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, 2000 1-8052
TORCHMARK CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 63-0780404
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2001 Third Ave. South, 35233
Birmingham, AL
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
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 CLASS: CUSIP NUMBER:
8 1/4% Senior Debentures due 2009 891027 AE 4
7 7/8% Notes due 2023 891027 AF 1
7 3/8% Notes due 2013 891027 AG 9
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH) AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [_]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K ((S)229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN, AND
WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE
PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [_]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT $4,382,303,511
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON
STOCK, AS OF FEBRUARY 28, 2001: 126,000,676.
DOCUMENTS INCORPORATED BY REFERENCE
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 26, 2001,
PART III
INDEX OF EXHIBITS (PAGES 85 through 88)
TOTAL NUMBER OF PAGES INCLUDED ARE 95
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. ("Waddell & Reed")
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 ("Family
Service") was purchased in July, 1990, and American Income Life Insurance
Company ("American Income") was purchased in November, 1994. Torchmark
disposed of Family Service and Waddell & Reed in 1998.
The following table presents Torchmark's business by primary distribution
method:
Primary
Distribution Method Company Products Distribution
- ------------------------------------------------------------------------------------------------------------------
Direct Response Globe Life And Individual life and supplemental health Direct response, mail,
Accident insurance including juvenile and television,magazine;
Insurance Company senior life coverage, Medicare nationwide.
Oklahoma City, OK Supplement, long-term care.
- ------------------------------------------------------------------------------------------------------------------
Liberty National Liberty National Life Individual life and 2,032 full-time sales repre-
Exclusive Agency Insurance Company supplemental health insurance. sentatives; 107 district
Birmingham, Alabama offices in the Southeastern
U.S.
- ------------------------------------------------------------------------------------------------------------------
American Income American Income Life Individual life and supplemental health 1,352 agents in the U.S.,
Exclusive Agency Insurance Company insurance to union and credit Canada, and New Zealand.
Waco, Texas union members and other
associations.
- ------------------------------------------------------------------------------------------------------------------
United Investors United Investors Life Individual life insurance 2,865 Waddell & Reed
Agency Insurance Company and annuities. representatives; indepen-
Birmingham, Alabama dent agents; 223 offices
nationwide.
- ------------------------------------------------------------------------------------------------------------------
Military Liberty National Life Individual life insurance Independent Agency
Insurance Company through career agents
Birmingham, Alabama nationwide.
Globe Life And Accident
Insurance Company
Oklahoma City, Oklahoma
- ------------------------------------------------------------------------------------------------------------------
United American United American Senior life and supplemental health 41,252 independent agents
Independent Agency Insurance Company insurance including in the U.S., Puerto Rico and
and Exclusive Agency McKinney, Texas Medicare Supplement Canada; 3,661 exclusive
coverage and long-term care. agents in 87 branch offices.
Additional information concerning industry segments may be found in
Management's Discussion and Analysis and in Note 19--Business Segments in the
Notes to Consolidated Financial Statements.
Insurance
Life Insurance
Torchmark's insurance subsidiaries write a variety of nonparticipating
ordinary life insurance products. These include traditional and interest
sensitive whole-life insurance, term life insurance, and other life insurance.
The following table presents selected information about Torchmark's life
products:
(Amounts in thousands)
Annualized Annualized
Premium Issued Premium in Force
-------------------------- --------------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- ---------- ---------- ----------
Whole life:
Traditional............ $133,413 $119,799 $115,154 $ 652,195 $ 612,964 $ 575,888
Interest-sensitive..... 13,907 18,348 17,131 160,865 168,805 162,046
Term.................... 139,990 115,592 108,469 368,045 330,533 306,785
Other................... 3,433 3,468 3,713 19,039 18,307 17,928
-------- -------- -------- ---------- ---------- ----------
$290,743 $257,207 $244,467 $1,200,144 $1,130,609 $1,062,647
======== ======== ======== ========== ========== ==========
1
The distribution methods for life insurance products include sales by direct
response, exclusive agents and independent agents. These methods are discussed
in more depth under the heading Marketing. The following table presents life
annualized premium issued by distribution method:
(Amounts in thousands)
Annualized Annualized
Premium Issued Premium in Force
-------------------------- --------------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- ---------- ---------- ----------
Direct response.... $112,918 $ 96,091 $ 93,500 $ 306,162 $ 283,406 $ 260,320
Exclusive Agents:
Liberty National.. 53,608 51,467 45,532 312,173 307,495 298,082
American Income... 56,560 54,045 53,576 245,433 231,490 216,291
United American... 4,730 5,315 5,481 21,362 21,800 21,390
Independent Agents:
United American... 25,708 13,319 9,401 53,269 43,394 41,078
Other............. 37,219 36,970 36,977 261,745 243,024 225,486
-------- -------- -------- ---------- ---------- ----------
$290,743 $257,207 $244,467 $1,200,144 $1,130,609 $1,062,647
======== ======== ======== ========== ========== ==========
Permanent insurance products sold by Torchmark insurance subsidiaries build
cash values which are available to policyholders. Policyholders may borrow
such funds using the policies as collateral. The aggregate value of policy
loans outstanding at December 31, 2000 was $255 million and the average
interest rate earned on these loans was 6.8% in 2000. Interest income earned
on policy loans was $17.0 million in 2000, $16.3 million in 1999, and $15.3
million in 1998.
The availability of cash values contributes to voluntary policy terminations
by policyholders through surrenders. Life insurance products may be terminated
or surrendered at the election of the insured at any time, generally for the
full cash value specified in the policy. Specific surrender procedures vary
with the type of policy. For certain policies this cash value is based upon a
fund less a surrender charge which decreases with the length of time the
policy has been in force. This surrender charge is either based upon a
percentage of the fund or a charge per $1,000 of face amount of insurance. The
schedule of charges may vary by plan of insurance and, for some plans, by age
of the insured at issue. The ratio of aggregate face amount voluntary
terminations to the mean amount of life insurance in force was 17.8% in 2000,
17.0% in 1999, and 17.0% in 1998.
The following table presents an analysis of changes to the Torchmark
subsidiaries' life insurance business in force:
(Amounts in thousands)
2000 1999 1998
---------------------- ---------------------- ----------------------
Number of Amount of Number of Amount of Number of Amount of
policies Insurance policies Insurance policies Insurance
--------- ------------ --------- ------------ --------- ------------
In force at January 1,.. 9,654 $101,846,461 9,622 $ 96,339,059 9,630 $ 91,869,995
New issues.............. 1,292 25,754,400 1,332 22,846,100 1,452 21,448,243
Other increases......... -0- 69,187 -0- 105,271 1 75,849
Death benefits.......... (114) (355,728) (105) (327,733) (107) (323,393)
Lapses.................. (994) (17,175,351) (1,023) (15,352,225) (1,006) (14,589,649)
Surrenders.............. (141) (1,568,313) (145) (1,505,248) (151) (1,438,085)
Other decreases......... (26) (251,666) (27) (258,763) (197) (703,901)
----- ------------ ------ ------------ ------ ------------
In force at December
31,.................... 9,671 $108,318,990 9,654 $101,846,461 9,622 $ 96,339,059
===== ============ ====== ============ ====== ============
Average policy size (in
dollar amounts):
Direct response--
Juvenile.............. $ 6,766 $ 6,690 $ 6,688
Other.................. 12,985 12,146 11,411
2
Health insurance
Torchmark insurance subsidiaries offer supplemental health insurance
products. These are generally classified as (1) Medicare Supplement, (2)
cancer and (3) other health policies.
Medicare Supplement policies are offered on both an individual and group
basis through exclusive and independent agents, and direct response. These
guaranteed renewable policies provide reimbursement for certain expenses not
covered by the federal Medicare program. One popular feature is an automatic
claim filing system for Medicare Part B benefits whereby policyholders do not
have to file most claims because they are paid from claim records sent
electronically directly to the Torchmark insurers by Medicare.
Cancer policies are offered on an individual basis through exclusive and
independent agents as well as direct response. These guaranteed renewable
policies are designed to fill gaps in existing medical coverage. Benefits are
triggered by a diagnosis of cancer or health related events or medical
expenses related to the treatment of cancer. Benefits may be in the form of a
lump sum payment, stated amounts per diem, per medical procedure, or
reimbursement for certain medical expenses.
Other health policies include accident, long term care and limited benefit
hospital and surgical coverages. These policies are generally issued as
guaranteed-renewable and are offered on an individual basis through exclusive
and independent agents, and direct response. They are designed to supplement
existing medical coverages. Benefits are triggered by certain health related
events or incurred expenses. Benefit amounts are per diem, per health related
event or defined expenses incurred up to a stated maximum.
The following table presents supplemental health annualized premium for the
three years ended December 31, 2000 by marketing method:
(Amounts in thousands)
Annualized Annualized
Premium Issued Premium in Force
-------------------------- ----------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- ---------- -------- --------
Direct response........ $3,572 $ 4,323 $ 3,884 $16,167 $ 12,785 $ 9,617
Exclusive agents:
Liberty National...... 10,081 9,859 11,124 163,387 149,447 143,668
American Income....... 8,615 8,039 9,138 47,659 46,691 44,300
United American....... 145,089 102,583 64,245 310,526 231,034 172,927
Independent agents:
United American....... 85,115 68,022 50,508 466,560 444,401 426,351
-------- -------- -------- ---------- -------- --------
$252,472 $192,826 $138,899 $1,004,299 $884,358 $796,863
======== ======== ======== ========== ======== ========
The following table presents supplemental health annualized premium
information for the three years ended December 31, 2000 by product category:
(Amounts in thousands)
Annualized Annualized
Premium Issued Premium in Force
-------------------------- ----------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- ---------- -------- --------
Medicare Supplement..... $201,396 $152,518 $102,421 $728,918 $630,915 $553,737
Cancer.................. 10,073 10,637 10,248 169,013 153,777 144,900
Other health related
policies............... 41,003 29,671 26,230 106,368 99,666 98,226
-------- -------- -------- ---------- -------- --------
$252,472 $192,826 $138,899 $1,004,299 $884,358 $796,863
======== ======== ======== ========== ======== ========
The number of individual health policies in force were 1.64 million, 1.58
million, and 1.59 million at December 31, 2000, 1999, and 1998, respectively.
3
Annuities
Annuity products offered by Torchmark insurance subsidiaries include single-
premium deferred annuities, flexible-premium deferred annuities, and variable
annuities. Single-premium and flexible-premium products are fixed annuities
where a portion of the interest credited is guaranteed. Additional interest
may be credited on certain contracts. Variable annuity policyholders may
select from a variety of mutual funds 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 excluding Family
Service:
(Amounts in thousands)
Collections (Amounts in millions)
For the year ended Deposit Balance
December 31, At December 31,
-------------------------- --------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- -------- -------- --------
Fixed annuities........... $ 41,617 $ 71,696 $ 64,687 $ 661.6 $ 677.5 $ 647.3
Variable annuities........ 608,251 392,769 299,005 3,583.6 3,274.9 2,343.5
-------- -------- -------- -------- -------- --------
$649,868 $464,465 $363,692 $4,245.2 $3,952.4 $2,990.8
======== ======== ======== ======== ======== ========
Investments
The nature, quality, and percentage mix of insurance company investments are
regulated by state laws that generally permit investments in qualified
municipal, state, and federal government obligations, corporate bonds,
preferred and common stock, real estate, and mortgages where the value of the
underlying real estate exceeds the amount of the loan. The investments of
Torchmark insurance subsidiaries consist predominantly of high-quality,
investment-grade securities. Fixed maturities represented 92% of total
investments at December 31, 2000. Approximately 6% 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. Most of these investments were in GNMA securities that are backed
by the full faith and credit of the United States government. The remainder of
these government investments were U.S. Treasuries, agency securities or
collateralized mortgage obligations ("CMO's") that are fully backed by GNMA's.
(See Note 3--Investments in the Notes to Consolidated Financial Statements and
Management's Discussion and Analysis.)
The following table presents the market value of fixed maturity investments
at December 31, 2000 on the basis of ratings as determined primarily by
Standard & Poor's Corporation. The lower of Moody's Investors Services' or
Standard & Poor's bond ratings are used when the two differ. Ratings of BBB
and higher (or their equivalent) are considered investment grade by the rating
services.
Amount
Rating (in thousands) %
------ -------------- -----
AAA................................................ $ 827,606 13.9%
AA................................................. 495,204 8.3
A.................................................. 2,901,272 48.8
BBB................................................ 1,379,001 23.2
BB................................................. 220,741 3.7
B.................................................. 50,512 0.8
Less than B........................................ 381 0.0
Not rated.......................................... 74,798 1.3
---------- -----
$5,949,515 100.0%
========== =====
4
The following table presents the market value of fixed maturity investments
of Torchmark's insurance subsidiaries at December 31, 2000 on the basis of
ratings as determined by the National Association of Insurance Commissioners
("NAIC"). Categories one and two are considered investment grade by the NAIC.
Amount
Rating (in thousands) %
---------------------- -------------- -----
1. Highest quality*... $4,372,772 73.9%
2. High quality....... 1,265,858 21.4
3. Medium quality..... 190,804 3.2
4. Low quality........ 61,858 1.0
5. Lower quality...... 28,781 0.5
6. In or near default. 29 0.0
---------- -----
$5,920,102 100.0%
========== =====
* Includes $345 million of exempt securities or 5.8% of the portfolio. Exempt
securities are exempt for valuation reserve purposes, and consist of U.S.
Government guaranteed securities.
Securities are assigned ratings when acquired. All ratings are reviewed and
updated at least annually. Specific security ratings are updated as
information becomes available during the year.
Pricing
Premium rates for life and health insurance products are established using
assumptions as to future mortality, morbidity, persistency, and expenses, all
of which are generally based on the experience of each insurance subsidiary,
and on projected investment earnings. Revenues for individual life and health
insurance products are primarily derived from premium income, and, to a lesser
extent, through policy charges to the policyholder account values on certain
individual life products. Profitability is affected to the extent actual
experience deviates from that which has been assumed in premium pricing and to
the extent investment income exceeds that which is required for policy
reserves.
Collections for annuity products and certain life products are not
recognized as revenues but are added to policyholder account values. Revenues
from these products are derived from charges to the account balances for
insurance risk and administrative costs. Profits are earned to the extent
these revenues exceed actual costs. Profits are also earned from investment
income on the deposits invested in excess of the amounts credited to policy
accounts.
Underwriting
The underwriting standards of each Torchmark insurance subsidiary are
established by management. Each company uses information from the application
and, in some cases, telephone interviews with applicants, inspection reports,
doctors' statements and/or medical examinations to determine whether a policy
should be issued in accordance with the application, with a different rating,
with a rider, with reduced coverage or rejected.
For life insurance in excess of certain prescribed amounts, each insurance
company requires medical information or examinations of applicants. These are
graduated according to the age of the applicant and may vary with the kind of
insurance. The maximum amount of insurance issued without additional medical
information is $200,000 through age 35. Additional medical information is
requested of all applicants, regardless of age or amount, if information
obtained from the application or other sources indicates that such information
is warranted.
In recent years, there has been considerable concern regarding the impact of
the HIV virus associated with Acquired Immune Deficiency Syndrome ("AIDS").
The insurance companies have implemented certain underwriting tests to detect
the presence of the HIV virus and 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 insurance subsidiaries
cede insurance to other unaffiliated insurance companies on policies they
issue in excess of retention limits. Reinsurance is an effective method for
keeping insurance risk within acceptable limits. In the event insurance
business is ceded, the Torchmark insurance subsidiaries remain contingently
liable with respect to ceded insurance should any reinsurer be unable to meet
the obligations it assumes. (See Note 18--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 premiums to be received
in the future 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 insurance subsidiaries are licensed to sell insurance in all 50
states, the District of Columbia, Puerto Rico, the Virgin Islands, Guam, New
Zealand and Canada. Distribution is through direct response, independent and
exclusive agents. The number of independent and exclusive agents below are
presented as of December 31, 2000.
Direct Response. Various Torchmark insurance companies offer life insurance
products directly to consumers through direct mail, co-op mailings,
television, national newspaper supplements and national magazines. Torchmark
operates a full service letterpress which enables the direct response
operation to maintain high quality standards while producing materials much
more efficiently than they could be purchased from outside vendors.
Exclusive Agents. Liberty National's 2,032 agents sell life and health
insurance, primarily in the seven state area of Alabama, Florida, Georgia,
Tennessee, Mississippi, South Carolina, and North Carolina. These agents are
employees of Liberty and are primarily compensated by commissions based on
sales. During the past several years this operation has emphasized bank draft
and direct bill collection of premium rather than agent collection, because of
the resulting lower cost and improved persistency. Agent collected sales were
discontinued in 1996.
Through the American Income Agency, individual life and fixed-benefit
accident and health insurance are sold through approximately 1,352 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.
The United American Exclusive Agency specializes in the sale of Medicare
Supplement and other life and health products for the over-age 50 market
through 3,661 agents in 87 branch offices throughout the United States. This
agency is Torchmark's fastest growing agency-based distribution unit.
The Waddell & Reed sales force, consisting of 2,865 sales representatives,
markets United Investors Life insurance products, fixed annuities, and
variable annuities.
Independent Agents. Torchmark insurance companies offer a variety of life
and health insurance policies through 41,252 independent agents, brokers, and
licensed sales representatives. Torchmark is
6
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.
Torchmark subsidiaries distribute life insurance through a nationwide
independent agency whose sales force is comprised of former commissioned and
noncommissioned military officers who sell exclusively to commissioned and
noncommissioned military officers and their families.
Ratings
The following list indicates the ratings currently held by Torchmark's five
largest insurance companies as rated by A.M. Best Company:
A.M. Best
Company
---------------
Liberty National Life Insurance Company A+ (Superior)
Globe Life And Accident Insurance Company A+ (Superior)
United Investors Life Insurance Company A+ (Superior)
United American Insurance Company A+ (Superior)
American Income Life Insurance Company A (Excellent)
A.M. Best states that it assigns A+ (Superior) ratings to those companies
which, in its opinion, have demonstrated superior overall performance when
compared to the norms of the life/health insurance industry. A+ (Superior)
companies have a superior ability to meet their obligations to policyholders
over a long period of time. A.M. Best states that it assigns A (Excellent)
ratings to those companies which, in its opinion, have demonstrated excellent
overall performance when compared to the norms of the life/health insurance
industry. A (Excellent) companies have an excellent ability to meet their
obligations to policyholders over a long period of time.
Liberty, Globe, United American, American Income, and UILIC have ratings of
AA by Standard & Poor's Corporation. This AA rating is assigned by Standard &
Poor's Corporation to those companies who offer excellent financial security
on an absolute and relative basis and whose capacity to meet policyholders
obligations is overwhelming under a variety of economic and underwriting
conditions.
Competition
The insurance industry is highly competitive. Torchmark competes with other
insurance carriers through policyholder service, price, product design, and
sales efforts. In addition to competition with other insurance companies,
Torchmark faces competition from other financial services organizations. While
there are insurance companies competing with Torchmark, no individual company
dominates 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 their peer companies, allowing Torchmark to have competitive rates
while maintaining underwriting margins. In the case of Medicare Supplement
business, having low expense levels is necessary in order to meet federally
mandated loss ratios and achieve the desired underwriting margins. Torchmark's
years of experience in the direct response business are a valuable asset in
implementing direct response marketing operations.
7
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: American Income, as of December 31, 1995; Globe,
as of December 31, 1997; Liberty, as of December 31, 1996; United American, as
of December 31, 1996; and UILIC, as of December 31, 1996.
NAIC Ratios. The NAIC developed the Insurance Regulatory Information System
("IRIS"), which is intended to assist state insurance regulators in monitoring
the financial condition of insurance companies. IRIS identifies twelve
insurance industry ratios from the statutory financial statements of insurance
companies, which are based on regulatory accounting principles and are not
based on generally accepted accounting principles ("GAAP"). IRIS specifies a
standard or "usual value" range for each ratio, and a company's variation from
this range may be either favorable or unfavorable. The following table
presents the IRIS ratios as determined by the NAIC for Torchmark's five
largest insurance subsidiaries, which varied unfavorably from the "usual
value" range for the years 1999 and 1998.
Usual Reported
Company Ratio Name Range Value
- --------- ----------------------------------- --------- --------
1999:
American Income Net change in Capital and Surplus 50 to -10 114
Gross change in Capital and Surplus 50 to -10 114
1998:
American Income Nonadmitted to Admitted Assets 0 to 10 10
Globe Life and Accident Net change in Capital and Surplus 50 to -10 -10
Gross change in Capital and Surplus 50 to -10 60
Explanation of Ratios:
Nonadmitted Assets to Admitted Assets--This ratio measures the degree to
which a company has acquired assets which cannot be carried on its statutory
balance sheet. American Income's ratio of 10% in 1998 was due to a large
amount of agent balances that arose from commissions that are advanced to
agents when a policy is submitted. Due to the growth of American Income's
business, these advances have grown and caused a variance in this particular
ratio. Agents balances due to American Income are recognized as assets in
Torchmark's consolidated financial statements. A significant amount of these
balances was sold to an unaffiliated financial institution in 1999.
Change in Capital and Surplus--These ratios, calculated on both a gross and
net basis, are a measure of improvement or deterioration in a company's
financial position during the year. The NAIC considers ratios less than or
equal to minus 10% and greater than or equal to 50% to be unusual. Globe's
ratio of 60% in 1998 was caused by the establishment of American Income as a
subsidiary of Globe. Previously, American Income was a direct subsidiary of
Torchmark. American Income's ratio of 114 in 1999 was caused by the sale in
that year of its agents' balances to an unaffiliated financial institution.
These transactions did not affect the consolidated equity of Torchmark at
December 31, 1998 or December 31, 1999. Also, these transactions did not
affect Globe's or American Income's ability to conduct business.
8
Risk Based Capital. The NAIC requires a risk based capital formula be
applied to all life and health insurers. The risk based capital formula is a
threshold formula rather than a target capital formula. It is designed only to
identify companies that require regulatory attention and is not to be used to
rate or rank companies that are adequately capitalized. All of the insurance
subsidiaries of Torchmark are adequately capitalized under the risk based
capital formula.
Guaranty Assessments. State solvency or guaranty laws provide for
assessments from insurance companies into a fund which is used, in the event
of failure or insolvency of an insurance company, to fulfill the obligations
of that company to its policyholders. The amount which a company is assessed
for these state funds is determined according to the extent of these
unsatisfied obligations in each state. These assessments are recoverable to a
great extent as offsets against state premium taxes.
Holding Company. States have enacted legislation requiring registration and
periodic reporting by insurance companies domiciled within their respective
jurisdictions that control or are controlled by other corporations so as to
constitute a holding company system. Torchmark and its subsidiaries have
registered as a holding company system pursuant to such legislation in
Alabama, Delaware, Missouri, New York, Texas, and Indiana.
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.
Personnel
At the end of 2000, Torchmark had 1,957 employees and 2,501 licensed
employees under sales contracts. Additionally, approximately 52,000
independent and exclusive agents and brokers, who were not employees of
Torchmark, were associated with Torchmark's marketing efforts.
Item 2. Real Estate
Torchmark, through its subsidiaries, owns or leases buildings that are used
in the normal course of business. Liberty owns a 487,000 square foot building
at 2001 Third Avenue South, Birmingham, Alabama which currently serves as
Liberty's, UILIC's, and Torchmark's home office. Approximately 160,000 square
feet of this building is available for lease to unrelated tenants by Liberty.
Liberty also operates from 58 company-owned district office buildings used for
agency sales personnel.
United American owns and is the sole occupant of a 140,000 square foot
facility, located in the Stonebridge Ranch development in McKinney, Texas (a
north Dallas suburb).
Globe owns a 300,000 square foot office building at 204 N. Robinson,
Oklahoma City, of which Globe occupies 56,000 square feet as its home office
and the remaining space is either leased or available for lease. Globe also
owns an 80,000 square foot office building at 120 Robert S. Kerr Avenue,
Oklahoma City, which is available for lease. Further, Globe owns a 112,000
square foot facility located at 133 NW 122 Street in Oklahoma City which
houses the Direct Response operation.
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.
Liberty and Globe also lease district office space for their agency sales
personnel.
During 1999, Torchmark sold the majority of its investment real estate
holdings for total consideration of $123 million. These sold investments
included its TMK Income Properties limited partnership and its joint venture
investment in Liberty Park, a planned community in Birmingham, Alabama. As of
December 31, 2000, Torchmark retained $15 million of investment real estate,
which included $7 million of properties that were partially occupied by
Torchmark subsidiaries and $7 million of undeveloped land in Liberty Park.
9
Information Technology Computing Equipment
Torchmark and its primary subsidiaries have significant information
technology capabilities at their disposal. The corporation uses centralized
mainframe computer systems, a corporate wide-area network, company-specific
local-area networks, workstations, and personal computers to meet its ongoing
information processing requirements. Torchmark and its primary subsidiaries
also use data communications hardware and software to support their remote
data communications networks, intranets, and internet-related
telecommunications capabilities.
Torchmark's computer hardware, data communications equipment, and associated
software programs are managed by the corporation's information technology
staff. All of the corporation's computer hardware and software support,
information processing schedules, and computer-readable data-management
requirements are met through company-specific policies and procedures. These
company-specific policies and procedures also provide for the off-site storage
and retention of backup computer software, financial, and business data files.
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.
In 1999, Alabama enacted legislation limiting punitive damages in non-physical
injury cases to the greater of $500,000 or three times compensatory damages.
Since this legislation has not undergone scrutiny by appellate courts
regarding its constitutionality and a jury's discretion regarding the amount
of compensatory damages (including mental anguish) awarded in any given case
is not precisely defined, the effect of this legislation on Torchmark's
litigation remains unclear. Bespeaking caution is the fact that the likelihood
or extent of a punitive damage award in any given case is currently impossible
to predict. As of December 31, 2000, Liberty was a party to approximately 80
active lawsuits (including 10 employment related cases and excluding
interpleaders and stayed cases), 71 of which were Alabama proceedings in which
punitive damages were sought. Liberty faces trial settings in these cases on
an on-going basis.
Based upon information presently available, and in light of legal and other
factual defenses available to Torchmark and its subsidiaries, contingent
liabilities arising from threatened and pending litigation are not presently
considered by management to be material. It should be noted, however, that
large punitive damage awards bearing little or no relation to actual damages
awarded by juries in jurisdictions in which Torchmark has substantial
business, particularly in Alabama, continue to occur, creating the potential
for unpredictable material adverse judgments in any given punitive damage
suit.
As previously reported, Dismukes v. Torchmark Corporation (Case No. CV-94-
1006-P-M), which was filed on December 30, 1994 in the U.S. District Court for
the Northern District of Alabama, was the only remaining purported class
action litigation brought by Torchmark shareholders alleging untimely and
inadequate disclosure of material contingent liabilities arising out of
insurance policy litigation involving Liberty. The U.S. District Court entered
an order granting partial summary judgment on behalf of the defendants on
April 16, 1996. Claims for damages based on Section 10b-5 of the Securities
Exchange Act, on state securities laws and for common law fraud remained
pending in the case following the U.S. District Court's 1996 order. On
September 28, 2000, the District Court granted defendants' motions for summary
judgment declaring plaintiffs' claims as time-barred by the statute of
limitations and denying class certification. Plaintiffs appealed the District
Court's orders to the Eleventh Circuit Court of Appeals. On December 19, 2000,
the Dismukes case was settled on an individual basis and the plaintiffs'
appeal was dismissed.
As previously reported, Torchmark, its insurance subsidiaries Globe and
United American, and certain Torchmark officers were named as defendants in
purported class action litigation filed in the District Court of Oklahoma
City, Oklahoma (Moore v. Torchmark Corporation, Case No. CJ-94-2784-65,
subsequently amended and restyled Tabor v. Torchmark Corporation). This suit
claims damages on
10
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. On February 6, 1998, the defendants renewed their motion
to dismiss the class claims for failure to prosecute. The District Court, in
an order dated April 2, 1998, allowed bifurcation of Tabor into Medicare
Supplement policy claims and non-Medicare Supplement policy claims. The non-
Medicare Supplement claims were stayed pending disposition of a related case
involving the same plaintiffs filed in Mississippi while discovery was allowed
to proceed on plaintiff's motion to certify a class of Medicare Supplement
policyholders' claims. On August 23, 2000, the non-Medicare Supplement claims
were dismissed with prejudice. Plaintiff's motion to certify a class of
Medicare Supplement policyholders' claims remains pending.
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 agent contracts based on misrepresentations of fact.
Monetary damages in an unspecified amount were sought. A plaintiff class was
certified by the District Court on February 26, 1996, although the
certification did not go to the merit of the allegations in the complaint. On
December 31, 1996, the plaintiffs filed an amended complaint in Smith to
allege violations of various provisions of the Employment Retirement Income
Security Act of 1974. Extensive discovery was then conducted. In October 1998,
defendants filed a motion to decertify the presently defined class in Smith.
On March 23, 1999, the District Court granted defendants' motion to decertify
the Smith class in part and decertified all but the ERISA claims of a more
narrowly defined Smith class. In May 1999, the defendants filed motions to
dismiss the claims certified by the Court's March 23, 1999 order. On December
14, 1999, the District Court granted defendants' motion for summary judgment.
That Court denied a motion for reconsideration on January 21, 2000. Defendants
filed a motion for summary judgment on the remaining individual claims in the
Smith case on May 1, 2000 and this motion was granted by the District Court on
January 4, 2001. The plaintiffs filed a notice of appeal shortly thereafter,
which defendants have moved to dismiss as premature.
Torchmark has previously reported the filing of purported class action
litigation on January 2, 1996 against Torchmark, Torch Energy Advisors
Incorporated, 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). The plaintiff alleged improper
payment of royalties and overriding royalties on coalbed methane gas produced
and sold from wells in Robinson's Bend Coal Degasification Field, sought
certification of a class and claimed unspecified compensatory and punitive
damages on behalf of such class. On April 11, 1996, Torchmark's motion to
change venue was granted and the case was transferred to the Circuit Court of
Tuscaloosa County, Alabama. Torchmark filed a motion to dismiss, which
remained pending while discovery proceeded. On February 10, 1999, the
plaintiffs filed a request for a class certification hearing and to set a
trial date for the Pearson case. After extensive negotiations, a tentative
settlement was reached by the parties. On January 8, 2001 the Circuit Court
held a settlement and fairness hearing on the stipulation and agreement of
compromise and settlement executed by counsel for all parties. The Circuit
Court approved this settlement and entered an order and final judgment of
dismissal with prejudice on January 10, 2001. The settlement fund of $6
million, to which Torchmark contributed pursuant to a litigation indemnity
given at the time of its 1996 sale of Torch Energy, was distributed in March
2001.
It has been previously reported that purported class action litigation was
filed against Torchmark's subsidiary, American Income Life Insurance Company
and certain of its employee benefit plans (Peet, et al. v. American Income
Life Insurance Company, et al., Case No. C-99-2283) on May 18, 1999 in the
U.S. District Court for the Northern District of California, which was
subsequently transferred to the U.S. District Court for the Western District
of Texas. Plaintiffs, individually and on behalf of all current and former
public relations representatives of American Income, asserted that they had
been improperly classified as independent contractors rather than employees
and thus denied participation in certain of American Income's employee benefit
plans. The lawsuit alleged breach of fiduciary duty and wrongful denial of
access to plan documents and other information under the Employee Retirement
Income Security Act. Declaratory and injunctive relief together with
restitution, disgorgement and statutory penalties were sought. On September
12, 2000, the District Court granted the defendants' motions for partial
summary judgment and denied plaintiffs' motion for class certification with
leave to renew plaintiffs'
11
class certification motion if they provided the Court with information
regarding additional benefit plans from which they had been improperly
excluded. Subsequently, in September 2000, plaintiffs submitted additional
information to the Court alleging additional benefit plans from which
plaintiffs had allegedly been improperly excluded, and plaintiffs also filed a
motion for reconsideration of the order granting defendants' motion for
summary judgment with respect to American Income's defined benefit plan.
As previously reported, Liberty was served on October 28, 1999 with a
subpoena from the Florida Department of Insurance in connection with that
Department's investigation into Liberty's sales practices and disclosures in
the State of Florida regarding industrial life insurance and low coverage life
insurance policies. Liberty has also received similar subpoenas from the
Alabama, Georgia, Kentucky, Texas, South Carolina and Minnesota Insurance
Departments regarding its industrial life insurance and other low face-amount
life insurance policies sold in those states. Specific inquiry is made into
the historical use of race-based mortality, a practice discontinued by Liberty
many years ago. Liberty has been and continues responding to these subpoenas
in a timely fashion. In July 2000, the Florida and Georgia Insurance
Departments issued cease and desist orders to all companies reporting premium
income from industrial life insurance, including Liberty, stating that, to the
extent that any company is currently collecting any race-based insurance
premiums from Florida and Georgia residents, respectively, it immediately
cease and desist from collecting any premium differential based on the race of
the policyholders. On August 22, 2000, the Florida First District Court of
Appeal issued an order staying the Florida Insurance Department's immediate
final cease and desist order. At present, Liberty, as an Alabama domestic
company, is being examined by representatives of the Alabama Department of
Insurance with regard to issues parallel to those raised by the State of
Florida.
On December 8, 1999, purported class action litigation was filed against
Liberty in the United States District Court for the Northern District of
Alabama (Moore v. Liberty National Life Insurance Company, Case No. CV-99-BU-
3262-S), on behalf of all African-Americans who have or have had at the time
of policy termination an ownership interest in certain life insurance policies
($25,000 face amount or less) marketed by Liberty and certain of its former
subsidiaries. The alleged class period covers virtually the entire twentieth
century. Plaintiffs allege racial discrimination in Liberty's premium rates in
violation of 42 U.S.C. (S) 1981, breach of fiduciary duty in sales and
administrative practices, receipt of excessive and unreasonable premium
payments by Liberty, improper hiring, supervision, retention and failure to
monitor actions of officers, agents and employees, breach of contract in
dismantling the debit premium collection system, fraudulent inducement and
negligent misrepresentation. Unspecified compensatory and punitive damages are
sought together with a declaratory judgment and equitable and/or injunctive
relief, including establishment of a constructive trust for the benefit of
class members. Defendants filed a motion for judgment on the pleadings or in
the alternative for summary judgment on January 27, 2000. On April 7, 2000,
the District Court entered an order granting Liberty's motion for judgment on
the pleadings and dismissing plaintiffs' claims under 42 U.S.C. (S) 1981 with
prejudice as time-barred and dismissing their state law claims without
prejudice to re-file in state court if desired. Plaintiffs subsequently filed
motions with the District Court to reconsider its April 17, 2000 order and for
permission to file an amended complaint adding similar claims under 24 U.S.C.
(S) 1982. Liberty opposed this motion. On June 22, 2000, purported class
action litigation with allegations comparable to those in the Moore case was
filed against Liberty in the Circuit Court of Jefferson County, Alabama
(Baldwin v. Liberty National Life Insurance Company, Case No. CV-00-684). The
Baldwin case is currently stayed pending disposition of the Moore case.
On July 3, 2000, the District Court issued an order in the Moore case
granting in part and denying in part the plaintiffs' motions. The District
Court ordered the Moore plaintiffs to file an amended complaint setting forth
their claims under 28 U.S.C. (S)(S) 1981 and 1982 and, if such claims are
timely, any state law claims for breach of contract related to the
discontinuance of debit collections, and dismissed with prejudice all
remaining state law claims of the plaintiffs as time-barred by the common law
rule of repose. On July 14, 2000, plaintiffs filed their amended complaint
with the District Court and Liberty filed a motion to alter or amend the
District Court's July order or, in the alternative, requested that the
District Court certify for purposes of appeal the issue whether the state law
doctrine of repose should be applied to and bar plaintiffs' actions under
(S)(S) 1981 and 1982. The District Court entered such an order on July 21,
2000 and stayed proceedings in Moore pending resolution of Liberty's petition
to the U.S. Circuit Court of Appeals for the Eleventh Circuit. Liberty filed a
petition on July 30, 2000 with the Eleventh Circuit seeking that Court's
permission to appeal the portions of the District Court's July order in Moore
granting the plaintiffs the right to file the amended complaint. The Eleventh
Circuit Court granted Liberty's motion and will consider Liberty's arguments
regarding the applicability of the state law of repose to actions under
12
(S)(S) 1981 and 1982. Five individual cases with similar allegations to those
in the Moore case have been filed against Liberty in various Circuit Courts in
the State of Alabama. In the earliest filed of these individual state court
actions, Walter Moore v. Liberty National Life Insurance Company (Circuit
Court of Dallas County, Alabama, CV-00-306) the Court has entered an order
granting summary judgment in favor of Liberty based upon the doctrine of
repose.
It has been previously reported that on August 18, 2000, a jury in Barbour
County, Alabama Circuit Court returned a verdict of $100,000 compensatory
damages and $3.5 million in punitive damages against Torchmark's subsidiary,
Liberty in Carter v. Liberty National Life Insurance Company (Civil Action No.
CV-99-026). An individual lawsuit filed in March 1999, the Carter case
involved allegations of fraud, misrepresentation, suppression and
negligent/wanton agent hiring, training and supervision practices by Liberty
in connection with the sale of an interest-sensitive life insurance policy.
The plaintiff had asserted that the policy had been purchased based upon agent
representations that it would become paid-up or self sustaining after a
specified number of years. Liberty pursued available motions for post trial
relief in this case and on February 15, 2001, the Circuit Court reduced the
Carter verdict to $100,000 compensatory damages and $700,000 in punitive
damages. Liberty will pursue additional appellate relief in the Carter case.
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 2000.
13
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
The principal market in which Torchmark's common stock is traded is the New
York Stock Exchange. There were 5,991 shareholders of record on December 31,
2000, 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 16--
Shareholders' Equity in the Notes to the Consolidated Financial Statements.
The market prices and cash dividends paid by calendar quarter for the past two
years are as follows:
2000
Market Price
------------
Dividends
Quarter High Low Per Share
------- -------- -------- ---------
1 $28.9375 $18.7500 $ .0900
2 28.7500 21.6250 .0900
3 29.5625 24.0625 .0900
4 41.1875 27.0625 .0900
Year-end closing
price.................$38.4375
1999
Market Price
------------
Dividends
Quarter High Low Per Share
------- -------- -------- ---------
1 $36.6250 $30.6875 $ .0900
2 37.1875 31.2500 .0900
3 36.1250 24.6250 .0900
4 35.9375 25.5625 .0900
Year-end closing
price.................$29.0625
14
Item 6. Selected Financial Data
The following information should be read in conjunction with Torchmark's
Consolidated Financial Statements and related notes reported elsewhere in this
Form 10-K:
(Amounts in thousands except per share and percentage data)
2000 1999 1998 1997 1996
Year ended December 31, ----------- ----------- ----------- ----------- ----------
Premium revenue:
Life................... $1,082,125 $ 1,018,301 $ 959,766 $ 909,992 $ 854,897
Health................. 911,156 824,816 759,910 739,485 732,618
Other ................. 52,929 40,969 33,954 28,527 22,404
Total................. 2,046,210 1,884,086 1,753,630 1,678,004 1,609,919
Net investment income... 472,426 447,337 459,558 429,116 399,551
Realized investment
gains (losses)......... (5,322) (110,971) (57,637) (36,979) 5,830
Total revenue........... 2,515,894 2,226,895 2,157,876 2,071,103 2,016,416
Net operating income(1). 365,292 341,167 324,315 273,730 240,637
Net income from
continuing operations.. 361,833 258,930 255,776 260,429 252,815
Net income.............. 362,035 273,956 244,441 337,743 311,372
Annualized premium
issued:
Life................... 290,743 257,207 244,467 230,379 214,741
Health................. 252,472 192,826 138,899 106,853 100,981
Total................. 543,215 450,033 383,366 337,232 315,722
Per common share:
Basic earnings:
Net operating
income(1)............ 2.85 2.56 2.32 1.97 1.69
Net income from
continuing
operations........... 2.83 1.95 1.83 1.87 1.78
Net income............ 2.83 2.06 1.75 2.43 2.19
Diluted earnings:
Net operating
income(1)............ 2.85 2.55 2.29 1.94 1.67
Net income from
continuing
operations........... 2.82 1.93 1.81 1.84 1.76
Net income............ 2.82 2.04 1.73 2.39 2.17
Cash dividends paid.... 0.36 0.36 0.58 0.59 0.58
Return on average common
equity, excluding
effect of SFAS 115,
Vesta earnings,
discontinued
operations, and
nonrecurring charge.... 16.3% 16.2% 15.1% 18.2% 18.4%
Basic average shares
outstanding............ 128,089 133,197 139,999 139,202 142,460
Diluted average shares
outstanding............ 128,353 133,986 141,352 141,431 143,783
- -------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
As of December 31, ----------- ----------- ----------- ----------- ----------
Cash and invested
assets................. $ 6,506,292 $ 6,202,251 $ 6,417,511 $ 6,473,096 $5,863,163
Total assets............ 12,962,558 12,131,664 11,249,028 11,127,648 9,893,964
Short-term debt......... 329,148 418,394 355,392 347,152 40,910
Long-term debt.......... 365,989 371,555 383,422 564,298 791,880
Shareholders' equity.... 2,202,360 1,993,337 2,259,528 1,932,736 1,629,343
Per common share ...... 17.43 15.10 16.51 13.80 11.69
Per common share
excluding effect of
SFAS 115.............. 18.53 16.32 15.43 12.90 11.42
Annualized premium in
force:
Life................... 1,200,145 1,130,609 1,062,647(2) 1,007,379 946,525
Health................. 1,004,298 884,358 796,863 762,052 748,153
Total................. 2,204,443 2,014,967 1,859,510(2) 1,769,431 1,694,678
- -------------------------------------------------------------------------------------------
(1) Net income from continuing operations, excluding realized investment gains
(losses), the related adjustment to deferred acquisition costs, equity in
Vesta earnings for periods prior to 1999, a one-time gain on the sale of
equipment, and the nonrecurring charge.
(2) Annualized life premium in force excludes $5.3 million representing the
Family Service business sold in 1998.
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Statements. Torchmark cautions readers regarding certain forward-
looking statements contained in the following discussion and elsewhere in this
document, and in any other statements made by, or on behalf of Torchmark
whether or not in future filings with the Securities and Exchange Commission.
Any statement that is not a historical fact, or that might otherwise be
considered an opinion or projection concerning Torchmark or its business,
whether express or implied, is meant as and should be considered a forward-
looking statement. Such statements represent management's opinions concerning
future operations, strategies, financial results or other developments.
Forward-looking statements are based upon estimates and assumptions that are
subject to significant business, economic and competitive uncertainties, many
of which are beyond Torchmark's control. If these estimates or assumptions
prove to be incorrect, the actual results of Torchmark may differ materially
from the forward-looking statements made on the basis of such estimates or
assumptions. Whether or not actual results differ materially from forward-
looking statements may depend on numerous foreseeable and unforeseeable events
or developments, which may be national in scope, related to the insurance
industry generally, or applicable to Torchmark specifically. Such events or
developments could include, but are not necessarily limited to:
1) Deteriorating general economic conditions leading to increased lapses
and/or decreased sales of Torchmark's policies;
2) Regulatory developments, including changes in governmental regulations
(particularly those impacting taxes and changes to the federal Medicare
program that would affect Medicare Supplement insurance) and regulatory
inquiries regarding industrial life insurance;
3) Increased pricing competition;
4) Adverse levels of mortality, morbidity, and utilization of healthcare
services relative to Torchmark's assumptions;
5) The inability of Torchmark to obtain timely and appropriate premium
rate increases for health insurance;
6) Interest rate changes that adversely affect product sales and/or
investment portfolio yield;
7) Adverse litigation results;
8) The inability of Torchmark to achieve the anticipated levels of
administrative and operational efficiencies;
9) The customer response to new products and marketing initiatives; and
10) Financial markets trends that adversely affect sales of Torchmark's
market-sensitive products.
Readers are also directed to consider other risks and uncertainties described
in other documents filed by Torchmark with the Securities and Exchange
Commission.
The following discussion should be read in conjunction with the Selected
Financial Data and Torchmark's Consolidated Financial Statements and Notes
thereto appearing elsewhere in this report.
16
RESULTS OF OPERATIONS
The following is a discussion of Torchmark's operations for the three years
ended December 31, 2000. In the analysis and comparison of Torchmark's
operating results for 1999 and 2000 with 1998, two divestitures that occurred
in 1998 should be taken into account:
a) the divestiture of Waddell & Reed
b) the sale of Family Service
Divestiture of Waddell & Reed. In March, 1998, Waddell & Reed, Torchmark's
asset management subsidiary, completed an initial public offering of
approximately 24 million shares of its common stock. The offering represented
approximately 36% of Waddell & Reed's shares. Net proceeds from the offering
were approximately $516 million after underwriters' fees and expenses. Waddell
& Reed used $481 million of the proceeds to repay existing notes owed to
Torchmark and other Torchmark subsidiaries and retained the remaining $35
million. Torchmark's $481 million proceeds from the note repayments were
invested or used to pay down debt. (See the discussion on Investments on page
29, Liquidity on page 33, and Capital Resources on page 33 of this report.)
The initial public offering resulted in a $426 million gain which was added to
Torchmark's additional paid-in capital. Torchmark retained the remaining 64%
of the Waddell & Reed stock.
On November 6, 1998, Torchmark distributed its remaining 64% investment in
Waddell & Reed through a tax-free spin-off to Torchmark shareholders. Each
Torchmark shareholder of record on October 23, 1998 received a total of .3018
Waddell & Reed shares per Torchmark share. After the spin-off, Torchmark
retained no further ownership interest in Waddell & Reed. As a result of the
transaction, Torchmark incurred $54 million in expenses related to the spin-
off, the majority of which was $50 million of corporate Federal income tax
resulting from the distribution of a portion of the policyholder surplus
account of a Torchmark life subsidiary.
Torchmark has accounted for the spin-off of Waddell & Reed as a disposal of
a segment. Accordingly, Torchmark's financial statements for 1998 and all
prior periods were modified to present the net assets and operating results of
Waddell & Reed as discontinued operations of the disposed segment. The $54
million expense of the spin-off is included in discontinued operations under
the caption "Loss on Disposal." The distribution of the Waddell & Reed shares
resulted in a reduction in Torchmark's shareholders' equity in the approximate
amount of $174 million, consisting of the equity in Waddell & Reed, net of the
36% minority interest. Torchmark's share of Waddell & Reed's earnings for 1998
was $48 million after reduction for the minority interest during the period
subsequent to the initial public offering but before the spin-off.
Sale of Family Service. On June 1, 1998, Torchmark sold Family Service, a
preneed funeral insurer, to an unaffiliated insurance carrier. Consideration
for the sale was $140 million in cash. Torchmark recorded a pretax realized
loss on the sale of approximately $14 million, but incurred a tax expense on
the transaction of $9 million for a total after-tax loss of $23 million. In
connection with the sale, Torchmark agreed to continue to service the policies
in force of Family Service for five years from the sale date for a fee of $2
million per year plus certain variable processing costs. Through May, 1998,
Family Service contributed $25 million in revenues and $5.8 million in pretax
income. Invested assets were $778 million and total assets were $828 million
at the date of the sale.
Summary of Operating Results. Torchmark's management computes a
classification of income called "net operating income." Torchmark's management
focuses on net operating income in evaluating the operating performance of the
company. It differs from net income as reported in the financial statements in
that it excludes unusual and nonrecurring income or loss items and
nonoperating items which distort operating trends. It also excludes
discontinued operations.
The following items were excluded from net income as reported in Torchmark's
financial statements in order to compute net operating income:
1) Realized investment gains and losses and the related adjustment to
deferred acquisition costs, net of tax;
17
2) Net income or loss from the discontinued operations of Waddell & Reed,
including the $54 million nonrecurring expenses of the spin-off;
3) Torchmark's pro rata share of the income or losses related to Vesta in
1998;
4) The nonrecurring loss from the redemption by Torchmark of its debt in
1998 in the amount of $5 million net of tax and the gain from redemption
of debt in 2000 of $.2 million net of tax;
5) A one-time gain on the sale of equipment (included in other income) in
the after-tax amount of $3.3 million in 1999; and
6) The effect of a change in accounting principle which modified the
accounting for an interest rate swap instrument, increasing net income
in the after-tax amount of $16.1 million in 1999.
Additionally, in 1999, Torchmark entered into a life insurance marketing
arrangement with a third party, discussed more fully under the caption Life
Insurance on page 21 of this report. This agreement contained certain cash
guarantees to the third party which would not be recoverable by Torchmark
based on test marketing results. Accordingly, Torchmark recorded a
nonrecurring after-tax operating charge of $13 million, or $.10 per diluted
share in 1999. Because this was an unusual one-time charge, net operating
income has been presented before the charge for comparability.
A reconciliation of net operating income to net income on a per diluted
share basis is as follows:
Reconciliation of Per Share Net Operating
Income to Reported Net Income*
2000 1999 1998
----- ----- -----
Net operating income before nonrecurring charge........ $2.85 $2.55 $2.29
Nonrecurring charge.................................... -- (.10) --
----- ----- -----
Net operating income.................................. 2.85 2.45 2.29
Realized investment losses, net of tax................. (.03) (.54) (.36)
Gain on sale of equipment, net of tax.................. -- .02 --
Equity in Vesta earnings (losses), net of tax.......... -- -- (.12)
Discontinued operations of Waddell & Reed, net of tax.. -- (.01) (.04)
Gain (loss) on redemption of debt, net of tax.......... -- -- (.04)
Change in accounting principle, net of tax............. -- .12 --
----- ----- -----
Net income............................................ $2.82 $2.04 $1.73
===== ===== =====
- --------
* Diluted share basis
Net realized investment losses in 2000 were $3.5 million after-tax. Gross
losses from investments were partially offset by an after-tax gain in the
amount of $4.9 million from the increase in value of Torchmark's interest rate
swap relating to its MIPS, as discussed under the caption Capital Resources on
page 34 of this report. The majority of the 2000 realized losses resulted from
the sale of fixed maturities. See the discussion under the caption Investments
beginning on page 29 of this report for more information on invested assets.
Realized investment losses in 1999 in the after-tax amount of $72 million
included a $41 million after-tax loss from the sale of real estate and a $19
million after-tax loss from the sale of fixed maturities. Realized losses in
1999 also included a $12 million after-tax loss from the reduction in value of
Torchmark's interest rate swap.
Realized investment losses in 1998, which were $51 million net of tax,
included a $23 million after-tax loss from the sale of Family Service, a $24
million after-tax loss on the writedown of Torchmark's Vesta holdings, and a
$3 million after-tax loss from the sale of a portion of the Vesta holdings.
The Vesta transactions are discussed on page 36 and the redemption of
Torchmark debt is discussed under the caption Capital Resources on page 34 of
this report. The change in accounting principle is discussed in Note 15--
Change in Accounting Principle in the Notes to the Consolidated Financial
Statements on page 65 of this report.
18
Torchmark reports basic and diluted earnings per share. Basic earnings per
share are based on average shares outstanding during the period. Diluted
earnings per share assume the exercise of Torchmark's employee stock options
for which the exercise price was lower than the market price during the year
and their impact on shares outstanding. Diluted earnings per share differ from
basic earnings per share in that they are influenced by changes in the market
price of Torchmark stock and the number of options as well as the number of
shares outstanding. Unless otherwise indicated, all references to per share
data in this report are on the basis of diluted shares.
A comparison of Torchmark's basic and diluted earnings per share is as
follows:
Earnings and Earnings Per Share
(Dollar amounts in thousands, except for per share data)
For the Year Ended
December 31,
--------------------------
2000 1999 1998
-------- -------- --------
Net operating income before nonrecurring
charge:
Amount........................................ $365,292 $341,167 $324,315
Per Share:
Basic........................................ 2.85 2.56 2.32
Diluted...................................... 2.85 2.55 2.29
Net operating income:
Amount........................................ 365,292 327,744 324,315
Per Share:
Basic........................................ 2.85 2.46 2.32
Diluted...................................... 2.85 2.45 2.29
Net income:
Amount........................................ 362,035 273,956 244,441
Per Share:
Basic........................................ 2.83 2.06 1.75
Diluted...................................... 2.82 2.04 1.73
Torchmark's revenues in 2000 were $2.52 billion, a 13% increase over 1999
revenues of $2.23 billion. Revenues rose 3% in 1999 over 1998 revenues of
$2.16 billion. After adjustment for realized investment gains and losses in
each year, revenues grew 8% to $2.52 billion in 2000 from $2.33 billion in
1999. They also increased 5% in 1999 over the prior year. Total premium rose
$162 million, or 9%, to $2.05 billion in 2000. Total premium increased 7% in
1999 to $1.88 billion. Life insurance premium grew 6% in 2000 to $1.08
billion, an increase of $64 million. Health premium in 2000 rose 10% to $911
million, an increase of $86 million. Net investment income increased $25
million, or 6%, in 2000 to $472 million. Life premium increased 6% to $1.02
billion and health premium grew 9% to $825 million in 1999. Net investment
income declined 3% in 1999 to $447 million, due primarily to the sale of
Family Service.
Other operating expenses, which consist of insurance administrative
expenses and expenses of the parent company, were $121 million in 2000,
compared with $115 million in 1999 and $117 million in 1998. Other operating
expenses as a percentage of revenues, excluding realized gains and losses,
declined in each period and were 4.8% in 2000, 4.9% in 1999, and 5.3% in 1998.
The components of Torchmark's revenues and operations are described in more
detail in the discussion of Insurance and Investment segments found on pages
21 through 32 of this report.
19
The following table is a summary of Torchmark's net operating income.
Insurance underwriting income is defined by Torchmark management as premium
income less net policy obligations, commissions, acquisition expenses, and
insurance administrative expenses plus other income. Excess investment income
is defined as tax-equivalent net investment income reduced by the interest
credited to net policy liabilities and financing costs. Financing costs
include the interest on Torchmark's debt and the net cost of the Monthly
Income Preferred Securities ("MIPS").
Summary of Net Operating Income
(Dollar amounts in thousands)
2000 1999 1998
---------------- ---------------- ----------------
% of % of % of
Amount Total Amount Total Amount Total
--------- ----- --------- ----- --------- -----
Insurance underwriting
income before other
income, administrative
expenses, and
nonrecurring charge:
Life................... $ 270,663 58.5% $ 263,269 60.5% $ 252,556 60.8%
Health................. 161,116 34.8 144,632 33.3 139,445 33.6
Annuity................ 30,959 6.7 26,831 6.2 23,423 5.6
--------- ----- --------- ----- --------- -----
Total .................. 462,738 100.0% 434,732 100.0% 415,424 100.0%
===== ===== =====
Other income............ 4,650 3,348 4,488
Administrative expenses. (111,817) (104,903) (102,559)
--------- --------- ---------
Insurance underwriting
income excluding
Family Service.......... 355,571 333,177 317,353
Insurance underwriting
income--Family Service.. -0- -0- 1,393
Excess investment income
(tax equivalent basis).. 226,986 215,387 206,119
Corporate expense........ (9,369) (10,166) (12,061)
Goodwill amortization.... (12,075) (12,075) (12,075)
Tax equivalency
adjustment.............. (8,655) (11,487) (11,143)
--------- --------- ---------
Pretax net operating
income................. 552,458 514,836 489,586
Income tax............... (187,166) (173,669) (165,271)
--------- --------- ---------
Net operating income
before nonrecurring
charge................. 365,292 341,167 324,315
Nonrecurring charge, net
of tax.................. -0- (13,423) -0-
--------- --------- ---------
Net operating income.... $ 365,292 $ 327,744 $ 324,315
========= ========= =========
Net operating income
before nonrecurring
charge per diluted
share.................. $ 2.85 $ 2.55 $ 2.29
========= ========= =========
Net operating income per
diluted share.......... $ 2.85 $ 2.45 $ 2.29
========= ========= =========
On a per share basis, Torchmark's net operating income before nonrecurring
charge grew 12% in 2000 and 11% in 1999. In dollar amounts, Torchmark's net
operating income before nonrecurring charge rose 7% in 2000 after a 5%
increase in 1999. Per share growth exceeded growth in the dollar amounts as a
result of share buybacks in both periods. Contributing to the growth in net
operating income were gains in insurance underwriting income and excess
investment income. Insurance underwriting income grew 7% in 2000 to $356
million. Excluding Family Service in 1998, insurance underwriting income rose
5% in 1999 to $333 million. Excess investment income also grew in both 2000
and 1999. The 2000 increase of 5% in excess investment income was a result of
the 5% growth in net investment income. Excess investment income increased in
1999 because of lower policy requirements and lower financing costs in 1999.
Torchmark's core operations are segmented into insurance underwriting
operations and investment operations. Insurance underwriting activities are
further segmented into life insurance, health insurance, and annuity product
groups. A detailed discussion of each of Torchmark's segments follows.
20
Life insurance. Life insurance is Torchmark's largest segment, with life
premium representing 53% of total premium and with life underwriting income
before other income, administrative expense, and nonrecurring charge,
representing 59% of the total.
Because Family Service was sold on June 1, 1998, information for 1998 in the
following discussions of Torchmark's life insurance operations exclude Family
Service for comparability.
Life insurance premium rose 6% in 2000 to $1.08 billion from $1.02 billion
in 1999. Life premium increased 6% in 1999 from $957 million. Sales of life
insurance, in terms of annualized premium, were $291 million in 2000,
increasing 13% over 1999 sales of $257 million. This compares with 5% growth
in 1999 sales over 1998 sales of $244 million. Annualized life premium in
force was $1.20 billion at December 31, 2000, compared with $1.13 billion at
1999 year end, an increase of 6%. Annualized premium in force grew 6% in 1999
from $1.06 billion at year-end 1998. Annualized premium in force and issued
data includes amounts collected on certain interest-sensitive life products
which are not recorded as premium income but excludes single-premium income
and policy account charges.
Life insurance products are marketed through a variety of distribution
channels. The following table presents life insurance premium by distribution
method during each of the three years ended December 31, 2000.
LIFE INSURANCE
Premium by Distribution Method
(Dollar amounts in thousands)
2000 1999 1998
---------------- ---------------- --------------
% of % of % of
Amount Total Amount Total Amount Total
---------- ----- ---------- ----- -------- -----
Liberty National Exclusive
Agency.................... $ 294,197 27.2% $ 288,330 28.3% $282,389 29.5%
Direct Response............ 267,899 24.7 245,824 24.1 221,371 23.1
American Income Exclusive
Agency.................... 231,149 21.4 217,367 21.3 204,310 21.3
United American Independent
Agency.................... 42,305 3.9 37,375 3.7 36,925 3.9
United American Exclusive
Agency.................... 19,393 1.8 19,318 1.9 18,798 2.0
Other...................... 227,182 21.0 210,087 20.7 193,481 20.2
---------- ----- ---------- ----- -------- -----
$1,082,125 100.0% $1,018,301 100.0% $957,274 100.0%
========== ===== ========== ===== ======== =====
21
Direct Response marketing is conducted through direct mail, co-op mailings,
television and consumer magazine advertising, and direct mail solicitations
endorsed by groups, unions and associations. It markets a line of life
products primarily to juveniles, their parents, and other adults over age 50
with face amounts of around $10 thousand on average. The Direct Response
operation is characterized by lower acquisition costs than Torchmark's agency-
based marketing systems. It accounted for almost 25% of Torchmark's life
insurance premium during 2000. In each of the three years 1998 through 2000,
the Direct Response distribution center had Torchmark's highest growth in life
insurance premium in dollar amount. Direct Response life premium was $268
million in 2000, increasing 9% over 1999 premium of $246 million. Direct
Response life premium in 1999 grew 11% over 1998 premium of $221 million.
Annualized premium sold by the Direct Response operation was $113 million in
2000, increasing 18% over 1999 sales of $96 million, due in part to a higher
average premium per policy issued. Sales in 1999 rose 3% over 1998 sales of
$94 million. Sales growth in 1999 had declined from 1998 due in part to the
withdrawal from the under-age 40 adult direct mail market because of
unfavorable financial results from that market. Direct mail sales to ages 40
to 50 were interrupted for part of the year while those products were repriced
to improve their financial results. The annualized life premium issued by the
Direct Response group represented 39% of Torchmark's total life sales in 2000.
Direct Response annualized life premium in force rose 8% to $306 million at
December 31, 2000 from $283 million a year earlier. At December 31, 2000,
Direct Response life annualized premium in force was 26% of Torchmark's total,
second only to that of the Liberty National Exclusive Agency. Direct Response
life insurance annualized premium in force grew 9% in 1999.
In addition to growth in life insurance sales and premium, the Direct
Response operation has promoted growth in some of Torchmark's agent-based
distribution channels through marketing support. This support includes
providing sales leads and assisting in agent recruiting. This assistance has
contributed indirectly to the growth in premium in other Torchmark
distribution agencies. For example, Direct Response marketing support
indirectly contributed to the increase in health sales by the United American
Exclusive Agency through its assistance in the agent recruiting process and by
providing leads to the agents.
The Liberty National Exclusive Agency distribution system represented
Torchmark's largest contribution to life insurance premium income in each of
the three years presented, with 2000 premium of $294 million representing 27%
of Torchmark's total life premium. The annualized life premium in force of the
Liberty Agency was $312 million at year-end 2000, compared with $307 million
and $298 million at year-ends 1999 and 1998, respectively. Life premium sales,
in terms of annualized premium issued, grew 4% during 2000 to $54 million,
compared with 13% growth in 1999. Sales growth in the Liberty Agency is
largely attributable to growth in the number of agents. Liberty's agent count
increased from 1,750 agents at year-end 1997 to 1,829 agents at year-end 1998,
an increase of 5%. They further increased 4% to 1,902 at year-end 1999 and 7%
to 2,032 at year end 2000. Ongoing agent recruitment efforts and training
programs, which help to improve agent retention, have been responsible for the
growth in this Agency. Management believes that the continued recruiting of
new agents and the retention of productive agents are critical to the
continued growth of sales in controlled agency distribution systems.
22
The American Income Exclusive Agency is a distribution system that focuses
on members of labor unions, credit unions, and other associations for its life
insurance sales. It is a high profit margin business characterized by lower
policy obligation ratios. At December 31, 2000, premium from this system
accounted for 21% of Torchmark's total life premium. In 2000, American
Income's premium rose 6% to $231 million, after a 6% increase in 1999 to $217
million. Annualized life premium in force was $245 million at year-end 2000,
an increase of 6% over 1999 premium in force of $231 million. Annualized life
premium in force rose 7% in 1999. Sales, in terms of annualized premium
issued, were $57 million in 2000, compared with $54 million in both 1999 and
1998. These sales represented a 5% increase in 2000, compared with a 1%
increase in 1999 and a 3% decrease in 1998. The turnaround in sales for this
agency was a result of the growth in the number of agents. An 8% decline in
agent count was experienced in 1998 to 1,222 agents at December 31, 1998, and
a further decline in the first half of 1999 resulted in 1,160 agents at June
30, 1999. However, changes in American Income's marketing organization were
implemented in 1999 to reverse the decline in the number of agents. As a
result, the American Income Agency had 1,197 agents at year-end 1999 and 1,352
agents at year-end 2000, representing a 3% increase in the second half of 1999
and a 13% increase in agency size in 2000. American Income's marketing
organization continues to implement efforts to improve agent recruiting,
retention, and productivity in order to increase the size of this Agency.
The United American Independent and Exclusive Agencies together represented
about 6% of Torchmark's total life premium in 2000. On a combined basis, life
premium rose 9% to $62 million in 2000 after a 2% increase in 1999 from $56
million to $57 million. Annualized life premium issued in 2000 was $30
million, increasing 63% over 1999 issues of $19 million. The United American
Independent Agency represented Torchmark's largest growth on a percentage
basis of any component agency in life premium income and life sales in 2000.
Life premium income rose 13% to $42 million and life sales gained 93% to $26
million.
Torchmark's Other life insurance distribution system consists of its
Military Agency, United Investors Agency, and other small miscellaneous sales
agencies. Torchmark's Military Agency consists of a nationwide independent
agency whose sales force is comprised of former commissioned and
noncommissioned military officers who sell exclusively to commissioned and
noncommissioned military officers and their families. This business consists
of whole life products with term insurance riders and is characterized by low
lapse rates. The United Investors Agency is comprised of several independent
agencies, including the sales representatives of Waddell & Reed. Life premium
income from the Other distribution category grew 8% to $227 million in 2000
and 9% to $210 million in 1999. Life premium income from the Other group
accounted for 21% of Torchmark's total life insurance premium income.
Annualized life premium in force grew 8% in 2000 to $262 million, after having
increased 8% to $243 million in 1999. A major factor in the growth of premium
income and in-force premium relates to the high persistency associated with
the Military business. Annualized premium sold during 2000 in the Other
distribution category was $37 million, flat with both 1999 and 1998 sales
which were also $37 million in each year.
In addition to the growth in life insurance sales, this agency has also
increased production of variable life collections. In 2000, collections were
$41 million, representing a 28% increase over 1999 collections of $32 million.
In 1999, these collections rose 77%. Although variable life collections are
not included in premium in force data, they are indicative of growth in the
variable life account balance. Indirectly, they add to premium revenue through
the policy account charges for insurance coverage and administration as the
account balance grows. At December 31, 2000, the variable life account balance
was $158 million, rising 14% over the prior year end.
23
LIFE INSURANCE
Summary of Results
(Dollar amounts in thousands)
2000 1999 1998
------------------- ------------------- ------------------
% of % of % of
Amount Premium Amount Premium Amount Premium
---------- ------- ---------- ------- --------- -------
Premium and policy
charges................ $1,082,125 100.0% $1,018,301 100.0% $ 957,274 100.0%
Policy obligations...... 711,833 65.8 666,122 65.4 618,867 64.7
Required interest on
reserves............... (246,989) (22.8) (229,287) (22.5) (215,185) (22.5)
---------- ----- ---------- ----- --------- -----
Net policy obligations. 464,844 43.0 436,835 42.9 403,682 42.2
Commissions and premium
taxes.................. 59,754 5.5 56,341 5.5 57,364 6.0
Amortization of
acquisition costs...... 188,268 17.4 170,444 16.7 158,298 16.5
Required interest on
deferred acquisition
costs.................. 98,596 9.1 91,412 9.0 85,374 8.9
---------- ----- ---------- ----- --------- -----
Total expense.......... 811,462 75.0 755,032 74.1 704,718 73.6
---------- ----- ---------- ----- --------- -----
Insurance underwriting
income before other
income and
administrative
expenses, excluding
Family Service and
nonrecurring charge.... 270,663 25.0% 263,269 25.9% 252,556 26.4%
===== ===== =====
Nonrecurring charge..... -0- (20,650) -0-
Family Service insurance
underwriting income
before other income and
administrative
expenses............... -0- -0- 2,187
---------- ---------- ---------
Insurance underwriting
income before other
income and
administrative
expenses............... $ 270,663 $ 242,619 $ 254,743
========== ========== =========
In the third quarter of 1999, Reader's Digest Association and Torchmark
entered into an agreement to market Torchmark life insurance products to
certain Reader's Digest customers. These products were marketed through
Torchmark's Direct Response operation, and required Torchmark to guarantee
specified compensation to Reader's Digest, regardless of marketing success.
Test marketing began in the fourth quarter of 1999. The less than favorable
results from these tests indicated that it would be unlikely that Torchmark
would recover the full amount of compensation guaranteed to Reader's Digest
under the terms of the agreement. As a result, Torchmark recorded a
nonrecurring operating charge of $21 million in the fourth quarter of 1999.
This charge represented $13 million after tax or $.10 per diluted share.
Torchmark has maintained its relationship with Reader's Digest and has used
its subscriber lists in selective marketing of Torchmark insurance products
and intends to continue to do so. However, Torchmark will only incur its
normal solicitation costs on future business and will have no further costs
related to the guaranteed compensation.
Life insurance gross margins have been presented in the above table to
remove the effect of Family Service underwriting income in 1998 and the 1999
nonrecurring charge, which distort comparisons. Excluding these items, gross
margins, as indicated by insurance underwriting income before other income and
administrative expense, increased 3% in 2000 to $271 million after having
risen 4% in 1999 to $263 million. As a percentage of life insurance premium,
life insurance gross margins were 26% in both 1999 and 1998, but were 25% in
2000. One factor in the 1% decline in 2000 is the reduction in underwriting
income margins for Direct Response. As a percentage of premium, Direct
Response underwriting income was 26.3% in 2000, compared with 27.9% a year
earlier. Additionally, an increase in policy obligation ratios was experienced
in the Other Category in the first half of 2000, which appears to have been a
short-term aberration. Fluctuations in obligation ratios are normal in the
life insurance industry.
24
Health Insurance. Torchmark markets its supplemental health insurance
products through a number of distribution channels. The following table
indicates health insurance premium income by distribution method during each
of the three years ended December 31, 2000.
HEALTH INSURANCE
Premium by Distribution Method
(Dollar amounts in thousands)
2000 1999 1998
-------------- --------------- --------------
% of % of % of
Amount Total Amount Total Amount Total
-------- ----- --------- ----- -------- -----
United American Independent
Agency....................... $442,370 48.6% $ 427,023 51.8% $417,556 54.9%
United American Exclusive
Agency....................... 254,267 27.9 194,594 23.6 150,602 19.8
Liberty National Exclusive
Agency....................... 151,363 16.6 143,857 17.4 135,861 17.9
American Income Exclusive
Agency....................... 48,296 5.3 47,564 5.8 47,074 6.2
Direct Response............... 14,860 1.6 11,778 1.4 8,817 1.2
-------- ----- --------- ----- -------- -----
$911,156 100.0% $ 824,816 100.0% $759,910 100.0%
======== ===== ========= ===== ======== =====
Premium for the health insurance segment increased 10% to $911 million in
2000 over 1999 and 9% to $825 million in 1999. Annualized health premium in
force grew 14% to $1.00 billion at December 31, 2000 over the previous year-
end balance of $884 million. Health premium in force rose 11% during 1999.
Sales of health insurance, in terms of annualized premium issued, were $252
million in 2000, increasing 31% over 1999 sales of $193 million. Sales in 1999
rose 39% over the prior year. Sales for 2000 marked the third consecutive year
of 30% or more growth in health insurance sales. Sales of health insurance
have accelerated greatly in these years due to increases in sales of Medicare
Supplement policies.
Health products sold by Torchmark insurance companies include Medicare
Supplement, cancer, long-term care, and other under-age-65 limited-benefit
supplemental medical and hospitalization products. As a percentage of
annualized health premium in force at December 31, 2000, Medicare Supplement
accounted for 73% and cancer 17%. The table below presents Torchmark's health
insurance annualized premium in force by major product category at December
31, 2000 and for the two preceding years.
HEALTH INSURANCE
Annualized Premium in Force by Product
(Dollar amounts in thousands)
December 31,
------------------------------------------------
2000 1999 1998
---------------- -------------- --------------
% of % of % of
Amount Total Amount Total Amount Total
---------- ----- -------- ----- -------- -----
Medicare Supplement........... $ 728,918 72.6% $630,915 71.3% $553,737 69.5%
Cancer........................ 169,013 16.8 153,777 17.4 144,900 18.2
Other......................... 106,368 10.6 99,666 11.3 98,226 12.3
---------- ----- -------- ----- -------- -----
Total....................... $1,004,299 100.0% $884,358 100.0% $796,863 100.0%
========== ===== ======== ===== ======== =====
25
Medicare Supplement insurance is sold primarily by the United American
Exclusive Agency and the United American Independent Agency. Health sales in
both agencies have grown significantly in the past three years. The United
American Exclusive Agency is Torchmark's fastest growing agency in terms of
health premium sales. The Exclusive Agency sold $145 million in annualized
health premium in 2000, a 41% increase over the prior year. Health sales for
this Agency rose 60% in 1999 to $103 million after having increased 62% in
1998. This Agency accounted for $60 million of the $86 million in health
premium growth in 2000, or 69%, adding primarily Medicare Supplement premium.
It also was instrumental in the growth of health annualized premium in force
in both 2000 and 1999, accounting for $79 million of the $120 million growth
in 2000 and adding $58 million to health premium in force in 1999. This Agency
represented 31% of Torchmark's annualized health premium in force at
December 31, 2000, compared with 26% one year earlier and 22% two years ago.
The United American Exclusive Agency has grown very rapidly in recent years.
At December 31, 2000, there were 3,661 agents, compared with 2,354 agents at
year-end 1999 and 1,752 agents at year-end 1998. This represents an increase
in Agency size of 56% in 2000 and 34% in 1999.
The United American Independent Agency continues to represent the largest
amount of Torchmark's health premium in force and is also growing rapidly. The
Agency's $467 million of annualized health premium in force at December 31,
2000, of which $436 million was Medicare Supplement premium in force, was 46%
of Torchmark's total health premium in force. Health sales by the United
American Independent Agency, in terms of annualized premium issued, were $85
million in 2000, a 25% increase over 1999. Sales rose 35% to $68 million in
1999.
Medicare Supplement policies are highly regulated at both the federal and
state levels with standardized benefit plans, limits on first year agent
compensation, and mandated minimum loss ratios. However, they remain a popular
supplemental health policy with the country's large and growing group of
Medicare beneficiaries. About 85% of all Medicare beneficiaries have Medicare
Supplements to cover at least some of the deductibles and coinsurance for
which the federal Medicare program does not pay. During the last few years,
Torchmark has focused on developing its United American Exclusive Agency to
serve this market. Use of targeted marketing support and increased agent
recruiting have led to increased sales. Because of loss ratio regulation,
underwriting margins on Medicare Supplements are less than on Torchmark's life
business. However, due to United American's low cost, service-oriented
customer service and claims administration, as well as its economies of scale,
it is a profitable line of business.
Until recently the primary competition for Medicare Supplement sales had
come from Medicare health maintenance organizations (HMO's), the managed care
alternative to traditional fee-for-service Medicare which eliminated the need
for a supplemental policy. However, in the last few years, growing public
dissatisfaction with managed care, increased medical cost inflation and
increased Federal Government regulatory pressures on Medicare HMO's have
caused an increasing number of HMO's to withdraw from the market, reducing
that competition. Other regulatory issues continue to affect the Medicare
Supplement market. Medical cost inflation and changes to the Medicare program
cause the need for annual rate increases, which generally require state
insurance department approval. In addition, Congress and the Federal
Administration have begun studying ways to restructure the Medicare program.
Therefore, it is likely that changes will be made to the Medicare program at
sometime in the future. However, it appears that there will continue to be an
important role for private insurers in helping senior citizens cover their
healthcare costs. As a result, Medicare Supplements should continue as a
popular product for senior-age consumers.
26
Cancer insurance premium in force rose 10% in 2000 to $169 million, compared
with 6% growth in 1999. Sales of this product declined in 2000 to $10 million
from $11 million in sales in 1999. Sales in 1998 were also $10 million. A
portion of the growth in cancer annualized premium in force has been
attributable to premium rate increases to offset increased health care costs.
Cancer insurance products are sold primarily by the Liberty National Exclusive
Agency. This Agency represented 86% of Torchmark's total cancer annualized
premium in force at December 31, 2000.
Annualized premium in force for other health products grew 7% in 2000 to
$106 million, after rising 1% in 1999 to $100 million. Other health sales rose
38% in 2000 to $41 million, after having increased 13% in 1999.
HEALTH INSURANCE
Summary of Results
(Dollar amounts in thousands)
2000 1999 1998
----------------- ----------------- -----------------
% of % of % of
Amount Premium Amount Premium Amount Premium
-------- ------- -------- ------- -------- -------
Premium.................. $911,156 100.0% $824,816 100.0% $759,910 100.0%
Policy obligations....... 591,022 64.9 535,901 65.0 482,496 63.5
Required interest on
reserves................ (15,736) (1.7) (17,383) (2.1) (20,440) (2.7)
-------- ----- -------- ----- -------- -----
Net policy obligations... 575,286 63.2 518,518 62.9 462,056 60.8
Commissions and premium
taxes................... 91,069 10.0 84,913 10.3 87,828 11.5
Amortization of
acquisition costs....... 68,778 7.5 64,046 7.8 59,208 7.8
Required interest on
deferred acquisition
costs................... 14,907 1.6 12,707 1.5 11,373 1.5
-------- ----- -------- ----- -------- -----
Total expense........... 750,040 82.3 680,184 82.5 620,465 81.6
-------- ----- -------- ----- -------- -----
Insurance underwriting
income before other
income and
administrative expenses. $161,116 17.7% $144,632 17.5% $139,445 18.4%
======== ===== ======== ===== ======== =====
Health insurance underwriting income before other income and administrative
expense rose 11% in 2000 to $161 million, after having increased 4% in 1999.
As a percentage of premium, underwriting income before other income and
administrative expense remained steady at approximately 18% throughout the
three-year period ending in 2000. Medicare Supplement margins are restrained
by the federally mandated minimum loss ratio of 65% and by competition. Cancer
product obligation ratios have increased in recent years primarily due to
higher loss ratios experienced on a closed block of business. Management has
actively sought timely and adequate premium rate increases from regulatory
authorities to offset these cost increases. As a result, margins on cancer
business improved slightly in 2000. Torchmark continues to seek such rate
increases to maintain margins on this business.
27
Annuities. Annuity products are marketed by Torchmark to service a variety
of needs, including retirement income and long-term, tax-deferred growth
opportunities. Torchmark's annuities are sold almost entirely by the United
Investors Agency, a component of Torchmark's Other distribution category. This
Agency consists of the Waddell & Reed sales force which markets United
Investors annuities and other products under a marketing agreement. In 2000,
this Agency collected $622 million of Torchmark's total $650 million in
annuity collections, or 96%. The United Investors Agency accounted for almost
99% of total annuity policy charges in 2000. Annuities are also marketed by
the United American Independent Agency, which collected $24 million in annuity
deposits in 2000, compared with $56 million in 1999.
Annuities are sold on both a fixed and variable basis. Fixed annuity
deposits are held and invested by Torchmark and are obligations of the
company. Variable annuity deposits are invested at the policyholder's
direction into his choice among a variety of mutual funds, which vary in
degree of investment risk and return. A fixed annuity investment account is
also available as a variable annuity investment option. Investments pertaining
to variable annuity deposits are reported as "Separate Account Assets" and the
corresponding deposit balances for variable annuities are reported as
"Separate Account Liabilities."
Annuity premium is added to the annuity account balance as a deposit and is
not reflected in income. Revenues on both fixed and variable annuities are
derived from charges to the annuity account balances for insurance risk,
administration, and surrender, depending on the structure of the contract.
Variable accounts are also charged an investment fee and a sales charge.
Torchmark benefits to the extent these policy charges exceed actual costs and
to the extent actual investment income exceeds the investment income which is
credited to fixed annuity policyholders.
The following table presents the annuity account balance at each year end
and the annuity collections for each year for both fixed and variable
annuities, excluding Family Service.
Annuity Deposit Balances Annuity Collections
-------------------------- --------------------------
(Dollar amounts in (Dollar amounts in
millions) thousands)
2000 1999 1998 2000 1999 1998
-------- -------- -------- -------- -------- --------
Fixed..................... $ 661.6 $ 677.5 $ 647.3 $ 41,617 $ 71,696 $ 64,687
Variable.................. 3,583.6 3,274.9 2,343.5 608,251 392,769 299,005
-------- -------- -------- -------- -------- --------
Total.................... $4,245.2 $3,952.4 $2,990.8 $649,868 $464,465 $363,692
======== ======== ======== ======== ======== ========
Collections of fixed annuity premium were $42 million in 2000, compared with
$72 million in 1999, a 42% decrease. Fixed annuity premium collections rose
11% in 1999 from $65 million in 1998. Management believes that the interest-
rate environment is one factor in the sales of fixed annuities. As rates fall,
alternative investments including variable annuities become more attractive.
In 1999, as interest rates increased, fixed annuities became more desirable
relative to alternative investments. Even though rates continued to rise in
2000, a decline in fixed annuity sales resulted from the loss of a key
independent agent from the United American Independent Agency. This decline is
expected to be temporary as management is in the process of redirecting
annuity sales efforts in this Agency. The fixed annuity deposit balance
declined 2% in 2000 to $662 million at year end. It rose 5% in the prior year
from $647 million at year-end 1998 to $677 million at the end of 1999.
Variable annuity collections rose 55% to $608 million in 2000, from $393
million in the prior year. Variable collections rose 31% from $299 million in
1998. The strength in financial markets throughout most of 2000 and the two
preceding years has had a positive influence on sales of variable annuities in
each period. The variable annuity account balance continues to grow. This
balance increased 9% in 2000 from $3.3 billion at December 31, 1999 to $3.6
billion at year-end 2000. This balance had previously increased 40% in 1999
and 29% in 1998. Strong financial markets in all of these periods contributed
greatly to the growth, although some weakening in markets was experienced in
the latter part of 2000. Variable accounts are valued based on the market
values of the underlying securities. The additional collections in each year
also added to the balances.
28
ANNUITIES
Summary of Results
(Dollar amounts in thousands)
2000 1999 1998
-------- -------- --------
Policy charges......................................... $ 52,929 $ 40,969 $ 33,594
Policy obligations..................................... 36,627 34,524 34,662
Required interest on reserves.......................... (42,688) (40,991) (42,171)
-------- -------- --------
Net policy obligations............................... (6,061) (6,467) (7,509)
Commissions and premium taxes.......................... 2,116 759 510
Amortization of acquisition costs...................... 17,791 13,310 11,561
Required interest on deferred acquisition costs........ 8,124 6,536 5,609
-------- -------- --------
Total expense........................................ 21,970 14,138 10,171
-------- -------- --------
Insurance underwriting income before other income
and administrative expenses, excluding Family Service. 30,959 26,831 23,423
Family Service insurance underwriting income before
other income and administrative expenses.............. -0- -0- 98
-------- -------- --------
Insurance underwriting income before other income
and administrative expenses........................... $ 30,959 $ 26,831 $ 23,521
======== ======== ========
Annuity underwriting income excluding Family Service and before other income
and administrative expense has grown steadily throughout each of the years
1998 through 2000. This underwriting income was $31 million in 2000 and $27
million in 1999, each representing a 15% increase over the prior year. Policy
charges have also grown in each period, rising 29% in 2000 and 22% in 1999.
Growth in policy charges is primarily related to the growth in the size of the
account balance, but is also attributable to the increase in the number of
annuity contracts in force and the cumulative effect of the growth in sales
over the past few years upon which the sales charge is based.
Investments. The following table summarizes Torchmark's investment income
and excess investment income.
Analysis of Excess Investment Income
(Dollar amounts in thousands)
2000 1999 1998
---------- ---------- ----------
Net investment income.................. $ 472,426 $ 447,337 $ 459,558
Tax equivalency adjustment............. 8,655 11,487 11,143
---------- ---------- ----------
Tax equivalent investment income...... 481,081 458,824 470,701
Required interest on net insurance
policy liabilities:
Interest on reserves.................. (305,413) (287,661) (296,696)
Interest on deferred acquisition
costs................................ 121,627 110,655 103,481
---------- ---------- ----------
Net required........................ (183,786) (177,006) (193,215)
Financing costs........................ (70,309) (66,431) (71,367)
---------- ---------- ----------
Excess investment income............... $ 226,986 $ 215,387 $ 206,119
========== ========== ==========
Mean invested assets (at amortized
cost)................................. $6,581,601 $6,319,465 $6,353,279
Average net insurance policy
liabilities........................... 3,129,892 3,066,351 3,261,982
Average debt (including MIPS).......... 924,729 965,728 1,000,063
29
Excess investment income represents the profit margin attributable to
investment operations and cash flow management. It is defined as net
investment income on a tax-equivalent basis reduced by the interest cost
credited to net policy liabilities and the interest cost associated with
capital funding or "financing costs." Excess investment income is increased in
a number of ways: an increase in investment yields over the rates credited to
policyholders' liabilities or in relationship to the rates applicable to
Torchmark debt, growth in invested assets in relation to policy liabilities
and debt, and the efficient use of capital resources and cash flow.
Net investment income increased 6% to $472 million in 2000. In 1999, net
investment income declined 3% to $447 million after rising 7% to $460 million
in 1998. On a tax-equivalent basis, in which the yield on tax-exempt
securities is adjusted to produce a yield equivalent to the pretax yield on
taxable securities, investment income gained 5% in 2000, after declining 3% in
1999 and rising 7% in 1998. The 2000 increase in investment income resulted
from a combination of the growth in mean invested assets and an increase in
yield. Mean invested assets, computed based on book value, rose 4% to $6.6
billion in 2000 over the prior year, as new cash flow was invested primarily
in taxable fixed maturities. The mean fixed maturity balance rose $381 million
or 7% to $6.1 billion for 2000. The 2000 growth in mean invested assets was
achieved even though $147 million was used to buy Torchmark stock and $95
million was used to pay down long and short-term debt. Higher interest rates
in financial markets caused yields on the fixed maturity portfolio to rise 8
basis points in 2000 to 7.47%. The 1999 decline in investment income was a
result of the sale of Family Service in the second quarter of 1998 and
repurchases of Torchmark stock since late 1998. The Family Service sale
resulted in the investment of approximately $140 million proceeds, producing
an additional $10 million of investment income in 1999, compared with
incremental investment income of $6 million in 1998. However, the 1998 tax-
equivalent net investment income also included $22 million earned on Family
Service assets which were not included in 1999. Mean invested assets were flat
in 1999, as the growth in 1999 invested assets from reinvested cash flows was
essentially offset by the loss of Family Service's $778 million in invested
assets when compared with the prior year.
Excess investment income increased 5% in both 2000 and 1999. Because of the
effect of repurchases of Torchmark stock, excess investment income on a per
share basis increased 10% in both 2000 and 1999. The 5% increase in 2000
correlated closely with the change in tax-equivalent investment income for the
same period. While the 1998 sale of Family Service caused a reduction in 1999
investment income when compared with 1998, it had little effect on the excess
investment income comparison in 1999 with 1998. The reduction in required
interest on Family Service's policy liabilities offset the loss in investment
income. The 1999 increase in excess investment income resulted primarily from
decreased financing costs, due to debt paydowns.
During 1999, Torchmark entered into two transactions to dispose of the
majority of its investment real estate. Total consideration for the combined
transactions was $123 million of which $111 million was cash. The real estate
dispositions resulted in an after-tax loss of $41 million. After the sales,
Torchmark retained $16 million in investment real estate, of which $8 million
was represented by properties partially occupied by Torchmark subsidiaries. At
December 31, 2000, Torchmark held $15 million in investment real estate.
Portfolio adjustments resulting in $8 million in after-tax capital losses
were taken in 2000. These losses were partially offset, however, by a $5
million after-tax gain from the increase in market value of the interest-rate
swap associated with Torchmark's MIPS, discussed in more depth under the
caption Capital Resources found on page 34 of this discussion. In 1999, in
addition to the real estate capital losses, Torchmark also generated $19
million in after-tax losses during 1999 from the planned sale of fixed
maturities. These losses allowed Torchmark to carry back and recover capital
gains taxes paid in prior years. Realized losses in 1999 also included a $12
million after-tax loss from the interest-rate swap on Torchmark's MIPS.
While yields as measured by returns on U.S. Treasury securities fell
substantially during 2000, corporate spreads widened and afforded investors
the opportunity to increase nominal and effective returns. New investments in
fixed-maturity securities, which totaled $1.1 billion in 2000, $2.1 billion in
1999, and $1.8 billion in 1998, were made at an effective compounded yield of
8.07% in 2000, compared with an effective compounded yield of 7.54% in 1999
and 7.26% in 1998. These yields equate to nominal yields on acquisition of
7.87%, 7.38%, and 7.13%, respectively, for 2000, 1999, and 1998. The size of
acquisitions in the current year is not comparable with the prior year since
1999 included proceeds from tax motivated bond sales and from the sale of real
estate.
30
With the "flat" yield curve available much of the year, higher returns were
possible in spite of a shortening of maturities. The average life of 2000
acquisitions was 7.7 years, compared with 14.9 years in 1999 and 20.7 years in
1998. Purchases of fixed-maturity investments with shorter maturities caused
the average life of the portfolio to decline to 11.8 years at year end 2000,
compared with 12.7 years at year-end 1999 but above the year-end 1998 level of
8.8 years.
With 2000 acquisitions made at yields in excess of the portfolio average,
the nominal portfolio yield increased to 7.47%, compared with 7.39% during
1999 and 7.42% in 1998. Emphasis continues to be on marketable, medium quality
investments. Approximately 92% of invested assets are fixed-maturity
securities, and 94% of these holdings are classified as investment grade by
the rating agencies. The NAIC considers 95% of the portfolio investment grade.
The portfolio is highly marketable, although its value fluctuates with changes
in interest rates. At year end 2000, the unrealized loss of $236 million
compares with an unrealized loss of $275 million at the end of 1999 and an
unrealized gain of $249 million at the end of 1998. Distribution of maturities
is as follows:
2000 1999
----- -----
Short terms and under 1 year................................ 4.5% 4.2%
2-5 years................................................... 15.6 13.6
6-10 years.................................................. 43.7 39.7
11-15 years................................................. 8.5 11.0
16-20 years................................................. 3.7 5.8
Over 20 years............................................... 24.0 25.7
----- -----
100.0% 100.0%
===== =====
With an emphasis on fixed-maturity investments, the percentage of holdings
in other types of securities is inconsistent with industry data. The following
table presents Torchmark's components of invested assets compared with the
latest industry data:
Torchmark
--------------------
Amount Industry %
(in thousands) % (1)
-------------- ----- ----------
Bonds & short terms......................... $6,050,061 93.6% 74.2%
Equities.................................... 543 -0- 5.2
Mortgage loans.............................. 118,642 1.8 12.0
Real estate................................. 15,483 .2 1.3
Policy loans................................ 255,320 3.9 5.2
Other invested assets....................... 31,154 .5 2.1
---------- ----- -----
$6,471,203 100.0% 100.0%
========== ===== =====
- --------
(1) Latest data available from the American Council of Life Insurance.
31
Market Risk Sensitivity. Market risk is the risk that the value of a
security will change because of a change in market conditions. Torchmark's
primary exposure to market risk is interest rate risk, which is the risk that
a change in a security's value could occur because of a change in interest
rates. This risk is significant to Torchmark's investment portfolio because
its fixed-maturity holdings amount to 92% of total investments. The effects of
interest rate fluctuations on fixed investments are reflected on an after-tax
basis in Torchmark's shareholders' equity because these investments are marked
to market.
The actual interest rate risk to Torchmark is reduced because the effect
that changes in rates have on assets is offset by the effect they have on
insurance liabilities and on debt. Interest assumptions are used to compute
the majority of Torchmark's insurance liabilities. These insurance
liabilities, net of deferred acquisition costs, were $3.2 billion and debt was
$.7 million at December 31, 2000, compared with fixed-maturity investments of
$6.2 billion at amortized cost at the same date. Because of the long-term
nature of insurance liabilities, temporary changes in value caused by rate
fluctuations have little bearing on ultimate obligations. Insurance
liabilities and debt are not marked to market.
Market risk is managed in a manner consistent with Torchmark's investment
objectives. Torchmark seeks to maintain a portfolio of high-quality fixed-
maturity assets that may be sold in response to changing market conditions. A
significant change in the level of interest rates, changes in credit quality
of individual securities, or changes in the relative values of a security or
asset sector are the primary factors that influence such sales. Occasionally,
the need to raise cash for various operating commitments may also necessitate
the sale of a security. Volatility in the value of Torchmark's fixed-maturity
holdings is reduced by maintaining a relatively short-term portfolio, 20% of
which matures within five years and 64% of which matures within ten years.
Also, the portfolio and market conditions are constantly evaluated for
appropriate action.
No derivative instruments are used to manage Torchmark's exposure to market
risk in the investment portfolio. An interest-rate swap instrument was entered
into by Torchmark in connection with its MIPS as discussed in the Notes to the
Consolidated Financial Statements on page 65 of this report and in Capital
Resources on page 34 of this report. A cap instrument was also previously
entered into to protect Torchmark from the market risk on an increase in rates
associated with the swap on this security. This cap expired during 1999.
The liability for Torchmark's insurance policy obligations is computed using
interest assumptions, some of which are contractually guaranteed. A reduction
in market interest rates of a permanent nature could cause investment return
to fall below amounts guaranteed. Torchmark's insurance companies participate
in the cash flow testing procedures imposed by statutory insurance
regulations, the purpose of which is to insure that such liabilities are
adequate to meet the company's obligations under a variety of interest rate
scenarios. Those procedures indicate that Torchmark's insurance policy
liabilities, when considered in light of the assets held with respect to such
liabilities and the investment income expected to be received on such assets,
are adequate to meet the obligations and expenses of Torchmark's insurance
activities in all but the most extreme circumstances.
The following table illustrates the market risk sensitivity of Torchmark's
interest-rate sensitive fixed-maturity portfolio at December 31, 2000 and
December 31, 1999. This table measures the effect of a change in interest
rates (as represented by the U.S. Treasury curve) on the fair value of
Torchmark's fixed-maturity portfolio. The data is prepared through a model
that measures the change in fair value arising from an immediate and sustained
change in interest rates in increments of 100 basis points. It takes into
account the effect that special option features such as call options, put
options, and unscheduled repayments would have on the portfolio, given the
changes in rates. The valuation of these option features is dependent upon
assumptions about future interest rate volatility that are based on past
performance.
Market Value of
Fixed-Maturity Portfolio
($ millions)
-------------------------
Change
in
Interest
Rates
(in At At
basis December 31, December 31,
points) 2000 1999
-------- ------------ ------------
-200 $6,720 $6,455
-100 6,325 6,055
0 5,950 5,680
100 5,597 5,332
200 5,272 5,012
32
FINANCIAL CONDITION
Liquidity. Liquidity pertains to an institution's ability to meet on demand
the cash commitments required by its business operations and financial
obligations. Torchmark has very strong liquidity, as evidenced by its three
sources of liquidity: its positive cash flow from operations, its portfolio of
marketable securities, and its line of credit facility.
Torchmark's insurance operations generate positive cash flows in excess of
its immediate needs. Cash flows provided from operations were $533 million in
2000, compared with $512 million in 1999 and $389 million in 1998. In addition
to operating cash flows, Torchmark received $226 million in investment
maturities and repayments during 2000, adding to available cash flows. Such
repayments were $413 million in 1999 and $474 million in 1998. Cash flows in
excess of immediate requirements are used to build an investment base to fund
future requirements.
Torchmark's cash and short-term investments were $136 million at December
31, 2000, compared with $115 million at year-end 1999. In addition to these
highly 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 $6.0 billion at December 31, 2000.
Torchmark has a line of credit facility with a group of lenders which allows
unsecured borrowings up to a specified maximum amount. The maximum amount on
this facility was $600 million at December 31, 2000. Interest is charged at
variable rates for borrowings. This line of credit is further designated as a
backup credit line for a commercial paper program not to exceed $600 million,
whereby Torchmark may borrow from either the credit line or issue commercial
paper at any time but may not borrow in excess of a total of $600 million on
the combined facilities. At December 31, 2000, $331 million in face amount of
commercial paper was outstanding and there were no borrowings on the line of
credit. A fee is charged on the entire $600 million facility. In accordance
with the agreements, Torchmark is subject to certain covenants regarding
capitalization and earnings. At December 31, 2000, 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. These requirements have declined in
both 2000 and 1999 from the respective prior year. Dividends from insurance
subsidiaries of Torchmark are limited to the greater of statutory net gain
from operations, excluding capital gains and losses, on an annual
noncumulative basis, or 10% of surplus, in the absence of special approval.
Distributions are not permitted in excess of statutory net worth. Subsidiaries
are also subject to certain minimum capital requirements. Although these
restrictions exist, dividend availability from subsidiaries has been and is
expected to be more than adequate for parent company operations. During the
year 2001, a maximum amount of $240 million is expected to be available to
Torchmark from insurance subsidiaries without regulatory approval.
Capital Resources. Torchmark's capital structure consists of long and short-
term debt, MIPS, and shareholders' equity. Torchmark's debt is primarily its
funded debt and its commercial paper facility. An analysis of Torchmark's
funded debt outstanding at year-ends 2000 and 1999 on the basis of par value
was as follows:
2000 1999
------------- -------------
Principal Principal
Year Amount Amount
Instrument Due Rate ($ thousands) ($ thousands)
---------- ---- ----- ------------- -------------
Senior Debentures..................... 2009 8 1/4 $ 99,450 $ 99,450
Notes................................. 2023 7 7/8 177,057 200,000
Notes................................. 2013 7 3/8 94,050 100,000
-------- --------
Total funded debt..................... 370,557 399,450
Debt held by subsidiaries............. -0- (22,318)
-------- --------
Long-term debt........................ $370,557 $377,132
======== ========
33
The carrying value of the funded debt was $366 million at December 31, 2000,
compared with $372 million a year earlier.
During 1998 and 1999, Torchmark acquired a portion of its funded debt in the
open market, through its insurance subsidiaries. In 1999, $7.5 million
principal amount of its 7 7/8% Notes due 2023 was acquired at a cost of $7.9
million. Also in 1999, $4.0 million principal amount of its 7 3/8% Notes due
2013 was purchased for $4.1 million. In 1998, Torchmark bought $10.8 million
of its 7 7/8% Notes at a price of $10.6 million. Insurance company holdings in
the funded debt reduce consolidated debt outstanding.
In 2000, all of the debt previously acquired by insurance subsidiaries was
acquired from those subsidiaries by the parent company. Additionally, another
$4.6 million principal amount of the 7 7/8% Notes and $2.0 million principal
amount of the 7 3/8% Notes were acquired by Torchmark in 2000 at a cost of
$4.2 million and $1.9 million, respectively. The redemption of this debt in
2000 resulted in an after-tax gain of $202 thousand.
During 1998, Torchmark received approximately $481 million in intercompany
note repayments from Waddell & Reed as a result of their initial public
offering. Torchmark utilized a portion of these funds to pay down funded debt.
It also took advantage of the lower interest rate environment in 1998 to
refinance existing funded debt at lower short-term rates. In early 1998,
Torchmark repaid $20 million principal amount on its 8 5/8% Sinking Fund
Debentures due in 2017, of which $8 million was a mandatory redemption and $12
million was an optional repayment under the terms of the agreement. On April
1, 1998, Torchmark called the remaining $160 million principal balance of this
debt at the prevailing call price of 103.76, or $166 million. A loss on the
redemption of debt was recorded in the second quarter of 1998 in the after-tax
amount of $5 million, representing the difference between the total call price
and the carrying value of $158 million. In addition to the call, Torchmark's 9
5/8% Senior Notes, principal amount $200 million, matured on May 1, 1998.
Torchmark borrowed on its commercial paper facility to repay the Sinking Fund
Debentures that were called and to repay its Senior Notes upon maturity with
accrued interest, in the combined amount of $377 million.
The MIPS were issued in November, 1994 at a redemption amount of $200
million with an annual dividend rate of 9.18%. They are subject to a mandatory
redemption in full at September 30, 2024, although Torchmark may elect to
extend the MIPS for up to an additional 20 years if certain conditions are
met. They are currently redeemable at Torchmark's option at any time. While
Torchmark is obligated to pay dividends at a fixed rate of 9.18%, Torchmark
has in place a ten-year interest-rate swap agreement with an unaffiliated
party. The swap agreement calls for Torchmark to pay a variable rate on the
$200 million face amount in exchange for payment of the fixed dividend by the
other party. The swap expires in 2004. Torchmark is at risk on this instrument
for higher financing costs to the extent interest rates rise during the
remaining term. At December 31, 2000, the variable rate was 8.0%. During 2000,
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. Torchmark's
after-tax cost in 1999 was $9.2 million and in 1998 was $9.8 million, saving
$2.7 million and $2.1 million in each of those years, respectively.
Effective January 1, 1999, Torchmark changed its method of accounting for
the swap agreement to recognize changes in its fair value, net of tax, as
realized investment gains or losses. This method of accounting for such
instruments was believed to be preferable under the guidance established by
Statement of Financial Accounting Standards No. 80, Accounting for Futures
Contracts ("SFAS 80") and the Securities and Exchange Commission. Previously,
Torchmark accounted for the swap using hedge accounting under SFAS 80. The
after-tax cumulative effect of the change at January 1, 1999 was $16.1 million
(net of income taxes of $8.7 million). The effect of the change on the twelve
months ended December 31, 1999 was to increase realized losses by $11.7
million ($.09 per diluted share), excluding the cumulative effect of the
change in accounting principle. Market value of the swap, which is included as
a component of Other Invested Assets, was $14.3 million and $6.7 million at
December 31, 2000 and 1999, respectively.
During July, 1999, Torchmark filed a Form S-3 Registration Statement with
the Securities and Exchange Commission for the shelf registration of capital
securities in an aggregate face amount of $300 million. Proceeds from the
issuance of any such capital securities could be used for the possible
purchase of Torchmark securities, for working capital, for the repayment of
debt, for acquisitions, or for any other general corporate purpose or business
opportunity. As of December 31, 2000, no capital securities have been issued
under this Registration Statement.
34
Short-term debt consists of Torchmark's commercial paper outstanding. The
commercial paper balance outstanding at December 31, 2000 was $329 million at
carrying value, compared with a balance of $418 million a year earlier. The
commercial paper borrowing balance fluctuates based on Torchmark's current
cash needs.
Total debt as a percentage of total capitalization was 21.5% at December 31,
2000. In the computation of this ratio, the MIPS are counted as equity and the
effect of fluctuations in security values based on changes in interest rates
in financial markets are excluded. This debt-to-capitalization ratio was 25.2%
at year-end 1999 and 24.3% at year-end 1998. The decline in the debt-to-
capitalization ratio at year-end 2000 was caused primarily by short-term debt
paydowns. The 1999 increase in this ratio resulted from the increase in short-
term borrowings. Torchmark's ratio of earnings before interest, taxes and
discontinued operations to interest requirements was 11.3 in 2000, compared
with 8.7 in 1999 and 8.9 in 1998. Torchmark's interest expense rose 4% to $54
million in 2000 after having declined 7% to $52 million in 1999. The increase
in 2000 was due primarily to an increase in short-term borrowing costs which
offset the lower amount of average debt outstanding. The 1999 decrease was
caused by a larger portion of total debt being short-term debt that carries a
lower borrowing cost.
Torchmark has made share purchases from time to time under its share
repurchase program on the open market when market conditions were favorable.
Torchmark purchased 6.1 million shares on the open market at a cost of $147
million in 2000 and 6.7 million shares at a cost of $222 million in 1999.
Purchases of 3.4 million shares were made in 1998 at a cost of $126 million,
subsequent to the Waddell & Reed spin off. Torchmark will continue to make
share purchases under its share repurchase program when prices are attractive.
Share purchases could have a favorable impact on earnings per share and return
on equity.
On November 15, 1999, Torchmark executed a stock option exercise and
restoration program through which 80 Torchmark directors and employees
exercised vested stock options and received a reduced number of replacement
options at the current market price. This program resulted in the issuance of
1.8 million shares, but over 1.3 million of the new shares were immediately
sold by the directors and employees through the open market to cover the cost
of the purchased shares and the related taxes. A similar option exercise and
restoration program was conducted on December 20, 2000 for two executives not
able to participate in the 1999 program. Under the 2000 program, 433 thousand
shares were issued but 283 thousand shares were sold to pay the exercise price
and taxes. As a result of both of these restoration programs, management's
ownership interest increased, and Torchmark received a significant current tax
benefit from the exercise of the options.
Shareholders' equity rose 10% to $2.20 billion at December 31, 2000.
Shareholders' equity declined 12% in 1999, from $2.26 billion at year-end 1998
to $1.99 billion at year-end 1999. The 2000 increase of $209 million in
shareholders' equity resulted primarily from the addition of earnings, less
the payment of dividends and $147 million of share purchases during the year.
The 1999 decrease was impacted by the decrease in the value of the fixed-
maturity portfolio due to increases in interest rates in the financial
markets. Book value per share was $17.43 at 2000 year end, compared with
$15.10 at year-end 1999. After adjusting for the impact on shareholders'
equity for security value fluctuations due to changes in interest rates in
financial markets, shareholders' equity rose from $2.15 billion at year-end
1999 to $2.34 billion at year-end 2000. Book value per share was $18.53 at
year-end 2000, an increase of 14% over $16.32 at year-end 1999. Return on
common shareholders' equity was 16.3% in 2000, compared with 16.2% in 1999.
The return-on-equity ratios exclude the mark up or down of shareholders'
equity for changes in security values caused by fluctuations in market
interest rates. They are also computed on a basis of net operating income
before nonrecurring charge, as defined on page 17 through 18 of this report.
35
OTHER ITEMS
Transactions Regarding Vesta Insurance Group. From 1993 until disposition in
2000, Torchmark held a passive investment in Vesta, a property insurance
carrier. Torchmark held 5.1 million shares of Vesta stock, or approximately
28% of the outstanding shares of Vesta, until December, 1998. Torchmark
carried its investment in Vesta during this period on the equity method of
accounting. In June, 1998, Vesta announced that (a) an investigation of
accounting irregularities that occurred during the fourth quarter of 1997 and
the first quarter of 1998 would result in an aggregate $14 million net after-
tax reduction in previously reported net income, and, in addition, that (b) it
would restate its historical financial statements for the period of 1993
through the first quarter of 1998, reflecting reductions in reported net
after-tax earnings of $49 million for the period of 1993 through 1997 and $10
million for the first quarter of 1998. To reflect its pro rata share of
Vesta's cumulative reported financial corrections, Torchmark recorded a pre-
tax charge of $20 million ($13 million after tax) or $.09 per diluted share in
the second quarter of 1998. As a result of the announcements relating to Vesta
and the decline in value of Vesta stock, Vesta is currently subject to
numerous class action lawsuits in state and Federal courts filed subsequent to
such announcements.
In the fourth quarter of 1998, Torchmark announced its intention to dispose
of its holdings in Vesta and to sell Vesta shares under satisfactory terms. In
December, 1998, Torchmark sold 680 thousand Vesta shares at a price of $4.75
per share, recording a loss of $3 million after tax. In 1999, Vesta filed a
registration statement with the Securities and Exchange Commission for the
public offering of its shares held by Torchmark. To facilitate the
registration of Vesta shares, Torchmark re-acquired the previously sold 680
thousand shares at a price of $5 per share. On November 5, 1999, the
registration statement was filed by Vesta to offer all of Torchmark's holdings
in Vesta.
Because of its intention to dispose of Vesta, Torchmark wrote its carrying
value of Vesta down to net realizable amount effective September 30, 1998. The
adjustment produced an after-tax realized loss of $24 million, or $.17 per
diluted Torchmark share. Net realizable value was $32 million at December 31,
1998. During 1998, Torchmark recorded a pretax loss of $27 million ($18
million after tax or $.13 per diluted share) on Vesta operations, including
its pro rata share of Vesta's cumulative accounting corrections.
During the first quarter of 1999, the two Torchmark directors who occupied
seats on the Vesta Board of Directors resigned from those Vesta seats. Due to
the vacating of the Vesta board seats and the absence of significant influence
regarding Vesta, Torchmark discontinued the equity method of accounting for
Vesta and has included Vesta in equity securities at market value subsequent
to December 31, 1998. Torchmark carried Vesta at a value of $20 million at
December 31, 1999.
Torchmark sold 3.75 million shares of Vesta during the second quarter of
2000. In early July, 2000, Torchmark sold the remaining 1.38 million shares of
Vesta stock that it held. The sales provided proceeds of $33 million and
resulted in an after-tax loss of $1.5 million. As of December 31, 2000,
Torchmark no longer had any ownership interest in Vesta.
Litigation. Torchmark and its subsidiaries continue to be named as parties
to pending or threatened litigation, most of which involves 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 may have the potential for significant adverse results.
Bespeaking caution is the fact that it is impossible to predict the extent of
punitive damages that may be awarded if liability is found in any given case,
since punitive damages in Alabama are based upon the compensatory damages
(including mental anguish) awarded and the discretion of the jury in awarding
compensatory damages is not precisely defined. 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. Based
upon information presently available, and in light of legal and other factual
defenses available to Torchmark and its subsidiaries, contingent liabilities
arising from threatened and pending litigation are not presently considered by
management to be material.
36
NEW ACCOUNTING RULES
Accounting for Derivative Instruments and Hedging Activities (FASB Statement
No. 133), as amended by FASB Statements No. 137 and 138, is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000, with
earlier application of all of the provisions of this Statement encouraged. For
Torchmark, the Statement is effective as of January 1, 2001. Early adoption of
selective provisions is prohibited. Prior periods may not be restated for
comparability.
This Statement establishes standards for the accounting and reporting of
derivative instruments. It requires that all derivatives be recognized as
assets or liabilities on the balance sheet and be measured at fair value.
Changes in the values of derivatives for the reporting period are reflected as
adjustments to earnings through realized gains and losses. If certain
conditions are met, a derivative may be designated as a hedge against exposure
to market risks of other instruments or commitments, cash flow risks, or
foreign currency risks. If a derivative is classified as a hedge, the
adjustment to earnings is offset by a corresponding change in the value of the
item hedged. Hedging relationships may be designated anew upon adoption of
this statement.
Management believes that Statement 133 will have an immaterial impact on
Torchmark's financial statements. Other than the interest rate swap on its
MIPs, which is a free-standing derivative currently carried at fair market
value, Torchmark's use of derivatives is limited.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (FASB Statement No. 140) provides accounting
and reporting standards for transfer and servicing of financial assets and
extinguishments of liabilities. It replaces FASB Statement No. 125, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. While it revises certain of the provisions of that statement, it
carries over most of Statement No. 125's provisions without reconsideration.
Statement No. 140 also requires certain disclosures.
Statement No. 140 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001. It
is to be applied prospectively with certain exceptions. Other than those
exceptions, earlier or retroactive application is not permitted. The adoption
of Statement No. 140 should have an immaterial impact on Torchmark.
37
Item 8. Financial Statements and Supplementary Data
Page
----
Independent Auditors' Reports............................................. 39
Consolidated Financial Statements:
Consolidated Balance Sheet at December 31, 2000 and 1999................. 41
Consolidated Statement of Operations for each of the years in the three-
year period ended December 31, 2000..................................... 42
Consolidated Statement of Comprehensive Income for each of the years in
the three-year period ended December 31, 2000........................... 44
Consolidated Statement of Shareholders' Equity for each of the years in
the three-year period ended December 31, 2000........................... 45
Consolidated Statement of Cash Flow for each of the years in the three-
year period ended December 31, 2000..................................... 46
Notes to Consolidated Financial Statements............................... 48
38
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Torchmark Corporation
Birmingham, Alabama
We have audited the accompanying consolidated balance sheets of Torchmark
Corporation and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations, comprehensive income, shareholders'
equity, and cash flow for the years then ended. Our audit also included the
financial statement schedules listed in the Index at Item 14 as of and for the
years ended December 31, 2000 and 1999. These financial statements and
financial statement schedules are the responsibility of Torchmark's
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Torchmark Corporation and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
Also, in our opinion, such 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.
DELOITTE & TOUCHE LLP
Dallas, Texas
January 30, 2001
39
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 as of and for the year ended
December 31, 1998. In connection with our audit of the consolidated financial
statements, we have also audited the financial statement schedules as listed
in Item 14(a) as of and for the year ended December 31, 1998. These
consolidated financial statements and financial statement schedules are the
responsibility of Torchmark's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedules based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Torchmark Corporation and subsidiaries for the year ended December
31, 1998, in conformity with accounting principles generally accepted in the
United States of America. 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.
KPMG LLP
Birmingham, Alabama
January 29, 1999, except
for Note 18 which is
as of February 10, 1999
40
TORCHMARK CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands except per share data)
December 31,
------------------------
2000 1999
----------- -----------
Assets:
Investments:
Fixed maturities--available for sale, at fair value
(amortized cost: 2000--$6,185,500; 1999--
$5,954,697) ...................................... $ 5,949,515 $ 5,679,795
Equity securities, at fair value (cost: 2000--$666;
1999--$37,121).................................... 543 29,189
Mortgage loans on real estate, at cost (estimated
fair value: 2000--$118,756; 1999--$94,716)........ 118,642 94,599
Investment real estate, at cost (less allowance for
depreciation: 2000--$20,024; 1999--$19,490)....... 15,483 16,379
Policy loans....................................... 255,320 244,607
Other long-term investments........................ 31,154 23,054
Short-term investments............................. 100,546 100,187
----------- -----------
Total investments................................. 6,471,203 6,187,810
Cash ............................................... 35,089 14,441
Accrued investment income........................... 119,124 112,475
Other receivables................................... 74,960 53,458
Deferred acquisition costs.......................... 1,942,161 1,741,570
Value of insurance purchased........................ 133,158 151,752
Property and equipment, net of accumulated
depreciation....................................... 38,694 38,761
Goodwill............................................ 390,509 402,584
Other assets........................................ 16,245 15,138
Separate account assets............................. 3,741,415 3,413,675
----------- -----------
Total assets...................................... $12,962,558 $12,131,664
=========== ===========
Liabilities:
Future policy benefits.............................. $ 5,111,730 $ 4,869,241
Unearned and advance premiums....................... 90,310 85,344
Policy claims and other benefits payable............ 240,421 215,923
Other policyholders' funds.......................... 80,555 81,919
----------- -----------
Total policy liabilities.......................... 5,523,016 5,252,427
Accrued income taxes................................ 423,327 309,271
Other liabilities................................... 183,908 179,681
Short-term debt..................................... 329,148 418,394
Long-term debt (estimated fair value: 2000--
$362,276; 1999--$378,046).......................... 365,989 371,555
Separate account liabilities........................ 3,741,415 3,413,675
----------- -----------
Total liabilities................................. 10,566,803 9,945,003
Monthly income preferred securities
(estimated fair value: 2000--$202,000; 1999--
$193,040;).......................................... 193,395 193,324
Shareholders' equity:
Preferred stock, par value $1 per share--Authorized
5,000,000 shares; outstanding: -0- in 2000 and in
1999............................................... -0- -0-
Common stock, par value $1 per share--Authorized
320,000,000 shares; outstanding: 147,800,908
issued, less 21,411,898 held in treasury in 2000
and 15,804,640 held in treasury in 1999 ........... 147,801 147,801
Additional paid-in capital.......................... 626,530 622,318
Accumulated other comprehensive income (loss)....... (148,406) (174,222)
Retained earnings................................... 2,220,671 1,910,487
Treasury stock...................................... (644,236) (513,047)
----------- -----------
Total shareholders' equity........................ 2,202,360 1,993,337
----------- -----------
Total liabilities and shareholders' equity........ $12,962,558 $12,131,664
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
41
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in thousands except per share data)
Year Ended December 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
Revenue:
Life premium............................. $1,082,125 $1,018,301 $ 959,766
Health premium........................... 911,156 824,816 759,910
Other premium............................ 52,929 40,969 33,954
---------- ---------- ----------
Total premium.......................... 2,046,210 1,884,086 1,753,630
Net investment income.................... 472,426 447,337 459,558
Realized investment losses............... (5,322) (110,971) (57,637)
Other income............................. 2,580 6,443 2,325
---------- ---------- ----------
Total revenue.......................... 2,515,894 2,226,895 2,157,876
Benefits and expenses:
Life policyholder benefits............... 711,833 666,122 625,272
Health policyholder benefits............. 591,022 535,901 482,496
Other policyholder benefits.............. 36,627 34,524 42,508
---------- ---------- ----------
Total policyholder benefits............ 1,339,482 1,236,547 1,150,276
Amortization of deferred acquisition
costs................................... 274,837 247,800 231,024
Commissions and premium taxes............ 150,869 160,655 143,747
Other operating expense.................. 121,186 115,069 117,438
Amortization of goodwill................. 12,075 12,075 12,075
Interest expense......................... 54,487 52,341 56,325
---------- ---------- ----------
Total benefits and expenses............ 1,952,936 1,824,487 1,710,885
Income from continuing operations before
income taxes, equity in earnings of
Vesta, extraordinary item, monthly income
preferred securities dividend, and
cumulative effect of change in accounting
principle................................ 562,958 402,408 446,991
Income taxes.............................. (190,841) (134,320) (154,338)
Equity in earnings (losses) of Vesta...... -0- -0- (6,866)
Adjustment to carrying value of Vesta..... -0- -0- (20,234)
Monthly income preferred securities
dividend (net of tax).................... (10,284) (9,158) (9,777)
---------- ---------- ----------
Net income from continuing operations.. 361,833 258,930 255,776
Discontinued operations of Waddell & Reed:
Income from operations (less applicable
income tax expense of $42,932 in 1998).. -0- -0- 47,868
Loss on disposal (less applicable income
tax benefit of $571 in 1999 and
including income tax of $49,840 in
1998)................................... -0- (1,060) (54,241)
---------- ---------- ----------
Net income before extraordinary item
and cumulative effect of change in
accounting principle.................. 361,833 257,870 249,403
Gain (loss) on redemption of debt (less
applicable income tax expense of $109 in
2000 and income tax benefit of $2,672 in
1998).................................... 202 -0- (4,962)
---------- ---------- ----------
Net income before cumulative effect of
change in accounting principle........ 362,035 257,870 244,441
Cumulative effect of change in accounting
principle (less applicable income tax
expense of $8,661)....................... -0- 16,086 -0-
---------- ---------- ----------
Net income............................. $ 362,035 $ 273,956 $ 244,441
========== ========== ==========
(Continued)
See accompanying Notes to Consolidated Financial Statements.
42
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS--(Continued)
(Amounts in thousands except per share data)
Year Ended
December 31,
------------------
2000 1999 1998
----- ----- -----
Basic net income per share:
Continuing operations..................................... $2.83 $1.95 $1.83
Discontinued operations of Waddell & Reed:
Net income from operations............................... -0- -0- .34
Loss on disposal......................................... -0- (.01) (.39)
----- ----- -----
Net income before extraordinary item and cumulative effect
of change in accounting principle........................ 2.83 1.94 1.78
Loss on redemption of debt............................... -0- -0- (.03)
----- ----- -----
Net income before cumulative effect of change in
accounting principle..................................... 2.83 1.94 1.75
Cumulative effect of change in accounting principle...... -0- .12 -0-
----- ----- -----
Net income.............................................. $2.83 $2.06 $1.75
===== ===== =====
Diluted net income per share:
Continuing operations..................................... $2.82 $1.93 $1.81
Discontinued operations of Waddell & Reed:
Net income from operations............................... -0- -0- .34
Loss on disposal......................................... -0- (.01) (.38)
----- ----- -----
Net income before extraordinary item and cumulative effect
of change in accounting principle........................ 2.82 1.92 1.77
Loss on redemption of debt............................... -0- -0- (.04)
----- ----- -----
Net income before cumulative effect of change in
accounting principle..................................... 2.82 1.92 1.73
Cumulative effect of change in accounting principle...... -0- .12 -0-
----- ----- -----
Net income.............................................. $2.82 $2.04 $1.73
===== ===== =====
See accompanying Notes to Consolidated Financial Statements.
43
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Amounts in thousands)
Year Ended December 31,
-----------------------------
2000 1999 1998
-------- --------- --------
Net income...................................... $362,035 $ 273,956 $244,441
Other comprehensive income:
Unrealized investment gains (losses):
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period.............................. 36,875 (568,398) 54,217
Reclassification adjustment for (gains)
losses on securities included in net
income..................................... 12,089 29,930 8,519
Reclassification adjustment for amortization
of (discount) and premium.................. (3,710) (1,266) (2,999)
Foreign exchange adjustment on securities
marked to market........................... 1,333 (1,159) 1,958
-------- --------- --------
Unrealized gains (losses) on securities...... 46,587 (540,893) 61,695
Unrealized gains (losses) on other
investments................................. 922 81 (7,551)
Unrealized gains (losses) on deferred
acquisition costs........................... (5,340) 48,380 (3,092)
-------- --------- --------
Total unrealized investment gains (losses).. 42,169 (492,432) 51,052
Applicable tax.............................. (14,764) 171,760 (17,524)
-------- --------- --------
Unrealized investment gains (losses), net of
tax.......................................... 27,405 (320,672) 33,528
Foreign exchange translation adjustments,
other than securities........................ (1,589) 1,949 (2,081)
Applicable tax.............................. -0- -0- -0-
-------- --------- --------
Foreign exchange translation adjustments, net
of tax....................................... (1,589) 1,949 (2,081)
Unrealized gains (losses) on discontinued
operations................................... -0- -0- (12,100)
Applicable tax.............................. -0- -0- 4,235
-------- --------- --------
Unrealized gains (losses) on discontinued
operations, net of tax....................... -0- -0- (7,865)
-------- --------- --------
Other comprehensive income (loss)............... 25,816 (318,723) 23,582
-------- --------- --------
Comprehensive income (loss)................. $387,851 $ (44,767) $268,023
======== ========= ========
See accompanying Notes to Consolidated Financial Statements.
44
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Amounts in thousands except per share data)
Accumulated
Additional Other Total
Preferred Common Paid-in Comprehensive Retained Treasury Shareholders'
Stock Stock Capital Income (Loss) Earnings Stock Equity
--------- --------- ---------- ------------- ---------- --------- -------------
Year Ended December 31, 1998
- ----------------------------
Balance at January 1, 1998..... $-0- $ 147,849 $187,731 $ 136,926 $1,694,781 $(234,551) $1,932,736
Comprehensive income........... 23,582 244,441 268,023
Common dividends declared
($0.58 a share)............... (73,304) (73,304)
Proceeds from Waddell & Reed
initial public offering....... 516,138 516,138
Distribution of Waddell & Reed. (174,113) (174,113)
Minority interest--Waddell
& Reed initial public
offering...................... (90,484) (90,484)
Sale of Family Service......... (16,007) 16,007 -0-
Acquisition of treasury stock--
common........................ (125,875) (125,875)
Grant of deferred stock
options....................... 319 319
Grant of restricted stock...... (4,958) 1,428 3,530 -0-
Conversion of restricted stock
to Waddell & Reed shares...... (48) 48 -0-
Value of restricted stock
grants and options............ 865 865
Exercise of stock options...... 1,266 (1,307) 5,264 5,223
---- --------- -------- --------- ---------- --------- ----------
Balance at December 31, 1998.. -0- 147,801 610,925 144,501 1,707,933 (351,632) 2,259,528
Year Ended December 31, 1999
- ----------------------------
Comprehensive loss............. (318,723) 273,956 (44,767)
Common dividends declared
($0.36 a share)............... (47,739) (47,739)
Acquisition of treasury stock--
common........................ (221,878) (221,878)
Grant of deferred stock
options....................... 482 482
Lapse of restricted stock
grant......................... 364 (364) -0-
Value of restricted stock
grants and options............ 797 797
Exercise of stock options...... 9,750 (23,663) 60,827 46,914
---- --------- -------- --------- ---------- --------- ----------
Balance at December 31, 1999.. -0- 147,801 622,318 (174,222) 1,910,487 (513,047) 1,993,337
Year Ended December 31, 2000
- ----------------------------
Comprehensive income........... 25,816 362,035 387,851
Common dividends declared
($0.36 a share)............... (45,917) (45,917)
Acquisition of treasury stock--
common........................ (147,008) (147,008)
Grant of deferred stock
options....................... 374 374
Value of restricted stock
grants and options............ 675 675
Exercise of stock options...... 3,163 (5,934) 15,819 13,048
---- --------- -------- --------- ---------- --------- ----------
Balance at December 31, 2000.. $-0- $ 147,801 $626,530 $(148,406) $2,220,671 $(644,236) $2,202,360
==== ========= ======== ========= ========== ========= ==========
See accompanying Notes to Consolidated Financial Statements.
45
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW
(Amounts in thousands)
Year Ended December 31,
-----------------------------
2000 1999 1998
-------- -------- ---------
Net income...................................... $362,035 $273,956 $ 244,441
Adjustments to reconcile net income to cash
provided from operations:
Increase in future policy benefits............ 231,973 206,724 173,593
Increase (decrease) in other policy benefits.. 28,100 20,730 (30,593)
Deferral of policy acquisition costs.......... (462,174) (419,590) (356,493)
Amortization of deferred policy acquisition
costs........................................ 274,837 247,800 231,024
Change in accrued income taxes................ 98,028 (30,434) 86,670
Depreciation.................................. 6,859 8,840 7,934
Realized (gains) losses on sale of
investments,
subsidiaries, and properties................. 5,322 110,971 57,637
Change in accounts payable and other
liabilities.................................. 5,206 43,930 3,753
Change in receivables......................... (18,333) 70,119 (20,331)
Other accruals and adjustments................ 921 3,314 19,473
Adjustment to carrying value of Vesta......... -0- -0- 20,234
Minority interest in income of Waddell & Reed. -0- -0- 20,869
Discontinued operations of Waddell & Reed..... -0- -0- (68,737)
Change in accounting principle................ -0- (24,747) -0-
-------- -------- ---------
Cash provided from operations................. $532,774 $511,613 $ 389,474
======== ======== =========
(Continued)
See accompanying Notes to Consolidated Financial Statements.
46
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW--(Continued)
(Amounts in thousands)
Year Ended December 31,
------------------------------------
2000 1999 1998
---------- ----------- -----------
Cash provided from operations............ $ 532,774 $ 511,613 $ 389,474
Cash provided from (used for) investment
activities:
Investments sold or matured:
Fixed maturities available for sale--
sold.................................. 629,111 1,240,652 757,649
Fixed maturities available for sale--
matured, called, and repaid........... 226,314 413,264 474,386
Equity securities...................... 39,693 260 3,056
Mortgage loans......................... 1,347 26,496 8,589
Real estate............................ 2,471 124,173 12,220
Other long-term investments............ 109 11,338 51,903
---------- ----------- -----------
Total investments sold or matured.... 899,045 1,816,183 1,307,803
Acquisition of investments:
Fixed maturities--available for sale... (1,099,179) (2,118,362) (1,872,040)
Equity securities...................... -0- (3,400) -0-
Mortgage loans......................... (25,372) (5,421) (52,921)
Real estate............................ (1,398) (29,639) (35,944)
Net increase in policy loans........... (10,713) (10,842) (13,445)
Other long-term investments............ (547) (10,949) (20,298)
---------- ----------- -----------
Total investments acquired........... (1,137,209) (2,178,613) (1,994,648)
Net (increase) decrease in short-term
investments............................ (302) (24,343) (19,168)
Repayment of loans to affiliates........ -0- -0- (1,390)
Sale of Family Service.................. -0- -0- 140,388
Dispositions of properties.............. 1,266 8,091 1,033
Additions to properties................. (6,508) (8,494) (6,170)
Dividends from Waddell & Reed........... -0- -0- 16,814
---------- ----------- -----------
Cash used for investment activities...... (243,708) (387,176) (555,338)
Cash provided from (used for) financing
activities:
Issuance of common stock................ 9,886 37,164 3,957
Additions to debt....................... -0- 63,152 216,429
Cash dividends paid to shareholders..... (46,422) (48,175) (82,601)
Repayments of debt...................... (95,390) (12,129) (390,917)
Acquisition of treasury stock........... (147,008) (221,878) (125,875)
Proceeds from Waddell & Reed offering... -0- -0- 516,138
Offering proceeds retained by Waddell &
Reed................................... -0- -0- (35,251)
Net receipts from deposit product
operations............................. 10,516 66,950 57,819
---------- ----------- -----------
Cash provided from (used for) financing
activities.............................. (268,418) (114,916) 159,699
Increase (decrease) in cash............. 20,648 9,521 (6,165)
Cash at beginning of year............... 14,441 4,920 11,085
---------- ----------- -----------
Cash at end of year..................... $ 35,089 $ 14,441 $ 4,920
========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
47
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars amounts in thousands except per share data)
Note 1--Significant Accounting Policies
Business: Torchmark Corporation ("Torchmark") through its subsidiaries
provides a variety of life and health insurance products and annuities to a
broad base of customers.
Basis of Presentation: The accompanying financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America ("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 and its wholly-owned subsidiaries. Subsidiaries which are not
majority-owned are reported on the equity method. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Investments: Torchmark classifies all of its fixed maturity investments,
which include bonds and redeemable preferred stocks, as available for sale.
Investments classified as available for sale are carried at fair value with
unrealized gains and losses, net of deferred taxes, reflected directly in
other comprehensive income. 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
other comprehensive income. 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. If an investment
becomes permanently impaired, such impairment is treated as a realized loss
and the investment is adjusted to net realizable value.
Gains and losses realized on the disposition of investments are recognized
as revenues and are determined on a specific identification basis.
Realized investment gains and losses and investment income attributable to
separate accounts are credited to the separate accounts and have no effect on
Torchmark's net income. Investment income attributable to all other insurance
policies and products is included in Torchmark's net investment income. Net
investment income for the years ended December 31, 2000, 1999, and 1998,
included $305.4 million, $287.7 million, and $296.7 million, respectively,
which was allocable to policyholder reserves or accounts. Realized investment
gains and losses are not allocable to insurance policyholders' liabilities.
Determination of Fair Values of Financial Instruments: Fair value for cash,
short-term investments, short-term debt, receivables and payables approximates
carrying value. Fair values for investment securities are based on quoted
market prices, where available. Otherwise, fair values are based on quoted
market prices of comparable instruments. Mortgages are valued using discounted
cash flows. Substantially all of Torchmark's long-term debt, including the
monthly income preferred securities, is valued based on quoted market prices.
Cash: Cash consists of balances on hand and on deposit in banks and
financial institutions. Overdrafts arising from the overnight investment of
funds offset cash balances on hand and on deposit.
Recognition of Premium Revenue and Related Expenses: Premiums for insurance
contracts which are not defined as universal life-type according to Statement
of Financial Accounting Standards ("SFAS") No. 97 are recognized as revenue
over the premium-paying period of the policy. Profits for limited-payment life
insurance contracts as defined by SFAS 97 are recognized over the contract
period. Premiums for universal life-type and annuity contracts are added to
the policy account value, and revenues for such products are recognized as
charges to the policy account value for mortality, administration, and
surrenders (retrospective deposit method). Variable annuity products are also
assessed an investment management fee and a sales charge. Life premium
includes policy charges of $71.4 million, $71.9 million, and $71.7 million for
the years ended December 31, 2000, 1999, and 1998,
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1--Significant Accounting Policies (continued)
respectively. Other premium includes annuity policy charges for the years
ended December 31, 2000, 1999, and 1998, of $52.2 million, $40.5 million, and
$33.5 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, are amortized with
interest over the estimated premium-paying period of the policies in a manner
which charges each year's operations in proportion to the receipt of premium
income. For limited-payment contracts, acquisition costs are amortized over
the contract period. For universal life-type policies, acquisition costs are
amortized with interest in proportion to estimated gross profits. The
assumptions used as to interest, persistency, morbidity and mortality are
consistent with those used in computing the liability for future policy
benefits and expenses. If it is determined that future experience will
probably differ significantly from that previously assumed, the estimates are
revised. Deferred acquisition costs are adjusted to reflect the amounts
associated with realized and unrealized investment gains and losses pertaining
to universal life-type products.
Income Taxes: Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement book
values and tax bases of assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Property and Equipment: Property and equipment is reported at cost less
allowances for depreciation. Depreciation is recorded primarily on the
straight line method over the estimated useful lives of these assets which
range from two to ten years for equipment and five to forty years for
buildings and improvements. Ordinary maintenance and repairs are charged to
income as incurred.
Impairments: Torchmark accounts for impairments in accordance with the
provisions of SFAS 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. This standard requires that certain
long-lived assets used in Torchmark's business as well as certain intangible
assets, including goodwill, be reviewed for impairment when circumstances
indicate that these assets may not be recoverable, and further provides how
such impairment shall be determined and measured. It also requires that long-
lived assets and intangibles to be disposed of be reported at the lower of
carrying amount or fair value less cost to sell. Except for Torchmark's
writedown of real estate in 1999, as discussed in Note 3--Investments on page
54 of this report, and Torchmark's writedown of its investment in Vesta
Insurance Group ("Vesta") in 1998, as discussed in Note 20--Related Party
Transactions on page 81 of this report, there were no significant impairments
in the three years ending 2000.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1--Significant Accounting Policies (continued)
Goodwill: The excess cost of businesses acquired over the fair value of
their net assets is reported as goodwill and is amortized on a straight-line
basis over a period not exceeding 40 years. Torchmark's unamortized goodwill
is periodically reviewed to ensure that conditions are present to indicate the
recorded amount of goodwill is recoverable from the estimated future
profitability of the related business. If events or changes in circumstances
indicate that future profits will not be sufficient to support the carrying
amount of goodwill, goodwill would be written down to the recoverable amount
and amortized over the original remaining period or a reduced period if
appropriate.
Treasury Stock: Torchmark accounts for purchases of treasury stock on the
cost method. Issuance of treasury stock is accounted for using the weighted-
average cost method.
Reclassifications: Certain amounts in the financial statements presented
have been reclassified from amounts previously reported in order to be
comparable between years. These reclassifications have no effect on previously
reported shareholders' equity or net income during the periods involved.
Litigation: Torchmark and its subsidiaries continue to be named as parties
to legal proceedings. Because much of Torchmark's litigation is brought in
Alabama, a jurisdiction known for large 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: Torchmark presents basic and diluted earnings per share
("EPS") on the face of the income statement and a reconciliation of basic EPS
to diluted EPS. Basic EPS is computed by dividing income available to common
stockholders by the weighted average common shares outstanding for the period.
Weighted average common shares outstanding for each period are as follows:
2000--128,089,235, 1999--133,197,023, 1998--139,998,671. Diluted EPS is
calculated by adding to shares outstanding the additional net effect of
potentially dilutive securities or contracts which could be exercised or
converted into common shares. Weighted average diluted shares outstanding for
each period are as follows: 2000--128,353,404, 1999--133,985,943, 1998--
141,351,912.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 2--Statutory Accounting
Insurance subsidiaries of Torchmark are required to file statutory financial
statements with state insurance regulatory authorities. Accounting principles
used to prepare these statutory financial statements differ from GAAP.
Consolidated net income and shareholders' equity on a statutory basis for the
insurance subsidiaries were as follows:
Net Income Shareholders' Equity
Year Ended December 31, At December 31,
-------------------------- ---------------------
2000 1999 1998 2000 1999
-------- -------- -------- ---------- ----------
Life insurance subsidiar-
ies...................... $239,804 $193,253 $260,847 $717,554 $667,168
During 1998, Liberty National Life Insurance Company paid an extraordinary
dividend to Torchmark in the amount of $213 million. In 1999, Liberty paid $61
million and Globe Life And Accident Insurance Company paid $34.5 million in
extraordinary dividends.
The excess, if any, of shareholders' equity of the insurance subsidiaries on
a GAAP basis over that determined on a statutory basis is not available for
distribution to Torchmark without regulatory approval.
A reconciliation of Torchmark's insurance subsidiaries' statutory net income
to Torchmark's consolidated GAAP net income is as follows:
Year Ended December 31,
-------------------------------
2000 1999 1998
--------- --------- ---------
Statutory net income.................... $ 239,804 $ 193,253 $ 260,847
Deferral of acquisition costs........... 462,174 419,590 356,493
Amortization of acquisition costs....... (274,837) (247,800) (231,024)
Differences in insurance policy liabili-
ties................................... 37,771 80,088 96,412
Deferred income taxes................... (84,585) (63,576) (107,384)
Income of noninsurance affiliates....... (53,631) (62,711) (100,758)
Other................................... 35,339 (44,888) (30,145)
--------- --------- ---------
GAAP net income....................... $ 362,035 $ 273,956 $ 244,441
========= ========= =========
A reconciliation of Torchmark's insurance subsidiaries' statutory
shareholders' equity to Torchmark's consolidated GAAP shareholders' equity is
as follows:
Year Ended
December 31,
----------------------
2000 1999
---------- ----------
Statutory shareholders' equity.................... $ 717,554 $ 667,168
Differences in insurance policy liabilities....... 591,535 587,619
Deferred acquisition costs........................ 1,942,161 1,741,570
Value of insurance purchased...................... 133,158 151,752
Deferred income taxes............................. (461,858) (367,994)
Debt of parent company............................ (695,137) (789,949)
Monthly income preferred securities............... (193,395) (193,324)
Asset valuation reserves.......................... 63,945 53,364
Nonadmitted assets................................ 46,331 15,983
Goodwill.......................................... 390,509 402,584
Market value adjustment on fixed maturities....... (225,978) (268,598)
Other............................................. (106,465) (6,838)
---------- ----------
GAAP shareholders' equity........................ $2,202,360 $1,993,337
========== ==========
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 3--Investments
Year Ended December 31,
-----------------------------
2000 1999 1998
-------- --------- --------
Investment income is summarized as fol-
lows:
Fixed maturities....................... $445,146 $ 409,695 $410,528
Equity securities...................... 378 488 301
Mortgage loans on real estate.......... 9,281 7,720 9,247
Investment real estate................. 2,693 7,889 8,332
Policy loans........................... 16,981 16,308 15,301
Other long-term investments............ 7,637 11,245 19,755
Short-term investments................. 5,728 4,066 6,089
-------- --------- --------
487,844 457,411 469,553
Less investment expense................ (15,418) (10,074) (9,995)
-------- --------- --------
Net investment income.................. $472,426 $ 447,337 $459,558
======== ========= ========
An analysis of gains (losses) from
investments is as follows:
Realized investment gains (losses):
Fixed maturities...................... $(15,328) $ (30,145) $ (8,519)
Equity securities..................... 3,239 215 -0-
Other................................. 6,767 (81,041) (49,118)
-------- --------- --------
(5,322) (110,971) (57,637)
Adjustment to deferred acquisition
costs ................................ -0- -0- -0-
-------- --------- --------
(5,322) (110,971) (57,637)
Applicable tax......................... 1,863 38,840 20,173
-------- --------- --------
Gains (losses) from investments, net of
tax................................... $ (3,459) $ (72,131) $(37,464)
======== ========= ========
An analysis of the net change in
unrealized investment gains (losses) is
as follows:
Equity securities...................... $ 7,803 $ (15,519) $ (1,080)
Fixed maturities available for sale.... 38,784 (525,374) 66,526
Other long-term investments and foreign
exchange translation adjustments...... (667) 2,028 (46,018)
Adjustment to deferred acquisition
costs................................. (5,340) 48,382 (3,091)
-------- --------- --------
40,580 (490,483) 16,337
Applicable tax......................... (14,764) 171,760 (8,762)
-------- --------- --------
Change in unrealized gains (losses),
net of tax............................ $ 25,816 $(318,723) $ 7,575
======== ========= ========
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 3--Investments (continued)
A summary of fixed maturities available for sale and equity securities by
amortized cost and estimated fair value at December 31, 2000 and 1999 is as
follows:
Cost or Gross Gross Amount per % of Total
Amortized Unrealized Unrealized Fair the Balance Fixed
Cost Gains Losses Value Sheet Maturities
---------- ---------- ---------- ---------- ----------- ----------
2000:
- -----
Fixed maturities avail-
able for sale:
Bonds:
U.S. Government direct
obligations and
agencies............. $ 73,838 $ 1,554 $ (4) $ 75,388 $ 75,388 1.3%
GNMAs................. 258,172 10,387 (777) 267,782 267,782 4.5
Mortgage-backed
securities, GNMA
collateral........... 8,454 46 (12) 8,488 8,488 0.1
Other mortgage-backed
securities........... 370,257 12,770 (332) 382,695 382,695 6.4
State, municipalities
and political
subdivisions......... 309,812 11,345 (1,849) 319,308 319,308 5.4
Foreign governments... 46,393 1,328 (2) 47,719 47,719 0.8
Public utilities...... 658,837 13,102 (23,753) 648,186 648,186 10.9
Industrial and
miscellaneous........ 4,308,625 54,389 (301,684) 4,061,330 4,061,330 68.3
Asset-backed
securities........... 148,600 645 (13,192) 136,053 136,053 2.3
Redeemable preferred
stocks................ 2,512 54 -0- 2,566 2,566 0.0
---------- -------- --------- ---------- ---------- -----
Total fixed maturities
..................... 6,185,500 105,620 (341,605) 5,949,515 5,949,515 100%
Equity securities:
Common stocks:
Banks and insurance
companies............ 427 81 (8) 500 500
Industrial and all
others............... 239 -0- (196) 43 43
---------- -------- --------- ---------- ----------
Total equity
securities........... 666 81 (204) 543 543
---------- -------- --------- ---------- ----------
Total fixed maturities
and equity
securities........... $6,186,166 $105,701 $(341,809) $5,950,058 $5,950,058
========== ======== ========= ========== ==========
1999:
- -----
Fixed maturities
available for sale:
Bonds:
U.S. Government direct
obligations and
agencies............. $ 82,550 $ 228 $ (1,885) $ 80,893 $ 80,893 1.4%
GNMAs................. 371,374 13,325 (4,027) 380,672 380,672 6.7
Mortgage-backed
securities, GNMA
collateral........... 20,617 99 (41) 20,675 20,675 0.4
Other mortgage-backed
securities........... 322,092 1,773 (6,320) 317,545 317,545 5.6
State, municipalities
and political
subdivisions......... 557,250 8,947 (4,972) 561,225 561,225 9.9
Foreign governments... 57,495 1,338 (317) 58,516 58,516 1.0
Public utilities...... 613,494 1,421 (31,828) 583,087 583,087 10.3
Industrial and
miscellaneous........ 3,761,683 6,600 (237,284) 3,530,998 3,530,998 62.2
Asset-backed
securities........... 165,611 33 (22,055) 143,590 143,590 2.5
Redeemable preferred
stocks................ 2,531 63 -0- 2,594 2,594 0.0
---------- -------- --------- ---------- ---------- -----
Total fixed
maturities........... 5,954,697 33,827 (308,729) 5,679,795 5,679,795 100.0%
Equity securities:
Common stocks:
Banks and insurance
companies............ 36,879 7,289 (15,042) 29,126 29,126
Industrial and all
others............... 242 -0- (179) 63 63
---------- -------- --------- ---------- ----------
Total equity
securities........... 37,121 7,289 (15,221) 29,189 29,189
---------- -------- --------- ---------- ----------
Total fixed maturities
and equity
securities........... $5,991,818 $ 41,116 $(323,950) $5,708,984 $5,708,984
========== ======== ========= ========== ==========
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 3--Investments (continued)
A schedule of fixed maturities by contractual maturity at December 31, 2000
is shown below on an amortized cost basis and on a fair value basis. Actual
maturities could differ from contractual maturities due to call or prepayment
provisions.
Amortized Fair
Cost Value
---------- ----------
Fixed maturities available
for sale:
Due in one year or less... $ 82,651 $ 82,925
Due from one to five
years.................... 732,004 720,939
Due from five to ten
years.................... 2,320,303 2,293,072
Due after ten years....... 2,262,547 2,054,995
---------- ----------
5,397,505 5,151,931
Redeemable preferred
stocks................... 2,512 2,566
Mortgage-backed and asset-
backed securities........ 785,483 795,018
---------- ----------
$6,185,500 $5,949,515
========== ==========
Proceeds from sales of fixed maturities available for sale were $629 million
in 2000, $1.24 billion in 1999, and $758 million in 1998. Gross gains realized
on those sales were $8.2 million in 2000, $4.3 million in 1999, and $6.1
million in 1998. Gross losses were $10.7 million in 2000, $36.5 million in
1999, and $20.1 million in 1998. Proceeds from sales of equity securities
available for sale were $39.7 million in 2000, $260 thousand in 1999, and -0-
in 1998. Gross gains realized on those sales were $6.5 million in 2000,
$215 thousand in 1999, and -0- in 1998. Gross losses were $3.2 million in
2000, -0- in 1999, and -0- in 1998.
Torchmark had $6.7 million and $7.0 million in investment real estate at
December 31, 2000 and 1999, respectively, which was nonincome producing during
the previous twelve months. These properties consisted primarily of
undeveloped land. Torchmark had $3.4 million and $118 thousand in nonincome
producing mortgages as of December 31, 2000 and 1999, respectively. As of
year-end 2000, Torchmark had $410 thousand in nonincome producing fixed
maturities. There were no other long-term investments which were nonincome
producing at December 31, 2000.
In 1999, Torchmark disposed of most of its investment real estate. In the
second quarter of 1999, efforts to dispose of these properties revealed that
the carrying value of the real estate exceeded its estimated realizable value.
For this reason Torchmark wrote down its investment real estate portfolio to
its estimated realizable value as of June 30, 1999. This write down resulted
in a pretax loss of $64 million, or $41 million after tax. The majority of the
investment real estate was sold in two transactions in the latter half of 1999
for total consideration of $123 million, of which $111 million was in cash and
the remainder in a ten-year collateralized note. After the sales, Torchmark
retained $16.4 million in investment real estate, of which $8 million was
included with properties partially occupied by Torchmark subsidiaries. At
December 31, 2000, Torchmark owned $15.5 million in investment real estate, of
which $7.1 million was included with properties partially occupied by
Torchmark subsidiaries.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4--Property and Equipment
A summary of property and equipment used in the business is as follows:
December 31, 2000 December 31, 1999
--------------------- ---------------------
Accumulated Accumulated
Cost Depreciation Cost Depreciation
-------- ------------ -------- ------------
Company occupied real estate........ $ 59,920 $29,956 $ 58,042 $28,440
Data processing equipment........... 22,206 20,884 20,823 19,185
Transportation equipment............ 7,430 2,995 7,128 2,525
Furniture and office equipment...... 19,315 16,342 17,083 14,165
-------- ------- -------- -------
$108,871 $70,177 $103,076 $64,315
======== ======= ======== =======
Depreciation expense on property used in the business was $6.3 million, $5.6
million, and $4.2 million in each of the years 2000, 1999, and 1998,
respectively.
Note 5--Deferred Acquisition Costs and Value of Insurance Purchased
An analysis of deferred acquisition costs and the value of insurance
purchased is as follows:
2000 1999 1998
---------------------- ---------------------- ----------------------
Deferred Value of Deferred Value of Deferred Value of
Acquisition Insurance Acquisition Insurance Acquisition Insurance
Costs Purchased Costs Purchased Costs Purchased
----------- --------- ----------- --------- ----------- ---------
Balance at beginning of
year................... $1,741,570 $151,752 $1,502,512 $170,640 $1,371,131 $216,988
Additions:
Deferred during peri-
od:
Commissions........... 290,597 -0- 246,174 -0- 207,864 -0-
Other expenses........ 171,577 -0- 173,416 -0- 148,629 -0-
---------- -------- ---------- -------- ---------- --------
Total deferred....... 462,174 -0- 419,590 -0- 356,493 -0-
Adjustment attributable
to unrealized invest-
ment losses(1)........ -0- -0- 48,380 -0- -0- -0-
---------- -------- ---------- -------- ---------- --------
Total additions...... 462,174 -0- 467,970 -0- 356,493 -0-
Deductions:
Amortized during peri-
od................... (256,243) (18,594) (228,912) (18,888) (210,287) (20,737)
Adjustment
attributable to
unrealized investment
gains(1)............. (5,340) -0- -0- -0- (3,092) -0-
Business disposed..... -0- -0- -0- -0- (11,734) (25,611)
---------- -------- ---------- -------- ---------- --------
Total deductions..... (261,583) (18,594) (228,912) (18,888) (225,113) (46,348)
---------- -------- ---------- -------- ---------- --------
Balance at end of year.. $1,942,161 $133,158 $1,741,570 $151,752 $1,502,511 $170,640
========== ======== ========== ======== ========== ========
- --------
(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 $9.1 million, $10.5 million, and $13.2 million, for
the years ended December 31, 2000, 1999, and 1998, respectively. The average
interest rates used for the years ended December 31, 2000, 1999, and 1998,
were 6.4%, 6.5%, and 6.8%, respectively. The estimated amortization, net of
interest accrued, on the unamortized balance at December 31, 2000 during each
of the next five years is: 2001, $16.3 million; 2002, $13.7 million; 2003,
$11.8 million; 2004, $10.2 million; and 2005, $8.9 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.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 6--Initial Public Offering and Divestiture of Asset Management Segment
Divestiture of Waddell & Reed. Waddell & Reed, Torchmark's asset management
subsidiary, completed an initial public offering in March, 1998 of
approximately 24 million shares of its common stock. The offering represented
approximately 36% of Waddell & Reed's shares. Net proceeds from the offering
were approximately $516 million after underwriters' fees and expenses. Waddell
& Reed used $481 million of the proceeds to repay existing notes owed to
Torchmark and other Torchmark subsidiaries and retained the remaining $35
million. Torchmark's $481 million proceeds from the note repayments were
invested or used to pay down debt. The initial public offering resulted in a
$426 million gain which was added to Torchmark's additional paid-in capital in
accordance with Staff Accounting Bulletin 51. Torchmark retained the remaining
64% of the Waddell & Reed stock.
On November 6, 1998, Torchmark distributed the remaining 64% investment in
Waddell & Reed through a tax-free spin-off to Torchmark shareholders. Each
Torchmark shareholder of record on October 23, 1998 received a total of .3018
Waddell & Reed shares per Torchmark share. After the spin-off, Torchmark
retained no further ownership interest in Waddell & Reed. As a result of the
transaction, Torchmark incurred $54 million in expense related to the spin-
off, the majority of which was $50 million of corporate Federal income tax
resulting from the distribution of a portion of the policyholder surplus
account of a Torchmark life subsidiary.
Torchmark accounted for the spin-off of Waddell & Reed as a disposal of a
segment. Accordingly, Torchmark's financial statements for 1998 and all prior
periods have been modified to present the net assets and operating results of
Waddell & Reed as discontinued operations of the disposed segment. The $54
million expense of the spin-off is included in discontinued operations under
the caption "Loss on Disposal." The distribution of the Waddell & Reed shares
resulted in a reduction in Torchmark's shareholders' equity in the approximate
amount of $174 million, consisting of the equity in Waddell & Reed net of the
36% minority Interest.
Note 7--Sale of Family Service
On June 1, 1998, Torchmark sold Family Service to an unaffiliated insurance
carrier. Family Service, which was acquired in 1990, is a preneed funeral
insurer. Consideration for the sale was $140 million in cash. Torchmark
recorded a pretax realized loss on the sale of approximately $14 million, but
incurred a tax expense on the transaction of $9 million. In connection with
the sale, Torchmark will continue to service the policies in force of Family
Service for the next five years for a fee of $2 million per year plus certain
variable processing costs. Through May, 1998, Family Service contributed $25
million in revenues and $5.8 million in pretax income. Invested assets were
$778 million and total assets were $828 million at the date of the sale.
Note 8--Supplemental Disclosures for Cash Flow Statement
The following table summarizes Torchmark's noncash transactions, which are
not reflected on the Statement of Cash Flow:
Year Ended
December 31,
----------------------
2000 1999 1998
------ ------ --------
Paid-in capital from tax benefit for stock option
exercises......................................... $3,163 $9,750 $ 933
Deferred option grants............................. 374 482 582
Distribution of Waddell & Reed stock............... -0- -0- 174,113
The following table summarizes certain amounts paid during the period:
Year Ended December 31,
-------------------------
2000 1999 1998
------- -------- --------
Interest paid..................................... $54,748 $ 52,704 $ 66,911
Income taxes paid................................. 79,241 148,223 102,753
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9--Future Policy Benefit Reserves
A summary of the assumptions used in determining the liability for future
policy benefits at December 31, 2000 is as follows:
Individual Life Insurance
Interest assumptions:
Percent of
Years of Issue Interest Rates Liability
-------------- --------------------- ----------
1917-2000 3.00% 2%
1947-1954 3.25% 1
1927-1989 3.50% 1
1955-1961 3.75% 1
1925-2000 4.00% 10
1962-1969 4.50% graded to 4.00% 2
1970-1980 5.50% graded to 4.00% 3
1970-2000 5.50% 1
1929-2000 6.00% 20
1986-1994 7.00% graded to 6.00% 12
1954-2000 8.00% graded to 6.00% 12
1951-1985 8.50% graded to 6.00% 8
2000 7.00% 1
1980-1987 8.50% graded to 7.00% 1
1984-2000 Interest Sensitive 25
---
100%
===
Mortality assumptions:
For individual life, the mortality tables used are various statutory
mortality tables and modifications of:
1950-54 Select and Ultimate Table
1954-58 Industrial Experience Table
1955-60 Ordinary Experience Table
1965-70 Select and Ultimate Table
1955-60 Inter-Company Table
1970 United States Life Table
1975-80 Select and Ultimate Table
X-18 Ultimate Table
Withdrawal assumptions:
Withdrawal assumptions are based on Torchmark's experience.
Individual Health Insurance
Interest assumptions:
Percent of
Years of Issue Interest Rates Liability
-------------- --------------------- ----------
1962-2000 3.00% 4%
1982-2000 4.50% 3
1993-2000 6.00% 23
1986-1992 7.00% graded to 6.00% 44
1955-2000 8.00% graded to 6.00% 20
1951-1986 8.50% graded to 6.00% 6
---
100%
===
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9--Future Policy Benefit Reserves (continued)
Morbidity assumptions:
For individual health, the morbidity assumptions are based on either
Torchmark's experience or the assumptions used in calculating statutory
reserves.
Termination assumptions:
Termination assumptions are based on Torchmark's experience.
Overall Interest Assumptions
The overall average interest assumption for determining the liability for
future life and health insurance benefits in 2000 was 6.1%.
Note 10--Liability for Unpaid Health Claims
Activity in the liability for unpaid health claims is summarized as follows:
Year ended December 31,
--------------------------
2000 1999 1998
-------- -------- --------
Balance at beginning of year:.................. $162,137 $145,802 $178,989
Incurred related to:
Current year.................................. 603,641 555,595 518,993
Prior year.................................... 6,365 8,297 (2,670)
-------- -------- --------
Total incurred................................. 610,006 563,892 516,323
Paid related to:
Current year.................................. 440,370 364,623 342,084
Prior year.................................... 148,626 182,934 207,426
-------- -------- --------
Total paid..................................... 588,996 547,557 549,510
-------- -------- --------
Balance at end of year......................... $183,147 $162,137 $145,802
======== ======== ========
The liability for unpaid health claims is included with "Policy claims and
other benefits payable" on the Consolidated Balance Sheet.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 11--Income Taxes
Torchmark and its subsidiaries file a life-nonlife consolidated federal
income tax return.
Total income taxes were allocated as follows:
Year Ended December 31,
-----------------------------
2000 1999 1998
-------- --------- --------
Income from continuing operations............ $190,841 $ 134,320 $154,338
Discontinued operations...................... -0- (571) 92,772
Monthly income preferred securities dividend. (5,538) (4,932) (5,265)
Shareholders' equity:
Unrealized gains (losses)................... 14,807 (171,757) 8,540
Tax basis compensation expense (from the
exercise of stock options) in excess of
amounts recognized for financial reporting
purposes................................... (3,164) (9,751) (933)
Other........................................ (3,803) (1,274) (1,964)
-------- --------- --------
$193,143 $ (53,965) $247,488
======== ========= ========
Income tax expense attributable to income from continuing operations
consists of:
Year ended December 31,
--------------------------
2000 1999 1998
-------- -------- --------
Current income tax expense....................... $116,773 $ 85,917 $118,827
Deferred income tax expense...................... 74,068 48,403 35,511
-------- -------- --------
$190,841 $134,320 $154,338
======== ======== ========
In 2000, 1999, and 1998, deferred income tax expense was incurred because of
certain differences between net operating income before income taxes as
reported on the consolidated statement of operations and taxable income as
reported on Torchmark's income tax returns. As explained in Note 1, these
differences caused the financial statement book values of some assets and
liabilities to be different from their respective tax bases.
The effective income tax rate differed from the expected 35% rate as shown
below:
Year ended December 31,
-------------------------------------------
2000 % 1999 % 1998 %
-------- --- -------- --- -------- ---
Expected income taxes............ $197,035 35% $140,843 35% $156,447 35%
Increase (reduction) in income
taxes resulting from:
Tax-exempt investment income.... (9,546) (2) (8,798) (2) (7,111) (2)
Equity in earnings of Vesta..... -0- -0- (9,485) (2)
Sale of Family Service.......... -0- -0- 13,460 3
Other........................... 3,352 1 2,275 1 1,027 1
-------- --- -------- --- -------- ---
Income taxes..................... $190,841 34% $134,320 34% $154,338 35%
======== === ======== === ======== ===
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 11--Income Taxes (continued)
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
December 31,
-----------------
2000 1999
-------- --------
Deferred tax assets:
Unrealized investment losses................................ $ 74,626 $ 89,433
Present value of future policy surrender charges............ 39,964 28,534
Carryover of nonlife net operating losses and life-nonlife
capital losses............................................. 28,227 18,044
Other assets and other liabilities, principally due to the
current nondeductibility of certain accrued expenses for
tax purposes............................................... 30,062 42,458
-------- --------
Total gross deferred tax assets............................. 172,879 178,469
Deferred tax liabilities:
Deferred acquisition costs.................................. 492,267 445,266
Future policy benefits, unearned and advance premiums, and
policy claims.............................................. 104,314 69,314
Other....................................................... 14,666 12,553
-------- --------
Total gross deferred tax liabilities........................ 611,247 527,133
-------- --------
Net deferred tax liability................................... $438,368 $348,664
======== ========
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 $10 million that arose prior to 1984 on temporary differences
related to the policyholders' surplus accounts in the life insurance
subsidiaries. A current tax expense will be recognized in the future if and
when these amounts are distributed.
As more fully discussed in Note 6, Torchmark completed the spin-off of its
asset management segment in 1998, which resulted in a distribution of the
policyholder surplus account of a Torchmark life insurance subsidiary. This
caused a current tax expense of $50 million.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 12--Postretirement Benefits
Pension Plans: Torchmark has noncontributory retirement benefit plans and
contributory savings plans which cover substantially all employees. There is
also a nonqualified noncontributory excess benefit pension plan which covers
certain employees. The total cost of these retirement plans charged to
operations was as follows:
Defined Excess
Defined Benefit Benefit
Year Ended Contribution Pension Pension
December 31, Plans Plans Plan
------------ ------------ ------- -------
2000.................... $3,097 $2,148 $462
1999.................... 2,775 2,889 480
1998.................... 1,530 2,875 399
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. Plan contributions are both mandatory and discretionary,
depending on the terms of the plan.
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 $7.5 million at December 31, 2000 and 1999, respectively. The plans
covering the majority of employees are organized as trust funds whose assets
consist primarily of investments in marketable long-term fixed maturities and
equity securities which are valued at market.
The excess benefit pension plan provides the benefits that an employee would
have otherwise received from a defined benefit pension plan in the absence of
the Internal Revenue Code's limitation on benefits payable under a qualified
plan. Although this plan is unfunded, pension cost is determined in a similar
manner as for the funded plans. Liability for the excess benefit plan was $4.6
million and $4.7 million at December 31, 2000 and 1999, respectively.
Net periodic pension cost for the defined benefit plans by expense component
was as follows:
Year Ended December 31,
--------------------------
2000 1999 1998
-------- ------- -------
Service cost--benefits earned during the pe-
riod....................................... $ 5,142 $ 5,133 $ 4,555
Interest cost on projected benefit obliga-
tion....................................... 8,763 8,260 7,595
Expected return on assets................... (10,639) (9,892) (8,598)
Amortization of prior service cost.......... 78 59 56
Recognition of net actuarial (gain)/loss.... (734) (191) (334)
-------- ------- -------
Net periodic pension cost.................. $ 2,610 $ 3,369 $ 3,274
======== ======= =======
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 12--Postretirement Benefits (continued)
Torchmark adopted FASB Statement No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits, that was effective for year-end
1998. In accordance with this Standard, the following table presents a
reconciliation from the beginning to the end of the year of the benefit
obligation and plan assets. This table also presents a reconciliation of the
plans' funded status with the amounts recognized on Torchmark's balance sheet.
Pension Benefits
For the year
ended
December 31,
------------------
2000 1999
-------- --------
Changes in benefit obligation:
Obligation at beginning of year..................... $104,581 $109,720
Service cost........................................ 5,142 5,133
Interest cost....................................... 8,763 8,260
Amendments.......................................... -0- 74
Actuarial loss (gain)............................... 7,812 (5,430)
Benefits paid....................................... (12,076) (13,176)
-------- --------
Obligation at end of year........................... 114,222 104,581
Changes in plan assets:
Fair value at beginning of year..................... 132,779 123,289
Return on assets.................................... 18,038 20,381
Contributions....................................... 577 2,285
Benefits paid....................................... (12,076) (13,176)
-------- --------
Fair value at end of year........................... 139,318 132,779
-------- --------
Funded status at year end........................... 25,096 28,198
Unrecognized amounts at year end:
Unrecognized actuarial loss (gain).................. (39,657) (40,764)
Unrecognized prior service cost..................... 787 865
Unrecognized transition obligation.................. (75) (115)
-------- --------
Net amount recognized at year end................... $(13,849) $(11,816)
======== ========
Amounts recognized consist of:
Prepaid benefit cost................................ $ 323 $ 243
Accrued benefit liability........................... (14,491) (12,418)
Intangible asset.................................... 319 359
-------- --------
Net amount recognized at year end................... $(13,849) $(11,816)
======== ========
The weighted average assumed discount rates used in determining the
actuarial benefit obligations were 7.5% in both 2000 and 1999. The rate of
assumed compensation increase was 4.5% in both 2000 and 1999 and the expected
long-term rate of return on plan assets was 9.2% in both 2000 and 1999.
Postretirement Benefit Plans Other Than Pensions: Torchmark provides
postretirement life insurance benefits for most retired employees, and also
provides additional postretirement life insurance benefits for certain key
employees. The majority of the life insurance benefits are accrued over the
working lives of active employees.
For retired employees over age sixty-five, Torchmark does not provide
postretirement benefits other than pensions. Torchmark does provide a portion
of the cost for health insurance benefits for employees who retired before
February 1, 1993 and before age sixty-five, covering them until they reach age
sixty-five. Eligibility for this benefit was generally achieved at age fifty-
five with at least fifteen years of service. This subsidy is minimal to
retired employees who did not retire before February 1, 1993. This plan is
unfunded.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 12--Postretirement Benefits (continued)
The components of net periodic postretirement benefit cost for plans other
than pensions are as follows:
Year Ended
December 31,
-----------------
2000 1999 1998
----- ---- ----
Service cost......................................... $ 301 $239 $249
Interest cost on accumulated postretirement benefit
obligation.......................................... 508 380 493
Expected return on plan assets....................... -0- -0- -0-
Amortization of prior service cost................... (161) (216) (206)
Recognition of net actuarial (gain)/loss............. (39) (234) (75)
----- ---- ----
Net periodic postretirement benefit cost............. $ 609 $169 $461
===== ==== ====
The following table presents a reconciliation of the benefit obligation and
plan assets from the beginning to the end of the year and a reconciliation of
the funded status to the accrued benefit liability:
Benefits Other Than Pensions
For the year ended December 31,
2000 1999
---------------- ---------------
Changes in benefit obligation:
Obligation at beginning of year........ $ 5,615 $ 6,849
Service cost........................... 301 239
Interest cost.......................... 508 380
Amendments............................. -0- -0-
Actuarial loss (gain).................. 1,780 (1,324)
Benefits paid.......................... (674) (529)
--------------- ---------------
Obligation at end of year.............. 7,530 5,615
Changes in plan assets:
Fair value at beginning of year........ -0- -0-
Return on assets....................... -0- -0-
Contributions.......................... 674 529
Benefits paid.......................... (674) (529)
--------------- ---------------
Fair value at end of year.............. -0- -0-
--------------- ---------------
Funded status at year end............. (7,530) (5,615)
Unrecognized amounts at year end:
Unrecognized actuarial loss (gain)..... (530) (2,349)
Unrecognized prior service cost........ (129) (290)
--------------- ---------------
Net amount recognized at year end as
accrued benefit liability............ $ (8,189) $ (8,254)
=============== ===============
For measurement purposes, a range of 7.0% to 10.0% annual rate of increase
in per capita cost of covered healthcare benefits was assumed for 2000. These
rates grade to ranges of 4.5% to 5.5% by the year 2010. The health care cost
trend rate assumption has a significant effect on the amounts reported, as
illustrated in the following table which presents the effect of a one
percentage point increase and decrease on the service and interest cost
components and the benefit obligation:
Change in Trend Rate
-----------------------
Effect on: 1% Increase 1% Decrease
---------- ----------- -----------
Service and interest cost components................. $ 77 $ 68
Benefit obligation................................... 609 536
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% in 2000 and 7.15% in 1999.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13--Debt
An analysis of debt at carrying value is as follows:
December 31,
-----------------------------------------
2000 1999
-------------------- --------------------
Short-term Long-term Short-term Long-term
Debt Debt Debt Debt
---------- --------- ---------- ---------
Senior Debentures, due 2009......... $ 99,450 $ 99,450
Notes, due 2023..................... 173,675 177,540
Notes, due 2013..................... 92,864 94,565
Commercial paper.................... $329,148 $418,394
-------- -------- -------- --------
$329,148 $365,989 $418,394 $371,555
======== ======== ======== ========
The amount of debt that becomes due during each of the next five years is:
2001, $329,148, and 2002-2005, $0.
The Senior Debentures, remaining principal amount of $99 million, are due
August 15, 2009. They bear interest at a rate of 8 1/4%, with interest payable
on February 15 and August 15 of each year. The Senior Debentures are not
redeemable at the option of Torchmark prior to maturity and have equal
priority with other Torchmark unsecured indebtedness.
The Notes, due May 15, 2023, were issued in May, 1993 in the principal
amount of $200 million. Proceeds of the issue, net of issue costs, were $196
million. Interest is payable on May 15 and November 15 of each year at a rate
of 7 7/8%. In 1998 and 1999, $10.8 million and $7.6 million principal amount
were purchased in the open market at a cost of $10.6 million and $7.9 million
respectively by Torchmark subsidiary companies, which in turn sold them to the
parent company in 2000 for $16.6 million. An additional $4.6 million principal
amount was purchased by the parent company in the open market at a cost of
$4.2 million. An after-tax gain on the redemption of debt of $166 thousand was
recorded in the fourth quarter of 2000. These notes are not callable 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%. In March, 1999, $4.0
million principal amount was purchased in the open market at a cost of
$4.1 million by a Torchmark insurance subsidiary, which in turn sold it to the
parent company in 2000 for $3.7 million. In the fourth quarter of 2000,
Torchmark purchased $2.0 million principal amount in the open market at a cost
of $1.9 million. An after-tax gain on the redemption of debt of $36 thousand
was recorded in the fourth quarter of 2000. These notes are not callable prior
to maturity and have equal priority with other Torchmark unsecured
indebtedness.
Torchmark has entered into a revolving credit agreement with a group of
lenders under which it may borrow on an unsecured basis up to $600 million.
The commitment matures October 22, 2002. Borrowings are at interest rates
selected by Torchmark based on either the corporate base rate or the
Eurodollar rate at the time of borrowing. At December 31, 2000 and December
31, 1999 there were no borrowings under the revolving credit agreement. The
revolving credit agreement is also designed to back up a commercial paper
program. The short-term borrowings under the revolving credit agreements and
in the commercial paper market averaged $370 million during 2000, and were
made at an average yield of 6.32%. At December 31, 2000, commercial paper was
outstanding in the face amount of $331 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, 2000, and pays a
facility fee based on size of the line. Including fees, the average borrowing
cost during 2000 was 6.47%.
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13--Debt (continued)
In the first quarter of 1998, Torchmark repaid $20 million principal amount
of its 8 5/8% Sinking Fund Debentures due March 1, 2017, through a sinking
fund payment of which $8 million was mandatory and $12 million was elective
under the terms of the issue. The remaining $160 million principal amount was
called by Torchmark on April 1, 1998, at a prevailing call price of 103.76, or
$166 million. An after-tax loss on the redemption of debt of $5 million was
recorded in the second quarter of 1998. These payments were made from
additional commercial paper borrowings.
Torchmark also had $200 million principal amount 9 5/8% Senior Notes which
matured on May 1, 1998. The principal amount with accrued interest was repaid
from additional commercial paper borrowings.
Interest in the amount of $0, $284 thousand, and $2.4 million was
capitalized during 2000, 1999, and 1998, 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 have been redeemable at Torchmark's option since
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 expired on September 30, 1999. The variable
interest rate was 8.03% at December 31, 2000 and 7.00% at December 31, 1999.
The swap is accounted for as a free-standing derivative and is marked to
market value at the end of each accounting period. The market value of the
swap agreement was a benefit of $14.3 million at December 31, 2000 and $6.7
million at December 31, 1999. Torchmark changed its method of accounting for
this swap agreement during 1999. Refer to Note 15--Change in Accounting
Principle below for more information on this change in accounting principle.
Note 15--Change in Accounting Principle
Torchmark has in place a swap agreement with an unaffiliated party whereby
Torchmark pays a variable dividend rate on its $200 million face amount
outstanding MIPS in exchange for payment of a 9.18% fixed dividend. Effective
January 1, 1999, Torchmark changed its method of accounting for this swap
agreement to recognize changes in its fair value, net of tax, as realized
investment gains or losses. This method of accounting for such instruments is
believed to be preferable under the guidance established by Statement of
Financial Accounting Standards No. 80, "Accounting for Futures Contracts
("SFAS 80") and the Securities and Exchange Commission. Previously, Torchmark
accounted for the swap using hedge accounting under SFAS 80. The after-tax
cumulative effect of the change at January 1, 1999 of $16.1 million (net of
income taxes of $8.7 million) is included in income for the twelve months
ended December 31, 1999. The effect of the change on the twelve months ended
December 31, 1999 was to increase realized losses by $11.7 million ($.09 per
diluted share) excluding the cumulative effect of the change in accounting
principle. The pro forma effect of the retroactive application of the new
accounting method to the twelve month period ended December 31, 1998 would be
to increase net income by $4.4 million ($.03 per diluted share).
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 16--Shareholders' Equity
Share Data: A summary of preferred and common share activity is as follows:
Preferred Stock Common Stock
--------------- ------------------------
Treasury Treasury
Issued Stock Issued Stock
------ -------- ----------- -----------
1998:
Balance at January 1, 1998.......... -0- -0- 147,848,908 (7,808,468)
Issuance of common stock due to
exercise of stock options.......... 175,240
Issuance of common stock due to
restricted stock grant............. 117,500
Treasury stock acquired............. (3,436,205)
Restricted shares converted to
Waddell & Reed shares.............. (48,000)
--- --- ----------- -----------
Balance at December 31, 1998........ -0- -0- 147,800,908 (10,951,933)
1999:
Issuance of common stock due to
exercise of stock options.......... 1,898,524
Treasury stock acquired............. (6,742,606)
Lapse of unvested stock grant....... (8,625)
--- --- ----------- -----------
Balance at December 31, 1999........ -0- -0- 147,800,908 (15,804,640)
2000:
Issuance of common stock due to
exercise of stock options.......... 523,742
Treasury stock acquired............. (6,131,000)
--- --- ----------- -----------
Balance at December 31, 2000........ -0- -0- 147,800,908 (21,411,898)
=== === =========== ===========
At December 31, 2000 At December 31, 1999
--------------------- ---------------------
Preferred Common Preferred Common
Stock Stock Stock Stock
--------- ----------- --------- -----------
Par value per share................ $1.00 $1.00 $1.00 $1.00
Authorized shares.................. 5,000,000 320,000,000 5,000,000 320,000,000
Acquisition of Common Shares: Torchmark shares are acquired from time to
time through open market purchases under the Torchmark stock repurchase
program when it is believed to be the best use of Torchmark's funds and for
future employee stock option exercises. Share repurchases under this program
were 6.1 million shares at a cost of $147 million in 2000, 6.7 million shares
at a cost of $222 million in 1999, and 3.4 million shares at a cost of $126
million in 1998.
Grant of Restricted Stock: On January 1, 1998, 117,500 shares were granted
to four executive officers of Torchmark or its subsidiaries. These shares vest
over eight years in accordance with the following schedule: 16% on the first
anniversary, with the vesting percentage declining one percent each year
thereafter until the eighth anniversary. The market value of Torchmark stock
was $42.1875 per share on the grant date. In the fourth quarter of 1999, 8,625
restricted shares lapsed under the terms of the grant and were returned to the
company.
Restrictions: Restrictions exist on the flow of funds to Torchmark from its
insurance subsidiaries. Statutory regulations require life insurance
subsidiaries to maintain certain minimum amounts of capital and surplus. These
restrictions generally limit the payment of dividends by insurance
subsidiaries to statutory net gain from operations before realized capital
gains or losses 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 2001, $240 million will be available to
Torchmark for dividends from insurance subsidiaries in compliance with
statutory regulations without prior regulatory approval.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 16--Shareholders' Equity (continued)
Earnings Per Share: A reconciliation of basic and diluted weighted-average
shares outstanding is as follows:
2000 1999 1998
----------- ----------- -----------
Basic weighted average shares outstanding.. 128,089,235 133,197,023 139,998,671
Weighted average dilutive options
outstanding............................... 264,169 788,920 1,353,241
----------- ----------- -----------
Diluted weighted average shares
outstanding............................... 128,353,404 133,985,943 141,351,912
=========== =========== ===========
Options outstanding considered to be anti-dilutive totaled 7,497,546,
5,013,990, and -0- as of December 31, 2000, 1999, and 1998, respectively, and
are excluded from the calculation of diluted earnings per share. Income
available to common shareholders for basic earnings per share is equivalent to
income available to common shareholders for diluted earnings per share.
Note 17--Employee Stock Options
Certain employees, directors, and consultants have been granted options to
buy shares of Torchmark stock, generally at the market value of the stock on
the date of grant, under the provisions of the various Torchmark stock option
plans. The options are exercisable during the period commencing from the date
they vest until expiring ten years and two days or eleven years after grant.
Employee and consultant stock options generally vest one-half in two years and
one-half in three years. Formula-based director grants generally vest in six
months. Grants in September, 1997 and November, 1999 vested immediately for
all optionees other than those subject to SEC Section 16(a) reporting, whose
options vest in six months. A grant in December, 2000 vests in six months.
Stock options awarded in connection with compensation deferrals by certain
directors and executives vest over ten years. Torchmark generally issues
shares for the exercise of stock options out of treasury stock.
An analysis of shares available for grant is as follows:
Available for Grant
----------------------------------
2000 1999 1998
---------- ---------- ----------
Balance at January 1.................... 10,869,220 13,192,506 2,434,004
1998 Stock Incentive Plan............... 14,000,000
Approval of Executive Deferred and
Director Plan grants................... (216,481)
Grant of restricted stock(1)............ (117,500)
Lapse of restricted stock grants(1)..... 8,625
Expired................................. 1,100 70,760 13,700
Closure of option plans(2).............. (2,113,723)
Other grants............................ (1,394,253) (2,402,671) (807,494)
---------- ---------- ----------
Balance at December 31.................. 9,476,067 10,869,220 13,192,506
========== ========== ==========
- --------
(1) This stock grant was made from the 1987 Stock Incentive Plan. The
retirement of an employee during 1999 resulted in the lapse of unvested
grants.
(2) The 1987 Stock Incentive Plan, the 1998 Directors' Stock Option Plan, and
the 1998 Executive Deferred Compensation Stock Option Plan were closed in
1998.
Torchmark accounts for its employee stock options in accordance with SFAS
123 Accounting for Stock-Based Compensation, which defines a "fair value
method" of measuring and accounting for employee stock options. This standard
also allows accounting for such options under the "intrinsic value method" in
accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB 25") and related interpretations. If a company
elects to use the intrinsic value method, then pro forma disclosures of
earnings and earnings per share are required as if the fair value method of
accounting was applied. The effects of applying SFAS 123 in the pro forma
disclosures are not necessarily indicative of future amounts.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 17--Employee Stock Options (continued)
Torchmark has elected to account for its stock options under the intrinsic
value method as outlined in APB 25. The fair value method requires the use of
an option valuation model, such as the Black-Scholes option valuation model,
to value employee stock options, upon which compensation expense is based. The
Black-Scholes option valuation model was not developed for use in valuing
employee stock options. Instead, this model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because Torchmark's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, it is management's opinion that the existing models do not provide a
reliable measure of the fair value of its employee stock options. Under the
intrinsic value method, compensation expense for Torchmark's option grants is
only recognized if the exercise price of the employee stock option is less
than the market price of the underlying stock on the date of grant.
The fair value for Torchmark's employee stock options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted average assumptions for 2000, 1999, and 1998:
2000 1999 1998
-------- -------- --------
Risk-free interest rate........................... 5.1% 6.0% 4.8%
Dividend yield.................................... 1.0% 1.2% 1.1%
Volatility factor................................. 32.5 25.6 22.8
Weighted average expected life (in years)......... 4.77 4.66 4.71
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Torchmark's
pro forma information follows (in thousands except for earnings per share
information):
2000 1999 1998
-------- -------- --------
Pro forma net income.............................. $357,423 $262,433 $245,383
Pro forma basic net income per share.............. 2.79 1.97 1.75
Pro forma diluted net income per share............ 2.78 1.96 1.74
On November 15, 1999, Torchmark executed a stock option exercise and
restoration program through which 80 Torchmark directors and employees
exercised vested stock options and received a reduced number of replacement
options at current market price. This program resulted in the issuance of 1.8
million shares, of which 1.2 million shares were immediately sold by the
directors and employees through the open market to cover the cost of the
purchased shares and related taxes. Another restoration program was effected
on December 20, 2000 involving two employees who were not able to participate
in the 1999 restoration program. They exercised vested options for 433
thousand shares, resulting in the issuance of 433 thousand shares, of which
283 thousand shares were sold by the employee to pay the exercise price and
minimum withholding taxes. As a result of these restoration programs,
management's ownership interest increased, and Torchmark received a
significant current tax benefit from the exercise of the options.
On November 6, 1998, in connection with its spin-off of Waddell & Reed,
Torchmark adjusted the number and exercise price of its employee stock options
so that the options' value after the spin would be equivalent to its value
before the spin. Additionally, every eligible optionee was given the
opportunity to elect to convert a portion of their Torchmark options into
equivalent Waddell & Reed options in accordance with the same spin ratio that
was applicable to all Torchmark shareholders. Also, employees of Waddell &
Reed and directors were allowed to convert all of their Torchmark options into
equivalent Waddell & Reed options. In every case, the employee or director
maintained the same value after the spin-off as was held prior to the
transaction.
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 17--Employee Stock Options (continued)
As a result of the adjustment and conversion of these options, 7.2 million
outstanding Torchmark options with an aggregate exercise price of $219 million
on November 6, 1998 were replaced with 6.4 million adjusted Torchmark options
with an aggregate exercise price of $167 million. Also 3.7 million Waddell &
Reed options were granted with an aggregate exercise price of $51.6 million.
A summary of Torchmark's stock option activity and related information for
the years ended December 31, 2000, 1999, and 1998 follows:
2000 1999 1998
--------------------------- ---------------------------- ----------------------------
Weighted Average Weighted Average Weighted Average
Options Exercise Price Options Exercise Price Options Exercise Price
--------- ---------------- ---------- ---------------- ---------- ----------------
Outstanding-beginning
of year................ 7,661,787 $30.14 7,228,400 $27.04 7,241,050 $29.76
Granted................. 1,394,253 36.37 2,402,671 31.36 1,023,975 34.97
Exercised............... (523,742) 18.89 (1,898,524) 19.80 (175,240) 22.58
Expired................. (1,100) 28.84 (70,760) 32.98 (13,700) 29.19
Reduction due to Waddell
& Reed spinoff......... (7,249,129) 30.20
Addition due to Waddell
& Reed spinoff......... 6,401,444 26.16
--------- ------ ---------- ----------
Outstanding-end of year. 8,531,198 31.85 7,661,787 30.14 7,228,400 27.04
========= ====== ========== ==========
Exercisable at end of
year................... 5,345,265 31.54 4,243,254 29.37 5,038,081 26.24
The weighted average fair value of options granted during the years ended
December 31, 2000, 1999, and 1998 were $12.05, $9.29, and $8.88, respectively.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 17--Employee Stock Options (continued)
The following table summarizes information about stock options outstanding at
December 31, 2000:
Contract
Exercise Number Number Termination
Price Grant Date Outstanding Exercisable Date
-------- ---------- ----------- ----------- -----------
4.86419 October 1, 1993 6,416 6,416 October 3, 2003
5.63977 October 1, 1993 5,016 5,016 October 3, 2003
14.55172-14.58579 December 16, 1994 25,080 25,080 December 18, 2004
14.55222 December 7, 1992 1,694 1,694 December 9, 2002
14.55659-14.57130 December 14, 1993 6,337 6,337 December 16, 2003
14.57573 October 1, 1993 1,526 1,526 October 3, 2003
14.7127 December 12, 1991 13,802 13,802 December 14, 2001
14.92781 January 3, 1995 7,010 7,010 January 5, 2005
15.94885* December 18, 1996 46,000 10,000 December 18, 2007
16.42468 January 2, 1992 21,029 21,029 January 4, 2002
18.56413-18.5922 December 20, 1995 137,467 137,467 December 22, 2005
18.618 December 14, 1993 25,702 25,702 December 16, 2003
19.26091 January 2, 1996 7,010 7,010 January 4, 2006
19.26091-19.276 January 3, 1994 13,010 13,010 January 5, 2004
19.8125 February 29, 2000 22,355 22,355 March 2, 2010
19.8125 February 29, 2000 8,546 0 February 28, 2011
21.29257-21.30859 December 16, 1996 430,966 430,966 December 18, 2006
21.50657-21.50770 January 2, 1997 65,422 65,422 January 4, 2007
21.52056 January 2, 1997 14,534 1,817 January 2, 2008
22.14864-22.16198 January 31, 1997 140,927 34,629 January 31, 2008
22.25559 December 7, 1992 14,484 14,484 December 9, 2002
24.7174-24.72794 January 4, 1993 13,010 13,010 January 6, 2003
25.75 January 18, 2000 6,309 0 January 18, 2011
27.325 January 17, 2000 6,011 0 January 17, 2011
27.75 January 4, 2000 19,071 0 January 4, 2011
27.8125 December 21, 1999 1,059,150 0 December 23, 2009
27.8125 December 21, 1999 75,663 8,565 December 21, 2010
28.3125 January 3, 2000 11,315 0 January 3, 2011
28.3125 January 3, 2000 48,000 48,000 January 3, 2011
33.27631-33.28237 December 24, 1997 315,243 315,243 December 26, 2007
33.4375 December 16, 1998 648,600 334,550 December 18, 2008
33.4375 December 16, 1998 115,590 23,119 December 16, 2009
33.4903-33.497 September 25, 1997 2,419,322 2,419,322 September 27, 2007
33.54382 January 9, 1998 12,984 2,597 January 9, 2009
33.9375 January 11, 1999 51,025 5,103 January 11, 2010
34.50 November 15, 1999 1,173,733 1,173,733 November 17, 2009
34.75 December 30, 1998 39,659 7,932 December 30, 2009
35.63037 February 16, 1998 12,056 2,411 February 16, 2009
36.11175-36.11284 January 2, 1998 152,709 94,355 January 4, 2008
36.37928 February 10, 1998 11,357 2,271 February 10, 2009
36.43278 February 4, 1998 11,412 2,282 February 4, 2009
36.50 January 4, 1999 42,000 42,000 January 6, 2009
37.375 December 20, 2000 955,600 0 December 22, 2010
37.375 December 20, 2000 263,052 0 December 22, 2010
37.375 December 20, 2000 53,994 0 December 20, 2011
--------- ---------
8,531,198 5,345,265
========= =========
- --------
* Issued when the market price was $24.8125. Option price at that time (prior
to the Waddell & Reed spin-off adjustment) was $18.61.
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 18--Commitments and Contingencies
Reinsurance: Insurance affiliates of Torchmark reinsure that portion of
insurance risk which is in excess of their retention limits. Retention limits
for ordinary life insurance range up to $2.5 million per life. Life insurance
ceded represents less than 1.0% of total life insurance in force at December
31, 2000. Insurance ceded on life and accident and health products represents
.7% of premium income for 2000. Torchmark would be liable for the reinsured
risks ceded to other companies to the extent that such reinsuring companies
are unable to meet their obligations.
Insurance affiliates also assume insurance risks of other companies. Life
reinsurance assumed represents 2.2% of life insurance in force at December 31,
2000 and reinsurance assumed on life and accident and health products
represents 1.7% of premium income for 2000.
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 $3.3 million in 2000, $3.4 million in 1999, and $3.2 million in 1998.
Future minimum rental commitments required under operating leases having
remaining noncancelable lease terms in excess of one year at December 31, 2000
are as follows: 2001, $1.9 million; 2002, $1.5 million; 2003, $911 thousand;
2004, $431 thousand; 2005, $227 thousand and in the aggregate, $5.2 million.
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, 2000, the investment portfolio
consisted of the following:
Percent of
Type of Investment Portfolio
------------------ ----------
Investment-grade corporate bonds 70%
Nongovernment-guaranteed mortgage-backed securities 6
Securities of the U.S. government or U.S. government-backed
securities 5
Securities of state and municipal governments 5
Noninvestment-grade securities 5
Policy loans, which are secured by the underlying insurance
policy values 4
Mortgages 2
Short-term investments, which generally mature within one
month 2
Securities of foreign governments, equity securities, real
estate, and other long-term investments 1
Investments in municipal governments and corporations are made throughout
the U.S. with no concentration in any given state. Most of the investments in
foreign government securities are in Canadian government obligations.
Corporate debt investments are made in a wide range of industries. At December
31, 2000, 3% or more of the portfolio was invested in the following
industries:
Percent of
Industry Portfolio
-------- ----------
Electric, gas, and sanitary services 11%
Depository institutions 10
Communications 6
Insurance carriers 5
Chemicals and allied products 4
Nondepository credit institutions 4
Food and kindred products 4
Transportation equipment 3
Otherwise, no individual industry represented 3% or more of Torchmark's
investments. At year-end 2000, 5% of the carrying value of fixed maturities
was rated below investment grade (BB or lower as rated by Standard & Poor's or
the equivalent NAIC designation). Par value of these investments was $405
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 18--Commitments and Contingencies (continued)
million, amortized cost was $393 million, and fair value was $302 million.
While these investments could be subject to additional credit risk, such risk
should generally be reflected in market value.
Collateral Requirements: Torchmark requires collateral for investments in
instruments where collateral is available and is typically required because of
the nature of the investment. Since the majority of Torchmark's investments is
in government, government-secured, or corporate securities, the requirement
for collateral is rare. Torchmark's mortgages are secured by collateral.
Guarantees: In the fourth quarter of 1999, Torchmark issued a full financial
guaranty of all obligations, receivables, and recovery of capital on behalf of
its subsidiaries American Income and AILIC Receivables Corporation up to $100
million. The guarantee was made to an unaffiliated third party as agent for
the purchasers of certain agent receivables of American Income.
Litigation: Torchmark and its subsidiaries continue to be named as parties
to pending or threatened legal proceedings. These lawsuits involve tax
matters, alleged breaches of contract, torts, including bad faith and fraud
claims based on alleged wrongful or fraudulent acts of agents of Torchmark's
subsidiaries, employment discrimination, and miscellaneous other causes of
action. Many of these lawsuits involve claims for punitive damages in state
courts of Alabama, a jurisdiction particularly recognized for its large
punitive damage verdicts. A number of such actions involving Liberty also name
Torchmark as a defendant. In 1999, Alabama enacted legislation limiting
punitive damages in non-physical injury cases to the greater of $500,000 or
three times compensatory damages. Since this legislation has not undergone
scrutiny by appellate courts regarding its constitutionality and a jury's
discretion regarding the amount of compensatory damages (including mental
anguish) awarded in any given case is not precisely defined, the effect of
this legislation on Torchmark's litigation remains unclear. Bespeaking caution
is the fact that the likelihood or extent of a punitive damage award in any
given case is currently impossible to predict. As of December 31, 2000,
Liberty was a party to approximately 80 active lawsuits (including 10
employment related cases and excluding interpleaders and stayed cases), 71 of
which were Alabama proceedings in which punitive damages were sought. Liberty
faces trial settings in these cases on an on-going basis.
Based upon information presently available, and in light of legal and other
factual defenses available to Torchmark and its subsidiaries, contingent
liabilities arising from threatened and pending litigation are not presently
considered by management to be material. It should be noted, however, that
large punitive damage awards bearing little or no relation to actual damages
awarded by juries in jurisdictions in which Torchmark has substantial
business, particularly in Alabama, continue to occur, creating the potential
for unpredictable material adverse judgments in any given punitive damage
suit.
As previously reported, Dismukes v. Torchmark Corporation (Case No. CV-94-
1006-P-M), which was filed on December 30, 1994 in the U.S. District Court for
the Northern District of Alabama, was the only remaining purported class
action litigation brought by Torchmark shareholders alleging untimely and
inadequate disclosure of material contingent liabilities arising out of
insurance policy litigation involving Liberty. The U.S. District Court entered
an order granting partial summary judgment on behalf of the defendants on
April 16, 1996. Claims for damages based on Section 10b-5 of the Securities
Exchange Act, on state securities laws and for common law fraud remained
pending in the case following the U.S. District Court's 1996 order. On
September 28, 2000, the District Court granted defendants' motions for summary
judgment declaring plaintiffs claims as time-barred by the statute of
limitations and denying class certification. Plaintiffs appealed the District
Court's orders to the Eleventh Circuit Court of Appeals. On December 19, 2000,
the Dismukes case was settled on an individual basis and the plaintiffs'
appeal was dismissed.
As previously reported, Torchmark, its insurance subsidiaries Globe and
United American, and certain Torchmark officers were named as defendants in
purported class action litigation filed in the District Court of Oklahoma
City, Oklahoma (Moore v. Torchmark Corporation, Case No. CJ-94-2784-65,
subsequently amended and restyled Tabor v. Torchmark Corporation). This suit
claims damages on
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 18--Commitments and Contingencies (continued)
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. On February 6, 1998, the defendants renewed their motion
to dismiss the class claims for failure to prosecute. The District Court, in
an order dated April 2, 1998, allowed bifurcation of Tabor into Medicare
Supplement policy claims and non-Medicare Supplement policy claims. The non-
Medicare Supplement claims were stayed pending disposition of a related case
involving the same plaintiffs filed in Mississippi while discovery was allowed
to proceed on plaintiff's motion to certify a class of Medicare Supplement
policyholders' claims. On August 23, 2000, the non-Medicare Supplement claims
were dismissed with prejudice. Plaintiff's motion to certify a class of
Medicare Supplement policyholders' claims remains pending.
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 agent contracts based on misrepresentations of fact.
Monetary damages in an unspecified amount were sought. A plaintiff class was
certified by the District Court on February 26, 1996, although the
certification did not go to the merit of the allegations in the complaint. On
December 31, 1996, the plaintiffs filed an amended complaint in Smith to
allege violations of various provisions of the Employment Retirement Income
Security Act of 1974. Extensive discovery was then conducted. In October 1998,
defendants filed a motion to decertify the presently defined class in Smith.
On March 23, 1999, the District Court granted defendants' motion to decertify
the Smith class in part and decertified all but the ERISA claims of a more
narrowly defined Smith class. In May 1999, the defendants filed motions to
dismiss the claims certified by the Court's March 23, 1999 order. On December
14, 1999, the District Court granted defendants' motion for summary judgment.
That Court denied a motion for reconsideration on January 21, 2000. Defendants
filed a motion for summary judgment on the remaining individual claims in the
Smith case on May 1, 2000 and this motion was granted by the District Court on
January 4, 2001. The plaintiffs filed a notice of appeal shortly thereafter,
which defendants have moved to dismiss as premature.
Torchmark has previously reported the filing of purported class action
litigation on January 2, 1996 against Torchmark, Torch Energy Advisors
Incorporated, 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). The plaintiff alleged improper
payment of royalties and overriding royalties on coalbed methane gas produced
and sold from wells in Robinson's Bend Coal Degasification Field, sought
certification of a class and claimed unspecified compensatory and punitive
damages on behalf of such class. On April 11, 1996, Torchmark's motion to
change venue was granted and the case was transferred to the Circuit Court of
Tuscaloosa County, Alabama. Torchmark filed a motion to dismiss, which
remained pending while discovery proceeded. On February 10, 1999, the
plaintiffs filed a request for a class certification hearing and to set a
trial date for the Pearson case. After extensive negotiations, a tentative
settlement was reached by the parties. On January 8, 2001 the Circuit Court
held a settlement and fairness hearing on the stipulation and agreement of
compromise and settlement executed by counsel for all parties. The Circuit
Court approved this settlement and entered an order and final judgment of
dismissal with prejudice on January 10, 2001. The settlement fund of $6
million, to which Torchmark contributed pursuant to a litigation indemnity
given at the time of its 1996 sale of Torch Enery, was distributed in March
2001.
It has been previously reported that purported class action litigation was
filed against Torchmark's subsidiary, American Income Life Insurance Company
and certain of its employee benefit plans (Peet, et al. v. American Income
Life Insurance Company, et al., Case No. C-99-2283) on May 18, 1999 in the
U.S. District Court for the Northern District of California, which was
subsequently transferred to the U.S. District Court for the Western District
of Texas. Plaintiffs, individually and on behalf of all current and former
public relations representatives of American Income, asserted that they had
been improperly classified as independent contractors rather than employees
and thus denied participation in certain of
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 18--Commitments and Contingencies (continued)
American Income's employee benefit plans. The lawsuit alleged breach of
fiduciary duty and wrongful denial of access to plan documents and other
information under the Employee Retirement Income Security Act. Declaratory and
injunctive relief together with restitution, disgorgement and statutory
penalties were sought. On September 12, 2000, the District Court granted the
defendants' motions for partial summary judgment and denied plaintiffs' motion
for class certification with leave to renew plaintiffs' class certification
motion if they provided the Court with information regarding additional
benefit plans from which they had been improperly excluded. Subsequently, in
September 2000, plaintiffs submitted additional information to the Court
alleging additional benefit plans from which plaintiffs had been improperly
excluded, and plaintiffs also filed a motion for reconsideration of the order
granting defendants' motion for summary judgment with respect to American
Income's defined benefit plan.
As previously reported, Liberty was served on October 28, 1999 with a
subpoena from the Florida Department of Insurance in connection with that
Department's investigation into Liberty's sales practices and disclosures in
the State of Florida regarding industrial life insurance and low coverage life
insurance policies. Liberty has also received similar subpoenas from the
Alabama, Georgia, Kentucky, Texas, South Carolina and Minnesota Insurance
Departments regarding its industrial life insurance and other low face-amount
life insurance policies sold in those states. Specific inquiry is made into
the historical use of race-based mortality, a practice discontinued by Liberty
many years ago. Liberty has been and continues responding to these subpoenas
in a timely fashion. In July 2000, the Florida and Georgia Insurance
Departments issued cease and desist orders to all companies reporting premium
income from industrial life insurance, including Liberty, stating that, to the
extent that any company is currently collecting any race-based insurance
premiums from Florida and Georgia residents, respectively, it immediately
cease and desist from collecting any premium differential based on the race of
the policyholders. On August 22, 2000, the Florida First District Court of
Appeal issued an order staying the Florida Insurance Department's immediate
final cease and desist order. At present, Liberty, as an Alabama domestic
company, is being examined by representatives of the Alabama Department of
Insurance with regard to issues parallel to those raised by the State of
Florida.
On December 8, 1999, purported class action litigation was filed against
Liberty in the United States District Court for the Northern District of
Alabama (Moore v. Liberty National Life Insurance Company, Case No. CV-99-BU-
3262-S), on behalf of all African-Americans who have or have had at the time
of policy termination an ownership interest in certain life insurance policies
($25,000 face amount or less) marketed by Liberty and certain of its former
subsidiaries. The alleged class period covers virtually the entire twentieth
century. Plaintiffs allege racial discrimination in Liberty's premium rates in
violation of 42 U.S.C. (S) 1981, breach of fiduciary duty in sales and
administrative practices, receipt of excessive and unreasonable premium
payments by Liberty, improper hiring, supervision, retention and failure to
monitor actions of officers, agents and employees, breach of contract in
dismantling the debit premium collection system, fraudulent inducement and
negligent misrepresentation. Unspecified compensatory and punitive damages are
sought together with a declaratory judgment and equitable and/or injunctive
relief, including establishment of a constructive trust for the benefit of
class members. Defendants filed a motion for judgment on the pleadings or in
the alternative for summary judgment on January 27, 2000. On April 7, 2000,
the District Court entered an order granting Liberty's motion for judgment on
the pleadings and dismissing plaintiffs' claims under 42 U.S.C. (S) 1981 with
prejudice as time-barred and dismissing their state law claims without
prejudice to re-file in state court if desired. Plaintiffs subsequently filed
motions with the District Court to reconsider its April 17, 2000 order and for
permission to file an amended complaint adding similar claims under 24 U.S.C.
(S) 1982. Liberty opposed this motion. On June 22, 2000, purported class
action litigation with allegations comparable to those in the Moore case was
filed against Liberty in the Circuit Court of Jefferson County, Alabama
(Baldwin v. Liberty National Life Insurance Company, Case No. CV-00-684). The
Baldwin case is currently stayed pending disposition of the Moore case.
On July 3, 2000, the District Court issued an order in the Moore case
granting in part and denying in part the plaintiffs' motions. The District
Court ordered the Moore plaintiffs to file an amended complaint setting forth
their claims under 28 U.S.C. (S)(S) 1981 and 1982 and, if such claims are
timely, any state law claims for breach of contract related to the
discontinuance of debit collections, and dismissed with
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 18--Commitments and Contingencies (continued)
prejudice all remaining state law claims of the plaintiffs as time-barred by
the common law rule of repose. On July 14, 2000, plaintiffs filed their
amended complaint with the District Court and Liberty filed a motion to alter
or amend the District Court's July order or, in the alternative, requested
that the District Court certify for purposes of appeal the issue whether the
state law doctrine of repose should be applied to and bar plaintiffs' actions
under (S)(S) 1981 and 1982. The District Court entered such an order on July
21, 2000 and stayed proceedings in Moore pending resolution of Liberty's
petition to the U.S. Circuit Court of Appeals for the Eleventh Circuit.
Liberty filed a petition on July 30, 2000 with the Eleventh Circuit seeking
that Court's permission to appeal the portions of the District Court's July
order in Moore granting the plaintiffs the right to file the amended
complaint. The Eleventh Circuit Court granted Liberty's motion and will
consider Liberty's arguments regarding the applicability of the state law of
repose to actions under (S)(S) 1981 and 1982. Five individual cases with
similar allegations to those in the Moore case have been filed against Liberty
in various Circuit Courts in the state of Alabama. In the earliest filed of
these individual state court actions, Walter Moore v. Liberty National Life
Insurance Company (Circuit Court of Dallas County, Alabama, CV-00-306) the
Court has entered an order granting summary judgment in favor of Liberty based
upon the doctrine of repose.
It has been previously reported that on August 18, 2000, a jury in Barbour
County, Alabama Circuit Court returned a verdict of $100,000 compensatory
damages and $3.5 million in punitive damages against Torchmark's subsidiary,
Liberty in Carter v. Liberty National Life Insurance Company (Civil Action No.
CV-99-026). An individual lawsuit filed in March 1999, the Carter case
involved allegations of fraud, misrepresentation, suppression and
negligent/wanton agent hiring, training and supervision practices by Liberty
in connection with the sale of an interest-sensitive life insurance policy.
The plaintiff had asserted that the policy had been purchased based upon agent
representations that it would become paid-up or self sustaining after a
specified number of years. Liberty pursued available motions for post trial
relief in this case and on February 15, 2001, the Circuit Court reduced the
Carter verdict to $100,000 compensatory damages and $700,000 in punitive
damages. Liberty will pursue additional appellate relief in the Carter case.
Note 19--Business Segments
Torchmark's segments are based on the insurance product lines it markets and
administers: life insurance, health insurance, and annuities. These major
product lines are set out as segments because of the common characteristics of
products within these categories, comparability of margins, and the similarity
in regulatory environment and management techniques. There is also an
investment segment which manages the investment portfolio, debt, and cash flow
for the insurance segments and the corporate function. Torchmark's management
evaluates the overall performance of the operations of the company in
accordance with these segments.
Life insurance products include traditional and interest-sensitive whole
life insurance as well as term life insurance. Health products are generally
guaranteed-renewable and include Medicare Supplement, cancer, accident, long-
term care, and limited hospital and surgical coverages. Annuities include both
fixed-benefit and variable contracts. Variable contracts allow policyholders
to choose from a variety of mutual funds in which to direct their deposits.
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 19--Business Segments (continued)
Torchmark markets its insurance products through a number of distribution
channels, each of which sells the products of one or more of Torchmark's
insurance segments. The tables below present segment premium revenue by each
of Torchmark's marketing groups.
For the Year 2000
-----------------------------------------------------------------
Life Health Annuity Total
---------------- -------------- ------------- ----------------
% of % of % of % of
Distribution Channel Amount Total Amount Total Amount Total Amount Total
- -------------------- ---------- ----- -------- ----- ------- ----- ---------- -----
United American
Independent............ $ 42,305 3.9% $442,370 48.6% $ 700 1.3% $ 485,375 23.7%
Liberty National
Exclusive.............. 294,197 27.2 151,363 16.6 79 0.2 445,639 21.8
American Income
Exclusive.............. 231,149 21.4 48,296 5.3 279,445 13.7
Direct Response......... 267,899 24.7 14,860 1.6 282,759 13.8
United American
Exclusive.............. 19,393 1.8 254,267 27.9 273,660 13.4
Other................... 227,182 21.0 52,150 98.5 279,332 13.6
---------- ----- -------- ----- ------- ----- ---------- -----
$1,082,125 100.0% $911,156 100.0% $52,929 100.0% $2,046,210 100.0%
========== ===== ======== ===== ======= ===== ========== =====
For the Year 1999
-----------------------------------------------------------------
Life Health Annuity Total
---------------- -------------- ------------- ----------------
% of % of % of % of
Distribution Channel Amount Total Amount Total Amount Total Amount Total
- -------------------- ---------- ----- -------- ----- ------- ----- ---------- -----
United American
Independent............ $ 37,375 3.7% $427,023 51.8% $ 508 1.2% $ 464,906 24.7%
Liberty National
Exclusive.............. 288,330 28.3 143,857 17.4 60 0.2 432,247 22.9
American Income
Exclusive.............. 217,367 21.4 47,564 5.8 264,931 14.1
Direct Response......... 245,824 24.1 11,778 1.4 257,602 13.7
United American
Exclusive.............. 19,318 1.9 194,594 23.6 213,912 11.4
Other................... 210,087 20.6 40,401 98.6 250,488 13.2
---------- ----- -------- ----- ------- ----- ---------- -----
$1,018,301 100.0% $824,816 100.0% $40,969 100.0% $1,884,086 100.0%
========== ===== ======== ===== ======= ===== ========== =====
For the Year 1998
-----------------------------------------------------------------
Life Health Annuity Total
---------------- -------------- ------------- ----------------
% of % of % of % of
Distribution Channel Amount Total Amount Total Amount Total Amount Total
- -------------------- ---------- ----- -------- ----- ------- ----- ---------- -----
United American
Independent............ $ 36,925 3.8% $417,556 54.9% $ 445 1.3% $ 454,926 25.9%
Liberty National
Exclusive.............. 282,389 29.4 135,861 17.9 84 0.2 418,334 23.9
American Income
Exclusive.............. 204,310 21.3 47,074 6.2 251,384 14.4
Direct Response......... 221,371 23.1 8,817 1.2 230,188 13.1
United American
Exclusive.............. 18,798 2.0 150,602 19.8 169,400 9.7
Other................... 195,973 20.4 33,425 98.5 229,398 13.0
---------- ----- -------- ----- ------- ----- ---------- -----
$ 959,766 100.0% $759,910 100.0% $33,954 100.0% $1,753,630 100.0%
========== ===== ======== ===== ======= ===== ========== =====
Because of the nature of the insurance industry, Torchmark has no individual
or group which would be considered a major customer. Substantially all of
Torchmark's business is conducted in the United States, primarily in the
Southeastern and Southwestern regions.
The measure of profitability established by management for insurance
segments is underwriting income before other income and administrative
expenses, in accordance with the manner the segments are managed. It
essentially represents gross profit margin on insurance products before
insurance administrative expenses and consists of premium, less net policy
obligations, acquisition expenses, and commissions. It differs from GAAP
pretax operating income before other income and administrative expense because
interest credited to net policy liabilities (reserves less deferred
acquisition costs and value of insurance purchased) is reflected as a
component of the Investment segment in order to match this cost to the
investment earnings from the assets supporting the net policy liabilities.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 19--Business Segments (continued)
The measure of profitability for the investment segment is excess investment
income, which represents the income earned on the investment portfolio in
excess of net policy requirements and financing costs associated with debt and
Torchmark's MIPS. The investment segment is measured on a tax-equivalent
basis, equating the return on tax-exempt investments to the pretax return on
taxable investments. Other than the above-mentioned interest allocations,
there are no other intersegment revenues or expenses. Expenses directly
attributable to corporate operations are included in the "Corporate" category.
All other unallocated revenues and expenses on a pretax basis, including
insurance administrative expense, are included in the "Other" segment
category. The table below sets forth a reconciliation of Torchmark's revenues
and operations by segment to its major income statement line items.
For the year 2000
-----------------------------------------------------------------------------------------
Life Health Annuity Investment Other Corporate Adjustments Consolidated
---------- -------- -------- ---------- --------- --------- ----------- ------------
Revenue:
Premium................ $1,082,125 $911,156 $ 52,929 $2,046,210
Net Investment income.. $481,081 $ (8,655) 472,426
Other income........... $ 4,650 (2,070) 2,580
---------- -------- -------- -------- --------- -------- -------- ----------
Total revenue........ 1,082,125 911,156 52,929 481,081 4,650 (10,725) 2,521,216
Expenses:
Policy benefits........ 711,833 591,022 36,627 1,339,482
Required interest on
reserves.............. (246,989) (15,736) (42,688) 305,413 -0-
Amortization of
acquisition costs..... 188,268 68,778 17,791 274,837
Commissions and premium
tax................... 59,754 91,069 2,116 (2,070) 150,869
Required interest on
acquisition costs..... 98,596 14,907 8,124 (121,627) -0-
Financing costs*....... 70,309 (15,822) 54,487
---------- -------- -------- -------- --------- -------- -------- ----------
Total expenses....... 811,462 750,040 21,970 254,095 (17,892) 1,819,675
---------- -------- -------- -------- --------- -------- -------- ----------
Underwriting income
before other income and
administrative expense. 270,663 161,116 30,959 462,738
Excess investment
income................. 226,986 226,986
Subtotal adjustments.... 4,650 7,167 11,817
---------- -------- -------- -------- --------- -------- -------- ----------
Subtotal............. 270,663 161,116 30,959 226,986 4,650 7,167 701,541
Administrative expense.. (111,817) (111,817)
Parent expense.......... $ (9,369) (9,369)
Goodwill amortization... (12,075) (12,075)
---------- -------- -------- -------- --------- -------- -------- ----------
Pretax operating
income.............. $ 270,663 $161,116 $ 30,959 $226,986 $(107,167) $(21,444) $ 7,167 568,280
========== ======== ======== ======== ========= ======== ========
Deduct realized investment losses
and deferred acquisition cost
adjustments.................................................................................... (5,322)
----------
Pretax income................................................................................ $ 562,958
==========
- -------
* Investment segment includes MIPS dividend on a pretax basis.
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 19--Business Segments (continued)
For the year 1999
-----------------------------------------------------------------------------------------
Life Health Annuity Investment Other Corporate Adjustments Consolidated
---------- -------- -------- ---------- --------- --------- ----------- ------------
Revenue:
Premium................ $1,018,301 $824,816 $ 40,969 $1,884,086
Net Investment income.. $458,824 $(11,487) 447,337
Other income........... $ 3,348 (2,008) 1,340
---------- -------- -------- -------- --------- -------- -------- ----------
Total revenue........ 1,018,301 824,816 40,969 458,824 3,348 (13,495) 2,332,763
Expenses:
Policy benefits........ 666,122 535,901 34,524 1,236,547
Required interest on
reserves.............. (229,287) (17,383) (40,991) 287,661 -0-
Amortization of
acquisition costs..... 170,444 64,046 13,310 247,800
Commissions and premium
tax................... 56,341 84,913 759 18,642 160,655
Required interest on
acquisition costs..... 91,412 12,707 6,536 (110,655) -0-
Financing costs*....... 66,431 (14,090) 52,341
---------- -------- -------- -------- --------- -------- -------- ----------
Total expenses....... 755,032 680,184 14,138 243,437 4,552 1,697,343
---------- -------- -------- -------- --------- -------- -------- ----------
Underwriting income
before other income and
administrative expense
and nonrecurring
charge................. 263,269 144,632 26,831 434,732
Nonrecurring charge..... (20,650) 20,650 -0-
---------- -------- -------- -------- --------- -------- -------- ----------
Underwriting income
before other income and
administrative expense. 242,619 144,632 26,831 20,650 434,732
Excess investment
income................. 215,387 215,387
Subtotal adjustments.... 3,348 (18,047) (14,699)
---------- -------- -------- -------- --------- -------- -------- ----------
Subtotal............. 242,619 144,632 26,831 215,387 3,348 2,603 635,420
Administrative expense.. (104,903) (104,903)
Parent expense.......... $(10,166) (10,166)
Goodwill amortization... (12,075) (12,075)
---------- -------- -------- -------- --------- -------- -------- ----------
Pretax operating
income.............. $ 242,619 $144,632 $ 26,831 $215,387 $(101,555) $(22,241) $ 2,603 508,276
========== ======== ======== ======== ========= ======== ========
Deduct realized investment losses, deferred acquisition cost adjustment, and gain on sale of
equipment...................................................................................... (105,868)
----------
Pretax income................................................................................ $ 402,408
==========
- -------
* Investment segment includes MIPS dividend on a pretax basis.
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 19--Business Segments (continued)
For the year 1998
------------------------------------------------------------------------------------------------------
Family
Service
Underwriting
Life Health Annuity Investment Other Corporate Income Adjustments Consolidated
--------- -------- -------- ---------- --------- --------- ------------ ----------- ------------
Revenue:
Premium........... $ 957,274 $759,910 $ 33,594 $ 2,852 $1,753,630
Net investment
income........... $ 470,701 $(11,143) 459,558
Other income...... $ 4,488 (2,163) 2,325
--------- -------- -------- --------- --------- -------- -------- -------- ----------
Total revenue... 957,274 759,910 33,594 470,701 4,488 2,852 (13,306) 2,215,513
Expenses:
Policy benefits... 618,867 482,496 34,662 14,251 1,150,276
Required interest
on reserves...... (215,185) (20,440) (42,171) 296,696 (18,900) -0-
Amortization of
acquisition
costs............ 158,298 59,208 11,561 3,883 (1,926) 231,024
Commissions and
premium tax...... 57,364 87,828 510 208 (2,163) 143,747
Required interest
on acquisition
costs............ 85,374 11,373 5,609 (103,481) 1,125 -0-
Financing costs*.. 71,367 (15,042) 56,325
--------- -------- -------- --------- --------- -------- -------- -------- ----------
Total expenses.. 704,718 620,465 10,171 264,582 567 (19,131) 1,581,372
--------- -------- -------- --------- --------- -------- -------- -------- ----------
Underwriting income
before other
income and
administrative
expense**......... 252,556 139,445 23,423 2,285 417,709
Reclass of Family
Service........... 2,187 98 (2,285) -0-
--------- -------- -------- --------- --------- -------- -------- -------- ----------
Underwriting income
before other
income and
administrative
expense........... 254,743 139,445 23,521 417,709
Excess investment
income............ 206,119 206,119
Subtotal
adjustments....... 4,488 5,825 10,313
--------- -------- -------- --------- --------- -------- -------- -------- ----------
Subtotal........ 254,743 139,445 23,521 206,119 4,488 5,825 634,141
Administrative
expense........... (103,451) (103,451)
Parent expense..... $(10,406) (3,581) (13,987)
Goodwill
amortization...... (12,075) (12,075)
--------- -------- -------- --------- --------- -------- -------- -------- ----------
Pretax operating
income......... $ 254,743 $139,445 $ 23,521 $ 206,119 $ (98,963) $(22,481) $ -0- $ 2,244 504,628
========= ======== ======== ========= ========= ======== ======== ========
Deduct realized investment losses and deferred acquisition cost adjustment............................. (57,637)
----------
Pretax income....................................................................................... $ 446,991
==========
- -------
* Investment segment includes MIPS dividend on a pretax basis.
** Insurance segments exclude Family Service.
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 19--Business Segments (continued)
Assets for each segment are reported based on a specific identification
basis. The insurance segments' assets contain deferred acquisition costs,
value of insurance purchased, and separate account assets. The investment
segment includes the investment portfolio, cash, and accrued investment
income. Goodwill is assigned to corporate operations. All other assets,
representing less than 2% of total assets, are included in the other category.
The table below reconciles segment assets to total assets as reported in the
consolidated financial statements.
At December 31, 2000
-------------------------------------------------------------------------
Life Health Annuity Investment Other Corporate Consolidated
---------- -------- ---------- ---------- -------- --------- ------------
Cash and invested
assets................. $6,506,292 $ 6,506,292
Accrued investment
income................. 119,124 119,124
Deferred acquisition
costs.................. $1,653,567 $266,131 $ 155,621 2,075,319
Goodwill................ $390,509 390,509
Separate account assets. 3,741,415 3,741,415
Other assets............ $129,899 129,899
---------- -------- ---------- ---------- -------- -------- -----------
Total assets............ $1,653,567 $266,131 $3,897,036 $6,625,416 $129,899 $390,509 $12,962,558
========== ======== ========== ========== ======== ======== ===========
At December 31, 1999
-------------------------------------------------------------------------
Life Health Annuity Investment Other Corporate Consolidated
---------- -------- ---------- ---------- -------- --------- ------------
Cash and invested
assets................. $6,202,251 $ 6,202,251
Accrued investment
income................. 112,475 112,475
Deferred acquisition
costs.................. $1,547,934 $225,637 $ 119,751 1,893,322
Goodwill................ $402,584 402,584
Separate account assets. 3,413,675 3,413,675
Other assets............ $107,357 107,357
---------- -------- ---------- ---------- -------- -------- -----------
Total assets............ $1,547,934 $225,637 $3,533,426 $6,314,726 $107,357 $402,584 $12,131,664
========== ======== ========== ========== ======== ======== ===========
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 20--Related Party Transactions
Transactions Regarding Vesta: From 1993 until disposition in 2000, Torchmark
held a passive investment in Vesta, a property insurance carrier. Torchmark
held 5.1 million shares of Vesta stock, or approximately 28% of the
outstanding shares of Vesta, until December, 1998. Torchmark carried its
investment in Vesta during this period on the equity method of accounting. In
June, 1998, Vesta announced that (a) an investigation of accounting
irregularities that occurred during the fourth quarter of 1997 and the first
quarter of 1998 would result in an aggregate $14 million net after-tax
reduction in previously reported net income, and, in addition, that (b) it
would restate its historical financial statements for the period of 1993
through the first quarter of 1998, reflecting reductions in reported net
after-tax earnings of $49 million for the period of 1993 through 1997 and $10
million for the first quarter of 1998. To reflect its pro rata share of
Vesta's cumulative reported financial corrections, Torchmark recorded a pre-
tax charge of $20 million ($13 million after tax) or $.09 per diluted share in
the second quarter of 1998. As a result of the announcements relating to Vesta
and the decline in value of Vesta stock, Vesta is currently subject to
numerous class action lawsuits in state and Federal courts filed subsequent to
such announcements.
In the fourth quarter of 1998, Torchmark announced its intention to dispose
of its holdings in Vesta and to sell Vesta shares under satisfactory terms. In
December, 1998, Torchmark sold 680 thousand Vesta shares at a price of $4.75
per share, recording a loss of $3 million after tax. In 1999, Vesta filed a
registration statement with the Securities and Exchange Commission for the
public offering of its shares held by Torchmark. To facilitate the
registration of Vesta shares, Torchmark reacquired the previously sold 680
thousand shares at a price of $5 per share. On November 5, 1999, the
registration statement was filed by Vesta to offer all of Torchmark's holdings
in Vesta.
Because of its intention to dispose of Vesta, Torchmark wrote its carrying
value of Vesta down to net realizable amount effective September 30, 1998. The
adjustment produced an after-tax realized loss of $24 million, or $.17 per
diluted Torchmark share. Net realizable value was $32 million at December 31,
1998. During 1998, Torchmark recorded a pretax loss of $27 million ($18
million after tax or $.13 per diluted share) on Vesta operations, including
its pro rata share of Vesta's cumulative accounting corrections.
During the first quarter of 1999, the two Torchmark directors who occupied
seats on the Vesta Board of Directors resigned from those Vesta seats. Due to
the vacating of the Vesta board seats and the absence of significant influence
regarding Vesta, Torchmark discontinued the equity method of accounting for
Vesta and has included Vesta in equity securities at market value subsequent
to December 31, 1998. Torchmark carried Vesta at a value of $20 million at
December 31, 1999.
Torchmark sold 3.75 million shares of Vesta during the second quarter of
2000. In early July, 2000, Torchmark sold the remaining 1.38 million shares of
Vesta stock that it held. The sales provided proceeds of $33 million and
resulted in an after-tax loss of $1.5 million. As of December 31, 2000,
Torchmark no longer had any ownership interest in Vesta.
Transactions with Directors and Officers: Lamar C. Smith, elected a director
of Torchmark in October 1999, is an officer, director and 15% owner of
Independent Research Agency for Life Insurance, Inc. (IRA), which receives
commissions as the Military Agency distribution system for selling certain
life insurance products offered by Torchmark's insurance subsidiaries. These
commissions were $43.5 million in 2000 and $39.2 million in 1999.
On October 1, 1999, Torchmark sold the majority of its investment real
estate in two transactions. One transaction involved sales to Elgin
Development Company and other investors for total consideration of
$97.4 million, of which $85 million was paid in cash and the remainder in a
ten year collaterialized note. The Chairman of the Executive Committee of
Torchmark is a 25% investor in Stonegate Realty Co., LLC, the parent company
of Elgin Development Company. His investment in Elgin Development was
approximately $1.5 million.
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 21--Selected Quarterly Data (Unaudited)
The following is a summary of quarterly results for the two years ended
December 31, 2000. The information is unaudited but includes all adjustments
(consisting of normal accruals) which management considers necessary for a
fair presentation of the results of operations for these periods.
Three Months Ended
-----------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
2000:
-----
Premium and policy charges..... $503,053 $506,834 $512,738 $523,585
Net investment income.......... 117,111 117,427 118,073 119,815
Realized investment losses..... (1,859) (9,839) 9,092 (2,716)
Total revenues................. 619,017 615,133 640,554 641,190
Policy benefits................ 331,520 333,274 335,692 338,996
Amortization of acquisition
expenses...................... 66,357 67,277 69,061 72,142
Pretax income from continuing
operations.................... 137,910 129,774 151,836 143,438
Net income..................... 88,882 83,294 97,736 92,123
Basic net income per common
share from continuing
operations.................... .68 .65 .77 .73
Basic net income per common
share......................... .68 .65 .77 .73
Diluted net income per common
share from continuing
operations.................... .68 .65 .77 .72
Diluted net income per common
share......................... .68 .65 .77 .73
Diluted net income per common
share from continuing
operations excluding realized
losses, related acquisition
cost adjustment, and gain on
redemption of debt............ .69 .70 .72 .74
1999:
-----
Premium and policy charges..... $462,764 $470,010 $471,850 $479,462
Net investment income.......... 111,396 110,538 111,758 113,645
Realized investment losses..... (7,116) (78,803) (18,128) (6,924)
Total revenues................. 567,510 507,228 565,779 586,378
Policy benefits................ 303,446 308,718 309,113 315,270
Amortization of acquisition
expenses...................... 59,570 62,082 62,921 63,227
Pretax income from continuing
operations.................... 125,042 57,171 113,688 106,507
Income (loss) from discontinued
operations.................... -0- (1,060) -0- -0-
Net income..................... 96,434 35,246 73,312 68,964
Basic net income per common
share from continuing
operations.................... .59 .27 .55 .52
Basic net income per common
share......................... .71 .26 .55 .52
Diluted net income per common
share from continuing
operations.................... .59 .27 .55 .52
Diluted net income per common
share......................... .71 .26 .55 .52
Diluted net income per common
share from continuing
operations excluding realized
losses, and related
acquisition cost adjustment... .62 .63 .64 .56
82
Item 9. Disagreements on Accounting and Financial Disclosure
On October 21, 1998, with the approval of the Audit Committee of the Board
of Directors of Torchmark, Torchmark engaged Deloitte & Touche LLP as its
principal accountants as of January 1, 1999, effective upon the issuance of
KPMG LLP's ("KPMG") reports on the consolidated financial statements of
Torchmark and subsidiaries and the separately issued financial statements of
Torchmark's subsidiaries, unit investment trust accounts and benefit plans as
of and for the year ending December 31, 1998. (KPMG completed its engagement
as Torchmark's principal accountants on October 14, 1999, the date upon which
the last of the audit reports as of and for the year ended December 31, 1998
for the entities noted above were issued.) The reports of KPMG on the
financial statements of Torchmark for either of the two most recent fiscal
years preceding their replacement did not contain any adverse opinion or
disclaimer of opinion. Such reports were not qualified or modified as to
uncertainty, audit scope or accounting principles. During such years and
during the period between December 31, 1998 and the date of the completion of
KPMG's engagement, there was no disagreement between KPMG and Torchmark on any
matter of accounting principles or practices, financial statement disclosure,
or auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of KPMG, would have caused that firm to make reference to the
subject matter of such disagreement in connection with its report on
Torchmark's financial statements.
PART III
Item 10. Directors and Executive Officers of Registrant
Information required by this item is incorporated by reference from the
sections entitled "Election of Directors," "Profiles of Directors and
Nominees," "Executive Officers" and Section 16(a) "Beneficial Ownership
Reporting Compliance" of the Securities Exchange Act in the Proxy Statement
for the Annual Meeting of Stockholders to be held April 26, 2001 (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:
Torchmark is not aware of any persons known to be the beneficial owner
of more than five percent of the company's outstanding common stock as
of December 31, 2000.
(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.
83
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K
(a) Index of documents filed as a part of this report:
Page of
this report
-----------
Financial Statements:
Torchmark Corporation and Subsidiaries:
Independent Auditors' Reports................................... 39
Consolidated Balance Sheet at December 31, 2000 and 1999........ 41
Consolidated Statement of Operations for each of the years in
the three-year period ended December 31, 2000.................. 42
Consolidated Statement of Comprehensive Income for each of the
years in the three-year period ended December 31, 2000......... 44
Consolidated Statement of Shareholders' Equity for each of the
years in the three-year period ended December 31, 2000......... 45
Consolidated Statement of Cash Flow for each of the years in the
three-year period ended December 31, 2000...................... 46
Notes to Consolidated Financial Statements...................... 48
Schedules Supporting Financial Statements for each of the years
in the three-year period ended December 31, 2000:
II. Condensed Financial Information of Registrant (Parent Compa-
ny)............................................................. 91
IV. Reinsurance (Consolidated).................................. 94
Schedules not referred to have been omitted as inapplicable or not required
by Regulation S-X.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the registrant during the fourth
quarter of 2000.
(c) Exhibits
84
EXHIBITS
Page of
this
Report
-------
(3)(i) Restated Certificate of Incorporation of Torchmark
Corporation, 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
December 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
Corporation, 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
(incorporated by reference from Exhibit 10(c) to Form 10-K
for the fiscal year ended December 31, 1992)
(d) Letter of Credit Agreement dated as of October 24, 2000
among TMK Re, Ltd., Torchmark Corporation, the Participants
named therein, Bank One, NA and Fleet National Bank
(e) Certified Copy of Resolution Regarding Director Retirement
Benefit Program (incorporated by reference from Exhibit
10(e) to Form 10-K for the fiscal year ended December 31,
1999)
(f) 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)
(g) The Torchmark Corporation 1987 Stock Incentive Plan
(incorporated by reference from Exhibit 10(f) to Form 10-K
for the fiscal year ended December 31, 1998)
(h) General Agency Contract between Liberty National Life
Insurance Company and Independent Research Agency For Life
Insurance, 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
between Liberty National Fire Insurance Company, Liberty
National Insurance Corporation and Liberty National Life
Insurance 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)
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(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
(incorporated 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
Corporation and other principal operating subsidiaries)
(incorporated 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
reference from Exhibit 10(o) to Form 10-K for the fiscal
year ended December 31, 1992)
(o) The Torchmark Corporation 1998 Stock Incentive Plan
(incorporated by reference from Exhibit 10(n) to Form 10-K
for the fiscal year ended December 31, 1998)
(p) The Torchmark Corporation Savings and Investment Plan
(incorporated by reference from Exhibit 10(s) to Form 10-K
for the fiscal year ended December 31, 1992)
(q) Credit Agreement dated as of October 22, 1997 among
Torchmark Corporation, the Lenders and The First National
Bank of Chicago, as Agent, as amended
(r) Coinsurance and Servicing Agreement between Security Benefit
Life Insurance Company and Liberty National Life Insurance
Company, effective as of December 31, 1995 (incorporated by
reference from Exhibit 10(u) to Form 10-K for the fiscal
year ended December 31, 1995)
(s) 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)
(t) Torchmark Corporation 1996 Non-Employee Director Stock
Option Plan (incorporated by reference from Exhibit 10(w) to
Form 10-K for the fiscal year ended December 31, 1996)
(u) Torchmark Corporation 1996 Executive Deferred Compensation
Stock Option Plan (incorporated by reference from Exhibit
10(x) to Form 10-K for the fiscal year ended December 31,
1996)
(v) The Liberty National Life Insurance Company Pension Plan for
Non-Commissioned Employees (incorporated by reference from
Exhibit 10(v) to Form 10-K for the fiscal year ended
December 31, 1999)
(x) Receivables Purchase Agreement dated as of December 21,
1999, as Amended and Restated as of March 31, 2000 among
AILIC Receivables Corporation, American Income Life
Insurance Company, Preferred Receivables Funding Corporation
and Bank One, NA
(11) Statement re computation of per share earnings 89
(20) Proxy Statement for Annual Meeting of Stockholders to be
held April 26, 2001
(21) Subsidiaries of the registrant 90
(23)(a) Consent of Deloitte & Touche LLP to incorporation by
reference of their audit report dated January 30, 2001, into
Form S-8 of The Torchmark Corporation Savings and Investment
Plan (Registration No. 2-76378)
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(b) Consent of Deloitte & Touche LLP to incorporation by
reference of their audit report dated January 30, 2001, into
Form S-8 and the accompanying Form S-3 Prospectus of the
Torchmark Corporation 1996 Non-Employee Director Stock Option
Plan (Registration No. 2-93760)
(c) Consent of Deloitte & Touche LLP to incorporation by
reference of their audit report dated January 30, 2001, into
Form S-8 and the accompanying Form S-3 Prospectus of the
Torchmark Corporation 1987 Stock Incentive Plan (Registration
No. 33-23580)
(d) Consent of Deloitte & Touche LLP to incorporation by
reference of their audit report dated January 30, 2001, into
Form S-8 and the accompanying Form S-3 Prospectus of The
Capital Accumulation and Bonus Plan of Torchmark Corporation
(Registration No. 33-1032)
(e) Consent of Deloitte & Touche LLP to incorporation by
reference of their audit report dated January 30, 2001, into
Form S-8 of the Liberty National Life Insurance Company
401(k) Plan (Registration No. 33-65507)
(f) Consent of Deloitte & Touche LLP to incorporation by
reference of their audit report dated January 30, 2001, into
Form S-8 and accompanying Form S-3 Prospectus of the
Torchmark Corporation 1996 Executive Deferred Compensation
Stock Option Plan (Registration No. 333-27111)
(g) Consent of Deloitte & Touche LLP to incorporation by
reference of their audit report dated January 30, 2001 into
Form S-8 of the Profit Sharing and Retirement Plan of Liberty
National Life Insurance Company (Registration No. 333-83317)
(h) Consent of Deloitte & Touche, LLP to incorporation by
reference of their audit report dated January 30, 2001 into
Form S-8 and the accompanying Form S-3 Prospectus of the
Torchmark Corporation 1998 Stock Incentive Plan (Registration
No. 333-40604)
(i) Consent of KPMG LLP to incorporation by reference of their
audit report dated January 29, 1999, except for Note 18,
which is as of February 10, 1999, into Form S-8 of the
Torchmark Corporation Savings and Investment Plan
(Registration No. 2-76378)
(j) Consent of KPMG LLP to incorporation by reference of their
audit report dated January 29, 1999, except for Note 18,
which is as of February 10, 1999, into Form S-8 and the
accompanying Form S-3 Prospectus of the Torchmark Corporation
1996 Non-Employee Director Stock Option Plan (Registration
No. 2-93760)
(k) Consent of KPMG LLP to incorporation by reference of their
audit report dated January 29, 1999, except for Note 18,
which is as of February 10, 1999, into Form S-8 and the
accompanying Form S-3 Prospectus of the Torchmark Corporation
1987 Stock Incentive Plan (Registration No. 33-23580)
(l) Consent of KPMG LLP to incorporation by reference of their
audit report dated January 29, 1999, except for Note 18,
which is as of February 10, 1999, into Form S-8 and the
accompanying Form S-3 Prospectus of the Capital Accumulation
and Bonus Plan of Torchmark Corporation (Registration No. 33-
1032)
(m) Consent of KPMG LLP to incorporation by reference of their
audit report dated January 29, 1999, except for Note 18,
which is as of February 10, 1999, into Form S-8 of the
Liberty National Life Insurance Company 401(k) Plan
(Registration No. 33-65507)
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(n) Consent of KPMG LLP to incorporation by reference of their
audit report dated January 29, 1999, except for Note 18,
which is as of February 10, 1999, into Form S-8 and the
accompanying Form S-3 Prospectus of the Torchmark Corporation
1996 Executive Deferred Compensation Stock Option Plan
(Registration No. 333-27111)
(o) Consent of KPMG LLP to incorporation by reference of their
audit report dated January 29, 1999, except for Note 18,
which is as of February 10, 1999 into Form S-8 and the
accompanying Form S-3 Prospectus of the Torchmark Corporation
1998 Stock Incentive Plan (Registration No. 333-40604)
(p) Consent of KPMG LLP to incorporation by reference of their
audit report dated January 29, 1999, except for Note 18,
which is as of February 10, 1999, into Form S-8 The Profit
Sharing and Retirement Plan of Liberty National Life
Insurance Company (Registration No. 333-83317)
(24) Powers of attorney
(27) Financial Data Schedule
88
Exhibit 11. Statement re computation of per share earnings
TORCHMARK CORPORATION COMPUTATION OF EARNINGS PER SHARE
Twelve months ended December 31,
---------------------------------------
2000 1999 1998
------------ ------------ ------------
Net income from continuing operations. $361,833,000 $258,930,000 $255,776,000
Discontinued operations of Waddell &
Reed:
Net income from operations........... -0- -0- 47,868,000
Loss on disposal..................... -0- (1,060,000) (54,241,000)
------------ ------------ ------------
Net income before extraordinary item
and cumulative effect of change in
accounting principle................. 361,833,000 257,870,000 249,403,000
Gain (loss) on redemption of debt .... 202,000 -0- (4,962,000)
------------ ------------ ------------
Net income before cumulative effect of
change in accounting principle....... 362,035,000 257,870,000 244,441,000
Cumulative effect of change in ac-
counting principle................... -0- 16,086,000 -0-
------------ ------------ ------------
Net income............................ $362,035,000 $273,956,000 $244,441,000
============ ============ ============
Basic weighted average shares out-
standing............................. 128,089,235 133,197,023 139,998,671
Diluted weighted average shares out-
standing............................. 128,353,404 133,985,943 141,351,912
Basic earnings per share:
Net income from continuing operations. $ 2.83 $ 1.95 $ 1.83
Discontinued operations of Waddell &
Reed:
Net income from operations........... -0- -0- .34
Loss on disposal..................... -0- (.01) (.39)
------------ ------------ ------------
Net income before extraordinary item
and cumulative effect of change in
accounting principle................. 2.83 1.94 1.78
Loss on redemption of debt............ -0- -0- (.03)
------------ ------------ ------------
Net income before cumulative effect of
change in accounting principle....... 2.83 1.94 1.75
Cumulative effect of change in ac-
counting principle................... -0- .12 -0-
------------ ------------ ------------
Net income............................ $ 2.83 $ 2.06 $ 1.75
============ ============ ============
Diluted earnings per share:
Net income from continuing operations. $ 2.82 $ 1.93 $ 1.81
Discontinued operations of Waddell &
Reed:
Net income from operations........... -0- -0- .34
Loss on disposal..................... -0- (.01) (.38)
------------ ------------ ------------
Net income before extraordinary item
and cumulative effect of change in
accounting principle................. 2.82 1.92 1.77
Loss on redemption of debt............ -0- -0- (.04)
------------ ------------ ------------
Net income before cumulative effect of
change in accounting principle....... 2.82 1.92 1.73
Cumulative effect of change in ac-
counting principle................... -0- .12 -0-
------------ ------------ ------------
Net income............................ $ 2.82 $ 2.04 $ 1.73
============ ============ ============
89
Exhibit 21. Subsidiaries of the Registrant
The following table lists subsidiaries of the registrant which meet the
definition of "significant subsidiary" according to Regulation S-X:
State of Name Under Which
Company Incorporation Company Does Business
----------------------- ------------- ---------------------
American Income Life American Income Life
Insurance Company Indiana Insurance Company
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
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 85 through 88 of
this report. Exhibits not referred to have been omitted as inapplicable or not
required.
90
TORCHMARK CORPORATION (PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
(Amounts in thousands)
December 31,
----------------------
2000 1999
---------- ----------
Assets:
Investments:
Long-term investments................................ $ 27,198 $ 200,843
Short-term investments............................... 5,219 2,899
---------- ----------
Total investments..................................... 32,417 203,742
Cash.................................................. -0- 1,059
Investment in affiliates.............................. 3,055,354 2,851,913
Due from affiliates................................... 37 -0-
Accrued investment income............................. 260 2,360
Taxes receivable...................................... 25,184 5,883
Other assets.......................................... 26,552 38,521
---------- ----------
Total assets........................................ $3,139,804 $3,103,478
========== ==========
Liabilities and shareholders' equity:
Liabilities:
Short-term debt...................................... $ 329,148 $ 418,394
Long-term debt....................................... 365,989 394,160
Due to affiliates.................................... 393 51,724
Other liabilities.................................... 48,519 52,539
---------- ----------
Total liabilities.................................... 744,049 916,817
Monthly income preferred securities................... 193,395 193,324
Shareholders' equity:
Preferred stock...................................... 351 279
Common stock......................................... 147,801 147,801
Additional paid-in capital........................... 977,041 901,532
Accumulated other comprehensive income .............. (148,406) (174,222)
Retained earnings.................................... 2,220,671 1,910,487
Treasury stock....................................... (995,098) (792,540)
---------- ----------
Total shareholders' equity........................... 2,202,360 1,993,337
---------- ----------
Total liabilities and shareholders' equity........... $3,139,804 $3,103,478
========== ==========
See Notes to Condensed Financial Statements and accompanying Independent
Auditors' Report.
91
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
CONDENSED STATEMENT OF OPERATIONS
(Amounts in thousands)
Year Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
Net investment income............................ $ 11,073 $ 17,747 $ 20,024
Realized investment losses....................... (81,724) (24,179) (54,855)
-------- -------- --------
Total revenue.................................. (70,651) (6,432) (34,831)
General operating expenses....................... 9,296 10,169 10,406
Reimbursements from affiliates................... (9,576) (10,800) (13,653)
Interest expense................................. 58,734 58,119 65,871
-------- -------- --------
Total expenses................................. 58,454 57,488 62,624
-------- -------- --------
Operating loss before income taxes and equity in
earnings of affiliates.......................... (129,105) (63,920) (97,455)
Income taxes .................................... 46,874 22,834 44,132
-------- -------- --------
Net operating loss before equity in earnings of
affiliates...................................... (82,231) (41,086) (53,323)
Equity in earnings of affiliates................. 454,348 308,114 327,984
Adjustment to carrying value of Vesta............ -0- -0- (20,234)
Monthly income preferred securities dividend (net
of tax)......................................... (10,284) (9,158) (9,777)
-------- -------- --------
Net income from continuing operations.......... 361,833 257,870 244,650
Discontinued operations of Waddell & Reed:
Income from operations.......................... -0- -0- 9,154
Loss on disposal................................ -0- -0- (4,401)
-------- -------- --------
Net income before extraordinary item and
cumulative effect of change in accounting
principle....................................... 361,833 257,870 249,403
Gain (loss) on redemption of debt (net of tax)... 202 -0- (4,962)
-------- -------- --------
Net income before cumulative effect of change in
accounting principle............................ 362,035 257,870 244,441
Cumulative effect of change in accounting princi-
ple............................................. -0- 16,086 -0-
-------- -------- --------
Net Income..................................... $362,035 $273,956 $244,441
======== ======== ========
See Notes to Condensed Financial Statements and accompanying Independent
Auditors' Report.
92
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(continued)
CONDENSED STATEMENT OF CASH FLOW
(Amounts in thousands)
Year Ended December 31,
-------------------------------
2000 1999 1998
--------- --------- ---------
Cash provided from operations before dividends
from subsidiaries............................ $ (44,603) $ (60,364) $ (46,825)
Cash dividends from subsidiaries............. 220,542 284,881 462,267
--------- --------- ---------
Cash provided from operations................. 175,939 224,517 415,442
Cash provided from (used for) investing activ-
ities:
Disposition of investments................... 119,021 43,436 217,323
Acquisition of investments................... -0- (49,260) (311,784)
Investment in subsidiaries................... (1,000) (172) (710)
Loans to subsidiaries........................ (35,500) (77,476) (48,723)
Repayments on loans to subsidiaries.......... 35,500 75,400 120,079
Net decrease (increase) in temporary invest-
ments....................................... (2,320) (1,185) (1,378)
Additions to properties...................... (53) (1,298) (48)
Other........................................ 18 13 -0-
--------- --------- ---------
Cash used for investing activities............ 115,666 (10,542) (25,241)
Cash provided from (used for) financing activ-
ities:
Issuance of debt............................. -0- 63,152 216,279
Sale of Vesta shares......................... -0- -0- 3,056
Repayments of debt........................... (95,390) -0- (380,000)
Issuance of stock............................ 6,723 37,163 3,957
Redemption of preferred stock................ -0- (20,000) -0-
Acquisitions of treasury stock............... (147,008) (221,878) (125,875)
Borrowed from subsidiaries................... 85,450 138,800 -0-
Repayment on borrowings from subsidiaries.... (85,450) (150,885) -0-
Payment of dividends......................... (65,965) (66,992) (107,166)
--------- --------- ---------
Cash provided from (used for) financing activ-
ities........................................ (301,640) (220,640) (389,749)
Net increase (decrease) in cash............... (10,035) (6,665) 452
Cash balance at beginning of period........... 1,059 7,724 7,272
--------- --------- ---------
Cash balance at end of period................. $ (8,976) $ 1,059 $ 7,724
========= ========= =========
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:
2000 1999 1998
-------- -------- --------
Consolidated subsidiaries..................... $220,542 $284,881 $462,267
======== ======== ========
Note B--Exchange of Preferred Stock for Debt
During 2000, Torchmark exchanged 71,369 shares of its preferred stock with
two Torchmark subsidiary companies for $22.3 million principal amount of
Torchmark notes, valued at $20.3 million, and $51 million of intercompany
debt.
See accompanying Independent Auditors' Report.
93
TORCHMARK CORPORATION
SCHEDULE IV. REINSURANCE (CONSOLIDATED)
(Amounts in thousands)
Percentage
Ceded Assumed of Amount
Gross to Other from Other Net Assumed
Amount Companies Companies Amount to Net
------------ --------- ---------- ------------ ----------
For the Year Ended December 31, 2000:
- -------------------------------------
Life insurance in force.............. $105,989,502 $974,566 $2,329,488 $107,344,424 2.2%
============ ======== ========== ============ ===
Premiums:*
Life insurance...................... $ 984,506 $ 6,266 $ 33,153 $ 1,011,393 3.3%
Health insurance.................... 917,552 6,397 -0- 911,155 0%
------------ -------- ---------- ------------
Total premiums..................... $ 1,902,058 $ 12,663 $ 33,153 $ 1,922,548 1.7%
============ ======== ========== ============ ===
For the Year Ended December 31, 1999:
- -------------------------------------
Life insurance in force.............. $99,741,126 $872,720 $2,377,705 $101,246,111 2.3%
============ ======== ========== ============ ===
Premiums:*
Life insurance...................... $ 919,779 $ 5,622 $ 32,713 $ 946,870 3.5%
Health insurance.................... 831,984 7,180 12 824,816 0%
------------ -------- ---------- ------------
Total premiums..................... $ 1,751,763 $ 12,802 $ 32,725 $ 1,771,686 1.8%
============ ======== ========== ============ ===
For the Year Ended December 31, 1998:
- -------------------------------------
Life insurance in force.............. $ 93,904,622 $718,777 $2,434,438 $ 95,620,283 2.5 %
============ ======== ========== ============ ===
Premiums:*
Life insurance...................... $ 862,101 $ 5,090 $ 31,503 $ 888,514 3.5 %
Health insurance.................... 768,874 7,873 (1,092) 759,909 (.1)%
------------ -------- ---------- ------------
Total premiums..................... $ 1,630,975 $ 12,963 $ 30,411 $ 1,648,423 1.8 %
============ ======== ========== ============ ===
- --------
* Excludes policy charges
See accompanying Independent Auditors' Report.
94
SIGNATURES
Pursuant to the requirements of Section 12 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Torchmark Corporation
/s/ C.B. Hudson
By: ________________________________
C.B. Hudson, Chairman, President, Chief
Executive Officer and Director
/s/ Gary L. Coleman
By: ________________________________
Gary L. Coleman, Executive Vice
President and Chief Financial
Officer (Principal Accounting
Officer)
Date: March 21, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ David L. Boren * /s/ Mark S. McAndrew *
By: ________________________________ By: ________________________________
David L. Boren Director Mark S. McAndrew Director
/s/ Joseph M. Farley *
By: ________________________________ /s/ Harold T. McCormick *
Joseph M. Farley Director By: ________________________________
Harold T. McCormick Director
/s/ Louis T. Hagopian *
By: ________________________________ /s/ George J. Records *
Louis T. Hagopian Director By: ________________________________
George J. Records Director
/s/ Joseph L. Lanier, Jr. *
By: ________________________________ /s/ R.K. Richey *
Joseph L. Lanier, Jr. Director By: ________________________________
R.K. Richey Director
/s/ Lamar C. Smith *
By: ________________________________
Lamar C. Smith Director
Date: March 21, 2001
/s/ Gary L. Coleman
*By: _______________________________
Gary L. Coleman Attorney-in-fact
95