2008 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 30, 2009
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: Mike Majors
Phone: (972) 569-3627
Fax: (972) 569-3282
E-Mail: tmkir@torchmarkcorp.com
Individual Stock Ownership Information:
(205) 325-4270
INDEPENDENT AUDITORS
Deloitte & Touche LLP
2200 Ross Avenue
Suite 1600
Dallas, Texas 75201
STOCK EXCHANGE LISTINGS
New York Stock Exchange
Symbol: TMK
The London Stock Exchange,
London, England
INDENTURE TRUSTEE FOR
SENIOR DEBENTURES AND
77/8%, 73/8% AND 63/8% NOTES
The Bank of New York
Trust Company, N.A.
505 North 20th Street, Suite 950
Birmingham, AL 35203
Attention: Corporate Trust Administration
Toll-Free Number: (800) 254-2826
Website: www.bankofny.com/corptrust
TORCHMARK CAPITAL TRUST
PREFERRED SECURITIES
Torchmark Capital Trust III, a Delaware
business trust subsidiary of Torchmark, has
issued a total of 4.8 million 7.10% Trust
Preferred Securities (liquidation amount
$25 per Trust Preferred Security). The Trust
through
Preferred Securities
Depository Trust Company under global
certificates listed on the New York Stock
Exchange (Torchmark Capital Trust III,
NYSE symbol: TMKPRA).
trade
STOCK TR ANSFER AGENT AND
SHAREHOLDER ASSISTANCE
BNY Mellon Shareowner Services
P.O. Box 358015
Pittsburgh, PA 15252-8015
Toll-Free Number: (866) 557-8699
TDD for Hearing Impaired:
(800) 231-5469
Outside the U.S.: (201) 680-6578
Website:
www.bnymellon.com/shareowner/isd
DIVIDEND REINVESTMENT
a
Torchmark maintains
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) 557-8699
or by writing: Torchmark Corporation, c/o
BNY Mellon Shareowner Services, P.O.
Box 358016, Pittsburgh, PA 15252-8016.
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) 557-8699.
CORPOR ATE GOVERNANCE
The Company timely submitted to the
New York Stock Exchange a Section
303A (12)(a) CEO Certification without
qualification in 2008. In 2008, Torchmark
also timely filed with the Securities
the
and
required
CEO/ CFO
the
by Section 404 and 302 of
Sarbanes-Oxley
Exhibits
to its Form 10-K.
Certifications
Commission
Exchange
Act
as
TORCHMARK
CORPOR ATION
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
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
2008
2007
% CHANGE
$2,758,134
$2,834,562
513,287
1,707,522
1,098,349
88,516
522,113
1,672,865
1,233,884
95,846
15.3%
15.8%
(2.7)
(1.7)
2.1
(11.0)
(7.6)
$5.80
39.17
$5.45
36.26
6.4
8.0
* Certain financial data differ from the comparable GAAP financial data.
Reconciliations to GAAP financial data are presented on pages 11-12.
2 · TORCHMARK CORPORATION ·
LETTER TO SHAREHOLDERS*
This letter is very difficult for me to write. A year ago,
$6.00
I could not imagine circumstances which could have
caused anything near the decline in the market price
$5.00
$4.00
$3.00
$2.00
$1.00
0
of our shares which we have experienced in the past
12 months. While I am disappointed in our short-term
stock performance, I am not discouraged. I remain
confident in our conservative management practices
and philosophies and I believe wholeheartedly that
the market will eventually recognize the true value of
the Company we have built.
While 2008 was a difficult year for Torchmark, it
proved to be devastating for many businesses.
Huge losses, bankruptcies and government bailouts
became commonplace as we experienced the start
of what many have described as a once in a century
economic crisis. The depth and duration of this crisis
are still unclear.
We faced many challenges in 2008. The Lehman
Brothers and Washington Mutual bankruptcies
NET OPERATING INCOME COMPONENTS
Earnings Per Share
5.80
2.40
5.45
2.18
4.99
2.03
4.59
1.98
4.23
1.91
3.40
3.27
2.96
2.61
3.87
1.78
3.51
1.57
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 2008
10-YEAR
COMPOUND ANNUAL
GROWTH RATE
Underwriting Income 8.7%
Excess Investment Income 10.3%
Net Operating Income 9.3%
Underwriting Income
Excess Investment
Income
resulted in bond defaults which generated after-tax
The priorities and responsibilities of Torchmark
losses of $60 million in our investment portfolio. The
management have not changed:
lack of liquidity in the bond markets contributed to
an increase in net unrealized losses of $1.7 billion for
the year in our fixed maturity portfolio. The decline
• Insure that we have more than adequate capital and
liquidity to fund the operations of the Company.
in the equity markets created underwriting losses of
• Invest the assets of the Company in a manner
$9 million during the fourth quarter in our small block
which stresses asset preservation and provides a
of variable annuity business.
conservative balance of yield and risk.
For the year, net operating income per share increased
• Maximize growth
in our existing distribution
6.4% to $5.80. If we value our investment portfolio
systems with products and pricing which provide
at amortized cost, our book value per share grew 8%
a good value to our customers, fair compensation
to $39.17 and our return on equity was 15.3%. On a
to our sales force, and a reasonable profit to our
GAAP reported basis, with fixed maturities carried at
shareholders.
market value, book value was $26.24 per share.
• Utilize excess capital in a manner which provides the
maximum benefit to our long-term shareholders.
* Certain financial data differ from the comparable GAAP financial data. Reconciliations to GAAP financial data are presented on pages 11-12.
LETTER TO SHAREHOLDERS · TORCHMARK CORPORATION · 3
CAPITAL AND LIQUIDITY
Our first priority is to insure that we have sufficient
capital and cash at the parent company as well as each
of the subsidiary insurance companies.
CAPITALIZATION as of 12/31/08
($ in millions)
INSURANCE COMPANY
RISK BASED CAPITAL
Capital
Required Capital
Company Action Level RBC
CORPORATE
DEBT TO CAPITAL
Commercial Paper
Senior Debentures & Notes
Trust Preferred
Total Debt
Equity, Excluding FAS 115
Total Capitalization
$1,281
$389
329%
$304
602
120
$1,026
3,318
$4,344
7.0%
13.9%
2.7%
23.6%
At the insurance company level, our goal for many years
has been to achieve a Risk Based Capital (RBC) ratio of
300%. While it is much more than we need to cover
our obligations, we have found that, historically, an RBC
ratio of 300% has been sufficient to maintain our credit
and claims-paying ability ratings.
At the end of 2008, our RBC ratio was 329%. At that
Using Moody’s historical bond default rates, we found
that the highest default rates occurred in 1933 – during
the height of the Great Depression. We applied the
1933 bond default rates by rating category to our
current portfolio and calculated our potential losses to
be $200 million.
In the unlikely event that we did suffer $200 million of
investment losses (with no offsetting tax benefits or
liquidation proceeds), we believe our RBC ratio would
continue to be at or above 300%. We could maintain
this RBC level without any capital injection into the
insurance companies. Our debt to capital ratio at the
parent company would still be around 25% - well below
our 30% limit. As additional cushion, we have annual
free cash flow at the parent company in excess of
$300 million per year which could be used if investment
losses exceeded the historically worst case estimate of
$200 million.
The strength of our capitalization is a result of the strong
and consistent cash flows we generate at both the
insurance company and the parent company levels.
INSURANCE COMPANIES NET CASH FLOW
($ in millions)
Insurance Underwriting
Excess Investment Income
2008
2009 E
$494
608
(171)
$931
587
$940-$960
600
level, we have approximately $110 million more in
Income Taxes and Parent Expenses
capital in the insurance companies than our minimum
objective of 300%.
Investment Dispositions and
Other Non-Operating Activities
At the parent company, we intend to keep our debt to
Net Cash Flow
$1,518
$1,540-$1,560
capital ratio below 30% which we have done for the past
9 years. This target was also set in order to preserve
our standings with the various rating agencies. At year-
end, Torchmark’s debt to capital ratio was 23.6% as
shown above.
In the insurance companies, we generated net cash
of just over $1.5 billion during 2008, of which $931
million came from core operations. Typical of insurance
companies, excess investment income is the largest
We believe that these measures demonstrate that our
source of operating cash flow. Unlike most companies,
companies are well capitalized. However, in light of
however, Torchmark’s underwriting operations also
current economic conditions and concerns about bond
generate a significant amount of cash. In 2008, our
impairments, we have performed additional analysis of
underwriting cash flow amounted to $494 million
our investment portfolio and adequacy of our capital.
– 45% of our core operating cash flow.
4 · TORCHMARK CORPORATION · LETTER TO SHAREHOLDERS
We are consistently able to produce these cash flows
As of year end, we had just over $400 million of short
because of the strong underwriting margins in our
term debt - $99 million from a debt offering which
products and the stability of our in force blocks of
matures in August and $305 million of commercial
business. Contributing to this stability is the fact that
paper. While our preference is to refinance this
less than 1% of our premium revenue is derived from
debt, we have ample liquidity at the parent company
asset accumulation products where profitability is
($1.85 billion) to pay off this debt if we are unable to
subject to performance of the equity markets.
refinance at favorable terms.
For 2009, we expect net core operating cash flow to be
approximately $950 million and total cash flow at the
insurance companies to be around $1.6 billion.
PARENT COMPANY FREE CASH FLOW
($ in millions)
2008
2009 E
2009 DEBT MATURITIES
($ in millions)
Cash Needed for 2009 Debt Maturities
Commercial Paper
Senior Notes Due 8/09
$305
99
$404
Source of 2009 Debt Repayment
> Preference is to Refinance
> Sources of Cash if Refinancing Terms Aren’t Favorable
Estimated 2009 Free Cash Flow
Loans Available From Subsidiaries
Potential Issuance of Preferred Shares to Subsidiaries
Bank Line Capacity
Other Sources
$325
390
335
400
400
$1,850
Insurance Companies
Net Cash Flow
Less Cash Retained
Cash Dividends Paid to TMK
Torchmark Parent Company
Dividends Received From
Insurance Companies
Less Cash Outflow:
Interest Expense
Dividends to Shareholders
Other, Net
Net Outflow
$1,518
1,081
437
$437
62
49
(17)
94
Free Cash Flow
$343
$320-$330
Due to regulatory restrictions, most of our cash flow
must remain in the insurance companies. In 2008,
we were able to dividend $437 million to the parent
company. Of this amount, $94 million was used to pay
parent company obligations including interest on debt
and shareholder dividends which left $343 million of
“free” cash flow at the parent company.
In 2009, the cash we will be allowed to dividend to the
parent company will be slightly less because of the bond
impairment losses we incurred in 2008. We continue
to expect “free” cash flow at the parent company in the
$320 - $330 million range – the fifth consecutive year in
which “free” cash has exceeded $300 million.
LETTER TO SHAREHOLDERS · TORCHMARK CORPORATION · 5
INVESTMENTS
At the end of 2008, our total invested assets (with bonds
valued at amortized cost) were $10.2 billion. Fixed
maturities comprised 94% of our portfolio compared to
the industry average of 77%. On the other hand, less
Of our fixed maturity assets, 78% are corporate bonds
and 15% are redeemable preferred stock. The balance
of the portfolio is primarily municipal bonds and other
government related securities. 92.6% of the portfolio
is rated investment grade with an average rating of A-.
than 1% of our invested assets are equities, mortgages
At year-end, net unrealized losses on our fixed maturity
and real estate in contrast to the industry average
portfolio were $1.8 billion – an increase of $1.1 billion
of 15%.
INVESTMENT PORTFOLIO as of 12/31/08
($ in millions)
Fixed Maturities
Equities
Mortgage Loans
Investment Real Estate
Policy Loans
Other Long-Term Investments
Short-Term Investments
Amortized
Cost
$9,610
% of
Total
94%
17
17
2
360
53
131
0%
0%
0%
4%
1%
1%
Industry
77%
3%
11%
1%
4%
3%
1%
Total
$10,190
100% 100%
We invest in fixed maturities more than our peers
because of the nature of our policy liabilities. Roughly
85% of our net policy liabilities are from traditional
whole life and term life insurance policies – they are
not investment products and the reserves are not
policyholder account values. These liabilities are
reserves set aside to pay future benefits and these
reserves are credited at fixed interest rates. Thus,
these fixed rate liabilities are best funded by fixed
rate assets.
during the second half of 2008. 74% of this increase
was from bonds which had no change in their credit
ratings with another 18% from bonds which had a one
notch downgrade.
NET UNREALIZED LOSSES
FIXED MATURITIES
($ in millions)
NET UNREALIZED LOSSES:
12/31/08
06/30/08
Increase in Unrealized Losses*
*% OF INCREASE IN UNREALIZED LOSSES
FROM FIXED MATURITIES WITH:
No Change in Rating
One Notch Downgrade
$1,793
670
$1,123
74%
18%
This indicates to us that the decline in the market
value of our fixed maturities is due more to the lack
of liquidity in the bond market that negatively affects
market prices instead of a significant deterioration in
the credit quality of our assets. Thanks to the strong
cash flows we generate, we don’t have a need to sell
bonds in this depressed market. We have the intent
and, more importantly, we have the ability to hold these
bonds to maturity.
6 · TORCHMARK CORPORATION · LETTER TO SHAREHOLDERS
UNDERWRITING INCOME 2008
($ in millions)
LIFE
U/W
Income
Premium
Share
of U/W
Income
Premium
American Income
$474
$128
511
287
201
32
17
95
92
53
43
1
3
20
38%
27%
15%
13%
0%
1%
6%
$73
45
135
0
357
341
0
Direct Response
Liberty National
Military
UA Independent
UA Branch
Other
Total
HEALTH
U/W
Income
$23
3
28
0
39
25
0
TOTAL LIFE & HEALTH
Share
of U/W
Income
Premium
U/W
Income
Share
of U/W
Income
19%
3%
24%
0%
33%
21%
0%
$547
$151
556
422
201
389
358
95
95
81
43
40
28
20
33%
21%
18%
9%
9%
6%
4%
$1,617
$340
100%
$951
$118
100%
$2,568
$458
100%
Underwriting income is premium and other operating income less policy obligations, commission and other acquisition and administrative expenses.
AMERICAN INCOME
DIRECT RESPONSE
2008 was an excellent year at American Income.
2008 was a good year for our direct response operation.
Net sales grew by 16% for the year to $120 million
Net life sales grew 8% to $123 million while life premiums
and premium revenue increased 7% to $547 million.
increased 6% to $511 million. Life underwriting income
Underwriting income was up 11% to $151 million and
was up 1% to $92 million.
represented 33% of Torchmark’s total underwriting
income for the year. The number of producing agents
increased 21% during 2008 and ended the year at 3,085.
Of our life distribution systems, direct response appears
to be the only one which may have been impacted
by the economy. During the course of 2008, we
We continue to make progress in the centralization
experienced deterioration in both our response rates
of the sales lead generation function at American
and initial persistency in some of our markets.
Income. I am pleased that the volume of new sales
leads increased 19% during 2008 and should continue
to improve through 2009 as we complete this project.
As a result of favorable tests in pricing and packaging,
we are seeing a reversal in these unfavorable trends.
We expect these improvements in response rates and
We plan to implement some major enhancements to the
persistency to continue during 2009.
sales process at American Income during 2009. Utilizing
a laptop computer presentation and an expanded term
life insurance product portfolio, we will be better able
to sell the life insurance products which fill the needs of
the middle income market. We believe these changes
will further boost our sales growth during the second
half of 2009.
LIBERTY NATIONAL
We saw a major turnaround at Liberty National
during 2008. While premiums declined 3% to
$422 million and underwriting income was down 5% to
$81 million, net sales grew 29% for the year to $61 million.
The number of producing agents increased 43% during
2008 to 3,437.
LETTER TO SHAREHOLDERS · TORCHMARK CORPORATION · 7
Increased recruiting activity, enhancements to our
bonus compensation and a new laptop computer sales
presentation all contributed to our sales growth. We
expect this momentum to continue in 2009 as we
continue to open new offices and expand the markets
served by Liberty National.
UNITED AMERICAN
United American markets primarily health insurance
products through a captive agency force as well as
independent agents. The markets served by United
American have always been highly competitive resulting
in very volatile sales results. For 2008, health net sales
at United American dropped 49% to $109 million.
Health premiums declined 10% for the year to
$698 million and health underwriting income was down
16% to $64 million.
While United American represents over 25% of our
premium revenue, it accounts for only 15% of our
insurance underwriting income after administrative
expenses and 8% of our net operating income.
Due to the competitive nature of its markets, the
products sold through United American have lower
underwriting margins and poorer persistency than the
other Torchmark distribution systems.
While we intend to continue to produce sales in our
current health insurance markets, we have decided
to shift our focus to selling life and supplemental
health products which have higher margins and better
persistency. During 2008, we began introducing the
Liberty National products and sales process to the
United American agents. This transition will continue
through 2009. While sales may continue to decline in
the short term, we believe this change will lead to long
term sustainable growth.
8 · TORCHMARK CORPORATION · LETTER TO SHAREHOLDERS
EXCESS CAPITAL
For many years now, we have used the “free” cash flow
at Torchmark to repurchase shares of our stock. Since
1998, we have repurchased over 59.8 million shares.
FREE CASH FLOW AND SHARE REPURCHASES
(in millions)
Free Cash Flow
# of Shares
Repurchased
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
$343
$358
$340
$300
$275
$225
$195
$152
$100
$110
$90
7.64
6.15
5.58
5.65
5.22
5.90
4.82
4.27
5.81
5.40
3.44
Cost
$427
$402
$320
$300
$268
$225
$182
$159
$135
$175
$126
Entering 2008, we believed that a strategic acquisition
could well be a better use of our excess capital and
produce significant accretion to our earnings per share.
During the first half of the year, we looked closely at
several potential acquisitions which we believed would
fit well within our company.
With the economic turmoil in the second half of the
year, we were forced to shelve any acquisition activity.
The drop in the market value of Torchmark stock
also caused us to reevaluate the relative merits of
our share repurchase program. For the year, we
repurchased 7.64 million shares of our stock at a cost
of $427 million.
Entering 2009, we intend to be cautious in how
we utilize our excess capital, but we also intend to
pursue opportunities.
With our stock trading at a historically low Price/Earnings
Ratio, share repurchase produces an exceptional return
to our shareholders. If credit markets improve, we
believe there are several potential acquisition candidates
with highly motivated sellers. If the credit markets do
not improve, we may use some of our “free” cash to
pay down our debt.
OUTLOOK
2009 will definitely be a challenging year, but I believe
Torchmark is well positioned to take advantage of the
opportunities which are presented to us. Our core
operations are in good shape and are, for the most part,
immune to changes in the economy.
We are well capitalized and continue to generate strong
cash flows at both the insurance companies and parent
company. We have more than sufficient liquidity to
retire all of our short term debt if the need arises.
We will not manage your Company to merely survive this
economic crisis. While remaining prudent, we intend to
continue to manage the Company to produce the best
possible returns to our long term shareholders.
MARK S. MCANDREW
Chairman and Chief Executive Officer
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, 2008, found on the following pages and on file with the Securities and Exchange
Commission. Torchmark specifically disclaims any obligation to update or revise any forward-looking statement because of new information, future
developments or otherwise.
LETTER TO SHAREHOLDERS · TORCHMARK CORPORATION · 9
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
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
MIKE MAJORS
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
OFFICERS OF SUBSIDIARIES
AMERICAN INCOME LIFE
ROGER SMITH
Chief Executive Officer and President
LIBERTY NATIONAL LIFE
ANTHONY L. MCWHORTER
Chief Executive Officer
UNITED AMERICAN
VERN D. HERBEL
Chief Executive Officer
GLOBE LIFE
CHARLES F. HUDSON
President and Chief Executive Officer
ANDREW W. KING
President and Chief Marketing Officer
ANDREW W. KING
President and Chief Marketing Officer
UNITED INVESTORS LIFE
ANTHONY L. MCWHORTER
President and Chief Executive Officer
10 · TORCHMARK CORPORATION · LETTER TO SHAREHOLDERS
OPER ATING SUMMARY
Unaudited and in thousands except per share amounts
TWELVE MONTHS ENDED DECEMBER 31,
2008
2007
% 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)
Tax settlements
Net proceeds (costs) from legal settlement
Loss on Company-occupied property
Net Income
EPS on a diluted basis
3%
4%
(8%)
(6%)
3%
(4%)
3%
1%
(2%)
(2%)
6%
$1,616,804
(662,704)
(522,325)
431,775
951,304
(589,198)
(189,156)
172,950
21,761
(6,423)
620,063
4,154
(159,283)
464,934
$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
671,231
648,562
(480,297)
200,172
(62,965)
328,141
(10,455)
782,620
(262,298)
$520,322
(7,035)
$513,287
$5.80
88,516
(447,755)
190,255
(67,300)
323,762
(9,815)
798,337
(270,955)
$527,382
(5,269)
$522,113
$5.45
95,846
$513,287
$522,113
181
(69,878)
10,823
(770)
(1,384)
$452,259
$5.11
2,768
1,777
1,149
(272)
0
$527,535
$5.50
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.
OPERATING SUMMARY · TORCHMARK CORPORATION · 11
CONDENSED BALANCE SHEET
Unaudited and amounts in thousands
AT DECEMBER 31,
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
2008
9,609,856
177,354
19,603
429,458
3,287,853
423,519
508,696
758,023
15,214,362
8,886,232
1,009,062
403,707
622,760
216,218
758,023
3,318,360
15,214,362
84,708
84,708
39.17
15.3%
3,350,397
23.6%
$
$
$
$
$
$
*Reconciliation of Torchmark management’s view of selected financial measures to comparable GAAP measures:
3,318,360
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
(1,792,670)
107,358
589,859
2,222,907
7,817,18 6
3,395,211
13,529,050
2,222,907
419,203
26.24
16.1%
2,808,381
31.6%
$
$
$
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%
$
$
$
$
$
$
$
3,386,142
(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%
$
$
$
The Condensed Balance Sheet, Excluding FAS 115 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 Sheet found in the accompanying SEC Form 10-K.
12 · TORCHMARK CORPORATION · CONDENSED BALANCE SHEET
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, 2008
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
Common Stock, $1.00 par value per share
7.10% Trust Originated Preferred Securities
CUSIP
891927104
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, 2008,
the aggregate market value of
the registrant’s common stock held by non-affiliates of
the registrant was
$5,181,799,170 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 30, 2009
84,509,765 shares
DOCUMENTS INCORPORATED BY REFERENCE
Document
Proxy Statement for the Annual Meeting of Stockholders to be
held April 30, 2009 (Proxy Statement)
Parts Into Which Incorporated
Part III
TORCHMARK CORPORATION
INDEX
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4.
Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . .
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . .
Item 8.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . .
Item 9.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 10. Directors, Executive Officers, and Corporate Governance . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships
and Director
Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
and Related Transactions
Item 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
1
6
9
10
10
13
13
15
16
54
55
109
109
109
112
112
112
112
112
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . .
113
PART I.
PART II.
PART III.
PART IV.
PART I
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.
3,437 producing agents; 161
branch offices primarily in
the Southeastern U.S.
Individual life and supplemental health
insurance marketed to union and credit
union members.
3,085 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.
2,838 independent
producing agents in the U.S.
and Canada; 1,583
exclusive producing agents
in 85 branch offices.
Additional information concerning industry segments may be found in Management’s Discussion and
Analysis and in Note 13—Business Segments in the Notes to the Consolidated Financial Statements.
1
Life Insurance
Insurance
Torchmark’s insurance subsidiaries write a variety of nonparticipating ordinary life insurance
products. These include traditional and interest sensitive whole-life insurance, term life insurance, and
other life insurance. The following table presents selected information about Torchmark’s life products.
Whole life:
(Amounts in thousands)
Annualized Premium in Force
2006
2007
2008
Traditional . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,037,315 $ 975,475 $ 934,553
123,802
Interest-sensitive . . . . . . . . . . . . . . . . . . . . . . .
506,921
Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50,211
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
118,701
525,279
53,410
112,055
503,669
54,483
$1,707,522 $1,672,865 $1,615,487
The distribution methods for life insurance products include sales by direct response, exclusive
agents and independent agents. These methods are described in more depth in the Distribution Method
chart earlier in this report. The following table presents life annualized premium in force by distribution
method.
(Amounts in thousands)
Annualized Premium in Force
2006
2007
2008
Direct response . . . . . . . . . . . . . . . . . . . . . . . . . . $ 553,740 $ 530,137 $ 496,772
Exclusive Agents:
American Income . . . . . . . . . . . . . . . . . . . . . .
Liberty National . . . . . . . . . . . . . . . . . . . . . . . .
United American . . . . . . . . . . . . . . . . . . . . . . .
Independent Agents:
United American . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
494,191
304,490
17,689
30,998
306,414
469,486
304,584
18,140
34,758
315,760
430,598
311,975
16,710
39,613
319,819
$1,707,522 $1,672,865 $1,615,487
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, 2008, 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, 2008. The net sales data illustrates the change in product mix in recent
periods favoring limited-benefit plans. However, Medicare Supplement premium in force exceeded that of
limited-benefit plans in all periods except 2007, reflecting the higher persistency in Medicare Supplement
business.
2
The following table presents health insurance net sales information for the three years ended
December 31, 2008 by product category. Net sales for Medicare Part D represent only new first-time
enrollees.
(Amounts in thousands)
Net Sales
2007
2008
2006
Amount
$111,470
27,533
28,292
% of
Total
67
16
17
Amount
$207,467
31,902
24,514*
% of
Total
79
12
9
Amount
$209,258
33,980
278,023
% of
Total
40
7
53
Limited-benefit plans . . . . . . . . . . . .
Medicare Supplement
. . . . . . . . . . .
Medicare Part D . . . . . . . . . . . . . . . .
Total Health . . . . . . . . . . . . . . . .
$167,295
100
$263,883
100
$521,261
100
* Restated
The following table presents supplemental health annualized premium information for the three years
ended December 31, 2008 by product category.
(Amounts in thousands)
Annualized Premium in Force
2007
2006
% of
Total
39
44
17
Amount
$ 519,994
518,205
195,685
% of
Total
42
42
16
Amount
$ 508,112
550,750
234,219
% of
Total
39
43
18
2008
Amount
$ 432,579
484,761
181,009
Limited-benefit plans . . . . . . . .
Medicare Supplement . . . . . . .
Medicare Part D . . . . . . . . . . . .
Total Health . . . . . . . . . . .
$1,098,349
100
$1,233,884
100
$1,293,081
100
The number of health policies in force (excluding Medicare Part D) was 1.54 million, 1.56 million, and
1.60 million at December 31, 2008, 2007, and 2006, respectively. Medicare Part D enrollees at
December 31, 2007 were approximately 158 thousand to begin the 2008 plan year, and are not expected
to increase for the 2009 plan year. There were 189 thousand enrollees at the beginning of the 2007 plan
year.
The following table presents supplemental health annualized premium in force for the three years
ended December 31, 2008 by marketing (distribution) method.
Direct response . . . . . . . . . . . . . . . . . . . . . . . . . . $
Exclusive agents:
United American . . . . . . . . . . . . . . . . . . . . . . .
Liberty National . . . . . . . . . . . . . . . . . . . . . . . .
American Income . . . . . . . . . . . . . . . . . . . . . .
Independent agents:
United American . . . . . . . . . . . . . . . . . . . . . . .
Medicare Part D . . . . . . . . . . . . . . . . . . . . . . .
(Amounts in thousands)
Annualized Premium in Force
2006
2007
2008
48,105 $
44,708 $
41,996
310,113
138,151
67,560
353,411
917,340
181,009
395,773
140,802
67,976
385,505
148,817
63,810
388,940
418,734
1,038,199
195,685
1,058,862
234,219
$1,098,349 $1,233,884 $1,293,081
3
Annuities
Annuity products offered include single-premium deferred annuities,
flexible-premium deferred
annuities, and prior to 2008 variable annuities.
In recent years Torchmark has deemphasized the
marketing of annuity products. Annuities in each of the three years ending December 31, 2008 comprised
less than 1% of premium.
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 93% of
fair value at
December 31, 2008. (See Note 3—Investments in the Notes to the Consolidated Financial Statements
and Management’s Discussion and Analysis.)
investments at
total
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.
Competition
4
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.
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 a fund which is used, in the event of failure or insolvency of an insurance company, to fulfill the
obligations of that company to its policyholders. The amount which a company is assessed 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.
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, 2008, Torchmark and its
to such legislation in Indiana,
subsidiaries have registered as a holding company system pursuant
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.
At the end of 2008, Torchmark had 2,195 employees and 1,410 licensed employees under sales
contracts.
Personnel
5
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.
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.
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
6
these alternative
organizations (HMOs) and other managed care or private plans. The success of
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
In recent years, price competition in the
the basis of price which could restrict future sales.
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
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.
Variable Annuity Marketplace Risk:
Our variable annuity business is at risk should equity markets decline. Revenues and
underwriting income for variable annuities are based on policyholder account values which consist of
investments primarily in equity markets. When equity markets decline, not only would revenues be
expected to decline, but we would generally expect redemptions to increase, further negatively affecting
revenues and underwriting income. As a part of this business, we also guarantee a minimum death
benefit to policyholders to be paid regardless of account size upon death. Because of this benefit, our
obligation costs rise as the account balance declines. Additionally, the decline in policyholder account
size will require us to adjust our actuarial assumptions on this business to take into account the lower
revenues. As a result, these revisions in assumptions will generally negatively impact our underwriting
income. Variable annuities are not a significant part of our business and we no longer offer new variable
annuity products.
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.
Ratings downgrades 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, downgrades in the ratings of Torchmark’s insurance subsidiaries could slightly affect the ability of
the subsidiaries to market their products.
Liquidity Risk:
Torchmark’s ability to pay dividends, service any of its debt or preferred securities, or meet
its other operating commitments 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
7
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.
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 factors could result
these risks include interest rate levels,
The Company’s investments are subject to market risks. Torchmark’s invested assets are
subject to the customary risks of defaults, downgrades, and changes in market values. Factors that may
affect
financial market performance, and general economic
conditions, as well as particular circumstances affecting the businesses or industries of individual issuers.
investments. Significant
Some of
increases in interest rates or widening of credit spreads 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. A severe down turn in
economic conditions could result in an increase in defaults and writedowns in our fixed maturity portfolio,
which could possibly restrict the capital structure of our insurance subsidiaries and limit their ability to pay
dividends.
in significant write-downs of
individual
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.
8
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, 2008, Torchmark had no unresolved staff comments.
9
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 4 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 5 buildings
were sold in 2008, and 21 buildings were sold in each of the years 2007 and 2006.
A subsidiary of Globe owns a 112,000 square foot facility located in Oklahoma City, Oklahoma which
houses the Globe direct response operation. During 2008, Globe sold two office buildings located in
Oklahoma City. The first was a 300,000 square foot building in which Globe previously occupied 56,000
square feet as its home office with the remainder either leased or available for lease. After the sale, Globe
continued to occupy 37,000 square feet under a lease expiring in April, 2011. The other sold building was
vacant, and consisted of 80,000 square feet.
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 bearing little or no relation to actual damages continue to be 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, on March15, 1999, Torchmark was named as a defendant in consolidated
derivative securities class action litigation involving Vesta Insurance Group, Inc. filed in the U.S. District
Court for the Northern District of Alabama (In Re: Vesta Insurance Group, Inc. Securities Litigation, Master
File No. 98-AR-1407-S). The amended consolidated complaint in this litigation alleged violations of Section
10 (b) of the Securities Exchange Act of 1934 by the defendants Vesta, certain present and former Vesta
officers and directors, KPMG, LLP (Vesta’s former independent public accountants) and Torchmark and of
Section 20 (a) of the Exchange Act by certain former Vesta officers and directors and Torchmark acting as
“controlling persons” of Vesta in connection with certain accounting irregularities in Vesta’s reported financial
results and filed financial statements. Unspecified damages and equitable relief were sought on behalf of a
purported class of purchasers of Vesta equity securities between June 2, 1995 and June 29, 1998. A class
was certified in this litigation on October 25, 1999. In September, 2001, Torchmark filed a motion for
summary judgment, which was denied by the District Court on January 10, 2002. On April 9, 2003, the
10
District Court issued an order denying the class plaintiffs’ motion to strike certain of Torchmark’s affirmative
defenses, holding that Torchmark could not be held jointly and severally liable with Vesta under the
securities law without an affirmative jury determination that Torchmark knowingly committed a violation of
the securities laws.
Vesta, its officers and directors, its insurance carriers and KPMG settled their portions of the litigation
with class plaintiffs in 2001; Torchmark did not. Subsequently,
in May 2003, Torchmark instituted
separate litigation against KPMG which was resolved in March, 2006. In April, 2006, class plaintiffs In Re
Vesta Insurance Group Securities Litigation filed a motion in U.S. District Court for the Northern District of
Alabama renewing their claims against Torchmark based upon an allegation of control person liability.
This matter was set for trial in the District Court on October 2, 2006 and was stayed pending resolution of
an interlocutory appeal to the U.S. Circuit Court of Appeals for the Eleventh Circuit filed by class plaintiffs.
The interlocutory appeal, which was filed August 23, 2006, sought a ruling whether and to what extent
proportionate liability provisions might apply if
the allegations of controlling person liability against
Torchmark were ultimately proven. Arguments on the interlocutory appeal were heard by the Eleventh
Circuit on July 31, 2007. On April 30, 2008, the Eleventh Circuit issued an opinion in the interlocutory
appeal affirming the District Court’s denial of class plaintiffs’ motion to dismiss Torchmark’s affirmative
defenses under the Private Securities Litigation Reform Act of 1995 (PSLRA). The Eleventh Circuit
concluded that substantive controlling person liability under the federal securities law remained the same
and survived the proportionate liability scheme established by PSLRA. The Court found that damages
allocated against a controlling person found liable for a securities law violation were based upon the
proportionate liability provisions in the PSLRA. A trial date of September 8, 2008 was set in the U.S.
District Court for the Northern District of Alabama. The parties reached a settlement of the Vesta litigation
issued an order preliminarily
on September 15, 2008. On September 25, 2008,
approving the settlement and directed the giving of notice thereof to the class members. After a final
settlement hearing, the District Court entered a Final Judgment and Order of Dismissal With Prejudice
approving the final settlement on December 12, 2008.
the District Court
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 essentially identical purported
class action claims 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.
11
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 the separate Roberts action to certify the Roberts 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 itself 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 were
then or had 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,
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. Subsequent to this hearing, an order approving the settlement
agreement was approved by the Barbour County Circuit Court but was thereafter vacated by that Court
due to technical errors in the printing of the original order. A corrected order finally approving the
settlement was entered on or about May 6, 2008. Prior to the entry of the corrected order, notice of
appeal was filed by one objector. On July 29, 2008, the Alabama Supreme Court dismissed the remaining
appeal in Robertson, but reinstated that appeal on September 22, 2008. Appellate mediation was ordered
with respect to this appeal, and on September 30, 2008, a settlement was reached in appellate mediation
which resulted in a dismissal order in the objector’s litigation issued by the Barbour County Circuit Court
on October 16, 2008. The Alabama Supreme Court dismissed the remaining appeal on December 18,
2008. The trial court’s May 6, 2008 order finally approving the second class settlement in Robertson is
therefore in full force and effect.
On January 10, 2007, purported class action litigation was filed against Globe Life And Accident
Insurance Company and additional unaffiliated defendants in the U.S. District Court for the Eastern
District of Texas (Taylor v. Texas Farm Bureau Mutual Insurance Company, Case No. 2-07-CV-014).
Plaintiffs allege violations of the Driver Privacy Protection Act (DPPA) in Globe’s marketing activities.
DPPA is federal
legislation restricting the ability to obtain and use driver’s license and motor vehicle
registration title information maintained by each state. Initially, DPPA allowed use of such personal
information for marketing activities so long as the states provided individuals the opportunity to prohibit
disclosure of their information. DPPA was amended effective June 1, 2000 to provide that using or
obtaining personal information from motor vehicle records for marketing purposes is permitted only if the
state involved obtained the express consent (“opt-in”) of the person whose data is being released.
Plaintiffs, all residents and holders of Texas driver’s licenses, allege that Globe wrongfully obtained,
possessed and/or used motor vehicle record information from the Texas Department of Public Safety
after the June 1, 2000 effective date of the “opt-in” amendment to the DPPA. They seek, in a jury trial,
liquidated damages as provided in the DPPA for each purported class member in the amount of $2,500
for each use of the personal information, punitive damages, the destruction of any personal information
determined to be illegally obtained from motor vehicle records and other appropriate equitable relief. On
September 8, 2008, the District Court entered an order granting the defendants’ consolidated motion to
dismiss with prejudice all plaintiffs’ claims in this litigation pursuant to Federal Rules of Civil Procedure
12(b)(1) and 12(b)(6). On October 8, 2008, plaintiffs filed a notice of appeal, which has been
subsequently amended twice, with the U.S. Circuit Court of Appeals for the Fifth Circuit.
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
12
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 alleged 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
was alleged, refusing to pay death benefits on issued policies. The plaintiffs sought unspecified
compensatory damages in excess of $75,000, punitive damages, injunctive relief, attorneys’ fees and
other relief. After the death of one of the named class plaintiffs and the Court’s dismissal of that plaintiff’s
claims without prejudice, the remaining two class plaintiffs elected to proceed with this litigation on an
individual basis. On January 22, 2009, the Court issued an Order granting Liberty’s Motion for Summary
Judgment and closing the case. A settlement has also been reached in substantially identical class
litigation filed on September 17, 2008 in the United States District Court for the Southern District of Florida
(Joseph v. Liberty National Life Insurance Company, Case No. 08-1:08-cv-22580).
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 2008.
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 4,226 shareholders of record on December 31, 2008, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $44.70
Quarter
1
2
3
4
Year-end closing price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $60.53
2008
Market Price
Low
High
$63.17 $57.85
58.65
55.97
27.67
65.27
62.39
58.44
Dividends
Per Share
$.13
.14
.14
.14
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
13
(c) Purchases of Certain Equity Securities by the Issuer and Others for the Fourth Quarter 2008
Period
October 1-31, 2008 . . . . . . . . . . .
November 1-30, 2008 . . . . . . . . .
December 1-31, 2008 . . . . . . . . .
(a) Total Number
of Shares
Purchased
1,397,100
325,700
2,000
(b) Average
Price Paid
Per Share
$46.27
35.98
42.49
(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
1,397,100
325,700
2,000
On October 30, 2008, Torchmark’s Board reaffirmed its continued authorization of the Company’s
stock repurchase program in amounts and with timing that management, in consultation with the Board,
determined to be in the best interest of the Company. The program has no defined expiration date or
maximum shares to be purchased.
(e) Performance Graph
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Torchmark Corporation, The S&P 500 Index
And The S&P Life & Health Insurance Index
$250
$200
$150
$100
$50
$0
12/03
12/04
12/05
12/06
12/07
12/08
Torchmark Corporation
S&P 500
S&P Life & Health Insurance
*
$100 invested on 12/31/03 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.
14
Item 6. Selected Financial Data
The following information should be read in conjunction with Torchmark’s Consolidated Financial
Statements and related notes reported elsewhere in this Form 10-K:
(Amounts in thousands except per share and percentage data)
Year ended December 31,
2008
2007
2006
2005
2004
Premium revenue:
Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,616,804 $ 1,569,964 $ 1,524,267 $ 1,468,288 $ 1,395,490
1,048,666
Health . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27,744
2,471,900
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
577,035
Net investment income . . . . . . . . . . . . . . . .
Realized investment gains (losses) . . . . . .
22,216
Total revenue . . . . . . . . . . . . . . . . . . . . . . .
3,071,542
Net income before cumulative effect of
1,127,059
14,393
2,758,256
671,495
(107,504)
3,326,918
1,237,532
22,914
2,784,713
628,746
(10,767)
3,421,178
1,236,797
20,470
2,827,231
648,826
2,734
3,486,697
1,014,857
24,929
2,508,074
603,068
280
3,125,910
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 . . . . .
452,259
452,259
527,535
527,535
518,631
518,631
495,390
495,390
475,718
468,555
5.14
5.14
5.59
5.59
5.20
5.20
4.73
4.73
4.32
4.26
5.11
5.11
0.56
0.55
88,053
88,516
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
As of December 31,
2008
2007
2006
2005
2004
Cash and invested assets . . . . . . . . . . . . . $ 8,443,601 $ 9,792,297 $ 9,719,988 $ 9,410,695 $ 9,243,090
14,252,184
Total assets . . . . . . . . . . . . . . . . . . . . . . . . .
170,354
Short-term debt . . . . . . . . . . . . . . . . . . . . . .
Long-term debt(1) . . . . . . . . . . . . . . . . . . . . .
694,685
3,419,844
Shareholders’ equity . . . . . . . . . . . . . . . . . .
31.07
Per diluted share . . . . . . . . . . . . . . . . . . .
Effect of SFAS 115 on diluted equity
15,241,428
202,058
721,723
3,324,627
35.60
14,768,903
381,505
507,902
3,432,768
32.91
14,980,355
169,736
721,248
3,459,193
34.68
13,529,050
403,707
622,760
2,222,907
26.24
per share(2) . . . . . . . . . . . . . . . . . . . . . .
(12.93)
(0.66)
1.43
2.50
3.62
Annualized premium in force:
Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Health . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic shares outstanding . . . . . . . . . . . . . .
Diluted shares outstanding . . . . . . . . . . . .
1,707,522
1,098,349
2,805,871
84,708
84,708
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)
Includes 7 3⁄4% Junior Subordinated Debentures reported as “Due to affiliates” on the Consolidated Balance Sheets at each
year end 2004 and 2005 in the amount of $154.6 million. Also included at year end 2006 through 2008 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 Sheets.
(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.
15
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, 2008. 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
16
Analysis of Profitability by Segment
(Dollar amounts in thousands)
2008
2007
2006
2008
Change
2007
%
Change %
Life insurance underwriting margin . . . . . . . $ 431,775 $ 417,038 $ 397,444 $ 14,737
(13,543)
Health insurance underwriting margin . . . . .
Annuity underwriting margin . . . . . . . . . . . . .
(15,760)
Other insurance:
194,711
(6,423)
206,694
11,915
208,254
9,337
Other income . . . . . . . . . . . . . . . . . . . . .
Administrative expense . . . . . . . . . . . . .
Excess investment income . . . . . . . . . . . . . .
Corporate and adjustments . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .
Applicable taxes . . . . . . . . . . . . . . . . . . . . . .
Pre-tax total
4,154
(159,283)
328,141
(21,278)
771,797
(258,510)
4,313
(154,552)
323,762
(17,921)
790,231
(268,118)
4,024
(155,331)
318,763
(14,437)
769,072
(264,716)
(159)
(4,731)
4,379
(3,357)
(18,434)
9,608
After-tax total
. . . . . . . . . . . . . . . . .
513,287
522,113
504,356
(8,826)
4 $ 19,594
1,560
(7)
(2,578)
(169)
5
1
(22)
(4)
3
1
19
(2)
(4)
(2)
7
289
(1)
779
4,999
2
(3,484) 24
21,159
(3,402)
17,757
3
1
4
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
-0-
(69,878)
181
10,823
-0-
1,777
2,768
1,149
(319)
(7,254)
-0-
(71,655)
2,816
11,607
(2,587)
9,674
319
9,031
(48)
(10,458)
(after tax) . . . . . . . . . . . . . . . . . . . . . . . . . .
(770)
(272)
7,425
(498)
(7,697)
Loss on writedown of Company-occupied
property (after tax) . . . . . . . . . . . . . . . . . . .
(1,384)
-0-
-0-
(1,384)
-0-
Net income . . . . . . . . . . . . . . . . . . . $ 452,259 $ 527,535 $ 518,631 $(75,276)
(14) $ 8,904
2
* See the discussion of Realized Gains and Losses in this report.
** Included as an addition to income of both the Investment Segment and Realized investment gains.
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 declined $75 million or 14% to $452 million in 2008. On a
diluted per share basis, net income declined 7% to $5.11. The primary cause for the 2008 decline was
after-tax realized investment losses of $70 million ($108 million before tax). These losses were due
mostly to writedowns of fixed-maturity securities issued by Lehman Brothers and Washington Mutual. In
2007, net income grew 2% or $9 million over the prior year to $528 million. On a per share basis, 2007
net income grew 7% to $5.50. Per share earnings growth exceeded the growth in dollar earnings in both
periods as a result of our share repurchase program discussed later under this caption. Life insurance
was our strongest performing segment in both years, contributing $15 million to 2008 pretax growth and
$20 million to 2007 growth. Margin improvements in this segment were a result of premium growth and
lower obligation ratios in both periods. The investment segment also contributed to the growth in pretax
income in each year, rising $4 million in 2008 and $5 million in 2007. Excess investment income,
measuring the profit of the investment segment, was benefited by reduced financing costs and growth in
the size of the investment portfolio in both years. The growth in excess investment income was attained
even though significant cash flow has been used to buy Torchmark stock in all three periods.
In 2008, the contributions to growth in our life insurance and investment segments were more than
offset by declines in our annuity and health segments. Our 2008 annuity underwriting loss was $6 million,
compared with gains of $9 million in 2007 and $12 million in 2006. In 2008, declines in equity markets
have caused variable policyholder account values to decline, guaranteed minimum death benefit costs to
increase, policyholders to withdraw funds, and changes in actuarial assumptions all of which have
resulted in the underwriting losses. We do not emphasize this segment and have discontinued the sale of
variable annuities in 2008, only offering a fixed annuity product. Health insurance underwriting margin
improved $2 million to $208 million in 2007, but declined 7% or $14 million in 2008 to $195 million. This
17
segment has experienced increased competition in recent periods, especially in 2008, which has caused
a decline in agent count resulting in a significant reduction in new sales.
Total revenues declined 5% in 2008 to $3.33 billion. In 2007, total revenues rose 2% to $3.49 billion
from $3.42 billion in 2006. Life premium rose $47 million in 2008 and $46 million in 2007, while net
investment income rose $23 million in 2008 and $20 million in 2007. Growth in these two revenue
components accounted for the increase in 2007 revenues. However, 2008 revenues were negatively
affected by the aforementioned pretax realized loss of $108 million and a decline in health premium of
$110 million, described further under this caption.
Life insurance premium has grown steadily in each of the three years ending December 31, 2008,
rising 3% in 2008 to $1.62 billion and also 3% in 2007. Margins as a percentage of premium have also
increased slightly each year to 27% of premium in 2008 and 2007 from 26% in 2006. Life net sales rose
13% in 2008 to $298 million, after having declined slightly in the two preceding years. Net sales rose in
each of the three major life distribution channels in 2008. Life insurance segment results are discussed
further under the caption Life Insurance.
We market three primary health insurance products: under-age-65 limited-benefit health insurance,
Medicare Supplement insurance, and the Medicare Part D prescription drug benefit. Health premium
declined 9% in 2008 to $1.1 billion from $1.2 billion in 2007. Health premium was flat in 2007 with 2006.
The primary factor in the 2008 decline was the decline in agent count in our United American Branch
Office during the year, our largest health producer. This agency has experienced intense competition,
which has resulted in a significant decrease in new health sales and has negatively impacted premium
income. Efforts are underway to rebuild this agency. Prior to 2008, this agency had been instrumental in
the growth in the sales of our limited-benefit health product, as demand for this product had increased.
Accordingly, premium from the limited-benefit product has grown significantly in relation to Medicare
Supplement premium in recent years. While Medicare Supplement remains our largest contributor to total
health premium, increased competition has also dampened sales of this product resulting in premium
declines in each successive year. Also, 2008 was our third year of offering Medicare Part D insurance. As
most of the country’s Part D enrollees selected a plan provider in 2006, we do not expect growth in our
Part D business going forward. See the discussion under Health Insurance for a more detailed discussion
of health insurance results.
While we still offer fixed annuities, we do not emphasize sales of annuity products, favoring life
insurance instead. See the caption Annuities for further discussion of the Annuity segment.
As previously mentioned, the investment segment’s pretax profitability, or excess investment income,
increased $4 million in 2008 and $5 million in 2007. It had declined 2% in the previous year. This segment
benefited from lower financing costs in each successive year. In 2008, these costs declined primarily due to
lower rates and a lower average balance on our short-term debt. In 2007, our interest expense on funded
debt declined due to the refinancing of the two funded debt issues noted below. Prior to 2008, the average
yield on new investments acquired had been lower than the average portfolio yield, restricting growth in net
investment income in relation to the size of the portfolio. In 2008, however, the yield on new investments
exceeded the portfolio yield by 25 basis points. Growth in total investment income has been negatively
affected by Torchmark’s share repurchase program (described later under this caption), which has diverted
the
cash that could have otherwise been used to acquire investments. Management believes that
acquisition of Torchmark stock at favorable prices provides a superior return on available cash.
Torchmark’s current investment policy limits new investment acquisitions to investment-grade fixed
maturities generally with longer maturities (often exceeding twenty years) that meet our quality and yield
objectives. Approximately 93% of our invested assets at fair value consists of fixed maturities of which
94% was investment grade at December 31, 2008. The average quality rating of the portfolio was BBB+.
The portfolio contains no securities backed by sub prime or Alt-A mortgages, no residential mortgages, no
counterparty risks, no credit default swaps, or derivative contracts. See the analysis of excess investment
income and investment activities under the caption Investments in this report and Note 3—Investments in
the Notes to Consolidated Statements of Operations for a more detailed discussion of this segment.
18
As mentioned earlier in this summary, we wrote down certain fixed maturities and equities during
2008, including bonds issued by Lehman Brothers, Washington Mutual, and various other institutions in
the pretax amount of $106 million. The write downs were taken as these securities met our criteria for
other-than-temporary impairment. These writedowns compared with $11 million taken in 2007 and none
in 2006. Please refer to Note 3—Investments in the Notes to Consolidated Financial Statements under
the caption Other-than-temporary impairments for more information on these writedowns and our criteria
for consideration of other-than-temporary impairment. Including the writedowns, we had total after-tax
realized investment losses of $70 million in 2008 ($.79 per share), compared with a $2 million gain in
2007 ($.02 per share), and a $7 million loss in 2006 ($.07 per share). 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 including the writedowns. 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.
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.
In each of the years 2006 through 2008, 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.
As reported in Note 1—Significant Accounting Policies in the Notes to Consolidated Financial
Statements under the caption Litigation and Tax Settlements, we have been involved in a number of
litigation issues over the course of the three year period 2006 through 2008 in which we either received
settlements net of expenses or incurred settlement losses and expenses. These issues resulted in
after-tax charges of $770 thousand in 2008, $272 thousand in 2007, and an after-tax benefit of
$7.4 million in 2006. Additionally, as described under the same caption of Note 1, we received tax
settlements in each year in the amounts of $10.8 million in 2008, $1.1 million in 2007, and $11.6 million in
2006. All of these litigation and tax issues pertained to issues arising many years ago and are not
considered by management to relate to our current operations. Legal expenses and litigation items
pertaining to current operations are included in either insurance administrative expenses or parent
expenses, as appropriate, in our segment analysis. As explained in Note 3—Investments under the
caption Other-than-temporary impairments, we wrote down certain company-occupied property to fair
value during 2008. The write down resulted in an after-tax charge of $1.4 million.
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. In 2007, 21 additional buildings were sold for proceeds of $6.4 million and a pretax gain of
$4.3 million ($2.8 million after tax). The program began to wind down in 2008 as five buildings were sold
for proceeds of $787 thousand and a pretax gain of $278 thousand ($181 thousand after tax). Four
buildings remained to be sold at December 31, 2008. Because of the significant scale of this nonoperating
activity, we have removed $4.3 million ($2.8 million after tax) from our core results representing the gain
in 2006 and the gains on the sales in 2007 and 2008.
19
Torchmark has in place an ongoing share repurchase program which began in 1986 and was
reaffirmed at its October 30, 2008 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, 2008.
Analysis of Share Purchases
(Amounts in thousands)
Purchases
2008
2007
Shares Amount Shares Amount Shares Amount
2006
Excess cash flow and borrowings . . . . . . . . . . . . . . .
Option proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,638
487
$426,640
29,096
6,150
766
$402,116
49,675
5,575
415
$320,425
24,436
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,125
$455,736
6,916
$451,791
5,990
$344,861
Throughout the remainder of this discussion, share purchases refer only to those made from excess
cash flow and borrowings.
A discussion of each of Torchmark’s segments follows.
Life Insurance. Life insurance is our
insurance segment, with 2008 life premium
largest
representing 59% of total premium. Life underwriting income before other income and administrative
expense represented 70% of the total in 2008. 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 $1.62 billion in 2008 after having increased 3% in 2007 to $1.57
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 . . . . . . . . . . . . . . . . . . . . . . . .
2008
2007
2006
Amount
$ 511,165
473,784
287,312
344,543
% of
Total
Amount
% of
Total
Amount
32% $ 484,176
440,164
29
293,936
18
351,688
21
31% $ 457,159
409,188
28
300,933
19
356,987
22
% of
Total
30%
27
20
23
$1,616,804
100% $1,569,964
100% $1,524,267
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
20
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 $1.71 billion at December 31, 2008, an increase of 2% over
$1.67 billion a year earlier. Annualized life premium in force was $1.62 billion at December 31, 2006.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008
2007
2006
Amount
$123,076
108,353
48,540
18,494
% of
Total
Amount
% of
Total
Amount
41% $114,232
92,306
37
36,981
16
20,727
6
43% $115,031
86,369
35
41,369
14
22,728
8
% of
Total
43%
33
16
8
$298,463
100% $264,246
100% $265,497
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008
2007
2006
Amount
$ 80,075
82,063
29,571
16,473
% of
Total
Amount
% of
Total
Amount
39% $ 76,043
73,862
39
28,773
14
18,980
8
38% $ 77,385
72,072
37
34,342
15
25,269
10
% of
Total
37%
35
16
12
$208,182
100% $197,658
100% $209,068
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.
21
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 over fifteen years. We
acquired DMAD in January, 2007 for $47 million, and integrated their operations during 2007. This
acquisition allowed the Company to expand marketing opportunities through increased solicitation volume
and also improve margins through cost savings in the insert media component.
The Direct Response operation accounted for 32% of our life insurance premium during 2008, 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 both
2008 and 2007. Net sales rose 8% in 2008 to $123 million after a 1% decline in 2007 to $114 million.
First-year collected premium increased 5% in 2008 to $80 million after a 2% decline in 2007.
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 $474 million in
2008, after having also increased 8% in 2007. Net sales increased 17% in 2008 to $108 million from $92
million in 2007. Net sales rose 7% in 2007. First-year collected premium rose 11% in 2008 to $82 million,
after having increased 2% in 2007. 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. The American Income agent
count was 3,085 at December 31, 2008 compared with 2,545 a year earlier, an increase of 21%. The
agent count rose 8% in 2007 from 2,353 at year end 2006. 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 both 2008 and
2007 compared with the respective prior year. Liberty’s life premium sales, in terms of net sales, were
$49 million in 2008, representing an increase of 31% in 2008. Net sales had declined 11% in 2007. First-
year collected premium increased 3% in 2008 to $30 million, after having declined 16% in 2007.
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 43% to 3,437 at December 31, 2008 from 2,410 a year earlier. This compared with an
increase of 39% in 2007 but a decline of 20% in 2006. Most of the growth in the 2007 agent count
occurred in the latter half of the year. As new agents become trained and more seasoned, they are
expected to become more productive. The growth in 2008 net sales is attributable to the growth in the
agent counts in 2008 and the latter part of 2007, while the 2007 decline in net sales was a result of the
decline in agent counts in 2006 and early 2007.
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. A
larger and more productive agency force should lead to increased sales, which in turn should result in
increased premium growth.
In 2006,
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,
independent
miscellaneous sales agencies. The United Investors Agency is comprised of several
agencies that concentrate on annuity business. United Investors represented 4% of Torchmark’s 2008 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
22
noncommissioned military officers and their families. This business consists of whole-life products with
term insurance riders. Military premium represented 12% of
life premium. The United American
Independent and Branch Office Agencies combined represented approximately 3% of Torchmark’s total
life premium. In the past, these agencies focused on health insurance, with life sales being incidental.
LIFE INSURANCE
Summary of Results
(Dollar amounts in thousands)
2008
% of
2007
% of
Amount
Premium Amount
Premium Amount
2006
% of
Premium
Premium and policy charges . . . . . . . . . $1,616,804
100% $1,569,964
100% $1,524,267
100%
Policy obligations . . . . . . . . . . . . . . . . . .
Required interest on reserves . . . . . . . .
1,073,920
(411,216)
66
(25)
1,039,278
(388,024)
66
(25)
1,005,771
(364,313)
66
(24)
Net policy obligations . . . . . . . . . . . . .
Commissions and premium taxes . . . . .
Amortization of acquisition costs . . . . . .
662,704
73,690
448,635
Total expense . . . . . . . . . . . . . . . . . . .
1,185,029
41
4
28
73
651,254
72,291
429,381
1,152,926
41
5
27
73
641,458
76,859
408,506
1,126,823
42
5
27
74
Insurance underwriting margin before
other income and administrative
expenses . . . . . . . . . . . . . . . . . . . . . . . $ 431,775
27% $ 417,038
27% $ 397,444
26%
Gross margins, as indicated by insurance underwriting margin before other
income and
administrative expense, rose 4% in 2008 to $432 million after rising 5% in 2007. As a percentage of life
insurance premium, gross margins have increased slightly each year and were 27% in 2008.
Improvements in life margins have resulted from several factors. Margin improvements in both 2008 and
2007 were 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. An important factor in the 2008 increase was that
American Income’s obligation ratios decreased from 34% to 32%. 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.
23
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. Health premium represented 41% of Torchmark’s total premium income in 2008. Excluding Part D
premium, health premium represented 37% in 2008, compared with 39% in 2007 and 40% in 2006.
Health underwriting margin, excluding Part D, accounted for 29% of the total in 2008, compared with 30%
in 2007 and 31% in 2006. 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. Health results have also
been negatively affected by increased competition in recent periods. 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)
2008
2007
2006
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 . . . . . . . . . . . . . . .
78,973
277,880
356,853
176,368
164,148
340,516
135,318
71
135,389
72,149
1,274
73,423
478
44,645
45,123
Total Premium (Before Part D)
Limited-benefit plans . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . .
463,286
488,018
$
92,042
296,368
388,410
37%
$ 102,163
316,527
38%
418,690
41%
203,577
183,377
386,954
141,082
84
141,166
69,268
1,403
70,671
527
41,811
42,338
506,496
523,043
37
14
7
4
49
51
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
36
14
8
5
49
51
Total Premium (Before Part D) . . . .
951,304
100% 1,029,539
100% 1,025,150
100%
Medicare Part D*
175,633
Total Health Premium* . . . . . . . . . .
$1,126,937
214,589
$1,244,128
212,382
$1,237,532
*
Total Medicare Part D premium and health premium exclude $7.3 million in 2007 of risk-sharing premium paid to the Centers for
Medicare and Medicaid Services consistent with the Medicare Part D contract. In 2008, $122 thousand of risk-sharing premium
was received. 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.
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 limited-benefit health insurance products to under-age-65 consumers
rather than Medicare Supplement insurance as customer demand for the limited-benefit hospital/surgical
24
plans has increased and price competition and lesser demand for Medicare Supplements has dampened
the sales of that product. While Medicare Supplement still remains our largest health product in terms of
premium income, the proportion of premium from other limited-benefit health products has grown steadily
over the past few years. As shown in the chart above, Medicare Supplement premium represented 51%
of total health premium (excluding Part D) in 2008.
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)
2008
2007
2006
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
United American Independent Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . . .
$ 23,084
14,517
$ 33,917
16,381
$ 38,651
16,278
37,601
27%
50,298
21%
54,929
23%
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 . . . . . . . . . . . . . . . . . . . .
64,126
7,422
71,548
12,087
96
12,183
11,848
-0-
11,848
325
5,498
5,823
Total Net Sales (Before Part D)
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . . .
111,470
27,533
151,924
10,406
162,330
9,842
130
9,972
11,307
-0-
11,307
477
4,985
5,462
207,467
31,902
68
4
5
2
87
13
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
51
9
9
4
80
20
Total Net Sales (Before Part D) . . . . . . . .
139,003
100% 239,369
100% 243,238
100%
Medicare Part D* . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,292
Total Health Net Sales . . . . . . . . . . . . . . .
$167,295
24,514**
$263,883
278,023
$521,261
Net sales for Medicare Part D represents only new first-time enrollees.
*
** Restated.
25
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)
2008
2007
2006
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
United American Independent Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . .
$ 20,360
15,495
$ 27,055
12,992
$ 31,817
15,084
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)
35,855
26%
40,047
21%
46,901
26%
69,572
7,905
77,477
8,345
105
8,450
12,316
-0-
12,316
437
4,102
4,539
56
6
9
3
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
Limited-benefit plans . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . .
111,030
27,607
80
20
163,200
27,890
85
15
147,777
33,860
81
19
Total (Before Part D) . . . . . . . . . . . . . . . .
138,637
100% 191,090
100% 181,637
100%
Medicare Part D* . . . . . . . . . . . . . . . . . . . . . . . . . .
16,655
Total First-Year Collected Premium . . . .
$155,292
53,269
$244,359
212,382
$394,019
*
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 (UA) Agencies have emphasized sales of individual supplemental limited-benefit health
plans known generally as hospital/surgical plans marketed to under-age-65 customers 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
the UA
having approximately the same underwriting margin as a percentage of premium. Both of
agencies offer these limited-benefit plans.
26
The UA Branch Office is an exclusive agency, meaning the agents in its 85 offices nationwide sell
only for us. In recent years, this agency has focused its efforts on sales of limited-benefit products, and
has been successful in building the sales of these plans replacing the decline in Medicare Supplement
sales.
In 2008,
the UA Branch Office represented 51% of Torchmark’s non-Medicare Part D sales.
Beginning in late 2007 and throughout 2008, this agency has experienced increased agent turnover and a
decline in agent count due to increased competition in the sales of health products. As a result, sales and
premium at the UA Branch Office declined in 2008. As is the case with all of our captive agencies,
growing the agency size translates into increased sales and premium growth. After growing very rapidly in
periods prior to mid-2007, the producing agent count in the UA Branch Office has declined since that
time. At year end 2008, the producing agent count was 1,583, compared with 2,979 at the end of 2007
and 3,015 at December 31, 2006. These declines in agent count have resulted in the declines in net sales
and premium growth shown in the charts above, especially in 2008. Efforts are underway to rebuild this
agency. Going forward, we are shifting the emphasis in the UA Branch Office Agency to life and health
products currently marketed by Liberty National agents. These products are priced to achieve higher
profit margins and have better persistency than UA’s limited-benefit health insurance. We will continue to
offer the current product portfolio, but the majority of our financial incentives will be used to encourage
agents to sell the Liberty National product line. We believe this will improve the stability and profitability of
the UA Branch Office Agency.
The UA 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 2,838 were active producing agents for Torchmark at
December 31, 2008. This agency is our largest carrier of Medicare Supplement insurance, with $278 million or
57% of our Medicare Supplement premium income in 2008. Overall, this agency’s contribution to Torchmark’s
total health sales and premium has declined in each of the past three years, as a result of the increased
competition in Medicare Supplement sales. Health premium for the UA Independent Agency declined 8% to
$357 million in 2008, after declining 7% in 2007. The declines in premium have resulted as new sales have not
compensated for lapses.
The Liberty National Exclusive Agency, predominantly 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 4% in 2008 to $135
million after a 3% drop in 2007. Several factors have contributed to the decline in health premium in this
agency. Most notable has been the increased emphasis on sales of the higher-margin life products at Liberty.
Another factor, prior to 2008, was the decline in agent count discussed earlier under the caption Life Insurance
as a result of the change in the agent compensation system in 2006 to improve persistency and margins.
However, recruiting and training initiatives have resulted in a significant increase in the Liberty agent count in
2008. Additionally, there was a 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 at that time and approximately 37% at year end 2008. Prior to
the settlement, significant rate increases to offset deteriorating margins on this block resulted in higher 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 rose 22% to $12
million, compared with 2007 net health sales of $10 million. Net health sales had declined 16% from 2006
sales of $12 million.
American Income Exclusive Agency, also predominantly a life insurance distribution channel, is
our fourth largest health insurance distributor based on 2008 premium collected. Its health plans are
comprised of various limited-benefit plans for which approximately 69% of the agency’s 2008 health
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 rose 4% in 2008 to $73 million, after having increased 5% to $71
million in 2007. Net health sales were $11.8 million in 2008, compared with $11.3 million in 2007 and
$11.7 million in 2006. Net health sales comprised less than 10% of the American Income Agency’s total
net sales in 2008.
27
Direct Response, primarily a life operation, also offers health insurance, which is predominantly
Medicare Supplements sold directly to employer or union sponsored groups. In 2008, net health sales
were $6 million, comprising less than 5% of Direct Response’s total
life and health net sales. Direct
Response health net sales and premium income have risen each year over the prior year. Net sales
increased 7% in 2008 and 2% in 2007. Health premium rose 7% in both 2008 and 2007, increasing to $45
million in 2008.
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 $176 million in 2008, compared with
$215 million in 2007 and $212 million in 2006. The decline in Part D premium resulted from the decline in
the number of enrollees. 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, 2007, United American had
approximately 158 thousand enrollees for the 2008 Part D plan, compared with 189 thousand for the 2007
plan year. Although final enrollment has not been confirmed, we do not expect a significant increase in
enrollees for the 2009 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 $28 million in 2008
and $25 million in 2007, compared with $278 million in 2006. We count only sales to new first-time
enrollees in net sales and 2006 was the first year the Medicare Part D program was in effect. The majority
of 2008 and 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. Due to our
experience with service to the senior-age market and the use of our existing Direct Response marketing
system, entry to this business required little new investment. However, we do not expect 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.
28
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
2008
Premium** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 951,304
100% $175,633
100% $1,126,937
100%
Policy obligations . . . . . . . . . . . . . . . . . . . . . . . . . .
Required interest on reserves . . . . . . . . . . . . . . .
621,227
(32,029)
Net policy obligations . . . . . . . . . . . . . . . . . . . . .
589,198
Commissions and premium taxes . . . . . . . . . . . .
Amortization of acquisition costs . . . . . . . . . . . . .
61,996
127,160
Total expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
778,354
65
(3)
62
7
13
82
138,239
-0-
138,239
11,252
4,381
153,872
79
-0-
79
6
3
88
759,466
(32,029)
727,437
73,248
131,541
932,226
67
(3)
64
7
12
83
Insurance underwriting income before other
income and administrative expenses . . . . . . . . $ 172,950
18% $ 21,761
12% $ 194,711
17%
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%
*
**
Health other than Medicare Part D.
Total Medicare Part D premium and health premium exclude $7.3 million in 2007 of risk-sharing premium paid to the CMS
consistent with the Medicare Part D contract. In 2008, $122 thousand of risk-sharing premium was received. 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.
29
Torchmark’s health insurance underwriting margin before other income and administrative expense
declined 7% in 2008 to $195 million, but has improved as a percentage of premium in each of the periods
presented. Health margin rose 1% to $208 million in 2007. 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 in each successive year. Liberty’s health margins
increased $2 million or 5% in 2008 and $6 million or 20% in 2007. As a percentage of premium, Liberty’s
health margin was 26% in 2008, compared with 24% in 2007 and 20% in 2006. American Income’s
margins rose $2 million in both 2008 and 2007. They were 37% of premium in 2008 and 36% of 2007
premium.
Annuities. Fixed annuity products are sold on a limited basis by our subsidiaries. Variable
annuities were sold prior to 2008 but new sales were discontinued during the year. Annuities represented
less than 1% of Torchmark’s 2008 premium revenue. We do not emphasize this segment, and annuities
continue to diminish in relation to our other operations.
Annuity Deposit Balances
(Dollar amounts in thousands)
At December 31,
2007
2008
2006
Fixed . . . . . . . . . . . . . . . . . . $ 954,047 $ 834,146 $ 771,789
1,308,477
Variable* . . . . . . . . . . . . . . .
1,208,577
625,119
$1,579,166 $2,042,723 $2,080,266
*
Balances in separate accounts
Declines in equity markets during 2008 have had a significant effect on the variable policyholder
account balance, as they have resulted in declines in value in the underlying investments and increased
policyholder withdrawals. The decline in the size of the annuity account balance has had a negative
impact on annuity underwriting income. An analysis of underwriting income is as follows.
ANNUITIES
Summary of Results
(Dollar amounts in thousands)
At December 31,
2008
2007
2006
Policy charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,393 $ 20,470 $ 22,914
Policy obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Required interest on reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39,407
(37,052)
28,049
(31,666)
23,743
(28,318)
Net policy obligations* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,355
(3,617)
(4,575)
Commissions and premium taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
141
18,320
119
14,631
88
15,486
Total expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,816
11,133
10,999
Insurance underwriting margin before other income and administrative
expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (6,423) $ 9,337 $ 11,915
Underwriting income attributable to:
Fixed Annuities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,448 $ 1,547 $ 1,746
10,169
Variable Annuities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7,871)
7,790
Insurance underwriting margin before other income and administrative
expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (6,423) $ 9,337 $ 11,915
*
A significant portion of fixed annuity profitability is derived from the spread of investment income exceeding contractual interest
requirements. This spread sometimes results in negative net policy obligations.
30
Annuities generate earnings from periodic policy fees and charges to the account balances, reduced
by net policy obligations and acquisition costs. Policy charges and underwriting margins have declined in
each of the periods presented, primarily due to the declines in our variable annuity business. Because
policy charge revenues for variable annuities are based on the size of the policyholder’s account value,
policy charges have declined each period as declining equity markets, voluntary terminations, and lower
sales have resulted in decreases in the variable account balance, especially in 2008. In addition to the
revenue declines, underwriting income for the variable product has been negatively affected by two other
factors. First, we have guaranteed minimum death benefits to variable policyholders providing that a
certain minimum death benefit will be payable to them regardless of the policyholders’ account value
upon death. For this reason, we provide a reserve for this benefit for which the cost increases as the
policyholder’s account value declines. This reserve is subject
to the periodic review of underlying
assumptions and a revision or “unlocking” when experience so indicates. In 2008, the additional charge to
policy obligation expense from unlocking was $6.1 million, compared with reduced expense of $1.4 million
in 2007 and $1.1 million in 2006. The other factor is that the deferred acquisition cost asset with regard to
variable annuities is also subject to the unlocking of assumptions. Because of the variable account
balance decline, future revenues and profits on variable business would also be expected to decline. This
unlocking of assumptions resulted in a net charge of $7.5 million in 2008, compared with charges of $2.3
million in 2007 and $.9 million in 2006. Without these unlocking adjustments, variable underwriting income
would have been $5.7 million in 2008 (42% of revenue), compared with $8.7 million (45% of revenue) in
2007 and $9.9 million (46% of revenue) in 2006. The unamortized deferred acquisition cost balance was
$42 million at December 31, 2008 compared with $53 million at year end 2007. If equity markets do not
stabilize, we could see higher amortization of acquisition costs in the future. The variable annuity
business is our only business where margins are significantly impacted by changes in equity markets.
While the fixed annuity account balance has increased each year over the prior year, policy charges
have remained steady and underwriting income has declined slightly each year. The stability in fixed
annuity policy charges has resulted as the charges consist of surrender charges and are not based on
account size. These charges have remained somewhat level in recent periods. A significant portion of
fixed annuity profitability is derived from the spread of investment income exceeding contractual interest
requirements, which can result in negative net policy obligations. However, this investment income spread
has declined in each year, resulting in the decline in underwriting income.
31
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, 2008.
Operating Expenses Selected Information
(Dollar amounts in thousands)
2008
2007
2006
Amount
% of
Prem. Amount
% of
Prem. Amount
% of
Prem.
Insurance administrative expenses:
Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 69,134
31,510
Other employee costs . . . . . . . . . . . . . . . . . . . . . . . .
47,835
Other administrative expense . . . . . . . . . . . . . . . . . .
8,773
Legal expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,031
Medicare Part D direct administrative expense . . .
2.5% $ 66,799
28,709
1.2
44,260
1.7
11,513
0.3
3,271
0.1
2.4% $ 66,031
31,300
1.0
45,951
1.6
6,634
0.4
5,415
0.1
Total insurance administrative expenses . . . . . . . .
159,283
5.8% 154,552
5.5% 155,331
2.4%
1.1
1.7
0.2
0.2
5.6%
Parent company expense . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation expense . . . . . . . . . . . . . . . . . . . . .
Expenses related to settlement of prior period
litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on writedown of Company-occupied property . . . .
10,455
10,823
2,522
2,129
Total operating expenses, per Consolidated
9,815
8,106
933
-0-
7,862
6,575
-0-
-0-
Statements of Operations . . . . . . . . . . . . . . . . . . . $185,212
$173,406
$169,768
Insurance administrative expenses:
Increase (decrease) over prior year . . . . . . . . . . . . .
3.1%
Total operating expenses:
Increase (decrease) over prior year . . . . . . . . . . . . .
6.8%
(.5)%
2.1%
5.2%
(1.8)%
Insurance administrative expenses rose 3% in 2008, after a slight decline in 2007. As a percentage
of premium, they rose to 5.8% in 2008, after having decreased from 5.6% in 2006 to 5.5% in 2007. The
2008 increase was primarily a result of higher salary expenses, pension costs, and other costs such as
postage and property taxes. The 2008 increases were partially offset by lower legal expenses and
Medicare Part D administrative expense. One factor in the higher 2007 legal expense was the affirmation
of an earlier jury verdict in insurance claim litigation in the amount of $1.9 million. Medicare Part D
administrative expenses were lower in both 2008 and 2007 than in 2006 because open enrollment
remained in effect in 2006 until May 15, causing us to incur additional administrative expenses in that
year. Open enrollments for the 2007 and 2008 plan years were closed on December 31 of the respective
prior year. Salaries, particularly in 2007, were favorably impacted by the previously-mentioned changes to
Liberty National’s agent compensation system. While these changes resulted in reductions in agent
salaries and related employee costs of approximately $2.8 million in 2007 compared with 2006, new
initiatives have resulted in an increase in these costs in 2008 of approximately $1.6 million over 2007.
Management believes that these salary reductions could be replaced by higher deferred acquisition costs
going forward, however, 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. Management believes that pension cost will
increase approximately $8 million in 2009, as a result of the impact that declining financial markets have
had on pension funding.
Parent company expense rose $640 thousand or 7% in 2008 and $2.0 million or 25% in 2007.
Included in 2008 and 2007 expenses were charges in the amount of $2.9 million in 2008 and $1.6 million
in 2007 for expenses incurred related to potential acquisition bids that were not successful.
32
As mentioned in Note 1—Significant Accounting Policies in the Notes to Consolidated Financial
Statements, we settled litigation in prior periods relating to issues occurring many years ago, but incurred
$2.5 million in legal costs in 2008 and $933 thousand in 2007. 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 in 2008 because 2008 was the first year after adoption of
the
accounting rule requiring the expensing of stock options where we had three years of annual employee
grants being expensed (2005, 2006 and 2008). The 2004 employee grant was fully vested in 2005 (before
adoption) and there was no grant in 2007. New restricted stock grants in each of the three years 2006
through 2008, which generally vest over five years, have also contributed to the increases in 2008 and
is highly unlikely that stock
2007 stock compensation expense. Management believes that
compensation expense will increase materially in 2009 or over the near term. 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.
As described in Note 3—Investments under the caption Other-than-temporary impairments, we wrote
down certain Company-occupied real estate because it met our criteria as described in that note for
other-than-temporary impairment. As a result, we incurred a pretax charge of $2.1 million which is
included in Operating expenses in the 2008 Consolidated Statement of Operations.
it
Investments. We manage our capital resources including investments, debt, and cash flow through
income represents the profit margin attributable to
the investment segment. Excess investment
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 $4.0 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)
2008
2007
2006
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Reclassification of interest amount due to deconsolidation* . . . . . . . . . . . . .
671,495 $ 648,826 $ 628,746
(454)
(264)
(264)
Adjusted investment income (per segment analysis) . . . . . . . . . . . . . . .
671,231
648,562
628,292
Interest credited to net insurance policy liabilities:
Interest on reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(480,297)
200,172
(447,755)
190,255
(417,293)
179,955
Net required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(280,125)
(257,500)
(237,338)
Financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(62,965)
(67,300)
(72,191)
Excess investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
328,141 $ 323,762 $ 318,763
Excess investment income per diluted share . . . . . . . . . . . . . . . . . . . . . . . . . $
3.71 $
3.38 $
3.15
Mean invested assets (at amortized cost) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,189,576 $9,775,769 $9,324,024
Average net insurance policy liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,156,050
4,828,161
4,496,561
Average debt and preferred securities (at amortized cost)
. . . . . . . . . . . . . .
945,508
919,936
1,005,561
33
*
Deconsolidation of trusts liable for Trust Preferred Securities required by accounting rule FIN46R. See Note 10—Debt in the
Notes to Consolidated Financial Statements.
Excess investment income increased $4 million or 1% in 2008 over the prior year. Excess investment
income increased $5 million or 2% in 2007. On a per diluted share basis, 2008 excess investment income
rose 10% to $3.71. Per share excess investment income increased 7% in 2007 and 3% in 2006.
The largest component of excess investment income is net investment income, which rose 3.5% to
$671 million in 2008. It increased 3.2% to $649 million in 2007 from $628 million in 2006. 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)
2008 2007 2006
3.5% 3.2% 4.2%
4.8
4.2
5.8
The lower growth in income is reflective of new investments that have been made in recent years at long-
term yields lower than the portfolio’s average yield, resulting from the lower rates available in financial
markets in those periods. However, as noted under the caption Investment Acquisitions below, we did
acquire $1.1 billion in fixed maturities in 2008 yielding 25 basis points higher than the average portfolio yield
for the first time in several years. In each year 2006 through 2008, new acquisitions were made at lower
yields than the yields on securities disposed of, contributing to the lower growth in income relative to the
portfolio growth. Another factor limiting the growth in net investment income relative to average assets in
2007 was the purchase of $256 million of tax-exempt municipal securities. Yields available on municipal
bonds are lower, but produce significant tax savings to the Company. 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 if rates available for new
investments do not exceed our portfolio yield, the rate of growth of investment income will lag the growth in
assets. More detailed information about investment acquisitions follows under the caption Investment
Acquisitions.
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
2008
Life and Health . . . . . . . . . . . . . . . . . . . . . . . . . .
Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in 2008 . . . . . . . . . . . . . . . . . . . . . . . . .
$240.8
39.3
280.1
$4,363.2
792.8
5,156.0
9%
7%
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%
5.52%
4.96
5.43
5.41%
4.88
5.33
5.35%
4.85
5.28
34
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)
2008
2007
2006
Interest expense per Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . $63,229 $67,564 $73,136
Reclassification of interest due to deconsolidation(1)
(454)
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit from interest-rate swaps(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(491)
(264)
-0-
(264)
-0-
Financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $62,965 $67,300 $72,191
(1) See Principles 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)
2008
2007
2006
Interest on funded debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $53,412 $53,379 $63,585
9,487
Interest on short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
(454)
Reclassification of interest due to deconsolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,127
58
(264)
9,770
47
(264)
Subtotal of interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit from interest-rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
62,965
-0-
67,300
-0-
72,682
(491)
Financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $62,965 $67,300 $72,191
Financing costs declined $4 million or 6% in 2008. They declined $5 million or 7% in 2007. The 2008
decline resulted from a decrease in short-term interest rates during 2008, as well as a 4% decline in our
average commercial paper balance for the year to $229 million. The primary factor in the 2007 decrease
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.
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.
that we invested the proceeds of
It should be noted, however,
35
Prior to 2006, we entered into several interest-rate swap agreements, in which we exchanged 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. However, as rates began to rise in 2005 and 2006,
we began to dispose of these instruments in 2005 and had disposed of all remaining swap instruments as
of the second quarter of 2006. The benefit of the swaps in 2006 reduced our financing costs in that year
by $491 thousand. More information concerning the debt offerings, repayments, and swaps is disclosed in
Note 10—Debt in the Notes to the Consolidated Financial Statements.
Excess investment income benefits from increases in long-term rates available on new investments
and decreases in short-term borrowing rates. Of these two factors, higher investment rates have the
greater impact because the amount of cash that we invest is significantly greater than the amount that we
borrow at short-term rates.
investment policy calls for
Investment Acquisitions. Torchmark’s current
investing almost
exclusively in investment-grade fixed maturities with long maturities (maturity date more than 20 years
after acquisition date) that meet our quality and yield objectives. We generally prefer to invest in securities
with longer maturities because they more closely match the long-term nature of our policy liabilities. We
believe this strategy is appropriate because our cash flows are generally stable and predictable. If such
longer-term securities do not meet our quality and yield objectives, new money is invested short-term,
with maturities less than five years. During calendar years 2006 through 2008, Torchmark invested almost
exclusively in fixed-maturity securities, primarily corporate securities. There were no below investment
grade securities acquired. 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.
36
The following table summarizes selected information for fixed-maturity purchases. The effective
annual yield shown in the table 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
2007
2008
2006
Investment-grade corporate securities . . . . . . . . . . . . . . . . . . . $1,031.2 $1,767.8 $1,179.2
-0-
Tax-exempt municipal securities . . . . . . . . . . . . . . . . . . . . . . . .
105.0
Other investment-grade securities . . . . . . . . . . . . . . . . . . . . . .
256.4
39.4
-0-
60.3
Total fixed-maturity acquisitions . . . . . . . . . . . . . . . . . . . $1,091.5 $2,063.6 $1,284.2
Effective annual yield (one year compounded*) . . . . . . . . . . . . . .
Average life (in years, to next call) . . . . . . . . . . . . . . . . . . . . . . . .
Average life (in years to maturity) . . . . . . . . . . . . . . . . . . . . . . . . .
Average rating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.22%
23.1
30.9
A
6.78%
19.6
32.6
A
6.72%
13.8
24.0
A
* Tax-equivalent basis, where the yield on tax-exempt securities is adjusted to produce a yield equivalent to
the pretax yield on taxable 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 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.
Prior to 2007, we generally did not invest in securities with maturity dates more than 30 years after
the acquisition date. Because of
the changing investment environment during 2007 and 2008, we
trust preferred securities and redeemable
invested some funds in fixed-maturity securities (bonds,
preferred stocks) with longer scheduled maturity dates. In virtually all cases, such securities have a
scheduled maturity date and are callable many years prior to the scheduled maturity date. Due primarily
to this increase in these longer-term securities, the average life of funds invested during 2007 and 2008
(to both next call and maturity) is significantly higher than that of investments during 2006.
New cash flow available to us for investment has been 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 have a negative impact on investment income if the proceeds from the calls are
reinvested in bonds that have lower yields than that of the bonds that were called. Issuer calls were $238
million in 2008, $848 million in 2007, and $229 million in 2006. The 2007 level of calls was unusual, and
contributed to the significant increase in funds invested in that year.
37
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, 2008 with the latest industry data.
Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock (redeemable and perpetual)(2) . . . . . . . . . . . .
Common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Torchmark
Amount
(in millions) % Industry %(1)
$ 8,161
1,465
1
17
2
360
53
131
$10,190
80
14
-0-
-0-
-0-
4
1
1
75
2
3
11
1
4
3
1
100
100
(1) Latest data available from the American Council of Life Insurance as of December 31, 2007.
(2)
Includes redeemable preferred of $1.45 billion or 14% and perpetual preferred of $16 million or 0%.
At December 31, 2008, approximately 94% of our investments at book value were in a diversified
fixed-maturity portfolio. Policy loans, which are secured by policy cash values, made up an additional 4%.
The remaining balance was comprised of other investments including equity securities, mortgage loans,
and other long-term and short-term investments.
Because fixed maturities represent such a significant portion of our investment portfolio, the remainder of
the discussion of portfolio composition will focus on fixed maturities. At December 31, 2008, fixed maturities
had a fair value of $7.8 billion, compared with $9.2 billion at December 31, 2007. Net unrealized losses on
fixed maturities increased from $103 million at December 31, 2007 to $1.8 billion at December 31, 2008.
More than $1 billion of the increase in net unrealized loss during 2008 was attributable to securities for which
there was no downgrade in the Bloomberg Composite Rating. Approximately $300 million of the increase
was attributable to securities for which there was a one-step downgrade in the Bloomberg Composite Rating.
More than $800 million of the increase was attributable to securities issued by banks and insurance
companies. As discussed in Note 3—Investments under the caption Fair value measurements, we believe,
based on what we have observed in the market, that much of the increase in unrealized losses was
attributable to illiquidity in the markets. This illiquidity has contributed to a spread widening, and accordingly
unrealized losses, on many securities that we expect to be fully recoverable. Torchmark has the ability and
intent to hold these securities until recovery. An analysis of our fixed-maturity portfolio by component at
December 31, 2008 is as follows:
Fixed Maturities by Component
At December 31, 2008
(Dollar amounts in millions)
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
% of Total
Fixed
Maturities*
Corporates . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable preferred stock . . . . . . . . . . . .
Municipals . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government-sponsored enterprises . . . . . .
Governments & agencies . . . . . . . . . . . . . . .
Residential mortgage-backed securities . . .
Commercial mortgage-backed securities . .
Collateralized debt obligations . . . . . . . . . . .
Other asset-backed securities . . . . . . . . . . .
$7,463
1,449
261
202
23
23
17
131
41
Total fixed maturities . . . . . . . . . . .
$9,610
$112
8
1
1
2
2
-0-
-0-
-0-
$126
$(1,300) $6,275
1,013
217
194
25
25
17
14
37
(444)
(45)
(9)
-0-
-0-
-0-
(117)
(4)
80%
13
3
3
-0-
-0-
-0-
-0-
1
$(1,919) $7,817
100%
* At fair value
38
Approximately 80% of our fixed maturity assets at December 31, 2008 were corporate bonds and
13% were redeemable preferred stocks. Less than 1% of the assets were residential and commercial
mortgage-backed securities and collateralized debt obligations (CDOs). All of
the mortgage-backed
securities were rated AAA. The average rating of our CDOs was A-, with none rated less than BBB.
Unless otherwise indicated, our security ratings are based on the Bloomberg Composite Rating, a blend
of ratings of securities from four prominent rating agencies.
At the end of 2008 and 2007, the fixed-maturity portfolio had a gross unrealized gain of $126 million
and $247 million,
respectively. Gross unrealized losses on fixed maturities were $1.9 billion at
December 31, 2008, compared with $350 million a year earlier. For further analysis of our fixed-maturity
portfolio by component at December 31, 2008 and 2007, an analysis of unrealized investment losses, and
a schedule of maturities, see Note 3—Investments in the Notes to Consolidated Financial Statements.
Additional information concerning the fixed-maturity portfolio is as follows.
Fixed Maturity Portfolio Selected Information
Average annual effective yield (1) . . . . . . . . . . . . . . . . . . .
Average life, in years, to:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Next call (2)
Maturity (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective duration to:
Next call (2), (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturity (2), (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
At December 31,
2008
At December 31,
2007
6.98%
6.96%
15.2
21.6
6.9
8.8
14.0
20.7
7.5
9.6
(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.
The decline in effective duration during 2008 was a result of significantly higher discount rates
implied by the decline in the market value of the portfolio, reducing sensitivity to changes in rates.
39
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. Approximately 94% of our fixed-maturity holdings
at book value are in corporate securities (including redeemable preferred and asset-backed securities).
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. We also seek to reduce credit risk by maintaining investments in a large number of issuers over a
wide range of industry sectors.
The following table presents the relative percentage of our corporate fixed maturities by industry
sector at December 31, 2008.
Fixed Maturities by Sector
At December 31, 2008
(Dollar amounts in millions)
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
% of Total
Fixed
Maturities*
Financial - Life/Health/PC
Insurance . . . . . . . . . . . . . . . . . . . . . .
Financial - Bank . . . . . . . . . . . . . . . . . .
Financial - Financial Guarantor . . . . . .
Financial - Mortgage Insurer . . . . . . . .
Financial - Insurance Broker . . . . . . . .
Financial - Other . . . . . . . . . . . . . . . . . .
Utilities . . . . . . . . . . . . . . . . . . . . . . . . . .
Energy . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer Non-cyclical
. . . . . . . . . . . .
Consumer Cyclical . . . . . . . . . . . . . . . .
Communications . . . . . . . . . . . . . . . . . .
Basic Materials . . . . . . . . . . . . . . . . . . .
Transportation . . . . . . . . . . . . . . . . . . . .
Other Industrials . . . . . . . . . . . . . . . . . .
ABS - CDO . . . . . . . . . . . . . . . . . . . . . .
MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . .
Government
$1,764
1,659
105
75
50
278
1,105
793
644
471
600
578
299
532
131
40
486
Total fixed maturities . . . . . . .
$9,610
* At fair value
$ 17
7
-0-
-0-
-0-
5
21
15
13
4
4
13
5
16
-0-
2
4
$126
$ (511)
(335)
(53)
(44)
(22)
(71)
(81)
(111)
(67)
(121)
(108)
(121)
(24)
(79)
(117)
-0-
(54)
$1,270
1,331
52
31
28
212
1,045
697
590
354
496
470
280
469
14
42
436
16%
17
1
0
0
3
13
9
7
5
6
6
4
6
0
1
6
$(1,919)
$7,817
100%
At December 31, 2008, approximately 37% of the fixed maturity assets at fair value were in the
financial sector, including 16% in life and health or property casualty insurance companies and 17% in
banks. Financial guarantors and mortgage insurers comprised approximately 1% of the portfolio. After
financials, the next largest sector was utilities, which comprised 13% of the portfolio. The balance of the
portfolio is spread among 246 issuers in a wide variety of sectors.
Gross unrealized losses were $1.9 billion. As previously noted, based upon what we have observed
in the market, management believes that much of the unrealized loss at December 31, 2008 was
attributable to illiquidity in the market, contributing to a spread widening, and accordingly unrealized
losses, on many securities that we expect to be fully recoverable. Torchmark has the ability and intent to
hold these securities until recovery. Approximately 54% of the gross unrealized losses were attributable to
the financial sector, including 27% attributable to life and health or property casualty insurance companies
and 17% attributable to banks. We are encouraged by the efforts of the Federal government to help
banks and insurance companies to weather the current financial crisis, but the Company cannot predict at
this time what impact these efforts will have on ultimate recovery.
40
An analysis of the fixed-maturity portfolio by the Bloomberg Composite Rating at December 31, 2008
is shown in the table below.
Fixed Maturities by Rating
At December 31, 2008
(Dollar amounts in millions)
Amortized
Cost
%
Fair
Value %
Investment grade:
AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BBB+ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BBB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BBB- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 492
442
3,366
1,486
1,958
1,153
5 $ 483
5
416
2,855
35
1,207
16
1,589
20
806
12
Investment grade . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,897
93
7,356
Below investment grade:
BB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Below B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Below investment grade . . . . . . . . . . . . . . . . . . . . . . . .
470
131
112
713
5
1
1
7
319
81
61
461
6
5
37
16
20
10
94
4
1
1
6
$9,610
100 $7,817 100
The portfolio has a weighted average quality rating of BBB+ based on amortized cost. Approximately
the portfolio at amortized cost was considered investment grade. Our investment portfolio
93% of
contains no securities backed by sub-prime or Alt-A mortgages (loans for which some of the typical
documentation was not provided by the borrower). We have no direct
investments in residential
mortgages, nor do we have any counterparty risks as we are not a party to any credit default swaps or
other derivative contracts. We do not participate in securities lending. There are no off-balance sheet
investments are reported on our Consolidated Balance Sheets. At December 31,
investments, as all
2008, we had $14 million at
fair value ($131 million book value) invested in CDOs, for which the
Bloomberg Composite Rating at that date was A-. The collateral underlying these CDOs is primarily trust
preferred securities issued by banks and insurance companies, but no sub-prime or Alt-A mortgages are
included in the collateral.
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.
Subsequent Data as of February 12, 2009. The gross unrealized loss on fixed maturity assets at
February 12, 2009 was $2.0 billion, an increase of $95 million or 5% since December 31, 2008. The
decline in fair value of fixed maturities in the Financial - Bank sector accounted for $109 million of the
increase in gross unrealized loss.
41
Market Risk Sensitivity. Torchmark’s financial securities are exposed to interest
rate risk,
meaning the effect of changes in financial market interest rates on the current fair value of the company’s
investment portfolio. Since 94% of the book value of our investments is attributable to fixed-maturity
investments (and virtually all of these investments are fixed-rate investments), the portfolio is highly
subject to market risk. Declines in market interest rates generally result in the fair value of the investment
portfolio exceeding the book value of the portfolio and increases in interest rates cause the fair value to
decline below the book value. Under normal market conditions, we do not expect to realize these
unrealized gains and losses because it is generally our investment strategy to hold these investments to
maturity. The long-term nature of our insurance policy liabilities and strong cash-flow operating position
substantially mitigate any future need to liquidate portions of the portfolio. The increase or decrease in the
fair value of insurance liabilities and debt due to increases or decreases in market interest rates largely
offset the impact of rates on the investment portfolio. However, in accordance with GAAP, these liabilities
are not marked to market.
The following table illustrates the market risk sensitivity of our interest-rate sensitive fixed-maturity
portfolio at December 31, 2008 and 2007. This table measures the effect of a change in interest rates (as
represented by the U.S. Treasury curve) on the fair value of
the fixed-maturity portfolio. The data
measures the change in fair value arising from an immediate and sustained change in interest rates in
increments of 100 basis points.
Market Value of
Fixed-Maturity Portfolio
($ millions)
Change in
Interest Rates
(in basis points)
At
December 31,
2008
At
December 31,
2007
-200
-100
0
100
200
$9,348
8,522
7,817
7,198
6,664
$11,188
10,132
9,226
8,445
7,765
Realized Gains and Losses. Our life and health insurance companies 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 our core insurance operations of providing insurance
coverage to policyholders.
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 not to be
the future trends of core operations.
indicative of historical core operating results nor predictive of
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.
42
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, 2008.
Analysis of Realized Gains (Losses), Net of Tax
(Dollar amounts in thousands, except for per share data)
Year Ended December 31,
2008
2007
2006
Amount
Per Share Amount
Per Share Amount Per Share
Fixed maturities and equities:
Sales . . . . . . . . . . . . . . . . . . . . . . . . $
Called or tendered . . . . . . . . . . . . .
Writedowns* . . . . . . . . . . . . . . . . . .
(371)
(865)
(68,907)
Real estate:
Sales . . . . . . . . . . . . . . . . . . . . . . . .
Writedowns* . . . . . . . . . . . . . . . . . .
1,160
(718)
Interest-rate swaps:
Valuation . . . . . . . . . . . . . . . . . . . . .
Spread** . . . . . . . . . . . . . . . . . . . . .
Loss on redemption of debt . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
-0-
(177)
$ -0-
(.01)
(.78)
.01
(.01)
-0-
-0-
-0-
-0-
$ (3,431)
11,223
(7,298)
$(.04)
.12
(.08)
$(3,795)
(708)
-0-
$(.04)
(.01)
-0-
776
-0-
-0-
-0-
-0-
507
.01
-0-
-0-
-0-
-0-
.01
213
-0-
(2,956)
319
(3,830)
3,503
-0-
-0-
(.03)
.01
(.04)
.04
Total . . . . . . . . . . . . . . . . . . . . . $(69,878)
$(.79)
$ 1,777
$ .02
$(7,254)
$(.07)
* Written down due to other-than-temporary impairment.
**
The reduction in interest cost from swapping fixed-rate obligations to floating rate.
As described in Note 3—Investments under the caption Other-than temporary impairments in the
Notes to Consolidated Financial Statements, we wrote certain securities down to fair value during 2008 as
a result of other-than-temporary impairment. The impaired securities met our criteria for other-than-
temporary impairment as discussed in Note 3 and in our Critical Accounting Policies in this report. The
writedown resulted in a 2008 pretax charge of $106 million ($69 million after tax). Of this pre-tax amount,
$94 million consisted of bonds of Lehman Brothers and Washington Mutual and perpetual preferred stock
of Federal National Mortgage Association as shown in the table below.
(Dollar amounts in millions)
Lehman Brothers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington Mutual
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal National Mortgage Association
Book Value
Before
Writedown
$ 82.2
19.0
(perpetual preferreds)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.0
$103.2
Fair Value Writedown
$8.6
0.4
0.1
$9.1
$73.7
18.6
1.9
$94.2
Due to the current status of these entities, we expect our future net investment income to be reduced
by approximately $7 million per year. Additionally in 2008, securities of certain non-financial institutions
were determined to be other-than-temporarily impaired and were written down $12 million ($8 million after
tax). We also wrote down a real estate investment to fair value in 2008, resulting in a loss of $1.1 million
($718 thousand after tax).
In 2007, we wrote down certain non-financial institution holdings because of other-than-temporary
impairment. 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. Since the writedown, a portion of these
securities were sold for proceeds of $19 million in 2007 and the remainder was sold in 2008 for proceeds
of $15 million.
43
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, and we recorded changes
as a component of “Realized investment gains (losses)”. During the first half of 2006, we sold all
remaining swap instruments, so that no swaps were held after June, 2006. More 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.
44
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.
The operations of our insurance subsidiaries have historically generated positive cash flows in
excess of our immediate needs. Sources of cash flows for the insurance subsidiaries include primarily
premium and investment
income. Cash outflows from operations include policy benefit payments,
commissions, administrative expenses, and taxes.
Cash inflows from insurance operations 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. As discussed below under the caption Parent Company Liquidity,
the primary source of the cash flows for these purposes is dividends paid by the insurance subsidiaries to
the parent company.
Cash flows provided from operations were $731 million in 2008, $850 million in 2007, and $865 million
in 2006. In addition, we received $581 million in investment maturities, repayments, and calls in 2008,
adding to available cash flows. Such repayments were $1.3 billion in 2007 and $606 million in 2006.
Our cash and short-term investments were $177 million at year-end 2008 and $131 million at year-
end 2007. 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 $7.8 billion at December 31,
2008. However, our strong cash flows from operations, investment maturities, and credit line availability
make any need to sell securities for liquidity unlikely.
Parent Company Liquidity. An important source of cash flow to the parent company is dividends
paid by the insurance subsidiaries. As allowed by insurance regulations, the insurance subsidiaries
generally pay dividends to Torchmark Parent in amounts equal to their prior year earnings calculated on a
statutory basis. These dividends are received in order to meet the Parent Company’s dividend payments
on common and preferred stock, interest and principal repayment requirements on debt of the Parent
Company, and operating expenses of the Parent. In 2008, $404 million in dividends were paid to the
Parent Company, as compared with $458 million in 2007 and $428 million in 2006. After paying debt
obligations, shareholder dividends, and other expenses (but before share repurchases), Torchmark
Parent had excess operating cash flow in 2008 of approximately $343 million. Parent Company cash flow
in excess of its operating requirements is available for other corporate purposes, such as strategic
acquisitions or share repurchases. In 2009, it is expected that the Parent Company will receive $348
million in dividends from subsidiaries and that a range of $320 million to $330 million will be available as
excess cash flow, assuming that our Senior Debt due in August, 2009 is refinanced. Certain restrictions
exist on the payment of these dividends. 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.
Torchmark qualifies for and is participating in the Commercial Paper Funding Facility (CPFF), a
facility created by the Federal Reserve Board to purchase commercial paper from eligible issuers.
Torchmark can issue $305 million under
the CPFF, which was the par amount outstanding at
December 31, 2008 (book value $304 million).
Capital in our insurance subsidiaries is sufficient to support current operations. As of December 31,
2008, the ratio of regulatory capital to Company Action Level required capital was 329%, in line with
recent years.
45
An additional source of parent company liquidity is a line of credit facility with a group of lenders
which allows unsecured borrowings and stand-by letters of credit up to $600 million. As of December 31,
2008, we had available $95 million on this facility. 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.
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, 2008 and
2007. 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
Consolidated Balance Sheets,
they are represented by Torchmark’s 7.1% Junior Subordinated
Debentures due to the trust. These Junior Subordinated Debentures were a Torchmark liability of $124
million par and book value at both December 31, 2008 and 2007. These securities are indicated as a
capital resource to us under the caption Capital Resources in this report. The 7.1% preferred dividends
due to the preferred shareholders are funded by our 7.1% interest payment on our 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.
As of December 31, 2008, 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, 2008.
(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:
. . . . . . . . . . $
Funded debt—principal(1)
Funded debt—interest(2) . . . . . . . . . . .
Capital leases . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . .
Purchase obligations . . . . . . . . . . . . . .
. . . . . . . . . . . . .
Pension obligations(3)
Uncertain tax positions(4) . . . . . . . . . . .
Future insurance obligations(5) . . . . . .
722
9
-0-
-0-
11
56
8
9,233
$
733
673
-0-
10
11
143
8
41,167
$
99
50
-0-
3
5
12
4
1,404
$
-0-
89
-0-
4
6
24
-0-
2,642
$
94
88
-0-
2
-0-
26
4
2,516
$
540
446
-0-
1
-0-
81
-0-
34,605
Total
. . . . . . . . . . . . . . . . . . . . . . . . . $10,039
$42,745
$1,577
$2,765
$2,730
$35,673
Interest on debt is based on our fixed contractual obligations.
(1) Funded debt is itemized in Note 10—Debt in the Notes to Consolidated Financial Statements.
(2)
(3) Pension obligations are primarily liabilities in trust funds that are calculated in accordance with the terms of the pension plans.
They are offset by invested assets in the trusts, which are funded through periodic contributions by Torchmark in a manner
which will provide for the settlement of the obligations as they become due. Therefore, our obligations are offset by those assets
when reported on Torchmark’s Consolidated Balance Sheets. At December 31, 2008,
these pension obligations were
$230 million, but there were also assets of $175 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.
(4) Uncertain tax positions do not include $1.2 million of accrued interest. See Note 8—Income Taxes in the Notes to Consolidated
Financial Statements for more information.
(5) Future insurance obligations consist primarily of estimated future contingent benefit payments on policies in force and separate
account obligations at December 31, 2008. 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, 2008, along with future
premiums and investment income, will be sufficient to fund all future insurance obligations.
46
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 Trust III which is liable
for its Trust Preferred Securities. In accordance with GAAP, these instruments are included in “Due to
affiliates” on the Consolidated Balance Sheets. A complete analysis and description of long-term debt
issues outstanding is presented in Note 10—Debt in the Notes to Consolidated Financial Statements.
The carrying value of the funded debt was $722 million at December 31, 2008, the same as a year
earlier. Our 8.25% Senior Debentures are due in August, 2009 at a redemption amount of $99.5 million
plus accrued interest, and are classified as short-term debt because they are due within a year. As a
result, reported long-term debt at December 31, 2008 was $499 million. If conditions in financial markets
stabilize, we intend to refinance this debt with another issue. Otherwise, we intend to repay the debt with
our excess cash flow.
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 Preferred Securities 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. However, as short-term
rates rose in 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
our two remaining swap agreements during 2006 and held no swap agreements after June 2006. More
information about our swaps is found in Note 10—Debt in the Notes to Consolidated Financial Statements
under the caption Interest Rate Swaps.
We believe that the most beneficial use of our excess cash flow could be a strategic acquisition.
However, an acquisition is unlikely until financial markets stabilize. Absent an acquisition, we believe that
the best use of excess cash is to buy Company stock. However, we will exercise caution given current
economic conditions. We will not jeopardize our liquidity or debt covenants through our share repurchase
program. As previously mentioned, our Board reaffirmed its continued authorization of
the stock
repurchase program in October, 2008 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 60 million shares at a total cost of $2.7 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 and to return on equity, and are an excellent way
to increase total shareholder value. As noted earlier in this report, we acquired over 7.6 million shares at a
cost of $427 million in 2008 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 million of additional
investment income, after tax, would have resulted and net income per diluted share would have declined
9% to $4.99. Because share purchases were made, actual net income per share was $5.11, a lesser
decline of 7%. We intend to continue the repurchase of our common shares when conditions are
favorable. The majority of purchased shares are retired each year.
47
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 can result from changes in interest rates and liquidity in
financial markets. While SFAS 115 requires invested assets to be revalued, accounting rules do not
permit interest-bearing insurance policy liabilities to be valued at fair value in a consistent manner. Due to
the size of our policy liabilities in relation to our shareholders’ equity, this inconsistency in measurement
usually has a material
impact on 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, 2008 At December 31, 2007 At December 31, 2006
GAAP
Effect of
SFAS 115*
Fixed maturities (millions) . . . . . . . . . . . . . $ 7,817
3,395
Deferred acquisition costs (millions) . . . . .
13,529
Total assets (millions) . . . . . . . . . . . . . . . .
404
Short-term debt (millions) . . . . . . . . . . . . .
Long-term debt (millions) ** . . . . . . . . . . . .
623
2,223
Shareholders’ equity (millions) . . . . . . . . .
$(1,793)
107
(1,685)
-0-
-0-
(1,095)
GAAP
$ 9,226
3,159
15,241
202
722
3,325
Effect of
SFAS 115*
$(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
Book value per diluted share . . . . . . . . . . .
Debt to capitalization *** . . . . . . . . . . . . . .
26.24
31.6%
(12.93)
8.0%
35.60
21.7%
(.66)
.3%
34.68
20.5%
1.43
(.7)%
Diluted shares outstanding
(thousands) . . . . . . . . . . . . . . . . . . . . . . .
Actual shares outstanding (thousands) . .
84,708
84,708
93,383
92,175
99,755
98,115
Amount added to (deducted from) comprehensive income to produce the stated GAAP item
Includes Torchmark’s 7.1% Junior Subordinated Debentures in 2008, 2007, and 2006 in the amount of $124 million.
*
**
*** Torchmark’s debt covenants require that the effect of SFAS 115 be removed to determine this ratio.
Effective in 2008, the FASB issued a new Statement SFAS 159, 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 liabilities and debt, the impact on earnings could be very
significant and volatile, causing reported earnings not to be reflective of core results. Therefore, we do not
intend to elect this option.
As discussed earlier in this report, the fixed maturity portfolio incurred $1.8 million in net unrealized
investment losses in 2008 ($1.1 million after tax and adjustments of deferred acquisition costs). These
unrealized losses are believed by management to have been brought on by widening credit spreads in
financial markets, and were the primary factor in the decline in our shareholders’ equity in 2008. Share
purchases in each of the years 2006 through 2008 were generally offset by net income, having little
impact on our total shareholders’ equity in those periods. Torchmark’s ratio of earnings before interest
and taxes to interest requirements (times interest earned) was 11.5 times in 2008, compared with 12.8
times in 2007 and 11.6 times in 2006. A discussion of our interest expense is included in the discussion of
financing costs under the caption Investments in this report.
48
Credit Ratings. The credit quality of Torchmark’s debt instruments and capital securities are rated
by various rating agencies. In 2008, Standard & Poor’s affirmed all credit ratings on Torchmark and its
subsidiaries. However, it revised its outlook to negative from stable for the Company. Standard & Poor’s
cited our increased risk within our investment portfolio which has experienced significant unrealized
losses concentrated in the financial sector. They also noted that our share repurchase program has
reduced our capitalization, but that we were still well within a level adequate to support their rating. Fitch
also revised its outlook to negative during 2008. 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 direct response strategy, all of which have 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, 2008.
. . . . . . . . . . . . . . . . . . . . . .
Commercial Paper
Funded Debt
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . .
A-1
A
BBB+
Standard
& Poor’s
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, 2008.
Liberty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Globe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United American . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
American Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA-
AA-
A
AA-
AA-
A+ (Superior)
A+ (Superior)
A (Excellent)
A+ (Superior)
A+ (Superior)
Standard
& Poor’s
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.
49
TRANSACTIONS WITH RELATED PARTIES
Information regarding related party transactions is found in Note 15—Related Party Transactions in
the Notes to Consolidated Financial Statements.
OTHER ITEMS
Litigation. Torchmark and its subsidiaries are subject to being named as parties to pending or
threatened litigation, much of which involves punitive damage claims based upon allegations of agent
misconduct at the insurance subsidiaries. Such punitive damage claims that are tried in Alabama state
courts 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
insurance in the State of Mississippi, a jurisdiction which is nationally
subsidiaries actively market
recognized for large punitive damage verdicts. This bespeaks caution since it is impossible to predict the
likelihood or extent of punitive damages that may be awarded if liability is found in any given case. Based
upon information presently available, and in light of
legal and other factual defenses available to
Torchmark and its subsidiaries, contingent liabilities arising from threatened and pending litigation are not
presently considered by 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 potentially applicable to Torchmark, effective in future
periods:
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.
Derivatives: Statement No. 161, Disclosures About Derivative Instruments and Hedging
Activities—an amendment of FASB Statement No. 133 (SFAS 161), was issued in March, 2008
expanding the disclosures about derivatives and hedging activities required under existing accounting
guidance. SFAS 161 is effective for Torchmark as of January 1, 2009. As of December 31, 2008,
Torchmark does not hold any of the derivative instruments subject to this Statement.
Financial Guarantee Insurance Contracts: Statement No. 163, Accounting for Financial
Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60 (SFAS 163) was issued in
May, 2008 to clarify accounting for such instruments. Torchmark does not offer this form of insurance and
therefore this Statement will not apply to us.
Postretirement Benefit Plan Assets: The FASB issued in December, 2008 FASB Staff Position
132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets (FSP 132(R)-1). This
document requires additional disclosures about plan assets, such as more detail information on asset
categories, investment strategies, concentrations of credit risks, and valuation techniques. The valuation
information is similar to the disclosures in SFAS 157 for Company investments. FSP 132(R)-1 also
requires a discussion of
the expected long-term-rate-of-return
assumption. It is effective for annual periods for Torchmark beginning in 2009.
the determination of
the basis for
50
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.
Approximately 73% of our liabilities for future policy benefits at December 31, 2008 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, 2008.
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 95% of our recorded amounts for deferred acquisition costs at December 31, 2008 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
the contracts. Absent a premium deficiency, variability in
issue, are not revised for the lifetime of
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, 2008.
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. With the exception of variable annuities, as discussed earlier in this report, revisions
related to our SFAS 97 assets have not had a material impact on the amortization of deferred acquisition
costs during the three years ended December 31, 2008. The variable annuity block could sustain further
increases in the level of amortization if equity markets do not stabilize. Amortization for SFAS 97 blocks
other than variable annuities is 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
51
claims is based on prior experience and is made after careful evaluation of all information available to us.
However, the factors upon which these estimates are based can be subject to change from historical
patterns. Factors involved include medical
the litigation
environment, regulatory mandates, and the introduction of policy types for which claim patterns are not
well established. Changes in these estimates, if any, are reflected in the earnings of the period in which
the adjustment is made. We believe that the estimates used to produce the liability for claims and other
benefits, including the estimate of unsubmitted claims, are the most appropriate under the circumstances.
However, there is no certainty that the resulting stated liability will be our ultimate obligation. 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.
trend rates and medical cost
inflation,
Revenue Recognition. Premium income from our subsidiaries’
insurance contracts is generally
recognized as the premium is collected. However, in accordance with GAAP, revenues 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.
During 2008, the values of our fixed maturities have also been affected by illiquidity in the financial
markets, which has contributed to a spread widening, and accordingly unrealized losses, on many
securities that we expect to be fully recoverable. Even though our fixed maturity portfolio is available for
sale, we have the ability and intent to hold the securities until maturity as a result of our strong and stable
cash flows generated from our insurance products. Considerable information concerning the policies,
procedures, classification levels, and other relevant data concerning the valuation of our fixed-maturity
investments are presented in Note 3—Investments under the caption Fair Value Measurements.
Impairment of Investments. We continually monitor our investment portfolio for investments that
have become impaired in value, where 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
52
investments are disclosed in Note 1—Significant Accounting Policies and
impairments of
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, 2008, our net liability under these plans was $56 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 be certain 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;
53
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 42 of this report.
54
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 2008 and 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for each of the three years in the period ended
Page
56
57
December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58
Consolidated Statements of Comprehensive Income for each of the three years in the period
ended December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended
December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59
60
61
62
55
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, 2008 and 2007, 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, 2008. 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, 2008 and 2007, and the results of
their operations and their cash flows for each of the three years in the period ended December 31, 2008,
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, 2008,
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 26, 2009
expressed an unqualified opinion on Torchmark’s internal control over financial reporting.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 26, 2009
56
TORCHMARK CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands except per share data)
December 31,
2008
2007
Assets:
Investments:
Fixed maturities—available for sale, at fair value (amortized cost: 2008—
$9,609,856; 2007—$9,329,149) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,817,186 $ 9,226,045
21,295
344,349
69,290
111,220
Equity securities, at fair value (cost: 2008—$16,876; 2007—$18,776) . . . .
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,346
360,431
72,284
130,954
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,397,201
9,772,199
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred acquisition costs and value of insurance purchased . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Separate account assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46,400
176,068
151,684
3,395,211
423,519
180,944
758,023
20,098
172,783
96,750
3,159,051
423,519
173,833
1,423,195
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,529,050 $15,241,428
Liabilities:
Future policy benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,475,020 $ 7,958,983
Unearned and advance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
86,714
256,462
Policy claims and other benefits payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
89,958
Other policyholders’ funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
85,190
236,313
89,709
Total policy liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,886,232
8,392,117
Current and deferred income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt (estimated fair value: 2008—$515,249; 2007—$655,543) . . .
Due to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Separate account liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
419,203
215,508
403,707
499,049
124,421
758,023
966,008
210,990
202,058
598,012
124,421
1,423,195
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,306,143 11,916,801
Shareholders’ equity:
Preferred stock, par value $1 per share—Authorized 5,000,000 shares;
outstanding: -0- in 2008 and in 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, par value $1 per share—Authorized 320,000,000 shares;
outstanding: (2008—85,874,748 issued, less 1,167,101 held in treasury
and 2007—94,874,748 issued, less 2,699,333 held in treasury) . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
85,875
446,065
(1,170,417)
2,928,950
(67,566)
2,222,907
94,875
481,228
(80,938)
3,003,152
(173,690)
3,324,627
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . $13,529,050 $15,241,428
See accompanying Notes to Consolidated Financial Statements.
57
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
Year Ended December 31,
2007
2008
2006
Revenue:
Life premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Health premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,616,804
1,127,059
14,393
$1,569,964 $1,524,267
1,237,532
22,914
1,236,797
20,470
Total premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,758,256
2,827,231
2,784,713
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized investment gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
671,495
(107,504)
4,671
648,826
2,734
7,906
628,746
(10,767)
18,486
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,326,918
3,486,697
3,421,178
Benefits and expenses:
Life policyholder benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Health policyholder benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other policyholder benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,073,920
759,588
39,407
1,039,278
835,101
28,049
1,005,771
834,017
23,743
Total policyholder benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,872,915
1,902,428
1,863,531
Amortization of deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . .
Commissions and premium taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
398,324
145,981
185,212
63,229
391,011
155,483
173,406
67,564
377,490
163,683
169,768
73,136
Total benefits and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,665,661
2,689,892
2,647,608
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
661,257
796,805
773,570
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(208,998)
(269,270)
(254,939)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 452,259
$ 527,535 $ 518,631
Basic net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends declared per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
5.14
5.11
.56
$
$
$
5.59 $
5.20
5.50 $
5.13
.52 $
.50
See accompanying Notes to Consolidated Financial Statements.
58
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Year Ended December 31,
2007
2008
2006
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
452,259 $ 527,535 $ 518,631
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) premium . . .
Foreign exchange adjustment on securities marked to market . . . . . . .
(1,808,802)
(305,635)
(208,344)
107,912
(12,410)
20,685
(760)
(7,572)
(17,141)
6,927
4,615
68
Unrealized gains (losses) on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,692,615)
(331,108)
(196,734)
Unrealized gains (losses), adjustment to deferred acquisition costs . . . . . .
98,893
19,148
12,374
Total unrealized investment gains (losses) . . . . . . . . . . . . . . . . . . . . . . .
(1,593,722)
(311,960)
(184,360)
Less applicable taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
557,803
109,186
64,525
Unrealized gains (losses), net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,035,919)
(202,774)
(119,835)
Foreign exchange translation adjustments, other than securities, net of tax of
$13,735, $(3,244), and $125 during 2008, 2007, and 2006, respectively . .
(17,712)
16,083
(237)
Pension adjustments:
Adoption of Supplemental Executive Retirement Plan . . . . . . . . . . . . . . . . . .
Amortization of pension costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Experience gain (loss)
-0-
3,047
(58,200)
(15,419)
2,692
(40,109)
Pension adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(55,153)
(52,836)
Less applicable taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,305
18,492
Pension adjustments, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(35,848)
(34,344)
-0-
-0-
-0-
-0-
-0-
-0-
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,089,479)
(221,035)
(120,072)
Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (637,220) $ 306,500 $ 398,559
See accompanying Notes to Consolidated Financial Statements.
59
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Amounts in thousands except per share data)
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Treasury
Stock
Total
Shareholders’
Equity
Year Ended December 31, 2006
Balance at January 1, 2006 . . . .
$-0-
$104,875
$508,713
$
269,084
$2,621,552 $ (71,456)
$3,432,768
Comprehensive income (loss)
. .
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
(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)
31, 2006 . . . . . . . . . . . . . . . .
-0-
99,875
492,333
140,097
2,827,287
(100,399)
3,459,193
Year Ended December 31, 2007
Comprehensive income (loss)
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
Year Ended December 31, 2008
Comprehensive income (loss)
Common dividends declared
. .
($0.56 a share) . . . . . . . . . . . . .
Acquisition of treasury stock . . . .
Stock-based compensation . . . . .
Exercise of stock options . . . . . . .
Retirement of treasury stock . . . .
Balance at December 31,
(1,089,479)
452,259
(48,678)
(11,856)
(465,927)
(455,736)
3,499
37,329
521,032
(637,220)
(48,678)
(455,736)
10,823
29,091
-0-
7,324
3,618
(46,105)
(9,000)
2008 . . . . . . . . . . . . . . . . . . . .
$-0-
$ 85,875
$446,065
$(1,170,417)
$2,928,950 $ (67,566)
$2,222,907
See accompanying Notes to Consolidated Financial Statements.
60
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended December 31,
2007
2008
2006
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to cash provided from operations:
452,259 $
527,535 $
518,631
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 (gains) losses on sale of investments and properties . . . . . . . . .
Change in other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net
429,256
(21,922)
(549,004)
398,324
57,316
107,504
(60,205)
(52,238)
(30,679)
412,751
11,078
(566,396)
391,011
94,009
(2,734)
(13,515)
(12,000)
8,258
430,087
(16,702)
(552,536)
377,490
76,502
11,258
(12,414)
(12,000)
44,985
Cash provided from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
730,611
849,997
865,301
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
123,659
580,580
-0-
16,933
313,576
1,345,794
19,332
7,425
Total investments sold or matured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
721,172
1,686,127
183,176
605,824
3,499
25,058
817,557
Acquisition of investments:
Fixed maturities—available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,091,462)
(16,082)
(10,284)
(2,063,648)
(15,458)
(4,694)
(1,284,181)
(12,062)
(1,737)
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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,117,828)
(19,734)
17,935
(9,800)
786
(24,779)
-0-
(2,083,800)
45,451
(57,810)
(24,162)
6,089
(27,369)
(47,122)
(1,297,980)
(38,361)
54,491
(7,665)
6,311
(54,954)
-0-
Cash used for investment activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(432,248)
(502,596)
(520,601)
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 . . . . . . . . . . . . . . .
25,473
(48,802)
42,636
(49,581)
21,451
(48,095)
-0-
-0-
-0-
-0-
-0-
102,178
3,618
(455,736)
112,011
-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
Cash provided from (used for) financing activities . . . . . . . . . . . . . . . . . . . . . . . .
(261,258)
(346,754)
(347,567)
Effect of foreign exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . .
(10,803)
Increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26,302
20,098
2,735
3,382
16,716
286
(2,581)
19,297
Cash at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
46,400 $
20,098 $
16,716
See accompanying Notes to Consolidated Financial Statements.
61
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions except per share data)
Note 1—Significant Accounting Policies
Business: Torchmark Corporation (Torchmark or alternatively, the Company) 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 views the Trust Preferred Securities as it does any other debt offering and consolidates the trust in
its segment analysis because GAAP requires that the segment analysis be reported as management views its
operations and financial condition.
Investments: Torchmark classifies all of its fixed-maturity investments, which include bonds and
redeemable preferred stocks, as available for sale. Investments classified as available for sale are carried
at fair value with unrealized gains and losses, net of deferred taxes, reflected directly in accumulated
other comprehensive income.
Investments in equity securities, which include common and
nonredeemable preferred stocks, are reported at fair value with unrealized gains and losses, net of
deferred taxes, reflected directly in accumulated other comprehensive income. Policy loans are carried at
unpaid principal balances. Mortgage loans, included in “Other long-term investments,” are carried at
amortized cost. Investments in real estate, included in “Other long-term investments,” are reported at cost
less allowances for depreciation. Depreciation is calculated on the straight
line method. Short-term
investments include investments in certificates of deposit and other interest-bearing time deposits with
original maturities of twelve months or less.
Gains and losses realized on the disposition of investments are determined on a specific identification
basis. Realized investment gains and losses and investment income attributable to separate 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, 2008, 2007, and 2006 included $480 million,
$448 million, and $417 million, respectively, which was allocable to policyholder reserves or accounts.
Realized investment gains and losses are not allocated to insurance policyholders’ liabilities.
Fair Value Measurements: Effective January 1, 2008, Torchmark adopted Financial Accounting
Standards Board Statement No. 157, Fair Value Measurements (SFAS 157). This Statement clarifies the
definition of fair value, establishes a hierarchy for measuring fair value, and expands disclosures about
measurement methodology and its effects on fair value. It does not change which assets or liabilities are
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
measured at fair value. The provisions of SFAS 157 are to be applied prospectively. The adoption of
SFAS 157 had no material
impact on Torchmark’s financial position or results of operations, as
Torchmark’s assets and liabilities have historically been measured substantially in accordance with its
provisions. For more information regarding Torchmark’s measurements and procedures, please see Note
3—Investments under the caption Fair Value Measurements.
Impairment of Investments: Torchmark evaluates securities for other-than-temporary impairment as
described in Note 3—Investments under the caption Other-than-temporary-impairments. 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. The written-down security will be amortized and revenue
recognized in accordance with estimated future cash flows.
As of the fourth quarter of 2008, Torchmark adopted FASB Staff Position EITF 99-20-1, Amendments
to the Impairment Guidance of EITF Issue No. 99-20. The objective of this Statement was to make the
impairment model for various asset-backed securities more consistent with other accounting guidance
concerning other-than-temporary impairments of investment securities. It was adopted prospectively for
interim and annual periods ending after December 15, 2008. The adoption of this Statement had no
impact on Torchmark’s results or financial condition.
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, receivables and payables approximate carrying value. Fair values for long-term debt and
equity securities are determined in accordance with SFAS 157. Fair values 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 other observable criteria. Additional
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
information concerning the fair value of securities is found in Note 3—Investments under the caption Fair
value measurements. The fair values of Torchmark’s long-term debt issues, along with the trust preferred
securities, are 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.
limited-payment
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
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 $51 million, $52 million, and $54 million for the years ended
December 31, 2008, 2007, and 2006, respectively. Other premium includes annuity policy charges for the
years ended December 31, 2008, 2007, and 2006, of $14 million, $20 million, and $23 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 for universal
Future Policy Benefits: The liability for
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 73% 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. 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-
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
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
described in 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 contract holders (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
value of death benefits in excess of
the projected account balance using actuarial methods and
assumptions including mortality, lapses, and interest. This excess benefit is then recognized ratably over the
accumulation period based on total expected assessments. The Company regularly evaluates estimates
If actual experience or other evidence suggests that earlier assumptions should be revised,
used.
Torchmark adjusts the additional
liability balance with a related charge or credit to benefit expense. At
December 31, 2008, this liability was $2.5 million and at December 31, 2007 was $1.1 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
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
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 $106 million
respectively. Accumulated depreciation was
and $131 million at December 31, 2008 and 2007,
$55 million at year end 2008 and $82 million at the end of 2007. Depreciation expense was $5.0 million in
2008, $4.3 million in 2007, and $5.2 million in 2006. During 2008, Torchmark completed the construction
of an office building adjacent to the home office building of its subsidiary United American Insurance
Company (United American) in McKinney, Texas. As of December 31, 2008, the Company has spent
approximately $23 million on the building and land, and approximately $3 million on equipment.
Subsidiary Liberty National Life Insurance Company (Liberty) has sold the majority of its agency office
buildings. In 2008, five offices were sold for proceeds of $787 thousand, recording a realized gain of $278
thousand before tax. In 2007, 21 buildings were sold for gross proceeds of $6.4 million, for 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. In 2008, Globe Life And Accident Insurance Company (Globe), a wholly-
owned Torchmark subsidiary, sold two office buildings in Oklahoma City, Oklahoma for total proceeds of
$7.5 million, recognizing a gain on the sale of $2.6 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, 2008, Torchmark had $138 million
invested 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 $129
million at December 31, 2007. 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, are recorded in “Net
investment income.” At December 31, 2008, $106 million of the investment is included in “Other assets”
with the remaining $32 million included in “Other
the
comparable amounts were $103 million and $26 million, respectively. Any unpaid commitments to invest
are recorded in “Other liabilities.”
invested assets.” At December 31, 2007,
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
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
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 2006 through 2008. The tests
involve assigning the Company’s carrying value to 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 acquired the assets of Direct Marketing and Advertising
Distributors, Inc. (DMAD) for $47 million in a cash transaction. For the preceding 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 to $424 million.
Treasury Stock: Torchmark accounts for purchases of treasury stock on the cost method. Issuance
of treasury stock is accounted for using the weighted-average cost method.
Litigation and Tax Settlements: Four significant legal and tax matters were settled in Torchmark’s
favor in 2006. The first settlement involved a subsidiary disposed of several years ago, resulting in 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 Company recorded a $10.8 million settlement benefit related to prior years during 2008 which
primarily resulted from the favorable resolution of litigation concerning tax liabilities asserted by Canadian
tax authorities covering several years. More information on this tax settlement is provided in Note 8—
Income Taxes in the Notes to Consolidated Financial Statements. The Company also benefited from
$1.1 million in U.S. Federal income tax issues settled in 2007 related to prior years.
Torchmark received an additional pre-tax litigation settlement, net of expenses, of $1.3 million in
2008 ($.9 million after tax) and $515 thousand in 2007 ($335 thousand after tax) from the WorldCom
litigation noted above. Legal settlement costs in the amount of $2.5 million in 2008 ($1.6 million after tax)
and $933 thousand in 2007 ($607 after tax) were expensed in those years relating to litigation issues
arising in prior periods and concerning events occurring many years ago.
The litigation receipt related to the disposed subsidiary in 2006 and the WorldCom receipts were
included in “Other income” on the Consolidated Statements of Operations. The legal settlement costs in
2008 and 2007 were included in “Other operating expense.” The state and Federal
income tax
settlements were included as reductions to “Income taxes.”
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 Statement is found in Note 9—Postretirement Benefits. Upon adoption of this
Statement, “Accumulated other comprehensive income,” net of tax, was decreased $9 million.
Stock Options: Torchmark accounts for its stock options under revised SFAS No. 123—Share-
Based Payment (SFAS 123R). This Statement requires companies to recognize an expense in their
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
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.
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. A summary of assumptions for options granted in each of the three years 2006 through
2008 is as follows:
Volatility factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.7% 12.0% 12.4%
0.8% 0.8% 0.8%
4.69
4.64
4.61
2.8% 4.7% 4.5%
2008
2007
2006
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
2008, were determined based on the simplified method as permitted by Staff Accounting Bulletins 107
and 110. 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
the Company still does not have sufficient exercise history to determine an
a three-year period,
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.
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).
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.
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.
68
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,
2006
2007
2008
Shareholders’ Equity
At December 31,
2007
2008
Life insurance subsidiaries . . . . . . . . . . . . . .
$350,263
$428,287
$417,115
$1,219,978 $1,070,096
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.
More information on the restrictions on the payment of dividends can be found in Note 11—Shareholders’
Equity.
Torchmark’s statutory financial statements are presented on the basis of accounting practices
prescribed by the insurance department of the state of domicile of each insurance subsidiary. All states
(NAIC) statutory accounting
have adopted the National Association of
practices (NAIC SAP) as the basis for statutory accounting. However, certain states have retained the
prescribed practices of their respective insurance code or administrative code which can differ from NAIC
SAP. There are no significant differences between NAIC SAP and the accounting practices prescribed by
the states of domicile for Torchmark’s life insurance companies that affect statutory surplus.
Insurance Commissioners’
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 3—Investments
Portfolio Composition:
A summary of fixed maturities available for sale and equity securities by cost or amortized cost and
estimated fair value at December 31, 2008 and 2007 is as follows:
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Amount
per the
Balance
Sheet
% of
Total Fixed
Maturities
2008:
Fixed maturities available for sale:
Bonds:
U.S. Government direct obligations
and agencies . . . . . . . . . . . . . . . . . . $
14,976
$
606
$
-0- $
15,582 $
15,582
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 . . . . . . . . .
202,293
11,896
28,241
260,760
8,200
873,213
6,589,449
171,795
1,449,033
1,086
940
1,084
661
1,163
16,377
95,172
375
8,362
(8,830)
-0-
(52)
194,549
12,836
29,273
194,549
12,836
29,273
(44,441)
-0-
(58,998)
216,980
9,363
830,592
(1,240,541) 5,444,080
(121,065)
51,105
(444,569) 1,012,826
216,980
9,363
830,592
5,444,080
51,105
1,012,826
-0-
3
-0-
-0-
3
-0-
10
70
1
13
Total fixed maturities . . . . . . . . . . . . . .
9,609,856
125,826
(1,918,496) 7,817,186
7,817,186
100
Equity securities:
Common stocks:
Banks and insurance companies . . . .
Industrial and all others . . . . . . . . . . . .
Non-redeemable preferred stocks . . . . .
Total equity securities . . . . . . . . . . . . .
777
-0-
16,099
16,876
205
2
420
627
-0-
-0-
(1,157)
(1,157)
982
2
15,362
16,346
982
2
15,362
16,346
Total fixed maturities and equity
securities . . . . . . . . . . . . . . . . . . . . . . $9,626,732
$126,453
$(1,919,653) $7,833,532 $7,833,532
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 . . . . . . . . .
233,631
14,393
32,322
268,969
9,348
729,751
6,540,542
173,567
1,308,437
3,997
1,287
1,724
364
1,641
28,689
176,911
3,442
27,958
(844)
-0-
-0-
236,784
15,680
34,046
236,784
15,680
34,046
(7,013)
(79)
(8,359)
262,320
10,910
750,081
(202,325) 6,515,128
159,634
(113,584) 1,222,811
(17,375)
262,320
10,910
750,081
6,515,128
159,634
1,222,811
-0-
3
-0-
-0-
3
-0-
8
71
2
13
Total fixed maturities . . . . . . . . . . . . . .
9,329,149
246,476
(349,580) 9,226,045
9,226,045
100
Equity securities:
Common stocks:
Banks and insurance companies . . . .
Industrial and all others . . . . . . . . . . . .
Non-redeemable preferred stocks . . . . .
Total equity securities . . . . . . . . . . . . .
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
Total fixed maturities and equity
securities . . . . . . . . . . . . . . . . . . . . . . $9,347,925
$249,541
$ (350,126) $9,247,340 $9,247,340
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 3—Investments (continued)
A schedule of fixed maturities by contractual maturity at December 31, 2008 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
$ 541,217
1,002,036
321,733
2,387,493
5,145,445
$ 539,140
944,031
290,427
1,898,504
4,051,870
9,397,924
7,723,972
Mortgage-backed and asset-
backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
211,932
93,214
$9,609,856
$7,817,186
Analysis of investment operations:
Net investment income is summarized as follows:
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2007
2008
2006
649,903 $ 621,752 $ 604,405
3,503
23,328
8,731
6,980
1,431
25,643
7,053
3,151
2,827
24,344
8,841
9,379
Less investment expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
687,181
(15,686)
667,143
(18,317)
646,947
(18,201)
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
671,495 $ 648,826 $ 628,746
An analysis of realized gains (losses) from investments is as follows:
Realized investment gains (losses):
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (106,011) $
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on redemption of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation of interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Spread on interest rate swaps (cash settlements) . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,901)
-0-
-0-
-0-
-0-
408
Applicable tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(107,504)
37,626
2,756 $ (4,735)
(2,193)
(1,996)
5,783
-0-
(5,893)
-0-
(4,548)
-0-
491
-0-
328
1,974
2,734
(957)
(10,767)
3,513
Realized gains (losses) from investments, net of tax . . . . . . . . . . . . . . . . . $
(69,878) $
1,777 $ (7,254)
An analysis of the net change in unrealized investment gains (losses) is as
follows:
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fixed maturities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3,049) $
(1,689,566)
1,379 $ (1,110)
(195,624)
(332,487)
Net change in unrealized gains (losses) on securities . . . . . . . . . . . . . . . . $(1,692,615) $(331,108) $(196,734)
Proceeds from sales of fixed maturities available for sale were $123.7 million in 2008, $313.6 million in
2007, and $183.2 million in 2006. Gross gains realized on those sales were $2.9 million in 2008, $1.6 million
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 3—Investments (continued)
in 2007, and $3.8 million in 2006. Gross losses were $3.4 million in 2008, $4.7 million in 2007, and $7.5
million in 2006. There were no equities sold in 2008. Proceeds from sales of equity securities were $7.6
million in 2007 and $3.5 million in 2006. Gross gains realized on those sales were zero in both years. Gross
losses realized on those sales were $2.2 million in both 2007 and 2006.
Fair value measurements: Torchmark measures the fair value of its financial assets in accordance
with SFAS 157. The hierarchy established by SFAS 157 consists of three levels to indicate the quality of
the fair value measurements as described below:
•
•
•
Level 1 – fair values are based on quoted prices in active markets for identical assets or liabilities
that the Company has the ability to access as of the measurement date.
Level 2 – fair values are based on inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted
prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets
or liabilities in markets that are not active, inputs other than quoted prices that are observable for
the asset or liability, or inputs that can otherwise be corroborated by observable market data.
Level 3 – fair values are based on inputs that are considered unobservable where there is little, if
any, market activity for the asset or liability as of the measurement date. In this circumstance, the
Company has to rely on values derived by independent brokers or
internally-developed
assumptions. Unobservable inputs are developed based on the best information available to the
Company which may include the Company’s own data or bid and ask prices in the dealer market.
The following table represents assets measured at fair value on a recurring basis:
Description
Asset-backed securities . . . . . . . . .
Mortgage-backed securities . . . . . .
Corporates . . . . . . . . . . . . . . . . . . . .
Other* . . . . . . . . . . . . . . . . . . . . . . . .
Total fixed maturities . . . . . . . . . . . .
Equities . . . . . . . . . . . . . . . . . . . . . .
Fair Value Measurements at December 31, 2008 Using:
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
$
-0-
-0-
214,143
-0-
214,143
15,691
Significant Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
$
13,870
42,109
6,908,474
435,851
7,400,304
31
$ 37,235
-0-
164,881
623
202,739
624
Total Fair
Value
$
51,105
42,109
7,287,498
436,474
7,817,186
16,346
Total . . . . . . . . . . . . . . . . . . . . . . . . .
$229,834
$7,400,335
$203,363
$7,833,532
Percent of total
. . . . . . . . . . . . . . . .
2.9%
94.5%
2.6%
100.0%
* Includes U.S. government, government-sponsored enterprises, municipals, and foreign governments.
therefore determines the fair values of
The great majority of the Company’s fixed maturities are not actively traded and direct quotes are not
generally available. Management
these securities after
consideration of data provided by third-party pricing services and independent broker/dealers. Over 97%
of the fair value reported at December 31, 2008 was determined using data provided by third-party pricing
services. Prices provided by third-party pricing services are not binding offers but are estimated exit
values. They are based on observable market data inputs which can vary by security type. Such inputs
include benchmark yields, available trades, broker/dealer quotes, issuer spreads, benchmark securities,
bids, offers, and other market data. Where possible,
these prices were corroborated against other
independent sources. When third party vendor prices are not available, the Company attempts to obtain
three quotes are
at
three quotes from broker/dealers for each security. When at
least
least
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 3—Investments (continued)
obtained, and a standard deviation of such quotes is less than 3%, the Company will use the median
quote and will classify the security as a Level 2 asset. The less than 3% standard deviation suggests that
the independent quotes were likely based on similar market data,
indicating observable inputs. At
December 31, 2008, there were no Level 2 assets valued in this manner with broker quotes. When the
standard deviation is 3% or greater, or the Company cannot obtain three quotes,
then additional
management judgment is required to assign fair value using whatever broker/dealer quotes or other
information is available. Any such assets are considered to be Level 3. As of December 31, 2008, the
prices underlying 84% of the Level 3 portfolio were obtained from broker/dealers. In some cases, the
Company will use less than three quotes to arrive at Level 3 fair value if, in its judgment, the values are
reasonable. Otherwise, the Company will search for trades of securities of the same issuer that are as
similar as possible to the holding. An estimate of the value will be determined based upon the yields and
characteristics of those observable trades, taking into account available comparable broker/dealer quotes.
The following table represents changes in assets measured at fair value on a recurring basis using
significant unobservable inputs (Level 3).
Analysis of Changes in Fair Value Measurements Using
Significant Unobservable Inputs (Level 3)
Asset-
backed
securities Corporates Other
Equities
Total
Balance at January 1, 2008 . . . . . . . . . . . . . . . . . . . $ 127,607
$170,086
$ 819
$594
$ 299,106
Total gains or losses:
Included in realized gains/losses . . . . . . .
Included in other comprehensive
-0-
21
-0-
income . . . . . . . . . . . . . . . . . . . . . . . . . .
(102,597)
(32,665)
(196)
Purchases, issuances, and settlements
(net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers in and/or out of Level 3 . . . . . . . . . .
(1,172)
13,397
(22,124)
49,563
-0-
-0-
-0-
30
-0-
-0-
21
(135,428)
(23,296)
62,960
Balance at December 31, 2008 . . . . . . . . . . . . . . . . $ 37,235
$164,881
$ 623
$624
$ 203,363
The collateral underlying asset-backed securities for which fair values are reported as Level 3
consists primarily of trust preferred securities issued by banks and insurance companies. None of the
collateral is subprime or Alt-A mortgages (loans for which the typical documentation was not provided).
None of the change in the fair value of Level 3 assets still held at the reporting date was included in net
income.
Other-than-temporary impairments: Torchmark’s portfolio of fixed maturities fluctuates in value due
to changes in interest rates in the financial markets as well as other factors. Fluctuations caused by
market interest rate changes have little bearing on whether or not the investment will be ultimately
recoverable. Therefore, Torchmark considers these declines in value resulting from changes in market
interest rates to be temporary. In certain circumstances, however, Torchmark determines that the decline
in the value of a security is other-than-temporary and writes the book value of the security down to its fair
value, realizing an investment loss. The determination that an impairment is other-than-temporary is
highly subjective and involves the careful consideration of many factors. Among the factors considered
are:
•
•
•
•
The length of time and extent to which the security has been impaired
The reason(s) for the impairment
The financial condition of the issuer and the near-term prospects for recovery in fair value of the
security
The Company’s ability and intent to hold the security until anticipated recovery
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 3—Investments (continued)
Among the facts and information considered in the process are:
• Default on a required payment
Issuer bankruptcy filings
•
Financial statements of the issuer
•
• Changes in credit ratings of the issuer
• News and information included in press releases issued by the issuer
• News and information reported in the media concerning the issuer
• News and information published by or otherwise provided by credit analysts
While all available information is taken into account, it is difficult to predict the ultimately recoverable
amount of a distressed or impaired security.
During 2008, the Company determined that certain of its holdings in fixed maturities and preferred
stocks were other-than-temporarily impaired, resulting in writedowns in the amount of $106 million
($69 million after tax). The pretax writedown includes writedowns of $74 million for bonds issued by
Lehman Brothers, $19 million for bonds issued by Washington Mutual, and $1.9 million for perpetual
preferred stock issued by the Federal National Mortgage Association. All losses for other-than-temporary
impairment were included in realized investment losses. Also during 2008, certain real estate holdings,
measured on a nonrecurring special-event basis, were written down because the carrying values of these
properties were not expected to be recoverable. The fair values were determined based on recent sales
of similar properties (Level 2 observable inputs). The writedowns consisted of company-occupied property
in the amount of $2.1 million ($1.4 million after tax) and investment real estate in the amount of $1.1
million ($.7 million after tax). The loss on company-occupied property was included in “Other operating
expense” and the loss on invested real estate was included as a Realized investment loss.
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. In 2008, the securities of two of these issues were
written down an additional $3.3 million ($2.2 after tax). All of the securities impaired during 2007 were
subsequently sold for an aggregate after tax gain of $733 thousand. As of year end 2008, previously
written down securities remaining in the portfolio were carried at a fair value of $8.3 million. Otherwise, as
of December 31, 2008, Torchmark has no information available to cause it to believe that any of its
investments are other-than-temporarily impaired.
Net unrealized losses on fixed maturities increased from $103 million at December 31, 2007 to $1.8
billion at December 31, 2008. More than 56% of the net unrealized loss at December 31, 2008 was
attributable to fixed maturity securities in the financial sector. Based upon conditions experienced by
companies in the bond market and the commercial paper market, management believes that much of the
unrealized loss at December 31, 2008 was attributable to illiquidity in the market, which contributed to a
spread widening, and accordingly unrealized losses, on many securities that management expects to be
fully recoverable. Due to the strong and stable cash flows generated by its insurance products,
Torchmark has the ability to hold these securities until recovery and intends to do so.
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 3—Investments (continued)
The following tables disclose unrealized investment losses by class of investment at December 31,
2008 and December 31, 2007. Torchmark considers these investments to be only temporarily impaired.
ANALYSIS OF GROSS UNREALIZED INVESTMENT LOSSES
At December 31, 2008
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 . . . . . . . . . . . . . . . . . .
$
-0-
$
-0-
$
-0-
$
Government-sponsored
enterprises . . . . . . . . . . . . . .
95,569
(8,830)
Other mortgage-backed
securities . . . . . . . . . . . . . . . .
17,104
(52)
-0-
-0-
-0-
-0-
-0-
$
-0-
$
-0-
95,569
17,104
(8,830)
(52)
States, municipalities, &
political subdivisions . . . . . . .
Foreign governments . . . . . . . .
Corporates . . . . . . . . . . . . . . . .
Total fixed maturities . . . .
Equities . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . .
1,817
-0-
2,670,642
2,785,132
31
$2,785,163
(48)
-0-
(454,429)
(463,359)
(68)
$(463,427)
204,753
-0-
2,669,979
2,874,732
911
$2,875,643
(44,393)
-0-
(1,410,744)
(1,455,137)
(1,089)
206,570
-0-
5,340,621
5,659,864
942
$(1,456,226) $5,660,806
(44,441)
-0-
(1,865,173)
(1,918,496)
(1,157)
$(1,919,653)
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
(7,013)
(79)
(341,643)
(349,580)
(546)
$(350,126)
(844)
-0-
Torchmark subsidiaries held 373 issues (CUSIP numbers) at December 31, 2008 that had been in an
less than twelve months, compared with 303 issues a year earlier.
unrealized loss position for
Additionally, 330 and 121 issues had been in an unrealized loss position twelve months or longer at
December 31, 2008 and 2007, respectively. Torchmark’s entire fixed-maturity and equity portfolio
consisted of 1,686 issues at December 31, 2008 and 1,819 issues at December 31, 2007. The weighted
average quality rating of all unrealized loss positions as of December 31, 2008 was BBB+.
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 3—Investments (continued)
Other investment information:
Other long-term investments consist of the following:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage loans, at cost
Investment real estate, at depreciated cost
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Low-income housing interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateral loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$17,215
2,388
32,242
14,041
6,398
$18,580
8,411
26,424
6,838
9,037
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$72,284
$69,290
December 31,
2007
2008
The estimated fair value of mortgage loans, based on discounted cash flows, was approximately
$18.0 million at December 31, 2008 and $18.5 million at December 31, 2007. Accumulated depreciation
on investment real estate was $1.8 million and $22.9 million at December 31, 2008 and 2007,
respectively.
Torchmark had $507 thousand in investment real estate at December 31, 2008 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, 2008.
76
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:
2008
2007
2006
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
. . . . . . . . . . . . . $3,097,554 $61,497 $2,890,651 $65,191 $2,698,049 $70,355
Additions:
Deferred during period:
Commissions . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . .
Total deferred . . . . . . . . . . . . . . . . . .
Foreign exchange adjustment . . . . . . . . .
Adjustment attributable to unrealized
295,594
253,410
549,004
-0-
investment losses(1)
. . . . . . . . . . . . . . .
98,892
Total additions . . . . . . . . . . . . . . . . . .
647,896
-0-
-0-
-0-
-0-
-0-
-0-
300,422
265,974
566,396
8,593
19,148
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
Deductions:
Amortized during period(2) . . . . . . . . . . . .
Foreign exchange adjustment . . . . . . . . .
(392,232)
(13,338)
(6,092)
(74)
(387,234)
-0-
(3,777)
-0-
(372,324)
-0-
(5,166)
-0-
Total deductions . . . . . . . . . . . . . . . .
(405,570)
(6,166)
(387,234)
(3,777)
(372,324)
(5,166)
Balance at end of year
. . . . . . . . . . . . . . . . . . $3,339,880 $55,331 $3,097,554 $61,497 $2,890,651 $65,191
(1) Represents amounts pertaining to investments relating to universal life-type products.
(2) Amortization includes $7.5 million, $2.3 million, and $.9 million in 2008, 2007, and 2006, respectively,
from unlocking
adjustments due to actuarial assumption revisions related to Torchmark’s variable annuity business.
The amount of interest accrued on the unamortized balance of value of insurance purchased was
$3.2 million, $3.6 million, and $3.8 million for the years ended December 31, 2008, 2007, and 2006,
respectively. The average interest rates used for the years ended December 31, 2008, 2007, and 2006
were 5.5%, 5.7%, and 5.7%, respectively. The estimated amortization, net of interest accrued, on the
unamortized balance at December 31, 2008 during each of the next five years is: 2009, $5.5 million;
2010, $5.0 million; 2011, $4.5 million; 2012, $4.2 million; and 2013, $3.8 million.
In the event of lapses or early withdrawals in excess of those assumed, deferred acquisition costs
and the value of insurance purchased may not be recoverable.
77
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, 2008 is as follows:
Individual Life Insurance
Interest assumptions:
Years of Issue
Interest Rates
Percent of
Liability
1917-2008
1985-2008
1986-1992
1954-2000
1951-1985
2008
2000-2008
1984-2008
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%
6.75%
7.0%
Interest Sensitive
13
28
9
11
4
1
16
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
1955-2008
1993-2008
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
62
24
8
1
3
100
Morbidity assumptions:
For individual health, the morbidity assumptions are based on either Torchmark’s experience or the
assumptions used in calculating statutory reserves.
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 5—Future Policy Benefit Reserves (continued)
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 2008 was 6.1%.
Note 6—Liability for Unpaid Health Claims
Activity in the liability for unpaid health claims is summarized as follows:
Year Ended December 31,
2006
2007
2008
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . $149,200 $145,793 $162,036
Incurred related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
716,821
(23,894)
786,120
(1,448)
767,272
(12,097)
Total incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paid related to:
692,927
784,672
755,175
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
604,721
117,551
651,765
129,500
633,269
138,149
Total paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
722,272
781,265
771,418
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $119,855 $149,200 $145,793
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 years.” Prior-year claims incurred during the year result from claim
settlements at different amounts from those amounts originally estimated.
The liability for unpaid health claims is included with “Policy claims and other benefits payable” on the
Consolidated Balance Sheets.
Note 7—Supplemental Disclosures of Cash Flow Information
The following table summarizes Torchmark’s noncash transactions, which are not reflected on the
Consolidated Statements of Cash Flows:
Year Ended December 31,
2006
2007
2008
Other stock-based compensation not involving cash . . . . . . . . . . .
Commitments for low-income housing interests . . . . . . . . . . . . . . .
$10,823
25,751
$8,106
3,696
$ 6,575
23,320
The following table summarizes certain amounts paid during the period:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 62,671
161,348
$ 67,098 $ 72,905
167,367
170,528
Year Ended December 31,
2006
2007
2008
79
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,
2007
2008
2006
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 208,998 $ 269,270 $254,939
Shareholders’ equity:
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adoption of FIN48 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax basis compensation expense (from the exercise of stock
options) in excess of amounts recognized for financial reporting
purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(590,843)
-0-
(124,434)
(2,333)
(69,452)
-0-
(3,618)
(6,460)
(3,072)
$(385,463) $ 136,043 $182,415
Income tax expense consists of:
Year Ended December 31,
2006
2007
2008
Current income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $148,277 $180,322 $151,841
103,098
Deferred income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60,721
88,948
$208,998 $269,270 $254,939
In 2008, 2007, and 2006, 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:
2008
Year Ended December 31,
%
2007
%
2006
%
Expected income taxes . . . . . . . . . . . . . . . . . . . . . . . $231,440 35.0% $278,882 35.0% $270,750 35.0%
Increase (reduction) in income taxes resulting
from:
Tax-exempt investment income . . . . . . . . . . . . . .
Tax settlements . . . . . . . . . . . . . . . . . . . . . . . . . . .
Low income housing investments . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,503)
(12,643)
(5,129)
(167)
(.7)
(1.9)
(.8)
-0-
(3,908)
(615)
(4,701)
(388)
(.5)
(.1)
(.6)
-0-
(1,496)
(11,607)
(3,063)
355
(.2)
(1.5)
(.4)
-0-
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . $208,998 31.6% $269,270 33.8% $254,939 32.9%
80
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:
December 31,
2008
2007
Deferred tax assets:
Fixed maturity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Carryover of nonlife losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36,764 $
15,058
637,221
9,416
Total gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
698,459
13,905
10,509
46,378
28,576
99,368
Deferred tax liabilities:
Employee and agent compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Future policy benefits, unearned and advance premiums, and policy claims . . . . . . . . . .
44,698
830,379
298,356
26,492
786,560
291,410
Total gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,173,433
1,104,462
Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 474,974 $1,005,094
Torchmark’s Federal income tax returns are routinely audited by the Internal Revenue Service (IRS).
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 $7.4
million tax benefit in 2006 to reflect the impact of these settlements on the tax years covered by the
examinations as well as all other tax years 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 IRS also completed its examination of
Torchmark’s 2003 and 2004 tax years during 2008. As a result, Torchmark recorded a $.7 million tax
benefit in 2008 to reflect the impact of the settlement. The statutes of limitation for the assessment of
additional tax are closed for all tax years prior to 2005. The IRS has substantially completed its review of
the Company’s 2005, 2006, and 2007 tax years. Final settlement of these reviews is expected in 2009
and is not expected to have any material impact on the Company’s effective tax rate. In addition, the
statute of limitation for the assessment of additional tax is also expected to expire in 2009 for the 2005 tax
year. 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, in 2006, Torchmark recorded a state income tax benefit of $4.3 million,
net of federal income tax.
Torchmark transacts business in Canada through a branch of one of its subsidiaries. For tax years
prior to 2003, Canadian income tax authorities asserted that the branch carried on business in Canada
through a permanent establishment and proposed additional taxes and interest. Torchmark challenged
their assertion and litigated the issue before the Tax Court of Canada. In the second quarter of 2008, the
Tax Court in Canada ruled in the Company’s favor and the Canadian tax authorities declined to appeal
the Court’s decision. As a result, the Company recorded an $11.9 million tax benefit in 2008, including
$5.4 million relating to the removal of amounts previously recorded by the Company for interest expense
anticipated to be owed, net of Federal income tax, and $6.5 million relating to estimated interest income,
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 8—Income Taxes (continued)
net of Federal income tax, required to be paid by the Canadian tax authorities on amounts previously
deposited with the tax authorities. No tax years are currently under examination by Canadian tax
authorities.
Torchmark has net operating loss carryforwards of approximately $26.9 million at December 31,
2008 which will begin to expire in 2021 if not otherwise used to offset future taxable income. In addition,
Torchmark has a net capital loss carryover of $16.1 million at December 31, 2008 which will expire in
2010 if not otherwise utilized to offset capital gains. 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
in management’s judgment,
has been recorded relating to Torchmark’s deferred tax assets since,
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, On January 1, 2007, 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 years 2007 and 2008 is as follows:
2008
2007
Balance at January 1,
Increase based on tax positions taken in current period . . . . . . . . . . .
Increase related to tax positions taken in prior periods . . . . . . . . . . . .
Decrease related to tax positions taken in prior periods . . . . . . . . . . .
Decrease due to settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,672 $12,263
361
17
(3,969)
-0-
361
-0-
(436)
(116)
Balance at December 31,
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,481 $ 8,672
If recognized in future periods, $518 thousand of the balance at December 31, 2008 would reduce
the effective tax rate. The remaining $8 million relates to timing differences which, if recognized, would
have no effect on the Company’s effective tax rate. As noted above, the IRS has substantially completed
its review of Torchmark’s 2005, 2006, and 2007 Federal income tax returns. Final settlement of all issues
relating to those tax years is expected to occur within the next twelve months. As a result, the Company
estimates that approximately $3.9 million of its unrecognized tax benefits relating to positions taken in
those tax years, each of which are individually insignificant, may be recognized by the end of 2009.
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 $11.9 million, net of
Federal income tax benefits, in its Consolidated Statement of Operations for 2008. The Company has an
accrued interest receivable of $10.9 million, net of Federal income tax benefits, which is comprised of a
$1.2 million interest payable relating to uncertain tax positions offset by a $12.1 million interest receivable
relating to prior year IRS and Canadian examination settlements. The Company has no accrued penalties
as of December 31, 2008.
82
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
2008 . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . .
$2,988
2,925
3,470
$8,918
7,621
8,514
Torchmark accrues expense for the defined contribution plans based on a percentage of
the
employees’ contributions. The plans are funded by the employee contributions and a Torchmark
contribution equal
to the amount of accrued expense. Plan contributions are both mandatory and
discretionary, depending on the terms of the plan.
Cost for the defined benefit pension plans has been calculated on the projected unit credit actuarial
cost method. 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 $63 million in 2008 and
$13 million in each of the years 2007 and 2006. Torchmark estimates as of December 31, 2008 that it will
contribute an amount not to exceed $20 million to these plans in 2009. 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 SERP is unfunded. The initial projected
benefit obligation of this plan was $15 million. The liability at December 31, 2008 was $28 million and was
$17 million a year earlier.
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 that 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 both December 31, 2008 and
December 31, 2007. Pension cost for both supplemental defined benefit plans is determined in the same
manner as for the qualified defined benefit plans.
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 plans by component for the years ended December 31, 2008 and 2007.
Pension Assets by Component
December 31,
2008
December 31,
2007
Amount
%
Amount
%
Corporate debt
Other fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Guaranteed annuity contract
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
32
1
59
7
-0-
1
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $174,701 100 $170,440 100
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 70,417
860
47,313
44,802
9,997
1,312
40 $ 54,436
891
-0-
101,215
27
12,467
26
-0-
6
1,431
1
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Postretirement Benefits (continued)
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, 2008, there were no
restricted investments contained in the portfolio.
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.
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Postretirement Benefits (continued)
Weighted Average Pension Plan Assumptions
For Benefit Obligations at December 31:
2008
2007
Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of Compensation Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.31% 6.62%
3.84% 3.91
For Periodic Benefit Cost for the Year:
Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected Long-Term Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of Compensation Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.62% 6.15% 5.54%
9.00
7.94
3.85
3.91
9.00
3.85
2008
2007
2006
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,
2006
2007
2008
Service cost—benefits earned during the period . . . . . . . . . . .
Interest cost on projected benefit obligation . . . . . . . . . . . . . . .
Expected return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 7,621
14,279
(15,939)
2,957
$ 8,221
13,360
(17,010)
3,050
$ 8,270
12,200
(16,055)
4,099
Net periodic pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8,918
$ 7,621
$ 8,514
An analysis of the impact on other comprehensive income (loss) is as follows:
2008
2007
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . .
$ (66,551)
$(13,715)
Adoption of SERP . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
(15,419)
Amortization of:
Prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . .
Net actuarial (gain) loss . . . . . . . . . . . . . . . . . . . .
Transition obligation . . . . . . . . . . . . . . . . . . . . . . .
Total amortization . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,078
976
(7)
3,047
2,078
621
(7)
2,692
Experience gain(loss) . . . . . . . . . . . . . . . . . . . . . . . .
(58,200)
(40,109)
Balance at December 31 . . . . . . . . . . . . . . . . . . . . .
$(121,704)
$(66,551)
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Postretirement Benefits (continued)
The following table presents a reconciliation from the beginning to the end of the year of the
projected benefit obligation and plan assets. This table also presents the amounts previously recognized
as a component of accumulated other comprehensive income.
Pension Benefits
For the year ended
December 31,
2008
2007
Changes in benefit obligation:
Obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $224,539 $219,922
8,221
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,360
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,219
Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(19,183)
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
224,539
Obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,621
14,280
1,719
(17,769)
230,390
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $174,701 $170,440
170,440
(40,555)
62,585
(17,769)
Funded status at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (55,689) $ (54,099)
Amounts recognized in accumulated other comprehensive income
consist of:
Net loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $109,423 $ 52,200
14,377
Prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(26)
Transition obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amounts recognized at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $121,704 $ 66,551
12,300
(19)
The portion of other comprehensive income that is expected to be reflected in pension expense in
2009 is as follows:
Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . $ 2,078
8,546
Amortization of net loss (gain) . . . . . . . . . . . . . . . . . . . . . . . .
(7)
Amortization of transition obligation . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,617
The accumulated benefit obligation (ABO) for Torchmark’s funded defined benefit pension plans was
$184 million and $176 million at December 31, 2008 and 2007, respectively. In the unfunded plans, the
ABO was $24 million at December 31, 2008 and $25 million at December 31, 2007.
86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Postretirement Benefits (continued)
Torchmark has estimated its expected pension benefits to be paid over the next ten years as of
December 31, 2008. These estimates use the same assumptions that measure the benefit obligation at
December 31, 2008, taking estimated future employee service into account. Those estimated benefits are
as follows:
For the year(s)
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,675
11,874
12,366
12,758
13,518
80,557
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
2008
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost on accumulated postretirement benefit
obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . .
Recognition of net actuarial (gain) loss . . . . . . . . . . . . . . . .
$ 654
$ 646
$ 731
978
-0-
-0-
(330)
968
-0-
-0-
(795)
927
-0-
-0-
(278)
Net periodic postretirement benefit cost
. . . . . . . . . . . . . . .
$1,302
$ 819
$1,380
87
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,
2008
2007
Changes in benefit obligation:
Obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 14,243
654
978
(330)
(626)
Obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,919
Changes in plan assets:
Fair value at beginning of year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value at end of year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
626
(626)
-0-
$ 14,204
645
968
(794)
(780)
14,243
-0-
-0-
780
(780)
-0-
Funded status at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(14,919)
$(14,243)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.60% 6.61%
4.50
4.50
2008
2007
For Periodic Benefit Cost for the Year:
2008
2007
2006
Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of Compensation Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.61% 6.22% 7.00%
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 2006 through 2008. 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.
88
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,
2008
2007
7.875% 5/93 5/15 & 11/15 $ 165,612 $ 163,019 $ 171,890
98,291
7.375% 7/93
2/1 & 8/1
93,479
94,050
$162,927
93,381
6.375% 6/06 6/15 & 12/15
250,000
—
246,754
(4,203)
245,068
—
246,427
(4,224)
509,662
499,049
515,249
498,511
Instrument
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 . . .
Senior Debentures, due
8/15/09(1)(2)(9)
. . . . . . . . . . . .
8.250% 8/89
2/15 & 8/15
99,450
99,471
101,726
99,501
Junior Subordinated
Debentures due
6/1/46(4)(5)
. . . . . . . . . . . .
Total funded debt . . . . . . . .
Commercial Paper(9)
. . . . . . .
7.100% 6/06 quarterly(6)
123,711
732,823
123,711
722,231
95,472(7)
123,711
712,447
721,723
305,000
304,236
304,236
202,058
$1,037,823 $1,026,467 $1,016,683
$923,781
(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 Preferred Securities.
(8) Callable subject to “make-whole” premium.
(9) Classified as short-term debt. Senior debentures due 2009 were classified as long-term debt in 2007.
The amount of debt that becomes due during each of the next five years is: 2009—$404 million;
2010—$0; 2011—$0; 2012—$0; 2013—$94 million and thereafter—$539 million.
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.
89
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 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, 2006, two such swaps were outstanding. The swaps were carried at fair value and classified
as “Other long-term investments” on the Consolidated Balance Sheets. These 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). They
were sold in June, 2006, as rising short-term rates continued to reduce future prospects for positive
interest-rate spreads. Torchmark received $63 thousand in net proceeds from the sales of these swaps.
No gain or loss was recognized on the sales. 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 qualified as a
hedge under accounting rules. However, when sold, the cost basis of the underlying Note was decreased
for the value of the swap, causing an increase in the amortization of that security until disposed of later in
2006. 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 sold swap did not qualify as a hedge.
Torchmark has held no interest-rate swaps since June, 2006.
Terms of the swaps held by Torchmark during 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
06/06
12/06
Yes
$180,000 6.250% six-month
120.5
six months
11/41 . . . . . . . . . . . . . . . . . . . .
06/06
11/11
No
150,000 7.750% three-month
221.0
three months
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 10—Debt (continued)
The following table summarizes the pretax impact of
interest-rate swaps on Torchmark’s 2006
operating results.
Related Debt
Net Cash Settlements
Received by Instrument*
Valuation Adjustment
by Instrument
Senior Notes, due 12/06 (hedge) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust Preferred Securities, due 11/41 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$275
216
$491
$
-0-
(4,548)
$(4,548)
*
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.”
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, as of December 31, 2008, the Company has
the ability to request up to $200 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, 2008, Torchmark had $305 million face amount ($304 million carrying amount) of
commercial paper outstanding, $200 million of letters of credit issued, and no borrowings under the line of
credit. During 2008, the short term borrowings under the facility averaged approximately $229 million, and
were made at an average yield of 3.5%, compared with an average balance of $238 million at an average
yield of 5.4% 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. Torchmark is subject
to certain covenants for the agreements regarding
capitalization and earnings, with which it was in compliance at December 31, 2008 and throughout the
three-year period ended December 31, 2008. 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, 2008.
91
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
2006:
Balance at January 1, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Grants of restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock due to exercise of stock options . . . . .
Treasury stock acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
104,874,748 (1,305,849)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . .
2008:
Grants of restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock due to exercise of stock options . . . . .
Treasury stock acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
-0-
-0-
10,000
967,227
(6,916,439)
(5,000,000) 5,000,000
94,874,748 (2,699,333)
54,382
602,550
(8,124,700)
(9,000,000) 9,000,000
Balance at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
85,874,748 (1,167,101)
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 7.6 million shares at a cost of
$427 million in 2008, 6.1 million shares at a cost of $402 million in 2007, and 5.6 million shares at a cost of
$320 million in 2006. 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 487 thousand shares at a cost of $29 million in 2008, 767 thousand
shares at a cost of $50 million in 2007, and 415 thousand shares costing $24 million in 2006.
Retirement of Treasury Stock: Torchmark retired 9 million shares of treasury stock in December,
2008, 5 million in 2007, and 5 million in 2006.
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 prior year
statutory net gain from operations not including realized capital gains on an annual noncumulative basis,
or 10% of prior year 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 2008, subsidiaries of Torchmark paid $404 million in
dividends to the parent company. During 2009, a maximum amount of $363 million is expected to be
available to Torchmark from subsidiaries without regulatory approval.
92
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 . . . . . . . . . . . .
88,052,650
463,445
94,317,142
1,528,855
99,732,608
1,379,549
Diluted weighted average shares outstanding . . . . . . . . . . . . .
88,516,095
95,845,997
101,112,157
2008
2007
2006
Stock options to purchase 3.5 million shares, 432 thousand shares, and 21 thousand shares during
the years 2008, 2007, and 2006, 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 (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.
An analysis of shares available for grant is as follows:
Available for Grant
2007
2008
2006
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adoption of 2007 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled on termination of prior plans . . . . . . . . . . . . . . . . . . . . . . . . .
Expired and forfeited during year* . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options granted during year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock and restricted stock units granted during year . . . . . .
3,136,000
-0-
-0-
8,000
(949,750)
(57,444)
465,224
3,250,000
(36,812)
15,300
(547,712)
(10,000)
916,483
-0-
-0-
34,749
(458,008)
(28,000)
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,136,806
3,136,000
465,224
* Options expired and forfeited are limited to shares in the 2007 Plan, as no shares are available from previous plans.
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 12—Stock-Based Compensation (continued)
A summary of stock compensation activity for each of the years in the three years ended December
31, 2008 is presented below:
2008
2007
2006
Stock-based compensation expense recognized* . . . . . . . . . . . . . . . . . . . . . . $10,823 $ 8,106 $ 6,575
2,301
Tax benefit recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.77
Weighted-average grant-date fair value of options granted . . . . . . . . . . . . . .
8,394
Intrinsic value of options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,451
Cash received from options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,938
Actual tax benefit received from exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,837
12.58
19,924
42,635
6,973
3,788
8.87
10,700
25,472
3,745
* No stock-based compensation expense was capitalized in any period.
An analysis of option activity for each of the three years ended December 31, 2008 is as follows:
2008
2007
2006
Options
Weighted Average
Exercise Price
Options
Weighted Average
Exercise Price
Options
Weighted Average
Exercise Price
Outstanding-beginning of
year . . . . . . . . . . . . . . . 9,393,920
949,750
(602,550)
(20,146)
Granted . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . .
Expired and forfeited . . .
Outstanding-end of
$51.80
62.50
42.27
61.12
9,828,735
547,712
(967,227)
(15,300)
$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
year . . . . . . . . . . . . . . . 9,720,974
$53.40
9,393,920
$51.80
9,828,735
$50.30
Exercisable at end of
year . . . . . . . . . . . . . . . 8,081,855
$51.57
8,003,842
$50.44
8,381,117
$49.40
A summary of restricted stock and restricted stock units granted during each of the years in the three
year period ended December 31, 2008 is presented in the table below. Restricted stock holders are
entitled to dividends on the stock and holders of restricted stock units are entitled to dividend equivalents.
All grants vest over five years.
Executives restricted stock:
2008
2007
2006
28,000
Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Price per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
63.70
Aggregate value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,353,380 $681,800 $1,783,600
Percent vested as of 12/31/08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
62.68 $ 68.18 $
10,000
53,500
20%
0%
40%
Directors restricted stock:
Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Price per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Aggregate value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Percent vested as of 12/31/08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
882
60.14
53,043
100%
Directors restricted stock units (including dividend equivalents):
3,062
Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Price per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
60.08
Aggregate value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 183,984
Percent vested as of 12/31/08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100%
N/A
N/A
N/A
N/A
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 12—Stock-Based Compensation (continued)
Additional information about Torchmark’s stock-based compensation as of December 31, 2008 and
2007 is as follows:
Outstanding options:
2008
2007
4.74
Weighted-average remaining contractual term (in years) . . . . . . . . . . . . . . . . . . . . . . .
Aggregate intrinsic value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,532 $82,006
3.98
Exercisable options:
Weighted-average remaining contractual term (in years) . . . . . . . . . . . . . . . . . . . . . . .
4.56
Aggregate intrinsic value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,061 $80,771
3.65
Unrecognized compensation* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,661 $12,692
1.65
Weighted average period of expected recognition (in years)* . . . . . . . . . . . . . . . . . . . . .
1.67
* Includes restricted stock
Additional information concerning Torchmark’s unvested options is as follows at December 31:
Number of shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,639,119 1,390,078
$59.64
Weighted-average exercise price (per share) . . . . . . . . . . . . . . . . . . . . . . .
7.51
Weighted-average remaining contractual term (in years)
. . . . . . . . . . . . .
$6,249
Aggregate intrinsic value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$62.45
5.60
$1,636
2008
2007
Torchmark expects that substantially all unvested options will vest.
The following table summarizes information about stock options outstanding at December 31, 2008.
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 – 62.68
63.70 – 68.18
704,284
741,296
896,183
3,711,801
971,106
783,192
1,001,750
911,362
$19.81 – $68.18
9,720,974
Options Outstanding
Options Exercisable
Weighted-
Average
Remaining
Contractual
Life (Years)
Weighted-
Average
Exercise
Price
3.19
2.57
4.50
3.20
3.79
5.45
6.12
5.01
3.98
$36.20
41.27
45.36
54.77
55.49
56.24
62.17
64.63
$53.40
Number
Exercisable
651,304
739,997
881,985
3,711,801
953,132
780,123
114,000
249,513
8,081,855
Weighted-
Average
Exercise
Price
$36.23
41.27
45.36
54.77
55.49
56.24
58.22
63.89
$51.57
No equity awards were cash settled during the three years ended December 31, 2008.
Note 13—Business Segments
Torchmark’s reportable 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 chief operating decision maker evaluates the overall
performance of the operations of the Company in accordance with these segments.
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13—Business Segments (continued)
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.
Torchmark Corporation
Premium Income By Distribution Channel
Life
Health
Annuity
Total
For the Year 2008
Distribution Channel
Amount
% of
Total
United American Independent . . . . . . .
Liberty National Exclusive . . . . . . . . . .
American Income Exclusive . . . . . . . . .
Direct Response . . . . . . . . . . . . . . . . . .
United American Branch Office . . . . . .
Medicare Part D . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
31,855
287,312
473,784
511,165
16,950
295,738
2
18
29
32
1
18
Amount
$ 356,853
135,389
73,423
45,123
340,516
175,633
% of
Total Amount
% of
Total
$
622
4
32
12
6
4
30
16
13,771
$1,616,804
100
$1,126,937
100
$14,393
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
$ 389,330
422,701
547,207
556,288
357,466
175,633
309,509
% of
Total
14
15
20
20
13
7
11
$2,758,134
100
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
96
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
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.
96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13—Business Segments (continued)
The measure of profitability established by the chief operating decision maker for insurance segments is
underwriting margin before other income and administrative expenses, in accordance with the manner the
segments are managed. It essentially represents gross profit margin on insurance products before insurance
administrative expenses and consists of premium, less net policy obligations, acquisition expenses, and
commissions. 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.
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 2008
Revenue:
Premium . . . . . . . . . . . . . . . . . . . . . . . . .$1,616,804 $1,126,937 $ 14,393
Net investment income . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . .
$ 671,231
Total revenue . . . . . . . . . . . . . . . . . 1,616,804 1,126,937
14,393
671,231
$
4,154
4,154
Expenses:
Policy benefits . . . . . . . . . . . . . . . . . . . . 1,073,920
(411,216)
Required interest on net reserves . . . .
448,635
Amortization of acquisition costs . . . . .
Commissions and premium tax . . . . . .
73,690
. .
Insurance administrative expense(3)
Parent expense . . . . . . . . . . . . . . . . . . .
Stock-based compensation
expense . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . .
759,466
(32,029)
131,541
73,248
39,407
(37,052)
18,320
141
480,297
(200,172)
159,283
$ 10,455
10,823
62,965
$
122 (1)
264 (2)
517 (4,5,6)
$2,758,256
671,495
4,671
903
3,434,422
122 (1)
(1,098)(4)
2,129 (7)
2,522 (5)
264 (2)
1,872,915
-0-
398,324
145,981
161,412
12,977
10,823
63,229
Total expenses . . . . . . . . . . . . . . . . 1,185,029
932,226
20,816
343,090
159,283
21,278
3,939
2,665,661
Subtotal
. . . . . . . . . . . . . . . . . . . . . . . . .
Nonoperating items . . . . . . . . . . . . . .
Measure of segment profitability
431,775
194,711
(6,423)
328,141
(155,129)
(21,278)
(3,036)
3,036 (5,6,7)
768,761
3,036
(pretax) . . . . . . . . . . . . . . . . . . . . . .$ 431,775 $ 194,711 $ (6,423) $ 328,141 $(155,129) $(21,278) $
-0-
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 on sale of agency buildings(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct loss on Company-occupied property(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
771,797
(258,510)
513,287
258,510
(107,504)
(1,185)
278
(2,129)
Pretax income per Consolidated Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 661,257
(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 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.
(7) Loss on Company-occupied property.
97
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 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 . .
72,291
Commissions and premium tax . . .
Insurance administrative expense(3)
Parent expense . . . . . . . . . . . . . . .
Stock-based compensation
expense . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . .
842,432
28,049
(28,065) (31,666)
14,631
137,254
119
84,253
447,755
(190,255)
(7,331)(1)
(1,180)(4)
933 (5)
154,552
$ 9,815
8,106
67,300
264 (2)
1,902,428
-0-
391,011
155,483
155,485
9,815
8,106
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-
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)
790,231
(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
98
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 expense(2)
Parent expense . . . . . . . . . . . . . . .
Stock-based compensation expense
Financing costs:
Debt . . . . . . . . . . . . . . . . . . . . . . .
Benefit from interest rate
swaps . . . . . . . . . . . . . . . . . . .
834,017
23,743
(24,662) (28,318) 417,293
133,453
15,486 (179,955)
88,030
88
(1,294)(3)
155,331
$ 7,862
6,575
1,863,531
-0-
377,490
163,683
155,331
7,862
6,575
72,682
(491)
454 (1)
73,136
(491)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add proceeds of legal settlements(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add gain from sale of agency buildings(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(264,716)
504,356
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
Torchmark holds a sizeable investment portfolio to support its insurance liabilities, the yield from
which is used to offset policy benefit, acquisition, administrative and tax expenses. This yield or
investment income is taken into account when establishing premium rates and profitability expectations of
its insurance products. In holding such a portfolio, investments are sold, called, or written down from time
to time, resulting in a realized gain or loss. These gains or losses generally occur as a result of disposition
due to issuer calls, a downgrade in credit quality, compliance with Company investment policies, or other
reasons often beyond management’s control. Unlike investment income, realized gains and losses are
incidental to insurance operations, and are not considered when setting premium rates or insurance
product profitability expectations. While these gains and losses are not relevant to segment profitability or
core operating results, they can have a material positive or negative result on net income. For these
reasons, management removes realized investment gains and losses when it views its segment
operations.
Prior to 2006, management entered into swap derivative contracts to exchange certain of its fixed-
rate debt securities to floating rates to reduce its interest cost. For this reason, management views the
difference between the floating-rate interest paid and the fixed-rate interest received (the “spread”) as an
adjustment to its financing cost in the Investment Segment and has reported it as such in this analysis. In
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13—Business Segments (continued)
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 accounts for its stock-based compensation under FASB Statement 123R, which
requires the expensing of such compensation on a fair value basis. 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
2008
2007
2006
$ 417,038
208,254
9,337
$ 397,444
206,694
11,915
2008
Change
$ 14,737
(13,543)
(15,760)
%
4
(7)
(169)
2007
Change %
$ 19,594
1,560
(2,578)
5
1
(22)
Life insurance underwriting margin . . . . . . . . . . . . . . . . . $ 431,775
194,711
Health insurance underwriting margin . . . . . . . . . . . . . .
Annuity underwriting margin . . . . . . . . . . . . . . . . . . . . . .
(6,423)
Other insurance:
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Administrative expense . . . . . . . . . . . . . . . . . . . . . . .
Excess investment income . . . . . . . . . . . . . . . . . . . . . . .
Corporate and adjustments . . . . . . . . . . . . . . . . . . . . . . .
4,154
(159,283)
328,141
(21,278)
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Applicable taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pre-tax total
771,797
(258,510)
4,313
(154,552)
323,762
(17,921)
790,231
(268,118)
4,024
(155,331)
318,763
(14,437)
769,072
(264,716)
(159)
(4,731)
4,379
(3,357)
(18,434)
9,608
After-tax total
. . . . . . . . . . . . . . . . . . . . . . . . . . .
513,287
522,113
504,356
(8,826)
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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on writedown of Company-occupied property
-0-
(69,878)
181
10,823
-0-
1,777
2,768
1,149
(319)
(7,254)
2,816
11,607
-0-
(71,655)
(2,587)
9,674
(770)
(272)
7,425
(498)
(4)
3
1
19
(2)
(4)
(2)
7
(1)
2
24
3
1
4
289
779
4,999
(3,484)
21,159
(3,402)
17,757
319
9,031
(48)
(10,458)
(7,697)
-0-
(after tax) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,384)
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 452,259
-0-
-0-
(1,384)
$ 527,535
$ 518,631
$(75,276)
(14)
$ 8,904
2
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.
100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13—Business Segments (continued)
Torchmark Corporation
Assets By Segment
Life
Health
Annuity
Investment
Other
Consolidated
At December 31, 2008
Cash and invested assets . . . . . . . . . . . . . . . . . .
Accrued investment income . . . . . . . . . . . . . . . .
Deferred acquisition costs . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Separate account assets . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,657,422
333,172
$597,292
87,282
$ 140,497
3,065
758,023
$8,443,601
176,068
$ 8,443,601
176,068
3,395,211
423,519
758,023
332,628
$332,628
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,990,594
$684,574
$ 901,585
$8,619,669
$332,628
$13,529,050
Cash and invested assets . . . . . . . . . . . . . . . . . .
Accrued investment income . . . . . . . . . . . . . . . .
Deferred acquisition costs . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
Separate account assets . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Life
Health
At December 31, 2007
Investment
Annuity
$9,792,297
172,783
$2,453,679
333,172
$576,569
87,282
$ 128,803
3,065
1,423,195
Other
Consolidated
$ 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
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 .9% of total life insurance in force at December 31, 2008. Insurance
ceded on life and accident and health products represented .4% of premium income for 2008. 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 1.3% of life insurance in force at December 31, 2008 and reinsurance assumed on life and
accident and health products represented .7% of premium income for 2008.
Leases: Torchmark leases office space and office equipment under a variety of operating lease
arrangements. Rental expense for operating leases was $5.1 million in 2008, $6.0 million in 2007, and
$6.1 million in 2006. Future minimum rental commitments required under operating leases having
remaining noncancelable lease terms in excess of one year at December 31, 2008 were as follows: 2009,
$3.4 million; 2010, $2.1 million; 2011, $1.4 million; 2012, $1.2 million; 2013, $1.0 million and in the
aggregate, $9.9 million.
Low-Income Housing Tax Credit Interests: As described in Note 1, Torchmark has invested $138
million in entities which provide certain tax benefits. As of December 31, 2008, Torchmark remained
obligated under these commitments for $11 million, of which $5 million is due in 2009, and $6 million in
2010.
101
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 diversified investment portfolio with limited
concentration in any given issuer. At December 31, 2008, 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
82%
5
4
3
2
investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments, which generally mature within one month . . . . . . . . . . . . . . . . . . . . .
2
2
100%
Investments in municipal governments and corporations are made throughout the U.S. with no
concentration in any given state. Corporate debt and equity investments are made in a wide range of
industries. At December 31, 2008, 2% or more of the corporate portfolio was invested in the following
industries:
Insurance carriers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19%
Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Electric, gas, and sanitation services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6
Oil and gas extraction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
Telecommunications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
Transportation equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
Chemicals and allied products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
Pipelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Food and kindred products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Retail
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Media (printing, publishing, and allied lines) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
Diversified financial services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Otherwise, no individual industry represented 2% or more of Torchmark’s investments. At year-end
2008, 5% 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 $802 million, amortized cost was $712 million, and fair value was $461 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, 2008, Torchmark had in place four guarantee agreements, all of
which were either parent company guarantees of subsidiary obligations to a third party, or parent
company guarantees of obligations between wholly-owned subsidiaries. As of December 31, 2008,
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
102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Commitments and Contingencies (continued)
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 Trust III default on an obligation. The
total redemption price of the trust preferred securities is $120 million.
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 $200 million. Torchmark (parent company) would be
liable to the extent that TMK Re, Ltd. does not pay the reinsured party. At December 31, 2008, $200
million of letters of credit were outstanding.
Agent Receivables: Previously, Torchmark issued a guarantee to an unaffiliated third party,
which purchased certain agents’ receivables of Torchmark’s wholly-owned subsidiary American
Income Life Insurance Company (American Income). The guarantee covered 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
purchased the agents’ receivables and received the earned commissions as they were applied to the
balance. The term of
the guarantee corresponded with the purchase arrangement, which was
annually renewable. Torchmark was liable to the extent that future commission collections were
the agreement with the
insufficient
unaffiliated third-party was cancelled. Management expects that commission collections in 2009 will
be sufficient to repay agent receivables purchased prior to the cancellation of the agreement. The
guarantee will expire once all amounts due under the contact are collected.
to repay the purchased amount. As of August 22, 2008,
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, 2008, total remaining undiscounted payments under the leases were approximately
$3.3 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.
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 bearing little or no relation to actual damages
continue to be 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, on March15, 1999, Torchmark was named as a defendant in consolidated
derivative securities class action litigation involving Vesta Insurance Group, Inc. filed in the U.S. District
103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Commitments and Contingencies (continued)
Court for the Northern District of Alabama (In Re: Vesta Insurance Group, Inc. Securities Litigation,
Master File No. 98-AR-1407-S). The amended consolidated complaint in this litigation alleged violations
of Section 10 (b) of the Securities Exchange Act of 1934 by the defendants Vesta, certain present and
former Vesta officers and directors, KPMG, LLP (Vesta’s former independent public accountants) and
Torchmark and of Section 20 (a) of the Exchange Act by certain former Vesta officers and directors and
Torchmark acting as “controlling persons” of Vesta in connection with certain accounting irregularities in
Vesta’s reported financial results and filed financial statements. Unspecified damages and equitable relief
were sought on behalf of a purported class of purchasers of Vesta equity securities between June 2, 1995
and June 29, 1998. A class was certified in this litigation on October 25, 1999. In September, 2001,
Torchmark filed a motion for summary judgment, which was denied by the District Court on January 10,
2002. On April 9, 2003, the District Court issued an order denying the class plaintiffs’ motion to strike
certain of Torchmark’s affirmative defenses, holding that Torchmark could not be held jointly and severally
liable with Vesta under the securities law without an affirmative jury determination that Torchmark
knowingly committed a violation of the securities laws.
Vesta, its officers and directors, its insurance carriers and KPMG settled their portions of the litigation
with class plaintiffs in 2001; Torchmark did not. Subsequently,
in May 2003, Torchmark instituted
separate litigation against KPMG which was resolved in March, 2006. In April, 2006, class plaintiffs In Re
Vesta Insurance Group Securities Litigation filed a motion in U.S. District Court for the Northern District of
Alabama renewing their claims against Torchmark based upon an allegation of control person liability.
This matter was set for trial in the District Court on October 2, 2006 and was stayed pending resolution of
an interlocutory appeal to the U.S. Circuit Court of Appeals for the Eleventh Circuit filed by class plaintiffs.
The interlocutory appeal, which was filed August 23, 2006, sought a ruling whether and to what extent
the allegations of controlling person liability against
proportionate liability provisions might apply if
Torchmark were ultimately proven. Arguments on the interlocutory appeal were heard by the Eleventh
Circuit on July 31, 2007. On April 30, 2008, the Eleventh Circuit issued an opinion in the interlocutory
appeal affirming the District Court’s denial of class plaintiffs’ motion to dismiss Torchmark’s affirmative
defenses under the Private Securities Litigation Reform Act of 1995 (PSLRA). The Eleventh Circuit
concluded that substantive controlling person liability under the federal securities law remained the same
and survived the proportionate liability scheme established by PSLRA. The Court found that damages
allocated against a controlling person found liable for a securities law violation were based upon the
proportionate liability provisions in the PSLRA. A trial date of September 8, 2008 was set in the U.S.
District Court for the Northern District of Alabama. The parties reached a settlement of the Vesta litigation
on September 15, 2008. On September 25, 2008,
issued an order preliminarily
approving the settlement and directed the giving of notice thereof to the class members. After a final
settlement hearing, the District Court entered a Final Judgment and Order of Dismissal With Prejudice
approving the final settlement on December 12, 2008.
the District Court
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 essentially identical purported
class action claims 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
104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Commitments and Contingencies (continued)
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 the separate Roberts action to certify the
Roberts 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 itself 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 were
then or had 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,
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. Subsequent to this hearing, an order approving the settlement
agreement was approved by the Barbour County Circuit Court but was thereafter vacated by that Court
due to technical errors in the printing of the original order. A corrected order finally approving the
settlement was entered on or about May 6, 2008. Prior to the entry of the corrected order, notice of
appeal was filed by one objector. On July 29, 2008, the Alabama Supreme Court dismissed the remaining
appeal in Robertson, but reinstated that appeal on September 22, 2008. Appellate mediation was ordered
with respect to this appeal, and on September 30, 2008, a settlement was reached in appellate mediation
which resulted in a dismissal order in the objector’s litigation issued by the Barbour County Circuit Court
on October 16, 2008. The Alabama Supreme Court dismissed the remaining appeal on December 18,
2008. The trial court’s May 6, 2008 order finally approving the second class settlement in Robertson is
therefore in full force and effect.
On January 10, 2007, purported class action litigation was filed against Globe Life And Accident
Insurance Company and additional unaffiliated defendants in the U.S. District Court for the Eastern
105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Commitments and Contingencies (continued)
District of Texas (Taylor v. Texas Farm Bureau Mutual Insurance Company, Case No. 2-07-CV-014).
Plaintiffs allege violations of the Driver Privacy Protection Act (DPPA) in Globe’s marketing activities.
DPPA is federal
legislation restricting the ability to obtain and use driver’s license and motor vehicle
registration title information maintained by each state. Initially, DPPA allowed use of such personal
information for marketing activities so long as the states provided individuals the opportunity to prohibit
disclosure of their information. DPPA was amended effective June 1, 2000 to provide that using or
obtaining personal information from motor vehicle records for marketing purposes is permitted only if the
state involved obtained the express consent (“opt-in”) of the person whose data is being released.
Plaintiffs, all residents and holders of Texas driver’s licenses, allege that Globe wrongfully obtained,
possessed and/or used motor vehicle record information from the Texas Department of Public Safety
after the June 1, 2000 effective date of the “opt-in” amendment to the DPPA. They seek, in a jury trial,
liquidated damages as provided in the DPPA for each purported class member in the amount of $2,500
for each use of the personal information, punitive damages, the destruction of any personal information
determined to be illegally obtained from motor vehicle records and other appropriate equitable relief. On
September 8, 2008, the District Court entered an order granting the defendants’ consolidated motion to
dismiss with prejudice all plaintiffs’ claims in this litigation pursuant to Federal Rules of Civil Procedure
12(b)(1) and 12(b)(6). On October 8, 2008, plaintiffs filed a notice of appeal, which has been
subsequently amended twice, with the U.S. Circuit Court of Appeals for the Fifth Circuit.
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 alleged 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
was alleged, refusing to pay death benefits on issued policies. The plaintiffs sought unspecified
compensatory damages in excess of $75,000, punitive damages, injunctive relief, attorneys’ fees and
other relief. After the death of one of the named class plaintiffs and the Court’s dismissal of that plaintiff’s
claims without prejudice, the remaining two class plaintiffs elected to proceed with this litigation on an
individual basis. On January 22, 2009, the Court issued an Order granting Liberty’s Motion for Summary
Judgment and closing the case. A settlement has also been reached in substantially identical class
litigation filed on September 17, 2008 in the United States District Court for the Southern District of Florida
(Joseph v. Liberty National Life Insurance Company, Case No. 08-1:08-cv-22580).
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
of First Command Bank, a subsidiary of First Command, until his retirement
from First Command
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 and $50.8 million in 2006. Torchmark held balances due from this agency of $5.0
million at year-end 2007.
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
106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 15—Related Party Transactions (continued)
First Command on behalf of Torchmark’s insurance subsidiaries. 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
the years 2006 and 2007. At
management services. Premium ceded was $2.7 million in each of
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, which began May 1, 2003. At
year end 2007, the outstanding balance was $17.8 million. 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. 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.
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, 2008 and 2007, the outstanding
balance of this loan was $371 thousand and $442 thousand, respectively.
Additionally, Torchmark has 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, 2008 and 2007,
the
outstanding balance of this loan was $651 thousand and $681 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 6.2% at December 31, 2008. This account balance was $42 thousand at
year end 2008 and $27 thousand at year end 2007.
Torchmark customarily grants options to certain consultants for their services in addition to their fees.
Mr. Baxley received Torchmark options in 2008, 2007, and 2006.
107
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, 2008. 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
2008:
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* . . . . . . .
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* . . . . . . .
$710,593
166,903
(6,964)
872,433
494,401
98,638
178,430
118,173
1.30
1.29
$731,812
162,580
10,049
905,975
504,476
97,226
204,295
135,191
1.39
1.37
$699,404
167,826
(7,698)
860,492
481,398
97,634
184,606
133,726
1.49
1.47
$715,397
160,729
(2,828)
876,569
489,276
97,354
192,037
127,117
1.34
1.32
$678,597
169,034
(95,221)
753,352
451,236
101,429
105,631
63,151
0.73
0.72
$697,096
163,080
1,408
863,614
462,833
98,898
201,584
132,882
1.43
1.41
$669,662
167,732
2,379
840,641
445,880
100,623
192,590
137,209
1.61
1.61
$682,926
162,437
(5,895)
840,539
445,843
97,533
198,889
132,345
1.44
1.41
*
Basic and diluted net income per share by quarter may not add to per share income on a year-to-date basis due to share
weighting and rounding.
108
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, 2008, 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 quarter ended December 31, 2008, 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
109
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, 2008. 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 26, 2009
110
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, 2008, 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, 2008, 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, 2008 of Torchmark and our report dated February 26, 2009 expressed
an unqualified opinion on those financial statements and financial statement schedules.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 26, 2009
111
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 30, 2009 (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, 2008
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
9,720,974
$53.40
2,136,806
Plan Category
Equity compensation
plans approved by
security holders . . .
Equity compensation
plans not approved
by security
holders . . . . . . . . . .
Total . . . . . . . . . . . . . .
9,720,974
(b) Security ownership of certain beneficial owners:
-0-
-0-
$53.40
-0-
2,136,806
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.
112
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, 2008 and 2007 . . . . . . . . . . . . . . .
Consolidated Statements of Operations for each of the three years in the period
ended December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income for each of the three years in
the period ended December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Shareholders’ Equity for each of the three years in
the period ended December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedules Supporting Financial Statements for each of the three years in the period
ended December 31, 2008:
II. Condensed Financial Information of Registrant (Parent Company) . . . . . . . . . . . . .
IV. Reinsurance (Consolidated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56
57
58
59
60
61
62
120
124
Schedules not referred to have been omitted as inapplicable or not required by Regulation S-X.
113
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)
Amended and Restated By-Laws of Torchmark Corporation, adopted and effective as of
October 30, 2008 (incorporated by reference from Exhibit 3.1 to Form 8-K dated
November 3, 2008)
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)
Third Amendment to Credit Agreement dated as of October 30, 2008, among Torchmark
Corporation, TMK Re, Ltd., the other lenders listed therein, and Bank of America, N.A.,
as Administrative Agent, Swing Line Lender and L/C Issuer (incorporated by reference
from Exhibit 10.1 to Form 8-K dated November 3, 2008)
114
Page of
this
Report
10.8
10.9
10.10
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)*
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)*
10.15
10.14
10.13
10.12
10.11 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)
Amendment to General Agency Contract between First Command Financial Services
and Liberty National Life Insurance Company (incorporated by reference from
Exhibit 10.1 to Form 10-Q for the First Quarter 2005)**
Form of Deferred Compensation Agreement Between Torchmark Corporation or
Subsidiary and Officer at the Level of Vice President or Above Eligible to Participate in
the Torchmark Corporation and Affiliates Retired Lives Reserve Agreement and to
Retire Prior to December 31, 1986 (incorporated by reference from Exhibit 10(k) to
Form 10-K for the fiscal year ended December 31, 1991)*
Form of Deferred Compensation Agreement between Torchmark Corporation or
Subsidiary and Officer at the Level of Vice President or Above Eligible to Participate in
the Torchmark Corporation and Affiliates Retired Lives Reserve Agreement and Not
Eligible to Retire Prior
to December 31, 1986 (incorporated by reference from
Exhibit 10(l) to Form 10-K for the fiscal year ended December 31, 1991)*
Form of Deferred Compensation Agreement Between Torchmark Corporation or
the Level of Vice President or Above Not Eligible to
Subsidiary and Officer at
Participate in Torchmark Corporation and Affiliates Retired Lives Reserve Agreement
(incorporated by reference from Exhibit 10(j) to Form 10-K for the fiscal year ended
December 31, 1991)*
Torchmark Corporation Supplemental Savings and Investment Plan (incorporated by
reference from Exhibit 10(m) to Form 10-K for the fiscal year ended December 31,
1992)*
Service Agreement, dated as of January 1, 1991, between Torchmark Corporation and
Liberty National Life Insurance Company (prototype for agreements between
Torchmark Corporation and other principal operating subsidiaries) (incorporated by
reference from Exhibit 10(n) to Form 10-K for the fiscal year ended December 31,
1992)
The Torchmark Corporation Pension Plan (incorporated by
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 (incorporated by reference
from Exhibit 10.19 to Form 10-K for the fiscal year ended December 31, 2007)*
Torchmark Corporation 2008 Management Incentive Plan (incorporated by reference
from Exhibit 10.1 to Form 8-K dated April 30, 2008)*
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)
reference from
10.17
10.19
10.16
10.18
10.22
10.20
10.21
115
Page of
this
Report
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
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)*
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)*
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)*
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 reference
from Exhibit 99.1 to Form 8-K dated May 2, 2007)*
116
Page of
this
Report
10.42
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50
10.51
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, as amended and
restated (incorporated by reference from Exhibit 10.1 to Form 8-K dated April 29, 2008)*
Amendment No. 1 to the Torchmark Corporation Supplemental Executive Retirement
Plan (incorporated by reference from Exhibit 10.53 to Form 10-K for the fiscal year ended
December 31, 2007)*
Amendment No. 2 to the Torchmark Corporation Supplemental Executive Retirement
Plan (incorporated by reference from Exhibit 10.54 to Form 10-K for the fiscal year ended
December 31, 2007)*
Amendment No. 2 to the Torchmark Corporation Supplementary Retirement Plan
(incorporated by reference from Exhibit 10.55 to Form 10-K for the fiscal year ended
December 31, 2007)*
Amendment No. 3 to the Torchmark Corporation Supplementary Retirement Plan
(incorporated by reference from Exhibit 10.56 to Form 10-K for the fiscal year ended
December 31, 2007)*
Form of Restricted Stock Award Notice under Torchmark Corporation Non-Employee
Director Compensation Plan (incorporated by reference from Exhibit 10.57 to Form 10-K
for the fiscal year ended December 31, 2007)*
Form of Restricted Stock Unit Award Notice under Torchmark Corporation Non-Employee
Director Compensation Plan (incorporated by reference from Exhibit 10.58 to Form 10-K
for the fiscal year ended December 31, 2007)*
Form of Restricted Stock Award (Compensation Committee grant) under Torchmark
Corporation 2007 Long-Term Compensation Plan (incorporated by reference from
Exhibit 10.59 to Form 10-K for the fiscal year ended December 31, 2007)*
10.52
Amendment Four to the Torchmark Corporation Supplementary Retirement Plan*
10.53
10.54
Amendment Three to the Torchmark Corporation Supplemental Executive Retirement
Plan*
Amendment One to the Torchmark Corporation Restated Deferred Compensation Plan for
Directors, Advisory Directors, Directors Emeritus and Officers*
10.55
Amendment Two to the Torchmark Corporation Restated Deferred Compensation Plan*
10.56
Amendment to the Torchmark Corporation 2007 Long-Term Compensation Plan*
10.57
10.58
(11)
(12)
(20)
(21)
Amendment One to the Torchmark Corporation Savings and Investment Plan (as restated
January 1, 2007)*
Receivables Purchase Agreement dated as of December 31, 2008 among AILIC
Receivables Corporation, American Income Life Insurance Company and TMK Re, Ltd.
(incorporated by reference from Exhibit 10.1 to Form 8-K dated January 6, 2009)
Statement re computation of per share earnings
Statement re computation of ratios
Proxy Statement for Annual Meeting of Stockholders to be held April 30, 2009***
Subsidiaries of the registrant
119
119
117
Page of
this
Report
(23)(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(24)
(31.1)
(31.2)
(32.1)
into Form S-8 of
Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports
dated February 27, 2009, 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 27, 2009, into Form S-8 and the accompanying Form S-3 Prospectus
the Torchmark Corporation 1996 Non-Employee Director Stock Option Plan
of
(Registration No. 2-93760)
Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports
dated February 27, 2009, 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 27, 2009, 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 27, 2009,
the Liberty National Life Insurance
Company 401(k) Plan (Registration No. 33-65507)
Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports
dated February 27, 2009, 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 27, 2009 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 27, 2009 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 27, 2009 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 27, 2009 into Form S-8 and the accompanying Form S-3 Prospectus
of
Incentive Plan
(Registration No. 333-125400)
Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports
dated February 27, 2009 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 27, 2009 into Form S-8 of the Torchmark Corporation 2007 Long-
Term Compensation Plan (Registration No. 333-148244)
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
the Torchmark Corporation 2005 Non-Employee Director
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, 2008.
118
Exhibit 11. Statement re computation of per share earnings
TORCHMARK CORPORATION
COMPUTATION OF EARNINGS PER SHARE
Twelve Months Ended December 31,
2006
2007
2008
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $452,259,000 $527,535,000 $518,631,000
Basic weighted average shares outstanding . . . . . . . . . . . . . . . . . . . .
Diluted weighted average shares outstanding . . . . . . . . . . . . . . . . . . .
88,052,650
88,516,095
94,317,142
95,845,997
99,732,608
101,112,157
Net income per basic share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net income per diluted share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5.14 $
5.11 $
5.59 $
5.50 $
5.20
5.13
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
Nebraska
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 114 through 118 of this report. Exhibits not referred to have been omitted as
inapplicable or not required.
119
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(Amounts in thousands)
December 31,
2008
2007
Assets:
Investments:
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,371 $
25,553
1,472
17,326
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26,924
749
3,317,597
11,617
62,901
27,535
18,798
-0-
4,259,118
16,281
38,470
27,928
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,447,323 $4,360,595
Liabilities and shareholders’ equity:
Liabilities:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Short-term debt
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
403,707 $ 202,058
598,012
499,049
151,074
185,479
84,824
136,181
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,224,416
1,035,968
Shareholders’ equity:
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
351
85,875
796,576
(1,170,417)
2,928,950
(418,428)
351
94,875
831,739
(80,938)
3,003,152
(524,552)
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,222,907
3,324,627
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,447,323 $4,360,595
See Notes to Condensed Financial Statements and accompanying Report of Independent Registered
Public Accounting Firm.
120
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
CONDENSED STATEMENTS OF OPERATIONS
(Amounts in thousands)
Year Ended December 31,
2006
2007
2008
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,752
-0-
Realized investment gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 23,716
131
-0-
$ 25,857
(9,023)
5,142
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,752
23,847
21,976
General operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reimbursements from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22,636
(9,374)
65,643
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78,905
17,582
14
68,549
86,145
14,205
(9,504)
73,880
78,581
Operating income (loss) before income taxes and equity in earnings of
affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(59,153)
20,231
(62,298)
22,425
(56,605)
27,041
Net operating loss before equity in earnings of affiliates . . . . . . . . . . . . . . . . . . . . . .
Equity in earnings of affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(38,922)
491,181
(39,873)
567,408
(29,564)
548,195
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $452,259
$527,535
$518,631
See Notes to Condensed Financial Statements and accompanying Report of Independent Registered
Public Accounting Firm.
121
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT—(continued)
CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended December 31,
2007
2008
2006
Cash provided from (used for) operations before dividends from
subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (53,882)
404,341
$ (27,803) $ (13,776)
427,747
458,017
Cash provided from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
350,459
430,214
413,971
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash provided from (used for) investing activities . . . . . . . . . . . . . . . . . . . . . . . .
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-
2,268
-0-
-0-
-0-
2,268
-0-
42,348
(11,082)
(18,043)
(26)
(39,574)
4,043
4,326
-0-
(28)
13,197
(31,233)
-0-
-0-
-0-
-0-
-0-
102,178
25,473
(455,736)
45,500
2,679
(72,072)
-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)
Cash provided from (used for) financing activities . . . . . . . . . . . . . . . . . . . . . . . .
(351,978)
(443,411)
(382,738)
Net decrease in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
749
-0-
749
-0-
-0-
$
-0- $
-0-
-0-
-0-
See Notes to Condensed Financial Statements and accompanying Report of Independent Registered
Public Accounting Firm.
122
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $404,341 $458,017 $427,747
2008
2007
2006
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:
Other stock-based compensation not involving cash . . . . . . . .
Dividend of affiliate applied to loan balance . . . . . . . . . . . . . . .
$10,823
-0-
$ 8,106
15,700
$ 6,576
14,800
The following table summarizes certain amounts paid (received) during the period:
Year Ended December 31,
2006
2007
2008
Year Ended December 31,
2006
2007
2008
Interest paid* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 64,997 $ 68,034 $ 73,547
(20,514)
Income taxes received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(20,332)
(18,351)
*
The interest cost reductions resulting from the cash settlements of Torchmark’s interest-rate swaps in
2006 are netted against realized investment losses.
Note C—Special Items
In 2008, $2.5 million of legal cost ($1.6 million after tax) was attributable to the Parent Company,
involving litigation of a subsidiary disposed of many years ago.
In 2008 and 2007, a Federal income tax benefit of $.1 million and $1.2 million, respectively, 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.
See accompanying Report of Independent Registered Public Accounting Firm.
123
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,
2008:
Life insurance in force . . . . . . . . . . . . . $145,812,859
$1,392,150
$1,966,917
$146,387,626
1.3%
Premiums:(2)
Life insurance . . . . . . . . . . . . . . . . . . $ 1,554,831
1,130,932
Health insurance . . . . . . . . . . . . . . .
Total premium . . . . . . . . . . . . . . . . $ 2,685,763
$
$
7,598
3,872
11,470
$
$
18,693
-0-
$ 1,565,926
1,127,060
18,693
$ 2,692,986
1.2%
0%
.7%
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%
(1) No amounts have been netted against ceded premium
(2) Excludes policy charges of $50,878, $52,331, and $54,365, in each of the years 2008, 2007, and 2006, respectively.
See accompanying Report of Independent Registered Public Accounting Firm.
124
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 26, 2009
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 26, 2009
*By:
/s/ GARY L. COLEMAN
Gary L. Coleman
Attorney-in-fact
125
3700 S. STONEBRIDGE DRIVE
MCKINNEY, TEX AS 75070
www.torchmarkcorp.com