1998 ANNUAL REPORT
Financial Highlights
(In thousands except percent and per share amounts)
TORCHMARK CORPORATION
Operations:
1998
1997
% Change
Total Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,753,630
$ 1,678,004
Total Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,157,876
2,071,103
4.5
4.2
Net Operating Income From Continuing Operations* . . . . . . .
324,315
273,730
18.5
Annualized Life Premium In Force . . . . . . . . . . . . . . . . . . . . .
1,062,647
1,007,379
Annualized Health Premium In Force . . . . . . . . . . . . . . . . . . .
796,863
762,052
5.5
4.6
Diluted Average Shares Outstanding . . . . . . . . . . . . . . . . . . .
141,352
141,431
(0.1)
Return From Continuing Operations
On Average Common Equity** . . . . . . . . . . . . . . . . . . . . . .
15.1%
18.2%
Per Common Share:
Net Operating Income From Continuing Operations* . . . . . . .
$ 2.29
$ 1.94
Shareholders’ Equity At Year End ** . . . . . . . . . . . . . . . . . . . .
15.43
12.90
18.0
19.6
Net Operating Income Per Common Share
Continuing Operations*
$2.29
$1.94
$1.49
$1.52
$1.67
$3.00
$2.00
$1.00
‘94
‘95
‘96
‘97
‘98
* Excludes realized investment gains (losses) and the related adjustment to deferred acquisition costs, equity in Vesta earnings,
and discontinued operations.
** Includes fixed maturity investments at amortized cost.
Insurance Sales Growth (Dollars in Millions)
1998 Compared With 1997
18%
}
$97
$82
$100
$75
$50
$25
51%
}
$70
$46
(4%)
}
$65 $63
4%
}
$60
$58
3%
}
$55 $57
Year Ended December 31
1997
1998
Increase
Health
Life
Total
$107
$230
$337
$139 30%
$244
6%
$383 14%
(cid:212)97 (cid:212)98
(cid:212)97 (cid:212)98
(cid:212)97 (cid:212)98
(cid:212)97 (cid:212)98
(cid:212)97 (cid:212)98
(cid:212)97 (cid:212)98
(cid:212)97 (cid:212)98
DIRECT
RESPONSE
UNITED
AMERICAN
EXCLUSIVE
AGENCY
AMERICAN
INCOME
AGENCY
UNITED
AMERICAN
INDEPENDENT
AGENCY
LIBERTY
NATIONAL
AGENCY
MILITARY
AGENCY
UNITED
INVESTORS
AGENCY
7%
}
$16 $17
50%
}
$15
$10
3%
}
$5
$5
(cid:212)9
(cid:212)97 (cid:212)97
OTHER
Insurance Premium Income Growth* (Dollars in Millions)
1998 Compared With 1997
(2%)
}
$466
$455
3%
}
$417
$406
6%
}
$251
$237
14%
}
$230
$202
$500
$400
$300
$200
$100
Year Ended December 31
1997
1998
Increase
Health $ 740 $ 760
Life $ 901 $ 957
Total $1,641 $1,717
3%
6%
5%
12%
}
$169
$151
16%
}
$92
$80
5%
}
$82
$78
(5%)
}
$22 $21
(cid:212)97 (cid:212)98
OTHER
(cid:212)97 (cid:212)98
(cid:212)97 (cid:212)98
(cid:212)97 (cid:212)98
(cid:212)97 (cid:212)98
(cid:212)97 (cid:212)98
(cid:212)97 (cid:212)98
(cid:212)97 (cid:212)98
UNITED
AMERICAN
INDEPENDENT
AGENCY
LIBERTY
NATIONAL
AGENCY
AMERICAN
INCOME
AGENCY
DIRECT
RESPONSE
UNITED
AMERICAN
EXCLUSIVE
AGENCY
MILITARY
AGENCY
UNITED
INVESTORS
AGENCY
*Excludes Family Service Life
Letter To Shareholders
1998 was an excellent year for Torchmark. Our net
FINANCIAL REVIEW
operating income per share from continuing operations
increased 18% to $2.29* per fully diluted share.
Net operating income per share from continuing
We experienced growth in sales and premiums in both
operations increased 18% to $2.29*. Excluding Family
life and health insurance. Not only did our investment
Service Life, insurance underwriting income increased
income grow, but more importantly, we experienced an
5% to $2.25 per share. Excess investment income
even greater growth rate
in free or excess invest-
ment income, which is
Key Components of Net Operating Income Per Diluted Share
the portion of investment
Continuing Operations -
1998
1997
%
income over and above
that which we must earn
on interest-bearing liabil-
ities. At the same time,
our insurance adminis-
Insurance Underwriting Income
- Excluding Family Service Life $2.25
.01
- Family Service Life
1.46
( .26)
(1.17)
Excess Investment Income
Other
Income Tax
Net Operating Income from
Continuing Operations*
$2.14
.03
1.01
( .25)
( .99)
5
45
18
18
2.29
1.94
increased 45% to $1.46
per share.
Total annualized premi-
um insurance sales
increased 14% to $383
million. Life insurance
sales increased 6% to
$244 million, and health
trative expenses were
Equity in Earnings of Vesta
( .03)
.08
insurance sales
basically unchanged
from the prior year.
Discontinued Operations -
Asset Management
(Net of Minority Interest)
increased 30% to $139
.34
.54
million.
Total Net Operating Income
$2.60
$2.56
In March we completed
the initial public offering
of 34% of Waddell &
Total premium income,
excluding Family Service
Life, increased 5% to
Reed, and in November the spin-off of our remaining
$1,751 million. Life premiums increased 6% to $957
ownership to our shareholders was completed. In June
million. Health premiums increased 3% to $760 million.
we sold Family Service Life. With the cash proceeds
Annuity income increased 22% to $34 million.
of these transactions, we reduced our long-term debt,
and reactivated our share repurchase program with the
Recognizing fixed maturity assets at their amortized
acquisition of 3.4 million shares late in the year.
cost, our shareholder equity increased 17% to
$2,112 million, and our return on equity from continuing
operations was 15%. Treating the monthly income
preferred securities as debt, our debt to capitalization
ratio declined to 31%.
*Excluding Waddell & Reed and our passive investment
in Vesta Insurance Group, Inc.
3
INSURANCE DISTRIBUTION
In addition to being an outstanding insurance
Direct Response
provides support to other distribution systems in
distribution system, our Direct Response operation
Torchmark. In 1998, it was responsible for generating
Direct Response sales increased 18% to $97 million.
over 550,000 life insurance and Medicare
Life insurance sales were $93 million, up 18%. Health
Supplement inquiries for our Exclusive Agency and
insurance sales were $4 million, up 29%.
Independent Agency operations at United American.
Total premium income increased 14% to $230 million.
began receiving direct response support in 1998,
Life insurance premiums were $221 million, up 13%.
and increased support will be provided in the future.
Furthermore, our Liberty National agency operation
Health insurance premiums were $9 million, up 36%.
The vast majority of our sales were exclusively a
United American
result of direct mail operations, but inquiries and sales
United American’s two distribution systems are
were also generated as a result of advertising through
our Exclusive Agency and the Independent Agency
television and publications. Total mailings in 1998
operations.
exceeded 265 million packages.
We have compiled a file of over 4.5 million households
in 1998. Health insurance sales were $65 million,
comprised of individuals who have responded in
up 62%. Life insurance sales were $5 million, down
recent years to our solicitations, but who have not yet
16%. Of the $65 million of health insurance sales,
purchased insurance from us. Re-mailings to this file
$59 million were Medicare Supplement sales,
Exclusive Agency sales increased 51% to $70 million
produce sales at a much higher rate than mailings to
an increase of 69%.
the general public. This ever-growing file has been and
will continue to be an excellent source of new sales.
Total premium income increased 12% to $169 million.
Over $11 million, or 12%, of our life insurance sales
up 14%. Life insurance premiums were $19 million,
Health insurance premiums were $151 million,
were add-on sales whereby our customers increased
up 3%.
their life insurance protection as a result of offers
included in their premium notice mailings. Add-on
1998 was an extraordinary year for our Exclusive
sales increased 20% in 1998.
Agency operation. We began the year with 900
agents in 59 branch offices. We ended the year
with 1,750 agents in 67 branch offices; the number of
4
agents and branches increased 94% and 14%,
providing financial support to these agencies, we have
respectively. In last year’s Annual Report, I stated that
reversed the downward trend in sales of recent years.
we expected to grow the number of agents by “no less
Independent Agency sales declined 5% in 1997 and
than 20%”. I’m pleased I chose the words “no less
increased, as stated above, 4% in 1998. We expect
than”. In the future, we expect continued impressive
even greater growth in 1999.
growth in the number of Exclusive agents and branch
offices.
Liberty National
Independent Agency sales increased 4% to $60 mil-
Liberty National agency sales increased 3% to $57
lion. Health insurance sales were $51 million, up
million in 1998. Life insurance sales were $46 million,
18%. Life insurance sales were $9 million, down
up 5%. Health insurance sales were $11 million,
38%. Of the $51 million of health insurance sales,
down 4%.
$38 million were Medicare Supplement sales, an
increase of 47%.
Total premium income increased 3% to $417 million.
Life insurance premiums were $281 million, no
Total premium income decreased 2% to $455 million.
change from 1997. Health insurance premiums were
Health insurance premiums were $418 million, down
$136 million, up 8%.
3%. Life insurance premiums were $37 million,
unchanged from 1997.
At the beginning of this decade, Liberty National
was a debit operation, a system where the agents
1998 was the first in several years that our
collected monthly premiums in the homes of our
Independent Agency operations had growth in
customers. The debit system served Liberty National
Medicare Supplement sales. Levelized commissions,
well in prior decades, but for many reasons the debit
mandated by federal law in 1992, had an adverse
business became an outmoded and inefficient method
effect on most general agencies; their financial ability
of sales and service. For most of this decade, Liberty
to recruit and train new agents was weakened.
National has been in the transformation from a debit
As a result, many independent general agencies left
operation to a traditional agency operation. The
the Medicare Supplement market.
transformation is now complete. Debit sales ceased
We have been developing business relationships with
Liberty National’s $442 million of annualized inforce
larger agencies that have the potential of writing
premiums are still being collected by agents.
in 1995, and as of year end 1998 only $.8 million of
higher volumes of business. By generating inquiries
through our Direct Response operation, and by
5
1998 was the first year of any significant increase in
Field management of an insurance sales force is
agents since Liberty National ceased debit sales
commonly comprised of two levels above the
activity. We started the year with 1,750 agents and
agents. Although the second level of management
we ended the year with 1,829 agents. Late in the
produces a significant volume of sales, its primary
year Liberty National began receiving support from
responsibility is new agent training, a critical
our Direct Response operation, and this support will
function in growing a successful sales force.
be increased throughout 1999. With increasing Direct
Sometimes, this level of management becomes too
Response support and continued growth in agents,
focused on personal production and fails to provide
we expect a greater growth rate in sales for the
the essential training to new recruits. It is the
upcoming year.
responsibility of both management levels to prevent
American Income
this situation. Nonetheless, this situation has
developed in American Income’s sales force.
Our objective for the upcoming year will be to
American Income agency sales declined 4% to $63
reverse the current trend and re-establish the
million during 1998. Life insurance sales declined 3%
historically strong growth of American Income’s
to $54 million. Health insurance sales declined 9% to
successful agency operations.
$9 million. Total premium income for 1998 increased
6% to $251 million. Life insurance premiums were
MIilitary
$204 million, up 7%. Health insurance premiums
were $47 million, up 2%.
Military Agency life insurance sales increased
7% to $17 million during 1998. Premium income
American Income is a “union label” company.
increased 16% to $92 million.
Our sales force and non-management home office
employees are organized by the Office and
This independent general agency sells exclusively
Professional Employees International Union.
to commissioned and non-commissioned military
With the cooperation and endorsement of labor
officers and their families. Our business
unions and credit unions, our agents sell life and
relationship dates back to 1981. They are an
supplemental health insurance to their members.
outstanding sales and service organization second
1998 was a difficult year for American Income.
write most of their life insurance sales through our
The decline in sales was primarily due to a decline
companies, we will work to earn an increasing
in agents from 1,366 at the beginning of the year to
portion of their total agency sales.
to none in this industry, and although they already
1,222 at the end of the year.
6
United Investors
subject to lower state and federal taxes), net
investment income was $470.7 million.
United Investors life sales increased 50% to
$15 million in 1998. Life insurance premium income
As shown in the 1998 Investment Income table,
increased 5% to $82 million. Annuity income increased
excess investment income, the portion of net invest-
22% to $34 million. The financial planners of Waddell &
ment income that contributes to our pre-tax earnings,
Reed are the primary distributors of United Investors life
is derived from two sources: (1) the income earned
and annuity products.
Although Waddell & Reed
is no longer a part of
1998 Investment Income
(Millions)
less the required income
on the invested assets
Total *
Required
Excess
that support net interest-
Torchmark, we will strive to
(1) Invested Assets Supporting:
earn their business by
continuing to provide
products and service to
their financial planners.
INVESTMENTS
Our investment strategy is
to maximize the difference
between investment yield
over required yield on our
Net Interest-Bearing
Policy Liabilities:
Life Insurance
Health Insurance
Annuities
Debt
$177.4
9.4
53.1
73.5
$138.6
9.1
45.5
71.4**
$38.8
.3
7.6
2.1
(2) Remaining Invested Assets 157.3
- 0 -
157.3
$470.7
$264.6
$206.1***
Increase Over 1997
7%
(10%)
44%
* For illustrative purposes only, total investment income has
been allocated pro rata based upon the net liabilities.
Torchmark does not specifically allocate assets to liabilities.
** Consists of interest on debt and dividends on monthly
income preferred securities.
*** $1.46 per share
bearing liabilities, and
(2) the income earned
on the remaining
invested assets.
Net interest-bearing
liabilities are (a) policy
reserves required to fund
future policy benefits,
less the interest-bearing
deferred acquisition
costs, and (b) debt.
net liabilities, and to avoid uncompensated risk.
Our net interest-bearing policy liabilities (in millions)
Our investment portfolio is concentrated in high quality
were as follows at year end:
fixed-maturity investments, which represented 84% of
our invested assets at year end. Our investment quality
remains strong with the average credit quality of the
fixed maturity portfolio being “A” as rated by Standard
& Poor’s.
Life Insurance
Health Insurance
Annuities
TOTAL
$2,366.4
107.4
550.4
$3,024 .2
The required annual effective yield on these liabilities
is 5.9%. Life insurance provides a significantly greater
Net investment income was $459.6 million. On a tax
opportunity for excess investment income because the
equivalent basis (i.e., recognizing that certain bonds are
net interest bearing policy liabilities are much greater
than in either health insurance or annuities.
7
Excess investment income increased 44%, or $63
OUTLOOK
million, in 1998 due to a 7% increase in investment
income and a 10% decline in the required interest on
In 1996, only four of our eight current distribution
net interest-bearing liabilities.
systems grew their annualized premium sales, and
total sales declined 1%. In 1997, five distribution
The 7% increase in investment income provided an
systems grew sales, and sales increased 7%.
additional $32 million of pre-tax income, and resulted
largely from a 6% increase in invested assets. In
In last year’s annual report I stated that we expected to
1998, invested assets benefited by the substantial
grow sales in all eight systems in 1998. All but one of
proceeds from the initial public offering of Waddell &
our systems produced growth in sales, and total sales
Reed, but were reduced by the sale of Family Service
increased 14%. We expect the percentage growth in
Life, a reduction in outstanding debt, and repurchases
sales to be no less in the coming year than in the past
of Torchmark stock.
year. In addition to being an outstanding distribution
system, our Direct Response operation provides
The 10% decrease in required interest on net
essential support to other systems within Torchmark.
interest-bearing liabilities provided an additional $31
This support will increase in 1999.
million of pre-tax income in 1998. Interest on debt
declined $16 million due to the reduction in outstanding
We expect greater growth in premium income and
debt and lower average borrowing costs. Interest on
underwriting margins, before administrative expenses.
policy reserves, less deferred acquisition costs,
Our administrative expenses may increase slightly, but
declined $15 million due to the decrease in net policy
should decline as a percentage of premium income.
reserves resulting from the sale of Family Service Life.
ADMINISTRATION
maintain our current yields and maintain the high
As we grow our invested assets, we will work to
Insurance administrative expenses decreased 1% to
$103 million. Relative to premium income, administra-
All in all, we expect 1999 to be another excellent year
tive expenses were 5.9% compared to 6.1% last year.
for Torchmark.
quality of our investment portfolio.
We continue to work to improve customer service by
simplifying and consolidating functions among our
companies. In so doing, we become a more efficient
C. B. Hudson
operation as we grow our business.
Chairman, President and Chief Executive Officer
8
Directors and Officers
DIRECTORS
TORCHMARK CORPORATION OFFICERS
David L. Boren
President of the University of Oklahoma
Norman, OK
Joseph M. Farley
Of Counsel in the Birmingham,
Alabama law firm of Balch & Bingham
Louis T. Hagopian
Retired Chairman of the Board and
Chief Executive Officer of NW Ayer, Inc.
New York, NY
C.B. Hudson
Chairman, President and Chief
Executive Officer of Torchmark
Joseph L. Lanier, Jr.
Chairman of the Board and Chief
Executive Officer of Dan River
Incorporated, Danville, VA
Mark S. McAndrew
President -United American
and Globe Life
Harold T. McCormick
Chairman and Chief Executive Officer
of Bay Point Yacht and Country Club
Panama City, FL
George J. Records
Chairman of Midland Financial Co.
Oklahoma City, OK
C.B. Hudson - Chairman , President and Chief Executive Officer
Tony G. Brill - Vice President
Gary L. Coleman - Vice President and Chief Accounting Officer
Michael K. Fagin - Vice President
Larry M. Hutchison - Vice President and General Counsel
Michael J. Klyce - Vice President and Treasurer
Joyce L. Lane - Vice President - Investor Relations
Carol A. McCoy - Associate Counsel and Corporate Secretary
Mark E. Pape - Vice President - Planning
Stephen W. Still - Vice President and Associate General Counsel
Spencer H. Stone - Controller
David F. Thorndike - Vice President
Russell B. Tucker - Vice President
TORCHMARK SUBSIDIARY OFFICERS
American Income Life
Bernard Rapoport - Chairman and Chief Executive Officer
Charles B. Cooper - President
William L. Garner - Executive Vice President
Globe Life
Mark S. McAndrew - President
George B. Burke - Senior Vice President, Direct Marketing
Glenn D. Williams - Senior Vice President, Marketing
Liberty National Life
Anthony L. McWhorter - President
Vurl E. Duce - Executive Vice President
United American
Mark S. McAndrew - President
Gene P. Grimland - Executive Vice President, Sales
Andrew W. King - Senior Vice President, Branch Office Sales
Rosemary J. Montgomery - Senior Vice President, Actuary
R.K. Richey
Chairman of the Executive Committee
of the Board of Directors of Torchmark
United Investors Life
Anthony L. McWhorter - President
9
Condensed Consolidated Statement of Operations
(Amounts in thousands except per share data)
The complete financial statements are found in the attached SEC Form 10-K with additional schedules and footnotes thereto.
10
Consolidated Balance Sheet
(Dollar amounts in thousands except per share data)
The complete financial statements are found in the attached SEC Form 10-K with additional schedules and footnotes thereto.
11
CORPORATE INFORMATION
Corporate Headquarters
Torchmark Corporation
2001 Third Avenue South
Birmingham, Alabama 35233
(205) 325-4200
www.torchmarkcorp.com
Key Insurance Subsidiaries
Liberty National Life Insurance Company
Birmingham, AL
United American Insurance Company
McKinney, TX
Globe Life and Accident Insurance Company
Oklahoma CIty, OK
United Investors Life Insurance Company
Birmingham, AL
American Income Life Insurance Company
Waco, TX
Annual Meeting of Shareholders
Thursday, April 29, 1999 @ 10:00 a.m.
Corporate Headquarters
Birmingham, Alabama
Stockholder Inquiries
For general information
regarding your Torchmark stock,
call (205) 325-4270.
For stock transfers, call (800) 446-2617.
Dividend Reinvestment
Torchmark maintains a dividend reinvestment plan for
all holders of its common stock. Under the plan,
shareholders may reinvest all or part
of their dividends in additional shares of common
stock and may also make periodic additional cash
payments of up to $3,000 toward the purchase of
Torchmark stock. Participation is voluntary. More infor-
mation on the plan may be obtained from the Stock
Transfer Agent by calling (800) 446-2617.
Stock Exchange Listing
12
New York Stock Exchange Symbol: TMK
The International Stock Exchange,
London, England
Stock Transfer Agent and
Shareholder Assistance
First Chicago Trust Company of New York
A Division of EquiServe
P.O. Box 2500
Jersey City, NJ 07303-2500
(201) 324-0313
Toll Free Number: (800) 446-2617
Hearing Impaired: (201) 222-4955
Fax: (201) 222-4892
Internet: http://www.equiserve.com
email: fctc@cm.fcnbd.com
Indenture Trustee for Senior Debentures
and Notes
The First National Bank of Chicago
One First National Plaza
Suite 0124
Chicago, Illinois 60670
(800) 524-9472
Independent Auditors for 1998
KPMG Peat Marwick LLP
Financial Center, Suite 1200
505 North 20th Street
Birmingham, Alabama 35203
Automatic Deposit of Dividends
Automatic deposit of dividends is available to share-
holders who wish to have their dividends directly
deposited into the financial institution
of their choice. Authorization forms may be obtained
from the Stock Transfer Agent by
calling (800) 446-2617. Participation is voluntary.
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
December 31, 1998
Commission file number
1-8052
TORCHMARK CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
2001 Third Ave. South, Birmingham, AL
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
63-0780404
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
35233
(ZIP CODE)
Registrant’s telephone number, including area code:
(205) 325-4200
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS
Common Stock, $1.00 Par Value
CUSIP NUMBER:
891027104
NAME OF EACH EXCHANGE ON
WHICH REGISTERED:
New York Stock Exchange
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:
81⁄4% Senior Debentures due 2009
77⁄8% Notes due 2023
73⁄8% Notes due 2013
CUSIP NUMBER:
891027 AE 4
891027 AF 1
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.
NO h
YES H
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K (§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. h
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT: $4,460,867,828
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT’S CLASSES OF COMMON STOCK, AS OF
FEBRUARY 28, 1999: 134,667,708
DOCUMENTS INCORPORATED BY REFERENCE
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 29, 1999, PART III
INDEX OF EXHIBITS (PAGES 81 THROUGH 84)
TOTAL NUMBER OF PAGES INCLUDED ARE 90
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 during 1998.
The following table presents Torchmark’s business by primary distribution method:
Primary
Distribution Method
Direct Response
Liberty National
Exclusive Agency
American Income
Exclusive Agency
United Investors
Exclusive Agency
Military
United American
Independent Agency
and Exclusive Agency
Company
Globe Life And
Accident
Insurance Company
Oklahoma City, OK
Liberty National Life
Insurance Company
Birmingham, Alabama
American Income Life
Insurance Company
Waco, Texas
United Investors Life
Insurance Company
Birmingham, Alabama
Liberty National Life
Insurance Company
Birmingham, Alabama
Globe Life And Accident
Insurance Company
Oklahoma City, Oklahoma
United American
Insurance Company
McKinney, Texas
Products
Individual life and supplemental health
insurance including juvenile and
senior life coverage, Medicare
Supplement, long-term care.
Individual life and
supplemental health insurance.
Individual life and supplemental health
insurance to union and credit
union members and other
associations.
Individual life insurance
and annuities.
Individual life insurance
Sales Force
Direct response, television,
magazine; nationwide.
1,829 full-time sales repre-
sentatives ; 108 district
offices in the Southeastern
U.S.
1,222 agents in the U.S.,
Canada, and New Zealand.
2,370 Waddell & Reed
representatives; indepen-
dent agents; 184 offices
nationwide.
Independent Agency
through career agents
nationwide.
Senior life and supplemental health
insurance including
Medicare Supplement
coverage and long-term care.
43,000 independent agents
in the U.S., Puerto Rico and
Canada; 1,750 exclusive
agents in 67 branch offices.
Additional
Analysis and in Note 18—Business Segments in the Notes to Consolidated Financial Statements.
information concerning industry segments may be found in Management’s Discussion and
Life Insurance
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
Premium Issued
Annualized
Premium in Force
1998
1997
1996
1998
1997
1996
Whole life:
Traditional . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-sensitive . . . . . . . . . . . . . . . . . . . . .
Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$115,154
17,131
108,469
3,713
$114,934
14,981
94,943
5,521
$112,817
16,638
82,331
2,955
$ 575,888
162,046
306,785
17,928
$ 551,047
163,058
270,905
22,369
$521,015
167,912
243,210
14,388
$244,467
$230,379
$214,741
$1,062,647
$1,007,379
$946,525
1
The distribution methods for life insurance products include sales efforts conducted by direct
response, exclusive agents and independent agents. These methods are discussed in more depth under
the heading ‘‘Marketing.’’ The following table presents life annualized premium issued by distribution
method:
Direct response . . . . . . . . . . . . . . . .
Exclusive Agents:
Liberty National . . . . . . . . . . . . . .
American Income . . . . . . . . . . . . .
United Investors . . . . . . . . . . . . . .
United American . . . . . . . . . . . . .
Independent Agents:
Military . . . . . . . . . . . . . . . . . . . . .
United American . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . .
(Amounts in thousands)
Annualized
Premium Issued
Annualized
Premium in Force
1998
1997
1996
1998
1997
1996
$ 93,500
$ 79,412
$ 62,029
$ 260,320
$ 232,535
$202,370
45,532
53,576
15,386
5,481
43,335
55,245
10,261
6,562
45,394
54,382
10,715
11,466
298,082
216,291
99,775
21,390
298,698
203,475
88,842
20,978
297,581
188,039
84,495
20,537
16,891
9,401
4,700
$244,467
15,781
15,225
4,558
$230,379
8,165
18,182
4,408
$214,741
98,902
41,078
26,809
$1,062,647
86,209
42,725
33,917
$1,007,379
74,150
40,130
39,223
$946,525
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, 1998 was $234 million and the average
interest rate earned on these loans was 6.7% in 1998. Interest income earned on policy loans was $15.3
million in 1998, $14.4 million in 1997, and $13.2 million in 1996. There were 198 thousand and 196
thousand policy loans outstanding at year-end 1998 and 1997, respectively.
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 17.0% in 1998,
16.5% in 1997, and 17.1% in 1996.
The following table presents an analysis of changes to the Torchmark subsidiaries’ life insurance
business in force:
In force at January 1, . . . . . . . .
New issues . . . . . . . . . . . . . . . .
Business acquired . . . . . . . . . .
Other increases . . . . . . . . . . . . .
Death benefits . . . . . . . . . . . . . .
Lapses . . . . . . . . . . . . . . . . . . . .
Surrenders . . . . . . . . . . . . . . . .
Other decreases . . . . . . . . . . . .
In force at December 31, . . . . .
Average policy size (in dollar
amounts):
Direct response—Juvenile . .
Other . . . . . . . . . . . . . . . . . . .
(Amounts in thousands)
1998
1997
1996
Number of
policies
Amount of
Insurance
Number of
policies
Amount of
Insurance
Number of
policies
Amount of
Insurance
9,630
1,452
-0-
1
(107)
(1,006)
(151)
(197)
9,622
$ 91,869,995
21,448,243
-0-
75,849
(323,393)
(14,589,649)
(1,438,085)
(703,901)
$ 96,339,059
9,392
1,441
-0-
1
(110)
(895)
(149)
(50)
9,630
$ 86,948,151
20,267,520
-0-
96,788
(307,752)
(13,358,973)
(1,383,373)
(392,366)
$ 91,869,995
9,196
1,320
38
1
(111)
(880)
(140)
(32)
9,392
$ 80,391,376
18,718,479
2,573,996
104,490
(289,687)
(13,008,065)
(1,296,744)
(245,694)
$ 86,948,151
$
6,688
11,411
$
6,725
10,689
$
6,776
10,246
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 Medicare sends directly to the Torchmark insurers.
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, 1998 by marketing method:
(Amounts in thousands)
Annualized
Premium Issued
Annualized
Premium in Force
1998
1997
1996
1998
1997
1996
$ 3,884
$ 3,001
$ 4,990
$ 9,617
$ 7,248
$ 5,141
11,124
9,138
64,245
11,541
10,052
39,616
11,258
10,645
31,565
143,668
44,300
172,927
138,179
43,552
141,780
122,305
42,140
131,250
Direct response . . . . . . . . . . .
Exclusive agents:
Liberty National
. . . . . . . . .
American Income . . . . . . . .
United American . . . . . . . . .
Independent agents:
United American . . . . . . . . .
50,508
42,643
42,523
426,351
431,293
447,317
$138,899
$106,853
$100,981
$796,863
$762,052
$748,153
The following table presents supplemental health annualized premium information for the three years
ended December 31, 1998 by product category:
(Amounts in thousands)
Annualized
Premium Issued
Annualized
Premium in Force
1998
1997
1996
1998
1997
1996
Medicare Supplement
. . . . . .
Cancer . . . . . . . . . . . . . . . . . .
Other health related policies .
$102,421
10,248
26,230
$ 65,161
10,757
30,935
$ 65,767
10,676
24,538
$553,737
144,900
98,226
$522,054
137,640
102,358
$523,902
119,428
104,823
$138,899
$106,853
$100,981
$796,863
$762,052
$748,153
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 managed by Waddell & Reed 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
For the year ended December 31,
(Amounts in millions)
Deposit Balance
At December 31,
1998
1997
1996
1998
1997
1996
Fixed annuities . . . . . . . . . . . . .
Variable annuities . . . . . . . . . . .
$ 64,687
299,005
$ 76,930
247,446
$ 72,392
247,461
$ 647.3
2,343.5
$ 611.0
1,821.2
$ 571.9
1,375.5
$363,692
$324,376
$319,853
$2,990.8
$2,432.2
$1,947.4
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
the loan. The investments of Torchmark insurance
underlying real estate exceeds the amount of
subsidiaries consist predominantly of high-quality,
investment-grade securities. Fixed maturities
represented 91% of
investments at December 31, 1998. Approximately 13% of fixed maturity
investments were securities guaranteed by the United States Government or its agencies or investments
that were collateralized by U.S. government securities. More than 70% of these investments were in
GNMA securities that are backed by the full faith and credit of the United States government. The
remainder of these government investments were U.S. Treasuries, agency securities or collateralized
mortgage obligations (‘‘CMO’s’’) that are fully backed by GNMA’s. (see Note 3—Investment Operations
in the Notes to Consolidated Financial Statements and Management’s Discussion and Analysis.)
total
The following table presents the market value of fixed maturity investments at December 31, 1998
on the basis of ratings as determined primarily by Standard & Poor’s Corporation. Moody’s Investors
Services’ bond ratings are used when Standard & Poor’s ratings are not available. Ratings of BBB and
higher (or their equivalent) are considered investment grade by the rating services.
Rating
AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BBB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less than B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Not rated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
(in thousands)
$1,410,967
591,326
2,540,294
849,481
267,086
293
2,296
106,704
%
24.5%
10.3
44.1
14.7
4.6
0.0
0.0
1.8
$5,768,447
100.0%
4
The following table presents the market value of fixed maturity investments of Torchmark’s insurance
subsidiaries at December 31, 1998 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.
Rating
Amount
(in thousands)
1. Highest quality* . . . . . . . .
2. High quality . . . . . . . . . . .
3. Medium quality . . . . . . . .
4. Low quality . . . . . . . . . . .
5. Lower quality . . . . . . . . .
6. In or near default . . . . . .
$4,592,764
807,433
249,731
25,500
2,405
0
$5,677,833
%
80.9%
14.3
4.4
0.4
0.0
0.0
100.0%
*
Includes $701 million of exempt securities or 12.4% 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 $35,000 through age 40. 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 continues to assess
the utility of other appropriate underwriting tests to detect AIDS in light of medical developments in this
field. To date, AIDS claims have not had a material impact on claims experience.
5
Reinsurance
As is customary among insurance companies, Torchmark 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 17—Commitments and
Contingencies in the Notes to Consolidated Financial Statements and Schedule IV—Reinsurance
[Consolidated]).
Reserves
The life insurance policy reserves reflected in Torchmark’s financial statements as future policy
benefits are calculated based on generally accepted accounting principles. These reserves, with the
addition of premiums to be received and the interest thereon compounded annually at assumed rates,
must be sufficient to cover policy and contract obligations as they mature. Generally, the mortality and
persistency assumptions used in the calculations of reserves are based on company experience. Similar
reserves are held on most of the health policies written by Torchmark’s insurance subsidiaries, since
these policies generally are issued on a guaranteed-renewable basis. A list of the assumptions used in
the calculation of Torchmark’s reserves are reported in the financial statements (See Note 9—Future
Policy Benefit Reserves in the Notes to Consolidated Financial Statements). Reserves for annuity
products consist of the policyholders’ account values and are increased by policyholder deposits and
interest credits and are decreased by policy charges and benefit payments.
Marketing
Torchmark 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.
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 1,829 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 1,222 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 Waddell & Reed sales force, consisting of 2,370 sales representatives, markets the life
insurance products, fixed annuities, and variable annuities of United Investors Life. This Agency also
distributes health insurance products of United American. This sales force continues to market
Torchmark’s insurance products subsequent to the spin-off of Waddell & Reed under a general agents’
contract.
United American offers life and health insurance targeted to various special markets through
approximately 1,750 United American exclusive agents in 67 branch offices throughout the United States.
Independent Agents. Torchmark insurance companies offer a variety of life and health insurance
policies through approximately 43,000 independent agents, brokers, and licensed sales representatives.
6
Torchmark is not committed or obligated in any way to accept a fixed portion of the business submitted
by any independent agent. All policy applications, both new and renewal, are subject to approval and
acceptance by Torchmark. Torchmark is not dependent on any single agent or any small group of
independent agents, the loss of which would have a materially adverse effect on insurance sales.
Various Torchmark insurance subsidiaries distribute life insurance through a nationwide independent
agency whose sales force is comprised of former commissioned and non-commissioned military officers
who sell exclusively to commissioned and non-commissioned military officers and their families.
Ratings
The following list indicates the ratings currently held by Torchmark’s five largest insurance companies
as rated by A.M. Best Company:
Liberty National Life Insurance Company
Globe Life And Accident Insurance Company
United Investors Life Insurance Company
United American Insurance Company
American Income Life Insurance Company
A.M. Best
Company
A+ (Superior)
A+ (Superior)
A+ (Superior)
A+ (Superior)
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, 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 effort. In addition to competition with other
insurance companies, Torchmark also faces increasing competition from other financial services
organizations. While there are a number of larger insurance companies competing with Torchmark that
there is no individual company
have greater resources and have considerable marketing forces,
dominating any of Torchmark’s life or health markets.
Torchmark’s health insurance products compete with, in addition to the products of other health
insurance carriers, health maintenance organizations, preferred provider organizations, and other health
care related institutions which provide medical benefits based on contractual agreements.
Generally, Torchmark companies operate at
lower administrative expense levels than its peer
companies, allowing Torchmark to have competitive rates while maintaining underwriting margins, or, in
the case of Medicare Supplement business, to remain in the business while some companies have
ceased new writings. Torchmark’s years of experience in direct response business are a valuable asset
in designing direct response products.
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
insurance
companies. They are also required to file detailed annual reports with supervisory agencies, and records
of
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, 1994; Liberty, as of December 31, 1996; United American, as of
December 31, 1996; and UILIC, as of December 31, 1996.
to examination at any time. Under the rules of
their business are subject
the NAIC,
insolvent
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.
insurance
IRIS identifies twelve insurance industry ratios from the statutory financial statements of
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 1997 and 1996.
Company
1997:
Ratio Name
Usual
Range
Reported
Value
Liberty
American Income
Investment in Affiliate to Capital and Surplus
Non-admitted to Admitted Assets
0 to 100
10
1996:
United American
American Income
Liberty
Liberty
Explanation of Ratios:
Change in Capital and Surplus
Non-admitted to Admitted Assets
Investment in Affiliate to Capital and Surplus
Change in Reserving Ratio
50 to -10
10
0 to 100
20 to -20
199
11
-15
11
240
-20
Change in Capital and Surplus—These ratios, calculated on both a gross and net basis, are a
measure of improvement or deterioration in the company’s financial position during the year. The NAIC
considers ratios less than minus 10% and greater than 50% to be unusual. United American’s ratios of
minus 15% in 1996 was caused by the payment of dividends to Torchmark in excess of its statutory net
income. This transaction did not affect the consolidated equity of Torchmark at December 31, 1996. Also,
this transaction did not affect United American’s ability to do business.
Non-admitted Assets to Admitted Assets—This ratio measures the degree to which a company has
acquired assets which cannot be carried on its statutory balance sheet. American Income’s ratio of 11%
in 1997 and in 1996 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 fully recognized as assets in Torchmark’s consolidated financial statements.
Investment in Affiliate to Capital and Surplus—This ratio is determined by measuring total investment
in affiliates against the capital and surplus of the company. The NAIC considers a ratio of more than
100% to be high, and to possibly impact a company’s liquidity, yield, and overall investment risk. The
large ratio in Liberty in 1997 and 1996 is the result of its ownership of other Torchmark insurance
companies and the ownership of 81% of the stock of Waddell & Reed. Liberty disposed of its investment
that company to its
in Waddell & Reed during 1998 in connection with Torchmark’s spin-off of
8
shareholders. All intercompany investment is eliminated in consolidation, and the internal organizational
structure has no bearing on consolidated financial condition or results. Furthermore, this intercompany
investment does not affect Liberty’s ability to do business.
Change in Reserving Ratio—The change in reserving ratio represents the number of percentage
points of difference between the reserving ratio for current and prior years. Liberty’s ratio was slightly over
the usual range in 1995, returning to the normal range in 1996, as a result of purchasing a block of
business in late 1995. The assumption of this business caused an increase in 1995 year-end reserves.
No allowance is made for special transactions such as this in the calculation of this ratio.
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.
Year 2000 Compliance
A full report of Torchmark’s risks, project plan, state of readiness, contingency plans, and other
matters concerning Year 2000 compliance is found in Management’s Discussions and Analysis of
Financial Condition and Results of Operations on page 34 of this report.
At the end of 1998, Torchmark had 1,820 employees and 2,261 licensed employees under sales
contracts. Additionally, approximately 49,000 independent and exclusive agents and brokers, who were
not employees of Torchmark, were associated with Torchmark’s marketing efforts.
Personnel
Item 2. Real Estate
Torchmark, through its subsidiaries, owns or leases buildings that are used in the normal course of
business. Liberty owns a 487,000 square foot building at 2001 Third Avenue South, Birmingham,
Alabama which currently serves as Liberty’s, UILIC’s, and Torchmark’s home office. Liberty leases
approximately 160,000 square feet of this building to unrelated tenants. Liberty also operates from 59
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).
9
Globe owns a 300,000 square foot office building at 204 North 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 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. All of the other
Torchmark companies lease their office space in various cities in the U.S.
A Torchmark subsidiary, Torchmark Development Corporation (‘‘TDC’’), as a part of a joint venture
with unaffiliated entities, is developing 3,400 acres as a planned community development known as
Liberty Park, which is located along Interstate 459 in Birmingham, Alabama.
TMK Income Properties, L.P.
(‘‘TIP’’), a partnership which is wholly-owned by Torchmark
subsidiaries, owns seven office buildings. These properties include: 1.) a 330,000 square foot office
building complex at 14000 Quail Springs Parkway Plaza Boulevard, Oklahoma City, which is 96% leased;
2.) six office buildings in Liberty Park in suburban Birmingham, Alabama containing approximately
675,000 square feet which are 95% leased.
Information Technology Computing Equipment
Torchmark, and its primary subsidiaries, have significant information technology capabilities at their
disposal. The corporation uses centralized mainframe computer systems, company-specific local-area
its ongoing information processing
networks, workstations, and personal computers to meet
requirements. Torchmark and its primary subsidiaries also use data communications hardware and
software to support
intranets, and internet-related
telecommunications capabilities.
remote data communications networks,
their
Torchmark’s computer hardware, data communications equipment, and associated software
programs are managed by information technology staff. All of the corporation’s computer hardware and
information processing schedules, and computer-readable data-management
software support,
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. As a practical matter, a jury’s discretion regarding the amount of a punitive damage award is
not limited by any clear, objective criteria under Alabama law. Accordingly, the likelihood or extent of a
punitive damage award in any given case is virtually impossible to predict. As of December 31, 1998,
Liberty was a party to approximately 125 active lawsuits (including 29 employment related cases and
excluding interpleaders and stayed cases), more than 110 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
10
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, Liberty has been subject to 76 individual cancer policy lawsuits pending in
Alabama and Mississippi, which were stayed or otherwise held in abeyance pending final resolution of
Robertson v. Liberty National Life Insurance Company (Case No. CV-92-021). Liberty filed motions to
dismiss these lawsuits based upon the U.S. Supreme Court opinion issued in Robertson in March 1997.
Only two of these individual cancer policy lawsuits remain, the other such suits having been 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 County, Oklahoma (Moore v. Torchmark Corporation, Case No. CJ-94-2784-
65, subsequently amended and restyled Tabor v. Torchmark Corporation). This suit claims damages on
behalf of individual health policyholders who are alleged to have been induced to terminate such policies
and to purchase Medicare Supplement and/or other insurance coverages. 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 plaintiffs’ motion to certify a class of Medicare Supplement policyholders’ claims.
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 (Smithv.TorchmarkCorporation, 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 are sought.
A plaintiff class was certified by the District Court on February 26, 1996, although the certification does
not go to the merit of the allegations in the complaint. On December 31, 1996, the plaintiffs filed an
amended complaint in Smith to allege violations of various provisions of the Employment Retirement
Income Security Act of 1974. Extensive discovery was then conducted. In October 1998, defendants filed
a motion to decertify the presently defined class in Smith.
It has been previously reported that Torchmark, its subsidiaries United American and Globe and
certain individual corporate officers are parties to purported class action litigation filed in April, 1996 in
the U.S. District Court for the Northern District of Georgia (Crichlow v. Torchmark Corporation, Case
No. 4:96-CV-0086-HLM) involving certain hospital and surgical insurance policies issued by Globe and
In September 1997,
United American.
the U.S. District Court entered an order granting summary
the plaintiffs on certain issues and denying national class certification, although
judgment against
indicating that plaintiffs could move for the certification of a state class of Georgia policyholders.
Discovery then proceeded on the remaining claims for breach of contract and the duty of good faith
arising from closure of
the block of business and certain post-claim matters as well as fraud and
conspiracy relating to pricing and delay in implementing rate increases. On June 17, 1998, the U.S.
District Court entered an order which denied the plaintiffs’ motion to certify a Georgia policyholders class,
denied reconsideration of the previously entered motion for summary judgment on certain issues, denied
reconsideration of
the denial of national certification of a class of policyholders and severed and
transferred claims of Mississippi policyholders to the U.S. District Court for the Northern District of
Mississippi (Grecov.TorchmarkCorporation, Case No. 1:98CV196-D-D). The U.S. District Court granted
defendants’ motion for summary judgment on all remaining issues in Crichlow on February 4, 1999.
Plaintiffs in Greco have moved to certify a class of persons purchasing Globe hospital and surgical
insurance policies in Mississippi. On February 1, 1999, defendants filed a motion for summary judgment
in Greco.
It has been previously reported that Liberty was a party to 53 individual cases filed in Chambers
County, Alabama involving allegations that an interest-sensitive life insurance policy would become paid-
11
up or self-sustaining after a specified number of years. Only one of these cases remains pending with all
others having been settled and dismissed by the Chambers County Circuit Court.
Torchmark has previously reported the case of Lawson v. Liberty National Life Insurance Company
(Case No. CV-96-01119), filed in the Circuit Court of Jefferson County, Alabama, where the plaintiffs
sought to represent a class of interest-sensitive life insurance policyholders, including those allegedly
induced to exchange life insurance policies or where the existing policy’s cash value was allegedly
depleted, in litigation alleging fraud, negligence and breach of contract in the sale or exchange of interest-
sensitive policies by Liberty. Torchmark was subsequently added as a defendant. In May 1996, the Circuit
Court entered an order conditionally certifying a plaintiffs class, which was subsequently redefined in
March 1997. The Circuit Court’s order allowed the parties to challenge the conditional certification based
upon subsequent discovery in the case. In March 1998, the defendants challenged the conditional
certification and a hearing on final certification was held in October 1998. On February 9, 1999, the Circuit
Court entered an order decertifying the conditional class and denying all petitions to certify a class in
Lawson.
Purported class action litigation was filed 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).
Plaintiff alleges improper payment of royalties and overriding royalties on coalbed methane gas produced
and sold from wells in Robinson’s Bend Coal Degasification Field, seeks certification of a class and
claims unspecified compensatory and punitive damages on behalf of such class. On April 11, 1996,
Torchmark’s motion to change venue was granted and the case has been transferred to the Circuit Court
of Tuscaloosa County, Alabama. Torchmark’s motion to dismiss remains pending while discovery is
proceeding. On February 10, 1999, the plaintiffs filed a request for a class certification hearing and to set
a trial date for the Pearson case.
In 1978, the United States District Court for the Northern District of Alabama entered a final judgment
in Battle v. Liberty National Life Insurance Company, et al (Case No. CV-70-H-752-S), class action
litigation involving Liberty, a class composed of all owners of funeral homes in Alabama and a class
insureds (Alabama residents only) under burial or vault policies issued, assumed or
composed of all
reinsured by Liberty. The final
judgment fixed the rights and obligations of Liberty and the funeral
directors authorized to handle Liberty burial and vault policies as well as reforming the benefits available
to the policyholders under the policies. Although class actions are inherently subject to subsequent
collateral attack by absent class members, the Battle decree remains in effect to date. A motion filed in
February 1990 to challenge the final judgment under Federal Rule of Civil Procedure 60(b) was rejected
by both the District Court in 1991 and the Eleventh Circuit Court of Appeals in 1992 and a Writ of
Certiorari was denied by the U.S. Supreme Court in 1993.
In November 1993, an attorney (purporting to represent the funeral director class) filed a petition in
the District Court seeking ‘‘alternative relief’’ under the final
judgment. This petition was voluntarily
withdrawn on November 8, 1995 by petitioners. On February 23, 1996, Liberty filed a petition with the
District Court requesting that it order certain contract funeral directors to comply with their obligations
under the Final Judgment in Battle and their funeral service contracts. A petition was filed on April 8, 1996
on behalf of a group of funeral directors seeking to modify the 1978 decree in Battle in light of changed
economic circumstances. All parties made extensive submissions to the District Court and a hearing on
the opposing petitions was held by the District Court on February 9, 1999.
It has been previously reported that in July 1998, a jury in U.S. District Court in the Middle District of
Florida recommended an aggregate total verdict amounting to $21.6 million against Liberty in Hipp v.
Liberty National Life Insurance Company (Case No. 95-1332-CIV-T-17A). This case, originally filed in
1995 in the Florida state court system, is a collective action under the Fair Labor Standards Act, alleging
age discrimination by Liberty in violation of the Age Discrimination in Employment Act and the Florida Civil
Rights Act. The plaintiffs, ten present or former Liberty district managers, sought damages for lost wages,
loss of future earnings, lost health and retirement benefits and lost raises and expenses. Three of these
plaintiffs, Florida residents, also sought compensatory and punitive damages allowable under Florida law.
On November 20, 1998, the District Court remitted the $10 million punitive damage portion of the jury
12
verdict to $0, thus reducing the total verdict to $11 million (including an advisory verdict of $3.2 million in
front pay awards). Additional revised front pay submissions were made by the plaintiffs to the District
Court in December 1998 and Liberty responded thereto in January 1999. Liberty is awaiting the entry of
a final judgment in the Hipp case and thereafter will pursue all available post trial and appellate relief.
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 1998.
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 6,738 shareholders of record on December 31, 1998, excluding shareholder accounts held in
nominee form. On August 1, 1997, Torchmark paid a 100% stock dividend to its common shareholders
of record on July 1, 1997. On November 6, 1998, Torchmark distributed its approximately 64% ownership
of Waddell & Reed to its shareholders at a ratio of .3018 Waddell & Reed shares to one share of
Torchmark. All market prices and dividends per share have been adjusted to reflect the 100% stock
Information concerning restrictions on the ability of
dividend and the Waddell & Reed distribution.
Torchmark’s subsidiaries to transfer funds to Torchmark in the form of cash dividends is set forth in Note
15—Shareholders’ Equity in the Notes to the Consolidated Financial Statements. The market prices and
cash dividends paid by calendar quarter for the past two years are as follows:
1998
Market Price
Quarter
1
2
3
4
High
$41.2813
43.0000
40.7344
40.2500
Low
$33.0156
34.5781
30.5313
27.4688
Year-end closing price . . . . . . . . . . $35.3125
1997
Market Price
Quarter
1
2
3
4
High
$26.7031
31.7031
35.9375
36.9531
Low
$21.5781
22.6563
30.0469
30.3750
Year-end closing price . . . . . . . . . . $36.4219
Dividends
Per Share
$ .1500
.1500
.1500
.1300
Dividends
Per Share
$ .1450
.1450
.1450
.1500
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)
Year ended December 31,
Premium revenue:
1998
1997
1996
1995
1994
Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . .
Realized investment gains (losses) . . . . . . . . . . . . . .
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating income(1) . . . . . . . . . . . . . . . . . . . . . . .
Net income from continuing operations . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income available to common shareholders . . . . .
Annualized premium issued:
959,766 $
759,910
33,954
1,753,630
459,558
(57,637)
2,157,876
324,315
255,776
244,441
244,441
750,588
23,438
732,618
22,404
429,116
(36,979)
909,992 $ 854,897 $ 772,257 $ 601,633
773,375
739,485
13,866
28,527
1,678,004 1,609,919 1,546,283 1,388,874
344,015
(2,551)
2,071,103 2,016,416 1,910,454 1,732,350
216,994
215,873
268,946
268,142
219,864
217,958
143,235
143,235
273,730
260,429
337,743
337,743
240,637
252,815
311,372
311,372
377,338
(14,323)
399,551
5,830
Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
244,467
138,899
383,366
230,379
106,853
337,232
214,741
100,981
315,722
217,988
103,491
321,479
149,833
122,663
272,496
Per common share:
Basic earnings:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating income(1) . . . . . . . . . . . . . . . . . . .
Net income from continuing operations . . . . . . .
Diluted earnings:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating income(1) . . . . . . . . . . . . . . . . . . .
Net income from continuing operations . . . . . . .
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . .
Return on average common equity, excluding effect
of SFAS 115, Vesta earnings, and discontinued
operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic average shares outstanding . . . . . . . . . . . . . . .
Diluted average shares outstanding . . . . . . . . . . . . . .
1.75
2.32
1.83
1.73
2.29
1.81
0.58
2.43
1.97
1.87
2.39
1.94
1.84
0.59
2.19
1.69
1.78
2.17
1.67
1.76
0.58
1.00
1.54
1.52
0.99
1.52
1.51
0.57
1.86
1.50
1.49
1.85
1.49
1.48
0.56
15.1%
139,999
141,352
18.2%
139,202
141,431
18.4%
142,460
143,783
18.3%
143,188
144,228
19.5%
144,192
145,192
1998
1997
1996
1995
1994
As of December 31,
Cash and invested assets . . . . . . . . . . . . . . . . . . . . . $ 6,417,511 $ 6,473,096 $5,863,163 $5,724,180 $4,913,925
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,249,028 11,127,648 9,893,964 9,445,623 8,144,002
250,116
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
791,518
1,932,736 1,629,343 1,588,952 1,242,603
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . .
8.69
Per common share (2) . . . . . . . . . . . . . . . . . . . . . .
9.65
Per common share excluding effect of SFAS 115 . .
355,392
383,422
2,259,528
16.51
15.43
40,910
791,880
189,372
791,988
347,152
564,298
11.09
10.16
11.69
11.42
13.80
12.90
Annualized premium in force:
Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,062,647(3) 1,007,379
762,052
796,955
812,371
1,859,510(3) 1,769,431 1,694,678 1,628,425 1,609,326
869,366
759,059
946,525
748,153
796,863
(1) Excludes realized investment gains (losses), the related adjustment to deferred acquisition costs, equity in Vesta
earnings, and discontinued operations.
(2) Computed after deduction of preferred shareholders’ equity.
(3) 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) Changes in governmental regulations (particularly those impacting taxes and changes to the
Federal Medicare program that would affect Medicare Supplement insurance);
3) Financial markets trends that adversely affect sales of Torchmark’s market-sensitive
products;
4) Interest rate changes that adversely affect product sales and/or investment portfolio yield;
5) Increased pricing competition;
6) Adverse regulatory developments;
7) Adverse litigation results;
8) Adverse Year 2000 compliance results;
9) Developments involving Vesta Insurance Group, Inc., described more fully elsewhere in this
document under the caption ‘‘Transactions involving Vesta Insurance Group’’ on page 34 of this
report;
10) The inability of Torchmark to achieve the anticipated levels of administrative and operational
efficiencies;
11) The customer response to new products and marketing initiatives;
12) Adverse levels of mortality, morbidity, and utilization of healthcare services relative to
Torchmark’s assumptions; and
13) The inability of Torchmark to obtain timely and appropriate premium rate increases.
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
In the analysis and comparison of Torchmark’s operating results with prior periods, 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 Asset Management Operations. 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. (See the discussion on Investments on page 27,
Liquidity on page 31, and Capital Resources on page 31 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
the
spin-off, Torchmark retained no further ownership interest
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.
in Waddell & Reed. As a result of
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 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.
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. This
compares with $77 million for 1997 and $66 million for 1996, when Torchmark owned 100% of Waddell
& Reed for the entire periods.
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 but has not
issued any new policies since 1995. 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
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. During 1997, Family Service accounted for $57 million in
revenues and $7.7 million in pretax income. 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.’’ Net operating income is the measure of income Torchmark’s management
focuses on to evaluate the performance of the operations 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
which distort operating trends.
17
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;
2) Torchmark’s pro rata share of Vesta Insurance Group’s (‘‘Vesta’s’’) adjustment to its equity as a
result of the accounting irregularities and earnings restatement reported by Vesta in the second
quarter of 1998, amounting to a $13 million loss after tax;
3) The $54 million nonrecurring expenses of the Asset Management Operations (Waddell & Reed)
spin-off;
4) The nonrecurring loss on the disposal of energy operations in 1996 in the after-tax amount of
$7 million; and
5) The nonrecurring loss from the redemption by Torchmark of its debt in the second quarter of
1998, in the amount of $5 million net of tax.
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 $2 million after-tax loss from the sale of a portion of the Vesta holdings. Losses in 1997,
in the after-tax amount of $24 million, were primarily a result of
intentional sales of fixed-maturity
investments at a loss to offset current and prior-year taxable gains. The Vesta adjustment and the
is
disposal of energy operations is discussed on page 34 and the redemption of Torchmark debt
discussed under the caption ‘‘Capital Resources’’ on page 32 of this report.
Net operating income is then further divided into three categories: continuing insurance operations,
discontinued operations, and Torchmark’s equity in the earnings of Vesta. Continuing insurance
operations consists of the operations of Torchmark’s insurance subsidiaries and corporate activities. The
operations of this group is reflective of Torchmark’s operations after the Waddell & Reed spin-off.
Discontinued operations include the discontinued asset management activities of Waddell & Reed.
A reconciliation of net operating income from continuing insurance operations to net income on a per
diluted share basis is as follows:
Reconciliation of Per Share Insurance Net Operating
Income to Reported Net Income*
1998
1997
1996
Insurance net operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued Asset Management operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in Vesta earnings (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2.29
.34
(.03)
$1.94
.55
.07
$1.67
.46
.06
Net operating income—all operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized investment gains (losses), net of tax . . . . . . . . . . . . . . . . . . . . . . . . . .
Vesta restatements, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of spin-off—Asset Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of energy operations, net of tax . . . . . . . . . . . . . . . . . . . . . . .
Loss on redemption of debt, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.60
(.36)
(.09)
(.38)
—
(.04)
2.19
2.56
.03
(.17)
—
—
—
—
— (.05)
—
—
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1.73
$2.39
$2.17
* Diluted share basis
In accordance with accounting rules, Torchmark reports earnings per share data as basic and
diluted. 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
18
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)
Insurance net operating income:
Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Per Share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating income—all continuing and discontinued operations:
Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Per Share:
For the Year Ended December 31,
1998
1997
1996
$324,315
$273,730
$240,637
2.32
2.29
1.97
1.94
1.69
1.67
367,720
361,908
315,206
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.63
2.60
2.60
2.56
2.21
2.19
Net income:
Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Per Share:
244,441
337,743
311,372
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.75
1.73
2.43
2.39
2.19
2.17
Insurance Operations. Revenues in 1998 were $2.16 billion, growing 4% over 1997 revenues of
$2.07 billion. Revenues rose 3% in 1997 over 1996 revenues of $2.02 million. After adjustment for
realized investment gains and losses in each year, revenues gained 5% in 1998 from $2.11 billion in 1997
to $2.22 billion in 1998. They rose 5% in 1997 over the prior year. Total premium increased $76 million
or 5% in 1998, accounting for 70% of the $107 million increase in total revenues excluding realized gains
and losses. Life insurance premium increased $50 million, or 5% and health premium grew $20 million or
3% in 1998. Net investment income increased 7% in 1998 to $460 million.
The $97 million or 5% growth in 1997 revenues excluding realized investment gains and losses
resulted largely from the increase in life premium of $55 million or 6%. Investment income, which rose
7%, also contributed $29 million to 1997 revenue growth.
Other operating expenses have declined in both 1998 and 1997 from the respective prior year. They
declined from $120 million in 1997 to $117 million in 1998. In 1997, expenses declined $6 million or 5%,
primarily due to a reduction in litigation expense. As a percentage of revenues, excluding realized gains
and losses, other operating expenses declined in each period and were 5.3% in 1998, 5.6% in 1997, and
6.2% in 1996. Other operating expenses consist of insurance administrative expenses and expenses of
the parent company. The components of Torchmark’s revenues and operations are described in more
detail in the discussion of Insurance and Investment segments found on pages 20 through 30 of this
report.
The effective tax rate for Torchmark was 34.5% in 1998, compared with 35.3% in 1997 and 35.8%
in 1996. Excluding goodwill, the effective tax rates for insurance operations were 33.0%, 32.9%, and
33.5% in 1998, 1997 and 1996, respectively. The 1997 decline in the effective rate resulted from
additional energy tax credits that were available as a part of the consideration from the 1996 disposition
of the energy segment.
The following table is a summary of Torchmark’s continuing insurance net operating income. Net
underwriting income is defined by Torchmark management as premium income less net policy
obligations, commissions, acquisition expenses, and insurance administrative expenses. Excess
investment income is defined as tax equivalent net investment income reduced by the interest credited to
19
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 Insurance Net Operating Income
(Dollar amounts in thousands)
1998
1997
1996
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Insurance underwriting income before other
income and administrative expenses:
Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 252,556
139,445
23,423
0
60.8% $ 241,038
141,540
33.6
19,025
5.6
7
60.0% $ 222,004
148,097
35.3
15,960
4.7
18
57.5%
38.4
4.1
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
415,424
100.0%
401,610
100.0%
386,079
100.0%
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Administrative expenses . . . . . . . . . . . . . . . . . .
4,488
(102,559)
Insurance underwriting income excluding
Family Service . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance underwriting income—Family Service .
Excess investment income . . . . . . . . . . . . . . . . . .
Corporate expense . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill amortization . . . . . . . . . . . . . . . . . . . . . .
Tax equivalency adjustment . . . . . . . . . . . . . . . . .
317,353
1,393
206,119
(12,061)
(12,075)
(11,143)
Pretax insurance net operating income . . . . . .
Income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
489,586
(165,271)
Insurance net operating income . . . . . . . . . . . . . .
$ 324,315
Insurance net operating income per diluted
3,141
(101,950)
302,801
3,685
143,476
(13,953)
(12,074)
(9,951)
413,984
(140,254)
$ 273,730
2,936
(108,020)
280,995
4,200
118,872
(13,798)
(12,074)
(10,638)
367,557
(126,920)
$ 240,637
share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2.29
$
1.94
$
1.67
Pretax insurance net operating income rose 18% in 1998 after a 13% increase in 1997 due to
increases in both periods in insurance underwriting income and investment results and declines in
financing costs. 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 discussion of each of Torchmark’s segments follows.
Life insurance. Life insurance is Torchmark’s largest segment, with life premium representing 55%
of
income and administrative expense
total premium and life underwriting income before other
representing 61% of the total. Sales of this group of products continues to be emphasized because of its
higher underwriting margins and larger asset base resulting from higher reserve levels. A larger asset
base provides Torchmark the opportunity to increase investment income.
Life insurance premium increased 5% in 1998 to $960 million from $910 million in 1997. Life premium
rose 6% in 1997. Sales of life insurance, in terms of annualized premium, were $244 million in 1998,
increasing 6% over 1997 sales of $230 million. This compares with 7% growth in 1997 sales over 1996.
Annualized life premium in force was $1.06 billion at December 31, 1998, compared with $1.01 billion at
1997 year end, an increase of 5%. Annualized premium grew 6% in 1997 from $947 million at year-end
1996. 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.
The sale of Family Service on June 1, 1998 caused some distortion in life insurance results for 1998.
life insurance premium income would have increased 6% to
Excluding Family Service operations,
$957 million in 1998 and 7% to $901 million in 1997. Annualized life premium in force would have
increased 6% in 1998 and 7% in 1997.
20
Life insurance products are marketed through a variety of distribution channels. The following table
presents life insurance premium by distribution method excluding Family Service during each of the three
years ended December 31, 1998.
LIFE INSURANCE
Premium by Distribution Method
(Dollar amounts in thousands)
United American Independent Agency . . . . . . .
United American Exclusive Agency . . . . . . . . . .
Direct Response . . . . . . . . . . . . . . . . . . . . . . . . .
Liberty National Exclusive Agency . . . . . . . . . .
American Income Exclusive Agency . . . . . . . . .
Military Independent Agency . . . . . . . . . . . . . . .
United Investors Exclusive Agency . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1998
1997
1996
Amount
$ 36,925
18,798
221,371
281,145
204,310
92,204
81,620
20,901
% of
Total
Amount
% of
Total
Amount
% of
Total
3.9% $ 36,810
18,243
2.0
195,393
23.1
280,519
29.4
190,681
21.3
79,631
9.6
77,986
8.5
21,924
2.2
4.1% $ 33,404
15,767
2.0
171,983
21.7
279,637
31.1
173,700
21.2
71,223
8.8
73,836
8.7
22,636
2.4
4.0%
1.9
20.4
33.2
20.6
8.4
8.8
2.7
$957,274
100.0% $901,187
100.0% $842,186
100.0%
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 primarily life products to juveniles and adults with face amounts of
less than
for
$10 thousand on average. The Direct Response operation is a profitable distribution channel
Torchmark characterized by lower acquisition costs than Torchmark’s agency-based marketing systems.
Direct Response life operations have grown rapidly since the early 1990’s when new direct distribution
media and target markets were added. Prior to that time, the primary product was a direct mail juvenile
this distribution center had Torchmark’s highest growth in life
life product.
insurance premium in dollar amount and accounted for over 23% of Torchmark’s life insurance premium
during 1998. Direct Response premium was $221 million in 1998, increasing 13% over 1997 premium of
$195 million. Direct Response life premium in 1997 grew 14% over 1996 premium of $172 million.
In both 1997 and 1998,
Leading the other distribution channels, annualized premium sold by the Direct Response operation
was $94 million in 1998, rising 18% over 1997 sales of $79 million. The 1997 sales increased 28% over
1996 sales of $62 million. Direct Response life annualized premium in force rose 12% to $260 million at
December 31, 1998 from $233 million a year earlier. At December 31, 1998, Direct Response life
annualized premium in force was second only to that of the Liberty National Exclusive Agency. Direct
Response life insurance annualized premium in force grew 15% in 1997.
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 providing marketing
support. Direct Response marketing support directly contributed to the increase in health sales by the
United American Exclusive Agency and its resulting agent recruiting success. Methods to extend Direct
Response marketing support to other Torchmark agent-based distribution channels are being explored.
The Liberty National Exclusive Agency distribution system represented Torchmark’s largest portion
of life insurance premium income in each of the three years presented, with 1998 premium of $281 million
representing 29% of total life premium. The annualized life premium in force of the Liberty Agency was
$298 million at year-end 1998, compared with $299 million and $298 million at year-ends 1997 and 1996,
respectively. Life premium sales, in terms of annualized premium issued, grew 5% during 1998 to
$46 million. This 1998 growth in life insurance sales compares to a decline in life sales during 1997 of
5% to $43 million. The turnaround in sales growth in the Liberty Agency was largely attributable to growth
in the number of agents from 1,750 agents at year-end 1997 to 1,829 agents at year-end 1998, an
increase of 5%. The number of first-year agents climbed 7% in 1998 to 804, after having increased 20%
in 1997. New agent recruitment programs were implemented in late 1996 resulting in the new agent
growth. Additionally, training programs have been employed to improve the retention of newly recruited
agents. 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.
21
The Liberty National Agency has completed the transition from a debit-style renewal premium
collection system to a direct bill or bank draft collection system. As a result, less than 1% of premium
was debit collected in 1998.
Another of Torchmark’s distribution channels for life insurance is a nationwide independent agency
whose sales force is comprised of former commissioned and non-commissioned military officers who sell
exclusively to commissioned and non-commissioned military officers and their families. This business is
comprised of whole life products with term insurance riders. The quality of the business produced by this
Military Agency is outstanding and is characterized by extremely low lapse rates. Life premium income
from this distribution system grew 16% to $92 million in 1998, representing the largest percentage growth
in 1998. Premium for this Agency rose 12% to
in life premium of any Torchmark distribution channel
$80 million in 1997. Annualized life premium in force for the Military distribution system grew 15% in 1998
to $99 million, after having increased 16% to $86 million in 1997. In both years this distribution system
produced the greatest amount of growth in annualized life premium in force on a percentage basis. A
major factor in this growth of in-force premium relates to the very high persistency associated with this
business. Annualized premium sold during 1998 by this Agency was $17 million, an increase of 7% over
sales of $16 million in 1997. Production almost doubled in 1997 from 1996 sales of $8 million.
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 margin business
characterized by lower policy obligation ratios. At December 31, 1998, premium from this system
accounted for 21% of Torchmark’s total
life premium. American Income’s premium increased 7% to
$204 million in 1998, after having risen 10% in 1997 to $191 million. Annualized life premium in force
was $216 million at year-end 1998, an increase of 6% over 1997 premium in force of $203 million.
Annualized life premium in force rose 8% in 1997. Sales, in terms of annualized premium issued, were
$54 million in 1998, $55 million in 1997, and $54 million in 1996. This Agency experienced a 12% decline
in agents during 1998, contributing to the decline in sales. Management
is currently implementing
changes to American Income’s marketing organization to focus on the recruitment and retention of
agents.
The United Investors Exclusive Agency is made up of Waddell & Reed sales representatives, who
market the life insurance products of United Investors Life under a marketing agreement with Waddell &
Reed. This Agency accounted for 9% of Torchmark’s life premium in 1998. Premium income rose 5% in
1998 to $82 million, following a 6% increase in 1997 to $78 million. Sales growth in this Agency in terms
of annualized premium issued was 50% in 1998, the highest life production of any Torchmark Agency in
terms of percentage growth. Sales were $15 million in 1988, compared with $10 million in 1997.
Annualized life premium in force increased 12% to $100 million at December 31, 1998, 9% of
Torchmark’s total life premium in force. In addition to the growth in life insurance sales, this agency has
also increased production of variable life collections from $5 million in 1997 to $18 million in 1998, almost
a fourfold increase. 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.
22
The United American Independent and Exclusive Agencies represented about 6% of
life
premium in 1998. On a combined basis, life premium rose 1% to $56 million in 1998. Premium for these
agencies increased 12% in 1997 to $55 million.
total
LIFE INSURANCE
Summary of Results
(Dollar amounts in thousands)
1998
1997
1996
Amount
% of
Premium
Amount
% of
Premium
Amount
% of
Premium
Premium and policy charges . . . . . . . . . . .
$ 957,274
100.0% $ 901,187
100.0% $ 842,186
100.0%
Policy obligations . . . . . . . . . . . . . . . . . . . .
Required reserve interest . . . . . . . . . . . . . .
618,867
(215,185)
64.7
(22.5)
574,139
(199,339)
63.7
(22.1)
538,233
(186,306)
63.9
(22.1)
Net policy obligations . . . . . . . . . . . . . . . .
403,682
Amortization of acquisition costs . . . . . . . .
Commissions and premium taxes . . . . . . .
Required interest on deferred acquisition
158,298
57,364
costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
85,374
Total expense . . . . . . . . . . . . . . . . . . . . .
704,718
42.2
16.5
6.0
8.9
73.6
374,800
149,358
55,019
80,972
660,149
41.6
16.6
6.1
9.0
73.3
351,927
138,553
53,747
75,955
620,182
41.8
16.5
6.4
9.0
73.7
Insurance underwriting income before
other income and administrative
expense, excluding Family Service . . . .
Family Service insurance underwriting
income before other income and
administrative expense . . . . . . . . . . . . . .
Insurance underwriting income before
other income and administrative
expense . . . . . . . . . . . . . . . . . . . . . . . . . .
252,556
26.4%
241,038
26.7% 222,004
26.3%
2,187
5,650
5,689
$ 254,743
$ 246,688
$ 227,693
Life insurance gross margins, as indicated by insurance underwriting income before other income
and administrative expense as a percentage of premium, have remained at approximately 27%
throughout the three-year period measured. The underwriting margin rose 3% in 1998 to $255 million,
after having increased 8% to $247 million in 1997. Excluding Family Service, the underwriting margin
increased 5% in 1998 to $253 million and 9% in 1997 to $241 million. Obligation ratios for life business
rose slightly in 1998, caused by an increase in mortality. Fluctuations in mortality are normal in the life
insurance industry and are not indicative of a trend.
Health Insurance. Torchmark markets its supplemental health insurance products through a
number of distribution channels. The following table indicates health insurance premium income during
each of the three years ended December 31, 1998 by distribution method.
HEALTH INSURANCE
Premium by Distribution Method
(Dollar amounts in thousands)
United American Independent Agency . . . . . . . .
United American Exclusive Agency . . . . . . . . . . .
Liberty National Exclusive Agency . . . . . . . . . . . .
American Income Exclusive Agency . . . . . . . . . .
Direct Response . . . . . . . . . . . . . . . . . . . . . . . . . .
1998
1997
1996
Amount
$417,556
150,602
135,861
47,074
8,817
% of
Total
Amount
% of
Total
Amount
54.9% $428,775
132,426
19.8
125,701
17.9
46,116
6.2
6,467
1.2
58.0% $440,862
124,037
17.9
120,028
17.0
44,172
6.2
3,519
0.9
% of
Total
60.2%
16.9
16.4
6.0
0.5
$759,910
100.0% $739,485
100.0% $732,618
100.0%
23
Health insurance premium increased 3% to $760 million in 1998 over 1997 premium of $739 million.
In 1997, health premium rose 1% over 1996 premium. However, 1997 was the first year since 1993 that
Torchmark recorded a year-over-year increase in premium for this segment. Annualized health premium
in force grew 5% to $797 million at December 31, 1998 over the previous year-end balance of $762
million. Health premium in force rose 2% during 1997. Sales of health premium, in terms of annualized
premium issued, were $139 million in 1998, increasing 30% over 1997 sales of $107 million. Sales in
1997 grew 6% over the prior year. Sales of health insurance have accelerated greatly in the past two
years due to increases in sales of Medicare Supplement policies. Prior to 1997, Torchmark had not
experienced year-over-year sales growth in health insurance for five years.
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, 1998, Medicare
Supplement accounted for 69%, cancer 18%, and other health products 13%. Medicare Supplement and
cancer annualized premium in force was $554 million and $145 million, respectively, at December 31,
1998.
Medicare Supplement insurance is sold primarily by the United American Exclusive Agency and the
United American Independent Agency. While health sales in both Agencies have grown in the past three
years, sales by the Exclusive Agency exceeded the health sales of the Independent Agency in 1998. This
Agency sold $64 million in annualized health premium in 1998, a 62% gain over the prior year. Health
sales of $40 million in 1997 rose 26% over 1996 sales. This Agency accounted for $18 million of the $20
million in health premium growth in 1998. It also was instrumental in health annualized premium growth
in both 1998 and 1997, accounting for $31 million of the $35 million growth during 1998 in in-force
premium and adding $11 million to annualized health premium in force in 1997. One factor in the growth
in Medicare Supplement sales in the United American Exclusive Agency is the targeted marketing support
provided by the Direct Response operation.
The United American Independent Agency continues to represent the largest amount of Torchmark’s
health premium in force. The Agency’s $426 million of annualized health premium in force at
December 31, 1998, of which $399 million was Medicare Supplement premium in force, was 54% of
Torchmark’s total health premium in force. Medicare Supplement sales by the United American
Independent Agency were $38 million in 1998, a 47% increase over 1997. In spite of increased Medicare
the United American
Supplement sales, Medicare Supplement annualized premium in force for
Independent Agency remained level at year-end 1998 compared with year-end 1997. This occurred
because recent years’ increases in sales resulting in additions to in force policies have been offset by
normal lapses occurring in the large, aging block of in force Medicare Supplement policies.
Medicare Supplement policies are highly regulated at both the federal and state levels with limits on
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 obtain 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. Using the Direct
Response operation, both targeted marketing support and increased agent recruiting have successfully
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,
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 finance the Medicare program in
increased medical cost
24
the future as it is anticipated that the program could be insolvent within the next decade. This would occur
because of the growth in the number of ‘‘baby boomers’’ becoming eligible for Medicare during that period
and increasing medical cost inflation generally due to increased utilization. Therefore, it is likely that
changes will be made to the Medicare program at sometime in the future. However, regardless of
proposed changes, 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.
Cancer insurance premium in force grew 5% in 1998 to $145 million, compared with 15% growth in
1997. Sales of this product declined 5% from 1997 sales of $11 million to $10 million. Sales in 1996 were
also $11 million. Growth in cancer annualized premium in force has been attributable in large part 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 85% of Torchmark’s total
cancer annualized premium in force at December 31, 1998.
Annualized premium in force for other health products declined 4% in 1998 to $98 million, after
declining 2% in 1997. Other health sales declined 15% in 1998 to $26 million. Sales increased in 1997,
however, with annualized premium issued rising 26% to $31 million. A large factor in the 1997 sales
increase was the increased issue of a limited-benefit hospital-surgical product sold by the United
American Independent Agency. With the resurgence of Medicare Supplement sales opportunities, the
emphasis of the United American Independent Agency during 1998 returned to Medicare Supplement
and less on other health products. As a result, sales and annualized premium in force by this agency of
other health products declined as compared with 1997.
HEALTH INSURANCE
Summary of Results
(Dollar amounts in thousands)
1998
% of
1997
% of
1996
% of
Premium
Amount
Premium Amount
Premium Amount
Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$759,910
100.0% $739,485
100.0% $732,618
100.0%
Policy obligations . . . . . . . . . . . . . . . . . . . . . .
Required reserve interest . . . . . . . . . . . . . . . .
482,496
(20,440)
Net policy obligations . . . . . . . . . . . . . . . . . . .
462,056
Amortization of acquisition costs . . . . . . . . . .
Commissions and premium taxes . . . . . . . . .
Required interest on deferred acquisition
59,208
87,828
costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,373
Total expense . . . . . . . . . . . . . . . . . . . . . . .
620,465
Insurance underwriting income before other
63.5
(2.7)
60.8
7.8
11.5
1.5
81.6
462,967
(21,644)
441,323
58,473
87,069
11,080
597,945
62.6
(2.9)
59.7
7.9
11.8
1.5
80.9
448,346
(26,137)
422,209
63,150
87,687
11,475
584,521
61.2
(3.6)
57.6
8.6
12.0
1.6
79.8
income and administrative expense . . . . . .
$139,445
18.4% $141,540
19.1% $148,097
20.2%
Health insurance underwriting income before other income and administrative expense declined 1%
in 1998 to $139 million, after having declined 4% in 1997. As a percentage of premium, underwriting
income before other income and administrative expense declined 1% in the years 1998 and 1997 from
the prior year, respectively. Margins have lagged premium growth because of higher obligation costs.
Medicare Supplement margins are restrained by the Federally mandated minimum loss ratio of 65% and
by competition. Cancer obligation ratios have increased in each year because of healthcare inflationary
pressures. To the extent management is able to obtain timely and adequate premium rate increases from
regulatory authorities to offset these cost increases, margins may be stabilized on cancer business.
Torchmark continues to seek such rate increases.
25
income and long-term,
Annuities. Annuity products are marketed by Torchmark to service a variety of needs, including
tax-deferred growth opportunities. Torchmark’s annuities are sold
retirement
almost entirely by the United Investors’ Exclusive Agency. This agency consists of the Waddell & Reed
sales force which markets United Investors’ annuities and other products under a marketing agreement.
In 1998, this agency collected $309 million of Torchmark’s total $368 million in annuity collections. The
United Investors Agency accounted for 97% of total annuity policy charges in 1998.
Annuities are sold on both a fixed and variable basis. Fixed annuity deposits are held and invested
by Torchmark and are obligations of
the
policyholder’s direction into his choice among a variety of mutual funds managed by Waddell & Reed,
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.’’
the company. Variable annuity deposits are invested at
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
(Dollar amounts in millions)
Annuity Collections
(Dollar amounts in thousands)
1998
1997
1996
1998
1997
1996
Fixed . . . . . . . . . . . . . . . . . . .
Variable . . . . . . . . . . . . . . . . .
$ 647.3
2,343.5
$ 611.0
1,821.2
Total
. . . . . . . . . . . . . . . . . .
$2,990.8
$2,432.2
$ 571.9
1,375.5
$1,947.4
$ 64,687
299,005
$ 76,930
247,446
$363,692
$324,376
$ 72,392
247,461
$319,853
Collections of fixed annuity premium were $65 million in 1998, compared with $77 million in 1997, a
decline of 16%. Management believes that the low-interest environment in 1997 and 1998 has been a
factor in the reduced sales of fixed annuities, as variable annuities and alternative investments have
grown more attractive. Fixed annuity collections were $72 million in 1996. The fixed annuity deposit
balance increased 6% in 1998 to $647 million at year end. It rose 7% in the prior period from $572 million
at year-end 1996 to $611 million at the end of 1997.
During 1998, Torchmark sold Family Service, a wholly-owned provider of preneed annuities. While
the sale of these preneed annuities had been discontinued in 1995, this block of annuities remained on
deposit until Family was sold. At the date of sale, this deposit balance was approximately $396 million.
Variable annuity collections rose 21% to $299 million in 1998. Variable collections were flat in 1997,
compared with the prior year at $247 million. The strength in financial markets has had a positive
influence on sales of variable annuities in both 1998 and 1997.
26
The variable account balance has experienced rapid growth in recent years, rising 31% in 1996 to
$1.4 billion at December 31, 1996, 32% in 1997 to $1.8 billion at year-end 1997, and 29% to $2.3 billion
at the end of 1998. Strong financial markets in all of these periods contributed greatly to the growth.
Variable accounts are valued based on the market values of the underlying securities. The additional
collections in each year also added to the balances.
ANNUITIES
Summary of Results
(Dollar amounts in thousands)
1998
Amount
1997
Amount
1996
Amount
Policy charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 33,594
$ 27,426
$ 21,029
Policy obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Required reserve interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net policy obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commissions and premium taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Required interest on deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . .
Total expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34,662
(42,171)
(7,509)
11,561
510
5,609
10,171
34,631
(41,551)
(6,920)
9,660
710
4,951
8,401
32,085
(38,972)
(6,887)
7,280
423
4,253
5,069
Insurance underwriting income before other income
and administrative expense, excluding Family Service . . . . . . . . . . . . . . . .
23,423
19,025
15,960
Family Service insurance underwriting income before
other income and administrative expense . . . . . . . . . . . . . . . . . . . . . . . . . .
98
305
520
Insurance underwriting income before other income
and administrative expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 23,521
$ 19,330
$ 16,480
Annuity underwriting income before other income and administrative expense has grown steadily
throughout each of the years 1996 through 1998, increasing 22% to $24 million in 1998 and 17% to
$19 million in 1997 over the respective prior year. Policy charges have also grown in each period, rising
22% in 1998 to $34 million and 30% in 1997 to $27 million. 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)
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax equivalency adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 459,558
11,143
$ 429,116
9,951
$ 399,551
10,638
Tax equivalent investment income . . . . . . . . . . . . . . . . . . . . . .
470,701
439,067
410,189
1998
1997
1996
Required interest on net insurance policy liabilities:
Interest on reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on deferred acquisition costs . . . . . . . . . . . . . . . . . . .
(296,696)
103,481
(308,632)
100,096
(298,408)
95,556
Net required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(193,215)
(208,536)
(202,852)
Financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(71,367)
(87,055)
(88,465)
Excess investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 206,119
$ 143,476
$ 118,872
Mean invested assets (at amortized cost) . . . . . . . . . . . . . . . . . . .
$6,353,279
$6,058,037
$5,626,803
Average net insurance policy liabilities . . . . . . . . . . . . . . . . . . . . .
3,261,982
3,468,702
3,312,575
Average debt (including MIPS) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,000,063
1,062,543
1,076,673
27
Excess investment income represents the profit margin attributable to investment operations and
cash flow management. It is defined as tax-equivalent investment income 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 over the rates applicable to Torchmark debt, growth in assets
in relation to policy liabilities and debt, and the efficient use of capital resources and cash flow.
Net investment income rose 7% to $460 million in 1998, compared with an increase of 7% to
$429 million in 1997. 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 also rose 7% in
both 1998 and 1997. These increases in investment income resulted primarily from the growth in the
invested asset base during each period. Mean invested assets increased 5% in 1998 and 8% in 1997.
Asset growth in 1998 was caused primarily by the receipt of $481 million in proceeds from the Waddell &
Reed offering in early 1998, offset somewhat by the sale of investments to repay debt and to buy
Torchmark stock. The Family Service sale also negatively impacted 1998 net investment income due to
the loss of approximately $778 million in invested assets at the date of the sale. Growth in 1997 excess
investment
the investments backing life reserves and the
reinvestment of cash flow.
income was due to the accumulation of
The increases in excess investment income were greater than the growth in net investment income,
however. In 1998, excess investment income increased 44% to $206 million. The $63 million increase in
1998 in excess investment income resulted primarily from the proceeds of the Waddell & Reed offering
which provided Torchmark with $481 million in additional funds to invest or to apply to outstanding debt.
There was also $7 million of interest income on an internal financing with Waddell & Reed included in
1998 income. Also in 1998, Torchmark essentially refinanced $380 million principal amount of its long-
term debt with either short-term debt or lower-yielding investments sales, saving an average of 350 basis
points in 1998 financing costs. The Family Services disposition had minimal
impact on the change in
excess investment income. The loss of Family’s investment portfolio did result in a loss of net investment
income, but this loss was offset by the reduction in required interest caused by the disposition of net
policy obligations and the receipt of $140 million in proceeds from the sale which were added to
investments.
In 1997, the 21% growth in excess investment income resulted primarily from the greater growth in
average invested assets relative to the growth in net policy liabilities. Also, financing costs declined 2%
during the period as a result of debt paydowns.
Torchmark’s share repurchase program, which was renewed after the Waddell & Reed spin-off, had
little impact on excess investment income in 1998 because purchases were made late in the year.
However, in 1999, share purchases will negatively affect growth in excess investment income. While
there is a cost of capital associated with share purchases, per share earnings could be improved.
U. S. Treasury rates continued a downward trend in 1998. The rates on corporate and municipal
securities did not decline to the same extent as treasuries, resulting in a ‘‘spread widening.’’ For this
reason, Torchmark was able to continue its fixed-maturity acquisition program relatively unchanged.
Excluding Family Service, which was sold during 1998, acquisitions totaled $1.8 billion, compared with
$1.7 billion for 1997. New fixed-maturity holdings were acquired at an average yield of 7.13% in 1998,
compared with 7.29% for 1997 and 7.12% in 1996. The estimated average maturity of 1998 acquisitions
was 20.7 years, compared with 13.3 years in 1997 and 7.8 years in 1996. Torchmark varies the maturities
of its new investments based on a number of factors, including the level of rates and the slope of the
prevailing yield curve in order to maximize investment value and return.
With lower yields on acquisitions, the fixed maturity portfolio yield declined to 7.42% at December 31,
1998, slightly below the year earlier level of 7.49% and 7.54% at year-end 1996. The average life of the
portfolio increased to 8.8 years, compared with 8.0 years at year-end 1997 and 7.8 years at year-end
1996. At year-end 1998, duration was 5.7 years, compared with 5.1 years in 1997 and 5.0 years in 1996.
the portfolio is
Emphasis continues to be on marketable, high quality investments. Over 93% of
considered by Standard and Poor’s to be investment grade, while 95% is considered investment grade
by the NAIC.
28
Torchmark considers its entire portfolio available for sale. It is therefore valued at market which
fluctuates as interest rate changes occur. The portfolio’s year-end 1998 unrealized gain of $249 million
compares with an unrealized gain of $213 million at year-end 1997 and $63 million at year-end 1996.
With the high quality and liquidity of its portfolio, Torchmark is able to minimize its holdings in short-term
investments, which totaled $76 million at year-end 1998 and $66 million at year-end 1997. A substantial
portion of the portfolio is expected to repay during the next several years.
Short terms and under 1 year . . . . . . . . . . . . . . . . . . . . . . . .
2-5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6-10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11-15 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16-20 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 20 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1998
1997
7.8%
5.4%
23.8
31.8
9.0
3.8
23.8
27.6
43.8
11.2
3.7
8.3
100.0% 100.0%
Fixed maturity investments continued to represent 91% of investment assets at year-end 1998, which
causes the percentage holdings of other type investments to vary from industry averages. The following
table presents Torchmark’s components of invested assets compared with the latest industry data:
Bonds & short terms . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Torchmark
Amount
(in thousands)
$5,844,291
9,843
124,072
164,644
233,765
35,976
%
91.1%
.2
1.9
2.6
3.6
.6
Industry %
(1)
74.8%
4.4
11.6
1.8
5.8
1.6
$6,412,591
100.0%
100.0%
(1) Latest data available from the American Council of Life Insurance.
Market Risk Sensitivity. Market risk is a 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 securities’ value could occur from a change in interest rates. This risk is
significant to Torchmark’s investment portfolio because its fixed-income holdings amount to 91% of total
investments. The effects of these interest rate fluctuations on fixed investments are reflected on an after-
tax basis in Torchmark’s shareholders’ equity from marking these investments 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 liabilities, net of deferred
acquisition costs, were $3.3 billion at December 31, 1998, compared with fixed income investments of
$5.5 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. These
liabilities 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-income holdings is
reduced by maintaining a relatively short-term portfolio, of which 63% matures within ten years. Also, the
portfolio and market conditions are constantly evaluated for appropriate action.
29
No derivative instruments are used to manage Torchmark’s exposure to market risk in the investment
portfolio. A swap instrument was entered into to allow Torchmark to participate in the downward trend in
interest rates in connection with its MIPS as discussed in the Notes to the Consolidated Financial
Statement on page 63 of this report and in Capital Resources on page 32 of this report. A cap instrument
was also entered into to protect Torchmark from the market risk on an increase in rates associated with
the swap on this security.
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. It has been determined from those procedures 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, 1998. 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.
Change in
Interest Rates
(in basis points)
-200
-100
0
100
200
Market Value of
Fixed-Maturity
Portfolio
($ millions)
$6,476
6,108
5,768
5,450
5,147
30
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 is highly liquid, 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 $398 million in 1998, compared with $410 million in 1997 and
$327 million in 1996. In addition to operating cash flows, Torchmark received $474 million in investment
maturities and repayments during 1998, adding to available cash flows. Such repayments were $513 million
in 1997 and $346 million in 1996. 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 $81 million at December 31, 1998, compared with
In addition to Torchmark’s liquid assets, Torchmark has a portfolio of
$77 million at year-end 1997.
marketable fixed and equity securities which are available for sale should the need arise. These securities
had a value of $5.8 billion at December 31, 1998.
facility with a group of
Torchmark has in place a line of credit
lenders which allows unsecured
borrowings up to a specified maximum amount. The maximum amount was increased during 1996 to $600
million and was at this level on December 31, 1998. 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,
1998, $357 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, 1998,
Torchmark was in full compliance with these covenants.
Liquidity of the parent company is affected by the ability of the subsidiaries to pay dividends. Dividends
are paid by subsidiaries to the parent in order to meet its dividend payments on common and preferred
stock, interest and principal repayment requirements on parent-company debt, and operating expenses of
the parent company. Dividends from insurance subsidiaries of Torchmark are limited to the greater of
statutory net gain from operations, excluding capital gains and losses, on an annual noncumulative basis or
10% of surplus, in the absence of special approval, and distributions are not permitted in excess of statutory
net worth. Subsidiaries are also subject to certain minimum capital requirements. Although these restrictions
exist, dividend availability from subsidiaries has been and is expected to be more than adequate for parent-
company operations. During 1999, a maximum amount of $258 million will 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 consists primarily of its funded debt and its commercial paper facility.
An analysis of Torchmark’s funded debt outstanding at year-ends 1998 and 1997 on the basis of par value
is as follows:
1998
1997
Instrument
Sinking Fund Debentures . . . . . . . . . . . . . . . . . .
Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior Debentures . . . . . . . . . . . . . . . . . . . . . . .
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total funded debt
. . . . . . . . . . . . . . . . . . . . . . . .
Current maturity of long-term debt . . . . . . . . . . .
Debt held by subsidiaries . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . .
Year
Due
2017
1998
2009
2023
2013
31
Rate
85⁄8% $
95⁄8
81⁄4
77⁄8
73⁄8
Principal
Amount
($ thousands)
–0–
–0–
99,450
200,000
100,000
399,450
–0–
(10,828)
$388,622
Principal
Amount
($ thousands)
$ 180,000
200,000
99,450
200,000
100,000
779,450
(208,000)
–0–
$ 571,450
The carrying value of
$772 million a year earlier.
the funded debt was $383 million at December 31, 1998, compared with
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 has also taken 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 85⁄8% 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 95⁄8% 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. Additionally, in October, 1998, Torchmark, through a subsidiary, acquired $10.8 million
principal amount of its 7 7/8% notes due 2023 in the open market at a cost of $10.6 million.
During 1997, Torchmark repaid $20 million principal amount on its 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. It also repaid $550 thousand principal amount of its Senior Debentures in 1996
under the terms of a put provision.
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 redeemable at Torchmark’s option at any time after September 30, 1999. While Torchmark is obligated
to pay dividends at a fixed rate of 9.18%, Torchmark has in place a ten-year interest-rate swap agreement
with an unaffiliated party to reduce financing costs. The swap expires in 2004. 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. Torchmark is at risk on this instrument for higher financing costs to the extent
interest rates rise during the remaining term. This risk is limited, however, by a five-year interest-rate cap
which Torchmark acquired in conjunction with the swap agreement that insures the variable rate cannot
exceed 10.39%. The cap expires on September 30, 1999. At December 31, 1998, the variable rate was
7.02%. During 1998, Torchmark’s after-tax dividend cost for the MIPS was $9.8 million, compared with
$11.9 million that would have been incurred without the swap and cap transactions. Torchmark’s after-tax
cost in 1997 was $9.9 million and in 1996 was $9.7 million, saving $2.0 million and $2.2 million in each of
those years, respectively.
Torchmark reduced its shareholder cash dividend paid in the fourth quarter of 1998 to $.13 per share
from $.15 paid in the previous four quarters. The fourth quarter 1998 dividend was paid prior to the spin-off
of Waddell & Reed. Because the dividend Waddell & Reed pays on its shares represents approximately
$.04 per Torchmark share, Torchmark’s quarterly dividend is expected to be $.09 per share each quarter in
1999.
Torchmark resumed its share buyback program in November, 1998 after completion of the Waddell &
Reed spin-off. Purchases of 3.4 million shares were made on the open market during November and
December of 1998 at a cost of $126 million. Funds for these purchases were derived primarily from the sale
of investments. During 1997, Torchmark acquired 5.2 million shares at a cost of $183 million. Share
purchases of 4.6 million shares were made in 1996 for $107 million. Torchmark will continue to make share
purchases under its share repurchase program on the open market when prices are attractive. Share
purchases have a favorable impact on earnings per share and return on equity, but negatively affect book
value per share.
Short-term debt consists primarily of Torchmark’s commercial paper outstanding but also includes the
current maturity of long-term debt. The commercial paper balance outstanding at December 31, 1998 was
$355 million at carrying value, compared with a balance of $139 million a year earlier. As previously noted,
Torchmark essentially refinanced $360 million face amount of
funded debt with additional short-term
borrowings. These borrowings were offset somewhat by the use of $82 million in Waddell & Reed offering
32
proceeds for repayment. The commercial paper borrowing balance fluctuates based on Torchmark’s
current cash needs. There was no current maturity of long-term debt at year-end 1998, compared with
$208 million a year earlier.
Shareholders’ equity increased 17% to $2.26 billion at December 31, 1998, over December 31, 1997
shareholders’ equity of $1.93 billion. Growth in shareholders’ equity was greatly impacted by the
Waddell & Reed offering and spin-off in 1998. Proceeds from the March, 1998 offering added $516 million
to Torchmark’s shareholders’ equity, but equity was reduced by $90 million of minority interest at the time
of the offering representing the 36% of Waddell & Reed that Torchmark no longer owned. Additionally,
the November, 1998 spin-off caused a reduction in Torchmark’s equity of $174 million, representing its
carrying value of Waddell & Reed at the time of the spin. Book value per share was $16.51 at 1998 year
end, compared with $13.80 at year-end 1997. After adjusting for the impact on shareholders’ equity for
security value fluctuations due to changes in interest rates in financial markets, book value per share was
$15.43 at year-end 1998, an increase of 20% over $12.90 at year-end 1997. Return on common
shareholders’ equity was 15.1% in 1998, compared with 18.2% in 1997. 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 also exclude all discontinued operations, equity in earnings of Vesta, and
realized investment gains and losses.
Total debt as a percentage of total capitalization continues to decline and was 24% at December 31,
1998. 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 31% at year-end 1997 and 32% at year-end 1996. The 1998 decline in this ratio
resulted primarily from the funded debt paydowns, net of the increase in short-term debt. The debt-to-
capitalization ratio was also favorably impacted by the net increase in Torchmark’s shareholders’ equity
resulting from the Waddell & Reed offering and spin-off. Torchmark’s ratio of earnings before interest,
taxes and discontinued operations to interest requirements also continues to improve and was 8.9 for
1998, compared with 6.5 in 1997 and 6.3 in 1996. Torchmark’s interest expense declined 22% in 1998
from $72 million to $56 million. Interest expense was $74 million in 1996.
33
OTHER ITEMS
TransactionsRegardingVesta. Since 1993, Torchmark has held a passive investment in 5.1 million
shares of Vesta, a property insurance carrier, representing approximately 28% of the outstanding shares
of Vesta. 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. Additionally, Vesta is now subject to numerous class action lawsuits
in state and Federal courts filed subsequent to such announcements.
During the fourth quarter of 1998, Torchmark announced it had entered into an agreement to sell
approximately 1.8 million shares of Vesta common stock to an unaffiliated insurance carrier for $7.42 a
share. In its fourth quarter Form 10Q, Torchmark reported its intent to sell its remaining Vesta shares and
vacate the two Vesta board seats it occupied. In view of the pending transaction, Torchmark adjusted the
carrying value of
its holdings in Vesta to estimated net realizable value of $45 million, effective
September 30, 1998. The adjustment produced an after-lax realized loss of $24 million or $.17 per
Torchmark diluted share. Torchmark further reported that because of the agreement to sell the Vesta
shares,
that Torchmark planned to
discontinue equity-method accounting in accordance with accounting standards.
the resulting writedown, and the vacating of
the board seats,
As of December 31, 1998, the terms of the agreement were not met by the unaffiliated insurance
carrier and the contract to sell the Vesta shares was terminated. In the meantime, on December 29, 1998,
Torchmark sold 680 thousand Vesta shares to another unrelated institution at a price of $4.75 per share.
Torchmark realized a $2 million after-tax loss on the sale. The sale reduced Torchmark’s ownership of
Vesta to 4.45 million shares or approximately 24% of Vesta at December 31, 1998. Because Torchmark’s
interest in Vesta exceeded 20% and the sale contract with the insurance carrier expired, Torchmark
continued equity-method accounting for its holdings in Vesta. Torchmark’s carrying value for Vesta
continues to reflect the previously-taken writedown.
Subsequent to Vesta’s June, 1998 announcement involving the accounting irregularities and the
financial restatements, Torchmark recorded its equity in Vesta’s earnings in the quarter that Vesta
reported those earnings. As a result, Torchmark’s equity in Vesta’s reported earnings during 1998,
including the restatements, was a pretax loss of $27 million. Torchmark carried Vesta at a value of
$32 million at December 31, 1998.
Disposalof EnergySegment. On September 30, 1996, Torchmark completed the sale of its energy
business segment
including its energy asset management subsidiary, Torch Energy Advisors
Incorporated (‘‘TEAI’’), and its Black Warrior coalbed methane investment. These operations, which were
classified as discontinued operations in Torchmark’s financial statements during the period prior to the
sale, were sold to a TEAI management group. After the sale, Torchmark had no controlling ownership
interest in any energy asset management organization.
In addition to previously transferred securities, warrants, and Section 29 energy-related tax credits,
which approximated $112 million at closing, Torchmark received subordinated debt and notes totaling
$32.5 million along with $15.5 million in cash. After closing costs and retained liabilities, Torchmark
recorded a pretax loss of $23 million and an after-tax loss of $7 million from the sale, or $.05 per share.
Litigation. Torchmark and its subsidiaries continue to be named as parties to pending or threatened
litigation, most of which involve punitive damage claims based upon allegations of agent misconduct at
Liberty in Alabama. Such punitive damage claims are tried in Alabama state courts where any punitive
damage litigation has the potential for significant adverse results. It is impossible to predict the extent of
punitive damages that may be awarded if liability is found in any given case, since the amount of punitive
damages in Alabama is left largely to the discretion of the jury in each case. It is thus difficult to predict
with certainty the liability of Torchmark or its subsidiaries in any given case because of the unpredictable
nature of this type of litigation.
Year 2000 Compliance. The new millennium poses a significant concern to all businesses which
use computer systems or electronic data in their operations. This concern arises because these
34
organizations have been processing computer systems and programs that cannot always identify a
proper date. For many years, programs were written using a two digit code to represent a year. At the
beginning of the year 2000, more digits are needed to accurately determine the date in these programs.
Without addressing this issue, many computer programs could fail or produce erroneous results.
Additionally, companies which are electronically engaged with other businesses or which rely on other
businesses for services are exposed to risk of failure by the electronic devices and computer systems of
those other entities to the extent they are not Year 2000 compliant. The potential of failure of these
systems creates considerable uncertainty and could potentially adversely affect the ongoing operations
and stability of a business.
Torchmark is exposed to these risks should its computer systems fail due to date-related problems.
Torchmark is also reliant on a number of third party businesses and governmental agencies with which it
either interacts electronically or depends upon for services in the conduct of
its business. These
institutions include but are not limited to banks, financial
institutions, telecommunication companies,
utilities, mail delivery organizations, and a variety of governmental agencies. Should Torchmark’s
computer systems or the systems of its third-party business partners not be compliant, Torchmark may
be exposed to considerable risks, including business interruption, loss of revenue, increased expense,
loss of policyholders, and litigation.
To reduce its business risk to an acceptable level, Torchmark has established a project plan to insure
that the company’s business-critical computer systems will be Year 2000 compliant. This plan also
addresses third-party compliance issues. Under the direction of executive management, objectives and
timetables have been set forth to achieve compliance in each geographic location where Torchmark
operates. Progress toward achieving those objectives is constantly monitored. Torchmark currently
expects the entire project, including all Year 2000 testing activities, to be completed during 1999.
As of December 31, 1998, Torchmark remains on schedule to meet all of its Year 2000 compliance
requirements. All known required software changes have been completed, and the related testing is in
process with plans for completion in 1999. With regard to third party concerns, Torchmark has in process
the following procedures:
1) Torchmark is confirming, with its software vendors, the Year 2000 readiness of its purchased
software packages because Torchmark has purchased software packages on all of its computer
platforms;
2) Torchmark is verifying the Year 2000 compliance status of its financial business partners’
computer and data communications systems to insure readiness, including data interface testing with
third parties; and
3) All of Torchmark’s electronic operational systems (telephones, security, utility, environmental)
are being evaluated for Year 2000 compliance.
As an example of Torchmark’s interface testing with selected third parties, Torchmark is utilizing
electronic data from selected third parties in processing Medicare Supplement benefit data using Year
2000 test data. Torchmark is also arranging similar testing with a selected number of banks. While
Torchmark is making every effort to verify the compliance of third parties, no assurances as to the
compliance of their computer systems can be given.
Torchmark has used primarily its own employees to complete its Year 2000 project. Other than
completion of software testing, all significant Year 2000 project milestones for internal computer systems
have been completed. Confirmation of third party compliance and electronic data interface testing with
third parties is continuing with completion expected during 1999. Torchmark has spent $5 million on its
Year 2000 project activities to date,
including internal programming costs, outside contractors, and
replacement costs. These costs have been expensed as incurred. Total project cost is expected to be
approximately $6 million.
Year 2000 contingency plans are being developed for critical risk areas. Management throughout the
organization has established and documented a contingency plan for Torchmark’s most critical systems
and interfaces with business partners within each individual’s responsibility. Such contingency plans
include possible manual operation efforts, staff adjustments, outside services, and alternative procedures.
These contingency plans will be maintained well into 2000.
35
NEW ACCOUNTING RULES
Accounting for Derivative Instruments and Hedging Activities (FASB Statement No. 133) is effective
for all fiscal quarters of all fiscal years beginning after June 15, 1999, with earlier application of all of the
provisions of this statement encouraged. 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.
Statement 133 will have minimal
impact on Torchmark’s financial statements. Torchmark has
negligible investments in derivative instruments, which are currently valued at fair value in its financial
statements. Torchmark’s use of derivatives for hedging purposes is very limited.
36
Item 8. Financial Statements and Supplementary Data
Independent Auditors’ Report
Consolidated Financial Statements:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheet at December 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Operations for each of the years in the three-year period
ended December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Comprehensive Income for each of the years in the three-year
period ended December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Shareholders’ Equity for each of the years in the three-year
period ended December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Cash Flow for each of the years in the three-year period
ended December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
38
39
40
42
43
44
46
37
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. In connection with our audits of the consolidated financial statements, we have also
audited the financial statement schedules as listed in Item 14(a). 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 audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial
includes
statements and financial statement schedules are free of material misstatement. An audit
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Torchmark Corporation and subsidiaries as of December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
Birmingham, Alabama
January 29, 1999 except
for Note 17 which is
as of February 10, 1999
38
TORCHMARK CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands except per share data)
Assets:
Investments:
Fixed maturities—available for sale, at fair value (cost: 1998—$5,519,772;
1997—$5,628,924)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities, at fair value (cost: 1998—$2,256; 1997—$3,284) . . . . . . . . . .
Mortgage loans on real estate, at cost (estimated fair value: 1998—$124,191;
1997—$79,096) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment real estate, at cost (less allowance for depreciation: 1998—
$40,828; 1997—$46,329) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in unconsolidated subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Value of insurance purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Separate account assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
1998
1997
$ 5,768,447
9,843
$ 5,841,690
12,404
124,072
164,644
233,765
35,976
75,844
6,412,591
4,920
31,510
99,279
130,279
1,502,511
170,640
39,080
414,658
-0-
18,298
2,425,262
78,974
167,297
221,703
74,433
65,510
6,462,011
11,085
102,305
100,392
116,506
1,371,131
216,988
37,100
426,732
387,910
19,049
1,876,439
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 11,249,028
$ 11,127,648
Liabilities:
Future policy benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned and advance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy claims and other benefits payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other policyholders’ funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,595,567
85,923
194,965
81,568
$ 5,023,763
83,722
228,754
82,224
Total policy liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt (estimated fair value: 1998—$430,431; 1997—$600,319) . . . . . . .
Separate account liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,958,023
511,311
162,831
355,392
383,422
2,425,262
8,796,241
5,418,463
416,665
378,696
347,152
564,298
1,876,439
9,001,713
Commitments and contingencies
Monthly income preferred securities
(estimated fair value: 1998—$205,040; 1997—$210,500) . . . . . . . . . . . . . . . . . . . .
193,259
193,199
Shareholders’ equity:
Preferred stock, par value $1 per share—Authorized 5,000,000 shares;
outstanding: -0- in 1998 and in 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, par value $1 per share—Authorized 320,000,000 shares;
outstanding: 147,800,908 issued less 10,951,933 held in treasury in 1998 and
147,848,908 issued less 7,808,468 shares held in treasury in 1997 . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
147,801
610,925
144,501
1,707,933
(351,632)
147,849
187,731
136,926
1,694,781
(234,551)
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,259,528
1,932,736
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 11,249,028 $ 11,127,648
See accompanying Notes to Consolidated Financial Statements.
39
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in thousands except per share data)
Year Ended December 31,
1998
1997
1996
Revenue:
Life premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Health premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 959,766
759,910
33,954
$ 909,992
739,485
28,527
$ 854,897
732,618
22,404
Total premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,753,630
1,678,004
1,609,919
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized investment gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
459,558
(57,637)
2,325
429,116
(36,979)
962
399,551
5,830
1,116
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,157,876
2,071,103
2,016,416
Benefits and expenses:
Life policyholder benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Health policyholder benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other policyholder benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
625,272
482,496
42,508
591,867
462,967
54,066
558,436
448,346
51,302
Total policyholder benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,150,276
1,108,900
1,058,084
Amortization of deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . .
Commissions and premium taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
231,024
143,747
117,438
12,075
56,325
224,738
141,296
120,233
12,074
71,863
218,826
140,448
125,881
12,074
73,611
Total benefits and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,710,885
1,679,104
1,628,924
Income from continuing operations before income taxes, equity in earnings
of unconsolidated subsidiaries, discontinued operations and
extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
446,991
391,999
387,492
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in earnings (or losses) of Vesta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment to carrying value of Vesta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Monthly income preferred securities dividend (net of tax) . . . . . . . . . . . . . . .
(154,338)
(6,866)
(20,234)
(9,777)
(138,409)
16,714
-0-
(9,875)
(138,676)
13,654
-0-
(9,655)
Net income from continuing operations . . . . . . . . . . . . . . . . . . . . . . .
255,776
260,429
252,815
Discontinued operations of energy segment:
Loss on disposal
(less applicable income tax benefit of: 1996—$15,813) . . . . . . . . . . . .
-0-
-0-
(7,137)
Discontinued operations of Waddell & Reed:
Income from operations (less applicable income tax expense of $42,932,
$40,081, and $41,946 respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal (including income tax of $49,840) . . . . . . . . . . . . . . . . .
Net income before extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on redemption of debt, (less applicable income tax benefit
47,868
(54,241)
77,314
-0-
65,694
-0-
249,403
337,743
311,372
of $2,672) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,962)
-0-
-0-
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 244,441
$ 337,743
$ 311,372
(Continued)
See accompanying Notes to Consolidated Financial Statements.
40
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS—(Continued)
(Amounts in thousands except per share data)
Year Ended December 31,
1998
1997
1996
Basic net income per share:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations of energy segment:
$1.83
$1.87
$1.78
Loss on disposal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
–0–
–0–
(.05)
Discontinued operations of Waddell & Reed:
Net income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income before extraordinary items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on redemption of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.34
(.39)
1.78
(.03)
.56
–0–
2.43
–0–
.46
–0–
2.19
–0–
Net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1.75
$2.43
$2.19
Diluted net income per share:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations of energy segment:
$1.81
$1.84
$1.76
Loss on disposal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
–0–
–0–
(.05)
Discontinued operations of Waddell & Reed:
Net income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income before extraordinary items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on redemption of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.34
(.38)
1.77
(.04)
.55
–0–
2.39
–0–
.46
–0–
2.17
–0–
Net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1.73
$2.39
$2.17
See accompanying Notes to Consolidated Financial Statements.
41
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Amounts in thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$244,441 $337,743 $311,372
Year Ended December 31,
1998
1997
1996
Other comprehensive income:
Unrealized investment gains (losses):
Unrealized gains (losses) on securities:
Unrealized holding gains arising during period . . . . . . . . . . . .
Reclassification adjustment for (gains) losses on securities
54,217
125,820
(152,706)
included in net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,519
29,967
(5,674)
Reclassification adjustment for amortization of (discount)
and premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,999)
(2,751)
(5,422)
Foreign exchange adjustment on securities marked to
market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,958
1,373
141
61,695
154,409
(163,661)
Unrealized gains (losses) on other investments . . . . . . . . . . . . .
(7,552)
(398)
1,894
Unrealized gains (losses) on deferred acquisition costs . . . . . .
(3,091)
(13,324)
17,837
Total unrealized investment gains (losses) . . . . . . . . . . . . . . .
51,052
140,687
(143,930)
Applicable tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(17,524)
(49,447)
50,375
Unrealized investment gains (losses), net of tax . . . . . . . . . . . . . .
33,528
91,240
(93,555)
Foreign exchange translation adjustments, other than securities .
(2,081)
(1,585)
Applicable tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
Foreign exchange translation adjustments, net of tax . . . . . . . . . .
(2,081)
(1,585)
Unrealized gains (losses) on discontinued operations . . . . . . . . . .
(12,100)
1,062
Applicable tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,235
(372)
(24)
-0-
(24)
(274)
96
Unrealized gains (losses) on discontinued operations, net of tax .
(7,865)
690
(178)
Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,582
90,345
(93,757)
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$268,023 $428,088 $217,615
See accompanying Notes to Consolidated Financial Statements.
42
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(Amounts in thousands except per share data)
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income
Retained
Earnings
Treasury
Stock
Total
Shareholders’
Equity
Year Ended December 31, 1996
Balance at January 1, 1996 . . . . . .
Comprehensive income . . . . . . . . .
Common dividends declared
($0.58 a share) . . . . . . . . . . . . . .
Acquisition of treasury stock—
common . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . .
$-0-
$ 73,784 $139,754
$140,338
(93,757)
$1,325,534 $ (90,458) $1,588,952
217,615
311,372
1,947
(82,320)
(82,320)
(5,195)
(106,996)
15,340
(106,996)
12,092
Balance at December 31, 1996 . . .
-0-
73,784
141,701
46,581
1,549,391
(182,114)
1,629,343
Year Ended December 31, 1997
Comprehensive income . . . . . . . . .
Common dividends declared
($0.585 a share) . . . . . . . . . . . . .
Two-for-one stock split in the form
of a dividend . . . . . . . . . . . . . . . .
Acquisition of treasury stock—
common . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . .
Grant of discounted options . . . . . .
Grant of deferred options . . . . . . . .
90,345
337,743
(81,793)
(73,784)
(36,776)
(182,903)
130,466
428,088
(81,793)
-0-
(182,903)
137,982
372
1,647
73,784
281
44,011
372
1,647
Balance at December 31, 1997 . . .
-0-
147,849
187,731
136,926
1,694,781
(234,551)
1,932,736
Year Ended December 31, 1998
Comprehensive income . . . . . . . . .
Common dividends declared
($0.58 a share) . . . . . . . . . . . . . .
Proceeds from Waddell & Reed
initial public offering . . . . . . . . . .
Distribution of Waddell & Reed . . .
Minority interest—Waddell & Reed
initial public offering . . . . . . . . . .
Sale of Family Service . . . . . . . . . .
Acquisition of treasury stock—
common . . . . . . . . . . . . . . . . . . .
Grant of deferred stock options . . .
Grant of restricted stock . . . . . . . .
Conversion of restricted stock to
Waddell & Reed shares . . . . . . .
Expense of restricted stock grants
and options . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . .
23,582
244,441
(73,304)
(174,113)
(16,007)
16,007
(125,875)
1,428
3,530
(1,307)
5,264
268,023
(73,304)
516,138
(174,113)
(90,484)
-0-
(125,875)
319
-0-
-0-
865
5,223
516,138
(90,484)
319
(4,958)
(48)
48
865
1,266
Balance at December 31, 1998 . . . .
$-0-
$147,801 $610,925
$144,501
$1,707,933 $(351,632) $2,259,528
See accompanying Notes to Consolidated Financial Statements.
43
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW
(Amounts in thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to cash provided from
operations:
Year ended December 31,
1998
1997
1996
$ 244,441 $ 337,743 $ 311,372
Increase in future policy benefits . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in other policy benefits . . . . . . . . . . . . .
Deferral of policy acquisition costs . . . . . . . . . . . . . . . . . . . .
Amortization of deferred policy acquisition costs . . . . . . . . .
Change in accrued income taxes . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized (gains) losses on sale of investments,
subsidiaries, and properties . . . . . . . . . . . . . . . . . . . . . . . .
Change in accounts payable and other liabilities . . . . . . . . .
Change in receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in payables and receivables of unconsolidated
affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accruals and adjustments . . . . . . . . . . . . . . . . . . . . . .
Adjustment to carrying value of Vesta . . . . . . . . . . . . . . . . .
Minority interest in income of Waddell & Reed . . . . . . . . . . .
Loss on energy disposal . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations of Waddell & Reed . . . . . . . . . . . .
173,593
(30,593)
(356,493)
231,024
86,670
7,934
147,207
10,096
(328,086)
224,738
87,590
8,038
136,375
14,319
(300,461)
218,826
31,370
7,297
57,637
3,753
(20,331)
2,021
25,631
20,234
20,869
-0-
(68,737)
36,979
(6,119)
(14,368)
1,385
(17,825)
-0-
-0-
-0-
(77,314)
(5,830)
(6,408)
(18,372)
(5,660)
(12,595)
-0-
-0-
22,950
(65,694)
Cash provided from operations . . . . . . . . . . . . . . . . . . . . . . .
$ 397,653 $ 410,064 $ 327,489
(Continued)
See accompanying Notes to Consolidated Financial Statements
44
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW—(Continued)
(Amounts in thousands)
Year ended December 31,
1998
1997
1996
Cash provided from operations . . . . . . . . . . . . . . . . . . . . . . . . .
$
397,653 $
410,064 $
327,489
Cash used for investment activities:
Investments sold or matured:
Fixed maturities available for sale—sold . . . . . . . . . . . . .
Fixed maturities available for sale—matured, called, and
repaid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term investments . . . . . . . . . . . . . . . . . . . . . . .
757,649
744,839
487,070
474,386
-0-
8,589
12,220
51,903
512,512
670
3,300
7,341
28,082
345,973
2,872
7,113
5,780
12,347
861,155
Total investments sold or matured . . . . . . . . . . . . . . .
1,304,747
1,296,744
Acquisition of investments:
Fixed maturities—available for sale . . . . . . . . . . . . . . . . .
Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in policy loans . . . . . . . . . . . . . . . . . . . . . . .
Other long-term investments . . . . . . . . . . . . . . . . . . . . . . .
(1,872,040)
(52,921)
(35,944)
(13,445)
(20,298)
(1,668,301)
(17,826)
(24,452)
(14,744)
(6,082)
(1,080,791)
(18,360)
(9,008)
(13,082)
(5,592)
Total investments acquired . . . . . . . . . . . . . . . . . . . . .
(1,994,648)
(1,731,405)
(1,126,833)
Net (increase) decrease in short-term investments . . . . . .
Funds borrowed from affiliates . . . . . . . . . . . . . . . . . . . . . .
Repayment of loans to affiliates . . . . . . . . . . . . . . . . . . . . .
Loans repaid by affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sale of Family Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sale of Vesta shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of discontinued energy operations . . .
Dispositions of properties . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions to properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends from Waddell & Reed . . . . . . . . . . . . . . . . . . . . .
(19,168)
-0-
(1,390)
-0-
140,388
3,056
-0-
1,033
(6,170)
16,814
(18,067)
42,210
-0-
-0-
-0-
-0-
-0-
1,407
(6,204)
52,977
Cash used for investment activities . . . . . . . . . . . . . . . . . . . . . .
Cash provided from (used for) financing activities:
(555,338)
(362,338)
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . .
Additions to debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid to shareholders . . . . . . . . . . . . . . . . .
Repayments of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of treasury stock . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from Waddell & Reed offering . . . . . . . . . . . . . . .
Offering proceeds retained by Waddell & Reed . . . . . . . . .
Net receipts from deposit product operations . . . . . . . . . . .
Cash provided from (used for) financing activities . . . . . . . . . .
Increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . .
Cash at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . .
3,957
216,429
(90,780)
(390,917)
(125,875)
516,138
(35,251)
57,819
151,520
(6,165)
11,085
93,973
98,185
(107,097)
(20,132)
(182,903)
-0-
-0-
78,817
(39,157)
8,569
2,516
4,971
167,070
-0-
12,000
-0-
-0-
15,500
1,769
(14,106)
10,000
(68,474)
10,145
-0-
(111,394)
(149,144)
(106,996)
-0-
-0-
94,513
(262,876)
(3,861)
6,377
Cash at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4,920 $
11,085 $
2,516
See accompanying Notes to Consolidated Financial Statements.
45
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars amounts in thousands except per share data)
Note 1—Significant Accounting Policies
BasisofPresentation: The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles (‘‘GAAP’’). The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation: The financial statements include the results of Torchmark Corporation
(‘‘Torchmark’’) and its wholly-owned subsidiaries. Subsidiaries which are not majority-owned are reported
on the equity method. All significant intercompany accounts and transactions have been eliminated in
consolidation.
Investments. Torchmark classifies all of its fixed maturity investments, which include bonds and
redeemable preferred stocks, as available for sale. Investments classified as available for sale are carried
at fair value with unrealized gains and losses, net of deferred taxes, reflected directly in shareholders’
equity. Investments in equity securities, which include common and nonredeemable preferred stocks, are
reported at
fair value with unrealized gains and losses, net of deferred taxes, reflected directly in
shareholders’ equity. Policy loans are carried at unpaid principal balances. Mortgage loans are carried at
amortized cost. Investments in real estate are reported at cost less allowances for depreciation, which
are calculated on the straight line method. Short-term investments include investments in certificates of
deposit and other interest-bearing time deposits with original maturities within three months.
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, 1998, 1997, and 1996 included $296.7 million,
$308.6 million, and $298.4 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
institutions.
Overdrafts arising from the overnight investment of funds offset cash balances on hand and on deposit.
in banks and financial
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
$71.7 million, $72.3 million, and $72.8 million for the years ended December 31, 1998, 1997, and 1996,
46
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, 1998,
1997, and 1996 of $33.5 million, $28.2 million, and $22.4 million, respectively. Profits are also earned to
the extent that investment income exceeds policy requirements. The related benefits and expenses are
matched with revenues by means of the provision of future policy benefits and the amortization of
deferred acquisition costs in a manner which recognizes profits as they are earned over the same period.
FuturePolicy 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.
DeferredAcquisitionCostsandValueofInsurancePurchased: 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 in accordance
with SFAS 109. Under the asset and liability method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement book values
and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Property and Equipment: Property and equipment
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 two to forty years for buildings and
improvements. Ordinary maintenance and repairs are charged to income as incurred.
is reported at cost
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 be reviewed for
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 its investment in Vesta
Insurance Group (‘‘Vesta’’), as discussed in Note 19, there were no significant impairments in the three
years ending 1998.
impairment when circumstances indicate that
47
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
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.
is periodically reviewed to ensure that conditions are present
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.
Reclassification: Certain amounts in the financial statements presented have been reclassified from
amounts previously reported in order to be comparable between years. These reclassifications have no
effect on previously reported shareholders’ equity or net income during the periods involved.
Litigation: Torchmark and its subsidiaries continue to be named as parties to legal proceedings.
Because much of Torchmark’s litigation is brought in Alabama, a jurisdiction known for excessive punitive
damage verdicts bearing little or no relationship to actual damages, the ultimate outcome of any particular
action cannot be predicted. It is reasonably possible that changes in the expected outcome of these
matters could occur in the near term, but such changes should not be material to Torchmark’s reported
results or financial condition.
Stock Split: On August 1, 1997, Torchmark distributed one share for every one share owned by
shareholders of record as of July 1, 1997 in the form of a stock dividend. The dividend was accounted
for as a stock split. All prior-year share and per share data have been restated to give effect for this split.
Earnings Per Share: Torchmark adopted SFAS 128, ‘‘Earnings per share,’’ effective year end 1997.
This standard requires the dual presentation of basic and diluted earnings per share (‘‘EPS’’) on the face
of the income statement and a reconciliation of basic EPS to diluted EPS. As required by SFAS 128, all
prior-period EPS data has been restated for comparability. 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: 1998—139,998,671,
1997—139,202,354, 1996—142,459,783. 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: 1998—
141,351,912, 1997—141,431,156, 1996—143,783,218.
Comprehensive Income: Torchmark adopted SFAS 130, ‘‘Reporting Comprehensive Income,’’
effective January 1, 1998. This standard defines comprehensive income as the change in equity of a
business enterprise during a period from transactions from all nonowner sources. It requires the company
to display comprehensive income for the period, consisting of net income and other comprehensive
income. In compliance with SFAS 130, a Consolidated Statement of Comprehensive Income is included
as an integral part of the financial statements.
48
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
Year Ended December 31,
Shareholders’ Equity
At December 31,
1998
1997
1996
1998
1997
Life insurance subsidiaries . . . . . . . . . . . . . .
$260,847
$369,446
$283,881
$640,034
$798,265
During 1998, Liberty National Life Insurance Company paid an extraordinary dividend to Torchmark
in the amount of $213 million.
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,
1998
1997
1996
Statutory net income . . . . . . . . . . . . . . . . . . . . . . . . .
$ 260,847
$ 369,446
$ 283,881
Deferral of acquisition costs . . . . . . . . . . . . . . . . . . .
Amortization of acquisition costs . . . . . . . . . . . . . . . .
Differences in insurance policy liabilities . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . .
Income of noninsurance affiliates . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
356,493
(231,024)
96,412
(107,384)
(100,758)
(30,145)
328,086
(224,738)
44,117
(47,541)
(142,041)
10,414
300,461
(218,826)
39,762
(20,496)
(108,257)
34,847
GAAP net income . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 244,441
$ 337,743
$ 311,372
A reconciliation of Torchmark’s insurance subsidiaries’ statutory shareholders’ equity to Torchmark’s
consolidated GAAP shareholders’ equity is as follows:
Year Ended
December 31,
1998
1997
Statutory shareholders’ equity . . . . . . . . . . . . . . . . . .
$ 640,034
$ 798,265
Differences in insurance policy liabilities . . . . . . . . . .
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . .
Value of insurance purchased . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . .
Debt of parent company . . . . . . . . . . . . . . . . . . . . . .
Monthly income preferred securities . . . . . . . . . . . . .
Asset valuation reserves . . . . . . . . . . . . . . . . . . . . . .
Nonadmitted assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market value adjustment on fixed maturities . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
585,680
1,502,511
170,640
(467,023)
(749,290)
(193,259)
68,674
84,826
414,658
200,087
1,990
543,365
1,371,131
216,988
(405,375)
(911,159)
(193,199)
101,057
89,859
396,953
196,369
(271,518)
GAAP shareholders’ equity . . . . . . . . . . . . . . . . . . . .
$2,259,528
$1,932,736
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 3—Investment Operations
Year Ended December 31,
1998
1997
1996
Investment income is summarized as follows:
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage loans on real estate . . . . . . . . . . . . . . . .
Investment real estate . . . . . . . . . . . . . . . . . . . . . . .
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term investments . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . .
$410,528
301
9,247
8,332
15,301
19,755
6,089
$396,489 $ 371,805
373
6,525
12,947
13,192
4,782
4,669
367
7,127
3,379
14,433
9,279
5,762
Less investment expense . . . . . . . . . . . . . . . . . . . .
469,553
(9,995)
436,836
(7,720)
414,293
(14,742)
Net investment income . . . . . . . . . . . . . . . . . . . . . .
$459,558
$429,116 $ 399,551
An analysis of gains (losses) from investments is as
follows:
Realized investment gains (losses):
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment to deferred acquisition costs . . . . . . . .
Applicable tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (8,519) $ (30,122) $
-0-
(49,118)
(57,637)
-0-
(57,637)
20,173
155
(7,012)
(36,979)
(198)
(37,177)
13,012
3,761
1,913
156
5,830
(749)
5,081
(1,778)
Gains (losses) from investments, net of tax . . . . . .
$ (37,464) $ (24,165) $
3,303
An analysis of the net change in unrealized investment
gains (losses) is as follows:
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed maturities available for sale . . . . . . . . . . . . . .
Other long-term investments and foreign
exchange translation adjustments . . . . . . . . . . . .
Adjustment to deferred acquisition costs . . . . . . . .
Applicable tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (1,080) $ 4,061 $
66,526
150,494
(734)
(163,224)
(46,018)
(3,091)
16,337
(8,762)
(1,054)
(13,324)
140,177
(49,832)
1,907
17,837
(144,214)
50,457
Change in unrealized gains (losses), net of tax . . .
$ 7,575
$ 90,345 $ (93,757)
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 3—Investment Operations (continued)
A summary of fixed maturities available for sale and equity securities by amortized cost and
estimated market value at December 31, 1998 and 1997 is as follows:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Market
Value
Amount per
the Balance
Sheet
% of
Total
Fixed
Maturities
2.7%
9.1
1.1
6.4
11.3
.9
7.6
60.9
-0-
1998:
Fixed maturities available for sale:
Bonds:
U.S. Government direct obligations and
agencies . . . . . . . . . . . . . . . . . . . . . . . . $ 145,902 $ 9,527 $
GNMAs . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities, GNMA
collateral . . . . . . . . . . . . . . . . . . . . . . .
Other mortgage-backed securities . . . .
State, municipalities and political
494,859
29,205
(13) $ 155,416 $ 155,416
523,583
523,583
(481)
60,724
355,419
566
14,968
(15)
(837)
61,275
369,550
61,275
369,550
subdivisions . . . . . . . . . . . . . . . . . . . .
Foreign governments . . . . . . . . . . . . . .
Public utilities . . . . . . . . . . . . . . . . . . . . .
Industrial and miscellaneous . . . . . . . . .
Redeemable preferred stocks . . . . . . . . . .
615,125
50,882
411,624
3,382,689
2,548
36,730
2,744
24,972
152,510
183
(233)
(296)
(11)
(20,844)
-0-
651,622
53,330
436,585
3,514,355
2,731
651,622
53,330
436,585
3,514,355
2,731
Total fixed maturities . . . . . . . . . . . . . .
5,519,772
271,405
(22,730)
5,768,447
5,768,447
100%
Equity securities:
Common stocks:
Banks and insurance companies . . . . .
Industrial and all others . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . .
2,013
243
2,256
7,756
-0-
7,756
(8)
(161)
(169)
9,761
82
9,843
9,761
82
9,843
Total fixed maturities and equity
securities . . . . . . . . . . . . . . . . . . . . . . $5,522,028 $279,161 $(22,899) $5,778,290 $5,778,290
1997:
Fixed maturities available for sale:
Bonds:
U.S. Government direct obligations and
agencies . . . . . . . . . . . . . . . . . . . . . . . . $ 189,708 $ 7,190 $
GNMAs . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities, GNMA
collateral . . . . . . . . . . . . . . . . . . . . . . .
Other mortgage-backed securities . . . .
State, municipalities and political
788,585
46,824
97,740
436,457
2,695
19,663
subdivisions . . . . . . . . . . . . . . . . . . . .
Foreign governments . . . . . . . . . . . . . .
Public utilities . . . . . . . . . . . . . . . . . . . . .
Industrial and miscellaneous . . . . . . . . .
Redeemable preferred stocks . . . . . . . . . .
634,304
77,736
341,055
3,058,468
4,870
28,610
3,653
12,514
100,595
508
(46) $ 196,852 $ 196,852
834,229
834,229
(1,180)
(13)
(2,054)
(1,163)
(2)
(511)
(4,516)
-0-
100,422
454,066
100,422
454,066
661,751
81,387
353,058
3,154,547
5,378
661,751
81,387
353,058
3,154,547
5,378
3.4%
14.3
1.7
7.8
11.3
1.4
6.0
54.0
.1
Total fixed maturities . . . . . . . . . . . . . . .
5,628,923
222,252
(9,485)
5,841,690
5,841,690
100.0%
Equity securities:
Common stocks:
Banks and insurance companies . . . . .
Industrial and all others . . . . . . . . . . . . .
Non-redeemable preferred stocks . . . . . .
Total equity securities . . . . . . . . . . . . . .
Total fixed maturities and equity
2,014
242
1,028
3,284
8,703
2
456
9,161
(10)
(31)
-0-
(41)
10,707
213
1,484
12,404
10,706
213
1,485
12,404
securities . . . . . . . . . . . . . . . . . . . . . . $5,632,207 $231,413 $ (9,526) $5,854,094 $5,854,094
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 3—Investment Operations (continued)
A schedule of fixed maturities by contractual maturity at December 31, 1998 is shown below on an
amortized cost basis and on a market value basis. Actual maturities could differ from contractual
maturities due to call or prepayment provisions.
Amortized
Cost
Market
Value
Fixed maturities available for sale:
Due in one year or less . . . . . . . . . .
Due from one to five years . . . . . . .
Due from five to ten years . . . . . . . .
Due after ten years . . . . . . . . . . . . .
$ 154,886 $ 155,961
1,019,278
1,523,155
1,973,823
978,186
1,443,002
1,888,194
Redeemable preferred stocks . . . . .
Mortgage-backed and asset-
4,464,268
2,548
4,672,217
2,731
backed securities . . . . . . . . . . . . .
1,052,956
1,093,499
$5,519,772 $5,768,447
Proceeds from sales of fixed maturities available for sale were $758 million in 1998, $745 million in
1997, and $487 million in 1996. Gross gains realized on those sales were $6.1 million in 1998,
$1.3 million in 1997, and $8.7 million in 1996. Gross losses were $20.1 million in 1998, $32.2 million in
1997, and $5.3 million in 1996.
Torchmark had $24.7 million and $30.5 million in investment real estate at December 31, 1998 and
1997, respectively, which was nonincome producing during the previous twelve months. These properties
included primarily construction in process and land. Torchmark had $124 thousand in non-income
producing mortgages as of year end 1998. There were no fixed maturity investments, or other long-term
investments which were nonincome producing at December 31, 1998.
Derivative investments were immaterial to Torchmark at December 31, 1998. These investments
consist of interest-only and principal-only collateralized mortgage obligations. Torchmark’s total carrying
value of
these investments was $9.6 million and $26.4 million at December 31, 1998 and 1997,
respectively. Torchmark has no off-balance sheet exposure in connection with these investments.
Note 4—Property and Equipment
A summary of property and equipment used in the business is as follows:
Company occupied real estate . . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transportation equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and office equipment
. . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 1998
December 31, 1997
Cost
$ 59,417
19,915
11,157
35,777
Accumulated
Depreciation
$28,697
18,743
7,551
32,195
Cost
$ 55,780
19,201
11,034
33,812
Accumulated
Depreciation
$25,313
18,342
7,367
31,705
$126,266
$87,186
$119,827
$82,727
Depreciation expense on property used in the business was $4.2 million, $4.6 million, and
$4.1 million, in each of the years 1998, 1997, and 1996, respectively.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 5—Deferred Acquisition Costs and Value of Insurance Purchased
An analysis of deferred acquisition costs and the value of insurance purchased is as follows:
1998
1997
1996
Deferred
Acquisition
Costs
Value of
Insurance
Purchased
Deferred
Acquisition
Costs
Value of
Insurance
Purchased
Deferred
Acquisition
Costs
Value of
Insurance
Purchased
Balance at beginning of year
. . . . . .
$1,371,131
$216,988
$1,253,727
$244,368
$1,121,325
$277,297
Additions:
Deferred during period:
Commissions . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . .
Total deferred . . . . . . . . . . .
Deductions:
Amortized during period . . . . . . .
Adjustment attributable to
unrealized investment
(gains)/losses(1)
. . . . . . . . . .
Adjustment attributable to
realized investment gains(1) . .
Business disposed . . . . . . . . . . .
207,864
148,629
356,493
-0-
-0-
-0-
199,177
128,909
328,086
-0-
-0-
-0-
185,197
115,264
300,461
-0-
-0-
-0-
(210,287)
(20,737)
(197,160)
(27,380)
(185,148)
(32,929)
(3,092)
-0-
(13,324)
-0-
(11,734)
-0-
(25,611)
(198)
-0-
-0-
-0-
-0-
17,838
(749)
-0-
-0-
-0-
-0-
Total deductions . . . . . . . . .
(225,113)
(46,348)
(210,682)
(27,380)
(168,059)
(32,929)
Balance at end of year . . . . . . . . . . .
$1,502,511
$170,640
$1,371,131
$216,988
$1,253,727
$244,368
(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
$13.2 million, $16.6 million, and $18.9 million, for the years ended December 31, 1998, 1997, and 1996,
respectively. The average interest rates used for the years ended December 31, 1998, 1997, and 1996
were 6.8%, 7.19%, and 7.26%, respectively. The estimated amount of the unamortized balance at
December 31, 1998 to be amortized during each of the next five years is: 1999, $17.8 million; 2000,
$15.8 million; 2001, $14.0 million; 2002, $12.5 million; and 2003, $11.2 million
In the event of lapses or early withdrawals in excess of those assumed, deferred acquisition costs
and the value of insurance purchased may not be recoverable.
Note 6—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.
53
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 (continued)
On November 6, 1998, Torchmark distributed the remaining 64% investment in Waddell & Reed
to Torchmark shareholders. Each Torchmark shareholder of record on
through a tax-free spin-off
October 23, 1998 received a total of .3018 Waddell & Reed shares per Torchmark share. After the
spin-off, Torchmark retained no further ownership interest
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.
in Waddell & Reed. As a result of
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 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—Disposal of Energy Segment
On September 30, 1996, Torchmark completed the sale of its energy business segment including its
energy asset management subsidiary, Torch Energy, and its Black Warrior coalbed methane investment.
After the sale, Torchmark had no controlling ownership interest
in any energy asset management
organization. These operations were reclassified as discontinued operations in Torchmark’s financial
statements.
Prior to the Sale, Torch Energy transferred to Torchmark marketable securities, warrants, and
Section 29 energy-related tax credits, which approximated $112 million at closing. Torchmark received at
closing subordinated debt and notes totaling $32.5 million along with $15.5 million in cash. After closing
costs and retained liabilities, Torchmark recorded a pretax loss of $23 million and an after-tax loss of $7
million from the sale, or $.05 per share.
In the first quarter of 1996, Torch Energy sold 1.5 million of its shares in Nuevo Energy common
stock for proceeds of $35.6 million. These proceeds were transferred to Torchmark in the form of a
dividend prior to the sale. Additionally, there were 1.3 million shares of Nuevo common stock included in
the above mentioned transferred marketable securities which were sold in the fourth quarter of 1996 for
proceeds of $57.6 million.
Note 8—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 but has not issued any new policies since 1995.
Consideration for the sale was $140 million in cash. Torchmark recorded a pretax realized loss on the
sale of approximately $14 million, but
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. During 1997, Family
Service accounted for $57 million in revenues and $7.7 million in pretax income. 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.
incurred a tax expense on the transaction of $9 million.
54
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, 1998 is as follows:
Interest assumptions:
Individual Life Insurance
Years of Issue
Interest Rates
Percent of
Liability
1917-1998
1947-1954
1927-1998
1955-1961
1925-1998
1962-1969
1970-1980
1970-1998
1929-1998
1986-1994
1954-1998
1951-1985
1980-1987
1984-1998
3.00%
3.25%
3.50%
3.75%
4.00%
4.50% graded to 4.00%
5.50% graded to 4.00%
5.50%
6.00%
7.00% graded to 6.00%
8.00% graded to 6.00%
8.50% graded to 6.00%
8.50% graded to 7.00%
Interest Sensitive
3%
1
1
1
12
2
4
1
14
12
12
10
1
26
100%
Mortality assumptions:
For individual life, the mortality tables used are various statutory mortality tables and modifications of:
1950-54 Select and Ultimate Table
1954-58 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.
Interest assumptions:
Individual Health Insurance
Years of Issue
Interest Rates
1962-1998
1982-1998
1993-1998
1986-1992
1955-1998
1951-1986
3.00%
4.50%
6.00%
7.00% graded to 6.00%
8.00% graded to 6.00%
8.50% graded to 6.00%
55
Percent of
Liability
2%
2
19
53
15
9
100%
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 1998 was 6.2%.
Note 10—Liability for Unpaid Health Claims
Activity in the liability for unpaid health claims is summarized as follows:
Balance at beginning of year: . . . . . . . . . . . . . . . . . . . . . . . . .
Incurred related to:
Year ended December 31,
1998
1997
1996
$178,989 $173,900 $170,566
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
518,993
(2,670)
503,948
15,280
495,642
179
Total incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paid related to:
516,323
519,228
495,821
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
342,084
207,426
349,815
164,324
340,310
152,177
Total paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
549,510
514,139
492,487
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$145,802 $178,989 $173,900
The liability for unpaid health claims is included with ‘‘Policy claims and other benefits payable’’ on
the Balance Sheet.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 11—Income Taxes
Torchmark and most of its subsidiaries file a life-nonlife consolidated federal
income tax return.
income tax return and will not be eligible to join
American Income files its own consolidated federal
Torchmark’s consolidated return group until 2000.
Total income taxes were allocated as follows:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Monthly income preferred securities dividend . . . . . . . . . . . . . . . . . . .
Shareholders’ equity:
Unrealized gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax basis compensation expense (from the exercise of stock
options) in excess of amounts recognized for financial reporting
purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
1998
1997
1996
$154,338
92,772
(5,265)
$138,409
40,081
(5,318)
$138,676
26,133
(5,199)
8,540
49,832
(50,457)
(933)
(1,964)
(44,011)
1,514
(1,947)
(898)
$247,488
$180,507
$106,308
Income tax expense attributable to income from continuing operations consists of:
Current income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$118,827
35,511
$ 92,989
45,420
$ 89,786
48,890
$154,338
$138,409
$138,676
Year ended December 31,
1998
1997
1996
In 1998, 1997, and 1996, 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,
1998
%
1997
%
1996
%
Expected income taxes . . . . . . . . . . . . . . . . . . . . .
$156,447
35% $137,200
35% $135,622
35%
Increase (reduction) in income taxes
resulting from:
Tax-exempt investment income . . . . . . . . . . . . .
Equity in earnings of Vesta . . . . . . . . . . . . . . . .
Sale of Family Service . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7,111)
(9,485)
13,460
1,027
(2)
(2)
3
1
(6,165)
5,850
-0-
1,524
(2)
1
1
(6,766)
4,779
-0-
5,041
(2)
1
2
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$154,338
35% $138,409
35% $138,676
36%
57
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,
1998
1997
Deferred tax assets:
Investments, principally due to the use of market value in recording the cost of fixed
maturities for financial reporting purposes but not for tax purposes (in the acquisition of
a subsidiary) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unconsolidated affiliates, principally due to the use of equity method accounting for
financial reporting purposes but not for tax purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Present value of future policy surrender charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets and other liabilities, principally due to the current nondeductibility of certain
$
-0- $ 2,376
2,648
20,153
-0-
13,925
accrued expenses for tax purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30,605
38,987
Total gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53,406
(2,111)
55,288
(2,111)
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
51,295
53,177
Deferred tax liabilities:
Investments, principally due to the accrual of discount for financial reporting purposes but
not for tax purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unconsolidated affiliates, principally due to the use of equity method accounting for
1,972
-0-
financial reporting purposes but not for tax purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Future policy benefits, unearned and advance premiums, and policy claims . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
381,415
82,324
46,621
15,625
19,208
363,077
73,784
15,911
9,877
Total gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
527,957
481,857
Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$476,662
$428,680
The valuation allowance for deferred tax assets as of December 31, 1998 and 1997 was $2.1 million.
Subsequently recognized tax benefits of $2.1 million relating to the December 31, 1998 valuation
allowance will be allocated to goodwill.
Torchmark has not recognized a deferred tax liability for the undistributed earnings of its wholly-
owned subsidiaries because such earnings are remitted to Torchmark on a tax-free basis. A deferred tax
liability will be recognized in the future if the remittance of such earnings becomes taxable to Torchmark.
In addition, Torchmark has not recognized a deferred tax liability of approximately $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, 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.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 12—Postretirement Benefits
Pension Plans: Torchmark has retirement benefit plans and savings plans which cover substantially
all employees. There is also a nonqualified excess benefit plan which covers certain employees. The total
cost of these retirement plans charged to operations was as follows:
Year Ended
December 31,
Defined
Contribution
Plans
1998 . . . . . . . . . . . . . . . . . . . . . .
1997 . . . . . . . . . . . . . . . . . . . . . .
1996 . . . . . . . . . . . . . . . . . . . . . .
$1,530
2,123
2,133
Defined
Benefit
Pension
Plans
$2,875
3,244
3,358
Excess
Benefit
Pension
Plan
$399
526
467
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.
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 $7.2 million and $5.0 million at
December 31, 1998 and 1997, 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 $4.7 million and
$5.4 million as of December 31, 1998 and 1997, respectively.
Net periodic pension cost for the defined benefit plans by expense component was as follows:
Year Ended December 31,
1998
1997
1996
Service cost—benefits earned during the period . . . .
Interest cost on projected benefit obligation . . . . . . . .
Actual return on assets . . . . . . . . . . . . . . . . . . . . . . . .
Net amortization and deferral . . . . . . . . . . . . . . . . . . .
$ 4,555 $ 4,732 $ 5,277
7,145
(14,309)
5,712
7,389
(17,014)
8,663
7,595
(21,572)
12,696
Net periodic pension cost . . . . . . . . . . . . . . . . . . . . . .
$ 3,274 $ 3,770 $ 3,825
59
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, effective for year-end 1998 with comparative periods restated. 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,
1998
1997
Changes in benefit obligation:
Obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 98,078
4,555
7,595
7,823
(8,331)
$ 94,665
4,732
7,389
71
(8,779)
Obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
109,720
98,078
Changes in plan assets:
Fair value at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
108,942
21,572
1,106
(8,331)
99,803
17,014
905
(8,779)
Fair value at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
123,289
108,943
Funded status at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,569
10,865
Unrecognized amounts at year end:
Unrecognized actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized transition obligation . . . . . . . . . . . . . . . . . . . . . . .
(25,016)
851
(356)
(19,965)
907
(596)
Net amount recognized at year end . . . . . . . . . . . . . . . . . . . . .
$(10,952) $ (8,789)
Amounts recognized consist of:
Prepaid benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued benefit liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
212
(12,083)
919
$
171
(10,570)
1,610
Net amount recognized at year end . . . . . . . . . . . . . . . . . . . . .
$(10,952) $ (8,789)
The weighted average assumed discount rates used in determining the actuarial benefit obligations
was 7.0% in 1998 and 7.5% in 1997. The rate of assumed compensation increase was 4.0% in 1998 and
4.5% in 1997 while the expected long-term rate of return on plan assets was 9.22% in 1998 and 9.25%
in 1997.
PostretirementBenefitPlansOtherThanPensions: 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.
60
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 other than pensions is as follows:
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost on accumulated postretirement benefit
obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . .
Net amortization and deferral
. . . . . . . . . . . . . . . . . . . . . .
Year Ended
December 31,
1998
1997
1996
$ 249
$ 248
$ 249
493
-0-
(281)
490
-0-
(377)
546
-0-
(233)
Net periodic postretirement benefit cost . . . . . . . . . . . . . .
$ 461
$ 361
$ 562
The following table presents a reconciliation of the benefit obligation and plan assets from the
beginning to the end of the year, also reconciling the funded status to the accrued benefit liability.
Benefits Other Than Pensions
For the year ended December 31,
Changes in benefit obligation:
Obligation at beginning of year . . . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss (gain)
. . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1998
$ 6,431
249
493
(149)
435
(610)
Obligation at end of year . . . . . . . . . . . . . . . . . . . . . .
6,849
Changes in plan assets:
Fair value at beginning of year . . . . . . . . . . . . . . . . . .
Return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value at end of year
. . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
610
(610)
-0-
1997
$ 6,787
249
490
-0-
(384)
(711)
6,431
-0-
-0-
711
(711)
-0-
Funded status at year end . . . . . . . . . . . . . . . . . . .
(6,849)
(6,431)
Unrecognized amounts at year end:
Unrecognized actuarial loss (gain) . . . . . . . . . . . . . . .
Unrecognized prior service cost . . . . . . . . . . . . . . . . .
(1,259)
(506)
(1,769)
(563)
Net amount recognized at year end as accrued
benefit liability . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(8,614)
$(8,763)
For measurement purposes, a 7.0% to 8.0% annual rate of increase in per capita cost of covered
healthcare benefits was assumed for 1998. These rates grade to ranges of 4.5% to 5.5% by the year
2007. 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:
Effect on:
1%
Increase
Service and interest cost components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 79
517
1%
Decrease
$ (67)
(453)
The weighted average discount rate used in determining the accumulated postretirement benefit
obligation was 7.38% in 1998 and 7.37% in 1997.
Change in Trend Rate
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 12—Postretirement Benefits (continued)
For measurement purposes, a 7.0% to 8.0% annual rate of increase in per capita cost of covered
healthcare benefits was assumed for 1998. These rates grade to ranges of 4.5% to 5.5% by the year
2007. 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:
Effect on:
1%
Increase
Service and interest cost components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 79
517
1%
Decrease
$ (67)
(453)
Change in Trend Rate
The weighted average discount rate used in determining the accumulated postretirement benefit
obligation was 7.38% in 1998 and 7.37% in 1997.
Note 13—Debt
An analysis of debt at carrying value is as follows:
December 31,
1998
1997
Short-term
Debt
Long-term
Debt
Short-term
Debt
Sinking Fund Debentures . . . . . . . . . . . . . . . . . . . . . . . .
Senior Notes, due 1998 . . . . . . . . . . . . . . . . . . . . . . . . .
Senior Debentures, due 2009 . . . . . . . . . . . . . . . . . . . .
Notes, due 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes, due 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other notes and mortgages payable at various interest
rates; collateralized by buildings . . . . . . . . . . . . . . . .
$355,242
150
$ 99,450
185,394
98,578
$ 8,000
199,898
138,963
291
Long-term
Debt
$170,354
99,450
195,969
98,525
$355,392
$383,422
$347,152
$564,298
The amount of debt that becomes due during each of the next five years is: 1999, $355,392, and
2000-2003, $0.
In the first quarter of 1998, Torchmark repaid $20 million principal amount of its 85⁄8% 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. An identical payment was made in the third quarter
of 1997. The remaining $160 million principal amount was called 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.
The 95⁄8% Senior Notes matured on May 1, 1998. The principal amount of $200 million with accrued
interest was repaid from additional commercial paper borrowings.
The Senior Debentures, remaining principal amount of $99 million, are due August 15, 2009. They
bear interest at a rate of 81⁄4%, with interest payable on February 15 and August 15 of each year. The
Senior Debentures, which are not redeemable at the option of Torchmark prior to maturity, provided the
holder with an option to require Torchmark to repurchase the debentures on August 15, 1996 at principal
amount plus accrued interest. Pursuant to this option, $550 thousand debentures were repurchased in
1996. The Senior Debentures have equal priority with other Torchmark unsecured indebtedness.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13—Debt (continued)
the issue, net of
The Notes, due May 15, 2023, were issued in May, 1993 in the principal amount of $200 million.
is payable on May 15 and
Proceeds of
November 15 of each year at a rate of 77⁄8%. In October, 1998, $10.8 million principal amount were
purchased in the open market at a cost of $10.6 million. These notes are not redeemable prior to maturity
and have equal priority with other Torchmark unsecured indebtedness.
issue costs, were $196 million.
Interest
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
73⁄8%. These notes are not redeemable 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 borrowings. At December 31, 1998 and December 31, 1997 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 $287 million during 1998, and were made at an average yield
of 5.58%. At December 31, 1998, commercial paper was outstanding in the face amount of $357 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, 1998, and pays a facility fee based on size of
the line.
Interest in the amount of $2.4 million, $1.7 million, and $1.4 million was capitalized during 1998,
1997, and 1996, respectively.
Note 14—Monthly Income Preferred Securities
In October, 1994, Torchmark, through its wholly-owned finance subsidiary, Torchmark Capital L.L.C.,
completed a public offering of eight million shares of 9.18% MIPS at a face amount of $200 million. The
securities are subject to a mandatory redemption in full at September 30, 2024, although Torchmark may
elect to extend the MIPS for up to an additional 20 years if certain conditions are met. They are
redeemable at Torchmark’s option after September 30, 1999. Torchmark subsequently entered into a ten-
year swap agreement with an unaffiliated party whereby Torchmark agreed to pay a variable rate on the
$200 million face amount
In a related transaction,
Torchmark purchased a five-year cap on the swap agreement that insures that the variable rate cannot
exceed 10.39% through September 30, 1999. The interest rate was 7.02% at December 31, 1998 and
7.36% at December 31, 1997. Torchmark paid the final yearly fee of $860 thousand for the cap
the swap agreement was a benefit of
agreement on September 30, 1998. The market value of
$24.7 million December 31, 1998 and $18.7 million at December 31, 1997. The market value of the cap
agreement, net of the present value of future annual payments, was $0 at December 31, 1998 and
$.8 million at December 31, 1997. Except as otherwise described in Note 3—Investments, Torchmark is
a party to no other derivative instruments as defined by SFAS 119.
in exchange for payment of
the fixed dividend.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 15—Shareholders’ Equity
Share Data: A summary of preferred and common share activity which has been restated to give
effect for the two-for-one stock split in the form of a dividend is as follows:
Preferred Stock
Common Stock
Issued
Treasury
Stock
Issued
Treasury
Stock
1996:
Balance at December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock due to exercise of stock options . . . .
Other treasury stock acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
147,568,456
(4,234,182)
676,376
(4,618,700)
Balance at December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
147,568,456
(8,176,506)
1997:
Issuance of common stock due to exercise of stock options . . . .
Other treasury stock acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . .
280,452
5,539,596
(5,171,558)
1998:
Issuance of common stock due to exercise of stock options . . . .
Issuance of common stock due to restricted stock grant . . . . . . .
Other treasury stock acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted shares converted to Waddell & Reed shares . . . . . . . .
-0-
-0-
147,848,908
(7,808,468)
175,240
117,500
(3,436,205)
(48,000)
-0-
-0-
147,800,908
(10,951,933)
Par value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Authorized shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1.00
5,000,000
$1.00
320,000,000
$1.00
5,000,000
$1.00
320,000,000
At December 31, 1998
At December 31, 1997
Preferred
Stock
Common
Stock
Preferred
Stock
Common
Stock
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 3.4 million shares at a cost of $126 million in 1998 and 5.2 million shares at a cost of $183
million in 1997, and 4.6 million shares at a cost of $107 million in 1996.
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.
Restrictions: Restrictions exist on the flow of funds to Torchmark from its insurance subsidiaries.
Statutory regulations require life insurance subsidiaries to maintain certain minimum amounts of capital
and surplus. These restrictions generally limit the payment of dividends by insurance subsidiaries to
statutory net gain on an annual noncumulative basis in the absence of special approval. Additionally,
insurance companies are not permitted to distribute the excess of shareholders’ equity as determined on
a GAAP basis over that determined on a statutory basis. In 1999, $258 million will be available to
Torchmark for dividends from insurance subsidiaries in compliance with statutory regulations without prior
regulatory approval.
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 15—Shareholders’ Equity (continued)
Earnings Per Share: A reconciliation of basic and diluted weighted-average shares outstanding, in
accordance with SFAS 128, is as follows:
Basic weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . .
Weighted average dilutive options outstanding . . . . . . . . . . . . . . . . . . . .
139,998,671
1,353,241
139,202,354
2,228,802
142,459,783
1,323,435
Diluted weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . .
141,351,912
141,431,156
143,783,218
1998
1997
1996
Weighted average options outstanding considered to be anti-dilutive under SFAS 128 totaled 0,
742,472, and 598,342 as of December 31, 1998, 1997 and 1996, respectively, and are excluded from
Income available to common shareholders for basic
the calculation of diluted earnings per share.
earnings per share is equivalent to income available to common shareholders for diluted earnings per
share.
Note 16—Employee Stock Options
Certain employees and directors have been granted options to buy shares of Torchmark stock
generally at the market value of the stock on the date of grant under the provisions of the Torchmark
Corporation 1987 Stock Incentive Plan (‘‘1987 Option Plan’’). The options are exercisable during the
period commencing from the date they vest until expiring ten years or ten years and two days after grant.
Employee stock options granted under the 1987 Option Plan generally vest one-half in two years and
one-half in three years. Director grants generally vest in six months. A grant in September, 1997 vested
immediately. Deferred executive and director grants 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 in terms of shares adjusted for the stock dividend is as
follows:
Available for Grant
1998
1997
1996
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amendment of 1987 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1998 Stock Incentive Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred and Director Grants . . . . . . . . . . . . . . . . . . . . . . . . . .
Grant of restricted stock(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Closure of option plans(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,434,004
14,000,000
(216,481)
(117,500)
13,700
(2,113,723)
(807,494)
2,499,778
1,345,080
4,800,000
(633,672)
32,896
293,502
(3,110,300)
(1,448,200)
Balance on December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,192,506
2,434,004
1,345,080
(1) This stock grant was made from the 1987 Stock Incentive Plan.
(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.
(3) Granted from the 1998 Stock Incentive Plan.
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. It also allows accounting for such options under the ‘‘intrinsic value method’’ in
accordance with Accounting Principles Board Opinion No. 25,
‘‘Accounting for Stock Issued to
Employees’’ (‘‘APB 25’’) and related interpretations. If a company elects to use the intrinsic value method,
then pro forma disclosures of earnings and earnings per share are required as if the fair value method of
accounting was applied. The effects of applying SFAS 123 in the pro forma disclosures are not
necessarily indicative of future amounts.
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 16—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 a compensation expense
is based. The Black-Scholes option valuation model was not developed for use in valuing employee stock
options. Instead, this model was developed for use in estimating the fair value of traded options which
have no vesting restrictions and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price volatility. Because Torchmark’s
employee stock options have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the fair value estimate, it is
management’s opinion that the existing models do not provide a reliable measure of the fair value of its
employee stock options. Under the intrinsic value method, compensation expense is only recognized if
the exercise price of the employee stock option is less than the market price of the underlying stock on
the date of grant.
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 1998, 1997 and
1996:
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Volatility factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average expected life (in years) . . . . . . . . . . . . . . . . . . . . . .
1998
1997
1996
4.8%
1.1%
22.8
4.71
6.1%
1.7%
23.7
3.93
6.4%
3.7%
22.8
4.17
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to
expense over the options’ vesting period. Torchmark’s pro forma information follows (in thousands except
for earnings per share information):
Pro forma net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma basic net income per share . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma diluted net income per share . . . . . . . . . . . . . . . . . . . . . . .
$245,383
1.75
1.74
$318,671
2.29
2.25
$309,657
2.17
2.15
1998
1997
1996
On September 25, 1997, Torchmark executed a stock option exercise and ‘‘reload’’ program through
which over 100 Torchmark directors and employees exercised vested stock options and received
replacement options at current market price. This program resulted in the issuance of 4.8 million shares,
of which over 3 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. As a result of the ‘‘reload’’ program,
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.
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.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 16—Employee Stock Options (continued)
A summary of Torchmark’s stock option activity adjusted for the stock dividend, and related
information for the years ended December 31, 1998, 1997, and 1996 follows:
1998
1997
1996
Options
Weighted Average
Exercise Price
Options
Weighted Average
Exercise Price
Options
Weighted Average
Exercise Price
Outstanding-beginning
of year . . . . . . . . . . . . . . 7,241,050
Granted . . . . . . . . . . . . . . . 1,023,975
(175,240)
Exercised . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . .
(13,700)
Reduction due to Waddell
$29.76
34.97
22.58
29.19
9,350,022
3,743,972
(5,820,048)
(32,896)
$18.52
36.70
16.17
29.81
8,871,700
1,448,200
(676,376)
(293,502)
$17.31
24.55
15.00
19.63
& Reed spinoff . . . . . . . . (7,249,129)
30.20
Addition due to Waddell &
Reed spinoff . . . . . . . . . . 6,401,444
Outstanding-end of year . . 7,228,400
26.16
27.04
Exercisable at end of
7,241,050
29.76
9,350,022
18.52
year . . . . . . . . . . . . . . . . 5,038,081
26.24
4,189,238
32.82
6,188,622
16.47
The weighted average fair value of options granted during the years ended December 31, 1998,
1997 and 1996 were $8.88, $8.43, and $5.08, respectively.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 16—Employee Stock Options (continued)
The following table summarizes information about stock options outstanding at December 31, 1998:
Exercise
Price
4.86419
5.63977
13.32138
13.91029
14.17778
14.55172-14.70181
14.55222-14.57135
14.55659-14.57236
14.57232-14.57573
14.7127-14.73215
14.92781
15.94885*
16.42468
18.56413-18.5922
18.61765-18.63421
19.26091
19.26091-19.276
19.94133
21.29257-21.30859
21.50657-21.52056
22.14864-22.16202
22.25559-22.26895
24.7174-24.72794
33.27631-33.28237
33.4375
33.4375
33.4903-33.497
33.54382
34.75
35.63037
36.11175-36.11284
36.37928
36.43278
Grant Date
October 1, 1993
October 1, 1993
January 15, 1991
January 2, 1991
January 25, 1990
December 16, 1994
December 7, 1992
December 14, 1993
October 1, 1993
December 12, 1991
January 3, 1995
December 18, 1996
January 2, 1992
December 20, 1995
December 14, 1993
January 2, 1996
January 3, 1994
October 1, 1993
December 16, 1996
January 2, 1997
January 31, 1997
December 7, 1992
January 4, 1993
December 24, 1997
December 16, 1998
December 16, 1998
September 25, 1997
January 9, 1998
December 30, 1998
February 16, 1998
January 2, 1998
February 10, 1998
February 4, 1998
Number
Outstanding
Number
Exercisable
6,416
5,016
14,699
21,029
21,029
179,899
9,390
20,337
6,552
31,364
7,010
60,000
21,029
1,151,575
62,219
7,010
13,010
2,536
1,040,887
142,003
466,015
96,411
19,010
340,361
687,600
119,894
2,435,922
12,984
39,659
12,056
152,709
11,357
11,412
6,416
5,016
14,699
21,029
21,029
179,899
9,390
20,337
6,552
31,364
7,010
12,000
21,029
1,151,575
62,219
7,010
13,010
2,536
520,444
8,827
329,347
96,411
19,010
0
0
0
2,435,922
0
0
0
36,000
0
0
7,228,400
5,038,081
Contract
Termination
Date
October 3, 2003
October 3, 2003
January 17, 2001
January 4, 2001
January 27, 2000
December 18, 2004
December 9, 2002
December 16, 2003
October 3, 2003
December 14, 2001
January 5, 2005
December 18, 2007
January 4, 2002
December 22, 2005
December 16, 2003
January 4, 2006
January 5, 2004
October 3, 2003
December 18, 2006
January 4, 2007
January 31, 2008
December 9, 2002
January 6, 2003
December 26, 2007
December 18, 2008
December 16, 2009
September 27, 2007
January 9, 2009
December 30, 2009
February 16, 2009
January 4, 2008
February 10, 2009
February 4, 2009
* Issued when the market price was $24.8125. Option price at that time (prior to the Waddell & Reed spin-off adjustment) was
$18.61.
Note 17—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, 1998.
Insurance ceded on life and accident and health products represents .8% of premium income for 1998.
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 2.5% of life insurance in force at December 31, 1998 and reinsurance assumed on life and
accident and health products represents 1.8% of premium income for 1998.
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 17—Commitments and Contingencies (continued)
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 $3.2 million in each of the years 1998, 1997, and 1996. Future
minimum rental commitments required under operating leases having remaining noncancelable lease
terms in excess of one year at December 31, 1998 are as follows: 1999, $2.0 million; 2000, $1.3 million;
2001, $639 thousand; 2002, $397 thousand; 2003, $197 thousand; and in the aggregate, $4.5 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, 1998, the
investment portfolio consisted of securities of the U.S. government or U.S. government-backed securities
(12%); non government-guaranteed mortgage-backed securities (6%); short-term investments, which
generally mature within one month (1%); securities of state and municipal governments (10%); securities
of foreign governments (1%) and investment-grade corporate bonds (57%). The remainder of the portfolio
was in real estate (3%), which is not considered a financial instrument according to GAAP; policy loans
(4%), which are secured by the underlying insurance policy values; and equity securities, noninvestment
grade securities, and other long-term investments (6%). Investments in municipal governments and
corporations are made throughout
the
investments in foreign government securities are in Canadian government obligations. Corporate debt
and equity investments are made in a wide range of industries. At December 31, 1998, 1% or more of
the portfolio was invested in the following industries: Financial services (19%); regulated utilities (7%);
consumer goods (5%); chemicals and allied products (4%); manufacturing (4%); transportation (4%);
services (4%); retailing (3%); machinery and equipment (3%); media/communications (3%); petroleum
(3%); asset-backed securities (2%); and forestry, paper, and allied products (1%). Otherwise, no
individual industry represented 1% or more of Torchmark’s investments. At year-end 1998, 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 $294.7 million, amortized
cost was $294.5 million, and market value was $295.3 million. While these investments could be subject
to additional credit risk, such risk should generally be reflected in market value.
the U.S. with no concentration in any given state. Most of
Collateral Requirements: Torchmark requires collateral
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.
for
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. As a practical matter, a jury’s discretion regarding the amount of a punitive damage award is
not limited by any clear, objective criteria under Alabama law. Accordingly, the likelihood or extent of a
punitive damage award in any given case is virtually impossible to predict. As of December 31, 1998,
Liberty was a party to approximately 125 active lawsuits (including 29 employment related cases and
excluding interpleaders and stayed cases), more than 110 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.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 17—Commitments and Contingencies (continued)
As previously reported, Liberty has been subject to 76 individual cancer policy lawsuits pending in
Alabama and Mississippi, which were stayed or otherwise held in abeyance pending final resolution of
Robertson v. Liberty National Life Insurance Company (Case No. CV-92-021). Liberty filed motions to
dismiss these lawsuits based upon the U.S. Supreme Court opinion issued in Robertson in March 1997.
Only two of these individual cancer policy lawsuits remain, the other such suits having been dismissed.
It has been previously reported that Liberty was a party to 53 individual cases filed in Chambers
County, Alabama involving allegations that an interest-sensitive life insurance policy would become paid-
up or self-sustaining after a specified number of years. Only one of these cases remains pending with all
others having been settled and dismissed by the Chambers County Circuit Court.
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 County, Oklahoma (Moore v. Torchmark Corporation, Case No. CJ-94-2784-
65, subsequently amended and restyled Tabor v. Torchmark Corporation). This suit claims damages on
behalf of individual health policyholders who are alleged to have been induced to terminate such policies
and to purchase Medicare Supplement and/or other insurance coverages. 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 plaintiffs’ motion to certify a class of Medicare Supplement policyholders’ claims.
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 (Smithv.TorchmarkCorporation, 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 are sought.
A plaintiff class was certified by the District Court on February 26, 1996, although the certification does
not go to the merit of the allegations in the complaint. On December 31, 1996, the plaintiffs filed an
amended complaint in Smith to allege violations of various provisions of the Employment Retirement
Income Security Act of 1974. Extensive discovery was then conducted. In October 1998, defendants filed
a motion to decertify the presently defined class in Smith.
It has been previously reported that Torchmark, its subsidiaries United American and Globe and
certain individual corporate officers are parties to purported class action litigation filed in April, 1996 in
the U.S. District Court for the Northern District of Georgia (Crichlow v. Torchmark Corporation, Case No.
4:96-CV-0086-HLM) involving certain hospital and surgical insurance policies issued by Globe and United
American. In September 1997, the U.S. District Court entered an order granting summary judgment
against the plaintiffs on certain issues and denying national class certification, although indicating that
plaintiffs could move for the certification of a state class of Georgia policyholders. Discovery then
proceeded on the remaining claims for breach of contract and the duty of good faith arising from closure
of the block of business and certain post-claim matters as well as fraud and conspiracy relating to pricing
and delay in implementing rate increases. On June 17, 1998, the U.S. District Court entered an order
which denied the plaintiffs’ motion to certify a Georgia policyholders class, denied reconsideration of the
previously entered motion for summary judgment on certain issues, denied reconsideration of the denial
of national certification of a class of policyholders and severed and transferred claims of Mississippi
policyholders to the U.S. District Court for the Northern District of Mississippi (Greco v. Torchmark
Corporation, Case No. 1:98CV196-D-D). The U.S. District Court granted defendants’ motion for summary
judgment on all remaining issues in Crichlow on February 4, 1999. Plaintiffs in Greco have moved to
certify a class of persons purchasing Globe hospital and surgical insurance policies in Mississippi. On
February 1, 1999, defendants filed a motion for summary judgment in Greco.
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 17—Commitments and Contingencies (continued)
Torchmark has previously reported the case of Lawson v. Liberty National Life Insurance Company
(Case No. CV-96-01119), filed in the Circuit Court of Jefferson County, Alabama, where the plaintiffs
sought to represent a class of interest-sensitive life insurance policyholders, including those allegedly
induced to exchange life insurance policies or where the existing policy’s cash value was allegedly
depleted, in litigation alleging fraud, negligence and breach of contract in the sale or exchange of interest-
sensitive policies by Liberty. Torchmark was subsequently added as a defendant. In May 1996, the Circuit
Court entered an order conditionally certifying a plaintiffs class, which was subsequently redefined in
March 1997. The Circuit Court’s order allowed the parties to challenge the conditional certification based
upon subsequent discovery in the case. In March 1998, the defendants challenged the conditional
certification and a hearing on final certification was held in October 1998. On February 9, 1999, the Circuit
Court entered an order decertifying the conditional class and denying all petitions to certify a class in
Lawson.
Purported class action litigation was filed 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).
Plaintiff alleges improper payment of royalties and overriding royalties on coalbed methane gas produced
and sold from wells in Robinson’s Bend Coal Degasification Field, seeks certification of a class and
claims unspecified compensatory and punitive damages on behalf of such class. On April 11, 1996,
Torchmark’s motion to change venue was granted and the case has been transferred to the Circuit Court
of Tuscaloosa County, Alabama. Torchmark’s motion to dismiss remains pending while discovery is
proceeding. On February 10, 1999, the plaintiffs filed a request for a class certification hearing and to set
a trial date for the Pearson case.
In 1978, the United States District Court for the Northern District of Alabama entered a final judgment
in Battle v. Liberty National Life Insurance Company, et al (Case No. CV-70-H-752-S), class action
litigation involving Liberty, a class composed of all owners of funeral homes in Alabama and a class
insureds (Alabama residents only) under burial or vault policies issued, assumed or
composed of all
judgment fixed the rights and obligations of Liberty and the funeral
reinsured by Liberty. The final
directors authorized to handle Liberty burial and vault policies as well as reforming the benefits available
to the policyholders under the policies. Although class actions are inherently subject to subsequent
collateral attack by absent class members, the Battle decree remains in effect to date. A motion filed in
February 1990 to challenge the final judgment under Federal Rule of Civil Procedure 60(b) was rejected
by both the District Court in 1991 and the Eleventh Circuit Court of Appeals in 1992 and a Writ of
Certiorari was denied by the U.S. Supreme Court in 1993.
In November 1993, an attorney (purporting to represent the funeral director class) filed a petition in
judgment. This petition was voluntarily
the District Court seeking ‘‘alternative relief’’ under the final
withdrawn on November 8, 1995 by petitioners. On February 23, 1996, Liberty filed a petition with the
District Court requesting that it order certain contract funeral directors to comply with their obligations
under the Final Judgment in Battle and their funeral service contracts. A petition was filed on April 8, 1996
on behalf of a group of funeral directors seeking to modify the 1978 decree in Battle in light of changed
economic circumstances. All parties made extensive submissions to the District Court and a hearing on
the opposing petitions was held by the District Court on February 9, 1999.
It has been previously reported that in July 1998, a jury in U.S. District Court in the Middle District of
Florida recommended an aggregate total verdict amounting to $21.6 million against Liberty in Hipp v.
Liberty National Life Insurance Company (Case No. 95-1332-CIV-T-17A). This case, originally filed in
1995 in the Florida state court system, is a collective action under the Fair Labor Standards Act, alleging
age discrimination by Liberty in violation of the Age Discrimination in Employment Act and the Florida Civil
Rights Act. The plaintiffs, ten present or former Liberty district managers, sought damages for lost wages,
loss of future earnings, lost health and retirement benefits and lost raises and expenses. Three of these
plaintiffs, Florida residents, also sought compensatory and punitive damages allowable under Florida law.
On November 20, 1998, the District Court remitted the $10 million punitive damage portion of the jury
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 17—Commitments and Contingencies (continued)
verdict to $0, thus reducing the total verdict to $11 million (including an advisory verdict of $3.2 million in
front pay awards). Additional revised front pay submissions were made by the plaintiffs to the District
Court in December 1998 and Liberty responded thereto in January 1999. Liberty is awaiting the entry of
a final judgment in the Hipp case and thereafter will pursue all available post trial and appellate relief.
Note 18—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.
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.
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.
Life
Health
Annuity
Total
For the Year 1998
Distribution Channel
Direct Response . . . . . . . . . . . . . . . . . . . . . . . . .
Liberty National Exclusive . . . . . . . . . . . . . . . . .
American Income Exclusive . . . . . . . . . . . . . . . .
United American Independent . . . . . . . . . . . . . .
United American Exclusive . . . . . . . . . . . . . . . .
Military Independent . . . . . . . . . . . . . . . . . . . . . .
United Investors Exclusive . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
$221,371
281,145
204,310
36,925
18,798
92,204
81,620
23,393
% of
Total
Amount
% of
Total Amount
% of
Total
Amount
% of
Total
23.1% $ 8,817
135,861
29.3
47,074
21.3
417,556
3.8
2.0
150,602
9.6
8.5
2.4
1.2%
17.9
6.2
54.9
19.8
$
84
445
33,065
360
1.3
$ 230,188
0.2% 417,090
251,384
454,926
169,400
92,204
114,685
23,753
97.4
1.1
13.1%
23.8
14.3
25.9
9.7
5.3
6.5
1.4
$959,766
100.0% $759,910
100.0% $33,954
100.0% $1,753,630
100.0%
Life
Health
Annuity
Total
For the Year 1997
Distribution Channel
Direct Response . . . . . . . . . . . . . . . . . . . . . . . . .
Liberty National Exclusive . . . . . . . . . . . . . . . . .
American Income Exclusive . . . . . . . . . . . . . . . .
United American Independent . . . . . . . . . . . . . .
United American Exclusive . . . . . . . . . . . . . . . .
Military Independent . . . . . . . . . . . . . . . . . . . . . .
United Investors Exclusive . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
$195,393
280,519
190,681
36,810
18,243
79,631
77,986
30,729
% of
Total
Amount
% of
Total Amount
% of
Total
Amount
% of
Total
21.5% $ 6,467
125,701
30.8
46,116
20.9
428,775
4.0
2.0
132,426
8.8
8.6
3.4
0.9%
17.0
6.2
58.0
17.9
$
84
333
27,009
1,101
1.2
$ 201,860
0.3% 406,304
236,797
465,918
150,669
79,631
104,995
31,830
94.7
3.8
12.0%
24.2
14.1
27.8
9.0
4.7
6.3
1.9
$909,992
100.0% $739,485
100.0% $28,527
100.0% $1,678,004
100.0%
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 18—Business Segments (continued)
Life
Health
Annuity
Total
For the Year 1996
Distribution Channel
Direct Response . . . . . . . . . . . . . . . . . . . . . . . . .
Liberty National Exclusive . . . . . . . . . . . . . . . . .
American Income Exclusive . . . . . . . . . . . . . . . .
United American Independent . . . . . . . . . . . . . .
United American Exclusive . . . . . . . . . . . . . . . .
Military Independent . . . . . . . . . . . . . . . . . . . . . .
United Investors Exclusive . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
$171,983
279,637
173,700
33,404
15,767
71,223
73,836
35,347
% of
Total
Amount
% of
Total Amount
% of
Total
Amount
% of
Total
20.1% $ 3,519
120,028
32.7
44,172
20.3
440,862
3.9
1.8
124,037
8.3
8.6
4.3
0.5%
16.4
6.0
60.2
16.9
$
99
249
20,681
1,375
1.1
$ 175,502
0.4% 399,764
217,872
474,515
139,804
71,223
94,517
36,722
92.3
6.2
10.9%
24.8
13.5
29.5
8.7
4.4
5.9
2.3
$854,897
100.0% $732,618
100.0% $22,404
100.0% $1,609,919
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 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 for two primary reasons.
First, there is a reduction to policy obligations for interest credited by contract to policyholders because
is also added to
this interest
acquisition expense which represents the implied interest cost of deferred acquisition costs, which is
funded by and is attributed to the investment segment.
is earned and credited by the investment segment. Second,
interest
is excess investment
The measure of profitability for the investment segment
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.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 18—Business Segments (continued)
For the year 1998
Life
Health Annuity Investment Other Corporate
Revenue:
Premium . . . . . . . . . . . . . . . . . . . . . . $ 957,274 $759,910 $ 33,594
Net investment income . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . .
$ 470,701
$
4,488
Family
Service
Underwriting
Income
$ 2,852
Adjustments Consolidated
$(11,143)
(2,163)
$1,753,630
459,558
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
Required reserve interest
(215,185)
Amortization of acquisition costs . . . 158,298
Commissions and premium tax . . . .
57,364
Required interest on acquisition
34,662
(20,440) (42,171)
11,561
59,208
510
87,828
. . . . . . . .
costs . . . . . . . . . . . . . . . . . . . . . . .
Financing costs* . . . . . . . . . . . . . . . .
85,374
11,373
5,609
296,696
(103,481)
71,367
14,251
(18,900)
3,883
208
1,125
1,150,276
-0-
231,024
143,747
-0-
56,325
(1,926)
(2,163)
(15,042)
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
Reclass of Family Service . . . . . . . . . .
2,187
23,423
98
Underwriting income before other
income and administrative
expense . . . . . . . . . . . . . . . . . . . . . . 254,743 139,445
23,521
Excess investment income . . . . . . . . .
Subtotal adjustments . . . . . . . . . . . . . .
206,119
Subtotal
. . . . . . . . . . . . . . . . . 254,743 139,445
23,521
206,119
Administrative expense . . . . . . . . . . . .
Parent expense . . . . . . . . . . . . . . . . . .
Goodwill amortization . . . . . . . . . . . . .
2,285
(2,285)
4,488
4,488
(103,451)
$(10,406)
(12,075)
5,825
5,825
(3,581)
417,709
-0-
417,709
206,119
10,313
634,141
(103,451)
(13,987)
(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.
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 18—Business Segments (continued)
For the year 1997
Life
Health Annuity Investment Other Corporate
Revenue:
Premium . . . . . . . . . . . . . . . . . . . . . $ 901,187 $739,485 $ 27,426
Net investment income . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . .
$ 439,067
$
3,141
Family
Service
Underwriting
Income
$ 9,906
Adjustments Consolidated
$(9,951)
(2,179)
$1,678,004
429,116
962
Total revenue . . . . . . . . . . . .
901,187 739,485
27,426
439,067
3,141
9,906
(12,130)
2,108,082
Expenses:
Policy benefits . . . . . . . . . . . . . . . .
Required reserve interest . . . . . . . .
Amortization of acquisition costs . .
Commissions and premium tax . . .
Required interest on acquisition
costs . . . . . . . . . . . . . . . . . . . . . .
Financing costs* . . . . . . . . . . . . . . .
574,139 462,967
(199,339)
149,358
55,019
34,631
(21,644) (41,551)
9,660
58,473
710
87,069
308,632
(7)
80,972
11,080
4,951
(100,096)
87,055
37,170
(46,098)
9,105
681
3,093
1,108,900
-0-
224,738
141,296
-0-
71,863
(1,858)
(2,183)
(15,192)
Total expenses . . . . . . . . . .
660,149 597,945
8,401
295,591
(7)
3,951
(19,233)
1,546,797
Underwriting income before other
income and administrative
expense** . . . . . . . . . . . . . . . . . . . .
Reclass of Family Service . . . . . . . . .
Underwriting income before other
income and administrative
expense . . . . . . . . . . . . . . . . . . . . . .
Excess investment income . . . . . . . .
Subtotal adjustments . . . . . . . . . . . . .
Subtotal
. . . . . . . . . . . . . . . . . . . . . . .
Administrative expense . . . . . . . . . . .
Parent expense . . . . . . . . . . . . . . . . .
Goodwill amortization . . . . . . . . . . . . .
Deferred acquisition cost adjustment
for realized gains . . . . . . . . . . . . . .
241,038 141,540
5,650
19,025
305
246,688 141,540
19,330
143,476
246,688 141,540
19,330
143,476
7
7
3,141
3,148
(104,220)
5,955
(5,955)
407,565
-0-
407,565
143,476
10,244
561,285
(104,220)
(16,013)
(12,074)
7,103
7,103
(2,134)
198
198
$(13,879)
(12,074)
Pretax operating income . . . . . . . . . . $ 246,688 $141,540 $ 19,330 $ 143,476 $(101,072) $(25,953)
$
0
$ 5,167
429,176
Deduct realized investment losses and deferred acquisition cost adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(37,177)
Pretax income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 391,999
* Investment segment includes MIPS dividend on a pretax basis.
** Insurance segments exclude Family Service.
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 18—Business Segments (continued)
For the year 1996
Life
Health Annuity Investment Other Corporate
Revenue:
Premium . . . . . . . . . . . . . . . . . . . . . $ 842,186 $732,618 $ 21,029
Net Investment income . . . . . . . . .
Other income . . . . . . . . . . . . . . . . .
$410,189
$
2,936
Family
Service
Underwriting
Income
$14,086
Adjustments Consolidated
$(10,638)
(1,820)
$1,609,919
399,551
1,116
Total revenue . . . . . . . . . . . .
842,186 732,618
21,029
410,189
2,936
14,086
(12,458)
2,010,586
Expenses:
Policy benefits . . . . . . . . . . . . . . . .
Required reserve interest . . . . . . . . .
Amortization of acquisition costs . .
Commissions and premium tax . . .
Required interest on acquisition
costs . . . . . . . . . . . . . . . . . . . . . .
Financing costs* . . . . . . . . . . . . . . .
538,233 448,346
(186,306)
138,553
53,747
32,085
(26,137) (38,972)
7,280
63,150
423
87,687
298,408
(18)
75,955
11,475
4,253
(95,556)
88,465
39,438
(46,993)
10,937
622
3,873
1,058,084
-0-
218,826
140,448
-0-
73,611
(1,094)
(2,031)
(14,854)
Total expenses . . . . . . . . . .
620,182 584,521
5,069
291,317
(18)
7,877
(17,979)
1,490,969
Underwriting income before other
income and administrative
expense . . . . . . . . . . . . . . . . . . . . .
Reclass of Family Service . . . . . . . . .
Underwriting income before other
income and administrative
expense** . . . . . . . . . . . . . . . . . . . .
Excess investment income . . . . . . . .
Subtotal adjustments . . . . . . . . . . . . .
Subtotal
. . . . . . . . . . . . . . . .
Administrative expense . . . . . . . . . . .
Parent expense . . . . . . . . . . . . . . . . .
Goodwill amortization . . . . . . . . . . . . .
Deferred acquisition cost adjustment
for realized gains . . . . . . . . . . . . . .
222,004 148,097
5,689
15,960
520
227,693 148,097
16,480
118,872
227,693 148,097
16,480
118,872
18
18
2,936
2,954
(110,029)
6,209
(6,209)
392,288
-0-
392,288
118,872
8,457
519,617
(110,029)
(15,852)
(12,074)
5,521
5,521
(1,893)
749
749
$(13,959)
(12,074)
Pretax operating income . . . $ 227,693 $148,097 $ 16,480 $118,872 $(107,075) $(26,033)
$
-0-
$ 4,377
382,411
Add realized investment gains and deferred acquisition cost adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,081
Pretax income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 387,492
Investment segment includes MIPS dividend on a pretax basis.
*
** Insurance segments exclude Family Service.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 18—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
is
includes the investment portfolio, cash, and accrued investment
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 financial statements.
income. Goodwill
Life
Health
Annuity
Investment
Other
Corporate Adjustments Consolidated
At December 31, 1998
Cash and invested assets . . . . . . . . . . . .
Accrued investment income . . . . . . . . . .
Deferred acquisition costs . . . . . . . . . . . . $1,390,030 $190,285 $
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . .
Separate account assets . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . .
92,836
2,425,262
$6,449,021
99,279
$414,658
$187,657
Total assets . . . . . . . . . . . . . . . . . . . . . . . $1,390,030 $190,285 $2,518,098 $6,548,300 $187,657 $414,658
$ 6,449,021
99,279
1,673,151
414,658
2,425,262
187,657
$11,249,028
Life
Health
Annuity
Investment
Other
Corporate Adjustments Consolidated
At December 31, 1997
Cash and invested assets . . . . . . . . . . . .
Accrued investment income . . . . . . . . . .
Deferred acquisition costs . . . . . . . . . . . . $1,296,501 $178,903 $ 112,715
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . .
Separate account assets . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . .
Discontinued assets . . . . . . . . . . . . . . . . .
1,876,439
$6,575,401
100,392
$426,732
$172,655
$387,910
$ 6,575,401
100,392
1,588,119
426,732
1,876,439
172,655
387,910
Total assets . . . . . . . . . . . . . . . . . . . . . . . $1,296,501 $178,903 $1,989,154 $6,675,793 $172,655 $426,732
$387,910
$11,127,648
Life
Health
Annuity
Investment
Other
Corporate Adjustments Consolidated
At December 31, 1996
Cash and invested assets . . . . . . . . . . . .
Accrued investment income . . . . . . . . . .
Deferred acquisition costs . . . . . . . . . . . . $1,215,863 $175,498 $ 106,734
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . .
Separate account assets . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . .
Discontinued assets . . . . . . . . . . . . . . . . .
1,420,025
$5,951,214
91,837
$438,806
$159,966
$334,021
$ 5,951,214
91,837
1,498,095
438,806
1,420,025
159,966
334,021
Total assets . . . . . . . . . . . . . . . . . . . . . . . $1,215,863 $175,498 $1,526,759 $6,043,051 $159,966 $438,806
$334,021
$ 9,893,964
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 19—Related Party Transactions
TransactionsRegarding Vesta. Since 1993, Torchmark has held a passive investment in 5.1 million shares
of Vesta, a property insurance carrier, representing approximately 28% of the outstanding shares of Vesta. 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. Additionally, Vesta is now subject
to numerous class action lawsuits in state and Federal courts filed subsequent to such announcements.
During the fourth quarter of 1998, Torchmark announced it had entered into an agreement
to sell
approximately 1.8 million shares of Vesta common stock to an unaffiliated insurance carrier for $7.42 a share. In
its fourth quarter Form 10Q, Torchmark reported its intent to sell its remaining Vesta shares and vacate the two
Vesta board seats it occupied. In view of the pending transaction, Torchmark adjusted the carrying value of its
holdings in Vesta to estimated net realizable value of $45 million, effective September 30, 1998. The adjustment
produced an after-lax realized loss of $24 million or $.17 per Torchmark diluted share.
As of December 31, 1998, the terms of the agreement were not met by the unaffiliated insurance carrier and
the contract to sell the Vesta shares expired. In the meantime, on December 29, 1998, Torchmark sold 680
thousand Vesta shares to another unrelated institution at a price of $4.75 per share. Torchmark realized a $2
million after-tax loss on the sale. The sale reduced Torchmark’s ownership of Vesta to 4.45 million shares or
approximately 24% of Vesta at December 31, 1998.
Subsequent to Vesta’s June, 1998 announcement involving the accounting irregularities and the financial
restatements, Torchmark recorded its equity in Vesta’s earnings in the quarter that Vesta reported those
earnings. As a result, Torchmark’s equity in Vesta’s reported earnings during 1998, including the restatements,
was a pretax loss of $27 million. Torchmark carried Vesta at a value of $32 million at December 31, 1998,
reflecting the previously taken writedown.
Torchmark leases office space to Vesta. Total rental income received from Vesta was $857 thousand, $585
thousand, and $508 thousand, for the years ended December 31, 1998, 1997 and 1996, respectively.
Note 20—Supplemental Disclosures for Cash Flow Statement
The following table summarizes Torchmark’s noncash transactions, which are not reflected on the Statement
of Cash Flow:
Paid-in capital from tax benefit for stock option exercises . . . . . . . . .
Discounted/deferred option grants . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash assets received from sale of energy operations . . . . . . . . .
Non-cash liabilities assumed from sale of energy operations . . . . . . .
Distribution of Waddell & Reed stock . . . . . . . . . . . . . . . . . . . . . . . . . .
$
933 $39,873 $ 1,598
-0-
2,020
582
79,289
-0-
-0-
48,942
-0-
-0-
-0-
-0-
174,113
Year Ended December 31,
1998
1997
1996
The following table summarizes certain amounts paid during the period:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 60,573 $73,537 $74,433
$102,753 $31,422 $66,987
Year Ended December 31,
1998
1997
1996
78
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, 1998. 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,
1998:
Premium and policy charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . $433,017 $439,364
117,881
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,854)
Realized investment losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
556,048
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
291,826
Policy benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57,755
Amortization of acquisition expenses . . . . . . . . . . . . . . . . . . . . .
123,856
Pretax income from continuing operations . . . . . . . . . . . . . . . . .
15,222
(Loss) from discontinued operations . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
63,142
Basic net income per common share from continuing
119,800
(3,173)
550,032
287,024
57,334
117,799
14,766
92,918
$437,964
112,165
(39,750)
511,271
285,217
57,248
87,054
(38,607)
14,546
$443,285
109,712
(12,860)
540,525
286,209
58,687
118,282
2,246
73,835
operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic net income per common share . . . . . . . . . . . . . . . . . . . . .
Basic net income per common share from continuing
operations excluding realized losses, related DPAC
adjustment, and equity in earnings of Vesta . . . . . . . . . . . . .
Diluted net income per common share from continuing
operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted net income per common share . . . . . . . . . . . . . . . . . . . .
Diluted net income per common share from continuing
operations excluding realized losses, related DPAC
adjustment, and equity in earnings of Vesta . . . . . . . . . . . . . . .
.56
.66
.55
.55
.66
.55
.34
.45
.58
.34
.45
.57
.38
.10
.58
.38
.10
.58
.51
.53
.61
.51
.53
.60
1997:
Premium and policy charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . $415,690 $419,887
105,728
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(22,948)
Realized investment losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
503,116
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
279,797
Policy benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55,128
Amortization of acquisition expenses . . . . . . . . . . . . . . . . . . . . .
82,368
Pretax income from continuing operations . . . . . . . . . . . . . . . . .
19,559
Income from discontinued operations . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
74,590
Basic net income per common share from continuing
102,537
(10,831)
507,597
273,081
56,523
89,940
18,215
77,328
$420,227
109,504
(390)
529,442
279,311
56,736
110,551
19,281
92,974
$422,200
111,347
(2,810)
530,948
276,711
56,351
109,140
20,259
92,851
operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic net income per common share . . . . . . . . . . . . . . . . . . . . .
Basic net income per common share from continuing
operations excluding realized losses, related DPAC
adjustment, and equity in earnings of Vesta . . . . . . . . . . . . .
Diluted net income per common share from continuing
operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted net income per common share . . . . . . . . . . . . . . . . . . . .
Diluted net income per common share from continuing
operations excluding realized losses, related DPAC
adjustment, and equity in earnings of Vesta . . . . . . . . . . . . .
.42
.55
.46
.42
.55
.45
.40
.54
.48
.39
.53
.48
.53
.67
.51
.52
.66
.50
.52
.66
.51
.51
.66
.51
79
Item 9. Disagreements on Accounting and Financial Disclosure
the Audit Committee of
On October 21, 1998, with the approval 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 Peat Marwick 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. The reports of KPMG on the financial statements of Torchmark for either of the two
most recent fiscal years 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, 1997 and the date of the independent accountants report for
the consolidated financial statements of Torchmark for the three years ended December 31, 1998, there
was no disagreement between KPMG and Torchmark on any matter of accounting principals 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.
Torchmark’s appointment of Deloitte & Touche will be submitted to shareholders for ratification at
Torchmark’s April, 1999 annual shareholders meeting.
PART III
Item 10. Directors and Executive Officers of Registrant
‘‘Profiles of Directors and Nominees,’’
Information required by this item is incorporated by reference from the sections entitled ‘‘Election of
Directors,’’
‘‘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 29, 1999 (the ‘‘Proxy Statement’’), which is to be filed with the
Securities and Exchange Commission.
Item 11. Executive Compensation
Information required by this item is incorporated by reference from the section entitled
‘‘Compensation and Other Transactions with Executive Officers and Directors’’ in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners of Management
(a) Security ownership of certain beneficial owners:
Information required by this item is incorporated by reference from the section entitled ‘‘Principal
Stockholders’’ in the Proxy Statement.
(b) Security ownership of management:
Information required by this item is incorporated by reference from the section entitled ‘‘Stock
Ownership’’ in the Proxy Statement.
(c) Changes in control:
Torchmark knows of no arrangements, including any pledges by any person of its securities, the
operation of which may at a subsequent date result in a change of control.
Item 13. Certain Relationships and Related Transactions
Information required by this item is incorporated by reference from the section entitled
‘‘Compensation and Other Transactions with Executive Officers and Directors’’ in the Proxy Statement.
80
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K
PART IV
(a)
Index of documents filed as a part of this report:
Page of
this report
Financial Statements:
Torchmark Corporation and Subsidiaries:
Independent Auditors’ Report
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheet at December 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Operations for each of the years in the three-year period
ended December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Comprehensive Income for each of the years in the three-
year period ended December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Shareholders’ Equity for each of the years in the three-
year period ended December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Cash Flow for each of the years in the three-year period
ended December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedules Supporting Financial Statements for each of the years in the three-year period
ended December 31, 1998:
II. Condensed Financial Information of Registrant (Parent Company) . . . . . . . . . . . . . . .
IV. Reinsurance (Consolidated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38
39
40
42
43
44
46
86
89
Schedules not referred to have been omitted as inapplicable or not required by Regulation S-X.
(b) Reports on Form 8-K.
The following Forms 8-K were filed by the registrant during the fourth quarter of 1998:
(1) Form 8-K dated October 19, 1998, announcing that on November 6, 1998, the registrant
would spin-off its remaining stock interest in Waddell & Reed to Torchmark common shareholders;
(2) Form 8-K dated October 28, 1998, reporting changes in the registrant’s certifying accountant;
and
(3) Form 8-K/A dated November 20, 1998, reporting completion of the spin-off disposition of
Waddell & Reed.
No financial statements were required in either of the Forms 8-K. Torchmark Corporation Pro Forma
Condensed Consolidated Financial Statements (Unaudited) were filed in Form 8-K/A dated
November 20, 1998.
(c) Exhibits
81
EXHIBITS
Page of
this
Report
(3)(i) Restated Certificate of Incorporation of Torchmark Corporation, as amended (incorpo-
rated by reference from Exhibit 3(i) to Form 10-K for the fiscal year ended December
31, 1998)
(ii) By-Laws of Torchmark Corporation, as amended (incorporated by reference from Ex-
hibit 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 Secu-
rities 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, (incor-
porated by reference from Exhibit 10(c) to Form 10-K for the fiscal year ended De-
cember 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) Certified Copies of Resolutions Establishing Retirement Policy for Officers and Direc-
tors of Torchmark Corporation and Providing Retirement Benefits for Directors (incor-
porated by reference from Exhibit 10(d) to Form 10-K for the fiscal year ended De-
cember 31, 1998)
(e) Torchmark Corporation Restated Deferred Compensation Plan for Directors, Advisory
Directors, Directors Emeritus and Officers, as amended (incorporated by reference
from Exhibit 10(e) to Form 10-K for the fiscal year ended December 31, 1992)
(f) The Torchmark Corporation 1987 Stock Incentive Plan (incorporated by reference
from Exhibit 10(f) to Form 10-K for the fiscal year ended December 31, 1998)
(g) General Agency Contract between Liberty National Life Insurance Company and In-
dependent 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)
(h) 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)
(i) Form of Deferred Compensation Agreement Between Torchmark Corporation or Sub-
sidiary 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)
82
Page of
this
Report
(j) Form of Deferred Compensation Agreement between Torchmark Corporation or Subsidi-
ary 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)
(k) Torchmark Corporation Supplemental Savings and Investment Plan (incorporated by ref-
erence from Exhibit 10(m) to Form 10-K for the fiscal year ended December 31, 1992)
(l) 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)
(m) The Torchmark Corporation Pension Plan (incorporated by reference from Exhibit 10(o)
to Form 10-K for the fiscal year ended December 31, 1992)
(n) The Torchmark Corporation 1998 Stock Incentive Plan
(o) 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)
(p) Credit Agreements dated as of October 24, 1996 among Torchmark Corporation, the
Lenders and The First National Bank of Chicago, as Agent (364 Day and Five Year)
(incorporated by reference from Exhibit 10(t) to Form 10-K for the fiscal year ended
December 31, 1996)
(q) Coinsurance and Servicing Agreement between Security Benefit Life Insurance Com-
pany 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)
(r) Form of Deferred Compensation Agreement Between Torchmark Corporation or Sub-
sidiary 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)
(s) 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)
(t) Torchmark Corporation 1996 Executive Deferred Compensation Stock Option Plan (in-
corporated by reference from Exhibit 10(x) to Form 10-K for the fiscal year ended De-
cember 31, 1996)
(11)
(20)
(21)
Statement re computation of per share earnings
Proxy Statement for Annual Meeting of Stockholders to be held April 29, 1999
Subsidiaries of the registrant
85
85
(23)(a) Consent of KPMG Peat Marwick LLP to incorporation by reference of their audit report
dated January 29, 1999, except for Note 17, which is as of February 10, 1999, into
Form S-8 of The Torchmark Corporation Savings and Investment Plan (Registration
No. 2-76378)
83
Page of
this
Report
(b) Consent of KPMG Peat Marwick LLP to incorporation by reference of their audit report
dated January 29, 1999, except for Note 17, 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 Stock Option Plan (Registration No. 2-93760)
(c) Consent of KPMG Peat Marwick LLP to incorporation by reference of their audit report
dated January 29, 1999, except for Note 17, 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)
(d) Consent of KPMG Peat Marwick LLP to incorporation by reference of their audit report
dated January 29, 1999, except for Note 17, 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)
(e) Consent of KPMG Peat Marwick LLP to incorporation by reference of their audit report
dated January 29, 1999, except for Note 17, 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)
(f) Consent of KPMG Peat Marwick LLP to incorporation by reference of their audit report
dated January 29, 1999, except for Note 17, which is as of February 10, 1999 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)
(24)
(27)
Powers of attorney
Financial Data Schedule
84
Exhibit 11. Statement re computation of per share earnings
TORCHMARK CORPORATION
COMPUTATION OF EARNINGS PER SHARE
Net income from continuing operations . . . . . . . . . . . . . . . . . . .
Discontinued operations of energy segment:
1998
1997
1996
$255,776,000
$260,429,000
$252,815,000
Loss on disposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
(7,137,000)
Discontinued operations of Waddell & Reed:
Net income from operations . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47,868,000
(54,241,000)
Net income before extraordinary items . . . . . . . . . . . . . . . . . . .
Loss on redemption of debt
. . . . . . . . . . . . . . . . . . . . . . . . . . .
249,403,000
(4,962,000)
77,314,000
-0-
337,743,000
-0-
65,694,000
-0-
311,372,000
-0-
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$244,441,000
$337,743,000
$311,372,000
139,998,671
141,351,912
139,202,354
141,431,156
142,459,783
143,783,218
$
1.83
$
1.87
$
1.78
Basic weighted average shares outstanding . . . . . . . . . . . . . . .
Diluted weighted average shares outstanding . . . . . . . . . . . . . .
Basic earnings per share:
Net income from continuing operations . . . . . . . . . . . . . . . . . . .
Discontinued operations of energy segment:
Loss on disposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations of Waddell & Reed:
Net income from operations . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income before extraordinary items . . . . . . . . . . . . . . . . . . .
Loss on redemption of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share:
Net income from continuing operations . . . . . . . . . . . . . . . . . . .
Discontinued operations of energy segment:
Loss on disposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations of Waddell & Reed:
Net income from operations . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income before extraordinary items . . . . . . . . . . . . . . . . . . .
Loss on redemption of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
-0-
0.34
(0.39)
1.78
(0.03)
1.75
1.81
-0-
0.34
(0.38)
1.77
(0.04)
$
$
-0-
0.56
-0-
2.43
-0-
2.43
1.84
-0-
0.55
-0-
2.39
-0-
2.39
$
$
$
(0.05)
.46
-0-
2.19
-0-
2.19
1.76
(0.05)
0.46
-0-
2.17
-0-
2.17
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1.73
$
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:
Company
American Income Life
Insurance Company
Globe Life And Accident
Insurance Company
Liberty National Life
Insurance Company
United American
Insurance Company
United Investors Life
Insurance Company
State of
Incorporation
Name Under Which
Company Does Business
Indiana
Delaware
Alabama
American Income Life
Insurance Company
Globe Life And Accident
Insurance Company
Liberty National Life
Insurance Company
United American
Delaware
Insurance Company
Missouri
United Investors Life
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 81 through 84 of this report. Exhibits not referred to have been omitted as
inapplicable or not required.
85
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
(Amounts in thousands)
December 31,
1998
1997
Assets:
Investments:
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 105,703
1,714
$
23,917
336
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
107,417
7,724
3,156,322
53,207
1,731
-0-
35,377
24,253
7,272
3,277,785
114,440
132
90,335
18,961
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,361,778
$3,533,178
Liabilities and shareholders’ equity:
Liabilities:
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 355,242
394,048
8,683
61,542
89,476
$ 346,861
564,298
11,905
373,792
110,387
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
908,991
1,407,243
Monthly income preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
193,259
193,199
Shareholders’ equity:
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
299
147,801
910,119
144,501
1,707,933
(651,125)
-0-
147,849
262,731
136,926
1,694,781
(309,551)
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,259,528
1,932,736
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,361,778
$3,533,178
See accompanying Independent Auditors’ Report.
86
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
CONDENSED STATEMENT OF OPERATIONS
(Amounts in thousands)
Year Ended December 31,
1996
1997
1998
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized investment losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 20,024
(54,855)
-0-
$ 5,275
(19,706)
-0-
$
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(34,831)
(14,431)
931
(5,738)
1
(4,806)
General operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reimbursements from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,406
(13,653)
65,871
13,880
(13,956)
96,402
13,958
(13,332)
88,916
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
62,624
96,326
89,542
Operating loss before income taxes and equity in earnings of affiliates . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(97,455)
44,132
(110,757)
38,189
(94,348)
23,102
Net operating loss before equity in earnings of affiliates . . . . . . . . . . . . . . . . . . . .
Equity in earnings of affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment to carrying value of Vesta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Monthly income preferred securities dividend (net of tax) . . . . . . . . . . . . . . . . . . .
(53,323)
327,984
(20,234)
(9,777)
(72,568)
420,186
-0-
(9,875)
(71,246)
420,900
-0-
(9,655)
Net income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
244,650
337,743
339,999
Discontinued operations of energy segment:
Loss on disposal (net of tax) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
Discontinued operations of Waddell & Reed:
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,154
(4,401)
-0-
-0-
-0-
(28,627)
-0-
-0-
Net income before extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on redemption of debt (net of tax) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
249,403
(4,962)
337,743
-0-
311,372
-0-
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$244,441
$337,743
$311,372
See accompanying Independent Auditors’ Report.
87
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT—(continued)
CONDENSED STATEMENT OF CASH FLOW
(Amounts in thousands)
Year Ended December 31,
1998
1997
1996
Cash provided from operations before dividends from subsidiaries . . . . . . . . . .
Cash dividends from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (46,825) $ (35,284) $ (77,291)
265,688
370,032
462,267
Cash provided from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
415,442
334,748
188,397
Cash provided from (used for) investing activities:
Disposition of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments on loans to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease (increase) in temporary investments . . . . . . . . . . . . . . . . . . . . .
Additions to properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
217,323
(311,784)
(710)
(48,723)
120,079
(1,378)
(48)
-0-
-0-
(2,150)
(174,799)
(117,392)
28,242
5,604
(454)
(7,460)
-0-
(1,667)
-0-
(12,508)
-0-
(4,946)
(49)
-0-
Cash used for investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(25,241)
(268,409)
(19,170)
Cash provided from (used for) financing activities:
Issuance of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sale of Vesta shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption of preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowed from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment on borrowings from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
216,279
3,056
(380,000)
3,957
-0-
(125,875)
-0-
-0-
(107,166)
98,185
-0-
(20,000)
93,973
(2,767)
(182,904)
133,880
(93,060)
(86,530)
-0-
-0-
(149,020)
10,145
-0-
(106,996)
153,959
8,500
(85,659)
Cash provided from (used for) financing activities . . . . . . . . . . . . . . . . . . . . . . . .
(389,749)
(59,223)
(169,071)
Net increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
452
7,272
7,116
156
Cash balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
7,724 $
7,272 $
156
-0-
156
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:
Consolidated subsidiaries . . . . . . . . . . . . . . . . . . . . .
$462,267 $370,032 $265,688
1998
1997
1996
See accompanying Independent Auditors’ Report.
88
TORCHMARK CORPORATION
SCHEDULE IV. REINSURANCE (CONSOLIDATED)
(Amounts in thousands)
Gross
Amount
Ceded
to Other
Companies
Assumed
from Other
Companies
Net
Amount
Percentage
of Amount
Assumed
to Net
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 . . . . . . . . . . . . . . . . . . . . . . . .
Health insurance . . . . . . . . . . . . . . . . . . . . . .
$
862,101
768,874
$ 5,090
7,873
Total premiums . . . . . . . . . . . . . . . . . . . . .
$ 1,630,975
$ 12,963
$
$
31,503
(1,092)
$
888,514
759,909
30,411
$ 1,648,423
3.5 %
(.1)%
1.8 %
For the Year Ended December 31, 1997:
Life insurance in force . . . . . . . . . . . . . . . . . . .
$89,372,206
$728,843
$2,497,790
$91,141,153
2.7 %
Premiums:*
Life insurance . . . . . . . . . . . . . . . . . . . . . . . .
Health insurance . . . . . . . . . . . . . . . . . . . . . .
$
813,918
748,375
$ 4,232
8,889
Total premiums . . . . . . . . . . . . . . . . . . . . .
$ 1,562,293
$ 13,121
$
$
28,363
-0-
$
838,049
739,486
28,363
$ 1,577,535
3.4 %
0 %
1.8 %
For the Year Ended December 31, 1996:
Life insurance in force . . . . . . . . . . . . . . . . . . .
$84,360,821
$655,574
$2,587,330
$86,292,577
3.0 %
Premiums:*
Life insurance . . . . . . . . . . . . . . . . . . . . . . . .
Health insurance . . . . . . . . . . . . . . . . . . . . . .
$
759,321
742,319
$ 3,472
9,835
Total premiums . . . . . . . . . . . . . . . . . . . . .
$ 1,501,640
$ 13,307
$
$
26,511
135
$
782,360
732,619
26,646
$ 1,514,979
3.4 %
0 %
1.8 %
* Excludes policy charges
See accompanying Independent Auditors’ Report.
89
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.
SIGNATURES
TORCHMARK CORPORATION
By:
By:
/S/ C.B. HUDSON
C.B. Hudson, Chairman, President,
Chief Executive Officer and Director
(Principal Financial Officer)
/S/ GARY L. COLEMAN
Gary L. Coleman, Vice President
and Chief Accounting Officer
Date: March 10, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
By:
By:
By:
By:
/S/ DAVID L. BOREN *
David L. Boren
Director
/S/
JOSEPH M. FARLEY *
Joseph M. Farley
Director
/S/ LOUIS T. HAGOPIAN *
Louis T. Hagopian
Director
/S/
JOSEPH L. LANIER, JR.
Joseph L. Lanier, Jr.
Director
*
Date: March 10, 1999
*By:
/S/ GARY L. COLEMAN
Gary L. Coleman
Attorney-in-fact
By:
By:
By:
By:
/s/ MARK S. MCANDREW *
Mark S. McAndrew
Director
/s/ HAROLD T. MCCORMICK *
Harold T. McCormick
Director
/S/ GEORGE J. RECORDS *
George J. Records
Director
/S/ R.K. RICHEY *
R.K. Richey
Director
90