-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CBm+QF9FDHHi32bLo3eOIS0ymRneH5KBn3K9aSy2ZxrT9F3gZ5Zh6YcTU1YmpH8m KRPe2Jbx/STZJfLjnTMUaQ== 0001193125-06-046266.txt : 20060306 0001193125-06-046266.hdr.sgml : 20060306 20060306172933 ACCESSION NUMBER: 0001193125-06-046266 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060306 DATE AS OF CHANGE: 20060306 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TORCHMARK CORP CENTRAL INDEX KEY: 0000320335 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 630780404 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08052 FILM NUMBER: 06668181 BUSINESS ADDRESS: STREET 1: 2001 3RD AVE S CITY: BIRMINGHAM STATE: AL ZIP: 35233 BUSINESS PHONE: 2053254200 FORMER COMPANY: FORMER CONFORMED NAME: TORCHMARK CORP SAVINGS & INVESTMENT PLAN DATE OF NAME CHANGE: 19820825 FORMER COMPANY: FORMER CONFORMED NAME: LIBERTY NATIONAL INSURANCE HOLDING CO DATE OF NAME CHANGE: 19820701 10-K 1 d10k.htm FORM 10-K FORM 10-K
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2005

 

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   63-0780404
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
2001 Third Avenue South, Birmingham, AL   35233
(Address of principal executive offices)   (Zip Code)

 

(205) 325-4200

(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


 

CUSIP


 

Name of each exchange on
which registered


Common Stock, $1.00 par value per share   891927104   New York Stock Exchange
    The International Stock Exchange, London, England
7 3/4% Trust Preferred Securities
7 3/4% Trust Preferred Securities
  89102Q201
89102T205
  New York Stock Exchange
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  x      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  x    

 

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  x      No  ¨    

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

                            Large accelerated filer x                             Accelerated filer ¨                             Non-accelerated filer ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨      No  x

 

As of June 30, 2005, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $5,469,250,667 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


  

Outstanding at January 31, 2006


Common Stock, $1.00 par value per share    103,567,942 shares

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Document


  

Parts Into Which Incorporated


Proxy Statement for the Annual Meeting of Stockholders to
be held April 27, 2006 (Proxy Statement)
   Part III


Table of Contents

TORCHMARK CORPORATION

INDEX

 

               Page

PART I.

              
    

Item 1.

  

Business

     1
    

Item 1.A.

  

Risk Factors

     5
    

Item 1.B.

  

Disclosure of Unresolved Staff Comments

     8
    

Item 2.

  

Real Estate

     9
    

Item 3.

  

Legal Proceedings

     9
    

Item 4.

  

Submission of Matters to a Vote of Security Holders

   10

PART II.

              
    

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   

11
    

Item 6.

  

Selected Financial Data

   12
    

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations   

13
    

Item 7.A.

  

Quantitative and Qualitative Disclosures about Market Risk

   43
    

Item 8.

  

Financial Statements and Supplementary Data

   44
    

Item 9.

  

Disagreements on Accounting and Financial Disclosure

   90
    

Item 9.A.

  

Controls and Procedures

   90
    

Item 9.B.

  

Other Information

   93

PART III.

              
    

Item 10.

  

Directors and Executive Officers of Registrant

   93
    

Item 11.

  

Executive Compensation

   93
    

Item 12.

  

Security Ownership of Certain Beneficial Owners of Management

   93
    

Item 13.

  

Certain Relationships and Related Transactions

   93
    

Item 14.

  

Principal Accounting Fees and Services

   93

PART IV.

              
    

Item 15.

   Exhibits, Financial Statements Schedules, and Reports on Form 8-K    94


Table of Contents

PART 1

 

Item 1.    Business

 

Torchmark Corporation (Torchmark) is an insurance holding company incorporated in Delaware in 1979. Its primary subsidiaries are American Income Life Insurance Company (American Income), Liberty National Life Insurance Company (Liberty), Globe Life And Accident Insurance Company (Globe), United American Insurance Company (United American), and United Investors Life Insurance Company (United Investors).

 

Torchmark’s website is: www.torchmarkcorp.com. Torchmark makes available free of charge through its website, its annual report on Form 10-K, its quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after they have been electronically filed with or furnished to the Securities and Exchange Commission.

 

The following table presents Torchmark’s business by primary marketing distribution method.

 

Primary
Distribution Method
  Company   Products and Target Markets   Distribution

 
Direct Response  

Globe Life And Accident Insurance Company

Oklahoma City, Oklahoma

  Individual life and supplemental health insurance including juvenile and senior life coverage and Medicare Supplement marketed to middle-income Americans.   Direct response, mail, television, magazine; nationwide.

Liberty National Exclusive Agency  

Liberty National Life Insurance Company

Birmingham, Alabama

  Individual life and supplemental health insurance marketed to middle-income families.   1,781 producing agents; 117 district offices primarily in the Southeastern U.S.

American Income Exclusive Agency  

American Income Life Insurance Company

Waco, Texas

  Individual life and supplemental health insurance marketed to union and credit union members.   2,027 agents in the U.S., Canada, and New Zealand.

United Investors Agency  

United Investors Life Insurance Company

Birmingham, Alabama

  Individual life insurance and annuities marketed to middle-income Americans.   Independent Agency.

Military  

Liberty National Life Insurance Company

Birmingham, Alabama

 

Globe Life And Accident Insurance Company

Oklahoma City, Oklahoma

  Individual life insurance marketed to active and retired military officers.   Independent Agency through career agents nationwide.

United American Independent Agency and Branch Office Agency  

United American
Insurance Company

McKinney, Texas

  Limited-benefit supplemental health coverage to people under age 65, Medicare Supplement coverage to Medicare beneficiaries and, to a lesser extent, life insurance.   27,509 independent agents in the U.S. and Canada; 2,166 exclusive producing agents in 99 branch offices.

 

Additional information concerning industry segments may be found in Management’s Discussion and Analysis and in Note 13—Business Segments in the Notes to the Consolidated Financial Statements.

 

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Insurance

 

Life 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.

 

     (Amounts in thousands)
     Annualized Premium in Force

     2005

   2004

   2003

Whole life:

                    

Traditional

   $ 911,444    $ 848,405    $ 817,454

Interest-sensitive

     128,409      162,694      138,676

Term

     492,409      473,061      459,135

Other

     45,373      39,175      34,025
    

  

  

     $ 1,577,635    $ 1,523,335    $ 1,449,290
    

  

  

 

The distribution methods for life insurance products include sales by direct response, exclusive agents and independent agents. These methods are discussed in more depth under the heading Marketing. The following table presents life annualized premium in force by distribution method.

 

     (Amounts in thousands)
     Annualized Premium in Force

     2005

   2004

   2003

Direct response

   $ 472,733    $ 442,997    $ 404,963

Exclusive Agents:

                    

American Income

     403,333      376,595      346,982

Liberty National

     318,435      317,897      321,176

United American

     17,315      18,829      19,715

Military

     205,485      198,601      179,027

Independent Agents:

                    

United American

     44,819      50,975      56,891

Other

     115,515      117,441      120,536
    

  

  

     $ 1,577,635    $ 1,523,335    $ 1,449,290
    

  

  

 

Health insurance

 

Torchmark offers supplemental limited-benefit health insurance products that include hospital/surgical plans, cancer, and accident plans sold to individuals under age 65. These policies are designed to supplement health coverage that applicants already own or to provide affordable, limited-benefit coverage to individuals without access to more comprehensive coverage. Medicare Supplements are also offered to enrollees in the traditional fee-for-service Medicare program. All Medicare Supplement plans are standardized by Federal regulation and are designed to pay deductibles and co-payments not paid by Medicare. Late in 2005, the Company began marketing a new Medicare Part D prescription drug policy for which coverage began in 2006.

 

Health plans are offered through the Company’s exclusive and independent agents and direct response, with the United American agencies being the leading writers in the three-year period ended December 31, 2005, selling predominantly hospital/surgical plans. As shown in the charts below, net sales of limited-benefit plans exceeded net sales of Medicare Supplements in all years of the three-year-period ended December 31, 2005, but Medicare Supplement premium in force exceeded that of limited-benefit plans during each year of the same period. These data reflect the change in product mix being sold from predominantly Medicare Supplements in years preceding 2003 to predominantly limited-benefit plans in the more current period.

 

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The following table presents health insurance net sales information for the three years ended December 31, 2005 by product category.

 

    

(Amounts in thousands)

 

Net Sales


     2005

   2004

   2003

     Amount

   % of
Total


   Amount

   % of
Total


   Amount

   % of
Total


Limited-benefit plans

   $ 146,193    79    $ 147,290    74    $ 125,121    65

Medicare Supplement

     39,328    21      52,624    26      67,601    35
    

  
  

  
  

  

Total Health

   $ 185,521    100    $ 199,914    100    $ 192,722    100
    

  
  

  
  

  

The following table presents supplemental health annualized premium information for the three years ended December 31, 2005 by product category.

    

(Amounts in thousands)

 

Annualized Premium in Force


     2005

   2004

   2003

     Amount

   % of
Total


   Amount

   % of
Total


   Amount

   % of
Total


Limited-benefit plans

   $ 434,742    42    $ 414,223    39    $ 376,939    65

Medicare Supplement

     591,668    58      642,228    61      687,489    35
    

  
  

  
  

  

Total Health

   $ 1,026,410    100    $ 1,056,451    100    $ 1,064,428    100
    

  
  

  
  

  

 

The number of individual health policies in force was 1.70 million, 1.64 million, and 1.62 million at December 31, 2005, 2004, and 2003, respectively.

 

The following table presents supplemental health annualized premium in force for the three years ended December 31, 2005 by marketing (distribution) method.

 

    

(Amounts in thousands)

     Annualized Premium in Force

     2005

   2004

   2003

Direct response

   $ 39,446    $ 36,550    $ 33,256

Exclusive agents:

                    

Liberty National

     145,341      165,445      172,106

American Income

     60,747      58,550      55,421

United American

     337,175      324,467      322,428

Independent agents:

                    

United American

     443,701      471,439      481,217
    

  

  

     $ 1,026,410    $ 1,056,451    $ 1,064,428
    

  

  

 

Annuities

 

Annuity products offered include single-premium deferred annuities, flexible-premium deferred annuities, and variable annuities. In recent years Torchmark has deemphasized the marketing of annuity products, and annuities in 2005 comprise less than 1% of premium income and less than 3% of insurance underwriting margin.

 

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

 

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and on projected investment earnings. Revenues for individual life and health insurance products are primarily derived from premium income, and, to a lesser extent, through policy charges to the policyholder account values on certain individual life products. Profitability is affected to the extent actual experience deviates from the assumptions made in pricing and to the extent investment income varies from that which is required for policy reserves.

 

Collections for annuity products and certain life products are not recognized as revenues but are added to policyholder account values. Revenues from these products are derived from charges to the account balances for insurance risk and administrative costs. Profits are earned to the extent these revenues exceed actual costs. Profits are also earned from investment income on the deposits invested in excess of the amounts credited to policyholder accounts.

 

Underwriting

 

The underwriting standards of each Torchmark insurance subsidiary are established by management. Each company uses information from the application and, in some cases, telephone interviews with applicants, inspection reports, doctors’ statements and/or medical examinations to determine whether a policy should be issued in accordance with the application, with a different rating, with a rider, with reduced coverage or rejected.

 

Reserves

 

The life insurance policy reserves reflected in Torchmark’s financial statements as future policy benefits are calculated based on generally accepted accounting principles (GAAP). These reserves, with premiums to be received in the future and the interest thereon compounded annually at assumed rates, must be sufficient to cover policy and contract obligations as they mature. Generally, the mortality and persistency assumptions used in the calculations of reserves are based on company experience. Similar reserves are held on most of the health policies written by Torchmark’s insurance subsidiaries, since these policies generally are issued on a guaranteed-renewable basis. A list of the assumptions used in the calculation of Torchmark’s reserves are reported in the financial statements (See Note 5Future Policy Benefit Reserves in the Notes to the Consolidated Financial Statements). Reserves for annuity products and certain life products consist of the policyholders’ account values and are increased by policyholder deposits and interest credited and are decreased by policy charges and benefit payments.

 

Investments

 

The nature, quality, and percentage mix of insurance company investments are regulated by state laws that generally permit investments in qualified municipal, state, and federal government obligations, corporate bonds, preferred and common stock, real estate, and mortgages where the value of the underlying real estate exceeds the amount of the loan. The investments of Torchmark insurance subsidiaries consist predominantly of high-quality, investment-grade securities. Fixed maturities represented 94% of total investments at December 31, 2005. (See Note 3Investments in the Notes to the Consolidated Financial Statements and Management’s Discussion and Analysis.)

 

Competition

 

Torchmark competes with other insurance carriers through policyholder service, price, product design, and sales efforts. While there are insurance companies competing with Torchmark, no individual company dominates any of Torchmark’s life or health markets.

 

Torchmark’s health insurance products compete with, in addition to the products of other health insurance carriers, health maintenance organizations, preferred provider organizations, and other health care-related institutions which provide medical benefits based on contractual agreements.

 

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.

 

 

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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 subject to examination at any time. Under the rules of the National Association of Insurance Commissioners (NAIC), insurance companies are examined periodically by one or more of the supervisory agencies.

 

Risk Based Capital. The NAIC requires a risk based capital formula be applied to all life and health insurers. The risk based capital formula is a threshold formula rather than a target capital formula. It is designed only to identify companies that require regulatory attention and is not to be used to rate or rank companies that are adequately capitalized. All Torchmark insurance subsidiaries are adequately capitalized under the risk based capital formula.

 

Guaranty Assessments. State guaranty laws provide for assessments from insurance companies into a fund which is used, 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 Alabama, Delaware, Indiana, Missouri, New York, and Texas.

 

Insurance holding company system statutes and regulations impose various limitations on investments in subsidiaries, and may require prior regulatory approval for the payment of certain dividends and other distributions.

 

Personnel

 

At the end of 2005, Torchmark had 2,169 employees and 2,361 licensed employees under sales contracts.

 

Item 1A. Risk Factors

 

Product marketplace and operational risks:

 

The insurance industry is a mature, regulated industry, populated by many firms. Torchmark operates in the life and health insurance sections of the insurance industry, each with its own set of risks.

 

Life Insurance marketplace risk:

 

The life insurance industry is highly competitive and could limit Torchmark’s ability to gain or maintain market share.    Competition by product price and for market share is generally strong in the life insurance industry, but is less so in Torchmark’s life insurance niche markets. In recent years, most life insurers have targeted the smaller, highly competitive, higher-income market by offering asset accumulation products. Torchmark’s market has remained the middle income market, offering individually-sold protection life insurance, which is less competitive because the market is larger with fewer competing insurers and with less price sensitivity than the higher income, asset accumulation marketplace.

 

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Torchmark’s life insurance markets are subject to risks of general economic conditions.     Because Torchmark serves the middle income market for individual protection life insurance, competition is primarily from alternative uses of the customer’s disposable income. In times of economic downturns that affect employment levels, potential customers may be less likely to buy policies and policyholders may fail to pay premiums.

 

Torchmark’s life products are sold in selected niche markets. The Company is at risk should any of these markets diminish.    Torchmark has two life distribution channels that focus on distinct market niches; labor union members and military officers. While both of these markets are known to have strong sales affinity, the contraction of the size of either market could adversely affect sales. In addition, because the military-focused agency is independent and uses other life insurance underwriters in addition to Torchmark, Torchmark has little control over marketing strategies of that agency, which could result in less-than favorable sales results for Torchmark.

 

The development and maintenance of Torchmark’s various distribution systems are critical to growth in product sales.    Because the Company’s life insurance sales are primarily made to individuals, rather than groups, and the face amounts sold are lower than that of policies sold in the higher income market, the development, maintenance and retention of adequate numbers of producing agents and direct response systems to support growth of sales in this market is critical. For agents, adequate compensation that is competitive with other employment opportunities, and that also motivates them to increase sales is very important. In direct response, continuous development of new offerings and cost efficiency are key. Less than optimum execution of these strategies will in time lead to less than optimum growth in sales and ultimately in profits.

 

Health Insurance marketplace risk:

 

Congress could make changes to the Medicare program which could impact Torchmark’s Medicare Supplement business.    Medicare Supplement insurance constitutes a significant portion of Torchmark’s in force health insurance business. Because of increasing medical cost inflation and concerns about the solvency of the Medicare program, it is likely that changes will be made to the Medicare program by Congress from time to time. These changes could have either a positive or negative effect on that business.

 

Torchmark’s Medicare Supplement business could be negatively affected by alternative healthcare providers.    The Medicare Supplement business is impacted by market trends in the senior-aged health care industry that provide alternative traditional Medicare, such as health maintenance organizations (HMOs) and other managed care or private plans. The success of these alternative businesses could negatively affect the sales and premium growth of traditional Medicare supplement insurance.

 

Torchmark’s Medicare Supplement business is subject to intense competition primarily on the basis of price which could restrict future sales.    In recent years, price competition in the traditional Medicare supplement market has been significant, characterized by some insurers who have been willing to earn very small profit margins or to under price new sales in order to gain market share in the short term. Torchmark believes these practices are not in the best interest of the Company or consumers and has elected not to compete on those terms, which has negatively affected sales. Should these industry practices continue, it is likely that Torchmark’s sales of this health product will remain depressed.

 

Torchmark’s health business is at risk in the event of government-sponsored under-age-65 health insurance.    Currently, Torchmark’s leading health sales are from limited benefit products sold to people under age 65. These products are in demand when buyers are either self employed or their employers offer limited or no health insurance to employees. If in the future the government offers comprehensive health care to people under age 65, demand for this product would likely decline. Given the high cost and political challenges of such a program, Torchmark believes this is a low-level risk in the foreseeable future.

 

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Changes in mortality, economic conditions, or other market conditions could significantly affect our operation and profitability.    The Company’s insurance contracts are affected by the levels of mortality, morbidity, persistency, and healthcare utilization that we experience. The resulting levels that occur may be significantly different from the levels assumed when premium rates were first set. Significant variations in these levels could negatively affect profit margins and income. However, the Company’s actuaries continually test expected to actual results.

 

Torchmark’s ability to pay dividends or service any of its debt or preferred securities is limited by the amounts its subsidiaries are able to pay to the holding company.    Torchmark’s insurance company subsidiaries, its principal sources of cash flow, periodically declare and distribute dividends on their common stock and preferred stock held by Torchmark, the holding company. Torchmark’s ability to pay dividends on its common stock, principal and interest on any debt security, or dividends on any preferred stock security is affected by the ability of its subsidiaries to pay the holding company these dividends. The insurance company subsidiaries are subject to various state statutory and regulatory restrictions, applicable to insurance companies, that limit the amount of cash dividends, loans, and advances that those subsidiaries may pay to the holding company. For example, under certain state insurance laws, an insurance company generally may pay dividends only out of its unassigned surplus as reflected in its statutory financial statements filed in that state. Additionally, dividends paid by insurance subsidiaries are generally limited to the greater of statutory net gain from operations, excluding capital gains and losses, or 10% of statutory surplus without regulatory approval.

 

Torchmark can give no assurance that more stringent restrictions will not be adopted from time to time by states in which its insurance subsidiaries are domiciled, which could have the effect, under certain circumstances, of significantly reducing dividends or other amounts payable to Torchmark by its subsidiaries. Additionally, the inability to obtain approval of the previously mentioned premium rate increases in a timely manner from state insurance regulatory authorities could adversely impact the profitability, and thus the ability of Torchmark’s insurance subsidiaries to declare and distribute dividends.

 

A ratings downgrade could negatively affect Torchmark’s ability to compete.    Ratings are an important factor in Torchmark’s competitive position. Rating organizations periodically review the financial performance and condition of insurers, including the Company’s insurance subsidiaries. While ratings are less important in the middle-income market than in markets focused on higher incomes or the group market, a downgrade in the ratings of Torchmark’s insurance subsidiaries could negatively affect the ability of the subsidiaries to market their products.

 

Rating organizations assign ratings based upon several factors. While most of the considered factors relate to the rated company, some of the factors relate to general economic conditions and circumstances outside of the Company’s control.

 

Investment Risk:

 

The Company’s investments are subject to market risks.    Torchmark’s invested assets are subject to the customary risks of defaults and changes in market values. Factors that may affect the default rates and market values of invested assets include interest rate levels, financial market performance, and general economic conditions, as well as particular circumstances affecting the businesses of individual issuers. Significant increases in interest rates could cause a material temporary decline in the fair value of the fixed investment portfolio, reflecting unrealized fair value losses. This risk is mitigated by Torchmark’s operating strategy to generally hold investments to maturity recognizing the long-term nature of its offsetting life policy reserve liabilities and by Torchmark’s strong operating cash flow that greatly diminishes the need to liquidate investments prior to maturity. Individual investments are also subject to impairment and write-down, due to adverse factors affecting that investment’s particular issuer, business, or industry.

 

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 crediting rates paid on outstanding policies. While Torchmark attempts to manage its investments to preserve the excess investment income spread, the Company can give no assurance that a significant and persistent decline in interest rates will not materially affect such spreads.

 

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Significant decreases in interest rates could result in calls by issuers of investments, where such features are available to issuers. These calls could result in a decline in the Company’s investment income as reinvestment of these proceeds would be at the prevailing lower rates.

 

Regulatory risk:

 

Regulatory changes could adversely affect our business.    Insurance companies are subject to government regulation in each of the states in which they conduct business. State agencies have broad administrative power over many aspects of the insurance business, which may include premium rates, marketing practices, advertising, licensing agents, policy forms, capital adequacy, and permitted investments. Government regulators are concerned primarily with the protection of policyholders rather than our shareholders. Insurance laws, regulations, and policies currently affecting Torchmark and its subsidiaries may change at any time, possibly having an adverse effect on its business. Furthermore, The Company cannot predict the timing or form of any future regulatory initiatives.

 

Changes in taxation could negatively affect our income.    Changes in the way the insurance industry is taxed or increases in tax rates could increase the Company’s tax burden and negatively affect its income.

 

Litigation risk:

 

Litigation could result in substantial judgments against the Company or its subsidiaries.    A number of civil jury verdicts have been returned against insurers in the jurisdictions in which Torchmark does business involving the insurers’ sales practices, alleged agent misconduct, failure to properly supervise agents, and other matters. These lawsuits have resulted in the award of substantial judgments against insurers that are disproportionate to the actual damages, including material amounts of punitive damages. In some states, including Alabama, juries have substantial discretion in awarding punitive damages. This discretion creates the potential for unpredictable material adverse judgments in any given punitive damages suit. Torchmark, like other insurers, is involved in this type of litigation from time to time in the ordinary course of business. The outcome of any such litigation cannot be predicted with certainty.

 

Natural disaster risk:

 

Torchmark’s business is subject to risk of a catastrophic event.    The marketplaces of Torchmark’s major subsidiaries are national in scope for all but one, which is multi-state. Because the Company’s insurance policies in force are relatively low-face amounts issued to large numbers of policyholders, the likelihood that a large portion of the Company’s policyholder base would be affected by a natural disaster is further diluted. As a result, it is unlikely that even a major natural disaster covering hundreds of miles would disrupt the marketing and premium collection in more than a small portion of Torchmark’s markets. In addition, the administration of the four leading subsidiaries is conducted in three distant locations that allow the company to take advantage of those distances to plan back-up administrative support for any one of the subsidiaries in the event of disaster. The Company also has outside contracts for off-site backup information systems and record keeping in the event of a disaster.

 

Item 1B. Disclosure of Unresolved Staff Comments

 

As of December 31, 2005, Torchmark had no unresolved staff comments.

 

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Item 2.    Real Estate

 

Torchmark, through its subsidiaries, owns or leases buildings that are used in the normal course of business. Liberty owns a 487,000 square foot building in Birmingham, Alabama which currently serves as Liberty’s, United Investors’, and Torchmark’s home office. Approximately 160,000 square feet of this building is leased or available for lease to unrelated tenants by Liberty. Liberty also operates from 48 company-owned district offices used for agency sales personnel.

 

United American owns and is the sole occupant of a 140,000 square foot facility, located in McKinney, Texas (a north Dallas suburb).

 

Globe owns a 300,000 square foot office building in Oklahoma City, Oklahoma of which Globe occupies 56,000 square feet as its home office and the remaining space is either leased or available for lease. Globe also owns an 80,000 square foot office building in Oklahoma City. Further, Globe owns a 112,000 square foot facility located in Oklahoma City which houses the Globe direct response operation.

 

American Income owns and is the sole occupant of an office building located in Waco, Texas. The building is a two-story structure containing approximately 72,000 square feet of usable floor space. American Income also owns a 43,000 square foot facility located in Waco which houses the American Income direct response operation.

 

Liberty and Globe also lease district office space for their agency sales personnel.

 

Torchmark believes that its owned and leased properties are suitable and adequate for its current business operations.

 

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. A number of such actions involving Torchmark’s subsidiary Liberty also names Torchmark as a defendant. Based upon information presently available, and in light of legal and other factual defenses available to Torchmark and its subsidiaries, management does not believe that such litigation will have a material adverse effect on Torchmark’s financial condition, future operating results or liquidity; however, assessing the eventual outcome of litigation necessarily involves forward-looking speculation as to judgments to be made by judges, juries and appellate courts in the future. This bespeaks caution, particularly in states with reputations for high punitive damage verdicts such as Alabama and Mississippi.

 

Many of these lawsuits involve claims for punitive damages in state courts of Alabama and Mississippi. Torchmark’s management recognizes that large punitive damage awards continue to occur bearing little or no relation to actual damages awarded by juries in jurisdictions in which Torchmark has substantial business, particularly Alabama and Mississippi, creating the potential for unpredictable material adverse judgments in any given punitive damage suit. As of December 31, 2005, Liberty was a party to approximately 76 active lawsuits (which included no employment-related cases and excluded interpleaders), 61 of which were Alabama proceedings and 4 of which were Mississippi proceedings in which punitive damages were sought.

 

As previously reported in Forms 10-K and Forms 10-Q, Liberty National Life Insurance Company is a party to a number of lawsuits (both a large number of lawsuits brought by individual plaintiffs and class action litigation with extremely broad class periods and relief sought) involving allegations of racially discriminatory pricing in the sale of insurance to African Americans prior to 1966. The litigation began with the December 8, 1999 filing of Moore v. Liberty National Life Insurance Company, Case No. CV-99-BU-3262-S in the U.S. District Court for the Northern District of Alabama. Over 29 race-distinct mortality cases with approximately 2,000 named plaintiffs have been consolidated with the Moore case

 

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(Master Case No. 2:02-CV-02741-UWC) and are pending in the U.S. District Court for the Northern District of Alabama, with one pending Alabama Circuit Court case (Baldwin v. Liberty National Life Insurance Company, Case No. CV-00-684) stayed pending a disposition of the Moore case.

 

The previously-reported December 5, 2005 trial date fixed by the U.S. District Court for Moore was reset by that Court to January 18, 2006. On January 18, 2006, all parties to Moore submitted a Joint Motion for Preliminary Approval of Settlement and a Stipulation and Agreement of Compromise and Settlement in that case to the District Court. After a hearing, the District Court entered an Order Preliminarily Approving Proposed Settlement on January 25, 2006. In the Order, the District Court preliminarily approved the Proposed Settlement Agreement; conditionally certified a settlement class defined as “All black Americans who have (or had at the time of the policy’s termination) an ownership or other legal interest in an industrial life insurance policy or burial policy issued by Liberty National Life Insurance Company, or one of its former subsidiaries, Service Insurance Company of Alabama, or Burial Service Insurance Company of Alabama on or before January 10, 1966, at a higher rate than similar plans offered to similarly situated white Americans”; certified the class representatives and class counsel; found that the claims in the case were primarily equitable and that the primary relief under the proposed Settlement was injunctive and equitable, with incidental monetary relief in the form of restitution not to exceed $6 million in the aggregate; approved and directed the giving of notice to class members in the manner and form set out in the Proposed Settlement Agreement beginning February 3, 2006; and fixed March 31, 2006 as the date for the fairness hearing. Pursuant to the Order, Liberty commenced dissemination of notice to class members on February 3, 2006. If approved, the Settlement will substantially resolve all class action issues in race-distinct pricing litigation at Liberty, except for certain consolidated individual claims for mental anguish and punitive damages previously asserted by approximately 2,000 individual plaintiffs, which claims are expressly excluded from the proposed Settlement. The Company intends to vigorously defend those claims. Additional information regarding the race-distinct mortality/dual pricing litigation can be found in the Company’s prior Forms 10-K and Forms 10-Q.

 

As previously reported in Form 10-Q, United American Insurance Company has been named as a defendant in purported class action litigation filed on September 16, 2004, in the Circuit Court of Saline County, Arkansas on behalf of the Arkansas purchasers of association group health insurance policies or certificates issued by United American through Heartland Alliance of America Association and Farm & Ranch Healthcare, Inc. (Smith and Ivie v. Collingsworth, et al., CV2004-742-2). The plaintiffs assert claims for fraudulent concealment, breach of contract, common law liability for non-disclosure, breach of fiduciary duties, civil conspiracy, unjust enrichment, violation of the Arkansas Deceptive Trade Practices Act, and violation of Arkansas law and the rules and regulations of the Arkansas Insurance Department. Declaratory, injunctive and equitable relief, as well as actual and punitive damages are sought by the plaintiffs. United American removed the case from the Saline County Circuit Court to the U.S. District Court for the Eastern District of Arkansas, but the District Court ordered the case back to the Circuit Court on December 21, 2005. The U.S. Circuit Court of Appeals for the Eighth Circuit denied United American’s petition for permission to appeal the District Court’s decision on January 25, 2006.

 

Liberty National Life Insurance Company and an unrelated Glendale, California mortuary were named as defendants in a purported class action litigation filed December 8, 2005 in the Superior Court for Los Angeles County, California (Gibson v. Liberty National Life Insurance Company, Case No. BC344178) on behalf of California holders of certain funeral services insurance policies. The plaintiff in Gibson asserts claims for breach of contractual duty to pay a covered claim under a funeral services insurance policy, breach of the implied obligation of good faith and fair dealing by unreasonably failing to pay and/or delaying payments of insurance benefits, fraud, negligent misrepresentation, and unfair business practices in violation of California Business and Professions Code Section 17000 et seq. The plaintiff is seeking unspecified compensatory and general damages, exemplary damages, injunctive and declaratory relief and attorneys’ fees and costs.

 

Item 4.    Submission of Matters to a Vote of Security Holders

 

No matter was submitted to a vote of shareholders, through the solicitation of proxies or otherwise, during the fourth quarter of 2005.

 

 

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PART II

 

Item 5.    Market for Registrant’s Common Equity,

Related Stockholder Matters and Issuer Purchases of Equity Securities

 

(a)   Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters

 

The principal market in which Torchmark’s common stock is traded is the New York Stock Exchange. There were 5,012 shareholders of record on December 31, 2005, excluding shareholder accounts held in nominee form. Information concerning restrictions on the ability of Torchmark’s subsidiaries to transfer funds to Torchmark in the form of cash dividends is set forth in Note 11Shareholders’ Equity in the Notes to the Consolidated Financial Statements. The market prices and cash dividends paid by calendar quarter for the past two years are as follows:

 

        

2005

Market Price


   Dividends
Per Share


Quarter


       High

   Low

  

1                

         $ 56.78    $ 50.82    $ .11

2                

           54.77      50.42      .11

3                

           53.18      50.90      .11

4                

           55.88      51.80      .11

Year-end closing price

  $ 55.60                     
         2004
Market Price


   Dividends
Per Share


Quarter


       High

   Low

  

1                

         $ 53.79    $ 45.11    $ .11

2                

           54.95      49.55      .11

3                

           53.87      50.36      .11

4                

           57.51      49.69      .11

Year-end closing price

  $ 57.14                     

 

(c)   Purchases of Certain Equity Securities by the Issuer and Others

 

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, 2005

   990    $ 52.179    0     

November 1-30, 2005

   125,421      53.019    119,195     

December 1-31, 2005

   108,280      55.327    92,835     

 

On July 28, 2005, Torchmark’s Board reaffirmed its continued authorization of the Company’s stock repurchase program in amounts and with timing that management, in consultation with the Board, determined to be in the best interest of the Company. The program has no defined expiration date or maximum shares to be purchased.

 

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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,    2005

   2004

   2003

    2002

    2001

 

Premium revenue:

                                      

Life

   $ 1,468,288    $ 1,395,490    $ 1,310,373     $ 1,220,688     $ 1,144,499  

Health

     1,014,857      1,048,666      1,034,031       1,019,120       1,010,753  

Other

     24,929      27,744      31,379       39,225       59,917  

Total

     2,508,074      2,471,900      2,375,783       2,279,033       2,215,169  

Net investment income

     603,068      577,035      557,670       518,978       491,880  

Realized investment gains (losses)

     280      22,216      (3,274 )     (38,722 )     (1,255 )

Total revenue

     3,125,910      3,071,542      2,930,998       2,761,409       2,708,269  

Net income from continuing operations

     495,390      475,718      430,141       383,433       386,377  

Net income

     495,390      468,555      430,141       383,433       356,513  

Per common share:

                                      

Basic earnings:

                                      

Net income from continuing operations

     4.73      4.32      3.75       3.19       3.09  

Net income

     4.73      4.26      3.75       3.19       2.85  

Diluted earnings:

                                      

Net income from continuing operations

     4.68      4.25      3.73       3.18       3.07  

Net income

     4.68      4.19      3.73       3.18       2.83  

Cash dividends paid

     0.44      0.44      0.38       0.36       0.36  

Basic average shares outstanding

     104,735      110,106      114,837       120,259       125,135  

Diluted average shares outstanding

     105,751      111,908      115,377       120,669       125,861  

As of December 31,    2005

   2004

   2003

    2002

    2001

 

Cash and invested assets

   $ 9,410,695    $ 9,243,090    $ 8,702,398     $ 7,790,930     $ 7,108,086  

Total assets

     14,768,903      14,252,184      13,465,525       12,365,361       12,432,792  

Short-term debt

     381,505      170,354      182,448       201,479       204,037  

Long-term debt(1)

     507,902      694,685      698,042       700,630       685,348  

Shareholders’ equity

     3,432,768      3,419,844      3,240,099       2,851,453       2,497,127  

Per diluted share

     32.91      31.07      28.45       24.04       20.24  

Effect of SFAS 115 on diluted equity per share(2)

     2.50      3.62      3.39       1.58       (0.01 )

Annualized premium in force:

                                      

Life

     1,577,635      1,523,335      1,449,290       1,343,156       1,257,413  

Health

     1,026,410      1,056,451      1,064,428       1,030,482       1,042,643  

Total

     2,604,045      2,579,786      2,513,718       2,373,638       2,300,056  

Basic shares outstanding

     103,569      107,944      112,715       118,267       122,888  

Diluted shares outstanding

     104,303      110,075      113,887       118,598       123,354  

(1) Includes 7 3/4% Junior Subordinated Debentures reported as “Due to affiliates” on the Consolidated Balance Sheets at each year end in the amount of $154.6 million.
(2) SFAS 115 is an accounting rule requiring fixed maturities to be revalued at fair value each period. The effect of SFAS 115 on diluted equity per share reflects the amount added or (deducted) under SFAS 115 to produce GAAP Shareholders’ equity per share. Please see the explanation and discussion under the caption Capital Resources in Management’s Discussion and Analysis in this report concerning the effect this rule has on Torchmark’s equity.

 

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with the Selected Financial Data and Torchmark’s Consolidated Financial Statements and Notes thereto appearing elsewhere in this report.

 

RESULTS OF OPERATIONS

 

How Torchmark Views Its Operations:    Torchmark is the holding company for a group of insurance companies which market primarily individual life and supplemental health insurance, and to a limited extent annuities, to middle income households throughout the United States. Torchmark views its 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.

 

Insurance Product Line Segments.    As fully described in Note 13Business Segments in the Notes to the Consolidated Financial Statements, the product line segments involve the marketing, underwriting, and benefit administration of policies. Each product line is further segmented by the various distribution units that market the insurance policies. Each distribution unit operates in a niche market offering insurance products designed for that particular market. Whether analyzing profitability of a segment as a whole, or the individual distribution units within the segment, the measure of profitability used by management is the underwriting margin, which is:

 

Premium revenue

Less:

    Policy obligations

    Policy acquisition costs

 

Investment Segment.    The investment segment involves the management of Torchmark’s capital resources, including investments and the management of corporate debt and liquidity. Torchmark’s 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 13Business Segments reconcile Torchmark’s revenues and expenses by segment to its major income statement line items for each of the years in the three-year period ending December 31, 2005. Additionally, this Note provides a summary of the profitability measures that demonstrates year-to-year comparability and which reconciles to Torchmark’s net income. That summary is reproduced below from the Consolidated Financial Statements to present Torchmark’s overall operations in the manner that management uses to manage the business.

 

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Analysis of Profitability by Segment

(Dollar amounts in thousands)

 

     For the Year

    2005
Change


    2004
Change


 
     2005

    2004

    2003

    Amount

    %

    Amount

    %

 

Life insurance

   $ 381,648     $ 352,177     $ 324,334     $ 29,471     8     $ 27,843     9  

Health insurance

     177,179       174,582       164,364       2,597     1       10,218     6  

Annuity

     12,580       13,964       11,824       (1,384 )   (10 )     2,140     18  

Other insurance:

                                                    

Other income

     2,366       1,833       2,582       533     29       (749 )   (29 )

Administrative expense

     (147,681 )     (141,620 )     (131,314 )     (6,061 )   4       (10,306 )   8  

Investment

     324,238       330,543       317,606       (6,305 )   (2 )     12,937     4  

Corporate and adjustments

     (9,660 )     (9,575 )     (10,234 )     (85 )   1       659     (6 )
    


 


 


 


 

 


     

Pretax total

     740,670       721,904       679,162       18,766     3       42,742     6  

Applicable taxes

     (255,165 )     (248,472 )     (232,779 )     (6,693 )   3       (15,693 )   7  
    


 


 


 


 

 


     

After-tax total

     485,505       473,432       446,383       12,073     3       27,049     6  

Remove interest-rate swap benefit (after tax) from Investment Segment

     (4,805 )     (15,157 )     (17,099 )     10,352             1,942        

Realized gains (losses) (after tax)*

     25       14,440       (2,129 )     (14,415 )           16,569        

Tax settlements

     15,989       -0-       -0-       15,989             -0-        

Net litigation settlements (after tax)

     (955 )     -0-       -0-       (955 )           -0-        

Retiring executive option term extension (after tax)

     (369 )     -0-       -0-       (369 )           -0-        

Interest on tax settlements (after tax)

     -0-       -0-       3,511       -0-             (3,511 )      

Loss on sale of airplane (after tax)

     -0-       -0-       (525 )     -0-             525        

Tax refund (after tax)

     -0-       3,003       -0-       (3,003 )           3,003        

Change in accounting principle (after tax)

     -0-       (7,163 )     -0-       7,163             (7,163 )      
    


 


 


 


 

 


     

Net income

   $ 495,390     $ 468,555     $ 430,141     $ 26,835     6     $ 38,414     9  
    


 


 


 


 

 


 


* 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:    Torchmark’s net income increased 6% or $27 million to $495 million in 2005, and 9% or $38 million to $469 million in 2004. The growth in earnings in both periods came primarily from the life insurance segment, although the investment and health segments contributed significantly in 2004. Health margins improved in 2004, but were relatively flat in 2005. Excess investment income declined for the first time in ten years in 2005, compressed by a flattening yield curve in that year.

 

The life insurance segment added $29 million to the 2005 increase in pretax earnings, and $28 million to the 2004 increase. The 2005 growth in life insurance resulted from margin improvements and 5% premium growth, although there was a decline in sales volume. Growth in 2004 was also a result of increases in premium income and margins. Life insurance segment results are discussed further under the caption Life Insurance.

 

Pretax health profits rose 6% in 2004 to $175 million but rose 1% in 2005 to $177 million. Health premium declined 3% in 2005, as competition in Torchmark’s Medicare Supplement business has continued to dampen health sales. Health premium income rose 1% in 2004. Premium collected in the first policy year rose 13% in 2004, but declined 11% in 2005. Health underwriting margin was flat in 2005 after having improved in 2004. The 2004 improvements were largely a result of reductions in loss ratios on a closed block of cancer business. This block had contributed to declines in margins in recent years prior to 2004. See the discussion under Health Insurance for a more detailed discussion of health insurance results.

 

Torchmark has previously stated that it offers annuities, but does not plan to emphasize annuity products, favoring life insurance instead. See the caption Annuities for further discussion.

 

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The investment segment’s pretax profitability declined $6 million in 2005 after increasing $13 million in 2004 and $26 million in 2003. The low long-term interest rates available for new investments since 2002 have caused Torchmark’s average portfolio yield to decline in each successive year, restricting growth in net investment income and excess investment income. Yields on new fixed-maturity investments have been lower than the average portfolio yield since January 1, 2003. In 2005 and late 2004, excess investment income was further compressed as short-term rates rose with no meaningful change in long-term rates. The increase in short-term rates caused short-term financing costs to increase and the income spread on Torchmark’s fixed-to-variable interest-rate swaps to narrow. See the analysis of excess investment income and investment activities under the caption Investments for a more detailed discussion.

 

Total revenues rose 2% in 2005 to $3.1 billion. In 2004, total revenues increased 5% to $3.07 billion from $2.93 billion in 2003. The life premium increase was the primary contributor to revenue growth in both periods, although net investment income also contributed to the revenue growth in both periods.

 

In 2005, Torchmark had immaterial after-tax realized investment gains compared with gains of $14 million in 2004 and losses of $2 million in 2003. Under the caption Realized Gains and Losses in this report, Torchmark presents a complete analysis and discussion of its realized gains and losses. Also, as explained in Note 13—Business Segments in the Notes to the Consolidated Financial Statements, Torchmark management does not consider realized gains and losses to be a component of its core insurance operations or its operating segments. However, they can have a material positive or negative impact on net income.

 

In each of the years 2003 through 2005, Torchmark’s net income was affected by certain significant, unusual, and nonrecurring nonoperating items. Torchmark management does not view these items as components of its core operating results because they are not indicative of past performance or future prospects of the insurance operations. A discussion of these items follows.

 

In 2005, Torchmark recorded an after-tax charge of $955 thousand ($1.5 million pretax) pertaining to litigation. This litigation involved net settlements after expenses primarily in three significant legal matters: Torchmark’s race-distinct mortality/dual-pricing litigation, its class-action cancer case, and the Waddell & Reed litigation. All of these cases relate to litigation arising many years ago and are not considered by management to relate to Torchmark’s current operations. Of this pre-tax amount, $13.5 million is recorded as “Other income” and $15 million is recorded as “Other operating expense” in the 2005 Consolidated Statement of Operations. For more information on these litigation items, see Note 14—Commitments and Contingencies in the Notes to Consolidated Financial Statements. Also in 2005, Torchmark recorded a $16 million settlement benefit from an Internal Revenue Service examination covering several years. More information on this tax settlement is provided in Note 8—Income Taxes in the Notes to the Consolidated Financial Statements. Additionally, a noncash after-tax charge of $369 thousand was recorded as a result of the extension in the term of a previously granted stock option for a senior officer upon retirement. The option extension expense was recorded as administrative expense in the 2005 Consolidated Statement of Operations. The tax settlement reduced tax expense.

 

As of January 1, 2004, Torchmark adopted Statement of Position 03-1 (SOP 03-1), an accounting rule concerning guaranteed minimum policy benefits on variable annuities. The adoption of this standard resulted in a one-time after-tax charge of $7.2 million recorded as a change in accounting principle. Also, during 2004, Torchmark received a refund of state income taxes in the amount of $3.0 million, after Federal tax. This refund resulted from the settlement of certain state tax issues concerning a discontinued operation in the mid-1990s. The refund reduced income tax expense in the 2004 Consolidated Statement of Operations.

 

In 2003, net income was impacted by two nonrecurring items. First, Torchmark sold an airplane and recognized a pretax loss of $.8 million. In the Consolidated Statements of Operations, this item was included as an administrative expense. Secondly, the settlement of a Federal tax issue resulted in interest due Torchmark in the pretax amount of $4.3 million. This item was included in investment income on the Consolidated Statements of Operations. Because the tax issue covered a period of many years, the interest income on the tax refund exceeded the refund itself. After expenses, the effect of the tax refund on earnings was immaterial. Significant gains or losses from non-investment property or significant interest income from non-investment sources are unusual for Torchmark.

 

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Table of Contents

Torchmark has in place an ongoing share repurchase program which began in 1986 and was reaffirmed at its July 28, 2005 Board of Director’s meeting. With no specified authorization amount, management determines the amount of repurchases based on the amount of the Company’s excess cash flow, general market conditions, and other alternative uses. The majority of these purchases are made from excess operating cash flow when market prices are favorable. Additionally, when stock options are exercised, proceeds from these exercises and the Company’s tax benefit are used to repurchase additional shares on the open market to minimize dilution as a result of the option exercises. The following chart summarizes share purchase activity for each of the three years ended December 31, 2005.

 

Analysis of Share Purchases

(Amounts in thousands)

 

     2005

   2004

   2003

Purchases


   Shares

   Amount

   Shares

   Amount

   Shares

   Amount

Excess cash flow

   5,647    $ 300,134    5,221    $ 268,310    5,902    $ 225,273

Option proceeds*

   4,655      254,812    314      16,916    0      0
    
  

  
  

  
  

Total

   10,302    $ 554,946    5,534    $ 285,226    5,902    $ 225,273
    
  

  
  

  
  

* In 2005, 4.5 million shares at a cost of $248 million related to the option restoration program more fully discussed under the caption Capital Resources.

 

Throughout the remainder of this discussion, share purchases refer only to those made from excess cash flow.

 

A discussion of each of Torchmark’s segments follows.

 

Life insurance.    Life insurance is Torchmark’s largest insurance segment. Its premium is also growing at a greater rate than the other insurance segments. In 2005, life premium represented 59% of total premium, compared with 56% in 2004 and 55% in 2003. Life underwriting income before other income and administrative expense represented 67% of the total in 2005, compared with 65% in both 2004 and 2003. Additionally, investments supporting the reserves for life products result in the majority of excess investment income attributable to the investment segment.

 

Life insurance premium rose 5% to $1.5 billion in 2005 and 6% in 2004 to $1.4 billion. Life insurance products are marketed through several distribution channels. Premium by channel for each of the last three years is as follows.

 

LIFE INSURANCE

Premium by Distribution Method

(Dollar amounts in thousands)

 

     2005

    2004

    2003

 
     Amount

   % of
Total


    Amount

   % of
Total


    Amount

   % of
Total


 

Direct Response

   $ 424,037    29 %   $ 387,006    28 %   $ 350,317    27 %

American Income Exclusive Agency

     380,365    26       349,686    25       314,849    24  

Liberty National Exclusive Agency

     302,747    21       303,965    22       304,319    23  

Military Agency

     199,319    13       186,555    13       166,299    13  

Other Agencies

     161,820    11       168,278    12       174,589    13  
    

  

 

  

 

  

     $ 1,468,288    100 %   $ 1,395,490    100 %   $ 1,310,373    100 %
    

  

 

  

 

  

 

Torchmark management uses four statistical measures as indicators of premium growth and sales over the near term: “annualized premium in force,” “annualized premium issued,” “net sales,” and “first-year collected premium.” Annualized premium in force is defined as the premium income that would be received over the following twelve months at any given date on all active policies if those policies remain in force throughout the twelve-month period. Annualized premium in force is an indicator of growth in

 

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premium revenue. Annualized premium issued (sold) is that amount of annualized premium in force added from new sales in a given period, and is an indicator of the acceleration of premium growth. Net sales is annualized premium issued, net of cancellations in the first thirty days after issue, except in the case of Direct Response where net sales is annualized premium issued at the time the first full premium is paid after any introductory offer period has expired. Management believes that net sales is a superior indicator of the rate of premium growth relative to gross 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 $1.6 billion at December 31, 2005, an increase of 4% over $1.5 billion a year earlier. Annualized life premium in force was $1.4 billion at December 31, 2003.

 

The following table sets forth net sales information for each of the last three years by distribution method.

 

LIFE INSURANCE

Net Sales by Distribution Method

(Dollar amounts in thousands)

 

     2005

   2004

   2003

     Amount

   % of
Total


   Amount

   % of
Total


   Amount

   % of
Total


Direct Response

   $ 112,240    41    $ 110,617    38    $ 97,271    32

American Income Exclusive Agency

     84,270    31      87,855    30      96,942    32

Liberty National Exclusive Agency

     47,088    17      49,145    17      53,525    18

Military Agency

     17,571    6      27,879    9      26,886    9

Other Agencies

     13,797    5      18,157    6      25,330    9
    

  
  

  
  

  
     $ 274,966    100    $ 293,653    100    $ 299,954    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)

 

     2005

   2004

   2003

     Amount

   % of
Total


   Amount

   % of
Total


   Amount

   % of
Total


Direct Response

   $ 76,746    35    $ 74,220    31    $ 62,580    28

American Income Exclusive Agency

     73,490    33      76,777    33      72,803    33

Liberty National Exclusive Agency

     35,993    16      39,724    17      40,459    18

Military Agency

     21,821    10      27,426    12      24,273    11

Other Agencies

     13,883    6      17,474    7      21,521    10
    

  
  

  
  

  
     $ 221,933    100    $ 235,621    100    $ 221,636    100
    

  
  

  
  

  

 

The Direct Response Group is Torchmark’s leading writer of life insurance. Marketing is conducted primarily through direct mail, but also through co-op mailings, television and consumer magazine advertising, and direct mail solicitations endorsed by groups, unions and associations. This group markets a line of life products primarily to juveniles, their parents, and other adults over age 50. The Direct Response operation accounted for almost 29% of Torchmark’s life insurance premium during 2005, the largest of any distribution group. Life premium rose 10% in 2005 and 10% in 2004.

 

This group’s focus is on its juvenile life product. Not only is the juvenile market an important source of sales, but it also is a vehicle to reach the parents and grandparents of the juvenile insureds. Parents and grandparents of juvenile policyholders are more likely to respond favorably to a solicitation by Direct Response for life coverage on themselves than is the general adult population. Also, both the juveniles and their parents are low-acquisition cost targets for sales of additional coverage over time. Torchmark

 

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expects that sales to the juvenile market and their parents will continue as one of this group’s premier markets. Management believes that the Direct Response Unit is the largest U.S. writer of juvenile direct response life insurance.

 

While the Direct Response group experienced strong growth in sales in 2003 and 2004, as evidenced by increases in both net sales and first-year collected premium, sales growth was not as strong in 2005. Net sales rose 28% in 2003 to $97 million and 14% in 2004 to $111 million, but increased 1% in 2005 to $112 million. First year collected premium grew 24% in 2003 and 19% in 2004, but rose 3% to $77 million in 2005. It should be noted that the volumes measured by both of these indicators in 2005 exceeded comparable amounts in the two strong-growth prior periods (2003 and 2004). Due to the nature of Torchmark’s Direct Response business, the rate of sales growth can vary from year to year. However, growth in Direct Response life premium has trended upward in a relatively stable manner, and the premium growth rate has averaged an increase of 11% over the past ten years.

 

The American Income Exclusive Agency focuses on members of labor unions, credit unions, and other associations for its life insurance sales. It is a high profit margin business characterized by lower policy obligation ratios. Life premium for this agency rose 9% to $380 million in 2005, after having increased 11% in 2004. Net sales declined 4% in 2005 to $84 million from $88 million in 2004. Net sales were $97 million in 2003, resulting in a decrease of 9% in 2004. First-year collected premium also declined 4% in 2005, after having increased 5% in 2004 and 19% in 2003. As in the case of all of Torchmark’s agency distribution systems, continued increases in product sales are largely dependent on increases in agent count. The American Income agent count was 2,027 at December 31, 2005 compared with 2,090 a year earlier, declining 3%. The agent count declined 9% in 2004 from 2,291 at year end 2003. In its efforts to recruit new agents, Torchmark recently implemented a new incentive program to reward growth in both the recruiting of new agents and in the production of new business. Additionally, the Company continues to utilize its systematic, centralized internet recruiting program to add new agents.

 

The Liberty National Exclusive Agency distribution system markets its life products to primarily middle-income customers in Southeastern states, but has recently expanded into several other states. Liberty’s life premium declined slightly in both 2005 and 2004 compared with the respective prior year. Annualized life premium in force was $318 million at December 31, 2005, flat with 2004 after having declined 1% in 2004 from 2003. Life premium sales for this agency, in terms of net sales, were $47 million in 2005, representing a decrease of 4% in 2005 after having decreased 8% in 2004. First-year collected premium declined 9% in 2005 to $36 million. First-year collected premium was flat in 2004 with the prior year at $40 million.

 

Growth in the Liberty Agency’s sales and premium volume are highly dependent on growth in the agency force. However, this agency has experienced volatility in its agency force in the past two years. Liberty had 1,781 producing agents at year end 2005, compared with 1,638 at year end 2004, an increase of 9%. But producing agents declined approximately 15% in 2004, the primary factor in sales declines in both 2004 and 2005. In the latter part of 2003, the agent’s compensation system was restructured to not only reward production and policy persistency, but also to encourage retention of productive agents. However, the recruiting of new agents was neglected, a primary cause in the 2004 decline in agent count. In late 2004, Liberty implemented initiatives similar to those of American Income to recruit new agents, primarily through use of the internet. The 2005 increase in producing agents is believed to have resulted from these efforts. As these agents become more seasoned, they should become more productive. Management believes that the continued recruiting of new agents and the retention of productive agents are critical to growing the sales in controlled agency distribution systems. Management also expects that the increased sales from a larger and more productive agency force will lead to an acceleration in premium growth.

 

Liberty’s life underwriting margins have improved steadily over the past three years. As a percentage of life premium, margins rose from 22% in 2003 to 24% in 2004 and then to 26% in 2005. These margin improvements resulted primarily from the reductions in acquisition costs due to the above-mentioned revisions in agents’ compensation. Improved persistency resulting from a 2003 change in collection procedure was also a factor.

 

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Torchmark’s Military Agency consists of a nationwide independent agency whose sales force is comprised of former military officers who sell primarily to commissioned and noncommissioned military officers and their families. This business consists of whole-life products with term insurance riders and is characterized by low lapse rates. In 2005, life premium was $199 million or 14% of Torchmark’s total life premium. Premium increased 7% in 2005 from $187 million. Premium also rose 12% in both 2004 and 2003. Annualized premium in force rose 3% in 2005 to $205 million after an increase of 11% in 2004 and 13% in 2003. Military net sales declined 37% in 2005 to $18 million. These sales rose 4% in 2004. First-year collected premium declined 20% in 2005 to $22 million after an increase in 2004 of 13%. This agency’s sales have been under pressure as it reorganizes its non-life (non-Torchmark) products. This reorganization included reduced commission rates on non-Torchmark investment products, and resulted in a loss of 30% of this agency’s producing agents appointed with Torchmark in 2005. Margins in the Military group were negatively affected by hostilities in the Middle East in all three periods, resulting in higher than expected benefits paid of $3.9 million in 2005, $4.0 million in 2004, and $1.1 million in 2003.

 

Torchmark’s Other Agencies consist of the United Investors Agency, the United American Independent and Branch Office Agencies, and other small miscellaneous sales agencies. The United Investors Agency is comprised of several independent agencies that concentrate on annuity business. United Investors represents approximately 5% of Torchmark’s life premium income. The loss of a significant marketing group in 2001 has had a negative impact on production in the United Investors Agency since that time. The United American Independent and Branch Office Agencies combined represented approximately 4% of Torchmark’s total life premium. Life premium income and sales for these two agencies has declined for the past three years because they focus on health insurance, with life sales being incidental.

 

LIFE INSURANCE

Summary of Results

(Dollar amounts in thousands)

 

     2005

    2004

    2003

 
     Amount

    % of
Premium


    Amount

    % of
Premium


    Amount

    % of
Premium


 

Premium and policy charges

   $ 1,468,288     100     $ 1,395,490     100     $ 1,310,373     100  

Policy obligations

     966,093     66       919,775     66       862,775     66  

Required interest on reserves

     (342,305 )   (23 )     (318,886 )   (23 )     (294,670 )   (23 )
    


 

 


 

 


 

Net policy obligations

     623,788     43       600,889     43       568,105     43  

Commissions and premium taxes

     76,278     5       73,006     5       75,308     6  

Amortization of acquisition costs

     386,574     26       369,418     27       342,626     26  
    


 

 


 

 


 

Total expense

     1,086,640     74       1,043,313     75       986,039     75  
    


 

 


 

 


 

Insurance underwriting margin before other income and administrative expenses

   $ 381,648     26     $ 352,177     25     $ 324,334     25  
    


 

 


 

 


 

 

Gross margins, as indicated by insurance underwriting margin before other income and administrative expense, rose 8% in 2005 to $382 million after rising 9% in 2004. As a percentage of life insurance premium, gross margins have increased slightly each year. Improvements in life margins have resulted from several factors. The previously-mentioned changes in Liberty’s agent compensation system and premium collection method have contributed to notable increases in Liberty’s margins. Additionally, the percentage of American Income premium to total premium continues to grow, and that has caused life margins to increase because that agency’s margins are Torchmark’s highest, exceeding 30% in 2005. Direct Response margins have grown to above 25% in 2005, as it has emphasized sales of its higher-margin juvenile policy.

 

 

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Health Insurance.    Health products sold by Torchmark insurance companies consist of supplemental plans that include limited benefit hospital/surgical plans, cancer, and accident plans sold to people under age 65, as well as Medicare Supplements sold to enrollees in the Federal Medicare program. Health premium represented 40% of Torchmark’s total premium income in 2005, compared with 42% in 2004 and 44% in 2003. Health underwriting margin accounted for 31% of the total, compared with 32% in 2004 and 33% in 2003. These declines in the health percentages indicate the growth in Torchmark’s life segment in relation to the health segment. The following table indicates health insurance premium income by distribution channel for each of the last three years.

 

HEALTH INSURANCE

Premium by Distribution Method

(Dollar amounts in thousands)

 

     2005

    2004

    2003

 
     Amount

   % of
Total


    Amount

   % of
Total


    Amount

   % of
Total


 

United American Independent Agency

                                       

Limited-benefit plans

   $ 98,023          $ 96,904          $ 76,252       

Medicare Supplement

     343,650            371,415            393,687       
    

        

        

      
       441,673    43 %     468,319    45 %     469,939    45 %

United American Branch Office Agency

                                       

Limited-benefit plans

     94,731            71,069            41,035       

Medicare Supplement

     228,036            251,210            274,982       
    

        

        

      
       322,767    32       322,279    31       316,017    31  

Liberty National Exclusive Agency

                                       

Limited-benefit plans

     148,894            163,833            163,747       

Medicare Supplement

     126            148            174       
    

        

        

      
       149,020    15       163,981    15       163,921    16  

American Income Exclusive Agency

                                       

Limited-benefit plans

     61,797            57,494            53,553       

Medicare Supplement

     1,826            2,025            2,216       
    

        

        

      
       63,623    6       59,519    6       55,769    5  

Direct Response

                                       

Limited-benefit plans

     638            691            767       

Medicare Supplement

     37,136            33,877            27,618       
    

        

        

      
       37,774    4       34,568    3       28,385    3  

Total Premium

                                       

Limited-benefit plans

     404,08340    40       389,991    37       335,354    32  

Medicare Supplement

     610,774    60       658,675    63       698,677    68  
    

  

 

  

 

  

Total Health

   $ 1,014,857    100 %   $ 1,048,666    100 %   $ 1,034,031    100 %
    

  

 

  

 

  

 

Torchmark markets its supplemental health insurance products through a number of distribution channels with the two United American agencies being the market leaders. Over the past three years, Torchmark has placed greater emphasis on the sale of limited-benefit health insurance products rather than Medicare Supplement insurance as customer demand for the limited benefit hospital/surgical plans has increased, and price competition and lesser demand for Medicare Supplements has dampened sales of that product. While Medicare Supplement still remains Torchmark’s dominant health product in terms of premium income, the other limited-benefit health products have been growing rapidly in their contribution to health premium. As shown in the chart above, Medicare Supplement premium represented 60% of total health premium in 2005, but has declined steadily as a percentage of total health premium in each successive year. Accordingly, limited-benefit health products have increased as a percentage of total health premium each year during the same period.

 

 

20


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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)

 

     2005

    2004

    2003

 
     Amount

   % of
Total


    Amount

   % of
Total


    Amount

   % of
Total


 

United American Independent Agency

                                       

Limited-benefit plans

   $ 42,753          $ 60,910          $ 58,181       

Medicare Supplement

     15,813            24,611            27,257       
    

        

        

      
       58,566    32 %     85,521    43 %     85,438    44 %

United American Branch Office Agency

                                       

Limited-benefit plans

     78,137            61,881            43,939       

Medicare Supplement

     17,953            20,836            27,268       
    

        

        

      
       96,090    52       82,717    41       71,207    37  

Liberty National Exclusive Agency

                                       

Limited-benefit plans

     13,218            12,426            10,995       

Medicare Supplement

     330            430            530       
    

        

        

      
       13,548    7       12,856    7       11,525    6  

American Income Exclusive Agency

                                       

Limited-benefit plans

     11,347            12,072            12,004       

Medicare Supplement

     0            0            0       
    

        

        

      
       11,347    6       12,072    6       12,004    6  

Direct Response

                                       

Limited-benefit plans

     738            1            2       

Medicare Supplement

     5,232            6,747            12,546       
    

        

        

      
       5,970    3       6,748    3       12,548    7  

Total Net Sales

                                       

Limited-benefit plans

     146,193    79       147,290    74       125,121    65  

Medicare Supplement

     39,328    21       52,624    26       67,601    35  
    

  

 

  

 

  

Total Health

   $ 185,521    100.0 %   $ 199,914    100 %   $ 192,722    100 %
    

  

 

  

 

  

 

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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)

 

     2005

    2004

    2003

 
     Amount

   % of
Total


    Amount

   % of
Total


    Amount

   % of
Total


 

United American Independent Agency

                                       

Limited-benefit plans

   $ 34,498          $ 44,168          $ 37,309       

Medicare Supplement

     16,834            24,748            25,187       
    

        

        

      
       51,332    35 %     68,916    42 %     62,496    43 %

United American Branch Office Agency

                                       

Limited-benefit plans

     49,887            43,330            23,382       

Medicare Supplement

     17,129            21,309            30,918       
    

        

        

      
       67,016    45       64,639    39       54,300    37  

Liberty National Exclusive Agency

                                       

Limited-benefit plans

     9,547            9,365            8,822       

Medicare Supplement

     332            419            499       
    

        

        

      
       9,879    7       9,784    6       9,321    6  

American Income Exclusive Agency

                                       

Limited-benefit plans

     12,804            12,781            12,119       

Medicare Supplement

     0            0            0       
    

        

        

      
       12,804    9       12,781    8       12,119    8  

Direct Response

                                       

Limited-benefit plans

     136            0            0       

Medicare Supplement

     5,714            8,862            8,077       
    

        

        

      
       5,850    4       8,862    5       8,077    6  

Total First-Year Collected Premium

                                       

Limited-benefit plans

     106,872    73       109,644    66       81,632    56  

Medicare Supplement

     40,009    27       55,338    34       64,681    44  
    

  

 

  

 

  

Total Health

   $ 146,881    100 %   $ 164,982    100 %   $ 146,313    100 %
    

  

 

  

 

  

 

The United American Branch Office and Independent Agencies.    As discussed above, the two United American Agencies have emphasized sales of individual supplemental limited-benefit health plans known generally as hospital/surgical plans for which demand has increased in recent years. These plans provide a per diem payment for each hospital inpatient day confined, a fixed-amount surgical schedule, some out patient coverage, and other miscellaneous hospital-related charges. They also contain caps on total per-illness benefits. Consumer interest in these products has increased as a result of growing unavailability or lack of affordability of individual major-medical plans and decreased coverage offered by employers. Minimum regulatory loss ratios on these limited-benefit plans are generally lower than those of Medicare Supplement; however, the Medicare Supplement product has higher persistency rates, resulting in both products having approximately the same underwriting margin as a percentage of premium. Both of the United American agencies offer these limited-benefit plans.

 

The United American Branch Office is an exclusive agency, meaning the agents in its 99 offices nationwide sell only for the Company. In recent years, this agency has been successful in building sales of limited-benefit plans to replace the decline in Medicare Supplement sales. Net sales of limited-benefit plans in 2005 were $78 million, a 26% increase. Net sales in 2004 were $62 million, a 41% increase over 2003. As a result, total health sales at the UA Branch Office were $96 million, a 16% increase over 2004, including the decline in Medicare Supplement sales. Premium from limited-benefit plans at the UA Branch Office increased by 33% to $95 million in 2005 compared with 2004, but total health premium remained

 

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relatively unchanged at $323 million in 2005, due to the slow decline in premium from the in force Medicare Supplement block. Health premium for 2004 increased 2% from $316 million in 2003. At year end 2005, the UA Branch office had 2,166 producing agents compared with 1,677 at year end 2004, a 29% increase. This agency had 1,510 agents at year end 2003.

 

The United American Independent Agency is composed of over 27,000 independent agencies whose size range from very large, multi-state organizations down to one-person offices, all of whom generally sell for a number of insurance companies. In the recent past, most of this agency’s health sales came from one large independent agency. However, in 2005, the UA Independent Agency’s net health sales dropped by 32% to $59 million, reflecting an earlier disruption in that leading agency’s recruiting and training program that resulted in a decline in producing agents. While 2005 limited-benefit premium of $98 million at the UA Independent Agency was up 1% compared with 2004, Medicare Supplement premium of $344 million declined 7%. The UA Independent Agency has the largest in force block of Medicare Supplement policies. Total health premium for 2005 at this agency was $442 million, declining 6% from 2004, while 2004 premium of $468 million was unchanged from 2003.

 

Liberty National Exclusive Agency, predominately a life insurance distribution channel, is the third largest writer of Torchmark health business based on premium collected. Cancer supplemental plans are the limited-benefit health products primarily produced by this agency and Liberty is the only Torchmark distribution channel for which cancer insurance is its primary health product. Approximately one half of the cancer block consists of a closed block of business which arose from a class-action settlement in the mid-1990s. Prior to 2005, significant rate increases to offset deteriorating margins on the closed block were a continuing factor causing growth in health premium, but increasing claims continued to reduce underwriting margins. Early in 2005, Liberty settled a class-action lawsuit that arose over the timing and size of the rate increases on the closed block. The settlement provides for claims incurred after the effective date of the settlement in early March 2005 to be paid on an actual incurred basis, rather than a billed basis, which management estimates will reduce benefits paid going forward. It also provides for a grandfathered period for certain claimants that will allow them to be paid at billed rates for one year. The settlement further requires Liberty to reduce premiums and to maintain an 85% claims loss ratio over the remaining life of the business. As a result, premiums are estimated to decline from about $70 million per year prior to the settlement to about $50 million in force when the settlement is fully phased in, assuming no lapsed policies. Prior to the settlement, Liberty has had a claims loss ratio above 100% on this block.

 

Health premium at Liberty declined 9% to $149 million in 2005 compared with 2004 because of the reduced premiums on the closed block of cancer business, as described above. 2004 health premium of $164 million remained unchanged from 2003. Net health sales for 2005 increased 5% to $14 million compared with 2004 net health sales of $13 million, which were up 12% compared with 2003.

 

American Income Exclusive Agency, also predominately a life insurance distribution channel, is Torchmark’s fourth largest health insurance distributor based on 2005 premium collected. Its health plans are comprised of various limited-benefit plans for which almost two thirds of the agency’s 2005 health premium was from accident policies. Sales of the health plans by this agency are generally made in conjunction with a life policy being sold to the same customer.

 

Health premium for 2005 increased 7% over 2004 to $64 million, while 2004 premium of $60 million increased 7% over 2003. Net health sales of $11 million in 2005 declined 6% compared with 2004, but net sales of $12 million increased 1% over 2003. Net health sales comprised only 12% of American Income Agency’s total net sales in 2005.

 

Direct Response, primarily a life operation, also produces health insurance, which is predominantly Medicare Supplements sold directly to employer or union sponsored groups. In 2005, net health sales of $6 million, which comprises only 5% of Direct Response’s total life and health net sales, declined 12% compared with 2004 net health sales of $7 million. The 2004 net health sales had declined 46% from 2003 net sales of $13 million. Health premium in 2005 was $38 million, a 9% increase compared with $35 million in 2004. The 2004 premium rose 22% over $28 million of premium in 2003.

 

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New health product offering—Medicare Part D.    In 2005, United American contracted with Centers for Medicare and Medicaid Services (CMS) to be an insurer under the government’s new prescription drug plan for Medicare beneficiaries. Unlike the traditional Medicare program for hospital and doctor services, where CMS is the primary insurer and private Medicare Supplement insurers like United American are secondary insurers, insurers participating in Part D are the primary insurers for plans regulated by CMS. CMS will pay approximately two thirds of the premium with the insured Medicare beneficiary paying one third of the premium. For 2006, United American will collect monthly premiums averaging $65.00 from CMS and $34.50 from each insured who joins UA’s plan. Sales solicitations were allowed to begin in October 2005 with the coverage becoming effective January 1, 2006. By January 31, 2006, United American had enrolled 121 thousand insureds into its Part D plan. Enrollment for 2006 coverage can continue until May 15, 2006. Details of the United American Part D plan can be viewed at www.unitedamericanpartd.com.

 

HEALTH INSURANCE

Summary of Results

(Dollar amounts in thousands)

 

     2005

    2004

    2003

 
     Amount

    % of
Premium


    Amount

    % of
Premium


    Amount

    % of
Premium


 

Premium

   $ 1,014,857     100     $ 1,048,666     100     $ 1,034,031     100  

Policy obligations

     668,205     66       697,645     67       689,395     67  

Required interest on reserves

     (20,879 )   (2 )     (19,502 )   (2 )     (17,397 )   (2 )
    


 

 


 

 


 

Net policy obligations

     647,326     64       678,143     65       671,998     65  

Commissions and premium taxes

     74,484     7       78,513     7       93,789     9  

Amortization of acquisition costs

     115,868     12       117,428     11       103,880     10  
    


 

 


 

 


 

Total expense

     837,678     83       874,084     83       869,667     84  
    


 

 


 

 


 

Insurance underwriting margin before other income and administrative expenses

   $ 177,179     17     $ 174,582     17     $ 164,364     16  
    


 

 


 

 


 

 

Health insurance underwriting margin before other income and administrative expense increased 1% in 2005 from $175 million to $177 million even though there was a 3% decline in premium. In 2004, health underwriting income rose 6% from $164 million in 2003. As a percentage of premium, underwriting income before other income and administrative expense rose in 2005 to 17.5% and in 2004 to 16.6% from 15.9% in 2003, largely as a result of the reduced loss ratios in the previously-mentioned closed block of cancer business at Liberty. Liberty’s health margins increased $7 million or 36% in 2005, or 17% of health premium. Liberty’s health margins were 11% of premium in 2004 and 6% in 2003.

 

 

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Annuities.    Fixed and variable annuity products are sold on a limited basis by Torchmark subsidiaries. Annuities represented 1% of Torchmark’s 2005 premium revenue and less than 3% of insurance underwriting margin. Torchmark does not emphasize this segment.

 

ANNUITIES

Summary of Results

(Dollar amounts in thousands)

 

     2005

    2004

    2003

 

Policy charges

   $ 24,929     $ 27,744     $ 31,379  

Policy obligations

     26,888       28,248       37,902  

Required interest on reserves

     (30,092 )     (31,740 )     (39,110 )
    


 


 


Net policy obligations

     (3,204 )     (3,492 )     (1,208 )

Commissions and premium taxes

     49       61       246  

Amortization of acquisition costs

     15,504       17,211       20,517  
    


 


 


Total expense

     12,349       13,780       19,555  
    


 


 


Insurance underwriting margin before other income and administrative expenses

   $ 12,580     $ 13,964     $ 11,824  
    


 


 


 

Annuities generate earnings from periodic policy fees and charges based on the average account balances, reduced by net policy obligations, less acquisition costs. For fixed annuities, net required interest on reserves is the required interest credited to the accounts and is offset by investment income.

 

For all three periods shown in the chart above, account balances declined, which resulted in reductions in policy fees and charges. Policy obligations also declined in each period. In all three periods, investment income earned exceeded required interest credited to fixed accounts resulting in negative net required interest on reserves. As a result, insurance underwriting margin for annuities (before other income and administrative expenses) increased 18% from $11.8 million in 2003 to $14.0 million in 2004, but declined 10% to $12.6 million in 2005. Margins were benefited by a decline in guaranteed minimum policy benefits in 2004 to $2.8 million from $5.0 million in 2003, as a result of an increase in equity markets. Equity markets were more stable in 2005.

 

Administrative expenses.    Torchmark’s operating expenses, as included in the Other and Corporate Segments, are classified in two categories: insurance administrative expenses and expenses of the parent company. A reconciliation of “Other operating expenses” per the Consolidated Statements of Operations to operating expenses per the segment analysis is as follows:

 

Reconciliation of Operating Expenses

(Amounts in thousands)

 

     2005

    2004

   2003

 

Other operating expenses, per Consolidated

                       

Statements of Operations

   $ 172,859     $ 151,195    $ 142,355  

Expense related to settlement of prior period litigation

     (14,950 )     -0-      -0-  

Option term extension expense for retiring executive

     (568 )     -0-      -0-  

Loss on sale of airplane

     -0-       -0-      (807 )
    


 

  


Total operating expenses, per segment analysis

   $ 157,341     $ 151,195    $ 141,548  
    


 

  


 

As noted in the Summary of Operations in this discussion, the costs of settling certain significant litigation in 2005 relate to prior periods and are not considered by management to relate to current insurance operations.

 

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Table of Contents

Consider the following information for the three years ended December 31, 2005.

 

Operating Expenses Selected Information

(Dollar amounts in thousands)

 

     2005

    2004

    2003

 

Insurance administrative expenses

   $ 147,681     $ 141,620     $ 131,314  

Parent company expense

     9,660       9,575       10,234  
    


 


 


Total operating expenses, per segment analysis

   $ 157,341     $ 151,195     $ 141,548  
    


 


 


Insurance administrative expenses:

                        

Increase over prior year

     4.3 %     7.8 %     5.4 %

Expense as percentage of premium

     5.9       5.7       5.5  

Total operating expenses:

                        

Increase over prior year

     4.1       6.8       4.8  

Expense as percentage of revenue*

     5.0       4.9       4.8  

* Revenues include realized gains of $.3 million in 2005 and $22.2 million in 2004, and losses of $3.3 million in 2003. Additionally, revenues in 2005 include a one-time litigation settlement of $13.5 million and revenues in 2003 also include a nonrecurring nonoperating interest income benefit of $4.3 million related to interest received on a tax settlement. Because realized gains and losses and nonoperating items bear no relationship to core operations in the view of management, Torchmark removes the effect of these items from revenue when evaluating expense ratios.

 

Insurance administrative expenses as a percentage of premium and total operating expenses as a percentage of total revenue rose slightly in both 2005 and 2004. The 2005 increase was primarily due to increased employee cost and a $1.3 million payroll tax charge related to the option exercise and restoration program incurred in 2005, which program is discussed under the caption Capital Resources in this report. Litigation expense in 2004 increased $3.7 million, affecting the 2004 increase.

 

Investments.    Excess Investment Income. The following table summarizes Torchmark’s investment income and excess investment income.

 

Analysis of Excess Investment Income

(Dollar amounts in thousands except for per share data)

 

     2005

    2004

    2003

 

Net investment income

   $ 603,068     $ 577,035     $ 557,670  

Reclassification of interest amount due to deconsolidation*

     (360 )     (360 )     (360 )

Interest from tax settlements

     -0-       -0-       (4,337 )
    


 


 


Adjusted investment income (per segment analysis)

     602,708       576,675       552,973  

Interest credited to net insurance policy liabilities:

                        

Interest on reserves

     (393,276 )     (370,128 )     (351,177 )

Interest on deferred acquisition costs

     167,987       156,808       145,279  
    


 


 


Net required

     (225,289 )     (213,320 )     (205,898 )

Financing costs

     (53,181 )     (32,812 )     (29,469 )
    


 


 


Excess investment income

   $ 324,238     $ 330,543     $ 317,606  
    


 


 


Excess investment income per diluted share

   $ 3.07     $ 2.95     $ 2.75  
    


 


 


Mean invested assets (at amortized cost)

   $ 8,810,584     $ 8,352,674     $ 7,848,475  

Average net insurance policy liabilities

     4,303,655       4,078,150       3,771,903  

Average debt and preferred securities (at amortized cost)

     892,971       859,032       866,317  

* Deconsolidation of trusts liable for Trust Preferred Securities required by accounting rule FIN46R. See—Note 10—Debt in the Notes to Consolidated Financial Statements.

 

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The investment segment is responsible for the management of capital resources including investments, debt and cash flow. Excess investment income represents the profit margin attributable to investment operations. It is the measure that management uses to evaluate the performance of the investment segment as described in Note 13—Business Segments in the Notes to the Consolidated Financial Statements. It is defined as net investment income less both the interest credited to net policy liabilities and the interest cost associated with capital funding or “financing costs.” Management also views excess investment income per diluted share as an important and useful measure to evaluate the performance of the investment segment. It is defined as excess investment income divided by the total diluted weighted average shares outstanding, representing the contribution by the investment segment to the consolidated earnings per share of the Company. Since implementing its share repurchase program in 1986, Torchmark has used over $2.8 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, management believes that excess investment income per diluted share is an appropriate measure of the investment segment.

 

Excess investment income declined 2% in 2005 to $324 million from $331 million in 2004. It increased 4% in 2004 and 9% in 2003. However, on a per diluted share basis, 2005 excess investment income rose 4% to $3.07. Per share excess investment income increased 7% in 2004 and 14% in 2003. Growth in excess investment income is impacted by increases in investment income due to the growth in the portfolio and changes in rates available in financial markets. It is also affected by crediting rates on policy liabilities and changes in Torchmark’s borrowing costs. Additionally, share purchases in recent periods have caused excess investment income per share to grow faster than excess investment income.

 

The largest component of excess investment income is net investment income, which rose 5% to $603 million in 2005. It rose 3% to $577 million in 2004 from $558 million in 2003. Included in 2003 investment income was a nonrecurring interest income item resulting from a tax settlement of $4.3 million pretax. Management excludes nonrecurring items when it views investment income. After excluding this item, investment income rose 4% in 2004. As presented in the following chart, the growth in net investment income in both periods was not as great as the growth in mean invested assets.

 

     2005

    2004

    2003

 

Growth in net investment income

   4.5 %   4.3 %   6.6 %

Growth in mean invested assets (at amortized cost)

   5.5     6.4     7.5  

 

The lower growth in income is reflective of new investments made each year at long-term yields lower than the portfolio’s average yield, resulting from the lower rates available in financial markets in recent years. Also contributing to the lower growth in yields in recent years were calls on fixed maturity securities in the portfolio, as the yield on the reinvestment of the proceeds was below that of the called securities. Given the sizeable annual cash flow from Torchmark’s operations, management expects mean invested assets to continue to grow, but as long as the current low-interest rate environment continues, the rate of growth of investment income will be under pressure. More detailed information about investment acquisitions follows under this caption.

 

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Table of Contents

Excess investment income is reduced by interest credited to net insurance policy liabilities and the interest paid on corporate debt. Information about interest credited to policy liabilities is shown in the following table.

 

Interest Credited to Net Insurance Policy Liabilities

(Dollar amounts in millions)

 

     Interest
Credited


   

Average Net

Insurance
Policy Liabilities


   

Average

Crediting
Rate


 

2005

                      

Life and Health

   $ 193.0     $ 3,635.4     5.31 %

Annuity

     32.3       668.3     4.84  
    


 


     

Total

     225.3       4,303.7     5.23  

Increase in 2005

     6 %     6 %      

2004

                      

Life and Health

   $ 180.3     $ 3,429.1     5.26 %

Annuity

     33.0       649.1     5.09  
    


 


     

Total

     213.3       4,078.2     5.23  

Increase in 2004

     4 %     8 %      

2003

                      

Life and Health

   $ 172.7     $ 3,201.8     5.39 %

Annuity

     33.2       570.1     5.83  
    


 


     

Total

     205.9       3,771.9     5.46  

Increase in 2003

     7 %     10 %      

 

Excess investment income was positively affected by reduced crediting rates on certain policy liabilities in 2003 and 2004. In those years, the growth in interest credited to policy liabilities was not as great as the growth in the liabilities, as the Company was able to respond to the low-interest environment with reduced crediting rates on fixed annuities and certain life products. While annuity crediting rates were reduced in 2005, the Company was not able to further reduce life and health crediting rates. For more information on life and health crediting rates, please refer to Note 5—Future Policy Benefit Reserves in the Notes to Consolidated Financial Statements.

 

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Table of Contents

Excess investment income is also impacted by financing costs. Financing costs for the investment segment primarily consist of interest on Torchmark’s various debt instruments and are deducted from excess investment income. The table below reconciles interest expense per the Consolidated Statements of Operations to financing costs.

 

Reconciliation of Interest Expense to Financing Costs

(Amounts in thousands)

 

     2005

    2004

    2003

 

Interest expense per Consolidated Statements of Operations

   $ 60,934     $ 56,491     $ 56,135  

Reclassification of interest due to deconsolidation(1)

     (360 )     (360 )     (360 )

Benefit from interest-rate swaps(2)

     (7,393 )     (23,319 )     (26,306 )
    


 


 


Financing costs

   $ 53,181     $ 32,812     $ 29,469  
    


 


 



(1) See Note 10—Debt in the Notes to Consolidated Financial Statements for explanation of deconsolidation.
(2) Included in the Consolidated Statements of Operations as a realized investment gain under the caption “Realized investment gains (losses)”. See Derivatives in Note 1Significant Accounting Policies in the Notes to Consolidated Financial Statements.

 

The table below presents the components of financing costs.

 

Analysis of Financing Costs

(Amounts in thousands)

 

     2005

    2004

    2003

 

Interest on funded debt

   $ 52,322     $ 52,287     $ 52,247  

Interest on short-term debt

     8,532       4,081       3,757  

Other

     80       123       131  

Reclassification of interest due to deconsolidation

     (360 )     (360 )     (360 )
    


 


 


Subtotal of interest expense

     60,574       56,131       55,775  

Benefit from interest-rate swaps

     (7,393 )     (23,319 )     (26,306 )
    


 


 


Financing costs

   $ 53,181     $ 32,812     $ 29,469  
    


 


 


 

Financing costs rose 62% or $20 million in 2005. They increased 11% or $3 million in 2004. Both the 2005 and 2004 increases primarily resulted from the expiration in September 2004 of a profitable interest-rate swap, on which Torchmark had earned over $3 million per quarter during the first three quarters of 2004 and the full year 2003. The interest-rate swaps are agreements between Torchmark and certain banks for which Torchmark receives from the banks fixed-rate payments that match the coupons that it pays to its debt holders, and makes floating-rate payments based on LIBOR rates to the banks. While new swaps were entered into in August of 2004, the spreads on the new swaps were not as great as the expired swap, and accounted for more than a $2 million reduction in swap benefit per quarter when compared against the expired swap. These new swaps were sold in September, 2005 because of a change in management’s outlook for short-term rates. During the thirteen-month period the swaps were held, Torchmark earned approximately $3.7 million in reduced interest cost. Also affecting financing costs in the latter part of 2004 and the full year 2005 were rising short-term rates. These rising rates reduced the positive effect of Torchmark’s other swaps and increased short-term borrowing costs. A full description of these swaps is disclosed in Note 10—Debt in the Notes to the Consolidated Financial Statements.

 

Torchmark’s investment strategy is to maintain a positive spread between the yield on investments and the yield on the interest-bearing policy liabilities and debt. It is this positive spread that results in excess investment income. At the same time, Torchmark desires to invest predominately in investment-grade corporate fixed maturities. In prolonged periods of low long-term interest rates, maintaining sufficient spread while limiting new investments to high quality securities becomes more challenging. Torchmark addressed this issue of low long-term rates prior to 2005 by lengthening the maturities of new investment purchases to maximize the yield, and by revising the crediting rates downward on various products. Even though yields on new long-term investments declined, there was still a significant spread of long-term yields over short-term yields.

 

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However, the lower long-term interest rates combined with rising short-term rates experienced in late 2004 and 2005 have restricted the growth of excess investment income. As the yield curve flattened, with rising short-term rates but with no meaningful change in long-term rates, compensation for investing long-term has been significantly diminished. Therefore, in mid-2005, Torchmark revised its investment strategy to shorten the maturity of most new investments, while maintaining its policy to acquire only investment grade securities. The Company believes that investing in shorter-term maturities is the best strategy because the reduced spreads between long and short maturities are not enough to justify investing solely in long-term bonds. The lower yields could result in reduced excess investment income spreads over the short-term.

 

In the event of an increase in long-term rates, excess investment income will benefit as new acquisitions can be made at higher yields. While higher short-term rates will increase floating-rate financing costs, higher long-term rates would be to Torchmark’s advantage because the amount of cash invested annually significantly exceeds the amount of floating rate debt, and would result in greater investment income net of financing costs under most yield curve scenarios. At any rate, excess investment income has grown significantly in each of the four years prior to 2005 and has exceeded fifty percent of net investment income in every year since 2000.

 

Acquisitions.    The chart below presents selected information about Torchmark’s fixed-maturity acquisitions in the years 2003 through 2005. Investment-grade corporate securities include both bonds and trust-preferred securities (classified as redeemable preferred stocks) with a diversity of issuers and industry sectors. Both yield and average life calculations on new purchases on noncallable bonds are based on the maturity date. In the case of callable bonds, the average life is based on the call date or maturity date, whichever produces the lowest yield (“yield to worst”).

 

Fixed Maturity Acquisitions Selected Information

(Dollar amounts in millions)

 

     For the Year

 
     2005

    2004

    2003

 

Cost of acquisitions:

                        

Investment-grade corporate securities

   $ 787.4     $ 1,202.9     $ 1,333.7  

Other investment-grade securities

     110.4       3.3       31.3  

Below investment-grade securities

                 1.8  
    


 


 


Total fixed-maturity acquisitions

   $ 897.8     $ 1,206.2     $ 1,366.8  
    


 


 


Average yield

     5.81 %     6.37 %     6.45 %

Effective annual yield

     5.90 %     6.47 %     6.55 %

Average life (in years, to worst call)

     15.3       23.4       23.1  

 

Torchmark continues to invest exclusively in investment-grade bonds. As previously discussed, Torchmark attempted to maximize yield on new investments in the low-interest environment in 2003, 2004, and early 2005 by lengthening maturities. As a result, the average life of new fixed maturity acquisitions was 23.4 years in 2004 and 23.1 years in 2003, and the effective annual yield on new investments was 6.47% in 2004 and 6.55% in 2003. In 2005, however, as Torchmark’s investment strategy changed, the effective annual yield on new investments declined to 5.90% and the average life fell to 15.3 years. Management believes that because of the long-term, fixed-rate characteristics of its policy liabilities, the Company does not have to strictly match assets and liabilities.

 

New cash flow available to Torchmark for investment has been greatly affected by issuer calls as a result of the low-interest environment experienced during the past few years. Issuers are more likely to call bonds when rates are low because they can refinance them at a lower cost. Calls increase funds available for investment, but they negatively affect portfolio yield, as they cause Torchmark to replace higher-yielding bonds with those available at lower prevailing yields. Calls increased during 2003 and 2004 but declined somewhat in 2005. Issuer calls were $226 million in 2005, $352 million in 2004, and $457 million in 2003. As long as the yields on new fixed maturity acquisitions remain below the overall portfolio yield, the portfolio yield will slowly decline as will investment income and excess investment income. As discussed above, however, because of the sizeable annual cash flow generated from operations, management believes the Company will be well positioned when investment interest rates eventually rebound.

 

 

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Table of Contents

Portfolio Analysis.    Torchmark’s emphasis has been on bond investments over alternative investments. Therefore, the relative percentage of Torchmark’s investments by type varies from industry norms. The following table presents a comparison of Torchmark’s components of invested assets at amortized cost as of December 31, 2005 with the latest industry data.

 

     Torchmark

    
     Amount
(in millions)


   %

   Industry %(1)

Bonds

   $ 8,412    94.0    77.2

Equities

     46    0.5    3.8

Mortgage loans

     31    0.3    10.0

Real estate

     12    0.1    0.7

Policy loans

     317    3.5    3.9

Other invested assets

     28    0.3    1.6

Short terms

     118    1.3    2.8
    

  
  
     $ 8,964    100.0    100.0
    

  
  

(1) Latest data available from the American Council of Life Insurance.

 

For an analysis of Torchmark’s fixed-maturity portfolio by component at December 31, 2005 and 2004, see Note 3Investments in the Notes to Consolidated Financial Statements.

 

The distribution of expected repayments for fixed maturities at December 31 of the indicated year is as follows:

 

     2005

    2004

 

Short terms and under 1 year

   8 %   5 %

1-5 years

   32     30  

6-10 years

   12     16  

11-15 years

   7     9  

16-20 years

   9     9  

Over 20 years

   32     32  
    

 

     100 %   100 %
    

 

 

Additional information concerning the fixed-maturity portfolio is as follows.

 

Fixed Maturity Portfolio Selected Information

 

    

At December 31,

2005


    At December 31,
2004


 

Average yield (book basis)

   6.97 %   7.07 %

Average life (in years, to worst call)

   12.4     12.7  

Average life (in years, to maturity)

   15.3     15.7  

Effective duration (in years, to worst call)*

   7.0     7.1  

Effective duration (in years, to maturity)*

   8.2     8.3  

*   A measure of the price sensitivity of a fixed-income security to a particular change in interest rates.

 

Torchmark calculates the average life and duration of the fixed-maturity portfolio two ways: (1) based on the same date used to calculate the yield, which is the call date producing the lowest yield (“worst call” date) for callable bonds and the maturity date for all other bonds, and (2) based on the maturity date of all bonds, whether callable or not.

 

At the end of 2005 and 2004, the fixed-maturity portfolio had a gross unrealized gain of $486 million and $670 million, respectively. Gross unrealized losses on fixed maturities were $61 million at December 31, 2005, compared with $21 million a year earlier. Please see Note 3—Investments in the Notes to Consolidated Financial Statements for an analysis of unrealized investment losses.

 

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Credit Risk Sensitivity. Credit risk is the level of certainty that a security’s issuer will maintain its ability to honor the terms of that security until maturity. In weak economic periods, the securities of industry sectors affected by the economic downturn suffer increased credit risk. As a result, securities in these weakened sectors could be downgraded by credit-rating agencies to below-investment grade status. Thus, the likelihood the issuers will honor their securities’ terms is reduced and the securities’ market values can be negatively impacted. As Torchmark continues to invest in corporate bonds with relatively long maturities, credit risk is a concern. Torchmark mitigates this ongoing risk, in part, by acquiring investment-grade bonds, and by investigating the financial fundamentals of each prospective issuer. Torchmark continues to monitor the status of issuers on an ongoing basis. At December 31, 2005, approximately 94% of invested assets at fair value were held in fixed-maturity securities. The major rating agencies considered 92% of this portfolio to be investment grade. The average quality rating of the portfolio continues to be BBB+. The table below demonstrates the credit rankings of Torchmark’s fixed-maturity portfolio at fair value as of December 31, 2005.

 

Rating


   Amounts
(in millions)


   %

AAA

   $ 458.1    5

AA

     242.4    3

A

     3,311.1    38

BBB

     4,149.3    47

BB

     529.8    6

B

     106.3    1

Less than B

     39.6    -0-

Not rated

     -0-    -0-
    

  
     $ 8,836.6    100
    

  

 

Torchmark’s 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.

 

Torchmark additionally reduces credit risk by maintaining investments in a wide range of industry sectors. The following table presents the industry sectors that exceeded 2% of the corporate fixed-maturity portfolio at fair value at December 31, 2005.

 

Industry


   %

Insurance carriers

   20

Depository institutions

   17

Electric, gas, sanitation services

   12

Nondepository credit institutions (finance)

   5

Communications

   4

Chemicals & allied products

   4

Media

   3

Transportation equipment

   3

Oil & gas extraction

   3

Food & kindred products

   3

Petroleum refining & related industries

   2

Industrial, commercial machinery, computer equipment

   2

 

Otherwise, no individual industry represented 2% or more of Torchmark’s corporate fixed maturities.

 

Market Risk Sensitivity.    The primary market risk to which Torchmark’s financial securities are exposed is interest rate risk, meaning the effect of changes in financial market interest rates on the current fair value of the company’s investment portfolio. Since Torchmark’s portfolio is comprised 94% of fixed-maturity investments, it is highly subject to market risk. Declines in market interest rates in recent years have generally resulted in the fair value of the investment portfolio exceeding the book value of the

 

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portfolio. However, Torchmark does not expect to realize these unrealized gains because it is generally the Company’s investment strategy to hold these investments to maturity. The Company’s strategy would be the same should markets reverse and market rates increase placing the fixed-income portfolio in an unrealized loss position. The long-term nature of Torchmark’s insurance policy liabilities and strong cash-flow operating position substantially mitigate any future need to liquidate portions of the portfolio. The increase in the fair value of insurance liabilities and debt due to declines in market interest rates largely offset the impact of rates on the investment portfolio. However, in accordance with GAAP, these liabilities are not marked to market.

 

The following table illustrates the market risk sensitivity of Torchmark’s interest-rate sensitive fixed-maturity portfolio at December 31, 2005 and 2004. This table measures the effect of a change in interest rates (as represented by the U.S. Treasury curve) on the fair value of Torchmark’s fixed-maturity portfolio. The data are prepared through a model which incorporates various assumptions and estimates to measure the change in fair value arising from an immediate and sustained change in interest rates in increments of 100 basis points. It takes into account the effect that special option features such as call options, put options, and unscheduled repayments could have on the portfolio, given the changes in rates. The valuation of these option features is dependent upon assumptions about future interest rate volatility that are based on past performance.

 

    

Market Value of
Fixed-Maturity Portfolio
($ millions)


Change in
Interest Rates
(in basis points)


  

At
December 31,
2005


  

At
December 31,
2004


-200

   $10,357    $10,233

-100

       9,568        9,445

      0

       8,837        8,715

 100

       8,205        8,083

 200

       7,615        7,493

 

Realized Gains and Losses.    As a group of life and health insurance carriers, Torchmark collects premium income from its 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, Torchmark also incurs acquisition costs, administrative expenses, and taxes as a part of its 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, Torchmark, as a part of its core insurance operations, holds a significant investment portfolio. This portfolio consists primarily of high-quality fixed maturities containing an adequate yield to provide for the cost of carrying these long-term insurance product obligations. As a result, fixed maturities are generally held for long periods to support the liabilities. Expected yields on these investments are taken into account when setting insurance premium rates and product profitability expectations.

 

Because Torchmark holds this large and diverse investment portfolio, 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. Torchmark does not engage in trading investments for profit. Therefore, gains or losses which occur in protecting the portfolio or its yield or which are beyond the control of management are only secondary to Torchmark’s core insurance operations of providing insurance coverage to policyholders. Unlike investment income, they are not considered in determining premium rates or product profitability of Torchmark’s insurance products.

 

Realized gains and losses can be significant in relation to the earnings from core insurance operations, however, and as a result, have a material positive or negative impact on net income. The significant fluctuations caused by gains and losses can cause period-to-period trends of net income to not be indicative of historical core operating results nor predictive of the future trends of core operations. Accordingly, they have no bearing on core insurance operations or segment results as management

 

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views its operations. For these reasons, Torchmark management removes the effects of realized gains and losses when evaluating its overall insurance operating results.

 

The following table summarizes Torchmark’s tax-effected realized gains (losses) by component for each of the years in the three-year period ended December 31, 2005.

 

Analysis of After-tax Realized Gains (Losses)

(Amounts in thousands, except for per share data)

 

     Year Ended December 31,

 
     2005

    2004

    2003

 
     Amount

    Per Share

    Amount

    Per Share

    Amount

    Per Share

 

Realized gains (losses), net of tax, from:

                                                

Investment sales and calls

   $ 608     $ .01     $ 8,734     $ 0.08     $ 604     $ 0.01  

Writedown of fixed maturities

     -0-       -0-       (2,784 )     (0.03 )     (6,305 )     (0.06 )

Writedown of other investments

     -0-       -0-       (1,335 )     (0.01 )     (3,405 )     (0.03 )

Valuation of interest rate swaps

     (5,388 )     (.05 )     (5,332 )     (0.05 )     (10,122 )     (0.09 )

Spread on interest rate swaps*

     4,805       .04       15,157       0.14       17,099       0.15  
    


 


 


 


 


 


Total

   $ 25     $ -0-     $ 14,440     $ 0.13     $ (2,129 )   $ (0.02 )
    


 


 


 


 


 



* The reduction in interest cost from swapping fixed-rate obligations to floating rate.

 

In both 2004 and 2003, Torchmark wrote down several individual holdings to estimated fair value as a result of other-than-temporary impairment. The impaired securities met some or all of Torchmark’s criteria for other-than-temporary impairment as discussed in Note 3Investments in the Notes to Consolidated Financial Statements and in its Critical Accounting Policies in this report. Pretax charges for these impairments were $6 million in 2004 and $15 million in 2003. Regarding all bonds previously written down, the bonds of 3 issuers were still held at December 31, 2005 at a fair value of $46.0 million and a recorded book value of $29.5 million.

 

Accounting rules require Torchmark to value its interest-rate swaps at their fair value at the end of each accounting period. The fair values of these instruments fluctuate with interest rates in financial markets and diminish with the passage of time so that their value will be zero when they ultimately expire. These period-to-period fluctuations can be substantial. However, Torchmark management does not consider these period-to-period fluctuations in value in managing its ongoing operations because their cumulative result will be zero if held to expiration. These temporary unrealized changes in swap values are included as a component of “Realized Investment Gains (Losses)” in the Consolidated Statements of Operations. This fair value adjustment for all swaps on an after-tax basis was a negative $5 million in 2005 and 2004, compared with a negative $10 million in 2003.

 

Torchmark has historically held its swaps to maturity. However, in the third quarter of 2005, two swaps were sold because of an expectation of higher short-term rates in the future. The swaps sold were the $99 million notional amount related to the 8.25% Senior Debentures and the $100 million notional amount associated with the 7.375% Notes. Proceeds of $239 thousand were received on the sales.

 

The Securities and Exchange Commission’s accounting guidance currently requires that all income and expenses related to a nonhedged derivative be recorded in the same line item on the income statement that the adjustment to fair value is recorded. Therefore, Torchmark combines the cash settlements on nonhedged swaps with the noncash unrealized fair value adjustment as a component of realized investment gains and losses. Additionally, Torchmark includes the cash settlements on its hedged swap derivatives in realized investment gains and losses for consistency. Torchmark’s pretax interest cost reduction from these cash settlements included in realized investment gains was a positive $7 million in 2005, a positive $23 million in 2004, and a positive $26 million in 2003. Torchmark continues to reduce interest cost for this benefit in its segment analysis, because the segment analysis is required by GAAP to be as management evaluates the performance of the segment. Torchmark views the benefit from lower interest rates as a reduction in its financing costs in its investment segment.

 

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FINANCIAL CONDITION

 

Liquidity.    Liquidity provides Torchmark with the ability to meet on demand the cash commitments required by its business operations and financial obligations. Torchmark’s liquidity is derived from three sources: positive cash flow from operations, a portfolio of marketable securities, and a line of credit facility.

 

Torchmark’s insurance operations have historically generated positive cash flows in excess of its immediate needs. Sources of cash flows from operations include primarily premium and investment income. Cash outflows from operations include policy benefit payments, commissions, administrative expenses, and taxes.

 

Operating cash inflows significantly exceed cash outflows primarily because life insurers, such as Torchmark, expect to pay the majority of their policyholder benefits in future periods, sometimes many years later. A liability is actuarially computed and recorded for these future benefits which increases as insurance in force grows so that Torchmark can “save” for these future payments. Earnings are charged for the increase in this reserve each period, but there is no corresponding cash outlay. Therefore, cash provided from operations is generally expected to significantly exceed net income in any given period. Cash flows are also generated by the maturities and scheduled repayments of Torchmark’s investment portfolio. Cash flows in excess of immediate requirements are invested to fund future requirements. Available cash flows are also used to repay debt, to buy back Torchmark shares, to pay shareholder dividends, and for other corporate uses. While Torchmark’s cash flows have historically been positive and very strong, a material reduction in cash flow could negatively affect its liquidity.

 

Cash flows provided from operations increased in each of the three years ended December 31, 2005 over their respective prior year. They were $857 million in 2005, $767 million in 2004, and $740 million in 2003. In addition, Torchmark received $473 million in investment maturities, repayments, and calls in 2005, adding to available cash flows. Such repayments were $574 million in 2004 and $682 million in 2003.

 

Torchmark has in place a line of credit facility with a group of lenders which allows unsecured borrowings and stand-by letters of credit up to $600 million. For a detailed discussion of this line of credit facility, see the commercial paper section of Note 10Debt in the Notes to Consolidated Financial Statements.

 

Torchmark’s cash and short-term investments were $138 million at year-end 2005 and $99 million at year-end 2004. Additionally, Torchmark has 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 $8.9 billion at December 31, 2005. However, Torchmark’s strong cash flows from operations, investment maturities, and credit line availability make any need to sell securities for liquidity unlikely.

 

Liquidity of the parent company is affected by the ability of the subsidiaries to pay dividends. The parent receives dividends from subsidiaries in order to meet dividend payments on common and preferred stock, interest and principal repayment requirements on parent-company debt, and operating expenses of the parent company. For more information on the restrictions on the payment of dividends by subsidiaries, see the restrictions section of Note 11Shareholders’ Equity in the Notes to Consolidated Financial Statements. Although these restrictions exist, dividend availability from subsidiaries historically has substantially exceeded the cash flow needs for parent company operations.

 

Off-Balance Sheet Arrangements.    As fully described and discussed in Note 10Debt in the Notes to the Consolidated Financial Statements and under the subcaption Funded Debt, Torchmark has outstanding $150 million (par amount) 7 3/4% Trust Preferred Securities. The Capital Trusts which are liable for these securities are the legal entities which are responsible for the securities and facilitate the payment of dividends to shareholders. They are off-balance sheet arrangements which Torchmark is required to deconsolidate in accordance with GAAP rules. Deconsolidation is required by accounting rules because they are considered to be variable interest entities in which Torchmark has no variable interest. Therefore Torchmark is not the primary beneficiary of the entity, even though it owns all of the entity’s voting equity. While these liabilities are not on Torchmark’s balance sheet, they are represented by Torchmark’s 7 3/4% Junior Subordinated Debentures due to the trusts. These Junior Subordinated Debentures are a Torchmark liability of $155 million par and book value at both December 31, 2005 and

 

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December 31, 2004 and are indicated as a capital resource to Torchmark under the caption Capital Resources in this report. The 7 3/4% preferred dividends due to the preferred shareholders are funded by Torchmark’s 7 3/4% interest payment on its debt to the trusts. As described in Note 14Commitments and Contingencies in the Notes to Consolidated Financial Statements, Torchmark has guaranteed the performance of the Capital Trusts to meet its financial obligations to the Trust Preferred shareholders.

 

Pension obligations to Torchmark’s employees are obligations of trust fund entities which are not reflected on Torchmark’s balance sheet. The obligations of these trusts are calculated in accordance with the terms of the pension plans. These trust entities hold assets which are funded through periodic contributions by Torchmark in a manner which will provide for the settlement of the pension obligations as they become due.

 

During 2005, Torchmark subsidiary American Income entered into an agreement to guarantee certain personal loans of American Income employees and agents with First Command Bank. First Command Bank is a subsidiary of First Command Financial Services, Inc. (First Command) of which Lamar C. Smith is Chairman and CEO. He is also a director of Torchmark. At December 31, 2005, the balance subject to this guarantee was $182 thousand. These guarantees are secured by vested commissions due the employees and agents. See Note 15—Related Party Transactions in the Notes to Consolidated Financial Statements for more information on this guarantee.

 

As of December 31, 2005, Torchmark had no other significant unconsolidated affiliates and no guarantees of the obligations of third-party entities other than as described above. All of Torchmark’s guarantees, other than the Trust Preferred guarantee and the First Command Bank guarantee, were guarantees of the performance of consolidated subsidiaries, as disclosed in Note 14Commitments and Contingencies. All of Torchmark’s derivative instruments were recorded at fair value on the balance sheet.

 

The following table presents information about payments under Torchmark’s contractual obligations for the selected periods as of December 31, 2005.

 

(Amounts in millions)

 

    Actual
Liability


 

Total

Payments


 

Less than

One Year


  One to
Three Years


 

Four to

Five Years


  More than
Five Years


Fixed and determinable:

                                   

Long-term debt—principal

  $ 688   $ 697   $ 180   $ -0-   $ 100   $ 418

Long-term debt—interest(1)

    8     741     51     80     69     541

Capital leases

    -0-     -0-     -0-     -0-     -0-     -0-

Operating leases

    -0-     15     4     5     3     4

Purchase obligations

    66     66     44     22     -0-     -0-

Pension obligations(2)

    -0-     127     10     22     24     70

Future insurance obligations(3)

    8,561     40,302     1,545     2,742     2,509     33,506
   

 

 

 

 

 

Total

  $ 9,323   $ 41,948   $ 1,834   $ 2,871   $ 2,705   $ 34,539
   

 

 

 

 

 


(1) Interest on debt is based on Torchmark’s fixed contractual obligations. As certain debt instruments have related swaps which exchange fixed obligations to those based on floating rates, Torchmark’s actual interest cost may be greater or lesser than presented. At December 31, 2005, Torchmark had in place swaps with a notional amount of $330 million on its $692 million of long-term debt at par value. More information about Torchmark’s swaps is found in Note 10—Debt in the Notes to Consolidated Financial Statements.
(2) Pension obligations are primarily liabilities in trust funds that are not reflected on Torchmark’s Consolidated Balance Sheets. At December 31, 2005, these pension obligations were $220 million, but there were also assets of $221 million in the pension entities, consisting of investments of $185 million and unrecognized losses of $36 million. 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 9Postretirement Benefits in the Notes to Consolidated Financial Statements for more information on pension obligations.
(3) Future insurance obligations consist primarily of estimated future contingent benefit payments on policies in force and separate account obligations at December 31, 2005. 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 $8.6 billion at December 31, 2005, along with future premiums and investment income, will be sufficient to fund all future insurance obligations.

 

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Capital Resources.    Torchmark’s capital structure consists of short-term debt (the commercial paper facility described in Note 10Debt in the Notes to Consolidated Financial Statements), long-term funded debt, Junior Subordinated Debentures supporting its trust preferred securities, and shareholders’ equity. The Junior Subordinated Debentures are payable to Torchmark’s Capital Trusts which are liable for its Trust Preferred Securities. In accordance with GAAP, these instruments are included in “Due to affiliates” on the Consolidated Balance Sheets. A complete analysis and description of long-term debt issues outstanding is presented in Note 10—Debt in the Notes to Consolidated Financial Statements.

 

The carrying value of the funded debt was $688 million at December 31, 2005, compared with $695 million a year earlier. In connection with these instruments, Torchmark had in place two interest-rate swap agreements at December 31, 2005, but also had two swap agreements that were sold in September, 2005 and another swap agreement which expired in September, 2004. All of these agreements were entered into to exchange Torchmark’s fixed-rate obligations on the debt instruments to floating rates. Information about these swaps is also found in Note 10.

 

The carrying value of Torchmark’s 6 1/4% Senior Notes is adjusted each period to reflect the change in fair value of a swap instrument which hedges the value of the note. This swap increased the value of long-term debt by $.3 million and $5.7 million at December 31, 2005 and December 31, 2004, respectively. Additionally, Torchmark entered into a swap agreement on its 8 1/4% Senior Debentures in August, 2004 which qualified as a fair-value hedge on that security. That swap was disposed of in September, 2005. It increased the value of long-term debt by $2.4 million at December 31, 2004.

 

Torchmark maintains a significant available-for-sale fixed-maturity portfolio to support its insurance policyholders’ liabilities. Torchmark is required by an accounting rule (SFAS 115) to revalue this portfolio to fair market value at the end of each accounting period. The period-to-period changes in fair value, net of their associated impact on deferred acquisition costs and income tax, are reflected directly in shareholders’ equity. Changes in the fair value of the portfolio result from changes in interest rates in financial markets. While SFAS 115 requires invested assets to be revalued, accounting rules do not permit interest-bearing insurance policy liabilities to be valued at fair value in a consistent manner. Due to the size of Torchmark’s policy liabilities in relation to its shareholders’ equity, this inconsistency in measurement usually has a material impact in the reported value of shareholders’ equity. If these liabilities were revalued in the same manner as the assets, the effect on equity would be largely offset. Fluctuations in interest rates cause undue volatility in the period-to-period presentation of Torchmark’s shareholders’ equity, capital structure, and financial ratios which would be essentially removed if interest-bearing liabilities were valued in the same manner as assets. For this reason, Torchmark’s management, credit rating agencies, lenders, many industry analysts, and certain other financial statement users prefer to remove the effect of SFAS 115 when analyzing Torchmark’s balance sheet, capital structure, and financial ratios.

 

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The following tables present selected data related to Torchmark’s capital resources. Additionally, the tables present the effect of SFAS 115 on relevant line items, so that investors and other financial statement users may determine its impact on Torchmark’s capital structure.

 

Selected Financial Data

 

     At December 31, 2005

    At December 31, 2004

    At December 31, 2003

 
     GAAP

   

Effect of

SFAS 115*


    GAAP

    Effect of
SFAS 115*


    GAAP

    Effect of
SFAS 115*


 

Fixed maturities (millions)

   $ 8,837     $ 425     $ 8,715     $ 649     $ 8,103     $ 631  

Deferred acquisition costs (millions) **

     2,768       (23 )     2,583       (37 )     2,420       (37 )

Total assets (millions)

     14,769       402       14,252       612       13,466       594  

Short-term debt (millions)

     382       -0-       170       -0-       182       -0-  

Long-term debt (millions)

     508       -0-       695       -0-       698       -0-  

Shareholders’ equity (millions)

     3,433       261       3,420       398       3,240       386  

Book value per diluted share

     32.91       2.50       31.07       3.62       28.45       3.39  

Debt to capitalization ***

     20.6 %     (1.3 )%     20.2 %     (2.1 )%     21.4 %     (2.2 )%

Diluted shares outstanding (thousands)

     104,303               110,075               113,887          

Actual shares outstanding (thousands)

     103,569               107,944               112,715          

* Amount added to (deducted from) comprehensive income to produce the stated GAAP item
** Includes the value of insurance purchased
*** Torchmark’s debt covenants require that the effect of SFAS 115 be removed to determine this ratio

 

Torchmark’s ratio of earnings before interest and taxes to interest requirements (times interest earned) was 13.0 times in 2005, compared with 13.8 times in 2004, and 12.6 times in 2003. A discussion of Torchmark’s interest expense is included in the discussion of financing costs under the caption Investments in this report.

 

In the second quarter of 2005, Torchmark executed a voluntary stock option exercise and restoration program in which 120 directors, employees and consultants exercised vested options of the Company’s common stock and received a lesser number of new options at the current market price. As a result, the Company issued 5.8 million new shares to the participants. However, a substantial number of the new shares were immediately sold through the open market by the participants to cover the option exercise price of their new shares and their related income taxes. As a result of the program, management’s ownership in Torchmark increased and the Company received a significant tax benefit from the exercise of the options. Torchmark received $213 million in proceeds for the exercise price and $37 million in tax benefits, both of which added to shareholder’s equity. However, as previously mentioned, Torchmark generally uses the proceeds of option exercises to repurchase shares on the open market to reduce the dilution caused by option exercises. As a result, the total impact on shareholder’s equity and cash flow from the transaction was immaterial. More information on stock options and this program is found in Note 1—Significant Accounting Policies and in Note 12—Stock Options in the Notes to Consolidated Financial Statements.

 

As previously mentioned, Torchmark’s Board reaffirmed its continued authorization of the Company’s stock repurchase program in July, 2005 in amounts and timing that management, in consultation with the Board, determined to be in the best interest of the Company. Torchmark has repurchased its common stock every year since 1986, except for 1995, the year following the acquisition of American Income. Since the beginning of 1998, Torchmark has repurchased 40 million shares at a total cost of $1.6 billion, and has acquired no fewer than 3.4 million shares in any one year. Management believes that Torchmark share purchases at favorable prices add incrementally to per share earnings, return on equity, and are an excellent way to increase total shareholder value. As noted earlier in this report, Torchmark acquired 5.6 million shares at a cost of $300 million in 2005 with excess cash flow. If the $300 million free cash flow used for the repurchase of Torchmark common stock had alternatively been invested in corporate bonds, an estimated $9 million of additional investment income, after tax, would have resulted and net income per diluted share would have increased 10% to $4.59. Because share purchases were made, actual net income per share was $4.68, an increase of 12%. Torchmark intends to continue the repurchase of its common shares when financial markets are favorable.

 

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Credit Ratings.    The credit quality of Torchmark’s debt instruments and capital securities are rated by various rating agencies. During 2003, Standard and Poor’s upgraded Torchmark’s funded debt rating from A to A+ and its preferred securities rating from BBB+ to A-. The chart below presents Torchmark’s credit ratings as of December 31, 2005.

 

     Standard
& Poors


   Fitch

   Moody’s

   A.M.
Best


Commercial Paper

   A-1    F-1    P-2    AMB-1

Funded Debt

   A+    A    A3    a

Preferred Stock

   A-    A-    baa1    a-

 

The financial strength of Torchmark’s major insurance subsidiaries are also rated by Standard & Poor’s and A.M. Best. Standard and Poor’s lowered the insurance financial strength rating of United Investors to A+ from AA, noting that United Investors was no longer a strategic subsidiary to Torchmark. Also during 2003, A. M. Best upgraded American Income’s insurance financial strength rating to A+ (Superior) from A (Excellent). The following chart presents these ratings for Torchmark’s five largest insurance subsidiaries at December 31, 2005.

 

     Standard
& Poors


  

A.M.

Best


Liberty

   AA    A+ (Superior)

Globe

   AA    A+ (Superior)

United Investors

   A+    A+ (Superior)

United American

   AA    A+ (Superior)

American Income

   AA    A+ (Superior)

 

A.M. Best states that it assigns A+ (Superior) ratings to those companies which, in its opinion, have demonstrated superior overall performance when compared to the norms of the life/health insurance industry. A+ (Superior) companies have a superior ability to meet their obligations to policyholders over a long period of time.

 

The AA rating is assigned by Standard & Poor’s Corporation to those insurers which have very strong financial security characteristics, differing only slightly from those rated higher. The A+ rating is assigned to an insurer with strong financial security characteristics, somewhat more likely to be affected by adverse business conditions than insurers with higher ratings. The “+” indicates that United Investors is among the strongest insurers within the A category.

 

TRANSACTIONS WITH RELATED PARTIES

 

Information regarding related party transactions is found in Note 15—Related Party Transactions in the Notes to Consolidated Financial Statements.

 

OTHER ITEMS

 

Litigation.    Torchmark and its subsidiaries continue to be named as parties to pending or threatened litigation, much of which involves punitive damage claims based upon allegations of agent misconduct at Liberty in Alabama. Such punitive damage claims are tried in Alabama state courts where any punitive damage litigation may have the potential for significant adverse results since punitive damages in Alabama are based upon the compensatory damages (including mental anguish) awarded and the discretion of the jury in awarding compensatory damages is not precisely defined. Additionally, it should be noted that Torchmark subsidiaries actively market insurance in the State of Mississippi, a jurisdiction which is nationally recognized for large punitive damage verdicts. Bespeaking caution is the fact that it is impossible to predict the likelihood or extent of punitive damages that may be awarded if liability is found in any given case. It is thus difficult to predict with certainty the liability of Torchmark or its subsidiaries in any given case because of the unpredictable nature of this type of litigation. Based upon information

 

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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 management to be material. For more information concerning litigation, please refer to Note 14Commitments and Contingencies in the Notes to the Consolidated Financial Statements.

 

NEW UNADOPTED ACCOUNTING RULES

 

Stock Option Expensing:    Stock options have been granted to executives, employees, consultants, and directors as a form of compensation to provide motivation and to align the interests of these groups with the same interests of shareholders. Because they are generally granted at the fair value of Torchmark stock at the date of grant, the value of these options increases as the value of Torchmark stock increases. The cost of these options to the Company is in the dilution caused by the assumed exercise of the options, as the grantees’ ownership of the Company grows in relation to that of existing shareholders. This dilution cost has historically been reflected in per share earnings in the financial statements under the “intrinsic value” method currently permitted by GAAP and used by Torchmark. Under this method, a value is assigned to an option only if the exercise price is less than the fair value of the stock at the date of grant. Because Torchmark’s options are generally granted at an exercise price equal to the fair value of Torchmark stock, Torchmark has historically incurred no option expense.

 

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement 123R, Share-Based Payment, originally effective for Torchmark as of July 1, 2005 but later deferred by the Securities and Exchange Commission to January 1, 2006. The provisions of this Statement will require Torchmark to record an expense in the financial statements for stock options based on the “fair value” method, whereby a value is assigned to each option granted and to recognize an expense as this value is amortized over the period that the option vests. This expense will be deducted from earnings and earnings per share in addition to the option cost already being reflected in the dilution computation described above.

 

GAAP rules currently require Torchmark to disclose in Note 1—Significant Accounting Policies the impact on earnings on a pro forma basis as if the “fair value” method were in effect. Please refer to Note 1 for more details on the impact of adoption of this revised statement. As explained in Note 1, the Company does not expect the adoption of this Statement to materially alter its methodology of computing option expense or that future results will vary significantly from the pro forma results disclosed for prior periods. At the present time, Torchmark does not plan to change its policies of stock option compensation because of the adoption of this revised statement.

 

While restatement of prior periods is permitted, the Statement also permits a “modified prospective” method of adoption, whereby the expense of all unvested options as of January 1, 2006 and options granted after January 1, 2006 are expensed in accordance with the Statement after that date. Torchmark will elect the modified prospective method of adoption.

 

The “fair value” assigned to option grants is derived from complex option pricing models using subjective assumptions such as price volatility and expected term. Considerable judgment is sometimes involved in the determination of these assumptions, which must be made at the time of option grant. Variations in actual experience versus the assumptions can cause material differences in an option’s actual value when it is ultimately exercised versus its expense recorded in the financial statements. However, while a variety of pricing models are acceptable under the Statement, Torchmark plans to use the Black-Scholes pricing model used for the pro forma disclosures, with assumptions most reflective of Torchmark’s experience. Statement 123R does not permit the recorded expense to be adjusted to reflect actual experience.

 

Earnings per Share: As described in Note 1Significant Accounting Policies, diluted earnings per share include the dilution resulting from the potential conversion of dilutive securities such as stock options into Torchmark common stock. The potential dilution from stock options has traditionally been calculated using the “treasury stock method” required by GAAP. This method assumes that Torchmark uses the funds derived from the assumed exercise of options to buy treasury stock, thus reducing the net number of new shares outstanding resulting from the exercise.

 

 

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The issuance by the FASB of Statement 123R, requiring the expensing of stock options, revises the method of computing dilutive shares. The revised method does not allow the traditional treasury stock method which simulates cash flow, but instead limits cash receipts from the tax benefit and injects a hypothetical concept known as “unrecognized option expense” to the dilution model. As a result, diluted shares outstanding under the new Standard will bear no relationship to diluted shares outstanding under the historical model or to a pattern that the Company could actually replicate with its cash flow as before. Management does not believe that these modifications to the treasury stock method will materially impact earnings per share.

 

Impairments of Investments: The FASB issued FASB Staff Position FAS 115-1 and FAS 124-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” effective for Torchmark January 1, 2006. This statement clarifies certain previously unresolved issues regarding accounting for investment impairments. No significant impact is expected from adoption.

 

CRITICAL ACCOUNTING POLICIES

 

Future Policy Benefits.    Because of the long-term nature of insurance contracts, Torchmark’s 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 1Significant Accounting Policies in the Notes to the Consolidated Financial Statements. While management and company actuaries have used their best judgment in determining the assumptions and in calculating the liability for future policy benefits, there is no assurance that the estimate of the liabilities reflected in the financial statements represents Torchmark’s ultimate obligation. Additionally, because of the size of this liability, significantly different assumptions could result in materially different reported amounts. A list of the significant assumptions used to calculate the liability for future policy benefits is reported in Note 5Future Policy Benefit Reserves in the Notes to the Consolidated Financial Statements.

 

Deferred Acquisition Costs and Value of Insurance Purchased.    The costs of acquiring new business are generally deferred and recorded as an asset. Deferred acquisition costs consist primarily of sales commissions and other underwriting costs of new insurance sales. Additionally, the costs of acquiring blocks of insurance from other companies or through the acquisition of other companies are also deferred and recorded as assets under the caption “Value of Insurance Purchased.” Torchmark’s policies for accounting for deferred acquisition costs and the associated amortization are reported in Note 1Significant Accounting Policies in the Notes to the Consolidated Financial Statements. Different assumptions with regard to deferred acquisition costs could produce materially different amounts of amortization. For more information about accounting for deferred acquisition costs see Note 4Deferred Acquisition Costs and Value of Insurance Purchased in the Notes to the Consolidated Financial Statements.

 

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 the Company. The estimate of unreported claims is based on prior experience and is made after careful evaluation of all information available to the Company. However, the factors upon which these estimates are based can be subject to change from historical patterns. Factors involved include medical trend rates and medical cost inflation, the litigation environment, regulatory mandates, and the introduction of policy types for which claim patterns are not well established. Changes in these estimates, if any, are reflected in the earnings of the period in which the adjustment is made. Torchmark management believes that the estimates used to produce the liability for claims and other benefits, including the estimate of unsubmitted claims, are the most appropriate under the circumstances. However, there is no certainty that the resulting stated liability will be Torchmark’s ultimate obligation.

 

Revenue Recognition.    Premium income for Torchmark’s subsidiaries’ insurance contracts is generally recognized as the premium is collected. However, in accordance with GAAP, revenue on limited-payment contracts and universal life-type contracts (deposit balance products) are recognized differently. Revenues on limited-payment contracts are recognized over the contract period. Premium for

 

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deposit balance products, such as Torchmark’s annuity and interest-sensitive life policies, is added to the policy account value. The policy account value (or deposit balance) is a Torchmark liability. This deposit balance is then charged a fee for the cost of insurance, administration, surrender, and certain other charges which are recognized as revenue in the period the fees are charged to the policyholder. In each case, benefits and expenses are matched with revenues in a manner by which they are incurred as the revenues are earned.

 

Investment income is reported as revenue by Torchmark when it is earned, less investment expenses. The investment activities of Torchmark are integral to its insurance operations. Because life and health insurance claims and benefits may not be paid until many years into the future, the accumulation of cash flows from premium receipts are invested. Anticipated yields earned on investments are reflected in premium rates, contract liabilities, and other product contract features. These yield assumptions are implied in the interest required on Torchmark’s net insurance liabilities (future policy benefits less deferred acquisition costs) and contractual interest obligations in its insurance and annuity products. For more information concerning revenue recognition, investment accounting, and interest sensitivity, please refer to Note 1Significant Accounting Policies and Note 3Investments in the Notes to the Consolidated Financial Statements and discussions under the captions Annuities, Investments, and Market Risk Sensitivity in this report.

 

Impairment of Investments.    Torchmark continually monitors its investment portfolio for investments that have become impaired in value. While the values of the investments in Torchmark’s portfolio constantly fluctuate due to market conditions, an investment is considered to be impaired only when it has experienced a decline in fair market value which is deemed other than temporary. The policies and procedures that Torchmark uses to evaluate and account for impairments of investments are disclosed in Note 1Significant Accounting Policies and Note 3Investments in the Notes to the Consolidated Financial Statements and the discussions under the captions Investments and Realized Gains and Losses in this report.

 

While every effort is made to make the best estimate of status and value with the information available regarding an other-than-temporary impairment, it is difficult to predict the future prospects of a distressed or impaired security.

 

Defined benefit pension plans.    Torchmark maintains funded defined benefit plans covering most full-time employees. It also has unfunded nonqualified defined benefit plans covering certain key and other employees. Torchmark’s 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 partially offset by the growth in value of the assets in the funded plans.

 

The actuarial assumptions used in determining Torchmark’s 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 Torchmark’s pension obligation. A decrease in projected salary increases will cause a decrease in this obligation. These assumptions are subjective in many cases and small changes in certain assumptions may cause material differences in reported results. While management has used its best efforts to determine the most reliable assumptions, given the information available from company experience, economic data, independent consultants and other sources, no assurance can be given that actual results will be the same as expected. The assumptions are reviewed annually and revised, if necessary, based on more current information available to the Company. Torchmark’s discount rate, rate of return on assets, and projected salary increase assumptions are disclosed in Note 9Postretirement Benefits in the Notes to Consolidated Financial Statements. This note also contains information about pension plan assets, investment policies, funded status, and other related data.

 

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CAUTIONARY STATEMENTS

 

Torchmark cautions readers regarding certain forward-looking statements contained in the foregoing discussion and elsewhere in this document, and in any other statements made by, or on behalf of Torchmark 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 Torchmark or its business, whether express or implied, is meant as and should be considered a forward-looking statement. Such statements represent management’s opinions concerning future operations, strategies, financial results or other developments.

 

Forward-looking statements are based upon estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond Torchmark’s control. If these estimates or assumptions prove to be incorrect, the actual results of Torchmark 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 Torchmark’s policies as well as levels of mortality, morbidity and utilization of healthcare services that differ from Torchmark’s 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 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 owned by Torchmark, or that may impair issuers ability to pay interest due Torchmark on those securities;

 

6) Changes in pricing competition;

 

7) Litigation results;

 

8) Levels of administrative and operational efficiencies that differ from Torchmark’s assumptions;

 

9) The inability of Torchmark 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 management’s estimates and judgments which may differ from the actual amounts ultimately realized.

 

Readers are also directed to consider other risks and uncertainties described in other documents filed by Torchmark 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 32 of this report.

 

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Item 8.    Financial Statements and Supplementary Data

 

     Page

Report of Independent Registered Public Accounting Firm

   45

Consolidated Financial Statements:

    

Consolidated Balance Sheets at December 31, 2005 and 2004

   46

Consolidated Statements of Operations for each of the three years in the period ended December 31, 2005

   47

Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 2005

   48

Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended December 31, 2005

   49

Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2005

   50

Notes to Consolidated Financial Statements

   51

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

Torchmark Corporation

Birmingham, Alabama

 

We have audited the accompanying consolidated balance sheets of Torchmark Corporation and subsidiaries (“Torchmark”) as of December 31, 2005 and 2004, 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, 2005. 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, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Torchmark’s internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness of Torchmark’s internal control over financial reporting and an unqualified opinion on the effectiveness of Torchmark’s internal control over financial reporting.

 

DELOITTE & TOUCHE LLP

 

Dallas, Texas

February 27, 2006

 

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TORCHMARK CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands except per share data)

 

    December 31,

 
    2005

    2004

 

Assets:

               

Investments:

               

Fixed maturities—available for sale, at fair value (amortized cost: 2005—$8,411,635; 2004—$8,065,402)

  $ 8,836,642     $ 8,714,698  

Equity securities, at fair value (cost: 2005—$45,797; 2004—$29,954)

    48,047       36,893  

Policy loans

    316,829       304,980  

Other long-term investments

    71,570       87,656  

Short-term investments

    118,310       88,212  
   


 


Total investments

    9,391,398       9,232,439  

Cash

    19,297       10,651  

Securities lending collateral

    257,390       172,599  

Accrued investment income

    158,225       153,248  

Other receivables

    67,262       73,408  

Deferred acquisition costs and value of insurance purchased

    2,768,404       2,583,332  

Goodwill

    378,436       378,436  

Other assets

    168,100       53,793  

Separate account assets

    1,560,391       1,594,278  
   


 


Total assets

  $ 14,768,903     $ 14,252,184  
   


 


Liabilities:

               

Future policy benefits

  $ 7,001,052     $ 6,616,848  

Unearned and advance premiums

    91,758       93,073  

Policy claims and other benefits payable

    257,771       265,655  

Other policyholders’ funds

    89,229       88,147  
   


 


Total policy liabilities

    7,439,810       7,063,723  

Deferred and accrued income taxes

    1,011,048       993,540  

Securities lending obligation

    257,390       172,599  

Other liabilities

    176,151       141,223  

Short-term debt

    381,505       170,354  

Long-term debt (estimated fair value: 2005—$427,280; 2004—$621,028)

    353,263       540,046  

Due to affiliates

    156,577       156,577  

Separate account liabilities

    1,560,391       1,594,278  
   


 


Total liabilities

    11,336,135       10,832,340  

Shareholders’ equity:

               

Preferred stock, par value $1 per share—Authorized 5,000,000 shares; outstanding:

-0- in 2005 and in 2004

    -0-       -0-  

Common stock, par value $1 per share—Authorized 320,000,000 shares; outstanding: (2005—104,874,748 issued, less 1,305,849 held in treasury and 2004—108,783,658 issued, less 839,737 held in treasury)

    104,875       108,784  

Additional paid-in capital

    508,713       484,886  

Accumulated other comprehensive income

    269,084       405,916  

Retained earnings

    2,621,552       2,462,513  

Treasury stock

    (71,456 )     (42,255 )
   


 


Total shareholders’ equity

    3,432,768       3,419,844  
   


 


Total liabilities and shareholders’ equity

  $ 14,768,903     $ 14,252,184  
   


 


 

See accompanying Notes to Consolidated Financial Statements.

 

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TORCHMARK CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands except per share data)

 

     Year Ended December 31,

 
     2005

    2004

    2003

 

Revenue:

                        

Life premium

   $ 1,468,288     $ 1,395,490     $ 1,310,373  

Health premium

     1,014,857       1,048,666       1,034,031  

Other premium

     24,929       27,744       31,379  
    


 


 


Total premium

     2,508,074       2,471,900       2,375,783  

Net investment income

     603,068       577,035       557,670  

Realized investment gains (losses)

     280       22,216       (3,274 )

Other income

     14,488       391       819  
    


 


 


Total revenue

     3,125,910       3,071,542       2,930,998  

Benefits and expenses:

                        

Life policyholder benefits

     966,093       919,775       862,775  

Health policyholder benefits

     668,205       697,645       689,395  

Other policyholder benefits

     26,888       28,248       37,902  
    


 


 


Total policyholder benefits

     1,661,186       1,645,668       1,590,072  

Amortization of deferred acquisition costs

     349,959       347,249       321,744  

Commissions and premium taxes

     149,451       150,138       167,580  

Other operating expense

     172,859       151,195       142,355  

Interest expense

     60,934       56,491       56,135  
    


 


 


Total benefits and expenses

     2,394,389       2,350,741       2,277,886  

Income before income taxes and cumulative effect of change in accounting principle

     731,521       720,801       653,112  

Income taxes

     (236,131 )     (245,083 )     (222,971 )
    


 


 


Net income before cumulative effect of change in accounting principle

     495,390       475,718       430,141  

Cumulative effect of change in accounting principle (less applicable income tax benefit of $3,857)

     -0-       (7,163 )     -0-  
    


 


 


Net income

   $ 495,390     $ 468,555     $ 430,141  
    


 


 


Basic net income per share:

                        

Net income before cumulative effect of change in accounting principle

   $ 4.73     $ 4.32     $ 3.75  

Cumulative effect of change in accounting principle (net of tax)

     -0-       (.06 )     -0-  
    


 


 


Net income

   $ 4.73     $ 4.26     $ 3.75  
    


 


 


Diluted net income per share:

                        

Net income before cumulative effect of change in accounting principle

   $ 4.68     $ 4.25     $ 3.73  

Cumulative effect of change in accounting principle (net of tax)

     -0-       (.06 )     -0-  
    


 


 


Net income

   $ 4.68     $ 4.19     $ 3.73  
    


 


 


Dividends declared per common share

   $ .44     $ .44     $ .40  
    


 


 


 

See accompanying Notes to Consolidated Financial Statements.

 

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TORCHMARK CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

 

    

Year Ended December 31,


 
     2005

    2004

    2003

 

Net income

   $ 495,390     $ 468,555     $ 430,141  

Other comprehensive income (loss):

                        

Unrealized investment gains (losses):

                        

Unrealized gains (losses) on securities:

                        

Unrealized holding gains (losses) arising during period

     (229,881 )     28,872       330,338  

Reclassification adjustment for (gains) losses on securities included in net income

     (778 )     (6,385 )     14,002  

Reclassification adjustment for amortization of (discount) and premium

     4,768       2,561       (255 )

Foreign exchange adjustment on securities marked to market

     (3,087 )     (7,909 )     (10,749 )
    


 


 


Unrealized gains (losses) on securities

     (228,978 )     17,139       333,336  

Unrealized gains (losses) on other investments

     896       (1,177 )     (491 )

Unrealized gains (losses), adjustment to deferred acquisition costs

     14,268       (528 )     (19,193 )
    


 


 


Total unrealized investment gains (losses)

     (213,814 )     15,434       313,652  

Foreign exchange translation adjustments, other than securities

     3,298       7,725       12,555  

Applicable tax

     73,684       (10,295 )     (109,777 )
    


 


 


Other comprehensive income (loss)

     (136,832 )     12,864       216,430  
    


 


 


Comprehensive income

   $ 358,558     $ 481,419     $ 646,571  
    


 


 


 

See accompanying Notes to Consolidated Financial Statements.

 

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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, 2003

                                                     

Balance at January 1, 2003

    -0-   $ 126,801     $ 554,768     $ 176,622     $ 2,316,868     $ (323,606 )   $ 2,851,453  

Comprehensive income

                          216,430       430,141               646,571  

Common dividends declared ($0.40 a share)

                                  (45,605 )             (45,605 )

Acquisition of treasury stock

                                          (225,273 )     (225,273 )

Exercise of stock options

                  1,403               (2,388 )     12,913       11,928  

Retirement of treasury stock

          (13,000 )     (56,179 )             (425,568 )     494,747       -0-  

Other

          (17 )     1,042                               1,025  
   

 


 


 


 


 


 


Balance at December 31, 2003

    -0-     113,784       501,034       393,052       2,273,448       (41,219 )     3,240,099  

Year Ended December 31, 2004

                                                     

Comprehensive income

                          12,864       468,555               481,419  

Common dividends declared ($0.44 a share)

                                  (48,236 )             (48,236 )

Acquisition of treasury stock

                                          (285,226 )     (285,226 )

Exercise of stock options

                  4,749               (6,480 )     32,597       30,866  

Retirement of treasury stock

          (5,000 )     (21,819 )             (224,774 )     251,593       -0-  

Other

                  922                               922  
   

 


 


 


 


 


 


Balance at December 31, 2004

    -0-     108,784       484,886       405,916       2,462,513       (42,255 )     3,419,844  

Year Ended December 31, 2005

                                                     

Comprehensive income

                          (136,832 )     495,390               358,558  

Common dividends declared ($0.44 a share)

                                  (45,865 )             (45,865 )

Acquisition of treasury stock

                                          (554,946 )     (554,946 )

Exercise of stock options

          91       41,443               (94,597 )     306,865       253,802  

Retirement of treasury stock

          (4,000 )     (18,991 )             (195,889 )     218,880       -0-  

Other

                  1,375                               1,375  
   

 


 


 


 


 


 


Balance at December 31, 2005

  $ -0-   $ 104,875     $ 508,713     $ 269,084     $ 2,621,552     $ (71,456 )   $ 3,432,768  
   

 


 


 


 


 


 


 

See accompanying Notes to Consolidated Financial Statements.

 

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TORCHMARK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

 

    

Year Ended December 31,


 
     2005

    2004

    2003

 

Net income

   $ 495,390     $ 468,555     $ 430,141  

Adjustments to reconcile net income to cash provided from operations:

                        

Increase in future policy benefits

     379,151       353,756       344,616  

Increase (decrease) in other policy benefits

     (8,117 )     14,432       11,112  

Deferral of policy acquisition costs

     (519,767 )     (515,197 )     (469,648 )

Amortization of deferred policy acquisition costs

     349,959       347,250       321,744  

Change in deferred and accrued income taxes

     131,072       94,049       76,357  

Realized losses on sale of investments and properties

     7,112       1,103       29,580  

Change in accounting principle

     -0-       11,019       -0-  

Other, net

     22,657       (7,895 )     (3,428 )
    


 


 


Cash provided from operations

     857,457       767,072       740,474  

Cash used for investment activities:

                        

Investments sold or matured:

                        

Fixed maturities available for sale—sold

     78,018       45,992       91,702  

Fixed maturities available for sale—matured, called, and repaid

     472,668       573,527       682,035  

Equity securities

     -0-       32,530       5,308  

Other long-term investments

     6,820       85,327       17,117  
    


 


 


Total investments sold or matured

     557,506       737,376       796,162  

Acquisition of investments:

                        

Fixed maturities—available for sale

     (897,823 )     (1,206,190 )     (1,366,815 )

Equity securities

     (15,842 )     (5,692 )     (26,999 )

Net increase in policy loans

     (11,849 )     (10,872 )     (14,679 )

Other long-term investments

     (9,345 )     (2,761 )     (3,321 )
    


 


 


Total investments acquired

     (934,859 )     (1,225,515 )     (1,411,814 )

Net (increase) decrease in short-term investments

     (30,098 )     (36,564 )     21,357  

Net change in payable or receivable for securities

     (40,810 )     29,598       (2,202 )

Net additions to properties

     (3,020 )     (3,699 )     (244 )

Investments in low-income housing interests

     (47,677 )     (435 )     (2,942 )
    


 


 


Cash used for investment activities

     (498,958 )     (499,239 )     (599,683 )

Cash provided from (used for) financing activities:

                        

Issuance of common stock

     217,257       26,123       10,525  

Cash dividends paid to shareholders

     (46,346 )     (48,761 )     (43,850 )

Net borrowing (repayment) of short-term debt

     31,299       (12,094 )     (19,031 )

Acquisition of treasury stock

     (554,946 )     (285,226 )     (225,273 )

Net receipts (payments) from deposit product operations

     2,883       50,070       142,365  
    


 


 


Cash provided from (used for) financing activities

     (349,853 )     (269,888 )     (135,264 )

Increase (decrease) in cash

     8,646       (2,055 )     5,527  

Cash at beginning of year

     10,651       12,706       7,179  
    


 


 


Cash at end of year

   $ 19,297     $ 10,651     $ 12,706  
    


 


 


 

 

See accompanying Notes to Consolidated Financial Statements.

 

50


Table of Contents

TORCHMARK CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in millions except per share data)

 

Note 1—Significant Accounting Policies

 

Business: Torchmark Corporation (Torchmark) through its subsidiaries provides a variety of life and health insurance products and annuities to a broad base of customers.

 

Basis of Presentation: The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the 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 significant intercompany accounts and transactions have been eliminated in consolidation.

 

In December 2003, the Financial Accounting Standards Board (FASB) revised its previously issued FASB Interpretation 46 (FIN46R) to clarify the definition of a variable interest and the instructions for consolidating variable interest entities (VIE’s). Primary beneficiaries only are required to consolidate VIE’s. Therefore, a company may have voting control of a VIE, but if it is not the primary beneficiary of the VIE in accordance with FIN46R, it is not permitted to consolidate the VIE. The trusts that are liable for Torchmark’s Trust Preferred Securities meet the definition of VIE’s. However, Torchmark is not the primary beneficiary because its interest is not variable. Therefore, Torchmark is not permitted to consolidate its interest in these trusts, even though it owns 100% of the voting equity of the Trusts. For this reason, Torchmark reports its 7 3/4% Junior Subordinated Debentures due to the Trusts as “Due to Affiliates” each period at its carrying value of $155 million.

 

Investments: Torchmark classifies all of its fixed-maturity investments, which include bonds and redeemable preferred stocks, as available for sale. Investments classified as available for sale are carried at fair value with unrealized gains and losses, net of deferred taxes, reflected directly in accumulated other comprehensive income. Investments in equity securities, which include common and nonredeemable preferred stocks, are reported at fair value with unrealized gains and losses, net of deferred taxes, reflected directly in accumulated other comprehensive income. Policy loans are carried at unpaid principal balances. Mortgage loans, included in “Other long-term investments,” are carried at amortized cost. Investments in real estate, included in “Other long-term investments,” are reported at cost less allowances for depreciation. Depreciation is calculated on the straight line method. Short-term investments include investments in certificates of deposit and other interest-bearing time deposits with original maturities within twelve months.

 

Gains and losses realized on the disposition of investments are determined on a specific identification basis. Realized investment gains and losses and investment income attributable to separate accounts are credited to the separate accounts and have no effect on Torchmark’s net income. Investment income attributable to all other insurance policies and products is included in Torchmark’s net investment income. Net investment income for the years ended December 31, 2005, 2004, and 2003, included $393 million, $370 million, and $351 million, respectively, which was allocable to policyholder reserves or accounts. Realized investment gains and losses are not allocated to insurance policyholders’ liabilities.

 

Impairment of Investments: In March, 2004, the Emerging Issues Task Force reached a consensus concerning Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF 03-1). It calls for evaluation of all of Torchmark’s fixed-maturity and equity investments for other-than-temporary impairment each reporting period using a three-step approach. First, evaluate if the investment is impaired (fair value is less than cost or amortized cost). Second, determine whether the impairment is other-than-temporary. While specific procedures are outlined, this step requires

 

51


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 1—Significant Accounting Policies (continued)

 

considerable evidence-based judgment as to the ultimate recoverability of amounts due, taking into account the severity and duration of the impairment. An assessment of the ability and intent to hold the security to recovery is also a factor. In the event there is an other-than-temporary impairment, the third step involves a writedown of the cost basis of the security to fair value, which becomes the new cost basis. EITF 03-1 also calls for certain disclosures.

 

This new accounting rule was to be effective for Torchmark beginning July 1, 2004. However, in the third quarter of 2004, the FASB deferred the effective date of certain portions of this rule until it could be further considered. The portions deferred relate to steps two and three in the impairment analysis above. In November, 2005, the FASB released FASB Staff Position 115-1 and 124-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” providing further guidance on the impairment issues. This document is effective for Torchmark as of January 1, 2006. It essentially retains the three-step model of EITF 03-1, replacing only the step two procedures with guidance previously in effect before EITF 03-1 was issued. This guidance was historically utilized by Torchmark in evaluating other-than-temporary impairment. The disclosures called for by EITF 03-1 were maintained, and appear in Note 3Investments. At the present time, Torchmark evaluates securities for other-than-temporary impairment as described in Note 3. If a security is determined to be other-than-temporarily impaired, the cost basis of the security is written down to fair value and is treated as a realized loss. Historically, investment income on other-than-temporarily impaired investments which is past due has not been recorded until received. Under the new FSP, the written-down security will be amortized and revenue recognized in accordance with estimated future cash flows.

 

Derivatives: Torchmark accounts for derivative instruments in accordance with Statement of Financial Accounting Standards (SFAS) 133, Accounting for Derivative Instruments and Hedging Activities, as amended. All of Torchmark’s derivatives, which consist of interest-rate swaps, are carried at fair market value in the consolidated financial statements. Fluctuations in these values adjust realized investment gains and losses. If a derivative qualifies as a fair value hedge under SFAS 133, gains and losses in the derivative are substantially offset by changes in the underlying hedged instrument.

 

During 2003, the Securities and Exchange Commission made known interpretative guidance concerning SFAS 133. They have concluded that all income and expenses related to a nonhedged derivative must be recorded in the same line item that the adjustment to fair value is recorded. In order to comply with this interpretation, Torchmark no longer reduces its interest expense on the Statements of Operations for the reduction in interest cost for swapping its fixed rate for a variable rate on nonhedged derivatives. Instead, this benefit from cash settlements is reported as a component of realized investment gains (losses), the same line where the required fair value adjustment for nonhedged derivatives is reported. Torchmark has also reported the interest cost benefit on hedged derivatives as a component of realized gains (losses), in order to report these items on a consistent basis. In its segment disclosure, however, Torchmark continues to report the interest cost benefit from the swaps as a reduction in interest expense, as GAAP requires this disclosure to be presented as management views its business.

 

Determination of Fair Values of Financial Instruments: Fair value for cash, short-term investments, short-term debt, receivables and payables approximates carrying value. Fair values for investment securities are based on quoted market prices, where available. Otherwise, fair values are based on quoted market prices of comparable instruments. Mortgages are valued using discounted cash flows. Substantially all of Torchmark’s long-term debt, along with the trust preferred securities, is valued based on quoted market prices. Interest-rate swaps are valued using discounted anticipated cash flows.

 

Cash: Cash consists of balances on hand and on deposit in banks and financial institutions. Overdrafts arising from the overnight investment of funds offset cash balances on hand and on deposit.

 

Securities Lending: Torchmark has entered into a securities lending agreement whereby certain securities from its portfolio are loaned to other institutions. Cash collateral obtained from the borrower, equal to 102% of the market value of the loaned securities plus accrued interest, is deposited with a lending agent and invested by that agent in accordance with the Company’s guidelines to generate

 

52


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 1—Significant Accounting Policies (continued)

 

additional income. Torchmark shares this income with the lending agent. Torchmark maintains full ownership rights to the securities loaned and continues to earn interest on them. Accordingly, the loaned securities are included in invested assets. The securities lending collateral is recognized as an asset with a corresponding liability for the obligations to return the collateral.

 

Recognition of Premium Revenue and Related Expenses: Premiums for insurance contracts which are not defined as universal life-type according to SFAS 97 are recognized as revenue over the premium-paying period of the policy. Profits for limited-payment life insurance contracts as defined by SFAS 97 are recognized over the contract period. Premiums for universal life-type and annuity contracts are added to the policy account value, and revenues for such products are recognized as charges to the policy account value for mortality, administration, and surrenders (retrospective deposit method). Variable life and annuity products are also assessed an investment management fee and a sales charge. Life premium includes policy charges of $57.6 million, $60.9 million, and $64.7 million for the years ended December 31, 2005, 2004, and 2003, respectively. Other premium includes annuity policy charges for the years ended December 31, 2005, 2004, and 2003, of $24.5 million, $27.5 million, and $31.2 million, respectively. Profits are also earned to the extent that investment income exceeds policy liability interest requirements. The related benefits and expenses are matched with revenues by means of the provision of future policy benefits and the amortization of deferred acquisition costs in a manner which recognizes profits as they are earned over the same period.

 

Future Policy Benefits: The liability for future policy benefits for universal life-type products according to SFAS 97 is represented by policy account value. The liability for future policy benefits for all other life and health products is provided on the net level premium method based on estimated investment yields, mortality, morbidity, persistency and other assumptions which were considered appropriate at the time the policies were issued. Assumptions used are based on Torchmark’s previous experience with similar products. For the majority of Torchmark’s insurance products, the assumptions used were those considered to be appropriate at the time the policies were issued. Once established, assumptions are generally not changed. An additional provision is made on most products to allow for possible adverse deviation from the assumptions assumed. These estimates are periodically reviewed and compared with actual experience. If it is determined future experience will probably differ significantly from that previously assumed, the estimates are revised. Additionally, significantly different assumptions could result in materially different reported amounts.

 

Deferred Acquisition Costs and Value of Insurance Purchased: The costs of acquiring new business are generally deferred and recorded as an asset. Deferred acquisition costs consist primarily of sales commissions and other underwriting costs of new insurance sales. Additionally, deferred acquisition costs include the value of insurance purchased, which are the costs of acquiring blocks of insurance from other companies or through the acquisition of other companies. Deferred acquisition costs and the value of insurance purchased are amortized in a systematic manner which matches these costs with the associated revenues. Policies other than universal life-type policies are amortized with interest over the estimated premium-paying period of the policies in a manner which charges each year’s operations in proportion to the receipt of premium income. Limited-payment contracts are amortized over the contract period. Universal life-type policies are amortized with interest in proportion to estimated gross profits. The assumptions used to amortize acquisition costs with regard to interest, mortality, morbidity, and persistency are consistent with those used to estimate the liability for future policy benefits. For interest-sensitive and deposit-balance type products, these assumptions are reviewed on a regular basis and are revised if actual experience differs significantly from original expectations. Deferred acquisition costs are subject to periodic recoverability and loss recognition testing. These tests ensure that the present value of future contract-related cash flows will support the capitalized deferred acquisition cost asset. These cash flows consist primarily of premium income, less benefits and expenses taking inflation into account. The present value of these cash flows, less the benefit reserve, is then compared with the unamortized deferred acquisition cost balance. In the event the estimated present value of net cash flows is less, this deficiency would be charged to expense as a component of amortization and the asset balance is reduced by a like amount. Different assumptions with regard to deferred acquisition costs could produce materially different amounts of amortization.

 

53


Table of Contents

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.

 

Separate Accounts: Separate accounts have been established in connection with Torchmark’s variable life and annuity businesses. The investments held for the benefit of contractholders (stated at fair value) are reported as “Separate account assets” and the corresponding deposit balance liabilities are reported as “Separate account liabilities.” The separate account investment portfolios and liabilities are segregated from Torchmark’s other assets and liabilities and these assets are invested in mutual funds of various unaffiliated mutual fund providers. Deposit collections, investment income, and realized and unrealized gains and losses on separate accounts accrue directly to the contractholders. Therefore, these items are added to the separate account balance and are not reflected in income. Fees are charged to the deposit balance for insurance risk, administration, and surrender. There is also a sales charge and an investment management fee. These fees and charges are included in premium revenues.

 

Guaranteed Minimum Policy Benefits: Torchmark’s variable annuity contracts generally provide contractual guarantees in the event of death of the contract holder to at least provide the return of the total deposits made to the contract, net of withdrawals. Under certain conditions, they also provide that the benefit will not be less than the highest contract value on certain specified anniversaries, adjusted for additional deposits and withdrawals after those anniversaries. Torchmark does not offer other types of guaranteed minimum policy benefits, such as minimum accumulation or income benefits.

 

In 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts (SOP 03-1), which was adopted by Torchmark on January 1, 2004. This Statement covers various aspects of accounting for nontraditional product features in order to increase uniformity in practice. The primary issue in the Statement affecting Torchmark is the accounting for liabilities for certain guaranteed minimum policy benefits on Torchmark’s variable annuities. Upon adoption, Torchmark established a liability for these guaranteed minimum policy benefits in the amount of $8.2 million and wrote down deferred acquisition costs in the amount of $2.8 million. As a result, Torchmark recorded a charge in the amount of $11.0 million before tax ($7.1 million after tax) to reflect the guaranteed benefits. This charge was reported as a cumulative effect of a change in accounting principle in 2004.

 

Subsequent to adoption, the liability for these minimum guarantees is determined each period end by estimating the expected value of death benefits in excess of the projected account balance using actuarial methods and assumptions including mortality, lapses, and interest. This excess benefit is then recognized ratably over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used. If actual experience or other evidence suggests that earlier assumptions should be revised, Torchmark adjusts the additional liability balance with a related charge or credit to benefit expense. At December 31, 2005, this liability was $3.5 million and at December 31, 2004 was $3.8 million.

 

Income Taxes: Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement book values and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

54


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 1—Significant Accounting Policies (continued)

 

Property and Equipment: Property and equipment, included in “Other assets,” is reported at cost less allowances for depreciation. Depreciation is recorded primarily on the straight line method over the estimated useful lives of these assets which range from two to ten years for equipment and five to forty years for buildings and improvements. Ordinary maintenance and repairs are charged to income as incurred. Impairments, if any, are accounted for in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Original cost of property and equipment was $111 million and $109 million at December 31, 2005 and 2004, respectively. Accumulated depreciation was $83 million and $79 million, respectively, at those same dates. Depreciation expense was $4.8 million in 2005, $4.1 million in 2004, and $4.1 million in 2003.

 

Low-Income Housing Tax Credit Interests:    As of December 31, 2005, Torchmark has invested approximately $122 million in flow-through entities that provide low-income housing tax credits and other related Federal income tax benefits to Torchmark. Significantly all of the return on the investments has been guaranteed by unrelated third-parties and has been accounted for using the effective-yield method. The remaining investments are non-guaranteed and are accounted for using the amortized-cost method. The federal income tax benefits accrued during the year, net of related amortization of the investment, is recorded in Income tax expense. The unamortized cost of the investments is included in Other assets and any unpaid commitments to invest are recorded in Other liabilities.

 

Goodwill: The excess cost of businesses acquired over the fair value of their net assets is reported as goodwill. In accordance with SFAS 142, Goodwill and Other Intangible Assets, goodwill is subject to annual impairment testing based on the procedures outlined in the Statement. Amortization of goodwill is not permitted. Torchmark tested its goodwill annually in each of the years 2003 through 2005. As a result of the tests, Torchmark’s goodwill was not impaired in any of the periods. Therefore, Torchmark continues to carry its goodwill at the January 1, 2003 balance of $378 million.

 

Treasury Stock: Torchmark accounts for purchases of treasury stock on the cost method. Issuance of treasury stock is accounted for using the weighted-average cost method.

 

Litigation Settlements: In 2005, Torchmark settled three significant legal matters. These cases involved Torchmark’s race-distinct mortality/dual-pricing litigation, its class-action cancer case, and its Waddell & Reed litigation. All of these cases related to litigation arising many years ago. The Waddell & Reed litigation was settled with Torchmark recording the $13.5 million proceeds net of costs as “Other income.” The other two settlements resulted in a $15 million pre-tax charge to “Other operating expenses.”

 

Stock Options: Torchmark accounts for its employee stock options in accordance with SFAS 123Accounting for Stock-Based Compensation as amended by SFAS 148Accounting for Stock-Based CompensationTransition which defines a “fair value method” of measuring and accounting for compensation expense from employee stock options. This standard also allows accounting for such options under the “intrinsic value method” in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations. If a company elects to use the intrinsic value method, then pro forma disclosures of earnings and earnings per share are required as if the fair value method of accounting was applied.

 

Torchmark has elected to account for its stock options under the intrinsic value method as outlined in APB 25, and has therefore computed the required pro forma earnings disclosures utilizing the fair value method. The fair value method requires the use of an option valuation model to value employee stock options. Torchmark uses the Black-Scholes valuation model to value its options, and pro forma compensation expense is based on these values. The pro forma expense is then charged to pro forma earnings over the option vesting period. Under the intrinsic value method, compensation expense for Torchmark’s option grants is only recognized if the exercise price of the employee stock option is less than the market price of the underlying stock on the date of grant.

 

55


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 1—Significant Accounting Policies (continued)

 

Torchmark’s pro forma earnings information is presented in the following table. The effects of applying SFAS 123 in the pro forma disclosures are not necessarily indicative of future amounts.

 

    

For the Year Ended December 31,


 
     2005

     2004

     2003

 

Net income as reported

   $ 495,390      $ 468,555      $ 430,141  

After-tax stock-based compensation, as reported

     635        353        350  

After-tax stock-based compensation, fair value method

     (35,952 )      (7,976 )      (8,066 )
    


  


  


Pro forma net income

   $ 460,073      $ 460,932      $ 422,425  
    


  


  


Earnings per share:

                          

Basic—as reported

   $ 4.73      $ 4.26      $ 3.75  
    


  


  


Basic—pro forma

   $ 4.39      $ 4.19      $ 3.68  
    


  


  


Diluted—as reported

   $ 4.68      $ 4.19      $ 3.73  
    


  


  


Diluted—pro forma

   $ 4.34      $ 4.11      $ 3.67  
    


  


  


 

In the second quarter of 2005, Torchmark executed a voluntary option exercise and restoration program whereby directors and employees exercised their vested options and received a lesser number of new grants at the then current market price. All of these options vested during 2005. As a result of this transaction, Torchmark incurred $24.0 million in pro forma after-tax option expense in 2005. Additionally, a grant to executives made in December, 2004 vested in June, 2005. This grant accounted for $7.0 million of 2005 after-tax pro forma expense.

 

In December 2004, the FASB revised Statement 123, Share-Based Payment (SFAS 123R), originally effective for Torchmark as of July 1, 2005. In April, 2005, the Securities and Exchange Commission deferred the effective date applicable to Torchmark to January 1, 2006. This Statement will require Torchmark to record an expense in the financial statements for stock options based on the “fair value method,” as presented in the pro forma disclosure above. While restatement of prior periods is permitted, the Statement also permits a “modified prospective” method of adoption, whereby the expense of all unvested options as of January 1, 2006 and options granted subsequent to January 1, 2006 are expensed in accordance with the Statement after that date. Torchmark will elect the modified prospective method of adoption. Torchmark plans to continue to use the Black Scholes model to value its options under SFAS 123R.

 

The new Statement will cause minor changes to the option expense computations for Torchmark going forward from the pro forma expense computations previously reported as follows:

 

  1)   forfeiture credits are estimated at the time of grant instead of being reported when incurred.

 

  2)   if an option fully vests upon an optionee’s retirement, the expense is accelerated to the earlier retirement date rather than the option’s normal vesting date as previously recorded.

 

  3)   if the deferred tax benefits recorded in connection with option expense exceeds the actual tax benefit realized upon exercise and the cumulative pool of such actual tax benefits allowed by the Statement, there would be an additional charge for such excess taxes.

 

Had these rules been in effect in each of the three years ended December 31, 2005, option expense or earnings per share would not have varied materially from the pro forma results presented above. Furthermore, Torchmark does not consider any of these new rules to materially affect option expense in future periods from that presented in the pro forma results, after removing the additional pro forma expense for the options granted in May, 2005 and in December, 2004 described above. The Company presently estimates 2006 after-tax stock option expense to be approximately $4 million or $.04 per diluted share.

 

56


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 1—Significant Accounting Policies (continued)

 

Earnings Per Share: Torchmark presents basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing income available to common shareholders by the weighted average common shares outstanding for the period. Diluted EPS is calculated by adding to shares outstanding the additional net effect of potentially dilutive securities or contracts, such as stock options, which could be exercised or converted into common shares. For more information on earnings per share, see Note 11Shareholders’ Equity.

 

Reclassifications: Certain amounts in the consolidated financial statements presented have been reclassified from amounts previously reported in order to be comparable between years. These reclassifications have no effect on previously-reported shareholders’ equity or net income for the periods involved.

 

Note 2—Statutory Accounting

 

Life insurance subsidiaries of Torchmark are required to file statutory financial statements with state insurance regulatory authorities. Accounting principles used to prepare these statutory financial statements differ from GAAP. Consolidated net income and shareholders’ equity (capital and surplus) on a statutory basis for the insurance subsidiaries were as follows:

 

     Net Income
Year Ended December 31,


   Shareholders’ Equity At
December 31,


     2005

   2004

   2003

   2005

   2004

Life insurance subsidiaries

   $ 420,355    $ 353,801    $ 331,586    $ 1,095,091    $ 952,071

 

The excess, if any, of shareholders’ equity of the insurance subsidiaries on a GAAP basis over that determined on a statutory basis is not available for distribution to Torchmark without regulatory approval.

 

Torchmark’s statutory financial statements are presented on the basis of accounting practices prescribed by the insurance department of the state of domicile of each insurance subsidiary. All states have adopted the National Association of Insurance Commissioners’ (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 state of domicile for Torchmark’s life insurance companies that affect statutory surplus except as noted in the chart below.

 

     December 31,

     2005

   2004

Statutory capital and surplus, as reported

   $ 1,095,091    $ 952,071

State prescribed practice:

             

Preferred stock of affiliate—non-admitted portion(1)

     13,264      15,905
    

  

Statutory capital and surplus in conformity with NAIC SAP

   $ 1,108,355    $ 967,976
    

  


(1) Carrying value of affiliated preferred stock limited to 2% of prior year admitted assets

 

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 3—Investments

 

A summary of fixed maturities available for sale and equity securities by cost or amortized cost and estimated fair value at December 31, 2005 and 2004 is as follows:

 

    Cost or
Amortized
Cost


  Gross
Unrealized
Gains


  Gross
Unrealized
Losses


    Fair Value

  Amount per
the Balance
Sheet


  % of
Total Fixed
Maturities


2005:                                    

Fixed maturities available for sale:

                                   

Bonds:

                                   

U.S. Government direct obligations and agencies

  $ 30,302   $ 919   $ (45 )   $ 31,176   $ 31,176   -0-

Government-sponsored enterprises

    246,159     2     (3,628 )     242,533     242,533   3

GNMAs

    25,970     1,984     -0-       27,954     27,954   -0-

Other mortgage-backed securities

    68,775     2,342     -0-       71,117     71,117   1

State, municipalities and political subdivisions

    41,318     1,487     (40 )     42,765     42,765   -0-

Foreign governments

    9,852     1,984     (2 )     11,834     11,834   -0-

Public utilities

    731,300     51,939     (1,113 )     782,126     782,126   9

Industrial and miscellaneous

    5,612,071     339,837     (50,683 )     5,901,225     5,901,225   67

Asset-backed securities

    68,896     4,189     (10 )     73,075     73,075   1

Redeemable preferred stocks

    1,576,992     80,914     (5,069 )     1,652,837     1,652,837   19
   

 

 


 

 

 

Total fixed maturities

    8,411,635     485,597     (60,590 )     8,836,642     8,836,642   100

Equity securities:

                                   

Common stocks:

                                   

Banks and insurance companies

    776     303     -0-       1,079     1,079    

Industrial and all others

    19,535     1     (3,226 )     16,310     16,310    

Non-redeemable preferred stocks

    25,486     5,172     -0-       30,658     30,658    
   

 

 


 

 

   

Total equity securities

    45,797     5,476     (3,226 )     48,047     48,047    
   

 

 


 

 

   

Total fixed maturities and equity securities

  $ 8,457,432   $ 491,073   $ (63,816 )   $ 8,884,689   $ 8,884,689    
   

 

 


 

 

   
2004:                                    

Fixed maturities available for sale:

                                   

Bonds:

                                   

U.S. Government direct obligations and agencies

  $ 33,672   $ 1,996   $ (46 )   $ 35,622   $ 35,622   -0-

Government-sponsored enterprises

    91,835     168     (1,063 )     90,940     90,940   1

GNMAs

    37,565     3,542     -0-       41,107     41,107   1

Other mortgage-backed securities

    76,415     4,991     -0-       81,406     81,406   1

State, municipalities and political subdivisions

    47,618     3,026     (596 )     50,048     50,048   1

Foreign governments

    14,170     2,229     -0-       16,399     16,399   -0-

Public utilities

    891,973     85,018     (916 )     976,075     976,075   11

Industrial and miscellaneous

    5,261,924     450,780     (12,077 )     5,700,627     5,700,627   65

Asset-backed securities

    76,604     5,053     (849 )     80,808     80,808   1

Redeemable preferred stocks

    1,533,626     113,446     (5,406 )     1,641,666     1,641,666   19
   

 

 


 

 

 

Total fixed maturities

    8,065,402     670,249     (20,953 )     8,714,698     8,714,698   100

Equity securities:

                                   

Common stocks:

                                   

Banks and insurance companies

    777     137     (6 )     908     908    

Industrial and all others

    5,692     1,066     -0-       6,758     6,758    

Non-redeemable preferred stocks

    23,485     5,742     -0-       29,227     29,227    
   

 

 


 

 

   

Total equity securities

    29,954     6,945     (6 )     36,893     36,893    
   

 

 


 

 

   

Total fixed maturities and equity securities

  $ 8,095,356   $ 677,194   $ (20,959 )   $ 8,751,591   $ 8,751,591    
   

 

 


 

 

   

 

58


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 3—Investments (continued)

 

     Year Ended December 31,

 
     2005

    2004

    2003

 

Net investment income is summarized as follows:

                        

Fixed maturities

   $ 584,198     $ 555,082     $ 528,025  

Equity securities

     2,986       2,611       2,232  

Policy loans

     22,377       21,526       20,488  

Other long-term investments

     7,117       11,816       20,690  

Short-term investments

     2,882       1,118       1,541  
    


 


 


       619,560       592,153       572,976  

Less investment expense

     (16,492 )     (15,118 )     (15,306 )
    


 


 


Net investment income

   $ 603,068     $ 577,035     $ 557,670  
    


 


 


An analysis of realized gains (losses) from investments is as follows:

                        

Realized investment gains (losses):

                        

Fixed maturities

   $ 778     $ 1,711     $ (14,294 )

Equity securities

     -0-       4,675       1,259  

Valuation of interest rate swaps

     (8,290 )     (8,203 )     (15,572 )

Spread on interest rate swaps (cash settlements)

     7,393       23,319       26,306  

Other

     399       714       (973 )
    


 


 


       280       22,216       (3,274 )

Applicable tax

     (255 )     (7,776 )     1,145  
    


 


 


Realized gains (losses) from investments, net of tax

   $ 25     $ 14,440     $ (2,129 )
    


 


 


An analysis of the net change in unrealized investment gains (losses) is as follows:

                        

Equity securities

   $ (4,689 )   $ (1,351 )   $ 8,093  

Fixed maturities available for sale

     (224,289 )     18,490       325,243  
    


 


 


Net change in unrealized gains (losses) on securities

   $ (228,978 )   $ 17,139     $ 333,336  
    


 


 


 

A schedule of fixed maturities by contractual maturity at December 31, 2005 is shown below on an amortized cost basis and on a fair value basis. Actual maturities could differ from contractual maturities due to call or prepayment provisions.

 

     Amortized
Cost


   Fair
Value


Fixed maturities available for sale:

             

Due in one year or less

   $ 256,011    $ 258,915

Due from one to five years

     1,997,522      2,086,816

Due from five to ten years

     808,859      874,653

Due after ten years

     5,185,602      5,444,112
    

  

       8,287,994      8,664,496

Mortgage-backed and asset-
backed securities

     163,641      172,146
    

  

     $ 8,411,635    $ 8,836,642
    

  

 

Proceeds from sales of fixed maturities available for sale were $78.0 million in 2005, $46.0 million in 2004, and $91.7 million in 2003. Gross gains realized on those sales were $7.6 million in 2005, $3.1 million in 2004, and $3.7 million in 2003. Gross losses were $13.7 million in 2005, $2.9 million in 2004, and $13.5 million in 2003. Proceeds from sales of equity securities were zero in 2005, $32.5 million in 2004, and $5.3 million in 2003. Gross gains realized on those sales were $4.7 million in 2004 and $1.5 million in 2003. Gross losses realized on those sales were $19 thousand in 2004 and zero in 2003.

 

Torchmark’s portfolio of fixed maturities fluctuates in value based on interest rates in financial markets and other economic factors. These fluctuations caused by market rate changes have little bearing on whether or not the investment will be ultimately recoverable. Therefore, Torchmark considers

 

59


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 3—Investments (continued)

 

these declines in value as temporary even in periods exceeding one year. In certain circumstances, however, it may become apparent that the principal of an investment may not be recoverable, generally due to factors specific to an individual issuer and not market interest rates. In this event, Torchmark classifies such investments as other-than-temporarily impaired and writes the investment down to fair value, realizing an investment loss. The determination that a security is other-than-temporarily impaired is highly subjective and involves the careful consideration of many factors. These factors include:

 

    Default on a payment
    Issuer has declared bankruptcy
    Severe deterioration in market value
    Deterioration in credit quality as indicated by credit ratings
    Issuer having serious financial difficulties as reported in the media
    News releases by issuer
    Information disseminated through the investment community
    Length of time (duration) security has been impaired

 

While all available information is taken into account, it is difficult to predict the ultimately recoverable amount of a distressed or impaired security. As of December 31, 2005, Torchmark has no information available to cause it to believe that any of its investments are other-than-temporarily impaired.

 

The following tables disclose unrealized investment losses by class of investment at December 31, 2005 and December 31, 2004. Torchmark considers these investments to be only temporarily impaired.

 

ANALYSIS OF GROSS UNREALIZED INVESTMENT LOSSES

At December 31, 2005

 

     Less than
Twelve Months


    Twelve Months
or Longer


    Total

 

Description of Securities


   Fair Value

   Unrealized
Loss


    Fair
Value


   Unrealized
Loss


    Fair
Value


   Unrealized
Loss


 

U.S. Government and agency

   $ 1,137    $ (9 )   $ 3,637    $ (36 )   $ 4,774    $ (45 )

Government-sponsored enterprises

     214,830      (2,378 )     23,750      (1,250 )     238,580      (3,628 )

States, municipalities, & political subdivisions

     —        —         1,148      (40 )     1,148      (40 )

Foreign governments

     691      (2 )     —        —         691      (2 )

Corporates

     962,850      (40,086 )     121,087      (16,789 )     1,083,937      (56,875 )
    

  


 

  


 

  


Total fixed maturities

     1,179,508      (42,475 )     149,622      (18,115 )     1,329,130      (60,590 )

Equities

     16,308      (3,226 )     —        —         16,308      (3,226 )
    

  


 

  


 

  


Total

   $ 1,195,816      (45,701 )     149,622      (18,115 )     1,345,438      (63,816 )
    

  


 

  


 

  


 

At December 31, 2004

 

     Less than
Twelve Months


    Twelve Months
or Longer


    Total

 

Description of Securities


   Fair
Value


   Unrealized
Loss


    Fair
Value


   Unrealized
Loss


    Fair
Value


   Unrealized
Loss


 

U.S. Government and agency

   $ 3,698    $ (46 )   $ —      $ —       $ 3,698    $ (46 )

Government-sponsored enterprises

     —        —         23,938      (1,063 )     23,938      (1,063 )

Other mortgage-backed securities

     109      —         —        —         109      —    

States, municipalities, & political subdivisions

     1,161      (25 )     3,699      (571 )     4,860      (596 )

Corporates

     340,667      (10,422 )     223,190      (8,826 )     563,857      (19,248 )
    

  


 

  


 

  


Total fixed maturities

     345,635      (10,493 )     250,827      (10,460 )     596,462      (20,953 )

Equities

     344      (6 )     —        —         344      (6 )
    

  


 

  


 

  


Total

   $ 345,979    $ (10,499 )   $ 250,827    $ (10,460 )   $ 596,806    $ (20,959 )
    

  


 

  


 

  


 

60


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

Note 3—Investments (continued)

 

Other long-term investments consist of the following:

 

     December 31,

     2005

   2004

Mortgage loans, at cost

   $ 31,043    $ 32,832

Investment real estate, at depreciated cost*

     12,414      13,676

Interest-rate swaps

     5,101      21,206

Low-income housing interests

     13,131      7,697

Other

     9,881      12,245
    

  

Total

   $ 71,570    $ 87,656
    

  


*Includes $6.2 million and $6.5 million of properties partially occupied by Torchmark subsidiaries at December 31, 2005 and 2004, respectively.

 

The estimated fair value of mortgage loans was $31.0 million at December 31, 2005 and $32.5 million at December 31, 2004. Accumulated depreciation on investment real estate was $21.1 million and $21.4 million at December 31, 2005 and 2004, respectively.

 

Torchmark had $5 million in investment real estate at December 31, 2005, which was nonincome producing during the previous twelve months. These properties consisted primarily of undeveloped land. Torchmark had $10 million in nonincome producing mortgages as of December 31, 2005. Torchmark had no nonincome producing fixed maturities or other long-term investments during the twelve months ended December 31, 2005.

 

During 2003, Torchmark recorded a reserve against its mortgage loans on real estate as a result of impairments. The reserve resulted in a pretax loss of $5 million, or $3.3 million after tax.

 

During 2004, Torchmark decided to reduce its exposure to mortgage loans. As a result, it sold mortgages with a carrying value of $75.7 million for proceeds of $74.4 million, resulting in a small loss. The sale included mortgages previously written down. As more fully described in Note 15Related Party Transactions, these mortgages were sold to MidFirst Bank, the Chairman of the Board of Directors of whose parent company was also a Torchmark director.

 

61


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 4—Deferred Acquisition Costs and Value of Insurance Purchased

 

An analysis of deferred acquisition costs and the value of insurance purchased is as follows:

 

    2005

    2004

    2003

 
    Deferred
Acquisition
Costs


    Value of
Insurance
Purchased


    Deferred
Acquisition
Costs


    Value of
Insurance
Purchased


    Deferred
Acquisition
Costs


    Value of
Insurance
Purchased


 

Balance at beginning of year

  $ 2,506,216     $ 77,116     $ 2,330,010     $ 89,849     $ 2,184,134     $ 102,091  

Additions:

                                               

Deferred during period:

                                               

Commissions

    304,915       -0-       313,261       -0-       294,989       -0-  

Return of commissions(1)

    -0-       -0-       -0-       -0-       (10,857 )     -0-  

Other expenses

    214,852       -0-       201,936       -0-       185,516       -0-  
   


 


 


 


 


 


Total deferred

    519,767       -0-       515,197       -0-       469,648       -0-  

Foreign exchange adjustment

    976       20       2,897       62       4,697       226  

Adjustment attributable to unrealized investment losses(3)

    14,268       -0-       -0-       -0-       -0-       -0-  
   


 


 


 


 


 


Total additions

    535,011       20       518,094       62       474,345       226  

Deductions:

                                               

Amortized during period

    (343,178 )     (6,781 )     (334,454 )     (12,795 )     (309,276 )     (12,468 )

Unlocking adjustment(2)

    -0-       -0-       (4,130 )     -0-       -0-       -0-  

Adoption of SOP 03-01

    -0-       -0-       (2,776 )     -0-       -0-       -0-  

Adjustment attributable to unrealized investment gains(3)

    -0-       -0-       (528 )     -0-       (19,193 )     -0-  
   


 


 


 


 


 


Total deductions

    (343,178 )     (6,781 )     (341,888 )     (12,795 )     (328,469 )     (12,468 )
   


 


 


 


 


 


Balance at end of year

  $ 2,698,049     $ 70,355     $ 2,506,216     $ 77,116     $ 2,330,010     $ 89,849  
   


 


 


 


 


 



(1) In 2003, $10.9 million in disputed commissions paid in prior years to Waddell & Reed were returned in settlement. This amount reduced deferred commissions.
(2) The unlocking adjustment resulted from revisions to actuarial assumptions related to guaranteed minimum death benefits in Torchmark’s variable annuity business.
(3) Represents amounts pertaining to investments relating to universal life-type products.

 

The amount of interest accrued on the unamortized balance of value of insurance purchased was $4.1 million, $4.8 million, and $5.5 million for the years ended December 31, 2005, 2004, and 2003, respectively. The average interest rates used for the years ended December 31, 2005, 2004, and 2003 were 5.6%, 5.7%, and 5.7%, respectively. The estimated amortization, net of interest accrued, on the unamortized balance at December 31, 2005 during each of the next five years is: 2006, $6.1 million; 2007, $5.5 million; 2008, $5.0 million; 2009, $4.5 million; and 2010, $4.0 million.

 

In the event of lapses or early withdrawals in excess of those assumed, deferred acquisition costs and the value of insurance purchased may not be recoverable.

 

62


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

Note 5—Future Policy Benefit Reserves

 

A summary of the assumptions used in determining the liability for future policy benefits at December 31, 2005 is as follows:

 

Individual Life Insurance

 

Interest assumptions:

 

Years of Issue


   Interest Rates

     Percent of
Liability


1917-2005

   2.5% to 5.5%      15

1929-2005

   6.0%      27

1986-1994

   7.0% graded to 6.0%      10

1954-2000

   8.0% graded to 6.0%      12

1951-1985

   8.5% graded to 6.0%      6

1980-2005

   7.0%      10

1984-2005

   Interest Sensitive      20
           
            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

  United States Life Table

1975-80

  Select and Ultimate Table

X-18

  Ultimate Table

 

Withdrawal assumptions:

 

Withdrawal assumptions are based on Torchmark’s experience.

 

Individual Health Insurance

 

Interest assumptions:

 

Years of Issue


   Interest Rates

     Percent of
Liability


1955-2005

   2.5% to 4.5%      4

1993-2005

   6.0%      47

1986-1992

   7.0% graded to 6.0%      31

1955-2000

   8.0% graded to 6.0%      13

1951-1986

   8.5% graded to 6.0%      2

2001-2005

   7.0%      3
           
            100
           

 

Morbidity assumptions:

 

For individual health, the morbidity assumptions are based on either Torchmark’s experience or the assumptions used in calculating statutory reserves.

 

Termination assumptions:

 

Termination assumptions are based on Torchmark’s experience.

 

Overall Interest Assumptions:

 

The overall average interest assumption for determining the liability for future life and health insurance benefits in 2005 was 6.0%.

 

63


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 6—Liability for Unpaid Health Claims

 

Activity in the liability for unpaid health claims is summarized as follows:

 

     Year Ended December 31,

 
     2005

    2004

    2003

 

Balance at beginning of year

   $ 180,843     $ 171,012     $ 173,616  

Incurred related to:

                        

Current year

     654,994       677,344       662,025  

Prior year

     (16,535 )     (5,195 )     (8,703 )
    


 


 


Total incurred

     638,459       672,149       653,322  

Paid related to:

                        

Current year

     504,648       512,940       504,724  

Prior year

     152,618       149,378       151,202  
    


 


 


Total paid

     657,266       662,318       655,926  
    


 


 


Balance at end of year

   $ 162,036     $ 180,843     $ 171,012  
    


 


 


 

At the end of each period, the liability for unpaid health claims includes an estimate of claims incurred but not yet reported to the Company. This estimate is based on historical trends. The difference between the estimate made at the end of each prior period and the actual experience is reflected above under the caption “Incurred related to: Prior year.” Prior-year claims incurred during the year result from claim settlements at different amounts from those amounts originally estimated.

 

The liability for unpaid health claims is included with “Policy claims and other benefits payable” on the Consolidated Balance Sheet.

 

Note 7—Supplemental Disclosures of Cash Flows Information

 

The following table summarizes Torchmark’s noncash transactions, which are not reflected on the Consolidated Statements of Cash Flows:

 

     Year Ended December 31,

     2005

   2004

   2003

Paid-in capital from tax benefit for stock option exercises

   $ 36,545    $ 4,748    $ 1,402

Other stock-based compensation not involving cash

     1,375      986      1,026

Commitments for low-income housing interests

     54,549      11,250      1,323

 

The following table summarizes certain amounts paid during the period:

 

     Year Ended December 31,

     2005

   2004

   2003

Interest paid*

   $ 48,272    $ 43,985    $ 49,382

Income taxes paid

     105,100      145,852      144,654

*   The interest cost reductions resulting from the cash settlements of Torchmark’s interest-rate swaps are netted against realized investment losses.

 

64


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 8—Income Taxes

 

Torchmark and its subsidiaries file a life-nonlife consolidated Federal income tax return.

 

The components of income taxes were as follows:

 

     Year Ended December 31,

 
     2005

    2004

    2003

 

Income tax expense

   $ 236,131     $ 245,083     $ 222,971  

Change in accounting principle

     -0-       (3,857 )     -0-  

Shareholders’ equity:

                        

Unrealized gains (losses)

     (73,680 )     10,292       109,779  

Tax basis compensation expense (from the exercise of stock options) in excess of amounts recognized for financial reporting purposes

     (36,545 )     (4,748 )     (1,402 )
    


 


 


     $ 125,906     $ 246,770     $ 331,348  
    


 


 


 

Income tax expense consists of:

 

     Year Ended December 31,

     2005

   2004

   2003

Current income tax expense

   $ 131,491    $ 139,522    $ 149,435

Deferred income tax expense

     104,640      105,561      73,536
    

  

  

     $ 236,131    $ 245,083    $ 222,971
    

  

  

 

In 2005, 2004, and 2003, 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 1Significant Accounting Policies, these differences caused the financial statement book values of some assets and liabilities to be different from their respective tax bases.

 

The effective income tax rate differed from the expected 35% rate as shown below:

 

     Year Ended December 31,

 
     2005

    %

    2004

    %

    2003

    %

 

Expected income taxes

   $ 256,032     35.0 %   $ 252,280     35.0 %   $ 228,589     35.0 %

Increase (reduction) in income taxes resulting from:

                                          

Tax-exempt investment income

     (2,458 )   (.3 )     (2,597 )   (.4 )     (4,284 )   (.7 )

Tax settlements

     (15,989 )   (2.2 )     (3,003 )   (.4 )     -0-      

Other

     (1,454 )   (.2 )     (1,597 )   (.2 )     (1,334 )   (.2 )
    


 

 


 

 


 

Income tax expense

   $ 236,131     32.3 %   $ 245,083     34.0 %   $ 222,971     34.1 %
    


 

 


 

 


 

 

65


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 8—Income Taxes (continued)

 

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:

 

     December 31,

     2005

   2004

Deferred tax assets:

             

Present value of future policy surrender charges

   $ 12,586    $ 16,159

Carryover of nonlife net operating losses

     7,105      3,048

Other assets and other liabilities, principally due to the current nondeductibility of certain accrued expenses for tax purposes

     11,654      9,097

Other

     -0-      12,367
    

  

Total gross deferred tax assets

     31,345      40,671

Deferred tax liabilities:

             

Unrealized investment gains

     147,507      221,187

Deferred acquisition costs

     685,253      625,097

Future policy benefits, unearned and advance premiums, and policy claims

     200,756      170,360

Other

     4,762      -0-
    

  

Total gross deferred tax liabilities

     1,038,278      1,016,644
    

  

Net deferred tax liability

   $ 1,006,933    $ 975,973
    

  

 

Torchmark’s Federal income tax returns are routinely audited by the Internal Revenue Service (IRS). In the fourth quarter of 2005, the Appeals division of the IRS and Torchmark agreed to settle all issues with respect to the Company’s 1996 and 1997 tax years. As a result, Torchmark recorded a $15.9 million tax benefit in 2005 to reflect the impact of this settlement on the tax years covered by the examination as well as all other tax years prior to 2005 to which these issues apply. The benefit relates primarily to Torchmark’s computation of the dividends received deduction on its separate account and the amount of life insurance reserves for income tax purposes. The IRS has completed its examinations of Torchmark’s 1998-2002 income tax returns, with most of the proposed adjustments being referred to Appeals. The Federal income tax returns for 2003 and 2004 are not currently under examination. Management believes that adequate provision has been made in the financial statements for any potential assessments that may result from the completed examinations, future tax examinations, and other tax-related matters for all open tax years.

A tax deferred component of statutory income accumulated prior to 1984 in a “policyholders’ surplus account” is not taxable unless it exceeds certain statutory limitations or is distributed to shareholders. As of December 31, 2004, Torchmark had not recognized a deferred tax liability of approximately $10 million that related to this accumulated income as management considered the situations causing taxation of the account to be remote. During 2004, the American Jobs Creation Act of 2004 amended Federal income tax law to permit life insurance companies to distribute amounts from policyholders’ surplus accounts in 2005 and 2006 without incurring Federal income tax on the distributions. Each of the affected insurance subsidiaries distributed to Torchmark all the amounts held in its policyholders’ surplus accounts in 2005, thereby permanently eliminating this potential liability for tax years after 2004.

 

Torchmark has net operating loss carryforwards of approximately $20.3 million at December 31, 2005 of which $120 thousand expire in 2008; $4.4 million expire in 2020; $4.6 million expire in 2021; and $11.2 million expire in 2025. A valuation allowance is to be provided when it is more likely than not that deferred tax assets will not be realized by the Company. No valuation allowance has been recorded relating to Torchmark’s deferred tax assets since, in management’s judgment, Torchmark will more likely than not have sufficient taxable income in future periods to fully realize its existing deferred tax assets.

 

66


Table of Contents

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 is also a nonqualified, noncontributory excess benefit pension plan which covers certain employees. The total cost of these retirement plans charged to operations was as follows:

 

  Year Ended
December 31,


   Defined Contribution
Plans


   Defined Benefit
Pension Plans


2005

   $ 3,597    $ 5,932

2004

     3,703      4,927

2003

     3,308      5,236

 

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 the pension plans subject to minimums required by regulation and maximums allowed for tax purposes. Defined benefit plan contributions were $12.0 million in 2005, $10.7 million in 2004, and $10.4 million in 2003. Torchmark estimates as of December 31, 2005 that it will contribute an amount not to exceed $20 million to these plans in 2006. The actual amount of contribution may be different from this estimate.

 

The excess benefit pension plan provides the benefits that an employee would have otherwise received from a defined benefit pension plan in the absence of the Internal Revenue Code’s limitation on benefits payable under a qualified plan. This plan is limited to a select group of employees and was closed as of December 31, 1994. Although this plan is unfunded, pension cost is determined in the same manner as for the funded plans. Liability for the excess benefit plan was $5.8 million at December 31, 2005 and $5.8 million at December 31, 2004.

 

Plan assets in the funded plans consist primarily of investments in marketable fixed maturities and equity securities and are valued at fair market value. The following table presents the assets of Torchmark’s defined benefit pension plans by component for the years ended December 31, 2005 and 2004.

 

Pension Assets by Component

 

     December 31,
2005


   December 31,
2004


     Amount

   %

   Amount

   %

Corporate debt

   $ 46,030    25    $ 49,977    28

Other fixed maturities

     1,122    1      1,447    1

Equity securities

     131,846    71      125,645    70

Securities of Torchmark

     -0-    -0-      -0-    -0-

Short-term investments

     5,492    3      2,786    1

Other

     279    -0-      484    -0-
    

  
  

  

Total

   $ 184,769    100    $ 180,339    100
    

  
  

  

 

67


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 9—Postretirement Benefits (continued)

 

Torchmark’s investment objectives for its plan assets include preservation of capital, preservation of purchasing power, and long-term growth. Torchmark seeks to preserve capital through investments made in high quality securities with adequate diversification to minimize risk. The portfolio is monitored continuously for changes in quality and diversification mix. The preservation of purchasing power is intended to be accomplished through asset growth, exclusive of contributions and withdrawals, in excess of the rate of inflation. Torchmark intends to maintain investments that when combined with future plan contributions will produce adequate long-term growth to provide for all plan obligations. It is also Torchmark’s objective that the portfolio’s investment return will meet or exceed the return of a balanced market index.

 

All of the securities in the portfolio are highly marketable so that there will be adequate liquidity to meet projected payments. There are no specific policies calling for asset durations to match those of benefit obligations.

 

Allowed investments are limited to equities, fixed maturities, and short-term investments (invested cash). Equities include common and preferred stocks, securities convertible into equities, and mutual funds that invest in equities. Fixed maturities consist of marketable debt securities rated investment grade at purchase by a major rating agency. Short-term investments include fixed maturities with maturities less than one year and invested cash. Target asset allocations are as follows with a twenty percent allowable variance as noted.

 

Asset Type


   Target

    Minimum

    Maximum

 

Equities

   65 %   45 %   85 %

Fixed maturities

   35     15     55  

Short-terms

   0     0     20  

 

Short-term divergences due to rapid market movements are allowed.

 

Portfolio risk is managed through quality standards, diversification, and continuous monitoring. Equities must be listed on major exchanges and adequate market liquidity is required. Fixed maturities must be rated investment grade at purchase by a major rating agency. Short-term investments in commercial paper must be rated at least A-2 by Standard & Poor’s with the issuer rated investment grade. Invested cash is limited to banks rated A or higher. Investments outside of the aforementioned list are not permitted, except by prior approval of the Plans’ Trustees. At December 31, 2005, there were no restricted investments contained in the portfolio.

 

The investment portfolio is to be well diversified to avoid undue exposure to a single sector, industry, business, or security. The equity and fixed-maturity portfolios are not permitted to invest in any single issuer that would exceed 10% of total plan assets at the time of purchase. Torchmark does not employ any other special risk management techniques, such as derivatives, in managing the pension investment portfolio.

 

68


Table of Contents

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:                   
     2005

    2004

       

Discount Rate

   5.54 %   6.04 %      

Rate of Compensation Increase

   3.65     3.84        
For Periodic Benefit Cost for the Year:                   
     2005

    2004

    2003

 

Discount Rate

   6.04 %   6.29 %   6.75 %

Expected Long-Term Returns

   9.00     8.70     8.75  

Rate of Compensation Increase

   3.84     3.78     4.50  

 

The expected long-term rate of return on plan assets is management’s best estimate of the average rate of earnings expected to be received on the assets invested in the plan over the benefit period. In determining this assumption, consideration is given to the historical rate of return earned on the assets, the projected returns over future periods, and the spread between the long-term rate of return on plan assets and the discount rate used to compute benefit obligations.

 

Net periodic pension cost for the defined benefit plans by expense component was as follows:

 

     Year Ended December 31,

 
     2005

    2004

    2003

 

Service cost—benefits earned during the period

   $ 7,412     $ 6,753     $ 6,051  

Interest cost on projected benefit obligation

     11,392       10,659       10,066  

Expected return on assets

     (14,368 )     (12,868 )     (11,529 )

Amortization of prior service cost

     112       60       (8 )

Recognition of net actuarial (gain)loss

     1,384       323       656  
    


 


 


Net periodic pension cost

   $ 5,932     $ 4,927     $ 5,236  
    


 


 


 

69


Table of Contents

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 benefit obligation and plan assets. This table also presents a reconciliation of the plans’ funded status with the amounts recognized on Torchmark’s Consolidated Balance Sheet.

 

     Pension Benefits
For the year ended
December 31,


 
     2005

    2004

 

Changes in benefit obligation:

                

Obligation at beginning of year

   $ 186,151     $ 170,298  

Service cost

     7,412       6,753  

Interest cost

     11,392       10,659  

Actuarial loss (gain)

     26,908       12,478  

Benefits paid

     (11,832 )     (13,936 )

Plan amendments

     -0-       (101 )
    


 


Obligation at end of year

     220,031       186,151  

Changes in plan assets:

                

Fair value at beginning of year

     180,339       157,973  

Return on assets

     3,722       26,386  

Contributions

     12,540       9,916  

Benefits paid

     (11,832 )     (13,936 )
    


 


Fair value at end of year

     184,769       180,339  
    


 


Funded status at year end

     (35,262 )     (5,812 )

Unrecognized amounts at year end:

                

Unrecognized actuarial loss (gain)

     37,364       1,164  

Unrecognized prior service cost

     874       987  

Unrecognized transition obligation

     (40 )     (48 )
    


 


Net amount recognized at year end

   $ (2,936 )   $ (3,709 )
    


 


Amounts recognized consist of:

                

Prepaid benefit cost

   $ 12,165     $ -0-  

Accrued benefit liability

     (9,229 )     (3,709 )

Intangible asset

     -0-       -0-  
    


 


Net amount recognized at year end

   $ 2,936     $ (3,709 )
    


 


 

The accumulated benefit obligations (ABO) for Torchmark’s funded defined benefit pension plans were $183.1 million and $155.3 million at December 31, 2005 and 2004, respectively. Plan assets exceeded the ABO in all of Torchmark’s funded pension plans at both December 31, 2005 and 2004. In the unfunded plans, the ABO was $11.3 million at December 31, 2005 and $9.9 million at December 31, 2004.

 

Torchmark has estimated its expected pension benefits to be paid over the next ten years as of December 31, 2005. These amounts will be substantially funded by plan assets and not corporate assets. These estimates use the same assumptions that measure the benefit obligation at December 31, 2005, taking estimated future employee service into account. Those estimated benefits are as follows:

 

For the year(s)


    

2006

   $ 10,297

2007

     9,848

2008

     12,584

2009

     12,148

2010

     11,871

2011-2015

     69,972

 

70


Table of Contents

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.

 

For retired employees over age sixty-five, Torchmark does not provide postretirement benefits other than pensions and the life insurance benefits described above. Torchmark does provide a portion of the cost for health insurance benefits for certain employees who retired before February 1, 1993 and for certain employees that retired before age sixty-five, covering them until they reach age sixty-five. Eligibility for this benefit was generally achieved at age fifty-five with at least fifteen years of service. This subsidy is minimal to retired employees who did not retire before February 1, 1993.

 

Torchmark’s post-retirement defined benefit plans other than pensions are not funded. Liabilities for these plans are measured as of December 31 for the appropriate year.

 

The components of net periodic postretirement benefit cost for plans other than pensions are as follows:

 

     Year Ended December 31,

 
     2005

    2004

    2003

 

Service cost

   $ 735     $ 768     $ 730  

Interest cost on accumulated postretirement benefit obligation

     891       879       862  

Expected return on plan assets

     -0-       -0-       -0-  

Amortization of prior service cost

     -0-       -0-       -0-  

Recognition of net actuarial (gain) loss

     (211 )     (440 )     (139 )
    


 


 


Net periodic postretirement benefit cost

   $ 1,415     $ 1,207     $ 1,453  
    


 


 


 

The following table presents a reconciliation of the benefit obligation and plan assets from the beginning to the end of the year and a reconciliation of the funded status to the accrued benefit liability:

 

    

Benefits Other Than Pensions
For the year ended December 31,


 
     2005

     2004

 

Changes in benefit obligation:

                 

Obligation at beginning of year

   $ 13,040      $ 12,488  

Service cost

     735        768  

Interest cost

     891        879  

Actuarial loss (gain)

     (211 )      (440 )

Benefits paid

     (775 )      (655 )
    


  


Obligation at end of year

     13,680        13,040  

Changes in plan assets:

                 

Fair value at beginning of year

     -0-        -0-  

Return on assets

     -0-        -0-  

Contributions

     775        655  

Benefits paid

     (775 )      (655 )
    


  


Fair value at end of year

     -0-        -0-  
    


  


Funded status at year end

     (13,680 )      (13,040 )

Unrecognized amounts at year end:

                 

Unrecognized actuarial loss (gain)

     -0-        -0-  

Unrecognized prior service cost

     -0-        -0-  
    


  


Net amount recognized at year end as accrued benefit liability

   $ (13,680 )    $ (13,040 )
    


  


 

71


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 9—Postretirement Benefits (continued)

 

On an aggregate basis, the post-retirement benefit obligation for the post-retirement plans other than pensions was $13.7 million and $13.0 million at December 31, 2005 and 2004, respectively. 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:                   
     2005

    2004

       

Discount Rate

   7.00 %   7.05 %      

Rate of Compensation Increase

   4.50     4.50        
For Periodic Benefit Cost for the Year:                   
     2005

    2004

    2003

 

Discount Rate

   7.05 %   7.25 %   7.59 %

Rate of Compensation Increase

   4.50     4.50     4.50  

 

For measurement purposes of the healthcare benefits, a range of 7-10% annual rate of increase in per capita cost of covered healthcare benefits was assumed for the years 2003 through 2005. Torchmark has assumed that the health care cost trend rate will remain stable at the 7-10% range in future periods. This trend rate assumption could have a significant effect on the amounts reported. However, because participants substantially pay the cost of this benefit, a 1% increase or decrease in the health care cost trend rate is not expected to have a significant effect in the service and interest cost components, nor is the effect on the plan’s benefit obligation expected to exceed $1 thousand.

 

Note 10—Debt

 

 

An analysis of debt at carrying value is as follows:

 

     December 31,  
     2005

    2004

 
     Short-term
Debt


   Long-term
Debt


    Short-term
Debt


   Long-term
Debt


 

Funded Debt:

                              

Senior Debentures, due 2009

          $ 99,553            $ 101,801  

Notes, due 2023

            166,007              165,934  

Notes, due 2013

            93,205              93,126  

Senior Notes, due 2006

   $ 179,852                     184,712  

Issue Expenses(1)

            (5,502 )            (5,527 )
    

  


 

  


Subtotal long-term debt

     179,852      353,263     $ -0-      540,046  

Junior Subordinated Debentures, due 2041(2)

            154,639              154,639  
    

  


 

  


Total funded debt

     179,852      507,902       -0-      694,685  

Commercial paper

     201,653              170,354         
    

  


 

  


     $ 381,505    $ 507,902     $ 170,354    $ 694,685  
    

  


 

  



(1) Unamortized issue expenses related to Trust Preferred Securities.
(2) Junior Subordinated Debentures included in “Due to affiliates” on the Consolidated Balance Sheet.

 

The amount of debt that becomes due during each of the next five years is: 2006—$382,000; 2007—$0; 2008—$0; 2009—$99,450; 2010—$0; and thereafter—$417,601.

 

Funded debt: During 2001, Torchmark established two Capital Trusts, which, in turn, sold a total of six million shares of Trust Preferred Securities (trust preferreds) in separate public offerings. The trust

 

72


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 10—Debt (continued)

 

preferreds were issued at a face amount of $150 million (par value), and are junior and subordinated to all other Torchmark debt. They pay a quarterly dividend at an annual rate of 7 3/4% which is equivalent to an annual rate of $1.9375 per share. All dividends are cumulative. The trust preferreds are subject to a mandatory redemption on November 2, 2041, but Torchmark has the option to redeem the securities in part or whole at par value on or after November 2, 2006. All payments by the Capital Trusts regarding the trust preferreds are guaranteed by Torchmark. The Capital Trusts in turn used the proceeds to buy 7 3/4% Junior Subordinated Debentures from Torchmark.

 

Effective January 1, 2004, Torchmark has accounted for its Trust Preferred Securities under FASB Interpretation 46, Consolidation of Variable Interest Entities as revised (FIN46R). FIN46R clarified the definition of a variable interest entity (VIE) and the determination of which holder is the VIE’s primary beneficiary. Only primary beneficiaries are permitted to consolidate VIE’s. Therefore, FIN46R does not permit consolidation of VIE’s in which a company has voting control but is not the primary beneficiary. The trusts that are liable for Torchmark’s trust preferreds meet the definition of VIE’s. Under FIN46R, Torchmark has no variable interest in these trusts and can therefore not be the entity’s primary beneficiary. For this reason, Torchmark does not consolidate the trusts, even though Torchmark is the sole owner of the voting equity of these entities and guarantees their performance. Therefore, Torchmark does not report the trust preferreds as long-term debt but instead reports its 7 3/4% Junior Subordinated Debentures due 2041 to the trust entities as “Due to Affiliates.” The amount of this debt was $154.6 million at December 31, 2004 and 2005, $4.6 million greater than the par value of the trust preferreds. Deconsolidation of the trusts results in reporting $4.6 million of additional debt which is due to the trust entities and is offset by an asset, included in “Other Receivables,” of a like amount representing Torchmark’s equity interest in the trusts. Also, the unamortized issue expenses of the trust preferreds of $5.5 million still remain as a reduction of long-term debt. The additional interest expense on this debt exceeds the trust preferred distributions by $360 thousand in each of the years ended December 31, 2005, 2004, and 2003, which is offset by investment income to Torchmark in like amount representing dividends from the trusts.

 

The following table presents detailed information about the terms of Torchmark’s funded debt.

 

Selected Information about Debt Issues as of December 31, 2005

 

Instrument


  Annual
Percentage
Rate


    Issue
Date


  Maturity
Date


  Outstanding
Principle
(Par Value)


  Outstanding
Principle
(Book Value)


  Outstanding
Principle
(Fair Value)


    Periodic
Interest
Payments Due


  Earliest Call
Date


Senior Debentures, due 2009(1)

  8.250 %   8/89   8/15/09   $ 99,450   $ 99,553   $ 109,703     2/15 & 8/15   Not callable

Notes, due 2023(1)

  7.875 %   5/93   5/15/23     168,912     166,007     211,056     5/15 & 11/15   Not callable

Notes, due 2013(1)

  7.375 %   7/93   8/1/13     94,050     93,205     106,521     2/1 & 8/1   Not callable

Senior Notes, due 2006(1)

  6.250 %   12/01   12/15/06     180,000     179,852     182,268     6/15 & 12/15   Not callable

Junior Subordinated Debentures(2)

  7.750 %   11/01   11/2/41     154,639     154,639     154,600 (4)   quarterly(3)   11/2/06

(1) All securities other than “Due to affiliate” have equal priority with one another.
(2) Junior Subordinated Debentures are classified as “Due to affiliate” and are junior to other securities in priority of payment.
(3) Quarterly payments on the second day of Feb., May, Aug., and Nov.
(4) Fair value of trust preferreds.

 

Interest rate swaps: Torchmark has entered into swap agreements in connection with certain debt instruments to swap fixed-rate interest commitments to floating rates. All swaps are carried at fair value and are classified as “Other long-term investments” on the Consolidated Balance Sheets. In August, 2004, Torchmark entered into two new swap agreements exchanging its fixed 8.25% interest rate of the Senior Debentures due 2009 and its fixed 7.375% interest rate of the Notes due 2013 for variable rates.

 

73


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 10—Debt (continued)

 

These swaps were disposed of in September, 2005 for proceeds of $239 thousand. As of September 30, 2004, the swap on the 9.18% Monthly Income Preferred Securities expired. The swap related to the 6 1/4% Senior Notes qualifies as a hedge under accounting rules, as did the sold swap on the 8 1/4% Senior Debentures. Changes in the fair value of these swaps are offset by an adjustment of the carrying value of the related Notes in like amount each period. The following tables summarize selected information about interest rate swaps.

 

Selected Information About Interest Rate Swaps

 

Related Debt


  Expiration

  Hedge
Y/N


  Notional
Amount


  Fixed
Rate


    Floating
LIBOR base


  Additional
basis
points


  Floating
Rate at
12/31/05


    Reset period

Senior Notes, due 12/06

  12/06   Yes   $ 180,000   6.250 %   six-month   120.5   5.875 %   six months

Trust Preferred Securities, due 11/41

  11/11   No     150,000   7.750 %   three-month   221.0   6.750 %   three months

Monthly Income Preferred Securities*

  09/04   No     200,000   9.180 %   one-month   139.0   n/a     one month

Senior Debentures, due 8/09**

  08/09   Yes     99,450   8.250 %   six-month   391.0   n/a     six months

Notes, due 8/13**

  08/09   No     100,000   7.375 %   six-month   305.0   n/a     six months
                                       

* $200 million of Monthly Income Preferred Securities were redeemed in full in 2001, but the related swap was retained until expiration.
** Swaps sold in September, 2005.

 

Additional Interest Rate Swap Information

 

     Net Cash Settlements Received
from Interest Rate Swaps by
Instrument*


   Value at
December 31,


Related Debt

   2005

   2004

   2003

   2005

   2004

Senior Notes, due 12/06

   $ 3,131    $ 6,101    $ 6,813    $ 336    $ 5,671

Trust Preferred Securities, due 11/41

     2,478      5,552      6,448      4,765      10,869

Monthly Income Preferred Securities

     -0-      9,777      13,045      n/a      n/a

Senior Debentures, due 8/09**

     920      961      n/a      n/a      2,351

Notes, due 8/13**

     864      928      n/a      n/a      2,315
    

  

  

  

  

     $ 7,393    $ 23,319    $ 26,306    $ 5,101    $ 21,206
    

  

  

  

  


* Due to the Securities and Exchange Commission’s interpretive guidance concerning SFAS 133, the benefit of the interest spread has been reclassified from “Interest expense” to “Realized investment losses.”
** Swaps sold in September, 2005.

 

Commercial Paper: On November 18, 2004, Torchmark entered into a credit facility with a group of lenders which allows unsecured borrowings and stand-by letters of credit up to $600 million. The five-year facility matures on November 18, 2009. Interest is charged at variable rates. In addition, Torchmark can request up to $175 million letters of credit to be issued against the facility. The line of credit is further designated as a back-up credit line for a commercial paper program, which cannot exceed $600 million. Torchmark may borrow from the credit facility or issue commercial paper, with total borrowings and commercial paper outstanding not to exceed $600 million. At December 31, 2005, Torchmark had $202 million face amount ($202 million carrying amount) of commercial paper outstanding, $152 million of letters of credit issued, and no borrowings under the line of credit. During 2005, the short term borrowings under the combined facilities averaged approximately $219 million, and were made at an average yield of 3.3%, compared with 1.54% a year earlier. The facility does not have a ratings-based acceleration trigger which would require early payment. A facility fee is charged for the entire $600 million facility at a rate of 8 basis points. For letters of credit issued, there is an issuance fee of 22 basis points and a fronting fee of 7.5 basis points. Additionally, if borrowings on both the line of credit and letters of credit exceed 50% of

 

74


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 10—Debt (continued)

 

the total $600 million facility, there is a usage fee of 7.5 basis points. During 2005, Torchmark’s usage of the facility was below this threshold and no usage fee was required. Torchmark is subject to certain covenants for the agreements regarding capitalization and earnings, with which it was in compliance at December 31, 2005. Borrowings on this facility are reported as short-term debt on the Consolidated Balance Sheets.

 

There was no capitalized interest during the three years ended December 31, 2005.

 

Note 11—Shareholders’ Equity

 

Share Data: A summary of preferred and common share activity is as follows:

 

     Preferred Stock

   Common Stock

 
     Issued

   Treasury
Stock


   Issued

    Treasury
Stock


 

2003:

                      

Balance at January 1, 2003

   -0-    -0-    126,800,908     (8,533,456 )

Issuance of common stock due to exercise of stock options

                   349,453  

Treasury stock acquired

                   (5,902,300 )

Lapse of restricted stock

             (17,250 )   17,250  

Retirement of treasury stock

             (13,000,000 )   13,000,000  
    
  
  

 

Balance at December 31, 2003

   -0-    -0-    113,783,658     (1,069,053 )

2004:

                      

Issuance of common stock due to exercise of stock options

                   763,592  

Treasury stock acquired

                   (5,534,276 )

Retirement of treasury stock

             (5,000,000 )   5,000,000  
    
  
  

 

Balance at December 31, 2004

   -0-    -0-    108,783,658     (839,737 )

2005:

                      

Issuance of common stock due to exercise of stock options

             91,090     5,835,740  

Treasury stock acquired

                   (10,301,852 )

Retirement of treasury stock

             (4,000,000 )   4,000,000  
    
  
  

 

Balance at December 31, 2005

   -0-    -0-    104,874,748     (1,305,849 )
    
  
  

 

 

Acquisition of Common Shares: Torchmark shares are acquired from time to time through open market purchases under the Torchmark stock repurchase program when it is believed to be the best use of Torchmark’s excess cash flows. Share repurchases under this program were 5.6 million shares at a cost of $300 million in 2005, 5.2 million shares at a cost of $268 million in 2004, and 5.9 million shares at a cost of $225 million in 2003. When stock options are exercised, proceeds from the exercises are generally used to repurchase approximately the number of shares available with those funds, closely simulating the treasury stock method of accounting for dilution. Shares repurchased for dilution purposes were 4.7 million shares costing $255 million in 2005 and 314 thousand shares at a cost of $17 million in 2004. There were no such purchases in 2003.

 

Retirement of Treasury Stock: Torchmark retired 4 million shares of treasury stock in December, 2005. In 2004 and 2003, Torchmark also retired 5 million and 13 million treasury shares, respectively.

 

Restrictions: Restrictions exist on the flow of funds to Torchmark from its insurance subsidiaries. Statutory regulations require life insurance subsidiaries to maintain certain minimum amounts of capital and surplus. Dividends from insurance subsidiaries of Torchmark are limited to the greater of statutory net gain from operations, excluding capital gains and losses, on an annual noncumulative basis, or 10% of surplus, in the absence of special regulatory approval. Additionally, insurance company distributions are generally not permitted in excess of statutory surplus. Subsidiaries are also subject to certain minimum capital requirements. In 2005, subsidiaries of Torchmark paid $365 million in dividends to the parent company. During the year 2006, a maximum amount of $437 million is expected to be available to Torchmark from subsidiaries without regulatory approval.

 

75


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 11—Shareholders’ Equity (continued)

 

Earnings Per Share: A reconciliation of basic and diluted weighted-average shares outstanding used in the computation of basic and diluted earnings per share is as follows:

 

     2005

   2004

   2003

Basic weighted average shares outstanding

   104,735,466    110,106,078    114,836,778

Weighted average dilutive options outstanding

   1,015,947    1,801,723    540,377
    
  
  

Diluted weighted average shares outstanding

   105,751,413    111,907,801    115,377,155
    
  
  

 

Stock options to purchase 6.1 million shares, 946 thousand shares, and 3.3 million shares as of December 31, 2005, 2004, and 2003, respectively, are considered to be anti-dilutive and are excluded from the calculation of diluted earnings per share. Income available to common shareholders for basic earnings per share is equivalent to income available to common shareholders for diluted earnings per share.

 

Note 12—Stock Options

 

Certain employees, directors, and consultants have been granted options to buy shares of Torchmark stock, generally at the market value of the stock on the date of grant, under the provisions of the various Torchmark stock option plans. The options are exercisable during the period commencing from the date they vest until expiring according to the terms of the grant. Options generally expire the earlier of employee termination or option contract term, which ranges from seven to eleven years. Employee and consultant stock options generally vest one-half in two years and one-half in three years. Formula-based director grants generally vest in six months. Stock options awarded in connection with compensation deferrals by certain directors and executives generally vest over a range of six to ten years. All options vest immediately upon the attainment of age 65, subject to a minimum vesting period of one year for employees or six months for directors. Torchmark generally issues shares for the exercise of stock options from treasury stock.

 

During 2005, Torchmark shareholders approved two new stock option plans, the 2005 Employee Plan for 5,625,000 shares and the 2005 Director Plan for 375,000 shares. Upon approval of these new plans, options previously available for grant under prior plans were cancelled and are no longer available for grant.

 

As described in Note 1—Significant Accounting Policies, the Company executed a voluntary option exercise and restoration program in the second quarter of 2005 whereby participants exercised vested options and received a lesser number of new options at the then current market price. As a result of this program, 5.8 million options were exercised resulting in that many shares being issued to participants, but 4.7 million shares were immediately sold by participants to pay their exercise price and their withholding taxes. Optionees retained 1.1 million shares and were issued 4.1 million new options granted at a price of $54.77 per Torchmark share.

 

An analysis of shares available for grant is as follows:

 

     Available for Grant

 
     2005

    2004

    2003

 

Balance at January 1

   1,716,920     2,785,705     3,860,340  

Adoption of new plans

   6,000,000          

Cancelled on termination of prior plans

   (1,641,145 )        

Expired during year

   3,828     15,310     4,250  

Granted during year

   (5,163,120 )   (1,039,095 )   (1,078,885 )
    

 

 

Balance at December 31

   916,483     1,761,920     2,785,705  
    

 

 

 

As previously stated in Note 1Significant Accounting Policies, Torchmark accounts for its employee stock options in accordance with SFAS 123, Accounting for Stock-Based Compensation as amended by SFAS 148, and has elected to account for its stock options under the intrinsic value method as outlined in

 

76


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 12—Stock Options (continued)

 

APB 25 and permitted by SFAS 123. The fair value method requires the use of an option valuation model to value employee stock options, upon which compensation expense is based. As required by SFAS 148, Accounting for Stock-Based Compensation—Transition and Disclosure, the pro forma earnings giving effect to the fair value method of option accounting has been reported in Note 1. The fair value for Torchmark’s employee stock options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 2005, 2004, and 2003:

 

     2005

    2004

    2003

 

Risk-free interest rate

   3.8 %   3.4 %   2.8 %

Dividend yield

   0.8 %   0.8 %   1.0 %

Volatility factor

   14.8     20.6     25.8  

Weighted average expected life (in years)

   3.90     4.43     4.48  

 

The weighted average fair value of options as determined by the option pricing model granted during the years ended December 31, 2005, 2004, and 2003 were $9.31, $11.83, and $10.52, respectively.

 

A summary of Torchmark’s stock option activity and related information for the years ended December 31, 2005, 2004, and 2003 follows:

 

    2005

  2004

  2003

    Options

    Weighted Average
Exercise Price


  Options

    Weighted Average
Exercise Price


  Options

    Weighted Average
Exercise Price


Outstanding-beginning of year

  10,680,273     $ 37.46   10,420,080     $ 37.66   9,694,898     $ 36.64

Granted

  5,163,120       54.91   1,039,095       55.11   1,078,885       44.32

Exercised

  (5,926,830 )     36.66   (763,592 )     34.20   (349,453 )     30.12

Expired

  (3,828 )     39.73   (15,310 )     36.51   (4,250 )     33.85
   

 

 

       

     

Outstanding-end of year

  9,912,735     $ 49.33   10,680,273     $ 39.60   10,420,080     $ 37.66
   

 

 

 

 

 

Exercisable at end of year

  8,242,341     $ 49.32   7,942,059     $ 37.46   7,514,759     $ 36.99
   

 

 

 

 

 

 

The following table summarizes information about stock options outstanding at December 31, 2005.

 

        Options Outstanding

  Options Exercisable

Range of
Exercise Prices


  Number
Outstanding


 

Weighted-

Average
Remaining
Contractual
Life (Years)


  Weighted-
Average
Exercise
Price


  Number
Exercisable


  Weighted-
Average
Exercise
Price


$15.95-$37.41   578,181   3.53   $ 31.58   435,184   $ 31.97
  37.44-  38.79   711,611   6.59     37.60   653,917     37.58
  41.26-  41.26   1,478,189   5.51     41.26   1,478,189     41.26
  41.75-  54.50   1,128,375   7.58     45.56   594,503     46.00
  54.77-  54.77   4,121,539   6.35     54.77   4,121,539     54.77
  55.05-  55.48   936,798   7.02     55.47   5,572     55.05
  56.24-  56.78   958,042   8.97     56.27   953,437     56.27
   
 
 

 
 

$15.95-$56.78   9,912,735   6.53   $ 49.33   8,242,341   $ 49.32
   
 
 

 
 

 

 

77


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 13—Business Segments

 

Torchmark’s segments are based on the insurance product lines it markets and administers: life insurance, health insurance, and annuities. These major product lines are set out as segments because of the common characteristics of products within these categories, comparability of margins, and the similarity in regulatory environment and management techniques. There is also an investment segment which manages the investment portfolio, debt, and cash flow for the insurance segments and the corporate function. Torchmark’s management evaluates the overall performance of the operations of the Company in accordance with these segments.

 

Life insurance products include traditional and interest-sensitive whole life insurance as well as term life insurance. Health products are generally guaranteed-renewable and include Medicare Supplement, cancer, accident, long-term care, and limited-benefit hospital and surgical coverages. Annuities include both fixed-benefit and variable contracts. Variable contracts allow policyholders to choose from a variety of mutual funds in which to direct their deposits.

 

Torchmark markets its insurance products through a number of distribution channels, each of which sells the products of one or more of Torchmark’s insurance segments. The tables below present segment premium revenue by each of Torchmark’s marketing groups.

 

Torchmark Corporation

Premium By Distribution Channel

 

     For the Year 2005

     Life

   Health

   Annuity

   Total

Distribution Channel


   Amount

   % of
Total


   Amount

   % of
Total


   Amount

   % of
Total


   Amount

   % of
Total


United American Independent

   $ 45,472    3    $ 441,673    43    $ 419    2    $ 487,564    19

Liberty National Exclusive

     302,747    21      149,020    15                  451,767    18

American Income Exclusive

     380,365    26      63,623    6                  443,988    18

Direct Response

     424,037    29      37,774    4                  461,811    18

United American Branch Office

     16,891    1      322,767    32                  339,658    14

Military

     199,319    13                              199,319    8

Other

     99,457    7                  24,510    98      123,967    5
    

  
  

  
  

  
  

  
     $ 1,468,288    100    $ 1,014,857    100    $ 24,929    100    $ 2,508,074    100
    

  
  

  
  

  
  

  
     For the Year 2004

     Life

   Health

   Annuity

   Total

Distribution Channel


   Amount

   % of
Total


   Amount

   % of
Total


   Amount

   % of
Total


   Amount

   % of
Total


United American Independent

   $ 49,834    4    $ 468,319    45    $ 262    1    $ 518,415    21

Liberty National Exclusive

     303,965    22      163,981    15                  467,946    19

American Income Exclusive

     349,686    25      59,519    6                  409,205    17

Direct Response

     387,006    28      34,568    3                  421,574    17

United American Branch Office

     17,838    1      322,279    31                  340,117    14

Military

     186,555    13                              186,555    7

Other

     100,606    7                  27,482    99      128,088    5
    

  
  

  
  

  
  

  
     $ 1,395,490    100    $ 1,048,666    100    $ 27,744    100    $ 2,471,900    100
    

  
  

  
  

  
  

  
     For the Year 2003

     Life

   Health

   Annuity

   Total

Distribution Channel


   Amount

   % of
Total


   Amount

   % of
Total


   Amount

   % of
Total


   Amount

   % of
Total


United American Independent

   $ 52,645    4    $ 469,939    45    $ 226    1    $ 522,810    22

Liberty National Exclusive

     304,319    23      163,921    16      87    0      468,327    20

American Income Exclusive

     314,849    24      55,769    5                  370,618    15

Direct Response

     350,317    27      28,385    3                  378,702    16

United American Branch Office

     18,674    1      316,017    31                  334,691    14

Military

     166,299    13                              166,299    7

Other

     103,270    8                  31,066    99      134,336    6
    

  
  

  
  

  
  

  
     $ 1,310,373    100    $ 1,034,031    100    $ 31,379    100    $ 2,375,783    100
    

  
  

  
  

  
  

  

 

78


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 13—Business Segments (continued)

 

Because of the nature of the life insurance industry, Torchmark has no individual or group which would be considered a major customer. Substantially all of Torchmark’s business is conducted in the United States, primarily in the Southeastern and Southwestern regions.

 

The measure of profitability established by management for insurance segments is underwriting margin before other income and administrative expenses, in accordance with the manner the segments are managed. It essentially represents gross profit margin on insurance products before insurance administrative expenses and consists of premium, less net policy obligations, acquisition expenses, and commissions. Interest credited to net policy liabilities (reserves less deferred acquisition costs and value of insurance purchased) is reflected as a component of the Investment segment in order to match this cost to the investment earnings from the assets supporting the net policy liabilities.

 

The measure of profitability for the investment segment is excess investment income, which represents the income earned on the investment portfolio in excess of net policy requirements and financing costs associated with Torchmark’s debt. Other than the above-mentioned interest allocations, there are no other intersegment revenues or expenses. Expenses directly attributable to corporate operations are included in the “Corporate” category. 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.

 

    For the Year 2005

 
    Life

    Health

    Annuity

    Investment

    Other

    Corporate

    Adjustments

    Consolidated

 

Revenue:

                                                               

    Premium

  $ 1,468,288     $ 1,014,857     $ 24,929                                     $ 2,508,074  

    Net investment income

                          $ 602,708                     $ 360 (1)     603,068  

    Other income

                                  $ 2,366               12,122 (3,4)     14,488  
   


 


 


 


 


 


 


 


            Total revenue

    1,468,288       1,014,857       24,929       602,708       2,366               12,482       3,125,630  

Expenses:

                                                               

    Policy benefits

    966,093       668,205       26,888                                       1,661,186  

    Required interest on reserves

    (342,305 )     (20,879 )     (30,092 )     393,276                               0  

    Amortization of acquisition costs

    386,574       115,868       15,504       (167,987 )                             349,959  

    Commissions and premium tax

    76,278       74,484       49                               (1,360 )(3)     149,451  

    Insurance administrative     expense(2)

                                    147,681               14,950 (4)     162,631  

    Parent expense

                                            9,660       568 (5)     10,228  

    Financing costs:

                                                               

        Debt

                            60,574                       360 (1)     60,934  

        Benefit from interest rate swaps

                            (7,393 )                             (7,393 )
   


 


 


 


 


 


 


 


            Total expenses

    1,086,640       837,678       12,349       278,470       147,681       9,660       14,518       2,386,996  
   


 


 


 


 


 


 


 


    Subtotal

    381,648       177,179       12,580       324,238       (145,315 )     (9,660 )     (2,036 )     738,634  

        Nonoperating items

                                                    2,036 (4,5)     2,036  
   


 


 


 


 


 


 


 


        Measure of segment profitability         (pretax)

  $ 381,648     $ 177,179     $ 12,580     $ 324,238     $ (145,315 )   $ (9,660 )   $ -0-     $ 740,670  
   


 


 


 


 


 


 


       

Deduct applicable income taxes

 

    (255,165 )
                                                           


    Segment profits after tax

 

    485,505  

Add back income taxes applicable to segment profitability

 

    255,165  

Remove benefit from interest rate swaps (included in “Realized investment gains (losses)”)

 

    (7,393 )

Add (deduct) realized investment gains (losses)

 

    280  

Deduct net cost of legal settlements(4)

 

    (1,468 )

Deduct option term extension expense(5)

 

    (568 )
     


Pretax income per income statement

 

  $ 731,521  
     



(1) Reclassification of interest amount due to adoption of FIN46R (accounting rule requiring deconsolidation of Trust Preferred Securities).

 

(2) Administrative expense is not allocated to insurance segments

 

       

(3) Elimination of intersegment commission

 

       

(4) Legal settlements on litigation related to prior years

 

       

(5) Option term extension for retiring executive

 

       

 

79


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 13—Business Segments (continued)

 

    For the Year 2004

 
    Life

    Health

    Annuity

    Investment

    Other

    Corporate

    Adjustments

    Consolidated

 

Revenue:

                                                               

Premium

  $ 1,395,490     $ 1,048,666     $ 27,744                                     $ 2,471,900  

Net investment income

                          $ 576,675                     $ 360 (1)     577,035  

Other income

                                  $ 1,833               (1,442 )(3)     391  
   


 


 


 


 


 


 


 


Total revenue

    1,395,490       1,048,666       27,744       576,675       1,833       -0-       (1,082 )     3,049,326  

Expenses:

                                                               

Policy benefits

    919,775       697,645       28,248                                       1,645,668  

Required interest on reserves

    (318,886 )     (19,502 )     (31,740 )     370,128                               -0-  

Amortization of acquisition costs

    369,418       117,428       17,211       (156,808 )                             347,249  

Commissions and premium tax

    73,006       78,513       61                               (1,442 )(3)     150,138  

Insurance administrative expense(2)

                                  $ 141,620                       141,620  

Parent expense

                                          $ 9,575               9,575  

Financing costs:

                                                               

Interest expense

                            56,131                       360 (1)     56,491  

Benefit from interest rate swaps

                            (23,319 )                             (23,319 )
   


 


 


 


 


 


 


 


Total expenses

    1,043,313       874,084       13,780       246,132       141,620       9,575       (1,082 )     2,327,422  
   


 


 


 


 


 


 


 


Measure of segment profitability (pretax)

  $ 352,177     $ 174,582     $ 13,964     $ 330,543     $ (139,787 )   $ (9,575 )   $ -0-     $ 721,904  
   


 


 


 


 


 


 


       
Deduct applicable income taxes       (248,472 )
                                                           


Segment profits after tax

 

    473,432  
Add back income taxes applicable to segment profitability       248,472  
Remove benefit from interest rate swaps (included in “Realized investment gains (losses)”)       (23,319 )
Add realized investment gains       22,216  
                                                           


Pretax income per income statement

 

  $ 720,801  
                                                           



(1) Reclassification of interest amount due to FIN46R (accounting rule requiring deconsolidation of Trust Preferred Securities).
(2) Administrative expense is not allocated to insurance segments.
(3) Elimination of intersegment commission.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 13—Business Segments (continued)

 

    For the Year 2003

 
    Life

    Health

    Annuity

    Investment

    Other

    Corporate

    Adjustments

    Consolidated

 

Revenue:

                                                               

Premium

  $ 1,310,373     $ 1,034,031     $ 31,379                                     $ 2,375,783  

Net investment income

                          $ 552,973                     $ 4,697 (1,2)     557,670  

Other income

                                  $ 2,582               (1,763 )(3)     819  
   


 


 


 


 


 


 


 


Total revenue

    1,310,373       1,034,031       31,379       552,973       2,582       -0-       2,934       2,934,272  

Expenses:

                                                               

Policy benefits

    862,775       689,395       37,902                                       1,590,072  

Required interest on reserves

    (294,670 )     (17,397 )     (39,110 )     351,177                               -0-  

Amortization of acquisition costs

    342,626       103,880       20,517       (145,279 )                             321,744  

Commissions and premium tax

    75,308       93,789       246                               (1,763 )(3)     167,580  

Insurance administrative expense(5)

                                    131,314               807 (4)     132,121  

Parent expense

                                          $ 10,234               10,234  

Financing costs:

                                                               

Interest expense

                            55,775                       360 (2)     56,135  

Benefit from interest rate swaps

                            (26,306 )                             (26,306 )
   


 


 


 


 


 


 


 


Total expenses

    986,039       869,667       19,555       235,367       131,314       10,234       (596 )     2,251,580  
   


 


 


 


 


 


 


 


Subtotal

    324,334       164,364       11,824       317,606       (128,732 )     (10,234 )     3,530       682,692  

Nonoperating items

                                                    (3,530 )(1,4)     (3,530 )
   


 


 


 


 


 


 


 


Measure of segment profitability (pretax)

  $ 324,334     $ 164,364     $ 11,824     $ 317,606     $ (128,732 )   $ (10,234 )   $ -0-       679,162  
   


 


 


 


 


 


 


       

Deduct applicable income taxes

                                                            (232,779 )
                                                           


Segment profits after tax

                                                            446,383  

Add back income taxes applicable to segment profitability

 

    232,779  

Remove benefit from interest rate swaps (included in “Realized investment gains (losses)”)

 

    (26,306 )

Deduct realized investment losses

 

    (3,274 )

Add nonrecurring interest receipt from tax settlement(1)

 

    4,337  

Deduct nonrecurring loss on sale of airplane(4)

 

    (807 )
                                                           


Pretax income per income statement

 

  $ 653,112  
                                                           



(1)   Reclassification of nonrecurring interest receipt from tax settlement $4.3 million.
(2)   Reclassification of interest amount due to FIN46R (accounting rule requiring deconsolidation of Trust Preferred Securities).
(3)   Elimination of intersegment commission.
(4)   Reclassification of nonrecurring gain from sale of airplane $.8 million
(5)   Administrative expense is not allocated to insurance segments.

 

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 issuer calls, a downgrade in credit quality, or other reasons beyond management’s control. Unlike investment income, realized gains and losses are incidental to insurance operations, and are not considered when setting premium rates or insurance product profitability expectations. While these gains and losses are not relevant to segment profitability or core operating results, they can have a material positive or negative result on net income. For these reasons, management removes realized investment gains and losses when it views its segment operations.

 

Management has entered into swap derivative contracts to exchange certain of its fixed-rate debt securities to floating rates to reduce its interest cost. For this reason, management views the difference between the floating-rate interest paid and the fixed-rate interest received (the “spread”) as an adjustment to its financing cost in the Investment Segment and has reported it as such in this analysis. In accordance with current accounting rules, this spread on a non-hedged swap must be included in the same line item as the swap’s change in fair value each period. Because of this rule, Torchmark includes the spread on all

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 13—Business Segments (continued)

 

swaps in Realized investment gains and losses in the Consolidated Statements of Operations, as this is the line item that contains the fair value adjustment each period.

 

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

 

    2005

    2004

    2003

    2005
Change


    %

    2004
Change


    %

 

Life insurance

  $ 381,648     $ 352,177     $ 324,334     $ 29,471     8     $ 27,843     9  

Health insurance

    177,179       174,582       164,364       2,597     1       10,218     6  

Annuity

    12,580       13,964       11,824       (1,384 )   (10 )     2,140     18  

Other insurance:

                                                   

Other income

    2,366       1,833       2,582       533     29       (749 )   (29 )

Administrative expense

    (147,681 )     (141,620 )     (131,314 )     (6,061 )   4       (10,306 )   8  

Investment

    324,238       330,543       317,606       (6,305 )   (2 )     12,937     4  

Corporate and adjustments

    (9,660 )     (9,575 )     (10,234 )     (85 )   1       659     (6 )
   


 


 


 


 

 


 

Pre-tax total

    740,670       721,904       679,162       18,766     3       42,742     6  

Applicable taxes

    (255,165 )     (248,472 )     (232,779 )     (6,693 )   3       (15,693 )   7  
   


 


 


 


 

 


 

After-tax total

    485,505       473,432       446,383       12,073     3       27,049     6  

Remove interest-rate swap benefit (after tax) from Investment Segment

    (4,805 )     (15,157 )     (17,099 )     10,352             1,942        

Realized gains (losses) (after tax)

    25       14,440       (2,129 )     (14,415 )           16,569        

Tax settlements

    15,989       0               15,989             0        

Net litigation settlements (after tax)

    (955 )     0               (955 )           0        

Retiring executive option term extension (after tax)

    (369 )     0               (369 )           0        

Interest on tax settlements (after tax)

    0       0       3,511       0             (3,511 )      

Loss on sale of airplane (after tax)

    0       0       (525 )     0             525        

Tax refund (after tax)

    0       3,003       0       (3,003 )           3,003        

Change in accounting principle (after tax)

    0       (7,163 )     0       7,163             (7,163 )      
   


 


 


 


 

 


 

Net Income

  $ 495,390     $ 468,555     $ 430,141     $ 26,835     6     $ 38,414     9  
   


 


 


 


 

 


 

 

Assets for each segment are reported based on a specific identification basis. The insurance segments’ assets contain deferred acquisition costs, value of insurance purchased, and separate account assets. The investment segment includes the investment portfolio, cash, and accrued investment income. Goodwill is assigned to the insurance segments based on SFAS 142. All other assets, representing less than 2% of total assets, are included in the other category. The table below reconciles segment assets to total assets as reported in the consolidated financial statements.

 

Torchmark Corporation

Assets By Segment

 

     At December 31, 2005

     Life

   Health

   Annuity

   Investment

   Other

   Consolidated

Cash and invested assets

                        $ 9,410,695           $ 9,410,695

Securities lending collateral

                          257,390             257,390

Accrued investment income

                          158,225             158,225

Deferred acquisition costs

   $ 2,200,261    $ 452,328    $ 115,815                    2,768,404

Goodwill

     288,089      87,282      3,065                    378,436

Separate account assets

                   1,560,391                    1,560,391

Other assets

                               $ 235,362      235,362
    

  

  

  

  

  

Total assets

   $ 2,488,350    $ 539,610    $ 1,679,271    $ 9,826,310    $ 235,362    $ 14,768,903
    

  

  

  

  

  

 

     At December 31, 2004

     Life

   Health

   Annuity

   Investment

   Other

   Consolidated

Cash and invested assets

                        $ 9,243,090           $ 9,243,090

Securities lending collateral

                          172,599             172,599

Accrued investment income

                          153,248             153,248

Deferred acquisition costs

   $ 2,064,117    $ 403,755    $ 115,460                    2,583,332

Goodwill

     288,089      87,282      3,065                    378,436

Separate account assets

                   1,594,278                    1,594,278

Other assets

                               $ 127,201      127,201
    

  

  

  

  

  

Total assets

   $ 2,352,206    $ 491,037    $ 1,712,803    $ 9,568,937    $ 127,201    $ 14,252,184
    

  

  

  

  

  

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 14—Commitments and Contingencies

 

Reinsurance: Insurance affiliates of Torchmark reinsure that portion of insurance risk which is in excess of their retention limits. Retention limits for ordinary life insurance range up to $2.0 million per life. Life insurance ceded represents 1.2% of total life insurance in force at December 31, 2005. Insurance ceded on life and accident and health products represents .5% of premium income for 2005. 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 represents 1.6% of life insurance in force at December 31, 2005 and reinsurance assumed on life and accident and health products represents .9% of premium income for 2005.

 

Leases: Torchmark leases office space and office equipment under a variety of operating lease arrangements. Rental expense for operating leases was $5.6 million in 2005, $5.2 million in 2004, and $4.7 million in 2003. Future minimum rental commitments required under operating leases having remaining noncancelable lease terms in excess of one year at December 31, 2005 were as follows: 2006, $3.7 million; 2007, $2.7 million; 2008, $2.1 million; 2009, $1.6 million; 2010, $1.5 million and in the aggregate, $15.0 million.

 

Low-Income Housing Tax Credit Interests: As described in Note 1, Torchmark has committed to invest $122 million in entities which provide certain tax benefits. As of December 31, 2005, Torchmark remained obligated under these commitments for $65.8 million, of which $44.3 million is due in 2006, $15.1 million in 2007, and $6.4 million in 2008.

 

Concentrations of Credit Risk: Torchmark maintains a highly diversified investment portfolio with limited concentration in any given region, industry, or economic characteristic. At December 31, 2005, the investment portfolio, at fair value, consisted of the following:

 

Investment-grade corporate securities

   82 %

Noninvestment-grade securities

   7  

Policy loans, which are secured by the underlying insurance policy values

   3  

Government-sponsored enterprises

   3  

Securities of state and municipal governments, equity securities, mortgages, securities of foreign governments, real estate, and other long-term investments

   2  

Short-term investments, which generally mature within one month

   1  

Nongovernment-guaranteed mortgage-backed securities

   1  

Securities of the U.S. government or U.S. government-backed securities

   1  

 

Investments in municipal governments and corporations are made throughout the U.S. with no concentration in any given state. Corporate debt and equity investments are made in a wide range of industries. At December 31, 2005, 2% or more of the portfolio was invested in the following industries:

 

Insurance carriers

   19 %

Depository institutions

   17  

Electric, gas, and sanitation services

   13  

Nondepository credit institutions

   5  

Communications

   4  

Chemicals and allied products

   4  

Oil and gas extraction

   3  

Media (printing, publishing, and allied lines)

   3  

Food and kindred products

   3  

Transportation equipment

   3  

Petroleum refining and related industries

   2  

Industrial, commercial machinery, and computer equipment

   2  

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 14—Commitments and Contingencies (continued)

 

Otherwise, no individual industry represented 2% or more of Torchmark’s investments. At year-end 2005, 7% of invested assets was represented by fixed maturities rated below investment grade (BB or lower as rated by the Bloomberg Composite or the equivalent NAIC designation). Par value of these investments was $670 million, amortized cost was $671 million, and fair value was $676 million. While these investments could be subject to additional credit risk, such risk should generally be reflected in market value.

 

Collateral Requirements: Torchmark requires collateral for investments in instruments where collateral is available and is typically required because of the nature of the investment. Since the majority of Torchmark’s investments is in government, government-secured, or corporate securities, the requirement for collateral is rare. Torchmark’s mortgages are secured by the underlying real estate.

 

Guarantees: At December 31, 2005, Torchmark had in place five guarantee agreements, four 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, 2005, Torchmark had no liability with respect to these guarantees. The fifth guarantee related to third party performance.

 

Trust Preferred Securities: Torchmark entered into a performance guarantee for the obligations of the Torchmark Capital Trusts I and II when the trust preferred securities were issued by those trusts. 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 one or both of the Capital Trusts default on an obligation. The total redemption price of the trust preferred securities is $150 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 is a five-year contract expiring in 2009. The maximum amount of letters of credit available is $175 million. Torchmark (parent company) would be liable to the extent that TMK Re, Ltd. does not pay the reinsured party. At December 31, 2005, $152 million of letters of credit were outstanding.

 

Agent Receivables: Torchmark issued a guarantee to an unaffiliated third party, which has purchased certain agents’ receivables of Torchmark’s wholly-owned subsidiary American Income Life Insurance Company. The guarantee covers all obligations and recovery of capital to the third party under the receivables purchase agreement up to a maximum amount of $95 million. Under the terms of the revolving purchase arrangement, the third party has purchased the agents’ receivables and receives the earned commissions as they are applied to the balance. The term of the guarantee corresponds with the purchase arrangement, which is annually renewable. Torchmark would be liable to the extent that future commission collections were insufficient to repay the purchased amount. As of December 31, 2005, the present value of future commissions substantially exceeded the purchased balance.

 

Equipment leases: Torchmark has guaranteed performance of two subsidiaries as lessees under leasing arrangements for aviation equipment. The leases commenced in 2003 for lease terms of approximately 10 years. Lessees have certain renewal and early termination options, however. At December 31, 2005, total remaining undiscounted payments under the leases were approximately $6.2 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.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 14—Commitments and Contingencies (continued)

 

Personal loans: Torchmark subsidiary American Income is a party to an agreement to guarantee certain personal loans of American Income employees and agents with First Command Bank. First Command Bank is a subsidiary of First Command Services, Inc. (First Command) of which Lamar C. Smith is chairman and CEO. Mr. Smith is also a director of Torchmark. At December 31, 2005, the balance subject to this guarantee was $182 thousand. These guarantees are secured by vested commissions due the employees and agents. See Note 15—Related Party Transactions for more information on Mr. Smith and First Command.

 

Litigation: Torchmark and its subsidiaries, in common with the insurance industry in general, are subject to litigation, including claims involving tax matters, alleged breaches of contract, torts, including bad faith and fraud claims based on alleged wrongful or fraudulent acts of agents of Torchmark’s subsidiaries, employment discrimination, and miscellaneous other causes of action. A number of such actions involving Torchmark’s subsidiary Liberty also name Torchmark as a defendant. Based upon information presently available, and in light of legal and other factual defenses available to Torchmark and its subsidiaries, management does not believe that such litigation will have a material adverse effect on Torchmark’s financial condition, future operating results or liquidity; however, assessing the eventual outcome of litigation necessarily involves forward-looking speculation as to judgments to be made by judges, juries and appellate courts in the future. This bespeaks caution, particularly in states with reputations for high punitive damage verdicts such as Alabama and Mississippi.

 

Many of these lawsuits involve claims for punitive damages in state courts of Alabama and Mississippi. Torchmark’s management recognizes that large punitive damage awards continue to occur bearing little or no relation to actual damages awarded by juries in jurisdictions in which Torchmark has substantial business, particularly Alabama and Mississippi, creating the potential for unpredictable material adverse judgments in any given punitive damage suit. As of December 31, 2005, Liberty was a party to approximately 76 active lawsuits (which included no employment-related cases and excluded interpleaders), 61 of which were Alabama proceedings and 4 of which were Mississippi proceedings in which punitive damages were sought.

 

As previously reported in Forms 10-K and Forms 10-Q, Liberty National Life Insurance Company is a party to a number of lawsuits (both a large number of lawsuits brought by individual plaintiffs and class action litigation with extremely broad class periods and relief sought) involving allegations of racially discriminatory pricing in the sale of insurance to African Americans prior to 1966. The litigation began with the December 8, 1999 filing of Moore v. Liberty National Life Insurance Company, Case No. CV-99-BU-3262-S in the U.S. District Court for the Northern District of Alabama. Over 29 race-distinct mortality cases with approximately 2,000 named plaintiffs have been consolidated with the Moore case (Master Case No. 2:02-CV-02741-UWC) and are pending in the U.S. District Court for the Northern District of Alabama, with one pending Alabama Circuit Court case (Baldwin v. Liberty National Life Insurance Company, Case No. CV-00-684) stayed pending a disposition of the Moore case.

 

The previously-reported December 5, 2005 trial date fixed by the U.S. District Court for Moore was reset by that Court to January 18, 2006. On January 18, 2006, all parties to Moore submitted a Joint Motion for Preliminary Approval of Settlement and a Stipulation and Agreement of Compromise and Settlement in that case to the District Court. After a hearing, the District Court entered an Order Preliminarily Approving Proposed Settlement on January 25, 2006. In the Order, the District Court preliminarily approved the Proposed Settlement Agreement; conditionally certified a settlement class defined as “All black Americans who have (or had at the time of the policy’s termination) an ownership or other legal interest in an industrial life insurance policy or burial policy issued by Liberty National Life Insurance Company, or one of its former subsidiaries, Service Insurance Company of Alabama, or Burial Service Insurance Company of Alabama on or before January 10, 1966, at a higher rate than similar plans offered to similarly situated white Americans”; certified the class representatives and class counsel; found that the claims in the case were primarily equitable and that the primary relief under the proposed Settlement was injunctive and equitable, with incidental monetary relief in the form of restitution not to

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 14—Commitments and Contingencies (continued)

 

exceed $6 million in the aggregate; approved and directed the giving of notice to class members in the manner and form set out in the Proposed Settlement Agreement beginning February 3, 2006; and fixed March 31, 2006 as the date for the fairness hearing. Pursuant to the Order, Liberty commenced dissemination of notice to class members on February 3, 2006. If approved, the Settlement will substantially resolve all class action issues in race-distinct pricing litigation at Liberty, except for certain consolidated individual claims for mental anguish and punitive damages previously asserted by approximately 2,000 individual plaintiffs, which claims are expressly excluded from the proposed Settlement. The Company intends to vigorously defend those claims. Additional information regarding the race-distinct mortality/dual pricing litigation can be found in the Company’s prior Forms 10-K and Forms 10-Q.

 

As previously reported in Form 10-Q, United American Insurance Company has been named as a defendant in purported class action litigation filed on September 16, 2004, in the Circuit Court of Saline County, Arkansas on behalf of the Arkansas purchasers of association group health insurance policies or certificates issued by United American through Heartland Alliance of America Association and Farm & Ranch Healthcare, Inc. (Smith and Ivie v. Collingsworth, et al., CV2004-742-2). The plaintiffs assert claims for fraudulent concealment, breach of contract, common law liability for non-disclosure, breach of fiduciary duties, civil conspiracy, unjust enrichment, violation of the Arkansas Deceptive Trade Practices Act, and violation of Arkansas law and the rules and regulations of the Arkansas Insurance Department. Declaratory, injunctive and equitable relief, as well as actual and punitive damages are sought by the plaintiffs. United American removed the case from the Saline County Circuit Court to the U.S. District Court for the Eastern District of Arkansas, but the District Court ordered the case back to the Circuit Court on December 21, 2005. The U.S. Circuit Court of Appeals for the Eighth Circuit denied United American’s petition for permission to appeal the District Court’s decision on January 25, 2006.

 

Liberty National Life Insurance Company and an unrelated Glendale, California mortuary were named as defendants in a purported class action litigation filed December 8, 2005 in the Superior Court for Los Angeles County, California (Gibson v. Liberty National Life Insurance Company, Case No. BC344178) on behalf of California holders of certain funeral services insurance policies. The plaintiff in Gibson asserts claims for breach of contractual duty to pay a covered claim under a funeral services insurance policy, breach of the implied obligation of good faith and fair dealing by unreasonably failing to pay and/or delaying payments of insurance benefits, fraud, negligent misrepresentation, and unfair business practices in violation of California Business and Professions Code Section 17000 et seq. The plaintiff is seeking unspecified compensatory and general damages, exemplary damages, injunctive and declaratory relief and attorneys’ fees and costs.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 15—Related Party Transactions

 

First Command.    Lamar C. Smith, a director of Torchmark, is an officer and director of First Command Financial Services, Inc. (First Command), a corporation 100% owned by the First Command Employee Stock Ownership Plan (First Command ESOP). Mr. Smith is a beneficiary of the First Command ESOP although he has no ability to vote the stock of First Command that is held by the First Command ESOP. First Command receives commissions as the Military Agency distribution system for selling certain life insurance products offered by Torchmark’s insurance subsidiaries. These commissions were $60.9 million in 2005, $67.0 million in 2004, and $59.4 million in 2003. Torchmark held balances due from these agents of $9.4 million at year-end 2005 and $17.0 million at year-end 2004.

 

During 2001, Torchmark entered into a coinsurance agreement with First Command’s life subsidiary whereby Torchmark ceded back to First Command approximately 5% of the new life insurance business sold by First Command on behalf of Torchmark’s insurance subsidiaries. In 2004, the ceding rate was changed to 3% on newly ceded business. Under the terms of this agreement, First Command pays Torchmark a maintenance expense allowance equal to 5.5% of all premium collected and an issue allowance of 2.9% of first year premium collected. Torchmark is also reimbursed for actual commissions, premium taxes, and claims paid on the business ceded to First Command. Also under the agreement, Torchmark provides First Command certain administrative, accounting, and investment management services. Premium ceded in 2005 was $2.6 million, in 2004 was $2.3 million, and in 2003 was $1.6 million. At December 31, 2005, the face amount of life insurance ceded was $316 million and annualized ceded premium was $2.7 million.

 

Torchmark currently has two loan agreements with First Command, a mortgage loan agreement and a collateral loan agreement. The mortgage loan bears interest at a rate of 7.0%. The initial balance of $22.3 million is being repaid in equal monthly payments over fifteen years, beginning May 1, 2003. At year end 2005, the outstanding balance was $19.9 million, compared with $20.9 million one year ago. The loan is collateralized by a four-story office building in Fort Worth, Texas, which was appraised by an independent firm in 2001 at $22.8 million. In addition to the office building as collateral, Torchmark has the right of offset to any commissions due First Command, in the event of default.

 

The collateral loan bears interest at the rate of 7.0%. First Command is making fixed monthly payments which are scheduled to repay the loan by May, 2010. First Command has the right to make additional, unscheduled payments. At year end 2005, the outstanding balance was $9.3 million, compared with $11.1 million at year end 2004. The loan is collateralized by real estate and a parking garage in Fort Worth, Texas. The property was appraised by an independent firm in 2002 at $17.6 million.

 

As disclosed in Note 14—Commitments and Contingencies, Torchmark subsidiary American Income is a party to an agreement to guarantee certain personal loans of American Income employees and agents with First Command Bank, a subsidiary of First Command. At December 31, 2005, the balance subject to this guarantee was $182 thousand. These guarantees are secured by vested commissions due the employees and agents.

 

Richey.    R. K. Richey, Chairman of the Executive Committee of Torchmark until April 2005 and formerly a director and chief executive officer of Torchmark, is a minority investor in a real estate management company, Commercial Real Estate Services (CRES). CRES manages certain of Torchmark’s company-occupied and investment real estate properties along with those of other clients. Fees paid by Torchmark subsidiaries for these management and maintenance services were $680 thousand in 2005, $702 thousand in 2004, and $683 thousand in 2003. Mr. Richey is also a 50% investor in Stonegate Realty Company, LLC., the parent company of Elgin Development Company, LLC. (Elgin Development). Elgin Development leases commercial space to Torchmark subsidiaries. Lease rentals paid by Torchmark subsidiaries were $262 thousand, $261 thousand, and $261 thousand in 2005, 2004, and 2003, respectively.

 

Torchmark annually pays premiums on three life insurance policies for Mr. Richey, in the amount of $61 thousand in each of the years 2003 through 2005.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Dollar amounts in thousands except per share data)

 

 

Note 15—Related Party Transactions (continued)

 

Executive share purchases.    On January 3, 2005, two grantor-retained annuity trusts for the benefit of the adult sons of C. B. Hudson, Chief Executive Officer of Torchmark at that time, and of which trusts he serves as trustee, sold 41,470 shares of Torchmark common stock in a privately-negotiated transaction to Torchmark for $2.4 million. The purchases (20,735 shares from each of the trusts) were made at the average of the high and low prices of Torchmark stock on January 3, 2005 ($57.045 per share).

 

MidFirst Bank.    Torchmark has engaged MidFirst Bank as the servicing agent for a portion of Torchmark’s subsidiaries’ commercial mortgages portfolios. George J. Records, a Torchmark director until April 27, 2005, was also an officer, director, and 38.3% beneficial owner of Midland Financial Co., the parent corporation of MidFirst Bank until December 31, 2003. After that date, he was no longer a beneficial owner. Fees paid for MidFirst Bank’s services were $90 thousand in 2004 and $110 thousand in 2003. No fees were paid in 2005.

 

In the fourth quarter of 2003, a reserve in the pretax amount of $5 million was established on certain mortgages that met Torchmark’s criteria for impairment. These mortgages were originated and serviced by MidFirst. In the fourth quarter of 2004, Torchmark’s subsidiary Liberty sold its participation interests in certain mortgages back to MidFirst Bank in two transactions. The first transaction was completed in October, 2004 for proceeds of $57.3 million with a carrying value of $56.2 million, and the second was effected in December, 2004 for $17.1 million proceeds and a carrying value of $19.5 million. Because of Mr. Records’ relationship, the Board of Directors of Torchmark, with Mr. Records recusing himself, reviewed and approved the first transaction. Both of the transactions were also reviewed and approved by the Liberty National Board of Directors on which Mr. Records did not serve. Torchmark obtained opinions from an independent third party valuation firm experienced in valuing commercial loans that the purchase price on each transaction was within a reasonable and acceptable range.

 

Baxley.    William J. Baxley is a partner in the law firm of Baxley, Dillard, Dauphin, McKnight & Barclift which performs legal services for Torchmark and certain of its subsidiaries. In 1997, Mr. Baxley was loaned $668 thousand on an unsecured basis at a rate of 6.02%. Repayments are made in the form of legal services at customary rates and are applied against the outstanding balance, amortizing the loan with interest over its remaining term. In October, 2001, the terms of the loan were revised and an additional amount of $395 thousand was loaned to Baxley. The interest rate was revised to 5.6% and the term of the loan was extended until July, 2013. The loan is being repaid in accordance with its amortization schedule and all payments are current. At December 31, 2005 and 2004, the outstanding balance of this loan was $572 thousand and $632 thousand, respectively.

 

Additionally, Liberty loaned Mr. Baxley’s wife $883 thousand secured by a mortgage on a building sold to her in 1997. Interest is charged at a rate of 7.7%. Scheduled cash payments are made to amortize the loan over thirty years. However, there is a balloon payment due at the end of ten years (2007) in the amount of $712 thousand less a credit of $18 thousand if all payments are made timely. To date, all payments have been timely. At December 31, 2005 and 2004, the outstanding balance of this loan was $751 thousand and $772 thousand, respectively.

 

Torchmark customarily grants options to certain consultants for their services in addition to their fees. Mr. Baxley received Torchmark options in 2005, 2004, and 2003.

 

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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, 2005. 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.

 

     Three Months Ended

 
         March 31,    

        June 30,    

    September 30,

    December 31,

 
2005:                                 

Premium and policy charges

   $ 636,707     $ 629,617     $ 620,557     $ 621,193  

Net investment income

     149,176       150,620       151,120       152,152  

Realized investment gains(losses)

     (3,128 )     10,703       (2,908 )     (4,387 )

Total revenues*

     782,994       804,797       769,022       769,097  

Policy benefits

     424,173       418,084       410,883       408,046  

Amortization of acquisition expenses

     88,722       88,399       85,994       86,844  

Pretax income*

     179,137       202,546       181,392       168,446  

Net income*

     117,843       132,365       119,046       126,136  

Basic net income per common share before cumulative effect of change in accounting principle

     1.11       1.26       1.14       1.22  

Basic net income per common share

     1.11       1.26       1.14       1.22  

Diluted net income per common share before cumulative effect of change in accounting principle

     1.09       1.25       1.14       1.21  

Diluted net income per common share

     1.09       1.25       1.14       1.21  
2004:                                 

Premium and policy charges

   $ 620,411     $ 621,035     $ 615,989     $ 614,465  

Net investment income

     141,725       144,002       145,255       146,053  

Realized investment gains(losses)

     10,328       (1,144 )     12,890       142  

Total revenues

     772,542       763,959       774,199       760,842  

Policy benefits

     412,523       414,647       411,713       406,785  

Amortization of acquisition expenses

     84,608       84,036       90,889       87,716  

Pretax income

     182,236       173,234       189,460       175,871  

Net income

     112,351       116,561       124,132       115,511  

Basic net income per common share before cumulative effect of change in accounting principle

     1.06       1.05       1.14       1.07  

Basic net income per common share

     1.00       1.05       1.14       1.07  

Diluted net income per common share before cumulative effect of change in accounting principle

     1.05       1.04       1.12       1.05  

Diluted net income per common share

     .99       1.04       1.12       1.05  

*   In 2005, Torchmark recorded settlements on three significant legal matters. The first settlement related to the Waddell & Reed litigation and resulted in $13.5 million of additional revenue in the second quarter. The other two cases were Torchmark’s race-distinct mortality/dual-pricing litigation and its class-action cancer case. These two cases involved charges of $4 million in the second quarter and $11 million in the fourth quarter. The after-tax effect of these items was a positive $6 million in the second quarter and a charge of $7 million in the fourth quarter. Also in the fourth quarter of 2005, Torchmark recorded a $16 million settlement benefit from an Internal Revenue Service examination covering several years. More information on these litigation and tax settlements is provided in Note 8—Income Taxes and Note 1—Significant Accounting Policies in the Notes to Consolidated Financial Statements.

 

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Item 9.    Disagreements on Accounting and Financial Disclosure

 

No disagreements with accountants on any matter of accounting principles or practices or financial statement disclosure have been reported on a Form 8-K within the twenty-four months prior to the date of the most recent financial statements.

 

Item 9A.    Controls and Procedures

 

Torchmark, under the direction of the Chairman and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, has established disclosure controls and procedures that are designed to ensure that information required to be disclosed by Torchmark in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to Torchmark’s management, including the Chairman and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

 

As of the end of the fiscal quarter completed December 31, 2005, an evaluation was performed under the supervision and with the participation of Torchmark management, including the Chairman and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, of Torchmark’s disclosure controls and procedures (as those terms are defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon their evaluation, the Chairman and Chief Executive Officer and the Executive Vice President and Chief Financial Officer have concluded that Torchmark’s disclosure controls and procedures are effective as of the date of this Form 10-K. In compliance with Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350), each of these officers executed a Certification included as an exhibit to this Form 10-K.

 

As of the date of this Form 10-K for the fiscal year and the quarter ended December 31, 2005, there have not been any significant changes in Torchmark’s internal control over financial reporting or in other factors that could significantly affect this control over financial reporting subsequent to the date of their evaluation which have materially affected, or are reasonably likely to materially affect, Torchmark’s internal control over financial reporting. No material weaknesses in such internal controls were identified in the evaluation and as a consequence, no corrective action was required to be taken.

 

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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 ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.

 

Management evaluated the Company’s internal control over financial reporting, and based on its assessment, believes that the Company maintained effective internal control over financial reporting as of December 31, 2005. The Company’s independent audit firm has issued an attestation report on management’s assessment of the Company’s internal control over financial reporting as stated in their report which is included herein.

 

/s/ Mark S. McAndrew

Mark S. McAndrew

Chief Executive Officer

/s/ Gary L. Coleman

Gary L. Coleman

Executive Vice President and
Chief Financial Officer

 

February 27, 2006

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

Torchmark Corporation

Birmingham, Alabama

 

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Torchmark Corporation and subsidiaries (“Torchmark”) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Torchmark’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of Torchmark’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

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, management’s assessment that Torchmark maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, Torchmark maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal ControlIntegrated 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, 2005 of Torchmark and our report dated February 27, 2006 expressed an unqualified opinion on those financial statements and financial statement schedules.

 

DELOITTE & TOUCHE LLP

 

Dallas, Texas

February 27, 2006

 

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Item 9B. Other Information

 

On December 13, 2005, the Compensation Committee of the Board of Directors of Torchmark awarded certain stock options pursuant to the Torchmark Corporation 2005 Incentive Plan in the forms of Stock Option Grant Agreements filed as Exhibits 10.36 and 10.37 to this Form 10-K.

 

PART III

 

Item 10.    Directors and Executive Officers of Registrant

 

Information required by this item is incorporated by reference from the sections entitled “Election of Directors,” “Profiles of Directors and Nominees,” “Executive Officers,” “Audit Committee Report,” “Governance Guidelines and Codes of Ethics” and “Section 16(a) Beneficial Ownership Reporting Compliance” of the Securities Exchange Act in the Proxy Statement for the Annual Meeting of Stockholders to be held April 27, 2006 (the Proxy Statement), which is to be filed with the Securities and Exchange Commission.

 

Item 11.    Executive Compensation

 

Information required by this item is incorporated by reference from the section entitled Compensation and Other Transactions with Executive Officers and Directors in the Proxy Statement.

 

Item 12.    Security Ownership of Certain Beneficial Owners of Management

 

(a)

 

Equity Compensation Plan Information

As of December 31, 2005

 

Plan Category


  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


Equity compensation plans approved by security holders

  9,912,735   $ 49.33   916,483

Equity compensation plans not approved by security holders

  0     0   0
   
 

 

Total

  9,912,735   $ 49.33   916,483
   
 

 

 

(b)

  Security ownership of certain beneficial owners:
    Information required by this item is incorporated by reference from the section entitled “Principal Stockholders” in the Proxy Statement.

(c)

  Security ownership of management:
    Information required by this item is incorporated by reference from the section entitled “Stock Ownership” in the Proxy Statement.

(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

 

Information required by this item is incorporated by reference from the section entitled Compensation and Other Transactions with Executive Officers and Directors in the Proxy Statement.

 

Item 14.    Principal Accounting 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.

 

 

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PART IV

 

Item 15.    Exhibits, Financial Statements Schedules, and Reports on Form 8-K

 

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

   45

Consolidated Balance Sheets at December 31, 2005 and 2004

   46

Consolidated Statements of Operations for each of the three years in the period ended December 31, 2005

   47

Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 2005

   48

Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended December 31, 2005

   49

Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2005

   50

Notes to Consolidated Financial Statements

   51

Schedules Supporting Financial Statements for each of the three years in the period ended December 31, 2005:

    

 II. Condensed Financial Information of Registrant (Parent Company)

   101

IV. Reinsurance (Consolidated)

   105

Schedules not referred to have been omitted as inapplicable or not required by Regulation S-X.

 

 

 

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EXHIBITS

 

        Page of
this
Report


3.1   Restated Certificate of Incorporation of Torchmark Corporation, as amended (incorporated by reference from Exhibit 3(i) to Form 10-K for the fiscal year ended December 31, 2000)    
3.2   By-Laws of Torchmark Corporation, as amended (incorporated by reference from Exhibit 3.2 to Form 8-K dated May 4, 2005)    
4.1   Specimen Common Stock Certificate (incorporated by reference from Exhibit 4(a) to Form 10-K for the fiscal year ended December 31, 1989)    
4.2   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))    
4.3   Junior Subordinated Indenture, dated November 2, 2001, between Torchmark Corporation and The Bank of New York defining the rights of the 7 3/4% Junior Subordinated Debentures (incorporated by reference from Exhibit 4.3 to Form 8-K dated November 2, 2001)    
4.4   Supplemental Indenture, dated as of December 14, 2001, between Torchmark, BankOne Trust Company, National Association and The Bank of New York, supplementing the Indenture Agreement dated February 1, 1987 (incorporated herein by reference to Exhibit 4(b) to Torchmark’s Registration Statement on Form S-3 (File No. 33-11716), and defining the rights of the 6 1/4% Senior Notes (incorporated by reference from Exhibit 4.1 to Form 8-K dated December 14, 2001)    
10.1   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)*    
10.2   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)*    
10.3   Torchmark Corporation Supplementary Retirement Plan (incorporated by reference from Exhibit 10(c) to Form 10-K for the fiscal year ended December 31, 1992)*    
10.4   Credit Agreement dated as of November 18, 2004 among Torchmark Corporation, as the Borrower, TMK Re, Ltd., as a Loan Party, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, J.P. Morgan Bank, N.A., KeyBank National Association, Regions Bank and SunTrust Bank as Co-Syndication Agents and the other lenders party thereto (incorporated by reference from Exhibit 10.01 to Form 8-K dated November 23, 2004)    
10.5   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)*    
10.6   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)*    
10.7   The Torchmark Corporation 1987 Stock Incentive Plan (incorporated by reference from Exhibit 10(f) to Form 10-K for the fiscal year ended December 31, 1998)*    
10.8   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)    

 

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this
Report


10.9   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)**    
10.10   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)*    
10.11   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)*    
10.12   Form of Deferred Compensation Agreement Between Torchmark Corporation or Subsidiary and Officer at the Level of Vice President or Above Not Eligible to Participate in Torchmark Corporation and Affiliates Retired Lives Reserve Agreement (incorporated by reference from Exhibit 10(j) to Form 10-K for the fiscal year ended December 31, 1991)*    
10.13   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)*    
10.14   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 Pension Plan (incorporated by reference from Exhibit 10(o) to Form 10-K for the fiscal year ended December 31, 1992)*    
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)*    
10.17   The Torchmark Corporation Savings and Investment Plan (incorporated by reference from Exhibit 10(s) to Form 10-K for the fiscal year ended December 31, 1992)*    
10.18   The Torchmark Corporation Annual Management Incentive Plan (incorporated by reference from Exhibit 10(p) to Form 10-K for the fiscal year ended December 31, 2004)    
10.19   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)    
10.20   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)*    
10.21   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)*    
10.22   The Liberty National Life Insurance Company Pension Plan for Non-Commissioned Employees (incorporated by reference from Exhibit 10(v) to Form 10-K for the fiscal year ended December 31, 1999)*    

 

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10.23   Receivables Purchase Agreement dated as of December 21, 1999, as Amended and Restated as of March 31, 2000 among AILIC Receivables Corporation, American Income Life Insurance Company, Preferred Receivables Funding Corporation and Bank One, NA (incorporated by reference from Exhibit 10(x) to Form 10-K for the fiscal year ended December 31, 2000)    
10.24   Amendment dated as of August 31, 2001 to Receivables Purchase Agreement dated as of December 21, 1999 among AILIC Receivables Corporation, American Income Life Insurance Company, Preferred Receivables Funding Corporation and BankOne, N.A. (incorporated by reference from Exhibit 10(y) to Form 10-K for the fiscal year ended December 31, 2001)    
10.25   Amendment No. 2 dated as of August 30, 2002 to Receivables Purchase Agreement dated as of December 21, 1999 as amended and restated as of March 31, 2000 among AILIC Receivables Corporation, American Income Life Insurance Company Preferred Receivables Funding Corporation and Bank One, N.A. (incorporated by reference from Exhibit 10(y) to Form 10-K for the fiscal year ended December 31, 2003)    
10.26   Amendment No. 3 dated as of October 24, 2002 to Receivables Purchase Agreement dated as of December 21, 1999 as amended and restated as of March 31, 2000 among AILIC Receivables Corporation, American Income Life Insurance Company, Preferred Receivables Funding Corporation, certain financial institutions parties thereto, and Bank One, N.A. (incorporated by reference from Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2004)    
10.27   Amendment No. 4 dated as of August 28, 2003 to Receivables Purchase Agreement dated as of December 21, 1999 as amended and restated as of March 31, 2000 among AILIC Receivables Corporation, American Income Life Insurance Company, Preferred Receivables Funding Corporation, certain financial institutions parties thereto, and Bank One, N.A. (incorporated by reference from Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 2004)    
10.28   Amendment No. 5 dated as of August 27, 2004 to Receivables Purchase Agreement dated as of December 21, 1999 as amended and restated as of March 31, 2000 among AILIC Receivables Corporation, American Income Life Insurance Company, Preferred Receivables Funding Corporation, certain financial institutions parties thereto, and Bank One, N.A. (incorporated by reference from Exhibit 10.3 to Form 10-Q for the quarter ended September 30, 2004)    
10.29   Amendment No. 6 dated as of August 26, 2005 to Receivables Purchase Agreement dated as of December 21, 1999 as amended and restated as of March 31, 2000 among AILIC Receivables Corporation, American Income Life Insurance Company, Preferred Receivables Funding Corporation, certain financial institutions party thereto, and JPMorgan Chase Bank, National Association, Successor by Merger to Bank One, N.A. (incorporated by reference from Exhibit 10.1 to Form 8-K dated August 31, 2005)    
10.30   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)*    
10.31   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)*    
10.32   Payments to Directors*    
10.33   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)*    

 

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10.34   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)*    
10.35   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)*    
10.36   Form of Stock Option Agreement pursuant to Torchmark Corporation 2005 Incentive Plan (bonus)*    
10.37   Form of Stock Option Agreement pursuant to Torchmark Corporation 2005 Incentive Plan (regular vesting)*    
10.38   Torchmark Corporation 2005 Non-Employee Director Incentive Plan (incorporated by reference from Exhibit 10.1 to Form 8-K dated May 4, 2005)*    
10.39   Torchmark Corporation 2005 Stock Incentive Plan (incorporated by reference from Exhibit 10.2 to Form 8-K dated May 4, 2005)*    
10.40   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)*    
(11)   Statement re computation of per share earnings   100
(12)   Statement re computation of ratios    
(20)   Proxy Statement for Annual Meeting of Stockholders to be held April 27, 2006    
(21)   Subsidiaries of the registrant   100
(23)(a)   Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports dated March 2, 2006, into Form S-8 of The Torchmark Corporation Savings and Investment Plan (Registration No. 2-76378)    
      (b)   Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports dated March 2, 2006, into Form S-8 and the accompanying Form S-3 Prospectus of the Torchmark Corporation 1996 Non-Employee Director Stock Option Plan (Registration No. 2-93760)    
      (c)   Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports dated March 2, 2006, into Form S-8 and the accompanying Form S-3 Prospectus of the Torchmark Corporation 1987 Stock Incentive Plan (Registration No. 33-23580)    
      (d)   Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports dated March 2, 2006, into Form S-8 and the accompanying Form S-3 Prospectus of The Capital Accumulation and Bonus Plan of Torchmark Corporation (Registration No. 33-1032)    
      (e)   Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports dated March 2, 2006, into Form S-8 of the Liberty National Life Insurance Company 401(k) Plan (Registration No. 33-65507)    
      (f)   Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports dated March 2, 2006, into Form S-8 and accompanying Form S-3 Prospectus of the Torchmark Corporation 1996 Executive Deferred Compensation Stock Option Plan (Registration No. 333-27111)    
      (g)   Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports dated March 2, 2006 into Form S-8 of the Profit Sharing and Retirement Plan of Liberty National Life Insurance Company (Registration No. 333-83317)    

 

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      (h)   Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports dated March 2, 2006 into Form S-8 and the accompanying Form S-3 Prospectus of the Torchmark Corporation 1998 Stock Incentive Plan (Registration No. 333-40604)    
      (i)   Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports dated March 2, 2006 into Form S-8 and the accompanying Form S-3 Prospectus of the Torchmark Corporation 2005 Incentive Plan (Registration No. 333-125409)    
      (j)   Consent of Deloitte & Touche LLP to incorporation by reference of their audit reports dated March 2, 2006 into Form S-8 and the accompanying Form S-3 Prospectus of the Torchmark Corporation 2005 Non-Employee Director Incentive Plan (Registration No. 333-125400)    
(24)   Powers of attorney    
(31.1)   Rule 13a-14(a)/15d-14(a) Certification by Mark S. McAndrew    
(31.2)   Rule 13a-14(a)/15d-14(a) Certification by Gary L. Coleman    
(32.1)   Section 1350 Certification by Mark S. McAndrew and Gary L. Coleman    

*   Compensatory plan or arrangement.
**   Certain portions of the exhibit have been omitted pursuant to a request for confidential treatment. The non-public information has been filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

 

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Exhibit 11. Statement re computation of per share earnings

 

TORCHMARK CORPORATION

COMPUTATION OF EARNINGS PER SHARE

 

    

Twelve Months Ended December 31,


     2005

   2004

    2003

Net Income before cumulative effect of change in accounting principle

   $ 495,390,000    $ 475,718,000     $ 430,141,000

Cumulative effect of change in accounting principle (net of applicable tax)

     -0-      (7,163,000 )     -0-
    

  


 

Net Income

   $ 495,390,000    $ 468,555,000     $ 430,141,000
    

  


 

Basic weighted average shares outstanding

     104,735,466      110,106,078       114,836,778

Diluted weighted average shares outstanding

     105,751,413      111,907,788       115,377,155

Basic earnings per share:

                     

Net Income before cumulative effect of change in accounting principle

   $ 4.73    $ 4.32     $ 3.75

Cumulative effect of change in accounting principle (net of applicable tax)

     -0-      (.06 )     -0-
    

  


 

Net Income

   $ 4.73    $ 4.26     $ 3.75
    

  


 

Diluted earnings per share:

                     

Net Income before cumulative effect of change in accounting principle

   $ 4.68    $ 4.25     $ 3.73

Cumulative effect of change in accounting principle (net of applicable tax)

     -0-      (.06 )     -0-
    

  


 

Net Income

   $ 4.68    $ 4.19     $ 3.73
    

  


 

 

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                


   State of
Incorporation


    

     Name Under Which
Company Does Business


American Income Life

Insurance Company

   Indiana     

American Income Life

Insurance Company

Globe Life And Accident

Insurance Company

   Delaware     

Globe Life And Accident

Insurance Company

Liberty National Life

Insurance Company

   Alabama     

Liberty National Life

Insurance Company

United American

Insurance Company

   Delaware     

United American

Insurance Company

United Investors Life

Insurance Company

   Missouri     

United Investors Life

Insurance Company

 

All other exhibits required by Regulation S-K are listed as to location in the “Index of documents filed as a part of this report” on pages 95 through 99 of this report. Exhibits not referred to have been omitted as inapplicable or not required.

 

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TORCHMARK CORPORATION

(PARENT COMPANY)

SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT

CONDENSED BALANCE SHEETS

(Amounts in thousands)

 

     December 31,

 
     2005

    2004

 

Assets:

                

Investments:

                

Long-term investments

   $ 10,365     $ 27,620  

Short-term investments

     21,035       10,544  
    


 


Total investments

     31,400       38,164  

Investment in affiliates

     4,299,039       4,233,040  

Taxes receivable

     5,248       -0-  

Other assets

     43,819       55,901  
    


 


Total assets

   $ 4,379,506     $ 4,327,105  
    


 


Liabilities and shareholders’ equity:

                

Liabilities:

                

Short-term debt

   $ 381,505     $ 170,354  

Long-term debt

     353,263       540,046  

Due to affiliates

     171,791       156,964  

Taxes payable

     -0-       4,847  

Other liabilities

     40,179       35,050  
    


 


Total liabilities

     946,738       907,261  

Shareholders’ equity:

                

Preferred stock

     351       351  

Common stock

     104,875       108,784  

Additional paid-in capital

     859,224       835,397  

Accumulated other comprehensive income

     269,084       405,916  

Retained earnings

     2,621,552       2,462,513  

Treasury stock

     (422,318 )     (393,117 )
    


 


Total shareholders’ equity

     3,432,768       3,419,844  
    


 


Total liabilities and shareholders’ equity

   $ 4,379,506     $ 4,327,105  
    


 


 

See Notes to Condensed Financial Statements and accompanying Report of Independent Registered

Public Accounting Firm.

 

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TORCHMARK CORPORATION

(PARENT COMPANY)

SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)

CONDENSED STATEMENTS OF OPERATIONS

(Amounts in thousands)

 

    

Year Ended December 31,


 
     2005

    2004

    2003

 

Net investment income

   $ 16,499     $ 15,283     $ 15,241  

Realized investment gains (losses)

     419       13,062       6,734  

Other income

     13,482       -0-       -0-  
    


 


 


Total revenue

     30,400       28,345       21,975  

General operating expenses

     9,986       9,321       10,020  

Reimbursements from affiliates

     (10,392 )     (10,296 )     (10,596 )

Interest expense

     60,997       56,070       56,352  
    


 


 


Total expenses

     60,591       55,095       55,776  
    


 


 


Operating income (loss) before income taxes and equity in earnings of affiliates

     (30,191 )     (26,750 )     (33,801 )

Income taxes

     21,493       10,359       13,118  
    


 


 


Net operating loss before equity in earnings of affiliates

     (8,698 )     (16,391 )     (20,683 )

Equity in earnings of affiliates

     504,088       484,946       450,824  
    


 


 


Net income

   $ 495,390     $ 468,555     $ 430,141  
    


 


 


 

See Notes to Condensed Financial Statements and accompanying Report of Independent Registered

Public Accounting Firm.

 

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TORCHMARK CORPORATION

(PARENT COMPANY)

SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT—(continued)

CONDENSED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

 

     Year Ended December 31,

 
     2005

    2004

    2003

 

Cash provided from (used for) operations before dividends from subsidiaries

   $ 4,754     $ (13,391 )   $ 21,997  

Cash dividends from subsidiaries

     365,458       345,945       313,682  
    


 


 


Cash provided from operations

     370,212       332,554       335,679  

Cash provided from (used for) investing activities:

                        

Disposition of investments

     1,540       659       479  

Loans to subsidiaries

     (79,000 )     (62,700 )     (14,000 )

Repayments on loans to subsidiaries

     79,000       62,700       14,000  

Net decrease (increase) in temporary investments

     (10,491 )     14,328       (15,822 )

Additions to properties

     (55 )     (13 )     (37 )
    


 


 


Cash provided from (used for) investing activities

     (9,006 )     14,974       (15,380 )

Cash provided from (used for) financing activities:

                        

Issuance of debt

     31,299       -0-       -0-  

Repayments of debt

     -0-       (12,094 )     (19,031 )

Issuance of stock

     217,257       26,123       10,525  

Acquisitions of treasury stock

     (554,946 )     (285,226 )     (225,273 )

Borrowings from subsidiaries

     128,000       85,100       116,600  

Repayment on borrowings from subsidiaries

     (113,200 )     (89,400 )     (136,000 )

Payment of dividends

     (69,616 )     (72,031 )     (67,120 )
    


 


 


Cash provided from (used for) financing activities

     (361,206 )     (347,528 )     (320,299 )

Net decrease in cash

     -0-       -0-       -0-  

Cash balance at beginning of period

     -0-       -0-       -0-  
    


 


 


Cash balance at end of period

   $ -0-     $ -0-     $ -0-  
    


 


 


 

See Notes to Condensed Financial Statements and accompanying Report of Independent Registered

Public Accounting Firm.

 

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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:

 

     2005

   2004

   2003

Consolidated subsidiaries

   $ 365,458    $ 345,945    $ 313,682
    

  

  

 

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,


     2005

   2004

   2003

Paid-in capital from tax benefit for stock option exercises

   $ 8,115    $ 1,103    $ -0-

Other stock-based compensation not involving cash

     1,375      918      1,026

 

The following table summarizes certain amounts paid (received) during the period:

 

    

Year Ended December 31,


 
     2005

    2004

    2003

 

Interest paid*

   $ 47,706     $ 42,813     $ 48,508  

Income taxes received

     (19,513 )     (15,725 )     (16,464 )

* The interest cost reductions resulting from the cash settlements of Torchmark’s interest-rate swaps are netted against realized investment losses.

 

Note C—Special Items

 

Other income includes $13.5 million from a legal settlement which was recorded in the second quarter of 2005. Income taxes in 2005 include the Parent Company’s portion of an $11 million settlement benefit from an Internal Revenue Service examination covering several years. More information on the tax settlement is provided in Note 8—Income Taxes in the Notes to Consolidated Financial Statements. The litigation settlement is disclosed in Note 1—Significant Accounting Policies in those notes.

 

 

See accompanying Report of Independent Registered Public Accounting Firm.

 

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TORCHMARK CORPORATION

SCHEDULE IV. REINSURANCE (CONSOLIDATED)

(Amounts in thousands)

 

     Gross
Amount


   Ceded
to Other
Companies


   Assumed
from Other
Companies


   Net
Amount


   Percentage
of Amount
Assumed
to Net


 

For the Year Ended December 31, 2005:


                          

Life insurance in force

   $ 137,086,106    $ 1,564,944    $ 2,146,473    $ 137,667,635    1.6 %
    

  

  

  

  

Premiums:*

                                  

Life insurance

   $ 1,398,402    $ 7,479    $ 20,164    $ 1,411,087    1.4 %

Health insurance

     1,018,838      3,981      0      1,014,857    0.0 %
    

  

  

  

      

Total premium

   $ 2,417,240    $ 11,460    $ 20,164    $ 2,425,944    .8 %
    

  

  

  

  

For the Year Ended December 31, 2004:


                          

Life insurance in force

   $ 132,450,148    $ 1,575,831    $ 2,189,851    $ 133,064,168    1.6 %
    

  

  

  

  

Premiums:*

                                  

Life insurance

   $ 1,321,514    $ 7,527    $ 20,888    $ 1,334,875    1.6 %

Health insurance

     1,051,536      4,030      1,160      1,048,666    0.1 %
    

  

  

  

      

Total premium

   $ 2,373,050    $ 11,557    $ 22,048    $ 2,383,541    0.9 %
    

  

  

  

  

For the Year Ended December 31, 2003:


                          

Life insurance in force

   $ 124,514,661    $ 1,478,974    $ 2,222,421    $ 125,258,108    1.8 %
    

  

  

  

  

Premiums:*

                                  

Life insurance

   $ 1,231,657    $ 5,763    $ 19,993    $ 1,245,887    1.6 %

Health insurance

     1,038,709      4,678      0      1,034,031    0.0 %
    

  

  

  

      

Total premium

   $ 2,270,366    $ 10,441    $ 19,993    $ 2,279,918    0.9 %
    

  

  

  

  


*   Excludes policy charges

 

See accompanying Report of Independent Registered Public Accounting Firm.

 

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SIGNATURES

 

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.

 

TORCHMARK CORPORATION
By:   /s/    MARK S. MCANDREW        
    Mark S. McAndrew,
    Chairman and Chief Executive Officer and Director
By:   /s/    GARY L. COLEMAN        
    Gary L. Coleman, Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)

 

Date: March 3, 2006

 

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:   /s/    CHARLES E. ADAIR  *               By:   /s/    JOSEPH L. LANIER, JR.  *        
    Charles E. Adair           Joseph L. Lanier, Jr.
    Director           Director
By:   /s/    DAVID L. BOREN  *               By:   /s/    SAM R. PERRY  *        
    David L. Boren           Sam R. Perry
    Director           Director
By:   /s/    M. JANE BUCHAN  *               By:   /s/    HAROLD T. MCCORMICK  *        
    M. Jane Buchan           Harold T. McCormick
    Director           Director
By:   /s/    JOSEPH M. FARLEY  *               By:   /s/    LAMAR C. SMITH  *        
    Joseph M. Farley           Lamar C. Smith
    Director           Director
By:   /s/    ROBERT W. INGRAM  *               By:   /s/    PAUL J. ZUCCONI  *        
    Robert W. Ingram           Paul J. Zucconi
    Director           Director
Date: March 3, 2006            

*By:  

  /s/    GARY L. COLEMAN                    
    Gary L. Coleman            
    Attorney-in-fact            

 

106

EX-10.32 2 dex1032.htm PAYMENTS TO DIRECTORS PAYMENTS TO DIRECTORS

Exhibit 10.32

 

Payments to Directors

 

Directors of Torchmark Corporation are currently compensated on the following basis:

 

(1) Directors who are not officers or employees of the Company or a subsidiary of the Company (Outside Directors) receive a fee of $2,000 for each physically attended Board or Board Committee meeting, a fee of $500 for each telephonic Board or Board Committee meeting in which they participate, and an annual retainer of $45,000 payable each January for the entire year. They do not receive fees for the execution of written consents in lieu of Board meetings and Board committee meetings. They receive reimbursement for their travel and lodging expenses if they do not live in the area where the meeting is held.

 

Each Outside Director is automatically awarded annually non-qualified stock options on 6,000 shares of Company common stock on the first day of each calendar year in which stock is traded on the New York Stock Exchange. The entire Board may, for calendar years commencing with 1996, award non-qualified stock options on a non-formula basis to all or such individual Outside Directors as it shall select. Such options may be awarded at such times and for such number of shares as the Board in its discretion determines. The price of such options shall be the fair market value of the stock on the grant date. Options on 6,000 shares are typically granted pursuant to this non-formula provision on the date of election of each new director at fair market value on that date.

 

Commencing with 1997 retainer and meeting and committee fees (assuming attendance at all scheduled meetings) Outside Directors have been able to annually elect to defer up to 100% of their director compensation for the following year and receive stock options. Such options are awarded with a fair market value exercise price on a January grant date selected by the Compensation Committee.

 

(2) Beginning in January, 1993, directors who are officers or employees of the Company or a subsidiary of the Company waived receipt of all fees for attending Board meetings. They do not receive fees for the execution of written consents in lieu of Board meetings or Board committee meetings. They also do not receive a fee for attending Board committee meetings or an annual retainer. They are reimbursed their travel and lodging expenses, if any.

 

(3) Beginning in April 2003, the director serving as Chairman of the Audit Committee receives a $5,000 annual retainer for service as chairman.

 

(4) Each person who served as a non-employee director on or prior to February 29, 2000 is eligible to receive upon retirement from the Board a retirement benefit payable annually, in an amount equal to $200 a year for each year of service as a director or advisory director up to 25 years, but not less than $1,200 a year. In determining this benefit, the number of years of service may include years as a director of a subsidiary of the Company if the payment for such years by the Company is in place of a payment which would otherwise be made by the subsidiary. Directors who retired prior to the termination of this retirement benefit program effective February 29, 2000, have been and will continue to receive their retirement benefit payments in cash. Directors with accrued but unpaid retirement benefits under this program on the date of termination were offered the opportunity to convert the present value of such retirement benefits on that date to options in Company common stock. Directors elected after February 29, 2000 will not receive any director retirement benefits.
EX-10.36 3 dex1036.htm FORM OF STOCK OPTION AGREEMENT (BONUS) Form of Stock Option Agreement (bonus)

Exhibit 10.36

 

STATE OF ALABAMA )

JEFFERSON COUNTY )

TORCHMARK CORPORATION

NON-QUALIFIED STOCK OPTION

GRANT AGREEMENT

 

TORCHMARK CORPORATION, a corporation organized and existing under the laws of the state of Delaware (the “Company”) hereby awards [NAME] (the “Optionee”), the following non-qualified stock option (the “Option”) upon the terms and conditions hereinafter set forth.

 

AUTHORITY FOR GRANT

 

1. Stock Incentive Plan. The Option is awarded pursuant to the provisions of the Torchmark Corporation 2005 Incentive Plan (the “Plan”), and is subject to the terms and provisions of said Plan, as it may be from time to time amended. Capitalized terms used but not defined herein shall have the meaning given them in the Plan, which is incorporated by reference herein.

 

TERMS OF OPTION

 

2. Number of Shares. The Optionee is hereby granted an option to purchase from the Company 8,503 shares (the “Shares”) of the Company’s common capital stock.

 

3. Option Price Per Share. The option price for each Share subject to the Option shall be $[            ], the closing price of the Stock on the New York Stock Exchange Composite Tape on [Date], which is the “Grant Date”.

 

4. Option Period. The Option shall be and become first exercisable, cumulatively, as to 1/6 of the shares commencing on each of the first through sixth anniversaries of the Option Grant Date. This Agreement shall terminate on the date which is seven (7) years from the Option Grant Date, and the parties hereto shall have no further rights or obligation hereunder. For the purposes of this Agreement, “Option Period” shall mean the seven (7) year period commencing on the Grant Date.

 

5. Method of Exercise. The Option may be exercised to the extent then exercisable in whole or in part at any time during the Option Period, by giving written notice of exercise to the Company specifying the number of Shares to be purchased, accompanied by payment in full of the purchase price, in cash, by check or such other instrument as may be acceptable to the Compensation Committee of the Board of Directors of the Company (the “Committee”). Payment in full or in part may also be made in the form of unrestricted Stock already owned by the Optionee (based on the Fair Market Value of the Stock on the date the Option is exercised). The Optionee shall have the right to dividends or other rights of a stockholder with respect to the Shares subject to the Option when the Optionee has given written notice of exercise and has paid in full for such Shares.

 

6. Transferability of Options. The Option may be transferred by the Optionee to members of his or her Immediate Family (the children, grandchildren or spouse of the Optionee), to one or more trusts for the benefit of such Immediate Family members or to one or more partnerships where such Immediate Family members are the only partners if (i) the Optionee has received express written approval of such transfer from the Committee and (ii) the Optionee does not receive any consideration in any form


whatsoever for said transfer. Except as provided in the foregoing sentence, the Option shall not be transferable by the Optionee other than by will or by the laws of descent and distribution.

 

TERMINATION OF OPTION

 

7. Accelerated Vesting. Notwithstanding paragraph 4 above, the Option shall become immediately exercisable and may thereafter be exercised until the expiration of the original term of the Option upon the first to occur of (i) the death of the Optionee, (ii) the Optionee obtaining Normal Retirement Age, (iii) the occurrence of a Change in Control, or (iv) the unanimous determination by the Committee that the Option shall become fully exercisable. In no event will retirement, other termination of employment or failure to be reelected as an officer of the Company or any Subsidiary thereof shorten the term of this Option.

 

GENERAL TERMS AND PROVISIONS

 

8. Shares Listed on the Exchange. The Shares for which the Option is hereby granted shall have been listed on the New York Stock Exchange at the time the Option is exercised.

 

9. Shares May Be Newly Issued or Purchased. The Shares to be delivered upon the exercise of the Option shall be made available, at the discretion of the Company, either from authorized but previously unissued Shares or from Shares held in the treasury of the Company.

 

10. Change in Corporate Structure Affecting Shares. In the event of any change in the number of issued Shares without new consideration to the Company such as by stock split, reorganization, exchange of shares, recapitalization, liquidation, combination, stock dividend, or other change in corporate structure affecting the Stock, on any distribution of cash or property which has a substantial impact on the value of issued Shares such adjustment shall be made in the number and price of Shares subject to the Option as may be determined to be appropriate by the Committee in its sole discretion so that the consideration payable to the Company and the value of the Option shall not be changed.

 

11. Certain Reorganizations. The Committee shall authorize the issuance, continuation or assumption of any outstanding portion of the Option or provide for other equitable adjustments to the Option after changes in the Shares resulting from any merger, consolidation, sale of assets, acquisition of property or stock, recapitalization, reorganization or similar occurrence in which the Company is the continuing or surviving corporation.

 

12. Payment of Taxes. The Optionee shall, no later than the date as of which the value of any portion of the Option first becomes includable in his/her gross income for Federal income tax purposes, pay to the Company, or make other arrangements satisfactory to the Committee, in its sole discretion, regarding payment of, any Federal, state, local or FICA taxes of any kind required by law to be withheld with respect to the Option. The obligations of the Company under this Agreement shall be conditional on such payment or arrangements.

 

13. Headings. The headings contained herein are for convenience of reference only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof.

 

14. Notices. Any notices required by or permitted to be given to the Company under this Agreement shall be made in writing and addressed to the Secretary of the Company in care of the

 

2


Company’s Legal Department, 2001 Third Avenue South, Birmingham, Alabama 35233. Any such notice shall be deemed to have been given when received by the Company.

 

15. Effective Date of Stock Option. This Option has been executed this             day of             , 20__, effective as of this             day of             , 20__.

 

TORCHMARK CORPORATION
By:    
    Its Duly Authorized Officer
     
   

OPTIONEE

 

3

EX-10.37 4 dex1037.htm FORM OF STOCK OPTION AGREEMENT (REGULAR VESTING) Form of Stock Option Agreement (regular vesting)

Exhibit 10.37

STATE OF ALABAMA )

JEFFERSON COUNTY )

 

TORCHMARK CORPORATION NON-QUALIFIED STOCK OPTION

GRANT AGREEMENT

 

TORCHMARK CORPORATION, a corporation organized and existing under the laws of the state of Delaware (the “Company”), does hereby grant and give unto [NAME] (the “Optionee”), the following non-qualified stock option (the “Option”) upon the terms and conditions hereinafter set forth.

 

AUTHORITY FOR GRANT

 

1. Stock Incentive Plan. The Option is granted under the provisions of the Torchmark Corporation 2005 Incentive Plan (the “Plan”), as a non-qualified option and is subject to the terms and provisions of the Plan. Capitalized terms used but not defined herein shall have the meaning given them in the Plan which is incorporated by reference herein.

 

TERMS OF OPTION

 

2. Number of Shares. The Optionee is hereby granted an option to purchase from the Company [Number] Shares (the “Shares”) of the Company’s common capital stock.

 

3. Option Price Per Share. The option price for each Share subject to the Option shall be $[            ], the closing price of the Stock on the New York Stock Exchange Composite Tape on [Date], which is the “Grant Date”.

 

4. Option Period. The Option shall be and become first exercisable to the extent of 50% of the Shares on and after [Date]. The remaining Shares shall become exercisable on and after [Date]. Notwithstanding any other provision of this Agreement, if the Option is not exercised with respect to all Shares prior to seven (7) from the Grant Date, it shall terminate and the parties hereto shall have no further rights or obligations hereunder. For the purposes of this agreement “Option Period” shall mean the seven (7) year period commencing on the Grant Date.

 

5. Method of Exercise. The Option may be exercised in whole or in part at any time during the Option Period, by giving written notice of exercise to the Company specifying the number of Shares to be purchased, accompanied by payment in full of the purchase price, in cash, by check or such other instrument as may be acceptable to the Compensation Committee of the Torchmark Board of Directors (the “Committee”). Payment in full or in part may also be made in the form of unrestricted stock already owned by the Optionee (based on the fair market value of the stock on the date the Option is exercised). The Optionee shall have the rights to dividends or other rights of a stockholder with respect to the Shares subject to the option when the Optionee has given written notice of exercise and has paid in full for such Shares.

 

6. Transferability of Option. The Option may be transferred by the Optionee to members of his or her Immediate Family (the children, grandchildren or spouse of the Optionee), to one or more trusts for the benefit of such Immediate Family members or to one or more partnerships where such Immediate Family members are the only partners if (i) the Optionee has received express written approval of such transfer from the Committee and (ii) the Optionee does not receive any consideration in any form


whatsoever for said transfer. Except as provided in the foregoing sentence, the Option shall not be transferable by the Optionee other than by will or by the laws of descent and distribution.

 

TERMINATION OF OPTION

 

7. Termination by Death. If the Optionee’s employment with the Company, any Subsidiary and/or any Affiliate terminates by reason of death (or if Optionee dies following termination of employment by reason of disability or retirement at or after age 65), the Option shall become immediately exercisable and may thereafter be exercised by the legal representative of the estate or by the legatee of the Optionee under the will of the Optionee, during the period ending on the expiration of the stated term of the Option or the first anniversary of the Optionee’s death, whichever is later.

 

8. Termination by Reason of Disability. If the Optionee’s employment with the Company, any Subsidiary, and/or any Affiliate terminates by reason of Disability, the Option shall be immediately exercisable and may thereafter be exercised during the period ending on the expiration of the stated term of the Option.

 

9. Termination by Reason of Retirement. If the Optionee’s employment with the Company, any Subsidiary, and/or any Affiliate terminates by reason of retirement at or after age 65, the Option shall become immediately exercisable and may thereafter be exercised during the period ending on the expiration of the stated term of the Option.

 

If the Optionee’s employment with the Company, any Subsidiary, and/or any Affiliate terminates by reason of retirement at or after age 60, the Option shall terminate five (5) years from the date of such retirement or upon the expiration of the stated term of the Option, whichever is shorter. If the Optionee’s employment with the Company, any Subsidiary and/or any Affiliate terminates by reason of retirement at or after age 55, the Option shall terminate three (3) years from the date of such retirement or upon the expiration of the stated term of the Option, whichever is shorter. In the event of retirement at or after ages 55 or 60, there shall be no acceleration of vesting of the Option and the Option may only be exercised to the extent it is or becomes exercisable prior to the termination of the Option.

 

10. Termination for Cause. If the Optionee’s employment with the Company, any Subsidiary and/or any Affiliate is terminated for Cause, or the Committee determines that the Optionee has engaged in conduct that would be grounds for termination with cause, the Option shall be immediately forfeited to the Company upon the giving of notice of termination of employment.

 

11. Other Termination. If the Optionee’s employment with the Company, any Subsidiary and/or any Affiliate is involuntarily terminated by the Optionee’s employer without Cause, the Option shall terminate three (3) months from the date of termination of employment or upon the expiration of the stated term of the Option, whichever is shorter. If the Optionee’s employment with the Company, any Subsidiary, and/or any Affiliate is voluntarily terminated for any reason, the Option shall terminate one (1) month from the date of termination of employment or upon the expiration of the stated term of the Option, whichever is shorter. In the event of involuntary termination without Cause or voluntarily termination, there shall be no acceleration of vesting of the Option and the Option may only be exercised to the extent it is or becomes exercisable prior to such termination.

 

GENERAL TERMS AND PROVISIONS

 

12. Shares Listed on the Exchange. The Shares for which the Option is hereby granted shall have been listed on the New York Stock Exchange at the time the Option is exercised.

 

2


13. Shares May be Newly Issued or Purchased. The Shares to be delivered upon the exercise of the Option shall be made available, at the discretion of the Company, either from authorized but previously unissued Shares or from Shares held in the treasury of the Company.

 

14. Adjustment of Shares for Recapitalization. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, or other change in corporate structure affecting the Stock, a substitution or adjustment shall be made in the number and price of Shares subject to the Option as may be determined to be appropriate by the Committee in its sole discretion.

 

15. Payment of Taxes. The Optionee shall, no later than the date as of which the value of any portion of the Option first becomes includable in his/her gross income for Federal income tax purposes, pay to the Company, or make other arrangements satisfactory to the Committee, in its sole discretion, regarding payment of, the minimum Federal, state, local or FICA taxes of any kind required by law to be withheld with respect to the Option. The obligations of the Company under this Agreement shall be conditional on such payment or arrangements.

 

The Optionee may elect, subject to the approval of the Committee, to satisfy his/her minimum Federal, and where applicable, FICA, state and local tax withholding obligations arising from all awards by the reduction in an amount necessary to pay any such minimum withholding tax obligations, of the number of Shares of stock or amount of cash otherwise issuable or payable to said Optionee upon the issuance of Shares or payment of cash in respect of an Option. The Company and, where applicable, its Subsidiaries and Affiliates shall, to the extent permitted by law, have the right to deduct any such minimum withholding taxes owed by an Optionee who is not subject to Section 16 of the 1934 Act from any payment of any kind otherwise due to said Optionee.

 

16. Headings. The headings contained herein are for convenience of reference only, do not constitute a part of this Grant Agreement and shall not be deemed to limit or affect any of the provisions hereof.

 

17. Notices. Any notices required by or permitted to be given to the Company under this Agreement shall be made in writing and addressed to the Secretary of the Company in care of the Company’s Legal Department, 2001 Third Avenue South, Birmingham, Alabama 35233. Any such notice shall be deemed to have been given when received by the Company.

 

18. Effective Date Stock Option. This Option has been executed this day of             , 20__, effective as of [Date].

 

TORCHMARK CORPORATION
By:    
   

Its Authorized Officer

     
   

OPTIONEE

 

3

EX-12 5 dex12.htm STATEMENT RE COMPUTATION OF RATIOS STATEMENT RE COMPUTATION OF RATIOS

EXHIBIT 12

 

Exhibit 12. Statement re computation of ratios

 

TORCHMARK CORPORATION

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

(Dollar amounts in thousands)

 

     Year Ended December 31,

     2005

   2004

   2003

Earnings before fixed charges:

                    

Pre-tax earnings

   $ 731,521    $ 720,801    $ 653,112

Fixed charges

     62,775      58,220      57,695
    

  

  

Earnings before fixed charges

   $ 794,296    $ 779,021    $ 710,807
    

  

  

Fixed charges:

                    

Interest expense*

   $ 60,290    $ 55,881    $ 55,565

Amortization of bond issue costs

     644      610      570

Estimated interest factor of rental expense

     1,841      1,729      1,560
    

  

  

Total fixed charges

   $ 62,775    $ 58,220    $ 57,695
    

  

  

Ratio of earnings to fixed charges

     12.7      13.4      12.3
    

  

  

                      

Earnings before fixed charges

   $ 794,296    $ 779,021    $ 710,807

Interest credited for deposit products

     63,049      64,470      67,618
    

  

  

Adjusted earnings before fixed charges

   $ 857,345    $ 843,491    $ 778,425
    

  

  

Fixed charges

   $ 62,775    $ 58,220    $ 57,695

Interest credited for deposit products

     63,049      64,470      67,618
    

  

  

Adjusted fixed charges

   $ 125,824    $ 122,690    $ 125,313
    

  

  

Ratio of earnings to fixed charges including interest credited on deposit products as a fixed charge

     6.8      6.9      6.2
    

  

  

Rental expense

   $ 5,579    $ 5,238    $ 4,727

Estimated interest factor of rental expense (33%)

     1,841      1,729      1,560

* There was no interest capitalized in any period indicated.
EX-20 6 dex20.htm PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS Proxy Statement for Annual Meeting of Stockholders

EXHIBIT 20

 

LOGO

 

March 20, 2006

 

To the Stockholders of

TORCHMARK CORPORATION:

 

Torchmark’s 2006 annual meeting of stockholders will be held in the Company’s offices at 2001 Third Avenue South, Birmingham, Alabama 35233 at 10:00 a.m., Central Daylight Time, on Thursday, April 27, 2006. The meeting will be conducted using Robert’s Rules of Order and the Company’s Shareholder Rights Policy. This policy is posted on Torchmark’s web site at http://www.torchmarkcorp.com or you may obtain a printed copy by writing to the Corporate Secretary at the Company’s principal executive offices, 2001 Third Ave South, Birmingham, Alabama 35233.

 

The accompanying notice and proxy statement discuss proposals which will be submitted to a stockholder vote. If you have any questions or comments about the matters discussed in the proxy statement or about the operations of your Company, we will be pleased to hear from you.

 

It is important that your shares be voted at this meeting. Please mark, sign, and return your proxy or vote over the telephone or on the Internet. If you attend the meeting, you may withdraw your proxy and vote your stock in person if you desire to do so.

 

We hope that you will take this opportunity to meet with us to discuss the results and operations of the Company during 2005.

 

Sincerely,

LOGO

Mark S. McAndrew

Chairman and Chief Executive Officer



 

Notice of Annual Meeting of Stockholders

to be held April 27, 2006

 


 

To the Holders of Common Stock of

TORCHMARK CORPORATION

 

The annual meeting of stockholders of Torchmark Corporation will be held in the Company’s offices at 2001 Third Avenue South, Birmingham, Alabama 35233 on Thursday, April 27, 2006 at 10:00 a.m., Central Daylight Time. The meeting will be conducted in accordance with Robert’s Rules of Order and the Company’s Shareholders Rights Policy. You will be asked to:

 

(1) Elect the nominees shown in the proxy statement as directors to serve for their designated terms or until their successors have been duly elected and qualified.

 

(2) Consider ratification of the appointment of Deloitte & Touche LLP as independent auditors.

 

(3) Approve the Torchmark Corporation Amended and Restated 2005 Incentive Plan.

 

(4) Consider a shareholder proposal regarding diversity of the Board of Directors.

 

(5) Transact any other business that properly comes before the meeting.

 

These matters are more fully discussed in the accompanying proxy statement.

 

The close of business on Friday, March 3, 2006 is the date for determining stockholders who are entitled to notice of and to vote at the annual meeting. You are requested to mark, date, sign, and return the enclosed form of proxy in the accompanying envelope, whether or not you expect to attend the annual meeting in person. You may also choose to vote your shares over the telephone or on the Internet. You may revoke your proxy at any time before it is voted at the meeting.

 

The annual meeting may be adjourned from time to time without further notice other than by an announcement at the meeting or at any adjournment. Any business described in this notice may be transacted at any adjourned meeting.

 

By Order of the Board of Directors

LOGO

Carol A. McCoy

Vice President, Associate Counsel & Secretary

 

Birmingham, Alabama

March 20, 2006


PROXY STATEMENT

 

Solicitation of Proxies

 

The Board of Directors of Torchmark Corporation solicits your proxy for use at the 2006 annual meeting of stockholders and at any adjournment of the meeting. The annual meeting will be held in the Company offices at 2001 Third Avenue South, Birmingham, Alabama 35233 at 10:00 a.m., Central Daylight Time on Thursday, April 27, 2006. Mark S. McAndrew and Larry M. Hutchison are named as proxies on the proxy/direction card. They have been designated as directors’ proxies by the Board of Directors.

 

If the enclosed proxy/direction card is returned, properly executed, and in time for the meeting, your shares will be voted at the meeting. All proxies will be voted in accordance with the instructions set forth on the proxy/ direction card. If proxies are executed and returned which do not specify a vote on the proposals considered, those proxies will be voted FOR proposals 1, 2 and 3 and AGAINST proposal 4. You have the right to revoke your proxy by giving written notice of revocation addressed to the Secretary of the Company at the address shown above at any time before the proxy is voted.

 

The card is considered to be voting instructions furnished to the respective trustees of each of the Torchmark Corporation Savings and Investment Plan, the Profit-Sharing and Retirement Plan of Liberty National Life Insurance Company, the Liberty National Life Insurance Company 401(k) Plan and the Waddell & Reed Financial, Inc. 401-K and Savings and Investment Plan with respect to shares allocated to individual’s accounts under these plans. If the account information is the same, participants in one or more of the plans who are also shareholders of record will receive a single card representing all their shares. If a plan participant does not return a proxy/direction card to the Company, the trustees of any plan in which shares are allocated to the participant’s individual account will vote those shares in the same proportion as the total shares in that plan for which directions have been received.

 

A simple majority vote of the holders of the issued and outstanding common stock of the Company represented in person or by proxy at the stockholders meeting is required to elect directors and approve all other matters put to a vote of stockholders. Abstentions are considered as shares present and entitled to vote. Abstentions have the same legal effect as a vote against a matter presented at the meeting. Any shares for which a broker or nominee does not have discretionary voting authority under applicable New York Stock Exchange rules will be considered as shares not entitled to vote and will not be considered in the tabulation of the votes.

 

Record Date and Voting Stock

 

Each stockholder of record at the close of business on March 3, 2006 is entitled to one vote for each share of common stock held on that date upon each proposal to be voted on by the stockholders at the meeting. At the close of business on March 3, 2006, there were 102,346,617 shares of common capital stock of the Company outstanding (not including 3,728,131 shares held by the Company which are non-voting while so held). There is no cumulative voting of the common stock.

 

1


Principal Stockholders

 

The following table lists all persons known to be the beneficial owner of more than five percent of the Company’s outstanding common stock as of December 31, 2005, as indicated from Schedule 13G filings with the Securities and Exchange Commission.

 

Name and Address


   Number of
Shares


    Percent of
Class


 

Pzena Investment Management, LLC

120 West 45th Street, 20th Floor

New York, New York 10036

   9,907,348 (1)   9.55 %

Franklin Resources, Inc.

Charles B. Johnson

Rupert H. Johnson, Jr.

One Franklin Parkway

San Mateo, CA 94403-1906

            

Templeton Global Advisors Limited

Lyford Cay

Post Office Box N-7729

Nassau, Bahamas

   6,726,584 (2)   6.5 %

(1)   Pzena Investment Management, LLC, a Delaware investment adviser, has sole power to vote or direct the vote on 5,006,023 shares and sole power to dispose or direct the disposition of 9,907,348 shares.

 

(2)   Franklin Resources, Inc. (FRI), a Delaware corporation, and Charles B. Johnson and Rupert H. Johnson, Jr. (Principal Shareholders), who each own in excess of 10% of the common stock of FRI, hold no shares of Torchmark stock directly except for 500 shares owned by Rupert H. Johnson, Jr. (sole voting and dispositive power). FRI and the Principal Shareholders disclaim beneficial ownership in all reported securities, except Rupert H. Johnson, Jr. does not make such disclaimer with respect to said 500 shares owned directly by him.

 

Except as reported above, all shares are beneficially owned by one or more closed-end investment companies or other managed accounts that are investment advisory clients of investment advisors that are direct and indirect subsidiaries of FRI (Adviser Subsidiaries). Adviser Subsidiaries report the following and disclaim beneficial ownership of the same:

 

Adviser Subsidiary


   Power to Vote
or Direct Vote


  

Power to Dispose

or Direct Disposition


     Sole

   Sole

   Shared

Templeton Global Advisors Limited

   5,422,907    5,494,437    13,470

Franklin Templeton Investment Management Limited

   446,230    796,601     

Templeton Investment Counsel, LLC

   202,340    202,340     

Franklin Templeton Investments Australia Limited

   56,380    34,320    22,060

Franklin Templeton Alternative Strategies, Inc.

   36,200    36,200     

Franklin Templeton Portfolio Advisors, Inc.

   29,106    29,106     

Franklin Templeton Investments (Asia) Limited

   26,340    26,340     

Franklin Advisors, Inc.

   24,980    24,980     

Franklin Templeton Investments Corp.

   18,730    18,730     

Franklin Templeton Investments Japan Limited

   11,630    11,630     

Fiduciary Trust Company International

   11,470    11,470     

Templeton Asset Management Ltd

   4,900    4,900     

 

2


PROPOSAL NUMBER 1

 

Election of Directors

 

The Company’s By-laws provide that there will be not less than seven nor more than fifteen directors with the exact number to be fixed by the Board of Directors. The number of directors was increased by the Board to twelve persons in October 2005 and M. Jane Buchan and Robert W. Ingram were elected to fill the newly created directorships serving until the 2006 Annual Meeting of Shareholders. In February 2006, the Board reduced the number of directors to eleven persons effective upon the retirement of C. B. Hudson and to ten persons effective upon the retirement of Joseph M. Farley, as discussed below.

 

The Board of Directors proposes the election of David L. Boren, M. Jane Buchan, Robert W. Ingram, Harold T. McCormick and Paul J. Zucconi as directors, to hold office for a term of three years, expiring at the close of the annual meeting of stockholders to be held in 2009 or until their successors are elected and qualified. Messrs. Boren, Ingram, McCormick, Zucconi and Ms. Buchan’s current terms expire in 2006. C. B. Hudson retired as Chairman of the Board and as a director on February 22, 2006. Mr. Hudson retired from the Board with no disagreements with the Board or Company management. Joseph M. Farley reached the retirement age for non-officer directors of 78 and will retire from the Board as of the April 27, 2006 annual meeting of shareholders. The term of office of the other five directors continues until the close of the annual meeting of stockholders in the year shown in the biographical information below or until their successors are elected and qualified.

 

Non-officer directors first elected to the Board of Directors prior to April 28, 2005 retire from the Board of Directors at the annual meeting of stockholders which immediately follows their 78th birthday. Non-officer directors first elected to the Board after April 28, 2005 retire from the Board at the annual meeting of stockholders immediately following their 74th birthday. Directors who are employee officers of the Company retire from active service as directors at the annual stockholders meeting immediately following their 65th birthday.

 

If any of the nominees becomes unavailable for election, the directors’ proxies will vote for the election of any other person recommended by the Board of Directors unless the Board reduces the number of directors.

 

The Board recommends that the stockholders vote FOR the nominees.

 

Profiles of Directors and Nominees(1)

 

Charles E. Adair (age 58) has been a director since April, 2003. His term expires in 2007. He is also a director of Performance Food Group, Inc., Tech Data Corporation, and PSS World Medical, Inc. Principal Occupation: Partner, Cordova Ventures, Montgomery, Alabama, a venture capital management company since December, 1993.

 

David L. Boren (age 65) has been a director of the Company since April, 1996. He is also a director of AMR Corporation and Texas Instruments, Inc. Principal occupation: President of The University of Oklahoma, Norman, Oklahoma since November, 1994.

 

M. Jane Buchan (age 42) has been a director of the Company since October 2005. Principal Occupation: Chief Executive Officer and Managing Director of Pacific Alternative Asset Management Company, LLC, Irvine, California, an institutional fund of funds for pension plans of corporations, state governments and foreign retirement trusts, since March 2000. (Co-Managing Partner, Portfolio Manager of Collins Associates, Newport Beach, California 1987-March 2000; Visiting Lecturer, MBA Program, University of California, Irvine, California 2000).

 

Robert W. Ingram (age 57) has been a director of the Company since October 2005. Principal Occupation: Senior Associate Dean and Ross-Culverhouse Professor of Accounting in Culverhouse College of Commerce, University of Alabama, Tuscaloosa, Alabama since August, 2004. (Director, Culverhouse School of Accountancy, University of Alabama, 2002—2004; Director, Garner Center for Accounting Issues, University of Alabama, 1991—2001).

 

3


Joseph L. Lanier, Jr. (age 74) has been a director of the Company since 1980. His term expires in 2007. He is also a director of Dan River Incorporated, Flowers Foods and Alliance One International, Inc. Principal occupation: Chairman of the Board of Dan River Incorporated, Danville, Virginia, a textile manufacturer, since November 1989. (Chief Executive Officer of Dan River Incorporated November 1989-February 2005).

 

Mark S. McAndrew (age 55) has been a director of the Company since July, 1998. His term expires in 2008. Principal occupation: Chairman since February, 2006 and Chief Executive Officer since August, 2005 of the Company. (Chairman of Insurance Operations of the Company, February, 2003-August, 2005; Executive Vice President of the Company, September, 1999-February, 2003; Chief Executive Officer September, 1999-August, 2005 and President October, 1991-August, 2005 of Globe; Chairman of United American, Globe and American Income, September 1999-June, 2001; President October, 1991-July, 2004 and Chief Executive Officer September, 1999-July, 2004 of United American; President and Chief Executive Officer of American Income, September, 1999-December, 2003.)

 

Harold T. McCormick (age 77) has been a director since April, 1992. Principal occupation: Chairman and Chief Executive Officer of Bay Point Yacht & Country Club, Panama City, Florida, since March, 1988; Director, First Ireland Spirits Co., Ltd., Abbeyleix, Ireland, since February, 2001 (Chairman, February, 1996-February, 2001).

 

Sam R. Perry (age 71) has been a director of the Company since October 2004. His term expires in 2008. Principal occupation: Attorney in Private Practice, Austin, Texas since October 2004. (Shareholder and Of Counsel at Sneed Vine & Perry P.C., Austin, Texas December 2003-September 2004; Shareholder, Officer and Director of Sneed Vine & Perry, P.C. June 1961-December 2002.)

 

Lamar C. Smith (age 58) has been a director of the Company since October, 1999. His term expires in 2008. Principal Occupation: Chairman since 1992 and Chief Executive Officer since 1990 of First Command Financial Services, Inc., Fort Worth, Texas, a financial services company providing insurance, mutual funds and banking services to current and former commissioned and non-commissioned military officers.

 

Paul J. Zucconi (age 65) has been a director of the Company since July, 2002. He is also a director of Titanium Metals Corporation and Affirmative Insurance Holdings, Inc. Principal occupation: Business Consultant, Plano, Texas, since January, 2001. (Partner, KPMG LLP July, 1976-January, 2001)

 


(1) Liberty, Globe, United American, American Income and UILIC as used in this proxy statement refer to Liberty National Life Insurance Company, Globe Life And Accident Insurance Company, United American Insurance Company, American Income Life Insurance Company and United Investors Life Insurance Company, subsidiaries of the Company.

 

4


PROPOSAL NUMBER 2

 

Approval of Auditors

 

A proposal to ratify the appointment of the firm of Deloitte & Touche LLP as the principal independent accountants of the Company to audit the financial statements of the Company and its subsidiaries for the year ending December 31, 2006 will be presented to the stockholders at the annual meeting. Deloitte & Touche served as the principal independent accountants of Torchmark, auditing the financial statements of the Company and its subsidiaries for the fiscal year ended December 31, 2005 and has served in such capacity since 1999. The Audit Committee of the Board has appointed Deloitte & Touche to serve as the Company’s principal independent accountants for 2006 and has recommended ratification by stockholders of the appointment of Deloitte & Touche for 2006.

 

A representative of Deloitte & Touche is expected to be present at the meeting and available to respond to appropriate questions and, although the firm has indicated that no statement will be made, an opportunity for a statement will be provided.

 

If the stockholders do not ratify the appointment of Deloitte & Touche LLP, the selection of independent auditors will be reconsidered by the Audit Committee of the Board of Directors.

 

The Board recommends that stockholders vote FOR the proposal.

 

PROPOSAL NUMBER 3

APPROVAL OF THE TORCHMARK CORPORATION

AMENDED AND RESTATED 2005 INCENTIVE PLAN

 

The Board of Directors adopted the Torchmark Corporation 2005 Incentive Plan (the “Incentive Plan”) and the Torchmark Corporation 2005 Non-Employee Director Incentive Plan (the “Director Plan”), both of which were approved by the Company’s stockholders at the 2005 annual meeting. As of March 1, 2006, there are approximately 698,969 shares remaining available for future awards under the Incentive Plan, and 164,805 shares remaining available for future awards under the Director Plan.

 

In the second quarter of 2005, a voluntary stock option exercise and restoration program was authorized for non-employee directors under the Director Plan and for officers, key employees and consultants under the Incentive Plan. Under this program, 120 non-employee directors, officers, key employees and consultants exercised vested stock options originally granted under the Torchmark Corporation 1998 Stock Incentive Plan (the “1998 Incentive Plan”) and received a lesser number of new stock options at the current market price under the Director Plan or the Incentive Plan, as applicable. A substantial number of new shares issued in these option exercises were immediately sold in the open market by program participants to cover option exercise prices of the new shares and related income taxes. As a result of the program, management’s ownership in the Company increased and the Company received a significant tax benefit. The program resulted in the issuance of 4,032,407 stock options under the Incentive Plan and 121,915 stock options under the Director Plan.

 

The Board of Directors believes it is in the best interests of the Company and its stockholders to amend the Incentive Plan and the Director Plan to make the Director Plan a subplan of the Incentive Plan, and to combine the shares remaining available for future awards under the Director Plan into the Incentive Plan. Accordingly, on February 22, 2006, subject to stockholder approval at the Annual Meeting, the Board adopted amendments to the Incentive Plan to (i) permit the grant of awards under the plan to non-employee directors, (ii) increase by 164,805 the number of shares available under the plan, and (iii) to make certain other minor amendments to reflect new tax and accounting rules. The Board also amended and restated the Director Plan to provide that such plan will be a subplan of the Incentive Plan, and that all shares of common stock that may be issued pursuant to the Director Plan will be issued pursuant to and under the Incentive Plan. Combining the shares available under the Director Plan into the Incentive Plan will permit the Company greater flexibility in making future equity incentive awards to employees, officers and directors without any increase to the potential future dilution of stockholder interests.

 

As of March 1, 2006, there were approximately 250 employees, officers, directors and consultants eligible to participate in the Incentive Plan. We also maintain the 1998 Incentive Plan, but will not grant any additional awards under such plan.

 

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A summary of the Incentive Plan, as proposed to be amended and restated, is set forth below. This summary is qualified in its entirety by the full text of the plan, which is attached to this Proxy Statement as Appendix A.

 

Summary of the Plan

 

Purpose. The purpose of the plan is to promote the Company’s success by linking the personal interests of its employees, officers, directors and consultants to those of the Company’s stockholders, and by providing participants with an incentive for outstanding performance.

 

Permissible Awards. The plan authorizes the granting of awards in any of the following forms:

 

    options to purchase shares of common stock, which may be nonstatutory stock options or incentive stock options under the U.S. tax code (the “Code”). All such options shall be granted at 100% of the fair market value of our common stock on the grant date and shall have the term fixed by the Compensation Committee, which shall in no instance exceed seven years; and

 

    restricted stock, which is subject to restrictions on transferability and subject to forfeiture on terms set by the Compensation Committee.

 

Shares Available for Awards. Prior to the proposed amendments, the aggregate number of shares of common stock reserved and available for issuance pursuant to awards granted under the plan is 5,625,000. The proposed amendments would add the shares remaining available under the Director Plan into the Incentive Plan, which would result in an additional 164, 805 shares being available for awards under the Incentive Plan, for a total of 5,789,805. The maximum number of shares of common stock that may be issued upon the exercise of incentive stock options granted under the plan is 1,000,000. The maximum number of shares of common stock that may be issued as restricted stock under the plan is 50,000.

 

Limitation on Awards. The maximum number of shares of common stock that may be covered by options granted under the plan to any one person during any one calendar year is 800,000. The maximum number of shares of common stock issuable with respect to restricted stock under the plan that may be granted to any one person during any one calendar year is 7,000.

 

Administration. The plan will be administered by the Compensation Committee. The Compensation Committee will have the authority to designate participants; determine the type or types of awards to be granted to each participant and the number, terms and conditions thereof; establish, adopt or revise any rules and regulations as it may deem advisable to administer the plan; and make all other decisions and determinations that may be required under the plan. The Board of Directors may at any time administer the plan. If it does so, it will have all the powers of the Compensation Committee under the plan.

 

Limitations on Transfer; Beneficiaries. Unless specifically permitted by the Compensation Committee in limited circumstances, awards granted under the plan are not transferable or assignable by a participant other than by will or the laws of descent and distribution or (except in the case of an incentive stock option) pursuant to a qualified domestic relations order. Awards are exercisable during the lifetime of the participant only by the participant, and by the participant’s legal representative in the event of the death or disability of the participant. A participant may, in the manner determined by the Compensation Committee, designate a beneficiary to exercise the rights of the participant and to receive any distribution with respect to any award upon the participant’s death.

 

Acceleration Upon Certain Events. Unless otherwise provided in an award certificate, if a participant’s service terminates by reason of death or disability, or if a participant is terminated without cause or resigns for good reason (as such terms are defined in the plan) within one year after a change in control, all of such participant’s outstanding options will become fully vested and exercisable and all time-based vesting restrictions on his or her outstanding awards will lapse. In addition, the Compensation Committee may determine that upon a participant’s death, disability, retirement or termination of service, all or a portion of such participant’s options will become fully or partially exercisable, and/or that all or a part of the restrictions on all or a portion of such participant’s outstanding awards will lapse as of such date as the Compensation Committee may, in its sole discretion, declare. The Compensation Committee may discriminate among participants or among awards in exercising such discretion.

 

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Adjustments. In the event of a stock split, a dividend payable in shares of common stock, or a combination or consolidation of the common stock into a lesser number of shares, the share authorization limits under the plan will automatically be adjusted proportionately, and the shares then subject to each award will automatically be adjusted proportionately without any change in the aggregate purchase price for such award. If we are involved in another corporate transaction or event that affects the common stock, such as an extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination or exchange of shares, the share authorization limits under the plan will be adjusted proportionately, and the Compensation Committee may adjust outstanding awards to preserve the benefits or potential benefits of the awards.

 

Termination and Amendment

 

The Board of Directors or the Compensation Committee may, at any time and from time to time, terminate or amend the plan, but if an amendment to the plan would materially increase the benefits accruing to participants, materially increase the number of shares of stock issuable under the plan, expand the types of awards provided under the plan, materially expand the class of participants eligible to participate in the plan, materially extend the term of the plan or otherwise constitute a material amendment requiring stockholder approval under applicable listing requirements, laws, policies or regulations, then such amendment will be subject to stockholder approval. In addition, the Board of Directors or the Compensation Committee may condition any amendment on the approval the stockholders for any other reason. No termination or amendment of the plan may adversely affect any award previously granted under the plan without the written consent of the participant.

 

The Compensation Committee may amend or terminate outstanding awards. However, such amendments may require the consent of the participant and, unless approved by the stockholders, the exercise price of an outstanding option may not be reduced, directly or indirectly, and the original term of an option may not be extended.

 

Prohibition on Repricing

 

As indicated above under “Termination and Amendment,” outstanding stock options cannot be repriced, directly or indirectly, without the prior consent of our stockholders. The exchange of an “underwater” option (i.e., an option having an exercise price in excess of the current market value of the underling stock) for another award would be considered an indirect repricing and would, therefore, require the prior consent of our stockholders.

 

Certain Federal Tax Effects

 

Nonstatutory Stock Options. There will be no federal income tax consequences to the optionee or to us upon the grant of a nonstatutory stock option under the plan. When the optionee exercises a nonstatutory option, however, he or she will recognize ordinary income in an amount equal to the excess of the fair market value of the common stock received upon exercise of the option at the time of exercise over the exercise price, and we will be allowed a corresponding deduction. Any gain that the optionee realizes when he or she later sells or disposes of the option shares will be short-term or long-term capital gain, depending on how long the shares were held.

 

Incentive Stock Options. There typically will be no federal income tax consequences to the optionee or to us upon the grant or exercise of an incentive stock option. If the optionee holds the option shares for the required holding period of at least two years after the date the option was granted or one year after exercise, the difference between the exercise price and the amount realized upon sale or disposition of the option shares will be long-term capital gain or loss, and we will not be entitled to a federal income tax deduction. If the optionee disposes of the option shares in a sale, exchange, or other disqualifying disposition before the required holding period ends, he or she will recognize taxable ordinary income in an amount equal to the excess of the fair market value of the option shares at the time of exercise over the exercise price, and we will be allowed a federal income tax deduction equal to such amount. While the exercise of an incentive stock option does not result in current taxable income, the excess of the fair market value of the option shares at the time of exercise over the exercise price will be an item of adjustment for purposes of determining the optionee’s alternative minimum taxable income.

 

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Restricted Stock. Unless a participant makes an election to accelerate recognition of the income to the date of grant as described below, a participant will not recognize income, and we will not be allowed a tax deduction, at the time a restricted stock award is granted, provided that the award is nontransferable and is subject to a substantial risk of forfeiture. When the restrictions lapse, the participant will recognize ordinary income equal to the fair market value of the common stock as of that date (less any amount he or she paid for the stock), and we will be allowed a corresponding federal income tax deduction at that time, subject to any applicable limitations under Code Section 162(m). If the participant files an election under Code Section 83(b) within 30 days after the date of grant of the restricted stock, he or she will recognize ordinary income as of the date of grant equal to the fair market value of the stock as of that date (less any amount paid for the stock), and we will be allowed a corresponding federal income tax deduction at that time, subject to any applicable limitations under Code Section 162(m). Any future appreciation in the stock will be taxable to the participant at capital gains rates. However, if the stock is later forfeited, the participant will not be able to recover the tax previously paid pursuant to the Code Section 83(b) election.

 

Code Section 409A. Restricted stock awards and stock options that comply with the terms of the plan and do not have a deferral feature are generally exempt from the application of Code Section 409A.

 

Benefits to Named Executive Officers and Others. The table below shows, as of March 1, 2006, the stock options, which have been granted to the named individuals and groups under the 2005 Incentive Plan and the 2005 Non-Employee Director Incentive Plan which are proposed to become a single plan, the Torchmark Corporation Amended and Restated 2005 Incentive Plan. Any future awards under the plan will be made at the discretion of our Board of Directors or the Compensation Committee, as the case may be. Consequently, we cannot determine, with respect to (1) our executive officers, (2) all current executive officers as a group, (3) all non-executive directors, as a group, or (4) all eligible participants, including all current officers who are not executive officers, as a group, either the benefits or amounts that will be received in the future by such persons or groups pursuant to the plan.

 

Torchmark Corporation 2005 Incentive Plan:

 

Name and Position


   No. of Shares

C.B. Hudson,
Chairman until February 2006; Chief Executive Officer until August 2005

   799,9991

Mark S. McAndrew,
Chairman since February 2006 and Chief Executive Officer since August 2005; Chairman of Insurance Operations and President and Chief Executive Officer of Globe until August 2005

   407,1811

Tony G. Brill,
Executive Vice President and Chief Administrative Officer

   297,5081

Gary L. Coleman,
Executive Vice President and Chief Financial Officer

   248,9471

Larry M. Hutchison,
Executive Vice President and General Counsel

   246,6851

Rosemary J. Montgomery,
Executive Vice President and Chief Actuary

   251,6571

Executive Group

   3,127,5891

Non-Executive Director Group

   210,1952

Non-Executive Officer Employee Group

   650,4391,3

1  

Options granted in 2005 from the Torchmark Corporation 2005 Incentive Plan, for which officers, key employees and consultants are eligible. In 2005, pursuant to such plan, the Compensation Committee authorized a special restoration option program whereby participating optionees exercised options previously granted under the Company’s former 1998 Stock Incentive Plan and received restoration options

 

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under the Incentive Plan in the following amounts: Hudson, 799,999 options; McAndrew, 332,181 options; Brill, 247,508 options; Coleman, 188,947 options; Hutchison, 186,685 options; Montgomery, 191,657 options; Executive Group, 2,584,086 options; and Non-Executive Officer Employee Group, 288,319 options. Regular annual option awards in 2005 and 2005 bonuses paid as options under this plan were as follows: Hudson, 0 options; McAndrew, 75,000 options; Brill, 50,000 options; Coleman, 60,000 options; Hutchison, 60,000 options; Montgomery, 60,000 options; Executive Group, 543,503 options; and Non-Executive Officer Employee Group, 362,120 options.

 

2   Options awarded pursuant to the Torchmark Corporation 2005 Non-Employee Director Incentive Plan, comprised of 121,915 restoration options awarded to non-employee directors in 2005 restoration option program and 88,280 options awarded in 2005 and 2006 under the formula-based stock option, non-formula based option (to newly-elected directors) and deferred compensation stock option provisions.

 

3   Does not include restoration options to consultants and their transferees (583,716 options) and regular annual grant to a consultant (6,000 options).

 

Recommendation of the Board

 

The Board has approved and declared the advisability of the Amended and Restated 2005 Director Plan and believes that it is fair to and in the best interest of the Company and its shareholders. The Board recommends that shareholders vote “FOR” Proposal 3.

 

PROPOSAL NUMBER 4

Shareholder Proposal

 

Torchmark received the following resolution submitted by CHRISTUS Health and Catholic Healthcare West and is including the proposal in this Proxy Statement in accordance with SEC Rule 14a-8 of the Securities and Exchange Act of 1934. Torchmark will provide the address for the proponents as well as the number of common shares of Torchmark that they hold promptly upon written or oral request addressed to the Corporate Secretary at the Company’s executive offices.

 

BOARD DIVERSITY – TORCHMARK CORP

 

WHEREAS: Torchmark Corp. currently has a distinguished board of twelve persons, all of whom are white;

 

We believe that our Board should take every reasonable step to ensure that persons from minority racial groups are in the pool from which Board nominees are chosen; therefore be it

 

RESOLVED that the shareholders request the Board:

 

  1.   In connection with its search for suitable Board candidates, to ensure that persons from minority racial groups are among those it considers for nomination to the Board.

 

  2.   To publicly commit itself to a policy of board inclusiveness, including steps to be taken and a timeline for implementing that policy.

 

  3.   To report to shareholders, at reasonable expense (and omitting proprietary information) by September 2006:

 

  a.   On its efforts to encourage diversified representation on the board; and

 

  b.   Whether, in the nominating committee’s charter or its procedures, diversity is included as a criterion in selecting the total membership of the Board.

 

 

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SUPPORTING STATEMENT

 

Recent corporate scandals resulted in the enactment of the Sarbanes-Oxley Act and both the stock exchanges and the SEC have taken actions to enhance the independence, accountability and responsiveness of corporate boards, including requiring greater Board and committee independence.

 

We believe that in order to enhance such independence it is necessary for corporations to aggressively seek diversity by gender, age and race among their board candidates. As companies seek new board members to meet the new independence standards, there is a unique opportunity to enhance diversity on the board. Several corporations (including MorganChase, Coke, Johnson & Johnson, Pfizer, Proctor and Gamble and TimeWarner) have included their commitment to board diversity (by gender and race) in the charter for their nominating committee. We believe that the judgment and perspectives offered from deliberations of a diverse board of directors improve the quality of their decision making and will enhance business performance by enabling a company to respond more effectively to the needs of their customers.

 

We note that only a relatively small number of S&P 500 companies have all white boards. We believe that many publicly held corporations have benefited from the perspectives brought by many well-qualified board members who are women or minority group members. For that reason, some institutional investors are pressuring companies to diversity their boards. For example, the 2003 corporate governance guidelines of America’s largest institutional investor (TIAA-CREF) calls for diversity of directors by experience, sex, age and race.

 

Similarly, in 2002 the $20 billion Connecticut Retirement and Trust Funds launched a “board diversity initiative”. “My first priority as treasurer is the bottom line” said Connecticut State Treasurer, Denise Nappier, “Greater diversity leads to better corporate governance, which is good for Connecticut’s investments. I regard diversity as key to the functioning of an effective board. In a complex global market you need to pick from the largest pool of talent available to you,” said Ms. Nappier.

 

We urge the Board to enlarge its search for qualified members by casting a wider net.

 

The Board of Directors of the Company OPPOSES the adoption of the resolution for the following reasons:

 

The Company’s Corporate Governance Guidelines discuss director qualification standards in the areas of Board membership criteria, size of the Board, term limits, retirement policy and selection of the Chairman of the Board. In addition to the factors described in the Corporate Governance Guidelines, the Governance and Nominating Committee and the Board of Directors have adopted a listing of qualifications of directors which should at a minimum be considered as factors in the nomination or appointment of members of the Board. Those factors include integrity, absence of conflicts of interest, achievement/experience, business understanding, oversight, available time, age, independence and diversity. Specifically, the Qualifications of Directors states: “Directors should be selected so that the Board reflects appropriate diversity.” (Emphasis added)

 

The Company’s Governance and Nominating Committee has a long standing stated policy of receiving, evaluating, and considering the names and qualifications of any potential director candidates from all sources, including shareholders of the Company. As a part of that policy, the Governance and Nominating Committee performs its tasks seeking the best possible director nominees for the Board whatever the gender, racial background, ethnicity or religion of the potential director candidates and irrespective of whether the candidate is submitted by a shareholder, Company employee, a member of Company management or a present or former director. When vacancies arise on the Board, the Governance and Nominating Committee does and will continue to work to ensure that the Board meets the established qualifications of directors, including diversity. The Board of Directors believes rigid implementation through a fixed timeline for inclusion of a designated number of directors from minority racial groups may not necessarily achieve the best possible Board for the Company and accordingly will not serve the best interests of the Company or its shareholders.

 

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The Board of Directors recommends a vote AGAINST the proposal.

 

OTHER BUSINESS

 

The directors are not aware of any other matters which may properly be and are likely to be brought before the meeting. If any other proper matters are brought before the meeting, the persons named in the proxy, or in the event no person is named, Mark S. McAndrew and Larry M. Hutchison will vote in accordance with their judgment on these matters.

 

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INFORMATION REGARDING DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS

 

Executive Officers

 

The following table shows certain information concerning each person deemed to be an executive officer of the Company, except those persons also serving as directors. Each executive officer is elected by the Board of Directors of the Company or its subsidiaries annually and serves at the pleasure of that board. There are no arrangements or understandings between any executive officer and any other person pursuant to which the officer was selected.

 

Name


   Age

  

Principal Occupation
and Business Experience
for the Past Five Years(1)


Tony G. Brill

   63    Executive Vice President and Chief Administrative Officer of Company since September, 1999.

Gary L. Coleman

   54    Executive Vice President and Chief Financial Officer of Company since September, 1999.

Vern D. Herbel

   48    President and Chief Executive Officer of United American since July, 2004; Executive Vice President of Globe and American Income since May, 2002. (Executive Vice President August, 2002-July, 2004 and Senior Vice President May, 1999-August, 2002 of United American; Senior Vice President of Globe January, 1996-May, 2002).

Charles F. Hudson

   49    President and Chief Executive Officer of Globe since August, 2005. (Senior Vice President August, 2001-August, 2005 and Vice President, Marketing May, 1998-August, 2001 of Globe).

Larry M. Hutchison

   52    Executive Vice President and General Counsel of Company since September, 1999.

Andrew W. King

   48    President and Chief Marketing Officer of Liberty since January, 2006. (President, Branch Office Marketing Division of United American, September, 1999-January, 2006).

Anthony L. McWhorter

   56    Chief Executive Officer of Liberty and UILIC since September, 1999; President of UILIC since September, 1998; Executive Vice President of Company since September, 1999. (President of Liberty, December, 1994-January, 2006; Chairman of Liberty and UILIC, September, 1999-June, 2001).

Rosemary J. Montgomery

   56    Executive Vice President and Chief Actuary of Company since September, 1999.

Roger C. Smith

   53    President and Chief Executive Officer of American Income since December, 2003. (President—American Income Marketing Division, January, 2002-December, 2003; Executive Vice President and Sales Director of American Income, October, 1999-January, 2002).

Russell B. Tucker

   58    Executive Vice President and Chief Investment Officer of Company since October, 2001; (Vice President of Company, January, 1997-October, 2001).

Glenn D. Williams

   44    Executive Vice President and Chief Marketing Officer of Company since August, 2005. (Senior Vice President, Marketing of Company, March-August, 2005; Executive Vice President of Globe and United American, September, 1999-March, 2005).

 

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Stock Ownership

 

The following table shows certain information about stock ownership of the directors, director nominees and executive officers of the Company as of December 31, 2005, including shares with respect to which they have the right to acquire beneficial ownership prior to March 1, 2006.

 

     Company Common Stock or
Options Beneficially Owned as of
December 31, 2005(1)


Name


   Directly(2)

   Indirectly(3)

Charles E. Adair

Montgomery, AL

   19,000    0

David L. Boren

Norman, OK

   11,031    0

M. Jane Buchan

Corona Del Mar, CA

   0    0

Robert W. Ingram

Tuscaloosa, AL

   0    0

Joseph L. Lanier, Jr.

Lanett, AL

   213,519    18,912

Mark S. McAndrew

McKinney, TX

   659,600    10,712

Harold T. McCormick

Panama City, FL

   13,237    118,355

Sam R. Perry

Austin, TX

   14,000    0

Lamar C. Smith

Fort Worth, TX

   44,006    0

Paul J. Zucconi

Plano, TX

   22,000    2,534

Tony G. Brill

Plano, TX

   524,301    4,224

Gary L. Coleman

Plano, TX

   473,452    15,676

Vern D. Herbel

McKinney, TX

   115,488    26,726

Charles F. Hudson

Edmond, OK

   64,892    572

Larry M. Hutchison

Duncanville, TX

   405,135    10,944

Andrew W. King

Plano, TX

   246,811    10,474

Anthony L. McWhorter

Birmingham, AL

   383,555    1,924

Rosemary J. Montgomery

Parker, TX

   214,198    553

Roger C. Smith

Waco, TX

   151,108    177

Russell B. Tucker

Arlington, TX

   222,020    9,167

Glenn D. Williams

Plano, TX

   89,676    2,103

All Directors, Nominees and Executive Officers as a group:(4)

   3,887,029    233,032

(1)   No directors, director nominees or executive officers beneficially own 1% or more of the common stock of the Company.

 

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(2)   Includes: for Adair, 15,211 shares; for Boren, 8,000 shares; for McCormick, 13,237 shares; for Lanier, 147,926 shares; for McAndrew, 524,523 shares; for Lamar Smith, 32,668 shares; for Zucconi, 22,000 shares; for Perry, 12,000 shares; for Brill, 395,615 shares; for McWhorter, 373,104 shares; for Coleman, 341,953 shares; for Hutchison, 321,991 shares; for Montgomery, 337,562 shares; for Tucker, 210,797 shares; for Roger Smith, 138,485 shares; for Herbel, 115,488 shares; for Hudson, 89,828 shares; for Williams, 68,353 shares; for King, 191,011 shares and for all directors, executive officers and nominees as a group, 3,329,752 shares, that are subject to presently exercisable Company stock options. Buchan and Ingram have each been granted Company stock options on 12,000 shares, none of which are presently exercisable.

 

(3)   Indirect beneficial ownership includes shares (a) owned by the director, executive officer or spouse as trustee of a trust or executor of an estate, (b) held in a trust in which the director, executive officer or a family member living in his home has a beneficial interest, (c) owned by the spouse or a family member living in the director’s, executive officer’s or nominee’s home or (d) owned by the director or executive officer in a personal corporation or limited partnership. Indirect beneficial ownership also includes approximately 10,712 shares, 3,617 shares, 77 shares, 15,676 shares, 9,167 shares, 10,944 shares, 9,976 shares, 176 shares, 2,103, 572 and 10,474 and 553 shares calculated based upon conversion of stock unit balances held in the accounts of Messrs. McAndrew, Brill, McWhorter, Coleman, Tucker, Hutchison, Herbel, Roger Smith, Williams, Hudson, King and Ms. Montgomery, respectively, in the Company Savings and Investment Plan to shares. Additionally, indirect beneficial ownership includes for Mr. McCormick 75,955 shares subject to stock options transferred to his late spouse. Indirect ownership for Mr. McWhorter also includes approximately 1,847 shares calculated based upon conversion of stock unit balance in the Profit Sharing & Retirement Plan of Liberty (PS&R Plan) to shares. Indirect ownership for Mr. Herbel also includes 8,375 shares held in his living trust and 8,375 shares held in his spouse’s living trust.

 

Mr. Lanier disclaims beneficial ownership of 16,512 shares owned by his spouse and 2,400 shares owned by his children.

 

(4)   All directors, nominees and executive officers as a group, beneficially own 3.68% of the common stock of the Company.

 

During 2005, the Board of Directors met four times. In 2005, all of the directors, except Harold McCormick, attended at least 75% of the meetings of the Board and the committees on which they served. Because of illness, Mr. McCormick attended fifteen of twenty-two Board and committee meetings.

 

Torchmark has a long standing policy that the members of its Board of Directors be present at the Annual Meeting of Shareholders, unless they have an emergency, illness or an unavoidable conflict. At the April 28, 2005 Annual Meeting of Shareholders, nine of the ten directors were present.

 

CORPORATE GOVERNANCE

 

Director Independence Determinations

 

The New York Stock Exchange (NYSE) rules require that Torchmark have a majority of independent directors. The rules provide that no director will qualify as “independent” unless the Board of Directors affirmatively determines that the director has no material relationship with Torchmark and its subsidiaries (collectively, Torchmark), either directly or as a partner, shareholder or officer of an organization that has a relationship with the Company. In order to assist in the making of these determinations, the Board has adopted certain categorical standards described below to assist it in making determinations of independence.

 

The categorical standards for independence determinations adopted by the Board of Directors are:

 

i.   A director who is an employee, or whose immediate family member is an executive officer, of the company is not “independent” until three years after the end of such employment relationship.

 

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ii.   A director who receives, or whose immediate family member receives, more than $100,000 per year in direct compensation from Torchmark other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service), is not independent until three years after he or she ceases to receive more than $100,000 per year in such compensation.

 

iii.   A director who is affiliated with or employed by, or whose immediate family member is affiliated with or employed in a professional capacity by, a present or former internal or external auditor of the Company is not “independent” until three years after the end of the affiliation or the employment or auditing relationship.

 

iv.   A director who is employed, or whose immediate family member is employed, as an executive officer of another company where any of Torchmark’s present executives serve on that company’s compensation committee is not “independent” until three years after the end of such service or the employment relationship.

 

v.   A director who is an executive officer or an employee, or whose immediate family member is an executive officer, of a company that makes payments to, or receives payments from, Torchmark for property or services in an amount which, in any single fiscal year, exceeds the greater of $1 million, or 2% of such other company’s consolidated gross revenues, is not “independent” until three years after falling below such threshold.

 

The Board further adopted the following additional categorical standards for determining director independence on February 23, 2005:

 

1)   An independent director does not directly or indirectly beneficially own more than 10% of any class of the Company’s equity securities.

 

2)   If a Company director is an executive officer of another company in which the Company owns a common stock interest in excess of 5% of total shareholder’s equity, or where the other company owns a common stock interest in the Company in excess of 5% of total shareholder’s equity, the director is not independent.

 

3)   An independent director is not and is not affiliated with an entity that is an adviser or consultant to the Company or a member of the Company’s senior management.

 

4)   An independent director has no personal services contract(s) with the Company or a member of senior management of the Company.

 

5)   An independent director is not affiliated with a not-for-profit entity that receives significant contributions from the Company (defined as the greater of $1 million or 2% of the not-for-profit entity’s consolidated gross revenues).

 

6)   An independent director is not employed by a public company at which an executive officer of the Company serves as a director.

 

7)   If a Company director is an executive officer of another company that is indebted to the Company, or to which the Company is indebted, and the total amount of either company’s indebtedness to the other is greater than 5% of the total consolidated assets of the Company that he/she serves as an executive officer, the director is not independent.

 

8)   A director elected pursuant to any arrangement or understanding with another person or group is not an independent director.

 

9)   An independent director does not serve, and has no immediate family member who has served, as an executive officer or general partner of an entity that has received an investment from the Company or any of its subsidiaries, where such investment exceeds $1 million or 2% of such entity’s invested capital, whichever is greater, in any of the last three years.

 

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10)   An independent director does not have, nor may any immediate family member have, any direct or indirect material interest in a transaction or series of transactions to which the Company or a subsidiary is a party in which the transaction amount exceeds $60,000 (other than interests arising solely from an aggregate ownership interest of less than 10% of the Company or an entity furnishing services to the Company).

 

11)   An independent director has not, and his/her immediate family members have not, accepted or agreed to accept from the Company any consulting, advisory or other compensatory fee except fees received for service as a director.

 

All directors other than those deemed not “independent” under the foregoing standards will be deemed to be “independent” upon a Board determination.

 

Based on these categorical standards, after review and deliberation at their February 26, 2004 meeting, the Board determined that the following independent directors met the standards set by the Board: Charles E. Adair, David L. Boren, Joseph M. Farley, Joseph L. Lanier, Jr., Harold T. McCormick and Paul J. Zucconi. At their October 2005 election, it was determined that M. Jane Buchan and Robert W. Ingram met the independence standards set by the Board. Accordingly, as of the February 22, 2006 Board meeting, the Board determined that the following directors continue to meet the categorical standards set by the Board and are “independent”: Charles E. Adair, David L. Boren, M. Jane Buchan, Joseph M. Farley, Robert W. Ingram, Joseph L. Lanier, Jr., Harold T. McCormick, and Paul J. Zucconi.

 

Executive Sessions

 

Torchmark’s non-management directors have since October 2002 met in regularly scheduled executive sessions without any management participation by officers or employee directors. These executive sessions are currently held either before, after or otherwise in conjunction with the Board’s four regularly scheduled meetings per year. Additional executive sessions can be scheduled at the request of the non-management directors. Beginning in 2004, at least one executive session per year is conducted with only independent directors present.

 

The director who presides over the executive sessions is the Chairman of the Governance and Nominating Committee. If that director is not present, another independent director will be chosen by the executive session to preside.

 

You may communicate with Torchmark’s non-management directors by writing to the Executive Session of the Torchmark Corporation Board of Directors in care of the Corporate Secretary, Torchmark Corporation, 2001 Third Avenue South, Birmingham, Alabama 35233.

 

Communications with the Board of Directors

 

Security holders of the Company may communicate with the full Board of Directors by writing to the Board or a specific director or directors in care of the Corporate Secretary, Torchmark Corporation, 2001 Third Avenue South, Birmingham, Alabama 35233.

 

Governance Guidelines and Codes of Ethics

 

Torchmark has adopted Corporate Governance Guidelines, a Code of Ethics for the CEO and Senior Financial Officers, and a Code of Business Conduct and Ethics for its directors, officers and employees, all of which comply with the requirements of securities law, applicable regulations and New York Stock Exchange rules. These documents are available on the Company’s website by going to www.torchmarkcorp.com and clicking on the Investor Relations page. They are located under the Corporate Governance heading. Printed copies of these documents may be obtained at no charge by writing the Corporate Secretary, Torchmark Corporation, 2001 Third Avenue South, Birmingham, 35233.

 

16


Committees of the Board of Directors

 

The Board of Directors has the following standing Committees more fully described below: Audit, Compensation and Governance and Nominating. In February 2005, the Board of Directors determined to dissolve the Executive and Finance Committees as standing Committees since those committees met only very infrequently and the Company’s By-Laws were amended to reflect this change.

 

Audit Committee—The audit committee is comprised of Messrs. Zucconi (2005 Chairman), Adair, Farley, Ingram and McCormick. All members of the audit committee are independent under the definition contained in the NYSE rules and fully comply with SEC rules and regulations. The audit committee reviews and discusses with management and the independent auditors the Company’s audited financial statements and quarterly financial statements prior to filing, the Company’s earnings press releases and financial information and earnings guidance, and the Company’s policies for risk assessment and management; selects, appoints, reviews and, if necessary, discharges the independent auditors; reviews the scope of the independent auditors audit plan and pre-approves audit and non-audit services; reviews the adequacy of the Company’s system of internal controls over financial reporting; periodically reviews pending litigation and regulatory matters; reviews the performance of the Company’s internal audit function and reviews and appropriately treats complaints and concerns regarding accounting, internal accounting controls or auditing matters pursuant to a confidential “whistleblower” policy. Additionally, the audit committee meets with the Company’s independent accountants and internal auditors both with and without management present. The audit committee met fourteen times in 2005 (five physically-held meetings and nine teleconference meetings).

 

The audit committee has a written charter, which is annually reviewed and updated if necessary. The audit committee charter is posted on the Company’s website and can be viewed by going to www.torchmarkcorp.com and clicking on the Investor Relations page. The committee charter is located under the Corporate Governance heading. You may also obtain a printed copy of the committee charter at no charge by writing the office of the Corporate Secretary at the Torchmark address set out above.

 

Compensation Committee—The compensation committee is comprised of Messrs. Lanier (2005 Chairman), Farley and Boren and Ms. Buchan. All members of the compensation committee are independent under the rules of the NYSE, Section 16 of the Securities Exchange Act of 1934 and Section 162(m) of the Internal Revenue Code. The compensation committee determines the Company’s stated general compensation philosophy and strategy; reviews and determines the compensation of senior management of the Company and its subsidiaries, including establishing goals and objectives for the Chief Executive Officer’s compensation, evaluating the CEO’s performance in light thereof, and setting his compensation; establishes the annual bonus pool; administers the Company’s Section 162(m) bonus plan and stock incentive plan; and makes recommendations to the Board with respect to non-CEO compensation, incentive compensation plans and equity based plans. The compensation committee met five times in 2005 (three physically-held meetings and two teleconferences).

 

The compensation committee has a written charter, which is reviewed annually and updated if necessary. A copy of this charter is available on Torchmark’s website by going to www.torchmarkcorp.com and clicking on the Investor Relations page. The committee charter is located under the Corporate Governance heading. You may also obtain a printed copy of the committee charter at no charge by writing the office of the Corporate Secretary at Torchmark Corporation, 2001 Third Avenue South, Birmingham, Alabama 35233.

 

Governance and Nominating Committee—The governance and nominating committee is comprised of Messrs. Adair, Boren, Buchan, Farley (2005 Chairman), Ingram, Lanier, McCormick and Zucconi. All members of the governance and nominating committee are independent under the NYSE rules.

 

The governance and nominating committee has the following duties and responsibilities: (1) receiving and evaluating the names and qualifications of potential director candidates; (2) identifying individuals qualified to become Board members consistent with criteria set by the Board of Directors and recommending to the Board director nominees; (3) recommending the directors to be appointed to Board committees; (4) developing and

 

17


recommending to the Board a set of governance guidelines for the Company; (5) monitoring and annually evaluating how effectively the Board and Company have implemented the corporate governance guidelines and (6) overseeing evaluations of the Board and Company management. The governance and nominating committee met four times in 2005 (all physically-held meetings).

 

The governance and nominating committee will receive, evaluate and consider the names and qualifications of any potential director candidates from all sources, including shareholders of the Company. Recommendations of potential director candidates and supporting material may be directed to the Governance and Nominating Committee in care of the Corporate Secretary at Torchmark Corporation, 2001 Third Avenue South, Birmingham, Alabama 35233.

 

The governance and nominating committee has a written charter, which is reviewed annually and updated if necessary. A copy of this charter is available on Torchmark’s website by going to www.torchmarkcorp.com and clicking on the Investor Relations page. The committee charter is located under the Corporate Governance heading. You may also obtain a printed copy of the committee charter at no charge by writing the office of the Corporate Secretary at the Torchmark address set out above.

 

Director Qualification Standards

 

Torchmark’s Corporate Governance Guidelines discuss the following director qualification standards:

 

1.   Board Membership Criteria, including independence, limits on the number of boards on which a director serves, a former chief executive officer’s Board membership and directors who change their present job responsibilities;

 

2.   Size of the Board;

 

3.   Term Limits;

 

4.   Retirement Policy; and

 

5.   Selection of the Chairman of the Board.

 

More detail regarding these director qualification standards can be found in the Corporate Governance Guidelines by going to the Company’s website at www.torchmarkcorp.com and clicking on the Investor Relations page. The Guidelines are located under the Corporate Governance heading. Printed copies of the Guidelines may be obtained at no charge by writing the Corporate Secretary, Torchmark Corporation, 2001 Third Avenue South, Birmingham, AL 35233.

 

Additionally, the Governance and Nominating Committee and the Board of Directors of Torchmark adopted the following statements on Qualifications of Directors and Procedures for Identifying and Evaluating Director Candidates on April 29, 2004:

 

Torchmark Corporation

Qualifications of Directors

 

In addition to any other factors described in Torchmark’s Corporate Governance Guidelines, the Governance and Nominating Committee and the Board of Directors should at a minimum consider the following factors in the nomination or appointment of members of the Board:

 

1.   Integrity: Directors should have integrity and be of personal and professional ethical character.

 

2.   Absence of Conflicts of Interest: Directors should not have any interests that would materially impair his or her ability to exercise independent judgment or otherwise discharge the fiduciary duties owed by a director to the Company and its shareholders.

 

18


3.   Achievement/Experience: Directors should have experience in management or at the policy-making level in one or more fields of business, government, education, technology, science, or community/civic affairs.

 

4.   Business Understanding: Directors should have a general appreciation regarding major issues facing public companies of size and operational scope similar to that of the Company, including business strategy, business environment, corporate finance, corporate governance and board operations.

 

5.   Oversight: Directors should have the ability to exercise sound business judgment.

 

6.   Available Time: Directors should have sufficient time to effectively carry out their duties, including preparing for and attending Board meetings, meetings of the Board committees on which they serve and the Annual Meeting of Shareholders, after taking into consideration their other business and professional commitments.

 

7.   Age: Directors must comply with the Board established retirement age limits for directors.

 

8.   Independence: Directors should be independent in their thought and judgment and be committed to enhancing long-term value for all shareholders. A majority of the Board must be independent directors, as defined by the New York Stock Exchange.

 

9.   Diversity: Directors should be selected so that the Board reflects appropriate diversity.

 

Under exceptional and limited circumstances, the Committee and Board may approve the candidacy of a director nominee who may not necessarily satisfy all of these criteria, if they believe the service of that nominee is in the best interests of the Company and its shareholders.

 

Procedures for Identifying and Evaluating Director Candidates

 

1.   Chairman and CEO, the Governance and Nominating Committee or other Board Member identifies need (a) to add new Board Member meeting specific criteria or (b) to fill a vacancy on the Board.

 

2.   Governance and Nominating Committee initiates search, working with Company staff support and seeking input from other Board Members and Senior Company Management. The Governance and Nominating Committee may also engage a professional search firm to assist in identifying director candidates if necessary.

 

3.   Candidates that will satisfy any specific criteria and otherwise qualify for membership on the Board, are identified and presented to the Governance and Nominating Committee.

 

4.   The Chairman and CEO and at least one Member of the Governance and Nominating Committee will interview prospective candidate(s).

 

5.   Governance and Nominating Committee meets to consider and approve final candidate.

 

6.   Governance and Nominating Committee seeks full Board endorsement of selected candidate.

 

7.   In making its selection, the Governance and Nominating Committee will evaluate candidates proposed by shareholders under criteria similar to the evaluation of other candidates.

 

19


COMPENSATION AND OTHER TRANSACTIONS WITH

EXECUTIVE OFFICERS AND DIRECTORS

 

Summary Compensation Table


     Annual Compensation

   Long Term Compensation

    
                    Awards

    

(a)
Name and
Principal Position


   (b)
Year


   (c)
Salary
($)


  

(d)

Bonus

($)(1)


  

(f)
Restricted Stock
Award(s)

($)(2)


  

(g)

Securities
underlying
Options/
SARs

(#)(3)


   (i)
All other
Compensation
($)(4)


C.B. Hudson

Chairman; CEO until August 2005

   2005
2004
2003
   800,000
800,000
800,000
   400,000
0
0
   0
0
0
   819,602
98,666
95,000
   7,467
7,381
7,218

Mark S. McAndrew

Chief Executive Officer since

August 2005; Chairman–Insurance

Operations and President and

CEO of Globe until August 2005

   2005
2004
2003
   750,000
750,000
722,753
   300,000
200,000
300,000
   0
0
0
   407,181
60,000
95,000
   6,300
6,150
6,000

Tony G. Brill

Executive Vice President and

Chief Administrative Officer

   2005
2004
2003
   610,000
600,000
590,016
   160,000
150,000
140,000
   0
0
0
   297,508
55,000
65,000
   6,300
6,150
6,000

Gary L. Coleman

Executive Vice President

and Chief Financial Officer

   2005
2004
2003
   455,000
425,000
390,000
   175,000
150,000
140,000
   0
0
0
   248,947
55,000
55,000
   6,300
6,150
6,000

Larry M. Hutchison

Executive Vice President and

General Counsel

   2005
2004
2003
   415,000
390,000
370,000
   175,000
145,000
130,000
   0
0
0
   246,685
55,000
55,000
   6,300
6,150
6,000

Rosemary J. Montgomery

Executive Vice President and

Chief Actuary

   2005
2004
2003
   415,000
390,000
366,000
   175,000
145,000
130,000
   0
0
0
   251,657
55,000
55,000
   6,300
6,150
6,000

(1)   Messrs. Hudson, McAndrew and Brill received 2005 bonuses of $400,000, $300,000 and $160,000, respectively, under the Torchmark Corporation Annual Management Incentive Plan (the “Section 162(m) Plan”). These bonuses were certified by the Compensation Committee of the Board of Directors on January 5, 2006 and promptly paid in cash thereafter. Messrs. Coleman and Hutchison and Ms. Montgomery’s bonuses were paid in cash outside the Section 162(m) Plan.

 

Messrs. Hudson, McAndrew and Brill received 2004 bonuses of $300,000, $200,000 and $150,000 respectively, under the Section 162(m) Plan. These bonuses were certified by the Compensation Committee of the Board of Directors on January 12, 2005 and promptly paid thereafter. Mr. Hudson elected to be paid his $300,000 bonus in the form of non-qualified stock options on 19,603 shares granted January 12, 2005 with an exercise price of $55.05 (fair market value on the grant date). Messrs. McAndrew and Brill were paid their bonuses in cash. Messrs. Coleman and Hutchison and Ms. Montgomery’s bonuses were paid in cash outside the Section 162(m) Plan.

 

Messrs. Hudson, McAndrew and Brill received 2003 bonuses of $300,000, $300,000 and $140,000 respectively under the Section 162(m) Plan. These bonuses were certified by the Compensation Committee of the Board of Directors on January 8, 2004 and promptly paid thereafter. Mr. Hudson elected to be paid his $300,000 bonus in the form of non-qualified stock options on 23,666 shares granted January 8, 2004 with an exercise price of $45.60 (fair market value on the grant date). Messrs. McAndrew and Brill were paid their bonuses in cash. Messrs. Coleman and Hutchison and Ms. Montgomery’s bonuses were paid in cash outside the Section 162(m) Plan.

 

(2)  

At year-end 2005, Messrs. McAndrew and Brill each held 3,600, restricted shares valued at $200,160 (based on a year-end closing price of $55.60 per share). Restricted stock (40,000 shares) awarded on January 1, 1998 at $42.1875 per share to each of Messrs. McAndrew and Brill vests as follows: 1-1-99 6,400 shares; 1-1-00 6,000 shares; 1-1-01 5,600 shares; 1-1-02 5,200 shares; 1-1-03 4,800 shares; 1-1-04 4,400 shares; 1-

 

20


 

1-05 4,000 shares; and 1-1-06 3,600 shares. Cash dividends on all restricted stock are paid directly to the stockholder at the same rate as on unrestricted stock. Messrs. McAndrew and Brill agreed as a condition of their restricted stock awards to waive receipt of any shares of Waddell & Reed Financial, Inc. (WDR) stock distributed by Torchmark to its common shareholders in the WDR spin-off on November 6, 1998 on such restricted stock.

 

(3)   On January 12, 2005, Mr. Hudson received stock options under the Torchmark Corporation 1998 Stock Incentive Plan (1998 Incentive Plan) on 19,603 shares with a market value exercise price of $55.05 per share pursuant to his election to be paid his $300,000 bonus for 2004 under the Section 162(m) Plan, which was certified for payment by the Compensation Committee on said date. In May 2005, Messrs. Hudson, McAndrew, Brill, Coleman and Hutchison and Ms. Montgomery elected to participate in a program under the Torchmark Corporation 2005 Incentive Plan (2005 Incentive Plan) whereby they exercised existing Torchmark stock options and received restoration options for 799,999, 332,181, 247,508, 188,947, 186,685 and 191,657 Torchmark shares, respectively, with a market value exercise price of $54.77 on their May 4, 2005 grant date. On December 13, 2005, Messrs. McAndrew, Brill, Coleman and Hutchison and Ms. Montgomery received stock option grants pursuant to the 2005 Incentive Plan on 75,000, 50,000, 60,000, 60,000 and 60,000 shares, respectively, with a market value exercise price of $55.48 per share.

 

On December 13, 2005, the Compensation Committee amended the 12-13-04 and 5-4-05 stock options awarded to C. B. Hudson to provide that if his employment terminated by reason of retirement at or after age 55, said options would continue to vest on their respective normal vesting schedules and would remain exercisable thereafter for the full term of the respective option grant, expiring on the original expiration date of such option grant (12-15-14 and 5-4-12, respectively).

 

On January 8, 2004, Mr. Hudson received stock options under the 1998 Incentive Plan on 23,666 shares with a market value exercise price of $45.60 per share pursuant to his election to be paid his $300,000 bonus for 2003 under the Section 162(m) Plan which was certified for payment by the Compensation Committee on said date. On December 13, 2004, Messrs. Hudson, McAndrew, Brill, Coleman and Hutchison and Ms. Montgomery received stock option grants pursuant to the 1998 Incentive Plan on 75,000, 60,000, 55,000, 55,000, 55,000 and 55,000 shares, respectively, with a market value exercise price of $56.24 per share.

 

On December 11, 2003, Messrs. Hudson, McAndrew, Brill, Coleman and Hutchison and Ms. Montgomery received stock option grants pursuant to the 1998 Incentive Plan on 95,000, 95,000, 65,000, 55,000, 55,000 and 55,000 shares, respectively, with a market value exercise price of $44.89 per share.

 

(4)   Includes Company contributions to Torchmark Corporation Savings and Investment Plan, a funded, qualified defined contribution plan, for each of Messrs. Hudson, McAndrew, Brill, Coleman and Hutchison and Ms. Montgomery of $6,300 in 2005, $6,150 in 2004 and $6,000 in 2003, and interest only on prior contributions to the Torchmark Corporation Supplemental Savings and Investment Plan, an unfunded, non-qualified defined contribution plan, for Mr. Hudson of $1,167, $1,231 and $1,218, respectively, in 2005, 2004, and 2003.

 

21


OPTION GRANTS IN LAST FISCAL YEAR


     Individual Grants

   Potential realizable
value at assumed annual rates
of stock price appreciation
for option term


Name

(a)


   Number of
Securities
underlying
options
granted(#)
(b)(1)


   % of
total options
granted to
employees in
fiscal year
(c)


  

Exercise or
base price
($/ share)

(d)


  

Expiration
Date

(e)


   0% ($)

   5% ($)
(f)


  

10% ($)

(g)


C.B. Hudson

   19,603
799,999
   0.45
18.31
   55.05
54.77
   1-12-2016
5-04-2012
   0
0
   776,559
17,837,471
   1,999,782
41,568,932

Mark S. McAndrew

   332,181
75,000
   7.60
1.72
   54.77
55.48
   5-04-2012
12-13-2012
   0
0
   7,406,596
1,693,943
   17,260,533
3,947,611

Tony G. Brill

   247,508
50,000
   5.66
1.14
   54.77
55.48
   5-04-2012
12-13-2012
   0
0
   5,578,653
1,129,295
   12,860,820
2,631,741

Gary L. Coleman

   188,947
60,000
   4.32
1.37
   54.77
55.48
   5-04-2012
12-13-2012
   0
0
   4,212,926
1,355,154
   9,817,919
3,158,089

Larry M. Hutchison

   186,685
60,000
   4.27
1.37
   54.77
55.48
   5-04-2012
12-13-2012
   0
0
   4,162,491
1,355,154
   9,700,382
3,158,089

Rosemary J. Montgomery

   191,657
60,000
   4.39
1.37
   54.77
55.48
   5-04-2012
12-13-2012
   0
0
   4,271,351
1,355,154
   9,958,733
3,158,089

(1)   Options expiring on 01/12/2016 were issued in payment of a 2004 bonus certified under the Section 162(m) Plan on 01/12/2005 and are non-qualified stock options granted in Torchmark common stock pursuant to the 1998 Incentive Plan with an eleven year term at an exercise price equal to the closing price of the Company’s common stock on the grant date. Options expiring on 01/12/2016 are fully vested upon issuance, but are only first exercisable as to 1/10 per year commencing on the first anniversary of the grant date.

 

Options expiring on 05-04-2012 and 12-13-2012 are non-qualified stock options granted in Torchmark common stock pursuant to the 2005 Incentive Plan with a seven year term at an exercise price equal to the closing price of the Company’s common stock on the grant date. Options expiring on 05-04-2012 are not exercisable during the first six months after the grant date and vest as to 100% of the shares on and after six months from the grant date. Options expiring on 12-13-2012 are not exercisable during the first two years after the grant date and vest as to 50% of the shares two years after the grant date and as to the remaining 50% of the shares three years after the grant date.

 

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR

AND FISCAL YEAR-END OPTION VALUES

 

(a)
Name


  (b)
Shares acquired
on exercise (#)


 

(c) Value
Realized

($)


  (d)
Number of Securities
underlying unexercised
options at FY-end (#)


  (e)
Value of unexercised
in-the-money options
at FY-end ($)


            Exercisable

  Unexercisable

  Exercisable

  Unexercisable

C.B. Hudson

  1,117,274   20,467,748   1,264,346   208,734   $ 6,410,199   $ 3,427,579

Mark S. McAndrew

  475,004   9,212,776   524,523   122,500   $ 2,192,070   $ 517,725

Tony G. Brill

  354,959   6,931,035   395,615   85,727   $ 1,564,728   $ 425,594

Gary L. Coleman

  265,794   4,957,340   341,953   88,792   $ 1,599,250   $ 409,332

Larry M. Hutchison

  266,158   5,126,462   321,991   91,699   $ 1,324,675   $ 330,365

Rosemary J. Montgomery

  268,629   4,965,444   337,562   88,468   $ 1,479,955   $ 323,178

(1)   Of the shares shown as acquired on exercise, Messrs. Hudson, McAndrew, Brill, Coleman and Hutchison and Ms. Montgomery retained 236,970, 88,510, 51,414, 31,397, 51,809 and 46,465 shares, respectively, after cashless option exercises.

 

22


Pension Plans

 

Torchmark Corporation Pension Plan; Effective January 1, 2004, the Torchmark Corporation Pension Plan (TMK Pension Plan), the Liberty National Life Insurance Company Pension Plan for Non-Commissioned Employees (LNL Pension Plan) and a third existing Liberty National pension plan covering commissioned employees were merged into a single plan, called the Torchmark Corporation Pension Plan (the Plan). No changes in benefits to participants resulted or will result from the merger since benefits, definitions and formulas from the prior plans were amended into the TMK Pension Plan and continue to cover the same classes of employees.

 

The Plan is a non-contributory pension plan which covers all eligible employees who are 21 years of age or older and have one or more years of credited service. The benefits at age 65 under the provisions of the Plan applicable to persons who were subject to the former TMK Pension Plan are determined by multiplying the average of the participant’s earnings in the five consecutive years in which they were highest during the ten years before the participant’s retirement by a percentage equal to 1% for each of the participant’s first 40 years of credited service plus 2% for each year of credited service up to 20 years after the participant’s 45th birthday and then reducing that result by a Social Security offset and by other benefits from certain other plans of affiliates. Earnings for purposes of the Plan include compensation paid by subsidiaries and affiliates, and do not include commissions, directors’ fees, expense reimbursements, employer contributions to retirement plans, deferred compensation, or any amounts in excess of $200,000 (as adjusted). Benefits under the Plan vest 100% at five years. Upon the participant’s retirement, benefits under the Plan are payable as an annuity or in a lump sum. In 2005, covered compensation was $210,000 for Messrs. Hudson, McAndrew, Brill, Coleman and Hutchison and Ms. Montgomery under the provisions of the former TMK Pension Plan.

 

Vested benefits under the non-qualified Torchmark Supplemental Retirement Plan, in which Messrs. Hudson, McAndrew, Coleman and Hutchison and Ms. Montgomery have participated, were frozen as of December 31, 1994 and no additional benefits accrue after that date pursuant to the supplementary retirement plan. Mr. Brill has not participated in any supplementary pension plan.

 

Messrs. Hudson, McAndrew, Brill, Coleman and Hutchison and Ms. Montgomery have 31 years, 26 years, 9 years, 24, 20 and 25 years of credited service under the provisions of the former TMK Pension Plan, respectively.

 

The following tables show the estimated annual benefits payable under the benefit formulas applicable to employees covered under the former TMK Pension Plan along with the TMK Supplemental Retirement Plan (which was frozen in 1994) upon retirement of participants with varying final average earnings and years of service. The benefits shown below as payable pursuant to the benefit formulas applicable to participants under the former TMK Pension Plan and the TMK Supplemental Retirement Plan exceed the actual amounts which will be paid for the reasons set forth below:

 

(1) Benefits actually paid are based upon covered compensation of the participant as defined by the Internal Revenue Service and not upon final average earnings of the participant. Covered compensation is substantially lower than final average earnings. For example, covered compensation in 2005 was $210,000.

 

(2) Benefits paid under a qualified plan are limited by law to a fixed amount per year. In 2005, that amount was $170,000. Because Mr. Brill does not participate in any supplementary pension plan, the maximum pension benefit he will receive is limited to the amount fixed by law.

 

(3) The Torchmark Supplemental Retirement Plan was closed as of December 31, 1994, all vested benefits thereunder were frozen and no additional benefits can accrue to any participant. Accordingly, the maximum annual benefits that Messrs. Hudson, McAndrew, Coleman and Hutchison and Ms. Montgomery can ever receive from the supplemental plan are $209,480, $42,939, $9,601, $218 and $17,157, respectively.

 

The benefits shown are offset as described above and the amounts are calculated on the basis of payments for the life of a participant who is 65 years of age.

 

23


Torchmark Pension Plan Provisions and Supplemental Retirement Plan*

 

Final
Average
Earnings


   Years of Credited Service

   15

   20

   25

   30

   35

$   200,000    $ 90,000    $ 120,000    $ 130,000    $ 140,000    $ 150,000
$   400,000    $ 180,000    $ 240,000    $ 260,000    $ 280,000    $ 300,000
$   600,000    $ 270,000    $ 360,000    $ 390,000    $ 420,000    $ 450,000
$   800,000    $ 360,000    $ 480,000    $ 520,000    $ 560,000    $ 600,000
$1,000,000    $ 450,000    $ 600,000    $ 650,000    $ 700,000    $ 750,000
$1,200,000    $ 540,000    $ 720,000    $ 780,000    $ 840,000    $ 900,000

  * Benefits paid under a qualified defined benefit plan are limited by law in 2005 to $170,000 per year. Any balance of the benefit payments shown above thus comes from the Supplemental Retirement Plan. Because benefit accruals under the Supplemental Retirement Plan ceased as of December 31, 1994, Messrs. Hudson, McAndrew, Coleman and Hutchison and Ms. Montgomery have eleven years less of credited service under the Supplemental Retirement Plan than under the TMK Pension Plan. Benefits shown above are not offset for Social Security.

 

Deferred Compensation Plan for Directors and Executive Officers

 

Torchmark makes available to its directors and executive officers a traditional unfunded, deferred compensation plan, the Torchmark Corporation Restated Deferred Compensation for Directors, Advisory Directors, Directors Emeritus and Officers, as amended. Directors and executive officers choosing to participate may elect to defer all or any part of their compensation into an interest-bearing memorandum deferred compensation account until they terminate such election. The election must indicate the date the payments will commence and the method of distribution, either a lump sum or in equal monthly installments (not to exceed 120). Interest on the account is paid at a rate equal to the average yield for Corporate Aa bonds per Moody’s Bond Survey less a .5% Expense Allowance.

 

Director Joseph L. Lanier, Jr. and executive officer Russell B. Tucker have deferred compensation accounts under this plan. Mr. Lanier is no longer actively deferring compensation under the plan, but Mr. Tucker deferred compensation under the plan in 2005. Neither Mr. Lanier nor Mr. Tucker currently receive payouts under this plan.

 

Payments to Directors

 

Directors of the Company are currently compensated on the following basis:

 

(1) Directors who are not officers or employees of the Company or a subsidiary of the Company (Outside Directors) receive a fee of $2,000 for each physically attended Board or Board Committee meeting, a fee of $500 for each telephonic Board or Board Committee meeting in which they participate, and an annual retainer of $45,000, payable each January for the entire year. They do not receive fees for the execution of written consents in lieu of Board meetings and Board committee meetings. They receive reimbursement for their travel and lodging expenses if they do not live in the area where the meeting is held.

 

Each Outside Director is automatically awarded annually non-qualified stock options on 6,000 shares of Company common stock on the first day of each calendar year in which stock is traded on the New York Stock Exchange. The entire Board may, for calendar years commencing with 1996, award non-qualified stock options on a non-formula basis to all or such individual Outside Directors as it shall select. Such options may be awarded at such times and for such number of shares as the Board in its discretion determines. The price of such options will be fixed by the Board at the fair market value of the stock on the grant date. On October 26, 2005, the Board awarded stock options with a fair market value exercise price ($52.10) on this non-formula basis for 6,000 shares to each of M. Jane Buchan and Robert W. Ingram.

 

Pursuant to approval of Company shareholders received on April 28, 2005, the Torchmark Corporation 2005 Non-Employee Director Incentive Plan (the 2005 Director Plan), was adopted. The 2005 Director Plan permits non-employee directors to complete a timely irrevocable election for a calendar year and defer

 

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annual director compensation (retainer and Board and Committee meeting fees assuming attendance at all scheduled meetings) in 10% increments but not less than 50% of such compensation into non-qualified stock options. Such deferred compensation stock options are issued at fair market value on a date selected by the Compensation Committee during January in the calendar year to which the election relates. In 2005, Messrs. McCormick and Lamar Smith elected to defer 100% of their 2006 director compensation and receive fair market value stock options pursuant to the 2005 Director Plan on a January 2006 grant date selected by the Compensation Committee. On January 5, 2006, Messrs. McCormick and Lamar Smith were granted stock options on 6,056 and 4,652 shares, respectively, with an exercise price of $55.48 per share, the fair market value of Company common stock on the grant date selected by the Compensation Committee.

 

(2) Beginning in January, 1993, directors who are officers or employees of the Company or a subsidiary of the Company waived receipt of all fees for attending Board meetings. They do not receive fees for the execution of written consents in lieu of Board meetings or Board committee meetings. They also do not receive a fee for attending Board committee meetings or an annual retainer. They are reimbursed their travel and lodging expenses, if any.

 

(3) Beginning in April 2003, the director serving as Chairman of the Audit Committee receives a $5,000 annual retainer for service as chairman.

 

Each person who served as a non-employee director on or prior to February 29, 2000 is eligible to receive upon retirement from the Board a retirement benefit payable annually, in an amount equal to $200 a year for each year of service as a director or advisory director up to 25 years, but not less than $1,200 a year. In determining this benefit, the number of years of service may include years as a director of a subsidiary of the Company if the payment for such years by the Company is in place of a payment which would otherwise be made by the subsidiary. Directors who retired prior to the termination of this retirement benefit program effective February 29, 2000, have been and will continue to receive their retirement benefit payments in cash. Directors with accrued but unpaid retirement benefits under this program on the date of termination were offered the opportunity to convert the present value of such retirement benefits on that date to options in Company common stock. Accordingly, Messrs. Boren, Farley, Lanier, McCormick and Lamar Smith received stock options reflecting the present value of their respective retirement benefits on February 29, 2000. Messrs. Adair, Ingram, Perry and Zucconi and Ms. Buchan, who did not serve as directors in 2000, will not receive any director retirement benefits.

 

Other Transactions

 

Lamar C. Smith is an officer and director of First Command Financial Services, Inc. (First Command), a corporation 100% owned by the First Command Employee Stock Ownership Plan (First Command ESOP). Mr. Smith is a beneficiary of the First Command ESOP although he has no ability to vote the stock of First Command that is held by the First Command ESOP. First Command, receives commissions as the military agency distribution system for selling certain life insurance products offered by Torchmark’s insurance subsidiaries pursuant to agency agreements. In 2005, that company received commission payments of $60.9 million for sales of life insurance on behalf of Torchmark subsidiaries, which comprised approximately 37% of First Command’s 2005 revenues. Torchmark’s insurance subsidiaries held balances due from First Command agents of $9.4 million at year-end 2005.

 

Liberty, a Torchmark subsidiary, is also party to a coinsurance agreement with First Command Life Insurance Company, a First Command subsidiary, whereby Liberty cedes back to First Command Life on an annual basis approximately 3% of the life insurance business sold by First Command Life on behalf of Liberty and First Command Life annually pays Liberty certain designated percentages of renewal and first year premiums as expense reimbursement and the actual amount of commissions paid or advanced on the premium received. Additionally, under this agreement, Liberty and other Torchmark subsidiaries provide First Command Life with certain administrative, accounting and investment management services. In 2005, Liberty paid $2.6 million to First Command Life in premiums and received $0.2 million in expense reimbursements, $0.3 million in benefit repayments and $1.1 million as commission reimbursements.

 

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Torchmark subsidiaries, United American and Liberty, entered into a $27,000,000 7% collateral loan agreement (maximum principal amount and accumulated interest) with IRA (now First Command) in 1998 and a 7.55% construction loan agreement in an amount not to exceed $22,500,000 with First Command in 2001, respectively. UA made a $7,000,000 loan in 1998 and a $15,000,000 loan to First Command under the collateral loan agreement. The largest aggregate amount of indebtedness outstanding from First Command to United American under the collateral loan during 2005 was $11,059,028 and as of February 28, 2006, the outstanding balance of the collateral loan was $10,772,048. The construction loan resulted in a permanent fifteen year mortgage financing at a rate of 2.25% over the ten year treasury rate at inception but not less than 7%, specifically in a $22.3 million principal amount 7% mortgage loan to be repaid in monthly installments commencing on May 1, 2003. The mortgage loan had an outstanding principal balance of $19,761,453 at February 25, 2006. The largest aggregate indebtedness to Liberty from First Command under the mortgage loan during 2005 was $20,905,005.

 

Torchmark subsidiary American Income is a party to an agreement to guarantee certain personal loans of American Income employees and agents with First Command Bank, a subsidiary of First Command. At December 31, 2005 the balance subject to this guarantee, which is secured by vested commissions due the employees and agents, was $182 thousand.

 

Mike McAndrew, Assistant Vice President of a Company subsidiary and brother of Mark S. McAndrew, received compensation and fringe benefits in 2005 of $92,000.

 

On January 3, 2005, two grantor retained annuity trusts for the benefit of the adult sons of C. B. Hudson and of which he serves as trustee (the 1999 Ceb Hudson GRAT Trust dated January 3, 2000 and the 1999 Ben Hudson GRAT Trust dated January 3, 2000) sold 41,470 shares of Torchmark common stock in a privately- negotiated transaction to Torchmark for $2,365,656. The purchases (20,735 shares from each of the Trusts) were made at the average of the high and low prices of Torchmark stock on January 3, 2005 ($57.045 per share).

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Under the securities laws of the United States, the Company’s directors, its executive officers, and any persons holding more than ten percent of the Company’s common stock are required to report their initial ownership of the Company’s common stock and other equity securities and any subsequent changes in that ownership to the Securities and Exchange Commission and the New York Stock Exchange and to submit copies of these reports to the Company. To the Company’s knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended December 31, 2005, all required Section 16(a) filings applicable to its executive officers, directors, and greater than ten percent beneficial owners were timely and correctly made except Charles Hudson filed a late Form 3; Joseph Farley filed one late Form 4 to report a disclaimed disposition by a church endowment of which he serves as trustee; former director R.K. Richey filed one late Form 4 to report a sale by his spouse’s charitable remainder annuity trust; amended Forms 4 were filed to correct remaining unexercised balances of stock options held by Tony Brill (one amendment) and Anthony McWhorter (one amendment), to correctly report additional shares sold in a cashless option exercise by former director R.K. Richey (one amendment), to correctly reflect additional shares previously omitted from direct share balance by Michael Klyce (one amendment) and to correct calculation errors in direct share balance as a result of cashless option exercises by Randall Mull (one amendment); and Anthony McWhorter filed a Form 5 to correct a calculation error in direct share balance on a 2004 Form 4.

 

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COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

 

Compensation of senior executives of Torchmark and its subsidiaries and affiliates is determined by the Compensation Committee of the Board of Directors. The Compensation Committee, comprised entirely of outside independent directors in compliance with all New York Stock Exchange, Internal Revenue Service and Securities and Exchange Commission rules, meets to fix annual salaries in advance and bonuses for the current year of executives earning more than $150,000, to review annual goals and reward outstanding annual performance of executives, to grant stock options and/or restricted stock pursuant to the 2005 Incentive Plan, and to determine participants in the Section 162(m) Plan and fix annual bonus goals and targets for those participants.

 

The Committee operates to perform these duties pursuant to a written charter which is periodically reviewed (at least annually) and revised when needed by the Committee and the Board. The Committee meets on a scheduled basis throughout the year either in person or by teleconference and from time to time, also considers and takes action by unanimous written consent. The Committee Chairman makes regular reports to the full Board at its meetings regarding Committee actions and recommendations. Company management supports the Committee in its work and in some instances acts pursuant to delegated authority to perform various functions on behalf of the Committee in the day-to-day administration of the Company’s compensation program and plans. Additionally, the Committee has the authority to engage outside advisors, experts and others to assist it. Historically, the Committee has periodically utilized unaffiliated executive compensation consultants to assist it in reviewing executive compensation policies and practices. The Committee directly engaged an independent compensation consulting firm in 2004 and in the first-quarter of 2006 to assist the Committee in its review of the compensation for executive officers as described below.

 

In 2004 and 2006, Mercer Human Resource Consulting, an independent compensation consulting firm, was employed by the Committee to review the competitiveness of cash and equity compensation for the Company’s top five executive positions (the CEO and next four most highly paid executives) and to present a report on long-term incentive compensation. The results of the analysis by the independent consultant and corroborated by the Committee as of February 1, 2006 included the observation that Torchmark’s total executive compensation is generally between the median and the 75th percentile.

 

Both the Committee’s review and the outside compensation consultant’s review of Torchmark’s executive compensation indicate an emphasis on long-term performance with long-term incentive awards generally above the median market practices, which is reflective of the Company’s business philosophy and its Compensation Principles discussed more fully below. This emphasis of long-term incentive awards, largely in the form of market value stock options, puts a substantial portion of these executives’ compensation at-risk and aligns their interest with that of Company stockholders.

 

Compensation Principles

 

The business philosophy of the Company focuses on maintenance and improvement of insurance operating margins and other operating margins through the efficient management of assets and control of costs. The Company’s executive compensation program is based on principles which align compensation with this business philosophy, company values and management initiative. The program also takes into consideration competitive remuneration practices in the insurance and financial services sectors. Torchmark’s executive compensation program seeks to attract and retain key executives necessary to the long-term success of the Company, to mesh compensation with both annual and long-term strategic plans and goals and to reward executives for their efforts in the continued growth and success of the Company. Annual goals for executive compensation, whether paid under the Section 162(m) Plan or outside that Plan, focus on a number of factors, including growth in net operating income per share, pre-tax operating income and/or return on equity for holding company executives and on growth in insurance operating income, underwriting income and/or premium growth for the executives of the Company’s insurance subsidiaries.

 

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To the extent readily determinable and as one of the factors in its consideration of compensation matters, the Compensation Committee considers the anticipated tax treatment to the Company and to the executives of various payments and benefits. Some types of compensation payments and their deductibility depend upon the timing of an executive’s vesting or exercise of previously granted rights. Further, interpretations of and changes in the tax laws and other factors beyond the Compensation Committee’s control also affect the deductibility of compensation. For these and other reasons, the Compensation Committee will not necessarily and in all circumstances limit executive compensation to that paid under the Section 162(m) Plan or otherwise deductible under Section 162(m) of the Internal Revenue Code. The Compensation Committee will consider various alternatives to preserving the deductibility of compensation payments and benefits to the extent reasonably practicable and to the extent consistent with its other compensation objectives.

 

Compensation paid pursuant to the Torchmark Corporation Annual Management Incentive Plan (the Section 162(m) Plan), is intended to the extent reasonable to qualify as “performance-based compensation” not subject to the limitations of Internal Revenue Code Section 162(m) on tax deductability of executive compensation in excess of $1 million. In addition to bonus compensation paid under the Section 162(m) Plan, Torchmark may compensate its executives and key employees in the form of salaries, bonuses and other benefits for which the Company may or may not receive a tax deduction.

 

Salary and Bonus System

 

For some time the Company has used a system of salaries and bonuses to reward executives of the Company and its subsidiaries for performance relative to annual goals. These goals vary by operating company based upon that particular company’s current position. Annually, the Compensation Committee, with input from the Company’s Chairman and its Chief Executive Officer, calculates a pool to fund current year bonuses and subsequent year salaries for all executives whose combined cash compensation exceeds $150,000 per year. The salary/bonus pool is determined by taking a percentage not to exceed 1%, of Torchmark’s pre-tax operating income for the performance period (typically a calendar year). Pre-tax operating income is defined as income, before taxes, excluding realized investment losses and certain other nonoperating items, nonrecurring items and discontinued operations, which may vary from year to year. Both bonuses paid under the Section 162(m) Plan and discretionary bonuses paid outside that Plan are paid from this pool. The actual percentage used to establish the pool is based on the percentage derived by dividing the aggregate amount of the target bonus amounts of all executives of Torchmark and its subsidiaries who are eligible to receive a bonus (including bonuses paid outside the Plan) by the amount of Torchmark’s projected pre-tax operating income for the year.

 

The Compensation Committee, in consultation with the Company’s Chairman and its Chief Executive Officer, then reviews each subsidiary’s performance relative to the goals and fixes salaries and bonuses for that operating subsidiary’s executives. The degree to which these executives have met their particular subsidiary’s goals in turn determines the amount of the bonus, if any, and whether senior executive officers of the Company receive salary increases. Such executives do not receive any cost of living salary adjustments.

 

Section 162(m) Bonus Plan

 

Each year, the Compensation Committee determines within the first 90 days, those executives who are eligible to participate in the Section 162(m) Plan for that year from among the Chief Executive Officer, the four other highest paid executive officers other than the Chief Executive Officer (the covered employees), and any other executive officer of the Company or its subsidiaries they may select. Also within this 90 day period, the Compensation Committee establishes performance criteria and target awards for each participating executive. Performance criteria which may be selected are set out above in the Compensation Principles section. Actual performance relative to the selected performance criteria and targets determines the extent to which a target bonus amount may be paid. The maximum amount of the bonus pool which can be paid under the Plan to the CEO and the four “covered” executives cannot exceed 40% of the total pool, with not more than a maximum 15% payable to the CEO and the individual bonuses in total to the four other “covered” executives may not exceed 25% of the pool.

 

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At the end of the performance period, the Compensation Committee must determine and certify that the performance criteria/objectives have been met by a participant before any bonus is paid. While the Compensation Committee has the discretion to reduce a bonus to be paid for any reason, it may not increase a bonus payment above the objectively-determined amount.

 

On February 22, 2005, the Compensation Committee determined that C.B. Hudson, Mark S. McAndrew and Tony G. Brill would be participating in the Section 162(m) Plan for 2005. On that same date, the Compensation Committee determined the maximum pool would be 0.60% of 2005 pre-tax operating income. They also established the respective maximum percentages of the bonus pool that Messrs. Hudson, McAndrew and Brill, respectively, could receive and fixed growth in net operating income per share from 2004 to 2005 above an established threshold as the applicable performance criteria for each participant. That threshold must have been met before any bonus could be paid to a participant; if it was not, no bonus would be paid. If the threshold was met, the participant would be eligible for a bonus equal to his maximum percentage of the bonus pool, subject to the Compensation Committee’s discretion regarding any reduction in a bonus.

 

Stock Option Program

 

The Company began awarding stock options to executives and key employees in 1984. The option plan under which options in Company common stock were awarded in 2005 was adopted by Company shareholders in April 2005. It has as its stated purpose promoting the success and enhancing the value of the Company by linking the personal interests of employees, officers and consultants of the Company and its affiliates to those of Company shareholders and by providing these persons with an incentive for outstanding performance. To this end, the Compensation Committee, as administrator of the 2005 Incentive Plan, grants non-qualified stock options to officers and key employees at the market value of the Company’s common stock on the date of the grant, the size of the grant being based generally on the current compensation of such officers or key employees. The five most highly compensated executive officers are paid salaries and bonuses commensurate with the level of their responsibilities and therefore they typically are awarded a larger number of option shares than other employees with lesser levels of compensation and responsibility.

 

Decisions regarding stock option grants are made annually and the number of options previously awarded to an individual executive officer is not a substantial consideration in determining the amount of options granted to that officer in the future. Once an officer has been awarded options and becomes a part of the stock option program, he or she will typically continue to be eligible from year to year for consideration for stock option awards related to salary.

 

Stock options may be exercised using cash or previously-owned stock for payment or through a simultaneous exercise and sale program. Such stock options generally become first exercisable to the extent of 50% of the shares on the second anniversary of the option grant date and on the remaining 50% of the shares on the third anniversary of the option grant date.

 

Compensation of Chief Executive Officer

 

C. B. Hudson joined the Company subsidiary Globe in 1974 as its Chief Actuary and subsequently has served as a senior executive officer and director of the Company’s principal insurance subsidiaries since that time. During the period 1982 to 1991, he was elected as Chairman and Chief Executive Officer of United American, Globe and Liberty, all principal insurance subsidiaries of the Company. Mr. Hudson was elected to the Torchmark Board of Directors in 1986 and was named Chairman of Insurance Operations of the Company in January 1993. He assumed the responsibilities of Chairman, President and Chief Executive Officer of the Company on March 10, 1998. Effective as of April 2001, he served as Chairman and Chief Executive Officer of the Company until his retirement as Chief Executive Officer in August 2005. Thereafter, he continued to serve as Chairman until his February 2006 retirement from that position.

 

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Mark S. McAndrew joined Company subsidiary Globe in 1980 serving in various executive positions at Globe, United American and American Income, including tenure as President and Chief Executive Officer at each of these subsidiaries during the period from 1991 to 2005. He was responsible for the Company’s direct response insurance marketing as President and Chief Executive Officer of Globe until August 2005. Mr. McAndrew was elected to the Torchmark Board of Directors in 1998. He served as Chairman of Insurance Operations of the Company from 2003 until August 2005, when he began service as Chief Executive Officer of the Company.

 

Mr. Hudson’s and Mr. McAndrew’s base salaries are determined by the Compensation Committee considering each of their current job responsibilities and a comparison of salaries paid at peer companies.

 

On January 5, 2006 the Compensation Committee certified attainment of his bonus goals and targets and awarded Mr. Hudson a 2005 bonus of $400,000 under the Section 162(m) Plan. Mr. Hudson elected to receive that bonus in the form of a cash payment.

 

On January 5, 2006 the Compensation Committee certified attainment of his bonus goals and targets and awarded a 2005 bonus of $300,000 under the Section 162(m) Plan to Mr. McAndrew, which he chose to receive in cash.

 

Mr. Hudson’s and Mr. McAndrew’s respective base salaries and any stock options awarded to them were not directly tied to any one or a group of specific measures of corporate performance.

 

In the three-year period 2003-2005, which is covered by the Summary Compensation Table on page 22, Torchmark’s diluted operating earnings per share grew from $3.51 per share in 2002 to $4.59 per share in 2005. Return on equity decreased to 15.9% in 2005 from 16.5% in 2002. Torchmark repurchased 16.8 million shares in the 2003-2005 period under its share repurchase program, 14.2% of the outstanding shares at the beginning of that period.

 

Compensation of Other Executives

 

The other executive officers listed in the Summary Compensation Table in the Proxy Statement are compensated by salary and a bonus, either paid upon certified attainment of previously-established performance goals under the Section 162(m) Plan or on a discretionary basis outside that Plan, which may be impacted by a number of factors, more particularly described in the Compensation Principles section above. The pool of funds available for determining their salaries and bonuses is calculated based upon the formula described in the discussion of the salary and bonus system. Determination of any salary increase or discretionary bonus award to such an executive is then recommended by the Chairman and the Chief Executive Officer based upon an evaluation of a number of factors, including those listed above, to the Compensation Committee for its decision. Determination of any bonus paid to such executives who have been selected to participate in the Section 162(m) Bonus Plan is made by the Compensation Committee based on such executive’s attainment of the pre-established bonus goals and targets fixed by the Committee.

 

Mr. Brill is the Executive Vice President and Chief Administrative Officer in charge of insurance administration for Torchmark and all its insurance subsidiaries. On January 5, 2006, the Compensation Committee certified attainment of his bonus goals and targets and awarded a 2005 bonus under the Section 162(m) Plan to Mr. Brill of $160,000, which was paid in cash.

 

Mr. Coleman serves as Executive Vice President and Chief Financial Officer of the Company. He has been responsible for the Company’s accounting operations since 1994 and is also in charge of all financial areas. The Compensation Committee awarded Mr. Coleman a $175,000 discretionary bonus for 2005, which was paid in cash.

 

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Mr. Hutchison is Executive Vice President and General Counsel of the Company. He is responsible for all legal, regulatory and compliance matters in the Company. Mr. Hutchison was awarded a $175,000 discretionary bonus by the Compensation Committee for 2005, which was paid in cash.

 

Ms. Montgomery is Executive Vice President and Chief Actuary of the Company. In that position, she is responsible for the actuarial function at Torchmark and each of its insurance subsidiaries. Ms. Montgomery was awarded a $175,000 discretionary bonus by the Compensation Committee for 2005, which was paid in cash.

 

Compensation and Company Performance

 

As indicated above, the annual aspect of executive compensation for holding company executives of Torchmark centers on growth in net operating income per share, earnings per share and return on equity as well as increases in pre-tax operating income and for executives of the insurance subsidiaries on growth in underwriting income and premium income. Pre-tax operating income was $741 million in 2005, an increase of 3% over 2004. Diluted operating earnings per share grew from $4.23 per share in 2004 to $4.59 per share in 2005, a 9% change. Return on equity was 15.9% in 2005 compared to 16.2% in 2004. Premium income, which made up 80% of the Company’s total revenues, rose to $2.51 billion in 2005 from $2.47 billion in 2004. Underwriting income comprised 58% of the Company’s pre-tax operating income for 2005. Underwriting income increased 6% from $401 million to $426 million in 2005 from 2004.

 

The above performance resulted in compensation changes to certain of the Company’s executives as a group shown in the Summary Compensation Table on page 22. Salaries paid to persons who are listed in that table increased 3% in 2005 over 2004, while their bonuses increased 75% for an increase in total cash compensation of 17%.

 

The long-term portion of the executive compensation program centers on stock value through the granting of stock options. Over the last three fiscal years, diluted operating earnings per share have increased 31% and rose from $3.51 in 2002 to $4.59 in 2005.

 

Joseph L. Lanier, Jr., Chairman

David L. Boren

M. Jane Buchan

Joseph M. Farley

 

The foregoing Compensation Committee Report on Executive Compensation shall not be deemed “filed” with the Securities and Exchange Commission or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934.

 

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AUDIT COMMITTEE REPORT

 

The Audit Committee of the Board of Directors is comprised of five directors: Paul J. Zucconi, who currently serves as Committee Chairman; Charles E. Adair, Robert W. Ingram, Harold T. McCormick and Joseph M. Farley. All of the Audit Committee members are independent as that term is defined in the rules of the New York Stock Exchange. All members of the Audit Committee are financially literate as that qualification has been interpreted by the Company’s Board of Directors in its business judgment and at least one member of the Audit Committee has accounting or related financial management expertise. In October 2003, the Board of Directors, after review and deliberation, determined that Paul J. Zucconi is the audit committee financial expert serving on the audit committee in accordance with the definition and qualifications for an audit committee financial expert set out in SEC Regulation S-K, Item 401. Mr. Zucconi is independent as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934 and continues to serve as the audit committee financial expert.

 

The Audit Committee assists the Board of Directors in fulfilling its oversight responsibilities by reviewing the Company’s consolidated financial reports, its internal financial and accounting controls, and its auditing, accounting and financial reporting processes generally.

 

In discharging its oversight responsibilities regarding the audit process, the Audit Committee reviewed and discussed the audited consolidated financial statements of Torchmark as of and for the year ended December 31, 2005 with Company management and Deloitte & Touche LLP (Deloitte), the independent auditors. The Audit Committee received the written disclosures and the letter from Deloitte required by Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees, discussed with Deloitte any relationships which might impair that firm’s independence from management and the Company and satisfied itself as to the auditors’ independence. The Audit Committee reviewed and discussed with Deloitte all communications required by auditing standards generally accepted in the United States of America, including Statement on Auditing Standards No. 61, Communications with Audit Committees, as amended.

 

Based upon these reviews and discussions, the Audit Committee recommended to the Board of Directors that the Company’s audited consolidated financial statements be included in Torchmark’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 for filing with the Securities and Exchange Commission.

 

Paul J. Zucconi, Chairman

Charles E. Adair

Joseph M. Farley

Robert W. Ingram

Harold T. McCormick

 

The foregoing Audit Committee Report shall not be deemed “filed” with the Securities and Exchange Commission or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934.

 

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PRINCIPAL ACCOUNTING FIRM FEES

 

The following table sets forth the aggregate fees, including out-of-pocket expenses, billed to Torchmark for the fiscal years ended December 31, 2005 and 2004 by the Company’s principal accountants, Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu and their respective affiliates (collectively, the Deloitte Entities).

 

     2005

   2004

Audit Fees (a)

                       

Financial Statements

   $1,527,721         $ 1,276,826       

Sarbanes-Oxley Act, Section 404 Attestation

   1,118,700           1,300,000       

Audit Related Fees

                       

Pension Plan

   97,000           115,000       

Sarbanes-Oxley Act, Section 404 Advisory Services

   6,490           262,171       

Total Audit and Audit Related Fees

        $2,749,911           $ 2,953,997

Tax Fees (b)

        103,492             176,277

All Other Fees

                       

Actuarial Fees

   0           15,150       

Insurance Department Examinations

   21,128           0       

Total All Other Fees

        21,128             15,150
         
         

Total Fees

        2,874,468             3,145,424
         
         


(a)   Fees for audit services billed in 2005 and 2004 consisted of:

 

  (i)   Audit of Company’s annual financial statements and insurance subsidiaries statutory financial statements;
  (ii)   Review of the Company’s quarterly financial statements; and
  (iii)    Services related to Securities and Exchange Commission filings and regulatory matters.

 

(b)   Fees for tax services provided in 2005 and 2004 consisted primarily of fees for assistance with tax audits and appeals.

 

Pre-approval Policy

 

All audit and non-audit services performed by Deloitte in 2005 were pre-approved in accordance with the Policy Regarding the Approval of Audit and Non-Audit Services Provided by the Independent Auditor adopted by the Audit Committee at its April 23, 2003 meeting, as amended at its October 13-14, 2003 meeting. The Policy requires that all services provided by Deloitte, both audit and non-audit must be pre-approved by the Audit Committee or a Designated Member thereof except for certain de minimus exceptions. After discussions with Deloitte and Company management, the Audit Committee has determined that the provision of certain designated audit-related, tax and all other services do not impair the independence of Deloitte. The Policy describes the permitted audit, audit-related, tax and all other services (collectively, the Disclosure Categories) that Deloitte may perform. Pre-approvals of audit and non-audit services may be given at any time up to a year before commencement of the specific service.

 

A description of the services expected to be provided by Deloitte in each of the Disclosure Categories (a Service List) is presented to the Audit Committee for approval. Upon receipt of approval of these services by the Audit Committee or a Designated Member, the services are provided by Deloitte for the duration of the pre-approved period. Any requests for audit, audit-related, tax and other services not on the pre-approved Service List must be separately pre-approved by the Audit Committee or the Designated Member and cannot be commenced until such pre-approval is obtained. If the Designated Member pre-approves permitted services, a report of this specific pre-approval must be made to the Audit Committee at its next regularly scheduled meeting. The Chief Financial Officer or his designee may engage Deloitte to provide any permitted service if the expected

 

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fee does not exceed $50,000 after obtaining approval of the Chairman of the Audit Committee as the Designated Member. The Audit Committee may also periodically establish fee thresholds for pre-approved services.

 

At each regularly scheduled Audit Committee meeting, the Audit Committee reviews a summary of the services provided including fees, a listing of new pre-approved services since the Committee’s last meeting, a list of any de minimus services approved by the Chief Financial Officer and the Audit Committee Chairman and an updated projection for the current fiscal year of estimated annual fees to be paid to Deloitte.

 

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LOGO

 

  *   $100 invested on 12/31/00 in stock or index-including reinvestment of dividends. Fiscal year ending December 31.

 

Copyright © 2006, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved. www.researchdategroup.com/S&P.htm

 

The line graph shown above compares the yearly percentage change in 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.

 

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MISCELLANEOUS INFORMATION

 

Proposals of Stockholders

 

In order for a proposal by a stockholder of the Company to be eligible to be included in the proxy statement and proxy form for the annual meeting of stockholders in 2007, the proposal must be received by the Company at its home office, 2001 Third Avenue South, Birmingham, Alabama 35233, on or before November 21, 2006. If a stockholder proposal is submitted outside the proposal process mandated by Securities and Exchange Commission rules, it will be considered untimely if received after February 4, 2007.

 

General

 

The cost of this solicitation of proxies will be paid by the Company. The Company is requesting that certain banking institutions, brokerage firms, custodians, trustees, nominees, and fiduciaries forward solicitation material to the underlying beneficial owners of the shares of the Company they hold of record. The Company will reimburse all reasonable forwarding expenses.

 

The Annual Report of the Company for 2005, which accompanies this proxy statement, includes a copy of the Company’s Annual Report to the Securities and Exchange Commission on Form 10-K for the fiscal year ended December 31, 2005 and the financial statements and schedules thereto. Upon request and payment of copying cost, the exhibits to the Form 10-K will be furnished. These written requests should be directed to Investor Relations Department, Torchmark Corporation at its address stated above.

 

By Order of the Board of Directors

 

LOGO

Carol A. McCoy

Vice President, Associate Counsel & Secretary

 

March 20, 2005

 

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Appendix A

 

TORCHMARK CORPORATION

Amended and Restated 2005 INCENTIVE PLAN

 

ARTICLE 1

PURPOSE

 

1.1.         GENERAL.    The purpose of the Torchmark Corporation Amended and Restated 2005 Incentive Plan (the “Plan”) is to promote the success, and enhance the value, of Torchmark Corporation (the “Company”), by linking the personal interests of employees, officers, directors and consultants of the Company or any Affiliate (as defined below) to those of Company shareholders and by providing such persons with an incentive for outstanding performance. The Plan is further intended to provide flexibility to the Company in its ability to motivate, attract, and retain the services of employees, officers, directors and consultants upon whose judgment, interest, and special effort the successful conduct of the Company’s operation is largely dependent. Accordingly, the Plan permits the grant of incentive awards from time to time to selected employees, officers, directors and consultants of the Company and its Affiliates.

 

ARTICLE 2

DEFINITIONS

 

2.1.         DEFINITIONS.    When a word or phrase appears in this Plan with the initial letter capitalized, and the word or phrase does not commence a sentence, the word or phrase shall generally be given the meaning ascribed to it in this Section or in Section 1.1 unless a clearly different meaning is required by the context. The following words and phrases shall have the following meanings:

 

(a)    “Affiliate” means (i) any Subsidiary or Parent, or (ii) an entity that directly or through one or more intermediaries controls, is controlled by or is under common control with, the Company, as determined by the Committee.

 

(b)    “Award” means any Option or Restricted Stock Award granted to a Participant under the Plan.

 

(c)    “Award Certificate” means a written document, in such form as the Committee prescribes from time to time, setting forth the terms and conditions of an Award. Award Certificates may be in the form of individual award agreements or certificates or a program document describing the terms and provisions of an Awards or series of Awards under the Plan.

 

(d)    “Board” means the Board of Directors of the Company.

 

(e)    “Cause” as a reason for a Participant’s termination of employment shall have the meaning assigned such term in the employment, severance or similar agreement, if any, between such Participant and the Company or an Affiliate, provided, however that if there is no such employment, severance or similar agreement in which such term is defined, and unless otherwise defined in the applicable Award Certificate, “Cause” shall mean any of the following acts by the Participant, as determined by the Committee or the Board: gross neglect of duty, prolonged absence from duty without the consent of the Company, intentionally engaging in any activity that is in conflict with or adverse to the business or other interests of the Company, or willful misconduct, misfeasance or malfeasance of duty which is reasonably determined to be detrimental to the Company. With respect to a Participant’s termination of directorship, “Cause” means a Participant’s willful misconduct or dishonesty, any of which is directly and materially harmful to the business or reputation of the Company or any Subsidiary or Affiliate.


(f)    “Change in Control” means and includes the occurrence of any one of the following events:

 

(i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the 1934 Act) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of 25% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this subsection (1), the following acquisitions shall not constitute a Change in Control: (i) any acquisition by a Person who is on the Effective Date the beneficial owner of 25% or more of the Outstanding Company Voting Securities, (ii) any acquisition directly from the Company, (iii) any acquisition by the Company, (iv) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (v) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (3) of this definition; or

 

(ii) Individuals who, as of the Effective Date, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or

 

(iii) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case, unless following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Voting Securities, and (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 25% or more of the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or

 

(iv) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.

 

(g)    “Code” means the Internal Revenue Code of 1986, as amended from time to time, and includes a reference to the underlying final regulations.

 

(h)    “Committee” means the committee of the Board described in Article 4.

 

(i)    “Company” means Torchmark Corporation, a Delaware corporation, or any successor corporation.

 

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(j)    “Continuous Status as a Participant” means the absence of any interruption or termination of service as an employee, officer, director or consultant of the Company or any Affiliate, as applicable; provided, however, that for purposes of an Incentive Stock Option, “Continuous Status as a Participant” means the absence of any interruption or termination of service as an employee of the Company or any Parent or Subsidiary, as applicable, pursuant to applicable tax regulations. Continuous Status as a Participant shall continue to the extent provided in a written severance or employment agreement during any period for which severance compensation payments are made to an employee, officer, director or consultant and shall not be considered interrupted in the case of any short-term disability or leave of absence authorized in writing by the Company prior to its commencement; provided, however, that for purposes of Incentive Stock Options, no such leave may exceed 90 days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 91st day of such leave any Incentive Stock Option held by the Participant shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option.

 

(k)    “Covered Employee” means a covered employee as defined in Code Section 162(m)(3).

 

(l)    “Disability” or “Disabled” has the same meaning as provided in the long-term disability plan or policy maintained by the Company or if applicable, most recently maintained, by the Company or if applicable, an Affiliate, for the Participant, whether or not such Participant actually receives disability benefits under such plan or policy. If no long-term disability plan or policy was ever maintained on behalf of Participant or if the determination of Disability relates to an Incentive Stock Option, Disability means Permanent and Total Disability as defined in Section 22(e)(3) of the Code. In the event of a dispute, the determination whether a Participant is Disabled will be made by the Committee and may be supported by the advice of a physician competent in the area to which such Disability relates.

 

(m)     “Effective Date” has the meaning assigned such term in Section 3.1.

 

(n)    “Eligible Participant” means an employee, officer, director or consultant of the Company or any Affiliate.

 

(o)    “Exchange” means the New York Stock Exchange or any other national securities exchange or, if applicable, the Nasdaq National Market on which the Stock may from time to time be listed or traded.

 

(p)    “Fair Market Value”, on any date, means (i) if the Stock is listed on a securities exchange or is traded over the Nasdaq National Market, the closing sales price on such exchange or over such system on such date or, in the absence of reported sales on such date, the closing sales price on the immediately preceding date on which sales were reported, or (ii) if the Stock is not listed on a securities exchange or traded over the Nasdaq National Market, the mean between the bid and offered prices as quoted by Nasdaq for such date, provided that if it is determined that the fair market value is not properly reflected by such Nasdaq quotations, Fair Market Value will be determined by such other method as the Committee determines in good faith to be reasonable.

 

(q)    “Good Reason” has the meaning assigned such term in the employment, severance or similar agreement, if any, between a Participant and the Company or an Affiliate, provided, however that if there is no such employment, severance or similar agreement in which such term is defined, and unless otherwise defined in the applicable Award Certificate, “Good Reason” shall mean a reduction by the Company or an Affiliate in the Participant’s base salary (other than an overall reduction in salaries that affects substantially all full-time employees of the Company and its Affiliates).

 

(r)    “Grant Date” of an Award means the first date on which all necessary corporate action has been taken to approve the grant of the Award as provided in the Plan, or such later date as is determined and specified as part of that authorization process. Notice of the grant shall be provided to the grantee within a reasonable time after the Grant Date.

 

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(s)    “Incentive Stock Option” means an Option that is intended to be an incentive stock option and meets the requirements of Section 422 of the Code or any successor provision thereto.

 

(t)    “Non-Employee Director” means a director of the Company who is not a common law employee of the Company or an Affiliate.

 

(u)    “Nonstatutory Stock Option” means an Option that is not an Incentive Stock Option.

 

(v)    “Option” means a right granted to a Participant under Article 7 of the Plan to purchase Stock at a specified price during specified time periods. An Option may be either an Incentive Stock Option or a Nonstatutory Stock Option.

 

(w)    “Parent” means a corporation, limited liability company, partnership or other entity which owns or beneficially owns a majority of the outstanding voting stock or voting power of the Company. Notwithstanding the above, with respect to an Incentive Stock Option, Parent shall have the meaning set forth in Section 424(e) of the Code.

 

(x)    “Participant” means a person who, as an employee, officer, director or consultant of the Company or any Affiliate, has been granted an Award under the Plan; provided that in the case of the death of a Participant, the term “Participant” refers to a beneficiary designated pursuant to Section 9.5 or the legal guardian or other legal representative acting in a fiduciary capacity on behalf of the Participant under applicable state law and court supervision.

 

(y)    “Person” means any individual, entity or group, within the meaning of Section 3(a)(9) of the 1934 Act and as used in Section 13(d)(3) or 14(d)(2) of the 1934 Act.

 

(z)    “Plan” means this Torchmark Corporation Amended and Restated 2005 Incentive Plan, as amended or supplemented from time to time.

 

(aa)    “Restricted Stock Award” means Stock granted to a Participant under Article 8 that is subject to certain restrictions and to risk of forfeiture.

 

(bb)    “Retirement” means a Participant’s termination of employment with the Company or an Affiliate with the Committee’s approval after attaining any normal or early retirement age specified in any pension, profit sharing or other retirement program sponsored by the Company, or, in the event of the inapplicability thereof with respect to the Participant in question, as determined by the Committee in its reasonable judgment.

 

(cc)    “Section 162(m) Exemption” means the exemption from the limitation on deductibility imposed by Section 162(m) of the Code that is set forth in Section 162(m)(4)(C) of the Code or any successor provision thereto.

 

(dd)    “Shares” means shares of the Company’s Stock. If there has been an adjustment or substitution pursuant to Section 10.1, the term “Shares” shall also include any shares of stock or other securities that are substituted for Shares or into which Shares are adjusted pursuant to Section 10.1.

 

(ee)    “Stock” means the $.1.00 par value common stock of the Company and such other securities of the Company as may be substituted for Stock pursuant to Article 10.

 

(ff)    “Subsidiary” means any corporation, limited liability company, partnership or other entity of which a majority of the outstanding voting stock or voting power is beneficially owned directly or indirectly by the Company. Notwithstanding the above, with respect to an Incentive Stock Option, Subsidiary shall have the meaning set forth in Section 424(f) of the Code.

 

(gg)    “1933 Act” means the Securities Act of 1933, as amended from time to time.

 

(hh)    “1934 Act” means the Securities Exchange Act of 1934, as amended from time to time.

 

4


ARTICLE 3

EFFECTIVE TERM OF PLAN

 

3.1.         EFFECTIVE DATE.    The Plan shall be effective as of the date it is approved by the shareholders of the Company (the “Effective Date”).

 

3.2.        TERMINATION OF PLAN.     The Plan shall terminate on the tenth anniversary of the Effective Date unless earlier terminated as provided herein. The termination of the Plan on such date shall not affect the validity of any Award outstanding on the date of termination.

 

ARTICLE 4

ADMINISTRATION

 

4.1.        COMMITTEE.    The Plan shall be administered by a Committee appointed by the Board (which Committee shall consist of at least two directors) or, at the discretion of the Board from time to time, the Plan may be administered by the Board. It is intended that at least two of the directors appointed to serve on the Committee shall be “non-employee directors” (within the meaning of Rule 16b-3 promulgated under the 1934 Act) and “outside directors” (within the meaning of Code Section 162(m)) and that any such members of the Committee who do not so qualify shall abstain from participating in any decision to make or administer Awards that are made to Eligible Participants who at the time of consideration for such Award (i) are persons subject to the short-swing profit rules of Section 16 of the 1934 Act, or (ii) are reasonably anticipated to become Covered Employees during the term of the Award. However, the mere fact that a Committee member shall fail to qualify under either of the foregoing requirements or shall fail to abstain from such action shall not invalidate any Award made by the Committee which Award is otherwise validly made under the Plan. The members of the Committee shall be appointed by, and may be changed at any time and from time to time in the discretion of, the Board. The Board may reserve to itself any or all of the authority and responsibility of the Committee under the Plan or may act as administrator of the Plan for any and all purposes. To the extent the Board has reserved any authority and responsibility or during any time that the Board is acting as administrator of the Plan, it shall have all the powers of the Committee hereunder, and any reference herein to the Committee (other than in this Section 4.1) shall include the Board. To the extent any action of the Board under the Plan conflicts with actions taken by the Committee, the actions of the Board shall control.

 

4.2.        ACTION AND INTERPRETATIONS BY THE COMMITTEE.    For purposes of administering the Plan, the Committee may from time to time adopt rules, regulations, guidelines and procedures for carrying out the provisions and purposes of the Plan and make such other determinations, not inconsistent with the Plan, as the Committee may deem appropriate. The Committee’s interpretation of the Plan, any Awards granted under the Plan, any Award Certificate and all decisions and determinations by the Committee with respect to the Plan are final, binding, and conclusive on all parties. Each member of the Committee is entitled to, in good faith, rely or act upon any report or other information furnished to that member by any officer or other employee of the Company or any Affiliate, the Company’s or an Affiliate’s independent certified public accountants, Company counsel or any executive compensation consultant or other professional retained by the Company to assist in the administration of the Plan.

 

4.3.        AUTHORITY OF COMMITTEE.    Except as provided below, the Committee has the exclusive power, authority and discretion to:

 

(a)    Grant Awards;

 

(b)    Designate Participants;

 

(c)    Determine the type or types of Awards to be granted to each Participant;

 

5


(d)    Determine the number of Awards to be granted and the number of Shares or dollar amount to which an Award will relate;

 

(e)    Determine the terms and conditions of any Award granted under the Plan, including but not limited to, the exercise price, grant price, or purchase price, any restrictions or limitations on the Award, any schedule for lapse of forfeiture restrictions or restrictions on the exercisability of an Award, and accelerations or waivers thereof, based in each case on such considerations as the Committee in its sole discretion determines;

 

(f)    Determine whether, to what extent, and under what circumstances an Award may be settled in, or the exercise price of an Award may be paid in, cash, Stock, other Awards, or other property, or an Award may be canceled, forfeited, or surrendered;

 

(g)    Prescribe the form of each Award Certificate, which need not be identical for each Participant;

 

(h)    Decide all other matters that must be determined in connection with an Award;

 

(i)    Establish, adopt or revise any rules, regulations, guidelines or procedures as it may deem necessary or advisable to administer the Plan;

 

(j)    Make all other decisions and determinations that may be required under the Plan or as the Committee deems necessary or advisable to administer the Plan;

 

(k)    Amend the Plan or any Award Certificate as provided herein; and

 

(l)    Adopt such modifications, procedures, and subplans as may be necessary or desirable to comply with provisions of the laws of non-U.S. jurisdictions in which the Company or any Affiliate may operate, in order to assure the viability of the benefits of Awards granted to participants located in such other jurisdictions and to meet the objectives of the Plan.

 

Notwithstanding the foregoing, grants of Awards to Non-Employee Directors hereunder shall be made only in accordance with the terms, conditions and parameters of a plan, program or policy for the compensation of Non-Employee Directors as in effect from time to time, and the Committee may not make discretionary grants hereunder to Non-Employee Directors.

 

Notwithstanding the above, the Board or the Committee may, by resolution, expressly delegate to a special committee, consisting of one or more directors who are also officers of the Company, the authority, within specified parameters, to (i) designate Eligible Participants to be recipients of Awards under the Plan, and (ii) to determine the number of such Awards to be granted to any such Participants; provided that a limit on the total number or dollar value of Awards to be granted to any such Participants shall be approved in advance by the Board or the Committee and provided further that such delegation of duties and responsibilities to such special committee may not be made with respect to the grant of Awards to Eligible Participants (a) who are subject to Section 16(a) of the 1934 Act at the Grant Date, or (b) who as of the Grant Date are reasonably anticipated to be become Covered Employees during the term of the Award. The acts of such delegates shall be treated hereunder as acts of the Board and such delegates shall report regularly to the Board and the Compensation Committee regarding the delegated duties and responsibilities and any Awards so granted.

 

4.4.        AWARD CERTIFICATES.    Each Award shall be evidenced by an Award Certificate. Each Award Certificate shall include such provisions, not inconsistent with the Plan, as may be specified by the Committee.

 

ARTICLE 5

SHARES SUBJECT TO THE PLAN

 

5.1.        NUMBER OF SHARES.    Subject to adjustment as provided in Sections 5.2, the aggregate number of Shares reserved and available for issuance pursuant to Awards granted under the Plan shall be

 

6


5,789,805. The maximum number of Shares that may be issued upon exercise of Incentive Stock Options granted under the Plan shall be 1,000,000. The maximum number of Shares that may be issued as Restricted Stock under the Plan shall be [50,000].

 

5.2.        SHARE COUNTING.    To the extent that an Award is canceled, terminates, expires, is forfeited or lapses for any reason, any unissued or forfeited Shares from such Award will again be available for issuance pursuant to Awards granted under the Plan.

 

5.3.        STOCK DISTRIBUTED.    Any Stock distributed pursuant to an Award may consist, in whole or in part, of authorized and unissued Stock, treasury Stock or Stock purchased on the open market.

 

5.4.        LIMITATION ON AWARDS.    Notwithstanding any provision in the Plan to the contrary, the maximum number of Shares with respect to one or more Options that may be granted during any one calendar year under the Plan to any one Participant shall be 800,000. The maximum aggregate grant with respect to Restricted Stock Awards in any one calendar year to any one Participant shall be 7,000.

 

ARTICLE 6

ELIGIBILITY

 

6.1.        GENERAL.    Awards may be granted only to Eligible Participants; except that Incentive Stock Options may be granted to only to Eligible Participants who are employees of the Company or a Parent or Subsidiary as defined in Section 424(e) and (f) of the Code.

 

ARTICLE 7

STOCK OPTIONS

 

7.1.        GENERAL.    The Committee is authorized to grant Options to Participants on the following terms and conditions:

 

(a)    EXERCISE PRICE. The exercise price per Share under an Option shall be determined by the Committee; provided, however, that the exercise price of an Option shall not be less than the Fair Market Value as of the Grant Date.

 

(b)    TIME AND CONDITIONS OF EXERCISE. The Committee shall determine the time or times at which an Option may be exercised in whole or in part, subject to Section 7.1(d). The Committee shall also determine the performance or other conditions, if any, that must be satisfied before all or part of an Option may be exercised or vested. Except under certain circumstances contemplated by Section 9.9 or as may be set forth in an Award Certificate with respect to death, Disability or Retirement of a Participant, Options granted after June 30, 2005 will not be exercisable before the expiration of one year from the Grant Date.

 

(c)    PAYMENT. The Committee shall determine the methods by which the exercise price of an Option may be paid, the form of payment, including, without limitation, cash, Shares, or other property (including “cashless exercise” arrangements), and the methods by which Shares shall be delivered or deemed to be delivered to Participants.

 

(d)    EXERCISE TERM. In no event may any Option be exercisable for more than seven years from the Grant Date.

 

7.2.        INCENTIVE STOCK OPTIONS.    The terms of any Incentive Stock Options granted under the Plan must comply with the following additional rules:

 

(a)    EXERCISE PRICE. The exercise price of an Incentive Stock Option shall not be less than the Fair Market Value as of the Grant Date.

 

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(b)    LAPSE OF OPTION. Subject to any earlier termination provision contained in the Award Certificate, an Incentive Stock Option shall lapse upon the earliest of the following circumstances; provided, however, that the Committee may, prior to the lapse of the Incentive Stock Option under the circumstances described in subsections (3), (4) or (5) below, provide in writing that the Option will extend until a later date, but if an Option is so extended and is exercised after the dates specified in subsections (3) and (4) below, it will automatically become a Nonstatutory Stock Option:

 

(1) The expiration date set forth in the Award Certificate.

 

(2) The seventh anniversary of the Grant Date.

 

(3) Three months after termination of the Participant’s Continuous Status as a Participant for any reason other than the Participant’s Disability or death.

 

(4) One year after the Participant’s Continuous Status as a Participant by reason of the Participant’s Disability.

 

(5) One year after the Participant’s death if the Participant dies while employed, or during the three-month period described in paragraph (3) or during the one-year period described in paragraph (4) and before the Option otherwise lapses.

 

Unless the exercisability of the Incentive Stock Option is accelerated as provided in Article 9, if a Participant exercises an Option after termination of employment, the Option may be exercised only with respect to the Shares that were otherwise vested on the Participant’s termination of employment. Upon the Participant’s death, any exercisable Incentive Stock Options may be exercised by the Participant’s beneficiary, determined in accordance with Section 9.5.

 

(c)    INDIVIDUAL DOLLAR LIMITATION. The aggregate Fair Market Value (determined as of the Grant Date) of all Shares with respect to which Incentive Stock Options are first exercisable by a Participant in any calendar year may not exceed $100,000.00.

 

(d)    TEN PERCENT OWNERS. No Incentive Stock Option shall be granted to any individual who, at the Grant Date, owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary unless the exercise price per share of such Option is at least 110% of the Fair Market Value per Share at the Grant Date and the Option expires no later than five years after the Grant Date.

 

(e)    EXPIRATION OF AUTHORITY TO GRANT INCENTIVE STOCK OPTIONS. No Incentive Stock Option may be granted pursuant to the Plan after the day immediately prior to the tenth anniversary of the Effective Date of the Plan, or the termination of the Plan, if earlier.

 

(f)    RIGHT TO EXERCISE. During a Participant’s lifetime, an Incentive Stock Option may be exercised only by the Participant or, in the case of the Participant’s Disability, by the Participant’s guardian or legal representative.

 

(g)    ELIGIBLE GRANTEES. The Committee may not grant an Incentive Stock Option to a person who is not at the Grant Date an employee of the Company or a Parent or Subsidiary.

 

ARTICLE 8

RESTRICTED STOCK AWARDS

 

8.1        GRANT OF RESTRICTED STOCK.    The Committee is authorized to make Awards of Restricted Stock to Participants in such amounts and subject to such terms and conditions as may be selected by the Committee, subject to Section 5.4

 

8.2.        ISSUANCE AND RESTRICTIONS.    Restricted Stock shall be subject to such restrictions on transferability and other restrictions as the Committee may impose (including, without limitation, limitations on

 

8


the right to vote Restricted Stock or the right to receive dividends on the Restricted Stock) covering a period of time specified by the Committee (the “Restricted Period”). These restrictions may lapse separately or in combination at such times, under such circumstances, in such installments, upon the satisfaction of performance goals or otherwise, as the Committee determines at the time of the grant of the Award or thereafter. Except as otherwise provided in an Award Certificate or any special Plan document governing an Award, the Participant shall have all of the rights of a shareholder with respect to the Restricted Stock.

 

8.3.        FORFEITURE.    Except for certain limited situations (including the death, Disability or Retirement of the Participant or a Change in Control referred to in Section 9.8), Restricted Stock Awards subject solely to continued employment restrictions shall have a Restriction Period of not less than five years from the Grant Date (but permitting pro-rata vesting over such time). Except as otherwise determined by the Committee at the time of the grant of the Award or thereafter, immediately after termination of Continuous Status as a Participant during the applicable Restriction Period or upon failure to satisfy a performance goal during the applicable Restriction Period, Restricted Stock that is at that time subject to restrictions shall be forfeited.

 

8.4.        DELIVERY OF RESTRICTED STOCK.    Shares of Restricted Stock shall be delivered to the Participant at the time of grant either by book-entry registration or by delivering to the Participant, or a custodian or escrow agent (including, without limitation, the Company or one or more of its employees) designated by the Committee, a stock certificate or certificates registered in the name of the Participant. If physical certificates representing shares of Restricted Stock are registered in the name of the Participant, such certificates must bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock.

 

ARTICLE 9

PROVISIONS APPLICABLE TO AWARDS

 

9.1.        STAND-ALONE AND TANDEM AWARDS.    Awards granted under the Plan may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, any other Award granted under the Plan. Subject to Section 9.2, Awards granted in addition to or in tandem with other Awards may be granted either at the same time as or at a different time from the grant of such other Awards.

 

9.2.        TERM OF AWARD.    The term of each Award shall be for the period as determined by the Committee, provided that in no event shall the term of any Stock Option exceed a period of seven years from its Grant Date (or, if Section 7.2(d) applies, five years from its Grant Date).

 

9.3.        FORM OF PAYMENT FOR AWARDS.    Subject to the terms of the Plan and any applicable law or Award Certificate, payments or transfers to be made by the Company or an Affiliate on the grant or exercise of an Award may be made in such form as the Committee determines at or after the Grant Date, including without limitation, cash, Stock, or other property, or any combination, and may be made in a single payment or transfer, in installments, or on a deferred basis, in each case determined in accordance with rules adopted by, and at the discretion of, the Committee.

 

9.4.        LIMITS ON TRANSFER.    No right or interest of a Participant in any unexercised or restricted Award may be pledged, encumbered, or hypothecated to or in favor of any party other than the Company or an Affiliate, or shall be subject to any lien, obligation, or liability of such Participant to any other party other than the Company or an Affiliate. No unexercised or restricted Award shall be assignable or transferable by a Participant other than by will or the laws of descent and distribution or, except in the case of an Incentive Stock Option, pursuant to a domestic relations order that would satisfy Section 414(p)(1)(A) of the Code if such Section applied to an Award under the Plan; provided, however, that the Committee may (but need not) permit other transfers where there is no consideration whatsoever to any party for said transfer and the Committee concludes that such transferability (i) does not result in accelerated taxation, (ii) does not cause any Option

 

9


intended to be an Incentive Stock Option to fail to be described in Code Section 422(b), and (iii) is otherwise appropriate and desirable, taking into account any factors deemed relevant, including without limitation, state or federal tax or securities laws applicable to transferable Awards.

 

9.5.        BENEFICIARIES.    Notwithstanding Section 9.4, a Participant may, in the manner determined by the Committee, designate a beneficiary to exercise the rights of the Participant and to receive any distribution with respect to any Award upon the Participant’s death. A beneficiary, legal guardian, legal representative, or other person claiming any rights under the Plan is subject to all terms and conditions of the Plan and any Award Certificate applicable to the Participant, except to the extent the Plan and Award Certificate otherwise provide, and to any additional restrictions deemed necessary or appropriate by the Committee. If no beneficiary has been designated or survives the Participant, payment shall be made to the Participant’s estate. Subject to the foregoing, a beneficiary designation may be changed or revoked by a Participant at any time provided the change or revocation is filed with the Company.

 

9.6.        STOCK TRANSFERS.    All Stock issuable under the Plan is subject to any stop-transfer orders and other restrictions as the Committee deems necessary or advisable to comply with federal or state securities laws, rules and regulations and the rules of any national securities exchange or automated quotation system on which the Stock is listed, quoted, or traded. The Committee may place legends on any Stock certificate or issue instructions to the transfer agent to reference restrictions applicable to the Stock.

 

9.7.        ACCELERATION UPON DEATH OR DISABILITY.    Except as otherwise provided in the Award Certificate or any special Plan document governing an Award, upon the Participant’s death or Disability during his or her Continuous Status as a Participant, (i) all of such Participant’s outstanding Options shall become fully exercisable and (ii) all time-based vesting restrictions on the Participant’s outstanding Awards shall lapse. To the extent that this provision causes Incentive Stock Options to exceed the dollar limitation set forth in Section 7.2(c), the excess Options shall be deemed to be Nonstatutory Stock Options.

 

9.8.        ACCELERATION UPON A CHANGE IN CONTROL.    Except as otherwise provided in the Award Certificate or any special Plan document governing an Award if a Participant’s employment is terminated without Cause or the Participant resigns for Good Reason within one year after the effective date of a Change in Control, (i) all outstanding Options shall become fully exercisable and (ii) all time-based vesting restrictions on outstanding Awards shall lapse.

 

9.9.        DISCRETIONARY ACCELERATION.    Regardless of whether an event has occurred as described in Section 9.7 or 9.8 above, the Committee may in its sole discretion at any time determine that, upon the death, Disability, Retirement or termination of service of a Participant, all or a portion of such Participant’s Options shall become fully or partially exercisable, and/or that all or a part of the restrictions on all or a portion of the Participant’s outstanding Awards shall lapse as of such date as the Committee may, in its sole discretion, declare. The Committee may discriminate among Participants and among Awards granted to a Participant in exercising its discretion pursuant to this Section 9.9.

 

9.10.        TERMINATION OF EMPLOYMENT.    Whether military, government or other service or other leave of absence shall constitute a termination of employment shall be determined in each case by the Committee at its discretion, and any determination by the Committee shall be final and conclusive. A Participant’s Continuous Status as a Participant shall not be deemed to terminate (i) in a circumstance in which a Participant transfers from the Company to an Affiliate, transfers from an Affiliate to the Company, or transfers from one Affiliate to another Affiliate, or (ii) in the discretion of the Committee as specified at or prior to such occurrence, in the case of a spin-off, sale or disposition of the Participant’s employer from the Company or any Affiliate. To the extent that this provision causes Incentive Stock Options to extend beyond three months from the date a Participant is deemed to be an employee of the Company, a Parent or Subsidiary for purposes of Sections 424(e) and 424(f) of the Code, the Options held by such Participant shall be deemed to be Nonstatutory Stock Options.

 

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9.11.        FORFEITURE EVENTS.    The Committee may specify in an Award Certificate that the Participant’s rights and benefits with respect to an Award shall be subject to reduction, cancellation, forfeiture or recoupment upon the occurrence of certain specified events, in addition to any otherwise applicable vesting or performance conditions of an Award. Such events may include, but are not limited to, termination of employment for cause, violation of material Company or Affiliate policies, breach of non-competition, confidentiality or other restrictive covenants that may apply to the Participant, or other conduct by the Participant that is detrimental to the business or reputation of the Company or any Affiliate.

 

9.12.        SUBSTITUTE AWARDS.    The Committee may grant Awards under the Plan in substitution for stock and stock-based awards held by employees of another entity who become employees of the Company or an Affiliate as a result of a merger or consolidation of the former employing entity with the Company or an Affiliate or the acquisition by the Company or an Affiliate of property or stock of the former employing corporation. The Committee may direct that the substitute awards be granted on such terms and conditions as the Committee considers appropriate in the circumstances.

 

ARTICLE 10

CHANGES IN CAPITAL STRUCTURE

 

10.1.        GENERAL.    In the event of a corporate event or transaction involving the Company (including, without limitation, any stock dividend, stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination or exchange of shares), the authorization limits under Section 5.1 and 5.4 shall be adjusted proportionately, and the Committee may adjust the Plan and Awards to preserve the benefits or potential benefits of the Awards. Action by the Committee may include: (i) adjustment of the number and kind of shares which may be delivered under the Plan; (ii) adjustment of the number and kind of shares subject to outstanding Awards; (iii) adjustment of the exercise price of outstanding Awards; and (iv) any other adjustments that the Committee determines to be equitable. In addition, the Committee may, in its sole discretion, provide (i) that Awards will be settled in cash rather than Stock, (ii) that Awards will become immediately vested and exercisable and will expire after a designated period of time to the extent not then exercised, (iii) that Awards will be assumed by another party to a transaction or otherwise be equitably converted or substituted in connection with such transaction, (iv) that outstanding Awards may be settled by payment in cash or cash equivalents equal to the excess of the Fair Market Value of the underlying Stock, as of a specified date associated with the transaction, over the exercise price of the Award, or (v) any combination of the foregoing. The Committee’s determination need not be uniform and may be different for different Participants whether or not such Participants are similarly situated. Without limiting the foregoing, in the event of a subdivision of the outstanding Stock (stock-split), a declaration of a dividend payable in Shares, or a combination or consolidation of the outstanding Stock into a lesser number of Shares, the authorization limits under Section 5.1 and 5.4 shall automatically be adjusted proportionately, and the Shares then subject to each Award shall automatically be adjusted proportionately without any change in the aggregate purchase price therefor. To the extent that any adjustments made pursuant to this Article 10 cause Incentive Stock Options to cease to qualify as Incentive Stock Options, such Options shall be deemed to be Nonstatutory Stock Options.

 

ARTICLE 11

AMENDMENT, MODIFICATION AND TERMINATION

 

11.1.        AMENDMENT, MODIFICATION AND TERMINATION.

 

(a)    The Board or the Committee may, at any time and from time to time, amend, modify or terminate the Plan without shareholder approval; provided, however, that if an amendment to the Plan would, in the reasonable opinion of the Board or the Committee, either (i) materially increase the benefits accruing to Participants, (ii) materially increase the number of Shares available under the Plan, (iii) expand the types of

 

11


awards under the Plan, (iv) materially expand the class of participants eligible to participate in the Plan, (v) materially extend the term of the Plan, or (vi) otherwise constitute a material change requiring shareholder approval under applicable laws, policies or regulations or the applicable listing or other requirements of an Exchange, then such amendment shall be subject to shareholder approval; and provided, further, that the Board or Committee may condition any other amendment or modification on the approval of shareholders of the Company for any reason, including by reason of such approval being necessary or deemed advisable to (i) permit Awards made hereunder to be exempt from liability under Section 16(b) of the 1934 Act, (ii) to comply with the listing or other requirements of an Exchange, or (iii) to satisfy any other tax, securities or other applicable laws, policies or regulations.

 

(b)    No termination, amendment, or modification of the Plan shall adversely affect any Award previously granted under the Plan, without the written consent of the Participant affected thereby. An outstanding Award shall not be deemed to be “adversely affected” by a Plan amendment if such amendment would not reduce or diminish the value of such Award determined as if the Award had been exercised, vested or otherwise settled on the date of such amendment (with the per-share value of an Option for this purpose being calculated as the excess, if any, of the Fair Market Value as of the date of such amendment over the exercise or base price of such Award).

 

11.2.        AWARDS PREVIOUSLY GRANTED.    At any time and from time to time, the Committee may amend, modify or terminate any outstanding Award without approval of the Participant; provided, however:

 

(a)    Subject to the terms of the applicable Award Certificate, such amendment, modification or termination shall not, without the Participant’s consent, reduce or diminish the value of such Award determined as if the Award had been exercised, vested or otherwise settled on the date of such amendment or termination (with the per-share value of an Option for this purpose being calculated as the excess, if any, of the Fair Market Value as of the date of such amendment or termination over the exercise or base price of such Award);

 

(b)    The original term of an Option may not be extended without the prior approval of the shareholders of the Company; and

 

(c)    Except as otherwise provided in Article 10, the exercise price of an Option may not be reduced, directly or indirectly, without the prior approval of the shareholders of the Company.

 

ARTICLE 12

GENERAL PROVISIONS

 

12.1        SPECIAL PROVISIONS RELATED TO SECTION 409A OF THE CODE.

 

(a) Notwithstanding anything in the Plan or in any Award Certificate to the contrary, to the extent that any amount or benefit that would constitute “deferred compensation” for purposes of Section 409A of the Code would otherwise be payable or distributable under the Plan or any Award Certificate by reason the occurrence of a Change in Control or the Participant’s Disability or separation from service, such amount or benefit will not be payable or distributable to the Participant by reason of such circumstance unless (i) the circumstances giving rise to such Change in Control, Disability or separation from service meet the description or definition of “change in control event”, “disability” or “separation from service”, as the case may be, in Section 409A of the Code and applicable proposed or final regulations, or (ii) the payment or distribution of such amount or benefit would be exempt from the application of Section 409A of the Code by reason of the short-term deferral exemption or otherwise. This provision does not prohibit the vesting of any Award or the vesting of any right to eventual payment or distribution of any amount or benefit under the Plan or any Award Certificate.

 

(b) Notwithstanding anything in the Plan or in any Award Certificate to the contrary, to the extent necessary to avoid the application of Section 409A of the Code, (i) the Committee may not amend an outstanding Option, SAR or similar Award to extend the time to exercise such Award beyond the later of the

 

12


15th day of the third month following the date at which, or December 31 of the calendar year in which, the Award would otherwise have expired if the Award had not been extended, based on the terms of the Award at the original Grant Date (the “Safe Harbor Extension Period”), and (ii) any purported extension of the exercise period of an outstanding Award beyond the Safe Harbor Extension Period shall be deemed to be an amendment to the last day of the Safe Harbor Extension Period and no later.

 

12.2.        NO RIGHTS TO AWARDS; NON-UNIFORM DETERMINATIONS.    No Participant or any Eligible Participant shall have any claim to be granted any Award under the Plan. Neither the Company, its Affiliates nor the Committee is obligated to treat Participants or Eligible Participants uniformly, and determinations made under the Plan may be made by the Committee selectively among Eligible Participants who receive, or are eligible to receive, Awards (whether or not such Eligible Participants are similarly situated).

 

12.3.        NO SHAREHOLDER RIGHTS.    No Award gives a Participant any of the rights of a shareholder of the Company unless and until Shares are in fact issued to such person in connection with such Award.

 

12.4.        WITHHOLDING.    The Company or any Affiliate shall have the authority and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state, and local taxes (including the Participant’s FICA obligation) required by law to be withheld with respect to any exercise, lapse of restriction or other taxable event arising as a result of the Plan or an Award. If Shares are permitted to be surrendered to the Company to satisfy tax obligations in excess of the minimum tax withholding obligation, such Shares must have been held by the Participant as fully vested shares for such period of time, if any, as necessary to avoid the recognition of an expense under generally accepted accounting principles. The Company shall have the authority to require a Participant to remit cash to the Company in lieu of the surrender of Shares for tax withholding obligations if the surrender of Shares in satisfaction of such withholding obligations would result in the Company’s recognition of expense under generally accepted accounting principles. With respect to withholding required upon any taxable event under the Plan, the Committee may, at the time the Award is granted or thereafter, require or permit that any such withholding requirement be satisfied, in whole or in part, by withholding from the Award Shares having a Fair Market Value on the date of withholding equal to the minimum amount (and not any greater amount) required to be withheld for tax purposes, all in accordance with such procedures as the Committee establishes.

 

12.5.        NO RIGHT TO CONTINUED SERVICE.    Nothing in the Plan, any Award Certificate or any other document or statement made with respect to the Plan, shall interfere with or limit in any way the right of the Company or any Affiliate to terminate any Participant’s employment or status as an officer, director or consultant at any time, nor confer upon any Participant any right to continue as an employee, officer, director or consultant of the Company or any Affiliate, whether for the duration of a Participant’s Award or otherwise.

 

12.6.        UNFUNDED STATUS OF AWARDS.    The Plan is intended to be an “unfunded” plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant pursuant to an Award, nothing contained in the Plan or any Award Certificate shall give the Participant any rights that are greater than those of a general creditor of the Company or any Affiliate. This Plan is not intended to be subject to ERISA.

 

12.7.        RELATIONSHIP TO OTHER BENEFITS.    No payment under the Plan shall be taken into account in determining any benefits under any pension, retirement, savings, profit sharing, group insurance, welfare or benefit plan of the Company or any Affiliate unless provided otherwise in such other plan.

 

12.8.        EXPENSES.    The expenses of administering the Plan shall be borne by the Company and its Affiliates.

 

12.9.        TITLES AND HEADINGS.    The titles and headings of the Sections in the Plan are for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.

 

13


12.10.        GENDER AND NUMBER.    Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural.

 

12.11.        FRACTIONAL SHARES.    No fractional Shares shall be issued and the Committee shall determine, in its discretion, whether cash shall be given in lieu of fractional Shares or whether such fractional Shares shall be eliminated by rounding up or down.

 

12.12.        GOVERNMENT AND OTHER REGULATIONS.

 

(a)    Notwithstanding any other provision of the Plan, no Participant who acquires Shares pursuant to the Plan may, during any period of time that such Participant is an affiliate of the Company (within the meaning of the rules and regulations of the Securities and Exchange Commission under the 1933 Act), sell such Shares, unless such offer and sale is made (i) pursuant to an effective registration statement under the 1933 Act, which is current and includes the Shares to be sold, or (ii) pursuant to an appropriate exemption from the registration requirement of the 1933 Act, such as that set forth in Rule 144 promulgated under the 1933 Act.

 

(b)    Notwithstanding any other provision of the Plan, if at any time the Committee shall determine that the registration, listing or qualification of the Shares covered by an Award upon any Exchange or under any foreign, federal, state or local law or practice, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such Award or the purchase or receipt of Shares thereunder, no Shares may be purchased, delivered or received pursuant to such Award unless and until such registration, listing, qualification, consent or approval shall have been effected or obtained free of any condition not acceptable to the Committee. Any Participant receiving or purchasing Shares pursuant to an Award shall make such representations and agreements and furnish such information as the Committee may request to assure compliance with the foregoing or any other applicable legal requirements. The Company shall not be required to issue or deliver any certificate or certificates for Shares under the Plan prior to the Committee’s determination that all related requirements have been fulfilled. The Company shall in no event be obligated to register any securities pursuant to the 1933 Act or applicable state or foreign law or to take any other action in order to cause the issuance and delivery of such certificates to comply with any such law, regulation or requirement.

 

12.13.        GOVERNING LAW.    To the extent not governed by federal law, the Plan and all Award Certificates shall be construed in accordance with and governed by the laws of the State of Delaware.

 

12.14.        ADDITIONAL PROVISIONS.    Each Award Certificate may contain such other terms and conditions as the Committee may determine; provided that such other terms and conditions are not inconsistent with the provisions of the Plan.

 

12.15.        NO LIMITATIONS ON RIGHTS OF COMPANY.    The grant of any Award shall not in any way affect the right or power of the Company to make adjustments, reclassification or changes in its capital or business structure or to merge, consolidate, dissolve, liquidate, sell or transfer all or any part of its business or assets. The Plan shall not restrict the authority of the Company, for proper corporate purposes, to draft or assume awards, other than under the Plan, to or with respect to any person. If the Committee so directs, the Company may issue or transfer Shares to an Affiliate, for such lawful consideration as the Committee may specify, upon the condition or understanding that the Affiliate will transfer such Shares to a Participant in accordance with the terms of an Award granted to such Participant and specified by the Committee pursuant to the provisions of the Plan.

 

12.16.        INDEMNIFICATION.    Each person who is or shall have been a member of the Committee, or of the Board, or an officer of the Company to whom authority was delegated in accordance with Article 4 shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may

 

14


be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him or her in settlement thereof, with the Company’s approval, or paid by him or her in satisfaction of any judgment in any such action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf, unless such loss, cost, liability, or expense is a result of his or her own willful misconduct or except as expressly provided by statute. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company’s charter or bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.

 

12.17.        FOREIGN PARTICIPANTS.    In order to facilitate the granting of Awards to Eligible Participants who are foreign nationals or who are employed outside of the United States of America, the Committee may provide for such special terms and conditions, including without limitation substitutes for Awards, as the Committee may consider necessary or appropriate to accommodate differences in local law, tax policy or custom. The Committee may approve any supplements to, or amendments, restatements or alternative versions of this Plan as it may consider necessary or appropriate for the purposes of this Section 12.16 without thereby affecting the terms of this Plan as in effect for any other purpose, and the Secretary or other appropriate officer of the Company may certify any such documents as having been approved and adopted pursuant to properly delegated authority; provided, that no such supplements, amendments, restatements or alternative versions shall include any provisions that are inconsistent with the spirit of this Plan, as then in effect. Participants subject to the laws of a foreign jurisdiction may request copies of, or the right to view, any materials that are required to be provided by the Company pursuant to the laws of such jurisdiction.

 

12.18.        NOTICE.    Except as otherwise provided in this Plan, all notices or other communications required or permitted to be given under this Plan to the Company shall be in writing and shall be deemed to have been duly given if delivered personally or mailed, postage pre-paid, as follows: (i) if to the Company, at its principal business address to the attention of the Secretary; and (ii) if to any Participant, at the last address of the Participant known to the sender at the time the notice or other communication is sent.

 

12.19.        INUREMENT OF RIGHTS AND OBLIGATIONS.    The rights and obligations under this Plan and any related documents shall inure to the benefit of, and shall be binding upon, the Company, its successors and assigns, and the Participants and their beneficiaries.

 

12.20.        COSTS AND EXPENSES.    Except as otherwise provided herein, the costs and expenses of administering this Plan shall be borne by the Company, and shall not be charged to any Award nor to any Participant receiving an Award. Costs and expenses associated with the redemption or exercise of any Award under this Plan, including, but not limited to, commissions charged by any agent of the Company, may be charged to the Participant.

 

The foregoing is hereby acknowledged as being the Torchmark Corporation 2005 Amended and Restated Incentive Plan as adopted by the Board on                          , 2006 and approved by the shareholders on                          , 2006.

 

TORCHMARK CORPORATION

 

By:                                                                                   

 Its:

 

15


TORCHMARK

CORPORATION

 

YOUR VOTE IS IMPORTANT

VOTE BY INTERNET / TELEPHONE

24 HOURS A DAY, 7 DAYS A WEEK

INTERNET   TELEPHONE       MAIL
https://www.proxyvotenow.com/tmk       1-866-361-3802        

•      Go to the website address listed above.

 

OR

 

•      Use any touch-tone telephone.

•      Have your proxy card ready.

  OR  

•      Mark, sign and date your proxy
card.

•      Have your proxy card ready.

•      Follow the simple instructions that appear on your computer screen.

     

•      Follow the simple recorded instructions.

     

•      Detach your proxy card.

•      Return your proxy card in the postage-paid envelope provided.

 

1-866-361-3802

 

¨ CALL TOLL-FREE TO VOTE

 

Ú DETACH PROXY CARD HERE IF YOU ARE NOT VOTING BY TELEPHONE OR INTERNET Ú

 

x

Votes must be indicated

(x) in Black or Blue ink.

 

This proxy when properly executed will be voted in the manner directed herein. If no direction is made, this proxy will be voted FOR election of directors, FOR Proposals 2 and 3 and AGAINST Proposal 4.

 

1. Election of Directors

 

(01) David L. Boren, (02) M. Jane Buchan, (03) Robert W. Ingram, (04) Harold T. McCormick and (05) Paul J. Zucconi

  FOR       AGAINST    ABSTAIN

FOR

ALL             ¨

 

WITHHOLD

FOR ALL          ¨

 

          * EXCEPTIONS    ¨

 

3. Amended and Restated Incentive Plan

  ¨       ¨    ¨

Nominees: (01)                          (02)                         
(03)                         

      

4. Shareholder Proposal

  ¨       ¨    ¨
(INSTRUCTIONS: To withhold authority to vote for any individual nominee, mark the “Exceptions” box and write that nominee’s name in the space provided below.)   Mark here if you wish to discontinue receiving more than one annual report.    ¨

* Exceptions                                                                                      

 

To change your address, please mark this box.

   ¨
    FOR   AGAINST        ABSTAIN                         

2. Ratification of Auditors

 

¨

 

¨    

  

¨  

 

To include any comments, please mark this box.

   ¨
                 S C A N    L I N E
                 Please sign exactly as name appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such.
                 ________________________             
                       Date    Share Owner sign here       Co-Owner sign here


Dividend Reinvestment: Torchmark maintains a Dividend Reinvestment Plan for all holders of its common stock. Under the plan, shareholders may reinvest all or part of their dividends in additional shares of common stock and may also make periodic additional cash payments of up to $3,000 toward the purchase of Torchmark stock. Participation is entirely voluntary. More information on the plan can be obtained by calling 1-800-524-4488.

 

Direct Deposit of Dividends: Torchmark makes direct deposit of cash dividends available to its shareholders. To obtain information and materials for participation in this service, please call 1-800-524-4488.

 

www.torchmarkcorp.com: Torchmark’s web site, https://www.torchmarkcorp.com, contains financial information about the company, information regarding our insurance subsidiaries and corporate governance information. The Company’s Shareholder Rights Policy is also posted on the web site.

 

Multiple Annual Reports: Securities and Exchange Commission rules require that an annual report precede or be included with proxy materials. If you have multiple Torchmark accounts, you may be receiving more than one Torchmark annual report, which is costly to Torchmark and may be inconvenient to you. You may authorize Torchmark to discontinue mailing extra reports by marking the appropriate box on the reverse side of the proxy card for selected accounts. At least one account MUST continue to receive an annual report. Eliminating these duplicate mailings will not affect receipt of future proxy statements, proxy cards or dividend checks. To resume the mailing of an annual report to an account, please call 1-800-524-4488.

 

P R O X Y

 

TORCHMARK CORPORATION

Proxy/Direction Card for Annual Meeting on April 27, 2006

 

This Proxy/Direction is solicited by the Board of Directors of The Company.

 

The undersigned hereby appoints Mark S. McAndrew and Larry M. Hutchison, jointly and severally with full power of substitution, to vote all shares of common stock which the undersigned holds of record and is entitled to vote at the Annual Meeting of Shareholders to be held at the Company’s offices, 2001 Third Avenue South, Birmingham, Alabama 35233 on the 27th day of April, 2006 at 10:00 a.m. (CDT), or any adjournment thereof. All shares votable by the undersigned including shares held of record by agents or trustees for the undersigned as a participant in the Dividend Reinvestment Plan (DRP), Torchmark Corporation Savings and Investment Plan (TTP), Waddell & Reed Financial, Inc. 401-K and Savings and Investment Plan (WR 401K), Liberty National Life Insurance Company 401(k) Plan (LNL401K) and the Profit Sharing and Retirement Plan of Liberty National Life Insurance Company (LNL PS&R) will be voted in the manner specified and in the discretion of the persons named above or such agents or trustees on such other matters as may properly come before the meeting.

 

(change of address/comments)     
    

TORCHMARK CORPORATION

P.O. BOX 11173

NEW YORK, N.Y. 10203-0173

    
    
    

 

You are encouraged to specify your choices by marking the appropriate boxes, SEE REVERSE SIDE, but you need not mark any boxes if you wish to vote in accordance with the Board of Directors’ recommendations. The Proxy Committee cannot vote your shares unless you sign and return this card.

EX-23.(A-J) 7 dex23aj.htm CONSENT OF DELOITTE & TOUCHE LLP CONSENT OF DELOITTE & TOUCHE LLP

Exhibit 23 (a-j)

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We consent to the incorporation by reference in Registration Statements (Nos. 2-76378, 2-93760, 33-23580, 33-1032, 33-65507, 333-27111, 333-83317, 333-40604, 333-125409 and 333-125400) on Forms S-8 of our reports dated February 27, 2006, relating to the financial statements and financial statement schedules of Torchmark Corporation and management’s report on the effectiveness on internal control over financial reporting, appearing in this Annual Report on Form 10-K of Torchmark Corporation for the year ended December 31, 2005.

 

DELOITTE & TOUCHE LLP

 

Dallas, Texas

March 2, 2006

EX-24 8 dex24.htm POWER OF ATTORNEY POWER OF ATTORNEY

Exhibit 24

 

POWER OF ATTORNEY

 

KNOW ALL MEN BY THESE PRESENTS:

 

That the undersigned Director of Torchmark Corporation does hereby constitute and appoint Larry M. Hutchison, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 2005. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof.

 

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name.

 

/s/ Charles E. Adair

Charles E. Adair, Director

Date:March 3, 2006


POWER OF ATTORNEY

 

KNOW ALL MEN BY THESE PRESENTS:

 

That the undersigned Director of Torchmark Corporation does hereby constitute and appoint Larry M. Hutchison, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 2005. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof.

 

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name.

 

/s/ David L. Boren

David L. Boren, Director

Date:March 3, 2006


POWER OF ATTORNEY

 

KNOW ALL MEN BY THESE PRESENTS:

 

That the undersigned Director of Torchmark Corporation does hereby constitute and appoint Larry M. Hutchison, Gary L. Coleman and Carol A. McCoy, and each of them severally, her lawful attorneys and agents, for her and in her name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 2005. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms her signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof.

 

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below her name.

 

/s/ M. Jane Buchan

M. Jane Buchan, Director

Date: March 3, 2006

 

 


POWER OF ATTORNEY

 

KNOW ALL MEN BY THESE PRESENTS:

 

That the undersigned Director of Torchmark Corporation does hereby constitute and appoint Larry M. Hutchison, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 2005. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof.

 

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name.

 

/s/ Joseph M. Farley

Joseph M. Farley, Director

Date: March 3, 2006


POWER OF ATTORNEY

 

KNOW ALL MEN BY THESE PRESENTS:

 

That the undersigned Director of Torchmark Corporation does hereby constitute and appoint Larry M. Hutchison, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 2005. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof.

 

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name.

 

/s/ Robert W. Ingram

Robert W. Ingram, Director

Date:March 3, 2006


POWER OF ATTORNEY

 

KNOW ALL MEN BY THESE PRESENTS:

 

That the undersigned Director of Torchmark Corporation does hereby constitute and appoint Larry M. Hutchison, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 2005. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof.

 

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name.

 

/s/ Joseph L. Lanier, Jr.         

Joseph L. Lanier, Jr., Director

Date: March 3, 2006


POWER OF ATTORNEY

 

KNOW ALL MEN BY THESE PRESENTS:

 

That the undersigned Officer and Director of Torchmark Corporation does hereby constitute and appoint Larry M. Hutchison, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 2005. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof.

 

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name.

 

/s/ Mark S. McAndrew

Mark S. McAndrew, Chairman and

Chief Executive Officer

Date: March 3, 2006


POWER OF ATTORNEY

 

KNOW ALL MEN BY THESE PRESENTS:

 

That the undersigned Director of Torchmark Corporation does hereby constitute and appoint Larry M. Hutchison, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 2005. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof.

 

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name.

 

/s/ Harold T. McCormick

Harold T. McCormick, Director

Date:March 3, 2006

 

 


POWER OF ATTORNEY

 

KNOW ALL MEN BY THESE PRESENTS:

 

That the undersigned Director of Torchmark Corporation does hereby constitute and appoint Larry M. Hutchison, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 2005. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof.

 

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name.

 

/s/ Sam R. Perry

Sam R. Perry, Director

Date:March 3, 2006

 

 


POWER OF ATTORNEY

 

KNOW ALL MEN BY THESE PRESENTS:

 

That the undersigned Director of Torchmark Corporation does hereby constitute and appoint Larry M. Hutchison, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacities indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 2005. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof.

 

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name.

 

/s/ Lamar C. Smith

Lamar C. Smith, Director

Date: March 3, 2006


POWER OF ATTORNEY

 

KNOW ALL MEN BY THESE PRESENTS:

 

That the undersigned Director of Torchmark Corporation does hereby constitute and appoint Larry M. Hutchison, Gary L. Coleman and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 2005. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof.

 

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name.

 

/s/ Paul J. Zucconi

Paul J. Zucconi, Director

Date: March 3, 2006

 

 


POWER OF ATTORNEY

 

KNOW ALL MEN BY THESE PRESENTS:

 

That the undersigned Officer of Torchmark Corporation does hereby constitute and appoint Larry M. Hutchison and Carol A. McCoy, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 2005. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof.

 

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below his name.

 

/s/ Gary L. Coleman

Gary L. Coleman , Executive Vice

President and Chief Financial Officer

(Principal Accounting Officer)

Date: March 3, 2006

EX-31.1 9 dex311.htm 302 CERTIFICATION OF, CEO 302 CERTIFICATION OF, CEO

Exhibit 31.1

 

CERTIFICATIONS

 

I, Mark S. McAndrew, certify that:

 

I have reviewed this annual report on Form 10-K of Torchmark Corporation;

 

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date:    March 3, 2006

     

/s/ Mark S. McAndrew

       

Mark S. McAndrew

       

Chairman and Chief Executive Officer

EX-31.2 10 dex312.htm 302 CERTIFICATION OF, CFO 302 CERTIFICATION OF, CFO

Exhibit 31.2

 

CERTIFICATIONS

 

I, Gary L. Coleman, certify that:

 

I have reviewed this annual report on Form 10-K of Torchmark Corporation;

 

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date:     March 3, 2006

     

/s/ Gary L. Coleman

       

Gary L. Coleman,

       

Executive Vice President and

       

Chief Financial Officer

EX-32.1 11 dex321.htm 906 CERTIFICATION 906 CERTIFICATION

Exhibit 32.1

 

CERTIFICATION OF PERIODIC REPORT

 

We, Mark S. McAndrew, Chairman and Chief Executive Officer of Torchmark Corporation, and Gary L. Coleman, Executive Vice President and Chief Financial Officer of Torchmark Corporation, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that, to the best of our knowledge:

 

(1) the Annual Report on Form 10-K of the Company for the period ended December 31, 2005 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Dated: March 3, 2006

 

/s/ Mark S. McAndrew

Mark S. McAndrew

Chairman and Chief Executive Officer

/s/ Gary L. Coleman

Gary L. Coleman

Executive Vice President and

Chief Financial Officer

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