3700 S. Stonebridge Drive | McKinney, Texas 75070 | www.torchmarkcorp.com
Torchmark Corpor ation
2010 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 28, 2011
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 REGISTERED
PUBLIC ACCOUNTANTS
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
9 1/4%, 77/8%, 73/8% AND 63/8%
NOTES
The Bank of New York Mellon
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.bnymellon.com/corporatetrust
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/equityaccess
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.
TORCHMARK
CORPOR ATION
WEBSITE
On the home page at
www.torchmarkcorp.com
are links to the web pages of:
(cid:129) Torchmark’s Principal
Subsidiaries
(cid:129) Torchmark’s Annual Reports
(cid:129) Employment
(cid:129) Investor Relations
The
Investor Relations page
contains a menu with links to
many topics of interest to investors
and other interested third parties:
(cid:129) Annual Reports, 10-K
and Proxy Statements
(cid:129) News Releases
(cid:129) Stock Quotes
(cid:129) SEC Filings
(cid:129) XBRL
(cid:129) Financial Reports and Other
Financial Information
(cid:129) Officers
(cid:129) Torchmark Calendar
(cid:129) Management Presentations
(cid:129) Conference Calls on the Web
(cid:129) Corporate Governance
including:
- Corporate By-Laws
- Shareholder Rights Policy
- Code of Business
Conduct and Ethics
- Code of Ethics for CEO and
Senior Financial Officers
- Corporate Governance
Guidelines
- Employee Complaint
Procedure
- Members of the Board
- Audit Committee Charter
- Compensation
Committee Charter
- Governance & Nominating
Committee Charter
- How to Contact the
Board of Directors
- Director Independence
Criteria, Qualification
Standards and
Resignation Policy
(cid:129) Annual Meeting of
Shareholders
(cid:129) Stock Transfer Agent and
Shareholder Assistance
(cid:129) Dividend Reinvestment
(cid:129) Automatic Deposit
of Dividends
(cid:129) Contact Information
· TORCHMARK CORPORATION · 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
2010
2009
% CHANGE
$2,652,274
$2,612,596
525,955
1,753,046
973,625
82,082
495,580
1,694,402
1,026,560
83,034
13.8%
14.3%
1.5
6.1
3.5
(5.2)
(1.1)
$6.41
49.03
$5.97
44.22
7.4
10.9
* Certain financial data differ from the comparable GAAP financial data.
Reconciliations to GAAP financial data are presented on pages 13-14.
** Excludes discontinued operations from the sale of United Investors
2 · TORCHMARK CORPORATION ·
LETTER TO SHAREHOLDERS*
The past three years have been a very difficult
time – difficult for our country – difficult for
business in general – and particularly difficult for
financial service companies. Three years ago,
no one could have predicted the extent of the
financial crisis we have endured.
Three years ago, Torchmark was a safe,
In the
conservative, predictable company.
10 years prior to 2007, we had eliminated most of
the risk from our balance sheet (or so we thought).
We had divested ourselves of our oil and gas
holdings, our property and casualty subsidiary
and our real estate
investment properties.
We also had gotten out of the commercial
mortgage business and focused our investments
almost exclusively in investment grade corporate
bonds. By the end of 2007, we had well
positioned Torchmark to weather the impending
financial crisis.
Net Operating EPS
2007
$5.45
2010
$6.41
In the past three years, we have grown net
operating earnings per share from $5.45 to $6.41 –
an increase of 18%. While this level of growth
was well below our historical levels, we believe
it was significantly better than most of our peer
companies.
NET OPERATING EARNINGS PER SHARE
10–Year Compound Annual Growth Rate – 8.1%
$7.00
$6.00
$5.00
$4.00
$3.87
$3.51
$3.00
$2.94
$3.21
$6.41
$5.80 $5.97
$5.45
$4.99
$4.59
$4.23
I am proud of our performance over the last
three years. We not only weathered the crisis,
we have grown Torchmark in most key areas of
measurement. We achieved this growth without
obtaining government assistance or issuing equity.
$2.00
$1.00
0
2000
2001
2002 2003 2004 2005 2006
2007 2008 2009
2010
* Certain financial data differ from the comparable GAAP financial data. Reconciliations to GAAP financial data are presented on pages 13-14.
LETTER TO SHAREHOLDERS · TORCHMARK CORPORATION · 3
From 1999 through 2007, we grew our operating
earnings per share in a range of 8.5% to 11.5%
each year. We had become so predictable that we
rarely missed our guidance by more than a penny
per share.
Going into 2008, we expected to see comparable
growth, but along came the Lehman Brothers
collapse and the world changed. Our 6% growth
in operating EPS in 2008 shrank to 3% growth
in 2009 as solvency and liquidity concerns took
priority over short-term growth.
We, in fact, took a number of defensive actions in
2009 which had a negative impact on our earnings.
We held large amounts of cash throughout the
year to make sure we had ample liquidity in the
tight credit markets. We sold off a large number
of high-yielding below investment grade bonds.
We also issued $300 million of 9¼% debt.
The cumulative effect of these decisions was a
$43 million reduction in our pre-tax earnings or
$.33 per share after tax.
We also suspended our share repurchase program
in March of 2009.
We continue to believe that these decisions were
the correct decisions given the circumstances, but
they did drop our growth in operating earnings per
share from 9% to 3% for the year.
($ in millions)
Net life sales*
2007
$261
2010
$330
Unlike most of our peers, we have also grown
our new sales of life insurance. In the last three
years, our net life sales have increased 26% from
$261 million to $330 million. This growth came
from our two largest distribution systems – our
exclusive agency at American Income Life (AIL)
and our direct response operation at Globe Life.
Together, these distribution systems account for
about 60% of our underwriting income.
AMERICAN INCOME LIFE PREMIUM
($ in millions)
$600
$500
$400
$300
$200
$100
0
$561
$508
$474
$440
$409
$380
$350
$315
$277
$247
$231
2000
2001
2002 2003 2004 2005 2006 2007 2008 2009
2010
Book value per share
2007
2010
$35.60
$49.86
AMERICAN INCOME LIFE UNDERWRITING MARGIN
($ in millions)
I’m also pleased that we have grown our GAAP book
value per share in the last three years from $35.60
to $49.86 – an increase of 40%. If we value our
fixed maturity investments at our amortized cost,
our book value still increased more than 35% for
that period.
*Excludes discontinued operations from the sale of United Investors
4 · TORCHMARK CORPORATION · OPERATING SUMMARY
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
0
$186
$168
$155
$138
$126
$118
$106
$93
$83
$71
$65
2000
2001
2002 2003 2004 2005 2006 2007 2008 2009
2010
As you can see, American Income has grown
consistently over the
last 10 years – with
life premiums growing from $231 million to
$561 million (a CAGR of 9.3%) and life underwriting
margin increasing from $65 million to $186 million
(a CAGR of 11.1%). In just the last three years,
the number of producing agents at AIL has risen
from 2,545 to 3,912 – a 54% increase – and net life
sales have grown from $92 million to $138 million
- a 50% increase.
AIL has historically operated in a niche market
– organized labor – where it has had little
competition. In the past few years, AIL has
successfully diversified its customer base where
only about 28% of new sales originated from union
endorsed leads.
DIRECT RESPONSE LIFE PREMIUM
($ in millions)
$600
$500
$400
$300
$200
$100
0
$567
$537
$511
$484
$457
$424
$387
$350
$316
$289
$268
2000
2001
2002 2003 2004 2005 2006 2007 2008 2009
2010
*Excludes discontinued operations from the sale of United Investors
DIRECT RESPONSE LIFE UNDERWRITING MARGIN
($ in millions)
$160
$140
$120
$100
$80
$60
$40
$20
0
$145
$135
$121
$117
$97 $107
$109
$86
$71
$72
$76
2000
2001
2002 2003 2004 2005 2006 2007 2008 2009
2010
The direct response operation at Globe Life has
also consistently grown. Life premiums over the
last 10 years have increased from $268 million to
$567 million (a CAGR of 7.8%) and life underwriting
margin rose from $71 million to $145 million
(a CAGR of 7.4%).
Globe Life sells traditional life insurance products
to middle and lower-middle income households. It
sells directly to the consumer through a variety of
media – primarily direct mail, other media inserts
and the Internet. We have enjoyed relatively little
competition in the markets we serve due to our
cost control, economics of scale, and our vast pool
of experience. We believe this consistent growth
at both American Income and Globe will continue
for the foreseeable future.
($ in millions)
2007
2010
Invested assets (at amortized cost)
$9,160*
$11,088
In the last three years, our invested assets have
grown 21% from $9.2 billion to $11.1 billion.
Because we sell very little asset-accumulation or
investment type products, our invested assets
also show very consistent and predictable growth
as our life premiums and reserves continue to grow.
I would point out that we also spent $677 million
on share repurchase over this same time period.
LETTER TO SHAREHOLDERS · TORCHMARK CORPORATION · 5
In 2007, 41% of the portfolio was in the financial
sector. Due to our high concentration and volatility
in that sector, we directed 2008 – 2010 bond
purchases to other sectors. Now, financials have
been reduced to 35% of the portfolio, utilities have
grown from 9 – 15% and governments have grown
from 6 – 13%. Asset backed securities comprised
only 2% of the portfolio in 2007 and are now 1%.
Government bonds have grown from 6% to 13%
of the portfolio due to the purchase of $923 million
of Build America Bonds. These are taxable debt
securities issued by state and local governments
who receive a federal subsidy equal to 35% of their
required interest payments. Our Build America
bonds have an average rating of AA and yield of
6.3%. We don’t expect to further increase our
exposure in this sector.
Below investment grade bonds as a
percent of portfolio
2007
2010
8%
8%
At the end of 2007, our below investment grade
bonds were $754 million or 8.1% of our fixed
maturity portfolio. By year-end 2010, our below
investment grade bonds had grown to $863 million
or 8.3% of our portfolio. As a percentage of our
equity, however, below investment grade bonds
actually declined slightly over that period from
22.3% of equity to 21.8%.
INVESTMENT PORTFOLIO
($ in millions)
Fixed Maturities
Equities
Mortgage Loans
Investment Real Estate
Policy Loans
Other Long-Term Investments
Short-Term Investments
12/31/07* 12/31/10 % Increase
$8,658
$10,435
21%
19
19
9
313
42
100
15
14
2
378
26
217
21%
Total
$9,160 $11,088
21%
As I mentioned earlier, the bulk of our invested
assets (94%) are in fixed maturities – predominantly
investment grade corporate bonds. Less than .3%
of our investments are in equities, mortgage loans
and real estate compared to the industry average
of 13%.
FIXED MATURITIES
($ in millions)
Financial - Insurance
Financial - Bank
Financial - Other
Utilities
Government
Energy
Consumer
Basic Materials
Transportation and Other Industrials
Communications
Asset Backed
Total
% of Total
Amortized
Cost
12/31/07*
18%
% of Total
Amortized
Cost
12/31/10
16%
18%
41%
14%
35%
5%
9%
6%
8%
12%
7%
8%
7%
2%
5%
15%
13%
10%
8%
7%
7%
4%
1%
$8,658
$10,435
Prior to 2008, our bond acquisitions emphasized
banks, insurance companies and utilities in large
part because they are in regulated industries,
have a lower risk of leveraged buyout, which was
a concern in past years, and are companies we
expected to be around for a long time.
6 · TORCHMARK CORPORATION · LETTER TO SHAREHOLDERS
*Excludes discontinued operations from the sale of United Investors
BELOW INVESTMENT GRADE BONDS
($ in millions)
$1,400
$1,200
$1,000
$800
$600
$400
$200
0
$1,235
$824
$832
$863
$754
$627
$602
12/31/07
6/30/08 12/31/08 6/30/09 12/31/09 6/30/10 12/31/10
% of Fixed Maturities
8.1%
6.6%
6.3%
13.1%
8.1%
7.7%
8.3%
% of Equity, excluding FAS 115
22.3%
18.5%
18.1%
35.8%
22.4%
21.7%
21.8%
But 2009 was a challenging year for us.
By June 30, 2009, below investment grade
bonds had doubled to $1.2 billion, 13% of the
portfolio, due primarily to downgrades of formerly
investment grade securities. In the first six months
of 2009, 30% of our portfolio was downgraded;
and over half of those downgrades were two or
more notches. During that period, we wanted to
reduce our below investment grade portfolio, but
valuations were so low that we decided to wait.
In the last half of 2009, we reduced below
investment grade bonds by $411 million, primarily
by selling some of our below investment grade
bonds. Improved valuations made it possible for us
to get a better risk adjusted return by selling these
bonds than by holding them. This is an instance
where patience was rewarded. Had we sold these
bonds six months earlier, we would have received
approximately $80 million less in sale proceeds.
Even so, there was a cost associated with this
effort to improve the quality of the portfolio. Our
portfolio yield declined 9 basis points from 6.97%
to 6.88%.
reduced below
significantly
Although we
investment grade bonds from the high of 13.1%
to 8.3% they are still high relative to our peers
when looked at as a percentage of the portfolio.
However, due to our significantly lower portfolio
leverage, the percentage of below investment
grade bonds to equity is 22% which is likely less
than our peer average.
NET UNREALIZED GAINS/LOSSES
FIXED MATURITIES
($ in millions)
$500
$0
($103)
1.2%*
($500)
($1,000)
($1,500)
($2,000)
($2,500)
$178
1.7%*
$108
1.0%*
($456)
4.5%*
($670)
7.0%*
($1,362)
14.4%*
($1,793)
18.7%*
($2,232)
23.3%*
12/31/07
6/30/08
12/31/08
3/31/09
6/30/09
12/31/09
6/30/10
12/31/10
*Net unrealized gains/losses as a percentage of fixed maturities at amortized cost.
In the last three years, we’ve seen significant
fluctuations in the net unrealized gains/losses of
our bond portfolio. At March 31, 2009, we reported
an all time high of $2.2 billion of unrealized losses,
which was 23% of the portfolio value at amortized
cost. Due to improved bond valuations, and to
a lesser extent, our sale of below investment
grade bonds, net unrealized losses declined to
$456 million at year end 2009.
LETTER TO SHAREHOLDERS · TORCHMARK CORPORATION · 7
Even though the magnitude of unrealized losses
depressed shareholders’ equity in 2009, we were
not worried about those losses being realized. The
primary cause of the unrealized losses was market
driven, not credit driven. We prefer to hold bonds
to maturity unless there is a credit problem, and
due to the strong and stable positive cash flow
generated by our insurance products, we have the
ability to do so.
($ in millions)
Net investment income*
2007
$602
2010
$685
As a result of declining
interest rates, the
repositioning of our bond portfolio and our higher
debt cost, our net investment income grew by
14% over the last three years – significantly less
than our 21% growth in invested assets.
The yield on our fixed maturity portfolio has
declined 24 basis points to 6.72% over the three
year period and continues to temper our earnings
growth. Because of our relatively long duration, we
believe we have been less impacted than most of
our peers during this low interest rate environment.
Debt to capital ratio at December 31
(excluding FAS 115)
2007
21%
2010
22%
At the corporate level, capitalization is measured by
debt to total capital. From year ends 2007 – 2010,
our debt to capital ratio has ranged from 21 – 24%
and is currently at 22%. We have committed to
the rating agencies to keep this ratio below 30%
and have done so for the last ten years.
Risk Based Capital ratio at December 31
2007
294%
2010
421%
At the insurance company level, we strive for a
Risk Based Capital (RBC) ratio that is in line with
the expectations of our rating agencies. Until
2009, the target ratio was 300%, since then it has
been 325%. This ratio is lower than some peer
companies, but is sufficient for us in light of our
consistent statutory earnings and the relatively
lower risk of our policy liabilities.
At year end 2007, our consolidated RBC ratio was
294%; our statutory capital was $26 million less
than needed to achieve the then target of 300%.
At year end 2010, our RBC ratio stood at 421%.
CAPITALIZATION
LIFE INSURANCE COMPANIES
($ in millions)
Statutory Capital
Required Capital
Company Action Level RBC %
Target
Excess (Deficit) Capital vs 300%
Excess (Deficit) Capital vs 325%
12/31/07
$1,183
$403
294%
300%
($26)
-
12/31/10
$1,686
$400
421%
325%
$485
$385
in our
increased capital
We have
insurance
companies in the last three years by approximately
$500 million while required capital remained the
same. We increased capital without having to
raise equity as some had predicted. Instead we
increased capital by having the parent company
contribute $175 million down to the insurance
companies, selling non-admitted bonds, admitting
additional deferred tax assets, and having higher
earnings than dividend payouts.
By taking these actions, we ended 2010 with an
RBC ratio of 421% - higher than our target. As
a result, our capital is $385 million higher than
needed to maintain the desired 325% RBC ratio.
*Excludes discontinued operations from the sale of United Investors
8 · TORCHMARK CORPORATION · LETTER TO SHAREHOLDERS
($ in millions)
Liquid assets at parent company at
December 31
2007
$33
2010
$204
In addition to the extra capital in our insurance
companies, we held $204 million of liquid assets
at the holding company at year-end, 2010.
In 2007, and prior years, essentially all free cash
flow at the parent company was deployed in our
share repurchase program.
(Amounts in millions)
Outstanding shares at December 31
2007
92
2010
79
As I mentioned earlier, during the past three years,
we have spent $677 million repurchasing almost
13.5 million outstanding shares at an average price
of $50.17. Of our peer companies, we believe we
were the last to suspend our share repurchase in
2009 and among the first to reinstate the program
in 2010.
SHARE REPURCHASES
Average Price
No. of Shares
(in 000’s)
P/E Ratio**
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
$53.51
$22.78
$55.86
$65.39
$57.47
$53.15
$51.39
$38.17
$37.82
$37.25
$23.22
$32.50
$36.63
3,805
2,050
7,638
6,150
5,575
5,647
5,221
5,902
4,817
4,265
5,806
5,398
3,436
8.3
3.8
9.6
12.0
11.5
11.6
12.1
9.9
10.8
11.6
7.9
12.3
15.4
** P/E Ratios are calculated using the net operating earnings per share for the year
in which the share repurchases occurred.
Our repurchases the past three years have been
at relatively low P/E’s compared to historical
levels. In fact, for the 15 years prior to 2007, the
average P/E we paid for our share repurchase was
11.5 times operating earnings per share.
($ in millions)
Free cash flow generated for
following year
2007
$343
2010
$655*
* $350 from normal operations and $305 from sale of United Investors
For 2007, the free cash flow which was generated
for the parent company was $343 million.
For 2011, the new free cash flow at the holding
company will be around $655 million - $350
million from normal operations and $305 from the
sale of United Investors. This is in addition to the
$204 million of liquid assets already held at the
parent company at the beginning of the year.
PARENT COMPANY FREE CASH FLOW
($ in millions)
2006
2007 2008 2009 2010 2011 E
Dividends and
Transfers Received
From Insurance
Companies
Less Cash Outflow:
$444
$464
$437
$392 $401
$468
Interest Expense
71
67
62
71
76
77
Dividends to
Shareholders
Other, Net
Net Outflow
Normalized Free
Cash Flow
Additional
dividends received
as a result of sale
of United Investors
48
(16)
$104
50
(6)
$111
49
(17)
$94
47
(7)
$111
50
6
$132
51
(9)
$118
$340
$353
$343
$281 $269
$350
$305
Free Cash Flow
$340
$353
$343
$281
$269
$655
By law, each insurance company can pay dividends
up to the amount of its prior year statutory net
earnings without obtaining regulatory approval.
From the cash received, the parent pays the interest
expense on Torchmark debt and the dividends on
Torchmark stock.
LETTER TO SHAREHOLDERS · TORCHMARK CORPORATION · 9
The net amount of cash left over is “Free Cash”
that can be used by the parent for any corporate
purpose.
To recap:
In the last three years:
(cid:129) Operating earnings per share are up 18%
(cid:129) GAAP book value per share is up 40%
(cid:129) Net life insurance sales are up 26%
(cid:129) Below
investment grade bonds are at
comparable levels
(cid:129) We added $500 million of capital in the
insurance companies
(cid:129) We held $204 of cash at the parent company
(cid:129) We diversified our bond portfolio
(cid:129) Debt to capital ratio is at comparable level
With all of these positive changes, our stock closed
2010 slightly lower than it did three years prior.
CLOSING SHARE PRICE
$70.00
$60.00
$60.53
$58.65
$59.74
$49.51
$50.00
$40.00
$30.00
$20.00
$10.00
0
$44.70
$43.95
$37.04
$26.23
12/31/07
6/30/08 12/31/08
3/31/09
6/30/09 12/31/09 6/30/10 12/31/10
From 2006 – 2008, the Free Cash was around
$350 million a year. In 2009 and 2010, it slipped
to $281 million and $269 million. The $70 –
$80 million shortfall each year resulted primarily
from the impact on insurance company earnings of
impairments of fixed maturities and taking action
to protect the balance sheet during the economic
downturn,
certain below
investment grade bonds, and holding more cash.
including
selling
In 2011, Free Cash Flow from normal operations
will once again be at the $350 million level.
I would also point out that even at the bottom
of the economic crisis, we always maintained
$1.2 billion of untapped liquidity available to the
parent company. Never did we even consider
issuing equity.
($ in millions, except earnings per share and percentage data)
Net operating EPS
Book value per share
Net life sales*
2007
$5.45
2010
$6.41
$35.60
$49.86
$261
$330
Invested assets (at amortized cost)
$9,160*
$11,088
Below investment grade bonds as a
percent of portfolio
Net investment income*
Debt to capital ratio at December 31
RBC ratio at December 31
Liquid assets at parent company at
December 31
Outstanding shares at December 31
8%
$602
21%
294%
$33
92
8%
$685
22%
421%
$204
79
Free cash flow generated for following
year
$343
$655**
Share price at December 31
$60.53
$59.74
* Excludes discontinued operations from the sale of United Investors
** $350 from normal operations and $305 from sale of United Investors
10 · TORCHMARK CORPORATION · LETTER TO SHAREHOLDERS
If you’ve followed our stock, I’m sure you know
that it actually dropped below $17 in the first half
of 2009, so it has nearly quadrupled from its low
in less than two years. We continue to believe our
stock is undervalued. We are a better company
than we were three years ago – a stronger company.
The mid-point of our 2011 guidance for operating
earnings per share is $6.93 which would be an 8%
increase over 2010 with no accretion from the sale
of United Investors until 2012. We will have over
$850 million of “free cash” available this year at
the holding company which will be available for
share repurchase and/or an acquisition.
And, yes, we would very much like to find a suitable
acquisition.
Thank you for your confidence during these past
three years. We are well positioned to renew our
long history of growth and to take advantage of
opportunities as they arise.
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, 2010, 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 · 11
DIRECTORS
CHARLES E. ADAIR
Partner of Cordova Ventures,
Montgomery, Alabama
MARK S. MCANDREW
Chairman and Chief Executive Officer
of Torchmark
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
Retired Ross-Culverhouse Professor of
Accounting in Culverhouse College of
Commerce, University of Alabama
Fort Wayne, Indiana
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
GLENN D. WILLIAMS
Executive Vice President and
Chief Marketing Officer
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
DARREN M. REBELEZ
Executive Vice President and
Chief Operating Officer
7-Eleven, Inc.
Dallas, Texas
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 Chief Actuary
CAROL A. MCCOY
Vice President, Associate Counsel
and Secretary
LAMAR C. SMITH
Retired Chief Executive Officer of
First Command Financial Services, Inc.,
Westworth Village, Texas
PAUL J. ZUCCONI
Retired Partner of KPMG LLP,
Plano, Texas
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
12 · TORCHMARK CORPORATION · LETTER TO SHAREHOLDERS
OPER ATING SUMMARY
Unaudited and in thousands except per share amounts
TWELVE MONTHS ENDED DECEMBER 31,
2010
2009
% 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 compensation expense
Stock compensation expense, net of tax
Net Operating Income from Continuing Operations
Operating EPS on a diluted basis
Discontinued Operations - UILIC
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:
Realized gains/(losses)
Realized gains/(losses) - Discontinued Operations - UILIC
Loss on disposal of discontinued operations
Tax settlements
Loss on Company-occupied property
Net Income
EPS on a diluted basis
$1,663,699
(648,104)
(560,329)
455,266
778,967
(462,209)
(171,011)
145,747
24,312
1,348
626,673
2,834
(155,615)
473,892
685,253
(521,683)
208,840
(75,265)
297,145
(8,809)
762,228
(256,504)
$505,724
(7,701)
$498,023
$6.07
27,932
$525,955
$ 6.41
82,082
$1,591,853
(629,332)
(535,109)
427,412
836,616
(493,946)
(193,413)
149,257
21,153
312
598,134
2,914
(150,325)
450,723
632,276
(487,000)
200,042
(69,668)
275,650
(9,590)
716,783
(241,604)
$475,179
(6,409)
$468,770
$5.65
26,810
$495,580
$5.97
83,034
5%
7%
(7%)
(2%)
4%
5%
8%
8%
6%
6%
7%
6%
7%
$525,955
$495,580
24,270
1,852
(35,013)
0
0
$517,064
$ 6.30
(85,345)
(7,909)
0
2,858
(231)
$404,953
$4.88
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 · 13
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
Assets held for sale
Total assets
Liabilities and shareholders’ equity:
Policy liabilities
Accrued income taxes
Short-term debt
Long-term debt and trust preferred securities
Other liabilities
Liabilities held for sale
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
2010
10,435,497
582,359
16,635
421,628
3,410,739
396,891
792,880
0
16,056,629
9,537,087
1,173,336
198,875
913,354
284,772
0
3,949,205
16,056,629
79,243
80,543
49.03
13.8%
3,823,367
22.0%
$
$
$
$
$
$
Reconciliation of Torchmark management’s view of selected financial measures to comparable GAAP measures:
3,949,205
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
107,537
(4,404)
(36,097)
4,016,241
10,543,034
3,406,335
16,159,762
4,016,241
1,209,433
49.86
13.4%
3,861,013
21.7%
$
$
$
2009
9,559,499
529,148
17,404
404,097
3,291,750
396,891
595,956
1,656,974
16,451,719
9,011,585
1,114,350
233,307
919,761
175,476
1,320,175
3,677,065
16,451,719
82,841
83,159
44.22
14.3%
3,468,699
23.9%
$
$
$
$
$
$
$
3,677,065
(455,715)
27,755
149,786
3,398,891
9,104,115
3,319,505
16,023,759
3,398,891
964,680
40.87
15.0%
2,707,128
25.3%
$
$
$
The Condensed Balance Sheet, excluding the effect of net unrealized investment losses 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.
14 · 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, 2010
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 ‘ No È
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 ‘ No È
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files). Yes È No ‘
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, 2010,
the registrant’s common stock held by non-affiliates of
the aggregate market value of
the registrant was
$4,034,779,525 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 February 14, 2011
77,923,280 shares
DOCUMENTS INCORPORATED BY REFERENCE
Document
Proxy Statement for the Annual Meeting of Stockholders to be
held April 28, 2011 (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 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
12
13
13
15
17
18
56
57
116
116
116
119
119
119
119
119
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . .
120
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), and
United American Insurance Company (United American).
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
Liberty National Life
Insurance Company
McKinney, Texas
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.
Individual life and supplemental health
insurance marketed to middle-income
families.
Direct response, mail,
television, magazine;
nationwide.
2,001 producing agents; 153
branch offices.
Individual life and supplemental health
insurance marketed to union and credit
union members.
3,912 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.
1,406 independent
producing agents in the U.S.
and Canada.
Additional information concerning industry segments may be found in Management’s Discussion and
Analysis and in Note 14—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.
Annualized Premium in Force
(Amounts in thousands)
2009
2010
2008
Whole life:
Traditional . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,115,777 $1,077,347 $1,036,757
84,112
Interest-sensitive . . . . . . . . . . . . . . . . . . . . . . .
459,027
Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45,653
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
76,248
499,814
61,207
80,229
483,064
53,762
$1,753,046 $1,694,402 $1,625,549
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.
Annualized Premium in Force
(Amounts in thousands)
2009
2010
2008
Direct response . . . . . . . . . . . . . . . . . . . . . . . . . . $ 602,593 $ 578,223 $ 553,740
Exclusive Agents:
American Income . . . . . . . . . . . . . . . . . . . . . .
Liberty National . . . . . . . . . . . . . . . . . . . . . . . .
Independent Agents:
United American . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
596,583
310,475
24,726
218,669
549,540
317,413
27,740
221,486
494,191
322,179
30,998
224,441
$1,753,046 $1,694,402 $1,625,549
Health Insurance
Torchmark offers supplemental limited-benefit health insurance products that include primarily cancer
and accident plans. These policies are designed to supplement health coverage that applicants already
own. Medicare Supplements are also offered to enrollees in the traditional fee-for-service Medicare
program. Medicare Supplement plans are standardized by federal regulation and are designed to pay
deductibles and co-payments not paid by Medicare. We also offer Medicare Part D prescription drug
insurance.
2
The following table presents supplemental health annualized premium in force information for the
three years ended December 31, 2010 by product category.
Annualized Premium in Force
(Amounts in thousands)
2009
2010
2008
Amount
$461,386
308,899
203,340
% of
Total
47
32
21
Amount
$ 474,987
354,254
197,319
% of
Total
46
35
19
Amount
$ 484,761
432,579
181,009
% of
Total
44
39
17
Medicare Supplement . . . . . . . . . .
Limited-benefit plans . . . . . . . . . . .
Medicare Part D . . . . . . . . . . . . . . .
Total Health . . . . . . . . . . . . . .
$973,625
100
$1,026,560
100
$1,098,349
100
The number of health policies in force (excluding Medicare Part D) was 1.57 million, 1.66 million, and
1.54 million at December 31, 2010, 2009, and 2008, respectively. Medicare Part D enrollees at
December 31, 2010 were approximately 144 thousand to begin the 2011 plan year.
The following table presents supplemental health annualized premium in force for the three years
ended December 31, 2010 by marketing (distribution) method.
Annualized Premium in Force
(Amounts in thousands)
2009
2008
2010
Direct response . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 57,014 $
Exclusive agents:
Liberty National
. . . . . . . . . . . . . . . . . . . . . . . . .
American Income . . . . . . . . . . . . . . . . . . . . . . . .
316,839
74,049
Independent agents:
United American . . . . . . . . . . . . . . . . . . . . . . . .
322,383
Medicare Part D . . . . . . . . . . . . . . . . . . . . . . . . .
770,285
203,340
55,108 $
48,105
365,027
71,836
337,270
829,241
197,319
448,264
67,560
353,411
917,340
181,009
$973,625 $1,026,560 $1,098,349
Annuities
Annuity products offered include single-premium and flexible-premium deferred annuities. Annuities
in each of the three years ending December 31, 2010 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.
3
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 6—Future
Policy Benefit Reserves in the Notes to the Consolidated Financial Statements). Reserves for annuity
products and certain life products consist of the policyholders’ account values and are increased by
policyholder deposits and interest credited and are decreased by policy charges and benefit payments.
Investments
The nature, quality, and percentage mix of insurance company investments are regulated by state
laws. The investments of Torchmark insurance subsidiaries consist predominantly of high-quality,
investment-grade securities. Fixed maturities represented 94% of
fair value at
December 31, 2010. (See Note 4—Investments in the Notes to the Consolidated Financial Statements
and Management’s Discussion and Analysis.)
investments at
total
Competition
Torchmark competes with other insurance carriers through policyholder service, price, product
design, and sales efforts. While there are insurance companies competing with Torchmark, no individual
company dominates any of Torchmark’s life or health markets.
Torchmark’s health insurance products compete with, in addition to the products of other health
insurance carriers, health maintenance organizations, preferred provider organizations, and other health
care-related institutions which provide medical benefits based on contractual agreements.
Management believes Torchmark companies operate at lower policy acquisition and administrative
expense levels than peer companies. This allows Torchmark to have competitive rates while maintaining
higher underwriting margins.
Regulation
Insurance.
Insurance companies are subject to regulation and supervision in the states in which
they do business. The laws of the various states establish agencies with broad administrative and
supervisory powers which include, among other things, granting and revoking licenses to transact
business, regulating trade practices, licensing agents, approving policy forms, approving certain premium
rates, setting minimum reserve and loss ratio requirements, determining the form and content of required
financial statements, and prescribing the type and amount of investments permitted. They are also
required to file detailed annual reports with supervisory agencies, and records of their business are
Insurance
subject
Commissioners (NAIC),
the
supervisory agencies.
insurance companies are examined periodically by one or more of
to examination at any time. Under
the National Association of
the rules of
4
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. Torchmark and its subsidiaries have
registered as a holding company system pursuant to such legislation in Indiana, 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 2010, Torchmark had 2,224 employees and 1,067 licensed employees under sales
contracts.
Personnel
5
Item 1A. Risk Factors
Risks Related to Our Business
Product Marketplace and Operational Risks:
The insurance industry is a mature, regulated industry, populated by many firms. We operate in the
life and health insurance sections of the insurance industry, each with its own set of risks.
The development and maintenance of our various distribution systems are critical to growth
in product sales and profits. Because our life and health 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. We compete for
producing agents with other insurers primarily on the basis of our products and compensation. Adequate
compensation that is competitive with other employment opportunities and that also motivates producing
agents to increase sales is critical, as our competitors seek to hire away our agents from time to time.
Increased competition has led to a reduction in agents in our United American Branch Office Agency and
United American Independent Agency, which have historically been our major health distribution
channels. In direct response, continuous development of new offerings and cost efficiency are key. Less
than optimum execution of these strategies may result in reduced sales and profits.
Economic conditions may materially adversely affect our business and results of operations.
We serve primarily the middle-income market for individual protection life and health insurance and, as a
result, we compete directly with alternative uses of a customer’s disposable income. If disposable income
within this demographic group declines or the use of disposable income becomes more limited, as a
result of an economic downturn or otherwise, then new sales of our insurance products could become
more challenging, and our policyholders may choose to defer paying insurance premiums or stop paying
insurance premiums altogether.
Variations in expected to actual rates of mortality, morbidity, and persistency could
negatively affect our results of operations and financial condition. We establish a liability for our
policy reserves to pay future policyholder benefits and claims. These reserves do not represent an exact
calculation of liability, but rather are actuarial estimates based on models that include many assumptions
and projections which are inherently uncertain. The reserve computations involve the exercise of
significant judgment with respect to levels of mortality, morbidity, and persistency as well as the timing of
premium and benefit payments. Even though our actuaries continually test expected-to-actual results,
actual levels that occur may differ significantly from the levels assumed when premium rates were first
set. Accordingly, we cannot determine with precision the ultimate amounts of claims or benefits that we
will pay or the timing of such payments. Significant variations from the levels assumed when policy
reserves are first set could negatively affect our profit margins and income.
A ratings downgrade or other negative action by a rating agency could materially and
negatively affect our business, financial condition and results of operations. Various rating
agencies review the financial performance and condition of insurers, including our insurance subsidiaries,
and publish their financial strength ratings as indicators of an insurer’s ability to meet policyholder and
contract holder obligations. These ratings are important to maintaining public confidence in our insurance
these products and our competitive position. A downgrade or other
products, our ability to market
negative action by a rating agency with respect
to the financial strength ratings of our insurance
subsidiaries could negatively affect us in many ways, including the following: limiting or restricting the
ability of our insurance subsidiaries to pay dividends to us and adversely affecting our ability to sell
insurance products through our independent agencies.
Rating agencies also publish credit ratings for us. Credit ratings are indicators of a debt issuer’s
ability to meet the terms of debt obligations in a timely manner. These ratings are important to our overall
ability to access certain types of liquidity. Actual or anticipated downgrades in our credit ratings, or an
announcement that our ratings are under further review for a downgrade, could have a material adverse
effect on our operations, including limiting our access to capital markets, increasing the cost of debt,
6
impairing our ability to raise capital to refinance maturing debt obligations, limiting our capacity to support
growth at our insurance subsidiaries, and making it more difficult to maintain or improve the current
financial strength ratings of our insurance subsidiaries.
Ratings reflect only the rating agency’s views and are not recommendations to buy, sell or hold our
securities. Rating agencies assign ratings based upon several factors. While most of the factors relate to
the rated company, some of the factors relate to the views of the rating agency, general economic
conditions and circumstances outside the rated company’s control. In addition, rating agencies use
various models and formulas to assess the strength of a rated company, and from time to time rating
agencies have, in their discretion, altered the models. Changes to the models could impact the rating
agencies’ judgment of the rating to be assigned to the rated company. There can be no assurance that
current credit ratings will remain in effect for any given period of time or that such ratings will not be
lowered, suspended or withdrawn entirely by the rating agencies, if in each rating agency’s judgment,
circumstances so warrant. We cannot predict what actions the rating agencies may take, or what actions
we may take in response to the actions of the rating agencies, which could negatively affect our business,
financial condition and results of operations.
Life Insurance Marketplace Risk:
Our life products are sold in selected niche markets. We are at risk should any of these
markets diminish. We have 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 experienced minimal growth
and has declined as a percentage of employed workers. Most of our direct response business is solicited
either through direct mail or by insertion 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.
Health Insurance Marketplace Risks:
Congress could make changes to the Medicare program which could impact our Medicare
Supplement and Medicare Part D prescription drug insurance business. Medicare Supplement
insurance constitutes a significant portion of our 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. The nature and timing of
these changes cannot be predicted and could have a material adverse effect on that business.
Our Medicare Supplement business could be negatively affected by alternative healthcare
providers. Our Medicare Supplement business is impacted by market trends in the senior-aged health
care industry that provide alternatives to traditional Medicare, such as health maintenance organizations
(HMOs) and other managed care or private plans. The success of these alternative businesses could
negatively affect the sales and premium growth of traditional Medicare Supplement insurance.
Our Medicare Supplement and other health insurance business is subject
to intense
In recent years, price
competition primarily on the basis of price which could restrict future sales.
for other health
competition in the traditional Medicare Supplement market, as well as the market
products, has been significant, characterized by some insurers who have been willing to earn very small
profit margins or to underprice new sales in order to gain market share. We have elected not to compete
on those terms, which has negatively affected sales. Should these industry practices continue, it is likely
that our sales of health insurance products will remain depressed.
An inability to obtain timely and appropriate premium rate increases for the health insurance
policies we sell due to regulatory delay could adversely affect our results of operations and
financial condition. A significant percentage of the health insurance premiums that our insurance
subsidiaries earn is from Medicare Supplement insurance. Medicare Supplement insurance and the terms
under which the premiums for such policies may be increased are highly regulated at both the state and
federal level. As a result, it is characterized by lower profit margins than life insurance and requires strict
administrative discipline and economies of scale for success. Because Medicare Supplement policies are
7
coordinated with the federal Medicare program, which experiences health care inflation every year,
annual premium rate increases for the Medicare Supplement policies are necessary. Obtaining timely rate
increases is of critical importance to our success in this market. Accordingly, the inability of our insurance
subsidiaries to obtain approval of premium rate increases in a timely manner from state insurance
regulatory authorities in the future could adversely impact their profitability.
Investment Risks:
Our investments are subject to market and credit risks. Our invested assets are subject to the
customary risks of defaults, downgrades, and changes in market values. Substantially all of our
investment portfolio consists of fixed-maturity and short-term investments. A significant portion of our
fixed-maturity investments is comprised of corporate bonds, exposing us to the risk that
individual
corporate issuers will not have the ability to make required interest or principal payments on the
investment. Factors that may affect both market and credit risks include interest rate levels, financial
market performance, disruptions in credit markets, and general economic conditions, as well as particular
circumstances affecting the businesses or industries of each issuer. Additionally, because the majority of
our investments are longer-term fixed maturities that we typically hold until maturity, significant increases
in interest rates, widening of credit spreads, or inactive markets associated with market downturns could
cause a material temporary decline in the fair value of our fixed investment portfolio, even with regard to
performing assets. These declines could cause a material increase in unrealized losses in our investment
portfolio. Significant unrealized losses can substantially reduce our capital position and shareholders’
equity.
these securities with unrealized losses may
experience a default event and that a portion or all of that unrealized loss may not be recoverable. In that
case, the unrealized loss will be realized, at which point we would take an impairment charge, reducing
our net income.
is possible that our investment
in certain of
It
Difficulties in the business of particular issuers or in industries in which we hold investments
could cause significant downgrades, delinquencies and defaults in our investment portfolio,
potentially resulting in lower net investment income and increased realized and unrealized
investment losses. Difficult conditions in U.S. capital markets in recent periods caused a notable
increase in the troubled status of businesses in which we hold investments. If difficulties within these
businesses and industries increase, there could be deferrals and defaults on amounts owed to us. If
conditions in the capital markets worsen, we could experience credit downgrades or default events within
our investment portfolio.
A default by an issuer could result
in a significant other-than-temporary impairment of
that
investment, causing us to write the investment down and take a charge against net income. The risk of
default is higher for bonds with longer-term maturities, which we acquire in order to match our long-term
insurance obligations. We attempt to reduce this risk by purchasing only investment grade securities and
by carefully evaluating an issuer before entering into an investment. Also, while we have invested in a
broad array of industries and issuers in order to attempt to maintain a highly diversified portfolio, a
significant amount of our investments is in banks, insurance companies, and other financial institutions,
which have experienced an increased level of downgrades in recent years. Moreover, we cannot be
assured that any particular issuer, regardless of industry, will be able to make required interest and
principal payments, on a timely basis or at all. Material other-than-temporary impairments could reduce
our statutory surplus, leading to lower risk-based capital ratios, potential downgrades of our ratings by
rating agencies and a potential reduction of future dividend capacity from our insurance subsidiaries.
While we intend to hold our investments until maturity, a severe increase in defaults could cause us to
suffer a significant decrease in investment
income or principal repayments, resulting in substantial
realized losses from the writedowns of impaired investments. Current net income would be negatively
impacted by the writedowns, and prospective net income would be adversely impacted by the loss of
future interest income.
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 we attempt
to manage our
investments to preserve the excess investment
income spread, we provide no assurance that a
significant and persistent decline in interest rates will not materially affect such spreads. Significant
8
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 our investment income, as reinvestment of the
proceeds would likely be at lower rates.
Liquidity Risks:
Our liquidity to fund operations is substantially dependent on funds available, primarily
dividends, from our insurance subsidiaries. As a holding company with no direct operations, our
principal asset is the capital stock of our insurance subsidiaries, which periodically declare and distribute
dividends on their capital stock. Moreover, our liquidity, including our ability to pay our operating expenses
and to make principal and interest payments on debt securities or other indebtedness owed by us, as well
as our ability to pay dividends on our common stock or any preferred stock, depends significantly upon
the surplus and earnings of our insurance subsidiaries and the ability of these subsidiaries to pay
dividends or to advance or repay funds to us. Other sources of liquidity for us also include a variety of
short- and long-term instruments, including our credit facility, commercial paper and medium- and long-
term debt.
The principal sources of our insurance subsidiaries’
liquidity are insurance premiums, as well as
investment
income, maturities, repayments, and other cash flow from our investment portfolio. Our
insurance 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 us, including laws establishing minimum solvency and liquidity thresholds. For example, in the
states where our companies are domiciled, 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 prior year statutory net
income, excluding capital gains, on an annual noncumulative basis or 10% of prior year statutory surplus
without regulatory approval. Accordingly, a disruption in our insurance subsidiaries’ operations could
reduce their capital or cash flow and, as a result, limit or disallow payment of dividends to us, a principal
source of our cash flow.
We can give no assurance that more stringent restrictions will not be adopted from time to time by
states in which our insurance subsidiaries are domiciled, which could, under certain circumstances,
significantly reduce dividends or other amounts paid to us by our subsidiaries. Although we do not
anticipate changes, changes in these laws could constrain the ability of our subsidiaries to pay dividends
or to advance or repay funds to us in sufficient amounts and at times necessary to meet our debt
obligations and corporate expenses. Additionally, the inability of our insurance subsidiaries to obtain
approval of premium rate increases in a timely manner from state insurance regulatory authorities could
their profitability, and thus their ability to declare and distribute dividends to us.
adversely impact
Limitations on the flow of dividends from our subsidiaries could limit our ability to service and repay debt
or to pay dividends on our capital stock.
Adverse capital and credit market conditions may significantly affect our ability to meet
liquidity needs or access capital, as well as affect our cost of capital. The capital and credit
markets have recently experienced extreme instability and disruption for an extended period of time. In
some cases, the markets exerted downward pressure on the availability of liquidity and credit capacity for
certain industries and issuers. Additionally, should credit spreads widen again in the future, the interest
rate we must pay on any new debt obligation we may issue could increase, and our net income could be
reduced. If the credit and capital markets were to experience significant disruption, uncertainty, and
instability, these conditions could adversely affect our access to capital. Such market conditions may limit
our ability to replace maturing liabilities (in a timely manner or at all) and/or access the capital necessary
to grow our business.
In the unlikely event that current resources do not satisfy our needs, we may have to seek additional
financing or raise capital. The availability of additional financing or capital will depend on a variety of
factors such as market conditions, the general availability of credit or capital, the volume of trading
activities, the overall availability of credit to the insurance industry, and our credit ratings and credit
capacity. Additionally, customers, lenders, or investors could develop a negative perception of our long-
or short-term financial prospects if we incur large investment losses or if the level of our business activity
decreases due to a market downturn. Our access to funds may also be impaired if regulatory authorities
9
or rating agencies take negative actions against us. Our internal sources of liquidity may prove to be
insufficient, and, in such case, we may not be able to successfully obtain additional financing on favorable
terms, or at all. As such, we may be forced to delay raising capital, issue shorter term securities than we
prefer, or bear an unattractive cost of capital which could decrease our profitability and significantly
reduce our financial flexibility. Therefore, as a result, our results of operations, financial condition, and
cash flows could be materially negatively affected by disruptions in the financial markets.
Regulatory Risks:
Insurance companies,
including our insurance subsidiaries, are subject
Our businesses are heavily regulated, and changes in regulation may reduce our profitability
and growth.
to extensive
supervision and regulation in the states in which we do business. The primary purpose of this supervision
and regulation is the protection of our policyholders, not our investors. State agencies have broad
administrative power over numerous aspects of our business, including premium rates and other terms
and conditions that we can include in the insurance policies offered by our insurance subsidiaries,
marketing practices, advertising, licensing agents, policy forms, capital adequacy, solvency, reserves, and
permitted investments. Also, regulatory authorities have relatively broad discretion to grant, renew, or
initiate procedures to revoke licenses or approvals. The insurance laws, regulations and policies currently
affecting Torchmark and its insurance subsidiaries may change at any time, possibly having an adverse
effect on our business. We may be unable to maintain all required licenses and approvals, and our
business may not fully comply with the wide variety of applicable laws and regulations or the relevant
authority’s interpretation of the laws and regulations, which may change from time to time. If we do not
have the requisite licenses and approvals or do not comply with applicable regulatory requirements, the
insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of
our activities or impose substantial fines.
We cannot predict the timing or substance of any future regulatory initiatives. In recent years, there
has been increased scrutiny of insurance companies, including our insurance subsidiaries, by insurance
regulatory authorities, which has included more extensive examinations and more detailed review of
disclosure documents. These regulatory authorities may bring regulatory or other legal actions against us
if, in their view, our practices, or those of our agents or employees, are improper. These actions can
result in substantial fines, penalties, or prohibitions or restrictions on our business activities and could
have a material adverse effect on our business, results of operations, or financial condition. Additionally,
changes in the overall
legal or regulatory environment may, even absent any particular regulatory
authority’s interpretation of an issue changing, cause us to change our views regarding the actions that
we need to take from a legal or regulatory risk management perspective, thus necessitating changes to
our practices that may, in some cases, limit our ability to grow or otherwise negatively impact the
profitability of our business.
the U.S.
Currently,
federal government does not directly regulate the business of
insurance.
However,
the Dodd-Frank Wall Street Record and Consumer Protection Act of 2010 establishes a
Federal Insurance Office (FIO), whose duties have not yet been defined, within the Department of the
Treasury and the Patient Protection Affordable Care Act created the Center for Consumer Information
and Insurance Oversight (CCIIO), originally established under the Department of Health and Human
Services and subsequently transferred to the Centers for Medicare and Medicaid Services (CMS). The
creation of these insurance regulatory offices may indicate that the federal government intends to play a
larger role in the regulation of the insurance industry. We cannot predict what impact, if any, the FIO and
CCIIO, as well as any other proposals for federal regulation of insurance could have on our business,
results of operations, or financial condition.
Changes in U.S. federal income tax law could increase our tax costs. Changes to the Internal
Revenue Code, administrative rulings or court decisions affecting the insurance industry could increase
our effective tax rate and lower our net income.
Changes in accounting standards issued by accounting standard-setting bodies may
adversely affect our financial statements and reduce our profitability. Our financial statements are
subject to the application of accounting principles generally accepted in the United States of America
(GAAP), which principles are periodically revised and/or expanded. Accordingly, from time to time, we are
10
required to adopt new or revised accounting standards or guidance issued by recognized authoritative
bodies. It is possible that future accounting standards that we are required to adopt could change the
current accounting treatment
that we apply to our consolidated financial statements and that such
changes could have a material adverse effect on our financial condition and results of operations. Further,
standard setters have a full agenda of unissued topics under review at any given time, any of which have
the potential to negatively impact our profitability.
If we fail to comply with restrictions on patient privacy and information security, including
taking steps to ensure that our business associates who obtain access to sensitive patient
information maintain its confidentiality, our reputation and business operations could be
materially adversely affected. The collection, maintenance, use, disclosure and disposal of individually
identifiable data by our insurance subsidiaries are regulated at the international, federal and state levels.
These laws and rules are subject to change by legislation or administrative or judicial
interpretation.
Various state laws address the use and disclosure of individually identifiable health data to the extent they
are more restrictive than those contained in the privacy and security provisions in the federal Gramm-
Leach-Bliley Act of 1999 (GLBA) and in the Health Insurance Portability and Accountability Act of 1996
(HIPAA). HIPAA also requires that we impose privacy and security requirements on our business
associates (as that term is defined in the HIPAA regulations). Noncompliance with any privacy laws or
any security breach involving the misappropriation, loss or other unauthorized disclosure of sensitive or
information, whether by us or by one of our business associates, could have a material
confidential
adverse effect on our business, reputation and results of operations and could include material fines and
penalties, various forms of damages, consent orders regarding our privacy and security practices,
adverse actions against our licenses to do business and injunctive relief.
Litigation Risk:
Litigation could result in substantial judgments against us or our subsidiaries. We are, and
in the future may be, subject to litigation in the ordinary course of business. Some of these proceedings
have been brought on behalf of various alleged classes of complainants, and, in certain of these matters,
the plaintiffs are seeking large and/or indeterminate amounts, including punitive or exemplary damages.
Members of our management and legal teams review litigation on a quarterly and annual basis. However,
the outcome of any such litigation cannot be predicted with certainty. A number of civil jury verdicts have
been returned against insurers in the jurisdictions in which Torchmark and its insurance subsidiaries do
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.
In some states in which we operate, juries have substantial discretion in awarding punitive damages. This
for unpredictable material adverse judgments in any given punitive
discretion creates the potential
damages suit.
Our pending and future litigation could adversely affect us because of the costs of defending these
cases, the costs of settlement or judgments against us, or changes in our operations that could result
from litigation. Substantial legal liability in these or future legal actions could also have a material financial
effect or cause significant harm to our reputation, which, in turn, could materially harm our business and
our business prospects.
Catastrophic Event Risk:
Our business is subject to the risk of the occurrence of catastrophic events. Our insurance
policies are issued to and held by a large number of policyholders throughout the United States in
relatively low-face amounts. Accordingly, it is unlikely that a large portion of our policyholder base would
be affected by a single natural disaster. However, our insurance operations could be exposed to the risk
of catastrophic mortality, caused by events such as a pandemic, an act of terrorism, or another event that
causes a large number of deaths or injuries across a wide geographic area. These events could have a
material adverse effect on our results of operations in any period and, depending on their severity and
geographic scope, could also materially and adversely affect our financial condition.
The extent of losses from a catastrophe is a function of both the total number of policyholders in the
area affected by the event and the severity of the event. Pandemics, hurricanes, earthquakes, and man-
11
including terrorism and war, may produce significant claims in larger areas,
made catastrophes,
especially those that are heavily populated. Claims resulting from natural or man-made catastrophic
events could cause substantial volatility in our financial results for any fiscal quarter or year and could
materially reduce our profitability or harm our financial condition.
Information Technology Risk:
The occurrence of computer viruses, network security breaches, disasters, or other
unanticipated events could affect the data processing systems of Torchmark or its subsidiaries
and could damage our business and adversely affect our financial condition and results of
operations. A computer virus could affect the data processing systems of Torchmark or its subsidiaries,
destroying valuable data or making it difficult to conduct business. In addition, despite our implementation
of network security measures, our servers could be subject to physical and electronic break-ins and
similar disruptions from unauthorized tampering with our computer systems.
We retain confidential
information in our computer systems and rely on sophisticated commercial
technologies to maintain the security of those systems. Anyone who is able to circumvent our security
measures and penetrate our computer systems could access, view, misappropriate, alter, or delete
information and proprietary
including personally identifiable customer
information in the systems,
business information. In addition, an increasing number of states require that customers be notified of
unauthorized access, use, or disclosure of their information. Any compromise of the security of our
computer systems that results in inappropriate access, use, or disclosure of personally identifiable
customer information could damage our reputation in the marketplace, deter people from purchasing our
products, subject us to significant civil and criminal liability, and require us to incur significant technical,
legal, and other expenses.
In the event of a disaster such as a natural catastrophe, an industrial accident, a blackout, or a
terrorist attack or war, our computer systems may be inaccessible to our employees or customers for a
period of time. Even if our employees are able to report to work, they may be unable to perform their
duties for an extended period of time if our data or systems are disabled or destroyed.
Item 1B. Unresolved Staff Comments
As of December 31, 2010, Torchmark had no unresolved staff comments.
12
Item 2. Properties
Torchmark, through its subsidiaries, owns or leases buildings that are used in the normal course of
business. Torchmark owns and occupies a 290,000 square foot facility located in McKinney, Texas (a
north Dallas suburb). This facility is Torchmark’s corporate headquarters and also houses the operations
of United American.
Liberty owns a 487,000 square foot building in Birmingham, Alabama which until 2010 served as
Liberty’s home office. During 2010, Liberty vacated this building and currently operates its home office
activities out of a 34,000 square foot facility leased in a Birmingham suburb. Approximately 15,000 square
feet of storage space has also been leased near the new home office facility. 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, including its former home office building, opting
instead to operate from leased facilities.
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 disclosed in filings with the Securities and Exchange Commission (SEC), United
American was named as a defendant in purported class action litigation originally filed on September 16,
2004, in the Circuit Court of Saline County, Arkansas on behalf of the Arkansas purchasers of association
group health insurance policies or certificates issued by United American through Heartland Alliance of
America Association and Farm & Ranch Healthcare, Inc. (Smith and Ivie v. Collingsworth, et al., CV2004-
742-2). The plaintiffs asserted claims for fraudulent concealment, breach of contract, common law liability
for non-disclosure, breach of fiduciary duties, civil conspiracy, unjust enrichment, violation of the Arkansas
Deceptive Trade Practices Act, and violation of Arkansas law and the rules and regulations of the
Arkansas Insurance Department. Declaratory, injunctive, and equitable relief, as well as actual and
punitive damages, were sought by the plaintiffs. On September 7, 2005, the plaintiffs amended their
complaint to assert a nation-wide class, defined as all United American insureds who simultaneously
purchased both an individual Hospital and Surgical Expense health insurance policy (Form HSXC) and an
individual supplemental term life insurance policy (Form RT85) from Farm & Ranch through Heartland.
Defendants removed this litigation to the United States District Court for the Western District of Arkansas
13
(No. 4:05-cv-1382) but that Court remanded the litigation back to the state court on plaintiffs’ motion. On
July 22, 2008, the plaintiffs filed a second amended complaint, asserting a class defined as “all persons
who, between January 1998 and the present, were residents of Arkansas, California, Georgia, Louisiana
or Texas, and purchased through Farm & Ranch: (1) a health insurance policy issued by United American
known as Flexguard Plan, CS-1 Common Sense Plan, GSP Good Sense Plan, SHXC Surgical & Hospital
Expense Policy, HSXC 7500 Hospital/Surgical Plan, MMXC Hospital/Surgical Plan, SMXC Surgical/
Medical Expense Plan and/or SSXC Surgical Safeguard Expense Plan, and (ii) a membership in
Heartland.” Plaintiffs assert claims for breach of contract, violation of Arkansas Deceptive Trade Practices
Act and/or applicable consumer protection laws in other states, unjust enrichment, and common law
fraud. Plaintiffs seek actual, compensatory, statutory and punitive damages, equitable and declaratory
relief. On September 8, 2009, the Saline County Circuit Court granted the plaintiff’s motion certifying the
class. On October 7, 2009, United American filed its notice of appeal of the class certification and
subsequently filed its appellate brief on April 8, 2010. On December 2, 2010, the Arkansas Supreme
Court affirmed the lower court’s decision to certify the class. Discovery is ongoing.
As reported in previous SEC filings, on June 3, 2009, the Florida Office of Insurance Regulation
(Florida Office) issued an order to Liberty National to show cause why the Florida Office should not issue a
final order suspending or revoking Liberty National’s certificate of authority to do insurance business in the
State of Florida. The order asserted that Liberty National has engaged in alleged unfair trade practices in
violation of Florida law through past underwriting practices used by Liberty National with regard to
insurance applications submitted by persons who live in the United States but who were not U.S. citizens
and persons traveling to certain foreign countries. Liberty National denies the allegations made by the
Florida Office. Liberty National responded to the Florida Office’s order in a timely manner and the matter
was transmitted to the Division of Administrative Hearings on July 10, 2009. The matter was assigned to
an administrative law judge and was set for hearing commencing on February 1, 2010. On January 21,
2010, the Florida Office filed a motion for continuance which was granted and the hearing in the Florida
Department of Administrative Hearings was held June 7-11, 2010. Each of the parties submitted proposed
orders to the Administrative Law Judge on August 18, 2010 for her review. On November 9, 2010, the
Administrative Law Judge issued a recommended order and transmitted it to all parties. The Florida Office
filed exceptions to the order and Liberty National filed its response to those exceptions as well as its own
exceptions on December 3, 2010. On February 9, 2011, the Florida Office issued a Final Order that
essentially adopted the Administrative Law Judge’s previously recommended findings of
fact and
conclusions of law. However, in its Final Order, the Florida Office increased the recommended fines for the
four non-willful violations and trebled the fine for each non-willful violation resulting in a total fine of
$60,000. A decision whether or not the Final Order will be appealed has not been made.
As previously reported in filings with the SEC, on September 23, 2009, purported class action litigation
was filed against American Income Life Insurance Company in the Superior Court of San Bernardino
County, California (Hoover v. American Income Life Insurance Company, Case No. CIVRS 910758). The
plaintiffs, former insurance sales agents of American Income who are suing on behalf of all current and
former American Income sales agents in California for the four year period prior to the filing of this
litigation, assert that American Income’s agents are employees, not independent contractors as they are
classified by American Income. They allege failure to indemnify and reimburse for business expenses as
well as failure to pay all wages due upon termination in violation of the California Labor Code; failure to pay
minimum wages in violation of the California Industrial Welfare Commission Wage Order No. 4-2001,
originally and as amended; and unfair business practices in violation of the California Business and
Professions Code §§17200, et seq. They seek, in a jury trial, reimbursement for business expenses and
indemnification for losses, payment of minimum wages for their training periods, payment of moneys due
immediately upon termination under the California Labor Code, disgorgement of profits resulting from
unfair and unlawful business practices, and injunctive relief granting employee status to all of American
Income’s California agents. On October 29, 2009, American Income filed a motion seeking to remove this
litigation from the Superior Court in San Bernadino County to the U.S. District Court for the Central District
of California, Eastern Division. The U.S. District Court remanded the case without prejudice to the Superior
Court and denied American Income’s motion to dismiss on December 15, 2009. On January 19, 2010,
American Income filed a motion to dismiss which was denied by the Superior Court after a hearing held on
March 16, 2010. On September 20, 2010, American Income again filed a motion to remove the case to
federal court based upon jurisdictional grounds that had not been available previously. The Company’s
motion was not successful, however, and the case was remanded back to Superior Court. On January 12,
2011, the Superior Court denied the Company’s motion to exercise the arbitration clauses of those agent
contracts that contain them; the Company has appealed that denial. Discovery is proceeding.
14
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 3,784 shareholders of record on December 31, 2010, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $59.74
Quarter
1
2
3
4
2010
Market Price
Low
High
$53.73 $44.04
48.74
48.33
52.87
56.22
55.16
61.99
Dividends
Per Share
$.15
.15
.15
.16
2009
Market Price
Low
High
$46.32 $17.06
26.21
33.53
40.42
40.62
46.40
46.77
Dividends
Per Share
$.14
.14
.14
.14
Year-end closing price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $43.95
(c) Purchases of Certain Equity Securities by the Issuer and Others for the Fourth Quarter 2010
Period
(a) Total Number
of Shares
Purchased
(b) Average
Price Paid
Per Share
(c) Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
(d) Maximum Number
of Shares (or
Approximate Dollar
Amount) that May
Yet Be Purchased
Under the Plans or
Programs
October 1-31, 2010 . . . . . . . . . . .
November 1-30, 2010 . . . . . . . . .
December 1-31, 2010 . . . . . . . . .
150,410
706,000
802,831
$53.89
58.36
60.91
150,410
706,000
802,831
At its February 25, 2010 meeting, the board of Directors reactivated the Company’s previously
suspended share repurchase program in amounts and with timing that management, in consultation with
the Board, determines to be in the best interest of the Company. The program has no defined expiration
date or maximum shares to be repurchased.
15
(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
$140
$120
$100
$80
$60
$40
$20
$0
12/05
12/06
12/07
12/08
12/09
12/10
Torchmark Corporation
S&P 500
S&P Life & Health Insurance
* $100 invested on 12/31/05 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
Copyright© 2010 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
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.
16
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,
2010
2009
2008
2007
2006
Premium revenue:
Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,663,699 $ 1,591,853 $ 1,544,219 $ 1,495,363 $ 1,448,160
1,237,532
Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
537
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
2,686,229
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
577,460
Net investment income . . . . . . . . . . . . . . . . . .
Realized investment gains (losses) . . . . . . . .
(12,496)
3,269,679
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . .
480,511
Income from continuing operations . . . . . . . .
38,120
Income from discontinued operations . . . . . .
-0-
Loss on disposal, net of tax . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .
518,631
Per common share:
Basic earnings:
1,127,059
622
2,671,900
627,206
(107,541)
3,196,236
429,700
22,559
-0-
452,259
987,421
638
2,651,758
676,364
37,340
3,367,632
522,293
29,784
(35,013)
517,064
1,017,711
541
2,610,105
632,540
(129,492)
3,115,073
386,052
18,901
-0-
404,953
1,236,797
602
2,732,762
601,975
2,281
3,344,517
489,237
38,298
-0-
527,535
Income from continuing operations . . . .
Income from discontinued operations . .
Net income . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings:
Income from continuing operations . . . .
Income from discontinued operations . .
Net income . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared . . . . . . . . . . . . . .
Cash dividends paid . . . . . . . . . . . . . . . . . .
Basic average shares outstanding . . . . . . . .
Diluted average shares outstanding . . . . . . .
6.42
(0.06)
6.36
6.36
(0.06)
6.30
0.62
0.61
81,339
82,082
4.65
0.23
4.88
4.65
0.23
4.88
0.57
0.56
83,034
83,034
4.88
0.26
5.14
4.85
0.26
5.11
0.56
0.55
88,053
88,516
5.19
0.40
5.59
5.10
0.40
5.50
0.52
0.52
94,317
95,846
4.82
0.38
5.20
4.75
0.38
5.13
0.50
0.48
99,733
101,112
As of December 31,
2010
2009
2008
2007
2006
Cash and invested assets . . . . . . . . . . . . . . . $11,563,656 $10,054,764 $ 7,812,992 $ 9,084,312 $ 8,948,162
15,241,428 14,980,355
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
169,736
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt(1) . . . . . . . . . . . . . . . . . . . . . . .
721,248
3,459,193
Shareholders’ equity . . . . . . . . . . . . . . . . . . . .
Per diluted share . . . . . . . . . . . . . . . . . . . . .
34.68
Effect of fixed maturity revaluation on
13,529,050
403,707
622,760
2,222,907
26.24
16,023,759
233,307
919,761
3,398,891
40.87
16,159,762
198,875
913,354
4,016,241
49.86
202,058
721,723
3,324,627
35.60
diluted equity per share(2) . . . . . . . . . . . .
0.83
(3.35)
(12.93)
(0.66)
1.43
Annualized premium in force:
Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic shares outstanding . . . . . . . . . . . . . . . .
Diluted shares outstanding . . . . . . . . . . . . . . .
1,753,046
973,625
2,726,671
79,243
80,543
1,694,402
1,026,560
2,720,962
82,841
83,159
1,625,549
1,098,349
2,723,898
84,708
84,708
1,585,005
1,233,884
2,818,889
92,175
93,383
1,525,077
1,293,081
2,818,158
98,115
99,755
(1)
Includes Torchmark’s 7.1% Junior Subordinated Debentures reported as “Due to affiliates” on the Consolidated Balance Sheets
at year ends 2006 through 2010 in the amount of $123.7 million.
(2) There is an accounting rule requiring available-for-sale fixed maturities to be revalued at fair value each period. The effect of
this rule on diluted equity per share reflects the amount added or (deducted) under this rule 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.
17
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
Discontinued Operations: As described in Note 3—Discontinued Operations in the Notes to the
Consolidated Financial Statements, we sold our subsidiary United Investors Life Insurance Company
(United Investors) as of December 31, 2010. Because of the sale, United Investors’ financial results are
excluded from this discussion since those operations are discontinued.
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 14—Business Segments in the
line segments involve the marketing,
Notes to the Consolidated Financial Statements,
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 14—Business Segments reconcile Torchmark’s revenues and expenses by
segment to its major income statement line items for each of the years in the three-year period ending
the profitability measures that
December 31, 2010. Additionally,
demonstrates year-to-year comparability and which reconciles to net
income. That summary is
reproduced below from the Consolidated Financial Statements to present our overall operations in the
manner that we use to manage the business.
this Note provides a summary of
18
Analysis of Profitability by Segment
(Dollar amounts in thousands)
2010
2009
2008
Change %
Change %
2010
2009
Life insurance underwriting margin . . . . . . . . . . . . . . . . . . . . . . . . . $ 455,266 $ 427,412 $ 414,025 $ 27,854
(351)
Health insurance underwriting margin . . . . . . . . . . . . . . . . . . . . . .
-0-
Annuity underwriting margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,036 332
Other insurance:
194,711
-0-
170,059
1,348
170,410
312
7 $ 13,387
3
(24,301) (12)
312
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Administrative expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,834
(155,615)
297,145
(29,810)
2,914
(150,325)
275,650
(19,450)
4,154
(156,164)
303,529
(21,278)
(3)
(80)
4
(5,290)
21,495
8
(10,360) 53
(1,240) (30)
(4)
5,839
(9)
(27,879)
(9)
1,828
Pre-tax total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Applicable taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
741,227
(243,204)
706,923
(238,153)
738,977
(248,225)
34,304
(5,051)
After-tax total, before discontinued operations . . . . . . . .
Discontinued operations (after tax) . . . . . . . . . . . . . . . . . . . . . . . . .
498,023
27,932
468,770
26,810
490,752
22,535
29,253
1,122
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains (losses) (after tax)* . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains (losses)—discontinued operations (after tax) . . . .
Loss on disposal of discontinued operations (after tax)
. . . . . . . .
Gain on sale of agency buildings, net of tax . . . . . . . . . . . . . . . . . .
Tax settlements (after tax) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds (cost) from legal settlements (after tax) . . . . . . . . . .
Loss on writedown of Company-occupied property (after tax) . . .
525,955
24,270
1,852
(35,013)
-0-
-0-
-0-
-0-
495,580
(85,345)
(7,909)
-0-
-0-
2,858
-0-
(231)
513,287
30,375
(69,902) 109,615
9,761
(35,013)
-0-
(2,858)
-0-
231
24
-0-
181
10,823
(770)
(1,384)
5
2
6
4
6
(32,054)
10,072
(4)
(4)
(21,982)
(4)
4,275 19
(3)
(17,707)
(15,443)
(7,933)
-0-
(181)
(7,965)
770
1,153
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 517,064 $ 404,953 $ 452,259 $112,111
28 $(47,306) (10)
* See the discussion of Realized Gains and Losses in this report.
Torchmark’s operations on a segment-by-segment basis are discussed in depth under
the
appropriate captions following in this report.
Summary of Operations: Net income rose 28% or $112 million in 2010 to $517 million. In 2009,
net income declined $47 million or 10% to $405 million from $452 million. On a diluted per share basis,
2010 net income increased 29% to $6.30. In 2009, per share net income declined 5% to $4.88. Included
in 2010 results is the $35 million after tax loss on the disposal of United Investors, representing $.43 per
diluted share.
The major contributor to the growth in 2010 earnings compared with the previous two years was in
realized investment gains and losses, as 2010 had net gains of $24 million compared with net losses of
$85 million in 2009 and $70 million in 2008. The losses in 2009 and 2008 included a number of
writedowns of fixed-maturity securities that were determined to be other-than-temporarily impaired. In
2009, after-tax realized investment losses reduced per share earnings $1.03, of which $1.13 per share
related to other-than-temporary impairments of fixed maturities. In 2008, after-tax losses accounted for
$.79 per share, of which $.78 related to fixed maturity other-than-temporary impairments. In 2010, we had
realized investment gains which added $.30 to per diluted share earnings, even though there was an
other-than-temporary impairment writedown of $.04 per share that offset the net gains for the period.
Another important
factor in 2010 earnings growth was a $21 million or 8% growth in our excess
investment income, the measure of profitability of our investment segment. In 2009, excess investment
income declined $28 million or 9%. Poor economic conditions in 2009, especially early in the year,
caused us to hold a significant portion in low-yielding cash and short-term investments for increased
liquidity. Excess investment income was also negatively affected in 2009 because of our issuance of a
$300 million 9 1⁄4% debt security in June, 2009 (net proceeds of $296 million) and repayment of a $99
million 8 1⁄4% security which matured in August, 2009. These transactions resulted in a net increase in our
financing costs in 2009 and reduced excess investment income. Results in our core life insurance
segment rose 7% in 2010 to $455 million and also increased 3% in 2009, largely as a result of premium
growth in both years. The life segment is our largest contributor to operating results. Earnings from our
health operations stabilized in 2010 after two years of declines. This segment has experienced intense
competition in recent periods resulting in significant declines in agent counts, which in turn has resulted in
19
lower sales of new health products. Health underwriting margins were flat at $170 million in 2010 after
having declined $24 million or 12% in 2009.
Total revenues increased 8% in 2010 to $3.37 billion. In 2009, total revenues declined 3% to $3.12
billion from $3.20 billion in 2008. Life premium rose 5% or $72 million in 2010 and $48 million in 2009. Net
investment income rose $44 million in 2010, compared with $5 million in 2009. However, growth in
revenues in 2009 and 2008 were negatively affected by the aforementioned pretax realized investment
losses and declines in health premium, described further under this caption.
While life insurance premium has grown steadily in each of the three years ending December 31,
2010, margins as a percentage of premium have also held steady each year at 27% of premium. Life net
sales rose 1% in 2010 to $330 million and 10% in 2009 to $326 million. Life insurance segment results
are discussed further under the caption Life Insurance.
We market three primary health insurance products: Medicare Supplement insurance, the Medicare
Part D prescription drug benefit, and under-age-65 limited-benefit health insurance. Health premium
declined 3% in 2010 to $987 million from $1.02 billion in 2009. Health premium declined 10% in 2009. The
decreases in both years were caused by the decline in agent count and poor persistency. Agent turnover
has increased as lower premium, lower margin products offered by competitors have provided agents with
products that are easier to sell. Turnover has also increased due to the Company’s decision to
deemphasize the marketing of certain limited-benefit products. Sales of these de-emphasized products
were discontinued altogether after September, 2010. Declines in these agent counts have resulted in lower
net sales, which in turn have pressured premium growth. Medicare Supplement remains our largest
contributor to total health premium, but increased competition has also dampened sales of this product in
recent years, resulting in premium declines in each successive year. Our Medicare Part D premium rose
14% in 2010, after having increased 5% in 2009. However, as most of the country’s Part D enrollees
selected a plan provider in 2006, we do not expect significant growth in our Part D business going forward.
See the discussion under Health Insurance for a more detailed discussion of health insurance results.
We offer fixed annuities, but we do not emphasize sales of annuity products, favoring life insurance
instead. With the sale of United Investors, we disposed of 37% of our annuity deposit balance. 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 $21 million in 2010 but declined $28 million in 2009. Profitability in this segment is based on three
major components: net investment income, required interest on net policy liabilities (interest applicable to
insurance products), and financing costs. In recent years, growth in net investment income has been
restricted in relation to the growth in the size of our portfolio. However, in 2010, the growth in net investment
income exceeded the growth in the average portfolio (amortized cost) for the first time in many years,
primarily as a result of the special constraints on the growth in net investment income in 2009 noted below.
One reason that investment income has grown at a lower rate than mean invested assets has grown in
recent years is that new investments have been made at yield rates lower than the yield rates earned on
securities that matured or were otherwise disposed of. Also, there is sometimes a lag between the time
when proceeds from maturities and dispositions are received and when the proceeds are reinvested, in
which the funds are held in cash. Growth in total investment income has also been somewhat negatively
affected by Torchmark’s share repurchase program (described later under this caption), which has diverted
cash that could have otherwise been used to acquire investments. During 2009, due primarily to uncertainty
about liquidity in the financial markets, we held significantly more cash and short term investments than we
normally would. Additionally, in 2009, we sold a significant portion of higher-yielding but lower-rated fixed
maturities and reinvested the proceeds in lower-yielding but higher-rated bonds in 2009 and early 2010 to
improve our risk-adjusted return. These factors contributed to reduced 2009 net investment income.
The interest required on net policy liabilities is deducted from net investment income, and generally
grows in conjunction with the insurance policy reserves that are supported by the invested assets. Financing
costs, which consist of the interest required for debt service on our long and short-term debt, are also
deducted from net investment income. In 2010, interest expense on our long-term debt rose $9 million after
increasing $11 million in 2009. As noted earlier during 2009, we issued our $300 million 9 1⁄4% Senior Notes
but repaid our $99 million 8 1⁄4% Senior Debentures, resulting in a higher balance of debt outstanding at a
20
higher interest rate. However, this segment has benefited from lower short-term financing costs in each
successive year, as these costs have declined primarily due to lower rates on our short-term debt.
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 94% of our invested assets at fair value consists of fixed maturities of which
93% was investment grade at December 31, 2010. The average quality rating of the portfolio was BBB+.
The portfolio contains no securities backed by sub prime or Alt-A mortgages, no direct investment in
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 4—Investments in the Notes to Consolidated Statements of Operations for a more
detailed discussion of this segment.
As described earlier in this summary, we wrote down certain fixed maturity and equity securities in
each of the years 2008 through 2010, as these securities met our criteria for other-than-temporary
impairment. The pretax impairment losses were $5 million, $143 million, and $106 million in 2010, 2009,
and 2008, respectively. Please refer to Note 4—Investments in the Notes to Consolidated Financial
Statements under the caption Other-than-temporary impairments and under the caption Realized Gains
and Losses in this report 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
gains of $24 million in 2010 ($.30 per share), realized investment losses of $85 million in 2009 ($1.03 per
share), and $70 million in 2008 ($.79 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 14—
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.
As mentioned earlier, we used a portion of the $296 million proceeds from the offering of our 9 1⁄4%
Senior Notes ($300 million par amount) in 2009 to repay our $99 million 8 1⁄4% Senior Debentures which
also matured in 2009. In addition, we also used $175 million to strengthen the capital position of certain of
our insurance subsidiaries in 2009 in the form of capital contributions and surplus notes. The regulatory
capital positions of these subsidiaries had been negatively affected by rating-agency downgrades of
bonds in their investment portfolios. The subsidiaries in turn invested these funds in investment-grade
fixed maturities. More information on these transactions can be found in Note 11—Debt in the Notes to
Consolidated Financial Statements and in our discussion of Capital Resources in this report.
In each of the years 2008 and 2009, income from continuing operations 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 certain litigation
issues in 2008 and 2009 in which we either received settlements net of expenses or incurred settlement
losses and expenses. These issues resulted in a net after-tax charge of $770 thousand in 2008.
Additionally, as described under the same caption of Note 1, we received tax settlements in each year in
the amounts of $2.9 million in 2009 and $10.8 million in 2008. 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 and litigation expenses pertaining to current operations are included in either
insurance administrative expenses or parent expenses, as appropriate, in our segment analysis. Income
from litigation settlements is included in other income. As explained in Note 4—Investments under the
caption Other-than-temporary impairments, we wrote down certain company-occupied property to fair
value during both 2009 and 2008. The write downs resulted in after-tax charges of $231 thousand in 2009
and $1.4 million in 2008.
Torchmark has in place an ongoing share repurchase program which began in 1986. 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
21
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.
Due to economic conditions in late 2008 and early 2009, we temporarily suspended our share repurchase
program in the first quarter of 2009. However, in the first quarter of 2010, the Board of Directors
reactivated the Company’s previously suspended share repurchase program in amounts and with timing
that management, in consultation with the Board, determines to be in the best interest of the Company.
The following chart summarizes share purchase activity for each of the three years ended December 31,
2010.
Analysis of Share Purchases
(Amounts in thousands)
Purchases
2010
Shares Amount
2009
2008
Shares Amount Shares Amount
Excess cash flow and borrowings . . . . . . . . . . . . . . . .
Option proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,805
716
$203,566
42,440
2,050
20
$46,695
869
7,638
487
$426,640
29,096
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,521
$246,006
2,070
$47,564
8,125
$455,736
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 2010 life premium
largest
representing 63% of total premium. Life underwriting income before other income and administrative
expense represented 73% of the total in 2010. Additionally, investments supporting the reserves for life
products result in the majority of excess investment income attributable to the investment segment.
We have been in the process of combining selected United American (UA) Exclusive Agency Branch
Offices with the Liberty National Exclusive Agency. For this reason, all data will be reported on a
combined basis in this report.
Life insurance premium rose 5% to $1.66 billion in 2010 after having increased 3% in 2009 to $1.59
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 . . . . . . . . . . . . . . . . . . . . . . . .
2010
2009
2008
Amount
$ 566,604
560,649
294,587
241,859
% of
Total
Amount
% of
Total
Amount
34% $ 536,878
507,899
34
298,485
18
248,591
14
34% $ 511,165
473,784
32
304,262
19
255,008
15
% of
Total
33%
31
20
16
$1,663,699
100% $1,591,853
100% $1,544,219
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
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
22
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 $1.75 billion at December 31, 2010, an increase of 3% over
$1.69 billion a year earlier. Annualized life premium in force was $1.63 billion at December 31, 2008.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
2009
2008
Amount
$136,653
137,554
44,763
10,561
% of
Total
Amount
% of
Total
Amount
41% $131,566
127,688
42
55,146
14
11,518
3
40% $123,076
108,353
39
54,784
17
11,083
4
% of
Total
41%
37
18
4
$329,531
100% $325,918
100% $297,296
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
2009
2008
Amount
$ 89,542
110,751
34,845
10,364
% of
Total
Amount
% of
Total
Amount
37% $ 84,775
95,693
45
35,137
14
10,313
4
37% $ 80,075
82,063
42
33,299
16
11,016
5
% of
Total
39%
40
16
5
$245,502
100% $225,918
100% $206,453
100%
Direct Response 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.
The insert media area targets primarily the adult market. It involves placing insurance solicitations as
advertising inserts into a variety of media, such as coupon packets, newspapers, bank statements, and
billings.
23
The Direct Response operation accounted for 34% of our life insurance premium during 2010, the
largest of any distribution group. Life premium for this channel rose 6% in 2010 and 5% in 2009. Net
sales rose 4% in 2010 to $137 million after a 7% gain in 2009 to $132 million. First-year collected
premium increased 6% in 2010 to $90 million after a 6% gain in 2009.
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 Torchmark’s highest profit margin
business. Life premium for this agency rose 10% to $560 million in 2010, after having increased 7% in
2009. Net sales increased 8% in 2010 to $138 million from $128 million in 2009, as this agency was
Torchmark’s largest contributor to life net sales in 2010. Net sales rose 18% in 2009. First-year collected
premium rose 16% in 2010 to $111 million, after having increased 17% in 2009. 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. The American Income agent count was 3,912 at December 31, 2010 compared
with 4,154 a year earlier, a decline of 6%. However, the agent count rose 35% in 2009 from 3,085 at year
end 2008, after having risen 21% in 2008. 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.
As previously mentioned, we have combined selected UA Exclusive Agency Branch Offices into the
Liberty National Exclusive Agency. This Agency markets primarily low-face amount life insurance and
supplemental health insurance to middle-income customers. Life premium income for this agency was
$295 million in 2010, a 1% decrease compared with $298 million in 2009. Life premium for this agency
declined 2% in 2009 from 2008. First-year collected premium on a combined basis declined 1% to $35
million in 2010, after having increased 6% in 2009.
The Liberty Agency’s net sales declined 19% to $45 million in 2010, after having increased 1% a year
earlier. This agency had 2,001 producing agents at December 31, 2010, compared with 2,471 a year
earlier, a decline of 19%. The agent count at Liberty had also declined 51% in 2009 from 5,020. The
decrease in agent count has been due in part to the closing of several offices which have had low
production. In addition, agent compensation issues that arose in 2009 have negatively impacted agent
counts. A two-tier bonus threshold proved more difficult for producing agents to meet than anticipated.
Management reverted to a level bonus threshold later in 2009. Also, due to deteriorating first-year
persistency on business written during 2008 and early 2009, management modified compensation
incentives in 2009 to place more emphasis on the persistency of newly issued policies. This resulted in the
departure of a number of the less productive agents but improved first year persistency.
The Liberty Exclusive Agency agent counts have also decreased due to issues related to its health
insurance business. Until recently, the agency’s health insurance marketing efforts had been focused on
limited-benefit hospital-surgical plans. These plans were subject to intense competition which ultimately
resulted in decreases in agent counts. In addition, these limited-benefit hospital-surgical plans became
less marketable due to healthcare reform developments. Sales of these limited-benefit hospital/surgical
plans were discontinued after September, 2010. In response, the agency has shifted its marketing focus
to a product mix more weighted towards life insurance and supplemental health insurance products (not
affected by healthcare reform) that have higher margins and persistency. We believe this will increase the
Agency’s profitability and stability in the long run.
We also offer life insurance through Other Agencies consisting of the Military Agency, the United
American Independent Agency, and other small miscellaneous sales agencies. The Military Agency
consists of a nationwide independent agency whose sales force is comprised primarily of former military
officers who have historically sold primarily to commissioned and noncommissioned military officers and
their families. This business consists of whole-life products with term insurance riders. Military premium
represented 12% of life premium. The United American Independent Agency represented less than 2% of
Torchmark’s total
life premium. This agency is focused on health insurance, with life sales being
incidental.
24
LIFE INSURANCE
Summary of Results
(Dollar amounts in thousands)
2010
% of
2009
% of
Amount
Premium Amount
Premium Amount
2008
% of
Premium
Premium and policy charges . . . . . . . . . $1,663,699
100% $1,591,853
100% $1,544,219
100%
Policy obligations . . . . . . . . . . . . . . . . . .
Required interest on reserves . . . . . . . .
1,082,423
(434,319)
65
(26)
1,040,249
(410,917)
65
(26)
1,015,494
(389,526)
66
(25)
Net policy obligations . . . . . . . . . . . . .
Commissions and premium taxes . . . . .
Amortization of acquisition costs . . . . . .
648,104
72,559
487,770
Total expense . . . . . . . . . . . . . . . . . . .
1,208,433
39
5
29
73
629,332
72,272
462,837
1,164,441
39
5
29
73
625,968
69,295
434,931
1,130,194
41
4
28
73
Insurance underwriting margin before
other income and administrative
expenses . . . . . . . . . . . . . . . . . . . . . . . $ 455,266
27% $ 427,412
27% $ 414,025
27%
Gross margins, as indicated by insurance underwriting margin before other
income and
administrative expense, rose 7% in 2010 to $455 million after rising 3% in 2009. As a percentage of life
insurance premium, gross margins have been stable each year at 27%. Margin growth in all periods was
primarily the result of premium growth.
Health Insurance. Health insurance sold by Torchmark includes primarily Medicare Supplement
and Part D prescription drug coverage to enrollees in the federal Medicare program, cancer coverage,
and accident coverage. All health coverage plans other than Medicare Supplement and Part D are
classified here as limited-benefit plans. For several years, our primary health insurance product had been
hospital/surgical plans. However, as previously mentioned,
to intense
competition which resulted in decreasing agent counts. In addition, these plans became less marketable
due to healthcare reform developments. These factors contributed to the Company’s decisions to de-
emphasize and discontinue the marketing of
In 2010, Medicare Supplement sales
exceeded those of the limited-benefit products for the first time since 2001, and represented 56% of
health net sales exclusive of Medicare Part D. Medicare Supplement sales have been stronger than
limited-benefit sales due in part to changes in agent counts in our health distribution groups discussed
below.
these plans became subject
these products.
25
Total health premium represented 37% of Torchmark’s total premium income in 2010. Excluding Part
D premium, health premium represented 32% in 2010, compared with 34% in 2009 and 38% in 2008.
Health underwriting margin, excluding Part D, accounted for 24% of the total in 2010, compared with 26%
in 2009 and 29% in 2008. 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. As mentioned previously,
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)
2010
2009
2008
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
United American Independent Agency
Limited-benefit plans . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
Medicare Supplement
$ 47,244
267,280
314,524
40%
$
60,292
266,150
326,442
$
78,973
277,880
356,853
39%
37%
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
201,037
130,019
331,056
78,141
918
79,059
398
53,930
54,328
Total Premium (Before Part D)
Limited-benefit plans . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
Medicare Supplement
326,820
452,147
243,568
144,954
388,522
74,015
1,082
75,097
438
46,117
46,555
378,313
458,303
46
9
6
45
55
311,686
164,219
475,905
72,149
1,274
73,423
478
44,645
45,123
463,286
488,018
50
8
5
49
51
43
10
7
42
58
Total Premium (Before Part D) . . . . . .
778,967
100%
836,616
100%
951,304
100%
Medicare Part D*
208,970
Total Health Premium* . . . . . . . . . . . .
$987,937
183,586
$1,020,202
175,633
$1,126,937
*
Total Medicare Part D premium and health premium exclude $.5 million in 2010 and $2.5 million in 2009 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, increasing premium. 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.
26
We market supplemental health insurance products through a number of distribution channels with
the United American Independent Agency being our market leader. 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)
2010
2009
2008
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
United American Independent Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . . .
$ 4,596
27,444
$ 12,256
30,431
$ 23,084
14,517
32,040
50%
42,687
44%
37,601
27%
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 . . . . . . . . . . . . . . . . . . . .
10,385
3,804
14,189
13,081
-0-
13,081
549
4,548
5,097
Total Net Sales (Before Part D)
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . . .
28,611
35,796
25,306
4,461
29,767
13,393
-0-
13,393
665
10,233
10,898
51,620
45,125
31
14
11
53
47
76,213
7,518
83,731
11,848
-0-
11,848
325
5,498
5,823
111,470
27,533
60
9
4
80
20
22
20
8
44
56
Total Net Sales (Before Part D) . . . . . . . .
64,407
100%
96,745
100% 139,003
100%
Medicare Part D* . . . . . . . . . . . . . . . . . . . . . . . . . . .
38,799
Total Health Net Sales . . . . . . . . . . . . . . .
$103,206
43,004
$139,749
28,292
$167,295
*
Net sales for Medicare Part D represents only new first-time enrollees.
27
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)
2010
2009
2008
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
United American Independent Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . .
$ 5,638
29,999
$ 11,459
16,066
$ 20,360
15,495
35,637
47%
27,525
35%
35,855
26%
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)
Limited-benefit plans . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . .
Total (Before Part D) . . . . . . . . . . . . . . .
Medicare Part D* . . . . . . . . . . . . . . . . . . . . . . . . .
12,435
3,324
15,759
13,965
-0-
13,965
488
9,162
9,650
32,526
42,485
75,011
48,945
21
19
13
43
57
100%
28,003
4,973
32,976
12,996
-0-
12,996
384
4,251
4,635
52,842
25,290
78,132
26,708
Total First-Year Collected Premium . . .
$123,956
$ 104,840
77,917
8,010
85,927
12,316
-0-
12,316
437
4,102
4,539
62
9
3
111,030
27,607
80
20
42
17
6
68
32
100% 138,637
100%
16,655
$155,292
*
First-year collected premium for Medicare Part D represents only premium collected from new first-time enrollees in their first
policy year.
The Medicare Part D Health product will be presented and discussed separately in this report.
Health insurance, excluding Medicare Part D. As noted under the caption Life Insurance, we have
emphasized life insurance sales relative to health, due to life’s superior margins and other benefits. Our
health distribution groups have also encountered increased competition in recent periods. The increased
competition has led to losses in agents in our Liberty Exclusive Agency and Independent Agencies. Agent
turnover has increased as lower premium, lower margin products offered by competitors have provided
agents with products that are easier to sell. Turnover has also increased due to the Company’s decision
to deemphasize the marketing of certain limited-benefit products as previously discussed. The marketing
of these products was discontinued altogether after September, 2010. Declines in these agent counts
have resulted in lower net sales, which in turn have pressured premium growth. Health premium,
excluding Part D premium, fell 7% to $779 million in 2010, after declining 12% in 2009. Medicare
Supplement premium declined 1% to $452 million in 2010, compared with a 6% decline in 2009. Other
limited-benefit health premium dropped 14% in 2010 to $327 million, after a decline of 18% in 2009 and
9% in 2008. Net sales, excluding Medicare Part D, declined 33% to $64 million in 2010. Net sales fell
30% in 2009 to $97 million. Medicare Supplement net sales fell 21% in 2010, but rose 64% in 2009. Other
health net sales continued to decline, falling 45% in 2010 and 54% in 2009. First year collected premium
also declined in both 2010 and 2009.
28
Medicare Supplement provides the greatest amount of health premium, partially because Medicare
Supplement products are generally more persistent than the limited-benefit products, but also because of
more stable sales in recent periods. Medicare Supplement premium represented 58% of non-Part D
health premium in 2010, compared with 55% in 2009 and 51% in 2008.
The Liberty National Exclusive Agency is Torchmark’s largest in terms of health premium income.
In 2010, this Agency represented 43% of all Torchmark non-Part D income health premium at $331
million. The Liberty Agency markets Medicare Supplements and limited-benefit health products including
cancer insurance. In 2010, health premium income in this Agency declined 15% from prior year premium
of $389 million. Premium also fell 18% in 2009 from $476 million. First-year collected premium declined
52% to $16 million in 2010, after declining 62% a year earlier. As noted earlier, increased competition in
the health insurance market and our de-emphasis of certain health products has caused declines in agent
counts. Marketing of the de-emphasized products was discontinued altogether after September, 2010.
The decline in agent counts has resulted in decreased new sales, translating into declines in premium.
Net sales for 2010 declined 52% from $30 million in 2009 to $14 million. In 2009, this Agency’s net sales
fell 64%. Also discussed under the Life Insurance caption are efforts designed to strengthen this 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. Torchmark had 1,406 active producing agents at December 31,
2010. This agency is our largest distributor of non-Part D health insurance in terms of health net sales,
representing 50% in 2010. This agency is also our largest carrier of Medicare Supplement insurance, with
$267 million or 59% of our Medicare Supplement premium income in 2010. Net sales for this Agency dropped
25% to $32 million in 2010, after having gained 14% to $43 million in 2009. Medicare Supplement net sales of
$27 million declined 10% from $30 million a year earlier. Medicare Supplement net sales had more than
doubled in 2009 over net sales of $15 million in 2008. The increases in 2009 were due to increases in group
Medicare Supplement sales. Group Medicare Supplement sales fluctuate greatly from period to period and do
not indicate a trend. Total health premium income for the UA Independent Agency was $315 million in 2010, a
4% decline from 2009 premium of $326 million. Premium income also declined 9% in 2009 from 2008. These
declines in premium have resulted as new sales have not compensated for lapses.
The American Income Exclusive Agency, predominantly a life insurance distribution channel, is
our third largest health insurance distributor based on 2010 premium collected. Its health plans are
comprised of various limited-benefit plans. Approximately 70% of the agency’s 2010 health premium was
from accident policies. Sales of the 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 5% in 2010 to $79 million, after having increased 2% to $75
million in 2009. Net health sales were $13 million in both 2010 and 2009, compared with $12 million in
2008. Net health sales comprised 9% of the American Income Agency’s total net sales in 2010.
Direct Response, primarily a life operation, also offers health insurance, which is predominantly
Medicare Supplements sold directly to employer or union sponsored groups. In 2010, net health sales
were $5 million, comprising approximately 4% of Direct Response’s total life and health net sales. Direct
Response health premium income has risen each year over the prior year. Health premium rose 17% in
2010 to $54 million and 3% in 2009.
Medicare Part D.
Torchmark, through its subsidiary United American, offers coverage under the
government’s Medicare Part D plan. 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 $209 million in 2010, compared with $184 million in 2009, an increase of
14%. Part D premium rose 5% in 2009. Changes in Part D premium generally result from changes in the
29
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 31, 2010, United American had
approximately 144 thousand enrollees for the 2011 Part D plan, compared with 158 thousand for the 2010
plan year and 147 thousand for the 2009 plan year. Our Medicare Part D product is sold primarily through
the Direct Response operation, but is also sold to groups through the UA Independent agency. Part D net
sales were $39 million in 2010, compared with $43 million in 2009 and $28 million in 2008. We count only
sales to new first-time enrollees in net sales, and the majority of premium income was from previous
enrollees.
We believe that the Medicare Part D program is a meaningful component of 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
significant growth in the Part D product in the near future, as most Medicare beneficiaries have already
chosen a plan. Additionally, as with any government-sponsored program, the possibility of regulatory
changes could change the outlook for this market.
30
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
2010
Premium** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $778,967
100% $208,970
100% $ 987,937
100%
Policy obligations** . . . . . . . . . . . . . . . . . . . . . . . . . .
Required interest on reserves . . . . . . . . . . . . . . . . .
497,576
(35,368)
Net policy obligations . . . . . . . . . . . . . . . . . . . . . .
462,208
Commissions and premium taxes . . . . . . . . . . . . . .
Amortization of acquisition costs . . . . . . . . . . . . . . .
44,960
126,052
Total expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
633,220
64
(5)
59
6
16
81
172,131
-0-
172,131
8,341
4,186
184,658
82
-0-
82
4
2
88
669,707
(35,368)
634,339
53,301
130,238
817,878
68
(4)
64
6
13
83
Insurance underwriting income before other
income and administrative expenses . . . . . . . . . $145,747
19% $ 24,312
12% $ 170,059
17%
Health*
% of
Premium
Medicare
Part D
% of
Premium
Total
Health
% of
Premium
2009
Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $836,616
100% $183,586
100% $1,020,202
100%
Policy obligations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Required interest on reserves . . . . . . . . . . . . . . . . .
528,189
(34,243)
Net policy obligations . . . . . . . . . . . . . . . . . . . . . .
493,946
Commissions and premium taxes . . . . . . . . . . . . . .
Amortization of acquisition costs . . . . . . . . . . . . . . .
50,114
143,299
Total expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
687,359
63
(4)
59
6
17
82
151,621
-0-
151,621
6,960
3,852
162,433
82
-0-
82
4
2
88
679,810
(34,243)
645,567
57,074
147,151
849,792
67
(3)
64
5
14
83
Insurance underwriting income before other
income and administrative expenses . . . . . . . . . $149,257
18% $ 21,153
12% $ 170,410
17%
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 other than Medicare Part D.
Total Medicare Part D premium and health premium excludes $516 thousand in 2010 and $2.5 million in 2009 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, increasing premium. 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.
31
Torchmark’s health insurance underwriting margin before other income and administrative expense
declined 12% in 2009 to $170 million but stabilized in 2010, remaining flat at $170 million. As a
percentage of premium income, margins were stable in all periods at approximately 17%.
Annuities. As described in Note 3—Discontinued Operations, we sold our subsidiary United
Investors. United Investors was our carrier of variable annuities and a primary carrier of fixed annuities.
As a result of
the sale, we disposed of approximately 37% of our annuity deposit balance as of
December 31, 2010, including all variable annuities. These balances have been reported as “Held for
Sale” on the Consolidated Balance Sheets of prior periods. Accordingly, we do not expect that annuities
will be a significant portion of our business or marketing strategy going forward.
Our fixed annuity balances at the end of 2010, 2009, and 2008 were $1.24 billion, $959 million, and
$817 million, respectively.
An analysis of underwriting income is as follows.
ANNUITIES
Summary of Results
(Dollar amounts in thousands)
At December 31,
2010
2009
2008
Policy charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
638 $
541 $
622
Policy obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Required interest on reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41,430
(51,996)
35,762
(41,840)
27,458
(29,853)
Net policy obligations* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(10,566)
(6,078)
(2,395)
Commissions and premium taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
134
9,722
Total expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(710)
267
6,040
229
141
2,876
622
Insurance underwriting margin before other income and administrative
expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,348 $
312 $
0
*
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.
While the fixed annuity account balance has increased each year over the prior year, policy charges
and underwriting income have fluctuated only modestly. 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 considerable 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. In both 2010 and 2009, the spreads for fixed annuities increased
over the prior year as a result of credited rate reductions on the inforce annuities. Furthermore, spreads
were increased by the introduction of a new annuity form on Liberty National paper in mid-2009. The
amortization of deferred acquisition costs also rose as these costs are amortized in relation to gross
profits.
32
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, 2010.
Operating Expenses Selected Information
(Dollar amounts in thousands)
2010
2009
2008
Amount
% of
Prem.
Amount
% of
Prem.
Amount
% of
Prem.
Insurance administrative expenses:
Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 71,827
33,839
Other employee costs . . . . . . . . . . . . . . . . . . . .
40,904
Other administrative expense . . . . . . . . . . . . .
Legal expense—insurance . . . . . . . . . . . . . . . .
6,727
Medicare Part D direct administrative
2.7%
1.3
1.5
.3
$ 73,133
27,105
39,476
8,342
2.8%
1.1
1.5
.3
$ 68,850
31,510
45,212
8,561
2.5%
1.2
1.7
.3
expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,318
.1
2,269
.1
2,031
.1
Total insurance administrative expenses . . . .
155,615
5.9%
150,325
5.8%
156,164
5.8%
Parent company expense . . . . . . . . . . . . . . . . . . . .
Stock compensation expense . . . . . . . . . . . . . . . . .
Expenses related to settlement of prior period
litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on writedown of Company-occupied
property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,809
11,848
-0-
-0-
Total operating expenses, per Consolidated
9,590
9,860
-0-
355
10,455
10,823
2,522
2,129
Statements of Operations . . . . . . . . . . . . . . . $176,272
$170,130
$182,093
Insurance administrative expenses:
Increase (decrease) over prior year
. . . . . . . .
3.5%
Total operating expenses:
Increase (decrease) over prior year
. . . . . . . .
3.6%
(3.7)%
(6.6)%
4.1%
7.8%
Insurance administrative expenses rose 4% in 2010, after having declined 4% in 2009. As a
percentage of premium, they increased to 5.9% in 2010 from 5.8% in both 2009 and 2008. The 2010
increase was caused primarily by higher employee costs, mostly related to higher employee health
benefit costs. Partially offsetting the increase in employee costs was a decline in legal costs, as we
favorably settled certain previously reserved litigation during 2010. In 2009, increases in salaries were
more than offset by declines in other administrative costs and other employee costs. As a result of the
effort to achieve greater consistency in expense classification among our subsidiaries, we deferred $12
million more of deferrable administrative expense to acquisition expense in 2009 compared with 2008.
These reductions in administrative expense were partially offset by increases in pension and other
employee benefit costs during the period.
33
As mentioned in Note 1—Significant Accounting Policies in the Notes to Consolidated Financial
Statements, we settled litigation for $2.5 million in 2008 relating to issues occurring many years ago. As
previously noted, we do not consider the costs of settling litigation applicable to prior periods to be related to
current insurance operations. Stock compensation expense declined in 2009, primarily as a result of the
lower stock price caused by the severe market decline in 2009 and the effect it had on values at the time of
our annual stock and stock option grants for 2009. Expense related to the new 2009 grants replaced the
expense for costlier older grants that became fully vested. Stock compensation expense rose in 2010 as
market conditions improved, resulting in higher values for stock and option grants in 2010. Management
believes that stock compensation expense will increase slightly in 2011. As stated in Note 14—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 4—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 in 2008 and $355 thousand in 2009
which are included in Operating expenses in the Consolidated Statements of Operations in the respective
year.
Investments. We manage our capital resources including investments, debt, and cash flow through
the investment segment. Excess investment income represents the profit margin attributable to investment
operations. It is the measure that we use to evaluate the performance of the investment segment as
described in Note 14—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 over $4.2 billion of
cash flow to repurchase Torchmark shares after determining that the repurchases provided a greater return
than other 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.
34
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)
2010
2009
2008
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Reclassification of low income housing expense . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification of interest amount due to deconsolidation* . . . . . . . . . . . . . . .
676,364 $
9,153
(264)
632,540 $ 627,206
-0-
(264)
-0-
(264)
Adjusted investment income (per segment analysis) . . . . . . . . . . . . . . . . .
685,253
632,276
626,942
Interest credited to net insurance policy liabilities:
Interest on reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(521,683)
208,840
(487,000)
200,042
(451,408)
190,960
Net required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(312,843)
(286,958)
(260,448)
Financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(75,265)
(69,668)
(62,965)
Excess investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
297,145 $
275,650 $ 303,529
Excess investment income per diluted share . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3.62 $
3.32 $
3.43
Mean invested assets (at amortized cost) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,836,788 $10,012,673 $9,497,004
4,810,093
Average net insurance policy liabilities** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
945,508
Average debt and preferred securities (at amortized cost) . . . . . . . . . . . . . . . .
5,279,621
1,111,940
5,736,662
1,112,147
*
Deconsolidation of trusts liable for Trust Preferred Securities required by accounting guidance. See Note 11—Debt in the Notes to
Consolidated Financial Statements.
** Net of deferred acquisition costs, excluding the associated unrealized gains and losses thereon.
Excess investment income increased $21 million or 8% in 2010 over the prior year. Excess investment
income declined $28 million or 9% in 2009. On a per diluted share basis, excess investment income rose
9% to $3.62 per share in 2010, after having declined 3% in the prior year. Share purchases caused the 2010
increase in per share excess investment income to be greater than the dollar amount of increase. Likewise,
those purchases also caused the decline in per share excess investment income in 2009 to be less than the
decline in the dollar amount.
The largest component of excess investment income is net investment income, which rose 8% to $685
million in 2010. It increased 1% to $632 million in 2009 from $627 million in 2008. Presented in the following
chart is the growth in net investment income compared with the growth in mean invested assets.
Growth in net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Growth in mean invested assets (at amortized cost) . . . . . . . . . . . . . .
8.4% .9% 4.1%
5.4
8.2
5.0
2010 2009 2008
In 2010, the growth in net investment income exceeded the growth in mean invested assets (at amortized
cost) for the first time in many years. One of the primary reasons that investment income has grown at a
lower rate than mean invested assets has grown in recent years is that new investments have been made at
yield rates lower than the yield rates earned on securities that matured or were otherwise disposed of.
Another factor that has contributed to the relatively slower growth rate of investment income is the time lag
between the date proceeds from maturities and dispositions are received and the date such proceeds are
reinvested. During these lags, we have held cash at lower yields. One of the most important factors
contributing to the low growth rate in investment income during 2009 is the fact that, due primarily to
uncertainty about
term
investments during 2009 than we did during 2010 and 2008. Had we not done so, and if short term
investment rates had not been much lower during 2009 than in 2008, the growth rate in investment income
during 2009 would have been approximately the same as the growth rate in mean assets.
liquidity in the financial markets, we held significantly more cash and short
35
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
2010
Life and Health . . . . . . . . . . . . . . . . . . . . . . . . . .
Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$257.0
55.8
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in 2010 . . . . . . . . . . . . . . . . . . . . . . . . .
312.8
9.02%
2009
Life and Health . . . . . . . . . . . . . . . . . . . . . . . . . .
Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$240.8
46.2
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in 2009 . . . . . . . . . . . . . . . . . . . . . . . . .
287.0
10.18%
2008
Life and Health . . . . . . . . . . . . . . . . . . . . . . . . . .
Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$225.0
35.4
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in 2008 . . . . . . . . . . . . . . . . . . . . . . . . .
260.4
9.50%
$4,668.8
1,067.9
5,736.7
8.66%
$4,388.6
891.0
5,279.6
9.76%
$4,134.7
675.4
4,810.1
7.92%
5.50%
5.23
5.45
5.49%
5.19
5.44
5.44%
5.24
5.42
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
to Note 6—Future Policy Benefit Reserves in the Notes to
health crediting rates, please refer
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)
2010
2009
2008
Interest expense per Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . $75,529 $69,932 $63,229
Reclassification of interest due to deconsolidation(1)
(264)
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
(264)
(264)
Financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $75,265 $69,668 $62,965
(1) See Principles of Consolidation in Note 1—Significant Accounting Policies in the Notes to Consolidated Financial Statements
for an explanation of deconsolidation.
36
The table below presents the components of financing costs.
Analysis of Financing Costs
(Amounts in thousands)
2010
2009
2008
Interest on funded debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $72,889 $64,369 $53,412
9,770
Interest on short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
(264)
Reclassification of interest due to deconsolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,513
50
(264)
2,589
51
(264)
Financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $75,265 $69,668 $62,965
Financing costs increased $6 million or 8% in 2010. They rose $7 million or 11% in 2009. The
increases in financing costs in both years reflect the issuance in June 2009 of $300 million principal
amount 9 ¼% Senior Notes due in 2019. In 2010, we incurred a full year of interest on this issue. The
increase in 2009 was partially offset by the maturity in August 2009 of $99 million principal amount 8 ¼%
three years,
Senior Debentures. Short-term interest expense has trended downward over the past
decreasing $3 million in 2010 after having declined $4 million in 2009. These declines have resulted from
significantly lower interest rates when compared with the respective prior year. The 2010 decrease was
also impacted by a 22% decline in the average balance of commercial paper outstanding compared with
2009.
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 generally 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 strong positive cash flows are generally
stable and predictable. If such longer-term securities do not meet our quality and yield objectives, we
consider investing in short-term securities, taking into consideration the slope of the yield curve and other
factors at the time. During calendar years 2008 through 2010, Torchmark invested almost exclusively in
fixed-maturity securities.
37
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.” 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)
For the Year
2009
2010
2008
Cost of acquisitions:
Investment-grade corporate securities . . . . . . . . . . . . . . . . . . . $1,478.5 $1,431.6 $ 986.4
3.6
Taxable municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
44.2
Other investment-grade securities . . . . . . . . . . . . . . . . . . . . . .
754.4
15.4
201.2
33.7
Total fixed-maturity acquisitions . . . . . . . . . . . . . . . . . . . $1,713.4 $2,201.4 $1,034.2
Effective annual yield (one year compounded*) . . . . . . . . . . . . . .
Average life (in years, to next call) . . . . . . . . . . . . . . . . . . . . . . . .
Average life (in years to maturity) . . . . . . . . . . . . . . . . . . . . . . . . .
Average rating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.89%
24.2
26.1
A-
6.43%
16.3
21.2
A
7.21%
23.3
31.0
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, but 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. However, 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. The average life of funds invested in 2009 (to both next call and maturity) was lower than
that of funds invested during 2008 and 2010 due to actions taken for statutory capital management
purposes and the limited availability of longer term investments.
During the three years 2008 through 2010, we have invested primarily in investment-grade corporate
bonds. During 2008, we invested a considerable amount of the funds in trust preferred securities and
redeemable preferred stocks with longer scheduled maturity dates, often exceeding 30 years. In virtually
all cases, such securities are callable many years prior to the scheduled maturity date. During 2009 and
2010, we acquired a significant amount of taxable municipal bonds, primarily Build America Bonds
authorized by the American Recovery and Retirement Act of 2009. In assessing the creditworthiness of
these bonds, we took into account the geographic location of the municipalities. The investments in these
municipal bonds consisted almost exclusively of general obligation bonds and revenue bonds for
essential services.
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, although this effect has diminished each
successive year. 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 $109 million in 2010, $181 million in
2009, and $238 million in 2008. The higher level of acquisitions in 2009 was primarily due to the
additional cash flow available from the special sales transactions noted below.
38
Sales transactions. As disclosed in Note 4—Investments, the Company sold $703 million of fixed
maturities at amortized cost in the third quarter of 2009, including $293 million of below- investment-grade
securities. The market value for some of these securities increased significantly during the period to a
level where, even though the sales price was less than amortized cost, management determined that
better risk-adjusted returns could be achieved by selling rather than continuing to hold the securities.
Other securities were sold at prices that produced gains to offset these losses for tax purposes. Due in
large part to selling below-investment-grade securities and reinvesting the proceeds in investment-grade
securities, below-investment-grade securities as a percentage of total fixed maturities at amortized cost
declined from 15% at June 30, 2009 to 9% at December 31, 2009. The reduction in below-investment-
grade securities had a positive impact on the risk-based capital position of our insurance subsidiaries.
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, 2010 with the latest industry data.
Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock (redeemable and perpetual)(2) . . . . . . . . . . . .
Common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and short terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Torchmark
Amount
(in millions) % Industry %(1)
$ 9,124
1,326
1
14
2
378
26
583
$11,454
80%
12
0
0
0
3
0
5
75%
0
2
10
1
4
4
4
100
100
(1) Latest data available from the American Council of Life Insurance as of December 31, 2009.
(2)
Includes redeemable preferred of $1.3 billion or 12% and perpetual preferred of $14 million or 0%.
At December 31, 2010, 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 3%.
The remaining balance was comprised of other investments including equity securities, mortgage loans,
and other long-term and short-term investments.
39
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. An analysis of our fixed-maturity portfolio
by component at December 31, 2010 and December 31, 2009 is as follows:
Fixed Maturities by Component
At December 31, 2010
(Dollar amounts in millions)
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
% of Total
Fixed Maturities
Fair
Value
Amortized
Cost
Fair
Value
Corporates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,708
1,312
Redeemable preferred stock . . . . . . . . . . . . . . .
1,212
Municipals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58
Government-sponsored enterprises . . . . . . . . .
35
Governments & agencies . . . . . . . . . . . . . . . . .
16
Residential mortgage-backed securities . . . . .
-0-
Commercial mortgage-backed securities . . . . .
57
Collateralized debt obligations . . . . . . . . . . . . .
37
Other asset-backed securities . . . . . . . . . . . . .
Total fixed maturities . . . . . . . . . . . . . $10,435
$423
36
11
-0-
2
2
-0-
-0-
2
$476
$(210)
(80)
(42)
(1)
-0-
-0-
-0-
(34)
(1)
$(368)
$ 7,921
1,268
1,181
57
37
18
-0-
23
38
$10,543
75%
12
12
1
-0-
-0-
-0-
-0-
-0-
74%
13
12
1
-0-
-0-
-0-
-0-
-0-
100% 100%
Fixed Maturities by Component
At December 31, 2009
(Dollar amounts in millions)
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
% of Total
Fixed Maturities
Fair
Value
Amortized
Cost
Fair
Value
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 . . . . . . . . . . . . . .
Total fixed maturities . . . . . . . . . . . . . .
$6,964
1,353
1,012
83
33
18
2
55
39
$9,559
$212
23
5
-0-
1
2
-0-
-0-
1
$244
$(419)
(206)
(30)
(6)
-0-
-0-
-0-
(37)
(1)
$(699)
$6,757
1,170
987
77
34
20
2
18
39
$9,104
74%
13
11
1
-0-
-0-
-0-
-0-
1
73%
14
11
1
-0-
-0-
-0-
1
-0-
100% 100%
40
At December 31, 2010, fixed maturities had a fair value of $10.5 billion, compared with $9.1 billion at
December 31, 2009. At December 31, 2010, fixed maturities were in a $108 million net unrealized gain
position compared with an unrealized loss position of $455 million at December 31, 2009. Approximately
74% of our fixed maturity assets at December 31, 2010 at amortized cost were corporate bonds and 13%
were redeemable preferred stocks. This compares with 73% corporate bonds and 14% redeemable
preferred stocks at year end 2009. At December 31, 2010, less than 2% of the assets at amortized cost
were residential mortgage-backed securities, other asset-backed securities, and collateralized debt
obligations (CDOs). The $57 million of CDOs at amortized cost made up less than 1% of the assets and
are backed primarily by trust preferred securities issued by banks and insurance companies. The $16
million of mortgage-backed securities are rated AAA. For more information about our fixed-maturity
portfolio by component at December 31, 2010 and 2009, including an analysis of unrealized investment
losses and a schedule of maturities, see Note 4—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,
2010
At December 31,
2009
6.63%
6.80%
16.6
22.3
9.0
10.9
15.4
21.9
8.2
10.2
(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.
41
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 87% 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 fixed maturities by industry sector at
December 31, 2010.
Fixed Maturities by Sector
At December 31, 2010
(Dollar amounts in millions)
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
% of Total
Fixed Maturities
At
Amortized
Cost
At
Fair
Value
Financial - Life/Health/PC
Insurance . . . . . . . . . . . . . . . . . . . . $ 1,677
1,487
79
47
376
1,588
1,039
510
302
450
686
297
441
57
16
1,306
77
Financial - Bank . . . . . . . . . . . . . . . .
Financial - Financial Guarantor . . . .
Financial - Insurance Broker
. . . . . .
Financial - Other . . . . . . . . . . . . . . . .
Utilities . . . . . . . . . . . . . . . . . . . . . . . .
Energy . . . . . . . . . . . . . . . . . . . . . . . .
Consumer Non-cyclical . . . . . . . . . . .
Consumer Cyclical
. . . . . . . . . . . . . .
Communications . . . . . . . . . . . . . . . .
Basic Materials . . . . . . . . . . . . . . . . .
Transportation . . . . . . . . . . . . . . . . . .
Other Industrials . . . . . . . . . . . . . . . .
Collateralized debt obligations . . . . .
Mortgage-backed securities . . . . . . .
Government . . . . . . . . . . . . . . . . . . . .
Technology . . . . . . . . . . . . . . . . . . . .
Total fixed maturities . . . . . $10,435
$ 43
43
-0-
-0-
24
94
65
40
12
28
46
21
23
-0-
2
12
23
$476
$(101)
(70)
(28)
(2)
(24)
(17)
(7)
(4)
(10)
(12)
(5)
(2)
(9)
(34)
-0-
(43)
-0-
$ 1,619
1,460
51
45
376
1,665
1,097
546
304
466
727
316
455
23
18
1,275
100
16%
14
1
-0-
4
15
10
5
3
4
6
3
4
1
-0-
13
1
15%
14
1
-0-
4
16
11
5
3
4
7
3
4
-0-
-0-
12
1
$(368)
$10,543
100% 100%
At December 31, 2010, approximately 35% of the fixed maturity assets at amortized cost (34% at fair
value) were in the financial sector, including 16% in life and health or property casualty insurance
companies and 14% in banks at amortized cost. Financial guarantors, mortgage insurers, and insurance
brokers comprised approximately 5% of the portfolio. After financials, the next largest sector was utilities,
which comprised 15% of the portfolio at amortized cost. The balance of the portfolio is spread among 268
issuers in a wide variety of sectors. As previously noted, gross unrealized losses were $368 million at
December 31, 2010, declining from $699 million a year earlier. As shown in the chart above, the portfolio
was in a net unrealized gain position at December 31, 2010, compared with a net unrealized loss position
at the prior year end. Approximately 60% of the change in the fair value relative to amortized cost in 2010
was attributable to improvements in the financial sectors, while the remaining 40% was in the non-
the unrealized losses
financial sectors. As discussed in Note 4—Investments, we believe much of
experienced in 2008 and 2009 were attributable to illiquidity in the financial markets. We expect to recover
the full book value of our investments in impaired securities.
As shown in the table above, the ratio of gross unrealized losses to book value was greater than 45%
for our investments in CDOs and the financial guarantor sector. We evaluated each of the impaired
securities in these and all other sectors to determine whether or not any of the impairments were other-
than-temporary. Certain information about our evaluation of the impaired securities in the CDO and
monoline insurer sectors is provided in the following paragraphs.
42
At December 31, 2010, we held investments in five different CDOs. In our opinion, our investments in
four of these CDOs were other-than-temporarily impaired. Three of these CDOs have been written down
to a carrying value of zero. The fourth is carried at a value of $34 million, less than the present value of
discounted future cash flows at original purchase yield but greater than its fair value of $17 million. The
fifth CDO ($22 million amortized cost and $6 million fair value) we believe was not other-than-temporarily
impaired. At December 31, 2009, the four CDOs that were other-than-temporarily impaired had an
amortized cost of $34 million ($13 million fair value). The CDO that was not other-than-temporarily
impaired had an amortized cost of $21 million ($5 million fair value). In reaching these conclusions
concerning other-than-temporary impairment, we reviewed and discussed with the collateral managers of
each of these CDOs the current status of the collateral underlying our investments, the credit events
(defaults and deferrals in underlying collateral) experienced to date, and the possibility of future credit
events. We calculated expected future cash flows using assumptions for expected future credit events
that reflect actual historical experience and expected future experience. We reviewed the actual versus
expected cash flows received to date and the impact that potential future credit events would have on our
future credit events that could be
expected future cash flows. We calculated the magnitude of
experienced without negatively impacting the recovery of our investment and our expected yield rate.
While there is a possibility that future credit events will exceed our current expectations, we believe there
is ample evidence to support our conclusions.
Also at December 31, 2009, we held investments issued by five different monoline insurers. In our
opinion, our investments in three of these monoline insurers ($9 million amortized cost and $10 million fair
value) were other-than-temporarily impaired. These securities were sold in 2010 for $12 million for a
realized gain of $3 million. Our investments in the other two monoline insurers ($83 million amortized cost
and $37 million fair value at December 31, 2009) were not believed to be other-than-temporarily impaired.
At December 31, 2010, these two investments were carried at an amortized cost of $84 million (fair value
$56 million). We collected and analyzed a significant amount of information to form opinions about the
reasons for the severity of our impairments, including the illiquidity of some of our holdings (and its impact
on fair values), the expected future experience in the mortgage market, and the reasonable expectation of
the receipt of all future contractual interest and principal payments for these investments. We reviewed
news and information about the economy and the mortgage market in general and about the issuers of
our investments. We reviewed and analyzed financial statements and had discussions with sell-side and
independent credit analysts who follow this sector, certain regulators, and members of the management
teams of some of the issuers of our investments. While there is a possibility that future experience in the
mortgage markets will differ from our current expectations, we believe there is ample evidence to support
our conclusions.
43
An analysis of the fixed-maturity portfolio by a composite rating at December 31, 2010 is shown in
the table below.
Fixed Maturities by Rating
At December 31, 2010
(Dollar amounts in millions)
Investment grade:
AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BBB+ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BBB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BBB- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment grade . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Below investment grade:
BB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Below B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Below investment grade . . . . . . . . . . . . . . . . . . . . . . .
Amortized
Cost
%
Fair
Value
$
469
1,147
2,901
2,053
1,943
1,060
9,573
419
292
151
862
4 $
11
28
20
19
10
92
4
3
1
8
458
1,163
3,033
2,121
1,988
1,049
9,812
400
226
105
731
%
4
11
29
20
19
10
93
4
2
1
7
$10,435
100% $10,543 100%
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
92% 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, as all
investments are reported on our Consolidated Balance Sheets. At December 31,
2010, we had $22 million at fair value ($57 million book value) invested in CDOs, for which the composite
rating at that date was C+. The collateral underlying these CDOs is primarily trust preferred securities
issued by banks and insurance companies, and 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.
44
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, 2010 and 2009. 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,
2010
At
December 31,
2009
-200
-100
-0-
100
200
$12,919
11,656
10,543
9,559
8,686
$11,203
10,070
9,104
8,276
7,561
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.
45
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, 2010.
Analysis of Realized Gains (Losses), Net of Tax
(Dollar amounts in thousands, except for per share data)
Year Ended December 31,
2010
2009
2008
Amount
Per Share
Amount
Per Share
Amount
Per Share
Fixed maturities and equities:
Sales . . . . . . . . . . . . . . . . . . . . . . . $10,699
17,265
Called or tendered . . . . . . . . . . . .
(3,152)
Writedowns* . . . . . . . . . . . . . . . . .
$ 0.13
0.21
(0.04)
$ 7,727
1,878
(94,234)
$ 0.09
0.02
(1.13)
$
(453)
(807)
(68,907)
$ -0-
(.01)
(.78)
Real estate:
Sales . . . . . . . . . . . . . . . . . . . . . . .
Writedowns* . . . . . . . . . . . . . . . . .
Loss on redemption of debt . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . .
62
-0-
(1,070)
466
-0-
-0-
(0.01)
0.01
(83)
(133)
(1)
(499)
Total . . . . . . . . . . . . . . . . . . . . $24,270
$ 0.30
(85,345)
-0-
-0-
-0-
(0.01)
(1.03)
1,160
(718)
-0-
(177)
(69,902)
.01
(.01)
-0-
-0-
(.79)
* Written down due to other-than-temporary impairment.
As described in Note 4—Investments under the caption Other-than temporary impairments in the
Notes to Consolidated Financial Statements, we wrote certain securities down to fair value during each
year 2008 through 2010 as a result of other-than-temporary impairment. The impaired securities met our
criteria for other-than-temporary impairment as discussed in Note 4 and in our Critical Accounting Policies
in this report. The writedowns resulted in pretax charges of $5 million in 2010 ($3 million after tax), $143
million in 2009 ($94 million after tax), and $106 million in 2008 ($69 million after tax). The 2009 charge
included $83 million on CDOs ($55 million after tax) and $24 million on monoline financial guarantors and
mortgage insurers ($16 million after tax). The remaining writedowns in 2009 were from losses on a variety
of corporate bonds. In 2008, the significant bonds written down were Lehman Brothers bonds of $74
million pretax ($48 million after tax) and Washington Mutual bonds of $19 million pretax ($12 million after
tax). Other writedowns in 2008 included perpetual preferred stocks of Federal National Mortgage
Association and certain non-financial securities.
Additionally, as described in Note 4, we wrote down a real estate investment to fair value in 2008,
resulting in a loss of $1.1 million ($718 thousand after tax). We wrote down an additional $205 thousand
($133 thousand after tax) in 2009 on this investment. In 2010, we acquired $7.3 million book value of our
9 1⁄4% Senior Notes at a cost of $8.9 million, resulting in an after-tax loss on debt redemption of $1.1
million.
46
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 primarily 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
income. Cash outflows from operations include policy benefit payments,
premium and investment
commissions, administrative expenses, and taxes.
Insurance Subsidiary Liquidity. The operations of our insurance subsidiaries have historically
generated substantial cash inflows in excess of immediate cash 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. The funds to provide
for policy benefits, the majority of which are paid in future periods, are invested primarily in long-term
fixed maturities to meet these long-term obligations. In addition to investment income, maturities and
scheduled repayments in the investment portfolio are sources of cash. Excess cash available from the
insurance subsidiaries’ operations is generally distributed as a dividend to the Parent Company, subject
to regulatory restriction. The dividends are generally paid in amounts equal to the subsidiaries’ prior year
earnings calculated on a statutory basis.
Parent Company Liquidity. Cash flows from the insurance subsidiaries are used to pay Parent
Company dividends on common and preferred stock,
interest and principal repayments on Parent
Company debt, and operating expenses of the Parent. In 2010, the Parent received $401 million of
dividends and transfers from its insurance subsidiaries, as compared with $392 million in 2009 and $437
million in 2008. After paying debt obligations, shareholder dividends, and other expenses (but before
share repurchases), Torchmark Parent had excess operating cash flow in 2010 of approximately
$269 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 2011, it is expected that the
Parent Company will receive $742 million in dividends from subsidiaries, including approximately $305
million of the proceeds from the sale of United Investors, and that approximately $655 million will be
available as excess cash flow. 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 12—Shareholders’ Equity in the Notes to Consolidated Financial Statements. Although these
restrictions exist, dividend availability from subsidiaries historically has been sufficient for the cash flow
needs of the Parent Company. As additional liquidity, the Parent held $63 million of cash and short-term
investments at December 31, 2010, compared with $155 million a year earlier. The Parent also had
available a $138 million receivable from subsidiaries at December 31, 2010.
Short-Term Borrowings. 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 described in the Commercial Paper section of Note 11—Debt in the Notes to Consolidated
Financial Statements, this facility was entered into on December 10, 2010 and replaced an earlier $600
million facility which would have expired in August, 2011. As of December 31, 2010, we had available
$203 million under this facility. For detailed information about this new line of credit facility, see the
Commercial Paper section of Note 11—Debt.
47
The following table presents certain information about our short-term borrowings, all of which was
commercial paper during the two years ending December 31, 2010 and December 31, 2009.
Short-term Borrowings—Commercial Paper
(Dollar amounts in millions)
For the year
2010
2009
At December 31,
2009
2010
At end of period:
Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Daily-weighted average interest rate* . . . . . . . . . . . . . . . . . . . . . . .
Letters of credit outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Remaining amount available under credit line . . . . . . . . . . . . . . . .
N/A
N/A
$199.0
$233.4
0.45%
0.45%
$198.0
$203.0
$199.7
$166.9
Average balance outstanding during period:
Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $196.3
Daily-weighted average interest rate* . . . . . . . . . . . . . . . . . . . . . . .
.43%
$251.5
1.10%
N/A
N/A
Maximum daily amount outstanding during period . . . . . . . . . . . . . . . . . $250.0
$325.0
* Annualized
There have been no difficulties in accessing the commercial paper market under this facility during
the years ending December 31, 2010 and 2009.
In summary, Torchmark expects to have readily available funds for 2011 and the foreseeable future
to conduct its operations and to maintain target capital ratios in the insurance subsidiaries through
internally generated cash flow and the credit facility. In the unlikely event that more liquidity is needed, the
Company could generate additional funds through multiple sources including, but not limited to, the
issuance of additional debt, a short-term credit facility, and intercompany borrowing.
Consolidated Liquidity. Consolidated net cash inflows provided from operations were $1.03 billion
in 2010, compared with $976 million in 2009, and $731 million in 2008. In addition to cash inflows from
operations, our companies have received $321 million in investment calls and tenders and $318 million of
scheduled maturities or repayments during 2010. Maturities, tenders, and calls totaled $761 million in
2009 and $581 million in 2008.
Our cash and short-term investments were $582 million at year-end 2010 and $529 million at year-
end 2009. Included in cash at December 31, 2010 was the $343 million of proceeds received from the
sale of United Investors on that date. 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 $10.5 billion at December 31, 2010. However, our strong cash flows from operations, investment
maturities, and the availability of our credit line make any need to sell securities for liquidity unlikely.
Off-Balance Sheet Arrangements. As fully described and discussed in Note 11—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, 2010 and
2009. 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, 2010 and 2009. 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 15—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.
48
As a part of its above-mentioned credit facility, Torchmark has outstanding $198 million in stand-by
letters of credit. However, these letters are issued among our subsidiaries and have no impact on
company obligations as a whole.
As of December 31, 2010, 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 15—Commitments and Contingencies.
The following table presents information about future payments under our contractual obligations for
the selected periods as of December 31, 2010.
(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:
Debt—principal(1) . . . . . . . . . . . . . . . . . $ 1,112
7
Debt—interest(2) . . . . . . . . . . . . . . . . . .
-0-
Capital leases . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . .
-0-
122
Purchase obligations . . . . . . . . . . . . . .
49
. . . . . . . . . . . . .
Pension obligations(3)
1
Uncertain tax positions(4) . . . . . . . . . . .
9,150
Future insurance obligations(5) . . . . . .
$ 1,125
812
-0-
17
122
169
1
39,653
Total
. . . . . . . . . . . . . . . . . . . . . . . . . $10,440
$41,899
$ 199
72
-0-
4
66
13
-0-
1,205
$1,559
$
94
143
-0-
5
56
28
1
2,336
$2,663
$ 250
131
-0-
4
-0-
31
-0-
2,248
$2,664
$
582
466
-0-
4
-0-
97
-0-
33,864
$35,013
(1) Funded debt
is itemized in Note 11—Debt
in the Notes to Consolidated Financial Statements and includes short-term
commercial paper.
Interest on debt is based on our fixed contractual obligations.
(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, 2010,
these pension obligations were
$286 million, but there were also assets of $237 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 10—Postretirement Benefits in the Notes to
Consolidated Financial Statements for more information on pension obligations.
(4) Uncertain tax positions do not
include $40 thousand of accrued interest. See Note 9—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 at
December 31, 2010. 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 $9.2 billion at December 31, 2010, along with future premiums
and investment income, will be sufficient to fund all future insurance obligations.
49
Capital Resources. Torchmark’s capital structure consists of short-term debt (the commercial
paper facility described in Note 11—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 11—Debt in the Notes to Consolidated Financial Statements.
The carrying value of the funded debt was $913 million at December 31, 2010, compared with $920
million a year earlier. As fully explained in Note 11—Debt, we issued $300 million principal amount of
9¼% Senior Notes due in 2019 in June of 2009 for proceeds of $296 million. A portion of these proceeds
were used to repay the $99 million due upon the August, 2009 maturity of our 8¼% Senior Debentures.
Of the $197 million balance of the proceeds, $175 million was contributed as capital to our insurance
subsidiaries in 2009. The subsidiaries then in turn invested these funds in investment-grade corporate
bonds and municipal bonds. The capital contributions were made as a result of our desire to maintain
subsidiary regulatory capital at levels adequate to meet the requirements of rating agencies.
Poor economic conditions experienced during 2009 caused the ratings of many bonds in our
insurance subsidiaries’ portfolios to be downgraded and also resulted in increased other-than-temporary
impairments taken. This large volume of ratings downgrades and impairments in 2009 had a significant
negative effect on the subsidiaries’ regulatory capital. Our insurance subsidiaries generally target a capital
ratio of at least 325% of required regulatory capital under Risk-Based Capital (RBC), a formula designed
by insurance regulatory authorities to monitor the adequacy of capital. The 325% target is considered
sufficient for the subsidiaries because of their strong reliable cash flows, the relatively low risk of their
product mix, and because that ratio is in line with rating agency expectations for Torchmark. RBC was
favorably impacted in 2009 by these capital contributions and the sales of below-investment-grade
securities discussed under the caption Investments—Sales Transactions in this report. Improvements in
financial markets in 2010 which resulted in rating upgrades in the bond portfolios further strengthened the
capital position of our insurance subsidiaries in 2010. At both December 31, 2010 and 2009, our
insurance subsidiaries in the aggregate had RBC ratios in excess of 350%. Should we experience
additional impairments and ratings downgrades in the future and the ratio falls below 325%, management
has available cash on hand and a credit line at the Parent Company to make additional contributions as
necessary to maintain the ratios at or above 325%.
As noted under the caption Highlights in this report, we reactivated our share repurchase program
during the first quarter of 2010. We previously had suspended the program indefinitely in March, 2009
due to general economic conditions at that time. Under this program, we acquired 4 million shares at a
cost of $204 million in 2010 (average of $53.51 million per share), 2 million shares for $47 million in 2009,
and 8 million shares for $427 million in 2008. The majority of purchased shares are retired each year.
Please refer to the description of our share repurchase program under the caption Highlights in this
report.
Torchmark has recently increased the dividend on its common shares. In the first quarter of 2010, the
dividend was increased from $.14 per share to $.15 per share and in the fourth quarter of 2010, it was
further increased to $.16 per share.
Shareholders’ equity was $4.0 billion at December 31, 2010, compared with $3.4 billion at December
31, 2009. During the twelve months since December 31, 2009, shareholders’ equity was reduced by the
$204 million in share purchases but has been increased by after tax unrealized gains of $345 million in
the fixed maturity portfolio as conditions in financial markets have improved. As explained in Note 4—
Investments—unrealized loss analysis, unrealized losses in 2008 and early 2009 resulted primarily from
illiquidity in the financial markets as a result of general economic conditions.
We plan to use excess cash as efficiently as possible in the future but we will be cautious in doing so.
Excess cash flow could be used for share repurchases, acquisitions, increases in shareholder dividends,
investment in fixed maturities, or repayment of short-term debt. We will determine the best use of excess
cash after ensuring that desired capital levels are maintained in our companies.
50
We maintain a significant available-for-sale fixed-maturity portfolio to support our
insurance
policyholders’ liabilities. Current accounting guidance 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 invested assets are revalued, accounting rules do not permit interest-bearing
insurance policy liabilities to be valued at fair value in a consistent manner as assets, with changes in
value applied directly to shareholders’ equity. 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. Recently, the
market value of our fixed maturity portfolio had been depressed as a result of bond market illiquidity
resulting in a significant decrease in shareholders’ equity. Because of the long-term nature of our fixed
maturities and liabilities and the strong cash flows generated by our insurance subsidiaries, we have the
intent and ability to hold our securities to maturity. As such, we do not expect to incur losses due to
fluctuations in market value of fixed maturities caused by interest rate changes and temporarily illiquid
markets. Accordingly, our management, credit rating agencies, lenders, many industry analysts, and
certain other financial statement users prefer to remove the effect of this accounting rule 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 this accounting guidance 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, 2010
At December 31, 2009
Effect of
Accounting
Rule
Requiring
Revaluation*
GAAP
Fixed maturities (millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,543
3,406
Deferred acquisition costs (millions) . . . . . . . . . . . . . . . . . . . . . .
16,160
Total assets (millions)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
199
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term debt (millions)
913
Long-term debt (millions) ** . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,016
. . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity (millions)
$107
(4)
103
-0-
-0-
67
Effect of
Accounting
Rule
Requiring
Revaluation*
$ (456)
28
(428)
-0-
-0-
(278)
GAAP
$ 9,104
3,320
16,024
233
920
3,399
Book value per diluted share . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt to capitalization *** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
49.86
21.7%
.83
(0.3)%
40.87
25.3%
(3.35)
1.5%
Diluted shares outstanding (thousands) . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . .
Actual shares outstanding (thousands)
80,543
79,243
83,159
82,841
Amount added to (deducted from) comprehensive income to produce the stated GAAP item
Includes Torchmark’s 7.1% Junior Subordinated Debentures in 2010 and 2009 in the amount of $124 million.
*
**
*** Torchmark’s debt covenants require that the effect of the accounting rule requiring revaluation be removed to determine this
ratio. This ratio is computed by dividing total debt by the sum of debt and shareholders’ equity.
Effective in 2008, the FASB issued new guidance, 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 have not elected this option.
51
The fixed maturity portfolio contained $1.8 billion in net unrealized investment losses at year end
2008 ($1.1 billion after tax and the associated adjustment to deferred acquisition costs) including fixed
maturities in the subsidiary sold in 2010. 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. In 2009, as conditions in financial markets began to improve,
unrealized losses declined $1.3 billion ($.9 billion after tax). As financial markets continued to improve in
2010, the $456 million of unrealized losses at year end 2009 in the fixed maturity portfolio turned into
$107 million of unrealized gains, a positive change of $531 million after taking into account the adjustment
of $32 million to deferred acquisition costs ($345 million after tax). Torchmark’s ratio of earnings before
interest and taxes to interest requirements (times interest earned) was 11.3 times in 2010, compared with
9.3 times in 2009 and 10.9 times in 2008. This times-interest-earned ratio is computed by dividing interest
expense into the sum of pre-tax income from continuing operations and interest expense. A discussion of
our interest expense is included in the discussion of financing costs under the caption Investments in this
report.
Credit Ratings. The chart below presents Torchmark’s credit ratings as of December 31, 2010.
Commercial Paper . . . . . . . . . . . . . . . . . . . . . .
Funded Debt . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . .
A-1
A
BBB+
P-2
Baa1
Baa2
Standard
& Poor’s
Moody’s
A.M.
Best
AMB-1
a-
bbb
Fitch
F-2
BBB+
BBB-
During the three year period ended December 31, 2010, each of the rating agencies revised the
outlook for Torchmark from stable to negative and then back to stable. Reasons cited for the negative
outlook included increased risk in our investment portfolio, tighter liquidity, and reduced financial flexibility.
Reasons cited for the revision back to a stable outlook included improved financial flexibility, increased
capital
levels at the insurance subsidiaries, the decrease in unrealized losses, and strong operating
performance.
The credit quality of Torchmark’s debt instruments and capital securities are rated by various rating
agencies. During 2009, A. M. Best downgraded our preferred stock from bbb+ to bbb. Also in 2009, Fitch
downgraded our Senior Debt from A to BBB+ (two notches), our preferred stock from A- to BBB (two
notches), and our commercial paper from F1 to F2 (one notch). Fitch stated that the downgrades were a
result of the weakness in the statutory capital position of Torchmark’s insurance subsidiaries brought on
by the ratings downgrades of fixed maturity securities held in the subsidiaries’ investment portfolios. They
also expressed concern with the level of intercompany financing by the Parent Company from the
turmoil, and the expectation of continued
subsidiaries,
investment deterioration going forward. In January, 2010, Fitch further downgraded our preferred stock
one notch to BBB-. At that time, Fitch downgraded over 200 hybrid securities issued by insurance industry
entities, as their assessments of these securities in our industry changed.
the ongoing exposure to financial market
The financial strength of our major insurance subsidiaries is also rated by Standard & Poor’s and
A. M. Best. The following chart presents these ratings for our four largest insurance subsidiaries at
December 31, 2010.
Liberty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Globe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United American . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
American Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA-
AA-
AA-
AA-
A+ (Superior)
A+ (Superior)
A+ (Superior)
A+ (Superior)
Standard
& Poor’s
A.M.
Best
A.M. Best states that it assigns an A+ (Superior) rating 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.
52
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.
TRANSACTIONS WITH RELATED PARTIES
Information regarding related party transactions is found in Note 16—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
subsidiaries actively market
insurance in the State of Mississippi, a jurisdiction which is nationally
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 15—Commitments and Contingencies in the Notes to the Consolidated Financial Statements.
NEW UNADOPTED ACCOUNTING RULES
The FASB has issued new accounting guidance potentially applicable to Torchmark, effective in
future periods:
Policy Acquisition Costs: This new accounting guidance amends the accounting for costs
associated with acquiring or renewing insurance contracts in order to address the diversity in practice
surrounding the capitalization and deferral of these costs. This guidance will be effective for Torchmark
beginning January 1, 2012, with early adoption permitted. Prospective or retrospective application is
permitted. We are currently evaluating the new guidance. At this time we expect its adoption to reduce
our shareholders’ equity approximately 8% at the time of adoption. We intend to adopt this guidance
retrospectively. Because both the deferral and amortization of acquisition costs will be lower in future
periods, and those effects are largely offsetting, we do not expect that there will be a material impact on
operating results going forward.
53
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 6—Future Policy Benefit Reserves.
Approximately 78% of our liabilities for future policy benefits at December 31, 2010 were traditional
insurance liabilities whereby the liability is determined as 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.
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 traditional business is very rare, and did not
occur during the three years ended December 31, 2010.
The remaining portion of liabilities for future policy benefits pertains to business accounted for as
deposit business, whereby 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 to determine the future policy benefit liability for deposit business.
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
the costs of
sales commissions and other underwriting costs of new insurance sales. Additionally,
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 5—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 97% of our recorded amounts for deferred acquisition costs at December 31, 2010
were related to traditional products and are being amortized over the premium-paying period in proportion
to the present value of actual historic and estimated future gross premiums. The projection assumptions
for this business are set at the time of contract issue. These assumptions are “locked-in” at that time and,
except where there is a loss recognition issue, are not revised for the lifetime of the contracts. Absent a
premium deficiency, variability in amortization after policy issuance is caused only by variability in
premium volume. We have not recorded a deferred acquisition cost loss recognition event for assets
related to this business for any period in the three years ended December 31, 2010.
The remaining portion of deferred acquisition costs pertain to deposit business 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. The assumptions must be
updated when actual experience or other evidence suggests that earlier estimates should be revised. As
noted earlier in this report, our variable annuity block was disposed of as of December 31, 2010.
Revisions related to our deposit business assets have not had a material impact on the amortization of
deferred acquisition costs during the three years ended December 31, 2010.
Policy Claims and Other Benefits Payable. This liability consists of known benefits currently payable
and an estimate of claims that have been incurred but not yet reported to us. The estimate of unreported
claims is based on prior experience and is made after careful evaluation of all information available to us.
However, the factors upon which these estimates are based can be subject to change from historical
patterns. Factors involved include the litigation environment, regulatory mandates, and the introduction of
54
policy types for which claim patterns are not well established, and medical trend rates and medical cost
inflation as they affect our health claims. 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.
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 recent periods, the values of our fixed maturities were also affected by illiquidity in the
financial markets, which 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 is presented in Note 4—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
impairments of
investments are disclosed in Note 1—Significant Accounting Policies and
Note 4—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, 2010, our net liability under these plans was $286 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
55
return on assets, and projected salary increase assumptions are disclosed and the criteria used to
determine those assumptions are discussed in Note 10—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 10 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;
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 45 of this report.
56
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 2010 and 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for each of the three years in the period ended
Page
58
59
December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60
Consolidated Statements of Comprehensive Income for each of the three years in the period
ended December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended
December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
61
62
63
64
57
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, 2010 and 2009, 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, 2010. 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, 2010 and 2009, and the results of
their operations and their cash flows for each of the three years in the period ended December 31, 2010,
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, 2010,
based on the criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of
the Treadway Commission and our report dated February 28, 2011
expressed an unqualified opinion on Torchmark’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
February 28, 2011
58
TORCHMARK CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands except per share data)
December 31,
2010
2009
Assets:
Investments:
Fixed maturities—available for sale, at fair value (amortized cost:
2010—$10,435,497; 2009—$9,559,499) . . . . . . . . . . . . . . . . . . . . . . . . . . $10,543,034 $ 9,104,115
16,722
352,351
52,428
298,077
Equity securities, at fair value (cost: 2010—$14,875; 2009—$14,875) . . . .
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,154
378,124
42,985
216,680
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,197,977
9,823,693
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred acquisition costs and value of insurance purchased . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets of subsidiary held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
365,679
183,861
230,319
3,406,335
396,891
378,700
-0-
231,071
168,246
192,902
3,319,505
396,891
234,808
1,656,643
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,159,762 $16,023,759
Liabilities:
Future policy benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,150,031 $ 8,629,349
Unearned and advance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
81,077
211,083
Policy claims and other benefits payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
90,076
Other policyholders’ funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
74,165
221,598
91,293
Total policy liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,537,087
9,011,585
Current and deferred income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt (estimated fair value: 2010—$933,336; 2009—$867,519) . . .
Due to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities of subsidiary held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,209,433
284,062
198,875
789,643
124,421
-0-
964,680
174,766
233,307
796,050
124,421
1,320,059
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,143,521 12,624,868
Shareholders’ equity:
Preferred stock, par value $1 per share—Authorized 5,000,000 shares;
outstanding: -0- in 2010 and in 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
Common stock, par value $1 per share—Authorized 320,000,000 shares;
outstanding: (2010—79,874,748 issued, less 631,665 held in treasury and
2009—83,874,748 issued, less 1,034,022 held in treasury) . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
79,875
432,608
22,958
3,513,419
(32,619)
4,016,241
83,875
441,361
(319,183)
3,228,904
(36,066)
3,398,891
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . $16,159,762 $16,023,759
See accompanying Notes to Consolidated Financial Statements.
59
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
Year Ended December 31,
2009
2010
2008
Revenue:
Life premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,663,699 $1,591,853 $1,544,219
1,127,059
Health premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
622
2,671,900
Total premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
987,421
638
2,651,758
1,017,711
541
2,610,105
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized investment gains (losses) . . . . . . . . . . . . . . . . . . . . . . .
Other-than-temporary impairments . . . . . . . . . . . . . . . . . . . . . . .
Portion of impairment loss recognized in other comprehensive
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
676,364
42,190
(4,850)
632,540
13,879
(164,137)
627,206
(426)
(107,115)
-0-
2,170
3,367,632
20,766
1,920
3,115,073
-0-
4,671
3,196,236
Benefits and expenses:
Life policyholder benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Health policyholder benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other policyholder benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total policyholder benefits . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred acquisition costs . . . . . . . . . . . . . . . . .
Commissions and premium taxes . . . . . . . . . . . . . . . . . . . . . . . .
Other operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total benefits and expenses . . . . . . . . . . . . . . . . . . . . . . .
1,082,423
669,191
41,430
1,793,044
418,890
125,330
176,272
75,529
2,589,065
1,040,248
677,319
35,762
1,753,329
415,986
128,620
170,130
69,932
2,537,997
1,015,494
759,588
27,458
1,802,540
378,388
141,586
182,093
63,229
2,567,836
Income from continuing operations before income taxes . . . . . . .
778,567
577,076
628,400
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(256,274)
(191,024)
(198,700)
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . .
522,293
386,052
429,700
Discontinued operations:
22,559
Income from discontinued operations, net of tax . . . . . . . . . . . .
-0-
Loss on disposal, net of tax benefit of $2,868 . . . . . . . . . . . . . . .
22,559
Income (loss) from discontinued operations . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 517,064 $ 404,953 $ 452,259
29,784
(35,013)
(5,229)
18,901
-0-
18,901
Basic net income per share:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total basic net income per share . . . . . . . . . . . . . . . . . . . $
6.42 $
(0.06)
6.36 $
4.65 $
0.23
4.88 $
Diluted net income per share:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total diluted net income per share . . . . . . . . . . . . . . . . . . $
6.36 $
(0.06)
6.30 $
4.65 $
0.23
4.88 $
4.88
0.26
5.14
4.85
0.26
5.11
Dividends declared per common share . . . . . . . . . . . . . . . . . . . . . . $
.62 $
.57 $
.56
See accompanying Notes to Consolidated Financial Statements.
60
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Year Ended December 31,
2009
2008
2010
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 517,064
$ 404,953 $
452,259
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
615,503
1,223,157
(1,808,802)
included in net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(38,170)
161,323
107,912
Reclassification adjustment for other-than-temporarily impaired
debt securities for which a portion of the loss was recognized in
earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustment for amortization of (discount)
-0-
(20,766)
-0-
premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . .
Foreign exchange adjustment on securities marked to market
(3,820)
(7,735)
(6,183)
(18,199)
(12,410)
20,685
Unrealized gains (losses) on securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
565,778
1,339,332
(1,692,615)
Unrealized gains (losses), adjustment to deferred acquisition costs . . . .
(32,181)
(79,603)
98,893
Total unrealized investment gains (losses) . . . . . . . . . . . . . . . . . . . .
533,597
1,259,729
(1,593,722)
Less applicable taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(186,760)
(440,905)
557,803
Unrealized gains (losses), net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
346,837
818,824
(1,035,919)
Foreign exchange adjustments:
Foreign exchange translation adjustments, other than securities . . . . . .
Less applicable taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,006
(1,752)
21,833
(7,642)
(31,447)
13,735
Foreign exchange translation adjustments, other than securities, net of
tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,254
14,191
(17,712)
Pension adjustments:
Amortization of pension costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Experience gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,857
(23,086)
Pension adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(12,229)
Less applicable taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension adjustments, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,279
(7,950)
11,219
16,811
28,030
(9,811)
18,219
3,047
(58,200)
(55,153)
19,305
(35,848)
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
342,141
851,234
(1,089,479)
Comprehensive income (loss)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 859,205
$1,256,187 $ (637,220)
See accompanying Notes to Consolidated Financial Statements.
61
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, 2008
Balance at January 1, 2008 . . . .
$-0-
$94,875
$481,228
$
(80,938)
$3,003,152 $(173,690)
$3,324,627
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
Year Ended December 31, 2009
Comprehensive income (loss)
Common dividends declared
. .
($0.57 a share) . . . . . . . . . . . . .
Acquisition of treasury stock . . . .
Stock-based compensation . . . . .
Exercise of stock options . . . . . . .
Retirement of treasury stock . . . .
Balance at December 31,
851,234
404,953
1,256,187
(47,182)
(435)
(57,382)
(47,564)
4,441
4,865
69,758
(47,182)
(47,564)
9,860
4,683
-0-
5,419
253
(10,376)
(2,000)
2009 . . . . . . . . . . . . . . . . . . . .
-0-
83,875
441,361
(319,183)
3,228,904
(36,066)
3,398,891
Year Ended December 31, 2010
Comprehensive income (loss)
Common dividends declared
. .
($.62 a share) . . . . . . . . . . . . . .
Acquisition of treasury stock . . . .
Stock-based compensation . . . . .
Exercise of stock options . . . . . . .
Retirement of treasury stock . . . .
Balance at December 31,
342,141
517,064
(49,015)
(2,329)
(181,205)
(246,006)
3,451
39,446
206,556
859,205
(49,015)
(246,006)
11,844
41,322
-0-
8,393
4,205
(21,351)
(4,000)
2010 . . . . . . . . . . . . . . . . . . . .
$-0-
$79,875
$432,608
$
22,958
$3,513,419 $ (32,619)
$4,016,241
See accompanying Notes to Consolidated Financial Statements.
62
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended December 31,
2009
2010
2008
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to cash provided from operations:
517,064 $
404,953 $
452,259
Increase in future policy benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in other policy benefits . . . . . . . . . . . . . . . . . . . . . . . . .
Deferral of policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . .
Change in current and deferred income taxes . . . . . . . . . . . . . . . . . . . . . . .
Realized (gains) losses on sale of investments and properties . . . . . . . . .
Change in other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contributions to benefit plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net
544,086
1,110
(526,791)
433,488
78,125
(40,190)
(24,716)
(34,755)
35,013
46,159
533,466
(18,172)
(560,120)
429,253
108,052
141,659
(43,471)
(14,000)
-0-
(5,507)
429,256
(21,922)
(549,004)
398,324
57,316
107,504
(60,205)
(52,238)
-0-
(30,679)
Cash provided from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,028,593
976,113
730,611
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
325,950
638,860
-0-
5,767
900,417
760,858
1,138
7,167
Total investments sold or matured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
970,577
1,669,580
123,659
580,580
-0-
16,933
721,172
Acquisition of investments:
Fixed maturities—available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,908,109)
(905)
(2,311,455)
(43)
(1,091,462)
(10,284)
Total investments acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,909,014)
(27,793)
128,727
(754)
(9,181)
77
(53,170)
342,890
(2,311,498)
(23,652)
(226,645)
(13,829)
(6,499)
-0-
(24,556)
-0-
(1,101,746)
(16,082)
(19,734)
17,935
(9,800)
786
(24,779)
-0-
Cash used for investment activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(557,641)
(937,099)
(432,248)
Cash provided from (used for) financing activities:
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of 9 1⁄4% Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of 9 1⁄4% Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of 8 1⁄4% Senior Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net borrowing (repayment) of commercial paper
. . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit from stock option exercises . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net receipts (payments) from deposit product operations . . . . . . . . . . . . . . .
37,863
(50,061)
-0-
(8,913)
-0-
(34,432)
3,455
(246,006)
(31,527)
4,430
(46,615)
296,308
-0-
(99,451)
(70,928)
253
(47,564)
112,005
25,473
(48,802)
-0-
-0-
-0-
102,178
3,618
(455,736)
112,011
Cash provided from (used for) financing activities . . . . . . . . . . . . . . . . . . . . . . . .
(329,621)
148,438
(261,258)
Effect of foreign exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . .
(7,570)
(1,934)
(10,803)
Increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash at beginning of year (includes cash of $847 thousand, $12.3 million,
and $-0- at January 1, 2010, 2009, and 2008, respectively, in subsidiary
held for sale) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash at end of year (includes cash of $0, $847 thousand and $12.3 million
at December 31, 2010, 2009, and 2008, respectively, in subsidiary held
for sale) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
133,761
185,518
26,302
231,918
46,400
20,098
365,679 $
231,918 $
46,400
See accompanying Notes to Consolidated Financial Statements.
63
TORCHMARK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands 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), under
guidance issued by the Financial Accounting Standards Board (FASB). The preparation of financial
statements in conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates.
Principles of Consolidation: The 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 accounting guidance which 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, 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.
Additionally, as further described under the caption Low-Income Housing Tax Credit Interests below
in this note, Torchmark holds passive interests in limited partnerships which provide investment returns
through the provision of tax benefits (principally from the transfer of federal or state tax credits related to
federal low-income housing). These interests are also considered to be VIEs. They are not consolidated
because the Company has no power to control the activities that most significantly affect the economic
performance of these entities and therefore the Company is not the primary beneficiary of any of these
interests. Torchmark’s involvement is limited to its limited partnership interest in the entity. Torchmark has
not provided any other financial support
to the entities beyond its commitments to fund its limited
partnership interests during 2008, 2009, or 2010, and there are no arrangements or agreements with any
of the interests to provide other financial support. The maximum loss exposure relative to these interests
is limited to their carrying value.
When a component of Torchmark’s business is sold or expected to be sold during the ensuing year,
Torchmark reports the assets and liabilities of the component as assets and liabilities of subsidiaries held
for sale. Assets or liabilities of subsidiaries held for sale are segregated and are recorded in the
Consolidated Balance Sheets at the lower of the carrying amount or estimated fair value less cost to sell.
If the carrying amount of the business exceeds its estimated fair value, a loss is recognized. Major
classes of assets and liabilities of subsidiaries held for sale are separately disclosed in the Notes to the
Consolidated Financial Statements.
Torchmark reports the results of operations of a business as discontinued operations when the
component is sold or expected to be sold, the operations and cash flows of the business have been or will
be eliminated from the ongoing operations as a result of the disposal transaction, and Torchmark will not
have any significant continuing involvement
the disposal
transaction. The results of discontinued operations are reported in discontinued operations in the
in the operations of
the business after
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
Consolidated Statements of Operations for current and prior periods commencing in the period in which
the business is either disposed of or is accounted for as a disposal group, including any gain or loss
recognized on the sale or adjustment of the carrying amount to fair value less cost to sell. Major
components
in
Note 3 — Discontinued Operations in the Notes to the Consolidated Financial Statements. Because the
business has been sold or classified as held for sale, and its operations are discontinued, the financial
results of the business are excluded from the Notes to the Consolidated Financial Statements, other than
in Note 3, the Consolidated Statements of Cash Flows, and Note 2 — Statutory Accounting.
from discontinued
operations
separately
disclosed
income
are
the
of
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 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. Income attributable to investments is included in Torchmark’s net investment income. Net investment
income for the years ended December 31, 2010, 2009, and 2008 included $522 million, $487 million, and
$451 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: Fair values for cash, short-term investments, short-term debt,
receivables and payables approximate carrying value. Fair values for long-term debt investments and
equity securities are determined in accordance with specific accounting guidance. 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. For
specific information regarding Torchmark’s measurements and procedures in valuing financial
instruments, please see Note 4—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. Mortgage loans are valued at discounted cash flows.
Impairment of Investments: Torchmark evaluates securities for other-than-temporary impairment as
described in Note 4—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.
In April, 2009, the FASB amended previous guidance concerning other-than-temporary impairments
of debt securities and changed the presentation of other-than-temporary impairments in the financial
statements. If an entity intends to sell or if it is more likely than not that it will be required to sell an
impaired security prior to recovery of its cost basis, the security is to be considered other-than-temporarily
impaired and the full amount of impairment must be charged to earnings. Otherwise, losses on securities
which are other-than-temporarily impaired are separated into two categories, the portion of loss which is
considered credit loss and the portion of loss which is due to other factors. The credit loss portion is
charged to earnings while the loss due to other factors is charged to other comprehensive income, both
charges net of tax. The revised guidance called for an opening cumulative effect adjustment to reclassify
any unrecognized after-tax credit loss on each previously other-than-temporarily impaired security held at
the beginning of the period of adoption as an adjustment to retained earnings and a corresponding
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
adjustment to accumulated other comprehensive income. The revisions were effective for interim and
annual periods ending after June 15, 2009, but early adoption was permitted for periods ending after
March 15, 2009. Disclosures for earlier periods for comparative purposes were not required until the
comparative period’s end after initial adoption.
Torchmark elected to early adopt the amended guidance for the periods beginning January 1, 2009.
Adoption resulted in no cumulative effect adjustment to opening retained earnings or to accumulated
other comprehensive income as of January 1, 2009. Invested assets, total assets, and total shareholders’
equity were not affected by adoption. Application of the new guidance resulted in an after-tax increase in
net income of $13.5 million in 2009, because the portion of other-than-temporary impairment loss related
to factors other than credit was recorded in other comprehensive income instead of being reflected in net
income. See Note 4—Investments under the caption Other-than-temporary impairments for a full
discussion and disclosures related to other-than-temporary impairments.
Cash: Cash consists of balances on hand and on deposit
in banks and financial
institutions.
Overdrafts arising from the overnight investment of funds offset cash balances on hand and on deposit.
Recognition of Premium Revenue and Related Expenses: Premium income for traditional
long-
duration life and health insurance products is recognized when due from the policyholder. Premiums for
short-duration health contracts are recognized as revenue over the contract period in proportion to the
insurance protection provided. Profits for limited-payment life insurance contracts 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). Life premium includes policy
charges of $26 million, $28 million, and $31 million for the years ended December 31, 2010, 2009, and
2008, respectively. Other premium consists of annuity policy charges in each year. Profits are also
earned to the extent that investment income exceeds policy liability interest requirements. The related
benefits and expenses are matched with revenues by means of the provision of future policy benefits and
the amortization of deferred acquisition costs in a manner which recognizes profits as they are earned
over the same period.
Future Policy Benefits: The liability for future policy benefits for universal
life-type products is
represented by policy account value. The liability for future policy benefits for all other life and health
products, approximately 78% 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
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
proportion to the receipt of premium income. Limited-payment contracts are amortized over the contract
period. Universal life-type policies are amortized with interest in proportion to estimated gross profits. The
assumptions used to amortize acquisition costs with regard to interest, mortality, morbidity, and
persistency are consistent with those used to estimate the liability for future policy benefits. For interest-
sensitive and deposit-balance type products, these assumptions are reviewed on a regular basis and are
revised if actual experience differs significantly from original expectations. For all other products,
amortization assumptions are generally not revised once established. Deferred acquisition costs are
subject to periodic recoverability and loss recognition testing to determine if there is a premium deficiency.
These tests ensure that the present value of future contract-related cash flows will support the capitalized
deferred acquisition cost asset. These cash flows consist primarily of premium income, less benefits and
expenses taking inflation into account. The present value of these cash flows, less the benefit reserve, is
then compared with the unamortized deferred acquisition cost balance. In the event the estimated present
value of net cash flows is less, the deficiency would be recognized by a charge to earnings and either a
reduction of unamortized acquisition costs or an increase in the liability for future benefits, as described
under the caption Future Policy Benefits.
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 were previously established in connection with Torchmark’s
variable life and annuity businesses. Torchmark disposed of this business as of December 31, 2010.
Accordingly, separate account assets and liabilities were included in “Assets or Liabilities of subsidiary
held for sale,” respectively, as of December 31, 2009.
Income Taxes:
Income taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement book values and tax bases of assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date. More information concerning income taxes is provided in Note 9—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 recorded when, based on events and circumstances, it becomes
evident that the fair value of the asset is less than its carrying amount. Original cost of property and
equipment was $119 million and $111 million at December 31, 2010 and 2009, respectively. Accumulated
depreciation was $65 million at year end 2010 and $60 million at the end of 2009. Depreciation expense
was $6.0 million in 2010, $4.6 million in 2009, and $5.0 million in 2008. 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. The Company spent
approximately $23 million on the building and land, and approximately $3 million on equipment. Liberty
National Life Insurance Company (Liberty), a wholly-owned Torchmark subsidiary, 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 2008, Globe Life And Accident Insurance Company (Globe),
a wholly-owned Torchmark subsidiary, sold two office buildings in Oklahoma City, Oklahoma for proceeds
of $7.5 million, recording a gain on the sale of $2.6 million. No buildings were sold in 2009 or 2010.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
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, 2010, Torchmark had $283 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 Torchmark’s investment
in these entities was $169 million at December 31, 2009. As of December 31, 2010, Torchmark was
obligated under future commitments of $122 million, which amount is included in the above carrying
value. Interests for which the return has been guaranteed by unrelated third-parties are accounted for
using the effective-yield method. The remaining interests are accounted for using the amortized-cost
method.
For 2010, the Federal income benefits accrued during the year, net of the amortization associated
with guaranteed interests, were recorded in “Income Tax Expense.” Amortization associated with non-
guaranteed interests was reflected as a component of “Net Investment Income.” For years prior to 2010,
the Federal income tax benefits accrued during the year, net of amortization associated with all interests,
were recorded in “Income tax expense.” All state premium tax benefits, net of the related amortization,
are recorded in “Net investment income.” At December 31, 2010, $269 million was included in “Other
assets” with the remaining $14 million included in “Other invested assets.” At December 31, 2009, the
comparable amounts were $149 million and $20 million, respectively. Any unpaid commitments to invest
are recorded in “Other liabilities.”
Goodwill: The excess cost of businesses acquired over the fair value of their net assets is reported
as goodwill. Goodwill is subject to annual impairment testing based on certain procedures outlined by
GAAP. Amortization of goodwill is not permitted. Torchmark tested its goodwill annually in each of the
years 2008 through 2010. The tests involve assigning the Company’s carrying value to each of the
reporting units of Torchmark’s segments, including the portion of goodwill assigned to each reporting unit.
The fair value of each reporting unit is measured against that reporting unit’s corresponding carrying
value. Because the estimated fair value exceeded the carrying value, including goodwill, of each reporting
unit in each period, Torchmark’s goodwill was not impaired in any of the periods. Approximately $27
million of goodwill was associated with a subsidiary sold in 2010, described more fully in Note 3—
Discontinued Operations.
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: The Company recorded a $2.9 million tax settlement benefit in 2009
primarily resulting from the favorable settlements of U.S. Federal income tax issues that related to prior tax
years. The Company also recorded a $10.8 million settlement benefit in 2008 related to litigation that
occurred in prior years as a result of the favorable resolution of litigation concerning tax liabilities asserted
by Canadian tax authorities covering several years. More information on these tax settlements is provided in
Note 9—Income Taxes.
Torchmark received an additional pre-tax litigation settlement, net of expenses, of $1.3 million in
2008 ($.9 million after tax) from investment litigation. Legal settlement costs in the amount of $2.5 million
in 2008 ($1.6 million after tax) were expensed relating to litigation issues arising in prior periods and
concerning events occurring many years ago.
The investment litigation receipts were included in “Other income” in the Consolidated Statement of
Operations. The legal settlement costs were included in “Other operating expense.” The income tax
settlements were included as reductions to “Income taxes.”
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
Postretirement Benefits: Torchmark accounts for its defined benefit pension plans by recognizing
the funded status of its postretirement benefit plans on its Consolidated Balance Sheets in accordance
with accounting guidance. Periodic gains and losses attributable to changes in plan assets and liabilities
that are not recognized as components of net periodic benefit costs are recognized as components of
other comprehensive income, net of tax. As of December 31, 2009, Torchmark adopted new accounting
guidance requiring new disclosures about assets in its pension plans. The new disclosures include
information about how investment decisions are made, categories of assets, information about how
assets are valued, and concentrations of
risk. More information concerning the accounting and
disclosures for postretirement benefits is found in Note 10—Postretirement Benefits.
Stock Compensation: Torchmark accounts for stock-based compensation by recognizing an
expense in the financial statements based on the “fair value method.” The fair value method requires that
a fair value be assigned to a stock option or other stock grant on its grant date and that this value be
amortized over the grantees’ service period.
The fair value method 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 2008 through 2010 is as follows:
Volatility factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40.3% 29.6% 11.7%
1.3% 2.4% 0.8%
4.74
4.72
4.69
2.5% 2.6% 2.8%
2010
2009
2008
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
2010, 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
a three-year period, the Company did not have sufficient exercise history during 2010 or previous years to
determine an appropriate expected term on these grants. Volatility and risk-free interest rates are
assumed over a period of time consistent with the expected term of the option. Volatility is measured on a
historical basis. Monthly data points are utilized 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,
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).
it
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 14—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 Consolidated Statements of Operations. 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 12—Shareholders’ Equity.
69
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,
2008
2009
2010
Shareholders’ Equity
At December 31,
2009
2010
Life insurance subsidiaries . . . . . . . . . . . . . .
$499,440
$274,734
$350,263
$1,607,811 $1,428,178
The excess, if any, of shareholder’s 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 12—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
have adopted the National Association of
(NAIC) statutory accounting
practices (NAIC SAP) as the basis for statutory accounting. However, certain states have retained the
prescribed practices of their respective insurance code or administrative code which can differ from NAIC
SAP. There are no significant differences between NAIC SAP and the accounting practices prescribed by
the states of domicile for Torchmark’s life insurance companies that affect statutory surplus.
Insurance Commissioners’
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 3—Discontinued Operations
During the third quarter of 2010, Torchmark’s subsidiary, Liberty, entered into an agreement to sell its
wholly-owned subsidiary, United Investors Life Insurance Company (United Investors), to an unaffiliated
insurance carrier. As a result of the agreement, as of September 30, 2010, Torchmark classified the
assets of United Investors as held for sale. The sale was completed as of December 31, 2010. United
Investors markets primarily term and interest-sensitive life insurance, fixed annuities, and, prior to 2009,
variable annuities. Consideration for the sale consisted of $343 million in cash at the closing, as well as
post-closing proceeds receivable from the buyer of approximately $21 million. The transaction resulted in
a pre tax loss of approximately $38 million ($35 million after tax), which has been reported as a realized
loss on the disposal of a discontinued operation. Additionally, Liberty has signed an agreement with the
acquirer to service the United Investors insurance and annuity products for an estimated period of
eighteen months subsequent to the closing under a service agreement.
Due to the sale, Torchmark’s consolidated financial statements are presented to reflect
the
transactions as discontinued operations. The primary operations of United Investors involve lines of
business that Torchmark no longer emphasizes. Therefore, Torchmark management believes this
transaction will allow the Company to focus on its core protection life and health insurance businesses, as
well as provide additional capital.
Significant assets and liabilities held for sale at December 31, 2009 were as follows:
December 31,
2009
Assets:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred acquisition costs and value of insurance purchased . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Separate account assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 683,494
847
137,633
26,628
15,218
792,823
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,656,643
Liabilities:
Policy liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current and deferred income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Separate account liabilities: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
521,928
1,746
3,562
792,823
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,320,059
Net equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 336,584
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 3—Discontinued Operations (continued)
An analysis of income from discontinued operations is as follows:
Twelve months ended December 31,
2009
2010
2008
Premium income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized investment gains (losses) . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 73,675
43,787
2,850
103
$ 77,094
42,375
(12,167)
22
$ 86,356
44,289
37
-0-
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
120,415
107,324
130,682
Policyholder benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred acquisition costs . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total benefits and expense . . . . . . . . . . . . . . . . . . . .
56,374
14,599
4,960
75,933
59,470
13,267
6,470
79,207
70,375
19,936
7,514
97,825
Pre tax income from discontinued operations . . . . . . . . .
Income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44,482
(14,698)
28,117
(9,216)
32,857
(10,298)
Income from discontinued operations . . . . . . . . . . . . . . .
$ 29,784
$ 18,901
$ 22,559
Revenues and profitability in the indicated segment were as follows:
Twelve Months Ended December 31,
2009
2008
2010
Revenues:
Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 65,726
7,949
43,787
103
$ 67,917
9,177
42,375
22
$ 72,585
13,771
44,289
-0-
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$117,565
$119,491
$130,645
Segment profitability (loss):
Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 22,692
(931)
22,490
(2,619)
$ 19,477
3,084
21,660
(3,937)
$ 17,750
(6,423)
24,612
(3,119)
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 41,632
$ 40,284
$ 32,820
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—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, 2010 and 2009 is as follows:
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Amount
per the
Balance
Sheet
% of Total
Fixed
Maturities*
2010:
Fixed maturities available for sale:
Bonds:
U.S. Government direct
obligations and agencies . . . . . . $
14,117 $
371
$
-0-
$
14,488 $
14,488
0%
Government-sponsored
enterprises . . . . . . . . . . . . . . . . .
GNMAs . . . . . . . . . . . . . . . . . . . . . .
States, municipalities, and
political subdivisions . . . . . . . . .
Foreign governments . . . . . . . . . .
Corporates . . . . . . . . . . . . . . . . . . .
Residential mortgage-backed
57,678
6,592
-0-
976
(1,059)
(1)
56,619
7,567
56,619
7,567
1,212,185
22,352
7,707,938
10,752
679
423,076
(41,811)
-0-
(210,149)
1,181,126
23,031
7,920,865
10,267
22,456
38,471
1,268,144
1,181,126
23,031
7,920,865
10,267
22,456
38,471
1,268,144
1
0
11
0
75
0
0
0
13
securities . . . . . . . . . . . . . . . . . .
Collateralized debt obligations . . .
Asset-backed securities . . . . . . . .
Redeemable preferred stocks . . . . .
9,717
56,525
36,689
1,311,704
550
-0-
2,460
36,405
-0-
(34,069)
(678)
(79,965)
Total fixed maturities . . . . . . . . . . . 10,435,497
475,269
(367,732)
10,543,034
10,543,034
100%
Equity securities:
Common stocks:
Banks and insurance
companies . . . . . . . . . . . . . . . . .
776
290
Non-redeemable preferred
stocks . . . . . . . . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . .
Total fixed maturities and equity
14,099
14,875
2,058
2,348
-0-
(69)
(69)
1,066
1,066
16,088
17,154
16,088
17,154
securities . . . . . . . . . . . . . . . . . . $10,450,372 $477,617
$(367,801) $10,560,188 $10,560,188
*
At fair value
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Amount
per the
Balance
Sheet
% of Total
Fixed
Maturities
2009:
Fixed maturities available for sale:
Bonds:
U.S. Government direct obligations
and agencies . . . . . . . . . . . . . . . . . . . $
Government-sponsored enterprises . . .
GNMAs . . . . . . . . . . . . . . . . . . . . . . . . . .
States, municipalities, and political
subdivisions . . . . . . . . . . . . . . . . . . . .
Foreign governments . . . . . . . . . . . . . . .
Corporates . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgage-backed
securities . . . . . . . . . . . . . . . . . . . . . . .
Commercial mortgage-backed
12,000 $
83,378
7,874
495 $
-0-
1,023
-0- $
(5,859)
-0-
12,495 $
77,519
8,897
12,495
77,519
8,897
0%
1
0
1,011,583
20,974
6,964,725
4,792
850
211,504
(29,913)
(10)
986,462
21,814
(419,509) 6,756,720
986,462
21,814
6,756,720
10,367
744
-0-
11,111
11,111
11
0
74
0
0
0
1
13
securities . . . . . . . . . . . . . . . . . . . . . . .
Collateralized debt obligations . . . . . . .
Asset-backed securities . . . . . . . . . . . . .
Redeemable preferred stocks . . . . . . . . . .
1,622
54,551
38,969
1,353,456
4
253
1,480
22,741
-0-
(36,767)
(1,016)
1,626
18,037
39,433
(206,196) 1,170,001
1,626
18,037
39,433
1,170,001
Total fixed maturities . . . . . . . . . . . . . . .
9,559,499
243,886
(699,270) 9,104,115
9,104,115
100%
Equity securities:
Common stocks:
Banks and insurance companies . . . . .
Industrial and all others . . . . . . . . . . . . .
Non-redeemable preferred stocks . . . . . .
Total equity securities . . . . . . . . . . . . . .
776
-0-
14,099
14,875
213
2
1,719
1,934
(42)
-0-
(45)
(87)
947
2
15,773
16,722
947
2
15,773
16,722
Total fixed maturities and equity
securities . . . . . . . . . . . . . . . . . . . . . . . $9,574,374 $245,820 $(699,357) $9,120,837 $9,120,837
A schedule of fixed maturities by contractual maturity at December 31, 2010 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
$
173,468
537,064
652,335
2,454,416
6,508,691
$
175,980
576,475
698,910
2,490,818
6,522,090
10,325,974
10,464,273
Mortgage-backed and asset-
backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
109,523
78,761
$10,435,497
$10,543,034
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
Analysis of investment operations:
Year Ended December 31,
2010
2009
2008
Net investment income is summarized as follows:
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$662,202
1,183
27,248
3,064
762
$ 609,566 $
1,287
25,394
6,482
1,296
605,523
1,431
23,787
6,935
2,901
Less investment expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(18,095)
(11,485)
(13,371)
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$676,364
$ 632,540 $
627,206
An analysis of realized gains (losses) from investments is as follows:
Realized investment gains (losses):
Fixed maturities:
Sales and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Writedowns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 43,022
(4,850)
$
15,638 $
(143,166)
(18,749)
(87,299)
Equity securities:
Sales and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Writedowns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on redemption of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
-0-
(1,646)
813
(862)
-0-
(1)
(1,101)
-0-
(1,901)
0
408
Applicable tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37,340
(13,070)
(129,492)
44,147
(107,541)
37,639
Realized gains (losses) from investments, net of tax . . . . . . . . . . . . . . . . .
$ 24,270
$ (85,345) $
(69,902)
An analysis of the net change in unrealized investment gains (losses) is as
follows:
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed maturities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
432
562,921
$
2,377 $
1,240,781
(3,049)
(1,591,281)
Net change in unrealized gains (losses) on securities . . . . . . . . . . . . . . . .
$563,353
$1,243,158 $(1,594,330)
Proceeds from sales of fixed maturities available for sale were $315 million in 2010, $831 million in
2009, and $100 million in 2008. Gross gains realized on those sales were $30 million in 2010, $69 million in
2009, and $3 million in 2008. Gross losses were $13 million in 2010, $56 million in 2009, and $3 million in
2008. Proceeds from sales of equity securities were $1.1 million in 2009. There were no equities sold in
2008, and 2010 sales were immaterial. Gross gains realized on those sales were zero in all three years.
Gross losses realized on the 2009 sales were $862 thousand.
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
Fair value measurements: Torchmark measures the fair value of its financial assets based on a
hierarchy consisting of three levels which 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.
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 99%
of the fair value reported at December 31, 2010 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 corroborated prices produce small variations, the close correlation indicates
observable inputs, and the median value is used. When corroborated prices present greater variations,
additional analysis is required to determine which value is the most appropriate. When only one price is
available, management evaluates observable inputs and performs additional analysis to confirm that the
price is appropriate. All fair value measurements based on prices determined with observable market data
are reported as Level 1 or Level 2 measurements.
When third-party vendor prices are not available, the Company attempts to obtain at least three
quotes from broker/dealers for each security. When at least three quotes are obtained, and the standard
deviation of such quotes is less than 3%, (suggesting that the independent quotes were likely derived
using similar observable inputs), the Company uses the median quote and classifies the measurement as
Level 2. At December 31, 2010 and 2009, there were no assets valued as Level 2 in this manner with
broker quotes.
information and management
When the standard deviation is 3% or greater, or the Company cannot obtain three quotes, then
additional
judgment are required to establish the fair value. The
measurement is then classified as Level 3. The Company uses information and valuation techniques
deemed appropriate for determining the point within the range of reasonable fair value estimates that is
most representative of fair value under current market conditions. As of December 31, 2010 and 2009,
fixed maturities and equity
fair value measurements classified as Level 3 represented 1% of
securities.
total
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
The following tables represent
the fair value of assets measured on a recurring basis at
December 31, 2010 and 2009:
Description
Fixed maturities available for sale: . . . . . . . . . . . . . .
Bonds:
U.S. Government direct obligations and
agencies . . . . . . . . . . . . . . . . . . . . . . . . . .
Government-sponsored enterprises . . . . .
GNMAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
States, municipalities, and political
subdivisions . . . . . . . . . . . . . . . . . . . . . . .
Foreign governments . . . . . . . . . . . . . . . . .
Corporates . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgage-backed
securities . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized debt obligations . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . .
Redeemable preferred stocks . . . . . . . . . . . . . .
Total fixed maturities . . . . . . . . . . . . . . . . . .
Equity securities:
Common stocks:
Banks and insurance companies . . . . . . . .
Non-redeemable preferred stocks . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . . .
Total fixed maturities and equity
Fair Value Measurements at December 31, 2010 Using:
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant Other
observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Total Fair
Value
$
-0-
-0-
-0-
-0-
-0-
15,347
-0-
-0-
-0-
270,189
285,536
396
16,088
16,484
$
14,488
56,619
7,567
1,181,126
23,031
7,831,845
10,267
-0-
30,429
997,955
10,153,327
-0-
-0-
-0-
$
-0-
-0-
-0-
$
14,488
56,619
7,567
-0-
-0-
73,673
-0-
22,456
8,042
-0-
104,171
670
-0-
670
1,181,126
23,031
7,920,865
10,267
22,456
38,471
1,268,144
10,543,034
1,066
16,088
17,154
securities . . . . . . . . . . . . . . . . . . . . . . . . .
$302,020
$10,153,327
$104,841
$10,560,188
Percentage of total
. . . . . . . . . . . . . . . . . . .
2.9%
96.1%
1.0%
100.0%
Description
Fixed maturities available for sale:
Bonds:
U.S. Government and agencies . . . . . . . . . . . . . . .
Government-sponsored enterprises . . . . . . . . . . . .
GNMAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
States, municipalities and political subdivisions . .
Foreign governments . . . . . . . . . . . . . . . . . . . . . . . .
Corporates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgage-backed securities . . . . . . . .
Commercial mortgage-backed securities . . . . . . . .
Collateralized debt obligations . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . .
Redeemable preferred stocks . . . . . . . . . . . . . . . . . . . . .
Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities:
Common stocks:
Banks and insurance companies . . . . . . . . . . . . . .
Industrial and all others . . . . . . . . . . . . . . . . . . . . . .
Non-redeemable preferred stocks . . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . . . . . . . . .
Total fixed maturities and equity securities . . . . . .
Fair Value Measurements at December 31, 2009 Using:
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Total Fair
Value
$
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
233,490
233,490
307
2
15,719
16,028
$249,518
$
12,495
77,519
8,897
986,462
16,618
6,684,956
11,111
1,626
-0-
31,452
936,511
8,767,647
-0-
-0-
54
54
$8,767,701
$
-0-
-0-
-0-
-0-
5,196
71,764
-0-
-0-
18,037
7,981
-0-
102,978
640
-0-
-0-
640
$103,618
$
12,495
77,519
8,897
986,462
21,814
6,756,720
11,111
1,626
18,037
39,433
1,170,001
9,104,115
947
2
15,773
16,722
$9,120,837
Percent of total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.7%
96.1%
1.2%
100.0%
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
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
Collateralized
debt
Obligations Corporates* Other Equities
Total
Balance at January 1, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,403
$ 115,204
$139,769
$
819
$594
$ 268,789
Total gains or losses:
Included in realized gains/losses . . . . . . . . . . . . .
Included in other comprehensive income . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other ** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers in and/or out of Level 3 . . . . . . . . . . . . . . . .
-0-
(2,006)
(550)
(167)
-0-
13,397
-0-
(100,424)
(622)
-0-
-0-
-0-
21
(25,084)
(22,123)
3,981
-0-
68,317
-0-
(103)
-0-
(5)
(89)
-0-
-0-
30
-0-
-0-
-0-
-0-
21
(127,587)
(23,295)
3,809
(89)
81,714
Balance at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . .
23,077
14,158
164,881
622
624
203,362
Total gains or losses:
Included in realized gains/losses . . . . . . . . . . . . .
Included in other comprehensive income . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other ** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers in and/or out of Level 3 . . . . . . . . . . . . . . . .
-0-
1,717
-0-
(183)
-0-
(16,630)
Balance at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . .
7,981
Total gains or losses:
Included in realized gains/losses . . . . . . . . . . . . .
Included in other comprehensive income . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other ** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers in and/or out of Level 3 . . . . . . . . . . . . . . . .
-0-
255
-0-
(194)
-0-
-0-
(83,458)
80,674
125
1,014
5,524
-0-
18,037
(1,712)
2,445
-0-
2,333
1,353
-0-
(2,502)
(2,728)
(6,833)
2,366
213
(83,633)
-0-
(4)
-0-
(5)
148
4,435
-0-
16
-0-
-0-
-0-
-0-
(85,960)
79,675
(6,708)
3,192
5,885
(95,828)
71,764
5,196
640
103,618
1,504
14,711
(5,862)
2,536
-0-
(10,980)
708
(564)
(2,331)
(1)
-0-
(3,008)
-0-
30
-0-
-0-
-0-
-0-
500
16,877
(8,193)
4,674
1,353
(13,988)
Balance at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . $ 8,042
$ 22,456
$ 73,673
$
-0-
$670
$ 104,841
*
**
Includes redeemable preferred stocks
Includes capitalized interest and foreign exchange adjustments.
The collateral underlying collateralized debt obligations 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 by
the borrower). Of the change in the fair value of Level 3 assets still held at December 31, 2010, $500
thousand of net realized investment gains was included in net income. At December 31, 2009, the charge
to earnings was $86 million.
In 2008 and 2009, respectively, $111 million and $53 million of fixed maturities transferred in to Level
3 from Level 2 due to the lack of observable market data. There were no transfers into Level 3 in 2010. In
2008, $29 million of fixed maturities transferred out of Level 3 into Level 2 due to the availability of
valuations based on observable data. In 2009, $149 million of fixed maturities transferred out of Level 3
into Level 2 due to the use of an additional pricing vendor whose valuations gave us an additional source
of observable data. In 2010, $14 million of fixed maturities transferred out of Level 3 into Level 2 due to
the availability of observable market data.
Torchmark adopted additional new guidance concerning the disclosures of fair value as of January 1,
2010. This new guidance expanded fair value disclosures by requiring the disclosure of transfers between
the Level 1 and Level 2 classifications and the reasons for the transfers; more detail about the activity
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
within the Level 3 classification by reporting purchases, sales, issuances, and settlements on a gross
rather than net basis; proper classification of assets and liabilities; and complete information about
valuation inputs and techniques. The disclosure of the additional detail regarding the Level 3 activity was
not required for Torchmark until 2011. However, Torchmark early adopted this guidance as of January 1,
2010 as permitted.
In 2010, there was one investment in the amount of $5 million that transferred from Level 1 to Level
2. This was because a direct quote was available at December 31, 2009, but no direct quote was
available at December 31, 2010, only observable inputs.
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 evaluation of Torchmark’s securities for other-than-temporary impairments is a
process that is undertaken not less frequently than quarterly and is overseen by a team of investment and
accounting professionals. Each security which is impaired because the fair value is less than the cost or
amortized cost is identified and evaluated. 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
•
• Expected future cash flows
In many cases, management believes it
The relative weight given to each of these factors can change over time as facts and circumstances
to
change.
prospective factors than to retrospective factors. Prospective factors that are given more weight include
prospects for recovery, the Company’s ability and intent to hold the security until anticipated recovery,
and expected future cash flows.
is appropriate to give relatively more weight
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
•
The value of underlying collateral
• 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
• Recent cash flows
While all available information is taken into account, it is difficult to predict the ultimately recoverable
amount of a distressed or impaired security.
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
During 2010, the Company determined that certain of its holdings in fixed maturities were other-than-
temporarily impaired, resulting in writedowns of $4.9 million ($3.2 million after tax) on a CDO and on three
corporate bonds. The pretax writedowns included the writedown of the CDO with a carrying amount of
$1.7 million to a fair value of zero ($1.1 million after tax). The corporate bonds were written down
$3.2 million ($2.1 million after tax).
During 2009, the Company determined that certain of its holdings in fixed maturities were other-than-
temporarily impaired, resulting in writedowns of $143 million ($94 million after tax) on CDOs and
corporate bonds. The pretax writedown included the writedowns of CDOs with a carrying amount of $117
million to a fair value of $13 million, resulting in a total pretax writedown of $104 million. However, in
accordance with accounting guidance regarding other-than-temporary impairments, $83 million of the
writedown was determined to be the result of a credit loss and was charged to earnings while the
remaining $21 million was charged to other comprehensive income. The credit loss portion on the CDOs
was determined as the difference between the securities’ amortized cost and the present value of
expected future cash flows. These expected cash flows were determined using judgment and the best
information available to the Company, and were discounted at the securities’ original effective yield rate.
Inputs used to derive expected cash flows included expected default
levels of
subordination, and loan-to-collateral value ratios. Management has determined that the present value of
future cash flows is a better measure of fair value due to limited observable market data and because the
market for these securities is not active and does not reflect orderly transactions. The pre-tax writedown
for other-than-temporary impairment on corporate bonds of $77 million was all credit related and was
included in the charge to earnings.
rates, current
During 2008, the Company also determined that certain holdings in securities 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 of these losses for other-than-temporary impairment were included in
realized investment losses.
As of year end 2010, previously written down securities remaining in the portfolio were carried at a
fair value of $68 million. Otherwise, as of December 31, 2010, Torchmark has no information available to
cause it to believe that any of its investments are other-than-temporarily impaired. Torchmark has the
ability and intent to hold these investments to recovery, and does not intend to sell nor expects to be
required to sell its other impaired securities.
During both 2009 and 2008, certain real estate holdings, measured on a nonrecurring basis, were
written down because the carrying values of these properties were not expected to be recoverable. In
2008, 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). In 2009,
additional writedowns in the amounts of $355 thousand ($231 thousand after tax) of Company-occupied
real estate and $205 thousand ($133 thousand after tax) of investment real estate were taken on these
same properties. The fair values in 2008 were determined based on recent sales of similar properties
(Level 2 observable inputs). The 2009 fair value was determined based on a bid (Level 1). The losses on
Company-occupied property were included in “Other operating expenses” and the losses on invested real
estate were included as “Other-than-temporary impairments.”
Unrealized loss analysis. Net unrealized losses on fixed maturities declined from $1.7 billion at
December 31, 2008 to $455 million at December 31, 2009, and then became a net unrealized gain of
$108 million at December 31, 2010. At December 31, 2010, investments in securities in the financial
sector were in a $115 million unrealized loss position, while investments in securities in the other sectors
had net gains of $223 million. The financial sector accounted for over 99% of the net unrealized losses in
2009. At December 31, 2008, the financial sector accounted for 56% of the net unrealized losses. Based
upon conditions experienced by companies in the bond market and the commercial paper market,
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
management believes that much of the unrealized loss at December 31, 2008 and during the early part of
2009 was attributable to illiquidity in the financial market which contributed to a spread widening, resulting
in increased unrealized losses on many securities that management expects to be fully recoverable.
Accordingly, as conditions in financial markets have improved since early 2009, unrealized gains in the
portfolio have occurred. Due to the strong and stable cash flows generated by its insurance products,
Torchmark has the ability to hold securities with temporary unrealized losses until recovery. Even though
these fixed maturity investments are available for sale, Torchmark generally expects and intends to hold
any securities which are temporarily impaired until they mature.
The following tables disclose unrealized investment losses by class of investment at December 31,
2010 and December 31, 2009. Torchmark considers these investments to be only temporarily impaired.
ANALYSIS OF GROSS UNREALIZED INVESTMENT LOSSES
At December 31, 2010
Description of Securities
Fixed maturities available for sale:
Bonds:
Less than
Twelve Months
Twelve Months
or Longer
Total
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
Government-sponsored
enterprises . . . . . . . . . . . . . $
GNMAs . . . . . . . . . . . . . . . . .
States, municipalities and
political subdivisions . . . . .
Corporates . . . . . . . . . . . . . .
Collateralized debt
56,619
47
$ (1,059) $
(1)
-0- $
-0-
-0- $
-0-
56,619 $ (1,059)
(1)
47
685,754
1,284,966
(26,734)
(39,331)
66,591
862,820
(15,077)
(170,818)
752,345
2,147,786
(41,811)
(210,149)
obligations . . . . . . . . . . . . .
Asset-backed securities . . . .
Redeemable preferred stocks . . .
-0-
-0-
199,362
-0-
-0-
(3,339)
22,331
8,042
646,454
(34,069)
(678)
(76,626)
22,331
8,042
845,816
(34,069)
(678)
(79,965)
Total fixed maturities . . . . . .
2,226,987
(70,464)
1,606,238
(297,268)
3,833,225
(367,732)
Equity securities:
Non-redeemable preferred
stocks . . . . . . . . . . . . . . . . . . . .
Total equity securities . . . . . .
Total fixed maturities and
-0-
-0-
-0-
-0-
30
30
(69)
(69)
30
30
(69)
(69)
equity securities . . . . . . . . $2,226,987
$(70,464) $1,606,268 $(297,337) $3,833,255 $(367,801)
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
ANALYSIS OF GROSS UNREALIZED INVESTMENT LOSSES
At December 31, 2009
Less than
Twelve Months
Twelve Months
or Longer
Total
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
Description of Securities
Fixed maturities available for sale:
Bonds:
Government-sponsored
enterprises . . . . . . . . . . . . . $
50,751
$ (3,069) $
26,767 $ (2,790) $
77,518 $ (5,859)
States, municipalities and
political subdivisions . . . . .
Foreign governments . . . . . .
Corporates . . . . . . . . . . . . . .
Collateralized debt
608,059
6,889
1,210,810
(18,845)
(10)
(56,336)
85,813
-0-
1,866,399
(11,068)
-0-
(363,173)
693,872
6,889
3,077,209
(29,913)
(10)
(419,509)
obligations . . . . . . . . . . . . .
Asset-backed securities . . . .
Redeemable preferred stocks . . .
-0-
1,034
58,313
-0-
(51)
(5,272)
15,975
8,253
922,593
(36,767)
(965)
(200,924)
15,975
9,287
980,906
(36,767)
(1,016)
(206,196)
Total fixed maturities . . . . . .
1,935,856
(83,583)
2,925,800
(615,687)
4,861,656
(699,270)
Equity securities:
Common stocks:
Banks and insurance
companies . . . . . . . . . . . . .
Non-redeemable preferred
stocks . . . . . . . . . . . . . . . . . . . .
Total equity securities . . . . . .
Total fixed maturities and
308
54
362
(42)
(45)
(87)
-0-
-0-
-0-
-0-
-0-
-0-
308
54
362
(42)
(45)
(87)
equity securities . . . . . . . . $1,936,218
$(83,670) $2,925,800 $(615,687) $4,862,018 $(699,357)
Torchmark subsidiaries held 234 issues (CUSIP numbers) at December 31, 2010 that had been in an
unrealized loss position for
less than twelve months, compared with 184 issues a year earlier.
Additionally, 133 and 279 issues had been in an unrealized loss position twelve months or longer at
December 31, 2010 and 2009, respectively. Torchmark’s entire fixed-maturity and equity portfolio
consisted of 1,430 issues at December 31, 2010 and 1,455 issues at December 31, 2009. The weighted
average quality rating of all unrealized loss positions as of December 31, 2010 was BBB+.
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
The following table presents an analysis of the changes in Torchmark’s amounts related to credit loss
positions for the year 2010.
Analysis of Amounts Related to Bifurcated Credit Losses*
For the Year Ended
December 31,
2010
2009
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21,566 $
-0-
Additions for which a credit loss related to other-than-temporary
impairment was not previously recognized . . . . . . . . . . . . . . . . . . . . . . . . . .
(52,293)
Reductions due to loss fully recognized in income and no longer
bifurcated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30,727
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21,566 $ 21,566
* Losses due to other-than-temporary impairment for which a portion was recognized in other comprehensive income.
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2010
2009
$14,481
2,154
14,482
8,913
2,955
$15,896
1,508
19,831
11,571
3,622
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$42,985
$52,428
The estimated fair value of mortgage loans, based on discounted cash flows, was approximately
$14.3 million at December 31, 2010 and $15.2 million at December 31, 2009. Accumulated depreciation
on investment real estate was $1.8 million at both December 31, 2010 and 2009.
Torchmark had $9.6 million in fixed maturities at book value ($17.1 million at fair value) that were
non-income producing during the twelve months ended December 31, 2010. Torchmark had $349
thousand in investment real estate at December 31, 2010 which was non-income producing during the
previous twelve months. Torchmark did not have any other invested assets that were non-income
producing during the twelve months ended December 31, 2010.
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 5—Deferred Acquisition Costs and Value of Insurance Purchased
An analysis of deferred acquisition costs and the value of insurance purchased is as follows:
2010
2009
2008
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
. . . . . . . . . . $3,270,895 $48,610 $ 3,174,822 $
54,065 $2,940,299 $60,178
Additions:
Deferred during period:
Commissions . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . .
Total deferred . . . . . . . . . . . . . . .
Foreign exchange adjustment . . . . . .
Adjustment attributable to unrealized
. . . . . . . . . . . .
investment losses(1)
296,043
229,367
525,410
5,038
-0-
Total additions . . . . . . . . . . . . . . .
530,448
-0-
-0-
-0-
17
-0-
17
309,722
248,984
558,706
10,617
-0-
569,323
-0-
-0-
-0-
46
-0-
46
292,836
251,700
544,536
-0-
75,674
620,210
-0-
-0-
-0-
-0-
-0-
-0-
Deductions:
Amortized during period . . . . . . . . . . .
Foreign exchange adjustment . . . . . .
Adjustment attributable to unrealized
investment gains(1) . . . . . . . . . . . . .
(413,114)
-0-
(5,776)
-0-
(410,485)
-0-
(5,501)
-0-
(372,349)
(13,338)
(6,039)
(74)
(24,745)
-0-
(62,765)
-0-
-0-
-0-
Total deductions . . . . . . . . . . . . .
(437,859)
(5,776)
(473,250)
(5,501)
(385,687)
(6,113)
Balance at end of year . . . . . . . . . . . . . . . . $3,363,484 $42,851 $ 3,270,895 $
48,610 $3,174,822 $54,065
(1) Represents amounts pertaining to investments relating to universal life-type products.
The amount of interest accrued on the unamortized balance of value of insurance purchased was
$2.6 million, $2.9 million, and $3.2 million for the years ended December 31, 2010, 2009, and 2008,
respectively. The average interest rates used for the years ended December 31, 2010, 2009, and 2008
were 5.6%, 5.6%, and 5.5%, respectively. The estimated amortization, net of interest accrued, on the
unamortized balance at December 31, 2010 during each of the next five years is: 2011, $4.8 million;
2012, $4.8 million; 2013, $4.7 million; 2014, $2.2 million; and 2015, $2.7 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.
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 6—Future Policy Benefit Reserves
A summary of
the assumptions used in determining the liability for future policy benefits at
December 31, 2010 is as follows:
Interest assumptions:
Individual Life Insurance
Years of Issue
Interest Rates
Percent of
Liability
1917-2010
1985-2010
1986-1992
1954-2000
1951-1985
1984-2010
2000-2010
1984-2010
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
12%
28
8
11
4
4
19
14
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
1955-2010
1993-2010
1986-1992
1955-2000
1951-1986
2008-2010
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%
6.75%
7.0%
Percent of
Liability
2%
61
24
7
1
1
4
100%
Morbidity assumptions:
For individual health, the morbidity assumptions are based on either Torchmark’s experience or the
assumptions used in calculating statutory reserves.
Termination assumptions:
Termination assumptions are based on Torchmark’s experience.
Overall Interest Assumptions:
The overall average interest assumption for determining the liability for future life and health
insurance benefits in 2010 was 6.1%.
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 7—Liability for Unpaid Health Claims
Activity in the liability for unpaid health claims is summarized as follows:
Year Ended December 31,
2008
2009
2010
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . $104,346 $119,855 $149,200
Incurred related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
661,740
(19,424)
674,710
(19,487)
716,821
(23,894)
Total incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paid related to:
642,316
655,223
692,927
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
577,875
68,189
583,127
87,605
604,721
117,551
Total paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
646,064
670,732
722,272
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,598 $104,346 $119,855
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. Such estimates are updated regularly based upon the Company’s
most recent claims data with recognition of emerging experience trends. Because of the nature of the
Company’s health business, the payment lags are relatively short and most claims are fully paid within a
year from the time incurred. Fluctuations in claims experience can lead to either over- or under-estimation
of the liability for any given year. The difference between the estimate made at the end of the prior period
and the actual experience during the period is reflected above under the caption Incurred related to: Prior
years.
Claims paid in each of the years 2008 through 2010 were settled for amounts less than anticipated
when estimated at the previous year end. The most significant components of these favorable variances
were in Torchmark’s UA Independent, UA Branch, and Medicare Part D distribution channels. In each of
the years 2008 through 2010, paid health claims have trended downwards and were settled more
favorably than the original estimates, resulting in reduced estimates of the claim liability in each year
compared with the prior year. The Company’s estimates at each point have reflected the emerging data
and trends. In the Medicare Part D channel, the Company is required to estimate claim discounts that will
be received from drug manufacturers. In each of the years 2008 through 2010, the discounts from the
drug manufacturers received in the current year but related to prior year claims were higher than
anticipated when the claim liability was determined.
The liability for unpaid health claims is included with “Policy claims and other benefits payable” on the
Consolidated Balance Sheets.
86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 8—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,
2008
2009
2010
Stock-based compensation not involving cash . . . . . . . . . . . . . . . . $ 11,848 $ 9,860
50,789
Commitments for low-income housing interests . . . . . . . . . . . . . . .
7,345
Capitalized investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
137,817
6,517
$10,823
25,751
7,772
The following table summarizes certain amounts paid during the period:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 76,911 $71,288
87,376
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
195,172
$ 62,671
161,348
Year Ended December 31,
2008
2009
2010
Note 9—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,
2008
2009
2010
Income tax expense from continuing operations . . . . . . . . . . . . . . . . . . . $256,274 $191,024 $ 198,700
Income tax expense from discontinued operations . . . . . . . . . . . . . . . . .
10,298
Shareholders’ equity:
11,830
9,216
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax basis compensation expense (from the exercise of stock options
and vesting of restricted stock awards) in excess of amounts
recognized for financial reporting purposes . . . . . . . . . . . . . . . . . . .
184,233
458,358
(590,843)
(3,455)
(253)
(3,618)
$448,882 $658,345 $(385,463)
Income tax expense from continuing operations consists of:
Year Ended December 31,
2008
2009
2010
Current income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $147,346 $147,917 $139,194
59,506
Deferred income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
108,928
43,107
$256,274 $191,024 $198,700
In each of the years 2008 through 2010, 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.
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Income Taxes (continued)
The effective income tax rate differed from the expected 35% rate as shown below:
2010
Year Ended December 31,
%
2009
%
2008
%
Expected income taxes . . . . . . . . . . . . . . . . . . . . . . . $272,498 35.0% $201,977 35.0% $219,940 35.0%
Increase (reduction) in income taxes resulting
from:
Tax-exempt investment income . . . . . . . . . . . . . .
Tax settlements . . . . . . . . . . . . . . . . . . . . . . . . . . .
Low income housing investments . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3,371)
-0-
(12,900)
47
(.4)
-0-
(1.7)
-0-
(3,483)
(3,101)
(6,038)
1,669
(.6)
(.5)
(1.0)
.3
(3,803)
(12,687)
(5,129)
379
(.6)
(1.9)
(.8)
-0-
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . $256,274 32.9% $191,024 33.2% $198,700 31.7%
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,
2010
2009
Deferred tax assets:
Fixed maturity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Carryover of tax losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50,126 $
12,293
2,023
1,352
Total gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
65,794
Deferred tax liabilities:
Employee and agent compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Future policy benefits, unearned and advance premiums, and policy claims . . . . . . . . . .
55,781
877,561
338,771
75,448
24,541
180,028
33,621
313,638
50,773
877,410
358,001
Total gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,272,113
1,286,184
Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,206,319 $ 972,546
Torchmark’s Federal income tax returns are routinely audited by the Internal Revenue Service (IRS).
The IRS completed its examination of the Company’s 2005, 2006, and 2007 tax years during 2009. The
Company recorded a $2.5 million tax benefit to reflect the results of the examination, including a reduction
in its liability for uncertain tax positions relating to these years. The statutes of
limitation for the
assessments of additional tax are closed for all tax years prior to 2007. Management believes that
adequate provision has been made in the financial statements for any potential assessments that may
result from future tax examinations and other tax-related matters for all open tax years.
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,
net of Federal income tax, required to be paid by the Canadian tax authorities on amounts previously
88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Income Taxes (continued)
deposited with the tax authorities. In 2009, the Company recorded $441 thousand of additional interest
income, net of Federal income tax, on amounts remaining to be refunded. No tax years are currently
under examination by Canadian tax authorities.
Torchmark has net operating loss carryforwards of approximately $35 million at December 31, 2010
which will begin to expire in 2021 if not otherwise used to offset future taxable income. In addition,
Torchmark had a net capital loss carryover of $36.8 million at December 31, 2009 which was utilized in
2010 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 has been recorded
relating to Torchmark’s deferred tax assets since, in management’s judgment, Torchmark will more likely
than not have sufficient taxable income in future periods to fully realize its existing deferred tax assets.
Torchmark’s tax liability is adjusted to include the provision for uncertain tax positions taken or
expected to be taken in a tax return. 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 2008 through
2010 is as follows:
2010
2009
2008
Balance at January 1, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,960 $ 8,481 $8,672
361
Increase based on tax positions taken in current period . . . . . . . . . .
-0-
Increase related to tax positions taken in prior periods . . . . . . . . . . .
(436)
Decrease related to tax positions taken in prior periods . . . . . . . . . .
(116)
Decrease due to settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
73
-0-
(4,594)
-0-
245
280
(3,610)
-0-
Balance at December 31, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
875 $ 3,960 $8,481
If recognized in future periods, $-0-, $145 thousand, and $518 thousand of
the balances at
December 31, 2010, 2009, and 2008, respectively, would reduce the effective tax rate. The remaining
balances relate to timing differences which, if recognized, would have no effect on the Company’s
effective tax rate.
Torchmark’s continuing practice is to recognize interest and/or penalties related to income tax
matters in income tax expense. The Company recognized interest income of $124 thousand, $1.7 million,
and $11.9 million, net of federal income tax benefits, in its Consolidated Statements of Operations for
2010, 2009, and 2008, respectively. The Company had an accrued interest receivable of $4.1 million and
$3.9 million, net of Federal income tax benefits, as of 2010 and 2009, respectively. The Company had no
accrued penalties at December 31, 2010 or 2009.
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 10—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
2010 . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . .
$3,617
3,511
2,988
$18,948
17,912
8,918
Torchmark accrues expense for the defined contribution plans based on a percentage of
the
employees’ contributions. The plans are funded by the employee contributions and a Torchmark
to the amount of accrued expense. Plan contributions are both mandatory and
contribution equal
discretionary, depending on the terms of the plan.
Cost for the defined benefit pension plans has been calculated on the projected unit credit actuarial
the
cost method. All plan measurements for the defined benefit plans are as of December 31 of
respective year. The defined benefit pension plans covering the majority of employees are funded.
Contributions are made to funded pension plans subject
to minimums required by regulation and
maximums allowed for tax purposes. Defined benefit plan contributions were $13 million in 2010,
$15 million in 2009, and $63 million in 2008. Torchmark estimates as of December 31, 2010 that it will
contribute an amount not to exceed $20 million to these plans in 2011. The actual amount of contribution
may be different from this estimate.
Torchmark has a 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. However, life insurance policies on the lives of plan
participants have been established for this plan with an unaffiliated insurance carrier. The premiums for
this coverage paid in 2010 and 2009 were $2 million and $11 million, respectively, and the cash value at
December 31, 2010 was $12 million. Additionally, a Rabbi Trust was established for this plan in 2010 in
the amount of $21 million to support the liability for this plan. Because this plan is unqualified, the Rabbi
Trust and the policyholder value of these policies is not included as defined benefit plan assets but as
assets of the Company. The liability for this SERP at December 31, 2010 was $38 million and was $32
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 $4 million at both December 31, 2010 and
December 31, 2009. 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 plans consist primarily of investments in marketable fixed maturities and
equity securities and are valued at fair value. Torchmark measures the fair value of its financial assets,
including the assets in its benefit plans, in accordance with accounting guidance which establishes a
hierarchy for asset values and provides a methodology for the measurement of value. Please refer to
Note 4—Investments under the caption Fair Value Measurements for a complete discussion of valuation
procedures. The following table presents the assets of Torchmark’s defined benefit pension plans for the
years ended December 31, 2010 and 2009.
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 10—Postretirement Benefits (continued)
Pension Assets by Component at December 31, 2010
Fair Value Determined by:
Quoted Prices
in Active
Markets for
Identical
Assets (Level 1)
Significant
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Total
Amount
% to
Total
Equity securities:
Consumer, Non-Cyclical
. . . .
Financial . . . . . . . . . . . . . . . . .
Industrial . . . . . . . . . . . . . . . . .
Technology . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . .
Corporate bonds . . . . . . . . . . . .
Other bonds . . . . . . . . . . . . . . . .
Guaranteed annuity contract . . .
Short-term investments . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . .
$14,932
29,692
11,303
10,643
1,339
67,909
9,637
19,484
2,002
$ 14,932
29,692
11,303
10,643
1,339
67,909
135,767
772
10,959
19,484
2,002
6%
13
5
4
1
29
57
-0-
5
8
1
$122,946
772
10,959
$3,184
Grand Total . . . . . . . . . . . . . . . . .
$99,032
$134,677
$3,184
$236,893
100%
Pension Assets by Component at December 31, 2009
Fair Value Determined by:
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Total
Amount
% to
Total
Equity securities:
Consumer, Non-Cyclical . . . .
Financial
. . . . . . . . . . . . . . . .
Utilities . . . . . . . . . . . . . . . . . .
Industrial
. . . . . . . . . . . . . . . .
Technology . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . .
Corporate bonds . . . . . . . . . . . .
Other bonds . . . . . . . . . . . . . . . .
Guaranteed annuity contract . .
Short-term investments . . . . . .
Other . . . . . . . . . . . . . . . . . . . . .
$12,606
23,440
3,554
7,973
7,801
2,774
58,148
10,174
8,176
2,210
$ 12,606
23,440
3,554
7,973
7,801
2,774
58,148
132,038
813
10,492
8,176
2,210
6%
11
2
4
4
1
28
62
-0-
5
4
1
$118,786
813
10,492
$3,078
Grand Total . . . . . . . . . . . . . . . .
$78,708
$130,091
$3,078
$211,877
100%
Torchmark’s investment objectives for its plan assets include preservation of capital, preservation of
purchasing power, and long-term growth. Torchmark seeks to preserve capital through investments made
in high quality securities with adequate diversification to minimize risk. The portfolio is monitored
continuously for changes in quality and diversification mix. The preservation of purchasing power is
intended to be accomplished through asset growth, exclusive of contributions and withdrawals, in excess
of the rate of inflation. Torchmark intends to maintain investments that when combined with future plan
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 10—Postretirement Benefits (continued)
is also
contributions will produce adequate long-term growth to provide for all plan obligations.
Torchmark’s objective that the portfolio’s investment return will meet or exceed the return of a balanced
market index.
It
All of the securities in the portfolio are highly marketable so that there will be adequate liquidity to
meet projected payments. There are no specific policies calling for asset durations to match those of
benefit obligations.
Allowed investments are limited to equities, fixed maturities, and short-term investments (invested
cash). Equities include common and preferred stocks, securities convertible into equities, and mutual
funds that invest in equities. Fixed maturities consist of marketable debt securities rated investment grade
at purchase by a major rating agency. Short-term investments include fixed maturities with maturities less
than one year and invested cash. Target asset allocations are as follows with a twenty percent allowable
variance as noted.
Asset Type
Target
Minimum Maximum
Equities . . . . . . . . . . . . . . . . . . . . .
Fixed maturities . . . . . . . . . . . . . .
Short-terms . . . . . . . . . . . . . . . . . .
65%
35
0
45%
15
0
85%
55
20
Short-term divergences due to rapid market movements are allowed. In recent periods, our holdings in
equities declined while our holdings in fixed maturities increased. Contributions in each of the years 2010,
2009, and 2008 were $13 million, $15 million, and $63 million, respectively. These contributions were
invested primarily in fixed maturities. The decline in equity values in both 2008 and early 2009 was also a
contributing factor. While equity values have recovered somewhat in 2009 and 2010, fixed maturity values
have also increased. Our asset allocation targets are currently under review.
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, 2010, 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.
92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 10—Postretirement Benefits (continued)
The following table discloses the assumptions used to determine Torchmark’s pension liabilities and
costs for the appropriate periods. The discount and compensation increase rates are used to determine
current year projected benefit obligations and subsequent year pension expense. The long-term rate of
return is used to determine current year expense. Differences between assumptions and actual
experience are included in actuarial gain or loss.
Weighted Average Pension Plan Assumptions
For Benefit Obligations at December 31:
2010
2009
Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of Compensation Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.77% 6.31%
4.00
3.79
For Periodic Benefit Cost for the Year:
Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected Long-Term Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of Compensation Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.31% 6.31% 6.62%
7.95
7.24
3.84
3.79
7.94
3.91
2010
2009
2008
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,
2008
2009
2010
Service cost—benefits earned during the period . . . . . . . . . . .
Interest cost on projected benefit obligation . . . . . . . . . . . . . . .
Expected return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8,174
15,393
(15,026)
10,407
$ 7,571
14,490
(15,577)
11,428
$ 7,621
14,279
(15,939)
2,957
Net periodic pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 18,948
$ 17,912
$ 8,918
An analysis of the impact on other comprehensive income (loss) is as follows:
2010
2009
2008
Balance at January 1 . . . . . . . . . . . .
$ (93,674)
$(121,704)
$ (66,551)
Amortization of:
Prior service cost . . . . . . . . . . . . .
Net actuarial (gain) loss . . . . . . . .
Transition obligation . . . . . . . . . .
Total amortization . . . . . . . . . . . . . .
2,098
8,766
(7)
10,857
2,060
9,166
(7)
11,219
2,078
976
(7)
3,047
Experience gain(loss) . . . . . . . . . . .
(23,086)
16,811
(58,200)
Balance at December 31 . . . . . . . .
$(105,903)
$ (93,674)
$(121,704)
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 10—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.
Changes in benefit obligation:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligation at beginning of year
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss (gain)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligation at end of year
Changes in plan assets:
Fair value at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension Benefits
For the year ended
December 31,
2010
2009
$242,159
8,174
15,392
-0-
34,029
(14,194)
285,560
$230,390
7,571
14,490
411
6,485
(17,188)
242,159
211,877
26,576
12,634
(14,194)
$236,893
174,701
39,078
15,286
(17,188)
$211,877
Funded status at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (48,667) $ (30,282)
Amounts recognized in accumulated other comprehensive income
consist of:
Net loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior service cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transition obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amounts recognized at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 97,382
8,526
(5)
$105,903
$ 83,062
10,624
(12)
$ 93,674
The portion of other comprehensive income that is expected to be reflected in pension expense in
2011 is as follows:
Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . $ 2,080
10,091
Amortization of net loss (gain) . . . . . . . . . . . . . . . . . . . . . . . .
(5)
Amortization of transition obligation . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,166
The accumulated benefit obligation (ABO) for Torchmark’s funded defined benefit pension plans was
$228 million and $191 million at December 31, 2010 and 2009, respectively. In the unfunded plans, the
ABO was $27 million at December 31, 2010 and December 31, 2009.
Torchmark has estimated its expected pension benefits to be paid over the next ten years as of
December 31, 2010. These estimates use the same assumptions that measure the benefit obligation at
December 31, 2010, taking estimated future employee service into account. Those estimated benefits are
as follows:
For the year(s)
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$13,159
13,604
14,465
15,255
16,144
96,586
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 10—Postretirement Benefits (continued)
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. Otherwise, Torchmark does not provide postretirement benefits other than
pensions and the life insurance benefits described above.
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,
2009
2008
2010
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 . . . . . . . . . . . . . . .
$ 728
$ 641
$ 654
970
-0-
-0-
(583)
947
-0-
-0-
283
978
-0-
-0-
(330)
Net periodic postretirement benefit cost
. . . . . . . . . . . . . .
$1,115
$1,871
$1,302
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,
2010
2009
Changes in benefit obligation:
Obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 16,340
728
970
(583)
(566)
Obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,889
Changes in plan assets:
Fair value at beginning of year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value at end of year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
566
(566)
-0-
$ 14,919
641
947
283
(450)
16,340
-0-
-0-
450
(450)
-0-
Funded status at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(16,889)
$(16,340)
No amounts were unrecognized at the respective year ends.
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 10—Postretirement Benefits (continued)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.77% 6.60%
4.50
4.50
2010
2009
For Periodic Benefit Cost for the Year:
Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of Compensation Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.60% 6.60% 6.61%
4.50
4.50
4.50
2010
2009
2008
96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 11—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,
2010
2009
7.875% 5/93 5/15 & 11/15 $ 165,612 $ 163,227 $ 186,540 $ 163,119
93,585
7.375% 7/93
2/1 & 8/1
104,500
94,050
93,700
Instrument
Notes, due 5/15/23(1)(2) . . . . . .
Notes, due 8/1/13(1)(2) . . . . . . .
Senior Notes, due
6/15/16(1)(8)
. . . . . . . . . . . . .
6.375% 6/06 6/15 & 12/15
250,000
247,477
274,775
247,104
Senior Notes, due
6/15/19(1)(8)
. . . . . . . . . . . . .
Issue Expenses(3) . . . . . . . . . .
Subtotal long-term debt . . .
Junior Subordinated
Debentures due
6/1/46(4)(5)
. . . . . . . . . . . .
Total funded debt . . . . . . . .
Commercial Paper(9)
. . . . . . .
9.250% 6/09 6/15 & 12/15
292,647
-0-
802,309
289,397
(4,158)
789,643
367,521
-0-
933,336
296,423
(4,181)
796,050
7.100% 6/06 quarterly(6)
123,711
926,020
123,711
122,880(7)
123,711
913,354
1,056,216
919,761
198,950
198,875
198,875
233,307
$1,124,970 $1,112,229 $1,255,091 $1,153,068
(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.
The amount of debt that becomes due during each of the next five years is: 2011—$199 million;
2012—$0; 2013—$94 million; 2014—$0; 2015—$0 and thereafter—$832 million.
Funded debt: During 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 15). 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. Therefore,
III even though it has 100%
III. Accordingly,
Torchmark is prohibited by accounting rules from consolidating Trust
ownership, complete voting control, and has guaranteed the performance of Trust
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 11—Debt (continued)
Torchmark carries its 7.1% Junior Subordinated Debentures due to Trust III as a liability under the caption
“Due to Affiliates” on its Consolidated Balance Sheets. Expenses of $4.3 million related to the offering
reduce long-term debt and are amortized over the forty-year redemption period.
On June 30, 2009, Torchmark issued $300 million principal amount of 9.25% Senior Notes due
June 15, 2019. Interest on the Notes is payable semi-annually commencing on December 15, 2009.
Proceeds from the issuance of this debt, net of expenses, were $296 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 75 basis points. Torchmark
used a portion of the net proceeds from this offering to repay its $99 million 8 1⁄4% Senior Debentures
which matured on August 15, 2009 (plus accrued interest). Remaining funds were invested.
During 2010, Torchmark acquired $7.4 million par value of its 9 1⁄4% Senior Notes ($7.3 million book
value) at a cost of $8.9 million. This repurchase resulted in a pre-tax loss of $1.6 million ($1.1 million after
tax).
Commercial Paper:
In December, 2010, Torchmark entered into a new credit facility with a group of
lenders allowing unsecured borrowings and stand-by letters of credit up to $600 million. The facility includes
a provision which allows Torchmark to increase the facility limit by $200 million if certain conditions are met.
The Company also has the ability to request up to $250 million in letters of credit to be issued against the
facility. This agreement replaces an earlier agreement which would have expired in August, 2011. The new
agreement is set to terminate on January 7, 2015. 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 the facility limit
less any letters of credit issued. Interest is charged at variable rates. At December 31, 2010, Torchmark had
$199 million face amount ($199 million carrying amount) of commercial paper outstanding, $198 million of
letters of credit issued, and no borrowings under the line of credit. During 2010, the short term borrowings
under the facility averaged approximately $196 million, and were made at an average yield of .4%,
compared with an average balance of $251 million at an average yield of 1.1% 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 facility at a rate of 17.5 basis points. For letters of credit issued, there is an issuance
fee of 132.5 basis points. Torchmark is subject
to certain covenants for the agreements regarding
capitalization and earnings, with which it was in compliance at December 31, 2010 and throughout the
three-year period ended December 31, 2010. Borrowings on the credit facilities are reported as short-term
debt on the Consolidated Balance Sheets.
98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 12—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
2008:
Balance at January 1, 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-
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)
2009:
Grants of restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock due to exercise of stock options . . . . . .
Treasury stock acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
76,707
126,172
(2,069,800)
(2,000,000) 2,000,000
Balance at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
83,874,748 (1,034,022)
2010:
Grants of restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeitures of restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock due to exercise of stock options . . . . . .
Treasury stock acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
81,283
(7,082)
849,065
(4,520,909)
(4,000,000) 4,000,000
Balance at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
-0-
79,874,748
(631,665)
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. Torchmark suspended its share repurchase program temporarily from the first
quarter of 2009 until the first quarter of 2010 because of uncertain economic conditions. Share repurchases
under this program were 3.8 million shares at a cost of $204 million in 2010, 2.1 million shares at a cost of $47
million in 2009, and 7.6 million shares at a cost of $427 million in 2008. 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 716 thousand
shares at a cost of $42 million in 2010, 20 thousand shares at a cost of $869 thousand in 2009, and 487
thousand shares at a cost of $29 million in 2008.
Retirement of Treasury Stock: Torchmark retired 4 million shares of treasury stock in December,
2010, 2 million in 2009, and 9 million in 2008.
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 income excluding 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 2010, subsidiaries of Torchmark paid $371 million in dividends to the
parent company. During 2011, a maximum amount of $742 million is expected to be available to
Torchmark from subsidiaries without regulatory approval.
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 12—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 . . . . . . . . . . . .
81,339,485
742,740
83,033,589
-0-
88,052,650
463,445
Diluted weighted average shares outstanding . . . . . . . . . . . . .
$82,082,225
83,033,589
88,516,095
2010
2009
2008
Stock options to purchase 6.8 million shares, 9.4 million shares, and 3.5 million shares, during the
years 2010, 2009, and 2008, 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 13—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.
An analysis of shares available for grant is as follows:
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired and forfeited during year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options granted during year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock and restricted stock units granted during year . . . . . .
1,149,693
17,513
(905,450)
(91,580)
2,136,806
25,000
(928,850)
(83,263)
3,136,000
8,000
(949,750)
(57,444)
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
170,176
1,149,693
2,136,806
Available for Grant
2009
2010
2008
100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13—Stock-Based Compensation (continued)
A summary of stock compensation activity for each of
the years in the three years ended
December 31, 2010 is presented below:
Stock-based compensation expense recognized* . . . . . . . . . . . . . . . . . . . . . . $11,848
4,147
Tax benefit recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15.53
Weighted-average grant-date fair value of options granted . . . . . . . . . . . . . . .
9,731
Intrinsic value of options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37,863
Cash received from options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,236
Actual tax benefit received from exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$9,860
3,451
5.50
1,088
4,430
381
$10,823
3,788
8.87
10,700
25,473
3,745
2010
2009
2008
* No stock-based compensation expense was capitalized in any period.
An analysis of option activity for each of the three years ended December 31, 2010 is as follows:
2010
Options
Weighted Average
Exercise Price
Options
2009
Weighted Average
Exercise Price
2008
Options
Weighted Average
Exercise Price
Outstanding-beginning of
year . . . . . . . . . . . . . . . 10,339,985
905,450
(849,065)
(272,551)
Granted . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . .
Expired and forfeited . . .
Outstanding-end of
$51.06
46.29
44.60
52.58
9,720,974
928,850
(126,172)
(183,667)
$53.40
24.05
35.12
49.32
9,393,920
949,750
(602,550)
(20,146)
$51.80
62.50
42.27
61.12
year . . . . . . . . . . . . . . . 10,123,819
$51.14
10,339,985
$51.06
9,720,974
$53.40
Exercisable at end of
year . . . . . . . . . . . . . . . 7,886,717
$54.15
8,256,242
$52.47
8,081,855
$51.57
A summary of restricted stock and restricted stock units granted during each of the years in the three
year period ended December 31, 2010 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.
Executive grants vest over five years and director grants vest over six months.
Executives restricted stock:
Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Price per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aggregate value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Percent vested as of 12/31/10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
75,000
$ 46.31
$ 3,473
75,500
53,500
$ 23.50 $ 62.68
$ 1,774 $ 3,353
0%
20%
40%
2010
2009
2008
Directors restricted stock:
Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Price per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aggregate value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Percent vested as of 12/31/10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,283
$ 46.28
291
$
100%
Directors restricted stock units (including dividend equivalents):
Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Price per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aggregate value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Percent vested as of 12/31/10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,297*
$ 44.76
451
$
100%
* 2,013 shares at $44.76 per share were later forfeited in 2010.
101
1,207
882
$ 44.89 $ 60.14
53
54 $
$
100%
100%
6,399
3,062
$ 44.89 $ 60.08
184
$
100%
287 $
100%
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13—Stock-Based Compensation (continued)
An analysis of unvested restricted stock is as follows
Executives
Restricted Stock
Directors
Restricted Stock
Total
2008:
Balance at January 1, 2008 . . . . . . . . . . . . . . . . . . . . . . . .
Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restriction lapses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2008 . . . . . . . . . . . . . . . . . . .
2009:
Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restriction lapses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32,400
53,500
(7,600)
78,300
75,500
(18,300)
Balance at December 31, 2009 . . . . . . . . . . . . . . . . . . .
135,500
2010:
Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restriction lapses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
75,000
(47,400)
(5,000)
-0-
882
(882)
-0-
1,207
(1,207)
-0-
6,283
(6,283)
-0-
32,400
54,382
(8,482)
78,300
76,707
(19,507)
135,500
81,283
(53,683)
(5,000)
Balance at December 31, 2010 . . . . . . . . . . . . . . . . . . .
158,100
-0-
158,100
Restricted stock units outstanding at each of the year ends 2010, 2009, and 2008 were 19,915;
9,618; and 3,062, respectively. Restricted stock units are only available to directors, and are not
converted to shares until the director’s retirement, death, or disability. There were no unvested director
restricted shares outstanding at the end of any of the years 2008 through 2010. Director restricted stock
and restricted stock units are generally granted on the first working day of the year and vest in six
months. Dividend equivalents are earned on restricted stock units only. They are granted in the form of
additional restricted stock units and vest immediately upon grant.
Additional information about Torchmark’s stock-based compensation as of December 31, 2010 and
2009 is as follows:
Outstanding options:
2010
2009
Weighted-average remaining contractual term (in years) . . . . . . . . . . . . . . . . . . . . . . .
3.33
Aggregate intrinsic value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $94,086 $24,407
2.85
Exercisable options:
Weighted-average remaining contractual term (in years) . . . . . . . . . . . . . . . . . . . . . . .
2.80
Aggregate intrinsic value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $49,810 $ 5,987
2.16
Unrecognized compensation* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,077 $10,822
1.72
Weighted average period of expected recognition (in years)* . . . . . . . . . . . . . . . . . . . . .
1.33
* Includes restricted stock
Additional information concerning Torchmark’s unvested options is as follows at December 31:
Number of shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,237,102 2,083,743
$45.50
Weighted-average exercise price (per share) . . . . . . . . . . . . . . . . . . . . . . .
5.42
Weighted-average remaining contractual term (in years)
. . . . . . . . . . . . .
$18,419
Aggregate intrinsic value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$40.52
5.28
$44,276
2010
2009
102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 13—Stock-Based Compensation (continued)
Torchmark expects that substantially all unvested options will vest.
The following table summarizes information about stock options outstanding at December 31, 2010.
Options Outstanding
Options Exercisable
Range of
Exercise Prices
Number
Outstanding
$19.81 – $33.04
34.00 – 38.79
41.26 – 42.56
44.76 – 54.50
54.77 – 54.77
55.05 – 55.80
56.24 – 59.75
62.68 – 62.68
63.70 – 68.18
898,734
345,821
453,826
1,632,383
3,355,695
867,856
788,392
875,250
905,862
$19.81 – $68.18
10,123,819
Weighted-
Average
Remaining
Contractual
Life (Years)
Weighted-
Average
Exercise
Price
5.06
2.02
0.65
4.69
1.34
2.01
3.91
4.12
3.00
2.85
$23.51
37.52
41.27
45.92
54.77
55.49
56.53
62.68
64.63
$51.14
Number
Exercisable
20,085
332,538
452,960
733,968
3,355,695
856,637
785,346
442,626
905,862
7,886,717
Weighted-
Average
Exercise
Price
$23.52
37.52
41.27
45.46
54.77
55.49
56.53
62.68
64.63
$54.15
No equity awards were cash settled during the three years ended December 31, 2010.
Note 14—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
reportable 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.
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 fixed-benefit contracts.
103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Business Segments (continued)
Torchmark markets its insurance products through a number of distribution channels, each of which
sells the products of one or more of Torchmark’s insurance segments. The tables below present segment
premium revenue by each of Torchmark’s marketing groups.
Torchmark Corporation
Premium Income By Distribution Channel
Life
Health
Annuity
Total
For the Year 2010
Distribution Channel
Amount
% of
Total
United American Independent . . . . . . .
Liberty National Exclusive . . . . . . . . . .
American Income Exclusive . . . . . . . . .
Direct Response . . . . . . . . . . . . . . . . . .
Medicare Part D . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
25,534
294,587
560,649
566,604
216,325
1
18
34
34
13
Amount
$ 314,524
331,056
79,059
54,328
208,970
% of
Total Amount
$638
32
34
8
5
21
% of
Total
100
Amount
$ 340,696
625,643
639,708
620,932
208,970
216,325
% of
Total
13
24
24
23
8
8
$1,663,699
100
$ 987,937
100
$638
100
$2,652,274
100
Life
Health
Annuity
Total
For the Year 2009
Distribution Channel
Amount
% of
Total
United American Independent . . . . . . .
Liberty National Exclusive . . . . . . . . . .
American Income Exclusive . . . . . . . . .
Direct Response . . . . . . . . . . . . . . . . . .
Medicare Part D . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
28,498
298,485
507,899
536,878
220,093
2
19
32
33
14
Amount
$ 326,442
388,522
75,097
46,555
183,586
% of
Total Amount
$541
32
38
7
5
18
% of
Total
100
Amount
$ 355,481
687,007
582,996
583,433
183,586
220,093
% of
Total
14
26
22
22
7
9
$1,591,853
100
$1,020,202
100
$541
100
$2,612,596
100
Life
Health
Annuity
Total
For the Year 2008
Distribution Channel
Amount
% of
Total
United American Independent . . . . . . .
Liberty National Exclusive . . . . . . . . . .
American Income Exclusive . . . . . . . . .
Direct Response . . . . . . . . . . . . . . . . . .
Medicare Part D . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
31,855
304,262
473,784
511,165
223,153
2
20
31
33
14
Amount
$ 356,853
475,905
73,423
45,123
175,633
% of
Total Amount
$622
32
42
6
4
16
% of
Total
100
Amount
$ 389,330
780,167
547,207
556,288
175,633
223,153
% of
Total
15
29
20
21
7
8
$1,544,219
100
$1,126,937
100
$622
100
$2,671,778
100
Because of the nature of the life insurance industry, Torchmark has no individual or group which
would be considered a major customer. Substantially all of Torchmark’s business is conducted in the
United States, primarily in the Southeastern and Southwestern regions.
The measure of profitability established by 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.
104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Business Segments (continued)
is excess investment
The measure of profitability for the Investment segment
income, which
represents the income earned on the investment portfolio in excess of net policy requirements and
financing costs associated with Torchmark’s debt. Other than the above-mentioned interest allocations
and an intersegment commission, 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 2010
Revenue:
Premium . . . . . . . . . . . . . . . . . . . . . . $1,663,699 $987,937 $
Net investment income . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . .
638
$ 685,253
Total revenue . . . . . . . . . . . . . . 1,663,699 987,937
638
685,253
$
2,834
2,834
Expenses:
Policy benefits . . . . . . . . . . . . . . . . . 1,082,423 669,707
Required interest on net
41,430
reserves . . . . . . . . . . . . . . . . . . . .
Amortization of acquisition costs . .
Commissions and premium tax . . .
Insurance administrative
expense(3) . . . . . . . . . . . . . . . . . .
Parent expense . . . . . . . . . . . . . . . .
Stock-based compensation
expense . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . .
(434,319)
(35,368)
487,770 130,238
53,301
72,559
(51,996)
9,722
134
521,683
(208,840)
155,615
$ 8,809
11,848
75,265
Total expenses . . . . . . . . . . . . . 1,208,433 817,878
(710)
388,108
155,615
20,657
$
(516)(1)
(8,889)(2,5)
(664)(4)
$2,651,758
676,364
2,170
(10,069)
3,330,292
(516)(1)
1,793,044
-0-
418,890
125,330
155,615
8,809
11,848
75,529
2,589,065
(664)(4)
264(2)
(916)
Measure of segment profitability
(pretax) . . . . . . . . . . . . . . . . . . . $ 455,266 $170,059 $ 1,348 $ 297,145 $(152,781) $(20,657)
(9,153)
741,227
Deduct applicable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,153(5)
Segment profits after tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
-0-
Add back income taxes applicable to segment profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add (deduct) realized investment gains (losses) and impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(243,204)
498,023
243,204
37,340
Pretax income per Consolidated Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 778,567
(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 accounting rule requiring deconsolidation of Trust Preferred Securities.
(3) Administrative expense is not allocated to insurance segments.
(4) Elimination of intersegment commission.
(5) Amortization of low-income housing expense.
105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Business Segments (continued)
Life
Health
Annuity Investment
Other
Corporate Adjustments Consolidated
For the Year 2009
Revenue:
Premium . . . . . . . . . . . . . . . . . . . . . .$1,591,853 $1,020,202 $
Net investment income . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . .
541
$ 632,276
Total revenue . . . . . . . . . . . . . . 1,591,853 1,020,202
541
632,276
$
2,914
2,914
Expenses:
Policy benefits . . . . . . . . . . . . . . . . . 1,040,248
Required interest on net
679,810
35,762
reserves . . . . . . . . . . . . . . . . . . . .
Amortization of acquisition costs . .
Commissions and premium tax . . .
Insurance administrative
expense(3) . . . . . . . . . . . . . . . . . . .
Parent expense . . . . . . . . . . . . . . . .
Stock-based compensation
expense . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . .
(410,917)
462,837
72,273
(34,243)
147,151
57,074
(41,840)
6,040
267
487,000
(200,042)
150,325
$ 9,590
9,860
69,668
$(2,491)(1)
264 (2)
(994)(4)
$2,610,105
632,540
1,920
(3,221)
3,244,565
(2,491)(1)
1,753,329
-0-
415,986
128,620
150,680
9,590
9,860
69,932
(994)(4)
355 (5)
264 (2)
Total expenses . . . . . . . . . . . . . 1,164,441
849,792
Subtotal
. . . . . . . . . . . . . . . . . . . . . .
Nonoperating items . . . . . . . . . . .
Measure of segment profitability
427,412
170,410
229
312
356,626
150,325
19,450
(2,866)
2,537,997
275,650
(147,411)
(19,450)
(355)
355 (5)
706,568
355
(pretax) . . . . . . . . . . . . . . . . . . .$ 427,412 $ 170,410 $
312 $ 275,650 $(147,411) $(19,450) $
-0-
$ 706,923
Deduct applicable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Segment profits after tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add back income taxes applicable to segment profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add (deduct) realized investment gains (losses) and impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct loss on Company-occupied property(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(238,153)
468,770
238,153
(129,492)
(355)
Pretax income per Consolidated Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 577,076
(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 accounting rule requiring deconsolidation of Trust Preferred Securities.
(3) Administrative expense is not allocated to insurance segments.
(4) Elimination of intersegment commission.
(5) Loss on Company-occupied property.
106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Business Segments (continued)
Life
Health
Annuity Investment
Other
Corporate Adjustments Consolidated
For the Year 2008
Revenue:
Premium . . . . . . . . . . . . . . . . . . . . . .$1,544,219 $1,126,937 $
Net investment income . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . .
622
$ 626,942
Total revenue . . . . . . . . . . . . . . 1,544,219 1,126,937
622
626,942
$
4,154
4,154
Expenses:
Policy benefits . . . . . . . . . . . . . . . . . 1,015,494
Required interest on net
759,466
27,458
reserves . . . . . . . . . . . . . . . . . . . .
Amortization of acquisition costs . .
Commissions and premium tax . . .
Insurance administrative
expense(3) . . . . . . . . . . . . . . . . . . .
Parent expense . . . . . . . . . . . . . . . .
Stock-based compensation
expense . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . .
(389,526)
434,931
69,295
(32,029)
131,541
73,248
(29,853)
2,876
141
451,408
(190,960)
156,164
10,455
10,823
62,965
$
122 (1)
264 (2)
517 (4,5,6)
$2,671,900
627,206
4,671
903
3,303,777
122 (1)
1,802,540
(1,098)(4)
2,129 (7)
2,522 (5)
264 (2)
-0-
378,388
141,586
158,293
12,977
10,823
63,229
Total expenses . . . . . . . . . . . . . 1,130,194
932,226
Subtotal . . . . . . . . . . . . . . . . . . . . . . .
Nonoperating items . . . . . . . . . . .
Measure of segment profitability
414,025
194,711
622
-0-
323,413
156,164
21,278
3,939
2,567,836
303,529
(152,010)
(21,278)
(3,036)
3,036 (5,6,7)
735,941
3,036
(pretax) . . . . . . . . . . . . . . . . . . .$ 414,025 $ 194,711 $
-0- $ 303,529 $ 152,010 $ 21,278 $
-0-
$ 738,977
Deduct applicable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Segment profits after tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add back income taxes applicable to segment profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add (deduct) realized investment gains (losses) and impairments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct cost of legal settlements(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add gain on sale of agency buildings(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct loss on Company-occupied property(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(248,225)
490,752
248,225
(107,541)
(1,185)
278
(2,129)
Pretax income per Consolidated Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 628,400
(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 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.
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 only overall yields are 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.
107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Business Segments (continued)
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
2010
2009
2008
Change %
Change %
2010
2009
Life insurance underwriting margin . . . . . . . . . . . . . . . . . . . . . . . . $ 455,266 $ 427,412 $ 414,025 $ 27,854
Health insurance underwriting margin . . . . . . . . . . . . . . . . . . . . . .
(351)
Annuity underwriting margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other insurance:
194,711
-0-
170,059
1,348
170,410
312
-0-
1,036 332
7 $ 13,387
3
(24,301) (12)
312
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Administrative expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,834
(155,615)
297,145
(29,810)
2,914
(150,325)
275,650
(19,450)
4,154
(156,164)
303,529
(21,278)
(3)
(80)
4
(5,290)
21,495
8
(10,360) 53
(1,240) (30)
(4)
5,839
(9)
(27,879)
(9)
1,828
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Applicable taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pre-tax total
741,227
(243,204)
706,923
(238,153)
738,977
(248,225)
34,304
(5,051)
After-tax total, before discontinued operations . . . . . . .
Discontinued operations (after tax) . . . . . . . . . . . . . . . . . . . . . . . .
498,023
27,932
468,770
26,810
490,752
22,535
29,253
1,122
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains (losses) (after tax) . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains (losses)—discontinued operations (after tax) . . .
Loss on disposal of discontinued operations (after tax) . . . . . . . .
Gain on sale of agency buildings, net of tax . . . . . . . . . . . . . . . . .
Tax settlements (after tax) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds (cost) from legal settlements (after tax) . . . . . . . . .
Loss on writedown of Company-occupied property (after tax) . .
525,955
24,270
1,852
(35,013)
-0-
-0-
-0-
-0-
495,580
(85,345)
(7,909)
-0-
-0-
2,858
-0-
(231)
30,375
513,287
(69,902) 109,615
9,761
(35,013)
-0-
(2,858)
-0-
231
24
-0-
181
10,823
(770)
(1,384)
5
2
6
4
6
(32,054)
10,072
(4)
(4)
(21,982)
(4)
4,275 19
(3)
(17,707)
(15,443)
(7,933)
-0-
(181)
(7,965)
770
1,153
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 517,064 $ 404,953 $ 452,259 $112,111
28 $(47,306) (10)
108
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 14—Business Segments (continued)
Assets for each segment are reported based on a specific identification basis. The insurance
segments’ assets contain deferred acquisition costs (including the value of insurance purchased). The
investment segment includes the investment portfolio, cash, and accrued investment income. Goodwill is
assigned to the insurance segments at the time of purchase based on the excess of cost over the fair
value of assets acquired for the benefit of that segment. All other assets, representing less than 4% 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.
Assets By Segment
Life
Health
Annuity
Investment
Other
Consolidated
At December 31, 2010
Cash and invested assets . . . . . . . . . . . . . . . . . .
Accrued investment income . . . . . . . . . . . . . . . . .
Deferred acquisition costs . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,803,095
309,609
$548,436
87,282
$54,804
$11,563,656
183,861
$11,563,656
183,861
3,406,335
396,891
609,019
$ 609,019
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,112,704
$635,718
$54,804
$11,747,517
$ 609,019
$16,159,762
Life
Health
Annuity
Investment
Other
Consolidated
At December 31, 2009
Cash and invested assets . . . . . . . . . . . . . . . . . .
Accrued investment income . . . . . . . . . . . . . . . . .
Deferred acquisition costs . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets of subsidiary held for sale . . . . . . . . . . . .
$2,686,357
309,609
$577,210
87,282
$55,938
$10,054,764
168,246
$10,054,764
168,246
3,319,505
396,891
427,710
1,656,643
$ 427,710
1,656,643
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,995,966
$664,492
$55,938
$10,223,010
$2,084,353
$16,023,759
109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 15—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 .5% of total life insurance in force at December 31, 2010. Insurance
ceded on life and accident and health products represented .3% of premium income for 2010. 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 3.3% of life insurance in force at December 31, 2010 and reinsurance assumed on life and
accident and health products represented .9% of premium income for 2010.
Leases: Torchmark leases office space and office equipment under a variety of operating lease
arrangements. Rental expense for operating leases was $4.9 million in 2010, $4.9 million in 2009, and
$5.1 million in 2008. Future minimum rental commitments required under operating leases having
remaining noncancelable lease terms in excess of one year at December 31, 2010 were as follows: 2011,
$3.7 million; 2012, $2.6 million; 2013, $2.4 million; 2014, $2.0 million; 2015, $2.0 million and in the
aggregate, $16.8 million.
Low-Income Housing Tax Credit Interests: As described in Note 1, Torchmark has invested $283
million in entities which provide certain tax benefits. As of December 31, 2010, Torchmark remained
obligated under these commitments for $122 million, of which $66 million is due in 2011, $52 million in
2012, and $4 million in 2013.
Concentrations of Credit Risk: Torchmark maintains a diversified investment portfolio with limited
concentration in any given issuer. At December 31, 2010, the investment portfolio, at fair value, consisted
of the following:
Investment-grade corporate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities of state and municipal governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Below-investment-grade securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy loans, which are secured by the underlying insurance policy values . . . . . . . . . . . . . .
Short-term investments, which generally mature within one month . . . . . . . . . . . . . . . . . . . . .
Other fixed maturities, equity securities, mortgages, real estate, and other long-term
76%
11
7
3
2
investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
100%
As of December 31, 2010, securities of state and municipal governments represented 11% of
invested assets at fair value. Such investments are made throughout the U.S. At year-end 2010, 5% or
more of the state and municipal bond portfolio at fair value was invested in securities issued within the
following states: Texas (34%), Washington (7%), Ohio (7%), Illinois (6%), and Alabama (5%). Otherwise,
there was no significant concentration within any given state.
110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 15—Commitments and Contingencies (continued)
Corporate debt and equity investments are made in a wide range of industries. Below are the ten
largest industry concentrations held in the corporate portfolio at December 31, 2010, based on fair value:
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19%
Electric . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16%
Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16%
6%
Oil and gas extraction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5%
Pipelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4%
Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3%
Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3%
Telecommunications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3%
Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2%
Diversified financial services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
At year-end 2010, 7% of invested assets was represented by fixed maturities rated below investment
grade (BB or lower as determined by the weighted average of available ratings from rating services). Par
value of these investments was $1.2 billion, amortized cost was $863 million, and fair value was $731
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, 2010, 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, 2010,
Torchmark had no liability with respect to these guarantees.
Trust Preferred Securities: Torchmark entered into a performance guarantee for the obligations
of the Torchmark Capital Trust III when the trust preferred securities were issued by that trust. It
guarantees payment of distributions and the redemption price of the securities until the securities are
redeemed in full, or all obligations have been satisfied should 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 2015. The
maximum amount of letters of credit available is $250 million. Torchmark (parent company) would be
liable to the extent that TMK Re, Ltd. does not pay the reinsured party. At December 31, 2010, $198
million of letters of credit were outstanding.
111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 15—Commitments and Contingencies (continued)
Equipment leases: Torchmark has guaranteed performance of a subsidiary as lessee under
two leasing arrangements for aviation equipment. One of the leases commenced in 2003 for a lease
term of approximately 10 years and the other was entered into in 2009 also for 10 years. Torchmark
has certain renewal and early termination options under the first lease. At December 31, 2010, total
remaining undiscounted payments under the leases were approximately $9.3 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 disclosed in filings with the Securities and Exchange Commission (SEC), United
American was named as a defendant in purported class action litigation originally filed on September 16,
2004, in the Circuit Court of Saline County, Arkansas on behalf of the Arkansas purchasers of association
group health insurance policies or certificates issued by United American through Heartland Alliance of
America Association and Farm & Ranch Healthcare, Inc. (Smith and Ivie v. Collingsworth, et al., CV2004-
742-2). The plaintiffs asserted claims for fraudulent concealment, breach of contract, common law liability
for non-disclosure, breach of fiduciary duties, civil conspiracy, unjust enrichment, violation of the Arkansas
Deceptive Trade Practices Act, and violation of Arkansas law and the rules and regulations of the
Arkansas Insurance Department. Declaratory, injunctive, and equitable relief, as well as actual and
punitive damages, were sought by the plaintiffs. On September 7, 2005, the plaintiffs amended their
complaint to assert a nation-wide class, defined as all United American insureds who simultaneously
purchased both an individual Hospital and Surgical Expense health insurance policy (Form HSXC) and an
individual supplemental term life insurance policy (Form RT85) from Farm & Ranch through Heartland.
Defendants removed this litigation to the United States District Court for the Western District of Arkansas
(No. 4:05-cv-1382) but that Court remanded the litigation back to the state court on plaintiffs’ motion. On
July 22, 2008, the plaintiffs filed a second amended complaint, asserting a class defined as “all persons
who, between January 1998 and the present, were residents of Arkansas, California, Georgia, Louisiana
or Texas, and purchased through Farm & Ranch: (1) a health insurance policy issued by United American
known as Flexguard Plan, CS-1 Common Sense Plan, GSP Good Sense Plan, SHXC Surgical & Hospital
Expense Policy, HSXC 7500 Hospital/Surgical Plan, MMXC Hospital/Surgical Plan, SMXC Surgical/
Medical Expense Plan and/or SSXC Surgical Safeguard Expense Plan, and (ii) a membership in
Heartland.” Plaintiffs assert claims for breach of contract, violation of Arkansas Deceptive Trade Practices
Act and/or applicable consumer protection laws in other states, unjust enrichment, and common law
fraud. Plaintiffs seek actual, compensatory, statutory and punitive damages, equitable and declaratory
relief. On September 8, 2009, the Saline County Circuit Court granted the plaintiff’s motion certifying the
class. On October 7, 2009, United American filed its notice of appeal of the class certification and
subsequently filed its appellate brief on April 8, 2010. On December 2, 2010, the Arkansas Supreme
Court affirmed the lower court’s decision to certify the class. Discovery is ongoing.
112
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 15—Commitments and Contingencies (continued)
As reported in previous SEC filings, on June 3, 2009, the Florida Office of Insurance Regulation
(Florida Office) issued an order to Liberty National to show cause why the Florida Office should not issue
a final order suspending or revoking Liberty National’s certificate of authority to do insurance business in
the State of Florida. The order asserted that Liberty National has engaged in alleged unfair trade
practices in violation of Florida law through past underwriting practices used by Liberty National with
regard to insurance applications submitted by persons who live in the United States but who were not
U.S. citizens and persons traveling to certain foreign countries. Liberty National denies the allegations
made by the Florida Office. Liberty National responded to the Florida Office’s order in a timely manner
and the matter was transmitted to the Division of Administrative Hearings on July 10, 2009. The matter
was assigned to an administrative law judge and was set for hearing commencing on February 1, 2010.
On January 21, 2010, the Florida Office filed a motion for continuance which was granted and the hearing
in the Florida Department of Administrative Hearings was held June 7-11, 2010. Each of the parties
submitted proposed orders to the Administrative Law Judge on August 18, 2010 for her review. On
November 9, 2010, the Administrative Law Judge issued a recommended order and transmitted it to all
parties. The Florida Office filed exceptions to the order and Liberty National filed its response to those
exceptions as well as its own exceptions on December 3, 2010. On February 9, 2011, the Florida Office
issued a Final Order that essentially adopted the Administrative Law Judge’s previously recommended
findings of fact and conclusions of law. However, in its Final Order, the Florida Office increased the
recommended fines for the four non-willful violations and trebled the fine for each non-willful violation
resulting in a total fine of $60,000. A decision whether or not the Final Order will be appealed has not
been made.
As previously reported in filings with the SEC, on September 23, 2009, purported class action
litigation was filed against American Income Life Insurance Company in the Superior Court of San
Bernardino County, California (Hoover v. American Income Life Insurance Company, Case No. CIVRS
910758). The plaintiffs, former insurance sales agents of American Income who are suing on behalf of all
current and former American Income sales agents in California for the four year period prior to the filing of
this litigation, assert that American Income’s agents are employees, not independent contractors as they
are classified by American Income. They allege failure to indemnify and reimburse for business expenses
as well as failure to pay all wages due upon termination in violation of the California Labor Code; failure to
pay minimum wages in violation of the California Industrial Welfare Commission Wage Order No. 4-2001,
originally and as amended; and unfair business practices in violation of the California Business and
Professions Code §§17200, et seq. They seek, in a jury trial, reimbursement for business expenses and
indemnification for losses, payment of minimum wages for their training periods, payment of moneys due
immediately upon termination under the California Labor Code, disgorgement of profits resulting from
unfair and unlawful business practices, and injunctive relief granting employee status to all of American
Income’s California agents. On October 29, 2009, American Income filed a motion seeking to remove this
litigation from the Superior Court in San Bernadino County to the U.S. District Court for the Central
District of California, Eastern Division. The U.S. District Court remanded the case without prejudice to the
Superior Court and denied American Income’s motion to dismiss on December 15, 2009. On January 19,
2010, American Income filed a motion to dismiss which was denied by the Superior Court after a hearing
held on March 16, 2010. On September 20, 2010, American Income again filed a motion to remove the
case to federal court based upon jurisdictional grounds that had not been available previously. The
Company’s motion was not successful, however, and the case was remanded back to Superior Court. On
January 12, 2011, the Superior Court denied the Company’s motion to exercise the arbitration clauses of
those agent contracts that contain them; the Company has appealed that denial. Discovery is proceeding.
113
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 16—Related Party Transactions
William J. Baxley is a partner in the law firm of Baxley, Dillard, Dauphin, McKnight & James 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, 2010 and 2009, the outstanding balance of this
loan was $217 thousand and $296 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, 2010 and 2009,
the
outstanding balance of this loan was $587 thousand and $620 thousand, respectively.
Torchmark also holds funds on behalf of Mr. Baxley as a part of an agreement established in 2006.
Interest is paid to Baxley based on a variable rate computed as the average yield for Aa corporate bonds
less fifty basis points, which was 5.0% at December 31, 2010. This account balance was $74 thousand at
year end 2010 and $58 thousand at year end 2009.
Torchmark grants options to certain consultants for their services in addition to their fees. Mr. Baxley
received Torchmark options in each of the years 2008 through 2010.
114
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 17—Selected Quarterly Data (Unaudited)
The following is a summary of quarterly results for the two years ended December 31, 2010. 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
2010:
Premium and policy charges . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . .
Realized investment gains(losses) . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy benefits . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquisition expenses . . . . . . . . .
Pretax income from continuing operations . . . . .
Income from continuing operations . . . . . . . . . . .
Income from discontinued operations . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic net income per common share*
Continuing operations . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . .
Total basic net income per share . . . . . . . .
Diluted net income per common share*
Continuing operations . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . .
Total diluted net income per share . . . . . . .
2009:
Premium and policy charges . . . . . . . . . . . . . . . .
Net investment income . . . . . . . . . . . . . . . . . . . .
Realized investment gains(losses) . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy benefits . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquisition expenses . . . . . . . . .
Pretax Income from continuing operations . . . . .
Income from continuing operations . . . . . . . . . . .
Income from discontinued operations . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic net income per common share*
Continuing operations . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . .
Total basic net income per share . . . . . . . .
Diluted net income per common share* . . . . . . .
Continuing operations . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . .
Total diluted net income per share . . . . . . .
$670,944
167,111
7,261
845,678
468,934
109,602
174,054
115,393
6,283
121,676
1.39
0.08
1.47
1.39
0.07
1.46
$667,391
158,167
(40,755)
785,208
460,490
108,346
126,918
76,961
(255)
76,706
0.91
0.00
0.91
0.91
0.00
0.91
$669,569
170,612
(5,002)
835,895
454,177
104,851
180,720
119,848
6,201
126,049
1.46
0.08
1.54
1.45
0.08
1.53
$661,870
156,483
(30,582)
788,217
450,330
104,038
144,743
103,788
10,330
114,118
1.25
0.13
1.38
1.25
0.13
1.38
$657,827
172,337
8,045
838,888
433,514
104,045
208,313
138,097
(23,566)
114,531
1.71
(0.29)
1.42
1.70
(0.29)
1.41
$638,539
158,972
(35,641)
762,321
420,786
101,986
143,760
98,558
2,242
100,800
1.19
0.03
1.22
1.19
0.03
1.22
$653,418
166,304
27,036
847,171
436,419
100,392
215,480
148,955
5,853
154,808
1.87
0.07
1.94
1.84
0.07
1.91
$642,305
158,918
(22,514)
779,327
421,723
101,616
161,655
106,745
6,584
113,329
1.29
0.08
1.37
1.28
0.08
1.36
*
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.
115
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 year completed December 31, 2010, 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
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.
the date of
As of the date of this Form 10-K for the quarter ended December 31, 2010, there have not been any
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
116
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, 2010. The Company’s independent registered public accounting firm has issued an
attestation report on the Company’s internal control over financial reporting as stated in their report which
is included herein.
/s/ Mark S. McAndrew
Mark S. McAndrew
Chief Executive Officer
/s/ Gary L. Coleman
Gary L. Coleman
Executive Vice President and
Chief Financial Officer
February 28, 2011
117
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, 2010, 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, 2010, 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, 2010 of Torchmark and our report dated February 28, 2011 expressed
an unqualified opinion on those financial statements and financial statement schedules.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
February 28, 2011
118
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,” “Director Qualification Standards,” “Procedures for
Director Nominations by Stockholders,” and “Section 16(a) Beneficial Ownership Reporting Compliance”
in the Proxy Statement for the Annual Meeting of Stockholders to be held April 28, 2011 (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, 2010
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
10,123,819
$51.14
170,176
Plan Category
Equity compensation
plans approved by
security holders . . .
Equity compensation
plans not approved
by security
holders . . . . . . . . . .
Total . . . . . . . . . . . . . .
10,123,819
(b) Security ownership of certain beneficial owners:
-0-
-0-
$51.14
-0-
170,176
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.
119
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, 2010 and 2009 . . . . . . . . . . . . . . .
Consolidated Statements of Operations for each of the three years in the period
ended December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income for each of the three years in
the period ended December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Shareholders’ Equity for each of the three years in
the period ended December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedules Supporting Financial Statements for each of the three years in the period
ended December 31, 2010:
II. Condensed Financial Information of Registrant (Parent Company) . . . . . . . . . . . . .
IV. Reinsurance (Consolidated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58
59
60
61
62
63
64
127
131
Schedules not referred to have been omitted as inapplicable or not required by Regulation S-X.
120
EXHIBITS
Page of
this
Report
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
10.1
10.2
10.3
10.4
Restated Certificate of Incorporation of Torchmark Corporation, filed with the Delaware
Secretary of State on April 30, 2010 (incorporated by reference from Exhibit 3.1.2 to
Form 8-K dated May 5, 2010)
Amended and Restated By-Laws of Torchmark Corporation, as amended August 5,
2010 (incorporated by reference from Exhibit 3.2 to Form 8-K dated August 11, 2010)
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)
Third Supplemental
Indenture dated as of June 30, 2009 between Torchmark
Corporation and The Bank of New York Mellon Trust Company, N.A. (incorporated by
reference from Exhibit 4 to Form 10-Q for the quarter ended June 30, 2009)
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 December 10, 2010 among Torchmark Corporation, as
the Borrower, TMK Re, Ltd., as a Loan Party, Wells Fargo Bank, National Association,
as Administrative Agent, Swing Line Lender, L/C Issuer and L/C Administrator and the
other lenders listed therein (incorporated by reference from Exhibit 10.01 to Form 8-K
dated December 16, 2010)
121
Page of
this
Report
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
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)*
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 Amended and Restated Pension Plan*
The Torchmark Corporation 1998 Stock Incentive Plan (incorporated by reference from
Exhibit 10(n) to Form 10-K for the fiscal year ended December 31, 1998)*
122
Page of
this
Report
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
The Torchmark Corporation Savings and Investment Plan (amended and restated as of
January 1, 2009)*
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)
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)*
123
Page of
this
Report
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50
10.51
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)*
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)*
Amendment Four
to the Torchmark Corporation Supplementary Retirement Plan
(incorporated by reference from Exhibit 10.52 to Form 10-K for the fiscal year ended
December 31, 2008)*
Amendment Three 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, 2008)*
Amendment One to the Torchmark Corporation Restated Deferred Compensation Plan for
Directors, Advisory Directors, Directors Emeritus and Officers (incorporated by reference
from Exhibit 10.54 to Form 10-K for the fiscal year ended December 31, 2008)*
124
10.52
10.53
10.54
10.55
10.56
10.57
10.58
10.59
(11)
(12)
(20)
(21)
(23)
(24)
(31.1)
(31.2)
(32.1)
(101)
Amendment Two to the Torchmark Corporation Restated Deferred Compensation Plan
(incorporated by reference from Exhibit 10.55 to Form 10-K for the fiscal year ended
December 31, 2008)*
Amendment
to the Torchmark Corporation 2007 Long-Term Compensation Plan
(incorporated by reference from Exhibit 10.56 to Form 10-K for the fiscal year ended
December 31, 2008)*
Amendment One to the Torchmark Corporation Savings and Investment Plan (as
restated January 1, 2007) (incorporated by reference to Exhibit 10.57 to Form 10-K for
the fiscal year ended December 31, 2008)*
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)
Torchmark Corporation 2011 Non-Employee Director Compensation Plan*
Form of Stock Option under Torchmark Corporation 2011 Non-Employee Director
Compensation Plan*
Form of Restricted Stock Award Notice under Torchmark Corporation 2011 Non-
Employee Director Compensation Plan*
Form of Restricted Stock Unit Award Notice under Torchmark Corporation 2011 Non-
Employee Director Compensation Plan*
Statement re computation of per share earnings
Statement re computation of ratios
Proxy Statement for Annual Meeting of Stockholders to be held April 28, 2011***
Subsidiaries of the registrant
Consent of Deloitte & Touche LLP
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
Interactive Data File
Page of
this
Report
126
126
Compensatory plan or arrangement.
*
** Certain portions of the exhibit have been omitted pursuant to a request for confidential treatment which was granted June 23,
2010 effective until May 9, 2015. 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, 2010.
125
Exhibit 11. Statement re computation of per share earnings
TORCHMARK CORPORATION
COMPUTATION OF EARNINGS PER SHARE
Twelve Months Ended December 31,
2008
2009
2010
Income from continuing operations . . . . . . . . . . . . . . . . . . . $522,293,000 $386,052,000 $429,700,000
22,559,000
Income (loss) from discontinued operations . . . . . . . . . . .
(5,229,000)
18,901,000
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $517,064,000 $404,953,000 $452,259,000
Basic weighted average shares outstanding . . . . . . .
Diluted weighted average shares outstanding . . . . . .
81,339,485
82,082,225
83,033,589
83,033,589
88,052,650
88,516,095
Basic net income per share:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . $
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . .
Total basic net income per share . . . . . . . . . . . . . $
Diluted net income per share:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . $
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . .
Total diluted net income per share . . . . . . . . . . . $
6.42 $
(0.06)
6.36 $
6.36 $
(0.06)
6.30 $
4.65 $
0.23
4.88 $
4.65 $
0.23
4.88 $
4.88
0.26
5.14
4.85
0.26
5.11
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
State of
Incorporation
Indiana
Nebraska
Nebraska
Name Under Which
Company Does
Business
American Income Life
Insurance Company
Globe Life And Accident
Insurance Company
Liberty National Life
Insurance Company
Nebraska
United American
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 121 through 125 of this report. Exhibits not referred to have been omitted as
inapplicable or not required.
126
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(Amounts in thousands)
December 31,
2010
2009
Assets:
Investments:
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
15,963
62,582
$
1,390
155,342
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78,545
4,973,495
138,130
65,195
5,391
156,732
4,384,023
77,170
45,001
2,885
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5,260,756
$4,665,811
Liabilities and shareholders’ equity:
Liabilities:
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 198,875
789,643
136,931
119,066
$ 233,307
796,050
138,081
99,482
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,244,515
1,266,920
Shareholders’ equity:
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
351
79,875
783,119
22,958
3,513,419
(383,481)
351
83,875
791,872
(319,183)
3,228,904
(386,928)
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,016,241
3,398,891
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5,260,756
$4,665,811
See Notes to Condensed Financial Statements and accompanying Report of Independent Registered
Public Accounting Firm.
127
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
CONDENSED STATEMENTS OF OPERATIONS
(Amounts in thousands)
Year Ended December 31,
2009
2010
2008
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized investment gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 26,031
(1,646)
$ 17,374
(1)
$ 19,752
-0-
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,385
17,373
19,752
General operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reimbursements from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,682
(13,375)
74,827
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
83,134
18,119
(5,973)
71,687
83,833
22,636
(9,374)
65,643
78,905
Operating income (loss) before income taxes and equity in earnings of
affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(58,749)
18,521
(66,460)
19,773
(59,153)
20,231
Net operating loss before equity in earnings of affiliates . . . . . . . . . . . . . . . .
Equity in earnings of affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(40,228)
557,292
(46,687)
451,640
(38,922)
491,181
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$517,064
$404,953
$452,259
See Notes to Condensed Financial Statements and accompanying Report of Independent Registered
Public Accounting Firm.
128
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT—(continued)
CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended December 31,
2009
2010
2008
Cash provided from (used for) operations before dividends from
subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (33,403)
370,947
$ (51,241)
354,695
$ (53,882)
404,341
Cash provided from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
337,544
303,454
350,459
Cash provided from (used for) investing activities:
Acquisition of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disposition of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease (increase) in short-term investments . . . . . . . . . . . . . . . . . .
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(14,279)
33
106,881
(18,722)
(125)
31
(129,789)
(100,000)
Cash provided from (used for) investing activities . . . . . . . . . . . . . . . . . . . . .
73,913
(229,883)
Cash provided from (used for) financing activities:
Issuance of 9 1⁄4% Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of 9 1⁄4% Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of 8 1⁄4% Senior Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net issuance (repayment) of commercial paper . . . . . . . . . . . . . . . . . . . . .
Issuance of stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net borrowings to/from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit on stock option exercises . . . . . . . . . . . . . . . . . . . . . . .
Payment of dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-0-
(8,913)
-0-
(34,432)
37,863
(246,006)
(86,800)
162
(73,331)
296,308
-0-
(99,050)
(71,329)
4,430
(47,564)
(87,200)
(30)
(69,885)
-0-
2,268
-0-
-0-
2,268
-0-
-0-
-0-
102,178
25,473
(455,736)
45,500
2,679
(72,072)
Cash provided from (used for) financing activities . . . . . . . . . . . . . . . . . . . . .
(411,457)
(74,320)
(351,978)
Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
-0-
-0-
-0-
(749)
749
$
-0-
$
749
-0-
749
See Notes to Condensed Financial Statements and accompanying Report of Independent Registered
Public Accounting Firm.
129
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$370,947
$354,695
$404,341
2010
2009
2008
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:
Year Ended December 31,
2009
2010
2008
Stock-based compensation not involving cash . . . . . . . . . .
$11,848
$9,860
$10,823
The following table summarizes certain amounts paid (received) during the period:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$75,909
2,379
$73,031
25,202
$64,997
18,351
Year Ended December 31,
2008
2009
2010
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 2009, a Federal
income tax expense of $1.5 million was incurred relating to Internal Revenue
Service examinations of prior years. In 2008 and 2007, a Federal income tax benefit of $.1 million and
$1.2 million, respectively, were recorded relating to such examinations.
Note D—Preferred Stock
As of December 31, 2010, Torchmark had 351 thousand shares of Cumulative Preferred Stock,
Series A, issued and outstanding, of which 280 thousand shares were 6.50% Cumulative Preferred Stock,
Series A, and 71 thousand shares were 7.15% Cumulative Preferred Stock, Series A (collectively, the
“Series A Preferred Stock”). All issued and outstanding shares of Series A Preferred Stock were held by
wholly-owned insurance subsidiaries. In the event of liquidation, the holders of the Series A Preferred
Stock at the time outstanding would be entitled to receive a liquidating distribution out of the assets legally
available to stockholders in the amount of $1 thousand per share or $351 million in the aggregate, plus
any accrued and unpaid dividends, before any distribution is made to holders of Torchmark common
stock. Holders of Series A Preferred Stock do not have any voting rights nor have rights to convert such
shares into shares of any other class of Torchmark capital stock.
See accompanying Report of Independent Registered Public Accounting Firm.
130
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,
2010:
Life insurance in force . . . . . . . . . . . . . $140,653,839
$722,577
$4,743,222
$144,674,484
3.3%
Premiums:(2)
Life insurance . . . . . . . . . . . . . . . . . . $ 1,618,973
990,024
Health insurance . . . . . . . . . . . . . . .
$ 4,684
2,603
Total premium . . . . . . . . . . . . . . . . $ 2,608,997
$ 7,287
$
$
23,419
-0-
$ 1,637,708
987,421
23,419
$ 2,625,129
1.4%
0%
.9%
For the Year Ended December 31,
2009:
Life insurance in force . . . . . . . . . . . . . $139,408,962
$744,213
$1,898,360
$140,563,109
1.4%
Premiums:(2)
Life insurance . . . . . . . . . . . . . . . . . . $ 1,550,434
1,020,467
Health insurance . . . . . . . . . . . . . . .
$ 4,647
2,756
Total premium . . . . . . . . . . . . . . . . $ 2,570,901
$ 7,403
$
$
18,172
-0-
$ 1,563,959
1,017,711
18,172
$ 2,581,670
1.2%
0%
.7%
For the Year Ended December 31,
2008:
Life insurance in force . . . . . . . . . . . . . $133,670,674
$736,266
$1,966,917
$134,901,325
1.5%
Premiums:(2)
Life insurance . . . . . . . . . . . . . . . . . . $ 1,500,104
1,130,932
Health insurance . . . . . . . . . . . . . . .
$ 4,630
3,872
Total premium . . . . . . . . . . . . . . . . $ 2,631,036
$ 8,502
$
$
18,693
-0-
$ 1,514,167
1,127,060
18,693
$ 2,641,227
1.2%
0%
.7%
(1) No amounts have been netted against ceded premium
(2) Excludes policy charges of $26,629, $28,435, and $30,673, in each of the years 2010, 2009, and 2008, respectively.
See accompanying Report of Independent Registered Public Accounting Firm.
131
Pursuant to the requirements of Section 12 or 15(d) of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
TORCHMARK CORPORATION
/s/ MARK S. MCANDREW
Mark S. McAndrew,
Chairman and Chief Executive Officer and Director
/s/ GARY L. COLEMAN
Gary L. Coleman, Executive Vice President
and Chief Financial Officer
/s/ DANNY H. ALMOND
Danny H. Almond
Vice President and Chief Accounting Officer
By:
By:
By:
Date: February 28, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
By:
By:
By:
By:
/s/ CHARLES E. ADAIR *
Charles E. Adair
Director
/s/ DAVID L. BOREN *
David L. Boren
Director
/s/ M. JANE BUCHAN *
M. Jane Buchan
Director
/s/ ROBERT W. INGRAM *
Robert W. Ingram
Director
By:
/s/
JOSEPH L. LANIER, JR. *
Joseph L. Lanier, Jr.
Director
Date: February 28, 2011
*By:
/s/ GARY L. COLEMAN
Gary L. Coleman
Attorney-in-fact
By:
By:
By:
By:
/s/ LLOYD W. NEWTON *
Lloyd W. Newton
Director
/s/ SAM R. PERRY *
Sam R. Perry
Director
/s/ DARREN M. REBELEZ *
Darren M. Rebelez
Director
/s/ LAMAR C. SMITH *
Lamar C. Smith
Director
/s/ PAUL J. ZUCCONI *
Paul J. Zucconi
Director
132
3700 S. Stonebridge Drive | McKinney, Texas 75070 | www.torchmarkcorp.com
Torchmark Corpor ation
2010 Annual Report