3700 S. Stonebridge Drive
McKinney, Texas 75070
www.torchmarkcorp.com
TORCHMARK CAPITAL TRUST
PREFERRED SECURITIES
Torchmark Capital Trust III, a Delaware
business trust subsidiary of Torchmark, has
issued a total of 4.8 million 7.10% Trust
Preferred Securities (liquidation amount
$25 per Trust Preferred Security). The Trust
Preferred Securities
through
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
Computershare
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 Computershare, 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.
PRINCIPAL EXECUTIVE OFFICE
3700 South Stonebridge Drive
McKinney, Texas 75070
(972) 569-4000
ANNUAL MEETING
OF SHAREHOLDERS
10:00 a.m. CDT, Thursday, April 26, 2012
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
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/10-K and Proxy
(cid:129) Employment
(cid:129) Investor Relations
Investor Relations page
The
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,
Replays, and Transcripts
(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
- Board Committees
- 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
2011
2010
% CHANGE
$2,657,345
$2,652,274
514,424
1,813,705
1,016,393
109,815
525,955
1,753,046
973,625
123,123**
13.8%
13.8%
0.2
(2.2)
3.5
4.4
(10.8)
PER COMMON SHARE:
Net Operating Income
Shareholders‘ Equity at Year End
$4.68
35.59
$4.27**
32.69**
9.6
8.9
* Certain financial data differ from the comparable GAAP financial data.
Reconciliations to GAAP financial data are presented on pages 21-22.
** Amounts have been restated for a 3-for-2 stock split that occurred in 2011.
2 · TORCHMARK CORPORATION ·
LETTER TO SHAREHOLDERS*
Torchmark Corporation was formed back in 1980, when Liberty National Life Insurance Company (LNL) of
Birmingham, AL acquired Globe Life And Accident Insurance Company (Globe Life) of Oklahoma City. For the
first 15 years of our existence, we grew rapidly, both internally as well as through acquisition. The Company
also became much more diverse as we acquired a mutual fund company, started an oil and gas subsidiary, a
real estate development company as well as a major expansion of our property and casualty subsidiary.
Over the past 15 or so years, the complexion of Torchmark has changed significantly. We spun off Waddell
& Reed, Vesta (our P & C subsidiary) and sold Torch Energy. Other than our administrative offices and direct
response facilities, we sold off all of our real estate holdings. A year ago, we sold United Investors. We
have simplified the Company and have focused on growing our core businesses.
NET OPERATING EARNINGS PER SHARE**
Compound Annual Growth Rate 1995 through 2011 – 8.7%
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$1.23
$1.17
$1.35
$5.10-
$5.40
$4.68
$4.27
$3.87
$3.98
$3.63
$3.33
$3.06
$2.82
$2.58
$2.34
$2.14
$1.96
$1.59
$1.76
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012 Est.
This change in Company direction has also changed the way the Company is perceived by analysts and
investors. The most common terms used to describe Torchmark these days are “safe” and “predictable,”
particularly in difficult economic conditions.
*Certain financial data differ from the comparable GAAP financial data. Reconciliations to GAAP financial data are presented on pages 21-22.
* *Per share data for 1995-2010 have been restated for a 3-for-2 stock split that occurred in 2011.
LETTER TO SHAREHOLDERS · TORCHMARK CORPORATION · 3
I would have to say that those terms are accurate. If you look at the previous chart, you will see that our net
operating earnings per share showed remarkably consistent growth from 1995 through 2011. The Compound
Annual Growth Rate (CAGR) for that period was 8.7%. For 2011, we grew net operating earnings per share
by 9.6% and, if we achieve the mid-point of our current guidance, we will see net operating Earnings Per
Share (EPS) growth of 12.2% for 2012, which would be our best year in the past 10 years.
BOOK VALUE PER SHARE (EXCLUDING NET UNREALIZED GAINS OR LOSSES ON FIXED MATURITIES)*
16-Year Compound Annual Growth Rate – 10.9%
$40.00
$35.00
$30.00
$25.00
$20.00
$15.00
$10.00
$6.78
$5.00
$7.61
$8.60
$35.59
$32.69
$29.48
$26.12
$24.17
$22.17
$20.27
$18.30
$16.71
$12.26
$13.50
$14.98
$10.20
$10.85
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Excluding the net unrealized gains or losses on our fixed maturities, our growth in book value per share has
also been remarkably consistent. For the period 1995 – 2011, the CAGR was 10.9%.
GAAP BOOK VALUE PER SHARE*
16-Year Compound Annual Growth Rate – 11.4%
$45.00
$40.00
$35.00
$30.00
$25.00
$20.00
$15.00
$10.00
$5.00
0
$41.54
$33.24
$27.25
$23.12
$23.73
$21.94
$20.71
$18.97
$17.49
$16.03
$13.50
$11.53
$10.92
$10.04
$9.20
$7.39
$7.79
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
4 · TORCHMARK CORPORATION · LETTER TO SHAREHOLDERS
*Per share data for 1995-2010 have been restated for a 3-for-2 stock split that occurred in 2011.
Our GAAP book value has also increased significantly over the same period although not with the same
consistency due to fluctuations in the market value of our investment portfolio. Over the last 16 years, the
CAGR was 11.4%.
There are three keys to Torchmark’s success:
(cid:129) Consistently high underwriting margins,
(cid:129) Conservative, long-term investment strategy, and
(cid:129) Strong free cash flow at the parent company.
First, we have consistently high underwriting margins. In fact, I believe our underwriting margins are
among the highest (if not the highest) in our industry.
How are we able to achieve and maintain these high margins? There are several factors:
(cid:129) We sell basic protection products – focusing on life and higher margin supplemental health
products. We do not market investment products or high risk, volatile primary health products.
(cid:129) We operate in relatively non-competitive markets. We market primarily to middle-income
households – a market which is increasingly underserved.
(cid:129) We control our distribution. Our three primary distribution systems are our two exclusive
agencies and our direct response operation. Unlike companies that operate primarily through
independent distribution channels, we don’t have to directly compete with other companies
for an agent’s business through compensation, product enhancements, or lower rates.
(cid:129) We control our expenses – both administrative and acquisition. It has been part of the culture
of Torchmark since its inception – constantly finding ways to be more efficient while improving
our service.
The charts below show a split of our business between life and health. Over the last 16 years, our life
underwriting margins have increased from 56% to 78% of our total.
TOTAL LIFE AND HEALTH
UNDERWRITING MARGIN 1995
TOTAL LIFE AND HEALTH
UNDERWRITING MARGIN 2011
(excluding Medicare Part D)
44%
56%
22%
78%
Life
Health (excluding Medicare Part D in 2011)
LETTER TO SHAREHOLDERS · TORCHMARK CORPORATION · 5
This shift was by design. We chose to exit the under age 65 primary health market for a number of reasons.
That business had:
(cid:129) High risk
(cid:129) Poor persistency
(cid:129) Low margins
(cid:129) Potential for litigation
We focus primarily on life insurance due to its higher underwriting margins, the excess investment income
it generates, and its relative lack of volatility. The major sources of our life premium and underwriting margin
are discussed in the following sections.
AMERICAN INCOME - LIFE PREMIUM
($ in millions)
16-Year Compound Annual Growth Rate - 9.0%
$700
$600
$500
$400
$300
$200
$100
0
$608
$561
$508
$474
$440
$409
$380
$350
$231
$247
$204
$217
$315
$277
$174
$191
$154
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Our largest and most profitable distribution system is American Income Life Insurance Company (AIL)
which we acquired in 1995. As you can see from the graph, it has enjoyed a long history of growth, with
life premiums growing at a CAGR of 9.0% since 1995.
AIL’s historical market has been labor unions. AIL is one of the few all union insurance companies – both
our agents and home office employees are members of the Office and Professional Employees International
Union. We currently have the endorsement of 88 international unions. While this continues to be a core
market for us, over the last 10 years we have made a concerted effort to expand beyond this market. Today,
only 28% of our new sales come from union endorsed leads.
In the last 10 years, our producing agents at AIL have grown from 1,768 to 4,381 - an increase of 148% -
while our net life sales have grown from $60 million to $142 million – a 137% increase.
We fully expect to continue this history of growth. In the fourth quarter of 2011, net life sales grew 11%
following our 12% increase in producing agents over the prior 12 months. We are currently projecting 12%
– 14% growth for 2012.
6 · TORCHMARK CORPORATION · LETTER TO SHAREHOLDERS
AMERICAN INCOME - LIFE UNDERWRITING MARGIN
($ in millions)
16-Year Compound Annual Growth Rate - 9.5%
$250
$200
$150
$100
$50
$47
$51
$55
$58
$62
$65
$201
$186
$168
$155
$93
$106
$118
$83
$71
$126
$138
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
This growth in premium did not result in declining margins. On the contrary, our persistency and mortality
continue to improve. So while life premiums grew at a CAGR of 9.0% over the past 16 years, life underwriting
margins increased at a CAGR of 9.5% over the same period.
DIRECT RESPONSE - LIFE PREMIUM
($ in millions)
16-Year Compound Annual Growth Rate - 9.0%
$700
$600
$500
$400
$300
$200
$100
0
$567
$594
$537
$511
$484
$457
$424
$387
$350
$268
$289
$316
$246
$221
$172
$195
$149
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Our second largest distribution system is the direct response operation at Globe Life. It, too, has a long
history of consistent growth, with life premiums achieving a CAGR of 9.0% over the last 16 years.
Globe Life also operates in a relatively non-competitive market – selling basic life insurance products to
middle and lower middle income households. Globe Life also enjoys some competitive advantages which
make it very difficult for other companies to duplicate our success.
LETTER TO SHAREHOLDERS · TORCHMARK CORPORATION · 7
Our biggest advantage is the ability and experience of our people. We have been in this market for 47 years
and have accumulated a wealth of experience in what works and what doesn’t work. We have assembled
the most talented group of people in my 32 years with Torchmark.
Our second big advantage is our control and cost containment over every aspect of the sales process.
Product design, list compilation and modeling, package design, printing, envelope manufacturing, and
lettershop – all are done in-house. As a result, we believe that no one can come close to matching our costs.
While continuing to grow our traditional direct mail and insert media distribution, we are constantly searching
for new areas for growth – particularly the Internet and social networking sites.
DIRECT RESPONSE - LIFE UNDERWRITING MARGIN
($ in millions)
16-Year Compound Annual Growth Rate - 7.0%
$160
$140
$120
$100
$80
$60
$40
$20
0
$145
$148
$135
$121
$117
$107
$109
$97
$86
$69
$69
$71
$72
$76
$61
$53
$50
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
While life premiums at Globe Life grew on average 9.0% over the past 16 years, life underwriting margins
increased by 7.0% over the same period. Over the past 10 years, however, underwriting margins have held
at approximately 25% of premium, in spite of numerous postage increases and inflation in both printing and
labor costs.
We expect 2012 to be a good year in direct response. While the mid-point of our guidance assumes a 6%
increase in our life sales, I believe we could see a significant improvement in that estimate.
8 · TORCHMARK CORPORATION · LETTER TO SHAREHOLDERS
LIBERTY NATIONAL LIFE - LIFE PREMIUM
($ in millions)
$350
$300
$250
$200
$150
$100
$50
0
$275
$280
$281
$281
$288
$294
$297
$302
$304
$304
$303
$301
$294
$287
$284
$282
$277
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Our third primary distribution system is LNL – the original parent company at the time Torchmark was
first incorporated. LNL was founded in 1900, and historically operated as a home service company in six
southeastern states.
The acquisition of Globe Life and formation of Torchmark in 1980 was a direct result of LNL’s inability to
sustain internal growth. As you can see from this chart, that challenge continues to this day. Over the past
16 years, life premiums at LNL have grown by only $2 million.
The challenges at LNL are not unique – they have been faced by every home service company. The biggest
challenge has been the cost structure characterized by high, fixed acquisition costs. All sales offices were company
owned and maintained – all sales personnel were employees and received salaries and benefits regardless of
their sales volume. For those reasons, most companies abandoned or de-emphasized this distribution model.
LIBERTY NATIONAL LIFE - LIFE UNDERWRITING MARGIN
($ in millions)
$90
$80
$70
$60
$50
$40
$30
$20
$10
0
$77
$73
$70
$73
$72
$71
$72
$70
$68
$74
$78
$78
$74
$69
$65
$56
$57
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
LETTER TO SHAREHOLDERS · TORCHMARK CORPORATION · 9
Maintaining LNL’s underwriting margins has also been a challenge. The life underwriting margin in 2011
was actually $5 million less than it was 16 years prior.
Beginning in 2003, we began a slow transition away from this high fixed cost structure. Today, our agents
and field sales management do not receive salaries – they are compensated by commissions and bonuses
only. Since November 1, 2011, all new hires are independent contractors and not eligible for employee
benefits. Effective January 1, 2012, all sales office expenses are paid by our Branch Managers. The effect
of these changes is a major reduction in our fixed acquisition costs which will result in a more consistent and
improved underwriting margin on our new business going forward.
But the challenge to grow remains. In December of last year, we changed the executive management at
LNL. Roger Smith, the CEO of AIL, assumed additional responsibility as CEO of LNL and Steve DiChiaro, a
very successful State General Agent at AIL, became Chief Agency Officer for LNL.
Their goal for 2012 is to implement similar recruiting, training and sales processes at LNL to those that have
worked well at AIL. I am optimistic that we will begin to see a turnaround at LNL the second half of 2012,
and should be in position to see growth at LNL in 2013 and beyond.
TOTAL LIFE PREMIUM 1995
TOTAL LIFE PREMIUM 2011
39%
21%
18%
22%
16%
15%
34%
35%
American Income
Direct Response
Liberty National
Other
As you can see from this chart, in 1995, LNL represented 39% of our total life premium – in 2011, it was only
16%. On the other hand, AIL and Globe accounted for 43% in 1995 – today they are 69%.
10 · TORCHMARK CORPORATION · LETTER TO SHAREHOLDERS
TOTAL LIFE UNDERWRITING
MARGIN 1995
TOTAL LIFE UNDERWRITING
MARGIN 2011
14%
24%
36%
26%
13%
16%
30%
41%
American Income
Direct Response
Liberty National
Other
In life underwriting margins, LNL shrank from 36% in 1995 to only 13% in 2011, while AIL and Globe Life
grew from 50% to 71% of the total.
TOTAL LIFE SALES 1995
TOTAL LIFE SALES 2011
20%
32%
27%
21%
7% 7%
42%
44%
American Income
Direct Response
Liberty National
Other
When we look at new life sales, LNL declined from 20% in 1995 to only 7% today, while AIL and Globe Life
increased from 48% to 86%.
I have not given up on LNL. I believe it will turnaround in 2012 and contribute to our future growth. I am
also very encouraged by recent trends at AIL and Globe Life and believe both are positioned to see the best
sales growth they have seen in a number of years.
LETTER TO SHAREHOLDERS · TORCHMARK CORPORATION · 11
The second key to our success is our conservative, long-term investment strategy. As our life
premiums and equity have grown, so too, have our invested assets – from $5.5 billion in 1995 to $11.4 billion
at year-end 2011.
TOTAL INVESTED ASSETS
($ in millions)
16-Year Compound Annual Growth Rate – 4.7%
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
0
$11,387
$11,088
$10,190
$10,277
$9,873
$9,473
$8,964
$8,577
$8,050
$6,471
$6,233
$6,156
$5,484
$5,788
$6,706
$7,106
$7,477
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Throughout this period, we invested predominantly in long-term, investment grade corporate bonds. We
believe this investment strategy is the best match to the long duration and fixed-rate nature of our policy
liabilities and provides the best risk-adjusted return to our shareholders.
BELOW INVESTMENT GRADE BONDS
As a Percent of Fixed Maturities*
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0
9.5%
9.5%
8.6%
8.3%
8.0%
8.1%
8.1%
8.3%
7.5%
7.4%
6.4%
5.9%
4.9%
4.8%
3.8%
3.6%
3.5%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
* Excluding net unrealized gains and losses
12 · TORCHMARK CORPORATION · LETTER TO SHAREHOLDERS
On the previous chart, you can see a history of our below investment grade (BIG) bonds. In June of 2009,
BIG bonds hit an all time high of $1.2 billion or 13% of the portfolio, during a time when 30% of our portfolio
was downgraded and over half of those downgrades were two or more notches. Since then we’ve reduced
the risk in our portfolio and the percentage has decreased to 6.4% - the lowest level since 2000.
NET UNREALIZED GAINS (LOSSES) ON FIXED MATURITIES
($ in millions)
$1,500
$1,000
$500
$0
($500)
($1,000)
($1,500)
($2,000)
$226
$63
$213
$249
($275)
($236)
($2)
$631
$649
$306
$425
$229
($103)
$964
$108
($456)
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
($1,793)
As you can see from this chart, the net unrealized gains and losses in our investment portfolio have seen
some wide swings, particularly in the last 5 years. At year end 2011, we had $964 million of net unrealized
gains – the highest in our history – with many of the same bonds that three years earlier had a $1.8 billion
net unrealized loss.
These fluctuations in the market value of our portfolio normally don’t concern us because we have the intent
and ability to hold them to maturity unless there is a credit problem.
Even in 2009, we never had to sell a bond to meet a cash need.
LETTER TO SHAREHOLDERS · TORCHMARK CORPORATION · 13
FIXED MATURITY PORTFOLIO YIELD*
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0
7.81%
7.68%
7.65%
7.56%
7.61%
7.64%
7.58%
7.57%
7.37%
7.19%
7.09%
7.02%
6.96%
6.98%
6.81%
6.63%
6.49%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
* Excluding net unrealized gains and losses
There has been much discussion and concern recently about a prolonged low interest rate environment and
the impact it would have on insurance companies.
At Torchmark, this is an issue we have been dealing with for a number of years. At the end of 2011, the
average yield on our fixed maturity portfolio was 6.49%:
(cid:129) 132 basis points lower than 1995,
(cid:129) 109 basis points less than 10 years ago, and
(cid:129) 53 basis points lower than five years ago.
While the decline in portfolio yield has lessened our EPS growth, it has not stopped it. In 2011, we saw
9.6% growth in our operating EPS even though the portfolio yield dropped 14 basis points. So what impact
will continued low interest rates have going forward?
To answer that question, I first need to remind you of the sources of our excess investment income (as of
December 31, 2011).
TOTAL INVESTED ASSETS
$11.4 BILLION
EXCESS INVESTMENT INCOME
$273 MILLION**
$3.5
Billion
$7.9
Billion
$58
Million
$215
Million
Assets Supporting Net Policy
Obligations and Debt
Assets Supporting Equity
Excess Investment Income from Assets
Supporting Net Policy Obligations and Debt
Excess Investment Income from Assets
Supporting Equity
14 · TORCHMARK CORPORATION · LETTER TO SHAREHOLDERS
** Calculated using assets, liabilities, related yields, and diluted shares outstanding at
December 31, 2011, incorporating estimated impact of Accounting Standards Update 2010-26
While 70% of our invested assets cover our policy and debt obligations, only 21% of our excess investment
income is derived from the spread between our portfolio yield and the interest required to fund our obligations.
The other $3.5 billion of assets represent our equity and contribute 79% of our excess investment income.
Low Interest Rate Environment – Earnings Impact
To project the impact of an extended low interest rate environment, we looked at a scenario where all new
investments for the next five years would be at a constant yield of 4.75%. Because of the low volume
of maturities and calls in the next five years (only 2%-3% per year), our overall portfolio yield would
only decline from 6.49% at December 31, 2011 to between 5.95% and 6.10% at December 31, 2016.
This reduction of about 50 basis points is roughly the same as what we’ve experienced over the past
ten years. The average discount rate on life insurance business inforce at December 31, 2016 would be
approximately 5.6%.
In this scenario there would still be a positive spread of 35 to 50 basis points on assets supporting net
policy liabilities and 595 to 610 points on assets supporting equity.
Because our assets and equity will continue to increase over the next five years, the impact is not that
great.
SOURCES OF EXCESS INVESTMENT INCOME PER SHARE*
2011 TOTAL $2.68
$0.57
$2.11
Excess Investment Income from Assets
Supporting Net Policy Obligations and Debt
Excess Investment Income from Assets
Supporting Equity
2016 TOTAL $3.41
Assuming New
Money Yield of
4.75% through 2016
$0.24
$3.17
2016 TOTAL $4.29
Assuming New
Money Yield of
6.49% through 2016
$0.89
$3.40
* Calculated using assets, liabilities, related yields, and diluted shares outstanding at
year-end, incorporating estimated impact of Accounting Standards Update 2010-26
LETTER TO SHAREHOLDERS · TORCHMARK CORPORATION · 15
In 2011, our excess investment income on a per share basis was $2.68 with $0.57 coming from the spread
over our obligations and $2.11 coming from interest earned on our equity.
In our stress test, we assumed our policy and debt obligations would increase 4% per year and our equity
would grow by 3% per year. We also assumed that we would continue to use our free cash at the parent
to repurchase shares – buying 28 million shares over the next five years.
If our portfolio yield were to remain flat at 6.49%, our excess investment income per share would grow at
a CAGR of 10% over the next five years. If we invest new money at 4.75% over that period and the overall
portfolio yield declines to 6.00%, the excess investment income per share attributed to the spread on our
obligations would drop from $0.57 to $0.24, but the interest on our equity would still grow from $2.11 to
$3.17. Total excess investment income per share would still grow at a CAGR of 5%.
I would also point out that, due to the nature of our products, we can maintain our profitability even with
lower interest rate assumptions. For most of our products, lowering the interest we credit on our policy
reserves by 100 basis points would only require a 1%-3% rate adjustment to provide the same profit margin.
We lowered the interest rate assumptions on new business written in 2011, and expect a further reduction
on new business written in 2012. We implemented an average 20% increase in new business rates at
Liberty in late 2010, and have made a 5% adjustment at AIL and Globe beginning in January 2012.
With the growth we expect in our underwriting income and continued use of our free cash in our share
repurchase program, we believe we can sustain double-digit growth in our operating earnings per share in
spite of a prolonged low-interest rate environment.
16 · TORCHMARK CORPORATION · LETTER TO SHAREHOLDERS
The last key to Torchmark’s success is our strong, consistent free cash flow at the parent company.
We define free cash flow as the dividends received from the subsidiary companies less the interest expense
on Torchmark debt and the dividends paid to Torchmark shareholders. The net amount of cash left over is
“free cash” that can be used by the parent for any corporate purpose.
FREE CASH FLOW
($ in Millions)
$400
$350
$300
$250
$200
$150
$100
$110
$100
$225
$195
$152
$340
$353
$343
$367*
$350-
$360
$300
$275
$281
$269
$50
0
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012 Est.
* Excludes $305 from the sale of United Investors.
This chart shows the dramatic growth in our free cash flow between 1999 and 2007 – from $110 million
to $353 million. While it dipped from 2008 – 2010 due to investment impairments and increased capital
requirements at the subsidiaries, it rebounded nicely in 2011 to $367 million. We are expecting a small
decline in 2012 free cash as a result of the United Investors sale, but we expect renewed growth in our free
cash flow in 2013.
LETTER TO SHAREHOLDERS · TORCHMARK CORPORATION · 17
Since 1996, we have used our free cash to repurchase company shares. Over that period we have acquired
127 million shares. During 2011, we spent $788 million to acquire 18.9 million shares or 16% of the diluted
outstanding shares at the beginning of the year.
SHARE REPURCHASES
Average Price*
No. of Shares (in 000’s)*
P/E Ratio**
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
$41.68
$35.67
$15.19
$37.24
$43.59
$38.32
$35.43
$34.26
$25.44
$25.22
$24.83
$15.48
$21.67
$24.42
$19.68
$15.44
--
18,898
5,707
3,075
11,457
9,225
8,363
8,471
7,831
8,853
7,225
6,397
8,709
8,097
5,154
3,049
6,928
8.9
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
14.6
13.2
-
* Amounts for 1996-2010 have been restated for a 3-for-2 stock split that occurred in 2011.
** P/E Ratios are calculated using the net operating earnings per share for the year in which the share repurchases occurred.
For 2012, with the $74 million of assets on hand at the beginning of the year, plus the additional free cash
from the subsidiaries, the parent will have $425 - $435 million of cash available. We plan to use most, if not
all, of this cash to continue to repurchase shares.
To summarize, 2011 was a very good year for us. 2012 is shaping up to be our best year in at least the
last 10. We are excited about our prospects for growth and believe we can sustain double-digit growth in
operating EPS even in a prolonged low-interest rate environment.
Thank you for your investment in Torchmark.
MARK S. MCANDREW
Chairman and Chief Executive Officer
18 · TORCHMARK CORPORATION · LETTER TO SHAREHOLDERS
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, 2011, 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 · 19
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 of
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
OFFICERS OF SUBSIDIARIES
LAMAR C. SMITH
Executive Chairman of
Vista Machining Company;
Retired Chief Executive Officer of
First Command Financial Services, Inc.,
Fort Worth, 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
AMERICAN INCOME LIFE
ROGER SMITH
Chief Executive Officer
SCOTT A. SMITH
President and Chief Marketing Officer
GLOBE LIFE
CHARLES F. HUDSON
President and Chief Executive Officer
LIBERTY NATIONAL LIFE
ROGER SMITH
President and Chief Executive Officer
UNITED AMERICAN
VERN D. HERBEL
President and Chief Executive Officer
STEVEN J. DICHIARO
Executive Vice President and
Chief Agency Officer
20 · TORCHMARK CORPORATION · LETTER TO SHAREHOLDERS
OPER ATING SUMMARY
Unaudited and in thousands except per share amounts
TWELVE MONTHS ENDED DECEMBER 31,
2011
2010
% 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
State administrative settlement
Loss on sale of equipment
Litigation expense
Net Income
EPS on a diluted basis
$1,726,244
(660,880)
(579,129)
486,235
733,783
(434,172)
(161,172)
138,439
23,552
2,345
650,571
2,507
(159,109)
493,969
707,041
(551,798)
214,998
(77,644)
292,597
(7,693)
778,873
(254,729)
524,144
(9,720)
$514,424
$4.68
0
$514,424
$4.68
109,815
$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
$4.04*
27,932
$525,955
$4.27*
123,123*
4%
7%
(6%)
(5%)
2%
4%
3%
(2%)
2%
3%
16%
(2%)
10%
$514,424
$525,955
16,838
0
(455)
(4,486)
(636)
(7,800)
$517,885
$4.72
24,270
1,852
(35,013)
0
0
0
$517,064
$4.20*
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.
* Amounts have been restated for a 3-for-2 stock split that occurred in 2011.
OPERATING SUMMARY · TORCHMARK CORPORATION · 21
CONDENSED BALANCE SHEET
Unaudited and amounts in thousands
AT DECEMBER 31,
2011
2010
Assets:
Fixed maturities at amortized cost
Cash and short-term investments
Mortgages and real estate
Other investments
Deferred acquisition costs
Goodwill
Other assets
Total assets
Liabilities and shareholders’ equity:
Policy liabilities
Accrued income taxes
Short-term debt
Long-term debt and trust preferred securities
Other liabilities
Shareholders’ equity, excluding FAS 115
Total liabilities and shareholders’ equity
Actual shares outstanding:
Basic
Diluted
Book value (shareholders’ equity, excluding FAS 115) per diluted share
Net operating income as a return on average equity, excluding FAS 115
Average equity, excluding FAS 115
Debt to capital ratio, excluding FAS 115
$
$
$
$
$
$
10,924,244
105,357
3,716
440,421
3,517,934
396,891
836,950
16,225,513
9,956,537
1,192,888
224,842
914,282
313,127
3,623,837
16,225,513
100,579
101,808
35.59
13.8%
3,724,263
23.9%
Reconciliation of Torchmark management’s view of selected financial measures to comparable GAAP measures:
3,623,837
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
963,961
(33,083)
(325,807)
4,228,908
11,888,205
3,484,851
17,156,391
4,228,908
1,518,695
41.54
12.8%
4,033,493
21.2%
$
$
$
$
$
$
$
$
$
10,435,497
582,359
16,635
421,628
3,410,739
396,891
792,880
16,056,629
9,537,087
1,173,336
198,875
913,354
284,772
3,949,205
16,056,629
118,865*
120,815*
32.69*
13.8%
3,823,367
22.0%
$
3,949,205
107,537
(4,404)
(36,097)
4,016,241
10,543,034
3,406,335
16,159,762
4,016,241
1,209,433
33.24*
13.4%
3,861,013
21.7%
$
$
$
The Condensed Balance Sheet, excluding the effect of net unrealized investment gains 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.
* Amounts have been restated for a 3-for-2 stock split that occurred in 2011.
22 · TORCHMARK CORPORATION · CONDENSED BALANCE SHEET
This page left intentionally blank.
· TORCHMARK CORPORATION · 23
24 · TORCHMARK CORPORATION ·
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, 2011
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
891027104
891027104
89102W208
Name of each exchange on
which registered
New York Stock Exchange
The International Stock Exchange, London, England
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È No ‘
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes ‘ No È
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes È No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. ‘
Indicate by check mark whether the registrant 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, 2011,
the aggregate market value of
the registrant’s common stock held by non-affiliates of
the registrant was
$4,506,812,451 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, 2012
100,186,568 shares
DOCUMENTS INCORPORATED BY REFERENCE
Document
Proxy Statement for the Annual Meeting of Stockholders to be
held April 26, 2012 (Proxy Statement)
Parts Into Which Incorporated
Part III
TORCHMARK CORPORATION
INDEX
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4.
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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
14
15
17
18
54
55
110
110
110
113
113
113
113
113
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . .
114
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
American Income
Exclusive Agency
Direct Response
American Income Life
Insurance Company
Waco, Texas
Globe Life And Accident
Insurance Company
Oklahoma City, Oklahoma
Liberty National
Exclusive Agency
United American
Independent Agency
Liberty National Life
Insurance Company
McKinney, Texas
United American
Insurance Company
McKinney, Texas
Products and Target Markets
Distribution
Individual life and supplemental health
insurance marketed to union and credit
union members.
4,381 producing agents in
the U.S., Canada, and New
Zealand.
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.
Supplemental limited-benefit health
coverage to people under age 65, Medicare
Supplement and Medicare Part D coverage
to Medicare beneficiaries and, to a lesser
extent, life insurance.
Direct mail, internet,
television, magazine;
nationwide.
1,345 producing agents; 64
branch offices.
1,447 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)
2010
2011
2009
Whole life:
Traditional . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,153,621 $1,115,777 $1,077,347
80,229
Interest-sensitive . . . . . . . . . . . . . . . . . . . . . . .
483,064
Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53,762
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
76,248
499,814
61,207
68,832
524,784
66,468
$1,813,705 $1,753,046 $1,694,402
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)
2010
2011
2009
Direct response . . . . . . . . . . . . . . . . . . . . . . . . . . $ 630,044 $ 602,593 $ 578,223
Exclusive agents:
American Income . . . . . . . . . . . . . . . . . . . . . .
Liberty National . . . . . . . . . . . . . . . . . . . . . . . .
Independent agents:
United American . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
642,803
302,489
22,203
216,166
596,583
310,475
24,726
218,669
549,540
317,413
27,740
221,486
$1,813,705 $1,753,046 $1,694,402
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, 2011 by product category.
Annualized Premium in Force
(Amounts in thousands)
2010
2011
2009
Amount
$ 451,773
281,633
282,987
% of
Total
44
28
28
Amount
$461,386
308,899
203,340
% of
Total
47
32
21
Amount
$ 474,987
354,254
197,319
% of
Total
46
35
19
Medicare Supplement . . . . . . . . .
Limited-benefit plans . . . . . . . . . .
Medicare Part D . . . . . . . . . . . . .
Total Health . . . . . . . . . . . . .
$1,016,393
100
$973,625
100
$1,026,560
100
The following table presents supplemental health annualized premium in force for the three years
ended December 31, 2011 by marketing (distribution) method.
Direct response . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Exclusive agents:
Liberty National
. . . . . . . . . . . . . . . . . . . . . . . . .
American Income . . . . . . . . . . . . . . . . . . . . . . . .
Independent agents:
United American . . . . . . . . . . . . . . . . . . . . . . . .
317,699
322,383
Medicare Part D . . . . . . . . . . . . . . . . . . . . . . . . .
733,406
282,987
770,285
203,340
Annualized Premium in Force
(Amounts in thousands)
2010
2009
2011
58,512 $ 57,014 $
55,108
284,204
72,991
316,839
74,049
365,027
71,836
337,270
829,241
197,319
$1,016,393 $973,625 $1,026,560
Annuities
Annuity products offered include single-premium and flexible-premium deferred annuities. Annuities
in each of the three years ending December 31, 2011 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 96% of
fair value at
December 31, 2011. (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 to
be placed 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 2011, Torchmark had 2,249 employees and 938 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 discount rates used to calculate 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,
Insurance Office (FIO) within the Department of
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
the Treasury, and the Patient Protection
Federal
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, 2011, 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 a
company-owned district office used for agency sales personnel. Liberty is currently in the process of
selling 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. This subsidiary has also leased an additional 25,000 square
feet on a temporary basis while a 21,000 square foot addition to its facility is constructed. The addition is
scheduled to be completed in late 2012, at which time the leased space will be vacated. Globe also
currently leases 37,000 square feet of space for its home office activities in downtown Oklahoma City.
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.
13
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. On January 6, 2012, the parties agreed in
principal
the trial,
previously set
to commence on January 17, 2012, pending notice to the class and the Court’s
consideration of the agreed-upon settlement.
to settle the case. On January 11, 2012,
the Court ordered the continuation of
On March 15, 2011, purported class action litigation was filed against American Income and
Torchmark in the District Court for the Northern District of Ohio (Fitzhugh v. American Income Life
Insurance Company and Torchmark Corporation, Case No. 1:11-cv-00533). The plaintiff, a formerly
independently contracted American Income agent, alleges that American Income intentionally
misclassified its agents as independent contractors rather than as employees in order to escape minimum
wage and overtime requirements of the Fair Labor Standards Act, as well as to avoid payroll taxes,
workers compensation premiums and other benefits required to be provided by employers. Monetary
damages in the amount of unpaid compensation plus liquidated damages and/or prejudgment interest as
well as injunctive and/or declaratory relief is sought by the plaintiff on behalf of the purported class. On
November 3, 2011, the Court granted American Income’s motion to compel arbitration and dismissed the
case. Plaintiffs have appealed this decision.
Torchmark subsidiary, United American was named as defendant in purported class action litigation
filed on May 31, 2011 in Cross County Arkansas Circuit Court (Kennedy v. United American Insurance
Company (Case # CV-2011-84-5). In the litigation, filed on behalf of a proposed nationwide class of
owners of certain limited hospital and surgical expense benefit policies from United American, the plaintiff
alleged that United American breached the policy by failing and/or refusing to pay benefits for the total
number of days an insured is confined to a hospital and by limiting payment to the number of days for
which there are incurred hospital room charges rather than also including benefits for services and
supplies. Claims for unjust enrichment, breach of contract, bad faith refusal to pay first party benefits,
breach of
the implied duty of good faith and fair dealing, bad faith, and violation of the Arkansas
Deceptive Trade Practices Act were initially asserted. The plaintiff sought declaratory relief, restitution
and/or monetary damages, punitive damages, costs and attorneys fees. In September 2011, the plaintiff
dismissed all causes of action, except for the breach of contract claim.
On November 14, 2011, plaintiff filed an amended complaint based upon the same facts asserting
only breach of contract claims on behalf of a purported nationwide restitution/monetary relief class or, in
the first alternative, a purported multiple-state restitution/monetary relief class or,
in the second
alternative, a purported Arkansas statewide restitution/monetary relief class. Restitution and/or monetary
relief for United American’s alleged breaches of contract, costs, attorney’s fees and expenses, expert
fees, prejudgment interest and other relief are sought on behalf of the plaintiff and members of the class.
On December 7, 2011, United American filed a Motion to Dismiss the plaintiff’s amended complaint and
on January 11, 2012, plaintiff filed a response thereto. Discovery has commenced and is ongoing.
Item 4. Mine Safety Disclosures.
Not Applicable.
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 3,528 shareholders of record on December 31, 2011, excluding shareholder accounts held in
nominee form. On July 1, 2012, Torchmark paid a three-for-two stock split to its common shareholders in
the form of a 50% stock dividend. All prices and dividends shown below have been adjusted to reflect its
payment. 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $43.39
Quarter
1
2
3
4
2011
Market Price
Low
High
$44.32 $40.45
41.00
33.18
33.72
45.23
43.68
43.74
Dividends
Per Share
$.107
.107
.11
.12
2010
Market Price
Low
High
$35.82 $29.36
32.49
32.22
35.25
37.48
36.77
41.33
Dividends
Per Share
$.10
.10
.10
.107
Year-end closing price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $39.83
(c) Purchases of Certain Equity Securities by the Issuer and Others for the Fourth Quarter 2011
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, 2011 . . . . . . . . . . .
November 1-30, 2011 . . . . . . . . .
December 1-31, 2011 . . . . . . . . .
1,106,282
2,075,000
1,231,000
$39.23
41.37
42.90
1,106,282
2,075,000
1,231,000
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. It was reaffirmed April 28, 2011 by the
Board. 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
$120
$100
$80
$60
$40
$20
$0
12/06
12/07
12/08
12/09
12/10
12/11
Torchmark Corporation
S&P 500
S&P Life & Health Insurance
* $100 invested on 12/31/06 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
Copyright© 2012 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,
2011
2010
2009
2008
2007
Premium revenue:
Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,726,244 $ 1,663,699 $ 1,591,853 $ 1,544,219 $ 1,495,363
1,236,797
Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
602
2,732,762
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
601,975
Net investment income . . . . . . . . . . . . . . . . .
Realized investment gains (losses) . . . . . . .
2,281
3,344,517
Total revenue . . . . . . . . . . . . . . . . . . . . . . . .
489,237
Income from continuing operations . . . . . . .
38,298
Income from discontinued operations . . . . .
Loss on disposal, net of tax . . . . . . . . . . . . .
0
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
527,535
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
1,017,711
541
2,610,105
632,540
(129,492)
3,115,073
386,052
18,901
0
404,953
987,421
638
2,651,758
676,364
37,340
3,367,632
522,293
29,784
(35,013)
517,064
929,466
608
2,656,318
693,028
25,904
3,377,401
518,340
0
(455)
517,885
Income from continuing operations . . .
Income (loss) from discontinued
operations . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . .
Diluted earnings:
Income from continuing operations . . .
Income (loss) from discontinued
operations . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared . . . . . . . . . . . . .
Cash dividends paid . . . . . . . . . . . . . . . . .
Basic average shares outstanding . . . . . . .
Diluted average shares outstanding . . . . . .
4.79
(0.01)
4.78
4.72
0.00
4.72
0.46
0.45
108,278
109,815
4.28
(0.04)
4.24
4.24
(0.04)
4.20
0.41
0.41
122,009
123,123
3.10
0.15
3.25
3.10
0.15
3.25
0.38
0.37
124,550
124,550
3.24
0.17
3.41
3.25
0.17
3.41
0.37
0.37
132,079
132,774
3.46
0.27
3.73
3.40
0.27
3.67
0.35
0.35
141,476
143,769
As of December 31,
2011
2010
2009
2008
2007
Cash and invested assets . . . . . . . . . . . . . . $ 12,437,699 $11,563,656 $10,054,764 $ 7,812,992 $ 9,084,312
15,241,428
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . .
202,058
Short-term debt . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt(1) . . . . . . . . . . . . . . . . . . . . . .
721,723
3,324,627
Shareholders’ equity . . . . . . . . . . . . . . . . . . .
Per diluted share . . . . . . . . . . . . . . . . . . . .
23.73
Effect of fixed maturity revaluation on
13,529,050
403,707
622,760
2,222,907
17.49
16,159,762
198,875
913,354
4,016,241
33.24
16,023,759
233,307
919,761
3,398,891
27.25
17,156,391
224,842
914,282
4,228,908
41.54
diluted equity per share(2) . . . . . . . . . . .
5.95
0.55
(2.23)
(8.63)
(0.44)
Annualized premium in force:
Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic shares outstanding . . . . . . . . . . . . . . .
Diluted shares outstanding . . . . . . . . . . . . . .
1,813,705
1,016,393
2,830,098
100,579
101,808
1,753,046
973,625
2,726,671
118,865
120,815
1,694,402
1,026,560
2,720,962
124,261
124,739
1,625,549
1,098,349
2,723,898
127,061
127,061
1,585,005
1,233,884
2,818,889
138,263
140,074
(1)
Includes Torchmark’s 7.1% Junior Subordinated Debentures reported as “Due to affiliates” on the Consolidated Balance Sheets
at year ends 2007 through 2011 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, 2011. 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)
2011
2010
2009
Change %
Change %
2011
2010
Life insurance underwriting margin . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 486,235 $ 455,266 $ 427,412 $ 30,969
(8,068)
Health insurance underwriting margin . . . . . . . . . . . . . . . . . . . . . . . .
Annuity underwriting margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
997
Other insurance:
161,991
2,345
170,059
1,348
170,410
312
7 $ 27,854
(5)
7
(351) 0
1,036
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Administrative expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,507
(159,109)
292,597
(22,647)
2,834
(155,615)
297,145
(20,657)
2,914
(150,325)
275,650
(19,450)
(327) (12)
2
(3,494)
(4,548)
(2)
(1,990) 10
Pre-tax total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Applicable taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
763,919
(249,495)
750,380
(252,357)
706,923
(238,153)
13,539
2,862
After-tax total, before discontinued operations . . . . . . . . . .
Discontinued operations (after tax) . . . . . . . . . . . . . . . . . . . . . . . . . . .
514,424
0
498,023
27,932
468,770
26,810
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains (losses)—investments (after tax)* . . . . . . . . . . . . . . .
. . . . .
Realized gains (losses)—discontinued operations (after tax)
Loss on disposal of discontinued operations (after tax) . . . . . . . . . .
Tax settlements (after tax) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of legal settlements (after tax) . . . . . . . . . . . . . . . . . . . . . . . . . .
State administrative settlement (after tax) . . . . . . . . . . . . . . . . . . . . .
Loss on Company-occupied property (after tax) . . . . . . . . . . . . . . . .
Loss on sale of equipment (after tax) . . . . . . . . . . . . . . . . . . . . . . . . .
514,424
16,838
0
(455)
0
(7,800)
(4,486)
0
(636)
525,955
24,270
1,852
(35,013)
0
0
0
0
0
495,580
(85,345)
(7,909)
0
2,858
0
0
(231)
0
16,401
(27,932)
(11,531)
(7,432)
(1,852)
34,558
0
(7,800)
(4,486)
0
(636)
2
(1)
3
(2)
(80) (3)
(5,290) 4
21,495
8
(1,207) 6
43,457
6
(14,204) 6
6
4
6
29,253
1,122
30,375
109,615
9,761
(35,013)
(2,858)
0
0
231
0
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 517,885 $ 517,064 $ 404,953 $
821
0 $112,111 28
* See the discussion of Realized Gains and Losses in this report.
Torchmark’s operations on a segment-by-segment basis are discussed in depth under
the
appropriate captions following in this report.
Summary of Operations: Net income increased slightly from $517 million to $518 million in 2011.
It rose 28% or $112 million in 2010, largely as a result of after-tax realized investment gains of $24 million
in 2010, compared with losses of $85 million after tax in 2009. The 2009 losses included $94 million of
write downs of fixed maturities which were determined to be other-than-temporarily impaired. Realized
investment gains were $17 million in 2011. On a diluted per share basis, 2011 net income increased 12%
to $4.72, after an increase in 2010 of 29% to $4.20.The above-mentioned after-tax realized investment
gains added $.15 to 2011 net income per diluted share and $.20 per share in 2010, while the 2009 loss
reduced net income $.69 per share of which the impairment writedowns accounted for $.76 of the loss.
More information concerning realized investment gains and losses can be found under the caption
Realized Gains and Losses in this report where there is a more complete discussion. 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. Also included in 2010 results is a $35 million after tax loss on the disposal of United Investors,
representing $.28 per diluted share.
As shown in the above chart, after tax segment operations, before discontinued operations, rose
each year over the prior year from $469 million in 2009 to $498 million in 2010 to $514 million in 2011.
The primary contributor to the growth in both 2011 and 2010 was the underwriting margin in our life
insurance segment, which margins rose $31 million in 2011 and $28 million in 2010. The life insurance
segment is our strongest segment and is the largest contributor to earnings in each year presented.
Growth in 2010 was also affected positively by the $21 million increased contribution of excess
investment income, the measure of profitability of the investment segment. Excess investment income in
2010 increased over 2009 investment segment income largely because of the unusually large holdings in
low-yielding cash and short-term investments held in 2009 due to the uncertain economic climate at that
time. These short-term holdings were invested in 2010 as financial conditions improved. Excess
investment income was also negatively affected in 2009 because of our issuance of a $300 million 9 1⁄4%
19
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. Growth in 2011 earnings was negatively affected by a
decline in the health insurance segment underwriting margin of $8 million, and a $5 million decline in
excess investment income from the investment segment. The 2011 decline in health contribution was
largely a result of the discontinuance of sales of certain limited-benefit health insurance products because
of healthcare reform. The decline in excess investment income was due to the continuing low-interest rate
environment which has pressured investment yields and spreads over policy benefit requirements,
discussed more fully under the captain Investments in this report.
Total revenues were flat in 2011 at $3.38 billion compared with $3.37 billion in 2010. Revenues
increased 8% in 2010 over revenues of $3.12 billion in 2009. Life premium rose 4% or $63 million in 2011
and $72 million in 2010. Net investment income rose 2% or $17 million in 2011, compared with $44
million in 2010. However, growth in revenues in 2011 and 2010 were negatively affected by the 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,
2011, margins as a percentage of premium rose in 2011 to 28% from 27% in 2010 and 2009. Segment
life insurance were not only positively affected by the premium growth, but also by
profits for
improvements in mortality and persistency in both periods. Life net sales declined 1% in 2011 to $325
million but rose 1% in 2010 to $330 million. Life insurance segment results are discussed further in this
report under the caption Life Insurance.
We primarily market
two health insurance products: Medicare Supplement
insurance and the
Medicare Part D prescription drug benefit. We also market limited-benefit cancer and accident health
products and prior to September, 2010, an under-age-65 limited-benefit hospital-surgical product. Health
premium declined 6% in 2011 to $929 million from $987 million in 2010. Health premium declined 3% in
2010. The decreases in both years were caused primarily by the de-emphasis and discontinuance of sales
in 2010 of our limited-benefit hospital-surgical health product. Declines in agent counts in the distribution
units that market our health products were another negative factor. These factors have caused reductions
in net sales of health products which have in turn 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 declined 6% in 2011, after having increased 14% in 2010. However, enrollees into our
Medicare Part D program for the plan year 2012 were 225 thousand, an increase of 56% over the 2011
enrollees. Therefore, we expect premium growth in 2012 at approximately the same rate. 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 in 2010, 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 $5 million in 2011. 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. 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. In 2011, net investment rose 3% while the portfolio (at amortized cost) grew 4%, in accordance
with the general pattern in recent periods. However, in 2010, the growth in net investment income slightly
exceeded the growth in the average portfolio for the first time in many years, primarily as a result of the
special constraints on the growth in 2009 net investment income. During 2009, due primarily to uncertainty
20
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 net policy liabilities that are supported by the invested assets. The lower new-
money yields resulting from the low-interest-rate environment noted above have had the effect of
compressing excess investment income as required interest has grown. We have implemented certain
strategies to offset this effect, including lowering the discount rate going forward and increasing premium
rates on sales of new products. 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. Financing costs in 2011 were
$78 million, an increase of 3% over $75 million in 2010. This increase was primarily a result of increased
charges related to our letters of credit facility. In 2010, financing costs increased 8% as interest expense on
our long-term debt rose $9 million or 13%. As noted earlier, in 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 higher interest rate in 2010.
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 96% of our invested assets at fair value consist of fixed maturities of which
95% were investment grade at December 31, 2011. The average quality rating of the portfolio was A-.
The portfolio contains no securities backed by sub prime or Alt-A mortgages, no direct investment in
residential mortgages, no direct investment in European Sovereign debt, 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 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. 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 2011 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. As reported in Note 1—Significant Accounting Policies in the Notes to Consolidated
Financial Statements under the caption Settlements, we have been involved in certain issues in 2011 or
2009 in which we either received settlements or incurred settlement losses and expenses. In 2011, we
settled a state administrative matter in the pretax amount of $6.9 million ($4.5 million after tax) and
accrued an estimated liability for a litigation settlement expected to settle in early 2012 in the pretax
amount of $12.0 million ($7.8 million after tax). Both of these issues involved matters arising many years
ago. Additionally, as described under the same caption of Note 1, we received a tax settlement in the
amount of $2.9 million in 2009. The tax settlement primarily involved the results of prior year
examinations. The state administrative settlement and the litigation accrual are included in “Other
operating expense” and the tax settlement is an adjustment to “Income taxes” in the Consolidated
Statements of Operations. However, as described in Note 1, we remove items such as these that are
concerned with prior periods when evaluating the results of current operations, and therefore exclude
such matters from our segment analysis for current periods.
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 poor economic conditions, 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
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, 2011, retroactively restated for the three-for-two
stock split described in Note 1—Significant Accounting Policies in the Notes to Consolidated Financial
Statements.
Analysis of Share Purchases
(Amounts in thousands)
Purchases
2011
2010
Shares Amount Shares Amount
2009
Shares Amount
Excess cash flow and borrowings . . . . . . . . . . . . . . . .
Option proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,901
4,380
$787,697
184,859
5,707
1,074
$203,566
42,440
3,075
30
$46,695
869
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,281
$972,556
6,781
$246,006
3,105
$47,564
Option proceeds increased significantly in 2011 due to optionholders exercising several years of
option grants that are due to expire in 2012.
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. The following discussions are presented in
the manner we view our operations, as described in Note 14—Business Segments.
Life Insurance. Life insurance is our
insurance segment, with 2011 life premium
largest
representing 65% of total premium. Life underwriting income before other income and administrative
expense represented 75% of the total in 2011. Additionally, investments supporting the reserves for life
products result in the majority of excess investment income attributable to the investment segment.
We completed the process of combining selected United American (UA) Exclusive Agency Branch
Offices with the Liberty National Exclusive Agency during 2011. For this reason, all data will be reported
on a combined basis in this report.
Life insurance premium rose 4% to $1.73 billion in 2011 after having increased 5% in 2010 to $1.66
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)
American Income Exclusive Agency . . . . . . .
Direct Response . . . . . . . . . . . . . . . . . . . . . . .
Liberty National Exclusive Agency . . . . . . . . .
Other Agencies . . . . . . . . . . . . . . . . . . . . . . . .
2011
2010
2009
Amount
$ 607,914
593,650
288,308
236,372
% of
Total
Amount
% of
Total
Amount
35% $ 560,649
566,604
34
294,587
17
241,859
14
34% $ 507,899
536,878
34
298,485
18
248,591
14
% of
Total
32%
34
19
15
$1,726,244
100% $1,663,699
100% $1,591,853
100%
22
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
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 $1.81 billion at December 31, 2011, an increase of 3% over
$1.75 billion a year earlier. Annualized life premium in force was $1.69 billion at December 31, 2009.
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)
American Income Exclusive Agency . . . . . . . . . . . . .
Direct Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liberty National Exclusive Agency . . . . . . . . . . . . . . .
Other Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
2010
2009
Amount
$141,793
136,663
36,338
10,404
% of
Total
Amount
% of
Total
Amount
% of
Total
44% $137,554
136,653
42
44,763
11
10,561
3
42% $127,688
$131,566
41
55,146
14
11,518
3
39%
40
17
4
$325,198
100% $329,531
100% $325,918
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)
American Income Exclusive Agency . . . . . . . . . . . . .
Direct Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liberty National Exclusive Agency . . . . . . . . . . . . . . .
Other Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011
2010
2009
Amount
$113,151
88,962
31,296
9,413
% of
Total
Amount
% of
Total
Amount
% of
Total
46% $110,751
89,542
37
34,845
13
10,364
4
45% $ 95,693
84,775
37
35,137
14
10,313
4
42%
37
16
5
$242,822
100% $245,502
100% $225,918
100%
The American Income Exclusive Agency focuses primarily on members of labor unions, but also
on credit unions and other associations as well as referrals from new customers for its life insurance
sales. It is Torchmark’s highest profit margin business. The American Income Agency was also the
largest contributor to life premium and net sales of any Torchmark distribution method in 2011. Life
premium for this agency rose 8% to $608 million in 2011, after having increased 10% in 2010. Net sales
increased 3% in 2011 to $142 million, after having risen 8% in 2010. Net sales rose 18% in 2009. First-
year collected premium rose 2% in 2011 to $113 million, after having increased 16% in 2010. The
average face amount of policies issued in 2011 was approximately $34 thousand. As in the case of all of
Torchmark’s agency distribution systems, continued increases in product sales are largely
23
dependent on increases in agent count. The American Income agent count was 4,381 at December 31,
2011 compared with 3,912 a year earlier, an increase of 12%. However, the agent count had declined 6%
in 2010 from 4,154 a year earlier. 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 recruitment of new
agents.
Direct Response consists of two primary components: insert media and direct mail. Insert media
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. Direct mail focuses
primarily on young middle-income households with children. The juvenile life insurance policy is a key
product for this group. 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 Direct Response operation accounted for 34% of our life insurance premium during 2011,
increasing 5% over 2010 premium. Life premium for this channel rose 6% in 2010 and 5% in 2009. Net
sales were flat in 2011 after a 4% increase in 2010 to $137 million. First-year collected premium declined
1% to $89 million in 2011 after a 6% gain in 2010. The average face amount of policies issued in 2011
was approximately $20 thousand.
The Liberty National Exclusive Agency markets primarily life insurance and supplemental health
insurance, focusing primarily on middle-income customers. Life premium income for this agency was
$288 million in 2011, a 2% decrease compared with $295 million in 2010. Life premium for this agency
declined 1% in 2010 from 2009. First-year collected premium declined 10% to $31 million in 2011, after
having also declined 1% in 2010. The average face amount of policies issued in 2011 was approximately
$25 thousand.
The Liberty Agency’s net sales declined 19% to $36 million in 2011, after also having declined 19% a
year earlier. As noted above, in the case of all of our agencies, the size of the agency drives product sales.
This agency had 1,345 producing agents at December 31, 2011, compared with 2,001 a year earlier, a
decline of 33%. The agent count at Liberty had also declined 19% in 2010 from 2,471. The decrease in
agent count has been due in part to the closing of several offices which had low production. In addition,
agent compensation issues that arose in 2009 have negatively impacted agent counts. The bonus
thresholds proved more difficult for producing agents to meet than anticipated. Management reduced the
bonus threshold later in 2009. Also, due to deteriorating first-year persistency, management modified
compensation incentives in 2009 to place more emphasis on the persistency of newly issued policies.
These changes resulted in the departure of a number of the less productive agents in 2010 and 2011.
While these modifications caused a loss of agents, they resulted in improved persistency and margins, and
contributed to Torchmark’s overall improvement in life insurance margins.
The Liberty Exclusive Agency agent counts have also decreased due to issues related to its health
insurance business. This agency’s health insurance marketing efforts had historically been focused on
to intense competition from other
limited-benefit hospital-surgical plans. These plans were subject
companies which offered lower-margin products providing agents with products that were easier to sell,
thus discouraging sales of our products and ultimately resulting 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. These developments caused further increases in agent turnover. 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.
Additionally, we are in the process of changing the cost structure of this agency to a more commission-
driven model. Going forward, branch office operating expenses will be the responsibility of the branch
managers and all new agent recruits will be independent contractors rather than employees. We are also
implementing new agent recruiting and training programs similar to those used at American Income. We
believe these changes will increase the Agency’s profitability and stability in the long run.
24
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 11% of life premium at December 31, 2011. The United American Independent Agency
represented approximately 1% of Torchmark’s total life premium at that date. This agency is focused on
health insurance, with life sales being incidental.
LIFE INSURANCE
Summary of Results
(Dollar amounts in thousands)
2011
% of
2010
% of
Amount
Premium Amount
Premium Amount
2009
% of
Premium
Premium and policy charges . . . . . . . . . $1,726,244
100% $1,663,699
100% $1,591,853
100%
Policy obligations . . . . . . . . . . . . . . . . . .
Required interest on reserves . . . . . . . .
1,118,909
(458,029)
65
(27)
1,082,423
(434,319)
65
(26)
1,040,249
(410,917)
65
(26)
Net policy obligations . . . . . . . . . . . . .
Commissions and premium taxes . . . . .
Amortization of acquisition costs . . . . . .
660,880
75,480
503,649
Total expense . . . . . . . . . . . . . . . . . . .
1,240,009
38
5
29
72
648,104
72,559
487,770
1,208,433
39
5
29
73
629,332
72,272
462,837
1,164,441
39
5
29
73
Insurance underwriting margin before
other income and administrative
expenses . . . . . . . . . . . . . . . . . . . . . . . $ 486,235
28% $ 455,266
27% $ 427,412
27%
Gross margins, as indicated by insurance underwriting margin before other
income and
administrative expense, rose 7% in both 2011 and 2010. The margin increased to $486 million in 2011
after rising to $455 million in 2010. As a percentage of life insurance premium, the 2011 margin rose to
28%. In the two prior years, margins were stable at 27%. Margin growth in all periods was primarily the
result of premium growth. Improved mortality was also a factor in 2011.
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
limited-benefit hospital/surgical plans. However, as previously discussed under the caption Life Insurance,
these plans became subject to intense competition which resulted in decreasing agent counts, most
notably in the Liberty National Exclusive Agency but also in the UA Independent Agency. In addition,
these plans became less marketable due to healthcare reform developments. These factors contributed
to the Company’s decisions to discontinue the marketing of
these limited-benefit hospital/surgical
products after September, 2010. We do continue to market the limited-benefit cancer and accident
products. Since 2009, Medicare Supplement sales have exceeded those of the limited-benefit products,
and represented 59% of health net sales exclusive of Medicare Part D in 2011. 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.
25
Total health premium represented 35% of Torchmark’s total premium income in 2011. Excluding Part
D premium, health premium represented 28% of total premium income in 2011, compared with 29% in
2010 and 32% in 2009. Health underwriting margin, excluding Part D, accounted for 21% of the total in
2011, compared with 23% in 2010 and 25% in 2009. These declines in the health percentages are
indicative of the growth in the premium and profitability of our life segment in relation to our health
segment. Health results have also been affected by the discontinuance of sales of the previously-
mentioned health products. 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)
2011
2010
2009
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
United American Independent Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . .
$ 36,461
270,029
$ 47,244
267,280
306,490
42% 314,524
40%
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 . . . . . . . . . . . . . . . . . .
175,133
114,974
290,107
79,302
817
80,119
372
56,695
57,067
Total Premium (Before Part D)
Limited-benefit plans . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . .
291,268
442,515
201,037
130,019
331,056
78,141
918
79,059
398
53,930
54,328
326,820
452,147
43
10
7
42
58
39
11
8
40
60
$
60,292
266,150
326,442
39%
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
Total Premium (Before Part D) . . . . . . .
733,783
100% 778,967
100%
836,616
100%
Medicare Part D*
196,710
Total Health Premium* . . . . . . . . . . . . . .
$930,493
208,970
$987,937
183,586
$1,020,202
*
Total Medicare Part D premium and health premium exclude $1.0 million in 2011, $516 thousand 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. 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)
2011
2010
2009
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
United American Independent Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . . .
$ 1,065
31,584
$ 4,596
27,444
$ 12,256
30,431
32,649
51%
32,040
50%
42,687
44%
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 . . . . . . . . . . . . . . . . . . . .
15,033
1,814
16,847
9,572
0
9,572
868
4,123
4,991
Total Net Sales (Before Part D)
Limited-benefit plans . . . . . . . . . . . . . . . . . . . . .
Medicare Supplement . . . . . . . . . . . . . . . . . . . .
26,538
37,521
10,385
3,804
14,189
13,081
0
13,081
549
4,548
5,097
28,611
35,796
22
20
8
44
56
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
26
15
8
41
59
Total Net Sales (Before Part D) . . . . . . . .
64,059
100%
64,407
100%
96,745
100%
Medicare Part D* . . . . . . . . . . . . . . . . . . . . . . . . . . .
115,122
Total Health Net Sales . . . . . . . . . . . . . . .
$179,181
38,799
$103,206
43,004
$139,749
*
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)
2011
2010
2009
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
United American Independent Agency
Limited-benefit plans . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .
Medicare Supplement
$ 1,531
28,044
$ 5,638
29,999
$ 11,459
16,066
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* . . . . . . . . . . . . . . . . . . . . . . . . . .
29,575
51%
35,637
47%
27,525
35%
10,432
2,144
12,576
11,652
0
11,652
572
4,209
4,781
24,187
34,397
58,584
26,823
21
20
8
41
59
100%
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
42
17
6
68
32
100%
Total First-Year Collected Premium . . . .
$85,407
$123,956
$ 104,840
*
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. Health premium other than Part D has declined in
each successive year presented, falling 6% in 2011 to $734 million and 7% in 2010. Net sales decreased
1% in 2011 to $64 million after a decline of 33% in 2010. First-year collected premium has also declined
in each period considered. These declines in sales and premium resulted from several factors: (1) our
previously-mentioned emphasis on life sales, due to life’s superior margins and its greater contribution to
investment income; (2) the discontinuance of sales of various limited-benefit health products; and (3) the
decline in agent counts in certain distribution units that market health products.
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 also continues to grow in relation to
our limited-benefit health premium. Medicare Supplement premium represented 60% of non-Part D health
premium in 2011, compared with 58% in 2010 and 55% in 2009.
The Liberty National Exclusive Agency represented 39% of all Torchmark non-Part D health
premium income at $290 million in 2011. The Liberty Agency markets Medicare Supplements and limited-
benefit health products consisting primarily of cancer insurance. In 2011, health premium income in this
Agency declined 12% from prior year premium of $331 million. Premium also fell 15% in 2010 from $389
million. First-year collected premium declined 20% to $13 million in 2011, after declining 52% a year
earlier. As noted earlier, the discontinuance of sales of certain health products and the earlier increased
competition in the health insurance market had caused steep declines in the agent count in this Agency.
As of December 31, 2011, this Agency had 1,345 agents, a decline of 33% from the 2010 year end count
of 2,001. In 2010, the number of agents fell 19% from 2,471 at year end 2009. The decline in agent
counts has resulted in decreased new sales, translating into declines in premium. Net sales for 2011 rose
19% from $14 million in 2010 to $17 million due to the introduction of new products. In 2010, this
Agency’s net sales fell 52%. Also discussed under the Life Insurance caption are efforts designed to
strengthen this Agency.
The UA Independent Agency is Torchmark’s largest in terms of health premium income. This 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 1,447 active producing agents at December 31, 2011 compared with 1,406 a year
earlier. This agency is our largest distributor of non-Part D health insurance in terms of health net sales,
representing 51% in 2011. This Agency is also our largest producer of Medicare Supplement insurance, with
$270 million or 61% of our Medicare Supplement premium income in 2011. Net sales for this Agency
increased 2% to $33 million in 2011, after having declined 25% in 2010 from $43 million in 2009. The greater
amount of net sales 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 $306 million in 2011, a 3% decline from 2010 premium of $315
million. Premium income also declined 4% in 2010. 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 premium income. Its health plans are comprised of
various limited-benefit plans. Approximately 69% of the agency’s 2011 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 1% in 2011 to $80 million, after having increased 5% to $79
million in 2010. However, net health sales declined 27% to $10 million in 2011. Net sales were $13 million
in both 2010 and 2009. Net health sales comprised only 6% of the American Income Agency’s total net
sales in 2011.
Direct Response, primarily a life operation, also offers health insurance, which is predominantly
Medicare Supplements sold directly to employer or union sponsored groups. In both 2011 and 2010, net
health sales were $5 million. In 2011, net health sales for this group represented 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 5% in 2011 to $57 million and 17% in 2010.
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. Under Part D, private carriers are
the primary insurers, while CMS provides significant premium subsidies and reinsurance. Total Medicare
Part D premium was $197 million in 2011, compared with $209 million in 2010, a decline of 6%. Part D
premium rose 14% in 2010. Changes in Part D premium generally result from changes in the number of
29
enrollees. At December 31, 2011, United American had approximately 225 thousand enrollees for the
2012 Part D plan, compared with 144 thousand for the 2011 plan year and 158 thousand for the 2010
plan year. Growth for the plan year 2012 was largely a result of a new lower cost Part D plan which
allowed us to pick up a large number of low-income automatic enrollees and to grow our own individual
sales. The new product is priced to achieve the same underwriting margin as our existing product. Our
Medicare Part D product is sold through the Direct Response operation and to groups through the UA
Independent Agency. Part D net sales were $115 million in 2011, compared with $39 million in 2010 and
$43 million in 2009. 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, limited-risk
due to 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, as with any
government-sponsored program, the possibility of regulatory changes could change the outlook for this
market.
30
As presented in the following table, Torchmark’s health insurance underwriting margin before other
income and administrative expense declined 5% in 2011 to $162 million but remained flat at $170 million
in 2010. As a percentage of premium income, margins were stable in all periods at approximately 17%.
HEALTH INSURANCE
Summary of Results
(Dollar amounts in thousands)
Health*
% of
Premium
Medicare
Part D
% of
Premium
Total
Health
% of
Premium
2011
Premium** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $733,783
100% $196,710
100% $ 930,493
100%
Policy obligations . . . . . . . . . . . . . . . . . . . . . . . . . . .
Required interest on reserves . . . . . . . . . . . . . . . . .
470,901
(36,729)
Net policy obligations . . . . . . . . . . . . . . . . . . . . . .
434,172
Commissions and premium taxes . . . . . . . . . . . . . .
Amortization of acquisition costs . . . . . . . . . . . . . . .
41,144
120,028
Total expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
595,344
64
(5)
59
6
16
81
161,946
0
161,946
7,798
3,414
173,158
82
0
82
4
2
88
632,847
(36,729)
596,118
48,942
123,442
768,502
68
(4)
64
5
14
83
Insurance underwriting income before other
income and administrative expenses . . . . . . . . . $138,439
19% $ 23,552
12% $ 161,991
17%
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 other than Medicare Part D.
Total Medicare Part D premium and health premium excludes $1.0 million in 2011, $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. 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
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 of our variable annuities. 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 2011, 2010, and 2009, were $1.29 billion, $1.24 billion, and
$959 million, respectively. Underwriting income was $2.3 million, $1.3 million, and $3.2 thousand in each
of the years 2011, 2010, and 2009, respectively.
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 primarily of surrender charges and are not based on account size. These
charges have remained somewhat
fixed annuity
profitability is derived from the spread of investment income exceeding contractual interest requirements,
which can result in negative net policy obligations. In each of the years presented, 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.
in recent periods. A considerable portion of
level
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, 2011.
Operating Expenses Selected Information
(Dollar amounts in thousands)
2011
2010
2009
Amount
% of
Prem.
Amount
% of
Prem.
Amount
% of
Prem.
Insurance administrative expenses:
Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 76,206
30,294
Other employee costs . . . . . . . . . . . . . . . . .
43,085
Other administrative expense . . . . . . . . . . .
9,524
Legal expense—insurance . . . . . . . . . . . . .
Total insurance administrative expenses . .
159,109
2.9%
1.1
1.6
.4
6.0%
$ 73,034
34,109
41,736
6,736
155,615
2.8%
1.3
1.6
.2
5.9%
$ 74,317
27,356
40,294
8,358
150,325
2.9%
1.1
1.5
.3
5.8%
Parent company expense . . . . . . . . . . . . . . . . . .
Stock compensation expense . . . . . . . . . . . . . . .
State administrative settlement . . . . . . . . . . . . . .
Settlement of prior period litigation . . . . . . . . . . .
. . . . . .
Loss on sale of property and equipment
7,693
14,954
6,901
12,000
979
Total operating expenses, per
Consolidated Statements of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . $201,636
8,809
11,848
0
0
0
9,590
9,860
0
0
355
$176,272
$170,130
Insurance administrative expenses:
Increase (decrease) over prior year . . . . . .
2.2%
Total operating expenses:
Increase (decrease) over prior year . . . . . .
14.4%
3.5%
3.6%
(3.7)%
(6.6)%
Insurance administrative expenses have trended upwards and rose 2% in 2011, after having
increased 4% in 2010. As a percentage of premium, they increased .1% in each successive year to 6.0%
in 2011. Employee costs increased 25% in 2010, primarily as a result of unusually high employee health
insurance costs in that year. Partially offsetting the increase in 2010 employee costs was a decline in
legal costs, as we favorably settled certain previously reserved litigation during 2010. In 2011, however,
legal expenses returned to normal
levels. Expenses for 2011 correlated more closely by expense
component to 2009 expenses, as 2010 expenses reflected the aforementioned unusual items. Parent
Company expense declined in 2011 primarily as a result of the decline in certain employee benefit
liabilities related to retired employees. Stock compensation expense has risen in each successive year as
the value of Torchmark stock has increased, resulting in higher values for grants of stock and options. 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 mentioned in Note 1—Significant Accounting Policies in the Notes to Consolidated Financial
Statements, we incurred two settlement expense issues in 2011 that related to events occurring many years
ago: the settlement of a state administrative issue of $7 million and a litigation issue in the estimated amount
of $12 million. In addition to these two items, we recorded two nonrecurring charges. In 2011, we sold
aviation equipment at a loss of $979 thousand and in 2009, we wrote down Company-occupied real estate
that was other-than-temporarily impaired in the amount of $355 thousand. While these nonrecurring
expenses were included in “Operating expenses” for the respective year in the Consolidated Statements of
Operations in accordance with accounting guidance, they are considered as non-operating expenses by
management.
33
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 required interest attributable 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
$5 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.
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)
2011
2010
2009
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Reclassification of low income housing expense(1) . . . . . . . . . . . . . . . . . . .
Reclassification of interest amount due to deconsolidation(2)
. . . . . . . . . .
693,028 $
14,277
(264)
676,364 $
9,153
(264)
Adjusted investment income (per segment analysis) . . . . . . . . . . . . .
707,041
685,253
632,540
0
(264)
632,276
Interest credited to net insurance policy liabilities:
Interest on reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . .
(551,798)
214,998
(521,683)
208,840
(487,000)
200,042
Net required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(336,800)
(312,843)
(286,958)
Financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(77,644)
(75,265)
(69,668)
Excess investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
292,597 $
297,145 $
275,650
Excess investment income per diluted share . . . . . . . . . . . . . . . . . . . . . . . $
2.66 $
2.41 $
2.21
Mean invested assets (at amortized cost) . . . . . . . . . . . . . . . . . . . . . . . . . . $11,254,566 $10,836,788 $10,012,673
Average net insurance policy liabilities(3) . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,279,621
1,111,940
Average debt and preferred securities (at amortized cost) . . . . . . . . . . . .
5,736,662
1,112,147
6,097,763
1,119,964
(1) Reclassified amortization of non-guaranteed low-income housing interests included in “Net
income” in the
Consolidated Statements of Operations but recorded in “Income taxes” in the segment analysis. See Note 1—Significant
Accounting Policies in the Notes to Consolidated Financial Statements under the caption Low-Income Housing Tax Credit
Interests for an explanation.
investment
(2) Deconsolidation of trusts liable for Trust Preferred Securities required by accounting guidance. See Note 11—Debt in the Notes
to Consolidated Financial Statements.
(3) Net of deferred acquisition costs, excluding the associated unrealized gains and losses thereon.
Excess investment income declined $5 million or 2% in 2011 from the prior year. Excess investment
income rose $21 million or 8% in 2010. On a per diluted share basis, excess investment income rose 10%
to $2.66 per share in 2011, after having risen 9% in the prior year. The favorable increases in the per
share amounts relative to the changes in dollar amounts for excess investment income are a result of
share purchases.
34
The largest component of excess investment income is net investment income, which rose 3% to
$707 million in 2011. It increased 8% to $685 million in 2010 from $632 million in 2009. 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) . . . . . . . . . . . . . .
3.2% 8.4% 0.9%
8.2
3.9
5.4
2011 2010 2009
Growth in net investment income generally correlates somewhat with the growth in mean invested assets at
amortized cost. With the exception of the years 2009 and 2010, growth in investment income has slightly
lagged the growth in mean assets for several years. One of the primary reasons that investment income has
grown at a lower rate than the growth in mean invested assets in recent years is due to the low-interest-rate
environment during that period. As a result, 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. During 2009, because of the uncertainty about liquidity in the
financial markets, we held significantly more cash and short-term investments than in other years. Holding
this larger balance of low-yielding securities in 2009 resulted in the extremely low growth rate in income in
that year, and also affected the higher growth rate in 2010 as these lower yielding cash balances were
invested in 2010. The trend of lags in growth in net investment income in relation to the growth in mean
invested assets is expected to continue until yields on suitable new investments exceed the portfolio yield.
Excess investment income is reduced by required interest on net insurance policy liabilities and the
interest paid on corporate debt. Information about interest credited to policy liabilities is shown in the
following table.
Required Interest on Net Insurance Policy Liabilities
(Dollar amounts in millions)
Required
Interest
Average Net
Insurance
Policy Liabilities
Average
Discount
Rate
2011
Life and Health . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$275.9
60.9
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . .
336.8
7.66%
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%
$4,898.4
1,199.4
6,097.8
6.29%
$4,668.8
1,067.9
5,736.7
8.66%
$4,388.6
891.0
5,279.6
9.76%
5.63%
5.07
5.52
5.50%
5.23
5.45
5.49%
5.19
5.44
The combined average interest discount rate has risen in each of the last three years due to changes in
the mix of the in force business. For more specific information on life and health discount rates, please refer
to Note 6—Future Policy Benefit Reserves in the Notes to Consolidated Financial Statements.
35
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.
The table below presents the components of financing costs.
Analysis of Financing Costs
(Amounts in thousands)
2011
2010
2009
Interest on funded debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $72,697 $72,889 $64,369
5,513
Interest on short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
2,589
51
5,207
4
Interest expense per Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . .
Reclassification of interest due to deconsolidation (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
77,908
(264)
75,529
(264)
69,932
(264)
Financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $77,644 $75,265 $69,668
(1) See Principles of Consolidation in Note 1—Significant Accounting Policies in the Notes to Consolidated Financial Statements
for an explanation of deconsolidation.
Financing costs increased $2 million or 3% in 2011. They rose $6 million or 8% in 2010. The increase
in financing costs in 2010 reflects the issuance in June 2009 of $300 million principal amount 9¼% Senior
Notes due in 2019. In 2010, we incurred a full year of interest on this issue. The 2011 increase in interest
on short-term debt was primarily a result of the $2.1 million increase in financing charges on our letter of
credit facility, arising from the December, 2010 restructuring of our credit facility. More information on this
facility is disclosed under the caption Short-Term Borrowings in the Financial Condition section of this
report and in Note 11—Debt in the Notes to Consolidated Financial Statements. The 2010 decrease was
due to a decline in short-term rates over the previous year, but 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.
However, growth in our excess investment income decreases when growth in income from the
portfolio is less than that of the interest required by policy liabilities and financing costs, such as we have
experienced in recent periods. In an extended low-interest-rate environment, the portfolio yield will tend to
decline as we invest new money at lower long-term rates. We believe, however, the decline would be
relatively slow, as only 2% to 3% of fixed maturities on average are expected to run off each year over the
next five years. We also believe that the deferred acquisition costs and benefit reserve balances on our
life and health business would not be impacted by an extended low-interest-rate environment. While
these balances for annuities could be affected, the impact would be immaterial.
In response to the lower interest rates, we raised the new business premium rates on certain life
products. The increased premiums will provide additional margin on these policies to help offset the
possible future reductions in excess investment income and are not expected to have a detrimental
impact on sales.
36
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. Further, we believe this strategy is appropriate because our strong positive cash flows are
If such longer-term securities do not meet our quality and yield
generally stable and predictable.
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 2009 through 2011, Torchmark invested almost
exclusively in fixed-maturity securities, primarily with longer-term maturities as presented in the chart
below.
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)
Cost of acquisitions:
For the Year
2010
2011
2009
Investment-grade corporate securities . . . . . . . . . . . . . . . . . . . $1,078.3 $1,478.5 $1,431.6
754.4
Taxable municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
15.4
Other investment-grade securities . . . . . . . . . . . . . . . . . . . . . .
201.2
33.7
10.7
15.2
Total fixed-maturity acquisitions . . . . . . . . . . . . . . . . . . . $1,104.2 $1,713.4 $2,201.4
Effective annual yield (one year compounded*) . . . . . . . . . . . . . .
Average life (in years, to next call) . . . . . . . . . . . . . . . . . . . . . . . .
Average life (in years to maturity) . . . . . . . . . . . . . . . . . . . . . . . . .
Average rating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.65%
27.4
28.1
A-
5.89%
24.2
26.1
A-
6.43%
16.3
21.2
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 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 2011 and 2010 due to actions taken for statutory capital management purposes and the
limited availability of longer term investments.
During the three years 2009 through 2011, we have invested primarily in investment-grade corporate
bonds. Purchases in 2011 were almost entirely in these corporates. 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. The investments in these municipal bonds consisted almost
exclusively of general obligation bonds and revenue bonds for essential services. In assessing the
creditworthiness of these bonds, we took into account a number of factors, including the geographic
location of the municipalities.
New cash flow available for investment is primarily provided through our insurance operations, but
has also been affected by other factors.
the low-interest environment
experienced during the past three years are a factor. 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,
Issuer calls, as a result of
37
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 $187 million in
2011, $109 million in 2010, and $181 million in 2009. The higher level of acquisitions in 2009 was
primarily due to the additional cash flow available from the special sales transactions noted below.
Sales transactions. During 2009, the Company sold $703 million of fixed maturities at amortized
cost, 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
to selling below-investment-grade
securities and reinvesting the proceeds in investment-grade securities, below-investment-grade securities
declined significantly as a percentage of total fixed maturities at year end 2009. The reduction in below-
investment-grade securities had a positive impact on the risk-based capital position of our insurance
subsidiaries at that date and thereafter.
these losses for tax purposes. Due in large part
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, 2011 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)
$ 9,761
1,177
1
1
3
401
22
105
$11,471
85%
10
0
0
0
4
0
1
76%
0
2
10
1
4
4
3
100
100
(1) Latest data available from the American Council of Life Insurance as of December 31, 2010.
(2)
Includes redeemable preferred of $1.2 billion or 10% and perpetual preferred of $14 million or 0%.
At December 31, 2011, approximately 95% of our investments at book value were in a diversified
fixed-maturity portfolio. Policy loans, which are secured by policy cash values, made up an additional 4%.
The remaining balance was comprised of other investments including equity securities, mortgage loans,
and other long-term and short-term investments.
38
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, 2011 and December 31, 2010 is as follows:
Fixed Maturities by Component
At December 31, 2011
(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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,358
1,163
Redeemable preferred stock . . . . . . . . . . . . . . .
1,213
Municipals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46
Government-sponsored enterprises . . . . . . . . .
36
Governments & agencies . . . . . . . . . . . . . . . . .
14
Residential mortgage-backed securities . . . . .
Commercial mortgage-backed securities . . . . .
0
60
Collateralized debt obligations . . . . . . . . . . . . .
34
Other asset-backed securities . . . . . . . . . . . . .
Total fixed maturities . . . . . . . . . . . . . $10,924
$1,051
27
119
1
1
1
0
0
3
$1,203
$(138)
(68)
(2)
0
0
0
0
(30)
(1)
$(239)
$ 9,271
1,122
1,330
47
37
15
0
30
36
$11,888
77%
11
11
0
0
0
0
1
0
78%
10
11
1
0
0
0
0
0
100% 100%
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
74%
13
12
1
0
0
0
0
0
75%
12
12
1
0
0
0
0
0
100% 100%
39
At December 31, 2011, fixed maturities had a fair value of $11.9 billion, compared with $10.5 billion
at December 31, 2010. At December 31, 2011, fixed maturities were in a $964 million net unrealized gain
position compared with an unrealized gain position of $108 million at December 31, 2010. Approximately
77% of our fixed maturity assets at December 31, 2011 at amortized cost were corporate bonds and 11%
were redeemable preferred stocks. This compares with 74% corporate bonds and 13% redeemable
preferred stocks at year end 2010. On a combined basis, residential mortgage-backed securities, other
asset-backed securities, and collateralized debt obligations (CDOs) were less than 2% of the assets at
amortized cost at December 31, 2011. The $60 million of CDOs at amortized cost made up less than
0.6% of the assets and are backed primarily by trust preferred securities issued by banks and insurance
residential mortgage-backed securities are rated AAA. For more
companies. The $14 million of
information about our fixed-maturity portfolio by component at December 31, 2011 and 2010, including an
analysis of unrealized investment losses and a schedule of maturities, see Note 4—Investments in the
Notes to Consolidated Financial Statements.
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 to maturity any
securities which are temporarily impaired.
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,
2011
At December 31,
2010
6.49%
6.63%
17.3
22.2
9.9
11.6
16.6
22.3
9.0
10.9
(1) Tax-equivalent basis, where 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.
40
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 88% 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 only 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, 2011.
Fixed Maturities by Sector
At December 31, 2011
(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 . . . . . . . . . . . . . . . . $ 1,785
1,320
509
Financial - Bank . . . . . . . . . . . . .
Financial - Other . . . . . . . . . . . .
$
Total Financial . . . . . . . . . . . . . .
Utilities . . . . . . . . . . . . . . . . . . . .
Energy . . . . . . . . . . . . . . . . . . . .
Government . . . . . . . . . . . . . . . .
Basic Materials . . . . . . . . . . . . .
Consumer Non-cyclical . . . . . . .
Other Industrials . . . . . . . . . . . .
Communications . . . . . . . . . . . .
Consumer Cyclical
. . . . . . . . . .
Transportation . . . . . . . . . . . . . .
Collateralized debt
obligations . . . . . . . . . . . . . . .
Mortgage-backed securities . . .
Total fixed
3,614
1,709
1,243
1,295
758
539
519
464
394
315
60
14
92
32
41
165
319
188
121
108
90
60
66
34
51
0
1
$ (63) $ 1,814
1,281
533
(71)
(17)
16% 16%
12
4
11
4
(151)
(9)
0
(2)
(3)
(4)
(19)
(12)
(9)
0
(30)
0
3,628
2,019
1,431
1,414
863
625
560
518
419
366
30
15
32
16
11
12
7
5
5
4
4
3
1
0
31
17
12
12
7
5
5
4
4
3
0
0
maturities . . . . . . . . . $10,924
$1,203
$(239) $11,888
100% 100%
At December 31, 2011, approximately 32% of the fixed maturity assets at amortized cost (31% at fair
value) were in the financial sector, including 16% in life and health or property casualty insurance
companies and 12% in banks at amortized cost. Financial guarantors, mortgage insurers, and insurance
brokers comprised approximately 4% of the portfolio. After financials, the next largest sector was utilities,
which comprised 16% of the portfolio at amortized cost. The balance of the portfolio is spread among 262
issuers in a wide variety of sectors. As previously noted, gross unrealized losses were $239 million at
December 31, 2011, declining from $368 million a year earlier. The portfolio was in a net unrealized gain
position of $964 million at December 31, 2011.
As shown in the table above, the ratio of gross unrealized losses to book value was approximately 50%
for our investments in CDOs. As previously noted, CDOs represented less than 0.6% of our fixed maturity
investments at December 31, 2011. We evaluated each of the impaired securities in this and all other
sectors to determine whether or not any of the impairments were other-than-temporary. Our portfolio
consisted of five CDO investments at December 31, 2011, in which three were carried at a value of $0, one
was considered only temporarily impaired, and one was previously considered other-than-temporarily
impaired.
41
The CDO considered temporarily impaired was carried at an amortized cost of $23.4 million and had a fair
value of $7.7 million. The CDO considered other-than-temporarily impaired was previously written down
and carried at an amortized cost of $37.0 million, based on the present value of expected cash flows at
the original purchase yield. This CDO had a fair value of $22.7 million at December 31, 2011. 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.
In reaching these conclusions concerning the other-than-temporary impairment of our CDOs, 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 could have on our expected future cash flows. We calculated the
magnitude of future credit events that could be 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.
An analysis of the fixed-maturity portfolio by a composite rating at December 31, 2011 is shown in
the table below.
Fixed Maturities by Rating
At December 31, 2011
(Dollar amounts in millions)
Amortized
Cost
%
Fair
Value
Investment grade:
AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BBB+ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BBB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BBB- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
473
1,338
2,941
2,172
2,212
1,087
Investment grade . . . . . . . . . . . . . . . . . . . . . . . . .
10,223
Below investment grade:
BB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Below B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Below investment grade . . . . . . . . . . . . . . . . . . .
410
170
121
701
4.3 $
12.2
26.9
19.9
20.3
10.0
93.6
3.8
1.6
1.0
6.4
505
1,457
3,399
2,400
2,419
1,129
11,309
370
134
75
579
%
4.2
12.3
28.6
20.2
20.3
9.5
95.1
3.2
1.1
0.6
4.9
$10,924
100.0 $11,888 100.0%
The portfolio has a weighted average quality rating of A- based on amortized cost. Approximately
93% of
the portfolio at amortized cost was considered investment grade. Our investment portfolio
contains no securities backed by sub-prime or Alt-A mortgages (loans for which some of the typical
investments in residential
documentation was not provided by the borrower). We have no direct
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. We have no direct
exposure to European sovereign debt.
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.
42
An analysis of changes in below-investment grade fixed maturities at amortized cost is as follows.
Year Ended
December 31,
2011
(in $ millions)
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Downgrades by rating agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Upgrades by rating agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 863
76
(98)
(143)
3
$ 701
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 96% 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, 2011 and 2010. This table measures the effect of a change in interest rates (as
the fixed-maturity portfolio. The data
represented by the U.S. Treasury curve) on the fair value of
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,
2011
At
December 31,
2010
-200
-100
0
100
200
$14,847
13,261
11,888
10,694
9,650
$12,919
11,656
10,543
9,559
8,686
43
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.
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
indicative of historical core operating results nor predictive of
the future trends of core operations.
they have no bearing on core insurance operations or segment results as we view
Accordingly,
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.
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, 2011.
Analysis of Realized Gains (Losses), Net of Tax
(Dollar amounts in thousands, except for per share data)
Year Ended December 31,
2011
2010
2009
Amount
Per Share Amount
Per Share
Amount
Per Share
Investments:
Sales . . . . . . . . . . . . . . . . . . . . . . . . $
Called or tendered . . . . . . . . . . . . .
Writedowns* . . . . . . . . . . . . . . . . . .
. . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on redemption of debt
Other
673
15,512
(13)
0
666
Total
. . . . . . . . . . . . . . . . . . . . $16,838
* Written down due to other-than-temporary impairment.
$0.01
0.14
0.00
0.00
0.00
$0.15
$10,761
17,265
(3,152)
(1,070)
466
$ 0.09
0.14
(0.02)
(0.01)
0.00
$ 7,644
1,878
(94,367)
(1)
(499)
$ 0.06
0.02
(0.77)
0.00
0.00
$24,270
$ 0.20
$(85,345)
$(0.69)
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 2009 through 2011 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 $20 thousand in 2011 ($13 thousand after
tax), $5 million in 2010 ($3 million after tax), and $143 million in 2009 ($94 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 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.
44
FINANCIAL CONDITION
Liquidity. Liquidity provides Torchmark with the ability to meet on demand the cash commitments
required by its business operations and financial obligations. Our liquidity is primarily derived from three
sources: positive cash flow from operations, a portfolio of marketable securities, and a line of credit
facility.
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
statutory net
the excess cash is
investment income. However, due to our high underwriting margins and effective expense control, a
significant portion of the excess cash comes from underwriting income.
income excluding realized capital gains. The leading source of
Parent Company Liquidity. Cash flows from the insurance subsidiaries are used to pay interest
and principal repayments on Parent Company debt, operating expenses of the Parent, and Parent
Company dividends to Torchmark shareholders. In 2011, the Parent received $790 million of dividends
and transfers from its insurance subsidiaries, as compared with $401 million in 2010 and $392 million in
2009. The 2011 dividend included $305 million of additional dividends available as a result of the sale of
United Investors. After paying debt obligations, shareholder dividends, and other expenses (but before
share repurchases), Torchmark Parent had excess operating cash flow in 2011 of approximately $672
million, including the $305 million from the sale of United Investors. Parent Company cash flow in excess
of its operating requirements is available for other corporate purposes, such as strategic acquisitions or
share repurchases.
receive approximately
$470 million in dividends and transfers from subsidiaries, and that approximately $360 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 $27 million of cash and short-term
investments at December 31, 2011, compared with $63 million a year earlier. The Parent also had
available a $51 million receivable from subsidiaries at December 31, 2011.
the Parent Company will
is expected that
In 2012,
it
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 of December 31, 2011, we had available $177 million of additional borrowing capacity under
this facility, as compared with $203 million a year earlier. For detailed information about this line of credit
facility, see the Commercial Paper section of Note 11—Debt.
45
The following table presents certain information about our short-term borrowings, all of which was
commercial paper.
Short-term Borrowings—Commercial Paper
(Dollar amounts in millions)
At December 31,
2011
2010
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $225.0 $199.0
Daily-weighted average interest rate* . . . . . . . . . . . . . . . . . . .
Letters of credit outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . $198.0 $198.0
Remaining amount available under credit line . . . . . . . . . . . . $177.0 $203.0
0.47% 0.45%
For the Year
2010
2011
2009
Average balance outstanding during period . . . . . . . . . . . . . . $206.1 $196.3 $251.5
Daily-weighted average interest rate* . . . . . . . . . . . . . . . . . . .
0.39% 0.43% 1.10%
Maximum daily amount outstanding during period . . . . . . . . . $271.8 $250.0 $325.0
*
Annualized
There have been no difficulties in accessing the commercial paper market under this facility during
the three years ended December 31, 2011.
In summary, Torchmark expects to have readily available funds for 2012 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 $859 million
in 2011, compared with $1.03 billion in 2010, and $976 million in 2009. In addition to cash inflows from
operations, our companies have received $230 million in investment calls and tenders and $180 million of
scheduled maturities or repayments during 2011. Maturities, tenders, and calls totaled $639 million in
2010 and $761 million in 2009.
Our cash and short-term investments were $105 million at year-end 2011 and $582 million at year-
end 2010. 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 $11.9 billion at December 31, 2011. 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 described 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, 2011 and 2010. 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. 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. The trust is an off-
balance sheet arrangement which we are required to deconsolidate in accordance with GAAP rules,
because the capital trust is considered to be a variable interest entity in which we have no variable
interest. 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 in the amount of $124 million which is
on our balance sheets at both December 31, 2011 and 2010. The 7.1% preferred dividends due to the
preferred shareholders are funded by our 7.1% interest payment on our debt to the trusts.
46
As a part of its above-mentioned credit facility, Torchmark had outstanding $198 million in stand-by
letters of credit at December 31, 2011. However, these letters are issued among our subsidiaries and
have no impact on company obligations as a whole.
As of December 31, 2011, 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, 2011.
(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) . . . . . . . . . . . . . . . . . $ 1,139
7
Debt—interest(2) . . . . . . . . . . . . . . . . . .
0
Capital leases . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . .
0
109
Purchase obligations . . . . . . . . . . . . . .
74
. . . . . . . . . . . . .
Pension obligations(3)
9,572
Future insurance obligations(4) . . . . . .
$ 1,151
741
0
13
109
185
40,332
Total
. . . . . . . . . . . . . . . . . . . . . . . . . $10,901
$42,531
$ 225
73
0
3
85
14
1,208
$1,608
$
94
136
0
4
23
31
2,351
$2,639
$ 250
122
0
3
0
34
2,241
$2,650
$
582
410
0
3
1
106
34,532
$35,634
(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, 2011,
these pension obligations were
$332 million, but there were also assets of $258 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) Future insurance obligations consist primarily of estimated future contingent benefit payments on policies in force at
December 31, 2011. 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 $9.6 billion at December 31, 2011, along with future premiums
and investment income, will be sufficient to fund all future insurance obligations.
47
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 $914 million at December 31, 2011, compared with $913
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. 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
these subsidiaries had been negatively affected by rating-agency downgrades of bonds in their
of
investment portfolios. The subsidiaries in turn invested these funds in investment-grade fixed maturities.
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. At December 31, 2011, our insurance subsidiaries in the
aggregate had RBC ratios of approximately 336%. Should we experience additional
impairments and
ratings downgrades in the future that cause the ratio to fall below 325%, management has more than
sufficient liquidity at the Parent Company to make additional contributions as necessary to maintain the
ratios at or above 325%.
As noted under the caption Summary of Operations 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. However, since reactivation,
we have made share purchases each quarter of 2010 and 2011. Under this program, we acquired
19 million shares at a cost of $788 million in 2011 (average of $41.68 per share), 6 million shares for $204
million in 2010, and 3 million shares for $47 million in 2009. The majority of purchased shares are retired
each year. Please refer to the description of our share repurchase program under the caption Summary
of Operations in this report.
Torchmark has recently increased the dividend on its common shares. In the first quarter of 2010, the
dividend was increased from $.0933 per share to $.10 per share and in the fourth quarter of 2010, it was
further increased to $.1067 per share. In the second quarter of 2011, it was again raised to $.12 per
share.
Shareholders’ equity was $4.2 billion at December 31, 2011, compared with $4.0 billion at December
31, 2010. During the twelve months since December 31, 2010, shareholders’ equity was reduced by the
$788 million in share purchases under the repurchase program and another $185 million to offset the
dilution from stock option exercises, but has been increased by the $518 million of net income and by
after tax unrealized gains of $538 million in the fixed maturity portfolio as conditions in financial markets
have improved.
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.
48
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 that of 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. From time to
time, the market value of our fixed maturity portfolio may be depressed as a result of bond market
illiquidity which could result 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, 2011 At December 31, 2010 At December 31, 2009
Effect of
Accounting
Rule
Requiring
Effect of
Accounting
Rule
Requiring
GAAP
Revaluation* GAAP
Revaluation* GAAP
Effect of
Accounting
Rule
Requiring
Revaluation*
Fixed maturities (millions) . . . . . . . . . . .$ 11,888
Deferred acquisition costs (millions) . . .
3,485
Total assets (millions) . . . . . . . . . . . . . . 17,156
225
. . . . . . . . . . .
Short-term debt (millions)
914
Long-term debt (millions) ** . . . . . . . . . .
4,229
Shareholders’ equity (millions) . . . . . . .
964
(33)
931
0
0
605
$ 10,543
3,406
16,160
199
913
4,016
$ 107
(4)
103
0
0
67
$ 9,104
3,320
16,024
233
920
3,399
$ (456)
28
(428)
0
0
(278)
Book value per diluted share . . . . . . . . .
Debt to capitalization *** . . . . . . . . . . . .
41.54
21.2%
5.95
(2.7)%
33.24
21.7%
0.55
(0.3)%
27.25
25.3%
(2.23)
1.5%
Diluted shares outstanding (thousands) 101,808
Actual shares outstanding
(thousands) . . . . . . . . . . . . . . . . . . . . . 100,579
120,815
118,865
124,739
124,261
Amount added to (deducted from) comprehensive income to produce the stated GAAP item
Includes Torchmark’s 7.1% Junior Subordinated Debentures in each period 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.
Previously, the FASB issued guidance which offered 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.
49
Torchmark’s ratio of earnings before interest and taxes to interest requirements (times interest
earned) was 10.7 times in 2011, compared with 11.3 times in 2010 and 9.3 times in 2009. 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, 2011.
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, 2011, 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
subsidiaries,
turmoil, and the expectation of continued
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, 2011.
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 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.
50
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 (ASU 2010-26). This 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. Please refer to Unadopted Accounting Guidance in Note 1 — Significant
Accounting Policies in the Notes to Consolidated Financial Statements for more information concerning
the effects of adoption.
Comprehensive Income (ASU 2011-05). Under this guidance, the components of comprehensive
income must be presented as either 1) a continuous statement (including the components of net income)
or 2) as two separate but consecutive statements (an income statement followed by a comprehensive
income statement). This guidance is effective for us in interim and annual periods beginning in 2012.
Because we already present comprehensive income as contemplated by the second alternative, this
guidance should not result in any change.
Fair Value Measurement and Disclosure (ASU 2011-04). The primary purpose of this new guidance
is to converge the measurement criteria and disclosures of fair value in U.S. GAAP with those of
International Accounting Standards. The measurement principles are generally consistent with current
U.S. GAAP and are not expected to have a material impact on our financial statements. The guidance will
require additional disclosures, including expanded disclosures for fair value measurements categorized in
Level 3 of the fair value hierarchy and a requirement to disclose the level in the fair value hierarchy of
items whose fair value is disclosed but not measured at fair value on the balance sheet. The guidance is
effective for us in calendar 2012, with early adoption prohibited.
Goodwill
Impairment Testing (ASU 2011-08). The issuance of
this update permits an optional
qualitative assessment in order to simplify how an entity tests its goodwill for impairment. Under this
assessment, if an entity concludes that a reporting units’ fair value is more likely than not greater than its
carrying amount, it would not be required to perform any further impairment testing for that reporting unit.
Otherwise, the two-step impairment test under current guidance would be required for the reporting unit.
This new guidance lists factors to consider in making the qualitative assessment. The revised guidance is
applicable to us beginning in 2012, with early adoption permitted. We do not expect this new guidance to
impact the value of our goodwill, only to modify the way we test for its impairment.
Health Insurer’s Fees Paid to the Federal Government (ASU 2011-06). Private health insurance
carriers will be required to pay a new fee to the Federal government beginning in calendar year 2014
under the Patient Protection and Affordable Care Act. This guidance addresses questions about how to
recognize and classify the fees, basically requiring that it be expensed ratably throughout the year. It is
effective for Torchmark beginning in the year 2014. Because the majority of Torchmark’s health products
are excluded from the mandate, the impact of adoption should be immaterial.
51
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 81% of our liabilities for future policy benefits at December 31, 2011 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. Torchmark had no premium deficiency event for its traditional business during the three
years ended December 31, 2011.
The remaining portion of liabilities for future policy benefits pertains to business accounted for as
deposit business, where 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. The costs of acquiring new business are generally deferred and
recorded as an asset. Deferred acquisition costs consist primarily of sales commissions and other
underwriting costs of new insurance sales. Additionally, the costs of acquiring blocks of insurance from
other companies or through the acquisition of other companies are also deferred and recorded as
deferred acquisition costs as indicated in Note 5—Deferred Acquisition Costs 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 98% of our recorded amounts for deferred acquisition costs at December 31, 2011
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, 2011.
The remaining 2% 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, 2011.
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
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
52
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 this 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 manage risk. 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
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.
is disclosed in 100 basis point
At times, the values of our fixed maturities can also be affected by illiquidity in the financial markets.
Illiquidity would contribute to a spread widening, and accordingly unrealized losses, on many securities
that we would 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 to be other than temporary. The policies and procedures that we use to evaluate and account
for
investments are disclosed in Note 1—Significant Accounting Policies and
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.
impairments of
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, 2011, our gross liability under these funded plans was $282 million, but
was offset by assets of $258 million.
The actuarial assumptions used in determining our obligations for pensions include employee
mortality and turnover, retirement age, the expected return on plan assets, projected salary increases,
and the discount rate at which future obligations could be settled. These assumptions have an important
effect on the pension obligation. A decrease in the discount rate or rate of return on plan assets will cause
an increase in the pension obligation. A decrease in projected salary increases will cause a decrease in
this obligation. Small changes in assumptions may cause material differences in reported results for these
plans. While we have used our best efforts to determine the most reliable assumptions, given the
information available from company experience, economic data,
independent consultants and other
sources, we cannot be certain that actual results will be the same as expected. Our discount rate, rate of
return on assets, and projected salary increase assumptions are disclosed and the criteria used to
determine those assumptions are discussed in Note 9—Postretirement Benefits in the Notes to
Consolidated Financial Statements. The assumptions are reviewed annually and revised, if necessary,
53
based on more current information available to us. Note 9 also contains information about pension plan
assets, investment policies, and other related data.
CAUTIONARY STATEMENTS
We caution readers regarding certain forward-looking statements contained in the foregoing
discussion and elsewhere in this document, and in any other statements made by us or on our behalf
whether or not in future filings with the Securities and Exchange Commission. Any statement that is not a
historical fact, or that might otherwise be considered an opinion or projection concerning us or our
business, whether express or implied, is meant as and should be considered a forward-looking statement.
Such statements represent our opinions concerning future operations, strategies, financial results or other
developments.
to
Forward-looking statements are based upon estimates and assumptions that are subject
significant business, economic and competitive uncertainties, many of which are beyond our control. If
these estimates or assumptions prove to be incorrect, the actual results may differ materially from the
forward-looking statements made on the basis of such estimates or assumptions. Whether or not actual
results differ materially from forward-looking statements may depend on numerous foreseeable and
unforeseeable events or developments, which may be national in scope, related to the insurance industry
generally, or applicable to Torchmark specifically. Such events or developments could include, but are not
necessarily limited to:
1) Changes in lapse rates and/or sales of our insurance policies as well as levels of mortality,
morbidity and utilization of healthcare services that differ from our assumptions;
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 43 of this report.
54
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 2011 and 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for each of the three years in the period ended
Page
56
57
December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58
Consolidated Statements of Comprehensive Income for each of the three years in the period
ended December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended
December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59
60
61
62
55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Torchmark Corporation
McKinney, Texas
We have audited the accompanying consolidated balance sheets of Torchmark Corporation and
subsidiaries (“Torchmark”) as of December 31, 2011 and 2010, 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, 2011. 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, 2011 and 2010, and the results of
their operations and their cash flows for each of the three years in the period ended December 31, 2011,
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, 2011,
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, 2012
expressed an unqualified opinion on Torchmark’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
February 28, 2012
56
TORCHMARK CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands except per share data)
December 31,
2011
2010
Assets:
Investments:
Fixed maturities—available for sale, at fair value (amortized cost:
2011—$10,924,244; 2010—$10,435,497) . . . . . . . . . . . . . . . . . . . . . . . . . $11,888,205 $10,543,034
17,154
378,124
42,985
216,680
Equity securities, at fair value (cost: 2011—$14,875; 2010—$14,875) . . . .
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,056
400,914
26,167
21,244
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,353,586 11,197,977
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
84,113
192,325
253,549
3,484,851
396,891
391,076
365,679
183,861
230,319
3,406,335
396,891
378,700
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,156,391 $16,159,762
Liabilities:
Future policy benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,572,257 $ 9,150,031
74,165
Unearned and advance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
221,598
Policy claims and other benefits payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
91,293
Other policyholders’ funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
69,539
222,254
92,487
Total policy liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,956,537
9,537,087
Current and deferred income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt (estimated fair value: 2011—$947,142; 2010—$933,336) . . .
Due to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,518,695
312,417
224,842
790,571
124,421
1,209,433
284,062
198,875
789,643
124,421
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,927,483 12,143,521
Shareholders’ equity:
Preferred stock, par value $1 per share—Authorized 5,000,000 shares;
outstanding: 0 in 2011 and in 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0
0
Common stock, par value $1 per share—Authorized 320,000,000 shares;
outstanding: (2011—112,312,123 issued, less 11,732,658 held in treasury
and 2010—119,812,123 issued, less 947,497 held in treasury)* . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
112,312
425,331
549,423
3,634,481
(492,639)
119,812
432,608
22,958
3,473,482
(32,619)
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,228,908
4,016,241
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . $17,156,391 $16,159,762
* Amounts have been retroactively adjusted for stock split described in Note 1.
See accompanying Notes to Consolidated Financial Statements.
57
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
Year Ended December 31,
2010
2011
2009
Revenue:
Life premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,726,244 $1,663,699 $1,591,853
1,017,711
Health premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
541
Other premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,610,105
Total premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
929,466
608
2,656,318
987,421
638
2,651,758
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized investment gains (losses) . . . . . . . . . . . . . . . . . . . . . . .
Other-than-temporary impairments . . . . . . . . . . . . . . . . . . . . . . .
Portion of impairment loss recognized in other comprehensive
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
693,028
25,924
(20)
676,364
42,190
(4,850)
632,540
13,879
(164,137)
0
2,151
3,377,401
0
2,170
3,367,632
20,766
1,920
3,115,073
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 . . . . . . . . . . . . . . . . . . . . . . .
1,118,909
631,820
42,547
1,793,276
424,781
124,134
201,636
77,908
2,621,735
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
Income from continuing operations before income taxes . . . . . . .
755,666
778,567
577,076
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(237,326)
(256,274)
(191,024)
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . .
518,340
522,293
386,052
Discontinued operations:
Income from discontinued operations, net of tax . . . . . . . . . . . .
Loss on disposal, net of tax benefit of $467 in 2011 and
0
29,784
18,901
0
$2,868 in 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from discontinued operations . . . . . . . . . .
18,901
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 517,885 $ 517,064 $ 404,953
(35,013)
(5,229)
(455)
(455)
Basic net income per share*:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total basic net income per share . . . . . . . . . . . . . . . . . . . $
4.79 $
(0.01)
4.78 $
4.28 $
(0.04)
4.24 $
Diluted net income per share*:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total diluted net income per share . . . . . . . . . . . . . . . . . . $
4.72 $
0.00
4.72 $
4.24 $
(0.04)
4.20 $
3.10
0.15
3.25
3.10
0.15
3.25
Dividends declared per common share* . . . . . . . . . . . . . . . . . . . . . $
.46 $
.41 $
.38
* Per share amounts have been retroactively adjusted for stock split described in Note 1.
See accompanying Notes to Consolidated Financial Statements.
58
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Year Ended December 31,
2010
2011
2009
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 517,885 $ 517,064 $ 404,953
Other comprehensive income (loss):
Unrealized investment gains (losses):
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period . . .
Reclassification adjustment for (gains) losses on
securities included in net income . . . . . . . . . . . . . . . . . . .
Reclassification adjustment for other-than-temporarily
impaired debt securities for which a portion of the loss
was recognized in earnings . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustment for amortization of (discount)
premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange adjustment on securities marked to
882,467
615,503
1,223,157
(27,771)
(38,170)
161,323
0
0
(20,766)
(1,880)
(3,820)
(6,183)
market
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains (losses) on securities . . . . . . . . . . . . . . . . . . .
3,510
856,326
(7,735)
565,778
(18,199)
1,339,332
Unrealized gains (losses), adjustment to deferred acquisition
costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains (losses) on other assets . . . . . . . . . . . . . . . . .
Total unrealized investment gains (losses) . . . . . . . . . . . . .
Less applicable taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains (losses), net of tax . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange translation adjustments, other than
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less applicable taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange translation adjustments, other than securities,
net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(28,679)
366
828,013
(32,181)
0
533,597
(79,603)
0
1,259,729
(289,806)
538,207
(186,760)
346,837
(440,905)
818,824
(3,427)
758
5,006
(1,752)
21,833
(7,642)
(2,669)
3,254
14,191
Pension adjustments:
Amortization of pension costs . . . . . . . . . . . . . . . . . . . . . . . . . . .
Experience gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less applicable taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension adjustments, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,146
(26,106)
(13,960)
4,887
(9,073)
10,857
(23,086)
(12,229)
4,279
(7,950)
11,219
16,811
28,030
(9,811)
18,219
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . .
526,465
342,141
851,234
Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . $1,044,350 $ 859,205 $1,256,187
See accompanying Notes to Consolidated Financial Statements.
59
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Amounts in thousands except per share data)
Preferred
Stock
Common
Stock*
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings*
Treasury
Stock
Total
Shareholders’
Equity
Year Ended December 31, 2009
Balance at January 1, 2009 . . . .
$0
$128,812
$446,065
$(1,170,417)
$2,886,013 $ (67,566)
$2,222,907
Comprehensive income (loss) . .
Common dividends declared
($0.38 a share)
. . . . . . . . . . . .
Acquisition of treasury stock . . . .
Stock-based compensation . . . .
Exercise of stock options . . . . . .
Retirement of treasury stock . . . .
Balance at December 31,
851,234
404,953
1,256,187
(47,182)
(435)
(56,382)
(47,564)
4,441
4,865
69,758
(47,182)
(47,564)
9,860
4,683
0
5,419
253
(10,376)
(3,000)
2009 . . . . . . . . . . . . . . . . . . .
0
125,812
441,361
(319,183)
3,186,967
(36,066)
3,398,891
Year Ended December 31, 2010
Comprehensive income (loss) . .
Common dividends declared
($.41 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)
(179,205)
(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)
(6,000)
2010 . . . . . . . . . . . . . . . . . . .
0
119,812
432,608
22,958
3,473,482
(32,619)
4,016,241
Year Ended December 31, 2011
Comprehensive income (loss) . .
Common dividends declared
($.46 a share) . . . . . . . . . . . . . .
Acquisition of treasury stock . . . .
Stock-based compensation . . . .
Exercise of stock options . . . . . .
Retirement of treasury stock . . . .
Balance at December 31,
526,465
517,885
1,044,350
(49,815)
(29,328)
(277,743)
(972,556)
7,323
191,941
313,272
(49,815)
(972,556)
14,954
175,734
0
7,631
13,121
(28,029)
(7,500)
2011 . . . . . . . . . . . . . . . . . . .
$0
$112,312
$425,331
$
549,423
$3,634,481 $(492,639)
$4,228,908
* Amounts have been retroactively adjusted for stock split described in Note 1.
See accompanying Notes to Consolidated Financial Statements.
60
TORCHMARK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended December 31,
2010
2011
2009
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to cash provided from operations:
517,885 $
517,064 $
404,953
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
431,362
(2,776)
(533,907)
424,781
42,059
(25,904)
(22,565)
(15,453)
455
43,527
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)
Cash provided from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
859,464
1,028,593
976,113
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investments sold or matured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
224,335
410,356
28,700
18,937
682,328
325,950
638,860
0
5,767
900,417
760,858
1,138
7,167
970,577
1,669,580
Acquisition of investments:
Fixed maturities—available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,104,231)
(28,772)
(6,246)
(1,908,109)
0
(905)
(2,311,455)
0
(43)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,139,249)
(22,790)
195,435
2,664
(5,386)
3,089
(49,812)
21,588
(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
Cash used for investment activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(312,133)
(557,641)
(937,099)
Cash provided from (used for) financing activities:
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of 9 1⁄4% Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition 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 . . . . . . . . . . . . . . .
162,613
(49,125)
0
0
0
25,967
13,121
(972,556)
(4,505)
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
Cash provided from (used for) financing activities . . . . . . . . . . . . . . . . . . . . . . . .
(824,485)
(329,621)
148,438
Effect of foreign exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . .
(4,412)
(7,570)
(1,934)
Increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash at beginning of year (includes cash of $0, $847 thousand and $12.3
million, at January 1, 2011, 2010 and 2009, respectively, in subsidiary
held for sale) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash at end of year (includes cash of $0, $0, and $847 thousand at
December 31, 2011, 2010, and 2009, respectively, in subsidiary held for
sale) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(281,566)
133,761
185,518
365,679
231,918
46,400
84,113 $
365,679 $
231,918
See accompanying Notes to Consolidated Financial Statements.
61
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). Only
primary beneficiaries are required or allowed 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 entities. Torchmark
has not provided any other financial support to the entities beyond its commitments to fund its limited
partnership interests, 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. 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 in the operations of the business after the disposal transaction. The results of
discontinued operations are reported in discontinued operations in the 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 of the income from
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
discontinued operations are separately disclosed 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.
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
Investments in equity securities, which include common and
other comprehensive income.
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, 2011, 2010, and 2009 included $552 million, $522 million, and
$487 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, equity
securities, and certain other assets 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
the caption Fair value
valuing financial
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.
instruments, please see Note 4—Investments under
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.
Current accounting guidance is such that 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
impairment must be charged to
considered other-than-temporarily impaired and the full amount of
earnings. Otherwise, losses on fixed maturities 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.
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.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
long-
Recognition of Premium Revenue and Related Expenses: Premium income for traditional
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 $24 million, $26 million, and $28 million for the years ended December 31, 2011, 2010, and
2009, 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 81% 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: 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. Deferred acquisition costs are amortized in a systematic
manner which matches these costs with the associated revenues. Policies other than universal life-type
policies are amortized with interest over the estimated premium-paying period of the policies in a manner
which charges each year’s operations in proportion to the receipt of premium income. Limited-payment
contracts are amortized over the contract period. Universal life-type policies are amortized with interest in
proportion to estimated gross profits. The assumptions used to amortize acquisition costs with regard to
interest, mortality, morbidity, and persistency are consistent with those used to estimate the liability for
future policy benefits. For interest-sensitive and deposit-balance type products, these assumptions are
reviewed on a regular basis and are revised if actual experience differs significantly from original
expectations. For all other products, amortization assumptions are generally not revised once established.
Deferred acquisition costs are subject to periodic recoverability and loss recognition testing to determine if
there is a premium deficiency. These tests ensure that the present value of future contract-related cash
flows will support the capitalized deferred acquisition cost asset. These cash flows consist primarily of
premium income, less benefits and expenses taking inflation into account. The present value of these
cash flows, less the benefit reserve, is then compared with the unamortized deferred acquisition cost
balance. In the event the estimated present value of net cash flows is less, the deficiency would be
recognized by a charge to earnings and either a reduction of unamortized acquisition costs or an increase
in the liability for future benefits, as described under the caption Future Policy Benefits.
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
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.
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 8—Income Taxes.
Property and Equipment: Property and equipment, included in “Other assets,” is reported at cost
less allowances for depreciation. Depreciation is recorded primarily on the straight line method over the
estimated useful lives of these assets which range from two to ten years for equipment and five to forty
years for buildings and improvements. Ordinary maintenance and repairs are charged to income as
incurred. Impairments, if any, are 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 at both December 31, 2011 and 2010. Accumulated depreciation was
$71 million at year end 2011 and $65 million at the end of 2010. Depreciation expense was $6.8 million in
2011, $6.0 million in 2010, and $4.6 million in 2009.
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, 2011, Torchmark had $293 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 $283 million at December 31, 2010. As of December 31, 2011, Torchmark was obligated under
future commitments of $109 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 2011 and 2010, the Federal income benefits accrued during the year, net of the amortization
associated with guaranteed interests, were recorded in “Income taxes.” Amortization associated with non-
guaranteed interests and interests providing for state premium tax benefits 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 the amortization associated with all
interests, were recorded in “Income taxes.” All state
premium tax benefits, net of the related amortization, were recorded in “Net investment income.” At
December 31, 2011, $281 million associated with the Federal interests was included in “Other assets”
with the remaining $12 million state-related interests included in “Other invested assets.” At December 31,
2010, the comparable amounts were $269 million and $14 million, respectively. Any unpaid commitments
to invest are recorded in “Other liabilities.” In the segment analysis, the amortization associated with the
non-guaranteed interests is reflected as a component of “Income tax expenses,” and not “Net investment
income,” consistent with the treatment of the guaranteed interests. Management views this presentation
as a more accurate matching of costs with the associated revenues with respect to the low-income
housing interests.
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
Goodwill: The excess cost of business 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. The
procedures involve measuring the carrying value of each reporting unit of Torchmark’s segments, including the
goodwill of that unit, against the estimated fair value of the corresponding unit. If the carrying value of a unit
including goodwill exceeds its estimated fair value, then the goodwill in that unit could potentially be impaired. In
that event, further testing is required under the accounting guidance to determine the amount of impairment, if
any. If there is an impairment in the goodwill of any reporting unit, it is written down and charged to earnings in
the period of test.
Torchmark has tested its goodwill annually in each of the years 2009 through 2011. These tests involved
assigning carrying value by allocating the Company’s net assets to each of the reporting units of Torchmark’s
segments, including the portion of goodwill assigned to the unit. The fair value of each reporting unit is
determined using discounted expected cash flows associated with that unit. Judgment and assumptions are used
in developing the projected cash flows for the reporting units, and such estimates are subject to change. The
Company also exercises judgment in the determination of the discount rate, which management believes to be
appropriate for the risk associated with the cash flow expectations. The fair value of each reporting unit is then
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 those periods.
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.
Settlements: During 2011, Torchmark settled a state administrative matter involving issues arising
over a period of many years. The settlement resulted in a pre-tax charge of $6.9 million ($4.5 million after
tax). Additionally in 2011, the Company accrued an estimated liability for settlement of an insurance litigation
matter expected to settle in 2012. The liability for this litigation, which arose many years ago, was estimated
to be $12.0 million pretax ($7.8 million after tax). Please refer to Note 15—Commitments and Contingencies
in the Notes to Consolidated Financial Statements for a discussion of the litigation settlement. In 2009,
Torchmark recorded a $2.9 million tax settlement primarily resulting from the favorable settlements of
U.S. Federal income tax issues that related to prior tax years. More information on this tax settlement is
provided in Note 8—Income Taxes. Management removes items that are related to prior periods when
evaluating the operating results of current periods. Therefore, these items are excluded in its presentation of
segment results as disclosed in Note 14—Business Segments, because accounting guidance requires that
operating segment results be presented as management views its business.
Postretirement Benefits: Torchmark accounts for
its postretirement defined benefit plans by
recognizing the funded status of those 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. More information concerning the accounting and disclosures for
postretirement benefits is found in Note 9—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.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 1—Significant Accounting Policies (continued)
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 2009 through 2011 is as follows:
Volatility factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42.3% 40.3% 29.6%
1.0% 1.3% 2.4%
4.66
4.74
4.72
2.0% 2.5% 2.6%
2011
2010
2009
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. Beginning in 2011, all grants with seven-year terms are
based on Company experience. The Torchmark Corporation 2011 Incentive Plan replaced the previous
plans and allows for option grants with a ten-year contractual term which vest over five years in addition
to seven-year grants which vest over three years as permitted by the previous plans. The Company has
no historical experience with five-year vesting, and will therefore use the simplified method to determine
the expected term for these grants until such experience is developed. 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, it is amortized on a straight-line basis over
the employee’s service period for that grant (from the grant date to the date the grant is fully vested).
Torchmark management views all stock-based compensation expense as a corporate or Parent
Company expense and, therefore, presents it as such in its segment analysis (See Note 14—Business
Segments). It is included in “Other operating expense” in the Consolidated Statements of Operations.
Stock Split: Torchmark declared a three-for-two stock split paid in the form of a 50% stock dividend
on all of the Company’s outstanding common stock. The record date for the split was the close of
business on June 1, 2011. On July 1, 2011, the payment date, holders of Torchmark common stock as of
the record date received one additional share of stock for every two shares held. The Company paid $123
thousand in cash to acquire 2,841 fractional shares as a result of the split. All share and per share
amounts have been adjusted to reflect this split for all periods presented in these consolidated financial
statements. “Common stock” and “Retained earnings” presented for all prior periods in the accompanying
Consolidated Balance Sheet and Consolidated Statements of Shareholders’ Equity have also been
retroactively adjusted to reflect this split.
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.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Unadopted Accounting Guidance: The FASB has adopted new guidance concerning policy
acquisition costs (ASU 2010-26). This 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. As a result of this new standard, certain costs that have been deferred and amortized
through deferred acquisition costs will no longer be allowed to be deferred and will be expensed as
incurred. The new guidance limits the deferral of costs to those incremental costs related only to the
successful issuance of an insurance contract. Previously, the Company was allowed to defer any cost
that varied with and related to the production of new business. For Torchmark, these costs that are no
longer deferrable primarily relate to our agent distribution systems, and include such costs as training,
recruiting, office space, and certain management and underwriting expenses. The new guidance further
limits the deferral of certain advertising costs associated with the Direct Response operation. Torchmark
will adopt retroactively, meaning the deferred acquisition cost will be written down to a level as if the new
the reduction in deferrals will cause
guidance had been in effect
the
the retroactive writedown,
commissions and expenses to increase. However, as a result of
amortization of previously deferred acquisition costs will decrease, greatly offsetting the impact of the
increased expenses. The Company currently expects it to reduce the deferred acquisition cost asset
approximately 16%, total assets approximately 3%, and shareholders’ equity approximately 10% at the
time of adoption. Torchmark also expects it will reduce 2012 earnings and earnings per share less than
2%. The adoption of this guidance will delay the recognition of underwriting margin on newly issued
business, but not the ultimate profitability of that business. It will have no impact on cash flows, liquidity,
or statutory earnings.
in prior periods. Going forward,
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,
2011
2010
2009
Shareholders’ Equity At
December 31,
2011
2010
Life insurance subsidiaries . . . . . . $
424,738
$499,440
$274,734
$
1,273,117 $1,607,811
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’
68
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. The sale was completed as of December 31, 2010. United Investors marketed primarily
term and interest-sensitive life insurance,
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 which was received in early 2011. The
transaction resulted in a pretax loss of approximately $38 million ($35 million after tax), which has been
reported as a realized loss on the disposal of a discontinued operation in 2010. Due to the sale,
Torchmark’s consolidated financial statements are presented to reflect the transactions as discontinued
operations.
fixed annuities, and, prior
An analysis of income from discontinued operations is as follows:
Twelve months ended December 31,
Premium income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized investment gains (losses) . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010
$ 73,675
43,787
2,850
103
Total revenue* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
120,415
Policyholder benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred acquisition costs . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total benefits and expense . . . . . . . . . . . . . . . . . . . .
56,374
14,599
4,960
75,933
Pre tax income from discontinued operations . . . . . . . . .
Income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44,482
(14,698)
2009
$ 77,094
42,375
(12,167)
22
107,324
59,470
13,267
6,470
79,207
28,117
(9,216)
Income from discontinued operations . . . . . . . . . . . . . . .
$ 29,784
$ 18,901
Revenues and profitability in the indicated segment were as follows:
Twelve Months Ended December 31,
2010
2009
Revenues:
Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 65,726
7,949
43,787
103
Total* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$117,565
Segment profitability (loss):
Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 22,692
(931)
22,490
(2,619)
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 41,632
$ 67,917
9,177
42,375
22
$119,491
$ 19,477
3,084
21,660
(3,937)
$ 40,284
*
Segment revenues differ from discontinued revenues by the amount of realized investment gains/losses, which Torchmark
excludes from its consideration of ongoing operations.
69
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, 2011 and 2010 is as follows:
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Amount
per the
Balance
Sheet
% of Total
Fixed
Maturities*
2011:
Fixed maturities available for sale:
Bonds:
U.S. Government direct, guaranteed,
and government-sponsored
enterprises . . . . . . . . . . . . . . . . . . . . $
States, municipalities, and political
subdivisions . . . . . . . . . . . . . . . . . . .
Foreign governments . . . . . . . . . . . . .
Corporates . . . . . . . . . . . . . . . . . . . . . .
Collateralized debt obligations . . . . . .
Other asset-backed securities . . . . . .
Redeemable preferred stocks . . . . . . . .
65,283 $
1,756 $
(4) $
67,035 $
67,035
1,213,082
21,832
8,357,809
60,437
42,862
1,162,939
118,636
1,327
1,051,019
0
3,210
27,184
(1,896)
0
(137,908)
(30,117)
(1,392)
(67,854)
1,329,822
23,159
9,270,920
30,320
44,680
1,122,269
1,329,822
23,159
9,270,920
30,320
44,680
1,122,269
1%
11
0
78
0
0
10%
Total fixed maturities . . . . . . . . . . . . . .
10,924,244
1,203,132
(239,171)
11,888,205
11,888,205
100%
Equity securities . . . . . . . . . . . . . . . . . . . . .
14,875
2,244
(63)
17,056
17,056
Total fixed maturities and equity
securities . . . . . . . . . . . . . . . . . . . . . $10,939,119 $1,205,376 $(239,234) $11,905,261 $11,905,261
*
At fair value
70
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
2010:
Fixed maturities available for sale:
Bonds:
U.S. Government direct,
guaranteed, and government-
sponsored enterprises . . . . . . . . . $
States, municipalities, and political
subdivisions . . . . . . . . . . . . . . . . .
Foreign governments . . . . . . . . . . .
Corporates . . . . . . . . . . . . . . . . . . . .
Collateralized debt obligations . . . .
Other asset-backed securities . . . .
Redeemable preferred stocks . . . . . .
78,387 $
1,347 $
(1,060) $
78,674 $
78,674
1%
1,212,185
22,352
7,707,938
56,525
46,406
1,311,704
10,752
679
423,076
0
3,010
36,405
(41,811)
0
(210,149)
(34,069)
(678)
(79,965)
1,181,126
23,031
7,920,865
22,456
48,738
1,268,144
1,181,126
23,031
7,920,865
22,456
48,738
1,268,144
11
0
75
0
1
12
Total fixed maturities . . . . . . . . . . . .
10,435,497
475,269
(367,732) 10,543,034
10,543,034
100%
Equity securities . . . . . . . . . . . . . . . . . . .
14,875
2,348
(69)
17,154
17,154
Total fixed maturities and equity
securities . . . . . . . . . . . . . . . . . . . $10,450,372 $477,617 $(367,801) $10,560,188 $10,560,188
A schedule of fixed maturities by contractual maturity at December 31, 2011 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 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed and asset-backed securities . . . . . . .
Amortized
Cost
Fair
Value
$
64,222
527,836
669,994
2,439,335
7,114,402
108,455
$
64,895
564,584
728,784
2,649,607
7,799,590
80,745
$10,924,244
$11,888,205
71
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,
2009
2010
2011
Net investment income is summarized as follows:
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$683,101
1,558
29,293
2,439
165
$662,202
1,183
27,248
3,064
762
$ 609,566
1,287
25,394
6,482
1,296
Less investment expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
716,556
(23,528)
694,459
(18,095)
644,025
(11,485)
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$693,028
$676,364
$ 632,540
An analysis of realized gains (losses) from investments is as follows:
Realized investment gains (losses):
Fixed maturities:
Sales and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Writedowns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on redemption of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 27,790
(20)
0
0
(1,866)
$ 43,022
(4,850)
1
(1,646)
813
$
Applicable tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,904
(9,066)
37,340
(13,070)
15,638
(143,166)
(862)
(1)
(1,101)
(129,492)
44,147
Realized gains (losses) from investments, net of tax . . . . . . . . . . . . . . . . . . .
$ 16,838
$ 24,270
$ (85,345)
An analysis of the net change in unrealized investment gains (losses) is as
follows:
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed maturities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(98) $
856,424
432
562,921
$
2,377
1,240,781
Net change in unrealized gains (losses) on securities . . . . . . . . . . . . . . . . . .
$856,326
$563,353
$1,243,158
Additional information about securities sold is as follows:
At December 31,
2010
2009
2011
Fixed maturities:
Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $236,662** $314,904* $830,892*
69,249
Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(56,499)
Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,249
(24,323)
29,821
(13,361)
Equities:
Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0
0
0
1
1
0
1,138
0
(862)
*
**
Proceeds from sales including discontined assets were $326 million in 2010 and $900 million in 2009.
Includes $12.3 million of unsettled trades
72
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, 2011 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. As part of the Company’s controls over pricing, management reviews
and analyzes all prices obtained to insure the reasonableness of
taking all available
information into account. One very important control is the corroboration of prices obtained from third-
party sources 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.
the values,
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, 2011 and 2010, 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, 2011 and 2010,
fair value measurements classified as Level 3 represented 0.4% and 1.0%, respectively, of total fixed
maturities and equity securities.
73
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, 2011 and 2010:
Description
Fixed maturities available for sale: . . . . . . . . . . . . . .
Bonds:
U.S. Government direct, guaranteed, and
government-sponsored enterprises . . .
States, municipalities, and political
$
subdivisions . . . . . . . . . . . . . . . . . . . . . . .
Foreign governments . . . . . . . . . . . . . . . . .
Corporates . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized debt obligations . . . . . . . . . .
Other asset-backed securities . . . . . . . . . .
Redeemable preferred stocks . . . . . . . . . . . . . .
Total fixed maturities . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fixed maturities and equity
Fair Value Measurements at December 31, 2011 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
28,092
0
0
217,613
245,705
16,346
$
67,035
$
0
$
67,035
1,329,822
23,159
9,231,578
0
37,558
904,656
11,593,808
0
0
0
11,250
30,320
7,122
0
48,692
710
1,329,822
23,159
9,270,920
30,320
44,680
1,122,269
11,888,205
17,056
securities . . . . . . . . . . . . . . . . . . . . . . . . .
$262,051
$11,593,808
$49,402
$11,905,261
Percentage of total
. . . . . . . . . . . . . . . . . . .
2.2%
97.4%
0.4%
100.0%
Description
Fixed maturities available for sale:
Bonds:
U.S. Government direct, guaranteed, and
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
government-sponsored enterprises . . . . . . . . .
$
0
$
78,674
$
0
$
78,674
States, municipalities and political
subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign governments . . . . . . . . . . . . . . . . . . . . . . .
Corporates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized debt obligations . . . . . . . . . . . . . . .
Other asset-backed securities . . . . . . . . . . . . . . . .
Redeemable preferred stocks . . . . . . . . . . . . . . . . . . . .
Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . .
0
0
15,347
0
0
270,189
285,536
1,181,126
23,031
7,831,845
0
40,696
997,955
10,153,327
0
0
73,673
22,456
8,042
0
104,171
1,181,126
23,031
7,920,865
22,456
48,738
1,268,144
10,543,034
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fixed maturities and equity securities . . . . .
16,484
$302,020
0
$10,153,327
670
$104,841
17,154
$10,560,188
Percent of total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.9%
96.1%
1.0%
100.0%
74
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
Total
Balance at January 1, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,077
$ 14,158
$ 164,881
$ 1,246 $ 203,362
Total gains or losses:
Included in realized gains/losses . . . . . . . . . . . . . . . . . . . . . .
Included in other comprehensive income . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other ** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers in to Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers out of Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0
1,717
0
(183)
0
0
(16,630)
(83,458)
80,674
125
1,014
5,524
0
0
(2,502)
(2,728)
(6,833)
2,366
213
48,995
(132,628)
0
12
0
(5)
148
4,435
0
(85,960)
79,675
(6,708)
3,192
5,885
53,430
(149,258)
Balance at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,981
18,037
71,764
5,836
103,618
Total gains or losses:
Included in realized gains/losses . . . . . . . . . . . . . . . . . . . . . .
Included in other comprehensive income . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other ** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers out of Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0
255
0
(194)
0
0
(1,712)
2,445
0
2,333
1,353
0
1,504
14,711
(5,862)
2,536
0
(10,980)
708
(534)
(2,331)
(1)
0
(3,008)
500
16,877
(8,193)
4,674
1,353
(13,988)
Balance at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,042
22,456
73,673
670 $ 104,841
Total gains or losses:
Included in realized gains/losses . . . . . . . . . . . . . . . . . . . . . .
Included in other comprehensive income . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other ** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers out of Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0
(714)
0
(206)
0
0
0
3,952
0
2,470
1,442
0
(12,542)
14,578
(13,875)
1,302
0
(51,886)
0
40
0
0
0
0
(12,542)
17,856
(13,875)
3,566
1,442
(51,886)
Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,122
$ 30,320
$ 11,250
$
710 $ 49,402
*
**
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).
The following table presents transfers in and out of each of the valuation levels of fair values.
Level 1 . . . . . . . .
Level 2 . . . . . . . .
Level 3 . . . . . . . .
In
$
0
51,886
0
2011
Out
Net
In
2010
Out
Net
In
2009
Out
Net
$
0
0
(51,886)
$
0
51,886
(51,886)
$
54
18,836
0
$ (4,848)
(54)
(13,988)
$ (4,794)
18,782
(13,988)
$
0
149,258
53,430
$
0
(53,430)
(149,258)
$
0
95,828
(95,828)
Transfers into Level 2 from Level 3 result from the availability of observable market data when a
security is valued at the end of a period. Transfers into Level 3 occur when there is a lack of observable
market information. Transfers into Level 1 from Level 2 occur when direct quotes are available; transfers
from Level 1 into Level 2 result when only observable market data and no direct quotes are available.
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
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
change.
to
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.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
Torchmark has determined that certain of its holdings in fixed maturity investments were other-than-
temporarily impaired during the three years ended December 31, 2011. Included in the impairments were
collateralized debt obligations in which the impairment was bifurcated in accordance with accounting
guidance. As a result of this guidance, the portion of an impairment considered to be a credit loss is
other-than-temporarily impaired and the amount of the credit loss is charged to net income. Any portion of
the impairment considered to be temporary is charged to other comprehensive income. The credit loss
portion of an impairment is determined as the difference between the security’s amortized cost and the
present value of expected future cash flows discounted at the securities’ original effective yield rate. The
temporary portion is the difference between this present value of expected future cash flows and fair
value (as discounted by a market yield). The expected cash flows are determined using judgment and the
best information available to the Company. Inputs used to derive expected cash flows include expected
default rates, current levels of subordination, and loan-to-collateral value ratios. Management believes
that the present value of future cash flows at the original effective yield is a better measure of valuation,
because fair value is based on limited observable market data, and the market for these securities is
neither active nor orderly. The following table presents the writedowns recorded due to these impairments
in accordance with accounting guidance and whether the writedown was charged to earnings or other
comprehensive income.
Writedowns for Other-Than-Temporary Impairments
2011
2010
2009
Net
Income
Other
Comprehensive
Income
Net
Income
Other
Comprehensive
Income
Net
Income
Other
Comprehensive
Income
Collateralized debt
obligations . . . . . . . . . . .
Corporate bonds . . . . . . . .
Total pre-tax . . . . . . . . . . . .
After tax . . . . . . . . . . . .
$
$
$
0
20
20
13
$
$
$
0
0
0
0
$ 1,712
3,138
$ 4,850
$ 3,152
$
$
$
0
0
0
0
$ 83,457
59,709
$143,166
$ 94,234
$
$
$
20,766
0
20,766
13,498
As of year end 2011, previously written down securities remaining in the portfolio were carried at a
fair value of $22.6 million. Otherwise, as of December 31, 2011, 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.
Bifurcated credit losses result when there is an other-than-temporary impairment for which a portion
of the loss is recognized in other comprehensive income. Torchmark’s balances related to bifurcated
credit loss positions included in other comprehensive income were $22 million at December 31, 2011,
December 31, 2010, and December 31, 2009. There was no change in this balance since December 31,
2009, the year the balance initially arose.
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
Unrealized gain/loss analysis. As conditions in financial markets have improved since early 2009,
unrealized gains in the portfolio have occurred and losses have declined. Net unrealized losses on fixed
maturities of $455 million at December 31, 2009 became net unrealized gains of $108 million at
December 31, 2010. During 2011, net unrealized gains rose to $964 million at December 31, 2011. At
December 31, 2011, investments in securities in the financial sector were in a $14 million unrealized gain
position compared with an unrealized loss position of $115 million at December 31, 2010. Investments in
securities in the other sectors had net unrealized gains of $950 million in 2011 and $223 million in 2010.
The following tables disclose gross unrealized investment losses by class of investment at December 31,
2011 and December 31, 2010. Torchmark considers these investments to be only temporarily impaired.
ANALYSIS OF GROSS UNREALIZED INVESTMENT LOSSES
At December 31, 2011
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
U.S. Government direct, guaranteed, and
government-sponsored enterprises . . . . . . . . . . . . $
States, municipalities and political subdivisions . . . .
Foreign governments . . . . . . . . . . . . . . . . . . . . . . . . .
Corporates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized debt obligations . . . . . . . . . . . . . . . . . .
Other asset-backed securities . . . . . . . . . . . . . . . . . .
Redeemable preferred stocks . . . . . . . . . . . . . . . . . .
279
0
0
585,265
0
0
205,449
$
(3) $
0
0
(38,249)
0
0
(14,250)
34 $
(1) $
313 $
17,609
0
612,338
30,320
7,122
367,450
(1,896)
0
(99,659)
(30,117)
(1,392)
(53,604)
17,609
0
1,197,603
30,320
7,122
572,899
(4)
(1,896)
0
(137,908)
(30,117)
(1,392)
(67,854)
Total fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . .
790,993
(52,502)
1,034,873
(186,669)
1,825,866
(239,171)
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
386
(63)
0
0
386
(63)
Total fixed maturities and equity securities . . . . . . . . $791,379
$(52,565) $1,034,873 $(186,669) $1,826,252 $(239,234)
78
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, 2010
Description of Securities
Fixed maturities available for sale:
Bonds:
U.S. Government direct, guaranteed, and
Less than
Twelve Months
Twelve Months
or Longer
Total
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
government-sponsored enterprises . . . . . . . . . . $
56,905
$ (1,060) $
0 $
0 $
56,905 $
(1,060)
States, municipalities and political
subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign governments . . . . . . . . . . . . . . . . . . . . . . .
Corporates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized debt obligations . . . . . . . . . . . . . . . .
Other asset-backed securities . . . . . . . . . . . . . . . .
Redeemable preferred stocks . . . . . . . . . . . . . . . .
685,754
0
1,284,966
0
0
199,362
(26,734)
0
(39,331)
0
0
(3,339)
66,591
0
862,820
22,331
8,042
646,454
(15,077)
0
(170,818)
(34,069)
(678)
(76,626)
752,345
0
2,147,786
22,331
8,042
845,816
(41,811)
0
(210,149)
(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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0
0
30
(69)
30
(69)
Total fixed maturities and equity securities . . . . . . $2,226,987
$(70,464) $1,606,268 $(297,337) $3,833,255 $(367,801)
Additional information about investments in an unrealized loss position is as follows:
Number of issues (Cusip numbers) held:
As of December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
117
234
93
133
Less than
Twelve
Months
Twelve
Months
or Longer
Total
210
367
Torchmark’s entire fixed-maturity and equity portfolio consisted of 1,373 issues at December 31,
2011 and 1,430 issues at December 31, 2010. The weighted-average quality rating of all unrealized loss
positions as of December 31, 2011 was BBB-, compared with BBB+ a year earlier. The weighted-average
quality ratings are based on amortized cost.
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 4—Investments (continued)
Other investment information:
Other long-term investments consist of the following:
Mortgage loans, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment real estate, at depreciated cost . . . . . . . . . . . . . . . . .
Low-income housing interests . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateral loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2011
2010
$
551
3,165
12,188
7,598
2,665
$14,481
2,154
14,482
8,913
2,955
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$26,167
$42,985
The estimated fair value of mortgage loans, based on discounted cash flows, was approximately $0.6
million at December 31, 2011 and $14.3 million at December 31, 2010. Accumulated depreciation on
investment real estate was $1.8 million at both December 31, 2011 and 2010.
Torchmark had $125 thousand in fixed maturities at book value ($130 thousand at fair value) that
were non-income producing during the twelve months ended December 31, 2011. Torchmark had
$3.0 million in investment real estate at December 31, 2011 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, 2011.
Note 5—Deferred Acquisition Costs
An analysis of deferred acquisition costs is as follows:
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,406,335
$3,319,505
$3,228,887
2011
2010
2009
Additions:
Deferred during period:
Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange adjustment
Total additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
291,267
242,640
533,907
0
533,907
296,043
229,367
525,410
5,055
530,465
Deductions:
Amortized during period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange adjustment
Adjustment attributable to unrealized investment gains(1)
. . . . . . . . . . .
(424,781)
(1,931)
(28,679)
(418,890)
0
(24,745)
Total deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(455,391)
(443,635)
309,722
248,984
558,706
10,663
569,369
(415,986)
0
(62,765)
(478,751)
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,484,851
$3,406,335
$3,319,505
(1) Represents amounts pertaining to investments relating to universal life-type products.
In the event of lapses or early withdrawals in excess of those assumed, deferred acquisition costs
may not be recoverable.
80
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, 2011 is as follows:
Interest assumptions:
Individual Life Insurance
Years of Issue
Interest Rates
Percent of
Liability
1917-2011
1985-2011
1986-1992
1954-2000
1951-1985
1984-2011
2011-2011
2000-2011
1984-2011
2.5% to 5.75%
6.0%
7.0% graded to 6.0%
8.0% graded to 6.0%
8.5% graded to 6.0%
6.75%
5.75% graded to 6.75%
7.0%
Interest Sensitive
11%
29
7
11
4
4
1
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
1955-2011
1993-2011
1986-1992
1955-2000
1951-1986
2008-2010
2001-2007
2.5% to 5.75%
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%
60
26
6
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 2011 was 5.9%.
81
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,
2009
2010
2011
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,598 $104,346 $119,855
Incurred related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
628,137
(10,644)
661,740
(19,424)
674,710
(19,487)
Total incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paid related to:
617,493
642,316
655,223
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
538,910
75,664
577,875
68,189
583,127
87,605
Total paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
614,574
646,064
670,732
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $103,517 $100,598 $104,346
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 2009 through 2011 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, Liberty National Branch, and Medicare Part D distribution
channels. 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 2009 through 2011, 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.
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 8—Income Taxes
Torchmark and its subsidiaries file a life-nonlife consolidated Federal income tax return.
The components of income taxes were as follows:
Year Ended December 31,
2009
2010
2011
Income tax expense from continuing operations . . . . . . . . . . . . . . . . . . . . $237,326 $256,274 $191,024
Income tax expense from discontinued operations . . . . . . . . . . . . . . . . . .
9,216
Shareholders’ equity:
11,830
(467)
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 . . . . . . . . . . . . . . . . . . . .
284,161
184,233
458,358
(13,121)
(3,455)
(253)
$507,899 $448,882 $658,345
Income tax expense from continuing operations consists of:
Year Ended December 31,
2009
2010
2011
Current income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $169,500 $147,346 $147,917
43,107
Deferred income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
108,928
67,826
$237,326 $256,274 $191,024
In each of the years 2009 through 2011, deferred income tax expense was incurred because of
certain differences between net income before income taxes as reported on the Consolidated Statements
of Operations and taxable income as reported on Torchmark’s income tax returns. As explained in Note
1—Significant Accounting Policies, these differences caused the financial statement book values of some
assets and liabilities to be different from their respective tax bases.
The effective income tax rate differed from the expected 35% rate as shown below:
2011
Year Ended December 31,
%
2010
%
2009
%
Expected income taxes . . . . . . . . . . . . . . . . . . . . . . . $264,483 35.0% $272,498 35.0% $201,977 35.0%
Increase (reduction) in income taxes resulting
from:
Tax-exempt investment income . . . . . . . . . . . . . .
Tax settlements . . . . . . . . . . . . . . . . . . . . . . . . . . .
Low income housing investments . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(.5)
(3,468)
0
0
(24,258) (3.2)
.1
569
(3,371)
0
(12,900)
47
(.4)
0
(1.7)
0
(3,483)
(3,101)
(6,038)
1,669
(.6)
(.5)
(1.0)
.3
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . $237,326 31.4% $256,274 32.9% $191,024 33.2%
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 8—Income Taxes (continued)
The tax effects of temporary differences that gave rise to significant portions of the deferred tax
assets and deferred tax liabilities are presented below:
Deferred tax assets:
Fixed maturity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Carryover of tax losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2011
2010
35,670 $
7,429
0
5,509
48,608
50,126
12,293
2,023
1,352
65,794
Deferred tax liabilities:
Unrealized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee and agent compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Future policy benefits, unearned and advance premiums, and policy claims . . . . . . . . . .
276,591
57,136
911,816
355,825
0
55,781
877,561
338,771
Total gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,601,368
1,272,113
Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,552,760 $1,206,319
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
limitation for the
in its liability for uncertain tax positions relating to these years. The statutes of
assessments of additional tax are closed for all tax years prior to 2008. 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 has net operating loss carryforwards of approximately $21 million at December 31, 2011
which will begin to expire in 2025 if not otherwise used to offset future taxable income. 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 2009 through
2011 is as follows:
2011
2010
2009
Balance at January 1, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 875 $ 3,960 $ 8,481
Increase based on tax positions taken in current period . . . . . . . . . . .
73
Increase related to tax positions taken in prior periods . . . . . . . . . . . .
0
Decrease related to tax positions taken in prior periods . . . . . . . . . . .
(4,594)
Decrease due to settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0
245
280
(3,610)
0
0
0
(875)
0
Balance at December 31, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0 $
875 $ 3,960
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 $0, $124 thousand, and $1.7
million, net of Federal income tax benefits, in its Consolidated Statements of Operations for 2011, 2010,
and 2009, respectively. The Company had an accrued interest receivable of $2.7 million and $4.1 million,
net of Federal income tax benefits, as of 2011 and 2010, respectively. The Company had no accrued
penalties at December 31, 2011 or 2010.
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Postretirement Benefits
Pension Plans: Torchmark has noncontributory retirement benefit plans and contributory savings
plans which cover substantially all employees. There are also two nonqualified, noncontributory
supplemental benefit pension plans which cover a limited number of employees. The total cost of these
retirement plans charged to operations was as follows:
Year Ended
December 31,
Defined Contribution
Plans
Defined Benefit
Pension Plans
2011 . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . .
$3,552
3,617
3,511
$20,952
18,948
17,912
Torchmark accrues expense for the defined contribution plans based on a percentage of
the
employees’ contributions. The plans are funded by the employee contributions and a Torchmark
contribution equal
to the amount of accrued expense. Plan contributions are both mandatory and
discretionary, depending on the terms of the plan.
Cost for the defined benefit pension plans has been calculated on the projected unit credit actuarial
cost method. All plan measurements for the defined benefit plans are as of December 31 of
the
respective year. The defined benefit pension 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 $8.6 million in 2011,
$13 million in 2010, and $15 million in 2009. Torchmark estimates as of December 31, 2011 that it will
contribute an amount not to exceed $20 million to these plans in 2012. 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 2011 was $3.9 million and in 2010 was $1.7 million. The cash value of these policies
at December 31, 2011 was $16 million and was $12 million a year earlier. Additionally, a Rabbi Trust was
established for this plan in 2010 in the amount of $21 million to support the liability for this plan. An
additional deposit of $5 million was added to this trust
in 2011 and an investment account was
established. As of December 31, 2011, the combined value of the insurance policies and the trust
investments was $43 million. Because this plan is unqualified, the Rabbi Trust and the policyholder value
of these policies are not included as defined benefit plan assets but as assets of the Company. The
liability for this SERP at December 31, 2011 was $47 million and was $38 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 $3 million at December 31, 2011 and
$4 million at December 31, 2010. 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, 2011 and 2010.
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Postretirement Benefits (continued)
Pension Assets by Component at December 31, 2011
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 . . . . . . . . . . . . . . . . . . . . . . .
General merchandise stores . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . .
Other bonds . . . . . . . . . . . . . . . . . . . . . . . .
Guaranteed annuity contract
. . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$14,866
24,255
11,491
13,184
8,119
7,544
79,459
6,661
0
0
3,767
1,989
Grand Total
. . . . . . . . . . . . . . . . . . . . . . . .
$91,876
$ 14,866
24,255
11,491
13,184
8,119
7,544
79,459
159,759
348
12,745
3,767
1,989
6%
9
5
5
3
3
31
62
0
5
1
1
$ 0
$258,067
100%
$153,098
348
12,745
0
0
$166,191
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
0
0
19,484
2,002
Grand Total . . . . . . . . . . . . . . . . . . . . . . . . .
$99,032
$ 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
$3,184
$3,184
$236,893
100%
$122,946
772
10,959
0
0
$134,677
86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Postretirement Benefits (continued)
Torchmark’s investment objectives for its plan assets include preservation of capital, preservation of
purchasing power, and long-term growth. Torchmark seeks to preserve capital through investments made
in high quality securities with adequate diversification by issuer and industry sector to minimize risk. The
portfolio is monitored continuously for changes in quality and diversification mix. The preservation of
purchasing power is intended to be accomplished through asset growth, exclusive of contributions and
withdrawals, in excess of the rate of inflation. Torchmark intends to maintain investments that when
combined with future plan contributions will produce adequate long-term growth to provide for all plan
obligations. The Company’s expectation for the portfolio is to achieve a compound total rate of return of
3% in excess of the inflation rate, to be reviewed on a three-year basis. It is also Torchmark’s objective
that the portfolio’s investment return will meet or exceed the return of a balanced market index.
The majority 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). There is also a guaranteed annuity contract to fund the obligations of the American Income
Pension Plan. The assets are to be invested in a mix of equity and fixed income investments that best
serve the objectives of the pension plan. Factors to be considered in determining the asset mix include
funded status, annual pension expense, annual pension contributions, and balance sheet liability. Equities
include common and preferred stocks, securities convertible into equities, mutual funds that invest in
equities, and other equity-related investments. Equities must be listed on major exchanges and adequate
market liquidity is required. 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. 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, 2011, there were no restricted investments contained in the portfolio.
Plan contributions have been invested primarily in fixed maturities during the three years ending
December 31, 2011.
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.
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—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:
2011
2010
Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of Compensation Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.09% 5.77%
4.04
4.00
For Periodic Benefit Cost for the Year:
2011
2010
2009
Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected Long-Term Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of Compensation Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.77% 6.31% 6.31%
7.24
7.24
3.79
4.00
7.95
3.84
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,
2009
2010
2011
Service cost—benefits earned during the period . . . . . . . . . . .
Interest cost on projected benefit obligation . . . . . . . . . . . . . . .
Expected return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,277
16,106
(16,068)
11,637
$ 8,174
15,392
(15,025)
10,407
$ 7,571
14,490
(15,577)
11,428
Net periodic pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 20,952
$ 18,948
$ 17,912
An analysis of the impact on other comprehensive income (loss) concerning pensions is as follows:
2011
2010
2009
Balance at January 1 . . . . . . . . . . . .
$(105,903)
$ (93,674)
$(121,704)
Amortization of:
Prior service cost . . . . . . . . . . . . .
Net actuarial (gain) loss . . . . . . . .
Transition obligation . . . . . . . . . .
Total amortization . . . . . . . . . . . . . .
2,080
10,071
(5)
12,146
2,098
8,766
(7)
10,857
2,060
9,166
(7)
11,219
Experience gain(loss) . . . . . . . . . . .
(24,653)
(23,086)
16,811
Balance at December 31 . . . . . . . .
$(118,410)
$(105,903)
$ (93,674)
88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—Postretirement Benefits (continued)
The following table presents a reconciliation from the beginning to the end of the year of the
projected benefit obligation and plan assets. This table also presents the amounts previously recognized
as a component of accumulated other comprehensive income.
Pension Benefits
For the year ended
December 31,
2011
2010
Changes in benefit obligation:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligation at beginning of year
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss (gain)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligation at end of year
$285,560
9,277
16,106
34,515
(13,849)
331,609
$242,159
8,174
15,392
34,029
(14,194)
285,560
Changes in plan assets:
Fair value at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
236,893
26,439
8,584
(13,849)
258,067
211,877
26,576
12,634
(14,194)
236,893
Funded status at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (73,542) $ (48,667)
Amounts recognized in accumulated other comprehensive income
consist of:
Net loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior service cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transition obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amounts recognized at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$111,964
6,446
0
$118,410
$ 97,382
8,526
(5)
$105,903
The portion of other comprehensive income that is expected to be reflected in pension expense in
2012 is as follows:
Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . $ 2,063
12,175
Amortization of net loss (gain) . . . . . . . . . . . . . . . . . . . . . . . .
0
Amortization of transition obligation . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,238
The accumulated benefit obligation (ABO) for Torchmark’s funded defined benefit pension plans was
$263 million and $228 million at December 31, 2011 and 2010, respectively. In the unfunded plans, the
ABO was $39 million and $32 million at December 31, 2011 and 2010, respectively.
Torchmark has estimated its expected pension benefits to be paid over the next ten years as of
December 31, 2011. These estimates use the same assumptions that measure the benefit obligation at
December 31, 2011, taking estimated future employee service into account. Those estimated benefits are
as follows:
For the year(s)
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 13,921
14,890
15,755
16,689
17,692
105,596
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—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,
2010
2011
2009
Service cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost on benefit obligation . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service cost . . . . . . . . . . . . . . . . . . . .
Recognition of net actuarial (gain) loss . . . . . . . . . . . . . . .
$ 919
999
0
0
(815)
$ 728
970
0
0
(583)
$ 641
947
0
0
283
Net periodic postretirement benefit cost
. . . . . . . . . . . . . .
$1,103
$1,115
$1,871
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, funded status is equivalent to the accrued
benefit liability.
Benefits Other Than Pensions
For the year ended December 31,
2011
2010
Changes in benefit obligation:
Obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 16,889
919
999
638
(437)
Obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,008
Changes in plan assets:
Fair value at beginning of year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value at end of year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0
0
437
(437)
0
$ 16,340
728
970
(583)
(566)
16,889
0
0
566
(566)
0
Funded status at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(19,008)
$(16,889)
Amounts recognized in accumulated other comprehensive income:
Net loss* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,453
Net amounts recognized at year end . . . . . . . . . . . . . . . . . . . . . .
$ 1,453
$
$
0
0
*
The net loss for benefit plans other than pensions reduces other comprehensive income.
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 9—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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.09% 5.77%
3.50
4.50
2011
2010
For Periodic Benefit Cost for the Year:
Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of Compensation Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.77% 6.60% 6.60%
4.50
4.50
4.50
2011
2010
2009
Note 10—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,
2009
2010
2011
Stock-based compensation not involving cash . . . . . . . . . . . . . . . . $14,954 $ 11,848 $ 9,860
50,789
Commitments for low-income housing interests . . . . . . . . . . . . . . .
7,345
Capitalized investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
137,817
6,517
36,722
5,321
The following table summarizes certain amounts paid during the period:
Year Ended December 31,
2009
2010
2011
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,653 $ 76,911 $71,288
87,376
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
195,172
188,510
91
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,
2011
2010
7.875% 5/93 5/15 & 11/15 $ 165,612 $ 163,344 $ 195,654 $ 163,227
93,700
7.375% 7/93
2/1 & 8/1
100,302
94,050
93,823
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
247,875
275,910
247,477
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
289,661
(4,132)
790,571
375,276
0
947,142
289,397
(4,158)
789,643
7.100% 6/06 quarterly(6)
123,711
926,020
123,711
122,208(7)
123,711
914,282
1,069,350
913,354
225,000
224,842
224,842
198,875
$1,151,020 $1,139,124 $1,294,192 $1,112,229
(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) Callable anytime
(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: 2012—$225 million;
2013—$94 million; 2014—$0; 2015—$0; 2016—$250 million and thereafter—$582 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 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 $124 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
the same annual rate from Torchmark on the Junior
7.1%, and receives quarterly payments at
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. They are
callable by Trust III at any time.
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
92
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 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 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. The 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, where 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, 2011, Torchmark had $225 million face amount ($225 million carrying amount) of
commercial paper outstanding, $198 million of letters of credit issued, and no borrowings under the line of
credit. During 2011, the short term borrowings under the facility averaged approximately $206 million, and
were made at an average yield of .4%, compared with an average balance of $196 million and also at an
average yield of .4% a year earlier. The facility does not have a ratings-based acceleration trigger which
would require early payment. A facility fee is charged for the entire facility.There is also an issuance fee
for letters of credit issued. Torchmark is subject to certain covenants for the agreements regarding
capitalization and earnings, with which it was in compliance at December 31, 2011 and throughout the
three-year period ended December 31, 2011. Borrowings on the credit facilities are reported as short-
term debt on the Consolidated Balance Sheets.
93
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
2009:
Balance at January 1, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Grants of restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock due to exercise of stock options . . . .
Treasury stock acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0
0
128,812,123
(3,000,000)
(1,750,651)
115,060
189,258
(3,104,700)
3,000,000
Balance at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . .
0
0
125,812,123
(1,551,033)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
121,923
(10,621)
1,273,598
(6,781,364)
6,000,000
(6,000,000)
Balance at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . .
0
0
119,812,123
(947,497)
2011:
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
173,553
(7,153)
4,829,892
(23,281,453)
7,500,000
(7,500,000)
Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . .
0
0
112,312,123 (11,732,658)
*
Retroactively adjusted for stock split described in Note 1
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 18.9 million shares at a cost of $788 million in 2011, 5.7 million
shares at a cost of $204 million in 2010, and 3.1 million shares at a cost of $47 million in 2009. 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 4.4 million shares at a cost of $185 million in 2011, 1.1 million shares at a cost of
$42 million in 2010, and 30 thousand shares at a cost of $869 thousand in 2009.
Retirement of Treasury Stock: Torchmark retired 7.5 million shares of treasury stock in 2011,
6 million in 2010, and 3 million in 2009.
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 2011, subsidiaries of Torchmark paid $769 million in dividends to the
parent company, including $305 million available from the proceeds from the sale of United Investors.
During 2012, a maximum amount of $470 million is expected to be available to Torchmark in dividends
and transfers from subsidiaries without regulatory approval.
94
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, retroactively adjusted for
the three-for-two stock split:
Basic weighted average shares outstanding . . . . . . . . . . . .
Weighted average dilutive options outstanding . . . . . . . . . .
108,278,113
1,537,277
122,009,228
1,114,110
124,550,384
0
Diluted weighted average shares outstanding . . . . . . . . . . .
109,815,390
123,123,338
124,550,384
2011
2010
2009
Stock options to purchase 3.5 million shares, 10.3 million shares, and 14.1 million shares, during the
years 2011, 2010, and 2009, 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
All share and per share amounts within this note have been retroactively adjusted for the three-for-
two stock split.
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. 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 ten years. Beginning in 2011, with the approval by
Shareholders of the Torchmark Corporation 2011 Incentive Plan, some employee grants vest one-fourth
over two years and the remaining three-fourths vest one-fourth over each of the next three years. All
employee options vest immediately upon retirement on or after the attainment of age 65. 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:
Available for Grant
2010
2011
2009
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Approval of Torchmark Corporation 2011 Incentive Plan* . . . . . . . . . .
Cancellation of available shares from prior plans . . . . . . . . . . . . . . . . .
Expired and forfeited during year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options granted during year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock granted under the Torchmark Corporation 2011
1,724,540
3,205,209
255,263
7,950,000
(229,333)
0
0
37,500
(1,338,013) (1,358,175) (1,393,275)
0
26,269
Incentive Plan (counted as 3.1 options per grant)* . . . . . . . . . . . . . .
(519,558)
Restricted stock and restricted stock units granted during the year
under previous plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(19,017)
(137,371)
(124,894)
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,099,342
255,263
1,724,540
* Plan allows for grant of restricted stock such that each stock grant reduces 3.1 options available for grant
95
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, 2011 is presented below:
Stock-based compensation expense recognized* . . . . . . . . . . . . . . . . . . . . . $ 14,954 $11,848
4,147
Tax benefit recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.35
Weighted-average grant-date fair value of options granted . . . . . . . . . . . . . .
12,102
Intrinsic value of options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37,863
Cash received from options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,236
Actual tax benefit received from exercises . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,234
15.48
40,991
162,613
14,347
$9,860
3,451
3.67
1,088
4,430
381
2011
2010
2009
* No stock-based compensation expense was capitalized in any period.
An analysis of option activity for each of the three years ended December 31, 2011 is as follows:
2011
2010
Options
Weighted Average
Exercise Price
Options
Weighted Average
Exercise Price
Options
2009
Weighted Average
Exercise Price
Outstanding-beginning
of year
. . . . . . . . . . . . 15,185,729
Granted . . . . . . . . . . . . . 1,338,013
(4,829,892)
Exercised . . . . . . . . . . . .
Expired and forfeited . .
(73,425)
Adjustment due to
$34.09
44.37
33.67
39.17
15,509,978
1,358,175
(1,273,598)
(408,826)
$34.04
30.86
29.73
35.05
14,581,461
1,393,275
(189,258)
(275,500)
$35.60
16.03
23.41
32.88
7/1/11 stock split . . . .
(32)
32.96
0
0.00
0
0.00
Outstanding-end of
year
. . . . . . . . . . . . . . 11,620,393
$35.42
15,185,729
$34.09
15,509,978
$34.04
Exercisable at end of
year
. . . . . . . . . . . . . . 8,265,818
$36.28
11,830,076
$36.10
12,384,363
$34.98
A summary of restricted stock and restricted stock units granted during each of the years in the three
year period ended December 31, 2011 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.
2011
2010
2009
Executives restricted stock:
Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Price per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aggregate value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Percent vested as of 12/31/11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
167,250
$ 44.39
$ 7,424
112,500
$ 30.87
$ 3,473
113,250
$ 15.67
$ 1,774
0%
20%
40%
Directors restricted stock:
Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Price per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aggregate value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Percent vested as of 12/31/11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,303
$ 40.45
255
$
100%
9,423
$ 30.85
291
$
100%
1,810
$ 29.93
54
$
100%
Directors restricted stock units (including dividend
equivalents):
Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Price per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aggregate value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Percent vested as of 12/31/11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
* 2,013 shares at $29.84 per share were later forfeited in 2010.
96
13,063
$ 40.49
529
$
100%
15,443*
$ 29.95
463
$
100%
9,831
$ 29.76
293
$
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
2009:
Balance at January 1, 2009 . . . . . . . . . . . . . . . . . . . . . . . .
Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restriction lapses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2009 . . . . . . . . . . . . . . . . . . .
2010:
Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restriction lapses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2010 . . . . . . . . . . . . . . . . . . .
2011:
Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restriction lapses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . .
117,450
113,250
(27,450)
203,250
112,500
(71,100)
(7,500)
237,150
167,250
(72,600)
(4,800)
327,000
0
1,810
(1,810)
0
9,423
(9,423)
0
0
6,303
(6,303)
0
0
117,450
115,060
(29,260)
203,250
121,923
(80,523)
(7,500)
237,150
173,553
(78,903)
(4,800)
327,000
Restricted stock units outstanding at each of the year ends 2011, 2010, and 2009, were 42,938,
29,872, and 14,426, 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 2009 through 2011. 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, 2011 and
2010 is as follows:
Outstanding options:
2011
2010
2.85
Weighted-average remaining contractual term (in years) . . . . . . . . . . . . . . . . . . . . . . .
Aggregate intrinsic value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $94,270 $94,086
2.95
Exercisable options:
Weighted-average remaining contractual term (in years) . . . . . . . . . . . . . . . . . . . . . . .
2.16
Aggregate intrinsic value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $59,097 $49,810
1.89
Unrecognized compensation* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,299 $17,077
1.33
Weighted average period of expected recognition (in years)* . . . . . . . . . . . . . . . . . . . . .
1.68
* Includes restricted stock
Additional information concerning Torchmark’s unvested options is as follows at December 31:
2011
2010
Number of shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average exercise price (per share) . . . . . . . . . . . . . . . . . . . . . $
Weighted-average remaining contractual term (in years) . . . . . . . . . . .
Aggregate intrinsic value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3,354,575
33.30 $
5.55
35,173 $
3,355,653
27.01
5.28
44,276
97
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, 2011.
Range of
Exercise Prices
Number
Outstanding
$15.67 - $15.67
22.03 - 30.40
30.87 - 36.33
36.51 - 36.51
36.70 - 37.20
37.49 - 40.45
41.79 - 41.79
42.47 - 43.06
44.39 - 45.45
1,086,231
1,244,673
1,401,238
1,859,229
1,005,845
1,134,413
1,270,873
1,130,041
1,487,850
$15.67 - $45.45
11,620,393
Options Outstanding
Options Exercisable
Weighted-
Average
Remaining
Contractual
Life (Years)
Weighted-
Average
Exercise
Price
Number
Exercisable
Weighted-
Average
Exercise
Price
4.13
1.85
4.86
0.34
1.05
2.97
3.13
1.99
6.32
2.95
$
$
15.67
28.49
31.11
36.51
37.00
37.69
41.79
42.78
44.50
35.42
431,969
1,226,486
71,188
1,859,229
994,084
1,125,948
1,270,873
1,130,041
156,000
8,265,818
$
$
15.67
28.50
35.51
36.51
37.00
37.68
41.79
42.78
45.45
36.28
No equity awards were cash settled during the three years ended December 31, 2011.
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.
98
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 2011
Distribution Channel
Amount
% of
Total
United American Independent . . . . . . .
Liberty National Exclusive . . . . . . . . . .
American Income Exclusive . . . . . . . . .
Direct Response . . . . . . . . . . . . . . . . . .
Medicare Part D . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
22,846
288,308
607,914
593,650
213,526
1
17
35
35
12
Amount
$ 306,490
290,107
80,119
57,067
196,710
% of
Total Amount
$608
33
31
9
6
21
% of
Total
100
Amount
$ 329,944
578,415
688,033
650,717
196,710
213,526
% of
Total
12
22
26
25
7
8
$1,726,244
100
$ 930,493
100
$608
100
$2,657,345
100
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
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) 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.
99
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 2011
Revenue:
Premium . . . . . . . . . . . . . . . . . . . . . . $1,726,244 $930,493 $
Net investment income . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . .
608
$ 707,041
Total revenue . . . . . . . . . . . . . . 1,726,244 930,493
608
707,041
$
2,507
2,507
Expenses:
Policy benefits . . . . . . . . . . . . . . . . . 1,118,909 632,847
Required interest on net
42,547
$ (1,027)(1)
(14,013)(2,5)
(356)(4)
$2,656,318
693,028
2,151
(15,396)
3,351,497
(1,027)(1)
1,793,276
reserves . . . . . . . . . . . . . . . . . . . .
Amortization of acquisition costs . .
Commissions and premium tax . . .
Insurance administrative
expense(3) . . . . . . . . . . . . . . . . . . .
Parent expense . . . . . . . . . . . . . . . .
Stock-based compensation
expense . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . .
(458,029)
(36,729)
503,649 123,442
48,942
75,480
(57,040)
12,688
68
551,798
(214,998)
(356)(4)
159,109
19,880(6,7,8)
$ 7,693
14,954
77,644
264(2)
0
424,781
124,134
178,989
7,693
14,954
77,908
Total expenses . . . . . . . . . . . . . 1,240,009 768,502
(1,737)
414,444
159,109
22,647
18,761
2,621,735
Sub total . . . . . . . . . . . . . . . . . . . . . . . .
Non operating items . . . . . . . . . . . .
Amortization of low-income
housing interests . . . . . . . . . . . . .
Measure of segment profitability
486,235 161,991
2,345
292,597
(156,602)
(22,647)
(34,157)
19,880(6,7,8)
729,762
19,880
14,277(5)
14,277
(pretax) . . . . . . . . . . . . . . . . . . . $ 486,235 $161,991 $ 2,345 $ 292,597 $(156,602) $(22,647) $
0
Deduct applicable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Segment profits after tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add back income taxes applicable to segment profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add (deduct) realized investment gains (losses)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct amortization of low-income housing(5)
Deduct state administrative settlement expense(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct loss on sale of equipment(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct litigation expense(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
763,919
(249,495)
514,424
249,495
25,904
(14,277)
(6,901)
(979)
(12,000)
Pretax income per Consolidated Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 755,666
(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 interests.
(6) State administrative settlement expense.
(7) Loss on sale of equipment.
(8) Litigation expense.
100
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 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
$
(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
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
(664)(4)
264(2)
(916)
Subtotal
. . . . . . . . . . . . . . . . . . . . . . . .
455,266 170,059
1,348
297,145
(152,781)
(20,657)
(9,153)
0
418,890
125,330
155,615
8,809
11,848
75,529
2,589,065
741,227
Amortization of low-income
housing interests . . . . . . . . . . . . .
Measure of segment profitability
9,153(5)
9,153
(pretax) . . . . . . . . . . . . . . . . . . . $ 455,266 $170,059 $ 1,348 $ 297,145 $(152,781) $(20,657) $
0
Deduct applicable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Segment profits after tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add back income taxes applicable to segment profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add (deduct) realized investment gains (losses)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct amortization of low-income housing(5)
750,380
(252,357)
498,023
252,357
37,340
(9,153)
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 interests, previously considered a reduction of consolidated pretax segment profitability.
101
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
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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
706,923
(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.
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.
102
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
2011
2010*
2009
Change %
Change %
2011
2010
Life insurance underwriting margin . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 486,235 $ 455,266 $ 427,412 $ 30,969
(8,068)
Health insurance underwriting margin . . . . . . . . . . . . . . . . . . . . . . . .
Annuity underwriting margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
997
Other insurance:
170,059
1,348
161,991
2,345
170,410
312
7 $ 27,854
(5)
7
(351) 0
1,036
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Administrative expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,507
(159,109)
292,597
(22,647)
2,834
(155,615)
297,145
(20,657)
2,914
(150,325)
275,650
(19,450)
(327) (12)
2
(3,494)
(4,548)
(2)
(1,990) 10
Pre-tax total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Applicable taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
763,919
(249,495)
750,380
(252,357)
706,923
(238,153)
13,539
2,862
After-tax total, before discontinued operations . . . . . . . . . .
Discontinued operations (after tax) . . . . . . . . . . . . . . . . . . . . . . . . . . .
514,424
0
498,023
27,932
468,770
26,810
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized gains (losses)—investments (after tax) . . . . . . . . . . . . . . .
Realized gains (losses)—discontinued operations (after tax)
. . . . .
Loss on disposal of discontinued operations (after tax) . . . . . . . . . .
Tax settlements (after tax) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of legal settlements (after tax) . . . . . . . . . . . . . . . . . . . . . . . . . .
State administrative settlement (after tax) . . . . . . . . . . . . . . . . . . . . .
Loss on Company-occupied property (after tax) . . . . . . . . . . . . . . . .
Loss on sale of equipment (after tax) . . . . . . . . . . . . . . . . . . . . . . . . .
514,424
16,838
0
(455)
0
(7,800)
(4,486)
0
(636)
525,955
24,270
1,852
(35,013)
0
0
0
0
0
495,580
(85,345)
(7,909)
0
2,858
0
0
(231)
0
16,401
(27,932)
(11,531)
(7,432)
(1,852)
34,558
0
(7,800)
(4,486)
0
(636)
2
(1)
3
(2)
(80) (3)
(5,290) 4
21,495
8
(1,207) 6
6
43,457
(14,204) 6
6
4
6
29,253
1,122
30,375
109,615
9,761
(35,013)
(2,858)
0
0
231
0
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 517,885 $ 517,064 $ 404,953 $
821
0 $112,111 28
*
During 2011, management changed the definition of total segment profits before tax to exclude the amortization of low-income
housing interests, which management views as a tax expense. Accordingly, the 2010 total segment profits before tax and
applicable tax amount have been updated for comparison purposes.
103
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 approximately 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, 2011
Cash and invested assets . . . . . . . . . . . . . . . . . .
Accrued investment income . . . . . . . . . . . . . . . . .
Deferred acquisition costs . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,929,739
309,609
$520,685
87,282
$34,427
$12,437,699
192,325
$12,437,699
192,325
3,484,851
396,891
644,625
$644,625
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,239,348
$607,967
$34,427
$12,630,024
$644,625
$17,156,391
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
Other Balances by Segment
At December 31, 2011
Life
Health
Annuity
Consolidated
Future policy benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned and advance premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy claims and other benefits payable . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7,697,108
16,965
118,737
$589,441
52,574
103,517
$1,285,708
$9,572,257
69,539
222,254
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7,832,810
$745,532
$1,285,708
$9,864,050
Future policy benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned and advance premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy claims and other benefits payable . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7,318,283
17,343
121,000
$570,775
56,822
100,598
$1,260,973
$9,150,031
74,165
221,598
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$7,456,626
$728,195
$1,260,973
$9,445,794
At December 31, 2010
Life
Health
Annuity
Consolidated
104
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, 2011. Insurance
ceded on life and accident and health products represented .3% of premium income for 2011. 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 3.0% of life insurance in force at December 31, 2011 and reinsurance assumed on life and
accident and health products represented 1.2% of premium income for 2011.
Leases: Torchmark leases office space and office equipment under a variety of operating lease
arrangements. Rental expense for operating leases was $4.8 million in 2011, $4.9 million in 2010, and
$4.9 million in 2009. Future minimum rental commitments required under operating leases having
remaining noncancelable lease terms in excess of one year at December 31, 2011 were as follows: 2012,
$2.7 million; 2013, $2.4 million; 2014, $2.0 million; 2015, $2.0 million; 2016, $1.4 million and in the
aggregate, $13.2 million.
Low-Income Housing Tax Credit Interests: As described in Note 1, Torchmark has $293 million
invested in entities which provide certain tax benefits. As of December 31, 2011, Torchmark remained
obligated under these commitments for $109 million, of which $85 million is due in 2012, $21 million in
2013, $2 million in 2014, and $1 million thereafter.
Concentrations of Credit Risk: Torchmark maintains a diversified investment portfolio with limited
concentration in any given issuer. At December 31, 2011, 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 . . . . . . . . . . . . . .
Other fixed maturities, equity securities, mortgages, real estate, other long-term
80%
11
5
3
investments, and short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
100%
As of December 31, 2011, 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 2011, 5% or
more of the state and municipal bond portfolio at fair value was invested in securities issued within the
following states: Texas (34%), Ohio (8%), Washington (7%), and Alabama (5%). Otherwise, there was no
significant concentration within any given state.
105
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, 2011, based on fair value:
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18%
Electric utilities and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17%
Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12%
6%
Oil and gas extraction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6%
Pipelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4%
Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3%
Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3%
Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3%
Telecommunications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2%
Diversified financial services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
At year-end 2011, 5% of invested assets at fair value 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 $787 million, amortized cost was $701 million, and
fair value was $579 million. While these investments could be subject to additional credit risk, such risk
should generally be reflected in their fair value.
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, 2011, 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, 2011,
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, 2011, $198
million of letters of credit were outstanding.
106
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, 2011, total
remaining undiscounted payments under the leases were approximately $8 million. Torchmark
(parent company) would be responsible for any subsidiary obligation in the event the subsidiary did
not make payments or otherwise perform under the terms of the lease.
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
Inc. (Smith and Ivie v. Collingsworth, et al.,
America Association and Farm & Ranch Healthcare,
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. On January 6, 2012, the parties agreed in
principal
previously set
consideration of the agreed-upon settlement.
the trial,
to commence on January 17, 2012, pending notice to the class and the Court’s
to settle the case. On January 11, 2012,
the Court ordered the continuation of
107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 15—Commitments and Contingencies (continued)
On March 15, 2011, purported class action litigation was filed against American Income and
Torchmark in the District Court for the Northern District of Ohio (Fitzhugh v. American Income Life
Insurance Company and Torchmark Corporation, Case No. 1:11-cv-00533). The plaintiff, a formerly
independently contracted American Income agent, alleges that American Income intentionally
misclassified its agents as independent contractors rather than as employees in order to escape minimum
wage and overtime requirements of the Fair Labor Standards Act, as well as to avoid payroll taxes,
workers compensation premiums and other benefits required to be provided by employers. Monetary
damages in the amount of unpaid compensation plus liquidated damages and/or prejudgment interest as
well as injunctive and/or declaratory relief is sought by the plaintiff on behalf of the purported class. On
November 3, 2011, the Court granted American Income’s motion to compel arbitration and dismissed the
case. Plaintiffs have appealed this decision.
Torchmark subsidiary, United American was named as defendant in purported class action litigation
filed on May 31, 2011 in Cross County Arkansas Circuit Court (Kennedy v. United American Insurance
Company (Case # CV-2011-84-5). In the litigation, filed on behalf of a proposed nationwide class of
owners of certain limited hospital and surgical expense benefit policies from United American, the plaintiff
alleged that United American breached the policy by failing and/or refusing to pay benefits for the total
number of days an insured is confined to a hospital and by limiting payment to the number of days for
which there are incurred hospital room charges rather than also including benefits for services and
supplies. Claims for unjust enrichment, breach of contract, bad faith refusal to pay first party benefits,
breach of
the implied duty of good faith and fair dealing, bad faith, and violation of the Arkansas
Deceptive Trade Practices Act were initially asserted. The plaintiff sought declaratory relief, restitution
and/or monetary damages, punitive damages, costs and attorneys fees. In September 2011, the plaintiff
dismissed all causes of action, except for the breach of contract claim.
On November 14, 2011, plaintiff filed an amended complaint based upon the same facts asserting
only breach of contract claims on behalf of a purported nationwide restitution/monetary relief class or, in
in the second
the first alternative, a purported multiple-state restitution/monetary relief class or,
alternative, a purported Arkansas statewide restitution/monetary relief class. Restitution and/or monetary
relief for United American’s alleged breaches of contract, costs, attorney’s fees and expenses, expert
fees, prejudgment interest and other relief are sought on behalf of the plaintiff and members of the class.
On December 7, 2011, United American filed a Motion to Dismiss the plaintiff’s amended complaint and
on January 11, 2012, plaintiff filed a response thereto. Discovery has commenced and is ongoing.
108
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 16—Selected Quarterly Data (Unaudited)
The following is a summary of quarterly results for the two years ended December 31, 2011. 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
2011:
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 . . . . . . .
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 . . . . . . .
$679,901
171,647
(22,723)
829,272
464,127
107,788
155,812
106,132
(599)
105,533
0.91
(0.01)
0.90
0.89
0.00
0.89
$670,944
167,111
7,261
845,678
468,934
109,602
174,054
115,393
6,283
121,676
0.93
0.05
0.98
0.92
0.05
0.97
$672,350
173,104
31,272
877,334
454,694
106,752
218,528
148,940
0
148,940
1.34
0.00
1.34
1.32
0.00
1.32
$669,569
170,612
(5,002)
835,895
454,177
104,851
180,720
119,848
6,201
126,049
0.97
0.05
1.02
0.97
0.05
1.02
$650,525
173,491
12,600
837,241
438,774
104,804
198,822
136,911
144
137,055
1.31
0.00
1.31
1.30
0.00
1.30
$657,827
172,337
8,045
838,888
433,514
104,045
208,313
138,097
(23,566)
114,531
1.14
(0.19)
0.95
1.13
(0.19)
0.94
$653,542
174,786
4,755
833,554
435,681
105,437
182,504
126,357
0
126,357
1.25
0.00
1.25
1.23
0.00
1.23
$653,418
166,304
27,036
847,171
436,419
100,392
215,480
148,955
5,853
154,808
1.24
0.05
1.29
1.23
0.05
1.28
*
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.
109
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, 2011, 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 quarter ended December 31, 2011, 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
110
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, 2011. 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, 2012
111
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, 2011, 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, 2011, 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, 2011 of Torchmark and our report dated February 28, 2012 expressed
an unqualified opinion on those financial statements and financial statement schedules.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
February 28, 2012
112
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 26, 2012 (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, 2011
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
11,620,393
$35.42
6,099,342
Plan Category
Equity compensation
plans approved by
security holders . . .
Equity compensation
plans not approved
by security
holders . . . . . . . . . .
Total . . . . . . . . . . . . . .
11,620,393
(b) Security ownership of certain beneficial owners:
0
0
$35.42
0
6,099,342
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.
113
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, 2011 and 2010 . . . . . . . . . . . . . . .
Consolidated Statements of Operations for each of the three years in the period
ended December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income for each of the three years in
the period ended December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Shareholders’ Equity for each of the three years in
the period ended December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedules Supporting Financial Statements for each of the three years in the period
ended December 31, 2011:
II. Condensed Financial Information of Registrant (Parent Company) . . . . . . . . . . . . .
IV. Reinsurance (Consolidated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56
57
58
59
60
61
62
121
125
Schedules not referred to have been omitted as inapplicable or not required by Regulation S-X.
114
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)
115
Page of
this
Report
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
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)
10.15
The Torchmark Corporation Amended and Restated Pension Plan (incorporated by
reference from Exhibit 10.15 to Form 10-K for the fiscal year ended December 31,
2010)*
10.16
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)*
116
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)* (incorporated by reference from Exhibit 10.17 to Form 10-K for the
fiscal year ended December 31, 2010)
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)*
117
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)*
118
10.52
10.53
10.54
10.55
10.56
10.57
10.58
10.59
10.60
10.61
10.62
10.63
10.64
(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 Five to the Torchmark Corporation Savings and Investment Plan
(amended and restated as January 1, 2009)*
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
(incorporated by reference from Exhibit 10.56 to Form10-K for fiscal year ended
December 31, 2010)*
Form of Stock Option under Torchmark Corporation 2011 Non-Employee Director
Compensation Plan (incorporated by reference from Exhibit 10.57 to Form 10-K for
fiscal year ended December 31,2010)*
Form of Restricted Stock Award Notice under Torchmark Corporation 2011 Non-
Employee Director Compensation Plan (incorporated by reference from Exhibit 10.58
to Form 10-K for fiscal year ended December 31, 2010)*
Form of Restricted Stock Unit Award Notice under Torchmark Corporation 2011 Non-
Employee Director Compensation Plan (incorporated by reference from Exhibit 10.59
to Form 10-K for fiscal year ended December 31, 2010)*
Torchmark Corporation 2011 Incentive Plan (incorporated by reference from Exhibit
10.1 to Form 8-K dated May 4, 2011)*
Form of Restricted Stock Award (Executive) under Torchmark Corporation 2011
Incentive Plan (incorporated by reference from Exhibit 10.2 to Form 8-K dated
May 4, 2011)*
Form of Restricted Stock Award (Special) under Torchmark Corporation 2011 Incentive
Plan (incorporated by reference from Exhibit 10.3 to Form 8-K dated May 4, 2011)*
Form of Ten year Stock Option under Torchmark Corporation 2011 Incentive Plan
(incorporated by reference from Exhibit 10.4 to Form 8-K dated May 4, 2011)*
Form of Five year Stock Option under Torchmark Corporation 2011 Incentive Plan
(incorporated by reference from Exhibit 10.5 to Form 8-K dated May 4, 2011)*
Statement re computation of per share earnings
Statement re computation of ratios
Proxy Statement for Annual Meeting of Stockholders to be held April 26, 2012***
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
120
120
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, 2011.
119
Exhibit 11. Statement re computation of per share earnings
TORCHMARK CORPORATION
COMPUTATION OF EARNINGS PER SHARE*
Twelve Months Ended December 31,
2009
2010
2011
Income from continuing operations . . . . . . . . . . . . . . . . . . . $518,340,000 $522,293,000 $386,052,000
18,901,000
Income (loss) from discontinued operations . . . . . . . . . . .
(5,229,000)
(455,000)
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $517,885,000 $517,064,000 $404,953,000
Basic weighted average shares outstanding . . . . . . .
Diluted weighted average shares outstanding . . . . . .
108,278,113
109,815,390
122,009,228
123,123,338
124,550,384
124,550,384
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 . . . . . . . . . . . $
4.79 $
(0.01)
4.78 $
4.72 $
0.00
4.72 $
4.28 $
(0.04)
4.24 $
4.24 $
(0.04)
4.20 $
3.10
0.15
3.25
3.10
0.15
3.25
*
Retroactively adjusted for three-for-two stock split
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 115 through 119 of this report. Exhibits not referred to have been omitted as
inapplicable or not required.
120
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(Amounts in thousands)
December 31,
2011
2010
Assets:
Investments:
Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
36,458
58
$
15,963
62,582
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36,516
27,099
5,329,769
50,977
61,616
7,581
78,545
0
4,973,495
138,130
65,195
5,391
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5,513,558
$5,260,756
Liabilities and shareholders’ equity:
Liabilities:
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 224,842
790,571
145,556
123,681
$ 198,875
789,643
136,931
119,066
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,284,650
1,244,515
Shareholders’ equity:
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
351
112,312
775,842
549,423
3,634,481
(843,501)
351
119,812
783,119
22,958
3,473,482
(383,481)
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,228,908
4,016,241
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5,513,558
$5,260,756
See Notes to Condensed Financial Statements and accompanying Report of Independent Registered
Public Accounting Firm.
121
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
CONDENSED STATEMENTS OF OPERATIONS
(Amounts in thousands)
Year Ended December 31,
2010
2011
2009
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized investment gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 23,542
508
$ 26,031
(1,646)
$ 17,374
(1)
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,050
24,385
17,373
General operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reimbursements from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30,945
(19,335)
75,426
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
87,036
21,682
(13,375)
74,827
83,134
18,119
(5,973)
71,687
83,833
Operating income (loss) before income taxes and equity in earnings of
affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(62,986)
14,380
(58,749)
18,521
(66,460)
19,773
Net operating loss before equity in earnings of affiliates . . . . . . . . . . . . . . . .
Equity in earnings of affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(48,606)
566,491
(40,228)
557,292
(46,687)
451,640
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$517,885
$517,064
$404,953
See Notes to Condensed Financial Statements and accompanying Report of Independent Registered
Public Accounting Firm.
122
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT—(continued)
CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended December 31,
2010
2011
2009
Cash provided from (used for) operations before dividends from
subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (33,042)
769,139
$ (33,403)
370,947
$ (51,241)
354,695
Cash provided from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
736,097
337,544
303,454
Cash provided from (used for) investing activities:
Acquisition of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disposition of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease (increase) in short-term investments . . . . . . . . . . . . . . . . . .
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0
11,828
62,524
(25,000)
(14,279)
33
106,881
(18,722)
(125)
31
(129,789)
(100,000)
Cash provided from (used for) investing activities . . . . . . . . . . . . . . . . . . . . .
49,352
73,913
(229,883)
Cash provided from (used for) financing activities:
Issuance of 9 1⁄4% Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition 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
0
0
25,967
162,613
(972,556)
96,000
2,021
(72,395)
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)
Cash provided from (used for) financing activities . . . . . . . . . . . . . . . . . . . . .
(758,350)
(411,457)
(74,320)
Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27,099
0
Cash balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 27,099
$
0
0
0
$
(749)
749
0
See Notes to Condensed Financial Statements and accompanying Report of Independent Registered
Public Accounting Firm.
123
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$769,139
$370,947
$354,695
2011
2010
2009
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,
2010
2011
2009
Stock-based compensation not involving cash . . . . . . . . .
$14,954
$11,848
$9,860
The following table summarizes certain amounts paid (received) during the period:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$74,569
22,893
$75,909
2,379
$73,031
25,202
Year Ended December 31,
2009
2010
2011
Note C—Special Items
In 2009, a Federal
income tax expense of $1.5 million was incurred relating to Internal Revenue
Service examinations of prior years.
Note D—Preferred Stock
As of December 31, 2011, 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.
124
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,
2011:
Life insurance in force . . . . . . . . . . . . . . $144,778,793
$738,935
$4,414,247
$148,454,105
3.0%
Premiums:(2)
Life insurance . . . . . . . . . . . . . . . . . . . $ 1,675,307
931,751
Health insurance . . . . . . . . . . . . . . . .
$ 4,716
2,285
Total premium . . . . . . . . . . . . . . . . $ 2,607,058
$ 7,001
$
$
31,311
0
$ 1,701,902
929,466
31,311
$ 2,631,368
1.8%
0%
1.2%
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%
(1) No amounts have been netted against ceded premium
(2) Excludes policy charges of $24,950, $26,629, and $28,435, in each of the years 2011, 2010, and 2009, respectively.
See accompanying Report of Independent Registered Public Accounting Firm.
125
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, 2012
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
Date: February 28, 2012
*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
126
3700 S. Stonebridge Drive
McKinney, Texas 75070
www.torchmarkcorp.com