TORCHMARK
CORPORATION
2006 ANNUAL REPORT
2001 THIRD AVENUE SOUTH
BIRMINGHAM, ALABAMA 35233
www.torchmarkcorp.com
PRINCIPAL EXECUTIVE OFFICE
3700 South Stonebridge Drive
McKinney, Texas 75070
(972) 569-4000
ANNUAL MEETING
OF SHAREHOLDERS
10:00 a.m. CDT, Thursday, April 26, 2007
Fairmont Hotel Dallas
1717 North Akard Street
Dallas, Texas 75201
The proceedings will be webcast live and
in replay on the Investor Relations page of
the Torchmark Corporation website. The
Company’s Annual Meeting will be conducted
in accordance with its Shareholder Rights
Policy. A copy of this policy can be obtained
on the Company’s website, or by contacting
the Corporate Secretary at the Torchmark
Corporation headquarters address.
INVESTOR RELATIONS
Contact: Joyce L. Lane
Phone: (972) 569-3627
Fax: (972) 569-3282
E-Mail: jlane@torchmarkcorp.com
Individual Stock Ownership Information:
(205) 325-4270
Toll-Free Stock Transfer Number:
(800) 524-4458
INDEPENDENT AUDITORS
Deloitte & Touche LLP
2200 Ross Avenue
Suite 1600
Dallas, Texas 75201
STOCK EXCHANGE LISTINGS
New York Stock Exchange
Symbol: TMK
The London Stock Exchange,
London, England
INDENTURE TRUSTEE FOR
SENIOR DEBENTURES AND
77/8%, 73/8% AND 63/8% NOTES
The Bank of New York Trust Company, N.A.
505 North 20th Street, Suite 950
Birmingham, AL 35203
Attention: Corporate Trust Administration
Toll-Free Number: (800) 254-2826
Website: www.bankofny.com/corptrust
TORCHMARK CAPITAL TRUST
PREFERRED SECURITIES
Torchmark Capital Trust III, a Delaware business
trust subsidiary of Torchmark, has issued a total
of 4.8 million 7.10% Trust Preferred Securities
(liquidation amount $25 per Trust Preferred
Security). The Trust Preferred Securities trade
through Depository Trust Company under global
certificates listed on the New York Stock
Exchange (Torchmark Capital Trust III, NYSE
symbol: TMKPRA).
STOCK TR ANSFER AGENT AND
SHAREHOLDER ASSISTANCE
The Bank of New York
Investor Services Department
P. O. Box 11258
New York, New York 10286-1258
Toll-Free Number: (800) 524-4458
Toll-Free Hearing Impaired
Number: (888) 269-5221
Outside the U.S.: (212) 815-3700
E-Mail: shareowners@bankofny.com
Website: www.stockbny.com
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 information on the plan may
be obtained from the Stock Transfer Agent by
calling toll-free (800) 524-4458 or by writing:
The Bank of New York, Dividend Reinvestment
Department, P. O. Box 1958, Newark, NJ
07101.
AUTOMATIC DEPOSIT
OF DIVIDENDS
Automatic deposit of dividends is available to
shareholders 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 toll-free (800) 524-4458. Participation
is voluntary.
CORPOR ATE GOVERNANCE
The Company timely submitted to the New
York Stock Exchange a Section 303A (12)(a)
CEO Certification without qualification in 2006.
In 2006, Torchmark also filed with the
Securities and Exchange Commission the CEO/
CFO Certifications required by Section 302 of
the Sarbanes-Oxley Act as Exhibits to its
Form 10-K.
TORCHMARK
CORPOR ATION WEBSITE
On the home page at
www.torchmarkcorp.com
are links to the web pages of:
(cid:129) Torchmark’s Principal
Subsidiaries
(cid:129) Torchmark’s Annual Reports
(cid:129) Employment
(cid:129) Investor Relations
The
Investor Relations page
contains a menu with links to
many topics of interest to investors
and other interested third parties:
(cid:129) About Torchmark
(cid:129) Annual Reports, SEC Forms
10-K and Proxy Statements
(cid:129) News Releases and
Stock Quotes
(cid:129) SEC Filings
(cid:129) Financial Reports and Other
Financial Information
(cid:129) Officers and Directors
(cid:129) Torchmark Calendar
(cid:129) Management Presentations
(cid:129) Conference Calls on the Web
(cid:129) Corporate Governance
including:
- Shareholder Rights Policy
- Code of Business
Conduct and Ethics
- Code of Ethics for CEO and
Senior Financial Officers
- Corporate Governance
Guidelines
- Audit Committee Charter
- Compensation
Committee Charter
- Governance & Nominating
Committee Charter
- Employee Complaint
Procedure
- How to Contact the
Board of Directors
(cid:129) Annual Meeting of
Shareholders
(cid:129) Stock Transfer Agent and
Shareholder Assistance
(cid:129) Dividend Reinvestment
(cid:129) Automatic Deposit
of Dividends
(cid:129) Contact Information
Financial Highlights*
In thousands, except percentage and per share amounts
2006
2005
% CHANGE
OPERATIONS:
Total Premium
Total Revenue
Net Operating Income
Annualized Life Premium In Force
Annualized Health Premium In Force
Diluted Average Shares Outstanding
Net Operating Income as a Return
on Average Common Equity
PER COMMON SHARE:
Net Operating Income
Shareholders‘ Equity at Year End
$2,784,713
$2,508,074
3,421,178
504,356
1,615,487
1,293,081
101,112
3,125,910
485,505
1,577,635
1,026,410
105,751
15.8%
15.9%
11.0
9.4
3.9
2.4
26.0
(4.4)
$4.99
33.25
$4.59
30.41
8.7
9.3
* Certain financial data differ from the comparable GAAP financial data.
Reconciliations to GAAP financial data are presented on pages 10-11.
TABLE OF CONTENTS
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Letter to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Board of Directors, Officers and Officers of Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Operating Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Condensed Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
TORCHMARK CORPORATION 1
Letter to
Shareholders*
Another year has come and gone and 2006 proved to be
another successful year for Torchmark. It has now been
eight years since our spin-off of Waddell & Reed and our
growth in earnings per share since that time has been
remarkably consistent.
This growth has been achieved internally through growth
in premium revenue, underwriting margins and investment
income while maintaining tight control over expenses. We
have also worked to grow our free cash flow which has been
used primarily in our stock repurchase program.
Our net operating income per share of $4.99 for 2006 is
an 8.7% increase over 2005. Excluding the change in
accounting rules for expensing stock options, our net
operating income per share grew by 9.6% to $5.03. Our
8-year compound annual growth rate for net operating
income per share is 9.8% with increases each year ranging
from 8.5% to 11.4%. Very few major corporations can
match our record of consistent earnings growth combined
with our low level of risk.
NET OPERATING INCOME COMPONENTS
Earnings Per Share
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
0
3.87
1.78
3.51
1.57
3.21
1.30
2.94
1.12
5.03†
2.05
4.59
1.98
4.23
1.91
2.98
2.61
1.82
1.91
1.94
2.32
2.09
2.64
1.00
1.64
1999
2000
2001
2002
2003
2004
2005
2006
8-YEAR
COMPOUND ANNUAL
GROWTH RATE
†Excludes $.04 per share option
expense for comparability to
earlier years.
Underwriting Income 9.2%
Underwriting Income
Excess Investment Income 10.8%
Net Operating Income 9.8%
Excess Investment Income
This growth is by no means automatic. We have, in fact,
had to overcome several significant challenges over the past
eight years in order to sustain our growth.
(cid:129)
(cid:129)
Through 2001, Waddell & Reed produced both life
insurance and annuity business for a Torchmark
subsidiary. During 2001, they not only discontinued
writing new business with us, they began to aggressively
replace the business written in prior years which was
still in force. Instead of the double-digit growth in
underwriting income we saw on the annuity business in
1999 and 2000, we experienced a $19 million decline in
underwriting income over the next three years.
insurance sales.
In 2000, we produced over $200 million of Medicare
supplement sales representing 80% of Torchmark’s
Our collected Medicare
health
supplement premiums in 2000 were $654 million. Since
the Bush administration took office in 2001, they have
made a concerted effort to privatize Medicare through
the Medicare Advantage program (primarily HMO’s). By
over compensating these plans by billions of dollars, the
government effectively lured away many of our existing
customers as well as our potential new customers to
these less expensive Medicare Advantage plans by
means of this uneven playing field. As a result, we have
seen our new Medicare supplement sales decline over
80% and our annual premium revenues drop by 15%
compared with 2000. These declines reduced our 2006
underwriting income by $12 million.
(cid:129)
For the past several years, we have been in a generally
declining interest rate environment. In the past three
years, we have seen the effective yield on our bond
portfolio decline from 7.55% to 7.04%. When you
consider our $9 billion bond portfolio, this drop in interest
rates cost us over $45 million in excess investment
income in 2006.
* Certain financial data differ from the comparable GAAP financial data. Reconciliations to GAAP financial data are presented on pages 10-11.
2 TORCHMARK CORPORATION LETTER TO SHAREHOLDERS
When considering these challenges, our consistent earnings
growth becomes more impressive. It is also good news that
these challenges are mostly behind us and should be less of
a hindrance to our growth in future years.
I am pleased to report that our stock price increased 14.7%
during 2006, bringing our 8-year compound annual growth
rate to 7.7%. If dividends had been reinvested, the effective
yield to a shareholder would have been 8.7% over the
8-year period.
TORCHMARK CLOSING STOCK PRICE
$63.76
$57.14
$55.60
$45.54
$38.44 $39.33
$36.53
$29.06
$70.00
$60.00
$50.00
$40.00
$30.00
$20.00
0
1999
2000
2001
2002
2003
2004
2005
2006
8-YEAR COMPOUND ANNUAL GROWTH RATE
1999-2006
1999-2006*
Torchmark Closing
Stock Price
S&P 500 Index
7.7%
1.8%
8.7%
3.4%
* With dividends reinvested
While the growth in our stock price still lags our growth in
earnings per share since 1998, it easily outdistances the
performance of the S&P 500 average which grew at only a
1.8% compound annual growth rate over the same period.
How have we been able to achieve this prolonged success?
To answer this question, you must understand the unique
nature of Torchmark within the life and health insurance
industry.
In the latest rankings of the FORTUNE 1000 companies
from the April 17, 2006 issue, there were 19 stock life and
health insurance companies listed. While Torchmark ranked
eleventh in revenues among this group, we ranked first in
profits as a percentage of revenue at 16%. The median profit
margin for the group was 10% of revenue which means that
Torchmark’s profit margin is 60% higher than our peers. A
number of factors contribute to this high profit margin.
(cid:129)
Our companies sell protection products versus
investment products. While most life insurance
companies have moved heavily into variable life and
annuity products, we continue to market traditional
whole life and term life insurance. We have found there
continues to be a major underserved need and desire for
(cid:129)
(cid:129)
these products by middle income Americans. The sales
and profitability of these products do not see the wide
swings that are typical in asset accumulation products.
Throughout Torchmark’s history, efficiency and expense
control have been two of our priorities. We believe we
have one of the lowest administrative expense ratios in
our industry.
In 2006, 88% of our life and health insurance sales were
generated through our captive agency forces and direct
response. Each of these distribution systems operates
in a unique niche with little competition. Over the last
25 years, most of the major life insurance companies in
this country have severely reduced or eliminated their
captive agency operations due to their inability to control
expenses and achieve growth. These companies now
focus primarily on independent agency distribution
systems which are characterized by extremely high
levels of competition in pricing and compensation.
While it is a constant challenge to achieve growth, we
believe our distribution systems are our most valuable
asset and a key factor in achieving our high, stable profit
margins.
Torchmark is truly unique in our industry in that we do not
jump into the latest trends in products or distribution. On
the contrary, we believe our competition has left a major
void which we intend to fill.
For 2006, Torchmark’s premium revenues grew 11% to
$2.78 billion. Underwriting margin, which is our premium
income less the amounts required to pay current and future
benefits and to amortize acquisition expenses, increased 9%
to $465 million. Premium revenues from life insurance grew
4% to $1.52 billion. Life underwriting margin also increased
4% to $397 million.
Health insurance premiums, excluding Medicare Part D, grew
1% for the year to $1.03 billion, reversing the 3% decline
we experienced in 2005. Health underwriting margins
increased 2% to $181 million. Revenues from the Medicare
Part D prescription drug program were $212 million with an
underwriting margin of $26 million.
Administrative expenses increased 5% to $155 million but
did not increase as a percent of premium. Excess investment
income, which is our net investment income reduced by
interest credited to our net policy liabilities and net financing
costs, declined 2% to $319 million.
When valuing fixed maturity assets at amortized cost, our
book value was $33.25 at year-end, an increase of 9% for
the year. Our debt to capital ratio declined slightly to 21.2%
and our net operating income as a return on equity was
15.8%.
LETTER TO SHAREHOLDERS TORCHMARK CORPORATION 3
Direct Response
Oper ation
In millions, except %
LIFE
2006
2005
Net Sales
First Year Collected Premium
Underwriting Margin:
Premium
Policy Obligations
Acquisition Expenses
Underwriting Margin
In millions, except %
Net Sales
First Year Collected Premium
Underwriting Margin:
Premium
Policy Obligations
Acquisition Expenses
Underwriting Margin
$
115
77
457
215
133
109
$
5
5
40
31
3
5
%*
47%
29%
24%
$
112
77
424
195
122
107
%*
46%
29%
25%
HEALTH
2006
2005
%*
79%
8%
14%
$
6
6
38
30
3
5
%*
79%
8%
13%
The direct response operation is our largest life distribution
system in premium revenue and has had the most consistent
long-term growth. For 2006, direct response life premiums
grew by 8% to $457 million and life underwriting margins
increased 2% to $109 million.
This distribution system has two primary components: direct
mail and insert media.
The direct mail component is comprised of individual mailings
targeted primarily to young middle income households with
children. Our Globe Life subsidiary has been in this market
since 1964. By controlling all aspects of these individual
mailings internally, we are able to achieve the lowest possible
packaging and postal costs and the highest probability of
response rates that will generate the desired underwriting
margin.
The insert media component began in the early 1990s. At
that time, we entered into an exclusive marketing agreement
with an outside entity, Direct Marketing Advertising
Distributors (DMAD), to place our life insurance solicitations
into a variety of different media including coupon packets,
newspapers, circulars, bank statements and utility billings.
Over the past 15 years, we have seen tremendous growth in
this market to the point where, in 2006, it represented 65%
of our total direct response life insurance sales.
Our relationship with DMAD has been a long and profitable one.
As previously announced, we were able to acquire DMAD in
4 TORCHMARK CORPORATION LETTER TO SHAREHOLDERS
January 2007 for $47 million. With their extensive knowledge
and experience, plus the additional control it provides us, we
are very optimistic that we can continue our growth in this
market while improving our underwriting margins.
American Income
Agency Oper ation
In millions, except %
2006
2005
LIFE
Net Sales
First Year Collected Premium
Underwriting Margin:
Premium
Policy Obligations
Acquisition Expenses
Underwriting Margin
In millions, except %
Net Sales
Underwriting Margin:
Premium
Policy Obligations
Acquisition Expenses
Underwriting Margin
$
86
72
409
140
144
126
$
12
13
67
25
18
24
%*
34%
35%
31%
$
84
73
380
132
131
118
%*
35%
34%
31%
HEALTH
2006
2005
%*
38%
26%
36%
$
11
13
64
26
16
21
%*
41%
26%
33%
* Percent of Premium
Our most profitable distribution system is the American
Income captive agency operation. In 2006, premium
revenues grew 7% to $476 million and underwriting margin
grew 8% to $150 million.
American Income is a “union label” company with union
members not only in the home office, but also in the sales
force. With the endorsement of unions at the local level,
the sales force markets products to union membership.
American Income is one of only two “union label” U.S. life
insurance companies, and American Income is clearly the
leader with respect to individual life and health insurance.
After two years of declines in our agency force and our
volume of new sales, we have begun to see a turnaround at
American Income. Due to increases in new agency recruiting,
we saw our producing agents increase 16% to 2,353 for the
year and 5% growth in new sales during the second half
of 2006. While the growth in new sales was somewhat
less than we had hoped, we believe this momentum will
accelerate in 2007.
* Percent of Premium
First Year Collected Premium
Liberty National
Exclusive Agency
Oper ation
In millions, except %
2006
2005
LIFE
Net Sales
First Year Collected Premium
Underwriting Margin:
Premium
Policy Obligations
Acquisition Expenses
Underwriting Margin
In millions, except %
Net Sales
First Year Collected Premium
Underwriting Margin:
Premium
Policy Obligations
Acquisition Expenses
Underwriting Margin
$
41
34
301
136
86
78
$
12
10
145
95
22
29
%*
45%
29%
26%
$
47
36
303
139
85
78
%*
46%
28%
26%
HEALTH
2006
2005
%*
65%
15%
20%
$
14
10
149
100
23
25
%*
67%
16%
17%
* Percent of Premium
For 2006, premium revenues declined 1% to $446 million
and underwriting margin increased 3% to $107 million.
Achieving growth at Liberty National has been a challenge
throughout Torchmark’s history. The challenge has been how
to expand a 106 year old regional home-service company
into a national operation.
Most of the major life insurance companies in this country
began as home service operations where agents were
assigned specific territories to not only sell new policies,
but also to service and collect premiums from existing
customers. A major component of agents’ earnings were
the “servicing salaries,” which were paid for their service
and collection activities. Expansion was difficult because
agents became reliant upon an existing customer base for
much of their income.
In May 2006, some major changes were implemented at
Liberty National. Newly hired agents are no longer paid a
“servicing salary” and salaries for our field sales management
are being phased out. Much of the money saved is being
spent on generating leads of prospective new customers
and improved commissions on new sales. These changes
will reduce the agents’ reliance on an existing customer
base, eliminate the need for defined territories and make it
easier to expand into new geographic areas.
We expected repercussions from these changes. For the
year, we saw our producing agents decline by 22% to 1,381
with new sales falling 18% during the second half of 2006.
We believe this short-term loss of agents and new sales will
reverse in 2007, with much better prospects for long-term
growth than could have been achieved if these changes had
not been implemented. The short-term decline in premium
revenue will be more than offset by higher underwriting
margin on our in force business.
United American
Gener al Agency
and Br anch Office
Oper ations
In millions, except %
2006
2005
LIFE
Net Sales
First Year Collected Premium
Underwriting Margin:
Premium
Policy Obligations
Acquisition Expenses
Underwriting Margin
In millions, except %
Net Sales
First Year Collected Premium
Underwriting Margin:
Premium
Policy Obligations
Acquisition Expenses
Underwriting Margin
$
4
3
56
24
26
7
$
214
154
773
495
156
123
%*
43%
46%
12%
$
5
5
62
27
28
7
%*
43%
45%
12%
HEALTH
2006
2005
%*
64%
20%
16%
$
155
118
764
491
147
126
%*
64%
19%
16%
* Percent of Premium
United American is our primary health insurance subsidiary
and markets its products through a captive agency force as
well as independent agents. Health insurance premiums
grew 1% for the year to $773 million while health underwriting
margin declined 2% to $123 million.
New health insurance sales declined 6% in the independent
agency distribution system to $55 million, but climbed 66%
in our captive branch office operation to $159 million. Our
branch office agency force grew 39% for the year to 3,015.
While both distribution systems market identical products,
our sales results demonstrate the extremely competitive
nature of independent agency operations.
LETTER TO SHAREHOLDERS TORCHMARK CORPORATION 5
Our primary focus in the health insurance marketplace is
to provide sensible, affordable coverage for the 47 million
Americans who are uninsured. The number of uninsured
continues to grow and we expect the demand for our health
insurance products to continue its robust growth.
Medicare Part D
Prescription Drug
Progr am
In millions, except %
HEALTH
2006
2005
Net Sales
First Year Collected Premium
Underwriting Margin:
Premium
Policy Obligations
Acquisition Expenses
Underwriting Margin
%*
$
278
212
212
163
23
26
%*
77%
11%
12%
$
-
-
-
-
-
-
* Percent of Premium
A new market for Torchmark in 2006 was the Medicare
Prescription Drug Program (Part D). This program provides
government subsidized prescription drug coverage through
private companies.
For 2006, the Medicare Part D program contributed $212
million of premium revenue and $26 million of underwriting
margin to Torchmark’s results. Going forward, we expect
the revenues from this program to be fairly stable with
slightly lower underwriting margin.
Investments
Our investment portfolio is concentrated in investment grade
fixed-maturity assets. Fixed-maturity assets on an amortized
cost basis represented 94% of our invested assets, and will
likely be an increasing percentage of our invested assets as
we are not as comfortable with alternative investments. The
average credit rating quality of the fixed-maturity portfolio
was A- as rated by Standard & Poor’s and A3 as rated by
Moody’s.
Net investment income increased 4% to $628 million. The
interest required on net interest-bearing liabilities increased
11% to $309 million. Therefore, excess investment income
was $319 million. Because of our stock repurchase program,
comparing the yearly change in excess investment income
is misleading. A better comparison is on a per-share basis;
as such, excess investment income increased 3%.
The relatively low long-term rates and the rising short-term
rates in 2006 had a negative impact on excess investment
income. Due to the long-term, fixed-rate nature of our policy
liabilities, we invest primarily in long-term fixed maturities.
Lower long-term rates resulted in us investing money
at around 30 basis points less than yield rate of the total
portfolio, thus restricting the growth of investment income.
In addition, rising short-term rates increased the cost of our
debt, a component of the interest-bearing liabilities.
In the past, we have said that we hope for higher interest
rates. To be more specific, we hope for higher long-term
rates, which would increase the spread earned on the assets
supporting the interest-bearing liabilities, and more important,
increase the yield on the remaining invested assets.
2006 INVESTMENT INCOME
In millions, except percent and per
share amounts
(1) From Invested Assets
Supporting:
Net Interest-Bearing Policy
Liabilities:
Policy Reserves
DAC
Net
Debt
Interest Rate Swaps
(2) From Remaining Invested
Assets
Per Diluted Share
Increase over 2005
TOTAL* REQUIRED EXCESS
$417
(180)
237
73
(1)
0
$309
$3.06
16%
$303
68
0
257
$ 628
$6.21
9%
$66
(5)
1
257
$319
$3.15
3%
* 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.
6 TORCHMARK CORPORATION LETTER TO SHAREHOLDERS
Interest rates have improved slightly since last year and we
hope the upward trend continues. We will continue our
conservative investment philosophy.
We believe that every decision made by the executive
officers of Torchmark is in the best interest of our long-term
shareholders...because we are long-term shareholders. The
majority of our assets are invested in this company. As a
group, our cash compensation is below the average for our
peers while our long-term incentive compensation (primarily
in the form of stock options), is above the average. I believe
this mix of compensation is proper and provides the best
alignment of managements’ interest with those of our
shareholders.
Thank you for allowing me to manage your company.
MARK S. MCANDREW
Chairman and Chief Executive Officer
Share Repurchase
Progr am
During the year, we repurchased 5.6 million shares of our
outstanding stock under our ongoing share repurchase
program at a cost of $320 million. Since the stock repurchase
program began in 1986, we have repurchased 146 million
shares at a total cost of over $3.1 billion. In the past five
years, we have repurchased 27 million shares at a cost of
$1.3 billion.
Obviously, we believe our stock has been undervalued.
We believe it still is, and we expect to continue the stock
repurchase program since it is a means of increasing
shareholder intrinsic value.
Outlook
Going into 2007, I believe Torchmark is in much better shape
than it was a year ago. We reversed the decline in our health
insurance premiums and will see this growth accelerate in
2007 with continued improvement in new health insurance
sales. On the life insurance side, we achieved growth in
sales at American Income for the first time since 2003. I
expect to see continued improvement in 2007.
The acquisition of DMAD provides significant new growth
opportunities in our direct response operation. By the
second half of 2007, I expect to see renewed strong growth
in life insurance sales in this distribution system. Growth in
premiums at Liberty National will be difficult this year, but
underwriting margins should improve. I believe the major
changes we made at Liberty National were necessary and
will benefit the Company in the years to come.
Torchmark cautions you that this Letter to Shareholders may contain forward-looking statements within the meaning of the federal securities law. These prospective
statements reflect management’s current expectations, but are not guarantees of future performance. Accordingly, please refer to Torchmark’s cautionary statement
regarding forward-looking statements, and the business environment in which the Company operates, contained in the Company’s Form 10-K for the period ended
December 31, 2006, found on the following pages and on file with the Securities and Exchange Commission. Torchmark specifically disclaims any obligation to update
or revise any forward-looking statement because of new information, future developments or otherwise.
LETTER TO SHAREHOLDERS TORCHMARK CORPORATION 7
Directors
Directors (from left to right) Lloyd W. Newton, Harold T. McCormick, Robert W. Ingram, Charles E. Adair, Mark S.
McAndrew, Sam R. Perry, Paul J. Zucconi, David L. Boren, Lamar C. Smith, M. Jane Buchan, Joseph L. Lanier, Jr.
CHARLES E. ADAIR
Partner of Cordova Ventures,
Montgomery, Alabama
DAVID L. BOREN
President of the University of Oklahoma,
Norman, Oklahoma
M. JANE BUCHAN
Chief Executive Officer and Managing Director
of Pacific Alternative Asset Company, LLC
Irvine, California
ROBERT W. INGRAM
Senior Associate Dean and Ross-Culverhouse
Professor of Accounting in Culverhouse College
of Commerce,
University of Alabama
Tuscaloosa, Alabama
JOSEPH L. LANIER, JR.
Retired Chairman of the Board of
Dan River, Incorporated
Danville, Virginia
MARK S. MCANDREW
Chairman and Chief Executive Officer
of Torchmark
HAROLD T. MCCORMICK
Chairman and Chief Executive Officer of
Bay Point Yacht and Country Club,
Panama City, Florida; Retired President of
Wheelabrator Technologies, Inc.
LLOYD W. NEWTON
Retired Executive Vice President Military
Engines of Pratt & Whitney; Retired General,
United States Air Force,
Lithia, Florida
SAM R. PERRY
Attorney, Austin, Texas
LAMAR C. SMITH
Chief Executive Officer of
First Command Financial Services, Inc.,
Fort Worth, Texas
PAUL J. ZUCCONI
Retired Partner of KPMG LLP,
Plano, Texas
8 TORCHMARK CORPORATION LETTER TO SHAREHOLDERS
Officers
Executive Officers (from left to right) Mark S. McAndrew, Rosemary Montgomery,
Gary L. Coleman, Larry M. Hutchison, Vern D. Herbel, Glenn D. Williams (not pictured: Tony G. Brill)
MARK S. MCANDREW
Chairman and Chief Executive Officer
ROSEMARY MONTGOMERY
Executive Vice President and
Chief Actuary
TONY G. BRILL
Executive Vice President
GARY L. COLEMAN
Executive Vice President and
Chief Financial Officer
VERN D. HERBEL
Executive Vice President and
Chief Administrative Officer
LARRY M. HUTCHISON
Executive Vice President and
General Counsel
GLENN D. WILLIAMS
Executive Vice President and
Chief Marketing Officer
DANNY H. ALMOND
Vice President and
Chief Accounting Officer
ARVELIA M. BOWIE
Vice President and
Director of Human Resources
MICHAEL J. KLYCE
Vice President and Treasurer
JOYCE L. LANE
Vice President, Investor Relations
CAROL A. MCCOY
Vice President, Associate Counsel
and Secretary
W. MICHAEL PRESSLEY
Vice President and Chief Investment Officer
SPENCER H. STONE
Controller
FRANK M. SVOBODA
Vice President, Director of Tax
DAVID F. THORNDIKE
Vice President
Officers of Subsidiaries
AMERICAN INCOME LIFE
ROGER SMITH
Chief Executive Officer and President
GLOBE LIFE
CHARLES F. HUDSON
President and Chief Executive Officer
LIBERTY NATIONAL LIFE
ANTHONY L. MCWHORTER
Chief Executive Officer
ANDREW W. KING
President and Chief Marketing Officer
UNITED AMERICAN
VERN D. HERBEL
President and Chief Executive Officer
UNITED INVESTORS LIFE
ANTHONY L. MCWHORTER
President and Chief Executive Officer
LETTER TO SHAREHOLDERS TORCHMARK CORPORATION 9
Oper ating Summary
Unaudited and amounts in thousands except per share amounts
TWELVE MONTHS ENDED DECEMBER 31,
2006
2005
% INCREASE
(DECREASE)
Underwriting Income
Life:
Premium
Net policy obligations
Commissions and acquisition expenses
Underwriting margin
Health:
Premium
Net policy obligations
Commissions and acquisition expenses
Underwriting margin
Health - Part D underwriting margin
Annuity underwriting margin
Total underwriting margin
Other income
Insurance administration expenses
Underwriting income
Excess Investment Income
Tax-equivalent net investment income
Required interest on:
Net policy liabilities:
Policy reserves
Deferred acquisition costs
Debt
Total excess investment income
Corporate expenses
Pre-tax operating income
Income tax
Net Operating Income before stock option expense
Stock option expense, net of tax
NET OPERATING INCOME
Operating EPS on a diluted basis
Diluted average shares outstanding
Reconciliation of Net Operating Income to Net Income:
Net operating income
Non operating items, net of tax:
Gain on sale of agency buildings
Realized gains/(losses)
Realized gains/(losses) - interest rate swaps
Tax settlements
Net proceeds (costs) from legal settlement
Retiring executive option term extension
Net Income
EPS on a diluted basis
4%
4%
1%
2%
5%
9%
4%
(2%)
5%
3%
4%
9%
$1,524,267
(641,458)
(485,365)
397,444
1,025,150
(645,898)
(198,121)
181,131
25,563
11,915
616,053
4,024
(155,331)
464,746
$1,468,288
(623,788)
(462,852)
381,648
1,014,857
(647,326)
(190,352)
177,179
0
12,580
571,407
2,366
(147,681)
426,092
628,292
602,708
(417,293)
179,955
(72,191)
318,763
(7,862)
775,647
(267,017)
$508,630
(4,274)
$504,356
$4.99
101,112
(393,276)
167,987
(53,181)
324,238
(9,660)
740,670
(255,165)
$485,505
0
$485,505
$4.59
105,751
$504,356
$485,505
2,816
(4,617)
(2,956)
11,607
7,425
0
$518,631
$5.13
0
608
(5,388)
15,989
(955)
(369)
$495,390
$4.68
The Operating Summary has been prepared in the manner Torchmark management uses to evaluate the operating results of the company. It differs from the Consolidated
Statement of Operations found in the accompanying SEC Form 10-K.
10 TORCHMARK CORPORATION OPERATING SUMMARY
Condensed Balance Sheet
Unaudited and amounts in thousands
AT DECEMBER 31,
2006
2005
Assets:
Fixed maturities at amortized cost *
Cash and short-term investments
Mortgages and real estate
Other investments
Deferred acquisition costs *
Goodwill
Other assets
Separate account assets
Total assets *
Liabilities and shareholders’ equity:
Policy liabilities
Accrued income taxes *
Short-term debt
Long-term debt and trust preferred securities
Other liabilities
Separate account liabilities
Shareholders’ equity, excluding FAS 115 *
Total liabilities and shareholders’ equity
Actual shares outstanding:
Basic
Diluted
Book value (shareholders’ equity, excluding FAS 115) per diluted share
Net operating income as a return on average equity, excluding FAS 115
Average equity, excluding FAS 115
Debt to capital ratio, excluding FAS 115
$
$
$
$
$
$
8,897,401
173,387
28,135
391,682
2,966,525
378,436
427,467
1,498,622
14,761,655
7,878,479
934,073
169,736
721,248
242,459
1,498,622
3,317,038
14,761,655
98,115
99,755
33.25
15.8%
3,188,688
21.2%
*Reconciliation of Torchmark management’s view of selected financial measures to comparable GAAP measures:
3,317,038
Shareholders’ equity, excluding FAS 115
$
Effect of FAS 115:
Increase fixed maturities
Decrease deferred acquisition costs
Increase accrued income taxes
Shareholders’ equity
Other comparable GAAP measures:
Fixed maturities
Deferred acquisition costs
Total assets
Shareholders’ equity
Accrued income taxes
Book value (shareholders’ equity) per diluted share
Net income as a return on average equity
Average equity
Debt to capital ratio
229,383
(10,683)
(76,545)
3,459,193
9,126,784
2,955,842
14,980,355
3,459,193
1,010,618
34.68
15.6%
3,321,667
20.5%
$
$
$
$
8,411,635
137,607
43,457
392,989
2,791,461
378,436
650,977
1,560,391
$ 14,366,953
$
7,439,810
870,365
381,505
507,902
435,479
1,560,391
3,171,501
$ 14,366,953
103,569
104,303
30.41
15.9%
3,045,446
21.9%
$
$
$
3,171,501
425,007
(23,057)
(140,683)
3,432,768
8,836,642
2,768,404
14,768,903
3,432,768
1,011,048
32.91
14.6%
3,389,878
20.6%
$
$
$
This Condensed Balance Sheet has been prepared in the manner Torchmark management, industry analysts, rating agencies and financial institutions use to evaluate the
financial position of the company. It differs from the Consolidated Balance Sheets found in the accompanying SEC Form 10-K.
CONDENSED BALANCE SHEET TORCHMARK CORPORATION 11
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
OR
‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number: 001-08052
TORCHMARK CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
3700 South Stonebridge Drive, McKinney, TX
(Address of principal executive offices)
63-0780404
(I.R.S. Employer
Identification No.)
75070
(Zip Code)
972-569-4000
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $1.00 par value per share
7.10% Trust Originated Preferred Securities
CUSIP
891927104
89102W208
Name of each exchange on
which registered
New York Stock Exchange
The International Stock Exchange, London, England
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes È No ‘
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes ‘ No È
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 reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes È No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. ‘
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition
of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Accelerated filer ‘
Large accelerated filer È
Non-accelerated filer ‘
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ‘ No È
As of June 30, 2006, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was
$6,006,777,612 based on the closing sale price as reported on the New York Stock Exchange.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Common Stock, $1.00 par value per share
Outstanding at January 31, 2007
97,986,486 shares
DOCUMENTS INCORPORATED BY REFERENCE
Document
Proxy Statement for the Annual Meeting of Stockholders to
be held April 26, 2007 (Proxy Statement)
Parts Into Which Incorporated
Part III
TORCHMARK CORPORATION
INDEX
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1.A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1.B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . .
11
Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7.A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . .
Item 8.
Item 9.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9.A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9.B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 10. Directors, Executive Officers, and Corporate Governance . . . . . . . . . . . . .
Item 11.
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships
and Director
Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
and Related Transactions
Item 14.
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
1
5
8
9
9
11
13
14
48
49
100
100
100
103
103
103
103
103
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
PART I.
PART II.
PART III.
PART IV.
Item 15.
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . .
104
PART 1
Item 1. Business
Torchmark Corporation (Torchmark) is an insurance holding company incorporated in Delaware in
1979. Its primary subsidiaries are American Income Life Insurance Company (American Income), Liberty
National Life Insurance Company (Liberty), Globe Life And Accident Insurance Company (Globe), United
American Insurance Company (United American), and United Investors Life Insurance Company (United
Investors).
Torchmark’s website is: www.torchmarkcorp.com. Torchmark makes available free of charge through
its website, its annual report on Form 10-K, its quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports as soon as reasonably practicable after they have been
electronically filed with or furnished to the Securities and Exchange Commission.
The following table presents Torchmark’s business by primary marketing distribution method.
Primary
Distribution Method
Company
Direct Response
Globe Life And Accident
Insurance Company
Oklahoma City, Oklahoma
Liberty National
Exclusive Agency
American Income
Exclusive Agency
United Investors
Agency
Military
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
Products and Target Markets
Distribution
Individual life and supplemental health
insurance including juvenile and senior life
coverage, Medicare Supplement, and
Medicare Part D marketed to middle-
income Americans.
Direct response, mail,
television, magazine;
nationwide.
Individual life and supplemental health
insurance marketed to middle-income
families.
1,381 producing agents; 109
district offices primarily in
the Southeastern U.S.
Individual life and supplemental health
insurance marketed to union and credit
union members.
Individual life insurance and annuities
marketed to middle-income Americans.
2,353 agents in the U.S.,
Canada, and New Zealand.
Independent Agency.
Individual life insurance marketed to middle
and upper income families, including active
and retired military officers.
Independent Agency
through career agents
nationwide.
United American
Independent Agency
and Branch Office
Agency
United American
Insurance Company
McKinney, Texas
Limited-benefit supplemental health
coverage to people under age 65, Medicare
Supplement and Medicare Part D coverage
to Medicare beneficiaries and, to a lesser
extent, life insurance.
3,491 independent
producing agents in the U.S.
and Canada; 3,015
exclusive producing agents
in 125 branch offices.
Additional information concerning industry segments may be found in Management’s Discussion and
Analysis and in Note 13—Business Segments in the Notes to the Consolidated Financial Statements.
1
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.
Whole life:
(Amounts in thousands)
Annualized Premium in Force
2006
2005
2004
Traditional . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 934,553 $ 911,444 $ 848,405
162,694
Interest-sensitive . . . . . . . . . . . . . . . . . . . . . . .
473,061
Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39,175
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
128,409
492,409
45,373
123,802
506,921
50,211
$1,615,487 $1,577,635 $1,523,335
The distribution methods for life insurance products include sales by direct response, exclusive
agents and independent agents. These methods are described in more depth in the Distribution Method
chart earlier in this report. The following table presents life annualized premium in force by distribution
method.
(Amounts in thousands)
Annualized Premium in Force
2006
2005
2004
Direct response . . . . . . . . . . . . . . . . . . . . . . . . . . $ 496,772 $ 472,733 $ 442,997
Exclusive Agents:
American Income . . . . . . . . . . . . . . . . . . . . . .
Liberty National . . . . . . . . . . . . . . . . . . . . . . . .
United American . . . . . . . . . . . . . . . . . . . . . . .
Independent Agents:
United American . . . . . . . . . . . . . . . . . . . . . . .
Military . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
430,598
311,975
16,710
39,613
206,858
112,961
403,333
318,435
17,315
44,819
205,485
115,515
376,595
317,897
18,829
50,975
198,601
117,441
$1,615,487 $1,577,635 $1,523,335
Health Insurance
Torchmark offers supplemental
limited-benefit health insurance products that
include hospital/
surgical plans, cancer, and accident plans sold to individuals under age 65. These policies are designed
to supplement health coverage that applicants already own or to provide affordable,
limited-benefit
coverage to individuals without access to more comprehensive coverage. Medicare Supplements are also
offered to enrollees in the traditional fee-for-service Medicare program. All Medicare Supplement plans
are standardized by federal regulation and are designed to pay deductibles and co-payments not paid by
Medicare. We also began offering Medicare Part D prescription drug insurance in 2006.
Health plans are offered through the Company’s exclusive and independent agents and direct
response, with the United American agencies being the leading writers in the three-year period ended
December 31, 2006, selling predominantly hospital/surgical plans. As shown in the charts below, net
sales of limited-benefit plans exceeded net sales of Medicare Supplements in all years of the three-year-
period ended December 31, 2006, but Medicare Supplement premium in force exceeded that of limited-
benefit plans during each year of the same period. These data reflect the change in product mix being
sold from predominantly Medicare Supplements in prior years to predominantly limited-benefit plans in the
more current periods.
2
The following table presents health insurance net sales information for the three years ended
December 31, 2006 by product category.
Limited-benefit plans . . . . . . . . . . . . . . .
. . . . . . . . . . . . . .
Medicare Supplement
Medicare Part D . . . . . . . . . . . . . . . . . . .
2006
Amount
$209,258
33,980
278,023
% of
Total
40
7
53
(Amounts in thousands)
Net Sales
2005
Amount
$146,193
39,328
-0-
% of
Total
79
21
-0-
2004
Amount
$147,290
52,624
-0-
% of
Total
74
26
-0-
Total Health . . . . . . . . . . . . . . . . . . .
$521,261
100
$185,521
100
$199,914
100
The following table presents supplemental health annualized premium information for the three years
ended December 31, 2006 by product category.
(Amounts in thousands)
Annualized Premium in Force
2006
2005
2004
Amount
$ 508,112
550,750
234,219
% of
Total
39
43
18
Amount
$ 434,742
591,668
-0-
% of
Total
42
58
-0-
Amount
$ 414,223
642,228
-0-
% of
Total
39
61
-0-
Limited-benefit plans . . . . . . . . . . .
Medicare Supplement . . . . . . . . . .
Medicare Part D . . . . . . . . . . . . . .
Total Health . . . . . . . . . . . . . .
$1,293,081
100
$1,026,410
100
$1,056,451
100
The number of individual health policies in force (excluding Medicare Part D) was 1.60 million, 1.60
million, and 1.64 million at December 31, 2006, 2005, and 2004, respectively. Medicare Part D enrollees
at December 31, 2006 were 189 thousand.
The following table presents supplemental health annualized premium in force for the three years
ended December 31, 2006 by marketing (distribution) method.
Direct response . . . . . . . . . . . . . . . . . . . . . . . . . . $
Exclusive agents:
(Amounts in thousands)
Annualized Premium in Force
2006
2005
2004
41,996 $
39,446 $
36,550
United American . . . . . . . . . . . . . . . . . . . . . . .
Liberty National . . . . . . . . . . . . . . . . . . . . . . . .
American Income . . . . . . . . . . . . . . . . . . . . . .
385,505
148,817
63,810
337,175
145,341
60,747
324,467
165,445
58,550
Independent agents:
United American . . . . . . . . . . . . . . . . . . . . . . .
418,734
443,701
471,439
Medicare Part D . . . . . . . . . . . . . . . . . . . . . . .
1,058,862
234,219
1,026,410
-0-
1,056,451
-0-
$1,293,081 $1,026,410 $1,056,451
Annuities
Annuity products offered include single-premium deferred annuities,
flexible-premium deferred
annuities, and variable annuities. In recent years Torchmark has deemphasized the marketing of annuity
products, and annuities in 2006 comprise less than 1% of premium income and less than 2% of insurance
underwriting margin.
3
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 Company experience
and on projected investment earnings. Revenues for individual life and health insurance products are
primarily derived from premium income, and, to a lesser extent, through policy charges to the policyholder
account values on certain individual life products. Profitability is affected to the extent actual experience
deviates from the assumptions made in pricing and to the extent investment income varies from 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 policyholder 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.
Reserves
The life insurance policy reserves reflected in Torchmark’s financial statements as future policy
benefits are calculated based on generally accepted accounting principles (GAAP). These reserves, with
premiums to be received in the future and the interest thereon compounded annually at assumed rates,
must be sufficient to cover policy and contract obligations as they mature. Generally, the mortality and
persistency assumptions used in the calculations of reserves are based on company experience. Similar
reserves are held on most of the health policies written by Torchmark’s insurance subsidiaries, since
these policies generally are issued on a guaranteed-renewable basis. A list of the assumptions used in
the calculation of Torchmark’s reserves are reported in the financial statements (See Note 5—Future
Policy Benefit Reserves in the Notes to the Consolidated Financial Statements). Reserves for annuity
products and certain life products consist of the policyholders’ account values and are increased by
policyholder deposits and interest credited and are decreased by policy charges and benefit payments.
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 94% of total investments at December 31, 2006. (See Note 3—Investments in the Notes to
the Consolidated Financial Statements and Management’s Discussion and Analysis.)
Competition
Torchmark competes with other insurance carriers through policyholder service, price, product
design, and sales efforts. While there are insurance companies competing with Torchmark, no individual
company dominates any of Torchmark’s life or health markets.
Torchmark’s health insurance products compete with, in addition to the products of other health
insurance carriers, health maintenance organizations, preferred provider organizations, and other health
care-related institutions which provide medical benefits based on contractual agreements.
4
Management believes Torchmark companies operate at lower policy acquisition and administrative
expense levels than peer companies. This allows Torchmark to have competitive rates while maintaining
higher underwriting margins.
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. They are also
required to file detailed annual reports with supervisory agencies, and records of their business are
Insurance
subject
Commissioners (NAIC),
the
supervisory agencies.
insurance companies are examined periodically by one or more of
to examination at any time. Under
the National Association of
the rules of
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 Torchmark insurance subsidiaries are adequately
capitalized under the risk based capital formula.
Guaranty Assessments. State guaranty laws provide for assessments from insurance companies into
a fund which is used,
failure or insolvency of an insurance company, to fulfill the
obligations of that company to its policyholders. The amount which a company is assessed is determined
according to the extent of these unsatisfied obligations in each state. Assessments are recoverable to a
great extent as offsets against state premium taxes.
in the event of
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, Indiana,
Missouri, New York, and Texas.
Insurance holding company system statutes and regulations impose various limitations on
for the payment of certain
investments in subsidiaries, and may require prior regulatory approval
dividends and other distributions.
Personnel
At the end of 2006, Torchmark had 2,495 employees and 1,263 licensed employees under sales
contracts.
Item 1A. Risk Factors
Product Marketplace and Operational Risks:
The insurance industry is a mature, regulated industry, populated by many firms. Torchmark
operates in the life and health insurance sections of the insurance industry, each with its own set of risks.
Life Insurance Marketplace Risk:
The life insurance industry is highly competitive and could limit Torchmark’s ability to gain or
maintain market share. Competition by product price and for market share is generally strong in the
life insurance industry, but is less so in Torchmark’s life insurance niche markets. In recent years, most
life insurers have targeted the smaller, highly competitive, higher-income market by offering asset
accumulation products. Torchmark’s market has remained the middle income market, offering
individually-sold protection life insurance, which is less competitive because the market is larger with
fewer competing insurers and with less price sensitivity than the higher income, asset accumulation
marketplace.
5
Torchmark’s life insurance markets are subject to risks of general economic conditions.
Because Torchmark serves the middle income market for individual protection life insurance, competition
is primarily from alternative uses of the customer’s disposable income. In times of economic downturns
that affect employment levels, potential customers may be less likely to buy policies and policyholders
may fail to pay premiums.
Torchmark’s life products are sold in selected niche markets. The Company is at risk should
any of these markets diminish. Torchmark has two life distribution channels that focus on distinct
market niches: labor union members and sales via direct response distribution. The contraction of the size
of either market could adversely affect sales. In recent years, labor union membership has grown little
and has declined as a percentage of employed workers; however, Torchmark’s union-member
policyholders are still a small portion of total union membership, indicating that sales growth can continue
for some time without growth in total union membership. Most of the Company’s direct response business
is either through direct mail solicitation or inserted into other mail media for distribution. Significant
adverse changes in postage cost or the acceptance of unsolicited marketing mail by consumers could
negatively affect this business.
The development and maintenance of Torchmark’s various distribution systems are critical to
growth in product sales. Because the Company’s life insurance sales are primarily made to
individuals, rather than groups, and the face amounts sold are lower than that of policies sold in the
higher income market, the development, maintenance and retention of adequate numbers of producing
agents and direct response systems to support growth of sales in this market are critical. For agents,
adequate compensation that is competitive with other employment opportunities, and that also motivates
them to increase sales is very important. In direct response, continuous development of new offerings
and cost efficiency are key. Less than optimum execution of these strategies will in time lead to less than
optimum growth in sales and ultimately in profits.
Health Insurance marketplace risk:
Congress could make changes to the Medicare program which could impact Torchmark’s
Medicare Supplement and Medicare Part D prescription drug insurance business. Medicare
Supplement insurance constitutes a significant portion of Torchmark’s in force health insurance business.
Because of increasing medical cost inflation and concerns about the solvency of the Medicare program, it
is possible that changes will be made to the Medicare program by Congress in the future. These changes
could have either a positive or negative effect on that business.
In 2006, Congress first provided
prescription drug coverage (Medicare Part D) to Medicare beneficiaries. Changes are likely to be made to
the program over the next several years as the acceptance and costs of the program become clear.
Some of these changes might adversely affect Torchmark’s ability to profit from its sale or the level of risk
involved.
Torchmark’s Medicare Supplement business could be negatively affected by alternative
healthcare providers. The Medicare Supplement business is impacted by market trends in the senior-
aged health care industry that provide alternatives to traditional Medicare, such as health maintenance
organizations (HMOs) and other managed care or private plans. The success of
these alternative
businesses could negatively affect the sales and premium growth of traditional Medicare supplement
insurance.
Torchmark’s Medicare Supplement business is subject to intense competition primarily on
the basis of price which could restrict future sales.
In recent years, price competition in the
traditional Medicare supplement market has been significant, characterized by some insurers who have
been willing to earn very small profit margins or to under price new sales in order to gain market share.
Torchmark believes these practices are not in the best interest of the Company or consumers and has
elected not to compete on those terms, which has negatively affected sales. Should these industry
practices continue, it is likely that Torchmark’s sales of this health product will remain depressed.
Torchmark’s health business is at risk in the event of government-sponsored under-age-65
health insurance. Currently, Torchmark’s leading health sales are from limited benefit products sold to
people under age 65. These products are in demand when buyers are either self employed or their
6
employers offer limited or no health insurance to employees. If in the future the government offers
comprehensive health care to people under age 65, demand for this product would likely decline. Given
the high cost and political challenges of such a program, Torchmark believes this is a low-level risk in the
foreseeable future.
General Operating Risk:
Changes in mortality, economic conditions, or other market conditions could significantly
affect our operation and profitability. The Company’s insurance contracts are affected by the levels
of mortality, morbidity, persistency, and healthcare utilization that we experience. The resulting levels that
occur may differ significantly from the levels assumed when premium rates were first set. Significant
variations in these levels could negatively affect profit margins and income. However, the Company’s
actuaries continually test expected to actual results.
Torchmark’s ability to pay dividends or service any of its debt or preferred securities is
limited by the amounts its subsidiaries are able to pay to the holding company. Torchmark’s
insurance company subsidiaries, its principal sources of cash flow, periodically declare and distribute
dividends on their common and preferred stock held by Torchmark, the holding company. Torchmark’s
ability to pay dividends on its common stock, principal and interest on any debt security, or dividends on
any preferred stock security is affected by the ability of its subsidiaries to pay the holding company these
dividends. The insurance company subsidiaries are subject to various state statutory and regulatory
restrictions, applicable to insurance companies, that limit the amount of cash dividends, loans, and
advances that those subsidiaries may pay to the holding company. For example, under certain state
insurance laws, an insurance company generally may pay dividends only out of its unassigned surplus as
reflected in its statutory financial statements filed in that state. Additionally, dividends paid by insurance
subsidiaries are generally limited to the greater of statutory net gain from operations, excluding capital
gains and losses, or 10% of statutory surplus without regulatory approval.
Torchmark can give no assurance that more stringent restrictions will not be adopted from time to
time by states in which its insurance subsidiaries are domiciled, which could, under certain
circumstances, significantly reduce dividends or other amounts paid to Torchmark by its subsidiaries.
Additionally, the inability to obtain approval of the previously mentioned premium rate increases in a
timely manner from state insurance regulatory authorities could adversely impact the profitability, and
thus the ability of Torchmark’s insurance subsidiaries to declare and distribute dividends.
A ratings downgrade could negatively affect Torchmark’s ability to compete. Ratings are an
important factor in Torchmark’s competitive position. Rating organizations periodically review the financial
performance and condition of insurers, including the Company’s insurance subsidiaries. While ratings are
less important in the middle-income market than in markets focused on higher incomes or the group
market, a downgrade in the ratings of Torchmark’s insurance subsidiaries could negatively affect the
ability of the subsidiaries to market their products.
Rating organizations assign ratings based upon several factors. While most of the considered factors
relate to the rated company, some of the factors relate to general economic conditions and circumstances
outside of the Company’s control.
Investment Risk:
these risks include interest rate levels,
The Company’s investments are subject to market risks. Torchmark’s invested assets are
subject to the customary risks of defaults, downgrades, and changes in market values. Factors that may
affect
financial market performance, and general economic
conditions, as well as particular circumstances affecting the businesses or industries of individual issuers.
Some of these factors could result in write-downs of individual
investments. Significant increases in
interest rates could cause a material temporary decline in the fair value of the fixed investment portfolio,
reflecting unrealized fair value losses. This risk is mitigated by Torchmark’s operating strategy to
generally hold investments to maturity recognizing the long-term nature of the life policy reserve liabilities
supported by investments and by Torchmark’s strong operating cash flow that greatly diminishes the need
to liquidate investments prior to maturity.
7
A decline in interest rates could negatively affect income. Declines in interest rates expose
insurance companies to the risk of not earning anticipated spreads between the interest rate earned on
investments and the rates credited to the net policy liabilities. While Torchmark attempts to manage its
investments to preserve the excess investment income spread, the Company can give no assurance that
a significant and persistent decline in interest rates will not materially affect such spreads.
Significant decreases in interest rates could result in calls by issuers of investments, where such
features are available to issuers. These calls could result in a decline in the Company’s investment
income as reinvestment of the proceeds would be at the prevailing lower rates.
Regulatory risk:
Regulatory changes could adversely affect our business.
Insurance companies are subject to
government regulation in each of the states in which they conduct business. State agencies have broad
administrative power over many aspects of the insurance business, which may include premium rates,
licensing agents, policy forms, capital adequacy, and permitted
marketing practices, advertising,
investments. Government regulators are concerned primarily with the protection of policyholders rather
than our shareholders. Insurance laws, regulations, and policies currently affecting Torchmark and its
subsidiaries may change at any time, possibly having an adverse effect on its business. Furthermore, the
Company cannot predict the timing or form of any future regulatory initiatives.
Changes in taxation could negatively affect our income. Changes in the way the insurance
industry is taxed or increases in tax rates could increase the Company’s tax burden and negatively affect
its income.
Litigation risk:
Litigation could result in substantial judgments against the Company or its subsidiaries. A
number of civil jury verdicts have been returned against insurers in the jurisdictions in which Torchmark
failure to properly
does business involving the insurers’ sales practices, alleged agent misconduct,
supervise agents, and other matters. These lawsuits have resulted in the award of substantial judgments
against insurers that are disproportionate to the actual damages, including material amounts of punitive
damages. In some states, including Alabama, juries have substantial discretion in awarding punitive
damages. This discretion creates the potential for unpredictable material adverse judgments in any given
punitive damages suit. Torchmark, like other insurers, is involved in this type of litigation from time to time
in the ordinary course of business. The outcome of any such litigation cannot be predicted with certainty.
Natural disaster risk:
Torchmark’s business is subject
to risk of a catastrophic event. The marketplaces of
Torchmark’s major subsidiaries are national in scope. Because the Company’s insurance policies in force
are relatively low-face amounts issued to large numbers of policyholders, the likelihood that a large
portion of the Company’s policyholder base would be affected by a natural disaster is not likely. As a
result, it is unlikely that even a major natural disaster covering hundreds of miles would disrupt the
marketing and premium collection in more than a small portion of Torchmark’s markets. In addition, the
administration of the four leading subsidiaries is conducted in three distant locations that allow the
company to take advantage of those distances to plan back-up administrative support for any one of the
subsidiaries in the event of disaster. The Company also has outside contracts for off-site backup
information systems and record keeping in the event of a disaster.
Item 1B. Unresolved Staff Comments
As of December 31, 2006, Torchmark had no unresolved staff comments.
8
Item 2. Properties
Torchmark, through its subsidiaries, owns or leases buildings that are used in the normal course of
business. United American owns and occupies a 140,000 square foot facility located in McKinney, Texas
(a north Dallas suburb). In 2006, Torchmark’s headquarters were relocated from Birmingham, Alabama to
McKinney. In conjunction with this move, we are constructing a 150,000 square foot building adjacent to
the United American building. The expected completion date of the new building is December 27, 2007.
Liberty owns a 487,000 square foot building in Birmingham, Alabama which currently serves as
Liberty’s and United Investors’ home office. Approximately 134,000 square feet of this building is leased
or available for lease to unrelated tenants by Liberty. Liberty also operates from 30 company-owned
district offices used for agency sales personnel. Liberty is currently in the process of selling its remaining
company-owned office buildings, opting instead to operate from leased facilities. In 2006, a total of 21
buildings were sold.
Globe owns a 300,000 square foot office building in Oklahoma City, Oklahoma 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 in Oklahoma City. Further, Globe owns a
112,000 square foot facility located in Oklahoma City which houses the Globe direct response operation.
American Income owns and is the sole occupant of an office building located in Waco, Texas. The
building is a two-story structure containing approximately 72,000 square feet of usable floor space.
American Income also owns a 43,000 square foot facility located in Waco which houses the American
Income direct response operation.
Liberty and United American also lease district office space for their agency sales personnel.
Item 3. Legal Proceedings
Torchmark and its subsidiaries, in common with the insurance industry in general, are subject to
litigation, including claims involving 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. Based upon information presently
available, and in light of legal and other factual defenses available to Torchmark and its subsidiaries,
management does not believe that such litigation will have a material adverse effect on Torchmark’s
financial condition, future operating results or liquidity; however, assessing the eventual outcome of
litigation necessarily involves forward-looking speculation as to judgments to be made by judges, juries
and appellate courts in the future. This bespeaks caution, particularly in states with reputations for high
punitive damage verdicts such as Alabama and Mississippi.
Many of
these lawsuits involve claims for punitive damages in state courts of Alabama and
Mississippi. Torchmark’s management recognizes that large punitive damage awards continue to occur
bearing little or no relation to actual damages awarded by juries in jurisdictions in which Torchmark has
substantial business, particularly Alabama and Mississippi, creating the potential
for unpredictable
material adverse judgments in any given punitive damage suit. As of December 31, 2006, Liberty was a
party to approximately 42 active lawsuits (which included no employment-related cases and excluded
interpleaders), 29 of which were Alabama proceedings and 1 of which was a Mississippi proceeding in
which punitive damages were sought.
As previously reported in Forms 10-K and 10-Q, Liberty National Life Insurance Company and
Torchmark Corporation were parties to purported class action litigation filed in the Circuit Court of
Choctaw County, Alabama on behalf of all persons who currently or in the past were insured under
9
Liberty cancer policies which were no longer being marketed, regardless of whether the policies remained
in force or lapsed (Roberts v. Liberty National Life Insurance Company, Case No. CV-2002-009-B). These
cases were based on allegations of breach of contract in the implementation of premium rate increases,
misrepresentation regarding the premium rate increases, fraud and suppression concerning the closed
block of business and unjust enrichment. On December 30, 2003, the Alabama Supreme Court issued an
opinion granting Liberty’s and Torchmark’s petition for a writ of mandamus, concluding that the Choctaw
Circuit Court did not have subject matter jurisdiction and ordering that Circuit Court to dismiss the action.
The plaintiffs then filed their purported class action litigation against Liberty and Torchmark in the Circuit
Court of Barbour County, Alabama on December 30, 2003 (Roberts v. Liberty National Life Insurance
Company, Civil Action No. CV-03-0137). On April 16, 2004 the parties filed a written Stipulation of
Agreement of Compromise and Settlement with the Barbour County, Alabama Circuit Court seeking
potential settlement of the Roberts case. A fairness hearing on the potential settlement was held by the
Barbour County Circuit Court on July 15, 2004. After receipt of briefs on certain issues and submission of
materials relating to objections to the proposed settlement to the Court-appointed independent special
master, the Court reconvened the previously-continued fairness hearing on September 23, 2004. After
the September 23, 2004 hearing, the Court, after hearing from the objectors to the potential settlement,
ordered the appointment of an independent actuary to report back to the Court on certain issues. The
report of the independent actuary was subsequently furnished to the special master and the Court on a
timely basis.
On November 22, 2004, the Court entered an order and final judgment in Roberts whereby the Court
consolidated Roberts with Robertson v. Liberty National Life Insurance Company, CV-92-021 (previously
reported in Forms 10-K and 10-Q) for purposes of the Roberts Stipulation of Settlement and certified the
Roberts class as a new subclass of the class previously certified by that Court in Robertson. The Court
approved the Stipulation and Settlement and ordered and enjoined Liberty to perform its obligations under
the Stipulation. Subject
to the Stipulation, Liberty and Torchmark were permanently enjoined from
instituting, engaging or participating in, maintaining, authorizing or continuing premium rate increases
inconsistent with the Stipulation; failing to implement temporary premium waivers in accordance with the
Stipulation; failing to implement the new benefits procedure described in the Stipulation; and failing to
implement the special schedules and special provisions of the Stipulation for subclass members who
have cancer and are receiving benefits and for subclass members who have no other cancer or medical
insurance and/or are not covered by Medicare. The Court dismissed plaintiffs’ claims, released the
defendants, enjoined Roberts subclass members from any further prosecution of released claims and
retained continuing jurisdiction of all matters relating to the Roberts settlement. In an order issued
February 1, 2005, the Court denied the objectors’ motion to alter, amend or vacate its earlier final
judgment on class settlement and certification. The companies proceeded to implement the settlement
terms. On March 10, 2005, the Roberts plaintiffs filed notice of appeal to the Alabama Supreme Court.
In an opinion issued on September 29, 2006, the Alabama Supreme Court voided the Barbour
County Circuit Court’s final judgment and dismissed the Roberts appeal. The Supreme Court held that the
Barbour County Court lacked subject-matter jurisdiction in Roberts to certify the Roberts class as a
subclass of the Robertson class and to enter a final judgment approving the settlement since Roberts was
filed as an independent class action collaterally attacking Robertson rather than being filed in Robertson
under the Barbour County Court’s reserved continuing jurisdiction over that case. On October 23, 2006,
Liberty filed a petition with the Barbour County Circuit Court under its continuing jurisdiction in Robertson
for clarification, or in the alternative, to amend the Robertson final judgment. Liberty seeks an order from
the Circuit Court declaring that Liberty pay benefits to Robertson class members based upon the amounts
accepted by providers in full payment of charges. A hearing will be held on Liberty’s petition on March 13,
2007.
Liberty National Life Insurance Company and an unrelated Glendale, California mortuary were
named as defendants in a purported class action litigation filed December 8, 2005 in the Superior Court
for Los Angeles County, California (Gibson v. Liberty National Life Insurance Company, Case No.
BC344178) on behalf of California holders of certain funeral services insurance policies. The plaintiff in
Gibson asserted claims for breach of contractual duty to pay a covered claim under a funeral services
insurance policy, breach of the implied obligation of good faith and fair dealing by unreasonably failing to
fraud, negligent misrepresentation, and unfair
pay and/or delaying payments of
business practices in violation of California Business and Professions Code Section 17000 et seq. The
insurance benefits,
10
plaintiff was seeking unspecified compensatory and general damages, exemplary damages, injunctive
and declaratory relief and attorneys’ fees and costs. In October 2006, this matter was confidentially
settled for a nominal amount.
On January 10, 2007, purported class action litigation was filed against Globe Life And Accident
Insurance Company and additional unaffiliated defendants in the U.S. District Court for the Eastern
District of Texas (Taylor v. Texas Farm Bureau Mutual Insurance Company, Case No. 2-07-CV-014).
Plaintiffs allege violations of the Driver Privacy Protection Act (DPPA) in Globe’s marketing activities.
DPPA is federal
legislation restricting the ability to obtain and use driver’s license and motor vehicle
registration title information maintained by each state. Initially, DPPA allowed use of such personal
information for marketing activities so long as the states provided individuals the opportunity to prohibit
disclosure of their information. DPPA was amended effective June 1, 2000 to provide that using or
obtaining personal information from motor vehicle records for marketing purposes is permitted only if the
state involved obtained the express consent (“opt-in”) of the person whose data is being released.
Plaintiffs, all residents and holders of Texas drivers licenses, allege that Globe wrongfully obtained,
possessed and/or used motor vehicle record information from the Texas Department of Public Safety
after the June 1, 2000 effective date of the “opt-in” amendment to the DPPA. They seek, in a jury trial,
liquidated damages as provided in the DPPA for each purported class member in the amount of $2,500
for each use of the personal information, punitive damages, the destruction of any personal information
determined to be illegally obtained from motor vehicle records and other appropriate equitable 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 2006.
Item 5. Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II
(a) Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters
The principal market in which Torchmark’s common stock is traded is the New York Stock Exchange.
There were 5,360 shareholders of record on December 31, 2006, excluding shareholder accounts held in
nominee form. Information concerning restrictions on the ability of Torchmark’s subsidiaries to transfer
funds to Torchmark in the form of cash dividends is set forth in Note 11—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:
Quarter
1
2
3
4
Year-end closing price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $63.76
Quarter
1
2
3
4
Year-end closing price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $55.60
11
2006
Market Price
High
Low
$57.79 $54.25
56.43
59.75
61.68
61.01
63.42
64.23
Dividends
Per Share
$.11
.11
.13
.13
2005
Market Price
High
Low
$56.78 $50.82
50.42
50.90
51.80
54.77
53.18
55.88
Dividends
Per Share
$.11
.11
.11
.11
(c) Purchases of Certain Equity Securities by the Issuer and Others for the Fourth Quarter 2006
Period
(a) Total Number
of Shares
Purchased
(b) Average
Price Paid
Per Share
(c) Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
(d) Maximum Number
of Shares (or
Approximate Dollar
Amount) that May
Yet Be Purchased
Under the Plans or
Programs
October 1-31, 2006 . . . . . . . . . . . . . .
November 1-30, 2006 . . . . . . . . . . . .
December 1-31, 2006 . . . . . . . . . . . .
199,000
1,108
62,175
$62.63
63.83
63.88
199,000
1,108
62,175
On July 27, 2006, Torchmark’s Board reaffirmed its continued authorization of the Company’s stock
repurchase program in amounts and with timing that management,
in consultation with the Board,
determined to be in the best interest of the Company. The program has no defined expiration date or
maximum shares to be purchased.
e) Performance Graph
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Torchmark Corporation, the S & P 500 Index,
and the S & P Life & Health Insurance Index
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
12/01
12/02
12/03
12/04
12/05
12/06
Torchmark Corporation
S & P 500
S & P Life & Health Insurance
*
$100 invested on 12/31/01 in stock or index-including reinvestment of dividends. Fiscal year ending December 31.
Copyright © 2006, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.
www.researchdatagroup.com/S&P.htm
The line graph shown above compares Torchmark’s cumulative total return on its common stock with
the cumulative total returns of the Standard and Poor’s 500 Stock Index (S&P 500) and the Standard and
Poor’s Life & Health Insurance Index (S&P Life & Health Insurance). Torchmark is one of the companies
whose stock is included within both the S&P 500 and the S&P Life & Health Insurance Index.
12
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,
2006
2005
2004
2003
2002
Premium revenue:
Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,524,267 $ 1,468,288 $ 1,395,490 $ 1,310,373 $ 1,220,688
1,019,120
Health . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39,225
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,279,033
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
518,978
Net investment income . . . . . . . . . . . . . . . .
(38,722)
Realized investment gains (losses) . . . . . .
Total revenue . . . . . . . . . . . . . . . . . . . . . . .
2,761,409
Net income before cumulative effect of
1,237,532
22,914
2,784,713
628,746
(10,767)
3,421,178
1,034,031
31,379
2,375,783
557,670
(3,274)
2,930,998
1,014,857
24,929
2,508,074
603,068
280
3,125,910
1,048,666
27,744
2,471,900
577,035
22,216
3,071,542
change in accounting principle . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . .
Per common share:
Basic earnings:
Net income before cumulative effect
of change in accounting
principle . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings:
Net income before cumulative effect
of change in accounting
principle . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid . . . . . . . . . . . . . . . .
Basic average shares outstanding . . . . . .
Diluted average shares outstanding . . . . .
518,631
518,631
495,390
495,390
475,718
468,555
430,141
430,141
383,433
383,433
5.20
5.20
4.73
4.73
4.32
4.26
3.75
3.75
3.19
3.19
5.13
5.13
0.48
99,733
101,112
4.68
4.68
0.44
104,735
105,751
4.25
4.19
0.44
110,106
111,908
3.73
3.73
0.38
114,837
115,377
3.18
3.18
0.36
120,259
120,669
As of December 31,
2006
2005
2004
2003
2002
Cash and invested assets . . . . . . . . . . . . . $ 9,719,988 $ 9,410,695 $ 9,243,090 $ 8,702,398 $ 7,790,930
12,365,361
Total assets . . . . . . . . . . . . . . . . . . . . . . . . .
201,479
Short-term debt . . . . . . . . . . . . . . . . . . . . . .
Long-term debt(1) . . . . . . . . . . . . . . . . . . . . .
700,630
2,851,453
Shareholders’ equity . . . . . . . . . . . . . . . . . .
Per diluted share . . . . . . . . . . . . . . . . . . .
24.04
Effect of SFAS 115 on diluted equity
14,252,184
170,354
694,685
3,419,844
31.07
13,465,525
182,448
698,042
3,240,099
28.45
14,980,355
169,736
721,248
3,459,193
34.68
14,768,903
381,505
507,902
3,432,768
32.91
per share(2) . . . . . . . . . . . . . . . . . . . . . .
1.43
2.50
3.62
3.39
1.58
Annualized premium in force:
Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Health . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic shares outstanding . . . . . . . . . . . . . .
Diluted shares outstanding . . . . . . . . . . . .
1,615,487
1,293,081
2,908,568
98,115
99,755
1,577,635
1,026,410
2,604,045
103,569
104,303
1,523,335
1,056,451
2,579,786
107,944
110,075
1,449,290
1,064,428
2,513,718
112,715
113,887
1,343,156
1,030,482
2,373,638
118,267
118,598
(1)
Includes 7 3⁄4% Junior Subordinated Debentures reported as “Due to affiliates” on the Consolidated Balance Sheets at each
year end 2002 through 2005 in the amount of $154.6 million. Also included at year end 2006 are Torchmark’s 7.1% Junior
Subordinated Debentures in the amount of $123.7 million, which are also reported as “Due to affiliates” on the Consolidated
Balance Sheet.
(2) SFAS 115 is an accounting rule requiring fixed maturities to be revalued at fair value each period. The effect of SFAS 115 on
diluted equity per share reflects the amount added or (deducted) under SFAS 115 to produce GAAP Shareholders’ equity per
share. Please see the explanation and discussion under the caption Capital Resources in Management’s Discussion and
Analysis in this report concerning the effect this rule has on Torchmark’s equity.
13
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
RESULTS OF OPERATIONS
How Torchmark Views Its Operations: Torchmark is the holding company for a group of
insurance companies which market primarily individual life and supplemental health insurance, and to a
limited extent annuities,
the United States. We view our
operations by segments, which are the major insurance product lines of life, health, and annuities, and the
investment segment that supports the product lines. Segments are aligned based on their common
characteristics, comparability of the profit margins, and management techniques used to operate each
segment.
to middle income households throughout
Insurance Product Line Segments. As fully described in Note 13—Business Segments in the
Notes to the Consolidated Financial Statements,
line segments involve the marketing,
underwriting, and benefit administration of policies. Each product line is further segmented by the various
distribution units that market the insurance policies. Each distribution unit operates in a niche market
offering insurance products designed for that particular market. Whether analyzing profitability of a
segment as a whole, or the individual distribution units within the segment, the measure of profitability
used by management is the underwriting margin, which is:
the product
Premium revenue
Less:
Policy obligations
Policy acquisition costs and commissions
Investment Segment. The investment segment involves the management of our capital resources,
including investments and the management of corporate debt and liquidity. Our measure of profitability for
the investment segment is excess investment income, which is:
Net investment income
Less:
Interest credited to net policy liabilities
Financing costs
The tables in Note 13—Business Segments reconcile Torchmark’s revenues and expenses by
segment to its major income statement line items for each of the years in the three-year period ending
the profitability measures that
December 31, 2006. Additionally,
demonstrates year-to-year comparability and which reconciles to net
income. That summary is
reproduced below from the Consolidated Financial Statements to present our overall operations in the
manner that we use to manage the business.
this Note provides a summary of
14
Analysis of Profitability by Segment
(Dollar amounts in thousands)
2006
2005
2004
Change %
2006
2005
Change
Life insurance underwriting margin . . . . . . . . . . $ 397,444 $ 381,648 $ 352,177 $15,796
Health insurance underwriting margin . . . . . . .
Annuity underwriting margin . . . . . . . . . . . . . . .
Other insurance:
174,582
13,964
206,694
11,915
177,179
12,580
29,515 17
(5)
(665)
4 $ 29,471
2,597
(1,384)
Other income . . . . . . . . . . . . . . . . . . . . . . .
Administrative expense . . . . . . . . . . . . . . .
Excess investment income . . . . . . . . . . . . . . . .
Corporate and adjustments . . . . . . . . . . . . . . . .
Pre-tax total . . . . . . . . . . . . . . . . . . . . .
Applicable taxes . . . . . . . . . . . . . . . . . . . . . . . . .
tax) from Investment Segment
After-tax total . . . . . . . . . . . . . . . . . . . .
Remove benefit from interest-rate swaps (after
. . . . . . . . . . .
Realized gains (losses) (after tax)* . . . . . . . . . .
Gain on sale of agency buildings, net of tax . .
Tax settlements (after tax) . . . . . . . . . . . . . . . . .
Net proceeds (cost) from legal settlements
(after tax) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retiring executive option term extension (after
tax) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in accounting principle (after tax) . . . .
4,024
(155,331)
318,763
(14,437)
769,072
(264,716)
2,366
(147,681)
324,238
(9,660)
740,670
(255,165)
1,833
(141,620)
330,543
(9,575)
721,904
(248,472)
1,658 70
5
(7,650)
(2)
(5,475)
(4,777) 49
28,402
(9,551)
4
4
4
504,356
485,505
473,432
18,851
(319)
(7,254)
2,816
11,607
7,425
-0-
-0-
(4,805)
25
-0-
15,989
(15,157)
14,440
-0-
3,003
4,486
(7,279)
2,816
(4,382)
(955)
(369)
-0-
-0-
8,380
-0-
(7,163)
369
-0-
533
(6,061)
(6,305)
(85)
18,766
(6,693)
12,073
10,352
(14,415)
-0-
12,986
(955)
(369)
7,163
%
8
1
(10)
29
4
(2)
1
3
3
3
Net income . . . . . . . . . . . . . . . . . . . . . $ 518,631 $ 495,390 $ 468,555 $23,241
5 $ 26,835
6
* See the discussion of Realized Gains and Losses in this report.
Torchmark’s operations on a segment-by-segment basis are discussed in depth under
the
appropriate captions following in this report.
Summary of Operations: Net income increased 5% or $23 million to $519 million in 2006, and 6%
or $27 million to $495 million in 2005. The primary contributor to growth in 2006 earnings was the health
insurance segment, as we first offered Medicare Part D for coverage beginning January 1, 2006. Our
Medicare Part D product accounted for $26 million of the $30 million growth in health margins. The life
insurance segment also added $16 million to our $28 million growth in pretax earnings in 2006. The
$19 million growth in 2005 earnings came primarily from the life insurance segment, as it accounted for
$29 million of pretax earnings growth. Excess investment income declined in both years, as it continues to
be compressed by a flattened yield curve and as increasing amounts of cash are used to repurchase
Torchmark shares.
Life insurance premium has grown steadily in each of the three years ending December 31, 2006,
rising 4% in 2006 to $1.5 billion and 5% in 2005. Margins as a percentage of premium have also
increased slightly each year from 25% of premium in 2004 to 26% in 2005 and 2006. The combination of
premium and margin percentage growth has resulted in increases in the total life contribution to pretax
earnings mentioned above. However, sales volumes have declined slightly each year. Life insurance
segment results are discussed further under the caption Life Insurance.
Health premium rose 22% or $223 million to $1.2 billion in 2006, but $212 million of the growth came
from Medicare Part D premium. Health premium declined 3% in 2005. Medicare Supplement accounts for
the largest portion of our health premium. Over the past few years, increased competition in the Medicare
Supplement business has continued to dampen health sales, and has resulted in declines in the premium
from this product each year. However, net sales of our under-age-65 limited-benefit health products have
grown significantly over the past few years, as demand for these products continues to increase. See the
discussion under Health Insurance for a more detailed discussion of health insurance results.
15
While we still offer annuities, we do not plan to emphasize annuity products, favoring life insurance
instead. See the caption Annuities for further discussion.
The investment segment’s pretax profitability declined 2% in each of the last two years, falling
$5 million in 2006 and $6 million in 2005. Growth in total investment income has been negatively affected
by Torchmark’s share repurchase program (described later under this caption), which has diverted cash
that could have otherwise been used to acquire investments. Management believes that the acquisition of
Torchmark stock at favorable prices provides a superior return on available cash. Additionally, the low
long-term interest rates available for new investments during the past three years have caused our
average portfolio yield to decline in each successive year, restricting growth in net investment income and
excess investment income. Beginning in late 2004 and continuing through mid-2006, excess investment
income was further compressed as short-term rates rose with no meaningful change in long-term rates.
The increase in short-term rates caused short-term financing costs to increase and the income spread on
Torchmark’s fixed-to-variable interest-rate swaps to narrow. Because of the diminished profitability of
these swaps, all of the swaps were disposed of by June, 2006. See the analysis of excess investment
income and investment activities under the caption Investments for a more detailed discussion.
During the second quarter of 2006, we issued two new debt securities in separate public offerings:
(1) our 7.1% Trust Preferred Securities, redemption amount $120 million and (2) our 6 3⁄ 8% Senior Notes,
par value $250 million. These offerings essentially provided funding for the repayment of two existing debt
instruments in the fourth quarter of 2006: (1) the call of our 7¾% Trust Preferred Securities at a
redemption price of $150 million and (2) the maturity of our 6¼% Senior Notes, par value $180 million.
More information on these transactions can be found in Note 10—Debt in the Notes to Consolidated
Financial Statements and in our discussion of Capital Resources in this report.
Total revenues rose 9% in 2006 to $3.42 billion. In 2005, total revenues increased 2% to $3.13 billion
from $3.07 billion in 2004. The 2006 revenue increase was primarily the result of the $212 million of
premium added from Medicare Part D. Growth in life premium and net
income also
contributed to 2006 revenue growth. Life premium was the greatest contributor to the 2005 revenue
increase, but net investment income was also a positive factor.
investment
We had $7 million of after-tax realized investment losses in 2006, compared with an immaterial
amount of after-tax realized investment gains in 2005 and gains of $14 million in 2004. Realized
investment gains and losses can vary significantly from period to period and have a material positive or
negative impact on net income. Under the caption Realized Gains and Losses in this report, we present a
complete analysis and discussion of our realized gains and losses. Also, as explained in Note 13—
Business Segments in the Notes to the Consolidated Financial Statements, we do not consider realized
gains and losses to be a component of our core insurance operations or operating segments.
In each of the years 2004 through 2006, net income was affected by certain significant, unusual, and
nonrecurring nonoperating items. We do not view these items as components of core operating results
because they are not indicative of past performance or future prospects of the insurance operations. A
discussion of these items follows.
In 2006, we received four litigation and tax settlements, two of which were concerned with issues
related to a subsidiary and an investment disposed of several years ago, a third involving our investment
in Worldcom, Inc. bonds (Worldcom), which was held and sold in prior years, and a fourth concerning
Federal income tax issues arising from examinations of prior years. The first settlement, involving the
disposed subsidiary, resulted in state income tax refunds of $6.7 million net of expenses ($4.3 million net
of tax) which were received and reported above as a tax settlement. The second settlement involving the
investment resulted in proceeds of $5.1 million net of expenses ($3.3 million net of tax) and is included in
the table above as a legal settlement. In the third settlement, we received $6.3 million ($4.1 million after
tax) in connection with our Worldcom class-action litigation for recovery of a portion of investment losses.
This item is included in the table above as a litigation settlement. The Federal income tax settlement
resulted in benefits due us of $7.4 million, included as tax settlements in the table above. The two
litigation settlements were included in “Other income” and the two tax settlements reduced “Income taxes”
in the 2006 Consolidated Statement of Operations. All four of these cases involved litigation or issues
arising years ago and are not considered by management to relate to our current operations.
16
Additionally in 2006, our subsidiary Liberty National began a program to dispose of its agency office
buildings, replacing them with rental facilities. In 2006, 21 buildings were sold for gross proceeds of $6.7
million and a pre-tax gain of $4.8 million. Because of the significant scale of this nonoperating item, we
have removed $4.3 million ($2.8 million after tax) from our core results representing the gain from the
sales. We contemplate this program to continue into 2007.
In 2005, we recorded an after-tax charge of $955 thousand ($1.5 million pretax) pertaining to litigation.
This litigation involved net settlements after expenses primarily in three significant legal matters: our
subsidiary Liberty National’s race-distinct mortality/dual-pricing litigation, its class-action cancer case, and
the Waddell & Reed litigation. All of the settlements of these cases relate to litigation arising many years
ago and are not relevant to current operations. Of this pre-tax amount, $13.5 million is recorded as “Other
income” and $15 million is recorded as “Other operating expense” in the 2005 Consolidated Statement of
Operations. For more information on these litigation items, see Note 14—Commitments and Contingencies
in the Notes to Consolidated Financial Statements. Also in 2005, We recorded a $16 million settlement
benefit from an Internal Revenue Service examination covering several years. This tax settlement reduced
tax expense. More information on this tax settlement is provided in Note 8—Income Taxes in the Notes to
the Consolidated Financial Statements. Additionally, a noncash after-tax charge of $369 thousand was
recorded as a result of the extension in the term of a previously granted stock option for a senior officer
upon retirement. The option extension expense was recorded as administrative expense in the 2005
Consolidated Statement of Operations.
As of January 1, 2004, Torchmark adopted Statement of Position 03-1 (SOP 03-1), an accounting
rule concerning guaranteed minimum policy benefits on variable annuities. The adoption of this standard
resulted in a one-time after-tax charge of $7.2 million recorded as a change in accounting principle. Also,
during 2004, we received a refund of state income taxes in the amount of $3.0 million, after federal tax.
This refund resulted from the settlement of certain state tax issues concerning a discontinued operation in
the mid-1990s. The refund reduced income tax expense in the 2004 Consolidated Statement of
Operations.
Torchmark has in place an ongoing share repurchase program which began in 1986 and was
reaffirmed at its July 27, 2006 Board of Director’s meeting. With no specified authorization amount, we
determine the amount of repurchases based on the amount of the Company’s excess cash flow, general
market conditions, and other alternative uses. The majority of these purchases are made from excess
operating cash flow when market prices are favorable. Additionally, when stock options are exercised,
proceeds from these exercises and the tax benefit are used to repurchase additional shares on the open
market to minimize dilution as a result of the option exercises. The following chart summarizes share
purchase activity for each of the three years ended December 31, 2006.
Analysis of Share Purchases
(Amounts in thousands)
Purchases
2006
2005
2004
Shares
Amount
Shares
Amount
Shares
Amount
Excess cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Option proceeds* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,575
415
$320,425
24,436
5,647 $300,134
254,812
4,655
5,221
313
$268,310
16,916
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,990
$344,861 10,302 $554,946
5,534
$285,226
*
In 2005, 4.5 million shares at a cost of $248 million related to the option restoration program more fully discussed under the
caption Capital Resources.
Throughout the remainder of this discussion, share purchases refer only to those made from excess
cash flow.
A discussion of each of Torchmark’s segments follows.
17
Life Insurance. Life insurance is our
insurance segment, with 2006 life premium
largest
representing 55% of total premium. Life underwriting income before other income and administrative
expense represented 65% of the total in 2006. Additionally, investments supporting the reserves for life
products result in the majority of excess investment income attributable to the investment segment.
Life insurance premium rose 4% to $1.52 billion in 2006 and 5% in 2005 to $1.47 billion. Life
insurance products are marketed through several distribution channels. Premium by channel for each of
the last three years is as follows.
LIFE INSURANCE
Premium by Distribution Method
(Dollar amounts in thousands)
Direct Response . . . . . . . . . . . . . . . . . . . . . . . . .
American Income Exclusive Agency . . . . . . . .
Liberty National Exclusive Agency . . . . . . . . . .
Military Agency . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Agencies . . . . . . . . . . . . . . . . . . . . . . . . . .
2006
2005
2004
Amount
$ 457,159
409,188
300,933
203,218
153,769
% of
Total
Amount
% of
Total
Amount
% of
Total
30% $ 424,037
380,365
27
302,747
20
199,319
13
161,820
10
29% $ 387,006
349,686
26
303,965
21
186,555
13
168,278
11
28%
25
22
13
12
$1,524,267
100% $1,468,288
100% $1,395,490
100%
We use four statistical measures as indicators of premium growth and sales over the near term:
“annualized premium in force,” “annualized premium issued,” “net sales,” and “first-year collected
premium.” Annualized premium in force is defined as the premium income that would be received over
the following twelve months at any given date on all active policies if those policies remain in force
throughout the twelve-month period. Annualized premium in force is an indicator of potential growth in
premium revenue. Annualized premium issued (sold) is that amount of annualized premium in force
added from new sales in a given period, and is an indicator of the acceleration of premium growth. Net
sales is annualized premium issued, net of cancellations in the first thirty days after issue, except in the
case of Direct Response where net sales is annualized premium issued at the time the first full premium
is paid after any introductory offer period has expired. We believe that net sales is a superior indicator of
the rate of premium growth relative to annualized premium issued. First-year collected premium is defined
as the premium collected during the reporting period for all policies in their first policy year. First-year
collected premium takes lapses into account in the first year when lapses are more likely to occur, and
thus is a useful indicator of how much new premium is expected to be added to premium income in the
future. Annualized life premium in force was $1.62 billion at December 31, 2006, an increase of 2% over
$1.58 billion a year earlier. Annualized life premium in force was $1.52 billion at December 31, 2004.
The following table shows net sales information for each of the last three years by distribution method.
LIFE INSURANCE
Net Sales by Distribution Method
(Dollar amounts in thousands)
Direct Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
American Income Exclusive Agency . . . . . . . . . . . . .
Liberty National Exclusive Agency . . . . . . . . . . . . . . .
Military Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006
2005
2004
Amount
$115,031
86,369
41,369
12,005
10,723
% of
Total
Amount
% of
Total
Amount
% of
Total
43% $112,240
84,270
33
47,088
16
17,571
4
13,797
4
41% $110,617
87,855
31
49,145
17
27,879
6
18,157
5
38%
30
17
9
6
$265,497
100% $274,966
100% $293,653
100%
18
The table below discloses first-year collected life premium by distribution channel.
LIFE INSURANCE
First-Year Collected Premium by Distribution Method
(Dollar amounts in thousands)
Direct Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
American Income Exclusive Agency . . . . . . . . . . . . .
Liberty National Exclusive Agency . . . . . . . . . . . . . . .
Military Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006
2005
2004
Amount
$ 77,385
72,072
34,342
14,129
11,140
% of
Total
Amount
% of
Total
Amount
% of
Total
37% $ 76,746
73,490
35
35,993
16
21,821
7
13,883
5
35% $ 74,220
76,777
33
39,724
16
27,426
10
17,474
6
31%
33
17
12
7
$209,068
100% $221,933
100% $235,621
100%
Direct Response is our leading writer of life insurance. Marketing is conducted through direct mail,
television and consumer magazine advertising, and direct mail
but also through co-op mailings,
solicitations endorsed by groups, unions and associations. This distribution channel markets a line of life
products primarily to juveniles,
their parents, and other adults over age 50. The Direct Response
operation accounted for 30% of our life insurance premium during 2006, the largest of any distribution
group. Direct Response’s share of total life premium has risen steadily in each of the last three years. Life
premium for this channel rose 8% in 2006 and 10% in 2005.
This group’s focus is on its juvenile life product. Not only is the juvenile market an important source of
sales, but it also is a vehicle to reach the parents and grandparents of the juvenile insureds. Parents and
grandparents of juvenile policyholders are more likely to respond favorably to a solicitation by Direct
Response for life coverage on themselves than is the general adult population. Also, both the juveniles
and their parents are low-acquisition cost targets for sales of additional coverage over time. We expect
that sales to the juvenile market and their parents will continue as one of this group’s premier markets.
We believe that the Direct Response Unit is the largest U.S. writer of juvenile direct mail life insurance.
In January, 2007, we acquired Direct Marketing and Advertising Distributors,
Inc. (DMAD), an
advertising and publication company which has supplied insert media and marketing services to our
Direct Response operation for the past fifteen years. We believe the acquisition should provide Direct
Response with significant cost savings and potential increases in solicitation volume.
Direct Response net sales rose 2% in 2006 to $115 million and 1% in 2005 to $112 million. First-year
collected premium grew 1% in 2006 to $77 million and rose 3% to $77 million in 2005. We believe that the
DMAD purchase will favorably impact Direct Response sales going forward.
The American Income Exclusive Agency focuses on members of labor unions, credit unions, and
other associations for its life insurance sales. It is a high profit margin business characterized by lower
policy obligation ratios. Life premium for this agency rose 8% to $409 million in 2006, after having
increased 9% in 2005. Net sales increased 2% in 2006 to $86 million from $84 million in 2005. Net sales
declined 4% in 2005. First-year collected premium declined 2% in 2006 to $72 million, after having
decreased 4% in 2005. As in the case of all of Torchmark’s agency distribution systems, continued
increases in product sales are largely dependent on increases in agent count. Growth in the agent count
has contributed to the improvements in sales in this agency. Net sales, a lead indicator of new sales, rose
after two years of declines. Additionally, the decline in first-year collected premium was reduced in 2006.
The American Income agent count was 2,353 at December 31, 2006 compared with 2,027 a year earlier,
an increase of 16%. The agent count declined 3% in 2005 from 2,090 at year end 2004. This agency
continues to recruit new agents focusing on an incentive program to reward growth in both the recruiting
of new agents and in the production of new business. Additionally, our systematic, centralized internet
recruiting program has enhanced the recruiting of new agents.
19
The Liberty National Exclusive Agency distribution system markets its life products to primarily
middle-income customers in Southeastern states, but has recently expanded into several other states.
Liberty’s life premium declined slightly in both 2006 and 2005 compared with the respective prior year.
Liberty’s life premium sales, in terms of net sales, were $41 million in 2006, representing a decrease of
12% in 2006 after having decreased 4% in 2005. First-year collected premium declined 5% in 2006 to $34
million. First-year collected premium declined 9% in 2005.
Growth in the Liberty Agency’s sales and premium volume are highly dependent on building the size
of its agency force. Liberty had 1,381 producing agents at year end 2006, compared with 1,781 at year
end 2005, a decline of 22%. This decline was the primary factor in 2006 sales declines. While the agent
count in this agency rose 9% in 2005, it fell 15% in 2004. In 2006, the Liberty National Agency began the
reorganization of its marketing leadership and restructured its agent compensation system to provide
greater reward to productive agents and to establish production minimums for agents. These changes led
to terminations and resignations during 2006 of agents not meeting these production minimums.
However, management believes that these changes will result in a more productive agency over the long
term. Management also believes these changes will result in margin improvements. Also, Liberty has
implemented initiatives similar to those of American Income to recruit new agents, primarily through the
use of the internet. As these agents become more seasoned, they should become more productive. The
continued recruiting of new agents and the retention of productive agents are critical to growing the sales
in controlled agency distribution systems. Increased sales from a larger and more productive agency
force should lead to increased premium growth.
Our Military Agency consists of a nationwide independent agency whose sales force is comprised
primarily of
former military officers who have historically sold primarily to commissioned and
noncommissioned military officers and their families. This business consists of whole-life products with
term insurance riders and is characterized by low lapse rates. In 2006, life premium was $203 million or
13% of Torchmark’s total life premium. Premium increased 2% in 2006 from $199 million. Premium rose
7% in 2005. This agency has broadened its portfolio to provide a much more comprehensive selection of
other products (non-Torchmark). It has reduced commission rates on non-Torchmark investment products
and, as a result, lost 30% of the producing agents appointed with Torchmark in 2005 and lost an
additional 24% of agents in 2006. While this agency recently broadened its target market to include non-
military customers, sales in this agency have fallen sharply. Military Agency net sales declined 32% in
2006 to $12 million after having declined 37% in 2005 to $18 million. First-year collected premium
declined 35% in 2006 to $14 million after a 2005 decline of 20%. Margins in the Military group improved in
2006 as a result of the decline in mortality. In 2005 and 2004, margins were negatively affected by
hostilities in the Middle East, resulting in higher than expected benefits paid of $3.9 million in 2005 and
$4.0 million in 2004. Benefits paid for these hostilities in 2006 were $2.5 million.
We also offer life insurance through Other Agencies consisting of the United Investors Agency, the
United American Independent and Branch Office Agencies, and other small miscellaneous sales
agencies. The United Investors Agency is comprised of several independent agencies that concentrate on
annuity business. United Investors represents approximately 5% of Torchmark’s life premium income.
The United American Independent and Branch Office Agencies combined represented approximately 4%
of Torchmark’s total life premium. Life premium income and sales for these two agencies has declined for
the past three years because they focus on health insurance, with life sales being incidental.
20
LIFE INSURANCE
Summary of Results
(Dollar amounts in thousands)
2006
2005
2004
Amount
% of
Premium
Amount
% of
Premium
Amount
% of
Premium
Premium and policy charges . . . . . . . . . . . $1,524,267
100% $1,468,288
100% $1,395,490
100%
Policy obligations . . . . . . . . . . . . . . . . . . . . .
Required interest on reserves . . . . . . . . . . .
1,005,771
(364,313)
66
(24)
966,093
(342,305)
66
(23)
919,775
(318,886)
66
(23)
Net policy obligations . . . . . . . . . . . . . . . .
Commissions and premium taxes . . . . . . .
Amortization of acquisition costs . . . . . . . .
641,458
76,859
408,506
Total expense . . . . . . . . . . . . . . . . . . . . . .
1,126,823
42
5
27
74
623,788
76,278
386,574
1,086,640
43
5
26
74
600,889
73,006
369,418
1,043,313
43
5
27
75
Insurance underwriting margin before
other income and administrative
expenses . . . . . . . . . . . . . . . . . . . . . . . . . $ 397,444
26% $ 381,648
26% $ 352,177
25%
Gross margins, as indicated by insurance underwriting margin before other
income and
administrative expense, rose 4% in 2006 to $397 million after rising 8% in 2005 and 9% in 2004. As a
percentage of life insurance premium, gross margins have increased slightly each year. Improvements in
life margins have resulted from several factors. The previously-mentioned changes in Liberty’s agent
compensation system has contributed to increases in Liberty’s margins, as this system has reduced
acquisition costs at Liberty. Additionally, the proportion of American Income premium to total premium
has grown each year, and that has caused life margins to increase because that agency’s margins are
Torchmark’s highest, well exceeding 30% in 2006. Mortality improvement in the Military Agency noted
above was also a major factor.
21
Health Insurance. Health products sold by Torchmark insurance companies consist of
supplemental plans that include limited benefit hospital/surgical plans, cancer, and accident plans sold to
people under age 65. We also sell Medicare Supplements to enrollees in the federal Medicare program,
as well as providing coverage under the Medicare Part D prescription drug program after January 1,
2006. Because Medicare Part D is a significant new health product and there is no comparative prior year
data, Medicare Part D business will be shown as a separate health component and will be discussed
separately in the analysis of the health segment. Health premium represented 44% of Torchmark’s total
premium income in 2006. Excluding Part D premium, health premium represented 40% in 2006,
compared with 40% in 2005 and 42% in 2004. Health underwriting margin accounted for 31% of the total
in both 2006 and 2005, excluding Part D in 2006, compared with 32% in 2004. These declines in the
health percentages are indicative of the growth in the premium and profitability of our life segment in
relation to our health segment. The following table indicates health insurance premium income by
distribution channel for each of the last three years.
HEALTH INSURANCE
Premium by Distribution Method
(Dollar amounts in thousands)
2006
2005
2004
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
United American Independent Agency
Limited-benefit plans . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
Medicare Supplement
$ 102,163
316,527
$
98,023
343,650
$
96,904
371,415
418,690
41%
441,673
43%
468,319
45%
United American Branch Office Agency
Limited-benefit plans . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
Medicare Supplement
Liberty National Exclusive Agency
Limited-benefit plans . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
Medicare Supplement
American Income Exclusive Agency
Limited-benefit plans . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
Medicare Supplement
Direct Response
Limited-benefit plans . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
Medicare Supplement
153,944
200,591
354,535
144,925
99
145,024
65,588
1,587
67,175
572
39,154
39,726
Total Premium (Before Part D)
Limited-benefit plans . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
Medicare Supplement
467,192
557,958
94,731
228,036
322,767
148,894
126
149,020
61,797
1,826
63,623
638
37,136
37,774
404,083
610,774
32
15
6
4
40
60
71,069
251,210
322,279
163,833
148
163,981
57,494
2,025
59,519
691
33,877
34,568
389,991
658,675
31
15
6
3
37
63
35
14
6
4
46
54
Total Premium (Before Part D)
. . . . .
1,025,150
100% 1,014,857
100% 1,048,666
100%
Medicare Part D
212,382
-0-
-0-
Total Health Premium . . . . . . . . . . . . .
$1,237,532
$1,014,857
$1,048,666
We market supplemental health insurance products through a number of distribution channels with
the two United American agencies being our market leaders. Over the past several years, we have placed
greater emphasis on the sale of
than Medicare
Supplement insurance as customer demand for the limited benefit hospital/surgical plans has increased
and price competition and lesser demand for Medicare Supplements has dampened sales of that product.
While Medicare Supplement still remains our largest health product in terms of premium income, the
limited-benefit health insurance products rather
22
premium from other limited-benefit health products have been growing rapidly. As shown in the chart
above, Medicare Supplement premium represented 54% of total health premium (excluding Part D) in
2006, but has declined steadily as a percentage of total health premium in each successive year.
Accordingly, limited-benefit health products have increased as a percentage of total health premium
before Part D each year during the same period.
The following table presents net sales by distribution method for the last three years.
HEALTH INSURANCE
Net Sales by Distribution Method
(Dollar amounts in thousands)
2006
2005
2004
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
United American Independent Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Medicare Supplement
$ 38,651
16,278
$ 42,753
15,813
$ 60,910
24,611
54,929
23%
58,566
32%
85,521
43%
United American Branch Office Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Medicare Supplement
Liberty National Exclusive Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Medicare Supplement
American Income Exclusive Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Medicare Supplement
Direct Response
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Medicare Supplement
146,711
12,765
159,476
11,588
216
11,804
11,685
-0-
11,685
623
4,721
5,344
Total Net Sales (Before Part D)
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Medicare Supplement
209,258
33,980
78,137
17,953
96,090
13,218
330
13,548
11,347
-0-
11,347
738
5,232
5,970
146,193
39,328
52
7
6
3
79
21
61,881
20,836
82,717
12,426
430
12,856
12,072
-0-
12,072
1
6,747
6,748
147,290
52,624
41
7
6
3
74
26
65
5
5
2
86
14
Total Net Sales (Before Part D) . . . . . . . . . .
243,238
100% 185,521
100% 199,914
100%
Medicare Part D . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
278,023
-0-
-0-
Total Health Net Sales . . . . . . . . . . . . . . . . .
$521,261
$185,521
$199,914
23
The following table discloses first-year collected health premium by distribution method.
HEALTH INSURANCE
First-Year Collected Premium by Distribution Method
(Dollar amounts in thousands)
2006
2005
2004
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
United American Independent Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . . .
$ 31,817
15,084
$ 34,498
16,834
$ 44,168
24,748
46,901
26%
51,332
35%
68,916
42%
United American Branch Office Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . . .
92,791
14,131
Liberty National Exclusive Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . . .
American Income Exclusive Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . . .
Direct Response
Limited-benefit plans . . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . . .
Total First-Year Collected Premium (Before
Part D)
106,922
59
9,756
248
10,004
12,716
-0-
12,716
697
4,397
5,094
5
7
3
49,887
17,129
67,016
9,547
332
9,879
12,804
-0-
12,804
136
5,714
5,850
45
7
9
4
43,330
21,309
64,639
9,365
419
9,784
12,781
-0-
12,781
-0-
8,862
8,862
39
6
8
5
Limited-benefit plans . . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . . .
147,777
33,860
81
19
106,872
40,009
73
27
109,644
55,338
66
34
Total (Before Part D) . . . . . . . . . . . . . . . . .
181,637
100% 146,881
100% 164,982
100%
Medicare Part D . . . . . . . . . . . . . . . . . . . . . . . . . . .
212,382
-0-
-0-
Total First-Year Collected Premium . . . . .
$394,019
$146,881
$164,982
The United American Branch Office and Independent Agencies. As discussed above, the two
United American Agencies have emphasized sales of individual supplemental limited-benefit health plans
known generally as hospital/surgical plans for which demand has increased in recent years. These plans
generally provide a per diem payment for each hospital inpatient day confined, a fixed-amount surgical
schedule, out patient coverage, and other miscellaneous hospital-related charges. They also contain caps
on total per-illness benefits. Consumer interest in these products has increased as a result of growing
unavailability or lack of affordability of individual major-medical plans and decreased coverage offered by
employers. Minimum regulatory loss ratios on these limited-benefit plans are generally lower than those of
Medicare Supplement; however, the Medicare Supplement product has historically had slightly higher
persistency rates, resulting in both products having approximately the same underwriting margin as a
percentage of premium. Both of the United American agencies offer these limited-benefit plans.
The United American Branch Office is an exclusive agency, meaning the agents in its 125 offices
nationwide sell only for us. In recent years, this agency has been successful in building sales of limited-
benefit plans to replace the decline in Medicare Supplement sales. Net sales of limited-benefit plans in
2006 were $147 million, an 88% increase. Net sales in 2005 were $78 million, a 26% increase over 2004.
24
As a result, total health sales at the UA Branch Office were $159 million, a 66% increase over 2005,
including the decline in Medicare Supplement sales. Premium from limited-benefit plans at the UA Branch
Office increased by 63% to $154 million in 2006 compared with 2005, and total health premium grew 10%
to $355 million, after taking the decline in the Medicare Supplement in force block into account. Premium
in 2004 and 2005 remained relatively unchanged at $323 million. At year end 2006, the UA Branch office
had 3,015 producing agents compared with 2,166 at year end 2005, a 39% increase. This agency had
1,677 agents at year end 2004. As is the case with all of our captive agencies, growing the agency size
translates into increased sales and premium growth.
The United American Independent Agency is composed of independent agencies appointed with
Torchmark whose size range from very large, multi-state organizations down to one-person offices. All of
these agents generally sell for a number of insurance companies, of which 3,491 were active producing
agents for Torchmark at December 31, 2006. Health premium for the UA Independent Agency declined
5% to $419 million in 2006, after declining 6% in 2005. The declines in premium are due to the decreases
in Medicare Supplement premium. This block of business continues to decline as sales have not
compensated for lapses. This agency’s contribution to Torchmark’s total health sales and premium has
declined in each of the past three years. However, limited-benefit premium has risen each year in this
agency and was 24% of agency premium in 2006, compared with 22% in 2005 and 21% in 2004. Even
though net sales of limited-benefit products declined in each of the last three years, each year’s new
sales have added to premium in force, resulting in the increases in limited-benefit premium. In the recent
past, most of this agency’s health sales came from one large independent agency. In 2005, that leading
agency’s recruiting and training program experienced a disruption that resulted in a decline in producing
agents. The disruption resulted in a 32% drop in 2005 net sales. Sales from this agency did not recover in
2006.
Liberty National Exclusive Agency, predominately a life insurance distribution channel, is the third
largest writer of Torchmark health business based on premium collected. Cancer supplemental plans are
the type of
limited-benefit health products primarily produced by this agency. Liberty is our only
distribution channel for which cancer insurance is its primary health product. Liberty’s health premium
declined 3% in 2006 to $145 million after a 9% drop in 2005. The declines in both years were the result of
the settlement of a class-action lawsuit in early 2005 concerning a closed block of cancer business over
the timing and size of the premium rate increases on this block. This block represented approximately half
of Liberty’s cancer business in 2005 and approximately 37% at year end 2006. Prior to 2005, significant
rate increases to offset deteriorating margins on this block were a continuing factor causing growth in
health premium, but increasing claims continued to reduce underwriting margins. The settlement provided
for claims incurred after the effective date of the settlement in March 2005 to be paid on an actual
incurred basis, rather than a billed basis, which reduced benefits paid going forward. The settlement
further required Liberty to reduce premiums and to maintain an 85% claims loss ratio over the remaining
life of the business. Prior to the settlement, Liberty had a claims loss ratio above 100% on this block.
Net health sales in the Liberty agency for 2006 declined 13% to $12 million, compared with 2005 net
health sales of $14 million. Net health sales were $13 million in 2004. The declines in agent counts
discussed above are the major cause of these fluctuations, as well as increased emphasis on selling the
higher-margin life products.
American Income Exclusive Agency, also predominately a life insurance distribution channel, is
our fourth largest health insurance distributor based on 2006 premium collected. Its health plans are
the agency’s 2006 health
comprised of various limited-benefit plans for which almost two thirds of
premium was from accident policies. Sales of the health plans by this agency are generally made in
conjunction with a life policy being sold to the same customer.
Health premium at this agency for 2006 increased 6% to $67 million, while 2005 premium of $64
million increased 7% over 2004. Net health sales of $12 million in 2006 rose 3% over 2005 sales, but
2005 net sales declined 6%. Net health sales comprised only 12% of the American Income Agency’s total
net sales in 2006.
Direct Response, primarily a life operation, also offers health insurance, which is predominantly
Medicare Supplements sold directly to employer or union sponsored groups. In 2006, net health sales
25
were $5 million, comprising only 4% of Direct Response’s total life and health net sales. These net sales
declined 10% in 2006. Net health sales declined 12% in 2005 to $6 million. Health premium in 2006 for
this group rose 5% to $40 million. Health premium in 2005 was $38 million, a 9% increase compared with
$35 million in 2004.
Medicare Part D.
In 2005, United American contracted with Centers for Medicare and Medicaid
Services (CMS) to be an insurer under the government’s new Medicare Part D stand-alone prescription
drug plan for Medicare beneficiaries. Unlike the traditional Medicare program for hospital and doctor
services, where CMS is the primary insurer and private Medicare Supplement
insurers like United
American are secondary insurers, insurers participating in Part D are the primary insurers for plans
regulated and funded in part by CMS. The program generally calls for CMS to pay approximately two
thirds of the premium with the insured Medicare beneficiary paying one third of the premium. Total
Medicare Part D premium was $212 million in 2006. At November, 2006, United American still had 190
thousand enrollees in the 2006 Part D plan. For the 2007 plan, we enrolled an additional 17 thousand, but
25 thousand of the 2006 enrollees left our plan. Enrollment for 2007 coverage ended December 31, 2006.
Our Medicare Part D product is sold primarily through the Direct Response operation, but is also sold by
the two UA agencies.
We believe that the Medicare Part D program is an excellent addition to our health product offerings
because of our experience with the senior-age market and with Medicare Supplements, the government
assurances with regard to the risk-sharing agreements for participating insurers, the incremental income
added to our health insurance margins, and the renewal of the business every year. Our experience with
service to the senior-age market and use of our Direct Response marketing system required little new
investment
to enter this business. As previously mentioned, we view the Medicare Part D product
separately from our other health products because of its significance and because there are no prior year
comparisons.
We do not expect significant growth in the Part D product in the near future, as most Medicare
beneficiaries enrolled in a plan in 2006. Additionally, as with any government-sponsored program, the
possibility of regulatory changes could change the outlook for this market.
26
The following tables present underwriting margin data for health insurance for each of the last three
years.
HEALTH INSURANCE
Summary of Results
(Dollar amounts in thousands)
Health*
% of
Premium
Medicare
Part D
% of
Premium
Total
Health
% of
Premium
2006
Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,025,150
100% $212,382
100% $1,237,532
100%
Policy obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Required interest on reserves . . . . . . . . . . . . . . . . . .
670,560
(24,662)
Net policy obligations . . . . . . . . . . . . . . . . . . . . . . .
645,898
Commissions and premium taxes . . . . . . . . . . . . . . .
Amortization of acquisition costs . . . . . . . . . . . . . . . .
71,040
127,081
Total expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
844,019
65
(2)
63
7
12
82
163,457
-0-
163,457
16,990
6,372
186,819
77
-0-
77
8
3
88
834,017
(24,662)
809,355
88,030
133,453
1,030,838
67
(2)
65
7
11
83
Insurance underwriting income before other income
and administrative expenses . . . . . . . . . . . . . . . . . $ 181,131
18% $ 25,563
12% $ 206,694
17%
Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,014,857
100%
$1,014,857
100%
Health*
% of
Premium
Medicare
Part D
% of
Premium
Total
Health
% of
Premium
2005
Policy obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Required interest on reserves . . . . . . . . . . . . . . . . . .
668,205
(20,879)
Net policy obligations . . . . . . . . . . . . . . . . . . . . . . .
647,326
Commissions and premium taxes . . . . . . . . . . . . . . .
Amortization of acquisition costs . . . . . . . . . . . . . . . .
74,484
115,868
Total expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
837,678
66
(2)
64
7
12
83
Insurance underwriting income before other income
668,205
(20,879)
647,326
74,484
115,868
837,678
66
(2)
64
7
12
83
and administrative expenses . . . . . . . . . . . . . . . . . $ 177,179
17%
$ 177,179
17%
Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,048,666
100%
$1,048,666
100%
Health*
% of
Premium
Medicare
Part D
% of
Premium
Total
Health
% of
Premium
2004
Policy obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Required interest on reserves . . . . . . . . . . . . . . . . . .
697,645
(19,502)
Net policy obligations . . . . . . . . . . . . . . . . . . . . . . .
678,143
Commissions and premium taxes . . . . . . . . . . . . . . .
Amortization of acquisition costs . . . . . . . . . . . . . . . .
78,513
117,428
Total expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
874,084
67
(2)
65
7
11
83
Insurance underwriting income before other income
697,645
(19,502)
678,143
78,513
117,428
874,084
67
(2)
65
7
11
83
and administrative expenses . . . . . . . . . . . . . . . . . $ 174,582
17%
$ 174,582
17%
*
Health other than Medicare Part D.
27
Torchmark’s health insurance underwriting margin excluding Part D before other income and
administrative expense increased 2% in 2006 from $177 million to $181 million. In 2005, margin rose 1%
even though there was a 3% decline in premium. As a percentage of premium, underwriting margin
increased from 17.5% in 2005 to 17.7% in 2006, after having risen from 16.6% in 2004. These increases
were largely the result of the reduced loss ratios in the previously-mentioned closed block of cancer
business at Liberty and improvements in American Income’s loss ratios, especially in 2006. Liberty’s
health margins increased $7 million or 36% in 2005, or 17% of health premium. They rose another $3
million to $29 million in 2006, representing 20% of premium. American Income’s margins rose $3 million
to $24 million in 2006, 36% of premium.
Annuities. Fixed and variable annuity products are sold on a limited basis by our subsidiaries.
insurance
Annuities represented 1% of Torchmark’s 2006 premium revenue and less than 2% of
underwriting margin. We no longer emphasize this segment.
ANNUITIES
Summary of Results
(Dollar amounts in thousands)
2006
2005
2004
Policy charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 22,914
$ 24,929
$ 27,744
Policy obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Required interest on reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,743
(28,318)
26,888
(30,092)
28,248
(31,740)
Net policy obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,575)
(3,204)
(3,492)
Commissions and premium taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
88
15,486
10,999
49
15,504
12,349
61
17,211
13,780
Insurance underwriting margin before other income and
administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 11,915
$ 12,580
$ 13,964
Annuities generate earnings from periodic policy fees and charges based on the average account
balances, reduced by net policy obligations and acquisition costs. For fixed annuities, net required interest
on reserves is the required interest credited to the accounts and is offset by investment income.
For all
three periods shown in the chart above, account balances declined, which resulted in
reductions in policy fees and charges. Policy obligations also declined in each period. As a result,
insurance underwriting margin for annuities (before other income and administrative expenses) declined
in each period and was $11.9 million in 2006. As a percentage of policy charges, margins improved each
year over the prior year. Margins in 2006 were benefited by a decline in guaranteed minimum policy
benefits to $.7 million from $2.3 million in 2005, as a result of an increase in equity markets in 2006.
Equity markets were somewhat stable in 2005. In all three periods, investment income earned exceeded
required interest credited to fixed accounts. A significant portion of annuity profitability is derived from the
spread of investment income exceeding contractual interest requirements. This spread results in negative
net policy obligations.
28
Administrative expenses. Operating expenses are included in the Other and Corporate Segments
and are classified into two categories: insurance administrative expenses and expenses of the parent
company. The following table is an analysis of operating expenses for the three years ended December
31, 2006. Included in the table is a reconciliation of operating expenses per the segment analysis to
“Other operating expenses” per the Consolidated Statements of Operations.
Operating Expenses Selected Information
(Dollar amounts in thousands)
2006
2005
2004
Amount
% of
Prem.
Amount
% of
Prem.
Amount
% of
Prem.
Insurance administrative expenses:
Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 66,031
31,300
Other employee costs . . . . . . . . . . . . . . . . . . . . . . . . .
45,951
Other administrative expense . . . . . . . . . . . . . . . . . . .
6,634
Legal expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,415
Medicare Part D direct administrative expense . . . . .
2.4% $ 64,339
27,953
1.1
41,878
1.7
13,511
0.2
-0-
0.2
2.6% $ 61,251
26,328
1.1
42,335
1.7
11,706
0.5
-0-
-0-
Total insurance administrative expenses . . . . . . . . . .
155,331
5.6% 147,681
5.9% 141,620
2.5%
1.0
1.7
0.5
-0-
5.7%
Parent company expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation expense . . . . . . . . . . . . . . . . . . . . . . .
7,862
6,575
Total operating expenses, per segment analysis . . . .
169,768
Expenses related to settlement of prior period
litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Option term extension expense for retiring executive . . . .
-0-
-0-
Total operating expenses, per Consolidated
9,660
-0-
157,341
14,950
568
9,575
-0-
151,195
-0-
-0-
Statements of Operations . . . . . . . . . . . . . . . . . . . . . $169,768
$172,859
$151,195
Insurance administrative expenses:
Increase over prior year . . . . . . . . . . . . . . . . . . . . . . . .
5.2%
4.3%
7.8%
Total operating expenses:
Increase over prior year . . . . . . . . . . . . . . . . . . . . . . . .
Expense as percentage of revenue* . . . . . . . . . . . . . .
7.9
5.0
4.1
5.0
6.8
4.9
*
Revenues include realized investment losses of $10.8 million in 2006. They also include realized gains of $.3 million in 2005
and $22.2 million in 2004. Additionally, revenues in 2006 include two litigation settlements in the combined amount of $11.4
million and revenues in 2005 include a litigation settlement of $13.5 million, all of which are nonoperating items concerning
issues arising in prior years. Because realized gains and losses and nonoperating items bear no relationship to core operations,
we remove the effect of these items from revenue when evaluating expense ratios.
As noted in the Summary of Operations in this discussion, we do not consider the costs of settling certain
significant litigation in 2005 applicable to prior periods to be related to current insurance operations. Also,
as stated in Note 13—Business Segments in the Notes to Consolidated Financial Statements,
management views stock compensation expense as a corporate expense, and therefore treats it as a
Parent Company expense.
Insurance administrative expenses as a percentage of premium declined to 5.6% in 2006 from 5.9%
in 2005, after having increased from 5.7% in 2004. The decline in the 2006 ratio occurred even after
including $5 million of Medicare Part D direct administrative expense for the first time in 2006. Decreased
legal costs were a primary factor, as several ongoing issues were resolved in 2005 and 2006. The 2005
increase was primarily due to a $1.3 million payroll tax charge related to the option exercise and
restoration program incurred in 2005, which program is discussed under the caption Capital Resources in
this report.
29
Investments. Excess Investment Income. The following table summarizes Torchmark’s investment
income and excess investment income.
Analysis of Excess Investment Income
(Dollar amounts in thousands except for per share data)
2006
2005
2004
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 628,746 $ 603,068 $ 577,035
(360)
Reclassification of interest amount due to deconsolidation* . . . . . . . . . . . . . .
(454)
(360)
Adjusted investment income (per segment analysis) . . . . . . . . . . . . . . . .
628,292
602,708
576,675
Interest credited to net insurance policy liabilities:
Interest on reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(417,293)
179,955
(393,276)
167,987
(370,128)
156,808
Net required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(237,338)
(225,289)
(213,320)
Financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(72,191)
(53,181)
(32,812)
Excess investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 318,763 $ 324,238 $ 330,543
Excess investment income per diluted share . . . . . . . . . . . . . . . . . . . . . . . . . . $
3.15 $
3.07 $
2.95
Mean invested assets (at amortized cost) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,324,024 $8,810,584 $8,352,674
Average net insurance policy liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,496,561
4,303,655
4,078,150
Average debt and preferred securities (at amortized cost)
. . . . . . . . . . . . . . .
1,005,561
892,971
859,032
*
Deconsolidation of trusts liable for Trust Preferred Securities required by accounting rule FIN46R. See—Note 10—Debt in the
Notes to Consolidated Financial Statements.
is responsible for
The investment segment
the management of capital
resources including
investments, debt and cash flow. Excess investment income represents the profit margin attributable to
investment operations. It is the measure that we use to evaluate the performance of the investment
segment as described in Note 13—Business Segments in the Notes to the Consolidated Financial
Statements. It is defined as net investment income less both the interest credited to net policy liabilities
and the interest cost associated with capital funding or “financing costs.” We also view excess investment
income per diluted share as an important and useful measure to evaluate the performance of the
investment segment. It is defined as excess investment income divided by the total diluted weighted
average shares outstanding, representing the contribution by the investment segment to the consolidated
earnings per share of the Company. Since implementing its share repurchase program in 1986, we have
used $3.1 billion of cash flow to repurchase Torchmark shares after determining that the repurchases
provided a greater
investment alternatives. Share repurchases reduce excess
investment income because of the foregone earnings on the cash that would otherwise have been
invested in interest-bearing assets, but they also reduce the number of shares outstanding. In order to put
all capital resource uses on a comparable basis, we believe that excess investment income per diluted
share is an appropriate measure of the investment segment.
return than other
Excess investment income declined 2% in 2006 to $319 million from $324 million in 2005. It also
declined 2% in 2005 but rose 4% in 2004. On a per diluted share basis, 2006 excess investment income
rose 3% to $3.15, however. Per share excess investment income increased 4% in 2005 and 7% in 2004.
Growth in excess investment income is impacted by increases in investment income due to the growth in
the portfolio and changes in rates available in financial markets. It is also affected by crediting rates on
policy liabilities and changes in our borrowing costs. Additionally, share purchases in recent periods have
caused excess investment income per share to grow faster than excess investment income.
30
The largest component of excess investment income is net investment income, which rose 4% to
$628 million in 2006. It rose 5% to $603 million in 2005 from $577 million in 2004. As presented in the
following chart, the growth in net investment income in both periods was not as great as the growth in
mean invested assets.
Growth in net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Growth in mean invested assets (at amortized cost) . . . . . . . . . . . . . .
2004
2006
2005
4.2% 4.5% 4.3%
5.5
5.8
6.4
The lower growth in income is reflective of new investments made each year at long-term yields lower
than the portfolio’s average yield, resulting from the lower rates available in financial markets in recent
years. Also contributing to the lower growth in yields in recent years were calls on fixed maturity securities
in the portfolio, as the yield on the reinvestment of the proceeds was below that of the called securities.
Given the sizeable annual cash flow from our operations, we expect mean invested assets to continue to
grow, but as long as rates available for new investments do not exceed our portfolio yield, the rate of
growth of
investment
acquisitions follows under this caption.
income will be under pressure. More detailed information about
investment
Excess investment income is reduced by interest credited to net insurance policy liabilities and the
interest paid on corporate debt. Information about interest credited to policy liabilities is shown in the
following table.
Interest Credited to Net Insurance Policy Liabilities
(Dollar amounts in millions)
Interest
Credited
Average Net
Insurance
Policy Liabilities
Average
Crediting
Rate
2006
Life and Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$206.3
31.0
237.3
$3,857.8
638.8
4,496.6
5%
4%
2005
Life and Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$193.0
32.3
225.3
$3,635.4
668.3
4,303.7
6%
6%
2004
Life and Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
Increase in 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$180.3
33.0
213.3
$3,429.1
649.1
4,078.2
4%
8%
5.35%
4.85
5.28
5.31%
4.84
5.23
5.26%
5.09
5.23
Excess investment
income was positively affected by reduced crediting rates on certain policy
liabilities in 2004. Accordingly, the growth in interest credited to policy liabilities was not as great as the
growth in the liabilities, as we were able to respond to the low-interest environment with reduced crediting
rates on fixed annuities and certain life products. While annuity crediting rates were reduced in 2005, we
were not able to further reduce life and health crediting rates in 2005 nor any crediting rates in 2006. For
more information on life and health crediting rates, please refer to Note 5—Future Policy Benefit
Reserves in the Notes to Consolidated Financial Statements.
31
Excess investment income is also impacted by financing costs. Financing costs for the investment
segment primarily consist of interest on our various debt instruments and are deducted from excess
investment income. The table below reconciles interest expense per the Consolidated Statements of
Operations to financing costs.
Reconciliation of Interest Expense to Financing Costs
(Amounts in thousands)
2006
2005
2004
Interest expense per Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . $73,136 $60,934 $ 56,491
Reclassification of interest due to deconsolidation(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(360)
Benefit from interest-rate swaps(2)
(23,319)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(360)
(7,393)
(454)
(491)
Financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $72,191 $53,181 $ 32,812
(1) See Principals of Consolidation in Note 1—Significant Accounting Policies in the Notes to Consolidated Financial Statements.
(2)
for an explanation of deconsolidation.
Included in the Consolidated Statements of Operations as a realized investment gain under the caption “Realized investment
gains (losses)”. See Derivatives in Note 1.
The table below presents the components of financing costs.
Analysis of Financing Costs
(Amounts in thousands)
2006
2005
2004
Interest on funded debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $63,585 $52,322 $ 52,287
4,081
Interest on short-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
123
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(360)
Reclassification of interest due to deconsolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,487
64
(454)
8,532
80
(360)
Subtotal of interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit from interest-rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
72,682
(491)
60,574
(7,393)
56,131
(23,319)
Financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $72,191 $53,181 $ 32,812
Financing costs increased 36% or $19 million in 2006. They rose 62% or $20 million in 2005. The
increases in financing costs were caused by increased short-term rates in financial markets which
impacted us in several ways. Most notable was the effect that rising short rates had on our interest rate
swaps, which we originally entered into to exchange our fixed-interest commitments for floating-rate
these swaps
In the low-interest environment experienced in the past several years,
commitments.
provided us with a considerable spread between our actual interest cost and what our fixed interest cost
would have been. In late 2004, a profitable ten-year swap expired. We earned $9.8 million in 2004 from
this swap, one major factor in the 2005 increase in financing costs. In 2004, short-term rates began to rise
for the next two years, resulting in significant declines in the benefit of all of our other swaps. Because of
the possibility that continued rising short-term rates could cause our spreads to become negative, we
disposed of all swap instruments as of the second quarter of 2006. Nevertheless, the reductions in
positive spreads on settlements from all swaps caused financing costs to increase $7 million in 2006 and
$16 million in 2005 over the prior periods. As a result of the dispositions of the swaps, our only exposure
to variable rates at December 31, 2006 was our commercial paper borrowing program, of which $170
million was outstanding.
In addition to their impact on our swaps, rising short-term rates were also the primary factor in
increased interest on our commercial paper borrowings, $1 million in 2006 and $4 million in 2005. Another
major factor in the increase in financing costs in 2006 was the refinancing of two funded debt issues. Our
6¼% Senior Notes ($180 million principal amount) matured in the fourth quarter of 2006. Our 7 3⁄4%
32
Trust Preferred Securities ($150 million redemption value) became callable also in the fourth quarter of
2006 and we elected to call them. These repayments were essentially funded by the issuance of two new
instruments in the second quarter of 2006, our 6 3⁄ 8% Senior Notes ($250 million principal amount) and
our 7.1% Trust Preferred Securities ($120 million principal amount). Because the new issues were offered
several months before the other securities were repaid, interest on funded debt increased $11 million. It
should be noted, however, that we invested the proceeds of the new offerings and the investment income
from those proceeds offset the increased financing costs, having little impact on total excess investment
income. More information concerning the debt offerings, repayments, and swaps is disclosed in Note
10—Debt in the Notes to the Consolidated Financial Statements.
Our primary investment goal is to maintain a positive spread between the yield on investments and
the yield on our interest-bearing policy liabilities and debt. It is this positive spread that results in excess
investment income. At the same time, we seek investments predominately in publicly-traded investment-
grade corporate fixed income securities. In periods of lower long-term rates, achieving our goal becomes
more challenging.
When yields available on high-quality long-term (over 20 years) securities are sufficient to meet our
yield and spread objectives, we generally prefer to invest in longer-term securities, which also more
closely match the long-term nature of our policy liabilities. However, we do not want to invest for long
durations at rates less than our minimum yield target. Therefore, during periods when we cannot obtain
our minimum target yield, we will invest shorter-term. At year end 2006, our current minimum target yield
was about 6.5%. In the last several years of a lower interest-rate environment, there have been periods
when yields on acceptable securities have been below our minimum target yield and we have invested
shorter term. These periods have also been characterized by a flat or inverted yield curve with short-term
rates about the same as long-term rates. In these periods, we could obtain yields that were equivalent to
long rates without the greater credit risks of long-term securities. We were also provided with an earlier
opportunity to reinvest the proceeds at higher rates at maturity.
Prior to early 2005, we addressed the new lower-interest rate environment by lengthening the
maturities of new investment purchases to maximize the yield. At that time there was still a significant
spread of long-term yields over short-term, even though yields on new long-term investments began to
decline. However, short-term rates began to rise in late 2004 and continued to do so throughout 2005 and
early into 2006 without a significant change in long-term rates, resulting in a flattened yield curve. At that
time we implemented our alternative strategy to invest shorter-term when the available long-term yield fell
below our minimum target yield, as described above. In mid-2006, long-term rates rose slightly, allowing
us to invest at or above our minimum target yield while buying long-term securities.
The lower long-term yields accompanied by higher short-term yields experienced during the past two
years have had a considerable restricting effect on excess investment income, causing it to decline in
each of the past two years from the prior year. However, in the event of an increase in long-term rates,
excess investment income will benefit as new acquisitions can be made at higher yields. Even though
short-term rates could rise along with long-term rates, higher long-term rates would be to Torchmark’s
advantage because the amount of cash invested annually significantly exceeds the amount of our floating
rate debt, and would result in greater investment income net of financing costs under most yield curve
scenarios.
33
Acquisitions. The chart below presents selected information about Torchmark’s fixed-maturity
acquisitions in the years 2004 through 2006. Investment-grade corporate securities include both bonds
and trust-preferred securities (classified as redeemable preferred stocks) with a diversity of issuers and
industry sectors. Both yield and average life calculations on new purchases of noncallable bonds are
based on the maturity date. In the case of callable bonds, the average life is based on the call date or
maturity date, whichever produces the lowest yield (“yield to worst”).
Fixed Maturity Acquisitions Selected Information
(Dollar amounts in millions)
For the Year
2006
2005
2004
Cost of acquisitions:
Investment-grade corporate securities . . . . . . . . . . . . . . . . . . . . . $1,179.2 $787.4 $1,202.9
3.3
Other investment-grade securities . . . . . . . . . . . . . . . . . . . . . . . .
110.4
105.0
Total fixed-maturity acquisitions . . . . . . . . . . . . . . . . . . . . $1,284.2 $897.8 $1,206.2
Average yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective annual yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average life (in years, to worst call) . . . . . . . . . . . . . . . . . . . . . . . . .
6.61% 5.81%
6.72% 5.90%
20.9
15.3
6.37%
6.47%
23.4
We continue to invest exclusively in investment-grade fixed maturities. As previously discussed, we
attempted to maximize yield on new investments in the low-interest environment in 2004 and early 2005
by lengthening maturities. Our strategy changed in mid-2005 through mid-2006 to invest in shorter
maturities, and then changed back to longer maturities in the latter part of 2006. As a result, the average
life of new fixed maturity acquisitions was 23.4 years in 2004, falling to 15.3 years in 2005, and then rising
to 20.9 years in 2006. The effective annual yield on new investments fluctuated accordingly, at 6.47% in
2004, 5.90% in 2005, and 6.72% in 2006. We believe that because of
fixed-rate
characteristics of our policy liabilities, even acquisitions with lives in excess of 20 years are appropriate
for us when matching assets and liabilities.
the long-term,
New cash flow available to us for investment was affected by issuer calls as a result of the low-
interest environment experienced during the past three years. Issuers are more likely to call bonds when
rates are low because they can refinance them at a lower cost. Calls increase funds available for
investment, but they negatively affect portfolio yield, as they cause us to replace higher-yielding bonds
with those available at lower prevailing yields. Issuer calls were $229 million in 2006, $226 million in 2005,
and $352 million in 2004.
As long as the yields on new fixed maturity acquisitions remain below the overall portfolio yield, the
portfolio yield should slowly decline. Accordingly, the portfolio yield has continued to decline in each
successive year. However, in 2006, the effective annual yield on new acquisitions did turn up after several
years of declines, rising to 6.7%, and having somewhat of a stabilizing effect on the downward trend of
the sizeable annual cash flow generated from
the portfolio yield. As discussed above, because of
operations, we believe Torchmark will be well positioned if and when investment interest rates rebound.
34
Portfolio Analysis. Our emphasis has been on bond investments over alternative investments.
Therefore, the relative percentage of Torchmark’s investments by type varies from industry norms. The
following table presents a comparison of Torchmark’s components of invested assets at amortized cost
as of December 31, 2006 with the latest industry data.
Torchmark
Amount
(in millions)
%
Industry %(1)
Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock (redeemable and perpetual) . . . . . . . . . . . . . .
Common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7,435
1,488
15
20
8
329
21
157
78.4
15.7
0.2
0.2
0.1
3.5
0.2
1.7
78.0
0.8
2.6
10.1
0.5
3.8
3.0
1.2
$ 9,473
100.0
100.0
(1) Latest data available from the American Council of Life Insurance.
For an analysis of our fixed-maturity portfolio by component at December 31, 2006 and 2005, see
Note 3—Investments in the Notes to Consolidated Financial Statements.
The distribution of expected repayments for fixed maturities at December 31 of the indicated year is
as follows:
Short terms and under 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6-10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11-15 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16-20 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 20 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006
2005
12% 8%
27
8
6
11
36
32
12
7
9
32
100% 100%
Additional information concerning the fixed-maturity portfolio is as follows.
Fixed Maturity Portfolio Selected Information
Average effective annual yield . . . . . . . . . . . . . . . . . . . . . . . . .
Average life (in years, to worst call)(1) . . . . . . . . . . . . . . . . . . . .
Average life (in years, to maturity) . . . . . . . . . . . . . . . . . . . . . .
Effective duration (in years, to worst call)(1,2) . . . . . . . . . . . . . .
Effective duration (in years, to maturity)(2)
. . . . . . . . . . . . . . . .
7.02%
13.5
16.5
7.4
8.6
7.09%
12.4
15.3
7.0
8.2
At December 31,
2006
At December 31,
2005
(1) Worst call is the call date producing the lowest yield.
(2) Effective duration is a measure of the price sensitivity of a fixed-income security to a particular change in interest rates.
At the end of 2006 and 2005, the fixed-maturity portfolio had a gross unrealized gain of $319 million
and $486 million,
respectively. Gross unrealized losses on fixed maturities were $90 million at
December 31, 2006, compared with $61 million a year earlier. Please see Note 3—Investments in the
Notes to Consolidated Financial Statements for an analysis of unrealized investment losses.
35
Credit Risk Sensitivity. Credit risk is the level of certainty that a security’s issuer will maintain its
ability to honor the terms of that security until maturity. In weak economic periods, the securities of
industry sectors affected by the economic downturn suffer increased credit risk. As a result, securities in
these weakened sectors could be downgraded by credit-rating agencies to below-investment grade
status. Thus, the likelihood the issuers will honor their securities’ terms is reduced and the securities’
market values can be negatively impacted. As we continue to invest in corporate bonds with relatively
long maturities, credit risk is a concern. We mitigate this ongoing risk, in part, by acquiring investment-
grade bonds, and by investigating the financial fundamentals of each prospective issuer. We continue to
monitor the status of issuers on an ongoing basis. At December 31, 2006, approximately 94% of invested
assets at fair value were held in fixed-maturity securities. The major rating agencies considered 93% of
this portfolio to be investment grade. The average quality rating of the portfolio is A-. The table below
demonstrates the credit rankings of Torchmark’s fixed-maturity portfolio at fair value as of December 31,
2006.
Rating
Amounts
(in millions) %
AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BBB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less than B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Not rated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 621.1
461.1
3,397.9
3,974.1
491.2
155.6
25.8
-0-
7
5
37
44
5
2
-0-
-0-
$9,126.8
100
Our current investment policy is to acquire only investment-grade obligations. Thus, any increases in
below investment-grade issues are a result of ratings downgrades of existing holdings.
We additionally reduce credit risk by maintaining investments in a wide range of industry sectors. The
following table presents the industry sectors that equaled or exceeded 2% of the corporate fixed-maturity
portfolio at fair value at December 31, 2006.
Industry
%
Insurance carriers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Depository institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Electric, gas, sanitation services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7
Nondepository credit institutions (finance) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
Chemicals & allied products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
Media . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
Food & kindred products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Oil & gas extraction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Transportation equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Petroleum refining & related industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Security & commodity brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Otherwise, no individual industry represented 2% or more of Torchmark’s corporate fixed maturities.
Market Risk Sensitivity. The primary market risk to which Torchmark’s financial securities are
exposed is interest rate risk, meaning the effect of changes in financial market interest rates on the
current fair value of the company’s investment portfolio. Since the portfolio is comprised 94% of fixed-
maturity investments, it is highly subject to market risk. Declines in market interest rates in recent years
have generally resulted in the fair value of the investment portfolio exceeding the book value of the
portfolio. However, we do not expect to realize these unrealized gains because it is generally our
investment strategy to hold these investments to maturity. Our strategy would be the same should
36
markets reverse and market rates increase placing the fixed-income portfolio in an unrealized loss
position. The long-term nature of our insurance policy liabilities and strong cash-flow operating position
substantially mitigate any future need to liquidate portions of the portfolio. The increase in the fair value of
insurance liabilities and debt due to declines in market interest rates largely offset the impact of rates on
the investment portfolio. However, in accordance with GAAP, these liabilities are not marked to market.
The following table illustrates the market risk sensitivity of our interest-rate sensitive fixed-maturity
portfolio at December 31, 2006 and 2005. This table measures the effect of a change in interest rates (as
represented by the U.S. Treasury curve) on the fair value of the fixed-maturity portfolio. The data are
prepared through a model which incorporates various assumptions and estimates to measure 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 could have on the portfolio, given the changes in rates. The valuation of these
option features is dependent upon assumptions about future interest rate volatility that are based on past
performance.
Market Value of
Fixed-Maturity Portfolio
($ millions)
Change in
Interest Rates
(in basis points)
At
December 31,
2006
At
December 31,
2005
-200
-100
0
100
200
$10,777
9,901
9,127
8,439
7,837
$10,357
9,568
8,837
8,205
7,615
Realized Gains and Losses. As a group of life and health insurance carriers, we collect premium
income from policyholders for the eventual payment of policyholder benefits, sometimes paid many years
or even decades in the future. In addition to the payment of these benefits, we also incur acquisition
costs, administrative expenses, and taxes as a part of insurance operations. Because benefits are
expected to be paid in future periods, premium receipts in excess of current expenses are invested to
provide for these obligations. For this reason, we hold a significant investment portfolio as a part of our
core insurance operations. This portfolio consists primarily of high-quality fixed maturities containing an
adequate yield to provide for the cost of carrying these long-term insurance product obligations. As a
result, fixed maturities are generally held for long periods to support the liabilities. Expected yields on
these investments are taken into account when setting insurance premium rates and product profitability
expectations.
Because our investment portfolio is large and diverse, investments are occasionally sold or called,
resulting in a realized gain or loss. These gains and losses occur only incidentally, usually as the result of
sales because of deterioration in investment quality of issuers or calls by the issuers. Investment losses
are also caused by writedowns due to impairments. We do not engage in trading investments for profit.
Therefore, gains or losses which occur in protecting the portfolio or its yield, or which result from events
that are beyond our control, are only secondary to the core insurance operations of providing insurance
coverage to policyholders. Unlike investment income, realized gains and losses are not considered in
determining premium rates or product profitability of our insurance products.
Realized gains and losses can be significant
in relation to the earnings from core insurance
operations, however, and as a result, have a material positive or negative impact on net income. The
significant fluctuations caused by gains and losses can cause period-to-period trends of net income to not
be indicative of historical core operating results nor predictive of the future trends of core operations.
Accordingly,
they have no bearing on core insurance operations or segment results as we view
operations. For these reasons, we remove the effects of realized gains and losses when evaluating
overall insurance operating results.
37
The following table summarizes our tax-effected realized gains (losses) by component for each of the
years in the three-year period ended December 31, 2006.
Analysis of After-tax Realized Gains (Losses)
(Amounts in thousands, except for per share data)
Year Ended December 31,
2006
2005
2004
Amount Per Share Amount Per Share Amount
Per Share
Realized gains (losses), net of tax, from:
Investment sales and calls . . . . . . . . . . . . . . . . $ (787)
(3,830)
Loss on redemption of debt
. . . . . . . . . . . . . . .
-0-
Writedown of fixed maturities . . . . . . . . . . . . . .
Writedown of other investments . . . . . . . . . . . .
-0-
(2,956)
Valuation of interest rate swaps . . . . . . . . . . . .
319
Spread on interest rate swaps* . . . . . . . . . . . .
$(.01)
(.04)
-0-
-0-
(.03)
.01
$
608
-0-
-0-
-0-
(5,388)
4,805
$ .01
-0-
-0-
-0-
(.05)
.04
$ 8,734
-0-
(2,784)
(1,335)
(5,332)
15,157
$ 0.08
-0-
(0.03)
(0.01)
(0.05)
0.14
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(7,254)
$(.07)
$
25
$ -0-
$14,440
$ 0.13
* The reduction in interest cost from swapping fixed-rate obligations to floating rate.
In 2004, we wrote down certain holdings to estimated fair value as a result of other-than-temporary
impairment. The impaired securities met some or all of our criteria for other-than-temporary impairment as
discussed in Note 3—Investments in the Notes to Consolidated Financial Statements and in our Critical
Accounting Policies in this report. The pretax charge for this impairment was $6 million. A previously
written down bond of 1 issuer was still held at December 31, 2006 at a fair value of $26 million and a
recorded book value of $10 million.
As discussed in Note 10—Debt in the Notes to Consolidated Financial Statements, we redeemed our
7¾% Trust Preferred Securities in 2006, recording a pretax loss of $5.5 million ($3.6 million after tax).
Additionally in 2006, we repurchased with the intent to retire $3.3 million principal amount of our 7 7⁄ 8%
Notes, recording a pretax loss of $415 thousand ($270 thousand after tax).
In prior years, we have entered into interest-rate swap agreements, swapping our fixed-rate
commitments on our long-term debt for floating-rate commitments. Accounting rules require us to value
our interest-rate swaps at their fair value at the end of each accounting period. The fair values of these
instruments fluctuate with interest rates in financial markets and diminish with the passage of time so that
their value will be zero when they ultimately expire. These period-to-period fluctuations can be
substantial. However, we do not consider these period-to-period fluctuations in value in managing
ongoing operations because their cumulative result will be zero if we elect to hold them to expiration.
These temporary unrealized changes in swap values are included as a component of “Realized
investment gains (losses)” in the Consolidated Statements of Operations. This fair value adjustment for all
swaps on an after-tax basis was a negative $3 million in 2006, compared with a negative $5 million in
both 2005 and 2004.
In prior periods, a steeper yield curve provided us with a considerable spread between long and
short-term rates on our interest-rate swaps, significantly reducing the interest cost of our long-term debt.
In recent periods however, as short-term rates have increased with no meaningful change in long-term
rates, these swaps have become less profitable. Because the outlook for short-term rate increases in late
2005 and the expectation of even greater short-term rate increases in 2006 could have caused these
spreads to become unprofitable in the future, we sold two of our swaps in the third quarter of 2005 and
the remaining two swaps in the second quarter of 2006. The 2005 sales consisted of the $99 million
notional amount related to the 8.25% Senior Debentures and the $100 million notional amount associated
with the 7.375% Notes. Proceeds of $239 thousand were received on the sales. The two remaining
swaps sold in 2006 consisted of the $180 million notional amount related to the 6¼% Senior Notes and
the $150 million notional amount in connection with the 7¾% Trust Preferred Securities. The 2006 sales
resulted in net proceeds of $63 thousand. No gain or loss was recorded at the time of the swap sales
38
because the gains and losses were already reflected in the financial statements as a result of the periodic
revaluation discussed above. More information on our swaps is found in Note 10—Debt in the Notes to
Consolidated Financial Statements.
The Securities and Exchange Commission’s accounting guidance currently requires that all income
and expenses related to a nonhedged derivative be recorded in the same line item on the income
statement that the adjustment to fair value is recorded. Therefore, we combined the cash settlements on
nonhedged swaps with the noncash unrealized fair value adjustment as a component of realized
investment gains and losses. Additionally, we included the cash settlements on hedged swap derivatives
in realized investment gains and losses for consistency. Our pretax interest cost reduction from these
cash settlements included in realized investment gains was a positive $491 thousand in 2006, a positive
$7 million in 2005, and a positive $23 million in 2004. We reduced interest cost for this benefit in our
segment analysis, because the segment analysis is required by GAAP to be as management evaluates
the performance of the segment. We view the benefit from lower interest rates as a reduction in financing
costs in the Investment segment.
39
FINANCIAL CONDITION
Liquidity. Liquidity provides Torchmark with the ability to meet on demand the cash commitments
required by its business operations and financial obligations. Our liquidity is derived from three sources:
positive cash flow from operations, a portfolio of marketable securities, and a line of credit facility.
Our insurance operations have historically generated positive cash flows in excess of our immediate
needs. Sources of cash flows from operations include primarily premium and investment income. Cash
outflows from operations include policy benefit payments, commissions, administrative expenses, and
taxes.
Operating cash inflows significantly exceed cash outflows primarily because life insurers, such as
Torchmark, expect to pay the majority of their policyholder benefits in future periods, sometimes many
years later. A liability is actuarially computed and recorded for these future benefits which increases as
insurance in force grows so that we can “save” for these future payments. Earnings are charged for the
increase in this reserve each period, but there is no corresponding cash outlay. Therefore, cash provided
from operations is generally expected to significantly exceed net income in any given period. Cash flows
are also generated by the maturities and scheduled repayments of the investment portfolio. Cash flows in
excess of immediate requirements are invested to fund future requirements. Available cash flows are also
used to repay debt, to buy back Torchmark shares, to pay shareholder dividends, and for other corporate
uses. While our cash flows have historically been positive and very strong, a material reduction in cash
flow could negatively affect our liquidity.
Cash flows provided from operations increased in each of the three years ended December 31, 2006
over their respective prior year. They were $869 million in 2006, $857 million in 2005, and $767 million in
2004. In addition, we received $606 million in investment maturities, repayments, and calls in 2006,
adding to available cash flows. Such repayments were $473 million in 2005 and $574 million in 2004.
We have in place a line of credit facility with a group of lenders which allows unsecured borrowings
and stand-by letters of credit up to $600 million. For a detailed discussion of this line of credit facility, see
the commercial paper section of Note 10—Debt in the Notes to Consolidated Financial Statements.
Our cash and short-term investments were $173 million at year-end 2006 and $138 million at year-
end 2005. Additionally, we have a portfolio of marketable fixed and equity securities that are available for
sale in the event of an unexpected need. These securities had a fair value of $9.1 billion at December 31,
2006. However, our strong cash flows from operations, investment maturities, and credit line availability
make any need to sell securities for liquidity unlikely.
Liquidity of the parent company is affected by the ability of the subsidiaries to pay dividends. The
parent receives dividends from subsidiaries in order to meet dividend payments on common and
preferred stock, interest and principal repayment requirements on parent-company debt, and operating
expenses of the parent company. For more information on the restrictions on the payment of dividends by
subsidiaries, see the restrictions section of Note 11—Shareholders’ Equity in the Notes to Consolidated
Financial Statements. Although these restrictions exist, dividend availability from subsidiaries historically
has substantially exceeded the cash flow needs for parent company operations.
Off-Balance Sheet Arrangements. As fully described and discussed in Note 10—Debt in the
Notes to the Consolidated Financial Statements and under the subcaption Funded Debt, Torchmark had
outstanding $120 million (par amount) 7.1% Trust Preferred Securities at December 31, 2006 and $150
million (par amount) 7 3⁄4% Trust Preferred Securities a year earlier. The Capital Trusts liable for these
securities are the legal entities which are responsible for the securities and facilitate the payment of
dividends to shareholders. They are off-balance sheet arrangements which we are required to
deconsolidate in accordance with GAAP rules. Deconsolidation is required by accounting rules because
they are considered to be variable interest entities in which we have no variable interest. Therefore
Torchmark is not the primary beneficiary of the entity, even though we own all of the entity’s voting equity
and have guaranteed the entity’s performance. While these liabilities are not on our balance sheet, they
are represented by Torchmark’s 7.1% and 7 3⁄4% Junior Subordinated Debentures due to the trusts.
These Junior Subordinated Debentures were a Torchmark liability of $124 million par and book value at
December 31, 2006 and $155 million par and book value at December 31, 2005. These securities are
40
indicated as a capital resource to us under the caption Capital Resources in this report. The 7.1%
preferred dividends due to the preferred shareholders are funded by our 7.1% interest payment on our
to the trusts. As described in Note 14—Commitments and Contingencies in the Notes to
debt
Consolidated Financial Statements, we have guaranteed the performance of the Capital Trusts to meet
their financial obligations to the Trust Preferred shareholders.
Pension obligations to our employees primarily are obligations of trust fund entities which are not
reflected on our balance sheet. The obligations of these trusts are calculated in accordance with the
terms of
the pension plans. These trust entities hold assets which are funded through periodic
contributions by Torchmark in a manner which will provide for the settlement of the pension obligations as
they become due. The difference in our pension obligations and the fair value of the assets which fund
those obligations are included on our Balance Sheet as of December 31, 2006.
During 2005, our subsidiary American Income entered into an agreement to guarantee certain
personal loans of American Income employees and agents with First Command Bank. First Command
Bank is a subsidiary of First Command Financial Services, Inc. (First Command) of which Lamar C. Smith
is Chairman and CEO. He is also a director of Torchmark. At December 31, 2006, the balance subject to
this guarantee was $71 thousand. These guarantees are secured by vested commissions due the
employees and agents. See Note 15—Related Party Transactions in the Notes to Consolidated Financial
Statements for more information on this guarantee.
As of December 31, 2006, we had no other significant unconsolidated affiliates and no guarantees of
the obligations of third-party entities other than as described above. All of our guarantees, other than the
Trust Preferred guarantee and the First Command Bank guarantee, were guarantees of the performance
of consolidated subsidiaries, as disclosed in Note 14—Commitments and Contingencies. All of our
derivative instruments, if any, were recorded at fair value on our Balance Sheets.
The following table presents information about future payments under our contractual obligations for
the selected periods as of December 31, 2006.
(Amounts in millions)
Actual
Liability
Total
Payments
Less than
One Year
One to
Three Years
Four to
Five Years
More than
Five Years
Fixed and determinable:
Long-term debt—principal . . . . . . . . . . . . . . . . $ 721
Long-term debt—interest(1) . . . . . . . . . . . . . . .
9
-0-
Capital leases . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
Operating leases . . . . . . . . . . . . . . . . . . . . . . .
34
Purchase obligations . . . . . . . . . . . . . . . . . . . .
Pension obligations(2)
7
. . . . . . . . . . . . . . . . . . .
Future insurance obligations(3) . . . . . . . . . . . .
8,955
$
733
778
-0-
12
34
130
41,773
$
-0-
53
-0-
3
24
9
1,472
$
99
103
-0-
4
10
24
2,784
$
-0-
89
-0-
3
-0-
25
2,599
$
633
533
-0-
2
-0-
72
34,918
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,726
$43,460
$1,561
$3,024
$2,716
$36,158
Interest on debt is based on our fixed contractual obligations.
(1)
(2) Pension obligations are primarily liabilities in trust funds that are offset by invested assets funding the trusts. Therefore, our
obligations are offset by those assets when reported on Torchmark’s Consolidated Balance Sheets. At December 31, 2006,
these pension obligations were $205 million, but there were also assets of $198 million in the pension entities. The schedule of
pension benefit payments covers ten years and is based on the same assumptions used to measure the pension obligations,
except there is no interest assumption because the payments are undiscounted. Please refer to Note 9—Postretirement
Benefits in the Notes to Consolidated Financial Statements for more information on pension obligations.
(3) Future insurance obligations consist primarily of estimated future contingent benefit payments on policies in force and separate
account obligations at December 31, 2006. These estimated payments were computed using assumptions for future mortality,
morbidity and persistency. The actual amount and timing of such payments may differ significantly from the estimated amounts
shown. Management believes that the assets supporting the liability of $9.0 billion at December 31, 2006, along with future
premiums and investment income, will be sufficient to fund all future insurance obligations.
41
Capital Resources. Torchmark’s capital structure consists of short-term debt (the commercial
paper facility described in Note 10—Debt in the Notes to Consolidated Financial Statements), long-term
funded debt, Junior Subordinated Debentures supporting its trust preferred securities, and shareholders’
equity. The Junior Subordinated Debentures are payable to Torchmark’s Capital Trusts which are liable
for its Trust Preferred Securities. In accordance with GAAP, these instruments are included in “Due to
affiliates” on the Consolidated Balance Sheets. A complete analysis and description of long-term debt
issues outstanding is presented in Note 10—Debt in the Notes to Consolidated Financial Statements.
The carrying value of the funded debt was $721 million at December 31, 2006, compared with $688
million a year earlier. During the second quarter of 2006, we registered and issued two new security
offerings: our 7.1% Trust Preferred Securities, offered through Torchmark Capital Trust III at a redemption
value of $120 million less issue expenses, and our 6 3⁄ 8% Senior Notes issued for the principal amount of
$250 million less issue expenses. In the fourth quarter of 2006, we redeemed our 7 3⁄4% Trust Preferred
Securities and we repaid our 6 1⁄4% Senior Notes which matured. The Trust Preferreds were redeemed for
$150 million plus accrued dividends and our Senior Notes were repaid in the principal amount of $180
million plus accrued interest. Specific information about the new securities offered in 2006, including the
uses of proceeds, as well as information concerning securities repaid in 2006, including funding, is
disclosed and discussed in Note 10—Debt in the Notes to Consolidated Financial Statements.
Over the past several years, we have entered into swap agreements to exchange the fixed-rate
commitments on our funded debt for floating-rate commitments. During the low interest-rate environment
in recent years, these swaps were very beneficial in reducing our interest cost, as discussed under the
captions Investments (Excess investment income) and Realized Gains and Losses in this report. As
short-term rates rose over the past two years with no meaningful change in long-term rates, these swaps
became less profitable. Because we believed that the swap settlements could have possibly turned
negative, we disposed of these agreements during the past two years and held no swap agreements as
of December 31, 2006. Detailed information about the history of our swaps for the past three years is
found in Note 10—Debt in the Notes to Consolidated Financial Statements under the caption Interest
Rate Swaps.
In the second quarter of 2005, we executed a voluntary stock option exercise and restoration
program in which 120 directors, employees and consultants exercised vested options in Torchmark’s
common stock and received a lesser number of new options at the current market price. As a result, we
issued 5.8 million new shares to the participants. However, a substantial number of the new shares were
immediately sold through the open market by the participants to cover the option exercise price of their
new shares and their related income taxes. As a result of the program, management’s ownership in
Torchmark increased and the Company received a significant tax benefit from the exercise of the options.
We received $213 million in proceeds for the exercise price and $37 million in tax benefits, both of which
added to shareholder’s equity. However, as previously mentioned, we generally use the proceeds of
option exercises to repurchase shares on the open market to reduce the dilution caused by option
exercises. As a result, the total impact on shareholder’s equity and cash flow from the transaction was
immaterial. More information on stock options and this program is found in Note 1—Significant
Accounting Policies and in Note 12—Stock-Based Compensation in the Notes to Consolidated Financial
Statements.
As previously mentioned, our Board reaffirmed its continued authorization of the stock repurchase
program in July, 2006 in amounts and timing that management,
in consultation with the Board,
determined to be in the best interest of the Company. We have repurchased common stock every year
since 1986, except for 1995, the year following the acquisition of American Income. Since the beginning
of 1998, we have repurchased 46 million shares at a total cost of $1.9 billion, and have acquired no fewer
than 3.4 million shares in any one year. We believe that Torchmark share purchases at favorable prices
add incrementally to per share earnings, return on equity, and are an excellent way to increase total
shareholder value. As noted earlier in this report, we acquired 5.6 million shares at a cost of $320 million
in 2006 with excess cash flow. If the $320 million free cash flow used for the repurchase of our common
stock had alternatively been invested in corporate bonds, an estimated $9 million of additional investment
income, after tax, would have resulted and net income per diluted share would have increased 7% to
$5.03. Because share purchases were made, actual net income per share was $5.13, an increase of
10%. We intend to continue the repurchase of our common shares when prices are favorable.
42
We maintain a significant available-for-sale fixed-maturity portfolio to support our
insurance
policyholders’ liabilities. Accounting rule (SFAS 115) requires that we revalue our portfolio to fair market
value at the end of each accounting period. The period-to-period changes in fair value, net of their
associated impact on deferred acquisition costs and income tax, are reflected directly in shareholders’
equity. Changes in the fair value of the portfolio result from changes in interest rates in financial markets.
While SFAS 115 requires invested assets to be revalued, accounting rules do not permit interest-bearing
insurance policy liabilities to be valued at fair value in a consistent manner. Due to the size of our policy
liabilities in relation to its shareholders’ equity, this inconsistency in measurement usually has a material
impact in the reported value of shareholders’ equity. If these liabilities were revalued in the same manner
as the assets, the effect on equity would be largely offset. Fluctuations in interest rates cause undue
volatility in the period-to-period presentation of our shareholders’ equity, capital structure, and financial
ratios which would be essentially removed if interest-bearing liabilities were valued in the same manner
as assets. For this reason, our management, credit rating agencies, lenders, many industry analysts, and
certain other financial statement users prefer to remove the effect of SFAS 115 when analyzing our
balance sheet, capital structure, and financial ratios.
The following tables present selected data related to our capital resources. Additionally, the tables
present the effect of SFAS 115 on relevant line items, so that investors and other financial statement
users may determine its impact on Torchmark’s capital structure.
Selected Financial Data
At December 31, 2006
At December 31, 2005
At December 31, 2004
GAAP
Effect of
SFAS 115*
Fixed maturities (millions) . . . . . . . . . . . . . . . . $ 9,127
2,956
Deferred acquisition costs (millions)
. . . . . . .
14,980
Total assets (millions) . . . . . . . . . . . . . . . . . . .
170
Short-term debt (millions) . . . . . . . . . . . . . . . .
721
Long-term debt (millions) ** . . . . . . . . . . . . . . .
3,459
Shareholders’ equity (millions) . . . . . . . . . . . .
$ 229
(10)
219
-0-
-0-
142
GAAP
$ 8,837
2,768
14,769
382
508
3,433
Effect of
SFAS 115*
$ 425
(23)
402
-0-
-0-
261
GAAP
$ 8,715
2,583
14,252
170
695
3,420
Effect of
SFAS 115*
$ 649
(37)
612
-0-
-0-
398
Book value per diluted share . . . . . . . . . . . . .
Debt to capitalization *** . . . . . . . . . . . . . . . . .
34.68
20.5%
1.43
(.7)%
32.91
20.6%
2.50
(1.3)%
31.07
20.2%
3.62
(2.1)%
Diluted shares outstanding (thousands) . . . . .
Actual shares outstanding (thousands) . . . . .
99,755
98,115
104,303
103,569
110,075
107,944
*
**
Amount added to (deducted from) comprehensive income to produce the stated GAAP item
Includes Torchmark’s 7.1% Junior Subordinated Debentures in 2006 in the amount of $124 million and its 7 3⁄4% Junior
Subordinated Debentures in the amount of $155 million in both 2005 and 2004.
*** Torchmark’s debt covenants require that the effect of SFAS 115 be removed to determine this ratio
Torchmark’s ratio of earnings before interest and taxes to interest requirements (times interest
earned) was 11.6 times in 2006, compared with 13.0 times in 2005, and 13.8 times in 2004. A discussion
of our interest expense is included in the discussion of financing costs under the caption Investments in
this report.
43
Credit Ratings. The credit quality of Torchmark’s debt instruments and capital securities are rated
by various rating agencies. During 2006, A.M. Best downgraded Torchmark’s funded debt one notch from
a to a-, and its preferred stock from a- to bbb+. Moody’s downgraded our funded debt from A3 to Baa1,
and our preferred stock from Baa1 to Baa2. Both downgrades were to reflect the “notching,” or widening
of rating levels between the insurance companies and their parent company which has issued the debt.
This notching is typical for these rating agencies as they rate other insurance companies. It does not
reflect any change in the creditworthiness of the Company. The chart below presents Torchmark’s credit
ratings as of December 31, 2006.
Commercial Paper . . . . . . . . . . . . . . . . . . . . . . . . .
Funded Debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
A-1
A+
A-
Standard
& Poors
Fitch
Moody’s
F-1
A
A-
P-2
Baa1
Baa2
A.M.
Best
AMB-1
a-
bbb+
The financial strength of our major insurance subsidiaries are also rated by Standard & Poor’s and
A.M. Best. In 2006, A. M. Best lowered its financial strength rating of United Investors to A (Excellent)
from A+ (Superior), as a result of Torchmark’s diminished emphasis of that subsidiary’s business. The
following chart presents these ratings for our five largest insurance subsidiaries at December 31, 2006.
Liberty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Globe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United American . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
American Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA
AA
A+
AA
AA
A+ (Superior)
A+ (Superior)
A (Excellent)
A+ (Superior)
A+ (Superior)
Standard
& Poors
A.M.
Best
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. The A.M. Best A (Excellent) rating is assigned 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.
The AA rating is assigned by Standard & Poor’s Corporation to those insurers which have very strong
financial security characteristics, differing only slightly from those rated higher. The A+ rating is assigned
to an insurer with strong financial security characteristics, somewhat more likely to be affected by adverse
business conditions than insurers with higher ratings. The “+” indicates that United Investors is among the
strongest insurers within the A category.
TRANSACTIONS WITH RELATED PARTIES
Information regarding related party transactions is found in Note 15—Related Party Transactions in
the Notes to Consolidated Financial Statements.
OTHER ITEMS
Litigation. Torchmark and its subsidiaries continue to be named as parties to pending or threatened
litigation, much of which involves punitive damage claims based upon allegations of agent misconduct at
Liberty in Alabama. Such punitive damage claims are tried in Alabama state courts where any punitive
for significant adverse results since punitive damages in
damage litigation may have the potential
Alabama are based upon the compensatory damages (including mental anguish) awarded and the
discretion of the jury in awarding compensatory damages is not precisely defined. Additionally, it should
be noted that our subsidiaries actively market insurance in the State of Mississippi, a jurisdiction which is
nationally recognized for large punitive damage verdicts. Bespeaking caution is the fact
is
impossible to predict the likelihood or extent of punitive damages that may be awarded if liability is found
in any given case. It is thus difficult to predict with certainty the liability of Torchmark or its subsidiaries in
that
it
44
any given case because of the unpredictable nature of this type of litigation. Based upon information
presently available, and in light of legal and other factual defenses available to Torchmark and its
liabilities arising from threatened and pending litigation are not presently
subsidiaries, contingent
considered by us to be material. For more information concerning litigation, please refer
to
Note 14—Commitments and Contingencies in the Notes to the Consolidated Financial Statements.
NEW UNADOPTED ACCOUNTING RULES
The FASB has issued several new standards applicable to Torchmark, effective in future periods:
Tax Uncertainties: Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109 (FIN 48) was issued to clarify the accounting for income taxes
by providing methodology for the financial statement recognition and measurement of uncertain income
tax positions taken or expected to be taken in a tax return. This interpretation also requires additional
disclosures and provides additional guidance on related topics. It is effective for Torchmark beginning
January 1, 2007. Torchmark has substantially completed its assessment of the impact of the adoption of
FIN 48 and expects that the financial impact of the initial adoption, if any, will not be material.
Hybrid Financial
(SFAS 155), extends the scope of Statement No. 133,
Instruments: Statement No. 155, Accounting for Certain Hybrid Financial
(Accounting for Derivative
Instruments,
Instruments and Hedging Activities), to include certain securitized financial assets. These assets include
primarily mortgage-backed securities, collateralized mortgage obligations, and asset-backed securities
that contain an embedded derivative. The Company would have a one-time election to value the entire
amount of any affected hybrid security at fair value, with fluctuations in value included in earnings. This
Statement is effective for Torchmark as of January 1, 2007. The effect of adoption of this Statement will
be immaterial for Torchmark.
Fair Value Measurements: Statement No. 157, Fair Value Measurements, clarifies the definition of
fair value, establishes a framework or a hierarchy for measuring fair value, and expands disclosures
about fair value measurements. It does not require any new fair value measurements. Accordingly, it is
not expected to have a significant impact on Torchmark’s financial position. However, new disclosures of
fair value measurement methodology and effects will be required. The Statement
is effective for
Torchmark in calendar year and interim periods of 2008, with its provisions applied prospectively.
Fair Value Option: Statement No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities, was issued in February, 2007. This Statement permits entities to choose to measure certain
financial assets and liabilities at fair value which are otherwise measured on a different basis in existing
literature. Additional disclosures are required. It is effective for Torchmark, if elected, as of January 1,
2008. Early adoption is permitted with several constraints. Torchmark is currently evaluating the impact of
this Statement.
Internal Replacements:
In September 2005, the American Institute of Certified Public Accountants
issued Statement of Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in
Connection with Modifications or Exchanges of Insurance Contracts (SOP 05-1). SOP 05-1 provides
accounting guidance for deferred policy acquisition costs associated with internal replacements of
insurance and investment contracts other than those already described in SFAS No. 97, “Accounting and
Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments.” SOP 05-1 defines an internal replacement as a modification in
product benefits, features, rights or coverages that occurs by the exchange of a contract for a new
contract, or by amendment, endorsement or rider to a contract, or by the election of a feature or coverage
within a contract. Under SOP 05-1, modifications that result in a substantially unchanged contract will be
accounted for as a continuation of the replaced contract. Modifications to a replacement contract that
substantially change the contract will be accounted for as an extinguishment of the replaced contract
resulting in a release of unamortized deferred acquisition cost, unearned revenue, and deferred sales
inducements associated with the replaced contract. The provisions of SOP 05-1 are effective for
Torchmark for internal replacements occurring after December 31, 2006. We are currently in the process
of evaluating the impact of adoption. At this time, we do not expect SOP 05-1 to have a material impact
on our financial position or our results of operations.
45
CRITICAL ACCOUNTING POLICIES
Future Policy Benefits. Because of the long-term nature of insurance contracts, our insurance
companies are liable for policy benefit payments that will be made in the future. The liability for future
policy benefits is determined by standard actuarial procedures common to the life insurance industry. The
accounting policies for determining this liability are disclosed in Note 1—Significant Accounting Policies in
the Notes to Consolidated Financial Statements. While management and company actuaries have used
their best judgment in determining the assumptions and in calculating the liability for future policy benefits,
there is no assurance that the estimate of the liabilities reflected in the financial statements represents our
ultimate obligation. Additionally, because of the size of this liability, significantly different assumptions
could have resulted in materially different reported amounts. A list of the significant assumptions used to
calculate the liability for future policy benefits is reported in Note 5—Future Policy Benefit Reserves in the
Notes to Consolidated Financial Statements.
Deferred Acquisition Costs and Value of
Insurance Purchased. The costs of acquiring new
business are generally deferred and recorded as an asset. Deferred acquisition costs consist primarily of
sales commissions and other underwriting costs of new insurance sales. Additionally,
the costs of
acquiring blocks of insurance from other companies or through the acquisition of other companies are
also deferred and recorded as assets under the caption “Value of Insurance Purchased” as indicated in
Note 4—Deferred Acquisition Costs and Value of Insurance Purchased in the Notes to Consolidated
Financial Statements. Our policies for accounting for deferred acquisition costs and the associated
amortization are reported in Note 1—Significant Accounting Policies in the Notes to Consolidated
Financial Statements. Different assumptions with regard to deferred acquisition costs could produce
materially different amounts of amortization. For more information about accounting for deferred
acquisition costs see Note 4.
Policy Claims and Other Benefits Payable. This liability consists of known benefits currently payable
and an estimate of claims that have been incurred but not yet reported to us. The estimate of unreported
claims is based on prior experience and is made after careful evaluation of all information available to us.
However, the factors upon which these estimates are based can be subject to change from historical
patterns. Factors involved include medical
the litigation
environment, regulatory mandates, and the introduction of policy types for which claim patterns are not
well established. Changes in these estimates, if any, are reflected in the earnings of the period in which
the adjustment is made. We believe that the estimates used to produce the liability for claims and other
benefits, including the estimate of unsubmitted claims, are the most appropriate under the circumstances.
However, there is no certainty that the resulting stated liability will be our ultimate obligation.
trend rates and medical cost
inflation,
Revenue Recognition. Premium income from our subsidiaries’
insurance contracts is generally
recognized as the premium is collected. However, in accordance with GAAP, revenue on limited-payment
contracts and universal
life-type contracts (deposit balance products) are recognized differently.
Revenues on limited-payment contracts are recognized over the contract period. Premium for deposit
balance products, such as our annuity and interest-sensitive life policies, is added to the policy account
value. The policy account value (or deposit balance) is a Torchmark liability. This deposit balance is then
charged a fee for the cost of insurance, administration, surrender, and certain other charges which are
recognized as revenue in the period the fees are charged to the policyholder. In each case, benefits and
expenses are matched with revenues in a manner by which they are incurred as the revenues are
earned.
We report
investment
income as revenue,
less investment expenses, when it
is earned. Our
investment activities are integral to our insurance operations. Because life and health insurance claims
and benefits may not be paid until many years into the future, the accumulation of cash flows from
premium receipts are invested. Anticipated yields earned on investments are reflected in premium rates,
contract liabilities, and other product contract features. These yield assumptions are implied in the interest
required on our net
insurance liabilities (future policy benefits less deferred acquisition costs) and
contractual interest obligations in our insurance and annuity products. For more information concerning
revenue recognition, investment accounting, and interest sensitivity, please refer to Note 1—Significant
Accounting Policies and Note 3—Investments in the Notes to Consolidated Financial Statements and
discussions under the captions Annuities, Investments, and Market Risk Sensitivity in this report.
46
Impairment of Investments. We continually monitor our investment portfolio for investments that
have become impaired in value, whereby fair value has declined below carrying value. While the values of
the investments in our portfolio constantly fluctuate due to market conditions, an investment is written
down only when it has experienced a decline in fair market value which is deemed other than temporary.
The policies and procedures that we use to evaluate and account for impairments of investments are
disclosed in Note 1—Significant Accounting Policies and Note 3—Investments in the Notes to
Consolidated Financial Statements and the discussions under the captions Investments and Realized
Gains and Losses in this report. While every effort is made to make the best estimate of status and value
with the information available regarding an other-than-temporary impairment, it is difficult to predict the
future prospects of a distressed or impaired security.
Defined benefit pension plans. We maintain funded defined benefit plans covering most full-time
employees. We also have unfunded nonqualified defined benefit plans covering certain key and other
employees. Our obligations under these plans are determined actuarially based on specified actuarial
assumptions. In accordance with GAAP, an expense is recorded each year as these pension obligations
grow due to the increase in the service period of employees and the interest cost associated with the
passage of time. These obligations are offset, at least in part, by the growth in value of the assets in the
funded plans.
The actuarial assumptions used in determining our obligations for pensions include employee
mortality and turnover, retirement age, the expected return on plan assets, projected salary increases,
and the discount rate at which future obligations could be settled. These assumptions have an important
effect on the pension obligation. A decrease in the discount rate or rate of return on plan assets will cause
an increase in the pension obligation. A decrease in projected salary increases will cause a decrease in
this obligation. These assumptions are subjective in many cases and small changes in certain
assumptions may cause material differences in reported results. While we have used our best efforts to
determine the most reliable assumptions, given the information available from company experience,
economic data, independent consultants and other sources, we cannot assure that actual results will be
the same as expected. The assumptions are reviewed annually and revised, if necessary, based on more
current information available to us. Our discount rate, rate of return on assets, and projected salary
increase assumptions are disclosed and discussed in Note 9—Postretirement Benefits in the Notes to
Consolidated Financial Statements. This note also contains information about pension plan assets,
investment policies, funded status, and other related data.
CAUTIONARY STATEMENTS
We caution readers regarding certain forward-looking statements contained in the foregoing
discussion and elsewhere in this document, and in any other statements made by us or on our behalf
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 us or our
business, whether express or implied, is meant as and should be considered a forward-looking statement.
Such statements represent our opinions concerning future operations, strategies, financial results or other
developments.
to
Forward-looking statements are based upon estimates and assumptions that are subject
significant business, economic and competitive uncertainties, many of which are beyond our control. If
these estimates or assumptions prove to be incorrect, the actual results 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) Changes in lapse rates and/or sales of our insurance policies as well as levels of mortality,
morbidity and utilization of healthcare services that differ from our assumptions;
47
2) Federal and state legislative and regulatory developments, particularly those impacting taxes
and changes to the federal Medicare program that would affect Medicare Supplement and Medicare
Part D insurance;
3) Market trends in the senior-aged health care industry that provide alternatives to traditional
Medicare, such as health maintenance organizations (HMOs) and other managed care or private
plans, and that could affect the sales of traditional Medicare Supplement insurance;
4) Interest rate changes that affect product sales and/or investment portfolio yield;
5) General economic, industry sector or individual debt issuers’ financial conditions that may
affect the current market value of securities that we own, or that may impair issuers’ ability to pay
interest due us on those securities;
6) Changes in pricing competition;
7) Litigation results;
8) Levels of administrative and operational efficiencies that differ from our assumptions;
9) Our inability to obtain timely and appropriate premium rate increases for health insurance
policies due to regulatory delay;
10) The customer response to new products and marketing initiatives; and
11) Reported amounts in the financial statements which are based on our estimates and
judgments which may differ from the actual amounts ultimately realized.
Readers are also directed to consider other risks and uncertainties described in our other documents on
file with the Securities and Exchange Commission.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Information required by this item is found under the heading Market Risk Sensitivity in Item 7
beginning on page 36 of this report.
48
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 2006 and 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for each of the three years in the period ended
Page
50
51
December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
52
Consolidated Statements of Comprehensive Income for each of the three years in the period
ended December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended
December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53
54
55
56
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Torchmark Corporation
McKinney, Texas
We have audited the accompanying consolidated balance sheets of Torchmark Corporation and
subsidiaries (“Torchmark”) as of December 31, 2006 and 2005, and the related consolidated statements
of operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years in
the period ended December 31, 2006. Our audits also included the financial statement schedules listed in
the Index at Item 15. These financial statements and financial statement schedules are the responsibility
of Torchmark’s management. Our responsibility is to express an opinion on the financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
their operations and their cash flows for each of
In our opinion, such consolidated financial statements present fairly, in all material respects, the
financial position of Torchmark Corporation and subsidiaries as of December 31, 2006 and 2005, and the
the three years in the period ended
results of
December 31, 2006, in conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
We have also audited,
in accordance with the standards of
the Public Company Accounting
Oversight Board (United States), the effectiveness of Torchmark’s internal control over financial reporting
as of December 31, 2006, based on the criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
February 28, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness
of Torchmark’s internal control over financial reporting and an unqualified opinion on the effectiveness of
Torchmark’s internal control over financial reporting.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 28, 2007
50
TORCHMARK CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands except per share data)
December 31,
2006
2005
Assets:
Investments:
Fixed maturities—available for sale, at fair value (amortized cost: 2006—
$8,897,401; 2005—$8,411,635) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,126,784 $ 8,836,642
48,047
316,829
71,570
118,310
Equity securities, at fair value (cost: 2006—$40,105; 2005—$45,797) . . . .
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41,245
328,891
49,681
156,671
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,703,272
9,391,398
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities lending collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred acquisition costs and value of insurance purchased . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Separate account assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,716
-0-
168,118
78,809
2,955,842
378,436
180,540
1,498,622
19,297
257,390
158,225
67,262
2,768,404
378,436
168,100
1,560,391
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,980,355 $14,768,903
Liabilities:
Future policy benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,456,423 $ 7,001,052
91,758
Unearned and advance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
257,771
Policy claims and other benefits payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
89,229
Other policyholders’ funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
88,039
243,346
90,671
Total policy liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,878,479
7,439,810
Deferred and accrued income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities lending obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt (estimated fair value: 2006—$676,281; 2005—$427,280) . . .
Due to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Separate account liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,010,618
-0-
241,749
169,736
597,537
124,421
1,498,622
1,011,048
257,390
176,151
381,505
353,263
156,577
1,560,391
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,521,162 11,336,135
Shareholders’ equity:
Preferred stock, par value $1 per share—Authorized 5,000,000 shares;
outstanding:
-0- in 2006 and in 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, par value $1 per share—Authorized 320,000,000 shares;
outstanding: (2006—99,874,748 issued, less 1,760,121 held in treasury
and 2005—104,874,748 issued, less 1,305,849 held in treasury) . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
99,875
492,333
140,097
2,827,287
(100,399)
104,875
508,713
269,084
2,621,552
(71,456)
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,459,193
3,432,768
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . $14,980,355 $14,768,903
See accompanying Notes to Consolidated Financial Statements.
51
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
Year Ended December 31,
2006
2005
2004
Revenue:
Life premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,524,267 $1,468,288 $1,395,490
1,048,666
Health premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27,744
Other premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,237,532
22,914
1,014,857
24,929
Total premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,784,713
2,508,074
2,471,900
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized investment gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
628,746
(10,767)
18,486
603,068
280
14,488
577,035
22,216
391
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,421,178
3,125,910
3,071,542
Benefits and expenses:
Life policyholder benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Health policyholder benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other policyholder benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,005,771
834,017
23,743
966,093
668,205
26,888
919,775
697,645
28,248
Total policyholder benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,863,531
1,661,186
1,645,668
Amortization of deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commissions and premium taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
377,490
163,683
169,768
73,136
349,959
149,451
172,859
60,934
347,249
150,138
151,195
56,491
Total benefits and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,647,608
2,394,389
2,350,741
Income before income taxes and cumulative effect of change in accounting
principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
773,570
731,521
720,801
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(254,939)
(236,131)
(245,083)
Net income before cumulative effect of change in accounting
principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative effect of change in accounting principle (less applicable income
tax benefit of $3,857) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
518,631
495,390
475,718
-0-
-0-
(7,163)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 518,631 $ 495,390 $ 468,555
Basic net income per share:
Net income before cumulative effect of change in accounting principle . . . $
Cumulative effect of change in accounting principle (net of tax) . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5.20 $
-0-
5.20 $
4.73 $
-0-
4.73 $
Diluted net income per share:
Net income before cumulative effect of change in accounting principle . . . $
Cumulative effect of change in accounting principle (net of tax) . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5.13 $
-0-
5.13 $
4.68 $
-0-
4.68 $
4.32
(.06)
4.26
4.25
(.06)
4.19
Dividends declared per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
.50 $
.44 $
.44
See accompanying Notes to Consolidated Financial Statements.
52
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 518,631 $ 495,390 $468,555
Year Ended December 31,
2006
2005
2004
Other comprehensive income (loss):
Unrealized investment gains (losses):
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period . . . . . . . . . . . . . .
Reclassification adjustment for (gains) losses on securities included in
(208,344)
(229,881)
28,872
net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,927
(778)
(6,385)
Reclassification adjustment for amortization of (discount) and
premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange adjustment on securities marked to market . . . . . . . .
4,615
68
4,768
(3,087)
2,561
(7,909)
Unrealized gains (losses) on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(196,734)
(228,978)
17,139
Unrealized gains (losses) on other investments . . . . . . . . . . . . . . . . . . . . . . . .
-0-
896
(1,177)
Unrealized gains (losses), adjustment to deferred acquisition costs . . . . . . .
12,374
14,268
(528)
Total unrealized investment gains (losses) . . . . . . . . . . . . . . . . . . . . . . . .
(184,360)
(213,814)
15,434
Less application taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64,525
74,839
(5,406)
Unrealized gains (losses), net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(119,835)
(138,975)
10,028
Foreign exchange translation adjustments, other than securities, net of tax of
$125, $(1,155), and $(4,889) during 2006, 2005, and 2004, respectively . . .
(237)
2,143
2,836
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(120,072)
(136,832)
12,864
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 398,559 $ 358,558 $481,419
See accompanying Notes to Consolidated Financial Statements.
53
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Amounts in thousands except per share data)
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Treasury
Stock
Total
Shareholders’
Equity
Year Ended December 31, 2004
Balance at January 1, 2004 . . . . . $ -0-
Comprehensive income . . . . . . . .
Common dividends declared
($0.44 a share)
. . . . . . . . . . . . .
Acquisition of treasury stock . . . . .
Exercise of stock options . . . . . . .
Retirement of treasury stock . . . .
. . . . . . . . . . . . . . . . . . . . . . .
Other
Balance at December 31,
$113,784 $501,034
$ 393,052
12,864
$2,273,448 $ (41,219) $3,240,099
481,419
468,555
(5,000)
4,749
(21,819)
922
(48,236)
(285,226)
32,597
(224,774) 251,593
(6,480)
(48,236)
(285,226)
30,866
-0-
922
2004 . . . . . . . . . . . . . . . . . . . .
-0-
108,784
484,886
405,916
2,462,513
(42,255)
3,419,844
Year Ended December 31, 2005
Comprehensive income . . . . . . . .
Common dividends declared
($0.44 a share)
. . . . . . . . . . . . .
Acquisition of treasury stock . . . . .
Exercise of stock options . . . . . . .
Retirement of treasury stock . . . .
. . . . . . . . . . . . . . . . . . . . . . .
Other
Balance at December 31,
(136,832)
495,390
(45,865)
(554,946)
(94,597) 306,865
(195,889) 218,880
358,558
(45,865)
(554,946)
253,802
-0-
1,375
91
(4,000)
41,443
(18,991)
1,375
2005 . . . . . . . . . . . . . . . . . . . .
-0-
104,875
508,713
269,084
2,621,552
(71,456)
3,432,768
Year Ended December 31, 2006
Comprehensive income . . . . . . . .
Adjustment to Accumulated other
comprehensive income due to
adoption of SFAS 158 . . . . . . . .
Common dividends declared
($0.50 a share)
. . . . . . . . . . . . .
Acquisition of treasury stock . . . . .
Stock-based compensation . . . . .
Exercise of stock options . . . . . . .
Retirement of treasury stock . . . .
Balance at December 31,
(120,072)
518,631
398,559
(8,915)
(49,457)
(344,861)
1,594
28,170
(256,721) 286,154
(6,718)
(8,915)
(49,457)
(344,861)
6,575
24,524
-0-
4,981
3,072
(24,433)
(5,000)
2006 . . . . . . . . . . . . . . . . . . . . $ -0-
$ 99,875 $492,333
$ 140,097
$2,827,287 $(100,399) $3,459,193
See accompanying Notes to Consolidated Financial Statements.
54
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to cash provided from operations:
Year Ended December 31,
2006
2005
2004
518,631 $ 495,390 $
468,555
Increase in future policy benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in other policy benefits . . . . . . . . . . . . . . . . . . . . . . .
Deferral of policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred policy acquisition costs . . . . . . . . . . . . . . . . . . .
Change in deferred and accrued income taxes . . . . . . . . . . . . . . . . . . . .
Realized losses on sale of investments and properties . . . . . . . . . . . . . .
Change in accounting principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
430,087
(16,702)
(552,536)
377,490
76,502
11,258
-0-
20,857
379,151
(8,117)
(519,767)
349,959
131,072
7,112
-0-
22,657
353,756
14,432
(515,197)
347,250
94,049
1,103
11,019
(7,895)
Cash provided from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
865,587
857,457
767,072
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
183,176
605,824
3,499
25,058
78,018
472,668
-0-
6,820
Total investments sold or matured . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
817,557
557,506
45,992
573,527
32,530
85,327
737,376
Acquisition of investments:
Fixed maturities—available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investments acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (increase) decrease in short-term investments . . . . . . . . . . . . . . . . . . .
Net change in payable or receivable for securities . . . . . . . . . . . . . . . . . . . .
Additions to properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in low-income housing interests . . . . . . . . . . . . . . . . . . . . . . . .
(1,284,181)
-0-
(12,062)
(1,737)
(1,297,980)
(38,361)
54,491
(7,665)
6,311
(54,954)
(897,823)
(15,842)
(11,849)
(9,345)
(934,859)
(30,098)
(40,810)
(3,447)
427
(47,677)
(1,206,190)
(5,692)
(10,872)
(2,761)
(1,225,515)
(36,564)
29,598
(4,046)
347
(435)
Cash used for investment activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(520,601)
(498,958)
(499,239)
Cash provided from (used for) financing activities:
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of 7.1% Junior Subordinated Debentures (net of $4.3 million
issue expenses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of 6 3⁄ 8% Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of 6 1⁄4% Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of 7 3⁄4% Junior Subordinated Debentures . . . . . . . . . . . . . . . .
Acquisition of 7 7⁄ 8% Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net borrowing (repayment) of commercial paper . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit from stock option exercises . . . . . . . . . . . . . . . . . . . . . .
Acquisition of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net receipts (payments) from deposit product operations . . . . . . . . . . . . . .
21,451
(48,095)
217,257
(46,346)
26,123
(48,761)
119,458
245,961
(180,000)
(154,639)
(3,659)
(31,917)
3,072
(344,861)
25,662
-0-
-0-
-0-
-0-
-0-
31,299
-0-
(554,946)
2,883
-0-
-0-
-0-
-0-
-0-
(12,094)
-0-
(285,226)
50,070
Cash provided from (used for) financing activities . . . . . . . . . . . . . . . . . . . . . . $ (347,567)
(349,853)
(269,888)
Increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,581)
19,297
8,646
10,651
(2,055)
12,706
Cash at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
16,716 $ 19,297 $
10,651
See accompanying Notes to Consolidated Financial Statements.
55
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions except per share data)
Note 1—Significant Accounting Policies
Business: Torchmark Corporation (Torchmark) through its subsidiaries provides a variety of life and
health insurance products and annuities to a broad base of customers.
Basis of Presentation: The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of America (GAAP). The
preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect
the financial
the reported amounts of assets and liabilities at
statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
the date of
Principles of Consolidation: The consolidated financial statements include the results of Torchmark
and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Torchmark accounts for its variable interest entities under Financial Accounting Standards Board
(FASB) Interpretation 46 (FIN46R). This Standard clarifies the definition of a variable interest and the
instructions for consolidating variable interest entities (VIE’s). Primary beneficiaries only are required to
consolidate VIE’s. Therefore, a company may have voting control of a VIE, but if it is not the primary
beneficiary of the VIE in accordance with FIN46R, it is not permitted to consolidate the VIE. The trusts
the definition of VIE’s. However,
that are liable for Torchmark’s Trust Preferred Securities meet
Torchmark is not the primary beneficiary of these entities because its interest is not variable. Therefore,
Torchmark is not permitted to consolidate its interest in these trusts, even though it owns 100% of the
voting equity of the Trusts and guarantees their performance. For this reason, Torchmark reports its 7.1%
and its 7 3⁄4% Junior Subordinated Debentures due to the Trusts as “Due to Affiliates” each period at their
respective carrying values. However, Torchmark consolidates these trusts in its segment analysis and
views the Trust Preferred Securities as it does any other debt offering, because GAAP requires that the
segment analysis be reported as management views its operations and financial condition.
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 accumulated
other comprehensive income.
Investments in equity securities, which include common and
nonredeemable preferred stocks, are reported at fair value with unrealized gains and losses, net of
deferred taxes, reflected directly in accumulated other comprehensive income. Policy loans are carried at
unpaid principal balances. Mortgage loans, included in “Other long-term investments,” are carried at
amortized cost. Investments in real estate, included in “Other long-term investments,” are reported at cost
less allowances for depreciation. Depreciation is calculated on the straight
line method. Short-term
investments include investments in certificates of deposit and other interest-bearing time deposits with
original maturities of twelve months or less.
Gains and losses realized on the disposition of
investments are determined on a specific
identification basis. Realized investment gains and losses and investment income attributable to separate
income.
accounts are credited to the separate accounts and have no effect on Torchmark’s net
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, 2006, 2005, and 2004,
included $417 million, $393 million, and $370 million, respectively, which was allocable to policyholder
reserves or accounts. Realized investment gains and losses are not allocated to insurance policyholders’
liabilities.
Impairment of Investments: In March, 2004, the Emerging Issues Task Force reached a consensus
concerning Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments (EITF 03-1). It called for the evaluation of all of Torchmark’s fixed-maturity and equity
investments for other-than-temporary impairment each reporting period using a three-step approach.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
First, evaluate if the investment is impaired (fair value is less than cost or amortized cost). Second,
determine whether the impairment is other-than-temporary. While specific procedures were outlined, this
step required considerable evidence-based judgment as to the ultimate recoverability of amounts due,
taking into account the severity and duration of the impairment. An assessment of the ability and intent to
hold the security to recovery was also a factor.
there was an other-than-temporary
impairment, the third step involved a writedown of the cost basis of the security to fair value, which
became the new cost basis. EITF 03-1 also called for certain disclosures.
In the event
This new accounting rule was to be effective for Torchmark beginning July 1, 2004. However, in the
third quarter of 2004, the FASB deferred the effective date of certain portions of this rule until it could be
further considered. The portions deferred related to steps two and three in the impairment analysis above.
In November, 2005, the FASB released FASB Staff Position 115-1 and 124-1 “The Meaning of Other-
Than-Temporary Impairment and Its Application to Certain Investments,” providing further guidance on
the impairment issues. This document was effective for Torchmark on January 1, 2006. It essentially
retained the three-step model of EITF 03-1, replacing only the step two procedures with guidance
previously in effect before EITF 03-1 was issued. This guidance was historically utilized by Torchmark in
evaluating other-than-temporary impairment. The disclosures called for by EITF 03-1 were maintained,
and appear in Note 3—Investments. At the present time, Torchmark evaluates securities for other-than-
temporary impairment as described in Note 3. If a security is determined to be other-than-temporarily
impaired, the cost basis of the security is written down to fair value and is treated as a realized loss.
Historically, investment income on other-than-temporarily impaired investments which is past due has not
been recorded until received. Under the new FASB Staff Position, the written-down security will be
amortized and revenue recognized in accordance with estimated future cash flows.
Derivatives: Torchmark accounts for derivative instruments in accordance with Statement of Financial
Accounting Standards (SFAS) 133, Accounting for Derivative Instruments and Hedging Activities, as
amended. All of Torchmark’s derivatives, which consist of interest-rate swaps, are carried at fair market
value in the consolidated financial statements. Fluctuations in these values adjust realized investment
gains and losses. If a derivative qualifies as a fair value hedge under SFAS 133, gains and losses in the
derivative are substantially offset by changes in the underlying hedged instrument. No interest-rate swaps
were outstanding at December 31, 2006.
Securities and Exchange Commission interpretative guidance concerning SFAS 133 concluded that
all income and expenses related to a nonhedged derivative must be recorded in the same line item that
the adjustment to fair value is recorded. In order to comply with this interpretation, Torchmark does not
reduce its interest expense on the Statements of Operations for the reduction in interest cost
for
swapping its fixed rate for a variable rate on nonhedged derivatives. Instead, this benefit from cash
settlements is reported as a component of realized investment gains (losses), the same line where the
required fair value adjustment for nonhedged derivatives is reported. Torchmark has also reported the
interest cost benefit on hedged derivatives as a component of realized gains (losses), in order to report
these items on a consistent basis. In its segment disclosure, however, Torchmark does report the interest
cost benefit from the swaps as a reduction in interest expense, as GAAP requires this disclosure to be
presented as management views its business.
Determination of Fair Values of Financial Instruments: Fair values for cash, short-term investments,
short-term debt,
investment
receivables and payables approximate carrying value. Fair values for
securities are based on quoted market prices, where available. Otherwise, fair values are based on quoted
market prices of comparable instruments. Approximately 98% of the fixed maturity portfolio is valued with
quoted market prices. Mortgages are valued using discounted cash flows. Torchmark’s long-term debt
issues, along with the trust preferred securities, are valued based on quoted market prices. Interest-rate
swaps are valued using discounted anticipated cash flows.
Cash: Cash consists of balances on hand and on deposit
in banks and financial
institutions.
Overdrafts arising from the overnight investment of funds offset cash balances on hand and on deposit.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
Securities Lending: Torchmark previously entered into a securities lending agreement whereby
certain securities from its portfolio were loaned to other institutions. Cash collateral obtained from the
borrower, equal to 102% of the market value of the loaned securities plus accrued interest, was deposited
with a lending agent and invested by that agent in accordance with the Company’s guidelines to generate
additional
income. Torchmark shared this income with the lending agent. Torchmark maintained full
ownership rights to the securities loaned and continued to earn interest on them. Accordingly, the loaned
securities were included in invested assets. The securities lending collateral was recognized as an asset
with a corresponding liability for the obligations to return the collateral. There were no securities loaned as
of December 31, 2006.
Recognition of Premium Revenue and Related Expenses: Premiums for insurance contracts which
are not defined as universal life-type according to SFAS 97 are recognized as revenue over the premium-
paying period of the policy. Profits for limited-payment life insurance contracts as defined by SFAS 97 are
recognized over the contract period. Premiums for universal life-type and annuity contracts are added to
the policy account value, and revenues for such products are recognized as charges to the policy account
value for mortality, administration, and surrenders (retrospective deposit method). Variable life and
annuity products are also assessed an investment management fee and a sales charge. Life premium
includes policy charges of $54.4 million, $57.2 million, and $60.7 million for
the years ended
December 31, 2006, 2005, and 2004, respectively. Other premium includes annuity policy charges for the
years ended December 31, 2006, 2005, and 2004, of $22.9 million, $24.9 million, and $27.7 million,
respectively. Profits are also earned to the extent that investment income exceeds policy liability interest
requirements. The related benefits and expenses are matched with revenues by means of the provision
of future policy benefits and the amortization of deferred acquisition costs in a manner which recognizes
profits as they are earned over the same period.
Future Policy Benefits: The liability for future policy benefits for universal life-type products according
to SFAS 97 is represented by policy account value. The liability for future policy benefits for all other life
and health products is provided on the net level premium method based on estimated investment yields,
mortality, morbidity, persistency and other assumptions which were considered appropriate at the time
the policies were issued. Assumptions used are based on Torchmark’s previous experience with similar
products. For the majority of Torchmark’s insurance products,
the assumptions used were those
considered to be appropriate at the time the policies were issued. Once established, assumptions are
generally not changed. An additional provision is made on most products to allow for possible adverse
deviation from the assumptions assumed. These estimates are periodically reviewed and compared with
actual experience. If it is determined future experience will probably differ significantly from that previously
assumed,
in
materially different reported amounts.
the estimates are revised. Additionally, significantly different assumptions could result
Deferred Acquisition Costs and Value of Insurance Purchased: The costs of acquiring new business
are generally deferred and recorded as an asset. Deferred acquisition costs consist primarily of sales
commissions and other underwriting costs of new insurance sales. Additionally, deferred acquisition costs
include the value of insurance purchased, which are the costs of acquiring blocks of insurance from other
companies or through the acquisition of other companies. Deferred acquisition costs and the value of
insurance purchased are amortized in a systematic manner which matches these costs with the
associated revenues. 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. Limited-payment contracts are amortized over the contract
period. Universal life-type policies are amortized with interest in proportion to estimated gross profits. The
assumptions used to amortize acquisition costs with regard to interest, mortality, morbidity, and
persistency are consistent with those used to estimate the liability for future policy benefits. For interest-
sensitive and deposit-balance type products, these assumptions are reviewed on a regular basis and are
revised if actual experience differs significantly from original expectations. Deferred acquisition costs are
subject to periodic recoverability and loss recognition testing. These tests ensure that the present value of
future contract-related cash flows will support the capitalized deferred acquisition cost asset. These cash
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
flows consist primarily of premium income, less benefits and expenses taking inflation into account. The
present value of these cash flows, less the benefit reserve, is then compared with the unamortized
deferred acquisition cost balance. In the event the estimated present value of net cash flows is less, this
deficiency would be charged to expense as a component of amortization and the asset balance is
reduced by a like amount. Different assumptions with regard to deferred acquisition costs could produce
materially different amounts of amortization.
Policy Claims and Other Benefits Payable: Torchmark establishes a liability for known policy benefits
payable and an estimate of claims that have been incurred but not yet reported to the Company. The
estimate of unreported claims is based on prior experience. Torchmark makes an estimate after careful
evaluation of all information available to the Company. However, there is no certainty the stated liability
for claims and other benefits, including the estimate of unsubmitted claims, will be Torchmark’s ultimate
obligation.
Separate Accounts: Separate accounts have been established in connection with Torchmark’s
variable life and annuity businesses. The investments held for the benefit of contractholders (stated at fair
value) are reported as “Separate account assets” and the corresponding deposit balance liabilities are
reported as “Separate account liabilities.” The separate account investment portfolios and liabilities are
segregated from Torchmark’s other assets and liabilities and these assets are invested in mutual funds of
various unaffiliated mutual fund providers. Deposit collections, investment income, and realized and
unrealized gains and losses on separate accounts accrue directly to the contractholders. Therefore, these
items are added to the separate account balance and are not reflected in income. Fees are charged to
the deposit balance for insurance risk, administration, and surrender. There is also a sales charge and an
investment management fee. These fees and charges are included in premium revenues.
Guaranteed Minimum Policy Benefits: Torchmark’s variable annuity contracts generally provide
contractual guarantees in the event of death of the contract holder to at least provide the return of the
total deposits made to the contract, net of withdrawals. Under certain conditions, they also provide that
the benefit will not be less than the highest contract value on certain specified anniversaries, adjusted for
additional deposits and withdrawals after those anniversaries. Torchmark does not offer other types of
guaranteed minimum policy benefits, such as minimum accumulation or income benefits.
In 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-1,
Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts
and for Separate Accounts (SOP 03-1), which was adopted by Torchmark on January 1, 2004. This
Statement covers various aspects of accounting for nontraditional product features in order to increase
uniformity in practice. The primary issue in the Statement affecting Torchmark is the accounting for
liabilities for certain guaranteed minimum policy benefits on Torchmark’s variable annuities. Upon
adoption, Torchmark established a liability for these guaranteed minimum policy benefits in the amount of
$8.2 million and wrote down deferred acquisition costs in the amount of $2.8 million. As a result,
Torchmark recorded a charge in the amount of $11.0 million before tax ($7.1 million after tax) to reflect
the guaranteed benefits. This charge was reported as a cumulative effect of a change in accounting
principle in 2004.
Subsequent to adoption, the liability for these minimum guarantees is determined each period end by
estimating the expected value of death benefits in excess of the projected account balance using actuarial
methods and assumptions including mortality, lapses, and interest. This excess benefit is then recognized
ratably over the accumulation period based on total expected assessments. The Company regularly
evaluates estimates used. If actual experience or other evidence suggests that earlier assumptions
should be revised, Torchmark adjusts the additional liability balance with a related charge or credit to
benefit expense. At December 31, 2006, this liability was $2.6 million and at December 31, 2005 was
$3.5 million.
Income Taxes: Income taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement book values and tax bases of assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
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, included in “Other assets,” is reported at cost less
allowances for depreciation. Depreciation is recorded primarily on the straight line method over the
estimated useful lives of these assets which range from two to ten years for equipment and five to forty
years for buildings and improvements. Ordinary maintenance and repairs are charged to income as
incurred. Impairments,
if any, are accounted for in accordance with SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Original cost of property and equipment was $112 million
and $111 million at December 31, 2006 and 2005,
respectively. Accumulated depreciation was
$83 million at the end of both of those years. Depreciation expense was $5.2 million in 2006, $4.8 million
in 2005, and $4.1 million in 2004. Torchmark has under construction an office building adjacent to the
home office building of
its subsidiary United American Insurance Company (United American) in
McKinney, Texas. The new structure, including land, is expected to cost approximately $24 million, along
with new equipment costing an additional $2.5 million. The facility is expected to be completed in
December, 2007. Subsidiary Liberty National Life Insurance Company (Liberty) is in the process of selling
its agency office buildings. During 2006, 21 buildings were sold for gross proceeds of $6.7 million and a
realized gain from the sales of $4.8 million.
Asset Retirements: Certain of Torchmark’s subsidiaries own and occupy buildings containing
asbestos. These facilities are subject to regulations which could cause the Company to be required to
remove and dispose of all or part of the asbestos upon the occurrence of certain events. Otherwise, the
subsidiaries are under no obligation under the regulations. At this time, no such events under these
regulations have occurred. For this reason, the Company has not recorded a liability for this potential
there is
obligation, as the time at which any obligation could be settled is not known. Therefore,
insufficient information to estimate a fair value.
Low-Income Housing Tax Credit Interests: As of December 31, 2006, Torchmark has invested
approximately $143 million in flow-through entities that provide low-income housing tax credits and other
related Federal
income tax benefits to Torchmark. Investments in these entities were $122 million at
December 31, 2005. Significantly all of the return on the investments has been guaranteed by unrelated
third-parties and has been accounted for using the effective-yield method. The remaining investments are
non-guaranteed and are accounted for using the amortized-cost method. The federal income tax benefits
is recorded in “Income tax
accrued during the year, net of related amortization of
expense.” The unamortized cost of
the investments is included in “Other assets” and any unpaid
commitments to invest are recorded in “Other liabilities.”
the investment,
Goodwill: The excess cost of businesses acquired over the fair value of their net assets is reported
as goodwill. In accordance with SFAS 142, Goodwill and Other Intangible Assets, goodwill is subject to
annual impairment testing based on the procedures outlined in the Statement. Amortization of goodwill is
not permitted. Torchmark tested its goodwill annually in each of the years 2004 through 2006. The tests
involve breaking down the Company’s carrying value of each of
the components of Torchmark’s
including the portion of goodwill assigned to each component. The fair value of each
segments,
component is measured against that component’s corresponding carrying value. Because the fair value
exceeded the carrying value, including goodwill, of each component in each period, Torchmark’s goodwill
was not impaired in any of the periods. Therefore, Torchmark continues to carry its goodwill at the
January 1, 2004 balance of $378 million.
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.
Litigation and Tax Settlements: Four significant legal and tax matters were settled in Torchmark’s
favor in 2006. The first settlement involved a subsidiary disposed of several years ago, resulting in
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
proceeds of $5.1 million after expenses. The second involved state income tax refunds of $6.7 million
related to prior years. The third settlement related to the Company’s investments in Worldcom, amounting
to $6.3 million, and representing a partial recovery of investment losses incurred prior to 2004. The final
settlement involved Federal income tax issues related to prior years, and consisted of a benefit due of $7.4
million. The litigation receipt related to the disposed subsidiary and the Worldcom receipt were included in
“Other income” on the Consolidated Statement of Operations. The state income tax refunds and the
Federal income tax benefit reduced “Income taxes.”
In 2005, Torchmark settled three significant legal matters. These cases involved Torchmark’s race-
distinct mortality/dual-pricing litigation, its class-action cancer case, and its Waddell & Reed litigation. All of
these cases related to litigation arising many years ago. The Waddell & Reed litigation was settled with
Torchmark recording the $13.5 million proceeds net of costs as “Other income.” The other two settlements
resulted in a $15 million pre-tax charge to “Other operating expenses.”
Postretirement Benefits: Torchmark adopted FASB Statement of Financial Accounting Standards
(SFAS) No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,
effective as of December 31, 2006. This Statement requires Torchmark to recognize the funded status of
its postretirement benefit plans on its Consolidated Balance Sheets. Periodic gains and losses attributable
to changes in plan assets and liabilities that are not recognized as components of net periodic benefit
costs are to be recognized as components of other comprehensive income, net of tax. This Statement
does not modify the procedures for measuring plan assets, liabilities, or net periodic benefit cost. The
information required by this Standard is found in Note 9—Postretirement Benefits. Upon adoption of this
Standard, “Accumulated other comprehensive income,” net of tax, was decreased $9 million.
The incremental effect of applying this Statement to affected line items on Torchmark’s Balance
Sheet at December 31, 2006 was as follows:
Before Application
of Statement 158
Other assets . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . .
Accumulated other comprehensive
income . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . .
$ 192,623
236,214
1,015,418
149,012
3,468,108
Adjustments
$(12,083)
1,632
(4,800)
After Application
of Statement 158
$ 180,540
237,846
1,010,618
(8,915)
(8,915)
140,097
3,459,193
Stock Options: As of January 1, 2006, Torchmark adopted revised SFAS No. 123—Share-Based
Payment (SFAS 123R) to account for its stock options. This Statement requires companies to recognize
an expense in their financial statements for stock options based on the “fair value method.” The fair value
method requires that a fair value be assigned to a stock option on its grant date and that this value be
amortized over the grantees’ service period. Prior to January 1, 2006, Torchmark accounted for stock
options in accordance with SFAS 123—Accounting for Stock-Based Compensation as amended by SFAS
148—Accounting for Stock-Based Compensation—Transition. These Statements permitted companies to
choose between two methods of recording the expense for stock options in their financial statements;
either the fair value method, or the “intrinsic value method,” in accordance with Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations.
Under the intrinsic value method, compensation expense for Torchmark’s option grants was only
recognized if the exercise price of the employee stock option was less than the market price of the
underlying stock on the date of grant. If a company elected to use the intrinsic value method, pro forma
disclosures of earnings and earnings per share were required as if the fair value method of accounting
had been applied. Torchmark previously elected to account for its stock options under the intrinsic value
method and therefore computed and disclosed the required pro forma disclosures.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
SFAS 123R provides for two alternative methods of adoption: the “modified retrospective” method
and the “modified prospective” method. While the modified retrospective method permits restatement of
prior periods for comparability, Torchmark elected to apply the modified prospective method. The
modified prospective method calls for unvested options as of January 1, 2006 and options granted after
January 1, 2006 to be expensed in accordance with SFAS 123R after that date. Compensation expense
under the fair value method for prior periods is not reflected in the financial statements of those periods
but is disclosed on a pro forma basis in the Notes to the Consolidated Financial Statements as previously
reported. The table below presents Torchmark’s pro forma earnings information as if stock options issued
prior to January 1, 2006, were expensed in prior periods.
Net income as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation, as reported, net of tax benefit of $342 and $190,
For the years ended December 31,
2005
2004
$495,390
$468,555
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
635
353
Effect of stock-based compensation, fair value method, net of tax benefit of
$19,319 and $4,128, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(35,952)
(7,976)
Pro forma net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$460,073
$460,932
Earnings per share:
Basic—as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic—pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted—as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted—pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
4.73
4.39
4.68
4.34
$
$
$
$
4.26
4.19
4.19
4.11
In May, 2005, Torchmark executed a voluntary option exercise and restoration program whereby
directors and executives exercised their vested options and received a lesser number of new grants at
the then current market price. All of these options vested during 2005. As a result of this transaction,
Torchmark incurred $20.1 million in pro forma after-tax option expense in 2005. Additionally, a grant to
executives made in December, 2004 vested in June, 2005. This grant accounted for $7.0 million in 2005
after-tax pro forma option expense.
The fair value method as outlined by SFAS 123R requires the use of an option valuation model to
value employee stock options. Torchmark has elected to use the Black-Scholes valuation model for
option expensing as it had done for the pro forma expense disclosures for periods prior to adoption of
SFAS 123R. A summary of assumptions for options granted in each of the three years 2004 through 2006
is as follows:
Volatility factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12.4% 14.8% 20.6%
0.8% 0.8% 0.8%
4.61
3.90
4.43
4.5% 3.8% 3.4%
2006
2005
2004
All of
the above assumptions, with the exception of
the expected term, are obtained from
independent data services. The expected term is generally derived from Company experience. However,
expected terms of grants made under the Torchmark Corporation 2005 Incentive Plan (2005 Plan),
involving grants made in 2005 and 2006, were determined based on the simplified method as permitted
by Staff Accounting Bulletin 107. This method was used because the 2005 Plan limited grants to a
maximum contract term of seven years, and Torchmark had no previous experience with seven-year
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
contract terms. Prior to 2005, substantially all grants contained ten-year terms. Volatility and risk-free
interest rates are assumed over a period of time consistent with the expected term of the option. Volatility
is measured on a historical basis, because the Company has no basis at the present time to believe that
future trends will differ from historical patterns. Monthly data points are utilized by the independent quote
service to derive volatility for periods greater than three years. Expected dividend yield is based on
current dividend yield held constant over the expected term.
Once the fair value of an option has been determined, it is amortized on a straight-line basis over the
employee’s service period for that grant (from the grant date to the date the grant is fully vested). The
effect of the adoption of SFAS 123R on selected line items is as follows for the year ended December 31,
2006:
Stock-based compensation expense* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flow from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flow from financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6,575
(6,575)
(2,301)
(4,274)
(3,072)
3,072
(.04)
(.04)
Increase (Decrease)
*
No stock option expense was capitalized.
The adoption of SFAS 123R has not materially altered Torchmark’s methodology of computing option
expense from that used to prepare the pro forma disclosures in previous years. Furthermore, at the
present time, Torchmark does not plan to change its policies of stock option compensation with respect to
the number of grants, terms, or alternative instruments as a result of the adoption of SFAS 123R.
Torchmark management views stock-based compensation expense as a corporate or Parent Company
expense and, therefore, presents it as such in its segment analysis (See Note 13—Business Segments).
It is included in “Other operating expense” in the Consolidated Statements of Operations.
In the fourth quarter of 2005, the FASB issued FASB Staff Position No. 123R-3 (FSP123R–3),
providing an alternative method for accounting for income taxes related to stock option expensing. SFAS
123R requires that tax benefits for book purposes previously recorded in excess of actual tax benefits
realized at the time of exercise, in addition to a cumulative pool of previously-realized actual tax benefits
allowed by SFAS 123R, must be charged to income. The alternative described in FSP123R–3 is a
simplified method of computing this cumulative pool of actual tax benefits. Torchmark has elected the
simplified alternative method. This election had no impact on Torchmark’s 2006 net income.
Earnings Per Share: Torchmark presents basic and diluted earnings per share (EPS) on the face of the
income statement. Basic EPS is computed by dividing income available to common shareholders by the
weighted average common shares outstanding for the period. Diluted EPS is calculated by adding to shares
outstanding the additional net effect of potentially dilutive securities or contracts, such as stock options,
which could be exercised or converted into common shares. For more information on earnings per share,
see Note 11—Shareholders’ Equity.
Subsequent Event: In January, 2007, a subsidiary of Globe Life and Accident Insurance Company
(Globe), a wholly-owned subsidiary of Torchmark, acquired the assets of Direct Marketing and Advertising
Distributors, Inc. (DMAD) for $47 million. For the past fifteen years, Globe was DMAD’s only insurance
client. During this period of time, DMAD provided advertising and targeted marketing for the part of
is distributed through mailed coupon packets and
Globe’s direct response insurance business that
its subsidiary in the
publication inserts. Globe guaranteed the performance of
acquisition. The purchase included equipment, intangible assets, and goodwill.
the obligations of
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 2—Statutory Accounting
Life 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 (capital and surplus) on
a statutory basis for the insurance subsidiaries were as follows:
Net Income
Year Ended December 31,
Shareholders’ Equity At
December 31,
2006
2005
2004
2006
2005
Life insurance subsidiaries . . . . . . . . . . . . . . $417,115 $420,355 $353,801 $1,164,150 $1,095,091
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.
Torchmark’s statutory financial statements are presented on the basis of accounting practices
prescribed by the insurance department of the state of domicile of each insurance subsidiary. All states
(NAIC) statutory accounting
have adopted the National Association of
practices (“NAIC SAP”) as the basis for statutory accounting. However, certain states have retained the
prescribed practices of their respective insurance code or administrative code which can differ from NAIC
SAP. There are no significant differences between NAIC SAP and the accounting practices prescribed by
the state of domicile for Torchmark’s life insurance companies that affect statutory surplus.
Insurance Commissioners’
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 3—Investments
A summary of fixed maturities available for sale and equity securities by cost or amortized cost and
estimated fair value at December 31, 2006 and 2005 is as follows:
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Amount per
the Balance
Sheet
% of
Total Fixed
Maturities
2006:
Fixed maturities available for sale:
Bonds:
U.S. Government direct obligations
and agencies . . . . . . . . . . . . . . . . . . . $
21,232 $
499 $
(31) $
21,700 $
Government-sponsored enterprises . .
GNMAs . . . . . . . . . . . . . . . . . . . . . . . . .
Other mortgage-backed securities . . .
States, municipalities and political
subdivisions . . . . . . . . . . . . . . . . . . . .
Foreign governments . . . . . . . . . . . . . .
Public utilities . . . . . . . . . . . . . . . . . . . .
Industrial and miscellaneous . . . . . . . .
Asset-backed securities . . . . . . . . . . . .
Redeemable preferred stocks . . . . . . . . .
347,555
18,748
49,544
39,189
9,746
684,001
6,151,189
113,464
1,462,733
1,311
1,227
1,180
758
1,674
34,689
218,324
5,338
53,993
(4,936)
-0-
-0-
(56)
(9)
(3,431)
(71,486)
(4)
(9,657)
343,930
19,975
50,724
21,700
343,930
19,975
50,724
39,891
11,411
715,259
6,298,027
118,798
1,507,069
39,891
11,411
715,259
6,298,027
118,798
1,507,069
Total fixed maturities . . . . . . . . . . . . . .
8,897,401
318,993
(89,610)
9,126,784
9,126,784
100
Equity securities:
Common stocks:
Banks and insurance companies . . . .
Industrial and all others . . . . . . . . . . . .
Non-redeemable preferred stocks . . . . . .
Total equity securities . . . . . . . . . . . . . .
776
13,843
25,486
40,105
366
2
4,058
4,426
-0-
(3,286)
-0-
(3,286)
1,142
10,559
29,544
41,245
1,142
10,559
29,544
41,245
Total fixed maturities and equity
securities . . . . . . . . . . . . . . . . . . . . . . $8,937,506 $323,419 $(92,896) $9,168,029 $9,168,029
2005:
Fixed maturities available for sale:
Bonds:
U.S. Government direct obligations
and agencies . . . . . . . . . . . . . . . . . . . $
30,302 $
Government-sponsored enterprises . .
GNMAs . . . . . . . . . . . . . . . . . . . . . . . . .
Other mortgage-backed securities . . .
States, municipalities and political
subdivisions . . . . . . . . . . . . . . . . . . . .
Foreign governments . . . . . . . . . . . . . .
Public utilities . . . . . . . . . . . . . . . . . . . .
Industrial and miscellaneous . . . . . . . .
Asset-backed securities . . . . . . . . . . . .
Redeemable preferred stocks . . . . . . . . .
246,159
25,970
68,775
41,318
9,852
731,300
5,612,071
68,896
1,576,992
919 $
2
1,984
2,342
(45) $
31,176 $
(3,628)
-0-
-0-
242,533
27,954
71,117
31,176
242,533
27,954
71,117
1,487
1,984
51,939
339,837
4,189
80,914
(40)
(2)
(1,113)
(50,683)
(10)
(5,069)
42,765
11,834
782,126
5,901,225
73,075
1,652,837
42,765
11,834
782,126
5,901,225
73,075
1,652,837
Total fixed maturities . . . . . . . . . . . . . .
8,411,635
485,597
(60,590)
8,836,642
8,836,642
100
Equity securities:
Common stocks:
Banks and insurance companies . . . .
Industrial and all others . . . . . . . . . . . .
Non-redeemable preferred stocks . . . . . .
Total equity securities . . . . . . . . . . . . . .
776
19,535
25,486
45,797
303
1
5,172
5,476
-0-
(3,226)
-0-
(3,226)
1,079
16,310
30,658
48,047
1,079
16,310
30,658
48,047
Total fixed maturities and equity
securities . . . . . . . . . . . . . . . . . . . . . . $8,457,432 $491,073 $(63,816) $8,884,689 $8,884,689
65
-0-
4
-0-
1
-0-
-0-
8
69
1
17
-0-
3
-0-
1
-0-
-0-
9
67
1
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 3—Investments (continued)
Net investment income is summarized as follows:
Year Ended December 31,
2006
2005
2004
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 604,405 $ 584,198 $555,082
2,611
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,526
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,816
Other long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,118
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,503
23,328
8,731
6,980
2,986
22,377
7,117
2,882
Less investment expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
646,947
(18,201)
619,560
(16,492)
592,153
(15,118)
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 628,746 $ 603,068 $577,035
An analysis of realized gains (losses) from investments is as follows:
Realized investment gains (losses):
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,735) $
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on redemption of debt
Valuation of interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Spread on interest rate swaps (cash settlements) . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
(2,193)
5,783
(5,893)
(4,548)
491
328
Applicable tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(10,767)
3,513
778 $ 1,711
4,675
-0-
1,158
-0-
-0-
-0-
(8,203)
(8,290)
23,319
7,393
(444)
399
280
(255)
22,216
(7,776)
Realized gains (losses) from investments, net of tax . . . . . . . . . . . . . . . . . . . . $ (7,254) $
25 $ 14,440
An analysis of the net change in unrealized investment gains (losses) is as
follows:
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,110) $ (4,689) $ (1,351)
18,490
Fixed maturities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(224,289)
(195,624)
Net change in unrealized gains (losses) on securities . . . . . . . . . . . . . . . . . . . $(196,734) $(228,978) $ 17,139
A schedule of fixed maturities by contractual maturity at December 31, 2006 is shown below on an
amortized cost basis and on a fair value basis. Actual maturities could differ from contractual maturities
due to call or prepayment provisions.
Amortized
Cost
Fair
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 379,850
1,987,747
444,558
5,903,490
$ 382,259
2,055,219
473,286
6,026,523
Mortgage-backed and asset-
backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
181,756
189,497
8,715,645
8,937,287
$8,897,401
$9,126,784
Proceeds from sales of fixed maturities available for sale were $183.2 million in 2006, $78.0 million in
2005, and $46.0 million in 2004. Gross gains realized on those sales were $3.8 million in 2006, $7.6
million in 2005, and $3.1 million in 2004. Gross losses were $7.5 million in 2006, $13.7 million in 2005,
and $2.9 million in 2004. Proceeds from sales of equity securities were $3.5 million in 2006, zero in 2005,
and $32.5 million in 2004. Gross gains realized on those sales were zero in 2006 and $4.7 million in
2004. Gross losses realized on those sales were $2.2 million in 2006 and $19 thousand in 2004.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 3—Investments (continued)
Torchmark’s portfolio of
fixed maturities fluctuates in value based on interest rates in financial
markets and other economic factors. These fluctuations caused by market rate changes have little
bearing on whether or not the investment will be ultimately recoverable. Therefore, Torchmark considers
these declines in value as temporary even in periods exceeding one year. In certain circumstances,
however, it may become apparent that the principal of an investment may not be recoverable, generally
due to factors specific to an individual
issuer and not market interest rates. In this event, Torchmark
classifies such investments as other-than-temporarily impaired and writes the investment down to fair
value, realizing an investment loss. The determination that a security is other-than-temporarily impaired is
highly subjective and involves the careful consideration of many factors. These factors include:
• Default on a payment
•
Issuer has declared bankruptcy
• Severe deterioration in market value
• Deterioration in credit quality as indicated by credit ratings
•
• News releases by issuer
•
•
Information disseminated through the investment community
Length of time (duration) security has been impaired
Issuer having serious financial difficulties as reported in the media
While all available information is taken into account, it is difficult to predict the ultimately recoverable
amount of a distressed or impaired security. As of December 31, 2006, Torchmark has no information
available to cause it to believe that any of its investments are other-than-temporarily impaired.
The following tables disclose unrealized investment losses by class of investment at December 31,
2006 and December 31, 2005. Torchmark considers these investments to be only temporarily impaired.
ANALYSIS OF GROSS UNREALIZED INVESTMENT LOSSES
At December 31, 2006
Less than
Twelve Months
Twelve Months
or Longer
Total
Description of Securities
Fair Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
U.S. Government and agency . . . . . . . . $
Government-sponsored enterprises . . .
Other mortgage-backed securities . . . .
States, municipalities, & political
$
5,465
44,284
3
(4) $ 2,694
232,632
-0-
(936)
-0-
subdivisions . . . . . . . . . . . . . . . . . . . . .
Foreign governments . . . . . . . . . . . . . . .
Corporates . . . . . . . . . . . . . . . . . . . . . . . .
Total fixed maturities . . . . . . . . . . . .
Equities . . . . . . . . . . . . . . . . . . . . . . . . . .
245
708
1,392,469
1,443,174
-0-
(4)
(9)
(31,229)
(32,182)
-0-
1,139
-0-
748,183
984,648
10,557
$
(27) $
(4,000)
-0-
(52)
-0-
(53,349)
(57,428)
(3,286)
8,159
276,916
3
1,384
708
2,140,652
2,427,822
10,557
Unrealized
Loss
$
(31)
(4,936)
-0-
(56)
(9)
(84,578)
(89,610)
(3,286)
Total . . . . . . . . . . . . . . . . . . . . . . . . . $1,443,174
$(32,182) $995,205
$(60,714) $2,438,379
$(92,896)
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 3—Investments (continued)
At December 31, 2005
Description of Securities
Fair Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Less than
Twelve Months
Twelve Months
or Longer
Total
U.S. Government and agency . . . . . . . . $
Government-sponsored enterprises . . .
States, municipalities, & political
subdivisions . . . . . . . . . . . . . . . . . . . . .
Foreign governments . . . . . . . . . . . . . . .
Corporates . . . . . . . . . . . . . . . . . . . . . . . .
-0-
691
962,850
Total fixed maturities . . . . . . . . . . . .
Equities . . . . . . . . . . . . . . . . . . . . . . . . . .
1,179,508
16,308
1,137
214,830
$
(9) $ 3,637
23,750
(2,378)
$
(36) $
(1,250)
4,774
238,580
$
(45)
(3,628)
-0-
(2)
(40,086)
(42,475)
(3,226)
1,148
-0-
121,087
149,622
-0-
(40)
-0-
(16,789)
(18,115)
-0-
1,148
691
1,083,937
1,329,130
16,308
(40)
(2)
(56,875)
(60,590)
(3,226)
Total . . . . . . . . . . . . . . . . . . . . . . . . . $1,195,816
(45,701)
149,622
(18,115)
1,345,438
(63,816)
As of December 31, 2006, Torchmark subsidiaries held 182 issues (CUSIP numbers) that had been in an
unrealized loss position for less than twelve months and 139 issues that had been in an unrealized loss
position twelve months or longer. At December 31, 2006, Torchmark’s entire fixed-maturity and equity
portfolio consisted of 2,199 issues.
Other long-term investments consist of the following:
December 31,
2006
2005
Mortgage loans, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19,739 $31,043
12,414
Investment real estate, at depreciated cost* . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,101
Interest-rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,131
Low-income housing interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,881
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,396
-0-
10,185
11,361
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $49,681 $71,570
*Includes $6.1 million and $6.2 million of properties partially occupied by Torchmark subsidiaries at
December 31, 2006 and 2005, respectively.
The estimated fair value of mortgage loans was approximately $20 million at December 31, 2006 and
$31 million at December 31, 2005. Accumulated depreciation on investment real estate was $21.7 million
and $21.1 million at December 31, 2006 and 2005, respectively.
Torchmark had $2 million in investment real estate at December 31, 2006, which was nonincome
producing during the previous twelve months. Torchmark had no nonincome producing fixed maturities or
other long-term investments during the twelve months ended December 31, 2006.
During 2004, Torchmark decided to reduce its exposure to mortgage loans. As a result, it sold
mortgages with a carrying value of $75.7 million for proceeds of $74.4 million, resulting in a small loss. In
2006, additional mortgages with a carrying value of $10.2 million were sold for proceeds of $16.0 million.
Both of these sales included mortgages previously written down. As more fully described in Note 15—
Related Party Transactions, these mortgages were sold to MidFirst Bank, the Chairman of the Board of
Directors of whose parent company was also a Torchmark director until April, 2005.
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Deferred Acquisition Costs and Value of Insurance Purchased
An analysis of deferred acquisition costs and the value of insurance purchased is as follows:
2006
2005
2004
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
. . . . . . . . . . . . . $2,698,049 $70,355 $2,506,216 $77,116 $2,330,010 $ 89,849
Additions:
Deferred during period:
Commissions . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . .
Total deferred . . . . . . . . . . . . . . . . . .
Foreign exchange adjustment . . . . . . . . .
Adjustment attributable to unrealized
304,476
248,060
552,536
16
investment losses(1)
. . . . . . . . . . . . . . .
12,374
Total additions . . . . . . . . . . . . . . . . . .
564,926
-0-
-0-
-0-
2
-0-
2
304,915
214,852
519,767
976
14,268
535,011
-0-
-0-
-0-
20
-0-
20
313,261
201,936
515,197
2,897
-0-
518,094
-0-
-0-
-0-
62
-0-
62
Deductions:
Amortized during period . . . . . . . . . . . . . .
Unlocking adjustment(2) . . . . . . . . . . . . . .
Adoption of SOP 03-01 . . . . . . . . . . . . . .
Adjustment attributable to unrealized
investment gains(1) . . . . . . . . . . . . . . . .
(372,324)
-0-
-0-
(5,166)
-0-
-0-
(343,178)
-0-
-0-
(6,781)
-0-
-0-
(334,454)
(4,130)
(2,776)
(12,795)
-0-
-0-
-0-
-0-
-0-
-0-
(528)
-0-
Total deductions . . . . . . . . . . . . . . . .
(372,604)
(5,166)
(343,178)
(6,781)
(341,888)
(12,795)
Balance at end of year
. . . . . . . . . . . . . . . . . . $2,890,651 $65,191 $2,698,049 $70,355 $2,506,216 $ 77,116
(1) Represents amounts pertaining to investments relating to universal life-type products.
(2) The unlocking adjustment resulted from revisions to actuarial assumptions related to guaranteed minimum death benefits in
Torchmark’s variable annuity business.
The amount of interest accrued on the unamortized balance of value of insurance purchased was
$3.8 million, $4.1 million, and $4.8 million for the years ended December 31, 2006, 2005, and 2004,
respectively. The average interest rates used for the years ended December 31, 2006, 2005, and 2004
were 5.7%, 5.6%, and 5.7%, respectively. The estimated amortization, net of interest accrued, on the
unamortized balance at December 31, 2006 during each of the next five years is: 2007, $4.7 million;
2008, $4.4 million; 2009, $4.1 million; 2010, $3.8 million; and 2011, $3.5 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.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 5—Future Policy Benefit Reserves
A summary of
the assumptions used in determining the liability for future policy benefits at
December 31, 2006 is as follows:
Interest assumptions:
Individual Life Insurance
Years of Issue
Interest Rates
Percent of
Liability
1917-2006
1985-2006
1986-1994
1954-2000
1951-1985
2000-2006
1984-2006
2.5% to 5.5%
6.0%
7.0% graded to 6.0%
8.0% graded to 6.0%
8.5% graded to 6.0%
7.0%
Interest Sensitive
14
28
10
12
5
12
19
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
1975-80 Select and Ultimate Table
Ultimate Table
X-18
Valuation Basic Table
2001
United States Life Table
Withdrawal assumptions:
Withdrawal assumptions are based on Torchmark’s experience.
Individual Health Insurance
Interest assumptions:
Years of Issue
Interest Rates
Percent of
Liability
1955-2006
1993-2006
1986-1992
1955-2000
1951-1986
2001-2006
2.5% to 4.5%
6.0%
7.0% graded to 6.0%
8.0% graded to 6.0%
8.5% graded to 6.0%
7.0%
3
56
26
11
1
3
100
Morbidity assumptions:
For individual health, the morbidity assumptions are based on either Torchmark’s experience or the
assumptions used in calculating statutory reserves.
Termination assumptions:
Termination assumptions are based on Torchmark’s experience.
Overall Interest Assumptions:
The overall average interest assumption for determining the liability for future life and health
insurance benefits in 2006 was 6.0%.
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 6—Liability for Unpaid Health Claims
Activity in the liability for unpaid health claims is summarized as follows:
Year Ended December 31,
2006
2005
2004
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . $162,036 $180,843 $171,012
Incurred related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
767,272
(12,097)
654,994
(16,535)
677,344
(5,195)
Total incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paid related to:
755,175
638,459
672,149
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
633,269
138,149
504,648
152,618
512,940
149,378
Total paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
771,418
657,266
662,318
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $145,793 $162,036 $180,843
At the end of each period, the liability for unpaid health claims includes an estimate of claims incurred
but not yet reported to the Company. This estimate is based on historical trends. The difference between
the estimate made at the end of each prior period and the actual experience is reflected above under the
caption “Incurred related to: Prior year.” Prior-year claims incurred during the year result from claim
settlements at different amounts from those amounts originally estimated.
The liability for unpaid health claims is included with “Policy claims and other benefits payable” on the
Consolidated Balance Sheets.
Note 7—Supplemental Disclosures of Cash Flow Information
The following table summarizes Torchmark’s noncash transactions, which are not reflected on the
Consolidated Statements of Cash Flows:
Year Ended December 31,
2006
2005
2004
Paid-in capital from tax benefit for stock option exercises . . . . . . .
Other stock-based compensation not involving cash . . . . . . . . . . .
Commitments for low-income housing interests . . . . . . . . . . . . . . .
$ 3,072 $36,545 $ 4,748
986
11,250
1,375
54,549
6,575
23,320
The following table summarizes certain amounts paid during the period:
Year Ended December 31,
2006
2005
2004
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,662 $ 48,272 $ 43,985
145,852
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
167,367
105,100
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 8—Income Taxes
Torchmark and its subsidiaries file a life-nonlife consolidated Federal income tax return.
The components of income taxes were as follows:
Year Ended December 31,
2006
2005
2004
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $254,939 $236,131 $245,083
Change in accounting principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3,857)
Shareholders’ equity:
-0-
-0-
Unrealized gains (losses)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax basis compensation expense (from the exercise of stock options)
in excess of amounts recognized for financial reporting
purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(69,452)
(73,680)
10,292
(3,072)
(36,545)
(4,748)
$182,415 $125,906 $246,770
Income tax expense consists of:
Year Ended December 31,
2006
2005
2004
Current income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $151,841 $131,491 $139,522
105,561
Deferred income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
103,098
104,640
$254,939 $236,131 $245,083
In 2006, 2005, and 2004, deferred income tax expense was incurred because of certain differences
between net income before income taxes as reported on the Consolidated Statements of Operations and
taxable income as reported on Torchmark’s income tax returns. As explained in Note 1—Significant
Accounting Policies, 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,
2006
%
2005
%
2004
%
Expected income taxes . . . . . . . . . . . . . . . . . . . . . . $270,750 35.0% $256,032 35.0% $252,280
35.0%
Increase (reduction) in income taxes resulting
from:
Tax-exempt investment income . . . . . . . . . . . . .
Tax settlements . . . . . . . . . . . . . . . . . . . . . . . . . .
Low income housing investments . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,496)
(11,607)
(3,063)
355
(.2)
(1.5)
(.4)
-0-
(2,458)
(15,989)
(1,282)
(172)
(.3)
(2.2)
(.2)
-0-
(2,597)
(3,003)
(47)
(1,550)
(.4)
(.4)
-0-
(.2)
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . $254,939 32.9% $236,131 32.3% $245,083
34.0%
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 8—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:
Deferred tax assets:
Present value of future policy surrender charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Carryover of nonlife net operating losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets and other liabilities, principally due to the current nondeductibility of
certain accrued expenses for tax purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Unrealized investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Future policy benefits, unearned and advance premiums, and policy claims . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2006
2005
7,701 $
6,801
12,586
7,105
5,785
20,287
78,055
733,955
240,471
8,385
11,654
31,345
147,507
685,253
200,756
4,762
Total gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,060,866
1,038,278
Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,040,579 $1,006,933
in 2006 to reflect
Torchmark’s Federal income tax returns are routinely audited by the Internal Revenue Service (IRS).
In the fourth quarter of 2005, the Appeals division of the IRS and Torchmark agreed to settle all issues
with respect to the Company’s 1996 and 1997 tax years. In the fourth quarter of 2006, the Appeals
division of the IRS and Torchmark agreed to settle all issues with respect to the Company’s 1998, 2001,
and 2002 tax years. As a result, Torchmark recorded a $15.9 million tax benefit in 2005 and a $7.4 million
tax benefit
these settlements on the tax years covered by the
examinations as well as all other tax years prior to 2006 to which the settled issues apply. The benefits
relate primarily to Torchmark’s computation of the dividends received deduction on its separate account
assets and the amount of life insurance reserves for income tax purposes. The statutes of limitation for
the assessment of additional tax are closed for the 1999 and 2000 tax years. The IRS has substantially
completed its examination of Torchmark’s 2003 and 2004 tax years. Management believes that adequate
provision has been made in the financial statements for any potential assessments that may result from
the completed examinations, future tax examinations, and other tax-related matters for all open tax years.
the impact of
For the tax years 1993 through 1998, Torchmark filed unitary state income tax returns with certain of
its subsidiaries, including subsidiaries disposed of in 1998. Disputes arose regarding whether Torchmark
was entitled to receive certain state tax benefit payments relating to these unitary returns. In 2006, an
arbitration panel ruled in favor of the Company and payments of the state income taxes in dispute were
made to Torchmark. As a result, Torchmark recorded a state income tax benefit of $4.3 million, net of
federal income tax.
A tax deferred component of statutory income accumulated prior to 1984 in a “policyholders’ surplus
account” is not taxable unless it exceeds certain statutory limitations or is distributed to shareholders. As
of December 31, 2004, Torchmark had not recognized a deferred tax liability of approximately $10 million
that related to this accumulated income as management considered the situations causing taxation of the
account to be remote. During 2004, the American Jobs Creation Act of 2004 amended Federal income
tax law to permit life insurance companies to distribute amounts from policyholders’ surplus accounts in
2005 and 2006 without incurring Federal income tax on the distributions. Each of the affected insurance
subsidiaries distributed to Torchmark all the amounts held in its policyholders’ surplus accounts in 2005,
thereby permanently eliminating this potential liability for tax years after 2004.
Torchmark has net operating loss carryforwards of approximately $19.4 million at December 31,
2006 of which $78 thousand expire in 2008; $3.8 million expire in 2020; $4.7 million expire in 2021; and
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 8—Income Taxes (continued)
$10.8 million expire in 2025. A valuation allowance is to be provided when it is more likely than not that
deferred tax assets will not be realized by the Company. No valuation allowance has been recorded
relating to Torchmark’s deferred tax assets since, in management’s judgment, Torchmark will more likely
than not have sufficient taxable income in future periods to fully realize its existing deferred tax assets.
Note 9—Postretirement Benefits
Pension Plans: Torchmark has noncontributory retirement benefit plans and contributory savings
plans which cover substantially all employees. There is also a nonqualified, noncontributory excess
benefit pension plan which covers certain employees. The total cost of these retirement plans charged to
operations was as follows:
Year Ended
December 31,
Defined Contribution
Plans
Defined Benefit
Pension Plans
2006 . . . . . . . . . . . . . . . . . . . . . . .
2005 . . . . . . . . . . . . . . . . . . . . . . .
2004 . . . . . . . . . . . . . . . . . . . . . . .
$3,470
3,597
3,703
$8,514
5,932
4,927
the
Torchmark accrues expense for the defined contribution plans based on a percentage of
employees’ contributions. The plans are funded by the employee contributions and a Torchmark
to the amount of accrued expense. Plan contributions are both mandatory and
contribution equal
discretionary, depending on the terms of the plan.
Cost for the defined benefit pension plans has been calculated on the projected unit credit actuarial
the
cost method. All plan measurements for the defined benefit plans are as of December 31 of
respective year. The defined benefit pension plan covering the majority of employees is funded.
Contributions are made to this funded pension plan subject to minimums required by regulation and
maximums allowed for tax purposes. Defined benefit plan contributions were $12.0 million in 2006, $12.0
million in 2005, and $10.7 million in 2004. Torchmark estimates as of December 31, 2006 that it will
contribute an amount not to exceed $20 million to these plans in 2007. The actual amount of contribution
may be different from this estimate.
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. This plan is limited to a select group of employees and was
closed as of December 31, 1994. Although this plan is unfunded, pension cost is determined in the same
manner as for the funded plans. Liability for the excess benefit plan was $6.1 million at December 31,
2006 and $5.8 million at December 31, 2005.
In January, 2007, Torchmark approved and implemented a new Supplemental Executive Retirement
Plan (SERP), which provides to a limited number of executives an additional supplemental defined
pension benefit. The supplemental benefit is based on the participant’s qualified plan benefit without
consideration to the regulatory limits on compensation and benefit payments applicable to qualified plans,
except that eligible compensation is capped at $1 million. Initially, the projected benefit obligation of this
plan is estimated to be approximately $15 million. Before mid-2007, this amount will be placed in a
“Rabbi” trust, and contributions will be added periodically to fund the plan’s obligations. Pension cost is
determined in the same manner as the qualified defined benefit plans.
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Postretirement Benefits (continued)
Plan assets in the funded plan consist primarily of investments in marketable fixed maturities and
equity securities and are valued at
fair market value. The following table presents the assets of
Torchmark’s defined benefit pension plan by component for the years ended December 31, 2006 and
2005.
Pension Assets by Component
Corporate debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48,720
962
Other fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
143,233
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,565
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,314
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25 $ 46,030
1,122
131,846
5,492
279
1
72
1
1
Amount
%
Amount
%
25
1
71
3
-0-
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $197,794 100 $184,769 100
December 31,
2006
December 31,
2005
Torchmark’s investment objectives for its plan assets include preservation of capital, preservation of
purchasing power, and long-term growth. Torchmark seeks to preserve capital through investments made
in high quality securities with adequate diversification to minimize risk. The portfolio is monitored
continuously for changes in quality and diversification mix. The preservation of purchasing power is
intended to be accomplished through asset growth, exclusive of contributions and withdrawals, in excess
of the rate of inflation. Torchmark intends to maintain investments that when combined with future plan
is also
contributions will produce adequate long-term growth to provide for all plan obligations.
Torchmark’s objective that the portfolio’s investment return will meet or exceed the return of a balanced
market index.
It
All of the securities in the portfolio are highly marketable so that there will be adequate liquidity to
meet projected payments. There are no specific policies calling for asset durations to match those of
benefit obligations.
Allowed investments are limited to equities, fixed maturities, and short-term investments (invested
cash). Equities include common and preferred stocks, securities convertible into equities, and mutual
funds that invest in equities. Fixed maturities consist of marketable debt securities rated investment grade
at purchase by a major rating agency. Short-term investments include fixed maturities with maturities less
than one year and invested cash. Target asset allocations are as follows with a twenty percent allowable
variance as noted.
Asset Type
Target
Minimum
Maximum
Equities . . . . . . . . . . . . . . . . . . . . . . . .
Fixed maturities . . . . . . . . . . . . . . . . .
Short-terms . . . . . . . . . . . . . . . . . . . .
65%
35
0
45%
15
0
85%
55
20
Short-term divergences due to rapid market movements are allowed.
Portfolio risk is managed through quality standards, diversification, and continuous monitoring.
Equities must be listed on major exchanges and adequate market liquidity is required. Fixed maturities
must be rated investment grade at purchase by a major rating agency. Short-term investments in
commercial paper must be rated at least A-2 by Standard & Poor’s with the issuer rated investment
grade. Invested cash is limited to banks rated A or higher. Investments outside of the aforementioned list
are not permitted, except by prior approval of the Plan’s Trustees. At December 31, 2006, there were no
restricted investments contained in the portfolio.
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Postretirement Benefits (continued)
The investment portfolio is to be well diversified to avoid undue exposure to a single sector, industry,
business, or security. The equity and fixed-maturity portfolios are not permitted to invest in any single
issuer that would exceed 10% of total plan assets at the time of purchase. Torchmark does not employ
any other special risk management techniques, such as derivatives, in managing the pension investment
portfolio.
The following table discloses the assumptions used to determine Torchmark’s pension liabilities and
costs for the appropriate periods. The discount and compensation increase rates are used to determine
current year projected benefit obligations and subsequent year pension expense. The long-term rate of
return is used to determine current year expense. Differences between assumptions and actual
experience are included in actuarial gain or loss.
Weighted Average Pension Plan Assumptions
For Benefit Obligations at December 31:
Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of Compensation Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.15% 5.54%
3.85
3.85
2006
2005
For Periodic Benefit Cost for the Year:
Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected Long-Term Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of Compensation Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.54% 6.04% 6.29%
9.00
9.00
3.84
3.85
8.70
3.78
2006
2005
2004
The discount rate is determined based on the expected duration of Plan liabilities. A yield is then
derived based on the current market yield of a hypothetical portfolio of high-quality corporate bonds which
match the liability duration. The rate of compensation increase is projected based on Company
experience, modified as appropriate for future expectations. The expected long-term rate of return on plan
assets is management’s best estimate of the average rate of earnings expected to be received on the
assets invested in the plan over the benefit period. In determining this assumption, consideration is given
to the historical rate of return earned on the assets, the projected returns over future periods, and the
spread between the long-term rate of return on plan assets and the discount rate used to compute benefit
obligations.
Net periodic pension cost for the defined benefit plans by expense component was as follows:
Year Ended December 31,
2006
2005
2004
Service cost—benefits earned during the period . . . . . . . . . . .
Interest cost on projected benefit obligation . . . . . . . . . . . . . . .
Expected return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . . .
Recognition of net actuarial (gain) loss . . . . . . . . . . . . . . . . . . .
$ 8,270
12,200
(16,055)
118
3,981
$ 7,412
11,392
(14,368)
112
1,384
$ 6,753
10,659
(12,868)
60
323
Net periodic pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8,514
$ 5,932
$ 4,927
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Postretirement Benefits (continued)
The following table presents a reconciliation from the beginning to the end of the year of the
projected benefit obligation and plan assets. This table also presents a reconciliation of the plans’ funded
status with the amounts recognized on Torchmark’s Consolidated Balance Sheets.
Pension Benefits
For the year ended
December 31,
2006
2005
Changes in benefit obligation:
Obligation at beginning of year
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $220,036
8,270
12,200
(15,135)
(21,150)
279
204,500
$186,151
7,412
11,392
26,908
(11,827)
-0-
220,036
Changes in plan assets:
Fair value at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
184,769
21,634
12,541
(21,150)
197,794
180,339
3,722
12,535
(11,827)
184,769
Funded status at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (6,706)
(35,267)
Unrecognized amounts at year end:
Unrecognized actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized transition obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amount recognized at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts recognized consist of:
Prepaid benefit cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued benefit liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amount recognized at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
N/A
N/A
37,369
874
(40)
$ 2,936
$ 12,165
(9,229)
-0-
$ 2,936
Amounts recognized in accumulated other comprehensive income as of
December 31, 2006 consist of:
Net loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,711
1,036
Prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(33)
Transition obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amounts recognized at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,714
The portion of other comprehensive income that is expected to be reflected in pension expense in
2007 is as follows:
Amortization of prior service cost
Amortization of net loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of transition obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $130
330
(7)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $453
The accumulated benefit obligation (ABO) for Torchmark’s funded defined benefit pension plan was
$168.4 million and $183.1 million at December 31, 2006 and 2005, respectively. Plan assets exceeded the
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Postretirement Benefits (continued)
ABO in Torchmark’s funded pension plan at both December 31, 2006 and 2005. In the unfunded plans, the
ABO was $11.5 million at December 31, 2006 and $11.3 million at December 31, 2005.
Torchmark has estimated its expected pension benefits to be paid over the next ten years as of
December 31, 2006. These estimates use the same assumptions that measure the benefit obligation at
December 31, 2006, taking estimated future employee service into account. Those estimated benefits are
as follows:
For the year(s)
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012-2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,421
12,712
11,571
11,304
12,915
72,137
These estimated payments do not include projected payments under the SERP that was adopted
January, 2007.
Postretirement Benefit Plans Other Than Pensions: Torchmark provides a small postretirement life
insurance benefit 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 and the life insurance benefits described above. Torchmark does provide a portion of the cost
for health insurance benefits for certain employees who retired before February 1, 1993 and for certain
employees that retired 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.
Torchmark’s post-retirement defined benefit plans other than pensions are not funded. Liabilities for
these plans are measured as of December 31 for the appropriate year.
The components of net periodic postretirement benefit cost for plans other than pensions are as follows:
Year Ended December 31,
2006
2005
2004
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 731
Interest cost on accumulated postretirement benefit
obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service cost . . . . . . . . . . . . . . . . . . . .
Recognition of net actuarial (gain) loss . . . . . . . . . . . . . . .
927
-0-
-0-
(278)
$ 735
$ 768
891
-0-
-0-
(211)
879
-0-
-0-
(440)
Net periodic postretirement benefit cost . . . . . . . . . . . . . . $1,380
$1,415
$1,207
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Postretirement Benefits (continued)
The following table presents a reconciliation of the benefit obligation and plan assets from the
beginning to the end of the year. As these plans are unfunded and all amounts are recognized, funded
status is equivalent to the accrued benefit liability.
Benefits Other Than Pensions
For the year ended December 31,
2006
2005
Changes in benefit obligation:
Obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 13,680
731
927
(278)
(856)
Obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,204
Changes in plan assets:
Fair value at beginning of year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value at end of year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
856
(856)
-0-
$ 13,040
735
891
(211)
(775)
13,680
-0-
-0-
775
(775)
-0-
Funded status at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(14,204)
$(13,680)
No amounts were unrecognized at the respective year ends.
The table below presents the assumptions used to determine the liabilities and costs of Torchmark’s
post-retirement benefit plans other than pensions.
Weighted Average Assumptions for Post-Retirement
Benefit Plans Other Than Pensions
For Benefit Obligations at December 31:
2006
2005
Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of Compensation Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.22% 7.00%
4.50
4.50
For Periodic Benefit Cost for the Year:
2006
2005
2004
Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of Compensation Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.00% 7.05% 7.25%
4.50
4.50
4.50
For measurement purposes of the healthcare benefits, a range of 7-10% annual rate of increase in
per capita cost of covered healthcare benefits was assumed for the years 2004 through 2006. Torchmark
has assumed that the health care cost trend rate will remain stable at the 7-10% range in future periods.
This trend rate assumption could have a significant effect on the amounts reported. However, because
participants substantially pay the cost of this benefit, a 1% increase or decrease in the health care cost
trend rate is not expected to have a significant effect in the service and interest cost components, nor is
the effect on the plan’s benefit obligation expected to exceed $1 thousand.
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 10—Debt
An analysis of debt at carrying value is as follows:
December 31,
2006
2005
Short-term
Debt
Long-term
Debt
Short-term
Debt
Long-term
Debt
Funded Debt:
Senior Debentures, due 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes, due 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes, due 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior Notes, due 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior Notes, due 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issue Expenses(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior Subordinated Debentures, due 2041(2) . . . . . . . . . . . . . .
Junior Subordinated Debentures, due 2046(2) . . . . . . . . . . . . . .
Total funded debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$169,736
$ 99,528
162,842
93,290
246,120
(4,243)
$179,852
597,537
179,852
123,711
721,248
179,852
201,653
$ 99,553
166,007
93,205
(5,502)
353,263
154,639
507,902
$169,736
$721,248
$381,505
$507,902
(1) Unamortized issue expenses related to Trust Preferred Securities.
(2) Junior Subordinated Debentures included in “Due to affiliates” on the Consolidated Balance Sheets.
The amount of debt that becomes due during each of the next five years is: 2007—$170,000; 2008—
$0; 2009—$99,450; 2010—$0; 2011—$0; and thereafter—$633,373.
Funded debt: The following table presents detailed information about the terms of Torchmark’s
funded debt.
Selected Information about Debt Issues as of December 31, 2006
Instrument
Senior Debentures, due 2009(1) . . . .
Notes, due 2023(1) . . . . . . . . . . . . . .
Notes, due 2013(1) . . . . . . . . . . . . . .
Senior Notes, due 2016(1) . . . . . . . .
Junior Subordinated
Debentures(2)
. . . . . . . . . . . . . . . .
Annual
Percentage
Rate
Issue
Date
Maturity
Date
Outstanding
Principle
(Par Value)
Outstanding
Principle
(Book Value)
Outstanding
Principle
(Fair Value)
Periodic
Interest
Payments
Due
Earliest Call
Date
8.250% 8/89 8/15/09
7.875% 5/93 5/15/23
7.375% 7/93 8/1/13
6.375% 6/06 6/15/16
$ 99,450
165,612
94,050
250,000
$ 99,528
162,842
93,290
246,120
$106,461
200,954
104,142
264,725
2/15 & 8/15 Not callable
5/15 & 11/15 Not callable
2/1 & 8/1
Not callable
6/15 & 12/15 Not callable
7.100% 6/06 6/1/46
123,711
123,711
128,064(3) quarterly(4)
6/1/11
(1) All securities other than “Due to affiliate” have equal priority with one another.
(2) Junior Subordinated Debentures are classified as “Due to affiliate” and are junior to other securities in priority of payment.
(3) Fair value of trust preferreds.
(4) Quarterly payments on the first day of March, June, Sept., and Dec.
During the second quarter of 2006, Torchmark established Torchmark Capital Trust III (Trust III) to
facilitate the public offering of 4.8 million shares of $25 par value Trust Preferred Securities. Trust III
completed the offering on June 8, 2006 for total proceeds of $120 million. It then exchanged $3.7 million
of its common stock and the $120 million of proceeds from the offering for $123.7 million of Torchmark
Junior Subordinated Debentures, due June 1, 2046. Trust III pays quarterly dividends on the Trust
Preferred Securities at an annual rate of 7.1%, and receives quarterly payments at the same annual rate
from Torchmark on the Junior Subordinated Debentures. All payments due to be paid by Trust III on the
Trust Preferred Securities are guaranteed by Torchmark (see Note 14). The securities are redeemable on
June 1, 2046, and first callable by Trust III on June 1, 2011.
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 10—Debt (continued)
Trust III is a variable interest entity in which Torchmark is not the primary beneficiary under GAAP.
Therefore, Torchmark is prohibited from consolidating Trust III even though it has 100% ownership,
complete voting control, and has guaranteed the performance of Trust III. Accordingly, Torchmark carries
its 7.1% Junior Subordinated Debentures due to Trust III as a liability under the caption “Due to Affiliates”
on its Consolidated Balance Sheets. Expenses of $4.3 million related to the offering reduce long-term
debt and are amortized over the forty-year redemption period.
On June 20, 2006, Torchmark issued $250 million principal amount of 6 3⁄ 8% Senior Notes due June
15, 2016. Interest on the Notes is payable semi-annually and commenced on December 15, 2006.
Proceeds from the issuance of this debt, net of expenses, were $246 million. The Notes are redeemable
by Torchmark in whole or in part at any time subject to a “make-whole” premium, whereby the Company
would be required to pay the greater of the full principal amount of the Notes or otherwise the present
value of the remaining repayment schedule of the Notes discounted at a rate of interest equivalent to the
rate of a United States Treasury security of comparable term plus a spread of 25 basis points.
On November 2, 2006, Torchmark’s 7¾% Trust Preferred Securities were called and redeemed in
the amount of $150 million plus accrued dividends. These securities were originally issued in 2001 as
preferred securities of Torchmark’s Capital Trusts I and II, deconsolidated variable interest entities similar
to Capital Trust III. Upon redemption of these securities, Capital Trusts I and II were liquidated. A loss of
$3.6 million after tax was recorded on this redemption. Additionally, on December 15, 2006, Torchmark’s
$180 million of 6¼% Senior Notes, due 2006, matured and were repaid with accrued interest.
Torchmark originally intended to use the net proceeds from both of the new security offerings to
repay the $180 million 6¼% Senior Notes and to redeem the $150 million of 7¾% Trust Preferred
Securities in the fourth quarter of 2006. Because interest rates on long-term investments trended higher
around the time of the offerings, the Company invested substantially all of the proceeds in long-term
investments. As a result, the Company funded both debt repayments with a combination of internally
generated cash flow and commercial paper borrowings.
During June, 2006, Torchmark acquired with the intent to retire $3.3 million par value of Torchmark’s
7 7⁄ 8% Notes due 2023 at a cost of $3.7 million. This transaction resulted in an after-tax realized loss of
$270 thousand.
Interest rate swaps: Torchmark previously entered into agreements with certain banks for which it
received from the banks fixed-rate payments that matched the coupons that it paid to the holders of
certain of its debt instruments, and made floating-rate payments based on LIBOR rates to the banks. As
of January 1, 2004, three such swaps were outstanding. All of Torchmark’s swaps were carried at fair
value and classified as “Other long-term investments” on the Consolidated Balance Sheets. In August,
2004, Torchmark entered into two new swap agreements exchanging its fixed 8.25% interest rate of the
Senior Debentures due 2009 and its fixed 7.375% interest rate of the Notes due 2013 for variable rates.
These swaps were disposed of in September, 2005 for proceeds of $239 thousand. As of September 30,
2004, a swap on Torchmark’s previous 9.18% Monthly Income Preferred Securities expired. Torchmark
sold its two remaining interest-rate swaps in June, 2006, as rising short-term rates continued to reduce
future prospects for positive interest-rate spreads. These sold swaps exchanged the fixed-interest
commitments for floating-rate commitments on Torchmark’s 6¼% Senior Notes ($180 million notional
amount) and the 7¾% Trust Preferred Securities ($150 million notional amount). Torchmark received $63
thousand in net proceeds from the sales of these swaps. No gain or loss was recognized on any of the
sales of the swaps. Swaps that qualify as hedges do not affect earnings on a periodic basis. Changes in
the fair value of these swaps are offset by an adjustment of the carrying value of the related Notes in like
amount each period. The swap related to the 6¼% Senior Notes and the swap on the 8¼% Senior
Debentures qualified as hedges under accounting rules. However, when sold, the cost basis of the
underlying Note is adjusted for the value of the swap, causing an increase or decrease in the future
amortization of that security. Swaps which do not qualify as hedges are revalued each period with such
changes in value reflected in realized gains and losses as incurred. The other two sold swaps did not
qualify as hedges. As of December 31, 2006, no interest-rate swaps were in place.
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 10—Debt (continued)
Terms of the various swaps held by Torchmark during the three years ended December 31, 2006 are
as follows:
Selected Information About Interest Rate Swaps
Related Debt
Date
Disposed
Original
Expiration
Hedge
Y/N
Notional
Amount
Fixed
Rate
Floating
LIBOR base
Additional
basis points Reset period
Senior Notes, due 12/06 . . . . . . . . . . .
Trust Preferred Securities, due
06/06
12/06
Yes
$180,000 6.250% six-month
120.5
six months
11/41 . . . . . . . . . . . . . . . . . . . . . . . . .
06/06
11/11
No
150,000 7.750% three-month
221.0
three months
Monthly Income Preferred
Securities* . . . . . . . . . . . . . . . . . . . . .
Senior Debentures, due 8/09 . . . . . . .
Notes, due 8/13 . . . . . . . . . . . . . . . . . .
09/04
09/05
09/05
09/04
08/09
08/09
No
Yes
No
200,000 9.180% one-month
99,450 8.250% six-month
100,000 7.375% six-month
139.0
391.0
305.0
one month
six months
six months
* $200 million of Monthly Income Preferred Securities were redeemed in full in 2001, but the related swap was retained until
expiration on September 30, 2004.
The following table summarizes the pretax impact of interest-rate swaps on Torchmark’s operating
results.
Related Debt
Senior Notes, due 12/06 (hedge)** . . . . . . . . . . . . . . . . .
Trust Preferred Securities, due 11/41** . . . . . . . . . . . . .
Monthly Income Preferred Securities*** . . . . . . . . . . . . .
Senior Debentures, due 8/09 (hedge)**** . . . . . . . . . . . .
Notes, due 8/13**** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Settlements Received
by Instrument*
Valuation Adjustment
by Instrument
2006
$275
216
-0-
-0-
-0-
$491
2005
$3,131
2,478
-0-
920
864
$7,393
2004
2006
2005
2004
$ 6,101
5,552
9,777
961
928
$23,319
$
-0-
(4,548)
-0-
-0-
-0-
$
-0-
(6,104)
-0-
-0-
(2,186)
$
-0-
(850)
(9,668)
-0-
2,315
$(4,548)
$(8,290)
$(8,203)
*
Due to the Securities and Exchange Commission’s interpretive guidance concerning SFAS 133, the benefit of the interest
spread has been reclassified from “Interest expense” to “Realized investment losses.”
** Swaps sold in June, 2006.
*** Expired in September, 2004.
**** Swaps sold in September, 2005.
Commercial Paper: On November 18, 2004, Torchmark entered into a credit facility with a group of
lenders allowing unsecured borrowings and stand-by letters of credit up to $600 million. Originally a five-
year facility set to terminate on November 18, 2009, the lending banks agreed in August, 2006 to extend
the maturities to August 31, 2011. As a part of the facility, the Company has the ability to request up to
$175 million in letters of credit to be issued against the facility. The credit facility is further designated as a
back-up credit line for a commercial paper program, whereby Torchmark may borrow from either the
credit line or issue commercial paper at any time, with total commercial paper outstanding not to exceed
$600 million less any letters of credit issued. Interest is charged at variable rates. At December 31, 2006,
Torchmark had $170 million face amount
($170 million carrying amount) of commercial paper
outstanding, $163 million of letters of credit issued, and no borrowings under the line of credit. During
2006, the short term borrowings under the combined facilities averaged approximately $166 million, and
were made at an average yield of 5.0%, compared with 3.3% a year earlier. The facility does not have a
ratings-based acceleration trigger which would require early payment. A facility fee is charged for the
entire $600 million facility at a rate of 8 basis points. For letters of credit issued, there is an issuance fee
of 22 basis points and a fronting fee of 7.5 basis points. Additionally, if borrowings on both the line of
credit and letters of credit exceed 50% of the total $600 million facility, there is a usage fee of 7.5 basis
points. During 2006, Torchmark’s usage of the facility was below this threshold and no usage fee was
required. Torchmark is subject to certain covenants for the agreements regarding capitalization and
earnings, with which it was in compliance at December 31, 2006. Borrowings on this facility are reported
as short-term debt on the Consolidated Balance Sheets.
There was no capitalized interest during the three years ended December 31, 2006.
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 11—Shareholders’ Equity
Share Data: A summary of preferred and common share activity is as follows:
Preferred Stock
Common Stock
Issued
Treasury
Stock
Issued
Treasury
Stock
2004:
Balance at January 1, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock due to exercise of stock options . . . . .
Treasury stock acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
113,783,658
(5,000,000)
(1,069,053)
763,592
(5,534,276)
5,000,000
Balance at December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
108,783,658
(839,737)
2005:
Issuance of common stock due to exercise of stock options . . . . .
Treasury stock acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
91,090
(4,000,000)
5,835,740
(10,301,852)
4,000,000
Balance at December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
104,874,748
(1,305,849)
2006:
Grants of restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock due to exercise of stock options . . . . .
Treasury stock acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,000
507,259
(5,989,531)
5,000,000
(5,000,000)
Balance at December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
99,874,748
(1,760,121)
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 excess cash flows. Share repurchases under this program were 5.6 million shares at a
cost of $320 million in 2006, 5.6 million shares at a cost of $300 million in 2005, and 5.2 million shares at
a cost of $268 million in 2004. When stock options are exercised, proceeds from the exercises are
generally used to repurchase approximately the number of shares available with those funds, in order to
reduce dilution. Shares repurchased for dilution purposes were 415 thousand shares at a cost of
$24 million in 2006, 4.7 million shares costing $255 million in 2005, and 313 thousand shares at a cost of
$17 million in 2004.
Retirement of Treasury Stock: Torchmark retired 5 million shares of treasury stock in December,
2006, 4 million in 2005, and 5 million in 2004.
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. 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 regulatory approval. Additionally, insurance company distributions are
generally not permitted in excess of statutory surplus. Subsidiaries are also subject to certain minimum
capital requirements. In 2006, subsidiaries of Torchmark paid $428 million in dividends to the parent
company. During 2007, a maximum amount of $434 million is expected to be available to Torchmark from
subsidiaries without regulatory approval.
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 11—Shareholders’ Equity (continued)
Earnings Per Share: A reconciliation of basic and diluted weighted-average shares outstanding used
in the computation of basic and diluted earnings per share is as follows:
Basic weighted average shares outstanding . . . . . . . . . . . .
Weighted average dilutive options outstanding . . . . . . . . . .
99,732,608
1,379,549
104,735,466
1,015,947
110,106,078
1,801,723
Diluted weighted average shares outstanding . . . . . . . . . . .
101,112,157
105,751,413
111,907,801
2006
2005
2004
Stock options to purchase 21 thousand shares, 3.8 million shares, and 83 thousand shares during
the years 2006, 2005, and 2004, respectively, are considered to be anti-dilutive and are excluded from
the calculation of diluted earnings per share.
Income available to common shareholders for basic
earnings per share is equivalent to income available to common shareholders for diluted earnings per
share.
Note 12—Stock-Based Compensation
Certain employees, directors, and consultants have been granted fixed equity options to buy shares
of Torchmark stock at the market value of the stock on the date of grant, under the provisions of the
Torchmark stock option plans. The options are exercisable during the period commencing from the date
they vest until expiring according to the terms of the grant. Options generally expire the earlier of
employee termination or option contract term, which ranges from seven to eleven years. Employee and
consultant stock options generally vest one-half in two years and one-half in three years. Formula-based
director grants generally vest in six months. Stock options awarded in connection with compensation
deferrals by certain directors and executives generally vest over a range of six to ten years. All options
vest immediately upon the attainment of age 65, subject to a minimum vesting period of one year for
employees or six months for directors. Torchmark generally issues shares for the exercise of stock
options from treasury stock. The Company generally uses the proceeds from option exercises to buy
shares of Torchmark common stock in the open market to reduce the dilution from option exercises. The
majority of Torchmark’s stock option grants are made annually in the fourth quarter.
During 2005, Torchmark shareholders approved two new stock option plans, the 2005 Employee
Plan for 5,625,000 shares and the 2005 Director Plan for 375,000 shares. Upon approval of these new
plans, options previously available for grant under prior plans were cancelled and were no longer
available for grant. During 2006, these two plans were combined into the 2005 Stock Incentive Plan.
Terms of this plan were amended to restate the Director Plan as a sub-plan of the new plan. The total
number of approved shares remained at 6 million.
On December 12, 2006, nine executive officers were granted a total of 28 thousand shares of
restricted stock under the 2005 Stock Incentive Plan. Fair value of Torchmark stock on that date was
$63.70, resulting in an aggregate value of the grant of $1.8 million. The shares vest over a period of
5 years. None of these shares were vested as of December 31, 2006.
As described in Note 1—Significant Accounting Policies, the Company executed a voluntary option
exercise and restoration program in the second quarter of 2005 whereby participants exercised vested
options and received a lesser number of new options at the then current market price. As a result of this
program, 5.8 million options were exercised resulting in that many shares being issued to participants, but
4.7 million shares were immediately sold by participants to pay their exercise price and their withholding
taxes. Optionees retained 1.1 million shares and were issued 4.1 million new options granted at a price of
$54.77 per Torchmark share, the fair value of Torchmark stock on the date of grant.
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 12—Stock-Based Compensation (continued)
An analysis of shares available for grant is as follows:
Available for Grant
2006
2005
2004
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adoption of new plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled on termination of prior plans . . . . . . . . . . . . . . . . . . . . . .
Expired and forfeited during year . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options granted during year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock granted during year . . . . . . . . . . . . . . . . . . . . . . . .
916,483
1,716,920
— 6,000,000
— (1,641,145)
3,828
(5,163,120)
-0-
34,749
(458,008)
(28,000)
2,785,705
—
—
15,310
(1,039,095)
-0-
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
465,224
916,483
1,761,920
A summary of option activity for each of the years in the three years ended December 31, 2006 is
presented below:
2006
2005
2004
Stock-based compensation expense recognized* . . . . . . . . . . . . . . . . . . . . . $ 6,575 $
Tax benefit recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average grant-date fair value of options granted . . . . . . . . . . . . .
Intrinsic value of options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash received from options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual tax benefit received from exercises . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,301
11.77
8,394
21,451
2,938
977 $
342
9.31
107,104
217,257
37,486
543
190
11.83
13,841
26,118
4,844
*
No stock-based compensation expense was capitalized in any period.
2006
2005
2004
Options
Weighted Average
Exercise Price
Options
Weighted Average
Exercise Price
Options
Weighted Average
Exercise Price
Outstanding-beginning of
year . . . . . . . . . . . . . . . . . . 9,912,735
458,008
(507,259)
(34,749)
Granted . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . .
Expired and forfeited . . . . .
Outstanding-end of year
. . . 9,828,735
Exercisable at end of
$49.33
62.42
42.29
50.50
$50.30
10,680,273
5,163,120
(5,926,830)
(3,828)
9,912,735
$39.60
54.91
36.66
39.73
$49.33
10,420,080
1,039,095
(763,592)
(15,310)
10,680,273
$37.66
55.11
34.20
36.51
$39.60
year . . . . . . . . . . . . . . . . . . 8,381,117
$49.40
8,242,341
$49.32
7,942,059
$37.46
Additional information about Torchmark’s stock-based compensation as of December 31, 2006 is as
follows:
Outstanding options:
Weighted-average remaining contractual term (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aggregate intrinsic value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.52
$132,268
Exercisable options:
Weighted-average remaining contractual term (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aggregate intrinsic value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.43
$120,318
Unrecognized compensation* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average period of expected recognition (in years)* . . . . . . . . . . . . . . . . . . . . . . . . .
$ 13,414
2.46
*
Includes restricted stock
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 12—Stock-Based Compensation (continued)
Additional information concerning Torchmark’s unvested options is as follows:
Number of shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,447,618
$55.50
Weighted-average exercise price (per share) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.05
Weighted-average remaining contractual term (in years) . . . . . . . . . . . . . . . . . . . . . . . .
$11,950
Aggregate intrinsic value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Torchmark expects that substantially all unvested options will vest.
The following table summarizes information about stock options outstanding at December 31, 2006.
Range of
Exercise Prices
Number
Outstanding
$15.95-$38.79
41.26- 41.26
41.75- 54.50
54.77- 54.77
55.05- 55.80
56.24- 56.24
56.78- 63.70
$15.95-$63.70
1,094,937
1,343,012
1,009,143
4,068,495
996,806
869,042
447,300
9,828,735
Options Outstanding
Options Exercisable
Weighted-
Average
Remaining
Contractual
Life (Years)
Weighted-
Average
Exercise
Price
4.31
4.57
6.55
5.24
5.82
7.53
7.09
5.52
$34.90
41.26
45.30
54.77
55.49
56.24
62.72
$50.30
Number
Exercisable
964,418
1,343,012
986,113
4,068,495
83,130
864,949
71,000
8,381,117
Weighted-
Average
Exercise
Price
$35.04
41.26
45.30
54.77
55.68
56.24
57.52
$49.40
The contractual
life of one option was extended in 2005 for the benefit of a retiring officer. This
modification, which was accounted for under the intrinsic value method, resulted in an after-tax charge of
$369 thousand. No equity awards were cash settled during the three years ended December 31, 2006.
Note 13—Business Segments
Torchmark’s segments are based on the insurance product lines it markets and administers: life
insurance, health insurance, and annuities. These major product lines are set out as segments because
of the common characteristics of products within these categories, comparability of margins, and the
similarity in regulatory environment and management techniques. There is also an investment segment
which manages the investment portfolio, debt, and cash flow for the insurance segments and the
corporate function. Torchmark’s management evaluates the overall performance of the operations of the
Company in accordance with these segments.
Life insurance products include traditional and interest-sensitive whole life insurance as well as term
life insurance. Health products are generally guaranteed-renewable and include Medicare Supplement,
Medicare Part D, cancer, accident, long-term care, and limited-benefit 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.
86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13—Business Segments (continued)
Torchmark Corporation
Premium By Distribution Channel
Life
Health
Annuity
Total
For the Year 2006
Distribution Channel
Amount
% of
Total
United American Independent
. . . . . . . . . . .
Liberty National Exclusive . . . . . . . . . . . . . . .
American Income Exclusive . . . . . . . . . . . . .
Direct Response . . . . . . . . . . . . . . . . . . . . . .
United American Branch Office . . . . . . . . . .
Military . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medicare Part D . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
40,378
300,933
409,188
457,159
15,775
203,218
97,616
3
20
27
30
1
13
6
Amount
$ 418,690
145,024
67,175
39,726
354,535
212,382
% of
Total Amount
% of
Total
34
12
5
3
29
17
$
537
2
22,377
98
Amount
$ 459,605
445,957
476,363
496,885
370,310
203,218
212,382
119,993
% of
Total
17
16
17
18
13
7
8
4
$1,524,267
100
$1,237,532
100
$22,914
100
$2,784,713
100
Life
Health
Annuity
Total
For the Year 2005
Distribution Channel
Amount
% of
Total
United American Independent
. . . . . . . . . . .
Liberty National Exclusive . . . . . . . . . . . . . . .
American Income Exclusive . . . . . . . . . . . . .
Direct Response . . . . . . . . . . . . . . . . . . . . . .
United American Branch Office . . . . . . . . . .
Military . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
45,472
302,747
380,365
424,037
16,891
199,319
99,457
3
21
26
29
1
13
7
Amount
$ 441,673
149,020
63,623
37,774
322,767
% of
Total Amount
% of
Total
$
419
2
43
15
6
4
32
24,510
98
100
Amount
$ 487,564
451,767
443,988
461,811
339,658
199,319
123,967
% of
Total
19
18
18
18
14
8
5
$2,508,074
100
$1,468,288
100
$1,014,857
100
$24,929
Life
Health
Annuity
Total
For the Year 2004
Distribution Channel
Amount
% of
Total
United American Independent
. . . . . . . . . . .
Liberty National Exclusive . . . . . . . . . . . . . . .
American Income Exclusive . . . . . . . . . . . . .
Direct Response . . . . . . . . . . . . . . . . . . . . . .
United American Branch Office . . . . . . . . . .
Military . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
49,834
303,965
349,686
387,006
17,838
186,555
100,606
4
22
25
28
1
13
7
Amount
$ 468,319
163,981
59,519
34,568
322,279
% of
Total Amount
% of
Total
$
262
1
45
15
6
3
31
27,482
99
100
Amount
$ 518,415
467,946
409,205
421,574
340,117
186,555
128,088
% of
Total
21
19
17
17
14
7
5
$2,471,900
100
$1,395,490
100
$1,048,666
100
$27,744
Because of the nature of the life insurance industry, Torchmark has no individual or group which would
be considered a major customer. Substantially all of Torchmark’s business is conducted in the United
States, primarily in the Southeastern and Southwestern regions.
The measure of profitability established by management for insurance segments is underwriting margin
before other income and administrative expenses,
in accordance with the manner the segments are
It essentially represents gross profit margin on insurance products before insurance
managed.
administrative expenses and consists of premium, less net policy obligations, acquisition expenses, and
commissions. Interest credited to net policy liabilities (reserves less deferred acquisition costs and value of
insurance purchased) is reflected as a component of the Investment segment in order to match this cost to
the investment earnings from the assets supporting the net policy liabilities.
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13—Business Segments (continued)
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 Torchmark’s debt. 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. Stock-based compensation expense is considered a
corporate expense by Torchmark management and is included in this category. All other unallocated
revenues and expenses on a pretax basis, including insurance administrative expense, are included in
the “Other” segment category. The following tables set forth a reconciliation of Torchmark’s revenues and
operations by segment to its major income statement line items.
is excess investment
Life
Health
Annuity
Investment
Other
Corporate Adjustments Consolidated
For the Year 2006
Revenue:
Premium . . . . . . . . . . . . . . . . . . . . $1,524,267 $1,237,532 $ 22,914
Net investment income . . . . . . . .
Other income . . . . . . . . . . . . . . . .
$ 628,292
$
4,024
$
454(1)
14,462(3,4,5)
$2,784,713
628,746
18,486
Total revenue . . . . . . . . . . . . 1,524,267
1,237,532
22,914
628,292
4,024
14,916
3,431,945
Expenses:
Policy benefits . . . . . . . . . . . . . . . 1,005,771
Required interest on reserves . . .
(364,313)
Amortization of acquisition
834,017
(24,662)
23,743
(28,318)
417,293
costs . . . . . . . . . . . . . . . . . . . . .
408,506
133,453
15,486
(179,955)
Commissions and premium
tax . . . . . . . . . . . . . . . . . . . . . . .
Insurance administrative expense(2)
Parent expense . . . . . . . . . . . . . .
Stock-based compensation
expense . . . . . . . . . . . . . . . . . .
Financing costs: . . . . . . . . . . . . . .
Debt . . . . . . . . . . . . . . . . . . . . . .
Benefit from interest rate
swaps . . . . . . . . . . . . . . . . . .
76,859
88,030
88
(1,294)(3)
155,331
$ 7,862
6,575
72,682
(491)
454(1)
73,136
(491)
1,863,531
-0-
377,490
163,683
155,331
7,862
6,575
Total expenses . . . . . . . . . . . 1,126,823
1,030,838
10,999
309,529
155,331
14,437
(840)
2,647,117
Subtotal
. . . . . . . . . . . . . . . . . . . .
Nonoperating items . . . . . . . . .
397,444
206,694
11,915
318,763
(151,307)
(14,437)
15,756
(15,756)(4,5)
784,828
(15,756)
Measure of segment
profitability (pretax)
. . . . . . . $ 397,444 $ 206,694 $ 11,915 $ 318,763 $(151,307) $(14,437) $
-0-
$ 769,072
Deduct applicable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(264,716)
Segment profits after tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
504,356
Add back income taxes applicable to segment profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Remove benefit from interest rate swaps (included in “Realized investment gains (losses)”)
Add (deduct) realized investment gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add proceeds of legal settlements(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add gain from sale of agency buildings(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
264,716
(491)
(10,767)
11,423
4,333
Pretax income per income statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 773,570
(1) Reclassification of interest amount due to adoption of FIN46R (accounting rule requiring deconsolidation of Trust Preferred
Securities)
(2) Administrative expense is not allocated to insurance segments
(3) Elimination of intersegment commission
(4) Legal settlements from litigation related to prior years
(5) Gain from sale of agency buildings
88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13—Business Segments (continued)
Life
Health
Annuity
Investment
Other
Corporate Adjustments Consolidated
For the Year 2005
Revenue:
Premium . . . . . . . . . . . . . . . . . . . .$1,468,288 $1,014,857 $ 24,929
Net investment income . . . . . . . . .
Other income . . . . . . . . . . . . . . . . .
$ 602,708
$
2,366
$
360(1)
12,122(3,4)
$2,508,074
603,068
14,488
Total revenue . . . . . . . . . . . . . 1,468,288
1,014,857
24,929
602,708
2,366
12,482
3,125,630
Expenses:
Policy benefits . . . . . . . . . . . . . . . .
Required interest on reserves . . .
Amortization of acquisition costs .
Commissions and premium tax . .
Insurance administrative
expense(2)
. . . . . . . . . . . . . . . . .
Parent expense . . . . . . . . . . . . . . .
. . . . . . . . . . . . . .
Financing costs:
Debt
. . . . . . . . . . . . . . . . . . . . . .
Benefit from interest rate swaps
966,093
(342,305)
386,574
76,278
668,205
(20,879)
115,868
74,484
26,888
(30,092)
15,504
49
393,276
(167,987)
1,661,186
0
349,959
149,451
(1,360)(3)
147,681
$ 9,660
14,950(4)
568(5)
162,631
10,228
60,574
(7,393)
360(1)
60,934
(7,393)
Total expenses . . . . . . . . . . . 1,086,640
837,678
12,349
278,470
147,681
9,660
14,518
2,386,996
Subtotal . . . . . . . . . . . . . . . . . . . . .
Nonoperating items . . . . . . . . . .
Measure of segment profitability
381,648
177,179
12,580
324,238
(145,315)
(9,660)
(2,036)
2,036(4,5)
738,634
2,036
(pretax) . . . . . . . . . . . . . . . . . . $ 381,648 $ 177,179 $ 12,580 $ 324,238 $(145,315) $(9,660)
$
-0-
$ 740,670
Deduct applicable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(255,165)
Segment profits after tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add back income taxes applicable to segment profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Remove benefit from interest rate swaps (included in “Realized investment gains (losses)”)
Add (deduct) realized investment gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct net cost of legal settlements(4)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct option term extension expense(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
485,505
255,165
(7,393)
280
(1,468)
(568)
Pretax income per income statement
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 731,521
(1) Reclassification of interest amount due to adoption of FIN46R (accounting rule requiring deconsolidation of Trust Preferred
Securities).
(2) Administrative expense is not allocated to insurance segments
(3) Elimination of intersegment commission
(4) Legal settlements on litigation related to prior years
(5) Option term extension for retiring executive
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13—Business Segments (continued)
Life
Health
Annuity Investment
Other
Corporate Adjustments Consolidated
For the Year 2004
Revenue:
Premium . . . . . . . . . . . . . . . . . . . . . . . .$1,395,490 $1,048,666 $ 27,744
Net investment income . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . .
$ 576,675
$
1,833
$360(1)
(1,442)(3)
$2,471,900
577,035
391
Total revenue . . . . . . . . . . . . . . . . 1,395,490 1,048,666
27,744
576,675
1,833
(1,082)
3,049,326
Expenses:
Policy benefits . . . . . . . . . . . . . . . . . . .
Required interest on reserves . . . . . .
Amortization of acquisition costs . . . .
Commissions and premium tax . . . . .
Insurance administrative
expense(2) . . . . . . . . . . . . . . . . . . . . .
Parent expense . . . . . . . . . . . . . . . . . .
Financing costs:
Interest expense . . . . . . . . . . . . . . .
Benefit from interest rate swaps . . .
919,775
(318,886)
369,418
73,006
28,248
697,645
(19,502) (31,740) 370,128
117,428
17,211 (156,808)
78,513
61
$ 141,620
$ 9,575
56,131
(23,319)
1,645,668
-0-
347,249
150,138
141,620
9,575
56,491
(23,319)
(1,442)(3)
360(1)
Total expenses . . . . . . . . . . . . . . . . 1,043,313
874,084
13,780
246,132
141,620
9,575
(1,082)
2,327,422
Measure of segment profitability
(pretax) . . . . . . . . . . . . . . . . . . . . .$ 352,177 $ 174,582 $ 13,964 $ 330,543 $(139,787) $(9,575)
$ -0-
$ 721,904
Deduct applicable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(248,472)
Segment profits after tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
473,432
Add back income taxes applicable to segment profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Remove benefit from interest rate swaps (included in “Realized investment gains (losses)”) . . . . . . . . . . . . . . . . . . . . .
Add realized investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
248,472
(23,319)
22,216
Pretax income per income statement
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 720,801
(1) Reclassification of interest amount due to FIN46R (accounting rule requiring deconsolidation of Trust Preferred Securities).
(2) Administrative expense is not allocated to insurance segments.
(3) Elimination of intersegment commission.
Torchmark holds a sizeable investment portfolio to support its insurance liabilities, the yield from
which is used to offset policy benefit, acquisition, administrative and tax expenses. This yield or
investment income is taken into account when establishing premium rates and profitability expectations of
its insurance products. In holding such a portfolio, investments are sold, called, or written down from time
to time, resulting in a realized gain or loss. These gains or losses generally occur as a result of disposition
due to issuer calls, a downgrade in credit quality, compliance with Company investment policies, or other
reasons often beyond management’s control. Unlike investment income, realized gains and losses are
incidental to insurance operations, and are not considered when setting premium rates or insurance
product profitability expectations. While these gains and losses are not relevant to segment profitability or
core operating results, they can have a material positive or negative result on net income. For these
reasons, management removes realized investment gains and losses when it views its segment
operations.
Prior to 2006, management entered into swap derivative contracts to exchange certain of its fixed-
rate debt securities to floating rates to reduce its interest cost. For this reason, management views the
difference between the floating-rate interest paid and the fixed-rate interest received (the “spread”) as an
adjustment to its financing cost in the Investment Segment and has reported it as such in this analysis. In
accordance with current accounting rules, this spread on a non-hedged swap must be included in the
same line item as the swap’s change in fair value each period. Because of this rule, Torchmark includes
the spread on all swaps in Realized investment gains and losses in the Consolidated Statements of
Operations, as this is the line item that contains the fair value adjustment each period.
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13—Business Segments (continued)
As described in Note 1—Significant Accounting Policies in the Notes to Consolidated Financial
Statements, Torchmark adopted FASB Statement 123R which requires the expensing of stock-based
compensation as of January 1, 2006. Torchmark management views stock-based compensation expense
as a corporate expense. Therefore, stock-based compensation expense is included in the Corporate
group in this segment analysis.
The following table summarizes the measures of segment profitability as determined in the three
preceding tables for comparison with prior periods. The table also reconciles segment profits to net income.
Analysis of Profitability by Segment
Life insurance underwriting margin . . . . . . . . . . . . . . . . . . . .
Health insurance underwriting margin . . . . . . . . . . . . . . . . .
Annuity underwriting margin . . . . . . . . . . . . . . . . . . . . . . . . .
Other insurance:
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Administrative expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess investment income . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and adjustments . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Applicable taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pre-tax total
2006
2005
2004
Change %
Change %
$ 397,444
206,694
11,915
$ 381,648
177,179
12,580
$ 352,177
174,582
13,964
$15,796
29,515
(665)
4
17
(5)
$ 29,471
2,597
(1,384)
8
1
(10)
2006
2005
4,024
(155,331)
318,763
(14,437)
769,072
(264,716)
2,366
(147,681)
324,238
(9,660)
740,670
(255,165)
1,833
(141,620)
330,543
(9,575)
721,904
(248,472)
70
1,658
5
(7,650)
(5,475)
(2)
(4,777) 49
28,402
(9,551)
4
4
4
After-tax total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
504,356
485,505
473,432
18,851
Remove benefit from interest-rate swaps (after tax)
from Investment Segment
. . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains (losses) (after tax) . . . . . . . . . . . . . . . . . . . . .
Gain on sale of agency buildings (after tax) . . . . . . . . . . . . .
Tax settlements (after tax) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds (cost) from legal settlements (after tax) . . . . .
Retiring executive option term extension (after tax) . . . . . . .
. . . . . . . . . . . . . .
Change in accounting principle (after tax)
(319)
(7,254)
2,816
11,607
7,425
-0-
-0-
(4,805)
25
-0-
15,989
(955)
(369)
-0-
(15,157)
14,440
-0-
3,003
-0-
-0-
(7,163)
4,486
(7,279)
2,816
(4,382)
8,380
369
-0-
29
4
(2)
1
3
3
3
533
(6,061)
(6,305)
(85)
18,766
(6,693)
12,073
10,352
(14,415)
-0-
12,986
(955)
(369)
7,163
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 518,631
$ 495,390
$ 468,555
$23,241
5
$ 26,835
6
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13—Business Segments (continued)
Assets for each segment are reported based on a specific identification basis. The insurance
segments’ assets contain deferred acquisition costs (including the value of insurance purchased) and
separate account assets. The investment segment includes the investment portfolio, cash, and accrued
investment income. Goodwill
is assigned to the insurance segments based on SFAS 142. All other
assets, representing less than 2% of total assets, are included in the other category. The table below
reconciles segment assets to total assets as reported in the consolidated financial statements.
Torchmark Corporation
Assets By Segment
Life
Health
Annuity
Investment
Other
Consolidated
At December 31, 2006
Cash and invested assets . . . . . . . . . . . . . . . . . .
Accrued investment income . . . . . . . . . . . . . . . .
Deferred acquisition costs . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Separate account assets . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,314,873
288,089
$518,488
87,282
$ 122,481
3,065
1,498,622
$9,719,988
168,118
$ 9,719,988
168,118
2,955,842
378,436
1,498,622
259,349
$259,349
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,602,962
$605,770
$1,624,168
$9,888,106
$259,349
$14,980,355
Life
Health
Annuity
Investment
Other
Consolidated
At December 31, 2005
Cash and invested assets . . . . . . . . . . . . . . . . . .
Securities lending collateral
. . . . . . . . . . . . . . . .
Accrued investment income . . . . . . . . . . . . . . . .
Deferred acquisition costs . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Separate account assets . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,200,261
288,089
$452,328
87,282
$ 115,815
3,065
1,560,391
$9,410,695
257,390
158,225
$ 9,410,695
257,390
158,225
2,768,404
378,436
1,560,391
235,362
$235,362
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,488,350
$539,610
$1,679,271
$9,826,310
$235,362
$14,768,903
Note 14—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 $2.0 million per life.
Life insurance ceded represented 1.1% of total life insurance in force at December 31, 2006. Insurance
ceded on life and accident and health products represented .5% of premium income for 2006. 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
represented 1.5% of life insurance in force at December 31, 2006 and reinsurance assumed on life and
accident and health products represented .7% of premium income for 2006.
Leases: Torchmark leases office space and office equipment under a variety of operating lease
arrangements. Rental expense for operating leases was $6.1 million in 2006, $5.6 million in 2005, and
$5.2 million in 2004. Future minimum rental commitments required under operating leases having
remaining noncancelable lease terms in excess of one year at December 31, 2006 were as follows: 2007,
$3.4 million; 2008, $2.3 million; 2009, $1.7 million; 2010, $1.5 million; 2011, $1.2 million and in the
aggregate, $12.5 million.
Low-Income Housing Tax Credit Interests: As described in Note 1, Torchmark has committed to
invest $143 million in entities which provide certain tax benefits. As of December 31, 2006, Torchmark
remained obligated under these commitments for $34.2 million, of which $24.1 million is due in 2007,
$9.7 million in 2008, and $.4 million in 2009.
92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Commitments and Contingencies (continued)
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, 2006, the
investment portfolio, at fair value, consisted of the following:
Investment-grade corporate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninvestment-grade securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government-sponsored enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy loans, which are secured by the underlying insurance policy values . . . . . . . . . . . . . .
Other fixed maturities, equity securities, mortgages, real estate, and other long-term
82%
7
4
3
investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments, which generally mature within one month . . . . . . . . . . . . . . . . . . . . .
2
2
100%
Investments in municipal governments and corporations are made throughout the U.S. with no
concentration in any given state. Corporate debt and equity investments are made in a wide range of
industries. At December 31, 2006, 2% or more of the corporate portfolio was invested in the following
industries:
Insurance carriers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21%
Depository institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Electric, gas, and sanitation services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7
Nondepository credit institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
Chemicals and allied products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
Media (printing, publishing, and allied lines) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
Food and kindred products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Oil and gas extraction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Transportation equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Petroleum refining and related industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Security and commodity brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Otherwise, no individual industry represented 2% or more of Torchmark’s investments. At year-end
2006, 7% of invested assets was represented by fixed maturities rated below investment grade (BB or
lower as rated by the Bloomberg Composite or the equivalent NAIC designation). Par value of these
investments was $676 million, amortized cost was $668 million, and fair value was $673 million. While
these investments could be subject to additional credit risk, such risk should generally be reflected in
market value.
Collateral Requirements: Torchmark requires collateral
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 the underlying real estate.
for
Guarantees: At December 31, 2006, Torchmark had in place six guarantee agreements, five of which
were either parent company guarantees of subsidiary obligations to a third party, or parent company
guarantees of obligations between wholly-owned subsidiaries. The sixth guarantee related to third party
performance. As of December 31, 2006, Torchmark had no liability with respect to these guarantees.
Trust Preferred Securities: Torchmark entered into a performance guarantee for the obligations
of the Torchmark Capital Trust III when the trust preferred securities were issued by that trust. It
guarantees payment of distributions and the redemption price of the securities until the securities are
redeemed in full, or all obligations have been satisfied should the Capital Trust default on an
obligation. The total redemption price of the trust preferred securities is $120 million.
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Commitments and Contingencies (continued)
Letters of Credit: Torchmark has guaranteed letters of credit in connection with its credit facility
with a group of banks. The letters of credit were issued by TMK Re, Ltd., a wholly-owned subsidiary,
to secure TMK Re, Ltd.’s obligation for claims on certain policies reinsured by TMK Re, Ltd. that were
sold by other Torchmark insurance companies. These letters of credit facilitate TMK Re, Ltd.’s ability
to reinsure the business of Torchmark’s insurance carriers. The agreement expires in 2011. The
maximum amount of letters of credit available is $175 million. Torchmark (parent company) would be
liable to the extent that TMK Re, Ltd. does not pay the reinsured party. At December 31, 2006, $163
million of letters of credit were outstanding.
Agent Receivables: Torchmark issued a guarantee to an unaffiliated third party, which has
purchased certain agents’ receivables of Torchmark’s wholly-owned subsidiary American Income Life
Insurance Company. The guarantee covers all obligations and recovery of capital to the third party
under the receivables purchase agreement up to a maximum amount of $95 million. Under the terms
of the revolving purchase arrangement, the third party has purchased the agents’ receivables and
receives the earned commissions as they are applied to the balance. The term of the guarantee
corresponds with the purchase arrangement, which is annually renewable. Torchmark would be liable
to the extent that future commission collections were insufficient to repay the purchased amount. As
of December 31, 2006,
future commissions substantially exceeded the
purchased balance.
the present value of
Equipment leases: Torchmark has guaranteed performance of two subsidiaries as lessees under
leasing arrangements for aviation equipment. The leases commenced in 2003 for lease terms of
approximately 10 years. Lessees have certain renewal and early termination options, however. At
December 31, 2006, total remaining undiscounted payments under the leases were approximately
$5.6 million. Torchmark (parent company) would be responsible for any subsidiary obligation in the
event the subsidiary did not make payments or otherwise perform under the terms of the lease.
Acquisition: Torchmark subsidiary Globe has guaranteed the payments of all obligations by its
subsidiaries in connection with the purchase transaction of DMAD (as disclosed in Note 1.) Globe
has also guaranteed performance under a consulting agreement related to the transaction. As of
January 31, 2007, substantially all of the payments due under the purchase transaction have been
paid. These payments consisted of the purchase price and fees for other services amounting to
approximately $69 million. The consulting agreement that is guaranteed consists of payments due in
the amount of $626 thousand per year for the years 2007 through 2009.
Personal loans: Torchmark subsidiary American Income is a party to an agreement to guarantee
certain personal loans of American Income employees and agents with First Command Bank. First
Command Bank is a subsidiary of First Command Services, Inc. (First Command) of which Lamar C.
Smith is CEO. Mr. Smith is also a director of Torchmark. At December 31, 2006, the balance subject
to this guarantee was $71 thousand, compared with $182 thousand a year earlier. These guarantees
are secured by vested commissions due the employees and agents. See Note 15—Related Party
Transactions for more information on Mr. Smith and First Command.
Litigation: Torchmark and its subsidiaries, in common with the insurance industry in general, are
subject to litigation, including claims involving 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. Based upon
information presently available, and in light of legal and other factual defenses available to Torchmark and
its subsidiaries, management does not believe that such litigation will have a material adverse effect on
Torchmark’s financial condition, future operating results or liquidity; however, assessing the eventual
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Commitments and Contingencies (continued)
outcome of litigation necessarily involves forward-looking speculation as to judgments to be made by
judges,
juries and appellate courts in the future. This bespeaks caution, particularly in states with
reputations for high punitive damage verdicts such as Alabama and Mississippi.
Many of
these lawsuits involve claims for punitive damages in state courts of Alabama and
Mississippi. Torchmark’s management recognizes that large punitive damage awards continue to occur
bearing little or no relation to actual damages awarded by juries in jurisdictions in which Torchmark has
substantial business, particularly Alabama and Mississippi, creating the potential
for unpredictable
material adverse judgments in any given punitive damage suit. As of December 31, 2006, Liberty was a
party to approximately 42 active lawsuits (which included no employment-related cases and excluded
interpleaders), 29 of which were Alabama proceedings and 1 of which was a Mississippi proceeding in
which punitive damages were sought.
As previously reported in Forms 10-K and 10-Q, Liberty National Life Insurance Company and
Torchmark Corporation were parties to purported class action litigation filed in the Circuit Court of
Choctaw County, Alabama on behalf of all persons who currently or in the past were insured under
Liberty cancer policies which were no longer being marketed, regardless of whether the policies remained
in force or lapsed (Roberts v. Liberty National Life Insurance Company, Case No. CV-2002-009-B). These
cases were based on allegations of breach of contract in the implementation of premium rate increases,
misrepresentation regarding the premium rate increases, fraud and suppression concerning the closed
block of business and unjust enrichment. On December 30, 2003, the Alabama Supreme Court issued an
opinion granting Liberty’s and Torchmark’s petition for a writ of mandamus, concluding that the Choctaw
Circuit Court did not have subject matter jurisdiction and ordering that Circuit Court to dismiss the action.
The plaintiffs then filed their purported class action litigation against Liberty and Torchmark in the Circuit
Court of Barbour County, Alabama on December 30, 2003 (Roberts v. Liberty National Life Insurance
Company, Civil Action No. CV-03-0137). On April 16, 2004 the parties filed a written Stipulation of
Agreement of Compromise and Settlement with the Barbour County, Alabama Circuit Court seeking
potential settlement of the Roberts case. A fairness hearing on the potential settlement was held by the
Barbour County Circuit Court on July 15, 2004. After receipt of briefs on certain issues and submission of
materials relating to objections to the proposed settlement to the Court-appointed independent special
master, the Court reconvened the previously-continued fairness hearing on September 23, 2004. After
the September 23, 2004 hearing, the Court, after hearing from the objectors to the potential settlement,
ordered the appointment of an independent actuary to report back to the Court on certain issues. The
report of the independent actuary was subsequently furnished to the special master and the Court on a
timely basis.
On November 22, 2004, the Court entered an order and final judgment in Roberts whereby the Court
consolidated Roberts with Robertson v. Liberty National Life Insurance Company, CV-92-021 (previously
reported in Forms 10-K and 10-Q) for purposes of the Roberts Stipulation of Settlement and certified the
Roberts class as a new subclass of the class previously certified by that Court in Robertson. The Court
approved the Stipulation and Settlement and ordered and enjoined Liberty to perform its obligations under
the Stipulation. Subject
to the Stipulation, Liberty and Torchmark were permanently enjoined from
instituting, engaging or participating in, maintaining, authorizing or continuing premium rate increases
inconsistent with the Stipulation; failing to implement temporary premium waivers in accordance with the
Stipulation; failing to implement the new benefits procedure described in the Stipulation; and failing to
implement the special schedules and special provisions of the Stipulation for subclass members who
have cancer and are receiving benefits and for subclass members who have no other cancer or medical
insurance and/or are not covered by Medicare. The Court dismissed plaintiffs’ claims, released the
defendants, enjoined Roberts subclass members from any further prosecution of released claims and
retained continuing jurisdiction of all matters relating to the Roberts settlement. In an order issued
February 1, 2005, the Court denied the objectors’ motion to alter, amend or vacate its earlier final
judgment on class settlement and certification. The companies proceeded to implement the settlement
terms. On March 10, 2005, the Roberts plaintiffs filed notice of appeal to the Alabama Supreme Court.
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Commitments and Contingencies (continued)
In an opinion issued on September 29, 2006, the Alabama Supreme Court voided the Barbour
County Circuit Court’s final judgment and dismissed the Roberts appeal. The Supreme Court held that the
Barbour County Court lacked subject-matter jurisdiction in Roberts to certify the Roberts class as a
subclass of the Robertson class and to enter a final judgment approving the settlement since Roberts was
filed as an independent class action collaterally attacking Robertson rather than being filed in Robertson
under the Barbour County Court’s reserved continuing jurisdiction over that case. On October 23, 2006,
Liberty filed a petition with the Barbour County Circuit Court under its continuing jurisdiction in Robertson
for clarification, or in the alternative, to amend the Robertson final judgment. Liberty seeks an order from
the Circuit Court declaring that Liberty pay benefits to Robertson class members based upon the amounts
accepted by providers in full payment of charges. A hearing will be held on Liberty’s petition on March 13,
2007.
Liberty National Life Insurance Company and an unrelated Glendale, California mortuary were
named as defendants in a purported class action litigation filed December 8, 2005 in the Superior Court
for Los Angeles County, California (Gibson v. Liberty National Life Insurance Company, Case No.
BC344178) on behalf of California holders of certain funeral services insurance policies. The plaintiff in
Gibson asserted claims for breach of contractual duty to pay a covered claim under a funeral services
insurance policy, breach of the implied obligation of good faith and fair dealing by unreasonably failing to
pay and/or delaying payments of
fraud, negligent misrepresentation, and unfair
business practices in violation of California Business and Professions Code Section 17000 et seq. The
plaintiff was seeking unspecified compensatory and general damages, exemplary damages, injunctive
and declaratory relief and attorneys’ fees and costs. In October 2006, this matter was confidentially
settled for a nominal amount.
insurance benefits,
On January 10, 2007, purported class action litigation was filed against Globe Life And Accident
Insurance Company and additional unaffiliated defendants in the U.S. District Court for the Eastern
District of Texas (Taylor v. Texas Farm Bureau Mutual Insurance Company, Case No. 2-07-CV-014).
Plaintiffs allege violations of the Driver Privacy Protection Act (DPPA) in Globe’s marketing activities.
DPPA is federal
legislation restricting the ability to obtain and use driver’s license and motor vehicle
registration title information maintained by each state. Initially, DPPA allowed use of such personal
information for marketing activities so long as the states provided individuals the opportunity to prohibit
disclosure of their information. DPPA was amended effective June 1, 2000 to provide that using or
obtaining personal information from motor vehicle records for marketing purposes is permitted only if the
state involved obtained the express consent (“opt-in”) of the person whose data is being released.
Plaintiffs, all residents and holders of Texas drivers licenses, allege that Globe wrongfully obtained,
possessed and/or used motor vehicle record information from the Texas Department of Public Safety
after the June 1, 2000 effective date of the “opt-in” amendment to the DPPA. They seek, in a jury trial,
liquidated damages as provided in the DPPA for each purported class member in the amount of $2,500
for each use of the personal information, punitive damages, the destruction of any personal information
determined to be illegally obtained from motor vehicle records and other appropriate equitable relief.
Note 15—Related Party Transactions
First Command. Lamar C. Smith, a director of Torchmark,
is an officer and director of First
Command Financial Services, Inc. (First Command), a corporation 100% owned by the First Command
Employee Stock Ownership Plan (First Command ESOP). Mr. Smith is a beneficiary of
the First
Command ESOP although he has no ability to vote the stock of First Command that is held by the First
Command ESOP. First Command receives commissions as the Military Agency distribution system for
selling certain life insurance products offered by Torchmark’s insurance subsidiaries. These commissions
were $50.8 million in 2006, $60.9 million in 2005, and $67.0 million in 2004. Torchmark held balances due
from these agents of $6.6 million at year-end 2006 and $9.4 million at year-end 2005.
Torchmark has in place a coinsurance agreement with First Command’s life subsidiary whereby
Torchmark cedes back to First Command approximately 3% of the new life insurance business sold by
First Command on behalf of Torchmark’s insurance subsidiaries. Prior to 2004, the ceding rate was 5%
96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 15—Related Party Transactions (continued)
on newly ceded business. Under the terms of
this agreement, First Command pays Torchmark a
maintenance expense allowance equal to 5.5% of all premium collected and an issue allowance of 2.9%
of first year premium collected. Torchmark is also reimbursed for actual commissions, premium taxes,
and claims paid on the business ceded to First Command. Also under the agreement, Torchmark
provides First Command certain administrative, accounting, and investment management services.
Premium ceded in 2006 was $2.7 million, in 2005 was $2.6 million, and in 2004 was $2.3 million. At
December 31, 2006, the face amount of life insurance ceded was $320 million and annualized ceded
premium was $2.7 million.
Torchmark currently has two loan agreements with First Command, a mortgage loan agreement and
a collateral loan agreement. The mortgage loan bears interest at a rate of 7.0%. The initial balance of
$22.3 million is being repaid in equal monthly payments over fifteen years, beginning May 1, 2003. At
year end 2006, the outstanding balance was $18.9 million, compared with $19.9 million a year earlier.
The loan is collateralized by a four-story office building in Fort Worth, Texas, which was appraised by an
independent firm in 2001 at $22.8 million. In addition to the office building as collateral, Torchmark has
the right of offset to any commissions due First Command, in the event of default.
The collateral
loan bears interest at the rate of 7.0%. First Command is making fixed monthly
payments which are scheduled to repay the loan by May, 2010. First Command has the right to make
additional, unscheduled payments. At year end 2006,
the outstanding balance was $7.4 million,
compared with $9.3 million at year end 2005. The loan is collateralized by real estate and a parking
garage in Fort Worth, Texas. The property was appraised by an independent firm in 2002 at $17.6 million.
As disclosed in Note 14—Commitments and Contingencies, Torchmark subsidiary American Income
is a party to an agreement to guarantee certain personal
loans of American Income employees and
agents with First Command Bank, a subsidiary of First Command. At December 31, 2006, the balance
subject to this guarantee was $71 thousand. These guarantees are secured by vested commissions due
the employees and agents.
Richey. R. K. Richey, Chairman of the Executive Committee of Torchmark until April, 2005 and
formerly a director and Chief Executive Officer of Torchmark, was at that time a minority investor in a real
estate management company, Commercial Real Estate Services (CRES). CRES manages certain of
Torchmark’s company-occupied and investment real estate properties along with those of other clients.
Fees paid by Torchmark subsidiaries for these management and maintenance services were $680
thousand in 2005 and $702 thousand in 2004. Mr. Richey was also a 50% investor in Stonegate Realty
Company, LLC., the parent company of Elgin Development Company, LLC. (Elgin Development). Elgin
Development leases commercial space to Torchmark subsidiaries. Lease rentals paid by Torchmark
subsidiaries were $262 thousand and $261 thousand in 2005 and 2004, respectively.
Torchmark annually paid premiums on three life insurance policies for Mr. Richey, in the amount of
$61 thousand in each of the years 2004 and 2005.
Executive share purchases. On January 3, 2005, two grantor-retained annuity trusts for the benefit
of the adult sons of C. B. Hudson, Chief Executive Officer and Chairman of the Board of Directors of
Torchmark at that time, and of which trusts he serves as trustee, sold 41,470 shares of Torchmark
common stock in a privately-negotiated transaction to Torchmark for $2.4 million. The purchases (20,735
shares from each of the trusts) were made at the average of the high and low prices of Torchmark stock
on January 3, 2005 ($57.045 per share). Mr. Hudson resigned as Chief Executive Officer in August, 2005.
He resigned as Chairman of the Board of Directors and as an employee of Torchmark in February, 2006.
MidFirst Bank. Torchmark engaged MidFirst Bank as the servicing agent
for a portion of
Torchmark’s subsidiaries’ commercial mortgages portfolios. George J. Records, a Torchmark director
until April 27, 2005, was also an officer, director, and 38.3% beneficial owner of Midland Financial Co., the
parent corporation of MidFirst Bank until December 31, 2003. After that date, he was no longer a
beneficial owner. Fees paid for MidFirst Bank’s services were $90 thousand in 2004. No fees were paid in
2005 or 2006.
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 15—Related Party Transactions (continued)
In the fourth quarter of 2004, Torchmark’s subsidiary Liberty sold its participation interests in certain
mortgages originated and serviced by MidFirst Bank back to MidFirst Bank in two transactions. The first
transaction was completed in October, 2004 for proceeds of $57.3 million with a carrying value of $56.2
million, and the second was effected in December, 2004 for $17.1 million proceeds and a carrying value
of $19.5 million. Because of Mr. Records’ relationship, the Board of Directors of Torchmark, with Mr.
Records recusing himself, reviewed and approved the first transaction. Both of the transactions were also
reviewed and approved by the Liberty National Board of Directors on which Mr. Records did not serve.
Torchmark obtained opinions from an independent third party valuation firm experienced in valuing
commercial loans that the purchase price on each transaction was within a reasonable and acceptable
range. In 2006, two additional mortgages were sold to MidFirst Bank that had been previously written
down and were carried at a value of $10.2 million. Proceeds from the sale were $16.0 million, causing
Torchmark to recognize an after-tax gain on the sale of $3.8 million.
Baxley. William J. Baxley is a partner in the law firm of Baxley, Dillard, Dauphin, McKnight & Barclift
which performs legal services for Torchmark and certain of its subsidiaries. In 1997, Mr. Baxley was
loaned $668 thousand on an unsecured basis at a rate of 6.02%. Repayments are made in the form of
legal services at customary rates and are applied against the outstanding balance, amortizing the loan
with interest over its remaining term. In October, 2001, the terms of the loan were revised and an
additional amount of $395 thousand was loaned to Baxley. The interest rate was revised to 5.6% and the
term of
the loan was extended until July, 2013. The loan is being repaid in accordance with its
amortization schedule and all payments are current. At December 31, 2006 and 2005, the outstanding
balance of this loan was $516 thousand and $572 thousand, respectively.
Additionally, Liberty loaned Mr. Baxley’s wife $883 thousand secured by a mortgage on a building
sold to her in 1997. Prior to 2006, interest was charged at a rate of 7.7%. This loan was originally due to
be repaid in 2007 with a balloon payment, but in January, 2006, the outstanding balance of $734
thousand was refinanced and extended until January of 2023. The interest rate was revised to 5.5%.
Scheduled cash payments are made to amortize the loan. At December 31, 2006 and 2005,
the
outstanding balance of this loan was $710 thousand and $751 thousand, respectively.
Torchmark also holds funds on behalf of Mr. Baxley as a part of an agreement established in 2006.
Interest is paid to Baxley based on a variable rate computed as the average yield for Aa corporate bonds
less fifty basis points, which was 5.1% at December 31, 2006. This account balance was $12 thousand at
year end 2006.
Torchmark customarily grants options to certain consultants for their services in addition to their fees.
Mr. Baxley received Torchmark options in 2006, 2005, and 2004.
98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 16—Selected Quarterly Data (Unaudited)
The following is a summary of quarterly results for the two years ended December 31, 2006. 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.
2006:
Premium and policy charges . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized investment gains(losses)
. . . . . . . . . . . . . . . .
Total revenues* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquisition expenses . . . . . . . . . . . . . .
Pretax income* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic net income per common share . . . . . . . . . . . . . .
Diluted net income per common share . . . . . . . . . . . . .
2005:
Premium and policy charges . . . . . . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized investment gains(losses)
. . . . . . . . . . . . . . . .
Total revenues** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquisition expenses . . . . . . . . . . . . . .
Pretax income** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic net income per common share . . . . . . . . . . . . . .
Diluted net income per common share . . . . . . . . . . . . .
March 31,
June 30,
September 30, December 31,
Three Months Ended
$702,677
153,389
(6,196)
857,008
480,154
92,069
183,971
120,274
1.17
1.16
$636,707
149,176
(3,128)
782,994
424,173
88,722
179,137
117,843
1.11
1.09
$705,796
154,925
7,681
869,135
480,756
91,172
194,007
127,375
1.28
1.26
$629,617
150,620
10,703
804,797
418,084
88,399
202,546
132,365
1.26
1.25
$683,657
160,908
(7,299)
837,939
446,052
100,521
189,273
128,544
1.30
1.28
$620,557
151,120
(2,908)
769,022
410,883
85,994
181,392
119,046
1.14
1.14
$692,583
159,524
(4,953)
857,096
456,569
93,728
206,319
142,438
1.45
1.43
$621,193
152,152
(4,387)
769,097
408,046
86,844
168,446
126,136
1.22
1.21
*
**
Four significant legal and tax matters were settled in Torchmark’s favor in 2006. The first settlement involved a subsidiary
disposed of several years ago, resulting in proceeds after expenses of $5.1 million ($3.3 million after tax) in the first quarter.
These proceeds were included in revenues. The second matter involved state income tax refunds of $6.7 million ($4.3 million
after tax) related to prior years. This receipt, net of tax, was recorded in the third quarter as a reduction to taxes. The third
settlement related to the Company’s investments in Worldcom, amounting to $6.3 million ($4.1 million after tax) in the fourth
quarter of 2006, and represented a partial recovery of prior period investment losses. This settlement is included in revenues.
The final settlement involved Federal income tax issues related to prior years, and consisted of a refund due of $7.4 million in
the fourth quarter that reduced taxes. More information on these litigation and tax settlements is provided in Note 8 - Income
Taxes, Note 14 - Commitments and Contingencies, and Note 1 - Significant Accounting Policies in the Notes to Consolidated
Financial Statements. Additionally, as described in Note 1, agency office buildings were sold in the fourth quarter of 2006 for a
pretax gain of $4.8 million ($3.1 after tax) included in total revenues.
In 2005, Torchmark recorded settlements on three significant legal matters. The first settlement related to the Waddell & Reed
litigation and resulted in $13.5 million of additional revenue in the second quarter. The other two cases were Torchmark’s race-
distinct mortality/dual-pricing litigation and its class-action cancer case. These two cases involved charges of $4 million in the
second quarter and $11 million in the fourth quarter. The after-tax effect of these items was a positive $6 million in the second
quarter and a charge of $7 million in the fourth quarter. Also in the fourth quarter of 2005, Torchmark recorded a $16 million
settlement benefit from an Internal Revenue Service examination covering several years.
99
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
No disagreements with accountants on any matter of accounting principles or practices or financial
statement disclosure have been reported on a Form 8-K within the twenty-four months prior to the date of
the most recent financial statements.
Item 9A. Controls and Procedures
Torchmark, under the direction of the Chairman and Chief Executive Officer and the Executive Vice
President and Chief Financial Officer, has established disclosure controls and procedures that are
designed to ensure that information required to be disclosed by Torchmark in the reports that it files or
submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms. The disclosure controls and procedures
are also intended to ensure that such information is accumulated and communicated to Torchmark’s
management, including the Chairman and Chief Executive Officer and the Executive Vice President and
Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
As of the end of the fiscal quarter completed December 31, 2006, an evaluation was performed
under the supervision and with the participation of Torchmark management, including the Chairman and
Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of Torchmark’s
disclosure controls and procedures (as those terms are defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934). Based upon their evaluation, the Chairman and Chief Executive Officer and the
Executive Vice President and Chief Financial Officer have concluded that Torchmark’s disclosure controls
and procedures are effective as of the date of this Form 10-K. In compliance with Section 302 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350), each of these officers executed a Certification included
as an exhibit to this Form 10-K.
As of the date of this Form 10-K for the fiscal year and the quarter ended December 31, 2006, there
have not been any significant changes in Torchmark’s internal control over financial reporting or in other
factors that could significantly affect this control over financial reporting subsequent to the date of their
evaluation which have materially affected, or are reasonably likely to materially affect, Torchmark’s
internal control over financial reporting. No material weaknesses in such internal controls were identified
in the evaluation and as a consequence, no corrective action was required to be taken.
There were no items required.
Item 9B. Other Information
100
Management’s Report on Internal Control over Financial Reporting
Management at Torchmark Corporation is responsible for establishing and maintaining adequate
internal control over financial reporting for the Company and for assessing the effectiveness of internal
control on an annual basis. As a framework for assessing internal control over financial reporting, the
Company utilizes the criteria for effective internal control over financial reporting described in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
There are inherent limitations in the effectiveness of any internal control, including the possibility of
human error and the circumvention or overriding of controls. Accordingly, even effective internal controls
can provide only reasonable assurance with respect to financial statement preparation. Further, because
of changes in conditions, the effectiveness of internal control may vary over time.
Management evaluated the Company’s internal control over financial reporting, and based on its
assessment, believes that the Company maintained effective internal control over financial reporting as of
December 31, 2006. The Company’s independent audit
firm has issued an attestation report on
management’s assessment of the Company’s internal control over financial reporting as stated in their
report which is included herein.
/s/ Mark S. McAndrew
Mark S. McAndrew
Chief Executive Officer
/s/ Gary L. Coleman
Gary L. Coleman
Executive Vice President and
Chief Financial Officer
February 28, 2007
101
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Torchmark Corporation
McKinney, Texas
We have audited management’s assessment, included in the accompanying Management’s Report
on Internal Control over Financial Reporting, that Torchmark Corporation and subsidiaries (“Torchmark”)
maintained effective internal control over financial reporting as of December 31, 2006, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Torchmark’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on management’s assessment
and an opinion on the effectiveness of Torchmark’s internal control over financial reporting based on our
audit.
We conducted our audit
in accordance with the standards of
the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, evaluating management’s assessment,
testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial officers, or persons performing
similar functions, and effected by the company’s board of directors, management, and other personnel to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
transactions are
dispositions of
recorded as necessary to permit preparation of
financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of
the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
the company; (2) provide reasonable assurance that
the assets of
Because of the inherent limitations of internal control over financial reporting, including the possibility
of collusion or improper management override of controls, material misstatements due to error or fraud
the
may not be prevented or detected on a timely basis. Also, projections of any evaluation of
effectiveness of the internal control over financial reporting to future periods are subject to the risk that the
controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
In our opinion, management’s assessment that Torchmark maintained effective internal control over
financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, Torchmark maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2006, based on the criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited,
the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and financial statement schedules
as of and for the year ended December 31, 2006 of Torchmark and our report dated February 28, 2007
expressed an unqualified opinion on those financial statements and financial statement schedules.
in accordance with the standards of
DELOITTE & TOUCHE LLP
Dallas, Texas
February 28, 2007
102
Item 10. Directors, Executive Officers and Corporate Governance
PART III
“Profiles of Directors and Nominees,”
Information required by this item is incorporated by reference from the sections entitled “Election of
Directors,”
“Audit Committee Report,”
“Governance Guidelines and Codes of Ethics” and “Section 16(a) Beneficial Ownership Reporting
Compliance” in the Proxy Statement for the Annual Meeting of Stockholders to be held April 26, 2007 (the
Proxy Statement), which is to be filed with the Securities and Exchange Commission (SEC).
“Executive Officers,”
Item 11. Executive Compensation
Information required by this item is incorporated by reference from the sections entitled Executive
Compensation, “Compensation Committee Report” and “Compensation Committee interlocks and insider
participation” in the Proxy Statement, which is to be filed with the SEC.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
(a)
Equity Compensation Plan Information
As of December 31, 2006
Number of securities to be
issued upon exercise of
outstanding options,
warrants, and rights
Weighted-average
exercise price of
outstanding options,
warrants, and rights
Number of securities
remaining available for
future issuance under
equity compensation plans
9,828,735
$50.30
465,224
Plan Category
Equity compensation plans
approved by security
holders . . . . . . . . . . . . . . . . .
Equity compensation plans not
approved by security
holders . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . .
9,828,735
(b) Security ownership of certain beneficial owners:
0
0
$50.30
0
465,224
Information required by this item is incorporated by reference from the section entitled “Principal
Stockholders” in the Proxy Statement, which is to be filed with the SEC.
(c) Security ownership of management:
Information required by this item is incorporated by reference from the section entitled “Stock
Ownership” in the Proxy Statement, which is to be filed with the SEC.
(d) 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 and Director Independence
Information required by this item is incorporated by reference from the sections entitled Related Party
Transaction Policy and Transactions and “Director Independence Determinations” in the Proxy Statement,
which is to be filed with the SEC.
Item 14. Principal Accountant Fees and Services
Information required by this Item is incorporated by reference from the section entitled Principal
Accounting Firm Fees and “Pre-approval Policy” in the Proxy Statement, which is to be filed with the SEC.
103
PART IV
Item 15. Exhibits and Financial Statement Schedules
Index of documents filed as a part of this report:
Page of
this report
Financial Statements:
Torchmark Corporation and Subsidiaries:
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets at December 31, 2006 and 2005 . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for each of the three years in the period
ended December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income for each of the three years in
the period ended December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Shareholders’ Equity for each of the three years in the
period ended December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedules Supporting Financial Statements for each of the three years in the period
ended December 31, 2006:
II. Condensed Financial Information of Registrant (Parent Company)
. . . . . . . . . . . . . .
IV. Reinsurance (Consolidated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50
51
52
53
54
55
56
111
115
Schedules not referred to have been omitted as inapplicable or not required by Regulation S-X.
104
EXHIBITS
Page of
this
Report
3.1
3.2
4.1
4.2
4.3
4.4
4.5
10.1
10.2
10.3
10.4
10.5
10.6
10.7
Incorporation of Torchmark Corporation, as amended
Restated Certificate of
(incorporated by reference from Exhibit 3(i) to Form 10-K for the fiscal year ended
December 31, 2000)
By-Laws of Torchmark Corporation, as amended (incorporated by reference from
Exhibit 3.2 to Form 8-K dated May 4, 2005)
Specimen Common Stock Certificate (incorporated by reference from Exhibit 4(a) to
Form 10-K for the fiscal year ended December 31, 1989)
Trust Indenture dated as of February 1, 1987 between Torchmark Corporation and
Morgan Guaranty Trust Company of New York, as Trustee (incorporated by reference
from Exhibit 4(b)
to Form S-3 for $300,000,000 of Torchmark Corporation Debt
Securities and Warrants (Registration No. 33-11816))
Junior Subordinated Indenture, dated November 2, 2001, between Torchmark
the 7 3⁄4% Junior
Corporation and The Bank of New York defining the rights of
Subordinated Debentures (incorporated by reference from Exhibit 4.3 to Form 8-K dated
November 2, 2001)
Supplemental
Indenture, dated as of December 14, 2001, between Torchmark,
BankOne Trust Company, National Association and The Bank of New York,
supplementing the Indenture Agreement dated February 1, 1987 (incorporated herein by
reference to Exhibit 4(b) to Torchmark’s Registration Statement on Form S-3 (File No.
33-11716), and defining the rights of the 6 1⁄4% Senior Notes (incorporated by reference
from Exhibit 4.1 to Form 8-K dated December 14, 2001)
Indenture dated as of June 23, 2006 between Torchmark
Second Supplemental
Corporation, J.P. Morgan Trust Company, National Association and The Bank of New
York Trust Company, N.A. (incorporated by reference from Exhibit 4.1 to Form 8-K filed
June 23, 2006)
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)*
Capital Accumulation and Bonus Plan of Torchmark Corporation, as amended,
(incorporated by reference from Exhibit 10(c) to Form 10-K for the fiscal year ended
December 31, 1988)*
Torchmark Corporation Supplementary Retirement Plan (incorporated by reference from
Exhibit 10(c) to Form 10-K for the fiscal year ended December 31, 1992)*
Credit Agreement dated as of November 18, 2004 among Torchmark Corporation, as
the Borrower, TMK Re, Ltd., as a Loan Party, Bank of America, N.A., as Administrative
Agent, Swing Line Lender and L/C Issuer, J.P. Morgan Bank, N.A., KeyBank National
Association, Regions Bank and SunTrust Bank as Co-Syndication Agents and the other
lenders party thereto (incorporated by reference from Exhibit 10.01 to Form 8-K dated
November 23, 2004)
First Amendment
to Credit Agreement dated June 9, 2006 among Torchmark
Corporation, TMK Re, Ltd., Lenders and Bank of America, N.A. (incorporated by
reference from Exhibit 10.1 to Form 8-K dated June 14, 2006)
Second Amendment to Credit Agreement dated August 31, 2006 among Torchmark
Corporation, TMK Re, Ltd., Lenders and Bank of America, N.A. (incorporated by
reference from Exhibit 10.01 to Form 8-K dated September 1, 2006)
Certified Copy of Resolution Regarding Director Retirement Benefit Program
(incorporated by reference from Exhibit 10(e) to Form 10-K for the fiscal year ended
December 31, 1999)*
105
Page of
this
Report
10.8
10.9
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)*
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)*
10.10 General Agency Contract between Liberty National Life Insurance Company and First
Command Financial Services, Inc., (formerly known as Independent Research Agency
For Life Insurance, Inc.) (incorporated by reference from Exhibit 10(i) to Form 10-K for
the fiscal year ended December 31, 1990)
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
Amendment to General Agency Contract between First Command Financial Services
and Liberty National Life Insurance Company (incorporated by reference from Exhibit
10.1 to Form 10-Q for the First Quarter 2005)**
Form of Deferred Compensation Agreement Between Torchmark Corporation or
Subsidiary and Officer at the Level of Vice President or Above Eligible to Participate in
the Torchmark Corporation and Affiliates Retired Lives Reserve Agreement and to
Retire Prior to December 31, 1986 (incorporated by reference from Exhibit 10(k) to
Form 10-K for the fiscal year ended December 31, 1991)*
Form of Deferred Compensation Agreement between Torchmark Corporation or
Subsidiary and Officer at the Level of Vice President or Above Eligible to Participate in
the Torchmark Corporation and Affiliates Retired Lives Reserve Agreement and Not
Eligible to Retire Prior to December 31, 1986 (incorporated by reference from Exhibit
10(l) to Form 10-K for the fiscal year ended December 31, 1991)*
Form of Deferred Compensation Agreement Between Torchmark Corporation or
the Level of Vice President or Above Not Eligible to
Subsidiary and Officer at
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)*
Torchmark Corporation Supplemental Savings and Investment Plan (incorporated by
reference from Exhibit 10(m) to Form 10-K for the fiscal year ended December 31,
1992)*
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)
The Torchmark Corporation Pension Plan*
The Torchmark Corporation 1998 Stock Incentive Plan (incorporated by reference from
Exhibit 10(n) to Form 10-K for the fiscal year ended December 31, 1998)*
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)*
The Torchmark Corporation Annual Management
Incentive Plan (incorporated by
reference from Exhibit 10(p) to Form 10-K for the fiscal year ended December 31, 2004)
Coinsurance and Servicing Agreement between Security Benefit Life Insurance
Company and Liberty National Life Insurance Company, effective as of December 31,
1995 (incorporated by reference from Exhibit 10(u) to Form 10-K for the fiscal year
ended December 31, 1995)
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)*
106
Page of
this
Report
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
Torchmark Corporation 1996 Executive Deferred Compensation Stock Option Plan
(incorporated by reference from Exhibit 10(x) to Form 10-K for the fiscal year ended
December 31, 1996)*
Receivables Purchase Agreement dated as of December 21, 1999, as Amended and
Restated as of March 31, 2000 among AILIC Receivables Corporation, American
Income Life Insurance Company, Preferred Receivables Funding Corporation and
Bank One, NA (incorporated by reference from Exhibit 10(x) to Form 10-K for the fiscal
year ended December 31, 2000)
Amendment dated as of August 31, 2001 to Receivables Purchase Agreement dated
as of December 21, 1999 among AILIC Receivables Corporation, American Income
Life Insurance Company, Preferred Receivables Funding Corporation and BankOne,
N.A. (incorporated by reference from Exhibit 10(y) to Form 10-K for the fiscal year
ended December 31, 2001)
Amendment No. 2 dated as of August 30, 2002 to Receivables Purchase Agreement
dated as of December 21, 1999 as amended and restated as of March 31, 2000 among
AILIC Receivables Corporation, American Income Life Insurance Company Preferred
Receivables Funding Corporation and Bank One, N.A. (incorporated by reference from
Exhibit 10(y) to Form 10-K for the fiscal year ended December 31, 2003)
Amendment No. 3 dated as of October 24, 2002 to Receivables Purchase Agreement
dated as of December 21, 1999 as amended and restated as of March 31, 2000 among
AILIC Receivables Corporation, American Income Life Insurance Company, Preferred
Receivables Funding Corporation, certain financial institutions parties thereto, and Bank
One, N.A. (incorporated by reference from Exhibit 10.1 to Form 10-Q for the quarter
ended September 30, 2004)
Amendment No. 4 dated as of August 28, 2003 to Receivables Purchase Agreement
dated as of December 21, 1999 as amended and restated as of March 31, 2000 among
AILIC Receivables Corporation, American Income Life Insurance Company, Preferred
Receivables Funding Corporation, certain financial
institutions parties thereto, and
Bank One, N.A. (incorporated by reference from Exhibit 10.2 to Form 10-Q for the
quarter ended September 30, 2004)
Amendment No. 5 dated as of August 27, 2004 to Receivables Purchase Agreement
dated as of December 21, 1999 as amended and restated as of March 31, 2000 among
AILIC Receivables Corporation, American Income Life Insurance Company, Preferred
Receivables Funding Corporation, certain financial
institutions parties thereto, and
Bank One, N.A. (incorporated by reference from Exhibit 10.3 to Form 10-Q for the
quarter ended September 30, 2004)
Amendment No. 6 dated as of August 26, 2005 to Receivables Purchase Agreement
dated as of December 21, 1999 as amended and restated as of March 31, 2000 among
AILIC Receivables Corporation, American Income Life Insurance Company, Preferred
Receivables Funding Corporation, certain financial
institutions party thereto, and
JPMorgan Chase Bank, National Association, Successor by Merger to Bank One, N.A.
(incorporated by reference from Exhibit 10.1 to Form 8-K dated August 31, 2005)
Amendment No. 7 dated as of August 25, 2006 to Receivables Purchase Agreement
dated as of December 21, 1999 as amended and restated as of March 31, 2000 among
AILIC Receivables Corporation, American Income Life Insurance Company, Preferred
formerly known as Preferred Receivables
Receivables Funding Company LLC,
Funding Corporation, certain financial institutions party thereto, and JPMorgan Chase
Bank, National Association, Successor by Merger to Bank One, N.A. (Chicago, Illinois)
(incorporated by reference from Exhibit 10.1 to Form 8-K dated August 28, 2006)
107
Page of
this
Report
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
(11)
(12)
(20)
(21)
(23)(a)
Form of Retirement Life Insurance Benefit Agreement ($1,995,000 face amount limit)
(incorporated by reference from Exhibit 10(z) to Form 10-K for the fiscal year ended
December 31, 2001)*
Form of Retirement Life Insurance Benefit Agreement ($495,000 face amount limit)
(incorporated by reference from Exhibit 10(aa) to Form 10-K for the fiscal year ended
December 31, 2001)*
Payments to Directors*
Form of Non-Formula Based Director Stock Option Agreement pursuant to Torchmark
Corporation 2005 Non-Employee Director Incentive Plan (incorporated by reference
from Exhibit 10.2 to Form 10-Q for the First Quarter 2005)*
Form of Stock Option Agreement pursuant to Torchmark Corporation 2005 Incentive
Plan (Section 16(a) (restoration)) (incorporated by reference from Exhibit 10.3 to Form
10-Q for the First Quarter 2005)*
Form of Stock Option Agreement pursuant to Torchmark Corporation 2005 Incentive
Plan (restoration general) (incorporated by reference from Exhibit 10.4 to Form 10-Q
for the First Quarter 2005)*
Form of Stock Option Agreement pursuant to Torchmark Corporation 2005 Incentive
Plan (bonus) (incorporated by reference from Exhibit 10.36 to Form 10-K for the fiscal
year ended December 31, 2005)*
Form of Stock Option Agreement pursuant to Torchmark Corporation 2005 Incentive
Plan (regular vesting) (incorporated by reference from Exhibit 10.37 to Form 10-K for
the fiscal year ended December 31, 2005)*
Torchmark Corporation 2005 Non-Employee Director Incentive Plan (incorporated by
reference from Exhibit 10.1 to Form 8-K dated May 4, 2005)*
Torchmark Corporation 2005 Stock Incentive Plan (incorporated by reference from
Exhibit 10.2 to Form 8-K dated May 4, 2005)*
to the
Form of Deferred Compensation Stock Option Grant Agreement pursuant
Torchmark Corporation 2005 Non-Employee Director Incentive Plan (incorporated by
reference from Exhibit 10.3 to Form 8-K dated May 4, 2005)*
Torchmark Corporation Amended and Restated 2005 Incentive Plan (incorporated by
reference from Exhibit 10.1 to Form 10-Q for quarter ended March 31, 2006)*
Torchmark Corporation Amended and Restated 2005 Non-Employee Director
Incentive Plan (incorporated by reference from Exhibit 10.2 to Form 10-Q for quarter
ended March 31, 2006)*
Form of Director Stock Option Issued under Torchmark Corporation Amended and
Restated 2005 Non-Employee Director Incentive Plan (incorporated by reference from
Exhibit 10.3 to Form 10-Q for quarter ended March 31, 2006)*
Amendment One to Torchmark Corporation Supplementary Retirement Plan
(incorporated by reference from Exhibit 10.4 to Form 10-Q for quarter ended March 31,
2006)*
Statement re computation of per share earnings
Statement re computation of ratios
Proxy Statement for Annual Meeting of Stockholders to be held April 26, 2007***
Subsidiaries of the registrant
Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports
dated February 28, 2007, into Form S-8 of The Torchmark Corporation Savings and
Investment Plan (Registration No. 2-76378)
110
110
108
Page of
this
Report
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports
dated February 28, 2007, into Form S-8 and the accompanying Form S-3 Prospectus
of
the Torchmark Corporation 1996 Non-Employee Director Stock Option Plan
(Registration No. 2-93760)
Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports
dated February 28, 2007, into Form S-8 and the accompanying Form S-3 Prospectus
of the Torchmark Corporation 1987 Stock Incentive Plan (Registration No. 33-23580)
Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports
dated February 28, 2007, 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)
Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports
dated February 28, 2007,
the Liberty National Life Insurance
Company 401(k) Plan (Registration No. 33-65507)
into Form S-8 of
Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports
dated February 28, 2007, 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)
Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports
dated February 28, 2007 into Form S-8 of the Profit Sharing and Retirement Plan of
Liberty National Life Insurance Company (Registration No. 333-83317)
Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports
dated February 28, 2007 into Form S-8 and the accompanying Form S-3 Prospectus
of the Torchmark Corporation 1998 Stock Incentive Plan (Registration No. 333-40604)
Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports
dated February 28, 2007 into Form S-8 and the accompanying Form S-3 Prospectus
of the Torchmark Corporation 2005 Incentive Plan (Registration No. 333-125409)
Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports
dated February 28, 2007 into Form S-8 and the accompanying Form S-3 Prospectus
of
Incentive Plan
(Registration No. 333-125400)
the Torchmark Corporation 2005 Non-Employee Director
(24)
(31.1)
(31.2)
(32.1)
Powers of attorney
Rule 13a-14(a)/15d-14(a) Certification by Mark S. McAndrew
Rule 13a-14(a)/15d-14(a) Certification by Gary L. Coleman
Section 1350 Certification by Mark S. McAndrew and Gary L. Coleman
Compensatory plan or arrangement.
*
** Certain portions of the exhibit have been omitted pursuant to a request for confidential treatment which was granted May 11,
2006 effective until May 9, 2010. The non-public information was filed separately with the Securities and Exchange Commission
pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.
*** To be filed with the Securities and Exchange Commission within 120 days after the fiscal year ended December 31, 2006.
109
Exhibit 11. Statement re computation of per share earnings
TORCHMARK CORPORATION
COMPUTATION OF EARNINGS PER SHARE
Twelve Months Ended December 31,
2006
2005
2004
Net Income before cumulative effect of change in accounting
principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $518,631,000 $495,390,000 $475,718,000
Cumulative effect of change in accounting principle (net of
applicable tax) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
(7,163,000)
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $518,631,000 $495,390,000 $468,555,000
Basic weighted average shares outstanding . . . . . . . . . . . . . . . . . . . .
Diluted weighted average shares outstanding . . . . . . . . . . . . . . . . . . .
Basic earnings per share:
Net Income before cumulative effect of change in accounting
99,732,608
101,112,157
104,735,466
105,751,413
110,106,078
111,907,788
principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5.20 $
4.73 $
4.32
Cumulative effect of change in accounting principle (net of
applicable tax) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5.20 $
4.73 $
(.06)
4.26
Diluted earnings per share:
Net Income before cumulative effect of change in accounting
principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5.13 $
4.68 $
4.25
Cumulative effect of change in accounting principle (net of
applicable tax) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5.13 $
4.68 $
(.06)
4.19
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
Indiana
Delaware
Alabama
Name Under Which
Company Does Business
American Income Life
Insurance Company
Globe Life And Accident
Insurance Company
Liberty National Life
Insurance Company
Delaware
United American
Missouri
Insurance Company
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 105 through 109 of this report. Exhibits not referred to have been omitted as
inapplicable or not required.
110
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(Amounts in thousands)
December 31,
2006
2005
Assets:
Investments:
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42,199 $
16,709
10,365
21,035
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58,908
4,308,397
18,012
33,348
31,400
4,299,039
5,248
43,819
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,418,665 $4,379,506
Liabilities and shareholders’ equity:
Liabilities:
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 169,736 $ 381,505
353,263
Long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
171,791
Due to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40,179
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
597,537
140,502
51,697
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
959,472
946,738
Shareholders’ equity:
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
351
99,875
842,844
140,097
2,827,287
(451,261)
351
104,875
859,224
269,084
2,621,552
(422,318)
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,459,193
3,432,768
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,418,665 $4,379,506
See Notes to Condensed Financial Statements and accompanying Report of Independent Registered
Public Accounting Firm.
111
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
CONDENSED STATEMENTS OF OPERATIONS
(Amounts in thousands)
Year Ended December 31,
2006
2005
2004
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,857 $ 16,499 $ 15,283
13,062
Realized investment gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(9,023)
5,142
419
13,482
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,976
30,400
28,345
General operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reimbursements from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,205
(9,504)
73,880
9,986
(10,392)
60,997
9,321
(10,296)
56,070
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78,581
60,591
55,095
Operating income (loss) before income taxes and equity in earnings of
affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(56,605)
27,041
(30,191)
21,493
(26,750)
10,359
Net operating loss before equity in earnings of affiliates . . . . . . . . . . . . . . . . . . . . . .
Equity in earnings of affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(29,564)
548,195
(8,698)
504,088
(16,391)
484,946
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $518,631 $495,390 $468,555
See Notes to Condensed Financial Statements and accompanying Report of Independent Registered
Public Accounting Firm.
112
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT—(continued)
CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended December 31,
2006
2005
2004
Cash provided from (used for) operations before dividends from subsidiaries . . $ (13,776) $
Cash dividends from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
427,747
4,754 $ (13,391)
345,945
365,458
Cash provided from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
413,971
370,212
332,554
Cash provided from (used for) investing activities:
Acquisition of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disposition of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease (increase) in temporary investments . . . . . . . . . . . . . . . . . . . . . .
Additions to properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(39,574)
4,043
4,326
(28)
-0-
1,540
(10,491)
(55)
-0-
659
14,328
(13)
Cash provided from (used for) investing activities . . . . . . . . . . . . . . . . . . . . . . . . .
(31,233)
(9,006)
14,974
Cash provided from (used for) financing activities:
Issuance of 7.1% Junior Subordinated Debentures (net of $4.3 million issue
expenses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of 6 3⁄ 8% Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of 6 1⁄4% Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of 7 3⁄4% Junior Subordinated Debentures . . . . . . . . . . . . . . . . . . .
Acquisition of 7 7⁄ 8% Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net issuance (repayment) of commercial paper . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment on borrowings from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit on stock option exercises . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
119,458
245,961
(180,000)
(154,639)
(3,659)
(31,917)
21,451
(344,861)
15,800
-0-
1,033
(71,365)
-0-
-0-
-0-
-0-
-0-
31,299
217,257
(554,946)
14,800
-0-
-0-
(69,616)
-0-
-0-
-0-
-0-
-0-
(12,094)
26,123
(285,226)
-0-
(4,300)
-0-
(72,031)
Cash provided from (used for) financing activities . . . . . . . . . . . . . . . . . . . . . . . . .
(382,738)
(361,206)
(347,528)
Net decrease in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
-0-
-0-
Cash balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0- $
-0- $
-0-
-0-
-0-
See Notes to Condensed Financial Statements and accompanying Report of Independent Registered
Public Accounting Firm.
113
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $427,747 $365,458 $345,945
2006
2005
2004
Note B—Supplemental Disclosures of Cash Flow Information
The following table summarizes noncash transactions, which are not reflected on the Condensed
Statements of Cash Flows:
Paid-in capital from tax benefit for stock option exercises . . . . . .
Other stock-based compensation not involving cash . . . . . . . . . .
Dividend of affiliate applied to loan balance . . . . . . . . . . . . . . . . .
$ 1,033
6,576
14,800
$8,115
1,375
-0-
$1,103
918
-0-
The following table summarizes certain amounts paid (received) during the period:
Year Ended December 31,
2006
2005
2004
Year Ended December 31,
2006
2005
2004
Interest paid* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 55,998 $ 47,706 $ 42,813
(15,725)
Income taxes received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(20,514)
(19,513)
*
The interest cost reductions resulting from the cash settlements of Torchmark’s interest-rate swaps are netted against realized
investment losses.
Note C—Special Items
Three significant legal and tax matters were settled in Torchmark’s favor in 2006 and were attributed
to the Parent Company. The first settlement involved a subsidiary disposed of several years ago and
resulted in proceeds of $5.1 million, after expenses, being recorded as other income. The second
involved state income tax refunds of $4.3 million after expenses (net of tax) related to prior years,
reducing income taxes. The final settlement involved Federal income tax issues related to prior years, and
consisted of a benefit of $3.1 million.
Other income includes $13.5 million from a legal settlement which was recorded in the second
quarter of 2005. Income taxes in 2005 include $7.7 million representing the Parent Company’s portion of
a settlement benefit
from an Internal Revenue Service examination covering several years. More
information on these tax settlement is provided in Note 8—Income Taxes in the Notes to Consolidated
Financial Statements. The litigation settlement is disclosed in Note 1—Significant Accounting Policies in
those notes.
See accompanying Report of Independent Registered Public Accounting Firm.
114
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, 2006:
Life insurance in force . . . . . . . . . . . . . . . . . . $139,033,372 $1,518,640 $2,100,189 $139,614,921
1.5%
Premiums:*
Life insurance . . . . . . . . . . . . . . . . . . . . . . . $ 1,457,512 $
Health insurance . . . . . . . . . . . . . . . . . . . .
1,242,350
7,492 $
4,818
19,882 $ 1,469,902
1,237,532
0
Total premium . . . . . . . . . . . . . . . . . . . . $ 2,699,862 $
12,310 $
19,882 $ 2,707,434
1.4%
0.0%
0.7%
For the Year Ended December 31, 2005:
Life insurance in force . . . . . . . . . . . . . . . . . . $137,086,106 $1,564,944 $2,146,473 $137,667,635
1.6%
Premiums:*
Life insurance . . . . . . . . . . . . . . . . . . . . . . . $ 1,398,402 $
Health insurance . . . . . . . . . . . . . . . . . . . .
1,018,838
7,479 $
3,981
20,164 $ 1,411,087
1,014,857
0
Total premium . . . . . . . . . . . . . . . . . . . . $ 2,417,240 $
11,460 $
20,164 $ 2,425,944
1.4%
0.0%
.8%
For the Year Ended December 31, 2004:
Life insurance in force . . . . . . . . . . . . . . . . . . $132,450,148 $1,575,831 $2,189,851 $133,064,168
1.6%
Premiums:*
Life insurance . . . . . . . . . . . . . . . . . . . . . . . $ 1,321,514 $
Health insurance . . . . . . . . . . . . . . . . . . . .
1,051,536
7,527 $
4,030
20,888 $ 1,334,875
1,048,666
1,160
Total premium . . . . . . . . . . . . . . . . . . . . $ 2,373,050 $
11,557 $
22,048 $ 2,383,541
1.6%
0.1%
0.9%
*
Excludes policy charges
See accompanying Report of Independent Registered Public Accounting Firm.
115
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
/s/ MARK S. MCANDREW
Mark S. McAndrew,
Chairman and Chief Executive Officer and Director
/s/ GARY L. COLEMAN
Gary L. Coleman, Executive Vice President
and Chief Financial Officer
/s/ DANNY H. ALMOND
Danny H. Almond
Vice President and Chief Accounting Officer
By:
By:
By:
Date: February 28, 2007
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/ CHARLES E. ADAIR *
Charles E. Adair
Director
/s/ DAVID L. BOREN *
David L. Boren
Director
/s/ M. JANE BUCHAN *
M. Jane Buchan
Director
/s/ ROBERT W. INGRAM *
Robert W. Ingram
Director
By:
/s/
JOSEPH L. LANIER, JR. *
Joseph L. Lanier, Jr.
Director
Date: February 28, 2007
*By:
/s/ GARY L. COLEMAN
Gary L. Coleman
Attorney-in-fact
By:
By:
By:
By:
By:
/s/ HAROLD T. MCCORMICK *
Harold T. McCormick
Director
/s/ LLOYD W. NEWTON *
Lloyd W. Newton
Director
/s/ SAM R. PERRY *
Sam R. Perry
Director
/s/ LAMAR C. SMITH *
Lamar C. Smith
Director
/s/ PAUL J. ZUCCONI *
Paul J. Zucconi
Director
116
PRINCIPAL EXECUTIVE OFFICE
TORCHMARK CAPITAL TRUST
3700 South Stonebridge Drive
McKinney, Texas 75070
(972) 569-4000
ANNUAL MEETING
OF SHAREHOLDERS
10:00 a.m. CDT, Thursday, April 26, 2007
Fairmont Hotel Dallas
1717 North Akard Street
Dallas, Texas 75201
The proceedings will be webcast live and
in replay on the Investor Relations page of
the Torchmark Corporation website. The
Company’s Annual Meeting will be conducted
in accordance with its Shareholder Rights
Policy. A copy of this policy can be obtained
on the Company’s website, or by contacting
the Corporate Secretary at the Torchmark
Corporation headquarters address.
INVESTOR RELATIONS
Contact: Joyce L. Lane
Phone: (972) 569-3627
Fax: (972) 569-3282
E-Mail: jlane@torchmarkcorp.com
Individual Stock Ownership Information:
Toll-Free Stock Transfer Number:
(205) 325-4270
(800) 524-4458
INDEPENDENT AUDITORS
Deloitte & Touche LLP
2200 Ross Avenue
Suite 1600
Dallas, Texas 75201
STOCK EXCHANGE LISTINGS
New York Stock Exchange
Symbol: TMK
The London Stock Exchange,
London, England
INDENTURE TRUSTEE FOR
SENIOR DEBENTURES AND
77/8%, 73/8% AND 63/8% NOTES
The Bank of New York Trust Company, N.A.
505 North 20th Street, Suite 950
Birmingham, AL 35203
Attention: Corporate Trust Administration
Toll-Free Number: (800) 254-2826
Website: www.bankofny.com/corptrust
PREFERRED SECURITIES
Torchmark Capital Trust III, a Delaware business
trust subsidiary of Torchmark, has issued a total
of 4.8 million 7.10% Trust Preferred Securities
(liquidation amount $25 per Trust Preferred
Security). The Trust Preferred Securities trade
through Depository Trust Company under global
certificates listed on the New York Stock
Exchange (Torchmark Capital Trust III, NYSE
symbol: TMKPRA).
STOCK TR ANSFER AGENT AND
SHAREHOLDER ASSISTANCE
The Bank of New York
Investor Services Department
P. O. Box 11258
New York, New York 10286-1258
Toll-Free Number: (800) 524-4458
Toll-Free Hearing Impaired
Number: (888) 269-5221
Outside the U.S.: (212) 815-3700
E-Mail: shareowners@bankofny.com
Website: www.stockbny.com
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 information on the plan may
be obtained from the Stock Transfer Agent by
calling toll-free (800) 524-4458 or by writing:
The Bank of New York, Dividend Reinvestment
Department, P. O. Box 1958, Newark, NJ
07101.
AUTOMATIC DEPOSIT
OF DIVIDENDS
Automatic deposit of dividends is available to
shareholders 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 toll-free (800) 524-4458. Participation
is voluntary.
CORPOR ATE GOVERNANCE
The Company timely submitted to the New
York Stock Exchange a Section 303A (12)(a)
CEO Certification without qualification in 2006.
In 2006, Torchmark also filed with the
Securities and Exchange Commission the CEO/
CFO Certifications required by Section 302 of
the Sarbanes-Oxley Act as Exhibits to its
Form 10-K.
TORCHMARK
CORPOR ATION WEBSITE
On the home page at
www.torchmarkcorp.com
are links to the web pages of:
(cid:129) Torchmark’s Principal
Subsidiaries
(cid:129) Torchmark’s Annual Reports
(cid:129) Employment
(cid:129) Investor Relations
The
Investor Relations page
contains a menu with links to
many topics of interest to investors
and other interested third parties:
(cid:129) About Torchmark
(cid:129) Annual Reports, SEC Forms
10-K and Proxy Statements
(cid:129) News Releases and
Stock Quotes
(cid:129) SEC Filings
(cid:129) Financial Reports and Other
Financial Information
(cid:129) Officers and Directors
(cid:129) Torchmark Calendar
(cid:129) Management Presentations
(cid:129) Conference Calls on the Web
(cid:129) Corporate Governance
including:
- Shareholder Rights Policy
- Code of Business
Conduct and Ethics
- Code of Ethics for CEO and
Senior Financial Officers
- Corporate Governance
Guidelines
- Audit Committee Charter
- Compensation
Committee Charter
- Governance & Nominating
Committee Charter
- Employee Complaint
Procedure
- How to Contact the
Board of Directors
(cid:129) Annual Meeting of
Shareholders
(cid:129) Stock Transfer Agent and
Shareholder Assistance
(cid:129) Dividend Reinvestment
(cid:129) Automatic Deposit
of Dividends
(cid:129) Contact Information
torcHMark
corPoration
2006 annual rePort
3700 S. Stonebridge drive
Mckinney, texaS 75070
www.torchmarkcorp.com