operations, were $478 million in 1995, compared with $337 million in 1994, an increase of 42%. This increase was primarily caused by increased deposit-product sales in 1995 and a one-time $48 million tax settlement paid in 1994 related to prior periods. Operating cash flows were $470 million in 1993. In addition to operating cash flows, Torchmark received $351 million in 1995 of scheduled investment maturities and repayments, further enhancing total positive cash flow. Such repayments were $796 million in 1994 and $485 million in 1993. Cash flows in excess of immediate requirements are used to build an investment base to fund future requirements. Cash and short-term investments were $86 million at December 31, 1995, compared with $120 million at year-end 1994. These liquid assets represented approximately 1% of total assets at December 31, 1995, compared with 1.5% at the end of the previous year. In addition to Torchmark's liquid assets, Torchmark has a portfolio of marketable fixed and equity securities which are available for sale should the need arise. These securities had a value of $5.2 billion at December 31, 1995. Torchmark has in place a line of credit facility with a group of lenders which allowed unsecured borrowings up to $400 million at December 31, 1995. This line of credit is further designed as a backup credit line for a commercial paper program not to exceed $400 million, whereby Torchmark may borrow from either the credit line or issue commercial paper at any time but may not borrow in excess of a total of $400 million on the combined facilities. At December 31, 1995, $189 million in commercial paper was outstanding and there were no borrowings on the line of credit. A facility fee is charged on the entire $400 million balance. In accordance with the agreements, Torchmark is subject to certain covenants regarding capitalization and earnings. At December 31, 1995, Torchmark was in full compliance with these covenants. Liquidity of the parent company is affected by the ability of the subsidiaries to pay dividends. Dividends are paid by subsidiaries to the parent in order to meet its dividend payments on common and preferred stock, interest and principal repayment requirements on parent company debt, and operating expenses of the parent company. Dividends from insurance subsidiaries of Torchmark are limited to the greater of statutory net gain from operations on an annual noncumulative basis or 10% of surplus, in the absence of special approval, and distributions are not permitted in excess of statutory net worth. Subsidiaries are also subject to certain minimum capital requirements. Although these restrictions exist, dividend availability from subsidiaries has been and is expected to be more than adequate for parent company operations. At December 31, 1995, a maximum amount of $237 million was available to Torchmark from insurance subsidiaries without regulatory approval. 26
Capital Resources: The carrying amount of Torchmark's long-term debt was $792 million at both year-ends 1995 and 1994. Major debt issues outstanding at December 31, 1995 were as follows: <TABLE> <CAPTION> PRINCIPAL AMOUNT INSTRUMENT DUE RATE ($ MILLIONS) ---------- ---- ----- ------------ <S> <C> <C> <C> Sinking Fund Debentures......................... 2017 8 5/8% $200 Senior Notes.................................... 1998 9 5/8 200 Senior Debentures............................... 2009 8 1/4 100 Notes........................................... 2023 7 7/8 200 Notes........................................... 2013 7 3/8 100 ---- $800 ==== </TABLE> In connection with the American Income purchase in November, 1994, Torchmark issued eight million shares or $200 million face amount Cumulative Monthly Income Preferred Securities, Series A ("MIPS") in October, 1994. The MIPS were issued at an annual dividend rate of 9.18%. They are subject to a mandatory redemption in full at September 30, 2024, although Torchmark may elect to extend the MIPS for up to an additional 20 years if certain conditions are met. They are redeemable at Torchmark's option at any time after September 30, 1999. While Torchmark is obligated to pay dividends at a fixed rate of 9.18%, Torchmark subsequently entered into a ten-year interest-rate swap agreement with an unaffiliated party whereby Torchmark agreed to pay a variable rate on the $200 million face amount in exchange for payment of the fixed dividend. Additionally, Torchmark acquired a five-year interest-rate cap on the swap agreement that insures the variable rate cannot exceed 10.39%. At December 31, 1995, the variable rate was 5.86%. During 1995, Torchmark's after-tax dividend cost for the MIPS was $10.3 million, compared with $11.9 million that would have been incurred without the swap and cap transactions. Short-term debt was $189 million at year-end 1995, compared with $250 million at the end of the previous year. Torchmark paid down a net of $61 million on its above-mentioned credit facility during 1995. Shareholders' equity rose to $1.59 billion at December 31, 1995, an increase of 28% from December 31, 1994 shareholders' equity of $1.24 billion. Book value per share was $22.17 at 1995 year end, compared with $17.37 and $18.80 at year-ends 1994 and 1993, respectively. After adjusting for the impact of interest-rate fluctuations on shareholders' equity required by accounting rules, book value per share was $20.33 at year-end 1995, an increase of 5% over $19.31 at year-end 1994. Comparative book value per share was $17.29 at year-end 1993. Return from continuing operations on common shareholders' equity was 18.5% in 1995, compared with 19.7% in 1994, declining in large part due to the growth in shareholders' equity. The return on equity ratio excludes the mark up or down of shareholders' equity for changes in interest rates required by accounting rules. Total debt as a percentage of total capitalization was 37% at December 31, 1995, with the MIPS counted as equity and excluding the effect of the above-mentioned accounting rule. This debt to capitalization ratio was 40% at year-end 1994 and 41% at year-end 1993. Torchmark's multiple of earnings before interest, taxes, and discontinued operations to interest requirements was 6.3 for 1995, compared with 6.2 in 1994 and 7.7 in 1993. OTHER ITEMS Acquisition of American Income: On November 3, 1994, Torchmark acquired American Income for a total cash purchase price of approximately $552 million. American Income sells life insurance to union and credit union members through exclusive agents. The addition of American Income's quality line of products and low-cost operation fits well with Torchmark's strategy of growing life insurance operations in niche markets. The results of operations of American Income were consolidated with those of Torchmark after the purchase date. Funds for the purchase were provided through a $200 million preferred stock offering which is discussed in more detail in the capital resources section above, a $175 million bridge loan from a group of banks, the sale of investments available for sale, and internal cash flow. 27
Restructure: Torchmark is exploring a strategic restructuring for the purpose of enhancing shareholder value. Many alternatives will be examined. One alternative includes the possibility that Torchmark could be divided into separate publicly-traded operating companies. Because there are many complex tax, accounting, business, operational, and capital issues to be resolved, should such a restructuring be undertaken, it is unknown at this time what the ultimate form of this restructuring might take . Litigation: Torchmark and its subsidiaries continue to be named as parties to pending or threatened litigation, most of which involve punitive damage claims based upon allegations of agent misconduct at Liberty in Alabama. Such punitive damage claims are tried in Alabama state courts where any punitive damage litigation has the potential for significant adverse results. It is impossible to predict the extent of punitive damages that may be awarded if liability is found in any given case, since the amount of punitive damages in Alabama is left largely to the discretion of the jury in each case. It is thus difficult to predict with certainty the liability of Torchmark or its subsidiaries in any given case because of the unpredictable nature of this type of litigation. Also, the class action litigation in Alabama over an exchange of Liberty's cancer policies continued in 1995. In May, 1994, a settlement was approved involving both equitable and monetary relief, valued by the court at $55 million. An appeal from the trial court's final approval of the settlement was taken to the Alabama Supreme Court, and final briefs in the case were submitted to the Supreme Court in February, 1995. The Supreme Court affirmed the trial court's decision in December, 1995. In February, 1996, the Alabama Supreme Court issued a notice overruling a petition for a rehearing. Merger with United Management: On October 1, 1993, Torchmark acquired the approximately 16% of United Management that it did not already own through the payment of $31.25 per share in cash for the remaining outstanding shares. Accordingly, United Management was merged into Torchmark. Including share purchases made in 1993, the total amount of consideration paid to the remaining United Management shareholders was approximately $230 million. Divestiture of Vesta: During 1993, Torchmark entered into a transaction whereby it disposed of approximately 73% of its common stock in Vesta, its wholly-owned subsidiary, which was at that time the holding company for Torchmark's property and casualty operations. On November 11, 1993, Vesta sold nine million shares of common stock in a public offering of which 6.8 million shares were owned by Torchmark prior to the sale and 2.2 million were newly issued shares. Torchmark's 6.8 million shares were sold for $25 per share less expenses, amounting to proceeds of approximately $161 million and resulting in a $57 million pretax gain. After the transaction, Torchmark continued to own 3.4 million shares of Vesta outstanding common stock or approximately 27% of the company. Torchmark also loaned Vesta $28 million in December, 1993, which was repaid in full in 1995 with interest. In January, 1996, Vesta declared and paid a three for two share stock dividend. After this dividend, Torchmark owned 5.1 million shares of Vesta stock, still representing approximately 27% of the company. NEW ACCOUNTING RULES Accounting for Stock-Based Compensation (FASB Statement No. 123) is effective for fiscal years beginning after December 15, 1995, with earlier adoption encouraged. This statement establishes and encourages a new accounting method for employee stock options based on a presumed fair market value of the option at the time of grant. Previously, accounting standards required these options to be valued at intrinsic value, or the difference between the market value of the stock and the option price. The cost of the options are to be charged to earnings generally over the option's vesting period. The new method of valuation of options is not required, but if the new method is not elected, disclosure of its impact on earnings on a pro forma basis is required. Additional disclosures are also required. Torchmark intends to continue to account for options using the accounting rules currently in effect. Therefore, while there will be no effect on future reported earnings and earnings per share, disclosure will be made giving the pro forma effect of valuing options at estimated fair value. No determination of fair value for Torchmark's options has been made, but such valuation should not have material impact on pro forma results. In 1995, Torchmark granted to employees stock options to purchase 739 thousand shares at a price of $43 3/8 per share. 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA <TABLE> <CAPTION> PAGE ---- <S> <C> Independent Auditors' Report.............................................. 30 Consolidated Financial Statements: Consolidated Balance Sheet at December 31, 1995 and 1994................. 31 Consolidated Statement of Operations for each of the years in the three- year period ended December 31, 1995................................................. 32 Consolidated Statement of Shareholders' Equity for each of the years in the three-year period ended December 31, 1995.......................................... 33 Consolidated Statement of Cash Flow for each of the years in the three- year period ended December 31, 1995................................................. 34 Notes to Consolidated Financial Statements............................... 35 </TABLE> 29
INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Torchmark Corporation Birmingham, Alabama We have audited the consolidated financial statements of Torchmark Corporation and subsidiaries as listed in Item 8 and the supporting schedules as listed in Item 14(a). These financial statements and financial statement schedules are the responsibility of Torchmark's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial statement schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Torchmark Corporation and subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in Note 1, Torchmark adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards (Statement) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in 1995. Also, as discussed in Notes 1, 11, and 12 to the consolidated financial statements, Torchmark adopted the provisions of the Financial Accounting Standards Board's Statement No. 109, Accounting for Income Taxes, and Statement No. 106, Employers' Accounting for Postretirement Benefits Other than Pensions, in 1993. Also, Torchmark adopted the provisions of the Financial Accounting Standards Board's Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, in 1993. KPMG PEAT MARWICK LLP Birmingham, Alabama January 31, 1996 except for Note 16 which is as of February 26, 1996 30
TORCHMARK CORPORATION CONSOLIDATED BALANCE SHEET (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) <TABLE> <CAPTION> DECEMBER 31, ---------------------- 1995 1994 ---------- ---------- <S> <C> <C> Assets: Investments: Fixed maturities--available for sale, at fair value (cost: 1995--$4,984,223; 1994--$4,634,594)................................... $5,210,224 $4,392,259 Equity securities, at fair value (cost: 1995--$4,758; 1994--$35,985)...................................... 10,551 31,547 Mortgage loans on real estate, at cost (estimated fair value: 1995--$50,686; 1994--$17,956)...................................... 52,274 17,997 Investment real estate, at cost (less allowance for depreciation: 1995--$32,463; 1994--$28,620)......... 143,356 132,554 Policy loans......................................... 193,877 181,988 Other long-term investments.......................... 95,744 93,090 Short-term investments............................... 72,847 108,362 ---------- ---------- Total investments................................... 5,778,873 4,957,797 Cash (includes restricted cash: 1995--$11,838; 1994-- $13,091)............................................. 13,158 11,298 Investment in unconsolidated subsidiaries............. 76,101 63,672 Accrued investment income............................. 82,006 67,116 Other receivables..................................... 122,108 125,671 Deferred acquisition costs............................ 1,121,325 1,017,467 Value of insurance purchased.......................... 277,297 274,124 Property and equipment................................ 47,185 47,368 Goodwill.............................................. 555,517 570,455 Other assets.......................................... 30,304 27,324 Discontinued operations assets........................ 174,386 287,749 Separate account assets............................... 1,085,844 715,203 ---------- ---------- Total assets........................................ $9,364,104 $8,165,244 ========== ========== Liabilities: Future policy benefits................................ $4,566,850 $4,229,916 Unearned and advance premiums......................... 83,473 90,871 Policy claims and other benefits payable.............. 209,773 201,754 Other policyholders' funds............................ 77,039 72,783 ---------- ---------- Total policy liabilities............................. 4,937,135 4,595,324 Accrued income taxes.................................. 362,005 173,003 Other liabilities..................................... 215,712 204,425 Short-term debt....................................... 189,372 250,116 Long-term debt (estimated fair value: 1995--$860,258; 1994--$751,603)...................................... 791,988 791,518 Separate account liabilities.......................... 1,085,844 715,203 ---------- ---------- Total liabilities.................................... 7,582,056 6,729,589 Commitments and contingencies Monthly income preferred securities (estimated fair value: 1995--$217,040; 1994--$200,000)....................................... 193,096 193,052 Shareholders' equity: Preferred stock, par value $1 per share--Authorized 5,000,000 shares; outstanding: -0- in 1995 and in 1994.............................. -0- -0- Common stock, par value $1 per share--Authorized 160,000,000 shares; outstanding: 73,784,228 issued in 1995 and in 1994, less 2,117,091 and 2,250,193 shares held in treasury in 1995 and 1994, respectively...... 73,784 73,784 Additional paid-in capital............................ 139,754 139,045 Unrealized gains (losses), net of applicable taxes.... 140,338 (140,756) Retained earnings..................................... 1,325,534 1,267,545 Treasury stock........................................ (90,458) (97,015) ---------- ---------- Total shareholders' equity........................... 1,588,952 1,242,603 ---------- ---------- Total liabilities and shareholders' equity........... $9,364,104 $8,165,244 ========== ========== </TABLE> See accompanying Notes to Consolidated Financial Statements. 31
TORCHMARK CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 ---------- ---------- ---------- <S> <C> <C> <C> Revenue: Life premium............................. $ 772,257 $ 601,633 $ 555,859 Health premium........................... 750,588 768,714 799,835 Other premium............................ 23,438 18,527 137,216 ---------- ---------- ---------- Total premium.......................... 1,546,283 1,388,874 1,492,910 Net investment income.................... 381,865 347,637 368,494 Financial services revenue............... 152,482 139,276 137,422 Realized investment gains (losses)....... (14,323) (2,551) 8,009 Gain from sale of Vesta shares........... -0- -0- 57,234 Other income............................. 1,175 2,101 2,777 ---------- ---------- ---------- Total revenue.......................... 2,067,482 1,875,337 2,066,846 Benefits and expenses: Life policyholder benefits............... 507,444 389,976 377,017 Health policyholder benefits............. 453,127 488,066 486,855 Other policyholder benefits.............. 48,765 43,235 107,684 ---------- ---------- ---------- Total policyholder benefits............ 1,009,336 921,277 971,556 Amortization of deferred acquisition costs................................... 204,067 178,107 187,073 Commissions and premium taxes............ 144,333 141,158 172,801 Financial services selling expense....... 40,080 39,962 47,055 Other operating expense.................. 145,520 118,353 137,039 Nonoperating expenses.................... -0- -0- 82,000 Amortization of goodwill................. 14,977 6,584 2,917 Interest expense......................... 80,994 75,922 64,447 ---------- ---------- ---------- Total benefits and expenses............ 1,639,307 1,481,363 1,664,888 Income from continuing operations before income taxes and equity in earnings of unconsolidated subsidiaries.............. 428,175 393,974 401,958 Income taxes.............................. (157,539) (135,994) (149,506) Equity in earnings of unconsolidated sub- sidiaries................................ 11,626 7,971 542 Minority interests in consolidated subsid- iaries................................... -0- -0- (10,696) Monthly income preferred securities divi- dend..................................... (10,317) (2,137) -0- ---------- ---------- ---------- Net income from continuing operations.. 271,945 263,814 242,298 Income (loss) from discontinued operations of energy segment (less applicable income taxes of: 1995--$86,050, 1994--$11,677, 1993--($3,580)).......................... (128,710) 5,132 37,278 Cumulative effect of changes in accounting principles............................... -0- -0- 18,403 ---------- ---------- ---------- Net income............................. 143,235 268,946 297,979 Dividends to preferred shareholders....... -0- (804) (3,289) ---------- ---------- ---------- Net income available to common share- holders............................... $ 143,235 $ 268,142 $ 294,690 ========== ========== ========== Net income per share: Continuing operations.................... $ 3.80 $ 3.65 $ 3.25 Discontinued operations of energy seg- ment.................................... (1.80) 0.07 0.51 Cumulative effect of changes in account- ing principles.......................... 0.00 0.00 0.25 ---------- ---------- ---------- Net income per share................... $ 2.00 $ 3.72 $ 4.01 ========== ========== ========== </TABLE> See accompanying Notes to Consolidated Financial Statements. 32
TORCHMARK CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) <TABLE> <CAPTION> ADDITIONAL UNREALIZED TOTAL PREFERRED COMMON PAID-IN GAINS RETAINED TREASURY SHAREHOLDERS' STOCK STOCK CAPITAL (LOSSES) EARNINGS STOCK EQUITY --------- ------- ---------- ---------- ---------- -------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> Year Ended December 31, 1993 Balance at January 1, 1993................... $1,000 $73,512 $212,021 $ 9,182 $ 867,698 $(47,753) $1,115,660 Net income.............. 297,979 297,979 Common dividends de- clared ($1.09 a share). (80,357) (80,357) Preferred dividends declared and accrued... (3,289) (3,289) Issuance of common stock.................. 272 15,290 312 15,874 Grant of stock options.. 5,121 5,121 Acquisition of treasury stock--common.......... (44,689) (44,689) Net change in unrealized gains (losses)......... 110,956 110,956 ------ ------- -------- -------- ---------- -------- ---------- Balance at December 31, 1993.................. 1,000 73,784 232,432 120,138 1,082,031 (92,130) 1,417,255 Year Ended December 31, 1994 Net income.............. 268,946 268,946 Common dividends de- clared ($1.12 a share). (80,602) (80,602) Preferred dividends declared and accrued... (804) (804) Acquisition of treasury stock--preferred....... (46,982) (46,982) Acquisition of treasury stock--common.......... (59,072) (59,072) Retirement of treasury stock--preferred....... (1,000) (93,736) 94,736 -0- Exercise of stock op- tions.................. 349 (2,026) 6,433 4,756 Net change in unrealized gains (losses)......... (260,894) (260,894) ------ ------- -------- -------- ---------- -------- ---------- Balance at December 31, 1994.................. -0- 73,784 139,045 (140,756) 1,267,545 (97,015) 1,242,603 Year Ended December 31, 1995 Net income.............. 143,235 143,235 Common dividends de- clared ($1.14 a share). (81,643) (81,643) Exercise of stock options................ 709 (3,603) 6,557 3,663 Net change in unrealized gains (losses)......... 281,094 281,094 ------ ------- -------- -------- ---------- -------- ---------- Balance at December 31, 1995.................. $ -0- $73,784 $139,754 $140,338 $1,325,534 $(90,458) $1,588,952 ====== ======= ======== ======== ========== ======== ========== </TABLE> See accompanying Notes to Consolidated Financial Statements. 33
TORCHMARK CORPORATION CONSOLIDATED STATEMENT OF CASH FLOW (AMOUNTS IN THOUSANDS) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------ 1995 1994 1993 ---------- ----------- ----------- <S> <C> <C> <C> Net income.............................. $ 143,235 $ 268,946 $ 297,979 Adjustments to reconcile net income to cash provided from operations: Increase in future policy benefits.... 178,850 81,062 140,867 Increase in other policy benefits..... 4,877 23,990 7,548 Deferral of policy acquisition costs.. (362,837) (225,409) (214,318) Amortization of deferred policy acqui- sition costs......................... 204,067 178,107 187,073 Change in accrued income taxes........ 42,337 (39,942) (13,034) Depreciation and depletion............ 9,603 11,271 10,852 Realized (gains) losses on sale of in- vestments, subsidiaries, and properties......... 14,323 2,551 (8,009) Change in accounts payable and other liabilities.......................... (6,623) (45,093) 65,244 Change in receivables................. (31,670) (2,237) (14,742) Change in payables and receivables of unconsolidated affiliates............ (2,348) (1,251) 4,502 Other accruals and adjustments........ (2,951) 2,483 (45,554) Discontinued operations of energy seg- ment................................. 128,710 (5,132) (37,278) ---------- ----------- ----------- Cash provided from operations........... 319,573 249,346 381,130 Cash used for investment activities: Investments sold or matured: Fixed maturities available for sale-- sold................................. 1,177,874 582,611 245,689 Fixed maturities available for sale-- matured, called, and repaid.......... 351,246 796,064 485,112 Fixed maturities held to maturity-- sold................................. -0- -0- 58,028 Fixed maturities held to maturity--ma- tured, called, and repaid............ -0- -0- 669,998 Equity securities..................... 16,587 23,179 9,909 Mortgage loans........................ 1,856 1,128 2,654 Real estate........................... 2,566 1,292 7,351 Other long-term investments........... 21,666 16,552 17,179 ---------- ----------- ----------- Total investments sold or matured.... 1,571,795 1,420,826 1,495,920 Acquisition of investments: Fixed maturities--available for sale.. (1,870,445) (1,264,056) (99,453) Fixed maturities--held to maturity.... -0- -0- (1,761,776) Equity securities..................... (394) (23,739) (830) Real estate........................... (17,708) (20,587) (10,129) Net increase in policy loans.......... (11,889) (8,305) (5,093) Other long-term investments........... (67,241) (15,333) (9,048) ---------- ----------- ----------- Total investments acquired........... (1,967,677) (1,332,020) (1,886,329) Net (increase) decrease in short-term investments........................... 35,514 76,457 (120,000) Purchase of American Income............ -0- (551,501) -0- Purchase of Minority Interest.......... -0- -0- (229,063) Proceeds from sale of stock in subsidi- aries................................. -0- -0- 187,220 Loans made to unconsolidated affili- ates.................................. -0- (20,186) (109,954) Loans repaid by unconsolidated affili- ates.................................. 28,000 -0- 91,537 Dispositions of properties............. 1,198 1,332 978 Additions to properties................ (6,510) (5,632) (4,029) Dividends from unconsolidated affili- ates.................................. 684 513 620 ---------- ----------- ----------- Cash used for investment activities..... (336,996) (410,211) (573,100) Cash provided from (used for) financing activities: Issuance of common stock............... 2,953 4,408 5,461 Issuance of monthly income preferred securities............................ -0- 193,046 -0- Additions to debt...................... -0- 143,000 294,110 Cash dividends paid to shareholders.... (80,887) (82,336) (82,932) Cash distributions to minority inter- ests.................................. -0- -0- (1,968) Repayments on debt..................... (60,867) (70,108) (88,102) Loans repaid to unconsolidated affili- ates.................................. -0- -0- (10,000) Acquisition of treasury stock.......... -0- (106,054) (41,897) Net receipts from deposit product oper- ations................................ 158,084 87,701 88,675 ---------- ----------- ----------- Cash provided from financing activities. 19,283 169,657 163,347 ---------- ----------- ----------- Increase (decrease) in cash............ 1,860 8,792 (28,623) Cash at beginning of year.............. 11,298 2,506 31,129 ---------- ----------- ----------- Cash at end of year.................... $ 13,158 $ 11,298 $ 2,506 ========== =========== =========== </TABLE> See accompanying Notes to Consolidated Financial Statements. 34
TORCHMARK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation: The accompanying financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principles of Consolidation: The financial statements include the results of Torchmark Corporation ("Torchmark") and its wholly-owned subsidiaries and United Investors Management Company ("United Management"). United Management was approximately 83% owned through October 1, 1993 at which time Torchmark acquired all of the publicly held shares. Subsidiaries which are not majority- owned are reported on the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments. Torchmark classifies all of its fixed maturity investments, which include bonds and redeemable preferred stocks, as available for sale. Investments classified as available for sale are carried at fair value with unrealized gains and losses, net of deferred taxes, reflected directly in shareholders' equity. Investments in equity securities, which include common and nonredeemable preferred stocks, are reported at fair value with unrealized gains and losses, net of deferred taxes, reflected directly in shareholders' equity. Policy loans are carried at unpaid principal balances. Mortgage loans are carried at amortized cost. Investments in real estate are reported at cost less allowances for depreciation, which are calculated on the straight line method. Short-term investments include investments in certificates of deposit and other interest-bearing time deposits with original maturities within three months. Other long-term investments consist of investments in mutual funds managed by a Torchmark subsidiary. They are carried at fair value. Other long- term investments also include passive energy limited-partnership investments which are valued at partnership equity. If an investment becomes permanently impaired, such impairment is treated as a realized loss and the investment is adjusted to net realizable value. Gains and losses realized on the disposition of investments are recognized as revenues and are determined on a specific identification basis. Realized investment gains and losses and investment income attributable to separate accounts are credited to the separate accounts and have no effect on Torchmark's net income. Investment income attributable to other policyholders is included in Torchmark's net investment income. Net investment income for the years ended December 31, 1995, 1994 and 1993 included $279.6 million, $240.7 million, and $229.5 million, respectively, which was allocable to policyholder reserves or accounts. Realized investment gains and losses are not allocable to policyholders. Determination of Fair Values of Financial Instruments: Fair value for cash, short-term investments, short-term debt, receivables and payables approximates carrying value. Fair values for investment securities are based on quoted market prices, where available. Otherwise, fair values are based on quoted market prices of comparable instruments. Mortgages are valued using discounted cash flows. Substantially all of Torchmark's long-term debt, including the monthly income preferred securities, is valued based on quoted market prices. Cash: Cash consists of balances on hand and on deposit in banks and financial institutions. Overdrafts arising from the overnight investment of funds offset cash balances on hand and on deposit. Recognition of Premium Revenue and Related Expenses: Premiums for insurance contracts which are not defined as universal life-type according to SFAS 97 are recognized as revenue over the premium-paying period of the policy. Profits for limited-payment life insurance contracts as defined by SFAS 97 are recognized over the contract period. Premiums for universal life-type and annuity contracts are added to the policy account value, and revenues for such products are recognized as charges to the policy account value for mortality, administration, and surrenders (retrospective deposit method). Variable annuity products are also assessed an investment management fee and a sales charge. Life premium 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) includes policy charges of $72.7 million, $74.2 million, and $76.2 million for the years ended December 31, 1995, 1994 and 1993, respectively. Other premium includes annuity policy charges for the years ended December 31, 1995, 1994, and 1993 of $19.0 million, $13.9 million, and $9.5 million, respectively. Profits are also earned to the extent that investment income exceeds policy requirements. The related benefits and expenses are matched with revenues by means of the provision of future policy benefits and the amortization of deferred acquisition costs in a manner which recognizes profits as they are earned over the same period. Future Policy Benefits: The liability for future policy benefits for universal life-type products according to SFAS 97 is represented by policy account value. The liability for future policy benefits for all other life and health products is provided on the net level premium method based on estimated investment yields, mortality, morbidity, persistency and other assumptions which were appropriate at the time the policies were issued. Assumptions used are based on Torchmark's experience as adjusted to provide for possible adverse deviation. These estimates are periodically reviewed and compared with actual experience. If it is determined future experience will probably differ significantly from that previously assumed, the estimates are revised. Deferred Acquisition Costs and Value of Insurance Purchased: The costs of acquiring new insurance business are deferred. Such costs consist of sales commissions, underwriting expenses, and certain other selling expenses. The costs of acquiring new business through the purchase of other companies and blocks of insurance business are also deferred. Deferred acquisition costs, including the value of life insurance purchased, for policies other than universal life-type policies according to SFAS 97 are amortized with interest over an estimate of the premium-paying period of the policies in a manner which charges each year's operations in proportion to the receipt of premium income. For universal life-type policies, acquisition costs are amortized with interest in proportion to estimated gross profits. The assumptions used as to interest, persistency, morbidity and mortality are consistent with those used in computing the liability for future policy benefits and expenses. If it is determined that future experience will probably differ significantly from that previously assumed, the estimates are revised. Deferred acquisition costs are adjusted to reflect the amounts associated with unrealized investment gains and losses pertaining to universal life-type products. Income Taxes: Income taxes are accounted for under the asset and liability method in accordance with SFAS 109. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement book values and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Effective January 1, 1993, Torchmark adopted SFAS 109 and has reported the cumulative effect of that change in the method of accounting for income taxes in the 1993 consolidated statement of operations. Property and Equipment: Property and equipment is reported at cost less allowances for depreciation. Depreciation is recorded primarily on the straight line method over the estimated useful lives of these assets which range from two to twenty years for equipment and two to forty years for buildings and improvements. Ordinary maintenance and repairs are charged to income as incurred. Impairments: Torchmark adopted the provisions of SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, effective at the issuance of the standard in March, 1995. This standard requires that certain long-lived assets used in Torchmark's business as well as certain intangible assets be reviewed for impairment when circumstances indicate that these assets may not be recoverable, and further provides how such impairment shall be determined and 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) measured. It also requires that long-lived assets and intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. Except for the writedown of the energy investment described in Note 8, the adoption of this statement had no material impact on Torchmark's operations or financial position. Goodwill: The excess cost of businesses acquired over the fair value of their net assets is reported as goodwill and is amortized on a straight-line basis over a period not exceeding 40 years. Torchmark's unamortized goodwill is periodically reviewed to ensure that conditions are present to indicate the recorded amount of goodwill is recoverable from the estimated future profitability of the related business. If events or changes in circumstances indicate that future profits will not be sufficient to support the carrying amount of goodwill, goodwill is written down to the recoverable amount and is amortized over the original remaining period or a reduced period if appropriate. Treasury Stock: Torchmark accounts for purchases of treasury stock on the cost method. Reclassification: Certain amounts in the financial statements presented have been reclassified from amounts previously reported in order to be comparable between years. These reclassifications have no effect on previously reported shareholders' equity or net income during the periods involved. Litigation: Torchmark and its subsidiaries continue to be named as parties to legal proceedings. Because much of Torchmark's litigation is sought in Alabama, a jurisdiction known for excessive punitive damage verdicts bearing little or no relationship to actual damages, the ultimate outcome of any particular action cannot be predicted. It is reasonably possible that changes in the expected outcome of these matters could occur in the near term, but such changes should not be material to Torchmark's reported results or financial condition. Earnings Per Share: Earnings available to holders of common stock are computed after deducting dividends on the Adjustable Rate Cumulative Preferred Stock. Primary earnings per share are then calculated by dividing the earnings available to holders of common stock by the weighted average number of common shares outstanding during the period. The weighted average numbers of common shares outstanding for each period are as follows: 1995--71,593,774, 1994-- 72,095,657, 1993--73,501,654. 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 2--STATUTORY ACCOUNTING Insurance subsidiaries of Torchmark are required to file statutory financial statements with state insurance regulatory authorities. Accounting principles used to prepare these statutory financial statements differ from GAAP. Consolidated net income and shareholders' equity on a statutory basis for the insurance subsidiaries were as follows: <TABLE> <CAPTION> NET INCOME SHAREHOLDERS' EQUITY YEAR ENDED DECEMBER 31, AT DECEMBER 31, -------------------------- --------------------- 1995 1994 1993 1995 1994 -------- -------- -------- ---------- ---------- <S> <C> <C> <C> <C> <C> Life....................... $245,552 $228,754 $364,421* $ 618,557 $552,906 Property and casualty...... -0- -0- 6,449 -0- -0- </TABLE> *Includes equity in earnings of property and casualty subsidiaries The excess, if any, of shareholders' equity of the insurance subsidiaries on a GAAP basis over that determined on a statutory basis is not available for distribution to Torchmark without regulatory approval. A reconciliation of Torchmark's insurance subsidiaries' statutory net income to Torchmark's consolidated GAAP net income is as follows: <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, -------------------------------- 1995 1994 1993 ---------- ---------- -------- <S> <C> <C> <C> Statutory net income................... $ 245,552 $228,754 $364,421 Deferral of acquisition costs.......... 328,598 225,409 214,318 Amortization of acquisition costs...... (204,067) (178,107) (187,073) Differences in insurance policy liabil- ities................................. 1,407 30,271 (42,364) Deferred income taxes.................. (40,380) (2,052) (22,281) Inter-affiliate dividends.............. (684) -0- (194,442) Income of noninsurance affiliates...... (207,164) 11,372 136,748 Other.................................. 19,973 (18,229) 28,652 Pre-acquisition adjustments............ -0- (28,472) -0- ---------- ---------- -------- GAAP net income........................ $ 143,235 $268,946 $297,979 ========== ========== ======== A reconciliation of Torchmark's insurance subsidiaries' statutory shareholders' equity to Torchmark's consolidated GAAP shareholders' equity is as follows: <CAPTION> YEAR ENDED DECEMBER 31, ---------------------- 1995 1994 ---------- ---------- <S> <C> <C> <C> Statutory shareholders' equity......... $ 618,557 $ 552,906 Differences in insurance policy liabil- ities................................. 371,599 321,084 Deferred acquisition costs............. 1,121,325 1,017,467 Value of insurance purchased........... 277,297 274,124 Deferred income taxes.................. (407,267) (223,385) Debt of parent company................. (980,814) (1,040,972) Asset valuation reserves............... 161,573 96,814 Nonadmitted assets..................... 85,240 43,610 Net assets of noninsurance affiliates . 158,259 230,671 Other.................................. 183,183 (29,716) ---------- ---------- GAAP shareholders' equity.............. $1,588,952 $1,242,603 ========== ========== </TABLE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 3--INVESTMENT OPERATIONS <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------ 1995 1994 1993 --------- --------- -------- <S> <C> <C> <C> Investment income is summarized as follows: Fixed maturities.......................... $ 350,931 $ 329,626 $349,403 Equity securities......................... 818 1,323 2,214 Mortgage loans on real estate............. 4,343 631 1,163 Investment real estate.................... 8,277 7,778 6,804 Policy loans.............................. 12,137 10,003 9,070 Other long-term investments............... 10,410 4,958 7,744 Short-term investments.................... 8,890 7,046 4,824 --------- --------- -------- 395,806 361,365 381,222 Less investment expense................... (13,941) (13,728) (12,728) --------- --------- -------- Net investment income..................... $ 381,865 $ 347,637 $368,494 ========= ========= ======== An analysis of gains (losses) from invest- ments is as follows: Realized investment gains (losses): Fixed maturities......................... $ 1,285 $ (5,049) $ 12,387 Equity securities........................ (15,033) 1,610 702 Other.................................... (575) 888 (5,080) --------- --------- -------- $ (14,323) $ (2,551) $ 8,009 ========= ========= ======== Net change in unrealized investment gains (losses) on equity securities before tax............. $ 10,125 $ (15,064) $ (1,855) Net change in unrealized investment gains on fixed maturities available for sale before tax............................... 468,336 (434,340) 192,007 Net change in unrealized investment gains on other long-term investments or foreign exchange translation adjustments......... 5,514 (4,088) 4,834 Adjustment to deferred acquisition costs.. (51,739) 52,334 (23,264) Applicable tax............................ (151,142) 140,264 (60,766) --------- --------- -------- Net change in unrealized gains (losses) on equity and fixed maturity securities available for sale....................... $ 281,094 $(260,894) $110,956 ========= ========= ======== </TABLE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 3--INVESTMENT OPERATIONS (CONTINUED) A summary of fixed maturities available for sale and equity securities by amortized cost and estimated market value at December 31, 1995 and 1994 is as follows: <TABLE> <CAPTION> GROSS GROSS AMOUNT PER AMORTIZED UNREALIZED UNREALIZED MARKET THE BALANCE COST GAINS LOSSES VALUE SHEET ---------- ---------- ---------- ---------- ----------- 1995: - ----- <S> <C> <C> <C> <C> <C> Fixed maturities avail- able for sale: Bonds: U.S. Government direct obligations and agencies............. $ 152,210 $ 4,645 $ (22) $ 156,833 $ 156,833 GNMAs................. 1,050,034 68,053 (1,221) 1,116,866 1,116,866 Mortgage-backed securities, GNMA collateral........... 214,186 8,136 (62) 222,260 222,260 Other mortgage-backed securities........... 230,981 11,527 (2,960) 239,548 239,548 State, municipalities and political subdivisions......... 762,943 21,383 (3,677) 780,649 780,649 Foreign governments... 71,489 5,303 (3) 76,789 76,789 Public utilities...... 258,840 13,276 (308) 271,808 271,808 Industrial and miscellaneous........ 2,235,811 103,443 (2,400) 2,336,854 2,336,854 Redeemable preferred stocks................ 7,729 888 0 8,617 8,617 ---------- -------- --------- ---------- ---------- Total fixed maturities........... 4,984,223 236,654 (10,653) 5,210,224 5,210,224 Equity securities: Common stocks: Banks and insurance companies............ 2,945 5,304 (10) 8,239 8,239 Industrial and all others............... 264 151 (7) 408 408 Non-redeemable preferred stocks...... 1,549 355 0 1,904 1,904 ---------- -------- --------- ---------- ---------- Total equity securities........... 4,758 5,810 (17) 10,551 10,551 ---------- -------- --------- ---------- ---------- Total fixed maturities and equity securities........... $4,988,981 $242,464 $ (10,670) $5,220,775 $5,220,775 ========== ======== ========= ========== ========== <CAPTION> 1994: - ----- <S> <C> <C> <C> <C> <C> Fixed maturities avail- able for sale: Bonds: U.S. Government direct obligations and agencies............. $ 105,239 $ 502 $ (3,985) $ 101,756 $ 101,756 GNMAs................. 1,775,852 18,007 (78,796) 1,715,063 1,715,063 Mortgage-backed securities, GNMA collateral........... 242,567 1,661 (7,676) 236,552 236,552 Other mortgage-backed securities........... 161,216 804 (2,441) 159,579 159,579 State, municipalities and political subdivisions......... 835,740 1,693 (69,078) 768,355 768,355 Foreign governments... 104,478 190 (3,702) 100,966 100,966 Public utilities...... 243,776 247 (20,168) 223,855 223,855 Industrial and miscellaneous........ 1,155,968 2,377 (82,255) 1,076,090 1,076,090 Redeemable preferred stocks................ 9,758 290 (5) 10,043 10,043 ---------- -------- --------- ---------- ---------- Total fixed maturities ..................... 4,634,594 25,771 (268,106) 4,392,259 4,392,259 Equity securities: Common stocks: Banks and insurance companies............ 33,272 6,852 (11,542) 28,582 28,582 Industrial and all others............... 1,165 65 (103) 1,127 1,127 Non-redeemable preferred stocks...... 1,548 291 (1) 1,838 1,838 ---------- -------- --------- ---------- ---------- Total equity securities........... 35,985 7,208 (11,646) 31,547 31,547 ---------- -------- --------- ---------- ---------- Total fixed maturities and equity securities........... $4,670,579 $ 32,979 $(279,752) $4,423,806 $4,423,806 ========== ======== ========= ========== ========== </TABLE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 3--INVESTMENT OPERATIONS (CONTINUED) A schedule of fixed maturities by contractual maturity at December 31, 1995 is shown below on an amortized cost basis and on a market value basis. Actual maturities could differ from contractual maturities due to call or prepayment provisions. <TABLE> <CAPTION> AMORTIZED MARKET COST VALUE ---------- ---------- <S> <C> <C> Fixed maturities available for sale: Due in one year or less... $ 42,759 $ 43,167 Due from one to five years.................... 615,081 640,534 Due from five to ten years.................... 1,669,975 1,735,945 Due after ten years....... 1,121,792 1,170,951 ---------- ---------- 3,449,607 3,590,597 Redeemable preferred stocks................... 7,729 8,617 Mortgage- and asset-backed securities............... 1,526,887 1,611,010 ---------- ---------- $4,984,223 $5,210,224 ========== ========== </TABLE> Proceeds from sales of fixed maturities available for sale were $1.18 billion in 1995, $583 million in 1994, and $246 million in 1993. Gross gains realized on those sales were $13.4 million in 1995, $14.6 million in 1994, and $8.3 million in 1993. Gross losses were $13.5 million in 1995, $20.8 million in 1994, and $176 thousand in 1993. Proceeds from sales of fixed investments held to maturity were $58 million in 1993. Gross gains and losses realized on those sales were $2.6 million and $138 thousand, respectively. The 1993 sales of fixed investments held to maturity were made for various reasons including changes in regulatory requirements, credit deterioration, and sales within 90 days of maturity. Torchmark had $25.7 million and $26.3 million in investment real estate at December 31, 1995 and 1994, respectively, which was nonincome producing during the previous twelve months. These properties included primarily construction in process and land. Fixed maturity investments, mortgage loans, and other long-term investments which were nonincome producing during the previous twelve months were $0.3 million and $0.6 million at December 31, 1995 and 1994, respectively. Derivative investments are immaterial to Torchmark at December 31, 1995. Torchmark's total carrying value of these investments was $23.9 million and $24.5 million at December 31, 1995 and 1994, respectively. Torchmark has no off-balance sheet exposure in connection with these investments. NOTE 4--PROPERTY AND EQUIPMENT A summary of property and equipment used in the business is as follows: <TABLE> <CAPTION> DECEMBER 31, 1995 DECEMBER 31, 1994 --------------------- --------------------- ACCUMULATED ACCUMULATED COST DEPRECIATION COST DEPRECIATION -------- ------------ -------- ------------ <S> <C> <C> <C> <C> Company occupied real estate........ $67,528 $31,040 $65,584 $29,742 Data processing equipment........... 24,507 22,198 24,611 21,760 Transportation equipment............ 12,802 8,005 13,574 7,656 Furniture and office equipment...... 36,979 33,388 35,447 32,690 Other............................... 3,697 3,697 3,697 3,697 -------- ------- -------- ------- $145,513 $98,328 $142,913 $95,545 ======== ======= ======== ======= </TABLE> Depreciation expense on property used in the business was $5.7 million, $7.6 million, and $7.3 million in each of the years 1995, 1994, and 1993, respectively. 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 5--DEFERRED ACQUISITION COSTS AND VALUE OF INSURANCE PURCHASED An analysis of deferred acquisition costs and the value of insurance purchased is as follows: <TABLE> <CAPTION> 1995 1994 1993 ---------------------- ---------------------- --------------------- DEFERRED VALUE OF DEFERRED VALUE OF DEFERRED VALUE OF ACQUISITION INSURANCE ACQUISITION INSURANCE ACQUISITION INSURANCE COSTS PURCHASED COSTS PURCHASED COSTS PURCHASED ----------- --------- ----------- --------- ----------- --------- <S> <C> <C> <C> <C> <C> <C> Balance at beginning of year................... $1,017,467 $274,124 $ 901,565 $131,602 $904,147 $152,421 Additions: Deferred during peri- od: Commissions........... 192,427 -0- 134,032 -0- 142,869 -0- Other expenses........ 136,170 -0- 91,377 -0- 71,449 -0- ---------- -------- ---------- -------- -------- -------- Total deferred....... 328,597 -0- 225,409 -0- 214,318 -0- Value of Insurance purchased -0- 34,240 -0- 158,788 -0- -0- Adjustment attributable to unrealized investment losses(1)............ -0- -0- 52,334 -0- -0- -0- Reassumed business.... -0- -0- -0- -0- -0- -0- ---------- -------- ---------- -------- -------- -------- Total additions...... 328,597 34,240 277,743 158,788 214,318 -0- ---------- -------- ---------- -------- -------- -------- Deductions: Amortized during peri- od................... (172,764) (31,067) (154,697) (16,266) (166,863) (20,210) Adjustment attributable to unrealized investment gains(1)............. (51,739) -0- -0- -0- (23,264) -0- Adjustment attribut- able to realized in- vestment gains(1).... (236) -0- (7,144) -0- -0- -0- Business disposed..... -0- -0- -0- -0- (26,773) (609) ---------- -------- ---------- -------- -------- -------- Total deductions..... (224,739) (31,067) (161,841) (16,266) (216,900) (20,819) ---------- -------- ---------- -------- -------- -------- Balance at end of year.. $1,121,325 $277,297 $1,017,467 $274,124 $901,565 $131,602 ========== ======== ========== ======== ======== ======== </TABLE> - -------- (1)Represents amounts pertaining to investments relating to universal life- type products. The amount of interest accrued on the unamortized balance of value of insurance purchased was $20.0 million, $11.7 million, and $10.8 million, for the years ended December 31, 1995, 1994 and 1993, respectively. The average interest accrual rates used for the years ended December 31, 1995, 1994 and 1993 were 7.26%, 7.72% and 7.57%, respectively. The estimated amount of the unamortized balance at December 31, 1995 to be amortized during each of the next five years is: 1996, $32.3 million; 1997, $27.7 million; 1998, $22.3 million; 1999, $20.5 million; and 2000, $19.2 million. In the event of lapses or early withdrawals in excess of those assumed, deferred acquisition costs and the value of insurance purchased may not be recoverable. NOTE 6--SALE OF VESTA SHARES In November, 1993, Torchmark sold approximately 73% of Vesta Insurance Group, Inc. ("Vesta"), Torchmark's holding company for its property and casualty insurance operations. The sale was made through an initial public offering of common stock for net proceeds of $161 million for a pretax gain of $57.2 million. Torchmark maintains a 27% interest in Vesta and accounts for its investment on the equity method, recording its investment as an unconsolidated subsidiary. In connection with the public offering, Torchmark loaned Vesta $28 million at an interest rate of 6.1% for a term of five years, which was outstanding at both December 31, 1994 and 1993. In July, 1995, this note was repaid in full. 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 7--ACQUISITIONS On October 1, 1993, the United Management public shareholders approved Torchmark's offer to acquire the remaining approximately 17% of United Management which it did not already own for cash consideration of $31.25 per share. The transaction was completed for a total purchase price of $234 million resulting in goodwill of $126 million which will be amortized over approximately 40 years on a straight line basis. All other purchase accounting adjustments were immaterial. On November 3, 1994, Torchmark acquired all of the outstanding common stock of American Income Holding, Inc., whose primary operating subsidiary is American Income Life Insurance Company ("American Income") for $35 per share or a total purchase price of $552 million, including expenses. American Income is a life insurance company which sells individual supplemental life and fixed-benefit accident and health insurance through labor union locals, credit unions, and other employment related associations. The purchase was financed with a combination of internal funds, sales of securities, bank borrowings, and the issuance by a finance subsidiary of 9.18% Cumulative Monthly Income Preferred Securities, Series A ("MIPS"). The transaction resulted in goodwill of approximately $403 million which will be amortized on a straight line basis over 40 years. The acquisition was accounted for as a purchase, and the results of operations since the acquisition date have been consolidated. A summary of the net assets acquired is as follows: <TABLE> <S> <C> 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 ========= </TABLE> The table below presents supplemental pro forma information for 1994 and 1993 as if the American Income acquisition were made at January 1, 1993 at the same purchase price, based on estimates and assumptions considered appropriate: <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------- 1994 1993 ---------- ---------- <S> <C> <C> Revenues.......................................... $2,086,987 $2,350,691 Net income before extraordinary items............. 278,533 301,209 Net income........................................ 277,014 301,209 Net income per common share before extraordinary items............................................ 3.86 4.10 Net income per common share....................... 3.84 4.10 </TABLE> NOTE 8--DISCONTINUED OPERATIONS OF ENERGY SEGMENT During 1995, Torchmark decided to dispose of Torch Energy Advisors Incorporated ("Torch Energy"), its energy management subsidiary. At year end 1995, Torchmark was negotiating to sell Torch Energy to an unaffiliated party. Also in 1995, Torchmark decided to dispose of its coalbed methane gas development in the Black Warrior basin of Alabama due to disappointments in production. Torchmark intends to sell this development, and implemented a plan to dispose of this investment in the fourth quarter of 1995. In view of the proposed sale of the Black Warrior investment, and in accordance with the provisions of SFAS 121, Torchmark wrote this investment down to its estimated net realizable value, resulting in an after-tax charge of $130 million or $1.82 per share. Since, on a combined basis, the activities of Torch Energy and the Black Warrior investment represent Torchmark's energy management and development activities, the disposition of these operations qualify for disposal of a segment 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 8--DISCONTINUED OPERATIONS OF ENERGY SEGMENT (CONTINUED) accounting treatment. Therefore, Torchmark has modified the presentation in its financial statements for 1995 and all prior periods to set forth separately the net assets and results attributable to the discontinued energy segment as discontinued operations. At December 31, 1995, discontinued operations assets consisted of: <TABLE> <S> <C> 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 ======== </TABLE> No proceeds for disposal of discontinued assets have been received. NOTE 9--FUTURE POLICY BENEFIT RESERVES A summary of the assumptions used in determining the liability for future policy benefits at December 31, 1995 is as follows: INDIVIDUAL LIFE INSURANCE INTEREST ASSUMPTIONS: <TABLE> <CAPTION> PERCENT OF YEARS OF ISSUE INTEREST RATES LIABILITY -------------- --------------------- ---------- <S> <C> <C> 1917-1995 3.00% 3% 1947-1954 3.25% 1 1927-1989 3.50% 1 1955-1961 3.75% 2 1925-1995 4.00% 13 1962-1969 4.50% graded to 4.00% 3 1970-1980 5.50% graded to 4.00% 5 1970-1995 5.50% 1 1929-1995 6.00% 7 1986-1994 7.00% graded to 6.00% 10 1943-1992 7.50% graded to 6.00% 1 1954-1995 8.00% graded to 6.00% 10 1951-1985 8.50% graded to 6.00% 11 1980-1987 8.50% graded to 7.00% 1 1975-1991 9.50% graded to 8.00% 6 1984-1995 Interest Sensitive 25 --- 100% === </TABLE> MORTALITY ASSUMPTIONS: For individual life, the mortality tables used are various statutory mortality tables and modifications of: 1950-54 Select and Ultimate Table 1954-58 Industrial Experience Table 1955-60 Ordinary Experience Table 1965-70 Select and Ultimate Table 1955-60 Inter-Company Table 1970 United States Life Table 1979-81 United States Life Table 1975-80 Select and Ultimate Table X-18 Ultimate Table WITHDRAWAL ASSUMPTIONS: Withdrawal assumptions are based on Torchmark's experience. 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 9--FUTURE POLICY BENEFIT RESERVES (CONTINUED) HEALTH INSURANCE INTEREST ASSUMPTIONS: <TABLE> <CAPTION> PERCENT OF YEARS OF ISSUE INTEREST RATES LIABILITY -------------- --------------------- ---------- <S> <C> <C> 1962-1995 3.00% 1% 1969-1980 5.50% graded to 4.00% 5 1982-1995 4.50% 1 1993-1995 6.00% 14 1986-1992 7.00% graded to 6.00% 55 1955-1995 8.00% graded to 6.00% 8 1951-1986 8.50% graded to 6.00% 16 --- 100% === </TABLE> MORBIDITY ASSUMPTIONS: For health, the morbidity assumptions are based on either Torchmark's experience or the assumptions used in calculating statutory reserves. TERMINATION ASSUMPTIONS: Termination assumptions are based on Torchmark's experience. OVERALL INTEREST ASSUMPTIONS The overall average interest assumption for determining the liability for future life and health insurance benefits in 1995 was 6.3%. NOTE 10--LIABILITY FOR UNPAID HEALTH CLAIMS Activity in the liability for unpaid health claims is summarized as follows: <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ---------------------------- 1995 1994 1993 -------- -------- -------- <S> <C> <C> <C> Balance at beginning of year: $166,731 $131,161 $137,350 Addition due to acquisition of American In- come....................................... -0- 9,185 -0- Incurred related to: Current year............................... 502,018 514,814 471,615 Prior year................................. (8,295) (14,985) (25,052) -------- -------- -------- Total incurred.............................. 493,723 499,829 446,563 -------- -------- -------- Paid related to: Current year............................... 342,905 332,273 321,196 Prior year................................. 146,983 141,171 131,556 -------- -------- -------- Total paid.................................. 489,888 473,444 452,752 -------- -------- -------- Balance at end of year...................... $170,566 $166,731 $131,161 ======== ======== ======== </TABLE> The liability for unpaid health claims is included with "Policy claims and other benefits payable" on the Balance Sheet. Health benefits for 1994 include a $30 million charge resulting from a reclassification of nonoperating expense to health benefits, since actual payments will be made in the form of health benefits. 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 11--INCOME TAXES Torchmark and most of its subsidiaries file a life-nonlife consolidated federal income tax return. Famlico and Sentinel file their own consolidated federal income tax return and will not be eligible to join Torchmark's consolidated return group until 1996 and 1997, respectively. American Income and Trust Life Insurance Company file their own consolidated federal income tax return and will not be eligible to join Torchmark's consolidated return group until 2000. As discussed in Note 1, Torchmark adopted Statement 109 on January 1, 1993. The cumulative effect of this change in accounting for income taxes was a $26.1 million addition to net income for the year ended December 31, 1993. This amount is included in the cumulative effect of changes in accounting principles line on the consolidated statement of operations. Total income taxes were allocated as follows: <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ---------------------------- 1995 1994 1993 -------- -------- -------- <S> <C> <C> <C> Income from continuing operations............. $157,539 $135,994 $149,506 Discontinued operations....................... (86,050) (11,677) 3,580 Change in accounting standards for post-re- tirement benefits other than pensions........ -0- -0- (4,124) Monthly income preferred securities dividend.. (5,555) (1,148) -0- Shareholders' equity Unrealized gains (losses).................... 157,200 (147,520) 60,768 Tax basis compensation expense in excess of amounts recognized for financial reporting purposes from the exercise of stock options. (709) (349) (5,637) Other........................................ (6,169) 9,424 (5,163) -------- -------- -------- $216,256 $(15,276) $198,930 ======== ======== ======== </TABLE> Income tax expense attributable to income from continuing operations consists of: <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, -------------------------- 1995 1994 1993 -------- -------- -------- <S> <C> <C> <C> Current income tax expense...................... $110,652 $113,215 $188,004 Increase in January 1, 1993 deferred income tax liability due to increase in corporate income tax rate to 35%................................ -0- -0- 8,763 Deferred income tax expense (benefit)........... 46,887 22,779 (47,261) -------- -------- -------- $157,539 $135,994 $149,506 ======== ======== ======== </TABLE> The effective income tax rate differed from the expected 35% rate in 1995, 1994, and 1993 as shown below: <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------------------- 1995 % 1994 % 1993 % -------- --- -------- --- -------- --- <S> <C> <C> <C> <C> <C> <C> Expected income taxes............. $149,861 35% $137,891 35% $140,685 35% Increase (reduction) in income taxes resulting from: Tax-exempt investment income..... (7,965) (2) (10,625) (2) (4,404) (1) Effect of tax rate change on de- ferred liability................ -0- 0 -0- 0 8,763 2 Other............................ 15,643 4 8,728 2 4,462 1 -------- --- -------- --- -------- --- Income taxes...................... $157,539 37% $135,994 35% $149,506 37% ======== === ======== === ======== === </TABLE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 11--INCOME TAXES (CONTINUED) The significant components of deferred income tax expense before the cumulative effect of the change in accounting principles and adjustments to shareholders' equity are as follows: <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------ 1995 1994 1993 ------- ------- -------- <S> <C> <C> <C> Deferred income tax expense (exclusive of the effect of the component listed below).. $46,887 $22,779 $(47,261) Adjustments to deferred tax assets and lia- bilities for the increase in the corporate income tax rate from 34% to 35%............ -0- -0- 8,763 ------- ------- -------- $46,887 $22,779 $(38,498) ======= ======= ======== </TABLE> The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below: <TABLE> <CAPTION> DECEMBER 31, ------------------ 1995 1994 -------- -------- <S> <C> <C> Deferred tax assets: Fixed maturities, equity securities, and investment real estate, principally due to write-downs of investments to net realizable value for financial reporting purposes.... $ 6,897 $ 13,754 Future policy benefits, unearned and advance premiums, and policy claims............................................ 27,432 20,628 Other liabilities, principally due to the current nonde- ductibility for tax purposes of certain accrued expenses. 18,344 35,715 Unrealized investment losses.............................. -0- 82,792 -------- -------- Total gross deferred tax assets........................... 52,673 152,889 Less valuation allowance.................................. (2,111) (2,111) -------- -------- Net deferred tax assets................................... 50,562 150,778 -------- -------- Deferred tax liabilities: Energy investments and other unconsolidated affiliates, principally due to accelerated depletion deductions for tax purposes........ 11,305 27,424 Deferred acquisition costs................................ 322,900 286,444 Unrealized investment gains............................... 74,408 -0- Other..................................................... 8,321 9,921 -------- -------- Total gross deferred tax liabilities...................... 416,934 323,789 -------- -------- Net deferred tax liability................................. $366,372 $173,011 ======== ======== </TABLE> The valuation allowance for deferred tax assets as of December 31, 1994 and 1995 was $2.1 million. Subsequently recognized tax benefits of $2.1 million relating to the December 31, 1995 valuation allowance will be allocated to goodwill. Torchmark has not recognized a deferred tax liability for the undistributed earnings of its wholly-owned subsidiaries because such earnings are remitted to Torchmark on a tax-free basis. A deferred tax liability will be recognized in the future if the remittance of such earnings becomes taxable to Torchmark. In addition, Torchmark has not recognized a deferred tax liability of approximately $60 million that arose prior to 1984 on temporary differences related to the policyholders' surplus accounts in the life insurance subsidiaries. A current tax expense will be recognized in the future if and when these amounts are distributed. 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 12--POSTRETIREMENT BENEFITS Pension Plans: Torchmark has retirement benefit plans and savings plans which cover substantially all employees. There is also a nonqualified excess benefit plan which covers certain employees. The total cost of these retirement plans charged to operations was as follows: <TABLE> <CAPTION> DEFINED EXCESS DEFINED BENEFIT BENEFIT YEAR ENDED CONTRIBUTION PENSION PENSION DECEMBER 31, PLANS PLANS PLAN ------------ ------------ ------- ------- <S> <C> <C> <C> 1995.................... $3,208 $6,820 $ 524 1994.................... $3,201 $6,922 $1,800 1993.................... $ 740 $6,733 $1,450 </TABLE> Cost for the defined benefit pension plans has been calculated on the projected unit credit actuarial cost method. Contributions are made to the pension plans subject to minimums required by regulation and maximums allowed for tax purposes. Accrued pension expense in excess of amounts contributed has been recorded as a liability in the financial statements and was $9.5 million and $11.8 million at December 31, 1995 and 1994, respectively. The plans are organized as trust funds whose assets consist primarily of investments in marketable long-term fixed maturities and equity securities which are valued at market. The excess benefit pension plan provides the benefits that an employee would have otherwise received from a defined benefit pension plan in the absence of the Internal Revenue Code's limitation on benefits payable under a qualified plan. Although this plan is unfunded, pension cost is determined in a similar manner as for the funded plans. Liability for the excess benefit plan was $5.5 million and $3.2 million as of December 31, 1995 and 1994, respectively. Net periodic pension cost for the defined benefit plans by expense component was as follows: <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, -------------------------- 1995 1994 1993 -------- -------- ------- <S> <C> <C> <C> Service cost--benefits earned during the period.................................... $ 7,190 $ 8,323 $ 8,298 Interest cost on projected benefit obliga- tion...................................... 8,867 8,242 7,711 Actual return on assets.................... (17,927) (2,302) (8,697) Net amortization and deferral.............. 9,214 (5,541) 871 -------- -------- ------- Net periodic pension cost.................. $ 7,344 $ 8,722 $ 8,183 ======== ======== ======= </TABLE> A reconciliation of the funded status of the defined benefit plans with Torchmark's pension liability was as follows: <TABLE> <CAPTION> AT DECEMBER 31, ------------------ 1995 1994 -------- -------- <S> <C> <C> Fair market value of assets available for benefits. $113,193 $ 94,207 Projected benefit obligation: Vested............................................ 89,170 72,119 Nonvested......................................... 5,441 4,141 -------- -------- Accumulated benefit obligation................... 94,611 76,260 Effect of projected future salary increases 27,003 27,195 -------- -------- Total projected benefit obligation............... 121,614 103,455 -------- -------- Funded status...................................... (8,421) (9,248) Unamortized prior service costs.................... 147 (1,531) Unamortized transition asset....................... (1,220) (2,183) Unrecognized (gain) or loss........................ (5,462) (2,061) -------- -------- Accrued pension costs included in liabilities.... $(14,956) $(15,023) ======== ======== </TABLE> The weighted average assumed discount rates used in determining the actuarial benefit obligations were 7.25% in 1995 and 8.0% in 1994. The rate of assumed compensation increase was 4.25% in 1995 and 5.0% in 1994 and the expected long-term rate of return on plan assets was 8.0% in 1995 and 1994. 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 12--POSTRETIREMENT BENEFITS (CONTINUED) Torchmark accrues expense for the defined contribution plans based on a percentage of the employees' contributions. The plans are funded by the employee contributions and a Torchmark contribution equal to the amount of accrued expense. Postretirement Benefit Plans Other Than Pensions: Torchmark provides postretirement life insurance benefits for most retired employees, and also provides additional postretirement life insurance benefits for certain key employees. The majority of the life insurance benefits are accrued over the working lives of active employees. For retired employees over age sixty-five, Torchmark does not provide postretirement benefits other than pensions. Torchmark does provide a portion of the cost for health insurance benefits for employees who retired before February 1, 1993 and before age sixty-five, covering them until they reached age sixty-five. Eligibility for this benefit was generally achieved at age fifty-five with at least fifteen years of service. This subsidy is minimal to employees who did not retire before February 1, 1993. This plan is unfunded. Torchmark adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," effective January 1, 1993. This statement requires that the expected cost of providing future benefits to employees be accrued during the employees' service period until each employee reaches full eligibility. Torchmark elected to recognize the effect of the adoption of this standard immediately as a change in accounting principle as permitted by SFAS 106. The cumulative effect of this change in accounting resulted in a $7.7 million after-tax charge to net income in 1993. It was reported as part of the cumulative effect of changes in accounting principles. In accordance with the provisions of SFAS 106, prior years' financial statements were not restated to apply the provisions of this statement. Net periodic postretirement benefit cost included the following components: <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, --------------------- 1995 1994 1993 ----- ------ ------ <S> <C> <C> <C> Service cost............................................ $ 284 $ 444 $ 411 Interest cost on accumulated postretirement benefit ob- ligation............................................... 678 831 954 Actual return on plan assets............................ -0- -0- -0- Net amortization and deferral........................... (559) (237) (14) ----- ------ ------ Net periodic postretirement benefit cost................ $ 403 $1,038 $1,351 ===== ====== ====== </TABLE> The following table sets forth the plans' combined benefit obligation with the amount shown in Torchmark's balance sheet: <TABLE> <CAPTION> AT DECEMBER 31, --------------- 1995 1994 ------- ------- <S> <C> <C> Accumulated postretirement benefit obligation: Retirees....................................................... $ 4,880 $ 5,811 Fully eligible active plan participants........................ 1,231 1,386 Other active plan participants................................. 3,145 3,546 ------- ------- Total accumulated postretirement benefit obligation........... 9,256 10,743 Plan assets at fair value....................................... -0- -0- ------- ------- Accumulated postretirement benefit obligation in excess of plan assets......................................................... 9,256 10,743 Unrecognized net gain from past experience different from that assumed and from changes in assumptions........................ 1,423 734 Prior service cost not yet recognized in net periodic post re- tirement benefit cost.......................................... 262 280 ------- ------- Accrued postretirement benefit cost included in liabilities..... $10,941 $11,757 ======= ======= </TABLE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 12--POSTRETIREMENT BENEFITS (CONTINUED) For measurement purposes, a 11% to 14% annual rate of increase in a per capita cost of covered health care benefits was assumed for 1995; the rate was assumed to decrease gradually to 4.5% by the year 2008 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the health care cost trend by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1995 by $855 million and would increase the net periodic postretirement cost for the year ended December 31, 1995 by approximately $146 thousand. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.0% to 8.0% in 1995 and 8.0% in 1994. NOTE 13--NOTES PAYABLE An analysis of notes payable is as follows: <TABLE> <CAPTION> DECEMBER 31, ----------------------------------------- 1995 1994 -------------------- -------------------- SHORT-TERM LONG-TERM SHORT-TERM LONG-TERM DEBT DEBT DEBT DEBT ---------- --------- ---------- --------- <S> <C> <C> <C> <C> Sinking Fund Debentures........... $198,033 $197,941 Senior Notes, due 1998............ 199,343 199,103 Senior Debentures, due 2009....... 99,881 99,703 Notes, due 2023................... 195,877 195,836 Notes, due 2013................... 98,432 98,390 Borrowings under Torchmark line of credit........................... $250,000 Commercial paper.................. $189,248 Other notes and mortgages payable at various interest rates; collateralized by buildings ..... 124 422 116 545 -------- -------- -------- -------- $189,372 $791,988 $250,116 $791,518 ======== ======== ======== ======== </TABLE> The amount of debt that becomes due during each of the next five years is: 1996, $189 million; 1997, $132 thousand; 1998, $200 million; 1999, $150 thousand; and 2000, $-0-. Additionally, during the thirty-day period beginning June 15, 1996, senior debenture debt holders have the option to require Torchmark to repay $100 million. The Sinking Fund Debentures, due March 1, 2017, are carried at $200 million principal amount less unamortized issue expenses and bear interest at 8 5/8%, payable on March 1 and September 1. A sinking fund provides for mandatory repayment at par of not less than $8 million principal amount per year from March 1, 1998 through March 1, 2016. At Torchmark's option, an additional $12 million principal amount per year may be redeemed at par according to the same schedule. The option to make such additional repayments is not cumulative and if not availed of in any year will terminate. Furthermore, Torchmark may, at its option, redeem the entire issue at prices ranging from 107.9% to 100.0% of par, subject to certain restrictions. The Sinking Fund Debentures have equal priority with other Torchmark unsecured indebtedness. The Senior Notes, due May 1, 1998, are not redeemable prior to maturity. They were issued in the principal amount of $200 million. Interest is payable on May 1 and November 1 of each year at a rate of 9 5/8%. These notes have equal priority with other Torchmark unsecured indebtedness. The Senior Debentures, principal amount of $100 million, are due August 15, 2009. They bear interest at a rate of 8 1/4%, with interest payable on February 15 and August 15 of each year. The Senior Debentures, which are not redeemable at the option of Torchmark prior to maturity, provide the holder with an option to require Torchmark to repurchase the debentures on August 15, 1996 at principal amount plus accrued interest. The Senior Debentures have equal priority with other Torchmark unsecured indebtedness. 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 13--NOTES PAYABLE (CONTINUED) The Notes, due May 15, 2023, were issued in May, 1993 in the principal amount of $200 million. Proceeds of the issue, net of issue costs, were $196 million. Interest is payable on May 15 and November 15 of each year at a rate of 7 7/8%. These notes are not redeemable prior to maturity and have equal priority with other Torchmark unsecured indebtedness. The Notes, due August 1, 2013, were issued in July, 1993 in the principal amount of $100 million for net proceeds of $98 million. Interest is payable on February 1 and August 1 of each year at a rate of 7 3/8%. These notes are not redeemable prior to maturity and have equal priority with other Torchmark unsecured indebtedness. Torchmark has entered into revolving credit agreements with a group of lenders under which it may borrow on an unsecured basis up to $400 million. One-half of the commitment matures December 3, 1996 and the balance matures December 6, 1999. Borrowings, pro rata under each facility, are at interest rates selected by Torchmark based on either the prime rate or the Eurodollar rate at the time of borrowings. At December 31, 1994, borrowings totalled $250 million and were made at an average rate of 6.40%. There were no borrowings outstanding at December 31, 1995. The revolving credit agreements are designed to back up a commercial paper program which began in March, 1995. The short- term borrowings under the revolving credit agreements and in the commercial paper market averaged $221 million during 1995, and were made at an average yield of 5.97%. At December 31, 1995, commercial paper was outstanding in the face amount of $190.4 million. Torchmark is subject to certain covenants for the revolving credit agreements regarding capitalization and earnings, for which it was in compliance at December 31, 1995, and pays a facility fee based on size of the lines. Interest in the amount of $1.6 million, $1.8 million and $10.5 million was capitalized during 1995, 1994, 1993, respectively. NOTE 14--MONTHLY INCOME PREFERRED SECURITIES In October, 1994, Torchmark, through its wholly-owned finance subsidiary, Torchmark Capital L.L.C., completed a public offering of eight million shares of 9.18% MIPS at a face amount of $200 million. The securities are subject to a mandatory redemption in full at September 30, 2024, although Torchmark may elect to extend the MIPS for up to an additional 20 years if certain conditions are met. They are redeemable at Torchmark's option after September 30, 1999. Torchmark subsequently entered into a ten-year swap agreement with an unaffiliated party whereby Torchmark agreed to pay a variable rate on the $200 million face amount in exchange for payment of the fixed dividend. In a related transaction, Torchmark purchased a five-year cap on the swap agreement that insures that the variable rate cannot exceed 10.39% through September 30, 1999. The interest rate was 5.86% at December 31, 1995 and 7.02% at December 31, 1994. Torchmark pays a yearly fee of $860 thousand for the cap agreement. The market value of the swap agreement was a benefit of $26.5 million at December 31, 1995 and an obligation of $4.1 million at December 31, 1994. The market value of the cap agreement, net of the present value of future annual payments, was an obligation of $2.1 million at December 31, 1995 and a benefit of $517 thousand at December 31, 1994. Except as otherwise described in "Note 3--Investments" on page 42 of this report, Torchmark is a party to no other derivative instruments as defined by SFAS 119. Net proceeds from the MIPS offering of approximately $193 million were loaned from Torchmark Capital to Torchmark to provide part of the financing of the acquisition of American Income Holding, Inc. The carrying value of the MIPS at December 31, 1995 and 1994 was $193 million. 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 15--SHAREHOLDERS' EQUITY Share Data: A summary of preferred and common share activity is as follows: <TABLE> <CAPTION> PREFERRED STOCK COMMON STOCK --------------------- --------------------- TREASURY TREASURY ISSUED STOCK ISSUED STOCK ---------- --------- ---------- ---------- <S> <C> <C> <C> <C> 1993: Balance at January 1, 1993....... 1,000,000 (530,180) 73,512,034 -0- Issuance of common stock due to exercise of stock options...... 272,194 6,341 Other treasury stock acquired... (895,475) ---------- --------- ---------- ---------- Balance at December 31, 1993.... 1,000,000 (530,180) 73,784,228 (889,134) 1994: Issuance of common stock due to exercise of stock options...... 130,641 Other treasury stock acquired... (469,820) (1,491,700) Retirement of preferred treasury stock.......................... (1,000,000) 1,000,000 ---------- --------- ---------- ---------- Balance at December 31, 1994.... -0- -0- 73,784,228 (2,250,193) 1995: Issuance of common stock due to exercise of stock options...... 133,102 ---------- --------- ---------- ---------- Balance at December 31, 1995.... -0- -0- 73,784,228 (2,117,091) ========== ========= ========== ========== </TABLE> <TABLE> <CAPTION> AT DECEMBER 31, 1995 AT DECEMBER 31, 1994 --------------------- --------------------- PREFERRED COMMON PREFERRED COMMON STOCK STOCK STOCK STOCK --------- ----------- --------- ----------- <S> <C> <C> <C> <C> 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 </TABLE> Adjustable Rate Preferred Stock: One million shares of adjustable rate preferred stock were issued in 1983 at an issue price of $100 per share. Prior to 1993, Torchmark acquired 530 thousand shares which were reported as treasury stock and had a total cost basis of $47.8 million and a total redemption value of $52.9 million. During 1994, Torchmark acquired the remaining 470 thousand shares at a cost of $100 per share plus accrued dividends. The acquisition was completed at an aggregate price of $47 million. The preferred treasury stock was immediately retired. Acquisition of Common Shares: Torchmark shares are acquired from time to time for the following reasons: (1) open market purchases under the Torchmark stock repurchase program, in which share purchases in the amount of $106 million for 1.5 million shares and $42 million for 850 thousand shares were made in 1994 and 1993, respectively, (2) for future employee stock option exercises, and (3) for payment of the option price and taxes upon exercise of stock options by employees. Stock Options: Under the provisions of the 1984 Torchmark Corporation Stock Option Plan ("1984 Option Plan") and the Torchmark Corporation 1987 Stock Incentive Plan ("1987 Option Plan"), certain employees and directors have been granted options to buy shares of Torchmark stock at the market value of the stock on the date of grant. In conjunction with the buyback of the minority interest of United Management, the United Investors Management Company 1986 Employee Stock Incentive Plan was amended to allow the granting of Torchmark stock options. The options are exercisable during the period commencing from three months to three years after grant until expiring ten years or ten years and two days after grant. In October, 1993, Torchmark implemented a policy to issue shares for the exercise of stock options out of treasury stock. 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 15--SHAREHOLDERS' EQUITY (CONTINUED) A summary of option activity in terms of shares is as follows: <TABLE> <CAPTION> AVAILABLE FOR GRANT OUTSTANDING ------------------------------ ------------------------------- 1995 1994 1993 1995 1994 1993 --------- --------- -------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> Balance at January 1.... 1,998,134 289,091 533,175 3,820,707 3,660,391 3,051,883 Additional shares available due to United Management merger...... 642,959 Additional shares available due to amendment of plan ..... 2,000,000 Granted................. (760,200) (316,600) (910,789) 760,200 316,600 910,789 Exercised............... (133,102) (130,641) (278,535) Expired................. 12,855 25,643 23,746 (12,855) (25,643) (23,746) --------- --------- -------- --------- --------- --------- Balance at December 31.. 1,250,789 1,998,134 289,091 4,434,950 3,820,707 3,660,391 ========= ========= ======== ========= ========= ========= </TABLE> Option information by exercise price is listed in the following table. Those options shown as granted on October 1, 1993 represent United Management options which were converted to Torchmark options in conjunction with the merger. <TABLE> <CAPTION> OUTSTANDING AT DECEMBER 31, EXERCISED DURING EXERCISE ----------------------------- ----------------------- PRICE GRANT DATE 1995 1994 1993 1995 1994 1993 -------- -------------------- --------- --------- --------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> $11.300 October 1, 1993(3) 16,893 18,393 18,393 1,500 -0- -0- 12.625 October 4, 1985 -0- 33,004 34,004 33,004 1,000 2,141 13.110 October 1, 1993(3) 13,828 13,828 13,828 -0- -0- -0- 14.000 March 26, 1985 -0- 11,246 15,746 11,246 4,500 5,250 14.125 January 30, 1986 12,375 16,875 16,875 4,500 -0- 1,000 15.000 December 3, 1987 -0- 854 854 854 -0- 400 16.000 December 16, 1987 7,500 7,500 7,500 -0- -0- -0- 19.875 February 25, 1988 5,217 5,217 5,217 -0- -0- -0- 20.375 January 3, 1989 30,003 30,003 30,003 -0- -0- -0- 22.600 October 1, 1993(3) 35,981 35,981 35,981 -0- -0- -0- 24.410 October 1, 1993(3) 5,532 5,532 5,532 -0- -0- -0- 25.625 October 11, 1990(1) 779,396 840,055 852,955 60,659 12,900 7,313 28.480 October 1, 1993(3) 85,158 85,158 85,158 -0- -0- -0- 31.125 January 15, 1991 532,926 532,926 538,856 -0- 5,930 97,118 32.500 January 2, 1991 63,000 63,000 63,000 -0- -0- -0- 33.125 January 25, 1990(1) 63,000 63,000 63,000 -0- -0- -0- 34.000 October 1, 1993(4) 58,567 60,682 207 -0- -0- 34.000 December 14, 1993(4) 295,006 301,881 3,875 -0- -0- 34.000 December 7, 1992(4) 138,403 142,433 3,530 -0- -0- 34.000 December 16, 1994 292,600 292,600 -0- -0- 34.350 October 1, 1993(3) 35,611 35,611 35,611 13,727 -0- -0- 34.375 December 12, 1991 658,278 673,666 679,977 -0- 6,311 27,869 34.875 January 3, 1995 21,000 -0- 36.000 February 7, 1991 -0- -0- 100,000 -0- 100,000 137,444 36.610 October 1, 1993(3) 27,997 27,997 65,774 -0- -0- -0- 38.375 January 2, 1992 63,000 63,000 63,000 -0- -0- -0- 43.375 December 20, 1995 739,200 -0- 43.500 December 14, 1993(2) 251,004 253,900 567,781 -0- -0- -0- 45.000 January 3, 1994 24,000 24,000 -0- -0- 46.560 October 1, 1993(3) 33,651 33,651 57,130 -0- -0- -0- 52.000 December 7, 1992 121,824 124,714 280,216 -0- -0- -0- 57.750 January 3, 1993 24,000 24,000 24,000 -0- -0- -0- --------- --------- --------- ------- ------- ------- --- 4,434,950 3,820,707 3,660,391 133,102 130,641 278,535 ========= ========= ========= ======= ======= ======= === Exercisable at December 31, 3,243,647 2,936,867 2,668,264 ========= ========= ========= </TABLE> (1) Options to purchase 1,098,090 shares previously granted December 31, 1989 at $37.13 per share, 521,100 shares previously granted January 25, 1990 at $33.13 per share, and 389,870 shares originally granted August 1, 1990 at $33.88 per share were allowed by recipients to expire voluntarily and were reissued October 11, 1990 along with 675,200 additional shares at $25.63 per share. (2) Includes 173,650 shares granted under the United Investors Management Company 1986 Employee Stock Incentive Plan. (3) Issued from the United Investors Management Company 1986 Employee Stock incentive plan. (4) Options to purchase 37,777 shares previously granted at $36.61, options to purchase 301,881 shares previously granted at $43.50, options to purchase 22,905 shares previously granted at $46.56, and options to purchase 142,433 shares previously granted at $52.00 were repriced to $34.00 per share on December 16, 1994. The vesting schedules of these options did not change. 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 15--SHAREHOLDERS' EQUITY (CONTINUED) Grant of Restricted Stock: A grant of 60,000 Torchmark shares was made on May 1, 1991 to a Torchmark senior officer. The shares are restricted as to resale, vesting 6,000 shares per year for 10 years on the anniversary date of the grant. The market value of Torchmark stock was $34.92 per share on the grant date. Restrictions: Restrictions exist on the flow of funds to Torchmark from its insurance subsidiaries. Statutory regulations require life insurance subsidiaries to maintain certain minimum amounts of capital and surplus. These restrictions generally limit the payment of dividends by insurance subsidiaries to statutory net gain on an annual noncumulative basis in the absence of special approval. Additionally, insurance companies are not permitted to distribute the excess of shareholders' equity as determined on a GAAP basis over that determined on a statutory basis. In 1996, $237 million will be available to Torchmark for dividends from insurance subsidiaries in compliance with statutory regulations without prior regulatory approval. NOTE 16--COMMITMENTS AND CONTINGENCIES Reinsurance: Insurance affiliates of Torchmark reinsure that portion of insurance risk which is in excess of their retention limits. Retention limits for ordinary life insurance range up to $2.5 million per life. Life insurance ceded represents less than 1% of total life insurance in force at December 31, 1995. Insurance ceded on life and accident and health products represents 1.0% of premium income for 1995. Torchmark would be liable for the reinsured risks ceded to other companies to the extent that such reinsuring companies are unable to meet their obligations. Insurance affiliates also assume insurance risks of other companies. Life reinsurance assumed represents less than 0.1% of life insurance in force at December 31, 1995 and reinsurance assumed on life and accident and health products represents 0.3% of premium income for 1995. Leases: Torchmark leases office space and office equipment under a variety of operating lease arrangements. These leases contain various renewal options, purchase options, and escalation clauses. Rental expense for operating leases was $6.3 million, $7.9 million, and $7.6 million for 1995, 1994, and 1993, respectively. Future minimum rental commitments required under operating leases having remaining noncancelable lease terms in excess of one year at December 31, 1995 are as follows: 1996, $4.3 million; 1997, $2.4 million; 1998, $1.4 million; 1999, $851 thousand; 2000, $440 thousand; and in the aggregate, $9.4 million. Restrictions on cash: A portion of the cash held in financial service subsidiaries that function as broker-dealers has been segregated for the benefit of customers in compliance with security regulations. This amount was $11.8 million at December 31, 1995 and $13.1 million at December 31, 1994. Concentrations of Credit Risk: Torchmark maintains a highly-diversified investment portfolio with limited concentration in any given region, industry, or economic characteristic. At December 31, 1995, the investment portfolio consisted of securities of the U.S. government or U.S. government-backed securities (26%); non government-guaranteed mortgage-backed securities (4%); short-term investments, which generally mature within one month (1%); securities of state and municipal governments (14%); securities of foreign governments (1%); and investment-grade corporate bonds (42%). The remainder of the portfolio was in oil and gas investments (1%) and real estate (3%), which are not considered financial instruments according to GAAP; policy loans (3%), which are secured by the underlying insurance policy values; and equity securities, mortgages, noninvestment grade corporate securities and other long-term investments (5%). Investments in municipal governments and corporations are made throughout the U.S. with no concentration in any given state. Substantially all investments in foreign government securities are in Canadian government obligations. Corporate equity and debt investments are made in a wide range of industries. At December 31, 1995, 1% or more of the portfolio was invested in the following industries or security types: Financial services (15%); regulated utilities (5%); chemicals (5%); transportation (4%); miscellaneous manufacturing (3%); foods (3%); petroleum (2%); retailing (2%); electronics (1%); media (1%); and paper and allied products (1%). Otherwise, no individual industry represented 1% or more of Torchmark's investments. At year-end 1995, 3% of the carrying value of fixed maturities was rated below investment grade (Ba or lower as rated by Moody's service or the equivalent 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 16--COMMITMENTS AND CONTINGENCIES (CONTINUED) NAIC designation). Par value of these investments was $162.1 million, amortized cost was $160.3 million, and market value was $164.6 million. While these investments could be subject to additional credit risk, such risk should generally be reflected in market value. Collateral Requirements: Torchmark requires collateral for investments in instruments where collateral is available and is typically required because of the nature of the investment. Since the majority of Torchmark's investments are in government, government-secured, or corporate securities, the requirement for collateral is rare. Torchmark's mortgages are secured by collateral, although new mortgages are no longer being acquired. Litigation: Torchmark and its subsidiaries continue to be named as parties to pending or threatened legal proceedings. These lawsuits involve tax matters, alleged breaches of contract, torts, including bad faith and fraud claims based on alleged wrongful or fraudulent acts of agents of Torchmark's subsidiaries, employment discrimination, and miscellaneous other causes of action. Many of these lawsuits involve claims for punitive damages in state courts of Alabama, a jurisdiction particularly recognized for its large punitive damage verdicts. A number of such actions involving Liberty National Life Insurance Company ("Liberty") also name Torchmark as a defendant. As a practical matter, a jury's discretion regarding the amount of a punitive damage award is not limited by any clear, objective criteria under Alabama law. Accordingly, the likelihood or extent of a punitive damage award in any given case is virtually impossible to predict. Furthermore, the Alabama Supreme Court has recently ruled that one half of all punitive damage awards, after the deduction of attorneys fees, should go to the State of Alabama. This same ruling also provides for a bifurcated trial, with the first stage devoted to this issue of liability and the second stage relating to damages. The hearing on damages will enable the jury to hear evidence of the financial worth of the defendant. This potentially damaging evidence has not been previously admissible in Alabama courts. The Alabama Supreme Court has been asked to reconsider this ruling and this petition is still pending. As of December 31, 1995, Liberty was a party to approximately 185 active lawsuits (including 31 employment related cases and excluding interpleaders and stayed cases), more than 160 of which were Alabama proceedings in which punitive damages were sought. Liberty faces trial settings in these cases on an on- going basis. Torchmark has previously reported the entry of an Order and Final Judgment by the Circuit Court of Barbour County, Alabama in Robertson v. Liberty National Life Insurance Company (Case No. CV-92-021) approving a cancer policy class action settlement involving legal and equitable relief valued at a total of $55 million. The cost of this settlement increases over time as Liberty is prohibited from increasing the premium rates on this block of business for one year from final binding affirmance by the Alabama Supreme Court. This aspect of the settlement is expected to cost Torchmark an additional $2.5 million before tax in each quarter going forward until one year after final binding affirmance by the Alabama Supreme Court. In July 1994, certain intervenors in the Robertson litigation filed a notice of appeal of the Order and Final Judgment approving class certification and the settlement with the Supreme Court of Alabama. Oral argument on the appeal was held July 17, 1995 and on December 22, 1995, the Supreme Court unanimously affirmed the Robertson class action settlement. On February 16, 1996, the Alabama Supreme Court issued a notice overruling the petition for a rehearing in Robertson filed by certain intervenors. On March 17, 1994, litigation was filed against Liberty, certain officers and present and former directors of Torchmark and KPMG Peat Marwick LLP, independent public accountants of Torchmark and its subsidiaries, in the Circuit Court of Marion County, Alabama (Miles v. Liberty National Life Insurance Company, Civil Action No. CV-94-67). The lawsuit asserted that it was brought on behalf of a class comprised of the shareholders of Torchmark. The complaint alleged a failure to timely and adequately report allegedly material contingent liabilities arising out of insurance policy litigation involving Liberty. Compensatory and punitive damages in an unspecified amount were sought. In April 1994, the complaint in Miles was amended to add an additional shareholder plaintiff and to name Torchmark as a defendant. The Miles case was dismissed upon the joint motion of all parties in September 1995. A second similar action (Oakley v. Torchmark Corporation, Case No. CV-94-47), filed on August 16, 1994 in the Circuit Court for Bibb County, Alabama, was dismissed by the plaintiff without 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 16--COMMITMENTS AND CONTINGENCIES (CONTINUED) prejudice. A third such action was filed on December 30, 1994, in the United States District Court for the Southern District of Alabama. This action, which seeks punitive damages, was subsequently transferred to the United States District Court for the Northern District of Alabama (Dismukes v. Torchmark Corporation, Case No. CV-94-1006-P-M). A class certification hearing in Dismukes was held on January 29, 1996, and the parties are awaiting the District Court's ruling on that motion and on defendant's motion for partial summary judgment. As previously reported, Torchmark, its insurance subsidiaries Globe Life And Accident Insurance Company ("Globe") and United American Insurance Company ("United American"), and certain Torchmark officers were named as defendants in litigation filed April 22, 1994, as a purported class action in the District Court of Oklahoma County, Oklahoma (Moore v. Torchmark Corporation, Case No. CJ-94-2784-65). The suit claims damages on behalf of individual health policyholders who are alleged to have been induced to terminate such policies and to purchase Medicare Supplement and/or other insurance coverages. The complaint seeks actual and punitive damages for each class member in excess of $10,000. Subsequent to the filing of this case, one of the plaintiffs was dismissed and the named plaintiff died. The complaint was amended to include new plaintiffs purporting to represent the class and restyled Tabor v. Torchmark Corporation. No class has been certified. A motion to dismiss filed by the defendants was denied and limited discovery as permitted by the Oklahoma Supreme Court is proceeding. The defendants intend to vigorously defend the action. Prior filings have reported that in July 1994, a purported class action alleging fraudulent and deceitful practices in premium billing and lapses of coverage on a payroll deduction insurance plan was filed in the Superior Court for Gordon County, Georgia against Liberty (Bryant v. Liberty National Life Insurance Company, Civil Action No. 28979). The complaint alleges actual damages in excess of $10 million and punitive damages of not less than $50 million as well as premium reimbursements. No class has been certified and no material proceedings have occurred in this case. Liberty removed this case to federal court, but the case has subsequently been remanded to the state court. Liberty intends to vigorously defend this action. Litigation was filed on April 26, 1995, in the Circuit Court of Houston County, Alabama against Liberty involving the sale of health insurance coverage and Omnibus Budget Reconciliation Act of 1990 (Stewart v. Liberty National Life Insurance Company, Case No. CV-95-345L; Tolar v. Liberty National Life Insurance Company, Case No. CV-95-346J; Ingram v. Liberty National Life Insurance Company, Case No. CV-95-348L; Burkett v. Liberty National Life Insurance Company, Case No. CV-95-347H). Liberty intends to vigorously defend these cases. On August 3, 1995, a $5.404 million verdict was rendered against Liberty in Allen v. Liberty National Life Insurance Company (Case No. CV-94-3634), by a jury in the Circuit Court of Jefferson County, Alabama. For a two month period beginning in September 1993, in reliance on federal law concerning the amount health care providers could collect from Medicare eligible individuals, Liberty limited the payment of benefits to such individuals to the amounts collectible under federal law. In November 1993, Liberty discontinued this practice and recalculated and repaid all claims as it had prior to September 1993. Mr. Allen nevertheless later brought suit against Liberty alleging the reduction in claims payments pursuant to his cancer policy was improper. He had been repaid in full with interest prior to filing suit, as had all other affected claimants. After reconsideration, the trial judge remitted the verdict to $2.7 million. An appeal was filed with the Alabama Supreme Court in January 1996. A purported class action was filed on August 8, 1995, against Liberty in the Circuit Court of Jefferson County, Alabama on behalf of Liberty cancer policyholders eligible for Medicare who submitted claims during the approximately two month period in 1993 described in the foregoing paragraph (Adkins v. Liberty National Life Insurance Company, Case No. CV-95-05634). The claims made in Adkins are identical to the individual claims in the Allen case above. More than 400 (and perhaps as many as 1,000) individuals appear to fit the proposed class definition in Adkins. Punitive damages and damages for mental anguish appear to be sought on behalf of the class. A class certification hearing is set in May 1996. The Company intends to oppose class certification and to vigorously defend the case. On August 25, 1995, a purported class action was filed against Torchmark, Globe, United American and certain officers of these companies in the United States District Court for the Western District of 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 16--COMMITMENTS AND CONTINGENCIES (CONTINUED) Missouri on behalf of all former agents of Globe (Smith v. Torchmark Corporation, Case No.: 95-3304-CV-S-4). This action alleges that the defendants breached independent agent contracts with the plaintiffs by treating them as captive agents and engaged in a pattern of racketeering activity wrongfully denying income and renewal commissions to the agents, restricting insurance sales, mandating the purchase of worthless leads, terminating agents without cause and inducing the execution of independent contracts based on misrepresentations of fact. Monetary damages in an unspecified amount are sought. A plaintiff class was certified by the District Court on February 26, 1996, although the certification does not go to the merit of the allegations in the complaint. The companies intend to vigorously defend this action. Much attention has been generated nationally with regard to so-called "vanishing premium" cases, where allegations that an interest sensitive life policy was sold with a projection that the policy would become paid-up or self-sustaining after a period of years. Plaintiffs in these cases typically assert that the projection amounted to a promise or misrepresentation. Liberty currently is a party to several individual lawsuits in the state courts of Alabama and was a party to one purported class action filed November 16, 1995 in the Circuit Court of Chambers County, Alabama (Mitcham v. Liberty National Life Insurance Company, Case No. CV-95-290), involving such claims. The Mitcham case was settled on a non-class basis on December 27, 1995. Another interest sensitive case (Carlton v. Liberty National Life Insurance Company, Case No. CV-96-22) filed on February 1, 1996, in the Circuit Court for Chambers County, Alabama, was amended on February 9, 1996, to allege a purported class action. Compensatory and punitive damages are sought. Liberty believes that appropriate projections were made in connection with the sale of the policies involved and intends to vigorously defend these cases. In 1978, the United States District Court for the Northern District of Alabama entered a final judgment in Battle v. Liberty National Life Insurance Company, et al. (CV-70-H-752-S), class action litigation involving Liberty, a class composed of all owners of funeral homes in Alabama and a class composed of all insureds (Alabama residents only) under burial or vault policies issued, assumed or reinsured by Liberty. The final judgment fixed the rights and obligations of Liberty and the funeral directors authorized to handle Liberty burial and vault policies as well as reforming the benefits available to the policyholders under the policies. It remains in effect to date. A motion filed in February 1990 to challenge the final judgment under Federal Rule of Civil Procedure 60(b) was rejected by both the District Court in 1991 and the Eleventh Circuit Court of Appeals in 1992 and a Writ of Certiorari was denied by the U.S. Supreme Court in 1993. In November 1993, an attorney (purporting to represent the funeral director class) filed a petition in the District Court seeking "alternative relief" under the final judgment. This petition was voluntarily withdrawn on November 8, 1995, by petitioners. On February 23, 1996, Liberty filed a petition with the District Court requesting that it order certain contract funeral directors to comply with their obligations under the Final Judgment in Battle and their funeral service contracts. Purported class action litigation was filed on January 2, 1996 against Torchmark, Torch Energy and certain Torch Energy subsidiaries and affiliated limited partnerships in the Circuit Court of Pickens County, Alabama (Pearson v. Torchmark Corporation, Case No. CV-95-140). Plaintiff alleges improper payment of royalties and overriding royalties on coalbed methane gas produced and sold from wells in Robinson's Bend Coal Degasification Field, seeks certification of a class and claims unspecified compensatory and punitive damages on behalf of such class. A motion to dismiss and in the alternative to change venue, has been filed by Torchmark, and is awaiting a hearing. Torchmark intends to vigorously defend this action. Based upon information presently available, and in light of legal and other defenses available to Torchmark and its subsidiaries, contingent liabilities arising from threatened and pending litigation are not presently considered by management to be material. It should be noted, however, that the frequency of large punitive damage awards bearing little or no relation to actual damages awarded by juries in jurisdictions in which Torchmark has substantial business, particularly in Alabama, continues to increase universally, creating the potential for unpredictable material adverse judgments in any given punitive damage suit. 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 17--INDUSTRY SEGMENTS Torchmark operates primarily in two industry segments, insurance and asset management. Operations in the insurance industry involve the sale and administration of life insurance, health insurance and annuities. It also includes investment operations related to insurance segment investments. Operations in the asset management industry include the management, distribution, and servicing of various mutual funds. Torchmark markets its products in all fifty states. Certain insurance company investments are managed by the asset management segment. Additionally, the asset management segment markets certain insurance products for the insurance segment and manages the mutual funds for the insurance segment's variable products. Total revenues by segment include revenues from other segments in addition to unaffiliated parties. Intersegment revenues include commission revenue and investment income which eliminate in consolidation. Pre-tax income for operating segments is total revenue less operating costs and expenses for the segment. Corporate pre-tax income includes transactions which are nonoperating in nature and are not related to the activities of a segment. Such items include parent company interest expense, goodwill amortization, and similar items. A summary of segment data is as follows: <TABLE> <CAPTION> ADJUSTMENTS ASSET AND CONSOLIDATED INSURANCE MANAGEMENT CORPORATE ELIMINATIONS TOTAL ---------- ---------- --------- ------------ ------------ <S> <C> <C> <C> <C> <C> 1995: Revenues--unaffiliated.. $1,926,516 $156,519 $ (15,553) $ -0- $2,067,482 Intersegment revenues... 7,497 27,503 (2,174) (32,826) -0- ---------- -------- --------- -------- ---------- Total revenues.......... $1,934,013 $184,022 $ (17,727) $(32,826) $2,067,482 ========== ======== ========= ======== ========== Pretax income........... $ 462,001 $ 96,371 $(124,380) $ (5,817) $ 428,175 Depreciation............ 6,135 3,327 141 9,603 Capital expenditures.... 7,094 15,227 193 22,514 Identifiable assets at year end............... 8,933,970 244,003 379,856 (193,725) 9,364,104 1994: Revenues--unaffiliated.. $1,721,650 $141,807 $ 11,880 $ -0- $1,875,337 Intersegment revenues... 2,724 25,895 (6,302) (22,317) -0- ---------- -------- --------- -------- ---------- Total revenues.......... $1,724,374 $167,702 $ 5,578 $(22,317) $1,875,337 ========== ======== ========= ======== ========== Pretax income........... $ 402,562 $ 84,975 $ (89,582) $ (3,981) $ 393,974 Depreciation............ 8,260 2,869 142 11,271 Capital expenditures.... 5,117 20,952 160 26,229 Identifiable assets at year end............... 7,697,456 180,881 442,639 (155,732) 8,165,244 1993: Revenues--unaffiliated.. $1,836,347 $140,827 $ 89,672 $ -0- $2,066,846 Intersegment revenues... 2,167 27,624 (2,782) (27,009) -0- ---------- -------- --------- -------- ---------- Total revenues.......... $1,838,514 $168,451 $ 86,890 $(27,009) $2,066,846 ========== ======== ========= ======== ========== Pretax income........... $ 325,842 $ 73,385 $ 730 $ 2,001 $ 401,958 Depreciation............ 8,111 2,584 157 10,852 Capital expenditures.... 4,311 9,613 233 14,157 Identifiable assets at year end............... 6,809,570 185,057 510,879 (64,321) 7,441,185 </TABLE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 18--RELATED PARTY TRANSACTIONS Investment in Related Parties: Other long-term investments include investment by Torchmark subsidiaries in the United Group of Mutual Funds and certain other funds for which Waddell & Reed, Inc. is sole advisor. These investments were $26.2 million and $24.4 million at December 31, 1995 and 1994, respectively. Investment income derived from these investments is included in net investment income. Rental Income: Torchmark leases office space to Vesta, a 27% owned subsidiary. Total rental income received from Vesta was $494 thousand, $461 thousand, and $66 thousand, for the years ended December 31, 1995, 1994 and 1993, respectively. NOTE 19--SUPPLEMENTAL DISCLOSURES FOR CASH FLOW STATEMENT The following table summarizes Torchmark's noncash transactions, which are not reflected on the Statement of Cash Flow as required by GAAP: <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ----------------- 1995 1994 1993 ----- ---- ------ <S> <C> <C> <C> Treasury stock accepted for exercise of stock options.... $ -0- $-0- $2,480 Paid in capital from tax benefit for stock option exer- cises................................................... 709 349 6,412 Grant of options in conjunction with United Management merger.................................................. -0- -0- 5,122 </TABLE> The following table summarizes certain amounts paid during the period: <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------- 1995 1994 1993 ------- -------- -------- <S> <C> <C> <C> Interest paid..................................... $82,642 $ 77,114 $ 64,193 Income taxes paid................................. $99,298 $182,052 $133,392 </TABLE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 20--SELECTED QUARTERLY DATA (UNAUDITED) The following is a summary of quarterly results for the two years ended December 31, 1995. The information is unaudited but includes all adjustments (consisting of normal accruals) which management considers necessary for a fair presentation of the results of operations for these periods. <TABLE> <CAPTION> THREE MONTHS ENDED ----------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, --------- -------- ------------- ------------ <S> <C> <C> <C> <C> 1995: - ----- Premium and policy charges...... $390,834 $384,759 $383,962 $386,728 Financial services revenue...... 34,774 37,223 39,108 41,377 Net investment income........... 92,808 92,883 93,762 102,412 Realized investment gains (loss- es)............................ (920) 304 (15,700) 1,993 Total revenues.................. 517,688 515,597 501,383 532,814 Policy benefits................. 253,369 252,640 252,547 250,780 Amortization of acquisition ex- penses......................... 50,185 49,936 51,150 52,796 Pretax income from continuing operations..................... 107,362 108,530 94,457 117,826 Income (loss) from discontinued operations..................... 288 569 2,017 (131,584) Net income...................... 68,621 70,023 60,974 (56,383) Net income per common share from continuing operations.......... 0.96 0.97 0.82 1.05 Net income per common share from discontinued operations........ 0.00 0.01 0.03 (1.84) Net income per common share..... 0.96 0.98 0.85 (0.79) Net income per common share ex- cluding realized gains, the re- lated DPAC adjustment, and dis- continued operations........... 0.96 0.97 0.97 1.03 1994: - ----- Premium and policy charges...... $348,148 $340,166 $336,533 $364,027 Financial services revenue...... 36,544 35,572 33,747 33,413 Net investment income........... 88,281 85,236 85,226 88,894 Realized investment gains (loss- es)............................ 12,595 (9,304) (1,278) (4,564) Total revenues.................. 485,858 452,426 454,637 482,416 Policy benefits................. 232,482 222,924 223,757 242,114 Amortization of acquisition ex- penses......................... 49,822 40,106 41,327 46,852 Pretax income from continuing operations..................... 108,912 94,829 94,536 95,697 Income (loss) from discontinued operations..................... 2,606 461 421 1,644 Net income...................... 75,572 64,903 64,698 63,773 Net income per common share from continuing operations.......... 0.99 0.89 0.90 0.87 Net income per common share from discontinued operations........ 0.04 0.00 0.01 0.02 Net income per common share..... 1.03 0.89 0.91 0.89 Net income per common share ex- cluding realized gains, the re- lated DPAC adjustment, and dis- continued operations........... 0.94 0.98 0.91 0.91 </TABLE> 60
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No disagreements with accountants on any matter of accounting principles or practices or financial statement disclosure have been reported on a Form 8-K within the twenty-four months prior to the date of the most recent financial statements. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT Information required by this item is incorporated by reference from the sections entitled "Election of Directors," "Profiles of Directors and Nominees," "Executive Officers" and "Compliance with Section 16(a) of the Securities Exchange Act" in the Proxy Statement for the Annual Meeting of Stockholders to be held April 25, 1996 (the "Proxy Statement"), which is to be filed with the Securities and Exchange Commission. ITEM 11. EXECUTIVE COMPENSATION Information required by this item is incorporated by reference from the section entitled "Compensation and Other Transactions with Executive Officers and Directors" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF MANAGEMENT (a)Security ownership of certain beneficial owners: Information required by this item is incorporated by reference from the section entitled "Principal Stockholders" in the Proxy Statement. (b)Security ownership of management: Information required by this item is incorporated by reference from the section entitled "Stock Ownership" in the Proxy Statement. (c)Changes in control: Torchmark knows of no arrangements, including any pledges by any person of its securities, the operation of which may at a subsequent date result in a change of control. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item is incorporated by reference from the section entitled "Compensation and Other Transactions with Executive Officers and Directors" in the Proxy Statement. 61
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K (a)Index of documents filed as a part of this report: <TABLE> <CAPTION> PAGE OF THIS REPORT ----------- <S> <C> Financial Statements: Torchmark Corporation and Subsidiaries: Independent Auditors' Report.................................... 30 Consolidated Balance Sheet at December 31, 1995 and 1994........ 31 Consolidated Statement of Operations for each of the years in the three-year period ended December 31, 1995.................. 32 Consolidated Statement of Shareholders' Equity for each of the years in the three-year period ended December 31, 1995......... 33 Consolidated Statement of Cash Flow for each of the years in the three-year period ended December 31, 1995...................... 34 Notes to Consolidated Financial Statements...................... 35 Schedules Supporting Financial Statements for each of the years in the three-year period ended December 31, 1995................ II.Condensed Financial Information of Registrant (Parent Compa- ny)............................................................. 67 III.Supplementary Insurance Information (Consolidated).......... 70 IV.Reinsurance (Consolidated)................................... 71 </TABLE> Schedules not referred to have been omitted as inapplicable or not required by Regulation S-X. 62
EXHIBITS <TABLE> <CAPTION> Page of this Report ------- <C> <S> <C> (3)(i) Restated Certificate of Incorporation of Torchmark Corpora- tion, as amended (ii) By-Laws of Torchmark Corporation, as amended (incorporated by reference from Exhibit 3(b) to Form 10-K for the fiscal year ended December 31, 1989) (4)(a) Specimen Common Stock Certificate (incorporated by reference from Exhibit 4(a) to Form 10-K for the fiscal year ended De- cember 31, 1989) (b) Trust Indenture dated as of February 1, 1987 between Torchmark Corporation and Morgan Guaranty Trust Company of New York, as Trustee (incorporated by reference from Exhibit 4(b) to Form S-3 for $300,000,000 of Torchmark Corporation Debt Securities and Warrants (Registration No. 33-11816)) (10)(a) Torchmark Corporation and Affiliates Retired Lives Reserve Agreement, as amended, and Trust (incorporated by reference from Exhibit 10(b) to Form 10-K for the fiscal year ended December 31, 1991) (b) Capital Accumulation and Bonus Plan of Torchmark Corpora- tion, as amended, (incorporated by reference from Exhibit 10(c) to Form 10-K for the fiscal year ended December 31, 1988) (c) Torchmark Corporation Supplementary Retirement Plan (incor- porated by reference from Exhibit 10(c) to Form 10-K for the fiscal year ended December 31, 1992) (d) Certified Copies of Resolutions Establishing Retirement Pol- icy for Officers and Directors of Torchmark Corporation, Providing for Advisory Directors, and Providing Retirement Benefits for Directors (incorporated by reference from Ex- hibit 10(e) to Form 10-K for the fiscal year ended December 31, 1989) (e) Torchmark Corporation Restated Deferred Compensation Plan for Directors, Advisory Directors, Directors Emeritus and Officers, as amended (incorporated by reference from Exhibit 10(e) to Form 10-K for the fiscal year ended December 31, 1992) (f) The Torchmark Corporation 1987 Stock Incentive Plan (g) The 1984 Torchmark Corporation Stock Option Plan (incorpo- rated by reference from Form S-8 for The 1984 Torchmark Cor- poration Stock Option Plan (Registration No. 2-93760)) (h) General Agency Contract between Liberty National Life Insur- ance Company and Independent Research Agency For Life Insur- ance, Inc. (incorporated by reference from Exhibit 10(i) to Form 10-K for the fiscal year ended December 31, 1990) (i) Form of Marketing and Administrative Services Agreement be- tween Liberty National Fire Insurance Company, Liberty Na- tional Insurance Corporation and Liberty National Life In- surance Company (incorporated by reference from Exhibit 10.2 to Form S-1 Registration Statement No. 33-68114) (j) Form of Deferred Compensation Agreement Between Torchmark Corporation or Subsidiary and Officer at the Level of Vice President or Above Eligible to Participate in the Torchmark Corporation and Affiliates Retired Lives Reserve Agreement and to Retire Prior to December 31, 1986 (incorporated by reference from Exhibit 10(k) to Form 10-K for the fiscal year ended December 31, 1991) </TABLE> 63
<TABLE> <CAPTION> Page of this Report ------- <C> <S> <C> (k) Form of Deferred Compensation Agreement between Torchmark Corporation or Subsidiary and Officer at the Level of Vice President or Above Eligible to Participate in the Torchmark Corporation and Affiliates Retired Lives Reserve Agreement and Not Eligible to Retire Prior to December 31, 1986 (in- corporated by reference from Exhibit 10(l) to Form 10-K for the fiscal year ended December 31, 1991) (l) Torchmark Corporation Supplemental Savings and Investment Plan (incorporated by reference from Exhibit 10(m) to Form 10-K for the fiscal year ended December 31, 1992) (m) Service Agreement, dated as of January 1, 1991, between Torchmark Corporation and Liberty National Life Insurance Company (prototype for agreements between Torchmark Corpora- tion and other principal operating subsidiaries) (incorpo- rated by reference from Exhibit 10(n) to Form 10-K for the fiscal year ended December 31, 1992) (n) The Torchmark Corporation Pension Plan (incorporated by ref- erence from Exhibit 10(o) to Form 10-K for the fiscal year ended December 31, 1992) (o) United Investors Management Company Retirement Income Plan (incorporated by reference from Exhibit 10(p) to Form 10-K for the fiscal year ended December 31, 1992) (p) Waddell & Reed, Inc. Career Field Retirement Plan (incorpo- rated by reference from Exhibit 10(q) to Form 10-K for the fiscal year ended December 31, 1992) (q) United Investors Management Company 1986 Employee Stock In- centive Plan (incorporated by reference from Exhibit 10(r) to Form 10-K for the fiscal year ended December 31, 1993) (r) The Torchmark Corporation Savings and Investment Plan (in- corporated by reference from Exhibit 10(s) to Form 10-K for the fiscal year ended December 31, 1992) (s) United Investors Management Company Savings and Investment Plan (incorporated by reference from Exhibit 10(t) to Form 10-K for the fiscal year ended December 31, 1992) (t) Credit Agreements dated as of December 6, 1994 among Torchmark Corporation, the Lenders and The First National Bank of Chicago, as Agent (364 Day and Five Year) (incorpo- rated by reference from Exhibit 10(t) to Form 10-K for the fiscal year ended December 31, 1995) (u) Coinsurance and Servicing Agreement between Security Benefit Life Insurance Company and Liberty National Life Insurance Company, effective as of December 31, 1995 (v) Form of Deferred Compensation Agreement Between Torchmark Corporation or Subsidiary and Officer at the Level of Vice President or Above Not Eligible to Participate in Torchmark Corporation and Affiliates Retired Lives Reserve Agreement (incorporated by reference from Exhibit 10(j) to Form 10-K for the fiscal year ended December 31, 1991) (11) Statement re computation of per share earnings 66 (20) Proxy Statement for Annual Meeting of Stockholders to be held April 25, 1996 (21) Subsidiaries of the registrant 66 (23)(a) Consent of KPMG Peat Marwick LLP to incorporation by refer- ence of their audit report dated January 31, and February 26, 1996 into Form S-8 of The Torchmark Corporation Savings and Investment Plan (Registration No. 2-76378) (b) Consent of KPMG Peat Marwick LLP to incorporation by refer- ence of their audit report dated January 31, and February 26, 1996 into Form S-8 of The United Investors Management Company Savings and Investment Plan (Registration No. 2- 76912) (c) Consent of KPMG Peat Marwick LLP to incorporation by refer- ence of their audit report dated January 31, and February 26, 1996 into Form S-8 and the accompanying Form S-3 Pro- spectus of The 1984 Torchmark Corporation Stock Option Plan (Registration No. 2-93760) </TABLE> 64
<TABLE> <CAPTION> Page of this Report ------- <C> <S> <C> (d) Consent of KPMG Peat Marwick LLP to incorporation by refer- ence of their audit report dated January 31, and February 26, 1996 into Form S-8 and the accompanying Form S-3 Pro- spectus of the Torchmark Corporation 1987 Stock Incentive Plan (Registration No. 33-23580) (e) Consent of KPMG Peat Marwick LLP to incorporation by refer- ence of their audit report dated January 31, and February 26, 1996 into Form S-8 and the accompanying Form S-3 Pro- spectus of The Capital Accumulation and Bonus Plan of Torchmark Corporation (Registration No. 33-1032) (f) Consent of KPMG Peat Marwick LLP to incorporation by refer- ence of their audit report dated January 31, and February 26, 1996 into Form S-8 of the Liberty National Life Insur- ance Company 401(k) Plan (24) Powers of attorney (27) Financial Data Schedule (99)(a) Form 11-K for The Torchmark Corporation Savings and Invest- ment Plan for the fiscal year ended December 31, 1995* (b) Form 11-K for The United Investors Management Company Sav- ings and Investment Plan for the fiscal year ended December 31, 1995* (c) Form 11-K for The Liberty National Life Insurance Company 401(k) Plan for the fiscal year ended December 31, 1995* </TABLE> - -------- *To be filed under cover of a Form 10K-A as an Amendment to Form 10-K for the fiscal year ended December 31, 1995. 65
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the registrant during the fourth quarter of 1995. (c) Exhibits Exhibit 11. Statement re computation of per share earnings TORCHMARK CORPORATION COMPUTATION OF EARNINGS PER SHARE <TABLE> <CAPTION> 1995 1994 1993 ------------- ------------ ------------ <S> <C> <C> <C> Net income from continuing opera- tions.............................. $271,945,720 $263,814,601 $242,297,802 Income/(loss) of discontinued energy segment............................ (128,710,390) 5,131,667 37,278,339 Cumulative effect of changes in ac- counting principles................ 0 0 18,402,739 ------------- ------------ ------------ Net income.......................... 143,235,330 268,946,268 297,978,880 Preferred dividends................. 0 (804,130) (3,289,568) ------------- ------------ ------------ Adjusted net income................. $143,235,330 $268,142,138 $294,689,312 ============= ============ ============ Weighted average shares outstanding. 71,593,774 72,095,657 73,501,654 ============= ============ ============ Primary earnings per share: From continuing operations......... $ 3.80 $ 3.65 $ 3.25 From discontinued operations....... (1.80) 0.07 0.51 From cumulative effect of account- ing change........................ 0.00 0.00 0.25 ------------- ------------ ------------ Net income........................ $ 2.00 $ 3.72 $ 4.01 ============= ============ ============ </TABLE> 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: <TABLE> <CAPTION> STATE OF NAME UNDER WHICH COMPANY INCORPORATION COMPANY DOES BUSINESS ----------------------- ------------- --------------------- <S> <C> <C> Family Service Life Family Service Life Insurance Company Texas Insurance Company Globe Life And Accident Globe Life And Accident Insurance Company Delaware Insurance Company Liberty National Life Liberty National Life Insurance Company Alabama Insurance Company United American United American Insurance Company Delaware Insurance Company United Investors Life United Investors Life Insurance Company Missouri Insurance Company Waddell & Reed, Inc. Delaware Waddell & Reed, Inc. American Income Life American Income Life Insurance Company Indiana Insurance Company </TABLE> All other exhibits required by Regulation S-K are listed as to location in the "Index of documents filed as a part of this report" on pages 63 through 65 of this report. Exhibits not referred to have been omitted as inapplicable or not required. 66
TORCHMARK CORPORATION (PARENT COMPANY) SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEET (AMOUNTS IN THOUSANDS) <TABLE> <CAPTION> DECEMBER 31, ---------------------- 1995 1994 ---------- ---------- <S> <C> <C> Assets: Investments: Long-term investments--available for sale........ $ 9,655 $ 21,448 Short-term investments........................... 994 806 ---------- ---------- Total investments................................. 10,649 22,254 Investment in affiliates.......................... 2,820,323 2,404,431 Due from affiliates............................... 105,887 85,387 Accrued investment income......................... 94 83 Other assets...................................... 3,636 3,822 Discontinued operations assets.................... 61,109 108,467 ---------- ---------- Total assets..................................... $3,001,698 $2,624,444 ========== ========== Liabilities and shareholders' equity: Liabilities: Short-term debt.................................. $ 189,248 $ 250,000 Long-term debt................................... 791,566 790,972 Due to affiliates................................ 195,193 97,523 Other liabilities................................ 43,643 50,294 ---------- ---------- Total liabilities................................ 1,219,650 1,188,789 Monthly income preferred securities............... 193,096 193,052 Shareholders' equity: Preferred stock.................................. -0- -0- Common stock..................................... 73,784 73,784 Additional paid-in capital....................... 139,754 139,045 Unrealized investment gains (losses)............. 140,338 (140,756) Retained earnings................................ 1,325,534 1,267,545 Treasury stock................................... (90,458) (97,015) ---------- ---------- Total shareholders' equity....................... 1,588,952 1,242,603 ---------- ---------- Total liabilities and shareholders' equity....... $3,001,698 $2,624,444 ========== ========== </TABLE> See accompanying Notes to Condensed Financial Statements. 67
TORCHMARK CORPORATION (PARENT COMPANY) SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued) CONDENSED STATEMENT OF OPERATIONS (AMOUNTS IN THOUSANDS) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ---------------------------- 1995 1994 1993 -------- -------- -------- <S> <C> <C> <C> Net investment income............................ $ 1,261 $ 5,183 $ 8,540 Realized investment gains (losses)............... (23,516) (4,422) 9,301 Other income..................................... 11 11 27,435 -------- -------- -------- Total revenue.................................. (22,244) 772 45,276 General operating expenses....................... 7,823 14,442 15,174 Non-operating expenses--related to affiliates.... 0 (71,417) 67,718 Reimbursements from affiliates................... (13,260) (15,218) (18,599) Interest expense................................. 91,825 79,762 64,859 -------- -------- -------- Total expenses................................. 86,388 7,569 129,152 -------- -------- -------- Operating loss before income taxes and equity in earnings of affiliates................................... (108,632) (6,797) (83,876) Income taxes .................................... 37,363 2,022 29,391 -------- -------- -------- Net operating loss before equity in earnings of affiliates...................................... (71,269) (4,775) (54,485) Equity in earnings of affiliates................. 326,822 271,992 360,991 Minority interests............................... 0 0 (11,073) Monthly income preferred securities dividend..... (10,317) (2,137) 0 -------- -------- -------- Net income from continuing operations.......... 245,236 265,080 295,433 Income (loss) from discontinued operations of en- ergy segment.................................... (102,001) 3,866 4,797 Cumulative effect of changes in accounting prin- ciples.......................................... -0- -0- (2,251) -------- -------- -------- Net income..................................... $143,235 $268,946 $297,979 ======== ======== ======== </TABLE> See accompanying Notes to Condensed Financial Statements. 68
TORCHMARK CORPORATION (PARENT COMPANY) SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(continued) CONDENSED STATEMENT OF CASH FLOW (AMOUNTS IN THOUSANDS) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 --------- --------- --------- <S> <C> <C> <C> Cash provided from operations before dividends from subsidiaries............................ $ (86,764) $ (48,378) $ (20,435) Cash dividends from subsidiaries............. 185,500 270,500 188,709 --------- --------- --------- Cash provided from operations................. 98,736 222,122 168,274 Cash provided from (used for) investing activ- ities: Disposition of investments................... 116 225,573 478,859 Acquisition of investments................... (1,556) (202,579) (526,421) Sale of subsidiaries......................... -0- -0- 76,744 Investment in subsidiaries................... (83,211) (70,000) (55,651) Purchase of minority interest................ -0- -0- (229,063) Purchase of American Income.................. -0- (476,501) -0- Loans to subsidiaries........................ (49,043) (28,916) (8,881) Repayment of loans by subsidiaries........... -0- -0- 31,924 Net decrease (increase) in temporary invest- ments....................................... (188) 1,529 (799) Additions to properties...................... (146) (113) (74) --------- --------- --------- Cash used for investing activities............ (134,028) (551,007) (233,362) Cash provided from (used for) financing activ- ities: Issuance of debt............................. -0- 143,000 294,110 Issuance of monthly income preferred securi- ties........................................ -0- 193,046 -0- Repayments of debt........................... (60,752) -0- (88,000) Issuance of stock to subsidiaries............ 77,766 -0- -0- Issuance of stock............................ 2,808 4,408 6,670 Acquisitions of treasury stock............... -0- (106,054) (41,897) Borrowed from subsidiaries................... 101,857 176,821* -0- Repayment on borrowings from subsidiaries.... (5,500) -0- (24,000) Payment of dividends......................... (80,887) (82,336) (83,646) --------- --------- --------- Cash provided from financing activities....... 35,292 328,885 63,237 Net increase in cash.......................... -0- -0- (1,851) Cash balance at beginning of period........... -0- -0- 1,851 --------- --------- --------- Cash balance at end of period................. $ -0- $ -0- $ -0- ========= ========= ========= </TABLE> * 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: <TABLE> <CAPTION> 1995 1994 1993 -------- -------- -------- <S> <C> <C> <C> Consolidated subsidiaries..................... $185,500 $270,500 $188,709 ======== ======== ======== </TABLE> 69
TORCHMARK CORPORATION SCHEDULE III. SUPPLEMENTARY INSURANCE INFORMATION (CONSOLIDATED) (AMOUNTS IN THOUSANDS) <TABLE> <CAPTION> AMORTIZATION OF DEFERRED PREMIUM AND NET POLICY OTHER POLICY INVESTMENT OTHER BENEFITS ACQUISITION OPERATING CHARGES INCOME INCOME AND CLAIMS COSTS EXPENSES ----------- ---------- -------- ---------- ------------ --------- <S> <C> <C> <C> <C> <C> <C> FOR THE YEAR ENDED DE- CEMBER 31, 1995: - ------------------------ Insurance.............. $1,546,283 $384,619 $ 3,111 $1,009,336 $205,509 $257,167 Asset management....... 4,021 180,001 87,651 Corporate.............. (3,418) (14,309) 106,653 Eliminations and ad- justments............. (3,357) (29,469) (1,442) (25,567) ---------- -------- -------- ---------- -------- -------- Total................. $1,546,283 $381,865 $139,334 $1,009,336 $204,067 $425,904 ========== ======== ======== ========== ======== ======== FOR THE YEAR ENDED DE- CEMBER 31, 1994: - ------------------------ Insurance.............. $1,388,874 $331,679 $ 3,821 $921,277 $172,493 $228,042 Asset management....... 2,443 165,259 82,727 Corporate.............. 8,103 (2,525) 95,160 Eliminations and ad- justments............. 5,412 (27,729) 5,614 (23,950) ---------- -------- -------- ---------- -------- -------- Total................. $1,388,874 $347,637 $138,826 $921,277 $178,107 $381,979 ========== ======== ======== ========== ======== ======== FOR THE YEAR ENDED DE- CEMBER 31, 1993: - ------------------------ Insurance.............. $1,492,910 $341,659 $ 3,945 $971,556 $188,283 $352,833 Asset management....... 4,620 163,831 95,066 Corporate.............. 21,589 65,301 86,160 Eliminations and ad- justments............. 626 (27,635) (1,210) (27,800) ---------- -------- -------- ---------- -------- -------- Total................. $1,492,910 $368,494 $205,442 $971,556 $187,073 $506,259 ========== ======== ======== ========== ======== ======== </TABLE> 70
TORCHMARK CORPORATION SCHEDULE IV. REINSURANCE (CONSOLIDATED) (AMOUNTS IN THOUSANDS) <TABLE> <CAPTION> PERCENTAGE CEDED ASSUMED OF AMOUNT GROSS TO OTHER FROM OTHER NET ASSUMED AMOUNT COMPANIES COMPANIES AMOUNT TO NET ----------- --------- ---------- ----------- ---------- <S> <C> <C> <C> <C> <C> FOR THE YEAR ENDED DE- CEMBER 31, 1995: - ---------------------- Life insurance in force $80,377,021 $636,961 $ 14,355 $79,754,415 0.0% =========== ======== ======== =========== ===== Premiums:* Life insurance......... $ 702,993 $ 3,305 $ 4,283 $ 703,971 0.6% Health insurance....... 761,573 10,985 -0- 750,588 0.0% ----------- -------- -------- ----------- Total premiums........ $ 1,464,566 $ 14,290 $ 4,283 $ 1,454,559 0.3% =========== ======== ======== =========== ===== FOR THE YEAR ENDED DE- CEMBER 31, 1994: - ---------------------- Life insurance in force $74,834,644 $633,485 $ 23,570 $74,224,729 0.0% =========== ======== ======== =========== ===== Premiums:* Life insurance......... $ 535,141 $ 4,386 $ 1,316 $ 532,071 0.2% Health insurance....... 781,207 12,493 -0- 768,714 0.0% ----------- -------- -------- ----------- Total premiums........ $ 1,316,348 $ 16,879 $ 1,316 $ 1,300,785 0.1% =========== ======== ======== =========== ===== FOR THE YEAR ENDED DE- CEMBER 31, 1993: - ---------------------- Life insurance in force $61,349,446 $594,416 $ 17,487 $60,772,517 0.0% =========== ======== ======== =========== ===== Premiums:* Life insurance......... $ 488,632 $ 4,862 $ 576 $ 484,346 0.1% Health insurance....... 814,456 14,621 -0- 799,835 0.0% Property and liability insurance............. 78,512 60,245 104,790 123,057 85.2% ----------- -------- -------- ----------- Total premiums........ $ 1,381,600 $ 79,728 $105,366 $ 1,407,238 7.5% =========== ======== ======== =========== ===== </TABLE> - -------- * Excludes policy charges 71
SIGNATURES Pursuant to the requirements of Section 12 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Torchmark Corporation /s/ R.K. Richey By: ________________________________ R.K. RICHEY, CHAIRMAN, CHIEF EXECUTIVE OFFICER AND DIRECTOR /s/ Keith A. Tucker By: ________________________________ KEITH A. TUCKER, VICE CHAIRMAN AND DIRECTOR (PRINCIPAL FINANCIAL OFFICER) /s/ Gary L. Coleman By: ________________________________ GARY L. COLEMAN, VICE PRESIDENT AND CHIEF ACCOUNTING OFFICER (PRINCIPAL ACCOUNTING OFFICER) Date: March 20, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ J.P. Bryan* /s/ Harold T. McCormick* By: ________________________________ By: ________________________________ J.P. BRYAN HAROLD T. MCCORMICK DIRECTOR DIRECTOR /s/ Joseph M. Farley* /s/ Joseph W. Morris* By: ________________________________ By: ________________________________ JOSEPH M. FARLEY JOSEPH W. MORRIS DIRECTOR DIRECTOR /s/ Louis T. Hagopian* /s/ George J. Records* By: ________________________________ By: ________________________________ LOUIS T. HAGOPIAN GEORGE J. RECORDS DIRECTOR DIRECTOR /s/ C.B. Hudson* /s/ Yetta G. Samford, Jr.* By: ________________________________ By: ________________________________ C.B. HUDSON YETTA G. SAMFORD, JR. DIRECTOR DIRECTOR /s/ Joseph L. Lanier, Jr.* By: ________________________________ JOSEPH L. LANIER, JR. DIRECTOR Date: March 20, 1996 /s/ Gary L. Coleman *By: _______________________________ GARY L. COLEMAN ATTORNEY-IN-FACT Date: March 20, 1996 72