2007 Annual Report
PRINCIPAL EXECUTIVE OFFICE
3700 South Stonebridge Drive
McKinney, Texas 75070
(972) 569-4000
ANNUAL MEETING
OF SHAREHOLDERS
10:00 a.m. CDT, Thursday, April 24, 2008
Corporate Headquarters
3700 South Stonebridge Drive
McKinney, Texas 75070
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
Mike Majors
Phone: (972) 569-3627
Fax: (972) 569-3282
E-Mail: tmkir@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
III, a Delaware
Torchmark Capital Trust
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 TRANSFER AGENT AND
SHAREHOLDER ASSISTANCE
BNY Mellon Shareowner Services
480 Washington Blvd.
Jersey City, New Jersey 07310-1900
Toll-Free Number: (866) 557-8696
Toll-Free Hearing Impaired
Number: (800) 231-5469
Outside the U.S.: (201) 680-6685
Website: www.bnymellon.com/shareowner/isd
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 (866) 557-
8696 or by writing: Torchmark Corporation,
c/o BNY Mellon Shareowner Services, P.O.
Box 358015, Pittsburgh, PA 15252-8015.
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 (866) 557-8696.
CORPORATE GOVERNANCE
The Company timely submitted to the New
York Stock Exchange a Section 303A (12)(a)
CEO Certification without qualification in 2007.
In 2007, Torchmark also timely 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 CORPORATION
WEBSITE
On the home page at
www.torchmarkcorp.com
are links to the web pages of:
• Torchmark’s Principal
Subsidiaries
• Torchmark’s Annual Reports
• Employment
• Investor Relations
The Investor Relations page
contains a menu with links to
many topics of interest to investors
and other interested third parties:
• About Torchmark
• Annual Reports, SEC Forms
10-K and Proxy Statements
• News Releases and
Stock Quotes
• SEC Filings
• Financial Reports and Other
Financial Information
• Officers and Directors
• Torchmark Calendar
• Management Presentations
• Conference Calls on the Web
• 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
• Annual Meeting of
Shareholders
• Stock Transfer Agent and
Shareholder Assistance
• Dividend Reinvestment
• Automatic Deposit
of Dividends
• Contact Information
TORCHMARK CORPORATION · 1
FINANCIAL HIGHLIGHTS*
In thousands, except percentage and per share amounts
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
2007
2006
% CHANGE
$2,834,562
$2,784,713
3,486,257
522,113
1,672,865
1,233,884
95,846
3,415,735
504,356
1,615,487
1,293,081
101,112
15.8%
15.8%
1.8
2.1
3.5
3.6
(4.6)
(5.2)
$5.45
36.26
$4.99
33.25
9.2
9.1
* 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*
2007 marked the 27th year of Torchmark’s existence
and it was another good year for the Company with net
operating income increasing 9.2% to $5.45 per share.
Our return on equity was 15.8% for the year and our
book value per share grew 9% to $36.26. While it was a
good year, I personally am not satisfied with the results.
I believe we can do better.
$6.00
$5.00
$4.00
$3.00
I have had the good fortune to be employed by
Torchmark since its formation and have been able to
$2.00
witness and participate in its long history of growth.
Since its inception, Torchmark has been lead by three
$1.00
exceptional CEOs – Frank Samford, Ron Richey and
C.B. Hudson. Each of these individuals was a highly
intelligent, dedicated leader who possessed the utmost
0
integrity. It is a considerable personal challenge for me
as I strive to follow in their footsteps.
NET OPERATING INCOME COMPONENTS
Earnings Per Share
5.45
2.18
4.99
2.03
4.59
1.98
4.23
1.91
3.87
1.78
3.51
1.57
3.27
2.96
2.61
3.21
1.30
2.94
1.12
1.82 1.91
1.94
2.32
2.09
2.64
1.00
1.64
1999 2000 2001 2002 2003 2004 2005 2006
2007
9-YEAR
COMPOUND ANNUAL
GROWTH RATE
Underwriting Income 9.2%
Excess Investment Income 10.3%
Net Operating Income 9.6%
Underwriting Income
Excess Investment
Income
* Certain financial data differ from the comparable GAAP financial data. Reconciliations to GAAP financial data are presented on pages 10-11.
LETTER TO SHAREHOLDERS · TORCHMARK CORPORATION · 3
When I reflect upon the past 27 years, it becomes
•
Efficiency and expense control.
Finding
apparent to me that there are two distinct periods within
ways to provide better service at a lower cost
Torchmark’s history with differing direction and results.
became a way of life at Torchmark. Through
The first of these two periods began when Liberty
automation, consolidation of administrative
National acquired Globe Life in 1980, and ended with
functions and streamlining of processes,
the spin-off of our Waddell & Reed subsidiary in 1998.
we became the model
for efficiency in
our industry.
COMPOUND ANNUAL GROWTH RATE
•
Selective acquisitions.
Subsequent to the
purchase of Globe Life in 1980, Torchmark also
acquired United American, Waddell & Reed,
United Investors, Family Service and American
Income. Each of these acquisitions contributed
to the Company’s growth in premium revenues
and EPS.
•
Share repurchase.
During the late 1990s
the direction of the Company changed. We
spun-off Waddell & Reed and sold Family
Service in 1998. We also exited other non-
core businesses, notably energy and real
estate. We simplified and strengthened
our balance sheet. While we continued to
emphasize internal growth and cost control,
our history of making selective acquisitions
ended. We instead focused on growing
Torchmark’s cash flow and using these monies
to expand our share repurchase program.
Since 1998, our growth in premium revenues
slowed to an average of 5.5% while
administrative expenses grew at a 4.7% annual
pace. Our operating EPS increased an average
of 9.6% over the last 9 years – a record that
most companies would envy. Our share price
has grown just over 6% per year since 1998,
although we have significantly outperformed
the S&P 500 average over the same period.
1981-1997
1998-2007
Premium Revenues
Administrative Expenses
Operating EPS
YE Stock Price
8.9%
2.1%
14.1%
20.3%
5.5%
4.7%
9.6%
6.2%
From 1981 through 1997, Torchmark’s growth was
impressive. As shown above, premium revenues grew
just under 9% per year on average while administrative
expenses increased only 2% per year. In 1981, our
administrative expenses were 17% of our premium
revenues – close to the industry average at the time.
By 1997, our administrative expense ratio had declined
to 6.1% of premium revenues making Torchmark one
of, if not the lowest cost company in our industry.
Our improvements in efficiency and cost containment
allowed the Company to realize over ten percentage
points additional pre-tax profit on each dollar of premium
we collected.
Our operating EPS increased over 14% per year on
average during this period and our stock price grew
by over 20% per year on average. Few companies
of our size could come close to matching our return
to shareholders over these 16 years.
There were
four major
factors, which contributed to these
outstanding results:
•
Internal growth.
During the 1980s, our United
American subsidiary quintupled its premium
revenues. Our direct
response operation
averaged solid double-digit growth throughout
this period of time. Liberty National continued
its pattern of slow, but consistent growth.
4 · TORCHMARK CORPORATION · LETTER TO SHAREHOLDERS
SHARE REPURCHASES (in Millions)
Free Cash Flow
# Shares
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
CAGR 16.6%
$358
$340
$300
$275
$225
$195
$152
$100
$110
$90
6.15
5.58
5.65
5.22
5.90
4.82
4.27
5.81
5.40
3.44
$
$402
$320
$300
$268
$225
$182
$159
$135
$175
$126
Our efforts to increase our free cash flow and
expand our share repurchase program have been
successful. As you can see from the above
table, our cash flow has nearly quadrupled since
1998, and we have repurchased over 52 million
Had we been the successful bidder, we intended
to use roughly $500 million of funds available in our
subsidiary companies and $1.9 billion of debt. Taking
on this amount of debt would have caused a short-
term downgrade in our credit ratings and required us
to suspend our share repurchase program for up to
three years. We believe the benefits far outweighed
these costs:
•
In the first 12 months after closing, we
estimated the acquisition would have added at
least $1 to our earnings per share. Over three
years, we expected EPS growth to average
14 – 15% or roughly five percentage points
more than we would achieve through using
our free cash flow for share repurchase.
•
Combining our free cash flow with that of the
acquired company would allow us to reduce
our debt/equity ratio to its current level (21%)
within three years.
shares at a cost of nearly $2.3 billion in the last
•
At the end of the third year, we would have at
9 years.
In total, we have repurchased over
least $100 million of additional free cash flow,
35% of the shares outstanding at the beginning
which could be used to resume our share
of 1998.
repurchase or to make additional acquisitions.
I believe it is important to review our history when
The factors that made this particular company attractive
deciding on a future direction for our Company. The
to us are the same factors we would look for in any
lesson I’ve learned from our history is that we should
potential acquisitions. First and foremost, this company
blend the best of both periods:
•
Continue to strive for improved internal growth.
marketed products with which we were comfortable
and provided very predictable and consistent profits.
These products were sold through nearly 7,000 captive
•
Renew our efforts to automate, consolidate
agents. While this agency force was somewhat
and streamline our administrative functions.
stagnant, we believed that significant growth potential
•
Actively pursue selective acquisitions in our
core businesses.
•
Continue to grow our free cash flow and, unless
the monies are needed for acquisition purposes,
continue our share repurchase program.
existed. This company also had very high expenses
which we estimated could be reduced by $75 - $100
million per year.
While obviously disappointed, we believe that
comparable
acquisition
opportunities
still
exist.
We will continue to seek out these opportunities and
During the fourth quarter of 2007, we were asked to bid
are in a good position to take advantage of them when
on a company which was put up for sale. Although our
they arise.
bid was unsuccessful (the winning bid was just over
1% higher than our bid), the experience was extremely
beneficial and reinforced our belief that an acquisition
would be in the best interests of our Shareholders.
LETTER TO SHAREHOLDERS · TORCHMARK CORPORATION · 5
AMERICAN INCOME
AGENCY OPERATION
number of new leads increased 62% during 2007, and
net life sales grew by over 50% for the same period.
We expect it will take us another 12 - 18 months to
American Income continues to be our most profitable
complete this project.
distribution system. In 2007, premium revenues grew
7% to $511 million and underwriting margin grew 9%
to $164 million.
I am pleased with the progress we’ve made at American
Income. While new sales were flat during the first half
of 2007, they grew by 9% in the third quarter followed
by 14% growth in the fourth quarter. Our producing
agents increased 8% for the year to 2,545.
DIRECT RESPONSE
2007 was a transitional year for our direct response
operation. While net life insurance sales declined
slightly for the full year, they were up 12% in the fourth
quarter. Life premiums grew 6% for the year to $484
million and life underwriting margin increased 7.5% to
We are in the midst of a major undertaking at American
$117 million.
Income – centralization of the sales lead generation
function. Historically, most new sales prospects have
been generated through endorsed solicitations mailed
to labor union members at a local level. The responsibility
for obtaining these local endorsements and producing
the mailings has previously been the responsibility of
our State General Agents (SGA). Since we did not
want to have multiple SGAs competing for the same
local union endorsements, it was necessary to assign
exclusive territories to each SGA.
Centralization of this function will benefit the Company
in several ways:
In January of 2007, we acquired Direct Marketing
Advertising Distributors
(DMAD) for $47 million.
Since
the early 1990s, we had an exclusive
marketing agreement with DMAD to place our life
insurance solicitations in a variety of different media
including coupon packets, newspapers, circulars, bank
statements and utility billings. In 2006, DMAD was
responsible for 65% of our total direct response life
insurance sales.
In 2006, DMAD reduced their circulation of our
solicitations in order to maximize their profitability,
which had a significant detrimental impact on our
•
Eliminating the need for exclusive territories
direct response life insurance sales. When they
will reduce our turnover of SGAs. We will be
projected an additional 30% reduction in circulation
able to add multiple SGAs in underperforming
for 2007, we entered into negotiations to acquire their
areas instead of being forced to replace an SGA
company. As a result of the acquisition, we were able to
who was not meeting our growth objectives.
substantially increase this circulation during the second
•
Using our direct response expertise, we
believe we will be able to generate more sales
half of 2007, which allowed us to achieve the double-
digit growth in sales during the fourth quarter.
leads at a lower cost from the groups we are
I must admit that I sleep better at night now that
we control this distribution. While it is a constant
challenge to find new ways to increase our direct
response sales, I am confident that the talent and
experience of our people will allow us to continue our
long history of growth in this market.
currently mailing.
•
In many areas, we believe we can obtain
additional endorsements from groups not
previously mailed
through a centralized
management structure.
The early results from this process have exceeded my
expectations. In the first seven territories where we
assumed responsibility for the lead generation, the
6 · TORCHMARK CORPORATION · LETTER TO SHAREHOLDERS
UNITED AMERICAN
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 less than 1% to $775 million
while health-underwriting margin declined 3% to
$119 million.
New health insurance sales at United American were
down 1% to $213 million and were a disappointment
particularly in our captive branch office operation. Our
rapid expansion of new branch offices during 2006,
and the first half of 2007, proved to be overly
aggressive and resulted in unusually high turnover
in our management ranks in the last half of the year.
The unanticipated management turnover negatively
impacted our new agent recruiting and the number of
producing agents dropped during the fourth quarter.
It will take us several months to replace the managers
we have lost. I believe this can be accomplished by mid-
2008, at which time we can renew our office expansion
at a somewhat less aggressive pace.
LIBERTY NATIONAL EXCLUSIVE
AGENCY OPERATION
For 2007, premium revenues at Liberty National
declined 2% to $435 million and underwriting margins
increased 1% to $108 million.
In May of 2006, we implemented some major
changes in our compensation structure for our sales
force at Liberty. Prior to that time, our agents and
sales management were paid a salary in addition to
their commission and bonus compensation. These
salaries amounted to over $22 million annually in non-
performance based compensation.
Since May of 2006, all new agents and all of the sales
management were moved to entirely performance-
based compensation as we have in our other agency
distribution systems. While we expected repercussions
from these changes, the turnover at both the agent and
management levels was greater than we anticipated.
As a result, we saw new sales drop by 18% during the
second half of 2006, followed by a 21% decline in the
first half of 2007.
The good news is that we have now turned the
corner at Liberty National. We have rebuilt our sales
management team and our producing agent count now
exceeds the May 2006 level. New life insurance sales
were up 12% in the fourth quarter of 2007, and I am
excited about our growth prospects for 2008.
LETTER TO SHAREHOLDERS · TORCHMARK CORPORATION · 7
INVESTMENTS
OUTLOOK
Our investment portfolio is concentrated in investment
I am more optimistic now about Torchmark’s future
grade fixed-maturity assets and contains no sub-prime
growth potential than I have been in a number of
mortgages or structured securities whose underlying
years. For the first time in Company history, all three
collateral consists of sub-prime mortgages. The fixed
of our primary life insurance distribution systems had
maturity portfolio had an amortized cost of $9.3 billion
double-digit growth in new sales in the fourth quarter
at year-end and comprised 94% of total invested assets.
of 2007, and enter 2008 with very positive momentum.
The portfolio earned an annual effective yield of 6.96%,
This is particularly encouraging because currently life
down slightly from 7.04% a year earlier.
insurance generates 67% of our underwriting income
Excess investment income grew by 2% to $324 million
and the vast majority of our invested assets.
for the year, but grew 7% on a per share basis, which
If we are able to find a suitable acquisition in 2008,
reflects the impact of our share repurchase program.
I believe we have the management team in place to
The interest rate environment continues to restrict our
growth in investment income but the effect continues
assure that it would greatly improve our growth in
earnings per share. If a suitable opportunity doesn’t
to diminish as the gap between the overall portfolio
arise, our share repurchase program continues to be an
yield and our new purchase yield continues to narrow.
excellent use of our free cash flow.
2007 INVESTMENT INCOME
(In millions, except percent and per share amounts)
Thank you for investing in Torchmark. I assure you
that we will do all we can to make your investment a
TOTAL* REQUIRED EXCESS
profitable one.
MARK S. MCANDREW
Chairman and Chief Executive Officer
(1) From Invested Assets
Supporting:
Net Interest-Bearing Policy
Liabilities:
Policy Reserves
DAC
Net
Debt
(2) From Remaining Invested
Assets
Per Diluted Share
Increase over 2006
$448
(190)
258
67
0
$62
(6)
268
$325
$3.39
11%
$324
$3.38
7%
$320
61
268
$ 649
$6.77
9%
* 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.
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, 2007, 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.
8 · TORCHMARK CORPORATION · LETTER TO SHAREHOLDERS
DIRECTORS
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 Management
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
OFFICERS
MARK S. MCANDREW
Chairman and Chief Executive Officer
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
ROSEMARY MONTGOMERY
Executive Vice President and
Chief Actuary
JOSEPH L. LANIER, JR.
Retired Chairman of the Board of
Dan River, Incorporated,
Danville, Virginia
LAMAR C. SMITH
Retired Chief Executive Officer of
First Command Financial Services, Inc.,
Fort Worth, Texas
MARK S. MCANDREW
Chairman and Chief Executive Officer
of Torchmark
PAUL J. ZUCCONI
Retired Partner of KPMG LLP,
Plano, Texas
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
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
JOYCE L. LANE
Vice President Investor Relations
BEN W. LUTEK
Vice President and Actuary
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
Chief Executive Officer
ANDREW W. KING
President and Chief Marketing Officer
UNITED INVESTORS LIFE
ANTHONY L. MCWHORTER
President and Chief Executive Officer
LETTER TO SHAREHOLDERS · TORCHMARK CORPORATION · 9
OPERATING SUMMARY
Unaudited and in thousands except per share amounts
TWELVE MONTHS ENDED DECEMBER 31,
2007
2006
% 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
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 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
Net Income
EPS on a diluted basis
3%
5%
0%
2%
(1%)
4%
3%
2%
3%
4%
9%
$1,569,964
(651,254)
(501,672)
417,038
1,029,539
(643,093)
(202,360)
184,086
24,168
9,337
634,629
4,313
(154,552)
484,390
$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
648,562
628,292
(447,755)
190,255
(67,300)
323,762
(9,815)
798,337
(270,955)
$527,382
(5,269)
$522,113
$5.45
95,846
(417,293)
179,955
(72,191)
318,763
(7,862)
775,647
(267,017)
$508,630
(4,274)
$504,356
$4.99
101,112
$522,113
$504,356
2,768
1,777
0
1,149
(272)
$527,535
$5.50
2,816
(4,617)
(2,956)
11,607
7,425
$518,631
$5.13
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
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
AT DECEMBER 31,
2007
9,329,149
131,318
26,991
407,943
3,150,586
423,519
443,366
1,423,195
15,336,067
8,392,117
999,132
202,058
721,723
211,700
1,423,195
3,386,142
15,336,067
92,175
93,383
36.26
15.8%
3,304,917
21.4%
$
$
$
$
$
$
2006
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%
$
$
$
$
$
$
$
3,317,038
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%
$
$
$
*Reconciliation of Torchmark management’s view of selected financial measures to comparable GAAP measures:
3,386,142
Shareholders’ equity, excluding FAS 115
$
Effect of FAS 115:
Increase (decrease) fixed maturities
Increase (decrease) deferred acquisition costs
(Increase) decrease 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
(103,104)
8,465
33,124
3,324,627
9,226,045
3,159,051
15,241,428
3,324,627
966,008
35.60
15.8%
3,338,196
21.7%
$
$
$
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, 2007
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, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer È
‘
Non-accelerated filer
(Do not check if a smaller reporting company)
‘
Accelerated filer
Smaller reporting company ‘
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, 2007, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was
$6,284,476,586 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, 2008
90,969,385 shares
DOCUMENTS INCORPORATED BY REFERENCE
Document
Proxy Statement for the Annual Meeting of Stockholders to
be held April 24, 2008 (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 . . . . . . . . . . . . . . . . .
12
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 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 15.
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . .
106
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
PART I.
PART II.
PART III.
PART IV.
Page
1
5
8
9
9
12
14
15
49
50
102
102
102
105
105
105
105
105
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 American
Independent Agency
and Branch Office
Agency
Liberty National Life
Insurance Company
Birmingham, Alabama
American Income Life
Insurance Company
Waco, Texas
United American
Insurance Company
McKinney, Texas
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.
2,060 producing agents; 130
district offices primarily in
the Southeastern U.S.
Individual life and supplemental health
insurance marketed to union and credit
union members.
2,545 producing agents in
the U.S., Canada, and New
Zealand.
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.
3,439 independent
producing agents in the U.S.
and Canada; 2,979
exclusive producing agents
in 155 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
2005
2006
2007
Traditional . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 975,475 $ 934,553 $ 911,444
128,409
Interest-sensitive . . . . . . . . . . . . . . . . . . . . . . .
492,409
Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45,373
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
123,802
506,921
50,211
118,701
525,279
53,410
$1,672,865 $1,615,487 $1,577,635
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
2005
2006
2007
Direct response . . . . . . . . . . . . . . . . . . . . . . . . . . $ 530,137 $ 496,772 $ 472,733
Exclusive Agents:
American Income . . . . . . . . . . . . . . . . . . . . . .
Liberty National . . . . . . . . . . . . . . . . . . . . . . . .
United American . . . . . . . . . . . . . . . . . . . . . . .
Independent Agents:
United American . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
469,486
304,584
18,140
34,758
315,760
430,598
311,975
16,710
39,613
319,819
403,333
318,435
17,315
44,819
321,000
$1,672,865 $1,615,487 $1,577,635
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, 2007, 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, 2007, but Medicare Supplement premium in force exceeded that of limited-
benefit plans during 2006 and 2005. At December 31, 2007, limited-benefit health premium in force
exceeded Medicare Supplement for the first time since Torchmark’s formation. 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, 2007 by product category. Net sales for Medicare Part D represent only new first-time
enrollees.
(Amounts in thousands)
Net Sales
2006
2005
2007
Amount
$207,467
31,902
37,913
% of
Total
75
11
14
Amount
$209,258
33,980
278,023
% of
Total
40
7
53
Amount
$146,193
39,328
-0-
% of
Total
79
21
-0-
Limited-benefit plans . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . .
Medicare Part D . . . . . . . . . . . . . . . .
Total Health . . . . . . . . . . . . . . . .
$277,282
100
$521,261
100
$185,521
100
The following table presents supplemental health annualized premium information for the three years
ended December 31, 2007 by product category.
(Amounts in thousands)
Annualized Premium in Force
2006
2007
2005
Amount
$ 519,994
518,205
195,685
% of
Total
42
42
16
Amount
$ 508,112
550,750
234,219
% of
Total
39
43
18
Amount
$ 434,742
591,668
-0-
% of
Total
42
58
-0-
Limited-benefit plans . . . . . . . .
Medicare Supplement . . . . . . .
Medicare Part D . . . . . . . . . . . .
Total Health . . . . . . . . . . .
$1,233,884
100
$1,293,081
100
$1,026,410
100
The number of health policies in force (excluding Medicare Part D) was 1.56 million, 1.60 million, and
1.60 million at December 31, 2007, 2006, and 2005, respectively. Medicare Part D enrollees at
December 31, 2006 were approximately 189 thousand to begin the 2007 plan year, but are expected to
decline slightly for the 2008 plan year.
The following table presents supplemental health annualized premium in force for the three years
ended December 31, 2007 by marketing (distribution) method.
Direct response . . . . . . . . . . . . . . . . . . . . . . . . . . $
Exclusive agents:
(Amounts in thousands)
Annualized Premium in Force
2005
2006
2007
44,708 $
41,996 $
39,446
United American . . . . . . . . . . . . . . . . . . . . . . .
Liberty National . . . . . . . . . . . . . . . . . . . . . . . .
American Income . . . . . . . . . . . . . . . . . . . . . .
395,773
140,802
67,976
385,505
148,817
63,810
337,175
145,341
60,747
Independent agents:
United American . . . . . . . . . . . . . . . . . . . . . . .
388,940
418,734
443,701
Medicare Part D . . . . . . . . . . . . . . . . . . . . . . .
1,038,199
195,685
1,058,862
234,219
1,026,410
-0-
$1,233,884 $1,293,081 $1,026,410
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. Annuities in 2007 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 subsidiary 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. The investments of Torchmark insurance subsidiaries consist predominantly of high-quality,
investment-grade securities. Fixed maturities represented 94% of total
investments at December 31,
2007.
(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
the
Commissioners (NAIC),
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 more than
adequately capitalized under the risk based capital formula.
Guaranty Assessments. State guaranty laws provide for assessments from insurance companies into
failure or insolvency of an insurance company, to fulfill the
a fund which is used,
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. At December 31, 2007, Torchmark and its
subsidiaries have registered as a holding company system pursuant to such legislation in Alabama,
Indiana, Missouri, Nebraska, and New York.
Insurance holding company system statutes and regulations impose various limitations on
investments in subsidiaries, and may require prior regulatory approval for material transactions between
insurers and affiliates and for the payment of certain dividends and other distributions.
Personnel
At the end of 2007, Torchmark had 2,354 employees and 1,242 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 Medicare Part D sales
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.
However, any government plan might provide beneficial opportunities if the plan includes the insurance
industry as providers. 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 a
in Torchmark’s competitive position. Rating organizations periodically review the financial
factor
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 slightly 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
financial market performance, and general economic
affect
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 likely be at 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,
marketing practices, advertising,
licensing agents, policy forms, capital adequacy, and permitted
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
does business involving the insurers’ sales practices, alleged agent misconduct,
failure to properly
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.
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.
including Alabama and Mississippi,
In some states,
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 throughout the country, 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, 2007, 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, through a joint venture with Torchmark, owns and occupies a 140,000 square
foot
facility located in McKinney, Texas (a north Dallas suburb). To facilitate the consolidation of
Torchmark’s operations, we have constructed a 150,000 square foot addition to this building, which was
substantially completed in December, 2007 and is now being occupied by United American.
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 9 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. A total of 21 buildings
were sold in each of the years 2007 and 2006.
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, a Globe
subsidiary 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. 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 and its subsidiaries have substantial business, particularly
Alabama and Mississippi, creating the potential for unpredictable material adverse judgments in any given
punitive damage suit.
As previously reported in Forms 10-K and 10-Q, Liberty and Torchmark 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).
9
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 with briefs received on
certain issues, materials relating to objections to the proposed settlement submitted to the Court-
appointed independent special master, objectors to the potential settlement heard and a report of the
Court-appointed independent actuary received on certain issues thereafter.
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. 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 sought 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 was held on Liberty’s petition on March 13,
2007.
On March 30, 2007, the Barbour County Circuit Court issued an order denying Liberty’s petition for
clarification and/or modification of Robertson, holding that Liberty’s policies did not state that they will pay
“actual charges” accepted by providers. On April 8, 2007, the Court issued an order granting a motion to
intervene and establishing a subclass in Robertson comprised of Liberty cancer policyholders who are
now or have within the past six years, undergone cancer treatment and filed benefit claims under the
to certify for an
policies in question. Liberty filed a motion with the Barbour County Circuit Court
interlocutory appeal that Court’s order on Liberty’s petition for clarification in Robertson on April 17, 2007.
An appellate mediation of these issues was conducted on August 9, 2007. On October 16, 2007, the
Alabama Supreme Court entered orders, based upon the conclusion by the parties of the appellate
mediation, staying the proceedings for a writ of mandamus, reinstating the cases on the appellate docket,
and remanding the cases to the Barbour County Circuit Court to implement the parties’ settlement
agreement. A fairness hearing on the proposed settlement agreement was held by the Barbour County
Circuit Court on January 15, 2008.
United American has been named as a defendant in previously-reported purported class action
litigation filed on September 16, 2004, in the Circuit Court of Saline County, Arkansas on behalf of the
Arkansas purchasers of association group health insurance policies or certificates issued by United
American through Heartland Alliance of America Association and Farm & Ranch Healthcare, Inc. (Smith
and Ivie v. Collingsworth, et al., CV2004-742-2). The plaintiffs assert claims for fraudulent concealment,
breach of contract, common law liability for non-disclosure, breach of fiduciary duties, civil conspiracy,
unjust enrichment, violation of the Arkansas Deceptive Trade Practices Act, and violation of Arkansas law
and the rules and regulations of
injunctive and
equitable relief, as well as actual and punitive damages are sought by the plaintiffs.
the Arkansas Insurance Department. Declaratory,
On September 7, 2005, the plaintiffs amended their complaint to assert a nation wide class, defined
as all United American insureds who simultaneously purchased both an individual Hospital and Surgical
10
Expense health insurance policy and an individual supplemental term life insurance policy from Farm &
Ranch through Heartland. Defendants removed this litigation to the United States District Court for the
Western District of Arkansas (No. 4:05-cv-1382) but that Court remanded the litigation back to state court
on plaintiffs’ motion. Discovery is proceeding.
As previously reported, United American was named as a defendant in purported class action
litigation filed on January 7, 2005, in the District Court of Starr County, Texas on behalf of the purchasers
of association group health insurance policies or certificates issued by United American through
Heartland Alliance of America and Farm & Ranch Healthcare, Inc. (Rodriguez v. Burdine, et al, DC-05-8).
The plaintiffs asserted claims of civil conspiracy, conversion and theft, violations of the Texas Insurance
and Administrative Codes, breach of fiduciary duties, fraud and gross negligence and breach of contract
the Heartland
as well as filing a members representative action on behalf of all
Association. The plaintiffs alleged excessive and unauthorized association dues payments that
the
defendants have collected from policyholders. A declaratory judgment, monetary damages, imposition of
a constructive trust, equitable forfeiture and attorney’s fees were sought by the plaintiffs. A class
certification hearing was held August 31, 2006, at which time the Court considered and approved a
proposed settlement agreement between the parties. A fairness hearing was conducted on October 5,
2006 and the judgment and related orders were entered without
issues. The final settlement was
concluded on November 9, 2006.
the members of
On February 17, 2005, named defendant Martha Burdine filed an amended answer and a complaint
(the cross complaint) against various other defendants including United American (the cross defendants)
on behalf of a purported class of former agents and managers of those cross defendants (the cross
plaintiffs). These cross plaintiffs asserted a pattern of contract breaches and misconduct by the cross
defendants including claims for breach of contract, intentional and negligent misrepresentation, fraud,
negligence, breach of duties of trustees, trespass to chattels, conversion, intentional interference with a
business relationship and intentional interference with a valid business expectancy. The cross plaintiffs
sought actual, punitive and exemplary damages, attorneys’ fees and costs and other legal and equitable
relief. Upon the conclusion of the Rodriguez settlement, only the cross claims filed by Martha Burdine
remained outstanding. The parties agreed to dismiss these cross claims with prejudice on August 29,
2007.
On July 26, 2007, previously-reported purported class action litigation for a class comprised only of
Texas citizens was filed against United American in the state District Court of Falls County, Texas
(Neuman v. United American Insurance Company, Case No. 36593). Plaintiffs assert
the UA
Partners program is a fraudulent scheme presented by United American to prospective insureds when
they apply for insurance as a discount product and service program and the fee for this program is built
into the insurance premium. They allege that United American has been unjustly enriched as a result of
the UA Partners program and initially had sued for money had and received and attorneys fees. On
January 28, 2008, plaintiffs amended their complaint to allege breach of contract and unfair business
practices prohibited by the Texas Insurance Code in connection with the UA Partners program and now
seek actual and additional statutory damages.
that
On January 18, 2008, purported class action litigation was filed against Liberty in the U.S. District
Court for the Southern District of Florida (Joseph v. Liberty National Life Insurance Company, Case No.
08-20117 CIV – Martinez) on behalf of all black Haitian-Americans who reside in Florida (including both
naturalized and alien persons) and who have or have had an ownership interest in life insurance policies
sold by Liberty where it is alleged that Liberty issued and administered such policies on a discriminatory
basis because of their race and Haitian ancestry, ethnicity or national origin. The plaintiffs allege an
intentional plan on behalf of Liberty to discriminate against the black Haitian-American community in the
formation, performance and termination of life insurance contracts in violation of 42 U.S.C. §1981 and
§1982 by target marketing and underwriting inquiries regarding whether the applicant for insurance was
Haitian, had traveled to Haiti in the past or planned to do so at any time in the future and, based upon
such information, either denying the application or issuing a substandard policy or in some instances it is
alleged, refusing to pay death benefits on issued policies. The plaintiffs seek unspecified compensatory
damages in excess of $75,000, punitive damages, injunctive relief, attorneys’ fees and other relief.
11
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 2007.
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 5,106 shareholders of record on December 31, 2007, excluding shareholder accounts held in
nominee form. 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $60.53
Quarter
1
2
3
4
2007
Market Price
Low
High
$66.87 $62.83
64.48
59.39
58.78
70.32
68.14
65.16
Dividends
Per Share
$.13
.13
.13
.13
2006
Market Price
Low
High
$57.79 $54.25
56.43
59.75
61.68
61.01
63.42
64.23
Dividends
Per Share
$.11
.11
.13
.13
Year-end closing price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $63.76
(c) Purchases of Certain Equity Securities by the Issuer and Others for the Fourth Quarter 2007
Period
October 1-31, 2007 . . . . . . . . . . .
November 1-30, 2007 . . . . . . . . .
December 1-31, 2007 . . . . . . . . .
(a) Total Number
of Shares
Purchased
32,002
5,000
28,779
(b) Average
Price Paid
Per Share
$64.45
60.18
61.20
(d) Maximum Number
of Shares (or
Approximate Dollar
Amount) that May
Yet Be Purchased
Under the Plans or
Programs
(c) Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
32,002
5,000
28,779
On July 26, 2007, Torchmark’s Board reaffirmed its continued authorization of the Company’s stock
in consultation with the Board,
repurchase program in amounts and with timing that management,
determined to be in the best interest of the Company. The program has no defined expiration date or
maximum shares to be purchased.
12
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
$300
$250
$200
$150
$100
$50
$0
12/02
12/03
12/04
12/05
12/06
12/07
Torchmark Corporation
S&P 500
S&P Life & Health Insurance
*
$100 invested on 12/31/02 in stock or index-including reinvestment of dividends. Fiscal year ending December 31.
Copyright © 2008, 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.
13
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,
2007
2006
2005
2004
2003
Premium revenue:
Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,569,964 $ 1,524,267 $ 1,468,288 $ 1,395,490 $ 1,310,373
1,034,031
Health . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31,379
2,375,783
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
557,670
Net investment income . . . . . . . . . . . . . . . .
Realized investment gains (losses) . . . . . .
(3,274)
Total revenue . . . . . . . . . . . . . . . . . . . . . . .
2,930,998
Net income before cumulative effect of
1,237,532
22,914
2,784,713
628,746
(10,767)
3,421,178
1,014,857
24,929
2,508,074
603,068
280
3,125,910
1,236,797
20,470
2,827,231
648,826
2,734
3,486,697
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 declared . . . . . . . . . . . .
Cash dividends paid . . . . . . . . . . . . . . . .
Basic average shares outstanding . . . . . .
Diluted average shares outstanding . . . . .
527,535
527,535
518,631
518,631
495,390
495,390
475,718
468,555
430,141
430,141
5.59
5.59
5.20
5.20
4.73
4.73
4.32
4.26
3.75
3.75
5.50
5.50
0.52
0.52
94,317
95,846
5.13
5.13
0.50
0.48
99,733
101,112
4.68
4.68
0.44
0.44
104,735
105,751
4.25
4.19
0.44
0.44
110,106
111,908
3.73
3.73
0.40
0.38
114,837
115,377
As of December 31,
2007
2006
2005
2004
2003
Cash and invested assets . . . . . . . . . . . . . $ 9,792,297 $ 9,719,988 $ 9,410,695 $ 9,243,090 $ 8,702,398
13,465,525
Total assets . . . . . . . . . . . . . . . . . . . . . . . . .
182,448
Short-term debt . . . . . . . . . . . . . . . . . . . . . .
Long-term debt(1) . . . . . . . . . . . . . . . . . . . . .
698,042
3,240,099
Shareholders’ equity . . . . . . . . . . . . . . . . . .
Per diluted share . . . . . . . . . . . . . . . . . . .
28.45
Effect of SFAS 115 on diluted equity
14,252,184
170,354
694,685
3,419,844
31.07
14,980,355
169,736
721,248
3,459,193
34.68
14,768,903
381,505
507,902
3,432,768
32.91
15,241,428
202,058
721,723
3,324,627
35.60
per share(2) . . . . . . . . . . . . . . . . . . . . . .
(0.66)
1.43
2.50
3.62
3.39
Annualized premium in force:
Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Health . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic shares outstanding . . . . . . . . . . . . . .
Diluted shares outstanding . . . . . . . . . . . .
1,672,865
1,233,884
2,906,749
92,175
93,383
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)
Includes 7 3⁄4% Junior Subordinated Debentures reported as “Due to affiliates” on the Consolidated Balance Sheets at each
year end 2003 through 2005 in the amount of $154.6 million. Also included at year end 2006 and 2007 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.
14
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
December 31, 2007. Additionally,
the profitability measures that
income. That summary is
demonstrates year-to-year comparability and which reconciles to net
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
15
Analysis of Profitability by Segment
(Dollar amounts in thousands)
2007
2006
2005
Change %
Change %
2007
2006
Life insurance underwriting margin . . . . . . . . . . $ 417,038 $ 397,444 $ 381,648 $ 19,594
1,560
Health insurance underwriting margin . . . . . . .
Annuity underwriting margin . . . . . . . . . . . . . . .
(2,578)
Other insurance:
177,179
12,580
206,694
11,915
208,254
9,337
5
1
(22)
$15,796
29,515
(665)
4
17
(5)
Other income . . . . . . . . . . . . . . . . . . . . . . .
Administrative expense . . . . . . . . . . . . . . .
Excess investment income . . . . . . . . . . . . . . . .
Corporate and adjustments . . . . . . . . . . . . . . . .
Pre-tax total . . . . . . . . . . . . . . . . . . . . .
Applicable taxes . . . . . . . . . . . . . . . . . . . . . . . . .
4,313
(154,552)
323,762
(17,921)
790,231
(268,118)
4,024
(155,331)
318,763
(14,437)
769,072
(264,716)
2,366
(147,681)
324,238
(9,660)
740,670
(255,165)
After-tax total . . . . . . . . . . . . . . . . . . . .
522,113
504,356
485,505
17,757
Remove benefit from interest-rate swaps
(after tax) from Investment Segment
. . . . . .
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)
-0-
1,777
2,768
1,149
(319)
(7,254)
2,816
11,607
(4,805)
25
-0-
15,989
319
9,031
(48)
(10,458)
(272)
7,425
(955)
(7,697)
-0-
-0-
(369)
-0-
7
289
(1)
779
4,999
2
(3,484) 24
21,159
(3,402)
3
1
4
70
1,658
5
(7,650)
(5,475)
(2)
(4,777) 49
28,402
(9,551)
18,851
4
4
4
4,486
(7,279)
2,816
(4,382)
8,380
369
Net income . . . . . . . . . . . . . . . . . . . . . $ 527,535 $ 518,631 $ 495,390 $ 8,904
2
$23,241
5
* 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 2% or $9 million to $528 million in 2007, and 5%
or $23 million to $519 million in 2006. The life insurance segment contributed $20 million to pretax growth
in the 2007 margin, the largest contributor. Life insurance margin growth in 2007 resulted from both
premium growth and favorable mortality. Also adding to 2007 pretax earnings growth was the investment
segment, from which excess investment income rose $5 million or 2%. It had declined in both of the
previous two years. Excess investment income in 2007 was positively affected by lower financing costs
on our debt as a result of the refinancing of two debt issues in 2006. 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. Excess investment
income declined in both 2006 and 2005, as it was
compressed by a flattened yield curve and as significant amounts of cash have been used to repurchase
Torchmark shares.
Total revenues rose 2% in 2007 to $3.49 billion. In 2006, total revenues increased 9% to $3.42 billion
from $3.13 billion in 2005. Growth in life premium of $46 million and net investment income of $20 million
accounted for the growth in 2007 revenues. 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 investment income
also contributed to 2006 revenue growth.
Life insurance premium has grown steadily in each of the three years ending December 31, 2007,
rising 3% in 2007 to $1.6 billion and 4% in 2006. Margins as a percentage of premium have also
increased slightly each year to 27% of premium in 2007 from 26% in 2005 and 2006. While premium and
margin percentage growth have resulted in increases in the total life insurance segment’s contribution to
pretax earnings, sales volumes have declined slightly each year. Life insurance segment results are
discussed further under the caption Life Insurance.
16
Health premium was flat in 2007 compared with 2006 at $1.2 billion. However, it rose 22% or $223
million in 2006 from $1.0 billion in 2005, but $212 million of the growth came from Medicare Part D
premium which was offered for the first time in 2006. Since the majority of the Country’s Part D enrollees
selected a plan in 2006, we do not expect significant growth in our Part D business going forward.
Medicare Supplement has historically accounted for the largest portion of our health premium. Over the
past few years, however, 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. At the
same time, 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. As a result, premium from the
limited-benefit health products are expected to overtake Medicare Supplement premium in 2008. See the
discussion under Health Insurance for a more detailed discussion of health insurance results.
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 last
As previously mentioned, the investment segment’s pretax profitability, or excess investment income,
increased $5 million or 2% in 2007, after having declined 2% in each of
two years. The
investment segment’s 2007 income was positively affected by a decline in our interest expense on debt,
due to the refinancing of the two funded debt issues noted below. However, 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 lower 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. At the same time, short-term
rates have risen and stayed at higher levels during the three-year period, negatively affecting excess
investment
income. During 2005 and continuing through mid-2006, short-term rates rose with no
meaningful change in long-term rates. The rising 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.
We had $2 million of after-tax realized investment gains in 2007, compared with after-tax realized
investment losses of $7 million in 2006. There was an immaterial amount of after-tax realized investment
gains in 2005. Realized investment gains and losses can vary significantly from period to period and may
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 2005 through 2007, 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 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
its class-action cancer case, and the
subsidiary Liberty’s race-distinct mortality/dual-pricing litigation,
17
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.
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.
Additionally in 2006, Liberty 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.
Liberty’s program to dispose of
its agency office buildings continued in 2007. As a result, 21
additional buildings were sold for proceeds of $6.4 million and a pre-tax gain of $4.3 million ($2.8 million
after tax). Also in 2007, additional legal costs or settlements from litigation relating to prior periods were
recorded. We received an additional $515 thousand ($334 thousand after tax) in settlement proceeds
from the Worldcom litigation discussed above. We also incurred additional costs relating to Liberty
National’s race-distinct pricing litigation that was settled in 2005 and was also discussed above. These
costs were $933 thousand ($606 thousand after tax). Additionally, in 2007, we recorded a Federal income
tax benefit of $1.1 million relating primarily to settlements of prior year examinations, presented as “Tax
settlements” in the table above. This item reduced “Income Taxes” in the 2007 Consolidated Statement of
Operations. See Note 8 for more information on this settlement.
We redomesticated two of our insurance subsidiaries, United American and Globe, to the state of
Nebraska in 2007. This redomestication will benefit us going forward by reducing premium tax rates in
these companies. We plan to redomesticate other subsidiaries to Nebraska in the future.
18
Torchmark has in place an ongoing share repurchase program which began in 1986 and was
reaffirmed at its July 26, 2007 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, 2007.
Analysis of Share Purchases
(Amounts in thousands)
Purchases
2007
2006
Shares Amount Shares Amount Shares Amount
2005
Excess cash flow and borrowings . . . . . . . . . . . . . . .
Option proceeds* . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,150
766
$402,116
49,675
5,575
415
$320,425
24,436
5,647
4,655
$300,134
254,812
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,916
$451,791
5,990
$344,861
10,302
$554,946
*
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.
Life Insurance. Life insurance is our
insurance segment, with 2007 life premium
largest
representing 55% of total premium. Life underwriting income before other income and administrative
expense represented 66% of the total in 2007. 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 3% to $1.57 billion in 2007 after having increased 4% in 2006 to $1.52
billion. Life insurance products are marketed through several distribution channels. Premium income 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 . . . . . . . . .
Other Agencies . . . . . . . . . . . . . . . . . . . . . . . .
2007
2006
2005
Amount
$ 484,176
440,164
293,936
351,688
% of
Total
Amount
% of
Total
Amount
31% $ 457,159
409,188
28
300,933
19
356,987
22
30% $ 424,037
380,365
27
302,747
20
361,139
23
% of
Total
29%
26
21
24
$1,569,964
100% $1,524,267
100% $1,468,288
100%
We use three statistical measures as indicators of premium growth and sales over the near term:
“annualized premium in force,” “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
19
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. 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 $1.67 billion at December 31, 2007, an increase of 4% over
$1.62 billion a year earlier. Annualized life premium in force was $1.58 billion at December 31, 2005.
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 . . . . . . . . . . . . .
Other Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007
2006
2005
Amount
$114,232
92,306
36,981
20,727
% of
Total
Amount
% of
Total
Amount
43% $115,031
86,369
35
41,369
14
22,728
8
43% $112,240
84,270
33
47,088
16
31,368
8
% of
Total
41%
31
17
11
$264,246
100% $265,497
100% $274,966
100%
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 . . . . . . . . . . . . .
Other Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007
2006
2005
Amount
$ 76,043
73,862
28,773
18,980
% of
Total
Amount
% of
Total
Amount
38% $ 77,385
72,072
37
34,342
15
25,269
10
37% $ 76,746
73,490
35
35,993
16
35,704
12
% of
Total
35%
33
16
16
$197,658
100% $209,068
100% $221,933
100%
Direct Response is our leading writer of life insurance. The Direct Response operation consists of
two primary components: direct mail and insert media. Direct mail targets primarily young middle-income
households with children. The juvenile life insurance policy is a key 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 policyholders. Parents and grandparents of
these juvenile policyholders are more likely to
respond favorably to a Direct Response solicitation for life coverage on themselves than is the general
adult population. Also, both the juvenile policyholders and their parents are low acquisition-cost targets for
sales of additional coverage over time. At this time, we believe that the Direct Response unit is the largest
U.S. writer of juvenile direct mail
life insurance. We expect that sales to this demographic group will
continue as one of Direct Response’s premier markets.
20
Insert media, which targets primarily the adult market, involves placing insurance solicitations as
advertising inserts into a variety of media, such as coupon packets, newspapers, bank statements, and
billings. This media was historically placed by Direct Marketing and Advertising Distributors, Inc. (DMAD),
previously an unrelated entity with which we have had a business relationship for fifteen years. We
acquired DMAD in January, 2007 for $47 million, and integrated their operations during 2007. This
acquisition allows the Company to expand marketing opportunities through increased solicitation volume
and also improve margins through cost savings in the insert media component. Over the period of our
relationship with DMAD, the insert media component has grown to the point that it now represents over
half of Direct Response net sales. However, in the last half of 2006, DMAD substantially reduced insert
media solicitations resulting in declines in reported net sales in the first half of 2007. Net sales from insert
media are generated four to seven months following the initial sales solicitation. We believe that the
DMAD purchase will favorably impact Direct Response sales going forward.
The Direct Response operation accounted for 31% of our life insurance premium during 2007, the
largest of any distribution group. Direct Response’s share of total life premium has risen steadily in each
of the last three years as illustrated in the chart above. Life premium for this channel rose 6% in 2007 and
8% in 2006. Net sales declined 1% in 2007 to $114 million after having risen 2% in 2006 to $115 million.
First-year collected premium declined 2% in 2007 to $76 million but grew 1% in 2006 to $77 million.
The American Income Exclusive Agency focuses primarily on members of labor unions, but also
on 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 $440 million in
2007, after having increased 8% in 2006. Net sales increased 7% in 2007 to $92 million from $86 million
in 2006. Net sales rose 2% in 2006. First-year collected premium rose 2% in 2007 to $74 million, after
having decreased 2% in 2006. 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
in both years and first-year collected premium turned positive in 2007 after a decline in 2006. The
American Income agent count was 2,545 at December 31, 2007 compared with 2,353 a year earlier, an
increase of 8%. The agent count rose 16% in 2006 from 2,027 at year end 2005. 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, the systematic, centralized internet recruiting
program has enhanced the recruiting of new agents.
The Liberty National Exclusive Agency distribution system markets its life products to primarily
middle-income customers in Southeastern states. Liberty’s life premium declined 2% in 2007 and 1% in
2006 compared with the respective prior year. Liberty’s life premium sales, in terms of net sales, were
$37 million in 2007, representing a decrease of 11% in 2007. Net sales also decreased 12% in 2006.
First-year collected premium declined 16% in 2007 to $29 million. First-year collected premium declined
5% in 2006.
Growth in the Liberty Agency’s sales and premium volume are highly dependent on building the size
of its agency force. Liberty has implemented initiatives similar to those of American Income to recruit new
agents, primarily through the use of the internet. The continued recruiting of new agents and the retention
of productive agents are critical to growing the sales in controlled agency distribution systems. Liberty’s
agent count rose 49% to 2,060 at December 31, 2007 from 1,381 a year earlier. This compared with a
decline of 22% in 2006 and an increase of 9% in 2005. Most of the growth in the 2007 agent count
occurred in the latter half of the year. As these new agents become trained and more seasoned, they
should become more productive. Declines in net sales in both 2007 and 2006 were attributable primarily
to the 2006 declines in agent count. 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 are responsible for recent margin improvements. Increased sales from a larger
and more productive agency force should lead to increased premium growth.
21
We also offer life insurance through Other Agencies consisting of the United Investors Agency, the
the United American Independent and Branch Office Agencies, and other small
Military Agency,
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 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. Military premium represents 13% of life premium. The United
American Independent and Branch Office Agencies combined represented approximately 3% of
Torchmark’s total life premium. Life premium income for these two agencies has declined for the past
three years because they focus on health insurance, with life sales being incidental.
LIFE INSURANCE
Summary of Results
(Dollar amounts in thousands)
2007
% of
2006
% of
Amount
Premium Amount
Premium Amount
2005
% of
Premium
Premium and policy charges . . . . . . . . . $1,569,964
100% $1,524,267
100% $1,468,288
100%
Policy obligations . . . . . . . . . . . . . . . . . .
Required interest on reserves . . . . . . . .
1,039,278
(388,024)
66
(25)
1,005,771
(364,313)
66
(24)
966,093
(342,305)
66
(23)
Net policy obligations . . . . . . . . . . . . .
Commissions and premium taxes . . . . .
Amortization of acquisition costs . . . . . .
651,254
72,291
429,381
Total expense . . . . . . . . . . . . . . . . . . .
1,152,926
41
5
27
73
641,458
76,859
408,506
1,126,823
42
5
27
74
623,788
76,278
386,574
1,086,640
43
5
26
74
Insurance underwriting margin before
other income and administrative
expenses . . . . . . . . . . . . . . . . . . . . . . . $ 417,038
27% $ 397,444
26% $ 381,648
26%
Gross margins, as indicated by insurance underwriting margin before other
income and
administrative expense, rose 5% in 2007 to $417 million after rising 4% in 2006 and 8% in 2005. As a
percentage of life insurance premium, gross margins have increased slightly each year and were 27% in
2007. Improvements in life margins have resulted from several factors. Margin improvement in 2007 was
primarily the result of premium growth, but
favorable mortality was also a positive factor. This
improvement in mortality is not expected to be a trend. In 2006, the previously-mentioned changes in
Liberty’s agent compensation system contributed to increases in Liberty’s margins, as this new 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 all periods. Mortality improvement in the Military
Agency was also a major factor in the 2006 improvement.
22
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 beginning January 1,
2006. Because Medicare Part D is a significant new health product and there is no comparative prior year
data in 2005, 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 2007. Excluding Part D premium, health premium represented 39%
in 2007, compared with 40% in both 2006 and 2005. Health underwriting margin, excluding Part D,
accounted for 30% of the total in 2007, compared with 31% of the total in both 2006 and 2005. 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)
2007
2006
2005
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
United American Independent Agency
Limited-benefit plans . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . .
$
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 . . . . . . . . . . . . . . .
92,042
296,368
388,410
203,577
183,377
386,954
141,082
84
141,166
69,268
1,403
70,671
527
41,811
42,338
Total Premium (Before Part D)
Limited-benefit plans . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . .
506,496
523,043
$ 102,163
316,527
38%
418,690
41%
$
98,023
343,650
441,673
43%
153,944
200,591
354,535
144,925
99
145,024
65,588
1,587
67,175
572
39,154
39,726
467,192
557,958
35
14
6
4
46
54
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
37
14
7
4
49
51
Total Premium (Before Part D) . . . .
1,029,539
100% 1,025,150
100% 1,014,857
100%
Medicare Part D*
214,589
Total Health Premium* . . . . . . . . . .
$1,244,128
212,382
$1,237,532
-0-
$1,014,857
*
Total Medicare Part D premium and health premium in 2007 exclude $7.3 million of risk-sharing premium paid to the Centers for
Medicare and Medicaid Services consistent with the Medicare Part D contract. This risk-sharing amount is a portion of the
excess or deficiency of actual over expected claims, and therefore we view this payment as a component of policyholder
benefits in our segment analysis.
23
limited-benefit health insurance products rather
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
premium from other limited-benefit health products have been growing rapidly. As shown in the chart
above, Medicare Supplement premium represented 51% of total health premium (excluding Part D) in
2007, 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)
2007
2006
2005
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
United American Independent Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . . .
$ 33,917
16,381
$ 38,651
16,278
$ 42,753
15,813
50,298
21%
54,929
23%
58,566
32%
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 . . . . . . . . . . . . . . . . . . . .
151,924
10,406
162,330
9,842
130
9,972
11,307
-0-
11,307
477
4,985
5,462
Total Net Sales (Before Part D)
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . . .
207,467
31,902
146,711
12,765
159,476
11,588
216
11,804
11,685
-0-
11,685
623
4,721
5,344
209,258
33,980
65
5
5
2
86
14
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
68
4
5
2
87
13
Total Net Sales (Before Part D) . . . . . . . .
239,369
100% 243,238
100% 185,521
100%
Medicare Part D* . . . . . . . . . . . . . . . . . . . . . . . . . . .
37,913
Total Health Net Sales . . . . . . . . . . . . . . .
$277,282
278,023
$521,261
-0-
$185,521
*
Net sales for Medicare Part D represents only new first-time enrollees.
24
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)
2007
2006
2005
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
United American Independent Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . .
$ 27,055
12,992
$ 31,817
15,084
$ 34,498
16,834
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 . . . . . . . . . . . . . . . . . . .
Total First-Year Collected Premium (Before
Part D)
40,047
21%
46,901
26%
51,332
35%
115,148
10,238
125,386
8,180
161
8,341
12,347
-0-
12,347
470
4,499
4,969
92,791
14,131
66
106,922
59
9,756
248
10,004
12,716
-0-
12,716
697
4,397
5,094
4
6
3
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
Limited-benefit plans . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . .
163,200
27,890
85
15
147,777
33,860
81
19
106,872
40,009
73
27
Total (Before Part D) . . . . . . . . . . . . . . . .
191,090
100% 181,637
100% 146,881
100%
Medicare Part D* . . . . . . . . . . . . . . . . . . . . . . . . . .
53,269
Total First-Year Collected Premium . . . .
$244,359
212,382
$394,019
-0-
$146,881
*
First-year collected premium for Medicare Part D represents only premium collected from new first-time enrollees in their first
policy year. In 2006, all premium was first year.
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.
25
The United American Branch Office is an exclusive agency, meaning the agents in its 155 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
2007 were $152 million, rising 4%. In 2006, net sales rose 88% to $147 million. As a result, total health
sales at the UA Branch Office were $162 million, a 2% increase over 2006, including the decline in
Medicare Supplement sales. However, in 2006, total net health sales for this Agency increased 66%, as a
result of the growth in limited-benefit sales. Total health premium rose 9% in 2007 to $387 million,
compared with a 10% increase in 2006 to $355 million, taking the decline in the Medicare Supplement in
force block into account. After growing very rapidly over the past few years, the producing agent count in
the UA Branch office declined 1% as of December 31, 2007 to 2,979 from 3,015. In 2006, the producing
agent count rose 39%, after growing 29% a year earlier. 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 3,439 were active producing agents for
Torchmark at December 31, 2007. Health premium for the UA Independent Agency declined 7% to $388
million in 2007, after declining 5% in 2006. 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. 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 have not recovered.
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 2007 to $141
million after a 3% drop in 2006. The declines in premium have resulted from 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 2007. 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 reduced benefits paid going forward
and further required Liberty to reduce premiums and to maintain an 85% claims loss ratio over the remaining
life of the business.
Net health sales in the Liberty agency for 2007 declined 16% to $10 million, compared with 2006 net
health sales of $12 million. Net health sales were $14 million in 2005. One factor in the decline in health
sales at Liberty has been the increased emphasis on selling the higher-margin life products. Another
issue had been the decline in agent counts in recent periods, as a result of a change in the agent
compensation system in 2006 to improve persistency and margins. However, as a result of recruiting and
training initiatives, the agent count rose from 1,381 at year end 2006 to 2,060 at year end 2007, an
increase of 49%.
American Income Exclusive Agency, also predominately a life insurance distribution channel, is
our fourth largest health insurance distributor based on 2007 premium collected. Its health plans are
the agency’s 2007 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 2007 increased 5% to $71 million, while 2006 premium of $67
million increased 6% over 2005. Net health sales were $11.3 million in 2007, compared with $11.7 million
in 2006 and $11.3 million in 2005. Net health sales comprised only 11% of the American Income
Agency’s total net sales in 2007.
26
Direct Response, primarily a life operation, also offers health insurance, which is predominantly
Medicare Supplements sold directly to employer or union sponsored groups. In 2007, net health sales
were $5 million, comprising only 5% of Direct Response’s total life and health net sales. These net sales
rose 2% in 2007, but declined 10% in 2006. Health premium in 2007 for this group rose 7% to $42 million.
Health premium in 2006 was $40 million, a 5% increase.
Medicare Part D.
Torchmark, through its subsidiary United American, began offering insurance
coverage under the government’s Medicare Part D plan as of January 1, 2006. The Medicare Part D plan
is a stand-alone prescription drug plan for Medicare beneficiaries. Part D is regulated and partially funded
by the Centers for Medicare and Medicaid Services (CMS) for participating private insurers like United
American, unlike the traditional Medicare program for hospital and doctor services, where CMS is the
primary insurer and private Medicare Supplement insurers are secondary insurers. 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 $215 million in 2007, compared with
$212 million in 2006. Enrollment for all Part D coverages ends on December 31 of the previous year,
except for enrollees who reach age 65 in the current year. At December, 2006, United American had
approximately 189 thousand enrollees for the 2007 Part D plan. Although final enrollment has not been
confirmed, we expect a decline in enrollees for the 2008 plan year. Our Medicare Part D product is sold
primarily through the Direct Response operation, but is also sold by the two UA agencies. Part D net
sales were $38 million in 2007 compared with $278 million in 2006, as we count only sales to new first-
time enrollees in net sales. The majority of 2007 premium income was from previous enrollees.
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 with 2005.
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.
27
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
2007
Premium** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,029,539
100% $214,589
100% $1,244,128
100%
Policy obligations** . . . . . . . . . . . . . . . . . . . . . . . .
Required interest on reserves . . . . . . . . . . . . . . .
671,158
(28,065)
Net policy obligations . . . . . . . . . . . . . . . . . . . . .
643,093
Commissions and premium taxes . . . . . . . . . . . .
Amortization of acquisition costs . . . . . . . . . . . . .
70,362
131,998
Total expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
845,453
65
(3)
62
7
13
82
171,274
-0-
171,274
13,891
5,256
190,421
80
-0-
80
7
2
89
842,432
(28,065)
814,367
84,253
137,254
1,035,874
68
(3)
65
7
11
83
Insurance underwriting income before other
income and administrative expenses . . . . . . . . $ 184,086
18% $ 24,168
11% $ 208,254
17%
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
668,205
(20,879)
647,326
74,484
115,868
837,678
66
(2)
64
7
12
83
income and administrative expenses . . . . . . . . $ 177,179
17%
$ 177,179
17%
*
**
Health other than Medicare Part D.
Total Medicare Part D premium and health premium in 2007 exclude $7.3 million of risk-sharing premium paid to CMS
consistent with the Medicare Part D contract. This risk-sharing amount is a portion of the excess or deficiency of actual over
expected claims, and therefore we view this payment as a component of policyholder benefits in our segment analysis.
28
Torchmark’s health insurance underwriting margin excluding Part D before other income and
administrative expense increased 2% in 2007 to $184 million from $181 million. In 2006, margin also rose
2%. As a percentage of premium, underwriting margin increased from 17.7% in 2006 to 17.9% in 2007,
after having risen from 17.5% in 2005. These increases were primarily 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 $6 million or 20% in
2007, or 24% of health premium. They also rose $3 million to $29 million in 2006, representing 20% of
premium. American Income’s margins rose $3 million to $24 million in 2006 and $2 million to $26 million
in 2007, 36% of premium in both periods.
Annuities. Fixed and variable annuity products are sold on a limited basis by our subsidiaries.
insurance
Annuities represented 1% of Torchmark’s 2007 premium revenue and less than 2% of
underwriting margin. We no longer emphasize this segment.
ANNUITIES
Summary of Results
(Dollar amounts in thousands)
2007
2006
2005
Policy charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 20,470
$ 22,914
$ 24,929
Policy obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Required interest on reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,049
(31,666)
23,743
(28,318)
26,888
(30,092)
Net policy obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3,617)
(4,575)
(3,204)
Commissions and premium taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
119
14,631
11,133
88
15,486
10,999
49
15,504
12,349
Insurance underwriting margin before other income and
administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,337
$ 11,915
$ 12,580
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 the three periods shown in the chart above, account balances declined, resulting in reductions in
policy fees and charges. Accordingly, insurance underwriting margin for annuities (before other income
and administrative expenses) declined in each period and was $9.3 million in 2007. As a percentage of
policy charges, margins rose slightly in 2006 to 52% but fell to 46% in 2007. The 2007 decline in margins
resulted from increased acquisition costs ratios due to the unlocking of deferred acquisition costs related
to guaranteed minimum death benefit business. We expect higher amortization of acquisition costs going
forward. 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.
29
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, 2007.
Operating Expenses Selected Information
(Dollar amounts in thousands)
2007
2006
2005
Amount
% of
Prem. Amount
% of
Prem. Amount
% of
Prem.
Insurance administrative expenses:
Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 66,799
28,709
Other employee costs . . . . . . . . . . . . . . . . . . . . . . . .
44,260
Other administrative expense . . . . . . . . . . . . . . . . . .
11,513
Legal expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,271
Medicare Part D direct administrative expense . . .
2.4% $ 66,031
31,300
1.0
45,951
1.6
6,634
0.4
5,415
0.1
2.4% $ 64,339
27,953
1.1
41,878
1.7
13,511
0.2
-0-
0.2
Total insurance administrative expenses . . . . . . . .
154,552
5.5% 155,331
5.6% 147,681
2.6%
1.1
1.7
0.5
-0-
5.9%
Parent company expense . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation expense . . . . . . . . . . . . . . . . . . . . .
Expenses related to settlement of prior period
litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Option term extension expense for retiring executive . .
9,815
8,106
933
-0-
Total operating expenses, per Consolidated
7,862
6,575
-0-
-0-
9,660
-0-
14,950
568
Statements of Operations . . . . . . . . . . . . . . . . . . . $173,406
$169,768
$172,859
Insurance administrative expenses:
Increase (decrease) over prior year . . . . . . . . . . . . .
(.5)%
5.2%
4.3%
Total operating expenses:
Increase (decrease) over prior year . . . . . . . . . . . . .
2.1%
(1.8)%
14.3%
Insurance administrative expenses as a percentage of premium declined to 5.5% in 2007 from 5.6%
in 2006 and 5.9% in 2005. The decline in the 2007 ratio occurred even though legal expense rose $4.9
million. A major factor in this increase was the affirmation of an earlier jury verdict in insurance claim
litigation in the amount of $1.9 million. The increase in legal expense was offset by declines in employee
costs other than salaries, and in a $2.1 million decline in Medicare Part D direct administrative expense.
One factor in the decline in insurance administrative expense resulted from the previously-mentioned
changes implemented in Liberty’s agent compensation system. These changes resulted in reductions in
agent salaries and related employee costs of approximately $2.8 million in 2007 compared with the prior
these salary reductions could be replaced by higher deferred
period. Management believes that
acquisition costs going forward, as the compensation system changes emphasize a commission-based
agent compensation system rather than salaries. Commissions on new product sales are deferred and
amortized over the premium-paying life of the business. The Medicare Part D administrative costs were
lower in 2007 because open enrollment was still
in effect in 2006 until May 15, causing us to incur
additional administrative expense in that year. Open enrollment for the 2007 plan year was closed on
December 31, 2006. The 2006 ratio of expense to premium also declined even after including the $5
million of Medicare Part D 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.
Parent company expense rose $2.0 million or 25% in 2007. Included in 2007 expense is a one-time
charge in the amount of $1.6 million for expenses incurred related to an acquisition bid that was not
successful.
30
As noted in the Summary of Operations in this discussion, we settled litigation in connection with
Liberty’s race-distinct mortality dual/pricing litigation and its class-action cancer case in 2005. Settlement
charges and expenses for both cases were recorded in 2005 in the amount of $15 million and additional
expenses of $933 thousand were recorded in 2007. Both of these cases arose many years ago. As
previously noted, we do not consider the costs of settling litigation applicable to prior periods to be related
to current insurance operations. Stock compensation expense rose due to a higher fair value assigned to
recent grants (primarily as a result of the increase in the Torchmark stock price), and due to restricted
stock granted in late 2006 and mid-2007 for the first time in several years. 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.
Investments. The investment segment is responsible for 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 our share repurchase program in 1986, we have
used $3.6 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. 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)
2007
2006
2005
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 648,826 $ 628,746 $ 603,068
(360)
Reclassification of interest amount due to deconsolidation* . . . . . . . . . . . . . .
(264)
(454)
Adjusted investment income (per segment analysis) . . . . . . . . . . . . . . . .
648,562
628,292
602,708
Interest credited to net insurance policy liabilities:
Interest on reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(447,755)
190,255
(417,293)
179,955
(393,276)
167,987
Net required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(257,500)
(237,338)
(225,289)
Financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(67,300)
(72,191)
(53,181)
Excess investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 323,762 $ 318,763 $ 324,238
Excess investment income per diluted share . . . . . . . . . . . . . . . . . . . . . . . . . . $
3.38 $
3.15 $
3.07
Mean invested assets (at amortized cost) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,775,769 $9,324,024 $8,810,584
Average net insurance policy liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,828,161
4,496,561
4,303,655
Average debt and preferred securities (at amortized cost)
. . . . . . . . . . . . . . .
919,936
1,005,561
892,971
*
Deconsolidation of trusts liable for Trust Preferred Securities required by accounting rule FIN46R. See—Note 10—Debt in the
Notes to Consolidated Financial Statements.
31
Excess investment income increased $5 million or 2% in 2007 over the prior year. Excess investment
income declined 2% in both 2006 and 2005. On a per diluted share basis, 2007 excess investment
income rose 7% to $3.38. Per share excess investment income increased 3% in 2006 and 4% in 2005.
The largest component of excess investment income is net investment income, which rose 3% to
$649 million in 2007. It increased 4% to $628 million in 2006 from $603 million in 2005. 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)
2007 2006 2005
3.2% 4.2% 4.5%
5.8
4.8
5.5
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. In 2007, we purchased $256 million of tax-exempt municipal securities. This was another factor in
limiting the growth of net investment income relative to average assets, as the yields available on
municipal bonds are lower, but produce significant tax savings. 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 income will be
under pressure. More detailed information about investment acquisitions follows under this caption.
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
2007
Life and Health . . . . . . . . . . . . . . . . . . . . . . . . . .
Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in 2007 . . . . . . . . . . . . . . . . . . . . . . . . .
$223.3
34.2
257.5
$4,127.8
700.4
4,828.2
8%
7%
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%
5.41%
4.88
5.33
5.35%
4.85
5.28
5.31%
4.84
5.23
32
The average interest crediting rate has risen in each of the last three years. In 2001, as part of our
normal review of policy reserve assumptions, we increased the interest rate assumption 100 basis points
(1%) on policies issued after January 1, 2001. As this group of policies becomes a larger proportion of our
business, the average crediting rate will continue to increase. For more specific information on life and
health crediting rates, please refer
to Note 5—Future Policy Benefit Reserves in the Notes to
Consolidated Financial Statements.
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)
2007
2006
2005
Interest expense per Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . $67,564 $73,136 $60,934
Reclassification of interest due to deconsolidation(1)
(360)
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit from interest-rate swaps(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7,393)
(454)
(491)
(264)
-0-
Financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $67,300 $72,191 $53,181
(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)
2007
2006
2005
Interest on funded debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $53,379 $63,585 $52,322
8,532
Interest on short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
80
Other
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(360)
Reclassification of interest due to deconsolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,127
58
(264)
9,487
64
(454)
Subtotal of interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit from interest-rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
67,300
-0-
72,682
(491)
60,574
(7,393)
Financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $67,300 $72,191 $53,181
Financing costs declined $5 million or 7% in 2007. They increased 36% or $19 million in 2006. The
primary factor in the 2007 decrease, as well as the 2006 increase in financing costs, was the refinancing
in 2006 of two of our funded debt issues. Our 6¼% Senior Notes ($180 million principal amount) matured
and our 7¾% Trust Preferred Securities ($150 million redemption value) were called in the fourth quarter
of 2006. 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 excess investment income.
Partially offsetting the decline in interest on funded debt in 2007 was an increase in interest on short-term
debt. While higher short-term rates were a factor, the primary cause of the increase was a higher average
balance of our commercial paper outstanding in 2007, which rose 43% to $238 million.
33
Increased short-term rates were also a factor in the 2006 increase in financing costs, impacting us in
two 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 commitments. In the
low-interest environment experienced in the past several years,
these swaps provided us with a
considerable spread between our actual interest cost and what our fixed interest cost would have been. In
2004, short-term rates began to rise for the next two years, resulting in significant declines in the benefit
of all of our 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 reduction in positive spreads on settlements from the swaps caused financing costs to
increase $7 million in 2006. As a result of the dispositions of the swaps, our only exposure to variable
rates at December 31, 2007 was our commercial paper borrowing program, of which $202 million was
outstanding. In addition to their impact on our swaps, rising short-term rates were also the primary factor
in the $1 million increase in interest on our commercial paper borrowings in 2006. More information
concerning the debt offerings, repayments, and swaps is disclosed in Note 10—Debt in the Notes to the
Consolidated Financial Statements.
Investment Acquisitions. During calendar years 2005 through 2007, Torchmark invested almost
exclusively in investment-grade fixed-maturity securities. The following chart summarizes selected
information for fixed maturity acquisitions in the years 2005 through 2007. Investment grade corporate
securities include both bonds and trust-preferred securities (which are classified as redeemable preferred
stocks) with a diversity of issuers and industry sectors. The effective annual yield shown is the yield
calculated to the potential termination date that produces the lowest yield. This date is commonly known
as the “worst call date.” For noncallable bonds, the worst call date is always the maturity date. For
callable bonds, the worst call date is the call date that produces the lowest yield (or the maturity date, if
the yield calculated to the maturity date is lower than the yield calculated to each call date). Two different
average life calculations are shown, average life to the next call date and average life to the maturity date.
Fixed Maturity Acquisitions Selected Information
(Dollar amounts in millions)
Cost of acquisitions:
For the Year
2006
2007
2005
Investment-grade corporate securities . . . . . . . . . . . . . . . . . . . . . $1,767.8 $1,179.2 $787.4
-0-
Tax-exempt municipal securities . . . . . . . . . . . . . . . . . . . . . . . . .
110.4
Other investment-grade securities . . . . . . . . . . . . . . . . . . . . . . . .
-0-
105.0
256.4
39.4
Total fixed-maturity acquisitions . . . . . . . . . . . . . . . . . . . . $2,063.6 $1,284.2 $897.8
Effective annual yield (one year compounded*) . . . . . . . . . . . . . . .
Average life (in years, to next call) . . . . . . . . . . . . . . . . . . . . . . . . . .
Average life (in years to maturity) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average rating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.78%
19.6
32.6
A
6.72% 5.90%
13.8
24.0
A
14.6
16.4
A-
* Tax-equivalent basis, whereby the yield on tax-exempt securities is adjusted to produce a yield equivalent to
the pretax yield on taxable securities.
When yields available on acceptable-quality long-term (maturity date more than 20 years after the
acquisition date) securities are sufficient to meet our yield and spread objectives, we generally prefer to
invest in such securities because they more closely match the long-term nature of our policy liabilities.
During periods when we cannot invest in long-term securities that meet our objectives, we generally
invest in shorter-term (maturity date less than 5 years after the acquisition date) securities. We prefer to
invest primarily in bonds that are not callable (on other than a make-whole basis) prior to maturity. We
periodically invest some funds in callable bonds when the incremental yield available on such bonds
warrants doing so.
For investments in callable bonds, the actual life of the investment will depend on whether or not (and
if so, when) the issuer calls the investment prior to the maturity date. Given our investments in callable
34
bonds, the actual average life of our investments can not be known at the time of the investment. We do
know that the average life will not be less than the average life to next call and will not exceed the
average life to maturity. Data for both of these average life measures is provided in the above chart.
During 2005-2007, especially during 2005,
there have been periods when yields available on
acceptable-quality long-term non-callable securities did not meet our objectives. During such periods, we
have invested in shorter-term securities. Some of these periods were characterized by relatively flat or
inverted yield curves. During such periods, we did not have to give up much yield to invest in shorter-term
securities, and we took on less credit risk than had we invested longer-term. Prior to 2007, we generally
did not invest in securities with maturity dates more than 30 years after the acquisition date. During 2007,
we invested some funds in hybrid securities (bonds, trust preferred securities and redeemable preferred
stocks) with very long scheduled maturity dates, often exceeding 50 years. In virtually all cases, such
hybrid securities are callable many years prior to the scheduled maturity date.
As shown in the chart above, the effective annual yield and average life to maturity on funds invested
during 2005 is significantly lower than that of funds invested during 2006 and 2007. This difference is
reflective of the fact that, consistent with the investment environment and strategy described above, we
invested relatively more funds in lower yielding, shorter-term investments in 2005 than we did in 2006-
2007. Due primarily to our investments in hybrid securities as described above, the average life of funds
invested during 2007 (to both next call and maturity) is significantly higher than that of investments during
2005-2006. Given the long-term fixed-rate characteristics of our policy liabilities, we believe that
investments with average lives in excess of 20 years are appropriate.
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 often can refinance them at a lower cost. Calls increase funds available for
investment, but they can negatively affect portfolio yield if they cause us to replace higher-yielding bonds
with those available at lower prevailing yields. Issuer calls were $848 million in 2007, $229 million in 2006,
and $226 million in 2005.
As long as we continue our current investment strategy and the average yield on new investments is
less than the average yield of the portfolio and of assets disposed of, the average yield on fixed maturity
assets in the portfolio should decline. Because of the significant investable cash flow generated from
investments and operations, Torchmark will benefit if yield rates available on new investments increase.
Portfolio Analysis. Because Torchmark has recently invested almost exclusively in fixed-maturity
securities, the relative percentage of our assets invested in various types of investments varies from
industry norms. The following table presents a comparison of Torchmark’s components of invested assets
at amortized cost as of December 31, 2007 with the latest industry data.
Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock (redeemable and perpetual) . . . . . . . . . . . .
Common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Torchmark
Amount
(in millions)
%
Industry %(1)
$8,021
1,327
1
19
8
344
42
111
$9,873
81.3
13.4
0.0
0.2
0.1
3.5
0.4
1.1
75.6
2.0
2.8
10.4
0.5
3.9
3.2
1.6
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, 2007 and 2006 and for
a schedule of maturities, see Note 3—Investments in the Notes to Consolidated Financial Statements.
35
Additional information concerning the fixed-maturity portfolio is as follows.
Fixed Maturity Portfolio Selected Information
At December 31,
2007
At December 31,
2006
Average effective annual yield(1) . . . . . . . . . . . . . . . . . . . . .
Average life (in years, to next call)(2)
. . . . . . . . . . . . . . . . .
Average life (in years, to maturity)(2)
. . . . . . . . . . . . . . . . .
Effective duration (in years, to next call)(2,3) . . . . . . . . . . . .
Effective duration (in years, to maturity)(2,3) . . . . . . . . . . . .
6.96%
14.0
20.7
7.5
9.6
7.02%
10.6
16.5
6.5
8.6
(1) Tax-equivalent basis, whereby the yield on tax-exempt securities is adjusted to produce a yield equivalent to the pretax yield on
taxable securities.
(2) Torchmark calculates the average life and duration of the fixed-maturity portfolio two ways: (a) based on the next call date
which is the next call date for callable bonds and the maturity date for noncallable bonds, and (b) based on the maturity date of
all bonds, whether callable or not.
(3) 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 2007 and 2006, the fixed-maturity portfolio had a gross unrealized gain of $247 million
and $319 million, respectively. Gross unrealized losses on fixed maturities were $350 million at
December 31, 2007, compared with $90 million a year earlier. Please see Note 3—Investments in the
Notes to Consolidated Financial Statements for an analysis of unrealized investment losses.
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. 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 analyzing the financial fundamentals of each prospective issuer. We
continue to monitor the status of issuers on an ongoing basis. At December 31, 2007, approximately 94%
of
fair value were held in fixed-maturity securities. The major rating agencies
considered 92% 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, 2007.
invested assets at
Rating
Amounts
(in millions) %
AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BBB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less than B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Not rated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 751.3
472.3
3,200.0
4,099.9
525.9
112.8
63.8
-0-
8
5
35
44
6
1
1
-0-
$9,226.0
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.
36
We additionally reduce credit risk by maintaining investments in a wide range of industry sectors. The
following table presents the industry sectors that exceeded 2% of the corporate fixed-maturity portfolio at
fair value at December 31, 2007.
Industry
%
Insurance carriers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Depository institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Electric, gas, sanitation services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
8
Nondepository credit institutions (finance) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
Oil & gas extraction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
Chemicals & allied products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Food & kindred products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Security & commodity brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transportation equipment
2
Petroleum refining & related industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Media . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Otherwise, no individual
industry represented more than 2% of Torchmark’s corporate fixed
maturities.
We have no direct investment exposure to subprime or Alt-A mortgages (loans for which the credit
score was acceptable but some of the typical documentation was not provided). We have no derivatives
or any other off-balance sheet investment arrangements, as all of our investments are carried on our
Consolidated Balance Sheets. We have $115 million at fair value ($132 million book value) invested in
collateralized debt obligations (CDOs) for which the average Bloomberg Composite rating at December
31, 2007 was A. The collateral underlying these CDOs is primarily trust preferred securities issued by
banks and insurance companies, and no subprime or Alt-A mortgages are included in the collateral.
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 generally result
in the fair value of the investment portfolio exceeding the book value of the portfolio and increases in
interest rates cause the fair value to decline below the book value. However, we do not expect to realize
these unrealized gains and losses because it
is generally our investment strategy to hold these
investments to maturity. 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
or decrease in the fair value of insurance liabilities and debt due to increases or decreases 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.
37
The following table illustrates the market risk sensitivity of our interest-rate sensitive fixed-maturity
portfolio at December 31, 2007 and 2006. 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
measures the change in fair value arising from an immediate and sustained change in interest rates in
increments of 100 basis points.
Change in
Interest Rates
(in basis points)
-200
-100
0
100
200
Market Value of
Fixed-Maturity Portfolio
($ millions)
At
December 31,
2007
At
December 31,
2006
$11,188
10,132
9,226
8,445
7,765
$10,777
9,901
9,127
8,439
7,837
Realized Gains and Losses. Our life and health insurance carriers 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 operation 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, and as a result, can have a material positive or negative impact on net income. The significant
fluctuations caused by gains and losses can cause the 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, and in line with industry practice, we remove the effects of realized gains
and losses when evaluating overall insurance operating results.
38
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, 2007.
Analysis of After-tax Realized Gains (Losses)
(Amounts in thousands, except for per share data)
Year Ended December 31,
2006
Amount Per Share Amount Per Share Amount Per Share
2007
2005
Realized gains (losses), net of tax, from:
Investment sales and calls . . . . . . . . . . .
Loss on redemption of debt . . . . . . . . . . .
Writedown of fixed maturities . . . . . . . . .
Valuation of interest rate swaps . . . . . . .
Spread on interest rate swaps* . . . . . . . .
$ 9,075
-0-
(7,298)
-0-
-0-
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,777
$ .10
-0-
(.08)
-0-
-0-
$ .02
$ (787)
(3,830)
-0-
(2,956)
319
$(7,254)
$(.01)
(.04)
-0-
(.03)
.01
$(.07)
$
608
-0-
-0-
(5,388)
4,805
$
25
$ .01
-0-
-0-
(.05)
.04
$ -0-
*
The reduction in interest cost from swapping fixed-rate obligations to floating rate.
In 2007, we wrote down certain non-financial institution 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 $11 million ($7 million after tax). At the time of impairment, these securities were carried at a value of
$48 million. Later during 2007, a portion of these securities were sold for proceeds of $19 million, with the
remainder held at December 31, 2007 valued at $18 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 years prior to 2007, we entered into interest-rate swap agreements, swapping our fixed-rate
commitments on our long-term debt for floating-rate commitments. Accounting rules required us to value
our interest-rate swaps at their fair value at the end of each accounting period, recording changes as a
component of “Realized investment gains (losses). Because the fair values of
these instruments
fluctuated with interest rates in financial markets and diminished with time, we never considered these
fluctuations in managing ongoing operations. As explained earlier under the caption Investments, 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 the spreads on our swaps to become unprofitable in the future.
Therefore, we sold two of our swaps in the third quarter of 2005 and the remaining two swaps in the
second quarter of 2006, so that no swaps were held after June, 2006. Complete information on our
swaps, including the accounting policies, is found in Note 1—Significant Accounting Policies and in
Note 10—Debt in the Notes to Consolidated Financial Statements.
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. An actuarially computed reserve is carried in the financial statements for these future benefits.
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 exceed net income. 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.
Cash flows provided from operations were $850 million in 2007, $865 million in 2006, and $858
million in 2005. In addition, we received $1.3 billion in investment maturities, repayments, and calls in
2007, adding to available cash flows. Such repayments were $606 million in 2006 and $473 million in
2005.
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 $131 million at year-end 2007 and $173 million at year-
end 2006. 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 $9.2 billion at December 31,
2007. 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 both December 31, 2007 and
2006. The Capital Trust liable for these securities is the legal entity which is responsible for the securities
and facilitates the payment of dividends to shareholders. The trust is an off-balance sheet arrangement
which we are required to deconsolidate in accordance with GAAP rules. Deconsolidation is required
because the Capital Trust is considered to be a variable interest entity 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
they are represented by Torchmark’s 7.1% Junior Subordinated
Consolidated Balance Sheets,
Debentures due to the trust. These Junior Subordinated Debentures were a Torchmark liability of $124
million par and book value at both December 31, 2007 and 2006. These securities are indicated as a
capital resource to us under the caption Capital Resources in this report. The 7.1% preferred dividends
40
due to the preferred shareholders are funded by our 7.1% interest payment on our debt to the trusts. As
described in Note 14—Commitments and Contingencies in the Notes to Consolidated Financial
Statements, we have guaranteed the performance of the Capital Trust to meet its 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 Sheets.
As of December 31, 2007, 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, were guarantees of the performance of consolidated subsidiaries, as disclosed
in Note 14—Commitments and Contingencies.
The following table presents information about future payments under our contractual obligations for
the selected periods as of December 31, 2007.
(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 . . . . . . . . . . $
Long-term debt—interest(1) . . . . . . . . .
Capital leases . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . .
Purchase obligations . . . . . . . . . . . . . .
Pension obligations(2)
. . . . . . . . . . . . .
Uncertain tax positions(3) . . . . . . . . . . .
Future insurance obligations(4) . . . . . .
721
9
-0-
-0-
10
54
15
9,382
$
733
726
-0-
12
10
138
15
42,137
$
-0-
53
-0-
3
10
12
6
1,493
$
99
95
-0-
4
-0-
21
9
2,857
$
-0-
89
-0-
3
-0-
26
-0-
2,666
$
634
489
-0-
2
-0-
79
-0-
35,121
Total
. . . . . . . . . . . . . . . . . . . . . . . . . $10,191
$43,771
$1,577
$3,085
$2,784
$36,325
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, 2007,
these pension obligations were $224 million, but there were also assets of $170 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) Uncertain tax positions include $8.6 million of tax liability and $6.5 million of accrued interest. See Note 8—Income Taxes in the
Notes to Consolidated Financial Statements for more information.
(4) Future insurance obligations consist primarily of estimated future contingent benefit payments on policies in force and separate
account obligations at December 31, 2007. 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 billion at December 31, 2007, along with future
premiums and investment income, will be sufficient to fund all future insurance obligations.
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.
41
The carrying value of the funded debt was $722 million at December 31, 2007, compared with $721
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 and the securities
repaid in 2006, including the uses of proceeds and sources of 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 in 2005 and 2006 with no meaningful change in long-term rates, these swaps
became less profitable. Because we believed that the swap settlements could have possibly become
unprofitable, we disposed of these agreements during 2005 and 2006 and held no swap agreements after
June 2006. Information about the history of our swaps 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.
We believe that the most beneficial use of our excess cash flow could be a strategic acquisition.
Absent an acquisition, we believe that the best use of excess cash is to buy Company stock. As
previously mentioned, our Board reaffirmed its continued authorization of the stock repurchase program
in July, 2007 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 52 million shares at a total cost of $2.3 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 over 6.1 million shares at a cost of $402
million in 2007 with excess cash flow. If the free cash flow used for the repurchase of our common stock
had alternatively been invested in corporate bonds, an estimated $11.0 million of additional investment
income, after tax, would have resulted and net income per diluted share would have increased 6% to
$5.42. Because share purchases were made, actual net income per share was $5.50, an increase of 7%.
We intend to continue the repurchase of our common shares when prices are favorable. The majority of
purchased shares are retired each year.
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 primarily from changes in interest rates in financial
markets. While SFAS 115 requires invested assets to be revalued, accounting rules do not permit
42
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 our 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, 2007 At December 31, 2006 At December 31, 2005
GAAP
Effect of
SFAS 115*
Fixed maturities (millions) . . . . . . . . . . . . . $ 9,226
3,159
Deferred acquisition costs (millions)
. . . .
15,241
Total assets (millions) . . . . . . . . . . . . . . . .
202
Short-term debt (millions) . . . . . . . . . . . . .
Long-term debt (millions) ** . . . . . . . . . . .
722
3,325
Shareholders’ equity (millions) . . . . . . . . .
$(103)
8
(95)
-0-
-0-
(62)
GAAP
$ 9,127
2,956
14,980
170
721
3,459
Effect of
SFAS 115*
$ 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
Book value per diluted share . . . . . . . . . .
Debt to capitalization *** . . . . . . . . . . . . . .
35.60
21.7%
(.66)
.3%
34.68
20.5%
1.43
(.7)%
32.91
20.6%
2.50
(1.3)%
Diluted shares outstanding
(thousands) . . . . . . . . . . . . . . . . . . . . . .
93,383
Actual shares outstanding
(thousands) . . . . . . . . . . . . . . . . . . . . . .
92,175
99,755
98,115
104,303
103,569
*
**
Amount added to (deducted from) comprehensive income to produce the stated GAAP item
Includes Torchmark’s 7.1% Junior Subordinated Debentures in both 2007 and 2006 in the amount of $124 million and its 7 3⁄4%
Junior Subordinated Debentures in the amount of $155 million in 2005.
*** Torchmark’s debt covenants require that the effect of SFAS 115 be removed to determine this ratio.
As discussed under the caption New Unadopted Accounting Policies in this report, the FASB has
issued a new Statement offering an option which, if elected, would permit us to value our interest-bearing
policy liabilities and debt at fair value in our Consolidated Balance Sheets. However, unlike current
accounting rules which permit us to account for changes in our available-for-sale bond portfolio through
other comprehensive income, the new rule requires such changes to be recorded in earnings. Because
both the size and duration of the investment portfolio do not match those attributes of our policyholder
the impact on earnings could be very significant and volatile, causing reported
liabilities and debt,
earnings not to be reflective of core results. Therefore, we will not elect this option.
Torchmark’s ratio of earnings before interest and taxes to interest requirements (times interest
earned) was 12.8 times in 2007, compared with 11.6 times in 2006, and 13.0 times in 2005. A discussion
of our interest expense is included in the discussion of financing costs under the caption Investments in
this report.
Credit Ratings. The credit quality of Torchmark’s debt instruments and capital securities are rated
by various rating agencies. During 2007, Standard & Poor’s lowered its credit rating on Torchmark’s
outstanding debt from A+ to A, and lowered the rating of its preferred stock from A- to BBB+. The credit
rating change was attributed to weaker agent productivity, recruiting, and retention, as well as changes in
43
direct response strategy, all of which has contributed to lower new sales. 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, 2007.
. . . . . . . . . . . . . . . . . . . . . .
Commercial Paper
Funded Debt
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . .
A-1
A
BBB+
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 2007, Standard & Poor’s lowered its financial strength rating of United Investors to A from
A+ and the ratings of Liberty, Globe, United American and American Income from AA to AA-, as a result
of an expected lag in new business sales in the short term. 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, 2007.
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 financial strength rating category 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 minus sign (-) shows the relative standing within the major rating category. 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.
Information regarding related party transactions is found in Note 15—Related Party Transactions in
the Notes to Consolidated Financial Statements.
TRANSACTIONS WITH RELATED PARTIES
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
damage litigation may have the potential
for significant adverse results since punitive damages in
Alabama are based upon the compensatory damages (including mental anguish) awarded and the
discretion of the jury in awarding compensatory damages is not precisely defined. Additionally, it should
be noted that our subsidiaries actively market insurance in the State of Mississippi, a jurisdiction which is
is
nationally recognized for large punitive damage verdicts. Bespeaking caution is the fact
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
any given case because of the unpredictable nature of this type of litigation. Based upon information
that
it
44
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 certain new standards applicable to Torchmark, effective in future periods:
Fair Value Measurements: Statement No. 157, Fair Value Measurements (SFAS 157), clarifies
the definition of fair value, establishes a single framework or a hierarchy for measuring fair value, and
expands disclosures about fair value measurements. It does not change which assets or liabilities are
measured at fair value. 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 the calendar year and interim periods of 2008, with
its provisions applied prospectively. Please refer to the discussion of Valuation of Fixed Maturities under
the caption Critical Accounting Policies in this report for more information related to this new unadopted
Statement.
Fair Value Option: Statement No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159), 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. If elected, it is effective as of January 1,
2008.
This Statement would provide us with the opportunity to carry our interest-bearing policy liabilities
and debt as well as our invested assets at market value, with changes reflected in earnings. The size of
this unrealized adjustment to earnings in relation to net income each period could be considerable and
very volatile, causing our earnings not to be reflective of core results, historical patterns, or predictive of
future earnings trends. Therefore, we will not elect to adopt this Statement.
Business Combinations: Statement No. 141(R), Business Combinations (SFAS 141R), replaces
the previous accounting guidance for the acquisition of other companies. It retains the purchase method
of accounting and the current guidance with respect to the accounting for indefinite-lived intangibles and
goodwill. However, the new Statement provides certain significant differences, most notably that all
assets and liabilities (including contingent liabilities) are measured at their fair value as of the acquisition
date rather than a cost allocation approach as previously required. Additionally, all expenses of the
acquisition are charged off as incurred rather than capitalized. This Statement is effective for Torchmark
as of January 1, 2009 in the event there is an acquisition dated subsequent to that date.
Noncontrolling Interests: Statement No. 160, Noncontrolling Interests in Consolidated Financial
Statements - an amendment of ARB No. 51 (SFAS 160), changes the accounting for noncontrolling
interests (also known as minority interests). At this time, Torchmark has no noncontrolling interests.
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. A list of the significant assumptions used to calculate the
liability for future policy benefits is reported in Note 5—Future Policy Benefit Reserves.
45
Approximately 68% of our liabilities for future policy benefits at December 31, 2007 are accounted for
under the provisions of Statement of Financial Accounting Standards No. 60, Accounting and Reporting
by Insurance Enterprises (SFAS 60), under which the liability is the present value of future benefits less
the present value of the portion of the gross premium required to pay for such benefits. The assumptions
used in estimating the future benefits for this portion of business are set at the time of contract issue.
Under SFAS 60, these assumptions are “locked in” and are not revised for the lifetime of the contracts,
except where there is a premium deficiency, as defined in Note 1—Significant Accounting Policies in the
Notes to Consolidated Financial Statements under the caption Future Policy Benefits. Otherwise,
variability in the accrual of policy reserve liabilities after policy issuance is caused only by variability of the
inventory of in force policies. A premium deficiency event for Torchmark’s SFAS 60 business is very rare,
and did not occur during the three years ended December 31, 2007.
The remaining portion of liabilities for future policy benefits pertains to business reported under
Statement of Financial Accounting Standards No. 97, Accounting and Reporting by Insurance Enterprises
for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments
(SFAS 97). Under SFAS 97, the recorded liability is the fund balance attributable to the benefit of
policyholders as determined by the policy contract at the financial statement date. Accordingly, there are
no assumptions used in the determination of the SFAS 97 future policy benefit liability.
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.
Approximately 94% of our recorded amounts for deferred acquisition costs at December 31, 2007 are
accounted for under the provisions of SFAS 60 for which deferred acquisition costs are amortized over
the premium-paying period in proportion to the present value of actual historic and estimated future gross
premiums. The projection assumptions for SFAS 60 business are set at the time of contract issue. Under
SFAS 60, these assumptions are “locked-in” at that time and, except where there is a loss recognition
issue, are not revised for the lifetime of
the contracts. Absent a premium deficiency, variability in
amortization after policy issuance is caused only by variability in premium volume. We have not recorded
a deferred acquisition cost loss recognition event for our SFAS 60 assets for any period in the three years
ended December 31, 2007.
The remaining portion of deferred acquisition costs pertain to business reported under SFAS 97 for
which deferred acquisition costs are amortized over the estimated lives of the contracts in proportion to
actual and estimated future gross profits. These contracts are not subject to lock-in. Under SFAS 97, the
assumptions must be updated when actual experience or other evidence suggests that earlier estimates
should be revised. For the three years ended December 31, 2007, revisions related to our SFAS 97
assets have not had a material impact on the amortization of deferred acquisition costs, and based on the
nature of our operations, are not expected to have a material impact on operations for the foreseeable
future.
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
the litigation
patterns. Factors involved include medical
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
trend rates and medical cost
inflation,
46
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. At this time,
we do not expect any change in estimate to have a material
impact on earnings or financial position
consistent with our historical experience.
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.
Valuation of Fixed Maturities: We hold a substantial
investment in high-quality fixed maturities to
provide for the funding of our future policy contractual obligations over long periods of time. While these
securities are generally expected to be held to maturity, they are classified as available for sale and are
sold from time to time, primarily to maintain our investment quality and diversification standards. We
report this portfolio at fair value. Fair value is the price that we would expect to receive upon sale of the
asset in an orderly transaction. The fair value of the fixed-maturity portfolio is primarily affected by
changes in interest rates in financial markets, having a greater impact on longer-term maturities. Because
of the size of our fixed-maturity portfolio, small changes in rates can have a significant effect on the
portfolio and the reported financial position of the Company. This impact is disclosed in 100 basis point
increments under the caption Market Risk Sensitivity in this report. However, as discussed under the
caption Financial Condition in this report, we believe these unrealized fluctuations in value have no
meaningful impact on our actual financial condition and, as such, we remove them from consideration
when viewing our financial position and financial ratios.
The fair value of approximately 1.6% of our fixed-maturity portfolio is established by quoted prices for
these assets in an active market, considered level 1 inputs in the hierarchy described by the recently
issued but unadopted SFAS 157. The fair value of approximately 95.2% of the portfolio is determined by
observable inputs other than direct quotes, considered as level 2 inputs by SFAS 157. These inputs
generally include quoted closing market prices for similar assets in active markets, such quotes in inactive
markets, or interest rates and yield curves observable under commonly quoted criteria. The remaining
3.2% of the portfolio is valued by unobservable inputs, or level 3 inputs in accordance with SFAS 157.
Unobservable inputs include data for which there is limited market information causing us to rely on
values derived by independent brokers or
internally-developed assumptions. These values are
established based on the best information available to us or the other parties.
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 other than temporary
impairment charge is recorded only when a security 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
investments are disclosed in Note 1—Significant Accounting Policies and
impairments of
47
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. At December 31, 2007, our net liability under these plans was $54 million.
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. Small changes in assumptions may cause material differences in reported results for these
plans. 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. Our discount rate, rate of
return on assets, and projected salary increase assumptions are disclosed and the criteria used to
determine those assumptions are discussed in Note 9—Postretirement Benefits in the Notes to
Consolidated Financial Statements. The assumptions are reviewed annually and revised, if necessary,
based on more current information available to us. Note 9 also contains information about pension plan
assets, investment policies, 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.
Forward-looking statements are based upon estimates and assumptions that are subject
to
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;
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;
48
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 37 of this report.
49
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 2007 and 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for each of the three years in the period ended
Page
51
52
December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53
Consolidated Statements of Comprehensive Income for each of the three years in the period
ended December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended
December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54
55
56
57
50
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, 2007 and 2006, 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, 2007. 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.
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, 2007 and 2006, and the results of
their operations and their cash flows for each of the three years in the period ended December 31, 2007,
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), Torchmark’s internal control over financial reporting as of December 31, 2007,
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, 2008
expressed an unqualified opinion on Torchmark’s internal control over financial reporting.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 28, 2008
51
TORCHMARK CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands except per share data)
Assets:
Investments:
Fixed maturities—available for sale, at fair value (amortized cost: 2007—
December 31,
2007
2006
$9,329,149; 2006—$8,897,401) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,226,045 $ 9,126,784
41,245
328,891
49,681
156,671
Equity securities, at fair value (cost: 2007—$18,776; 2006—$40,105) . . . .
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,295
344,349
69,290
111,220
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,772,199
9,703,272
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred acquisition costs and value of insurance purchased . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Separate account assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,098
172,783
96,750
3,159,051
423,519
173,833
1,423,195
16,716
168,118
78,809
2,955,842
378,436
180,540
1,498,622
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,241,428 $14,980,355
Liabilities:
Future policy benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,958,983 $ 7,456,423
Unearned and advance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
88,039
243,346
Policy claims and other benefits payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
90,671
Other policyholders’ funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
86,714
256,462
89,958
Total policy liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,392,117
7,878,479
Deferred and accrued income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt (estimated fair value: 2007—$655,543; 2006—$676,281) . . .
Due to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Separate account liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
966,008
210,990
202,058
598,012
124,421
1,423,195
1,010,618
241,749
169,736
597,537
124,421
1,498,622
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,916,801 11,521,162
Shareholders’ equity:
Preferred stock, par value $1 per share—Authorized 5,000,000 shares;
outstanding:
-0- in 2007 and in 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, par value $1 per share—Authorized 320,000,000 shares;
outstanding: (2007—94,874,748 issued, less 2,699,333 held in treasury
and 2006—99,874,748 issued, less 1,760,121 held in treasury) . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
94,875
481,228
(80,938)
3,003,152
(173,690)
99,875
492,333
140,097
2,827,287
(100,399)
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,324,627
3,459,193
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . $15,241,428 $14,980,355
See accompanying Notes to Consolidated Financial Statements.
52
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
Year Ended December 31,
2006
2007
2005
Revenue:
Life premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,569,964 $1,524,267 $1,468,288
1,014,857
Health premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,929
Other premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,236,797
20,470
1,237,532
22,914
Total premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,827,231
2,784,713
2,508,074
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized investment gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
648,826
2,734
7,906
628,746
(10,767)
18,486
603,068
280
14,488
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,486,697
3,421,178
3,125,910
Benefits and expenses:
Life policyholder benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Health policyholder benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other policyholder benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,039,278
835,101
28,049
1,005,771
834,017
23,743
966,093
668,205
26,888
Total policyholder benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,902,428
1,863,531
1,661,186
Amortization of deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commissions and premium taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
391,011
155,483
173,406
67,564
377,490
163,683
169,768
73,136
349,959
149,451
172,859
60,934
Total benefits and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,689,892
2,647,608
2,394,389
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
796,805
773,570
731,521
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(269,270)
(254,939)
(236,131)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 527,535 $ 518,631 $ 495,390
Basic net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5.59 $
5.20 $
4.73
Diluted net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5.50 $
5.13 $
4.68
Dividends declared per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
.52 $
.50 $
.44
See accompanying Notes to Consolidated Financial Statements.
53
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Year Ended December 31,
2006
2007
2005
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 527,535 $ 518,631 $ 495,390
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
net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustment for amortization of (discount) and
(305,635)
(208,344)
(229,881)
(760)
6,927
(778)
premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . .
Foreign exchange adjustment on securities marked to market
(7,572)
(17,141)
4,615
68
4,768
(3,087)
Unrealized gains (losses) on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(331,108)
(196,734)
(228,978)
Unrealized gains (losses) on other investments . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
896
Unrealized gains (losses), adjustment to deferred acquisition costs . . . . . . .
19,148
12,374
14,268
Total unrealized investment gains (losses) . . . . . . . . . . . . . . . . . . . . . . .
(311,960)
(184,360)
(213,814)
Less application taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
109,186
64,525
74,839
Unrealized gains (losses), net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(202,774)
(119,835)
(138,975)
Foreign exchange translation adjustments, other than securities, net of tax of
$(3,244), $125, and $(1,155) during 2007, 2006, and 2005, respectively . .
16,083
(237)
2,143
Pension adjustments:
Adoption of Supplemental Executive Retirement Plan . . . . . . . . . . . . . . . . . .
Amortization of pension costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Experience gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(15,419)
2,692
(40,109)
Pension adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(52,836)
Less applicable taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,492
Pension adjustments, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(34,344)
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(221,035)
(120,072)
(136,832)
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 306,500 $ 398,559 $ 358,558
See accompanying Notes to Consolidated Financial Statements.
54
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
$ -0-
$108,784
$484,886
$ 405,916
$2,462,513 $ (42,255)
$3,419,844
(136,832)
495,390
(45,865)
(94,597)
(195,889)
(554,946)
306,865
218,880
358,558
(45,865)
(554,946)
253,802
-0-
1,375
91
(4,000)
41,443
(18,991)
1,375
Year Ended December 31, 2005
Balance at January 1, 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,
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)
(6,718)
(256,721)
(344,861)
1,594
28,170
286,154
(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
Year Ended December 31, 2007
Comprehensive income . . . . . .
Common dividends declared
($0.52 a share)
. . . . . . . . . . .
Acquisition of treasury stock . .
Stock-based compensation . . .
Exercise of stock options . . . . .
Retirement of treasury stock . .
Adoption of FIN 48 (Notes
1,8) . . . . . . . . . . . . . . . . . . . . .
Balance at December 31,
7,479
6,460
(25,044)
(5,000)
(221,035)
527,535
(48,810)
(13,385)
(291,808)
2,333
(451,791)
627
56,021
321,852
306,500
(48,810)
(451,791)
8,106
49,096
-0-
2,333
2007 . . . . . . . . . . . . . . . . . .
$ -0-
$ 94,875
$481,228
$ (80,938)
$3,003,152 $(173,690)
$3,324,627
See accompanying Notes to Consolidated Financial Statements.
55
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended December 31,
2006
2007
2005
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to cash provided from operations:
527,535 $
518,631 $ 495,390
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 . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
412,751
11,078
(566,396)
391,011
94,009
(2,734)
(17,257)
430,087
(16,702)
(552,536)
377,490
76,502
11,258
20,571
379,151
(8,117)
(519,767)
349,959
131,072
7,112
22,848
Cash provided from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
849,997
865,301
857,648
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
313,576
1,345,794
19,332
7,425
183,176
605,824
3,499
25,058
78,018
472,668
-0-
6,820
Total investments sold or matured . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,686,127
817,557
557,506
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 . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of DMAD (Note 1)
(2,063,648)
-0-
(15,458)
(4,694)
(2,083,800)
45,451
(57,810)
(24,162)
6,089
(27,369)
(47,122)
(1,284,181)
-0-
(12,062)
(1,737)
(1,297,980)
(38,361)
54,491
(7,665)
6,311
(54,954)
-0-
(897,823)
(15,842)
(11,849)
(9,345)
(934,859)
(30,098)
(40,810)
(3,447)
427
(47,677)
-0-
Cash used for investment activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(502,596)
(520,601)
(498,958)
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 . . . . . . . . . . . . . .
42,636
(49,581)
21,451
(48,095)
217,257
(46,346)
-0-
-0-
-0-
-0-
-0-
32,322
6,460
(451,791)
73,200
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
Cash provided from (used for) financing activities . . . . . . . . . . . . . . . . . . . . . .
(346,754)
(347,567)
(349,853)
Effect of foreign exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,735
3,382
16,716
286
(191)
(2,581)
19,297
8,646
10,651
Cash at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
20,098 $
16,716 $ 19,297
See accompanying Notes to Consolidated Financial Statements.
56
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 intercompany accounts and transactions have been eliminated in
consolidation.
Torchmark accounts for its variable interest entities under Financial Accounting Standards Board (FASB)
Interpretation 46(R), Consolidation of Variable-Interest Entities, an interpretation of ARB No. 51 (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 trust that is liable for Torchmark’s Trust Preferred Securities meets the
definition of a VIE. However, Torchmark is not the primary beneficiary of this entity because its interest is not
variable. Therefore, Torchmark is not permitted to consolidate its interest, even though it owns 100% of the
voting equity of the Trust and guarantees its performance. For this reason, Torchmark reports its 7.1% Junior
Subordinated Debentures due to the Trust as “Due to Affiliates” each period at its carrying value. However,
Torchmark consolidates the trust 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
line method. Short-term
less allowances for depreciation. Depreciation is calculated on the straight
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 accounts are
credited to the separate accounts and have no effect on Torchmark’s net income. Investment income
attributable to all other insurance policies and products is included in Torchmark’s net investment income.
Net investment income for the years ended December 31, 2007, 2006, and 2005, included $448 million,
$417 million, and $393 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 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
(FSP 115-1 and 124-1), which superseded guidance developed by the Emerging Issues Task Force in
their consensus Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments (EITF 03-1), with respect to the evaluation of investments for other-than-temporary
impairment. FSP 115-1 and 124-1 was effective for Torchmark as of January 1, 2006. This guidance
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
retained a three-step evaluation process for impaired securities as indicated by EITF 03-1, only revising
procedures for determining if a security’s impairment was other-than-temporary. The new guidance
retained such procedures in effect prior to the issuance of EITF 03-1, which was historically utilized by
Torchmark in evaluating other-than-temporary impairment. Certain disclosures called for by EITF 03-1
were maintained, and appear in Note 3—Investments. At
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 FSP 115-1 and 124-1, the written-down security
will be amortized and revenue recognized in accordance with estimated future cash flows.
the present
Derivatives: Torchmark accounts for derivative instruments in accordance with Statement of Financial
Accounting Standards, Accounting for Derivative Instruments and Hedging Activities, (SFAS 133) as
amended. Torchmark’s derivatives have historically consisted of
interest-rate swaps, and when
outstanding are carried at fair value in the consolidated financial statements. However, no interest-rate
swaps were outstanding after June, 2006. Fluctuations in the values of these instruments 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.
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.
Hybrid Financial
Instruments: Statement No. 155, Accounting for Certain Hybrid Financial
Instruments, (SFAS 155), was adopted by Torchmark effective January 1, 2007. It extended the scope of
SFAS 133 to include certain securitized financial assets. Assets affected included 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. Because Torchmark
has negligible investments in affected securities, the impact of adoption was immaterial.
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 in active markets, quotes in inactive markets, or interest rates
and yield curves observable under commonly quoted criteria. Approximately 98% of the fixed maturity
portfolio is valued based on these methods. 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.
Recognition of Premium Revenue and Related Expenses: Premium income for traditional
long-
duration life and health insurance products is recognized when due from the policyholder. Premiums for
short-duration health contracts are recognized as revenue over the contract period in proportion to the
insurance protection provided. Profits for
life insurance contracts as defined by
Statement of Financial Accounting Standards No. 97, Accounting and Reporting by Insurance Enterprises
limited-payment
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments
(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 $52 million, $54 million, and $57 million for the years ended
December 31, 2007, 2006, and 2005, respectively. Other premium includes annuity policy charges for the
years ended December 31, 2007, 2006, and 2005, of $20 million, $23 million, and $25 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, approximately 68% of total future policy benefits, 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. Once established, assumptions for
these products 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 that existing contract liabilities, together with the
present value of future gross premiums, will not be sufficient to cover the present value of future benefits
and to recover unamortized acquisition costs, then a premium deficiency exists. Such a deficiency would
be recognized immediately by a charge to earnings and either a reduction of unamortized acquisition
costs or an increase in the liability for future policy benefits. From that point forward the liability for future
policy benefits would be based on the revised assumptions.
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. For all other products,
amortization assumptions are generally not revised once established. Deferred acquisition costs are
subject to periodic recoverability and loss recognition testing to determine if there is a premium deficiency.
These tests ensure that the present value of future contract-related cash flows will support the capitalized
deferred acquisition cost asset. These cash 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, the deficiency would be recognized by a charge to earnings and either a
reduction of unamortized acquisition costs or an increase in the liability for future benefits, as described
under the caption Future Policy Benefits.
As of January 1, 2007, Torchmark adopted 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
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
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 (SFAS 97). The adoption of
SOP 05-1 had no material impact on Torchmark’s financial position or results of operations.
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 contract holders. 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.
The liability for these minimum guarantees is determined each period end by estimating the expected
the projected account balance using actuarial methods and
value of death benefits in excess of
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
liability balance with a related charge or credit to benefit
revised, Torchmark adjusts the additional
expense. At December 31, 2007,
this liability was $1.1 million and at December 31, 2006 was
$2.6 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
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.
Torchmark adopted and implemented Financial Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48), on January 1, 2007. This
interpretation 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. The impact of the adoption of FIN 48 is described in Note 8 - Income Taxes.
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 $131 million
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
respectively. Accumulated depreciation was
and $112 million at December 31, 2007 and 2006,
$82 million at year end 2007 and $83 million at the end of 2006. Depreciation expense was $4.3 million in
2007, $5.2 million in 2006, and $4.8 million in 2005. Torchmark has constructed 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. As of December 31, 2007, the Company has spent approximately $19 million on the building and
land, and approximately $3 million on equipment. The facility was substantially complete as of December,
2007. Subsidiary Liberty National Life Insurance Company (Liberty) is in the process of selling its agency
office buildings. In 2007, 21 buildings were sold for gross proceeds of $6.4 million, recording a realized
gain of $4.3 million. 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 obligation, as the time at which any
obligation could be settled is not known. Therefore, there is insufficient information to estimate a fair value.
Low-Income Housing Tax Credit Interests: As of December 31, 2007, Torchmark had approximately
$136 million in limited partnerships that provide low-income housing tax credits and other related Federal
income tax and state premium tax benefits to Torchmark. The carrying value of these entities was $143
million at December 31, 2006. 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 accrued during the year, net of related amortization of the investment, are recorded in
“Income tax expense.” The premium tax benefits, net of the related amortization, reduce “Commissions
and premium taxes.” At December 31, 2007, $103 million of the investment is included in “Other assets”
with the remaining $33 million included in “Other invested assets.” Any unpaid commitments to invest are
recorded in “Other liabilities.”
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 2005 through 2007. The tests
involve breaking down the Company’s carrying value of each of
the components of Torchmark’s
segments,
including the portion of goodwill assigned to each component. The fair value of each
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.
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 in a cash transaction. 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 Globe’s direct response insurance business that is distributed through mailed coupon packets and
publication inserts. The purchase added approximately $45 million of goodwill and $2 million of other
assets to Torchmark as of the date of purchase. As a result of the transaction, Torchmark’s goodwill
increased from the unamortized January 1, 2005 balance of $378 million to $424 million at December 31,
2007.
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: 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
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
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.”
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 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 2007, Torchmark incurred $933 thousand additional costs in connection with its race-distinct
litigation which was settled in 2005. Also in 2007, the Company received $515 thousand in additional
settlement proceeds from the WorldCom litigation mentioned above.
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:
Other assets . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . .
Deferred and accrued
income taxes . . . . . . . . . . .
Accumulated other
comprehensive income . .
Shareholders’ equity . . . . . .
Before Application
of Statement 158 Adjustments
After Application
of Statement 158
$ 192,623
236,214
$(12,083)
1,632
$ 180,540
237,846
1,015,418
(4,800)
1,010,618
149,012
3,468,108
(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
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
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.
SFAS 123R provided for two alternative methods of adoption: the “modified retrospective” method
and the “modified prospective” method. While the modified retrospective method permitted restatement of
prior periods for comparability, Torchmark elected to apply the modified prospective method. The
modified prospective method called 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 . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of stock-based compensation, fair value method, net of tax benefit of $19,319 . . . . . . . . . .
Pro forma net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share:
Basic—as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic—pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted—as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted—pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the year
ended
December 31,
2005
$495,390
635
(35,952)
$460,073
$
$
$
$
4.73
4.39
4.68
4.34
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 2005 through 2007
is as follows:
Volatility factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12.0% 12.4% 14.8%
0.8% 0.8% 0.8%
4.64
4.61
3.90
4.7% 4.5% 3.8%
2007
2006
2005
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) and
the 2007 Long-Term Compensation Plan (2007 Plan), involving grants made in the years 2005 through
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
2007, were determined based on the simplified method as permitted by Staff Accounting Bulletins 107.
This method was used because the 2005 and 2007 Plans limited grants to a maximum contract term of
seven years, and Torchmark had no previous experience with seven-year contract terms. Prior to 2005,
substantially all grants contained ten-year terms. Because a large portion of these grants vest over a
three-year period, the Company still does not have sufficient exercise history to determine an appropriate
expected term on these grants. 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:
Increase (Decrease)
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)
* No stock option expense was capitalized.
Torchmark management views all 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 has had no impact on Torchmark’s net income since adoption.
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.
64
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,
2005
2006
2007
Shareholders’ Equity
At December 31,
2006
2007
Life insurance subsidiaries . . . . . . . . . . . . . . $428,287 $417,115 $420,355 $1,070,096 $1,164,150
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
have adopted the National Association of
(NAIC) statutory accounting
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 states of domicile for Torchmark’s life insurance companies that affect statutory surplus.
Insurance Commissioners’
65
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, 2007 and 2006 is as follows:
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Amount
per the
Balance
Sheet
% of
Total Fixed
Maturities
2007:
Fixed maturities available for sale:
Bonds:
U.S. Government direct obligations
and agencies . . . . . . . . . . . . . . . . . $
18,189
$
463
$
(1) $
18,651 $
18,651
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 . . . . . . .
Total fixed maturities . . . . . . . . . . . . .
Equity securities:
Common stocks:
Banks and insurance companies . . .
Industrial and all others . . . . . . . . . . .
Non-redeemable preferred stocks . . . .
Total equity securities . . . . . . . . . . . .
Total fixed maturities and equity
233,631
14,393
32,322
268,969
9,348
729,751
6,540,542
173,567
1,308,437
9,329,149
3,997
1,287
1,724
364
1,641
28,689
176,911
3,442
27,958
246,476
(844)
-0-
236,784
15,680
236,784
15,680
-0-
34,046
34,046
(7,013)
(79)
(8,359)
(202,325)
(17,375)
(113,584)
(349,580)
262,320
10,910
750,081
6,515,128
159,634
1,222,811
9,226,045
262,320
10,910
750,081
6,515,128
159,634
1,222,811
9,226,045
776
-0-
18,000
18,776
263
2
2,800
3,065
-0-
-0-
(546)
(546)
1,039
2
20,254
21,295
1,039
2
20,254
21,295
securities . . . . . . . . . . . . . . . . . . . . .
9,347,925
249,541
(350,126)
9,247,340
9,247,340
2006:
Fixed maturities available for sale:
Bonds:
U.S. Government direct obligations
and agencies . . . . . . . . . . . . . . . . . $
21,232
$
499
$
(31) $
21,700 $
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 . . . . . . .
Total fixed maturities . . . . . . . . . . . . .
Equity securities:
Common stocks:
Banks and insurance companies . . .
Industrial and all others . . . . . . . . . . .
Non-redeemable preferred stocks . . . .
Total equity securities . . . . . . . . . . . .
Total fixed maturities and equity
347,555
18,748
49,544
39,189
9,746
684,001
6,151,189
113,464
1,462,733
8,897,401
1,311
1,227
1,180
758
1,674
34,689
218,324
5,338
53,993
318,993
(4,936)
-0-
343,930
19,975
343,930
19,975
-0-
50,724
50,724
(56)
(9)
(3,431)
(71,486)
(4)
(9,657)
(89,610)
39,891
11,411
715,259
6,298,027
118,798
1,507,069
9,126,784
39,891
11,411
715,259
6,298,027
118,798
1,507,069
9,126,784
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
securities . . . . . . . . . . . . . . . . . . . . . $8,937,506
$323,419
$ (92,896) $9,168,029 $9,168,029
-0-
3
-0-
-0-
3
-0-
8
71
2
13
100
-0-
4
-0-
1
-0-
-0-
8
69
1
17
100
66
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
2007
2005
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 621,752 $ 604,405 $ 584,198
2,986
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22,377
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,117
Other long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,882
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,827
24,344
8,841
9,379
3,503
23,328
8,731
6,980
Less investment expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
667,143
(18,317)
646,947
(18,201)
619,560
(16,492)
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 648,826 $ 628,746 $ 603,068
An analysis of realized gains (losses) from investments is as follows:
Realized investment gains (losses):
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on redemption of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation of interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Spread on interest rate swaps (cash settlements)
. . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,756 $ (4,735) $
(1,996)
-0-
-0-
-0-
-0-
1,974
(2,193)
5,783
(5,893)
(4,548)
491
328
Applicable tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,734
(957)
(10,767)
3,513
Realized gains (losses) from investments, net of tax . . . . . . . . . . . . . . . . . . . $
1,777 $ (7,254) $
778
-0-
-0-
-0-
(8,290)
7,393
399
280
(255)
25
An analysis of the net change in unrealized investment gains (losses) is as
follows:
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fixed maturities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,379 $ (1,110) $ (4,689)
(224,289)
(195,624)
(332,487)
Net change in unrealized gains (losses) on securities . . . . . . . . . . . . . . . . . . $(331,108) $(196,734) $(228,978)
A schedule of fixed maturities by contractual maturity at December 31, 2007 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.
Fixed maturities available for sale:
Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due from one to five years . . . . . . . . . . . . . . . . . . . . . . . . . .
Due from five to ten years . . . . . . . . . . . . . . . . . . . . . . . . . .
Due from ten to twenty years . . . . . . . . . . . . . . . . . . . . . . . .
Due after twenty years . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized
Cost
Fair
Value
$ 295,381
1,451,854
322,491
2,134,127
4,905,014
$ 297,823
1,504,802
339,357
2,145,620
4,729,083
9,108,867
9,016,685
Mortgage-backed and asset-
backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
220,282
209,360
$9,329,149
$9,226,045
Proceeds from sales of fixed maturities available for sale were $313.6 million in 2007, $183.2 million
in 2006, and $78.0 million in 2005. Gross gains realized on those sales were $1.6 million in 2007, $3.8
million in 2006, and $7.6 million in 2005. Gross losses were $4.7 million in 2007, $7.5 million in 2006, and
$13.7 million in 2005. Proceeds from sales of equity securities were $7.6 million in 2007, $3.5 million in
2006, and zero in 2005. Gross gains realized on those sales were zero in 2007, 2006, and 2005. Gross
losses realized on those sales were $2.2 million in 2007, $2.2 million in 2006, and zero in 2005.
67
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
The Company’s intent to hold the security until recovery has changed
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.
During 2007, the securities of five issuers met the other-than-temporary impairment criteria and were
written down to fair value, resulting in a pre-tax loss of $11.2 million ($7.3 million after tax). After the write
downs, these securities were valued at $36.5 million. Subsequently, the securities of two of these issuers
with a fair value of $18.5 million were disposed of at a gain of $312 thousand. As of year-end, securities
of the other three issuers remained in the portfolio with a fair value of $18 million. Subsequent to year end
2007, the security of one of these issuers with a year-end fair value of $4 million was sold at a loss of
$381 thousand. Otherwise, as of December 31, 2007, 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,
2007 and December 31, 2006. Torchmark considers these investments to be only temporarily impaired.
ANALYSIS OF GROSS UNREALIZED INVESTMENT LOSSES
At December 31, 2007
Description of Securities
U.S. Government and
Less than
Twelve Months
Fair
Value
Unrealized
Loss
Twelve Months
or Longer
Total
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
agency . . . . . . . . . . . . . . . . . . .
$
240
$
(1)
120
$
-0-
360
$
(1)
Government-sponsored
enterprises . . . . . . . . . . . . . . . .
14,467
(278)
46,669
(566)
61,136
Other mortgage-backed
securities . . . . . . . . . . . . . . . . .
States, municipalities, & political
subdivisions . . . . . . . . . . . . . . .
Foreign governments . . . . . . . . .
Corporates . . . . . . . . . . . . . . . . .
Total fixed maturities . . . . . .
Equities . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . .
-0-
-0-
-0-
-0-
-0-
240,921
1,482
3,073,209
3,330,319
3,454
$3,333,773
(6,997)
(50)
(232,184)
(239,510)
(546)
(240,056)
1,176
752
926,327
975,044
-0-
975,044
(16)
(29)
(109,459)
(110,070)
-0-
(110,070)
242,097
2,234
3,999,536
4,305,363
3,454
4,308,817
(844)
-0-
(7,013)
(79)
(341,643)
(349,580)
(546)
(350,126)
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 3—Investments (continued)
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
Unrealized
Loss
U.S. Government and agency . . . . . $
Government-sponsored
5,465
$
(4)
$ 2,694
$
(27)
$
8,159
$
(31)
enterprises . . . . . . . . . . . . . . . . . . .
44,284
(936)
232,632
(4,000)
276,916
(4,936)
Other mortgage-backed
securities . . . . . . . . . . . . . . . . . . . .
States, municipalities, & political
subdivisions . . . . . . . . . . . . . . . . . .
Foreign governments . . . . . . . . . . . .
Corporates . . . . . . . . . . . . . . . . . . . .
Total fixed maturities . . . . . . . . .
Equities . . . . . . . . . . . . . . . . . . . . . . .
3
-0-
-0-
-0-
3
-0-
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
(52)
-0-
(53,349)
(57,428)
(3,286)
1,384
708
2,140,652
2,427,822
10,557
(56)
(9)
(84,578)
(89,610)
(3,286)
Total . . . . . . . . . . . . . . . . . . . . . . $1,443,174
$(32,182)
$995,205
$(60,714)
$2,438,379
$(92,896)
Torchmark subsidiaries held 303 issues (CUSIP numbers) at December 31, 2007 that had been in an
less than twelve months, compared with 182 issues a year earlier.
unrealized loss position for
Additionally, 121 and 139 issues had been in an unrealized loss position twelve months or longer at
December 31, 2007 and 2006, respectively. Torchmark’s entire fixed-maturity and equity portfolio
consisted of 1,819 issues at December 31, 2007 and 2,199 issues at December 31, 2006. The average
quality rating of all unrealized loss positions as of December 31, 2007 was BBB+.
Other long-term investments consist of the following:
December 31,
2006
2007
Mortgage loans, at cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment real estate, at depreciated cost* . . . . . . . . . . . . . . . . . . . . . . . . . . .
Low-income housing interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
$18,580
8,411
33,262
9,037
$19,739
8,396
10,185
11,361
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$69,290
$49,681
*
Includes $6.5 million and $6.1 million of properties partially occupied by Torchmark subsidiaries at
December 31, 2007 and 2006, respectively.
The estimated fair value of mortgage loans was approximately $18.5 million at December 31, 2007 and
$19.7 million at December 31, 2006. Accumulated depreciation on investment real estate was $22.9
million and $21.7 million at December 31, 2007 and 2006, respectively.
Torchmark had $892 thousand in investment real estate at December 31, 2007, 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, 2007.
In 2006, mortgages with a carrying value of $10.2 million were sold for proceeds of $16.0 million. The
sale included mortgages previously written down.
69
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:
2007
2006
2005
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
. . . . . . . . . . . . . $2,890,651 $65,191 $2,698,049 $70,355 $2,506,216 $77,116
Additions:
Deferred during period:
Commissions . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . .
Total deferred . . . . . . . . . . . . . . . . . .
Foreign exchange adjustment . . . . . . . . .
Adjustment attributable to unrealized
300,422
265,974
566,396
8,593
investment losses(1)
. . . . . . . . . . . . . . .
19,148
Total additions . . . . . . . . . . . . . . . . . .
594,137
-0-
-0-
-0-
83
-0-
83
304,476
248,060
552,536
16
12,374
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
Deductions:
Amortized during period . . . . . . . . . . . . . .
(387,234)
(3,777)
(372,324)
(5,166)
(343,178)
(6,781)
Total deductions . . . . . . . . . . . . . . . .
(387,234)
(3,777)
(372,324)
(5,166)
(343,178)
(6,781)
Balance at end of year
. . . . . . . . . . . . . . . . . . $3,097,554 $61,497 $2,890,651 $65,191 $2,698,049 $70,355
(1) Represents amounts pertaining to investments relating to universal life-type products.
70
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, 2007 is as follows:
Interest assumptions:
Individual Life Insurance
Years of Issue
Interest Rates
Percent of
Liability
1917-2007
1985-2007
1986-1992
1954-2000
1951-1985
2000-2007
1984-2007
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
13
28
10
12
5
14
18
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
1955-2007
1993-2007
1986-1992
1955-2000
1951-1986
2001-2007
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%
2
60
24
9
1
4
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 2007 was 6.0%.
71
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,
2005
2006
2007
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . $145,793 $162,036 $180,843
Incurred related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
786,120
(1,448)
767,272
(12,097)
654,994
(16,535)
Total incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paid related to:
784,672
755,175
638,459
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
651,765
129,500
633,269
138,149
504,648
152,618
Total paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
781,265
771,418
657,266
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $149,200 $145,793 $162,036
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:
Paid-in capital from tax benefit for stock option exercises . . . . . . .
Other stock-based compensation not involving cash . . . . . . . . . . .
Commitments for low-income housing interests . . . . . . . . . . . . . . .
$6,460
8,106
3,696
$ 3,072 $36,545
1,375
54,549
6,575
23,320
The following table summarizes certain amounts paid during the period:
Year Ended December 31,
2005
2006
2007
Year Ended December 31,
2005
2006
2007
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 67,098 $ 72,905 $ 60,256
105,100
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
167,367
170,528
72
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,
2005
2006
2007
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 269,270 $254,939 $236,131
Shareholders’ equity:
Unrealized gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adoption of FIN48 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax basis compensation expense (from the exercise of stock
options) in excess of amounts recognized for financial reporting
purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(124,434)
(2,333)
(69,452)
-0-
(73,680)
-0-
(6,460)
(3,072)
(36,545)
$ 136,043 $182,415 $125,906
Income tax expense consists of:
Current income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
180,322 $151,841 $131,491
104,640
103,098
88,948
$269,270 $254,939 $236,131
Year Ended December 31,
2005
2006
2007
In 2007, 2006, and 2005, 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:
2007
Year Ended December 31,
%
2006
%
2005
%
Expected income taxes . . . . . . . . . . . . . . . . . . . . . . . $278,882 35.0% $270,750 35.0% $256,032 35.0%
Increase (reduction) in income taxes resulting
from:
Tax-exempt investment income . . . . . . . . . . . . . .
Tax settlements . . . . . . . . . . . . . . . . . . . . . . . . . . .
Low income housing investments . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3,908)
(615)
(4,701)
(388)
(.5)
(.1)
(.6)
-0-
(1,496)
(11,607)
(3,063)
355
(.2)
(1.5)
(.4)
-0-
(2,458)
(15,989)
(1,282)
(172)
(.3)
(2.2)
(.2)
-0-
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . $269,270 33.8% $254,939 32.9% $236,131 32.3%
73
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized investment 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,
2007
2006
5,536 $
10,509
46,378
23,383
85,806
-0-
786,560
291,410
12,930
7,701
6,801
-0-
5,785
20,287
78,055
733,955
240,471
8,385
Total gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,090,900
1,060,866
Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,005,094 $1,040,579
the impact of
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
these settlements on the tax years covered by the
tax benefit
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. The IRS is not currently examining
the tax years 2005 through 2007, but such tax years remain subject to examination. Final settlement and
closing of the statute of limitations for the open tax years 1998 through 2004 is expected to occur in 2008
and is not expected to have any material
impact on the Company’s effective tax rate. 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.
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
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 8—Income Taxes (continued)
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 $30.0 million at December 31,
2007 of which $4.3 million expire in 2020; $4.7 million expire in 2021; $10.8 million expire in 2025; $.2
million expire in 2026; and $9.9 million expire in 2027. 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.
As noted in Note 1 – Significant Accounting Policies, Torchmark adopted FIN 48, an interpretation
which was issued to clarify the accounting for income taxes by providing a methodology for the financial
statement recognition and measurement of uncertain income tax positions taken or expected to be taken
in a tax return. As a result of the adoption, Torchmark recognized a $2.3 million decrease to its liability for
unrecognized tax benefits. This decrease was accounted for as an adjustment to the January 1, 2007
balance of “Retained earnings” on the Consolidated Balance Sheet. Including the cumulative effect
decrease at January 1, 2007, Torchmark had approximately $12.3 million of total gross unrecognized tax
benefits, excluding $6.0 million of accrued interest expense net of federal tax benefits. If recognized in
future periods, $1.2 million of the gross unrecognized tax benefits as of January 1, 2007 would have
reduced the effective tax rate. The remaining $11.1 million related to timing differences which,
if
recognized, would have had no effect on the Company’s effective tax rate.
A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding effects
of accrued interest, net of federal tax benefits) for the year 2007 is as follows:
Balance at January 1, 2007 (after adoption) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,263
361
Increase based on tax positions taken in current period . . . . . . . . . . . . . . . . . .
17
Increase related to tax positions taken in prior periods . . . . . . . . . . . . . . . . . . .
(3,969)
Decrease related to tax positions taken in prior periods . . . . . . . . . . . . . . . . . .
0
Decrease due to expiration of statutes of limitation . . . . . . . . . . . . . . . . . . . . . .
0
Decrease due to settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,672
If recognized in future periods, $882 thousand of the balance at December 31, 2007 would reduce
the effective tax rate. The remaining $7.8 million relates to timing differences which, if recognized, would
have no effect on the Company’s effective tax rate.
Canadian income tax authorities have completed their examination of Torchmark and its subsidiaries’
tax returns through 2002 and have proposed certain adjustments which are currently being litigated by the
Company. Torchmark believes that it is reasonably possible that the judicial process surrounding its case
against Canadian tax authorities will be concluded within the next 12 months. Should the Company be
wholly successful
in defending their position, the Company would recognize additional tax benefits of
approximately $5.4 million. The tax years subsequent to 2002 remain subject to examination by Canadian
income tax authorities.
Torchmark’s continuing practice is to recognize interest and/or penalties related to income tax
matters in income tax expense. The Company has recognized interest income of $735 thousand, net of
Federal income tax benefits, in its Consolidated Statement of Operations for 2007. The Company has an
accrued interest receivable of $2.8 million, net of Federal income tax benefits, which is comprised of a
$6.5 million interest payable relating to uncertain tax positions offset by a $9.3 million interest receivable
relating to prior year IRS examination settlements. The Company has no accrued penalties as of
December 31, 2007.
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Postretirement Benefits
Pension Plans: Torchmark has noncontributory retirement benefit plans and contributory savings
plans which cover substantially all employees. There are also two nonqualified, noncontributory
supplemental benefit pension plans which cover a limited number of 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
2007 . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . .
2005 . . . . . . . . . . . . . . . . . . .
$2,925
3,470
3,597
$7,621
8,514
5,932
Torchmark accrues expense for the defined contribution plans based on a percentage of
the
employees’ contributions. The plans are funded by the employee contributions and a Torchmark
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
cost method. All plan measurements for the defined benefit plans are as of December 31 of
the
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 million in each of the
years 2007, 2006, and 2005. Torchmark estimates as of December 31, 2007 that it will contribute an
amount not to exceed $20 million to these plans in 2008. The actual amount of contribution may be
different from this estimate.
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. The initial projected benefit obligation of this
plan was $15 million, and the liability at December 31, 2007 was $17 million. This amount, along with
periodic contributions to fund the plan’s obligations, will be placed in a “Rabbi” trust.
The other supplemental benefit pension plan is limited to a very select group of employees and was
closed as of December 31, 1994. It provides the full benefits than an employee would have otherwise
received from a defined benefit plan in the absence of the limitation on benefits payable under a qualified
plan. This plan is unfunded. Liability for this closed plan was $5 million at December 31, 2007 and $6
million a year earlier. Pension cost for both supplemental defined benefit plans is determined in the same
manner as for the qualified defined benefit plans.
76
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, 2007 and
2006.
Pension Assets by Component
December 31,
2007
December 31,
2006
Amount % Amount %
Corporate debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,436
891
Other fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
101,215
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,467
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,431
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32 $ 48,720
962
143,233
2,565
2,314
1
59
7
1
25
1
72
1
1
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $170,440 100 $197,794 100
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
contributions will produce adequate long-term growth to provide for all plan obligations.
is also
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, 2007, there were no
restricted investments contained in the portfolio.
77
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.62% 6.15%
3.91
3.85
2007
2006
For Periodic Benefit Cost for the Year:
Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected Long-Term Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of Compensation Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.15% 5.54% 6.04%
9.00
9.00
3.85
3.85
9.00
3.84
2007
2006
2005
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 higher-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,
2005
2006
2007
Service cost—benefits earned during the period . . . . . . . . . . .
Interest cost on projected benefit obligation . . . . . . . . . . . . . . .
Expected return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8,221
13,360
(17,010)
3,050
$ 8,270
12,200
(16,055)
4,099
$ 7,412
11,392
(14,368)
1,496
Net periodic pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7,621
$ 8,514
$ 5,932
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Postretirement Benefits (continued)
An analysis of the impact on other comprehensive income (loss) is as follows:
2007
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(13,715)
Adoption of SERP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(15,419)
Amortization of:
Prior service cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net actuarial (gain)/loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transition obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,078
621
(7)
2,692
Experience gain(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(40,109)
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(66,551)
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 the amounts previously recognized
as a component of accumulated other comprehensive income.
Pension Benefits
For the year ended
December 31,
2007
2006
Changes in benefit obligation:
Obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $219,922 $220,036
8,270
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,200
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(15,135)
Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(21,150)
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
279
Plan amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
204,500
Obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,221
13,360
2,219
(19,183)
-0-
224,539
Changes in plan assets:
197,794
Fair value at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(21,211)
Return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,040
Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(19,183)
Fair value at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $170,440
184,769
21,634
12,541
(21,150)
197,794
Funded status at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (54,099) $ (6,706)
Amounts recognized in accumulated other comprehensive income
consist of:
Net loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 52,200 $ 12,712
1,036
Prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(33)
Transition obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amounts recognized at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 66,551 $ 13,715
14,377
(26)
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Postretirement Benefits (continued)
The portion of other comprehensive income that is expected to be reflected in pension expense in
2008 is as follows:
Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . . $2,078
1,419
Amortization of net loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . .
(7)
Amortization of transition obligation . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,490
Total
The accumulated benefit obligation (ABO) for Torchmark’s funded defined benefit pension plan was
$176 million and $168 million at December 31, 2007 and 2006, respectively. In the unfunded plans, the
ABO was $25 million at December 31, 2007 and $11.5 million at December 31, 2006.
Torchmark has estimated its expected pension benefits to be paid over the next ten years as of
December 31, 2007. These estimates use the same assumptions that measure the benefit obligation at
December 31, 2007, taking estimated future employee service into account. Those estimated benefits are
as follows:
For the year(s)
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013-2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,305
10,960
10,446
12,215
13,612
79,182
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,
2007
2006
2005
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 646 $ 731
Interest cost on accumulated postretirement benefit
$ 735
obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . .
Recognition of net actuarial (gain) loss . . . . . . . . . . . . . . . . .
968
-0-
-0-
(795)
927
-0-
-0-
(278)
891
-0-
-0-
(211)
Net periodic postretirement benefit cost . . . . . . . . . . . . . . . . $ 819 $1,380
$1,415
80
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,
2007
2006
Changes in benefit obligation:
Obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 14,204
645
968
(794)
(780)
Obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,243
Changes in plan assets:
Fair value at beginning of year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value at end of year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
780
(780)
-0-
$ 13,680
731
927
(278)
(856)
14,204
-0-
-0-
856
(856)
-0-
Funded status at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(14,243)
$(14,204)
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:
Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of Compensation Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.61% 6.22%
4.50
4.50
2007
2006
For Periodic Benefit Cost for the Year:
2007
2006
2005
Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of Compensation Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.22% 7.00% 7.05%
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 2005 through 2007. 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.
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 10—Debt
The following table presents information about the terms and outstanding balances of Torchmark’s
debt.
Selected Information about Debt Issues
Annual
Percentage
Rate
Issue
Date
Periodic
Interest
Payments
Due
Outstanding
Principle
(Par Value)
Outstanding
Principle
(Book Value)
Outstanding
Principle
(Fair Value)
Outstanding
Principle
(Book Value)
As of December 31,
2007
2006
8.250% 8/89
2/15 & 8/15
7.875% 5/93 5/15 & 11/15
7.375% 7/93
2/1 & 8/1
$ 99,450
165,612
94,050
$ 99,501
162,927
93,381
$105,019
184,952
103,747
$ 99,528
162,842
93,290
6.375% 6/06 6/15 & 12/15
250,000
—
246,427
(4,224)
261,825
—
246,120
(4,243)
609,112
598,012
655,543
597,537
7.100% 6/06 quarterly(6)
123,711
732,823
123,711
721,723
109,920(7)
123,711
765,463
721,248
202,500
202,058
202,058
169,736
$935,323
$923,781
$967,521
$890,984
Instrument
Senior Debentures, due
8/15/09(1)(2) . . . . . . . . . . . . . .
Notes, due 5/15/23(1)(2) . . . . . .
Notes, due 8/1/13(1)(2) . . . . . . .
Senior Notes, due
6/15/16(1)(8)
. . . . . . . . . . . . .
Issue Expenses(3) . . . . . . . . . .
Subtotal long-term debt . . .
Junior Subordinated
Debentures due
6/1/46(4)(5)
. . . . . . . . . . . .
Total funded debt . . . . . . . .
Commercial Paper (short-
term debt) . . . . . . . . . . . . . .
(1) All securities other than the Junior Subordinated Debentures have equal priority with one another.
(2) Not callable.
(3) Unamortized issue expenses related to Trust Preferred Securities.
(4) Junior Subordinated Debentures are classified as “Due to affiliates” and are junior to other securities in priority of payment.
(5) Earliest call date is June 1, 2011.
(6) Quarterly payments on the first day of March, June, Sept., and Dec.
(7) Fair value of Trust Preference Securities.
(8) Callable subject to “make-whole” premium.
The amount of debt that becomes due during each of the next five years is: 2008—$202,500; 2009—
$99,450; 2010—$0; 2011—$0; 2012—$0; and thereafter—$633,373.
Funded debt: 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.
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.
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 10—Debt (continued)
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, 2005, four 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. Two swap
agreements exchanging fixed interest rates for variable rates were disposed of in September, 2005 for
proceeds of $239 thousand. These two swaps were associated with Torchmark’s fixed 8.25% Senior
Debentures due 2009 and its 7.375% Notes due 2013. 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 Notes were adjusted for the
respective value of each 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. Torchmark
has held no interest-rate swaps since June, 2006.
83
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 two years ended December 31, 2006 were
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
11/41 . . . . . . . . . . . . . . . . . . . .
Senior Debentures, due 8/09 . . .
Notes, due 8/13 . . . . . . . . . . . . .
06/06
12/06
Yes
$180,000 6.250% six-month
120.5
six months
06/06
09/05
09/05
11/11
08/09
08/09
No
Yes
No
150,000 7.750% three-month
99,450 8.250% six-month
100,000 7.375% six-month
221.0
391.0
305.0
three months
six months
six months
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** . . . . . . . . . . . . . . . . . .
Senior Debentures, due 8/09 (hedge)*** . . . . . . . . . . . . . . . . .
Notes, due 8/13*** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Settlements
Received by Instrument*
Valuation Adjustment
by Instrument
2007
$-0-
-0-
-0-
-0-
$-0-
2006
$275
216
-0-
-0-
$491
2005
2007
2006
2005
$3,131
2,478
920
864
$7,393
$-0-
-0-
-0-
-0-
$-0-
$
-0-
(4,548)
-0-
-0-
$
-0-
(6,104)
-0-
(2,186)
$(4,548)
$(8,290)
*
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.
*** 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, 2007,
Torchmark had $203 million face amount
($202 million carrying amount) of commercial paper
outstanding, $150 million of letters of credit issued, and no borrowings under the line of credit. During
2007, the short term borrowings under the facility averaged approximately $238 million, and were made at
an average yield of 5.4%, compared with an average balance of $166 million at an average yield of 5.0%
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 10 basis points. For letters
of credit issued, there is an issuance fee of 27.5 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 10 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, 2007 and throughout the three-year period
ended December 31, 2007. 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, 2007.
84
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
2005:
Balance at January 1, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock due to exercise of stock options . . . .
Treasury stock acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
108,783,658
91,090
(4,000,000)
(839,737)
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)
2007:
Grants of restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock due to exercise of stock options . . . .
Treasury stock acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,000
967,227
(6,916,439)
5,000,000
(5,000,000)
Balance at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
94,874,748
(2,699,333)
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 6.1 million shares at a cost of
$402 million in 2007, 5.6 million shares at a cost of $320 million in 2006, and 5.6 million shares at a cost of
$300 million in 2005. 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 767 thousand shares at a cost of $50 million in 2007, 415 thousand
shares at a cost of $24 million in 2006, and 4.7 million shares costing $255 million in 2005.
Retirement of Treasury Stock: Torchmark retired 5 million shares of treasury stock in December,
2007, 5 million in 2006, and 4 million in 2005.
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 2007, subsidiaries of Torchmark paid $458 million in dividends to the parent
company. During 2008, a maximum amount of $411 million is expected to be available to Torchmark from
subsidiaries without regulatory approval.
85
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 . . . . . . . . . . .
94,317,142
1,528,855
99,732,608
1,379,549
104,735,466
1,015,947
Diluted weighted average shares outstanding . . . . . . . . . . . .
95,845,997
101,112,157
105,751,413
2007
2006
2005
Stock options to purchase 432 thousand shares, 21 thousand shares, and 3.8 million shares during
the years 2007, 2006, and 2005, 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.
Shareholders approved a new stock compensation plan in April, 2007, the Torchmark Corporation
2007 Long-Term Compensation Plan (the 2007 Plan), authorizing a total of 3,250,000 shares for potential
grant. Of this total, a maximum of 250,000 shares may be granted as restricted stock. All shares available
for grant under previous plans were no longer available for grant under the 2007 Plan.
Previously, during 2005, Torchmark shareholders approved two 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 with terms of this plan amended to restate the Director Plan as a sub-plan of the new plan. The total
number of approved shares remained at 6 million. There are no shares available under this plan as of
December 31, 2007.
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. These shares were 20% vested as of December 31, 2007. An additional 10 thousand shares
were granted on April 26, 2007. These shares also vest over five years. None were vested as of
December 31, 2007.
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.
86
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
2007
2005
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 . . . . . . . . . . . . . . . . . . . . . . . . . . .
465,224
3,250,000
(36,812)
15,300
(547,712)
(10,000)
916,483
1,716,920
— 6,000,000
— (1,641,145)
3,828
(5,163,120)
-0-
34,749
(458,008)
(28,000)
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,136,000
465,224
916,483
A summary of option activity for each of the years in the three years ended December 31, 2007 is
presented below:
2007
2006
2005
Stock-based compensation expense recognized* . . . . . . . . . . . . . . . . . . . . . $ 8,106 $ 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
6,460
12.58
19,924
42,635
6,973
977
342
9.31
107,104
217,257
37,486
*
No stock-based compensation expense was capitalized in any period.
2007
2006
Options
Weighted Average
Exercise Price
Options
Weighted Average
Exercise Price
Options
2005
Weighted Average
Exercise Price
Outstanding-beginning of
year . . . . . . . . . . . . . . . . 9,828,735
547,712
(967,227)
(15,300)
Granted . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . .
Expired and forfeited . . . .
Outstanding-end of
$50.30
65.26
44.08
59.55
9,912,735
458,008
(507,259)
(34,749)
$49.33
62.42
42.29
50.50
10,680,273
5,163,120
(5,926,830)
(3,828)
$39.60
54.91
36.66
39.73
year . . . . . . . . . . . . . . . . 9,393,920
$51.80
9,828,735
$50.30
9,912,735
$49.33
Exercisable at end of
year . . . . . . . . . . . . . . . . 8,003,842
$50.44
8,381,117
$49.40
8,242,341
$49.32
Additional information about Torchmark’s stock-based compensation as of December 31, 2007 and
2006 is as follows:
2007
2006
Outstanding options:
Weighted-average remaining contractual term (in years) . . . . . . . . . . . . . . . . . .
Aggregate intrinsic value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.74
$82,006
5.52
$132,268
Exercisable options:
Weighted-average remaining contractual term (in years) . . . . . . . . . . . . . . . . . .
Aggregate intrinsic value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.56
$80,771
5.43
$120,318
Unrecognized compensation* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average period of expected recognition (in years)* . . . . . . . . . . . . . . . .
$12,692
1.65
$ 13,414
2.46
*
Includes restricted stock
87
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 at December 31:
Number of shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,390,078 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$59.64
7.51
$6,249
2007
2006
Torchmark expects that substantially all unvested options will vest.
The following table summarizes information about stock options outstanding at December 31, 2007.
Range of
Exercise Prices
Number
Outstanding
$19.81 – $38.79
41.26 – 42.56
44.89 – 54.50
54.77 – 54.77
55.05 – 55.80
56.24 – 56.24
56.78 – 68.18
773,809
1,160,714
919,008
3,771,429
989,156
791,942
987,862
$19.81 – $68.18
9,393,920
Options Outstanding
Options Exercisable
Weighted-
Average
Remaining
Contractual
Life (Years)
Weighted-
Average
Exercise
Price
4.04
3.58
5.54
4.22
4.81
6.51
6.41
4.74
$35.81
41.26
45.35
54.77
55.49
56.24
64.12
$51.80
Number
Exercisable
687,500
1,159,199
902,443
3,771,429
550,848
788,361
144,062
8,003,842
Weighted-
Average
Exercise
Price
$35.90
41.26
45.35
54.77
55.51
56.24
61.03
$50.44
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, 2007.
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.
88
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 2007
Distribution Channel
Amount
% of
Total
United American Independent . . . . . . . . . .
Liberty National Exclusive . . . . . . . . . . . . .
American Income Exclusive . . . . . . . . . . . .
Direct Response . . . . . . . . . . . . . . . . . . . . .
United American Branch Office . . . . . . . . .
Medicare Part D . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
$
35,828
293,936
440,164
484,176
15,573
300,287
2
19
28
31
1
19
Amount
$ 388,410
141,166
70,671
42,338
386,954
214,589
% of
Total Amount
% of
Total
$
602
3
31
11
6
4
31
17
19,868
$1,569,964
100
$1,244,128
100
$20,470
Amount
$ 424,840
435,102
510,835
526,514
402,527
214,589
320,155
% of
Total
15
15
18
19
14
8
11
$2,834,562
100
97
100
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 . . . . . . . . .
Medicare Part D . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
$
40,378
300,933
409,188
457,159
15,775
300,834
2
20
27
30
1
20
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
212,382
323,211
% of
Total
16
16
17
18
13
8
12
$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 . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
$
45,472
302,747
380,365
424,037
16,891
298,776
3
21
26
29
1
20
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
$1,468,288
100
$1,014,857
100
$24,929
Amount
$ 487,564
451,767
443,988
461,811
339,658
323,286
% of
Total
19
18
18
18
14
13
$2,508,074
100
98
100
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
in accordance with the manner the segments are
before other income and administrative expenses,
managed.
It essentially represents gross profit margin on insurance products before insurance
administrative expenses and consists of premium, less net policy obligations, acquisition expenses, and
commissions. 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.
89
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 is excess investment 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.
Life
Health
Annuity
Investment
Other
Corporate Adjustments Consolidated
For the Year 2007
Revenue:
Premium . . . . . . . . . . . . . . . . . . . . . . . $1,569,964 $1,244,128 $ 20,470
Net investment income . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . .
$ 648,562
$
4,313
$(7,331)(1)
264 (2)
3,593 (4,5,6)
$2,827,231
648,826
7,906
Total revenue . . . . . . . . . . . . . . . 1,569,964
1,244,128
20,470
648,562
4,313
(3,474)
3,483,963
Expenses:
Policy benefits . . . . . . . . . . . . . . . . . . 1,039,278
(388,024)
Required interest on net reserves . .
429,381
Amortization of acquisition costs . . .
Commissions and premium tax . . . .
72,291
Insurance administrative
842,432
(28,065)
137,254
84,253
28,049
(31,666)
14,631
119
447,755
(190,255)
(7,331)(1)
(1,180)(4)
933 (5)
1,902,428
-0-
391,011
155,483
155,485
9,815
8,106
154,552
$ 9,815
8,106
expense(3) . . . . . . . . . . . . . . . . . . . .
Parent expense . . . . . . . . . . . . . . . . .
Stock-based compensation
expense . . . . . . . . . . . . . . . . . . . . .
Financing costs:
Debt
. . . . . . . . . . . . . . . . . . . . . . . .
67,300
264 (2)
67,564
Total expenses . . . . . . . . . . . . . 1,152,926
1,035,874
11,133
324,800
154,552
17,921
(7,314)
2,689,892
Subtotal
. . . . . . . . . . . . . . . . . . . . . . .
Nonoperating items . . . . . . . . . . . .
Measure of segment profitability
417,038
208,254
9,337
323,762
(150,239)
(17,921)
3,840
(3,840)(5,6)
794,071
(3,840)
(pretax) . . . . . . . . . . . . . . . . . . . . $ 417,038 $ 208,254 $ 9,337 $ 323,762
(150,239) $(17,921) $
-0-
$ 790,231
Deduct applicable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Segment profits after tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add back income taxes applicable to segment profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add (deduct) realized investment gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct cost of legal settlements(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add gain from sale of agency buildings(6)
(268,118)
522,113
268,118
2,734
(418)
4,258
Pretax income per income statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 796,805
(1) Medicare Part D items adjusted to GAAP from the segment analysis, which matches expected benefits with policy premium.
(2) Reclassification of interest amount due to adoption of FIN46R (accounting rule requiring deconsolidation of Trust Preferred
Securities)
(3) Administrative expense is not allocated to insurance segments
(4) Elimination of intersegment commission
(5) Legal settlements from litigation related to prior years
(6) Gain from sale of agency buildings
90
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 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
(364,313)
Required interest on net reserves
408,506
Amortization of acquisition costs .
76,859
Commissions and premium tax . .
Insurance administrative
834,017
(24,662)
133,453
88,030
23,743
(28,318)
15,486
88
417,293
(179,955)
(1,294)(3)
1,863,531
-0-
377,490
163,683
155,331
7,862
6,575
155,331
$ 7,862
6,575
72,682
(491)
454(1)
73,136
(491)
expense(2) . . . . . . . . . . . . . . . . . .
Parent expense . . . . . . . . . . . . . . .
Stock-based compensation
expense . . . . . . . . . . . . . . . . . . .
Financing costs:
Debt . . . . . . . . . . . . . . . . . . . . . . .
Benefit from interest rate
swaps . . . . . . . . . . . . . . . . . . .
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
91
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 net 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
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.
92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13—Business Segments (continued)
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.
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
2007
2006
2005
Change %
Change %
$ 417,038
208,254
9,337
$ 397,444
206,694
11,915
$ 381,648
177,179
12,580
$ 19,594
1,560
(2,578)
5
1
(22)
$15,796
29,515
(665)
4
17
(5)
2007
2006
4,313
(154,552)
323,762
(17,921)
790,231
(268,118)
4,024
(155,331)
318,763
(14,437)
769,072
(264,716)
2,366
(147,681)
324,238
(9,660)
740,670
(255,165)
289
779
4,999
(3,484)
21,159
(3,402)
After-tax total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
522,113
504,356
485,505
17,757
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) . . . . . . .
-0-
1,777
2,768
1,149
(272)
-0-
(319)
(7,254)
2,816
11,607
7,425
-0-
(4,805)
25
-0-
15,989
(955)
(369)
319
9,031
(48)
(10,458)
(7,697)
-0-
7
(1)
2
24
3
1
4
70
1,658
5
(7,650)
(5,475)
(2)
(4,777) 49
4
4
4
28,402
(9,551)
18,851
4,486
(7,279)
2,816
(4,382)
8,380
369
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 527,535
$ 518,631
$ 495,390
$ 8,904
2
$23,241
5
93
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, 2007
Cash and invested assets . . . . . . . . . . . . . . . . . .
Accrued investment income . . . . . . . . . . . . . . . .
Deferred acquisition costs . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Separate account assets . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,453,679
333,172
$576,569
87,282
$ 128,803
3,065
1,423,195
$9,792,297
172,783
$ 9,792,297
172,783
3,159,051
423,519
1,423,195
270,583
$270,583
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,786,851
$663,851
$1,555,063
$9,965,080
$270,583
$15,241,428
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
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 1.0% of total life insurance in force at December 31, 2007. Insurance
ceded on life and accident and health products represented .4% of premium income for 2007. 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 1.4% of life insurance in force at December 31, 2007 and reinsurance assumed on life and
accident and health products represented .7% of premium income for 2007.
Leases: Torchmark leases office space and office equipment under a variety of operating lease
arrangements. Rental expense for operating leases was $6.0 million in 2007, $6.1 million in 2006, and
$5.6 million in 2005. Future minimum rental commitments required under operating leases having
remaining noncancelable lease terms in excess of one year at December 31, 2007 were as follows: 2008,
$3.5 million; 2009, $2.0 million; 2010, $1.7 million; 2011, $1.3 million; 2012, $1.2 million and in the
aggregate, $11.5 million.
Low-Income Housing Tax Credit Interests: As described in Note 1, Torchmark holds $136 million in
entities which provide certain tax benefits. As of December 31, 2007, Torchmark remained obligated
under these commitments for $10.5 million, of which $10.1 million is due in 2008, and $.4 million in 2009.
94
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, 2007, the
investment portfolio, at fair value, consisted of the following:
Investment-grade corporate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninvestment-grade securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy loans, which are secured by the underlying insurance policy values . . . . . . . . . . . . . .
States, municipalities, and political subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government-sponsored enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other fixed maturities, equity securities, mortgages, real estate, and other long-term
81%
7
4
3
2
investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments, which generally mature within one month . . . . . . . . . . . . . . . . . . . . .
2
1
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, 2007, 2% or more of the corporate portfolio was invested in the following
industries:
Insurance carriers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21%
Depository institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Electric, gas, and sanitation services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
8
Nondepository credit institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
Oil and gas extraction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
Chemicals and allied products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
Food and kindred products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Security and commodity brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Transportation equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Petroleum refining and related industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Media (printing, publishing, and allied lines) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Otherwise, no individual industry represented 2% or more of Torchmark’s investments. At year-end
2007, 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 $757 million, amortized cost was $754 million, and fair value was $702 million. While
these investments could be subject to additional credit risk, such risk should generally be reflected in
market value of the securities.
Collateral Requirements: Torchmark requires collateral
investments in instruments where
is available and is typically required because of the nature of the investment. Torchmark’s
for
collateral
mortgages are secured by the underlying real estate.
Guarantees: At December 31, 2007, 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, 2007, 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.
95
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, 2007, $150
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 (American Income). 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
to repay the
purchased amount. As of December 31, 2007, the present value of future commissions substantially
exceeded the purchased balance.
future commission collections were insufficient
that
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, 2007, total remaining undiscounted payments under the leases were approximately
$4.8 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.
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.
Lamar C. Smith, a director of Torchmark, was also Chairman of First Command Bank until
September 30, 2007. There were no balances outstanding subject to this guarantee at December 31,
2007 and Torchmark had no further liability after that date. At December 31, 2006, the balance
subject to this guarantee was $71 thousand. This guarantee was 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
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. 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 and its subsidiaries have
substantial business, particularly Alabama and Mississippi, creating the potential
for unpredictable
material adverse judgments in any given punitive damage suit.
96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Commitments and Contingencies (continued)
As previously reported in Forms 10-K and 10-Q, Liberty and Torchmark 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 with briefs received on certain issues,
materials relating to objections to the proposed settlement submitted to the Court-appointed independent
special master, objectors to the potential settlement heard and a report of
the Court-appointed
independent actuary received on certain issues thereafter.
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. 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 sought 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 was held on Liberty’s petition on March 13,
2007.
On March 30, 2007, the Barbour County Circuit Court issued an order denying Liberty’s petition for
clarification and/or modification of Robertson, holding that Liberty’s policies did not state that they will pay
“actual charges” accepted by providers. On April 8, 2007, the Court issued an order granting a motion to
intervene and establishing a subclass in Robertson comprised of Liberty cancer policyholders who are
now or have within the past six years, undergone cancer treatment and filed benefit claims under the
policies in question. Liberty filed a motion with the Barbour County Circuit Court
to certify for an
interlocutory appeal that Court’s order on Liberty’s petition for clarification in Robertson on April 17, 2007.
An appellate mediation of these issues was conducted on August 9, 2007. On October 16, 2007, the
Alabama Supreme Court entered orders, based upon the conclusion by the parties of the appellate
mediation, staying the proceedings for a writ of mandamus, reinstating the cases on the appellate docket,
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Commitments and Contingencies (continued)
and remanding the cases to the Barbour County Circuit Court to implement the parties’ settlement
agreement. A fairness hearing on the proposed settlement agreement was held by the Barbour County
Circuit Court on January 15, 2008.
United American has been named as a defendant in previously-reported purported class action
litigation filed on September 16, 2004, in the Circuit Court of Saline County, Arkansas on behalf of the
Arkansas purchasers of association group health insurance policies or certificates issued by United
American through Heartland Alliance of America Association and Farm & Ranch Healthcare, Inc. (Smith
and Ivie v. Collingsworth, et al., CV2004-742-2). The plaintiffs assert claims for fraudulent concealment,
breach of contract, common law liability for non-disclosure, breach of fiduciary duties, civil conspiracy,
unjust enrichment, violation of the Arkansas Deceptive Trade Practices Act, and violation of Arkansas law
and the rules and regulations of
injunctive and
equitable relief, as well as actual and punitive damages are sought by the plaintiffs.
the Arkansas Insurance Department. Declaratory,
On September 7, 2005, the plaintiffs amended their complaint to assert a nation wide class, defined
as all United American insureds who simultaneously purchased both an individual Hospital and Surgical
Expense health insurance policy and an individual supplemental term life insurance policy from Farm &
Ranch through Heartland. Defendants removed this litigation to the United States District Court for the
Western District of Arkansas (No. 4:05-cv-1382) but that Court remanded the litigation back to state court
on plaintiffs’ motion. Discovery is proceeding.
As previously reported, United American was named as a defendant in purported class action
litigation filed on January 7, 2005, in the District Court of Starr County, Texas on behalf of the purchasers
of association group health insurance policies or certificates issued by United American through
Heartland Alliance of America and Farm & Ranch Healthcare, Inc. (Rodriguez v. Burdine, et al, DC-05-8).
The plaintiffs asserted claims of civil conspiracy, conversion and theft, violations of the Texas Insurance
and Administrative Codes, breach of fiduciary duties, fraud and gross negligence and breach of contract
the Heartland
as well as filing a members representative action on behalf of all
Association. The plaintiffs alleged excessive and unauthorized association dues payments that
the
defendants have collected from policyholders. A declaratory judgment, monetary damages, imposition of
a constructive trust, equitable forfeiture and attorney’s fees were sought by the plaintiffs. A class
certification hearing was held August 31, 2006, at which time the Court considered and approved a
proposed settlement agreement between the parties. A fairness hearing was conducted on October 5,
2006 and the judgment and related orders were entered without
issues. The final settlement was
concluded on November 9, 2006.
the members of
On February 17, 2005, named defendant Martha Burdine filed an amended answer and a complaint
(the cross complaint) against various other defendants including United American (the cross defendants)
on behalf of a purported class of former agents and managers of those cross defendants (the cross
plaintiffs). These cross plaintiffs asserted a pattern of contract breaches and misconduct by the cross
defendants including claims for breach of contract, intentional and negligent misrepresentation, fraud,
negligence, breach of duties of trustees, trespass to chattels, conversion, intentional interference with a
business relationship and intentional interference with a valid business expectancy. The cross plaintiffs
sought actual, punitive and exemplary damages, attorneys’ fees and costs and other legal and equitable
relief. Upon the conclusion of the Rodriguez settlement, only the cross claims filed by Martha Burdine
remained outstanding. The parties agreed to dismiss these cross claims with prejudice on August 29,
2007.
On July 26, 2007, previously-reported purported class action litigation for a class comprised only of
Texas citizens was filed against United American in the state District Court of Falls County, Texas
the UA
(Neuman v. United American Insurance Company, Case No. 36593). Plaintiffs assert
Partners program is a fraudulent scheme presented by United American to prospective insureds when
they apply for insurance as a discount product and service program and the fee for this program is built
into the insurance premium. They allege that United American has been unjustly enriched as a result of
that
98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Commitments and Contingencies (continued)
the UA Partners program and initially had sued for money had and received and attorneys fees. On
January 28, 2008, plaintiffs amended their complaint to allege breach of contract and unfair business
practices prohibited by the Texas Insurance Code in connection with the UA Partners program and now
seek actual and additional statutory damages.
On January 18, 2008, purported class action litigation was filed against Liberty in the U.S. District
Court for the Southern District of Florida (Joseph v. Liberty National Life Insurance Company, Case No.
08-20117 CIV—Martinez) on behalf of all black Haitian-Americans who reside in Florida (including both
naturalized and alien persons) and who have or have had an ownership interest in life insurance policies
sold by Liberty where it is alleged that Liberty issued and administered such policies on a discriminatory
basis because of their race and Haitian ancestry, ethnicity or national origin. The plaintiffs allege an
intentional plan on behalf of Liberty to discriminate against the black Haitian-American community in the
formation, performance and termination of life insurance contracts in violation of 42 U.S.C. §1981 and
§1982 by target marketing and underwriting inquiries regarding whether the applicant for insurance was
Haitian, had traveled to Haiti in the past or planned to do so at any time in the future and, based upon
such information, either denying the application or issuing a substandard policy or in some instances it is
alleged, refusing to pay death benefits on issued policies. The plaintiffs seek unspecified compensatory
damages in excess of $75,000, punitive damages, injunctive relief, attorneys’ fees and other relief.
Note 15—Related Party Transactions
First Command. Lamar C. Smith, a director of Torchmark, served as Chief Executive Officer of First
Command Financial Services, Inc. (First Command), a corporation 100% owned by the First Command
Employee Stock Ownership Plan (First Command ESOP) until May 1, 2007 and thereafter as Chairman
from First Command
of First Command Bank, a subsidiary of First Command until his retirement
September 30, 2007. Mr. Smith was a beneficiary of the First Command ESOP although he had no ability
to vote the stock of First Command that is held by the First Command ESOP, which is independently
trusteed. 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
$45.3 million in 2007, $50.8 million in 2006, and $60.9 million in 2005. Torchmark held balances due from
this agency of $5.0 million at year-end 2007 and $6.6 million at year-end 2006.
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%
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 2007 was $2.7 million, in 2006 was $2.7 million, and in 2005 was $2.6 million. At
December 31, 2007, the face amount of life insurance ceded was $321 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 2007, the outstanding balance was $17.8 million, compared with $18.9 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 2007,
the outstanding balance was $5.4 million,
compared with $7.4 million at year end 2006. 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.
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 15—Related Party Transactions (continued)
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, but at year end 2007 there was no balance subject to the
guarantee and the Company has no further liability under this guarantee.
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. Mr. Richey was also a 50% investor in Stonegate Realty Company, LLC., the parent
company of Elgin Development Company, LLC.
leased
commercial space to Torchmark subsidiaries. Lease rentals paid by Torchmark subsidiaries were $262
thousand in 2005.
(Elgin Development). Elgin Development
Torchmark annually paid premiums on three life insurance policies for Mr. Richey in the amount of
$61 thousand in 2005.
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, 2007 and 2006, the outstanding
balance of this loan was $442 thousand and $516 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, 2007 and 2006,
the
outstanding balance of this loan was $681 thousand and $710 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, 2007. This account balance was $27 thousand at
year end 2007 and $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 2007, 2006, and 2005.
100
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, 2007. 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.
March 31,
June 30,
September 30, December 31,
Three Months Ended
2007:
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 . . . . . . . .
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 . . . . . . . .
$731,812
162,580
10,049
905,975
504,476
97,226
204,295
135,191
1.39
1.37
$702,677
153,389
(6,196)
857,008
480,154
92,069
183,971
120,274
1.17
1.16
$715,397
160,729
(2,828)
876,569
489,276
97,354
192,037
127,117
1.34
1.32
$705,796
154,925
7,681
869,135
480,756
91,172
194,007
127,375
1.28
1.26
$697,096
163,080
1,408
863,614
462,833
98,898
201,584
132,882
1.43
1.41
$683,657
160,908
(7,299)
837,939
446,052
100,521
189,273
128,544
1.30
1.28
$682,926
162,437
(5,895)
840,539
445,843
97,533
198,889
132,345
1.44
1.41
$692,583
159,524
(4,953)
857,096
456,569
93,728
206,319
142,438
1.45
1.43
*
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.
101
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, 2007, 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, 2007, 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
102
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, determined that the Company’s internal control over financial reporting was effective as of
December 31, 2007. The Company’s independent registered public accounting firm has issued an
attestation report on 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, 2008
103
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Torchmark Corporation
McKinney, Texas
We have audited the internal control over financial reporting of Torchmark Corporation and subsidiaries
(“Torchmark”) as of December 31, 2007, 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, included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on 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
internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
included obtaining an understanding of
the company’s principal executive and principal
A company’s internal control over financial reporting is a process designed by, or under the supervision
of,
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
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
dispositions of
transactions are
financial statements in accordance with generally
recorded as necessary to permit preparation of
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
financial reporting and the preparation of
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 may
not be prevented or detected on a timely basis. Also, projections of any evaluation of the 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, Torchmark maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2007, 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, in accordance with the standards of 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, 2007 of Torchmark and our report dated February 28, 2008 expressed
an unqualified opinion on those financial statements and financial statement schedules.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 28, 2008
104
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
“Audit Committee Report,”
Directors,”
“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 24, 2008 (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, 2007
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
9,393,920
$51.80
3,136,000
Plan Category
Equity compensation
plans approved by
security holders . . .
Equity compensation
plans not approved
by security
holders . . . . . . . . . .
Total . . . . . . . . . . . . . .
9,393,920
(b) Security ownership of certain beneficial owners:
0
0
$51.80
0
3,136,000
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.
105
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, 2007 and 2006 . . . . . . . . . . . . . . .
Consolidated Statements of Operations for each of the three years in the period
ended December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income for each of the three years in
the period ended December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Shareholders’ Equity for each of the three years in
the period ended December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedules Supporting Financial Statements for each of the three years in the period
ended December 31, 2007:
II. Condensed Financial Information of Registrant (Parent Company) . . . . . . . . . . . . .
IV. Reinsurance (Consolidated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
51
52
53
54
55
56
57
114
118
Schedules not referred to have been omitted as inapplicable or not required by Regulation S-X.
106
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
Restated Certificate of
Incorporation of Torchmark Corporation, as amended
(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)
Indenture, dated as of December 14, 2001, between Torchmark,
Supplemental
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)
Second Supplemental
Indenture dated as of June 23, 2006 between Torchmark
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)*
107
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
Subsidiary and Officer at
the Level of Vice President or Above Not Eligible to
Participate in Torchmark Corporation and Affiliates Retired Lives Reserve Agreement
(incorporated by reference from Exhibit 10(j) to Form 10-K for the fiscal year ended
December 31, 1991)*
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* (incorporated by reference from Exhibit
10.17 to Form 10-K for the fiscal year ended December 31, 2006)
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*
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)*
108
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
institutions party thereto, and
Receivables Funding Corporation, certain financial
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
Receivables Funding Company LLC,
formerly known as Preferred Receivables
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)
109
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
10.47
Amendment No. 8 dated as of August 24, 2007 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, Chariot
Funding LLC, successor by assignment to Preferred Receivables Funding Company,
LLC, 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 27, 2007)
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)*
Form of Deferred Compensation Stock Option Grant Agreement pursuant
to the
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)*
110
Page of
this
Report
113
113
10.48
10.49
10.50
10.51
10.52
10.53
10.54
10.55
10.56
10.57
10.58
10.59
(11)
(12)
(20)
(21)
(23)(a)
(b)
(c)
(d)
(e)
Torchmark Corporation Supplemental Executive Retirement Plan (incorporated by
reference from Exhibit 10.1 to Form 8-K dated January 25, 2007)*
Torchmark Corporation 2007 Long-Term Compensation Plan (incorporated by red from
Exhibit 99.1 to Form 8-K dated May 2, 2007)
Form of Stock Option Award Agreement under Torchmark Corporation 2007 Long-Term
Compensation Plan (incorporated by reference from Exhibit 99.2 to Form 8-K dated
May 2, 2007)
Form of Restricted Stock Award (Board grant) under Torchmark Corporation 2007 Long-
Term Compensation Plan (incorporated by reference from Exhibit 99.3 to Form 8-K
dated May 2, 2007)
Torchmark Corporation Non-Employee Director Compensation Plan (incorporated by
reference from Exhibit 10.1 to Form 8-K dated December 19, 2007)*
Amendment No. 1 to the Torchmark Corporation Supplemental Executive Retirement
Plan*
Amendment No. 2 to the Torchmark Corporation Supplemental Executive Retirement
Plan*
Amendment No. 2 to the Torchmark Corporation Supplementary Retirement Plan*
Amendment No. 3 to the Torchmark Corporation Supplementary Retirement Plan*
Form of Restricted Stock Award Notice under Torchmark Corporation Non-Employee
Director Compensation Plan*
Form of Restricted Stock Unit Award Notice under Torchmark Corporation Non-
Employee Director Compensation Plan*
Form of Restricted Stock Award (Compensation Committee grant) under Torchmark
Corporation 2007 Long-Term Compensation Plan
Statement re computation of per share earnings
Statement re computation of ratios
Proxy Statement for Annual Meeting of Stockholders to be held April 24, 2008***
Subsidiaries of the registrant
Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports
dated February 28, 2008, into Form S-8 of The Torchmark Corporation Savings and
Investment Plan (Registration No. 2-76378)
Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports
dated February 28, 2008, 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, 2008, 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, 2008, 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, 2008,
the Liberty National Life Insurance
Company 401(k) Plan (Registration No. 33-65507)
into Form S-8 of
111
Page of
this
Report
(f)
(g)
(h)
(i)
(j)
(k)
(l)
Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports
dated February 28, 2008, 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, 2008 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, 2008 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, 2008 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, 2008 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
Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports
dated February 28, 2008 into Form S-8 and the accompanying Form S-3 Prospectus
of
the Torchmark Corporation Amended and Restated 2005 Incentive Plan
(Registration No. 333-144554)
Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports
dated February 28, 2008 into Form S-8 of the Torchmark Corporation 2007 Long-
Term Compensation Plan (Registration No. 333-148244)
(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.
112
Exhibit 11. Statement re computation of per share earnings
TORCHMARK CORPORATION
COMPUTATION OF EARNINGS PER SHARE
Twelve Months Ended December 31,
2005
2006
2007
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $527,535,000 $518,631,000 $495,390,000
Basic weighted average shares outstanding . . . . . . . . . . . . . . . . . . . .
Diluted weighted average shares outstanding . . . . . . . . . . . . . . . . . . .
94,317,142
95,845,997
99,732,608
101,112,157
104,735,466
105,751,413
Net income per basic share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5.59 $
5.20 $
Net income per diluted share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5.50 $
5.13 $
4.73
4.68
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
Nebraska
Alabama
Nebraska
Missouri
Name Under Which
Company Does
Business
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
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 107 through 112 of this report. Exhibits not referred to have been omitted as
inapplicable or not required.
113
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(Amounts in thousands)
December 31,
2007
2006
Assets:
Investments:
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,472 $
17,326
42,199
8,863
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,798
4,259,118
16,281
38,470
27,928
51,062
4,308,397
646
18,012
32,702
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,360,595 $4,410,819
Liabilities and shareholders’ equity:
Liabilities:
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 202,058 $ 169,736
597,537
Long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
140,502
Due to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
43,851
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
598,012
151,074
84,824
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,035,968
951,626
Shareholders’ equity:
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
351
94,875
831,739
(80,938)
3,003,152
(524,552)
351
99,875
842,844
140,097
2,827,287
(451,261)
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,324,627
3,459,193
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,360,595 $4,410,819
See Notes to Condensed Financial Statements and accompanying Report of Independent Registered
Public Accounting Firm.
114
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
CONDENSED STATEMENTS OF OPERATIONS
(Amounts in thousands)
Year Ended December 31,
2005
2006
2007
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized investment gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 23,716
131
-0-
$ 25,857 $ 16,499
419
13,482
(9,023)
5,142
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,847
21,976
30,400
General operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reimbursements from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,582
14
68,549
86,145
14,205
(9,504)
73,880
9,986
(10,392)
60,997
78,581
60,591
Operating income (loss) before income taxes and equity in earnings of
affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(62,298)
22,425
(56,605)
27,041
(30,191)
21,493
Net operating loss before equity in earnings of affiliates . . . . . . . . . . . . . . . . . . . . . .
Equity in earnings of affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(39,873)
567,408
(29,564)
548,195
(8,698)
504,088
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$527,535
$518,631 $495,390
See Notes to Condensed Financial Statements and accompanying Report of Independent Registered
Public Accounting Firm.
115
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
2007
2005
Cash provided from (used for) operations before dividends from subsidiaries . . $ (27,803) $ (13,776) $
Cash dividends from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
458,017
427,747
4,754
365,458
Cash provided from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
430,214
413,971
370,212
Cash provided from (used for) investing activities:
Acquisition of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disposition of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease (increase) in temporary investments . . . . . . . . . . . . . . . . . . . . . .
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions to properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
42,348
(11,082)
(18,043)
(26)
(39,574)
4,043
4,326
-0-
(28)
-0-
1,540
(10,491)
-0-
(55)
Cash provided from (used for) investing activities . . . . . . . . . . . . . . . . . . . . . . . . .
13,197
(31,233)
(9,006)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit on stock option exercises . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
-0-
-0-
-0-
32,322
42,636
(451,791)
3,400
2,873
(72,851)
119,458
245,961
(180,000)
(154,639)
(3,659)
(31,917)
21,451
(344,861)
15,800
1,033
(71,365)
-0-
-0-
-0-
-0-
-0-
31,299
217,257
(554,946)
14,800
-0-
(69,616)
Cash provided from (used for) financing activities . . . . . . . . . . . . . . . . . . . . . . . . .
(443,411)
(382,738)
(361,206)
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.
116
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $458,017 $427,747 $365,458
2007
2006
2005
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 . . . . . . . . . . . . . . . .
$ 2,873
8,106
15,700
$ 1,033
6,576
14,800
$8,115
1,375
-0-
The following table summarizes certain amounts paid (received) during the period:
Year Ended December 31,
2005
2006
2007
Year Ended December 31,
2005
2006
2007
Interest paid* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 68,034 $ 73,547 $ 60,380
(19,513)
Income taxes received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(20,514)
(20,332)
*
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
In 2007, a Federal
income tax benefit of $1.2 million was recorded relating to Internal Revenue
Service examinations of prior years.
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
from an Internal Revenue Service examination covering several years. More
a settlement benefit
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.
117
TORCHMARK CORPORATION
SCHEDULE IV. REINSURANCE (CONSOLIDATED)
(Amounts in thousands)
Gross
Amount
Ceded
to Other
Companies(1)
Assumed
from Other
Companies
Net
Amount
Percentage
of Amount
Assumed
to Net
For the Year Ended December 31,
2007:
Life insurance in force . . . . . . . . . . . . . $143,316,407
$1,495,095
$2,033,069
$143,854,381
1.4%
Premiums:(2)
Life insurance . . . . . . . . . . . . . . . . . . $ 1,505,784
1,241,471
Health insurance . . . . . . . . . . . . . . .
Total premium . . . . . . . . . . . . . . . . $ 2,747,255
$
$
7,651
4,676
12,327
$
$
19,500
–0–
$ 1,517,633
1,236,795
19,500
$ 2,754,428
1.3%
0%
.7%
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:(2)
Life insurance . . . . . . . . . . . . . . . . . . $ 1,457,512
1,242,350
Health insurance . . . . . . . . . . . . . . .
Total premium . . . . . . . . . . . . . . . . $ 2,699,862
$
$
7,492
4,818
12,310
$
$
19,882
–0–
$ 1,469,902
1,237,532
19,882
$ 2,707,434
1.4%
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:(2)
Life insurance . . . . . . . . . . . . . . . . . . $ 1,398,402
1,018,838
Health insurance . . . . . . . . . . . . . . .
Total premium . . . . . . . . . . . . . . . . $ 2,417,240
$
$
7,479
3,981
11,460
$
$
20,164
–0–
$ 1,411,087
1,014,857
20,164
$ 2,425,944
1.4%
0%
.8%
(1) No amounts have been netted against ceded premium
(2) Excludes policy charges of $52,331; $54,365; and $57,201 in each of the years 2007, 2006, and 2005, respectively.
See accompanying Report of Independent Registered Public Accounting Firm.
118
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, 2008
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/ 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
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, 2008
*By:
/s/ GARY L. COLEMAN
Gary L. Coleman
Attorney-in-fact
119
3700 S. STONEBRIDGE DRIVE
MCKINNEY, TEXAS 75070
www.torchmarkcorp.com