-----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, CZ36VPxCSGY/fp6uOZNl6YjQnVQA8iB6w+oYp6f1KNfz9/YbVF9s2UDxDF0pjYG+ HimXph3Rzl8vyya3GOSO/Q== 0000931763-00-000595.txt : 20000324 0000931763-00-000595.hdr.sgml : 20000324 ACCESSION NUMBER: 0000931763-00-000595 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000323 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: SEC FILE NUMBER: 001-08052 FILM NUMBER: 576041 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 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission file number December 31, 1999 1-8052 TORCHMARK CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 63-0780404 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR IDENTIFICATION NO.) ORGANIZATION) 2001 Third Ave. South, 35233 Birmingham, AL (ADDRESS OF PRINCIPAL (ZIP CODE) EXECUTIVE OFFICES) Registrant's telephone number, including area code: (205) 325-4200 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS CUSIP NUMBER: ON WHICH REGISTERED: Common Stock, $1.00 Par 891027104 New York Stock Exchange Value The International Stock Exchange, London, England Securities registered pursuant to Section 12(g) of the Act: None Securities reported pursuant to Section 15(d) of the Act: TITLE OF EACH CLASS: CUSIP NUMBER: 8 1/4% Senior Debentures due 2009 891027 AE 4 7 7/8% Notes due 2023 891027 AF 1 7 3/8% Notes due 2013 891027 AG 9 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) 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 ((S)229.405 OF THIS CHAPTER) 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. [_] THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT $2,571,835,000 THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK, AS OF FEBRUARY 29, 2000: 129,808,697 DOCUMENTS INCORPORATED BY REFERENCE PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 27, 2000, PART III INDEX OF EXHIBITS (PAGES 83 through 85) TOTAL NUMBER OF PAGES INCLUDED ARE 92 PART 1 Item 1. Business Torchmark Corporation ("Torchmark"), an insurance and diversified financial services holding company, was incorporated in Delaware on November 19, 1979, as Liberty National Insurance Holding Company. Through a plan of reorganization effective December 30, 1980, it became the parent company for the businesses operated by Liberty National Life Insurance Company ("Liberty") and Globe Life And Accident Insurance Company ("Globe"). United American Insurance Company ("United American"), Waddell & Reed, Inc. ("Waddell & Reed") and United Investors Life Insurance Company ("UILIC") along with their respective subsidiaries were acquired in 1981. The name Torchmark Corporation was adopted on July 1, 1982. Family Service Life Insurance Company ("Family Service") was purchased in July, 1990, and American Income Life Insurance Company ("American Income") was purchased in November, 1994. Torchmark disposed of Family Service and Waddell & Reed during 1998. The following table presents Torchmark's business by primary distribution method:
Primary Distribution Method Company Products Sales Force - ------------------------------------------------------------------------------------------------------------------ Direct Response Globe Life And Individual life and supplemental health Direct response, television, Accident insurance including juvenile and magazine; nationwide. Insurance Company senior life coverage, Medicare Oklahoma City, OK Supplement, long-term care. - ------------------------------------------------------------------------------------------------------------------ Liberty National Liberty National Life Individual life and 1,902 full-time sales repre- Exclusive Agency Insurance Company supplemental health insurance. sentatives; 108 district Birmingham, Alabama offices in the Southeastern U.S. - ------------------------------------------------------------------------------------------------------------------ American Income American Income Life Individual life and supplemental health 1,197 agents in the U.S., Exclusive Agency Insurance Company insurance to union and credit Canada, and New Zealand. Waco, Texas union members and other associations. - ------------------------------------------------------------------------------------------------------------------ United Investors United Investors Life Individual life insurance 2,611 Waddell & Reed Agency Insurance Company and annuities. representatives; indepen- Birmingham, Alabama dent agents; 212 offices nationwide. - ------------------------------------------------------------------------------------------------------------------ Military Liberty National Life Individual life insurance Independent Agency Insurance Company through career agents Birmingham, Alabama nationwide. Globe Life And Accident Insurance Company Oklahoma City, Oklahoma - ------------------------------------------------------------------------------------------------------------------ United American United American Senior life and supplemental health 42,600 independent agents Independent Agency Insurance Company insurance including in the U.S., Puerto Rico and and Exclusive Agency McKinney, Texas Medicare Supplement Canada; 2,354 exclusive coverage and long-term care. agents in 78 branch offices.
Additional information concerning industry segments may be found in Management's Discussion and Analysis and in Note 19--Business Segments in the Notes to Consolidated Financial Statements. 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 Annualized Premium Issued Premium in Force -------------------------- -------------------------------- 1999 1998 1997 1999 1998 1997 -------- -------- -------- ---------- ---------- ---------- Whole life: Traditional............ $119,799 $115,154 $114,934 $ 612,964 $ 575,888 $ 551,047 Interest-sensitive..... 18,348 17,131 14,981 168,805 162,046 163,058 Term.................... 115,592 108,469 94,943 330,533 306,785 270,905 Other................... 3,468 3,713 5,521 18,307 17,928 22,369 -------- -------- -------- ---------- ---------- ---------- $257,207 $244,467 $230,379 $1,130,609 $1,062,647 $1,007,379 ======== ======== ======== ========== ========== ==========
1 The distribution methods for life insurance products include sales efforts conducted 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 issued by distribution method:
(Amounts in thousands) Annualized Annualized Premium Issued Premium in Force -------------------------- -------------------------------- 1999 1998 1997 1999 1998 1997 -------- -------- -------- ---------- ---------- ---------- Direct response.... $ 96,091 $ 93,500 $ 79,412 $ 283,406 $ 260,320 $ 232,535 Exclusive Agents: Liberty National.. 51,467 45,532 43,335 307,495 298,082 298,698 American Income... 54,045 53,576 55,245 231,490 216,291 203,475 United American... 5,315 5,481 6,562 21,800 21,390 20,978 Independent Agents: Military.......... 17,110 16,891 15,781 111,318 98,902 86,209 United American... 13,319 9,401 15,225 43,394 41,078 42,725 United Investors.. 15,616 15,386 10,261 105,523 99,775 88,842 Other............. 4,244 4,700 4,558 26,183 26,809 33,917 -------- -------- -------- ---------- ---------- ---------- $257,207 $244,467 $230,379 $1,130,609 $1,062,647 $1,007,379 ======== ======== ======== ========== ========== ==========
Permanent insurance products sold by Torchmark insurance subsidiaries build cash values which are available to policyholders. Policyholders may borrow such funds using the policies as collateral. The aggregate value of policy loans outstanding at December 31, 1999 was $245 million and the average interest rate earned on these loans was 6.8% in 1999. Interest income earned on policy loans was $16.3 million in 1999, $15.3 million in 1998, and $14.4 million in 1997. There were 200 thousand and 198 thousand policy loans outstanding at year-end 1999 and 1998, respectively. The availability of cash values contributes to voluntary policy terminations by policyholders through surrenders. Life insurance products may be terminated or surrendered at the election of the insured at any time, generally for the full cash value specified in the policy. Specific surrender procedures vary with the type of policy. For certain policies this cash value is based upon a fund less a surrender charge which decreases with the length of time the policy has been in force. This surrender charge is either based upon a percentage of the fund or a charge per $1,000 of face amount of insurance. The schedule of charges may vary by plan of insurance and, for some plans, by age of the insured at issue. The ratio of aggregate face amount voluntary terminations to the mean amount of life insurance in force was 17.0% in 1999, 17.0% in 1998, and 16.5% in 1997. The following table presents an analysis of changes to the Torchmark subsidiaries' life insurance business in force:
(Amounts in thousands) 1999 1998 1997 ---------------------- ---------------------- ---------------------- Number of Amount of Number of Amount of Number of Amount of policies Insurance policies Insurance policies Insurance --------- ------------ --------- ------------ --------- ------------ In force at January 1,.. 9,622 $ 96,339,059 9,630 $ 91,869,995 9,392 $ 86,948,151 New issues.............. 1,332 22,846,100 1,452 21,448,243 1,441 20,267,520 Business acquired....... -0- -0- -0- -0- -0- -0- Other increases......... -0- 105,271 1 75,849 1 96,788 Death benefits.......... (105) (327,733) (107) (323,393) (110) (307,752) Lapses.................. (1,023) (15,352,225) (1,006) (14,589,649) (895) (13,358,973) Surrenders.............. (145) (1,505,248) (151) (1,438,085) (149) (1,383,373) Other decreases......... (27) (258,763) (197) (703,901) (50) (392,366) ------ ------------ ------ ------------ ----- ------------ In force at December 31,.................... 9,654 $101,846,461 9,622 $ 96,339,059 9,630 $ 91,869,995 ====== ============ ====== ============ ===== ============ Average policy size (in dollar amounts): Direct response--Juve- nile.................. $ 6,690 $ 6,688 $ 6,725 Other.................. 12,146 11,411 10,689
2 Health insurance Torchmark insurance subsidiaries offer supplemental health insurance products. These are generally classified as (1) Medicare Supplement, (2) cancer and (3) other health policies. Medicare Supplement policies are offered on both an individual and group basis through exclusive and independent agents, and direct response. These guaranteed renewable policies provide reimbursement for certain expenses not covered by the federal Medicare program. One popular feature is an automatic claim filing system for Medicare Part B benefits whereby policyholders do not have to file most claims because they are paid from claim records sent directly to the Torchmark insurers by Medicare. Cancer policies are offered on an individual basis through exclusive and independent agents as well as direct response. These guaranteed renewable policies are designed to fill gaps in existing medical coverage. Benefits are triggered by a diagnosis of cancer or health related events or medical expenses related to the treatment of cancer. Benefits may be in the form of a lump sum payment, stated amounts per diem, per medical procedure, or reimbursement for certain medical expenses. Other health policies include accident, long term care and limited benefit hospital and surgical coverages. These policies are generally issued as guaranteed-renewable and are offered on an individual basis through exclusive and independent agents, and direct response. They are designed to supplement existing medical coverages. Benefits are triggered by certain health related events or incurred expenses. Benefit amounts are per diem, per health related event or defined expenses incurred up to a stated maximum. The following table presents supplemental health annualized premium for the three years ended December 31, 1999 by marketing method:
(Amounts in thousands) Annualized Annualized Premium Issued Premium in Force -------------------------- -------------------------- 1999 1998 1997 1999 1998 1997 -------- -------- -------- -------- -------- -------- Direct response........... $ 4,323 $ 3,884 $ 3,001 $ 12,785 $ 9,617 $ 7,248 Exclusive agents: Liberty National......... 9,859 11,124 11,541 149,447 143,668 138,179 American Income.......... 8,039 9,138 10,052 46,691 44,300 43,552 United American.......... 102,583 64,245 39,616 231,034 172,927 141,780 Independent agents: United American.......... 68,022 50,508 42,643 444,401 426,351 431,293 -------- -------- -------- -------- -------- -------- $192,826 $138,899 $106,853 $884,358 $796,863 $762,052 ======== ======== ======== ======== ======== ========
The following table presents supplemental health annualized premium information for the three years ended December 31, 1999 by product category:
(Amounts in thousands) Annualized Annualized Premium Issued Premium in Force -------------------------- -------------------------- 1999 1998 1997 1999 1998 1997 -------- -------- -------- -------- -------- -------- Medicare Supplement...... $152,518 $102,421 $ 65,161 $630,915 $553,737 $522,054 Cancer................... 10,637 10,248 10,757 153,777 144,900 137,640 Other health related policies................ 29,671 26,230 30,935 99,666 98,226 102,358 -------- -------- -------- -------- -------- -------- $192,826 $138,899 $106,853 $884,358 $796,863 $762,052
The number of individual health policies in force were 1.09 million, 1.09 million and 1.16 million at December 31, 1999, 1998, and 1997, respectively. 3 Annuities Annuity products offered by Torchmark insurance subsidiaries include single- premium deferred annuities, flexible-premium deferred annuities, and variable annuities. Single-premium and flexible-premium products are fixed annuities where a portion of the interest credited is guaranteed. Additional interest may be credited on certain contracts. Variable annuity policyholders may select from a variety of mutual funds managed by Waddell & Reed which offer different degrees of risk and return. The ultimate benefit on a variable annuity results from the account performance. The following table presents Torchmark subsidiaries' annuity collections and deposit balances by product type excluding Family Service:
(Amounts in thousands) Collections (Amounts in millions) For the year ended Deposit Balance December 31, At December 31, -------------------------- -------------------------- 1999 1998 1997 1999 1998 1997 -------- -------- -------- -------- -------- -------- Fixed annuities........... $ 71,696 $ 64,687 $ 76,930 $ 677.5 $ 647.3 $ 611.0 Variable annuities........ 392,769 299,005 247,446 3,274.9 2,343.5 1,821.2 -------- -------- -------- -------- -------- -------- $464,465 $363,692 $324,376 $3,952.4 $2,990.8 $2,432.2 ======== ======== ======== ======== ======== ========
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 92% of total investments at December 31, 1999. Approximately 9% of fixed maturity investments were securities guaranteed by the United States Government or its agencies or investments that were collateralized by U.S. government securities. Approximately 79% of these investments were in GNMA securities that are backed by the full faith and credit of the United States government. The remainder of these government investments were U.S. Treasuries, agency securities or collateralized mortgage obligations ("CMO's") that are fully backed by GNMA's. (See Note 3--Investments in the Notes to Consolidated Financial Statements and Management's Discussion and Analysis.) The following table presents the market value of fixed maturity investments at December 31, 1999 on the basis of ratings as determined primarily by Standard & Poor's Corporation. Moody's Investors Services' bond ratings are used when Standard & Poor's ratings are not available. Ratings of BBB and higher (or their equivalent) are considered investment grade by the rating services.
Amount Rating (in thousands) % ------ -------------- ----- AAA................................................ $1,038,734 18.3% AA................................................. 484,439 8.5 A.................................................. 2,690,891 47.5 BBB................................................ 1,113,956 19.6 BB................................................. 251,400 4.4 B.................................................. 13,279 0.2 Less than B........................................ 766 0.0 Not rated.......................................... 86,330 1.5 ---------- ----- $5,679,795 100.0% ========== =====
4 The following table presents the market value of fixed maturity investments of Torchmark's insurance subsidiaries at December 31, 1999 on the basis of ratings as determined by the National Association of Insurance Commissioners ("NAIC"). Categories one and two are considered investment grade by the NAIC.
Amount Rating (in thousands) % ---------------------- -------------- ----- 1. Highest quality*... $4,251,595 76.3% 2. High quality....... 1,038,060 18.6 3. Medium quality..... 236,016 4.2 4. Low quality........ 47,828 0.9 5. Lower quality...... 1,997 0.0 6. In or near default. 0 0.0 ---------- ----- $5,575,496 100.0% ========== =====
* Includes $463 million of exempt securities or 8.3% of the portfolio. Exempt securities are exempt for valuation reserve purposes, and consist of U.S. Government guaranteed securities. Securities are assigned ratings when acquired. All ratings are reviewed and updated at least annually. Specific security ratings are updated as information becomes available during the year. 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 the experience of each insurance subsidiary, 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 that which has been assumed in premium pricing and to the extent investment income exceeds 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 policy 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. For life insurance in excess of certain prescribed amounts, each insurance company requires medical information or examinations of applicants. These are graduated according to the age of the applicant and may vary with the kind of insurance. The maximum amount of insurance issued without additional medical information is $200,000 through age 35. Additional medical information is requested of all applicants, regardless of age or amount, if information obtained from the application or other sources indicates that such information is warranted. In recent years, there has been considerable concern regarding the impact of the HIV virus associated with Acquired Immune Deficiency Syndrome ("AIDS"). The insurance companies have implemented certain underwriting tests to detect the presence of the HIV virus and continues to assess the utility of other appropriate underwriting tests to detect AIDS in light of medical developments in this field. To date, AIDS claims have not had a material impact on claims experience. 5 Reinsurance As is customary among insurance companies, Torchmark insurance subsidiaries cede insurance to other unaffiliated insurance companies on policies they issue in excess of retention limits. Reinsurance is an effective method for keeping insurance risk within acceptable limits. In the event insurance business is ceded, the Torchmark insurance subsidiaries remain contingently liable with respect to ceded insurance should any reinsurer be unable to meet the obligations it assumes. (See Note 18--Commitments and Contingencies in the Notes to Consolidated Financial Statements and Schedule IV--Reinsurance [Consolidated].) Reserves The life insurance policy reserves reflected in Torchmark's financial statements as future policy benefits are calculated based on generally accepted accounting principles. 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 9--Future Policy Benefit Reserves in the Notes to Consolidated Financial Statements.) Reserves for annuity products consist of the policyholders' account values and are increased by policyholder deposits and interest credits and are decreased by policy charges and benefit payments. Marketing Torchmark insurance subsidiaries are licensed to sell insurance in all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands, Guam, New Zealand and Canada. Distribution is through direct response, independent and exclusive agents. Direct Response. Various Torchmark insurance companies offer life insurance products directly to consumers through direct mail, co-op mailings, television, national newspaper supplements and national magazines. Torchmark operates a full service letterpress which enables the direct response operation to maintain high quality standards while producing materials much more efficiently than they could be purchased from outside vendors. Exclusive Agents. Liberty National's 1,902 agents sell life and health insurance, primarily in the seven state area of Alabama, Florida, Georgia, Tennessee, Mississippi, South Carolina, and North Carolina. These agents are employees of Liberty and are primarily compensated by commissions based on sales. During the past several years this operation has emphasized bank draft and direct bill collection of premium rather than agent collection, because of the resulting lower cost and improved persistency. Agent collected sales were discontinued in 1996. Through the American Income Agency, individual life and fixed-benefit accident and health insurance are sold through approximately 1,197 exclusive agents who target moderate income wage earners through the cooperation of labor unions, credit unions, and other associations. These agents are authorized to use the "union label" because this sales force is represented by organized labor. United American offers life and health insurance targeted to various special markets through 2,354 United American exclusive agents in 78 branch offices throughout the United States. The Waddell & Reed sales force, consisting of 2,611 sales representatives, markets the life insurance products, fixed annuities, and variable annuities of United Investors Life. This sales force continues to market Torchmark's insurance products subsequent to the spin-off of Waddell & Reed under a general agents' contract. Independent Agents. Torchmark insurance companies offer a variety of life and health insurance policies through approximately 42,600 independent agents, brokers, and licensed sales representatives. 6 Torchmark is not committed or obligated in any way to accept a fixed portion of the business submitted by any independent agent. All policy applications, both new and renewal, are subject to approval and acceptance by Torchmark. Torchmark is not dependent on any single agent or any small group of independent agents, the loss of which would have a materially adverse effect on insurance sales. Various Torchmark insurance subsidiaries distribute life insurance through a nationwide independent agency whose sales force is comprised of former commissioned and noncommissioned military officers who sell exclusively to commissioned and noncommissioned military officers and their families. Ratings The following list indicates the ratings currently held by Torchmark's five largest insurance companies as rated by A.M. Best Company:
A.M. Best Company --------------- Liberty National Life Insurance Company A+ (Superior) Globe Life And Accident Insurance Company A+ (Superior) United Investors Life Insurance Company A+ (Superior) United American Insurance Company A+ (Superior) American Income Life Insurance Company A (Excellent)
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. A.M. Best states that it assigns A (Excellent) ratings to those companies which, in its opinion, have demonstrated excellent overall performance when compared to the norms of the life/health insurance industry. A (Excellent) companies have an excellent ability to meet their obligations to policyholders over a long period of time. Liberty, Globe, United American, and UILIC have ratings of AA by Standard & Poor's Corporation. This AA rating is assigned by Standard & Poor's Corporation to those companies who offer excellent financial security on an absolute and relative basis and whose capacity to meet policyholders obligations is overwhelming under a variety of economic and underwriting conditions. Competition The insurance industry is highly competitive. Torchmark competes with other insurance carriers through policyholder service, price, product design, and sales efforts. In addition to competition with other insurance companies, Torchmark faces competition from other financial services organizations. 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. Generally, Torchmark companies operate at lower administrative expense levels than its peer companies, allowing Torchmark to have competitive rates while maintaining underwriting margins, or, in the case of Medicare Supplement business, to remain in the business while some companies have ceased new writings. Torchmark's years of experience in the direct response business are a valuable asset in designing direct response products. 7 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. Insurance companies can also be required under the solvency or guaranty laws of most states in which they do business to pay assessments up to prescribed limits to fund policyholder losses or liabilities of insolvent insurance companies. 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 NAIC, insurance companies are examined periodically by one or more of the supervisory agencies. The most recent examinations of Torchmark's insurance subsidiaries were: American Income as of December 31, 1995; Globe, as of December 31, 1997; Liberty, as of December 31, 1996; United American, as of December 31, 1996; and UILIC, as of December 31, 1996. NAIC Ratios. The NAIC developed the Insurance Regulatory Information System ("IRIS"), which is intended to assist state insurance regulators in monitoring the financial condition of insurance companies. IRIS identifies twelve insurance industry ratios from the statutory financial statements of insurance companies, which are based on regulatory accounting principles and are not based on generally accepted accounting principles ("GAAP"). IRIS specifies a standard or "usual value" range for each ratio, and a company's variation from this range may be either favorable or unfavorable. The following table presents the IRIS ratios as determined by the NAIC for Torchmark's five largest insurance subsidiaries, which varied unfavorably from the "usual value" range for the years 1998 and 1997.
Usual Reported Company Ratio Name Range Value - --------- ---------------------------------------------- --------- -------- 1998: American Income Nonadmitted to Admitted Assets 0 to 10 10 Globe Life and Accident Net change in Capital and Surplus 50 to -10 -10 Gross change in Capital and Surplus 50 to -10 60 1997: Liberty Investment in Affiliate to Capital and Surplus 0 to 100 199 American Income Nonadmitted to Admitted Assets 0 to 10 11
Explanation of Ratios: Investment in Affiliate to Capital and Surplus--This ratio is determined by measuring total investment in affiliates against the capital and surplus of the company. The NAIC considers a ratio of more than 100% to be high, and to possibly impact a company's liquidity, yield, and overall investment risk. The large ratio in Liberty in 1997 was the result of its ownership of other Torchmark insurance companies and the ownership of 81% of the stock of Waddell & Reed. Liberty disposed of its investment in Waddell & Reed during 1998 in connection with Torchmark's spin-off of that company to its shareholders. All intercompany investment is eliminated in consolidation, and the internal organizational structure has no bearing on Torchmark's consolidated financial condition or results. Furthermore, this intercompany investment did not affect Liberty's ability to do business. Nonadmitted Assets to Admitted Assets--This ratio measures the degree to which a company has acquired assets which cannot be carried on its statutory balance sheet. American Income's ratio of 10% in 1998 and 11% in 1997 was due to a large amount of agent balances that arose from commissions that are advanced to agents when a policy is submitted. Due to the growth of American Income's business, these advances have grown and caused a variance in this particular ratio. Agents balances due to American Income are recognized as assets in Torchmark's consolidated financial statements. A significant amount of these balances was sold to an unaffiliated financial institution during 1999. Change in Capital and Surplus--These ratios, calculated on both a gross and net basis, are a measure of improvement or deterioration in the company's financial position during the year. The NAIC considers ratios less than or equal to minus 10% and greater than or equal to 50% to be unusual. Globe's ratio of 60% in 1998 was caused by the establishment of American Income as a subsidiary of Globe. 8 Previously, American Income was a direct subsidiary of Torchmark. This transaction did not affect the consolidated equity of Torchmark at December 31, 1998. Also, this transaction did not affect Globe's ability to do business. 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 of the insurance subsidiaries of Torchmark are adequately capitalized under the risk based capital formula. Guaranty Assessments. State solvency or 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 for these state funds is determined according to the extent of these unsatisfied obligations in each state. These 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, Missouri, New York, Texas, and Indiana. 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 in excess of statutory net gain from operations on an annual noncumulative basis by the registered insurer to the holding company or its affiliates. Personnel At the end of 1999, Torchmark had 1,915 employees and 2,345 licensed employees under sales contracts. Additionally, approximately 49,000 independent and exclusive agents and brokers, who were not employees of Torchmark, were associated with Torchmark's marketing efforts. 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 at 2001 Third Avenue South, Birmingham, Alabama which currently serves as Liberty's, UILIC's, and Torchmark's home office. Approximately 160,000 square feet of this building is available for lease to unrelated tenants by Liberty. Liberty also operates from 58 company-owned district office buildings used for agency sales personnel. United American owns and is the sole occupant of a 140,000 square foot facility, located in the Stonebridge Ranch development in McKinney, Texas (a north Dallas suburb). Globe owns a 300,000 square foot office building at 204 N. Robinson, Oklahoma City, 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 at 120 Robert S. Kerr Avenue, Oklahoma City, which is available for lease. Further, Globe owns a 112,000 square foot facility located at 133 NW 122 Street in Oklahoma City which houses the Direct Response operation. American Income owns and is the sole occupant of an office building located at 1200 Wooded Acres Drive, Waco, Texas. The building is a two-story structure containing approximately 72,000 square feet of usable floor space. Liberty and Globe also lease district office space for their agency sales personnel. 9 During 1999, Torchmark sold the majority of its investment real estate holdings for total consideration of $123 million. These sold investments included its TMK Income Properties limited partnership and its joint venture investment in Liberty Park, a planned community in Birmingham, Alabama. As of December 31, 1999, Torchmark retained $16 million of investment real estate, which included $8 million of properties that were partially occupied by Torchmark subsidiaries, $7 million of undeveloped land in Liberty Park, and $1 million of undeveloped land in north Texas. Information Technology Computing Equipment Torchmark, and its primary subsidiaries, have significant information technology capabilities at their disposal. The corporation uses centralized mainframe computer systems, company-specific local-area networks, workstations, and personal computers to meet its ongoing information processing requirements. Torchmark and its primary subsidiaries also use data communications hardware and software to support their remote data communications networks, intranets, and internet-related telecommunications capabilities. Torchmark's computer hardware, data communications equipment, and associated software programs are managed by information technology staff. All of the corporation's computer hardware and software support, information processing schedules, and computer-readable data-management requirements are met through company-specific policies and procedures. These company-specific policies and procedures also provide for the off-site storage and retention of backup computer software, financial, and business data files. Item 3. Legal Proceedings Torchmark and its subsidiaries continue to be named as parties to pending or threatened legal proceedings. These lawsuits involve 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. Many of these lawsuits involve claims for punitive damages in state courts of Alabama, a jurisdiction particularly recognized for its large punitive damage verdicts. A number of such actions involving Liberty also name Torchmark as a defendant. In 1999, Alabama enacted legislation limiting punitive damages in non-physical injury cases to the greater of $500,000 or three times compensatory damages. Since this legislation has not undergone scrutiny by appellate courts regarding its constitutionality and a jury's discretion regarding the amount of compensatory damages (including mental anguish) awarded in any given case is not precisely defined, the effect of this legislation on Torchmark's litigation remains unclear. Thus, the likelihood or extent of a punitive damage award in any given case is currently impossible to predict. As of December 31, 1999, Liberty was a party to approximately 135 active lawsuits (including 17 employment related cases and excluding interpleaders and stayed cases), 126 of which were Alabama proceedings in which punitive damages were sought. Liberty faces trial settings in these cases on an on-going basis. Based upon information presently available, and in light of legal and other factual defenses available to Torchmark and its subsidiaries, contingent liabilities arising from threatened and pending litigation are not presently considered by management to be material. It should be noted, however, that large punitive damage awards bearing little or no relation to actual damages awarded by juries in jurisdictions in which Torchmark has substantial business, particularly in Alabama, continue to occur, creating the potential for unpredictable material adverse judgments in any given punitive damage suit. On August 25, 1995, a purported class action was filed against Torchmark, Globe, United American and certain officers of these companies in the United States District Court for the Western District of Missouri on behalf of all former agents of Globe (Smith v. Torchmark Corporation, Case No. :95-3304-CV- S-4). This action alleges that the defendants breached independent agent contracts with the plaintiffs by treating them as captive agents and engaged in a pattern of racketeering activity wrongfully denying income and renewal commissions to the agents, restricting insurance sales, mandating the purchase of worthless leads, terminating agents without cause and inducing the execution of independent agent contracts based on misrepresentations of fact. Monetary damages in an unspecified amount are sought. A plaintiff class was certified by the District Court on February 26, 1996, although the certification did not go to the merit of the allegations in the complaint. On December 31, 1996, the plaintiffs filed an amended complaint in Smith to allege violations of various provisions of the Employment Retirement Income Security Act of 1974. Extensive discovery was then conducted. In October 1998, defendants filed a 10 motion to decertify the presently defined class in Smith. On March 23, 1999, the District Court granted defendants' motion to decertify the Smith class in part and decertified all but the ERISA claims of a more narrowly defined Smith class. In May 1999, the defendants filed motions to dismiss the claims certified by the Court's March 23, 1999 order. On December 14, 1999, the District Court granted defendants' motion for summary judgment. That Court denied a motion for reconsideration on January 21, 2000. It has been previously reported that Torchmark, its subsidiaries United American and Globe and certain individual corporate officers are parties to purported class action litigation filed in April, 1996 in the U.S. District Court for the Northern District of Georgia (Crichlow v. Torchmark Corporation, Case No. 4:96-CV-0086-HLM) involving certain hospital and surgical insurance policies issued by Globe and United American. In September 1997, the U.S. District Court entered an order granting summary judgment against the plaintiffs on certain issues and denying national class certification, although indicating that plaintiffs could move for the certification of a state class of Georgia policyholders. Discovery then proceeded on the remaining claims for breach of contract and the duty of good faith arising from closure of the block of business and certain post-claim matters as well as fraud and conspiracy relating to pricing and delay in implementing rate increases. On June 17, 1998, the U.S. District Court entered an order which denied the plaintiffs' motion to certify a Georgia policyholders class, denied reconsideration of the previously entered motion for summary judgment on certain issues, denied reconsideration of the denial of national certification of a class of policyholders and severed and transferred claims of Mississippi policyholders to the U.S. District Court for the Northern District of Mississippi (Greco v. Torchmark Corporation, Case No. 1:98CV196-D-D). The U.S. District Court granted defendants' motion for summary judgment on all remaining issues in Crichlow on February 4, 1999. Plaintiffs in Greco then moved to certify a class of persons purchasing Globe hospital and surgical insurance policies in Mississippi. On February 1, 1999, defendants filed a motion for summary judgment in Greco. Defendants' motion for summary judgment on all remaining issues in Crichlow was granted by the District Court on February 4, 1999. The Crichlow plaintiffs have appealed and Crichlow defendants have cross-appealed various orders of the District Court to the United States Court of Appeals for the Eleventh Circuit. On October 29, 1999, the District Court dismissed all of the plaintiffs' claims in Greco in their entirety and entered a final judgment dismissing Greco with prejudice. This October 29, 1999 order in Greco has been appealed by plaintiffs to the Fifth Circuit Court of Appeals. As previously reported, Liberty has been a party to two lawsuits alleging that a class of persons were insured under Liberty policies when Liberty knew that such persons were not entitled to retain any benefits under these policies, one of which was filed in 1996 in the Circuit Court of Jefferson County, Alabama (Harris v. Liberty National Life Insurance Company, Case No. CV-96-01836) and the other in the Circuit Court of St. Clair County, Alabama (Gentry v. Liberty National Life Insurance Company, Case No. CV-97-61). The Gentry case was dismissed by the St. Clair County Circuit Court on June 16, 1998 and subsequently the Harris case was amended to add former plaintiff Gentry as an additional class representative in that case. On December 28, 1999, the Jefferson County Circuit Court entered an order in Harris granting summary judgment for Liberty on all plaintiffs' claims except unjust enrichment. The only remaining claim in the Harris plaintiffs' motion for class certification, one of unjust enrichment, was denied by the Circuit Court in an order denying the motion for class certification entered February 10, 2000. In 1978, the United States District Court for the Northern District of Alabama entered a final judgment in Battle v. Liberty National Life Insurance Company, et al (Case No. CV-70-H-752-S), class action litigation involving Liberty, a class composed of all owners of funeral homes in Alabama and a class composed of all insureds (Alabama residents only) under burial or vault policies issued, assumed or reinsured by Liberty. The final judgment fixed the rights and obligations of Liberty and the funeral directors authorized to handle Liberty burial and vault policies as well as reforming the benefits available to the policyholders under the policies. Although class actions are inherently subject to subsequent collateral attack by absent class members, the Battle decree remains in effect to date. A motion filed in February 1990 to challenge the final judgment under Federal Rule of Civil Procedure 60(b) was rejected by both the District Court in 1991 and the Eleventh Circuit Court of Appeals in 1992 and a Writ of Certiorari was denied by the U.S. Supreme Court in 1993. 11 In November 1993, an attorney (purporting to represent the funeral director class) filed a petition in the District Court seeking "alternative relief" under the final judgment. This petition was voluntarily withdrawn on November 8, 1995 by petitioners. On February 23, 1996, Liberty filed a petition with the District Court requesting that it order certain contract funeral directors to comply with their obligations under the Final Judgment in Battle and their funeral service contracts. A petition was filed on April 8, 1996 on behalf of a group of funeral directors seeking to modify the 1978 decree in Battle in light of changed economic circumstances. All parties made extensive submissions to the District Court and a hearing on the opposing petitions was held by the District Court on February 9, 1999. On March 8, 1999, the District Court entered an order granting Liberty's petition to enforce the obligations of contract funeral directors under their funeral service contracts and denying the funeral directors' petition for review of the Battle Final Judgment and alternative relief. On July 29, 1999, the funeral director class filed an appeal with the U.S. Court of Appeals of the Eleventh Circuit seeking to have the March 8, 1999 order vacated on the merits. Liberty filed a joint motion in the Eleventh Circuit Court seeking remand to the District Court for purposes of appointment of class counsel for burial policyholders, who are currently not formally represented in these preceedings. The Circuit Court issued an order denying Liberty's joint motion on September 15, 1999 and the funeral director class' appeal remains pending. On January 24, 2000, Liberty and the funeral director class filed a joint motion for remand in order to allow the District Court to evaluate a proposed settlement of the funeral directors' appeal. On October 28, 1999, Liberty was served with a subpoena from the Florida Department of Insurance in connection with that Department's investigation into Liberty's sales practices and disclosures in the State of Florida regarding industrial life insurance and low coverage life insurance policies. Subsequently, on December 8, 1999, purported class action litigation was filed against Liberty in the United States District Court for the Northern District of Alabama (Moore v. Liberty National Life Insurance Company, Case No. CV-99- BU-3262-S), on behalf of all African-Americans who have or have had at the time of policy termination an ownership interest in certain life insurance policies ($25,000 face amount or less) marketed by Liberty and certain of its former subsidiaries. Plaintiffs allege racial discrimination in Liberty's premium rates in violation of 42 U.S.C (S)1981, breach of fiduciary duty in sales and administrative practices, receipt of excessive and unreasonable premium payments by Liberty, improper hiring, supervision, retention and failure to monitor actions of officers, agents and employees, breach of contract in dismantling the debit premium collection system, fraudulent inducement and negligent misrepresentation. Unspecified compensatory and punitive damages are sought together with a declaratory judgment and equitable and/or injunctive relief, including establishment of a constructive trust for the benefit of class members. Defendants filed a motion for judgment on the pleadings or in the alternative for summary judgment on January 27, 2000. 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 1999. 12 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters The principal market in which Torchmark's common stock is traded is the New York Stock Exchange. There were 6,378 shareholders of record on December 31, 1999, excluding shareholder accounts held in nominee form. On November 6, 1998, Torchmark distributed its approximately 64% ownership of Waddell & Reed to its shareholders at a ratio of .3018 Waddell & Reed shares to one share of Torchmark. All market prices and dividends per share have been adjusted to reflect the Waddell & Reed distribution. 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 16--Shareholders' 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:
1999 Market Price ------------ Dividends Quarter High Low Per Share ------- -------- -------- --------- 1 $36.6250 $30.6875 $ .0900 2 37.1875 31.2500 .0900 3 36.1250 24.6250 .0900 4 35.9375 25.5625 .0900
Year-end closing price.................$29.0625
1998 Market Price ------------ Dividends Quarter High Low Per Share ------- -------- -------- --------- 1 $41.2813 $33.0156 $ .1500 2 43.0000 34.5781 .1500 3 40.7344 30.5313 .1500 4 40.2500 27.4688 .1300
Year-end closing price.................$35.3125 13 Item 6. Selected Financial Data The following information should be read in conjunction with Torchmark's Consolidated Financial Statements and related notes reported elsewhere in this Form 10-K: (Amounts in thousands except per share and percentage data)
1999 1998 1997 1996 1995 Year ended December 31, ----------- ----------- ----------- ---------- ---------- Premium revenue: Life................... $ 1,018,301 $ 959,766 $ 909,992 $ 854,897 $ 772,257 Health................. 824,816 759,910 739,485 732,618 750,588 Other ................. 40,969 33,954 28,527 22,404 23,438 Total................. 1,884,086 1,753,630 1,678,004 1,609,919 1,546,283 Net investment income... 447,337 459,558 429,116 399,551 377,338 Realized investment gains (losses)......... (110,971) (57,637) (36,979) 5,830 (14,323) Total revenue........... 2,226,895 2,157,876 2,071,103 2,016,416 1,910,454 Net operating income(1). 341,167 324,315 273,730 240,637 219,864 Net income from continuing operations.. 258,930 255,776 260,429 252,815 217,958 Net income.............. 273,956 244,441 337,743 311,372 143,235 Annualized premium issued: Life................... 257,207 244,467 230,379 214,741 217,988 Health................. 192,826 138,899 106,853 100,981 103,491 Total................. 450,033 383,366 337,232 315,722 321,479 Per common share: Basic earnings: Net operating income(1)............ 2.56 2.32 1.97 1.69 1.54 Net income from continuing operations........... 1.95 1.83 1.87 1.78 1.52 Net income............ 2.06 1.75 2.43 2.19 1.00 Diluted earnings: Net operating income(1)............ 2.55 2.29 1.94 1.67 1.52 Net income from continuing operations........... 1.93 1.81 1.84 1.76 1.51 Net income............ 2.04 1.73 2.39 2.17 0.99 Cash dividends paid.... 0.36 0.58 0.59 0.58 0.57 Return on average common equity, excluding effect of SFAS 115, Vesta earnings, discontinued operations, and nonrecurring charge.... 16.2% 15.1% 18.2% 18.4% 18.3% Basic average shares outstanding............ 133,197 139,999 139,202 142,460 143,188 Diluted average shares outstanding............ 133,986 141,352 141,431 143,783 144,228 - ------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 As of December 31, ----------- ----------- ----------- ---------- ---------- Cash and invested assets................. $ 6,202,251 $ 6,417,511 $ 6,473,096 $5,863,163 $5,724,180 Total assets............ 12,131,664 11,249,028 11,127,648 9,893,964 9,445,623 Short-term debt......... 418,394 355,392 347,152 40,910 189,372 Long-term debt.......... 371,555 383,422 564,298 791,880 791,988 Shareholders' equity.... 1,993,337 2,259,528 1,932,736 1,629,343 1,588,952 Per common share (2)... 15.10 16.51 13.80 11.69 11.09 Per common share excluding effect of SFAS 115.............. 16.32 15.43 12.90 11.42 10.16 Annualized premium in force: Life................... 1,130,609 1,062,647(3) 1,007,379 946,525 869,366 Health................. 884,358 796,863 762,052 748,153 759,059 Total................. 2,014,967 1,859,510(3) 1,769,431 1,694,678 1,628,425
- ------------------------------------------------------------------------------- (1) Net income from continuing operations, excluding realized investment gains (losses), the related adjustment to deferred acquisition costs, equity in Vesta earnings for periods prior to 1999, a one-time gain on the sale of equipment, and the nonrecurring charge. (2) Computed after deduction of preferred shareholders' equity. (3) Annualized life premium in force excludes $5.3 million representing the Family Service business sold in 1998. 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statements. Torchmark cautions readers regarding certain forward- looking statements contained in the following 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) Deteriorating general economic conditions leading to increased lapses and/or decreased sales of Torchmark's policies; 2) Changes in governmental regulations (particularly those impacting taxes and changes to the federal Medicare program that would affect Medicare Supplement insurance); 3) Financial markets trends that adversely affect sales of Torchmark's market-sensitive products; 4) Increased pricing competition; 5) Adverse levels of mortality, morbidity, and utilization of healthcare services relative to Torchmark's assumptions; 6) The inability of Torchmark to obtain timely and appropriate premium rate increases; 7) Adverse regulatory developments; 8) Interest rate changes that adversely affect product sales and/or investment portfolio yield; 9) Adverse litigation results; 10) Developments involving Vesta Insurance Group, Inc., ("Vesta") described more fully elsewhere in this document under the caption "Transactions involving Vesta Insurance Group" on page of this report; 11) The inability of Torchmark to achieve the anticipated levels of administrative and operational efficiencies; and 12) The customer response to new products and marketing initiatives. Readers are also directed to consider other risks and uncertainties described in other documents filed by Torchmark with the Securities and Exchange Commission. 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. 15 RESULTS OF OPERATIONS The following is a discussion of Torchmark's operations for the three years ended December 31, 1999. In the analysis and comparison of Torchmark's operating results with 1998 and 1997, two divestitures that occurred in 1998 should be taken into account: a) the divestiture of Waddell & Reed b) the sale of Family Service Divestiture of Waddell & Reed. In March, 1998, Waddell & Reed, Torchmark's asset management subsidiary, completed an initial public offering of approximately 24 million shares of its common stock. The offering represented approximately 36% of Waddell & Reed's shares. Net proceeds from the offering were approximately $516 million after underwriters' fees and expenses. Waddell & Reed used $481 million of the proceeds to repay existing notes owed to Torchmark and other Torchmark subsidiaries and retained the remaining $35 million. Torchmark's $481 million proceeds from the note repayments were invested or used to pay down debt. (See the discussion on Investments on page 28, Liquidity on page 32, and Capital Resources on page 32 of this report.) The initial public offering resulted in a $426 million gain which was added to Torchmark's additional paid-in capital. Torchmark retained the remaining 64% of the Waddell & Reed stock. On November 6, 1998, Torchmark distributed its remaining 64% investment in Waddell & Reed through a tax-free spin-off to Torchmark shareholders. Each Torchmark shareholder of record on October 23, 1998 received a total of .3018 Waddell & Reed shares per Torchmark share. After the spin-off, Torchmark retained no further ownership interest in Waddell & Reed. As a result of the transaction, Torchmark incurred $54 million in expenses related to the spin- off, the majority of which was $50 million of corporate Federal income tax resulting from the distribution of a portion of the policyholder surplus account of a Torchmark life subsidiary. Torchmark has accounted for the spin-off of Waddell & Reed as a disposal of a segment. Accordingly, Torchmark's financial statements for 1998 and all prior periods were modified to present the net assets and operating results of Waddell & Reed as discontinued operations of the disposed segment. The $54 million expense of the spin-off is included in discontinued operations under the caption "Loss on Disposal." The distribution of the Waddell & Reed shares resulted in a reduction in Torchmark's shareholders' equity in the approximate amount of $174 million, consisting of the equity in Waddell & Reed, net of the 36% minority interest. Torchmark's share of Waddell & Reed's earnings for 1998 was $48 million after reduction for the minority interest during the period subsequent to the initial public offering but before the spin-off. This compares with $77 million for 1997, when Torchmark owned 100% of Waddell & Reed for the entire period. Sale of Family Service. On June 1, 1998, Torchmark sold Family Service to an unaffiliated insurance carrier. Family Service, which was acquired in 1990, is a preneed funeral insurer but has not issued any new policies since 1995. Consideration for the sale was $140 million in cash. Torchmark recorded a pretax realized loss on the sale of approximately $14 million, but incurred a tax expense on the transaction of $9 million for a total after-tax loss of $23 million. In connection with the sale, Torchmark agreed to continue to service the policies in force of Family Service for five years from the sale date for a fee of $2 million per year plus certain variable processing costs. During 1997, Family Service accounted for $57 million in revenues and $7.7 million in pretax income. Through May, 1998, Family Service contributed $25 million in revenues and $5.8 million in pretax income. Invested assets were $778 million and total assets were $828 million at the date of the sale. Summary of Operating Results. Torchmark's management computes a classification of income called "net operating income." Net operating income is the measure of income Torchmark's management focuses on to evaluate the performance of the operations of the company. It differs from net income as reported in the financial statements in that it excludes unusual and nonrecurring income or loss items which distort operating trends. It also excludes discontinued operations. 16 The following items were excluded from net income as reported in Torchmark's financial statements in order to compute net operating income: 1) Realized investment gains and losses and the related adjustment to deferred acquisition costs, net of tax; 2) Net income or loss from the discontinued operations of Waddell & Reed, including the $54 million nonrecurring expenses of the spin-off; 3) Torchmark's pro rata share of the income or losses related to Vesta; 4) The nonrecurring loss from the redemption by Torchmark of its debt in the second quarter of 1998 in the amount of $5 million net of tax; 5) A one-time gain on the sale of equipment (included in other income) in the after-tax amount of $3.3 million; and 6) The effect of a change in accounting principle which modified the accounting for an interest rate swap instrument, increasing net income in the after-tax amount of $16.1 million. Additionally, in 1999, Torchmark entered into a life insurance marketing arrangement with a third party, discussed more fully under the caption Life Insurance on page 20 of this report. This agreement contained certain cash guarantees to the third party which would not be recoverable by Torchmark based on test marketing results. Accordingly, Torchmark recorded a nonrecurring after-tax operating charge of $13 million, or $.10 per diluted share in 1999. Because this was an unusual one-time charge, net operating income has been presented before the charge for comparability. A reconciliation of net operating income to net income on a per diluted share basis is as follows: Reconciliation of Per Share Net Operating Income to Reported Net Income*
1999 1998 1997 ----- ----- ----- Net operating income before nonrecurring charge........ $2.55 $2.29 $1.94 Nonrecurring charge.................................... (.10) -- -- ----- ----- ----- Net operating income.................................. 2.45 2.29 1.94 Realized investment losses, net of tax................. (.54) (.36) (.17) Gain on sale of equipment, net of tax.................. .02 -- -- Equity in Vesta earnings (losses), net of tax.......... -- (.12) .07 Discontinued operations of Waddell & Reed, net of tax.. (.01) (.04) .55 Loss on redemption of debt, net of tax................. -- (.04) -- Change in accounting principle, net of tax............. .12 -- -- ----- ----- ----- Net income............................................ $2.04 $1.73 $2.39 ===== ===== =====
- -------- * Diluted share basis Realized investment losses in 1999 in the after-tax amount of $72 million included a $41 million after- tax loss from the sale of real estate and a $19 million after-tax loss from the sale of fixed maturities, which are discussed on page 29 of this report under the caption Investments. Realized losses in 1999 also included a $12 million after-tax loss from the reduction in value of Torchmark's interest rate swap relating to its MIPS, as discussed under the caption Capital Resources on page 32 of this report. Realized investment losses in 1998, which were $51 million net of tax, included a $23 million after-tax loss from the sale of Family Service, a $24 million after-tax loss on the writedown of Torchmark's Vesta holdings, and a $3 million after-tax loss from the sale of a portion of the Vesta holdings. Losses in 1997, in the after-tax amount of $24 million, were primarily a result of intentional sales of fixed-maturity investments at a loss to offset current and prior-year taxable gains. The Vesta transactions are discussed on page 35 and the redemption of Torchmark debt is discussed under the caption Capital Resources on page 32 of this report. The change in accounting principle is discussed in Note 15-- Change in Accounting Principle to the Consolidated Financial Statements on page 64 of this report. 17 Torchmark reports earnings per share data as basic and diluted. Basic earnings per share are based on average shares outstanding during the period. Diluted earnings per share assume the exercise of Torchmark's employee stock options for which the exercise price was lower than the market price during the year and their impact on shares outstanding. Diluted earnings per share differ from basic earnings per share in that they are influenced by changes in the market price of Torchmark stock and the number of options as well as the number of shares outstanding. Unless otherwise indicated, all references to per share data in this report are on the basis of diluted shares. A comparison of Torchmark's basic and diluted earnings per share is as follows: Earnings and Earnings Per Share (Dollar amounts in thousands, except for per share data)
For the Year Ended December 31, -------------------------- 1999 1998 1997 -------- -------- -------- Net operating income before nonrecurring charge: Amount.......................................... $341,167 $324,315 $273,730 Per Share: Basic........................................... 2.56 2.32 1.97 Diluted......................................... 2.55 2.29 1.94 Net operating income: Amount.......................................... 327,744 324,315 273,730 Per Share: Basic........................................... 2.46 2.32 1.97 Diluted......................................... 2.45 2.29 1.94 Net income: Amount.......................................... 273,956 244,441 337,743 Per Share: Basic........................................... 2.06 1.75 2.43 Diluted......................................... 2.04 1.73 2.39
Torchmark's revenues were $2.23 billion in 1999, an increase of 3% over 1998 revenues of $2.16 billion. Revenues rose 4% in 1998 over 1997 revenues of $2.07 million. After adjustment for realized investment gains and losses in each year, revenues grew 5% in 1999 from $2.22 billion in 1998 to $2.33 billion. They also rose 5% in 1998 over the prior year. Total premium rose $130 million, or 7%, to $1.88 billion in 1999. Total premium increased 5% in 1998 to $1.75 billion. Life insurance premium rose 6% in 1999 to $1.02 billion, an increase of $59 million. Health premium in 1999 rose 9%, an increase of $65 million to $825 million. Net investment income declined $12 million, or 3%, in 1999 due primarily to the sale of Family Service. Life premium increased 5% to $960 million and health premium grew 3% to $760 million in 1998. Net investment income increased 7% in 1998 to $460 million. Other operating expenses have declined in each of the years 1997 through 1999. They declined from $120 million in 1997 to $117 million in 1998 and to $115 million in 1999. Other operating expenses as a percentage of revenues, excluding realized gains and losses, declined in each period and were 4.9% in 1999, 5.3% in 1998, and 5.7% in 1997. Other operating expenses consist of insurance administrative expenses and expenses of the parent company. The components of Torchmark's revenues and operations are described in more detail in the discussion of Insurance and Investment segments found on pages 20 through 31 of this report. 18 The following table is a summary of Torchmark's continuing net operating income. Insurance underwriting income is defined by Torchmark management as premium income less net policy obligations, commissions, acquisition expenses, and insurance administrative expenses plus other income. Excess investment income is defined as tax-equivalent net investment income reduced by the interest credited to net policy liabilities and financing costs. Financing costs include the interest on Torchmark's debt and the net cost of the Monthly Income Preferred Securities ("MIPS"). Summary of Net Operating Income (Dollar amounts in thousands)
1999 1998 1997 ---------------- ---------------- ---------------- % of % of % of Amount Total Amount Total Amount Total --------- ----- --------- ----- --------- ----- Insurance underwriting income before other income and administra- tive expenses: Life................... $ 263,269 60.5% $ 252,556 60.8% $ 241,038 60.0% Health................. 144,632 33.3 139,445 33.6 141,540 35.3 Annuity................ 26,831 6.2 23,423 5.6 19,025 4.7 Other.................. -0- -0- 7 --------- ----- --------- ----- --------- ----- Total .................. 434,732 100.0% 415,424 100.0% 401,610 100.0% ===== ===== ===== Other income............ 3,348 4,488 3,141 Administrative expenses. (104,903) (102,559) (101,950) --------- --------- --------- Insurance underwriting income excluding Family Service.......... 333,177 317,353 302,801 Insurance underwriting income--Family Service.. -0- 1,393 3,685 Excess investment income (tax equivalent basis).. 215,387 206,119 143,476 Corporate expense........ (10,166) (12,061) (13,953) Goodwill amortization.... (12,075) (12,075) (12,074) Tax equivalency adjust- ment.................... (11,487) (11,143) (9,951) --------- --------- --------- Pretax net operating in- come................... 514,836 489,586 413,984 Income tax............... (173,669) (165,271) (140,254) --------- --------- --------- Net operating income be- fore nonrecurring charge................. 341,167 324,315 273,730 Nonrecurring charge, net of tax.................. (13,423) -0- -0- --------- --------- --------- Net operating income.... $ 327,744 $ 324,315 $ 273,730 ========= ========= ========= Net operating income be- fore nonrecurring charge per diluted share.................. $ 2.55 $ 2.29 $ 1.94 ========= ========= ========= Net operating income per diluted share.......... $ 2.45 $ 2.29 $ 1.94 ========= ========= =========
On a per share basis, Torchmark's net operating income before nonrecurring charge grew 11% in 1999 and 18% in 1998. Excluding the proceeds from the public offering of Waddell & Reed, the increase for 1998 would have been 10%. In total dollars, Torchmark's net operating income before nonrecurring charge rose 5% in 1999 after an 18% increase in 1998. Contributing to the growth in net operating income were gains in insurance underwriting income and excess investment income. Excluding Family Service, insurance underwriting income rose 5% in 1999 to $333 million and 5% in 1998 to $317 million. Excess investment income also rose in both 1998 and 1999 as a result of lower policy requirements in 1999, increased investment income in 1998, and lower financing costs in both years. Torchmark's core operations are segmented into insurance underwriting operations and investment operations. Insurance underwriting activities are further segmented into life insurance, health insurance, and annuity product groups. A detailed discussion of each of Torchmark's segments follows. 19 Life insurance. Life insurance is Torchmark's largest segment, with life premium representing 54% of total premium and with life underwriting income before other income, administrative expense, and nonrecurring charge, representing 61% of the total. Life insurance products provide higher underwriting margins and a larger asset base resulting from higher reserve levels. A larger asset base provides Torchmark the opportunity to increase investment income. Family Service was sold on June 1, 1998. Comparisons of 1997 through 1999 in the following discussions of Torchmark's life insurance operations exclude Family Service. Life insurance premium rose 6% in 1999 to $1.02 billion from $957 million in 1998. Life premium increased 6% in 1998. Sales of life insurance, in terms of annualized premium, were $257 million in 1999, increasing 5% over 1998 sales of $244 million. This compares with 6% growth in 1998 sales over 1997. Annualized life premium in force was $1.13 billion at December 31, 1999, compared with $1.06 billion at 1998 year end, an increase of 6%. Annualized premium in force grew 6% in 1998 from $1.00 billion at year-end 1997. Annualized premium in force and issued data includes amounts collected on certain interest-sensitive life products which are not recorded as premium income but excludes single-premium income and policy account charges. Life insurance products are marketed through a variety of distribution channels. The following table presents life insurance premium by distribution method during each of the three years ended December 31, 1999. LIFE INSURANCE Premium by Distribution Method (Dollar amounts in thousands)
1999 1998 1997 ---------------- -------------- -------------- % of % of % of Amount Total Amount Total Amount Total ---------- ----- -------- ----- -------- ----- Liberty National Exclusive Agency...................... $ 288,330 28.3% $282,389 29.5% $280,519 31.1% Direct Response.............. 245,824 24.1 221,371 23.1 195,393 21.7 American Income Exclusive Agency...................... 217,367 21.3 204,310 21.3 190,681 21.2 Military Independent Agency.. 104,590 10.3 92,204 9.6 79,631 8.8 United Investors Agency...... 84,098 8.3 80,376 8.4 77,986 8.7 United American Independent Agency...................... 37,375 3.7 36,925 3.9 36,810 4.1 United American Exclusive Agency...................... 19,318 1.9 18,798 2.0 18,243 2.0 Other........................ 21,399 2.1 20,901 2.2 21,924 2.4 ---------- ----- -------- ----- -------- ----- $1,018,301 100.0% $957,274 100.0% $901,187 100.0% ========== ===== ======== ===== ======== =====
20 Direct Response marketing is conducted through direct mail, co-op mailings, television and consumer magazine advertising, and direct mail solicitations endorsed by groups, unions and associations. It markets a line of life products primarily to juveniles and adults with face amounts of less than $10 thousand on average. The Direct Response operation is characterized by lower acquisition costs than Torchmark's agency-based marketing systems. In each of the three years 1997 through 1999, this distribution center had Torchmark's highest growth in life insurance premium in dollar amount. It accounted for over 24% of Torchmark's life insurance premium during 1999. Direct Response premium was $246 million in 1999, increasing 11% over 1998 premium of $221 million. Direct Response life premium in 1998 grew 13% over 1997 premium of $195 million. Annualized premium sold by the Direct Response operation was $96 million in 1999, increasing 3% over 1998 sales of $94 million. Sales in 1998 rose 18% over 1997 sales of $79 million. Sales growth declined as compared with previous years due in part to the withdrawal from the under-age 40 adult direct mail market because of unfavorable financial results from that segment. Direct mail sales to ages 40 to 50 were interrupted for part of the year while those products were repriced to improve their financial results. The annualized life premium issued by the Direct Response group represented over 37% of Torchmark's total life sales in 1999. Direct Response annualized life premium in force rose 9% to $283 million at December 31, 1999 from $260 million a year earlier. At December 31, 1999, Direct Response life annualized premium in force was second only to that of the Liberty National Exclusive Agency. Direct Response life insurance annualized premium in force grew 12% in 1998. In addition to growth in life insurance sales and premium, the Direct Response operation has promoted growth in some of Torchmark's agent-based distribution channels through marketing support. This support includes providing sales leads and assisting in agent recruiting. This assistance has contributed indirectly to the growth in premium in other Torchmark distribution agencies. For example, Direct Response marketing support indirectly contributed to the increase in health sales by the United American Exclusive Agency through its assistance in the agent recruiting process and by providing leads to the agents. The Liberty National Exclusive Agency distribution system represented Torchmark's largest contribution to life insurance premium income in each of the three years presented, with 1999 premium of $288 million representing 28% of total life premium. The annualized life premium in force of the Liberty Agency was $307 million at year-end 1999, compared with $298 million and $299 million at year-end 1998 and 1997, respectively. Life premium sales, in terms of annualized premium issued, grew 13% during 1999 to $51 million. This $6 million increase in annualized life premium sales by the Liberty National Agency was Torchmark's largest in dollar amount, accounting for 47% of the growth in annualized life premium issued. Life sales in this agency rose 5% in 1998 to $46 million, representing a turnaround in sales growth from a 5% decline in sales in 1997. The turnaround in sales growth in the Liberty Agency was largely attributable to growth in the number of agents. Liberty's agents rose from a count of 1,750 agents at year-end 1997 to 1,829 agents at year-end 1998, an increase of 5%. They further increased 4% to 1,902 at year-end 1999. Improved agent recruitment efforts and training programs which help improve agent retention have been responsible for the new agent growth. Additionally, training programs have been employed to improve the retention of recruited agents. Agency productivity has also increased in 1999, as average sales per agent rose 9% over the prior year. Management believes that the continued recruiting of new agents and the retention of productive agents are critical to the continued growth of sales in controlled agency distribution systems. 21 The American Income Exclusive Agency is a distribution system that focuses on members of labor unions, credit unions, and other associations for its life insurance sales. It is a high margin business characterized by lower policy obligation ratios. At December 31, 1999, premium from this system accounted for 21% of Torchmark's total life premium. In 1999, American Income's premium increased 6% to $217 million, after having risen 7% in 1998 to $204 million. Annualized life premium in force was $231 million at year-end 1999, an increase of 7% over 1998 premium in force of $216 million. Annualized life premium in force rose 6% in 1998 and 8% in 1997. Sales, in terms of annualized premium issued, were $54 million in 1999, $54 million in 1998, and $55 million in 1997, declining 3% in 1998 but increasing 1% in 1999. Growth in sales of this agency is dependent on the growth in the number of agents. An 8% decline in agent count was experienced in 1998 to 1,222 agents at December 31, 1998, and a further decline in the first half of 1999 resulted in 1,160 agents at June 30, 1999. However, changes in American Income's marketing organization were implemented in 1999 to reverse the decline in the number of agents. As a result, the American Income agency had 1,197 agents at year-end 1999, an increase of 3% in agents over June, 1999. Management continues to make changes to American Income's marketing organization to improve agent recruiting, retention, and productivity in order to increase the size of this agency. Another of Torchmark's distribution channels for life insurance is a nationwide independent agency whose sales force is comprised of former commissioned and noncommissioned military officers who sell exclusively to commissioned and noncommissioned military officers and their families. This business consists of whole life products with term insurance riders and is characterized by extremely low lapse rates. Life premium income from this distribution system grew 13% to $105 million in 1999. Premium for this agency rose 16% to $92 million in 1998. These premium increases represented the largest percentage growth in life premium of any Torchmark distribution channel in 1999 or 1998. Annualized life premium in force for the Military distribution system grew 13% in 1999 to $111 million, after having increased 15% to $99 million in 1998. In both years this distribution system produced the greatest amount of growth in annualized life premium in force on a percentage basis. A major factor in this growth of in-force premium relates to the very high persistency associated with this business. Annualized premium sold during 1999 by this agency was $17 million, flat with 1998 sales of $17 million. Sales in 1998 gained 7% over sales of $16 million in 1997. The United Investors Agency is made up of Waddell & Reed sales representatives, who market the life insurance products of United Investors Life under a marketing agreement with Waddell & Reed. This agency accounted for 8% of Torchmark's life premium in 1999. Premium income rose 5% in 1999 to $84 million, following a 3% increase in 1998 to $80 million. Sales, in terms of annualized premium issued, were $16 million in 1999, increasing 1% over 1998 sales. However, 1998 sales of $15 million rose 50% over 1997 sales of $10 million. Annualized life premium in force increased 6% to $106 million at December 31, 1999, representing 9% of Torchmark's total life premium in force. In addition to the growth in life insurance sales, this agency has also increased production of variable life collections in 1999 from $18 million in 1998 to $32 million in 1999, an increase of 77%. Variable life collections rose almost fourfold in 1998. Although variable life collections are not included in premium in force data, they are indicative of growth in the variable life account balance. Indirectly, they add to premium revenue through the policy account charges for insurance coverage and administration as the account balance grows. The United American Independent and Exclusive Agencies represented about 6% of total life premium in 1999. On a combined basis, life premium rose 2% to $57 million in 1999 after a 1% increase in 1998. Premium for these agencies increased 12% in 1997 to $55 million. Annualized life premium issued in 1999 was $19 million, increasing 25% over 1998 issues of $15 million. 22 LIFE INSURANCE Summary of Results (Dollar amounts in thousands)
1999 1998 1997 ------------------- ------------------ ------------------ % of % of % of Amount Premium Amount Premium Amount Premium ---------- ------- --------- ------- --------- ------- Premium and policy charges................ $1,018,301 100.0% $ 957,274 100.0% $ 901,187 100.0% Policy obligations...... 666,122 65.4 618,867 64.7 574,139 63.7 Required reserve interest............... (229,287) (22.5) (215,185) (22.5) (199,339) (22.1) ---------- ----- --------- ----- --------- ----- Net policy obligations. 436,835 42.9 403,682 42.2 374,800 41.6 Commissions and premium taxes.................. 56,341 5.5 57,364 6.0 55,019 6.1 Amortization of acquisition costs...... 170,444 16.7 158,298 16.5 149,358 16.6 Required interest on deferred acquisition costs.................. 91,412 9.0 85,374 8.9 80,972 9.0 ---------- ----- --------- ----- --------- ----- Total expense.......... 755,032 74.1 704,718 73.6 660,149 73.3 ---------- ----- --------- ----- --------- ----- Insurance underwriting income before other income and administrative expenses, excluding Family Service and nonrecurring charge.... 263,269 25.9% 252,556 26.4% 241,038 26.7% ===== ===== ===== Family Service insurance underwriting income before other income and administrative expenses............... -0- 2,187 5,650 ---------- --------- --------- Nonrecurring charge..... (20,650) -0- -0- Insurance underwriting income before other income and administrative expenses............... $ 242,619 $ 254,743 $ 246,688 ========== ========= =========
In the third quarter of 1999, Reader's Digest Association and Torchmark entered into an agreement to market Torchmark life insurance products to certain Reader's Digest customers. These products were marketed through Torchmark's Direct Response operation, and required Torchmark to guarantee specified compensation to Reader's Digest, regardless of marketing success. Test marketing began in the fourth quarter of 1999. The less than favorable results from these tests indicated that it would be unlikely that Torchmark would recover the full amount of compensation guaranteed to Reader's Digest under the terms of the agreement. As a result, Torchmark recorded a nonrecurring operating charge of $21 million in the fourth quarter of 1999. This charge represented $13 million after tax or $.10 per diluted share. Torchmark intends to maintain its relationship with Reader's Digest and to use its subscriber lists in selective marketing of Torchmark insurance products. Because of the nonrecurring charge, Torchmark will only incur its normal solicitation costs on future business and will have no further costs related to the guaranteed compensation. Life insurance gross margins have been presented in the above table to remove the effect of Family Service underwriting income and the nonrecurring charge, which distort comparisons. Excluding these items, gross margins, as indicated by insurance underwriting income before other income and administrative expense, increased 4% in 1999 to $263 million after having risen 5% in 1998 to $253 million. As a percentage of life insurance premium, life insurance gross margins were 26% in both 1999 and 1998, as compared with 27% in 1997. Slight increases in mortality have been experienced in both 1999 and 1998 over the prior year, resulting in increased obligation ratios. Fluctuations in mortality are normal in the life insurance industry and are not indicative of a trend. 23 Health Insurance. Torchmark markets its supplemental health insurance products through a number of distribution channels. The following table indicates health insurance premium income during each of the three years ended December 31, 1999 by distribution method. HEALTH INSURANCE Premium by Distribution Method (Dollar amounts in thousands)
1999 1998 1997 --------------- -------------- -------------- % of % of % of Amount Total Amount Total Amount Total --------- ----- -------- ----- -------- ----- United American Independent Agency....................... $ 427,023 51.8% $417,556 54.9% $428,775 58.0% United American Exclusive Agency....................... 194,594 23.6 150,602 19.8 132,426 17.9 Liberty National Exclusive Agency....................... 143,857 17.4 135,861 17.9 125,701 17.0 American Income Exclusive Agency....................... 47,564 5.8 47,074 6.2 46,116 6.2 Direct Response............... 11,778 1.4 8,817 1.2 6,467 0.9 --------- ----- -------- ----- -------- ----- $ 824,816 100.0% $759,910 100.0% $739,485 100.0% ========= ===== ======== ===== ======== =====
Premium for the health insurance segment increased 9% to $825 million in 1999 over 1998 premium of $760 million. In 1998, health premium rose 3%. Annualized health premium in force grew 11% to $884 million at December 31, 1999 over the previous year-end balance of $797 million. Health premium in force rose 5% during 1998. Sales of health insurance, in terms of annualized premium issued, were $193 million in 1999, increasing 39% over 1998 sales of $139 million. Sales in 1998 grew 30% over the prior year. Sales of health insurance have accelerated greatly in the past three years due to increases in sales of Medicare Supplement policies. Prior to 1997, Torchmark had not experienced year-over-year sales growth in health insurance for five years. Health products sold by Torchmark insurance companies include Medicare Supplement, cancer, long-term care, and other under-age-65 limited-benefit supplemental medical and hospitalization products. As a percentage of annualized health premium in force at December 31, 1999, Medicare Supplement accounted for 71%, cancer 17%, and other health products 11%. The table below presents Torchmark's health insurance annualized premium in force by major product category at December 31, 1999 and for the two preceding years. HEALTH INSURANCE Annualized Premium in Force by Product (Dollar amounts in thousands)
At December 31, ----------------------------------------------- 1999 1998 1997 --------------- -------------- -------------- % of % of % of Amount Total Amount Total Amount Total --------- ----- -------- ----- -------- ----- Medicare Supplement............ $ 630,915 71.3% $553,737 69.5% $522,054 68.5% Cancer......................... 153,777 17.4 144,900 18.2 137,640 18.1 Other.......................... 99,666 11.3 98,226 12.3 102,358 13.4 --------- ----- -------- ----- -------- ----- Total........................ $ 884,358 100.0% $796,863 100.0% $762,052 100.0% ========= ===== ======== ===== ======== =====
24 Medicare Supplement insurance is sold primarily by the United American Exclusive Agency and the United American Independent Agency. Health sales in both agencies have grown significantly in the past three years. The Exclusive Agency sold $103 million in annualized health premium in 1999, a 60% increase over the prior year. Health sales for this agency rose 62% in 1998 to $64 million. This agency accounted for $44 million of the $65 million in health premium growth in 1999. It also was instrumental in health annualized premium growth in both 1999 and 1998, accounting for $58 million of the $87 million growth during 1999 in in-force premium and adding $31 million to annualized health premium in force in 1998. The United American Exclusive Agency represented 26% of Torchmark's annualized health premium in force at December 31, 1999, compared with 22% a year earlier. One factor in the growth in Medicare Supplement sales in the United American Exclusive Agency is the targeted marketing support provided by the Direct Response operation. The United American Independent Agency continues to represent the largest amount of Torchmark's health premium in force. The agency's $444 million of annualized health premium in force at December 31, 1999, of which $418 million was Medicare Supplement premium in force, was 50% of Torchmark's total health premium in force. This agency increased annualized health premium in force over the previous year for the first time at year-end 1999 since 1992. Health sales by the United American Independent Agency, in terms of annualized premium issued, were $68 million in 1999, a 35% increase over 1998. Sales rose 18% to $51 million in 1998. Medicare Supplement policies are highly regulated at both the federal and state levels with standardized benefit plans, limits on first year agent compensation, and mandated minimum loss ratios. However, they remain a popular supplemental health policy with the country's large and growing group of Medicare beneficiaries. About 85% of all Medicare beneficiaries have Medicare Supplements to cover at least some of the deductibles and coinsurance for which the federal Medicare program does not pay. During the last few years, Torchmark has focused on developing its United American Exclusive Agency to serve this market. Using the Direct Response operation, targeted marketing support and increased agent recruiting have led to increased sales. Because of loss ratio regulation, underwriting margins on Medicare Supplements are less than on Torchmark's life business. However, due to United American's low cost, service-oriented customer service and claims administration, as well as its economies of scale, it is a profitable line of business. Until recently the primary competition for Medicare Supplement sales had come from Medicare health maintenance organizations (HMO's), the managed care alternative to traditional fee-for-service Medicare which eliminated the need for a supplemental policy. However, in the last few years, growing public dissatisfaction with managed care, increased medical cost inflation and increased Federal Government regulatory pressures on Medicare HMO's have caused an increasing number of HMO's to withdraw from the market, reducing that competition. Other regulatory issues continue to affect the Medicare Supplement market. Medical cost inflation and changes to the Medicare program cause the need for annual rate increases, which generally require state insurance department approval. In addition, Congress and the Federal Administration have begun studying ways to restructure the Medicare program in the future as it is anticipated that the program could be insolvent within the next decade. This would occur because of the growth in the number of "baby boomers" becoming eligible for Medicare during that period and increasing medical cost inflation generally due to increased utilization. Therefore, it is likely that changes will be made to the Medicare program at sometime in the future. However, regardless of proposed changes, it appears that there will continue to be an important role for private insurers in helping senior citizens cover their healthcare costs. As a result, Medicare Supplements should continue as a popular product for senior-age consumers. 25 Cancer insurance premium in force grew 6% in 1999 to $154 million, compared with 5% growth in 1998. Sales of this product rose 4% in 1999 to $11 million from $10 million. Sales in 1997 were also $11 million. Growth in cancer annualized premium in force has been partially attributable to premium rate increases to offset increased health care costs. Cancer insurance products are sold primarily by the Liberty National Exclusive Agency. This agency represented 85% of Torchmark's total cancer annualized premium in force at December 31, 1999. Annualized premium in force for other health products gained 1% in 1999 to $100 million, after declining 4% in 1998. Other health sales rose 13% in 1999 to $30 million, after having declined 15% in 1998. HEALTH INSURANCE Summary of Results (Dollar amounts in thousands)
1999 1998 1997 ----------------- ----------------- ----------------- % of % of % of Amount Premium Amount Premium Amount Premium -------- ------- -------- ------- -------- ------- Premium.................. $824,816 100.0% $759,910 100.0% $739,485 100.0% Policy obligations....... 535,901 65.0 482,496 63.5 462,967 62.6 Required reserve inter- est..................... (17,383) (2.1) (20,440) (2.7) (21,644) (2.9) -------- ----- -------- ----- -------- ----- Net policy obligations... 518,518 62.9 462,056 60.8 441,323 59.7 Commissions and premium taxes................... 84,913 10.3 87,828 11.5 87,069 11.8 Amortization of acquisi- tion costs.............. 64,046 7.8 59,208 7.8 58,473 7.9 Required interest on de- ferred acquisition costs................... 12,707 1.5 11,373 1.5 11,080 1.5 -------- ----- -------- ----- -------- ----- Total expense........... 680,184 82.5 620,465 81.6 597,945 80.9 -------- ----- -------- ----- -------- ----- Insurance underwriting income before other income and administrative expenses. $144,632 17.5% $139,445 18.4% $141,540 19.1% ======== ===== ======== ===== ======== =====
Health insurance underwriting income before other income and administrative expense rose 4% in 1999 to $145 million, after having declined 1% in 1998. As a percentage of premium, underwriting income before other income and administrative expense declined 1% in both of the years 1999 and 1998 from the prior year, respectively. Margins have lagged premium growth because of higher obligation costs. Medicare Supplement margins are restrained by the federally mandated minimum loss ratio of 65% and by competition. Cancer obligation ratios have increased in each year because of healthcare inflationary pressures. To the extent management is able to obtain timely and adequate premium rate increases from regulatory authorities to offset these cost increases, margins may be stabilized on cancer business. Torchmark continues to seek such rate increases. 26 Annuities. Annuity products are marketed by Torchmark to service a variety of needs, including retirement income and long-term, tax-deferred growth opportunities. Torchmark's annuities are sold almost entirely by the United Investors Agency. This Agency consists of the Waddell & Reed sales force which markets United Investors annuities and other products under a marketing agreement. In 1999, this Agency collected $403 million of Torchmark's total $464 million in annuity collections, or 87%. The United Investors Agency accounted for almost 99% of total annuity policy charges in 1999. Annuities are also marketed by the United American Independent Agency, which collected $56 million in annuity deposits in 1999. Annuities are sold on both a fixed and variable basis. Fixed annuity deposits are held and invested by Torchmark and are obligations of the company. Variable annuity deposits are invested at the policyholder's direction into his choice among a variety of mutual funds managed by Waddell & Reed, which vary in degree of investment risk and return. A fixed annuity investment account is also available as a variable annuity investment option. Investments pertaining to variable annuity deposits are reported as "Separate Account Assets" and the corresponding deposit balances for variable annuities are reported as "Separate Account Liabilities." Annuity premium is added to the annuity account balance as a deposit and is not reflected in income. Revenues on both fixed and variable annuities are derived from charges to the annuity account balances for insurance risk, administration, and surrender, depending on the structure of the contract. Variable accounts are also charged an investment fee and a sales charge. Torchmark benefits to the extent these policy charges exceed actual costs and to the extent actual investment income exceeds the investment income which is credited to fixed annuity policyholders. The following table presents the annuity account balance at each year end and the annuity collections for each year for both fixed and variable annuities, excluding Family Service.
Annuity Deposit Balances Annuity Collections -------------------------- -------------------------- (Dollar amounts in (Dollar amounts in millions) thousands) 1999 1998 1997 1999 1998 1997 -------- -------- -------- -------- -------- -------- Fixed..................... $ 677.5 $ 647.3 $ 611.0 $ 71,696 $ 64,687 $ 76,930 Variable.................. 3,274.9 2,343.5 1,821.2 392,769 299,005 247,446 -------- -------- -------- -------- -------- -------- Total.................... $3,952.4 $2,990.8 $2,432.2 $464,465 $363,692 $324,376 ======== ======== ======== ======== ======== ========
Collections of fixed annuity premium were $72 million in 1999, compared with $65 million in 1998, an increase of 11%. Fixed annuity premium collections declined 16% in 1998 from $77 million in 1997. Management believes that the interest-rate environment is a primary factor in the sales of fixed annuities. The low-interest rate environment of 1998 contributed to the lower sales as alternative investments grew more attractive. In 1999, as interest rates increased, fixed annuities became more desirable relative to alternative investments. The fixed annuity deposit balance increased 5% in 1999 to $677 million at year end. It rose 6% in the prior year from $611 million at year- end 1997 to $647 million at the end of 1998. During 1998, Torchmark sold Family Service, a wholly-owned provider of funeral preneed annuities. While the sale of these preneed annuities had been discontinued in 1995, this block of fixed annuities remained on deposit until Family was sold. At the date of sale, this deposit balance was approximately $396 million. Variable annuity collections were $393 million in 1999, increasing 31% over the prior year. Variable collections rose 21% to $299 million in 1998. The strength in financial markets has had a positive influence on sales of variable annuities in all of the years 1997 through 1999. The variable annuity account balance continues to experience rapid growth. The variable account balance rose 40% in 1999 from $2.3 billion at December 31, 1998 to $3.3 billion at year-end 1999. This balance had previously increased 29% in 1998 and 32% in 1997. Strong financial markets in all of these periods contributed greatly to the growth. Variable accounts are valued based on the market values of the underlying securities. The additional collections in each year also added to the balances. 27 ANNUITIES Summary of Results (Dollar amounts in thousands)
1999 1998 1997 -------- -------- -------- Policy charges................................ $ 40,969 $ 33,594 $ 27,426 Policy obligations............................ 34,524 34,662 34,631 Required reserve interest..................... (40,991) (42,171) (41,551) -------- -------- -------- Net policy obligations...................... (6,467) (7,509) (6,920) Commissions and premium taxes................. 759 510 710 Amortization of acquisition costs............. 13,310 11,561 9,660 Required interest on deferred acquisition costs........................................ 6,536 5,609 4,951 -------- -------- -------- Total expense............................... 14,138 10,171 8,401 -------- -------- -------- Insurance underwriting income before other income and administrative expenses, excluding Family Service...................................... 26,831 23,423 19,025 Family Service insurance underwriting income before other income and administrative expenses..... -0- 98 305 -------- -------- -------- Insurance underwriting income before other income and administrative expenses.................. $ 26,831 $ 23,521 $ 19,330 ======== ======== ========
Annuity underwriting income excluding Family Service and before other income and administrative expense has grown steadily throughout each of the years 1997 through 1999, increasing 15% to $27 million in 1999 and 23% to $23 million in 1998 over the respective prior year. Policy charges have also grown in each period, rising 22% in both 1999 and 1998. Growth in policy charges is primarily related to the growth in the size of the account balance, but is also attributable to the increase in the number of annuity contracts in force and the cumulative effect of the growth in sales over the past few years upon which the sales charge is based. Investments. The following table summarizes Torchmark's investment income and excess investment income. Analysis of Excess Investment Income (Dollar amounts in thousands)
1999 1998 1997 ---------- ---------- ---------- Net investment income.................. $ 447,337 $ 459,558 $ 429,116 Tax equivalency adjustment............. 11,487 11,143 9,951 ---------- ---------- ---------- Tax equivalent investment income...... 458,824 470,701 439,067 Required interest on net insurance policy liabilities: Interest on reserves.................. (287,661) (296,696) (308,632) Interest on deferred acquisition costs................................ 110,655 103,481 100,096 ---------- ---------- ---------- Net required........................ (177,006) (193,215) (208,536) Financing costs........................ (66,431) (71,367) (87,055) ---------- ---------- ---------- Excess investment income............... $ 215,387 $ 206,119 $ 143,476 ========== ========== ========== Mean invested assets (at amortized cost)................................. $6,319,465 $6,353,279 $6,058,037 Average net insurance policy liabilities........................... 3,066,351 3,261,982 3,468,702 Average debt (including MIPS).......... 965,728 1,000,063 1,062,543
28 Excess investment income represents the profit margin attributable to investment operations and cash flow management. It is defined as tax- equivalent investment income reduced by the interest cost credited to net policy liabilities and the interest cost associated with capital funding or "financing costs." Excess investment income is increased in a number of ways: an increase in investment yields over the rates credited to policyholders' liabilities or in relationship to the rates applicable to Torchmark debt, growth in invested assets in relation to policy liabilities and debt, and the efficient use of capital resources and cash flow. Net investment income declined 3% in 1999 to $447 million after rising 7% to $460 million in 1998 and 7% to $429 million in 1997. On a tax-equivalent basis, in which the yield on tax-exempt securities is adjusted to produce a yield equivalent to the pretax yield on taxable securities, investment income declined 3% in 1999 after rising 7% in both 1998 and 1997. The 1999 decline in investment income was a result of the sale of Family Service in the second quarter of 1998 and repurchases of Torchmark Stock since late 1998. The Family Service sale resulted in the investment of approximately $140 million proceeds, producing an additional $10 million of investment income in 1999, compared with incremental investment income of $6 million in 1998. However, the 1998 tax-equivalent net investment income also included $22 million earned on Family Service assets which were not includable in 1999. The Family Service sale also negatively impacted 1998 net investment income as 1997 tax- equivalent net investment income included $54 million on Family Service assets held for the entire year. Mean invested assets, computed based on book values, were flat in 1999, compared with the year 1998. The growth in 1999 invested assets from reinvested cash flows were essentially offset by the loss of Family Service's $778 million in invested assets when compared with the prior year. In spite of the loss of Family Service's invested assets in 1998, mean invested assets increased 5% during 1998 over the prior year. This increase was largely due to the receipt of $481 million in proceeds from the Waddell & Reed stock offering in early 1998, offset to some extent by the sale of investments to repay debt and to acquire Torchmark stock. Excess investment income increased 5% in 1999 and 44% in 1998 because the increases in excess investment income were greater than the growth in net investment income. While the 1998 sale of Family Service caused a reduction in 1998 and 1999 investment income, it had little effect on excess investment income comparisons in either 1999 or 1998. The reduction in required interest on Family Service's policy liabilities offset the loss in investment income. The 1999 increase in excess investment income resulted primarily from decreased financing costs. The $63 million increase in 1998 excess investment income resulted primarily from the proceeds of the Waddell & Reed offering which provided Torchmark with additional funds to invest or to apply to outstanding debt. Additionally, there was $7 million of interest income on an internal financing with Waddell & Reed included in 1998 income. Also in 1998, Torchmark essentially refinanced $380 million principal amount of its long- term debt with either short-term debt or with sales of lower-yielding investments, saving an average of 350 basis points in 1998 financing costs. During 1999, Torchmark entered into two transactions to dispose of the majority of its investment real estate. The first transaction closed in July, 1999 and the other closed in October, 1999. Total consideration for the combined transactions was $123 million of which $111 million was cash. The real estate dispositions resulted in an after-tax loss of $41 million. After the sales, Torchmark retained $16 million in investment real estate, of which $8 million was represented by properties partially occupied by Torchmark subsidiaries. In addition to the real estate capital losses, Torchmark has also generated $19 million in after-tax losses during 1999 from the planned sale of fixed maturities. These losses allowed Torchmark to carry back and recover capital gains taxes paid in prior years. Realized losses also included a $12 million after-tax loss from the decline in market value on the interest-rate swap associated with Torchmark's MIPS, discussed in more depth under the caption Capital Resources found on page 33 of this discussion. With the steady increase in interest rates during 1999, new investments of corporate bonds afforded higher returns each successive quarter, and the 1999 average yield on fixed maturity purchases was the highest it had been since 1992. Acquisitions in fixed maturity securities totaled $2.1 billion in 1999 and $1.8 billion in 1998. The 1999 acquisitions were made at an effective compounded yield of 7.54%, compared with an effective compounded yield of 7.26% for the prior year. The yields equate to nominal yields on acquisitions of 7.38% and 7.13% for 1999 and 1998, respectively. 29 During 1999, the yield curve "flattened" with short-term yields approaching long-term yields. In fact, the yield curve "inverted" in early 2000, with short-term yields exceeding long-term yields. This flattening allowed the purchase of new investments at higher yields with shorter maturities as compared with 1998. The average life of acquired securities was 14.9 years in 1999, compared with 20.7 years in 1998 and 13.3 years in 1997. In the fourth quarter of 1999, the average life of acquired securities was 8.8 years. Although 1999 acquisitions were made at a higher average yield than in the past six years, the new investment yield was slightly below the average yield of the portfolio, resulting in a 3 basis point decline in the nominal portfolio yield at year-end 1999. At December 31, 1999, the fixed-maturity portfolio had an estimated nominal yield of 7.39%, compared with 7.42% in 1998 and 7.49% in 1997. The average life of the portfolio was 12.7 years at year- end 1999, increasing from 8.8 years at year-end 1998 and 8.0 years at the year-end 1997. Duration also rose at 1999 year end to 6.2 years from the 5.7 year level at the end of 1998 and 5.1 year level at the end of 1997. The increase in average life and duration was impacted primarily by the purchase of securities with longer maturities than the prior year average maturity. Emphasis continues to be on marketable, high and medium quality investments. Approximately 92% of invested assets are fixed-maturity securities, and 94% of these holdings are rated investment grade by Standard & Poor's. The NAIC considers 95% of the portfolio investment grade. While the portfolio is highly marketable, its value fluctuates with changes in interest rates. The portfolio's unrealized loss of $275 million at year-end 1999 compares with unrealized gains of $249 million and $213 million at year ends 1998 and 1997, respectively. A considerable portion of the portfolio is expected to repay or mature within the next several years, as indicated by the following table.
1999 1998 ----- ----- Short terms and under 1 year................................ 4.2% 7.8% 2-5 years................................................... 13.6 23.8 6-10 years.................................................. 39.7 31.8 11-15 years................................................. 11.0 9.0 16-20 years................................................. 5.8 3.8 Over 20 years............................................... 25.7 23.8 ----- ----- 100.0% 100.0% ===== =====
Because Torchmark emphasizes fixed-maturity investments, the percentage holdings of Torchmark's investments by type vary considerably from industry averages. The following table presents Torchmark's components of invested assets compared with the latest industry data:
Torchmark -------------------- Amount Industry % (in thousands) % (1) -------------- ----- ---------- Bonds & short terms......................... $5,779,982 93.3% 74.5% Equities.................................... 29,189 .5 5.0 Mortgage loans.............................. 94,599 1.5 11.5 Real estate................................. 16,379 .3 1.5 Policy loans................................ 244,607 4.0 5.6 Other invested assets....................... 23,054 .4 1.9 ---------- ----- ----- $6,187,810 100.0% 100.0% ========== ===== =====
- -------- (1) Latest data available from the American Council of Life Insurance. 30 Market Risk Sensitivity. Market risk is a risk that the value of a security will change because of a change in market conditions. Torchmark's primary exposure to market risk is interest rate risk which is the risk that a change in a security's value could occur because of a change in interest rates. This risk is significant to Torchmark's investment portfolio because its fixed- income holdings amount to 92% of total investments. The effects of these interest rate fluctuations on fixed investments are reflected on an after-tax basis in Torchmark's shareholders' equity because these investments are marked to market. The actual interest rate risk to Torchmark is reduced because the effect that changes in rates have on assets is offset by the effect they have on insurance liabilities and on debt. Interest assumptions are used to compute the majority of Torchmark's insurance liabilities. These liabilities, net of deferred acquisition costs, were $3.4 billion at December 31, 1999, compared with fixed-income investments of $6.0 billion at amortized cost at the same date. Because of the long-term nature of insurance liabilities, temporary changes in value caused by rate fluctuations have little bearing on ultimate obligations. These liabilities are not marked to market. Market risk is managed in a manner consistent with Torchmark's investment objectives. Torchmark seeks to maintain a portfolio of high-quality fixed- maturity assets that may be sold in response to changing market conditions. A significant change in the level of interest rates, changes in credit quality of individual securities, or changes in the relative values of a security or asset sector are the primary factors that influence such sales. Occasionally, the need to raise cash for various operating commitments may also necessitate the sale of a security. Volatility in the value of Torchmark's fixed-income holdings is reduced by maintaining a relatively short-term portfolio, of which 18% matures within five years and 58% matures within ten years. Also, the portfolio and market conditions are constantly evaluated for appropriate action. No derivative instruments are used to manage Torchmark's exposure to market risk in the investment portfolio. An interest-rate swap instrument was entered into to allow Torchmark to participate in the downward trend in interest rates in connection with its MIPS as discussed in the Notes to the Consolidated Financial Statements on page 64 of this report and in Capital Resources on page 33 of this report. A cap instrument was also entered into to protect Torchmark from the market risk on an increase in rates associated with the swap on this security. This cap expired during 1999. The liability for Torchmark's insurance policy obligations is computed using interest assumptions, some of which are contractually guaranteed. A reduction in market interest rates of a permanent nature could cause investment return to fall below amounts guaranteed. Torchmark's insurance companies participate in the cash flow testing procedures imposed by statutory insurance regulations, the purpose of which is to insure that such liabilities are adequate to meet the company's obligations under a variety of interest rate scenarios. Those procedures indicate that Torchmark's insurance policy liabilities, when considered in light of the assets held with respect to such liabilities and the investment income expected to be received on such assets, are adequate to meet the obligations and expenses of Torchmark's insurance activities in all but the most extreme circumstances. The following table illustrates the market risk sensitivity of Torchmark's interest-rate sensitive fixed-maturity portfolio at December 31, 1999 and December 31, 1998. 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 is prepared through a model that measures 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 would 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 At At basis December 31, December 31, points) 1999 1998 -------- ------------ ------------ -200 $6,455 $6,476 -100 6,055 6,108 0 5,680 5,768 100 5,332 5,450 200 5,012 5,147
31 FINANCIAL CONDITION Liquidity. Torchmark's liquidity relates to its ability to meet on demand the cash commitments required by its business operations and financial obligations. Torchmark's liquidity is very strong, as evidenced by its three sources of liquidity: its positive cash flow from operations, its portfolio of marketable securities, and its line of credit facility. Torchmark's insurance operations generate positive cash flows in excess of its immediate needs. Cash flows provided from operations were $512 million in 1999, compared with $389 million in 1998 and $410 million in 1997. In addition to operating cash flows, Torchmark received $413 million in investment maturities and repayments during 1999, adding to available cash flows. Such repayments were $474 million in 1998 and $513 million in 1997. Cash flows in excess of immediate requirements are used to build an investment base to fund future requirements. Torchmark's cash and short-term investments were $115 million at December 31, 1999, compared with $81 million at year-end 1998. In addition to these highly liquid assets, Torchmark has a portfolio of marketable fixed and equity securities, which are available for sale should the need arise. These securities had a value of $5.7 billion at December 31, 1999. Torchmark has a line of credit facility with a group of lenders which allows unsecured borrowings up to a specified maximum amount. The maximum amount on this facility was $600 million at December 31, 1999. Interest is charged at variable rates for borrowings. This line of credit is further designated as a backup credit line for a commercial paper program not to exceed $600 million, whereby Torchmark may borrow from either the credit line or issue commercial paper at any time but may not borrow in excess of a total of $600 million on the combined facilities. At December 31, 1999, $420 million in face amount of commercial paper was outstanding and there were no borrowings on the line of credit. A fee is charged on the entire $600 million facility. In accordance with the agreements, Torchmark is subject to certain covenants regarding capitalization and earnings. At December 31, 1999, Torchmark was in full compliance with these covenants. Liquidity of the parent company is affected by the ability of the subsidiaries to pay dividends. Dividends are paid by subsidiaries to the parent in order to meet its dividend payments on common and preferred stock, interest and principal repayment requirements on parent-company debt, and operating expenses of the parent company. These requirements have declined in both 1999 and 1998 from the respective prior year. 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 approval. Distributions are not permitted in excess of statutory net worth. Subsidiaries are also subject to certain minimum capital requirements. Although these restrictions exist, dividend availability from subsidiaries has been and is expected to be more than adequate for parent company operations. During the year 2000, a maximum amount of $192 million will be available to Torchmark from insurance subsidiaries without regulatory approval. Capital Resources. Torchmark's capital structure consists of long and short- term debt, MIPS, and shareholders' equity. Torchmark's debt consists primarily of its funded debt and its commercial paper facility. An analysis of Torchmark's funded debt outstanding at year-ends 1999 and 1998 on the basis of par value was as follows:
1999 1998 ------------- ------------- Principal Principal Year Amount Amount Instrument Due Rate ($ thousands) ($ thousands) ---------- ---- ----- ------------- ------------- Senior Debentures..................... 2009 8 1/4 $ 99,450 $ 99,450 Notes................................. 2023 7 7/8 200,000 200,000 Notes................................. 2013 7 3/8 100,000 100,000 -------- -------- Total funded debt..................... 399,450 399,450 Debt held by subsidiaries............. (22,318) (10,828) -------- -------- Long-term debt........................ $377,132 $388,622 ======== ========
32 The carrying value of the funded debt was $372 million at December 31, 1999, compared with $383 million a year earlier. Through its insurance subsidiaries, Torchmark has reacquired a portion of its funded debt in the open market. In 1999, $7.5 million principal amount of its 7 7/8% Notes due 2023 were acquired at a cost of $7.9 million. Also in 1999, $4.0 million principal amount of its 7 3/8% Notes due 2013 were purchased for $4.1 million. In 1998, Torchmark bought $10.8 million of its 7 7/8% Notes at a price of $10.6 million. Insurance company holdings in the funded debt reduce consolidated debt outstanding. During 1998, Torchmark received approximately $481 million in intercompany note repayments from Waddell & Reed as a result of their initial public offering. Torchmark utilized a portion of these funds to pay down funded debt. It also took advantage of the lower interest rate environment in 1998 to refinance existing funded debt at lower short-term rates. In early 1998, Torchmark repaid $20 million principal amount on its 8 5/8% Sinking Fund Debentures due in 2017, of which $8 million was a mandatory redemption and $12 million was an optional repayment under the terms of the agreement. On April 1, 1998, Torchmark called the remaining $160 million principal balance of this debt at the prevailing call price of 103.76, or $166 million. A loss on the redemption of debt was recorded in the second quarter of 1998 in the after-tax amount of $5 million, representing the difference between the total call price and the carrying value of $158 million. In addition to the call, Torchmark's 9 5/8% Senior Notes, principal amount $200 million, matured on May 1, 1998. Torchmark borrowed on its commercial paper facility to repay the Sinking Fund Debentures that were called and to repay its Senior Notes upon maturity with accrued interest, in the combined amount of $377 million. During 1997, Torchmark repaid $20 million principal amount on its Sinking Fund Debentures due in 2017, of which $8 million was a mandatory redemption and $12 million was an optional repayment under the terms of the agreement. The MIPS were issued in November, 1994 at a redemption amount of $200 million with an annual dividend rate of 9.18%. They are subject to a mandatory redemption in full at September 30, 2024, although Torchmark may elect to extend the MIPS for up to an additional 20 years if certain conditions are met. They are currently redeemable at Torchmark's option at any time. While Torchmark is obligated to pay dividends at a fixed rate of 9.18%, Torchmark has in place a ten-year interest-rate swap agreement with an unaffiliated party. The swap agreement calls for Torchmark to pay a variable rate on the $200 million face amount in exchange for payment of the fixed dividend by the other party. The swap expires in 2004. Torchmark is at risk on this instrument for higher financing costs to the extent interest rates rise during the remaining term. At December 31, 1999, the variable rate was 7.0%. During 1999, Torchmark's after-tax dividend cost for the MIPS was $9.2 million, compared with $11.9 million that would have been incurred without the swap. Torchmark's after-tax cost in 1998 was $9.8 million and in 1997 was $9.9 million, saving $2.1 million and $2.0 million in each of those years, respectively. Effective January 1, 1999, Torchmark changed its method of accounting for the swap agreement to recognize changes in its fair value, net of tax, as realized investment gains or losses. This method of accounting for such instruments was believed to be preferable under the guidance established by Statement of Financial Accounting Standards No. 80, Accounting for Futures Contracts ("SFAS 80") and the Securities and Exchange Commission. Previously, Torchmark accounted for the swap using hedge accounting under SFAS 80. The after-tax cumulative effect of the change at January 1, 1999 was $16.1 million (net of income taxes of $8.7 million). The effect of the change on the twelve months ended December 31, 1999 was to increase realized losses by $11.7 million ($.09 per diluted share), excluding the cumulative effect of the change in accounting principal. Market value of the swap at December 31, 1999 was $6.7 million. During July, 1999, Torchmark filed with the Securities and Exchange Commission a Form S-3 Registration Statement for the shelf registration of capital securities in an aggregate face amount of $300 million. Proceeds from the issuance of any such capital securities could be used for the possible purchase of Torchmark securities, for working capital, for the repayment of debt, for acquisitions, or for any other general corporate purpose or business opportunity. 33 Short-term debt consists primarily of Torchmark's commercial paper outstanding. The commercial paper balance outstanding at December 31, 1999 was $418 million at carrying value, compared with a balance of $355 million a year earlier. The commercial paper borrowing balance fluctuates based on Torchmark's current cash needs. As previously noted, Torchmark essentially refinanced $360 million face amount of funded debt in 1998 with additional short-term borrowings. These borrowings were offset somewhat by the use of $82 million in Waddell & Reed offering proceeds for repayment. Total debt as a percentage of total capitalization was 25% at December 31, 1999. In the computation of this ratio, the MIPS are counted as equity and the effect of fluctuations in security values based on changes in interest rates in financial markets are excluded. This debt-to-capitalization ratio was 24% at year-end 1998 and 31% at year-end 1997. The increase in the debt-to- capitalization ratio at year-end 1999 was caused by the increase in short-term borrowings. The 1998 decline in this ratio resulted primarily from the funded debt paydowns, net of the increase in short-term debt. The debt-to- capitalization ratio was also favorably impacted by the net increase in Torchmark's shareholders' equity resulting from the Waddell & Reed offering and spin-off. Torchmark's ratio of earnings before interest, taxes and discontinued operations to interest requirements was 8.7 in 1999, compared with 8.9 in 1998 and 6.5 in 1997. Torchmark's interest expense declined 7% to $52 million in 1999, largely as a result of lower average debt than in 1998. There was also a larger proportion of short-term debt in 1999 compared with the prior year, resulting in lower borrowing costs. In 1998, interest expense declined 22% to $56 million primarily because of the funded debt paydowns. Torchmark resumed its share buyback program in November, 1998 after completion of the Waddell & Reed spin-off. Torchmark purchased 6.7 million shares on the open market at a cost of $222 million in 1999. Purchases of 3.4 million shares were made in late 1998 at a cost of $126 million. During 1997, Torchmark acquired 5.2 million shares at a cost of $183 million. Torchmark will continue to make share purchases under its share repurchase program on the open market when prices are attractive. Share purchases could have a favorable impact on earnings per share and return on equity, but negatively affect book value per share. On November 15, 1999, Torchmark executed a stock option exercise and restoration program through which 80 Torchmark directors and employees exercised vested stock options and received a reduced number of replacement options at the current market price. This program resulted in the issuance of 1.8 million shares, but over 1.3 million of the new shares were immediately sold by the directors and employees through the open market to cover the cost of the purchased shares and the related taxes. As a result of the restoration program, management's ownership interest increased, and Torchmark received a significant current tax benefit from the exercise of the options. Shareholders' equity declined 12% to $1.99 billion at December 31, 1999. Shareholders' equity rose 17% in 1998, from $1.93 billion at year-end 1997 to $2.26 billion at year-end 1998. The 1999 decrease was impacted by the decrease in the value of the fixed-maturity portfolio due to increases in interest rates in the financial markets. The 1998 growth in shareholders' equity was greatly impacted by the Waddell & Reed offering and spin-off in that year. Proceeds from the March, 1998 offering added $516 million to Torchmark's shareholders' equity, but equity was reduced by $90 million of minority interest at the time of the offering representing the 36% of Waddell & Reed that Torchmark no longer owned. Additionally, the November, 1998 spin-off caused a reduction in Torchmark's equity of $174 million, representing its carrying value of Waddell & Reed at the time of the spin. Book value per share was $15.10 at 1999 year end, compared with $16.51 at year-end 1998. After adjusting for the impact on shareholders' equity for security value fluctuations due to changes in interest rates in financial markets, shareholders' equity rose from $2.11 billion at year-end 1998 to $2.15 billion at year-end 1999. Book value per share was $16.32 at year-end 1999, an increase of 6% over $15.43 at year-end 1998. Return on common shareholders' equity was 16.2% in 1999, compared with 15.1% in 1998. The return-on-equity ratios exclude the mark up or down of shareholders' equity for changes in security values caused by fluctuations in market interest rates. They are also computed on a basis of net operating income before nonrecurring charge, as defined on page 16 through 17 of this report. 34 OTHER ITEMS Transactions Regarding Vesta Insurance Group. Since 1993, Torchmark has held a passive investment in Vesta, a property insurance carrier. Torchmark held 5.1 million shares of Vesta stock, or approximately 28% of the outstanding shares of Vesta, until December, 1998. Torchmark carried its investment in Vesta during this period on the equity method of accounting. In June, 1998, Vesta announced that (a) an investigation of accounting irregularities that occurred during the fourth quarter of 1997 and the first quarter of 1998 would result in an aggregate $14 million net after-tax reduction in previously reported net income, and, in addition, that (b) it would restate its historical financial statements for the period of 1993 through the first quarter of 1998, reflecting reductions in reported net after-tax earnings of $49 million for the period of 1993 through 1997 and $10 million for the first quarter of 1998. To reflect its pro rata share of Vesta's cumulative reported financial corrections, Torchmark recorded a pre-tax charge of $20 million ($13 million after tax) or $.09 per diluted share in the second quarter of 1998. As a result of the announcements relating to Vesta and the decline in value of Vesta stock, Vesta is currently subject to numerous class action lawsuits in state and Federal courts filed subsequent to such announcements. In the fourth quarter of 1998, Torchmark announced its intention to dispose of its holdings in Vesta and to sell Vesta shares under satisfactory terms. In December, 1998, Torchmark sold 680 thousand Vesta shares at a price of $4.75 per share, recording a loss of $3 million after tax. In 1999, Vesta filed a registration statement with the Securities and Exchange Commission for the public offering of its shares held by Torchmark. To facilitate the registration of Vesta shares, Torchmark reacquired the previously sold 680 thousand shares at a price of $5 per share. On November 5, 1999, the registration statement was filed by Vesta to offer all of Torchmark's holdings in Vesta. Because of its intention to dispose of Vesta, Torchmark wrote its carrying value of Vesta down to net realizable amount effective September 30, 1998. The adjustment produced an after-tax realized loss of $24 million, or $.17 per diluted Torchmark share. Net realizable value was $32 million at December 31, 1998. During 1998, Torchmark recorded a pretax loss of $27 million ($18 million after tax or $.13 per diluted share) on Vesta operations, including its pro rata share of Vesta's cumulative accounting corrections. During the first quarter of 1999, the two Torchmark directors who occupied seats on the Vesta Board of Directors resigned from those Vesta seats. Due to the vacating of the Vesta board seats and the absence of significant influence regarding Vesta, Torchmark discontinued the equity method of accounting for Vesta and has included Vesta in equity securities at market value subsequent to December 31, 1998. Torchmark carried Vesta at a value of $20 million at December 31, 1999. Litigation. Torchmark and its subsidiaries continue to be named as parties to pending or threatened litigation, most of which involves punitive damage claims based upon allegations of agent misconduct at Liberty National 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. It is impossible to predict the extent of punitive damages that may be awarded if liability is found in any given case, 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. 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 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. 35 NEW ACCOUNTING RULES Accounting for Derivative Instruments and Hedging Activities (FASB Statement No. 133), as amended by FASB Statement No. 137, is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000, with earlier application of all of the provisions of this statement encouraged. Early adoption of selective provisions is prohibited. Prior periods may not be restated for comparability. This statement establishes standards for the accounting and reporting of derivative instruments. It requires that all derivatives be recognized as assets or liabilities on the balance sheet and be measured at fair value. Changes in the values of derivatives for the reporting period are reflected as adjustments to earnings through realized gains and losses. If certain conditions are met, a derivative may be designated as a hedge against exposure to market risks of other instruments or commitments, cash flow risks, or foreign currency risks. If a derivative is classified as a hedge, the adjustment to earnings is offset by a corresponding change in the value of the item hedged. Hedging relationships may be designated anew upon adoption of this statement. Management believes that Statement 133 will have an immaterial impact on Torchmark's financial statements. Other than the interest rate swap on its MIPs, which is carried at fair market value, Torchmark's use of derivatives is limited. 36 Item 8. Financial Statements and Supplementary Data
Page ---- Independent Auditors' Reports............................................. 38 Consolidated Financial Statements: Consolidated Balance Sheet at December 31, 1999 and 1998................. 40 Consolidated Statement of Operations for each of the years in the three- year period ended December 31, 1999..................................... 41 Consolidated Statement of Comprehensive Income for each of the years in the three-year period ended December 31, 1999........................... 43 Consolidated Statement of Shareholders' Equity for each of the years in the three-year period ended December 31, 1999........................... 44 Consolidated Statement of Cash Flow for each of the years in the three- year period ended December 31, 1999..................................... 45 Notes to Consolidated Financial Statements............................... 47
37 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Torchmark Corporation Birmingham, Alabama We have audited the accompanying consolidated balance sheet of Torchmark Corporation and subsidiaries as of December 31, 1999, and the related consolidated statements of operations, comprehensive income, shareholders' equity, and cash flow for the year then ended. Our audit also included the financial statement schedules listed in the Index at Item 14 as of and for the year ended December 31, 1999. 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 audit. We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides a reasonable basis for our opinion. In our opinion, such 1999 consolidated financial statements present fairly, in all material respects, the financial position of Torchmark Corporation and subsidiaries as of December 31, 1999, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Also, in our opinion, such 1999 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. DELOITTE & TOUCHE LLP Dallas, Texas January 28, 2000 38 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Torchmark Corporation Birmingham, Alabama We have audited the consolidated financial statements of Torchmark Corporation and subsidiaries as listed in Item 8 as of and for the years ended December 31, 1998 and December 31, 1997. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedules as listed in Item 14(a) as of and for the years ended December 31, 1998 and December 31, 1997. These consolidated financial statements and financial statement schedules are the responsibility of Torchmark's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial statement schedules 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Torchmark Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related 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. KPMG LLP Birmingham, Alabama January 29, 1999 except for Note 18 which is as of February 10, 1999 39 TORCHMARK CORPORATION CONSOLIDATED BALANCE SHEET (Dollar amounts in thousands except per share data)
December 31, ------------------------ 1999 1998 ----------- ----------- Assets: Investments: Fixed maturities--available for sale, at fair value (cost: 1999--$5,954,697; 1998--$5,519,772) ....... $ 5,679,795 $ 5,768,447 Equity securities, at fair value (cost: 1999-- $37,121; 1998--$2,256)............................ 29,189 9,843 Mortgage loans on real estate, at cost (estimated fair value: 1999--$94,716; 1998--$124,191)........ 94,599 124,072 Investment real estate, at cost (less allowance for depreciation: 1999--$19,490; 1998--$40,828)....... 16,379 164,644 Policy loans....................................... 244,607 233,765 Other long-term investments........................ 23,054 35,976 Short-term investments............................. 100,187 75,844 ----------- ----------- Total investments................................. 6,187,810 6,412,591 Cash ............................................... 14,441 4,920 Investment in unconsolidated subsidiaries........... -0- 31,510 Accrued investment income........................... 112,475 99,279 Other receivables................................... 53,458 130,279 Deferred acquisition costs.......................... 1,741,570 1,502,511 Value of insurance purchased........................ 151,752 170,640 Property and equipment, net of accumulated depreciation....................................... 38,761 39,080 Goodwill............................................ 402,584 414,658 Other assets........................................ 15,138 18,298 Separate account assets............................. 3,413,675 2,425,262 ----------- ----------- Total assets...................................... $12,131,664 $11,249,028 =========== =========== Liabilities: Future policy benefits.............................. $ 4,869,241 $ 4,595,567 Unearned and advance premiums....................... 85,344 85,923 Policy claims and other benefits payable............ 215,923 194,965 Other policyholders' funds.......................... 81,919 81,568 ----------- ----------- Total policy liabilities.......................... 5,252,427 4,958,023 Accrued income taxes................................ 309,271 511,311 Other liabilities................................... 179,681 162,831 Short-term debt..................................... 418,394 355,392 Long-term debt (estimated fair value: 1999-- $378,046; 1998--$430,431).......................... 371,555 383,422 Separate account liabilities........................ 3,413,675 2,425,262 ----------- ----------- Total liabilities................................. 9,945,003 8,796,241 Monthly income preferred securities (estimated fair value: 1999--$193,040; 1998-- $205,040)........................................... 193,324 193,259 Shareholders' equity: Preferred stock, par value $1 per share--Authorized 5,000,000 shares; outstanding: -0- in 1999 and in 1998............................................... -0- -0- Common stock, par value $1 per share--Authorized 320,000,000 shares; outstanding: 147,800,908 issued, less 15,804,640 held in treasury in 1999 and 10,951,933 held in treasury in 1998 ........... 147,801 147,801 Additional paid-in capital.......................... 622,318 610,925 Accumulated other comprehensive income (loss)....... (174,222) 144,501 Retained earnings................................... 1,910,487 1,707,933 Treasury stock...................................... (513,047) (351,632) ----------- ----------- Total shareholders' equity........................ 1,993,337 2,259,528 ----------- ----------- Total liabilities and shareholders' equity........ $12,131,664 $11,249,028 =========== ===========
See accompanying Notes to Consolidated Financial Statements. 40 TORCHMARK CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (Amounts in thousands except per share data)
Year Ended December 31, ---------------------------------- 1999 1998 1997 ---------- ---------- ---------- Revenue: Life premium.............................. $1,018,301 $ 959,766 $ 909,992 Health premium............................ 824,816 759,910 739,485 Other premium............................. 40,969 33,954 28,527 ---------- ---------- ---------- Total premium........................... 1,884,086 1,753,630 1,678,004 Net investment income..................... 447,337 459,558 429,116 Realized investment losses................ (110,971) (57,637) (36,979) Other income.............................. 6,443 2,325 962 ---------- ---------- ---------- Total revenue........................... 2,226,895 2,157,876 2,071,103 Benefits and expenses: Life policyholder benefits................ 666,122 625,272 591,867 Health policyholder benefits.............. 535,901 482,496 462,967 Other policyholder benefits............... 34,524 42,508 54,066 ---------- ---------- ---------- Total policyholder benefits............. 1,236,547 1,150,276 1,108,900 Amortization of deferred acquisition costs.................................... 247,800 231,024 224,738 Commissions and premium taxes............. 160,655 143,747 141,296 Other operating expense................... 115,069 117,438 120,233 Amortization of goodwill.................. 12,075 12,075 12,074 Interest expense.......................... 52,341 56,325 71,863 ---------- ---------- ---------- Total benefits and expenses............. 1,824,487 1,710,885 1,679,104 Income from continuing operations before income taxes, equity in earnings of Vesta, extraordinary item, and cumulative effect of change in accounting principle......... 402,408 446,991 391,999 Income taxes............................... (134,320) (154,338) (138,409) Equity in earnings (losses) of Vesta....... -0- (6,866) 16,714 Adjustment to carrying value of Vesta...... -0- (20,234) -0- Monthly income preferred securities dividend (net of tax)..................... (9,158) (9,777) (9,875) ---------- ---------- ---------- Net income from continuing operations... 258,930 255,776 260,429 Discontinued operations of Waddell & Reed: Income from operations (less applicable income tax expense of $42,932 in 1998 and $40,081 in 1997)......................... -0- 47,868 77,314 Loss on disposal (less applicable income tax benefit of $571 in 1999 and including income tax of $49,840 in 1998)........... (1,060) (54,241) -0- ---------- ---------- ---------- Net income before extraordinary item and cumulative effect of change in accounting principle................... 257,870 249,403 337,743 Loss on redemption of debt (less applicable income tax benefit of $2,672)............. -0- (4,962) -0- ---------- ---------- ---------- Net income before cumulative effect of change in accounting principle......... 257,870 244,441 337,743 Cumulative effect of change in accounting principle (less applicable income tax expense of $8,661)........................ 16,086 -0- -0- ---------- ---------- ---------- Net income.............................. $ 273,956 $ 244,441 $ 337,743 ========== ========== ==========
(Continued) See accompanying Notes to Consolidated Financial Statements. 41 TORCHMARK CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS--(Continued) (Amounts in thousands except per share data)
Year Ended December 31, ------------------- 1999 1998 1997 ----- ----- ----- Basic net income per share: Continuing operations..................................... $1.95 $1.83 $1.87 Discontinued operations of Waddell & Reed: Net income from operations............................... -0- .34 .56 Loss on disposal......................................... (.01) (.39) -0- ----- ----- ----- Net income before extraordinary item and cumulative effect of change in accounting principle........................ 1.94 1.78 2.43 Loss on redemption of debt............................... -0- (.03) -0- ----- ----- ----- Net income before cumulative effect of change in accounting principle..................................... 1.94 1.75 2.43 Cumulative effect of change in accounting principle...... .12 -0- -0- ----- ----- ----- Net income.............................................. $2.06 $1.75 $2.43 ===== ===== ===== Diluted net income per share: Continuing operations..................................... $1.93 $1.81 $1.84 Discontinued operations of Waddell & Reed: Net income from operations............................... -0- .34 .55 Loss on disposal......................................... (.01) (.38) -0- ----- ----- ----- Net income before extraordinary item and cumulative effect of change in accounting principle........................ 1.92 1.77 2.39 Loss on redemption of debt............................... -0- (.04) -0- ----- ----- ----- Net income before cumulative effect of change in accounting principle..................................... 1.92 1.73 2.39 Cumulative effect of change in accounting principle...... .12 -0- -0- ----- ----- ----- Net income.............................................. $2.04 $1.73 $2.39 ===== ===== =====
See accompanying Notes to Consolidated Financial Statements. 42 TORCHMARK CORPORATION CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Amounts in thousands)
Year Ended December 31, ----------------------------- 1999 1998 1997 --------- -------- -------- Net income...................................... $ 273,956 $244,441 $337,743 Other comprehensive income: Unrealized investment gains (losses): Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period.............................. (568,398) 54,217 125,820 Reclassification adjustment for (gains) losses on securities included in net income..................................... 29,930 8,519 29,967 Reclassification adjustment for amortization of (discount) and premium.................. (1,266) (2,999) (2,751) Foreign exchange adjustment on securities marked to market........................... (1,159) 1,958 1,373 --------- -------- -------- Unrealized gains (losses) on securities...... (540,893) 61,695 154,409 Unrealized gains (losses) on other investments................................. 81 (7,551) (398) Unrealized gains (losses) on deferred acquisition costs........................... 48,380 (3,092) (13,324) --------- -------- -------- Total unrealized investment gains (losses).. (492,432) 51,052 140,687 Applicable tax.............................. 171,760 (17,524) (49,447) --------- -------- -------- Unrealized investment gains (losses), net of tax.......................................... (320,672) 33,528 91,240 Foreign exchange translation adjustments, other than securities........................ 1,949 (2,081) (1,585) Applicable tax.............................. -0- -0- -0- --------- -------- -------- Foreign exchange translation adjustments, net of tax....................................... 1,949 (2,081) (1,585) Unrealized gains (losses) on discontinued operations................................... -0- (12,100) 1,062 Applicable tax.............................. -0- 4,235 (372) --------- -------- -------- Unrealized gains (losses) on discontinued operations, net of tax....................... -0- (7,865) 690 --------- -------- -------- Other comprehensive income (loss)............... (318,723) 23,582 90,345 --------- -------- -------- Comprehensive income (loss)................. $ (44,767) $268,023 $428,088 ========= ======== ========
See accompanying Notes to Consolidated Financial Statements. 43 TORCHMARK CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Amounts in thousands except per share data)
Accumulated Additional Other Total Preferred Common Paid-in Comprehensive Retained Treasury Shareholders' Stock Stock Capital Income (Loss) Earnings Stock Equity --------- -------- ---------- ------------- ---------- --------- ------------- Year Ended December 31, 1997 Balance at January 1, 1997..... $ -0- $ 73,784 $141,701 $ 46,581 $1,549,391 $(182,114) $1,629,343 Comprehensive income........... 90,345 337,743 428,088 Common dividends declared ($0.585 a share).............. (81,793) (81,793) Two-for-one stock split in the form of a dividend............ 73,784 (73,784) -0- Acquisition of treasury stock-- common........................ (182,903) (182,903) Exercise of stock options...... 281 44,011 (36,776) 130,466 137,982 Grant of discounted options.... 372 372 Grant of deferred options...... 1,647 1,647 ----- -------- -------- --------- ---------- --------- ---------- Balance at December 31, 1997.. -0- 147,849 187,731 136,926 1,694,781 (234,551) 1,932,736 Year Ended December 31, 1998 Comprehensive income........... 23,582 244,441 268,023 Common dividends declared ($0.58 a share)............... (73,304) (73,304) Proceeds from Waddell & Reed initial public offering....... 516,138 516,138 Distribution of Waddell & Reed. (174,113) (174,113) Minority interest--Waddell & Reed initial public offering...................... (90,484) (90,484) Sale of Family Service......... (16,007) 16,007 -0- Acquisition of treasury stock-- common........................ (125,875) (125,875) Grant of deferred stock options....................... 319 319 Grant of restricted stock...... (4,958) 1,428 3,530 -0- Conversion of restricted stock to Waddell & Reed shares...... (48) 48 -0- Expense of restricted stock grants and options............ 865 865 Exercise of stock options...... 1,266 (1,307) 5,264 5,223 ----- -------- -------- --------- ---------- --------- ---------- Balance at December 31, 1998.. -0- 147,801 610,925 144,501 1,707,933 (351,632) 2,259,528 Year Ended December 31, 1999 Comprehensive loss............. (318,723) 273,956 (44,767) Common dividends declared ($0.36 a share)............... (47,739) (47,739) Acquisition of treasury stock-- common........................ (221,878) (221,878) Grant of deferred stock options....................... 482 482 Lapse of restricted stock grant......................... 364 (364) -0- Expense of restricted stock grants and options............ 797 797 Exercise of stock options...... 9,750 (23,663) 60,827 46,914 ----- -------- -------- --------- ---------- --------- ---------- Balance at December 31, 1999.. $ -0- $147,801 $622,318 $(174,222) $1,910,487 $(513,047) $1,993,337 ===== ======== ======== ========= ========== ========= ==========
See accompanying Notes to Consolidated Financial Statements. 44 TORCHMARK CORPORATION CONSOLIDATED STATEMENT OF CASH FLOW (Amounts in thousands)
Year ended December 31, ------------------------------ 1999 1998 1997 -------- --------- --------- Net income..................................... $273,956 $ 244,441 $ 337,743 Adjustments to reconcile net income to cash provided from operations: Increase in future policy benefits........... 206,724 173,593 147,207 Increase (decrease) in other policy benefits. 20,730 (30,593) 10,096 Deferral of policy acquisition costs......... (419,590) (356,493) (328,086) Amortization of deferred policy acquisition costs....................................... 247,800 231,024 224,738 Change in accrued income taxes............... (30,434) 86,670 87,590 Depreciation................................. 8,840 7,934 8,038 Realized (gains) losses on sale of investments, subsidiaries, and properties................ 110,971 57,637 36,979 Change in accounts payable and other liabilities................................. 43,930 3,753 (6,119) Change in receivables........................ 70,119 (20,331) (14,368) Change in payables and receivables of unconsolidated affiliates................... (5,931) 2,021 1,385 Other accruals and adjustments............... 9,245 17,452 (17,825) Adjustment to carrying value of Vesta........ -0- 20,234 -0- Minority interest in income of Waddell & Reed........................................ -0- 20,869 -0- Discontinued operations of Waddell & Reed.... -0- (68,737) (77,314) Change in accounting principle............... (24,747) -0- -0- -------- --------- --------- Cash provided from operations................ $511,613 $ 389,474 $ 410,064 ======== ========= =========
(Continued) See accompanying Notes to Consolidated Financial Statements. 45 TORCHMARK CORPORATION CONSOLIDATED STATEMENT OF CASH FLOW--(Continued) (Amounts in thousands)
Year ended December 31, ------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Cash provided from operations........... $ 511,613 $ 389,474 $ 410,064 Cash provided from (used for) investment activities: Investments sold or matured: Fixed maturities available for sale-- sold................................. 1,240,652 757,649 744,839 Fixed maturities available for sale-- matured, called, and repaid.......... 413,264 474,386 512,512 Equity securities..................... 260 3,056 670 Mortgage loans........................ 26,496 8,589 3,300 Real estate........................... 124,173 12,220 7,341 Other long-term investments........... 11,338 51,903 28,082 ----------- ----------- ----------- Total investments sold or matured... 1,816,183 1,307,803 1,296,744 Acquisition of investments: Fixed maturities--available for sale.. (2,118,362) (1,872,040) (1,668,301) Equity securities..................... (3,400) -0- -0- Mortgage loans........................ (5,421) (52,921) (17,826) Real estate........................... (29,639) (35,944) (24,452) Net increase in policy loans.......... (10,842) (13,445) (14,744) Other long-term investments........... (10,949) (20,298) (6,082) ----------- ----------- ----------- Total investments acquired.......... (2,178,613) (1,994,648) (1,731,405) Net (increase) decrease in short-term investments........................... (24,343) (19,168) (18,067) Funds borrowed from affiliates......... -0- -0- 42,210 Repayment of loans to affiliates....... -0- (1,390) -0- Sale of Family Service................. -0- 140,388 -0- Dispositions of properties............. 8,091 1,033 1,407 Additions to properties................ (8,494) (6,170) (6,204) Dividends from Waddell & Reed.......... -0- 16,814 52,977 ----------- ----------- ----------- Cash used for investment activities..... (387,176) (555,338) (362,338) Cash provided from (used for) financing activities: Issuance of common stock............... 37,164 3,957 93,973 Additions to debt...................... 63,152 216,429 98,185 Cash dividends paid to shareholders.... (48,175) (82,601) (107,097) Repayments of debt..................... (12,129) (390,917) (20,132) Acquisition of treasury stock.......... (221,878) (125,875) (182,903) Proceeds from Waddell & Reed offering.. -0- 516,138 -0- Offering proceeds retained by Waddell & Reed................................ -0- (35,251) -0- Net receipts from deposit product operations............................ 66,950 57,819 78,817 ----------- ----------- ----------- Cash provided from (used for) financing activities............................. (114,916) 159,699 (39,157) Increase (decrease) in cash............ 9,521 (6,165) 8,569 Cash at beginning of year.............. 4,920 11,085 2,516 ----------- ----------- ----------- Cash at end of year.................... $ 14,441 $ 4,920 $ 11,085 =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements. 46 TORCHMARK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars amounts in thousands 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 financial statements have been prepared in conformity with generally accepted accounting principles ("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 financial statements include the results of Torchmark Corporation ("Torchmark") and its wholly-owned subsidiaries. Subsidiaries which are not majority-owned are reported on the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation. 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 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 other comprehensive income. Policy loans are carried at unpaid principal balances. Mortgage loans are carried at amortized cost. Investments in real estate are reported at cost less allowances for depreciation, which are 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 three months. If an investment becomes permanently impaired, such impairment is treated as a realized loss and the investment is adjusted to net realizable value. Gains and losses realized on the disposition of investments are recognized as revenues and 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, 1999, 1998, and 1997, included $287.6 million, $296.7 million, and $308.6 million, respectively, which was allocable to policyholder reserves or accounts. Realized investment gains and losses are not allocable to insurance policyholders' liabilities. 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, including the monthly income preferred securities, is valued based on quoted market prices. Cash: Cash consists of balances on hand and on deposit in banks and financial institutions. Overdrafts arising from the overnight investment of funds offset cash balances on hand and on deposit. Recognition of Premium Revenue and Related Expenses: Premiums for insurance contracts which are not defined as universal life-type according to Statement of Financial Accounting Standards ("SFAS") No. 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 annuity products are also assessed an investment management fee and a sales charge. Life premium includes policy charges of $71.9 million, $71.7 million, and $72.3 million for the years ended December 31, 1999, 1998, and 1997, 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 1--Significant Accounting Policies (continued) respectively. Other premium includes annuity policy charges for the years ended December 31, 1999, 1998 and 1997, of $40.5 million, $33.5 million, and $28.2 million, respectively. Profits are also earned to the extent that investment income exceeds policy 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 appropriate at the time the policies were issued. Assumptions used are based on Torchmark's experience as adjusted to provide for possible adverse deviation. 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. Deferred Acquisition Costs and Value of Insurance Purchased: The costs of acquiring new insurance business are deferred. Such costs consist of sales commissions, underwriting expenses, and certain other selling expenses. The costs of acquiring new business through the purchase of other companies and blocks of insurance business are also deferred. Deferred acquisition costs, including the value of life insurance purchased, for 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. For limited-payment contracts, acquisition costs are amortized over the contract period. For universal life-type policies, acquisition costs are amortized with interest in proportion to estimated gross profits. The assumptions used as to interest, persistency, morbidity and mortality are consistent with those used in computing the liability for future policy benefits and expenses. If it is determined that future experience will probably differ significantly from that previously assumed, the estimates are revised. Deferred acquisition costs are adjusted to reflect the amounts associated with realized and unrealized investment gains and losses pertaining to universal life-type products. Income Taxes: Income taxes are accounted for under the asset and liability method in accordance with SFAS 109. 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. Property and Equipment: Property and equipment 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: Torchmark accounts for impairments in accordance with the provisions of SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This standard requires that certain long-lived assets used in Torchmark's business as well as certain intangible assets, including goodwill, be reviewed for impairment when circumstances indicate that these assets may not be recoverable, and further provides how such impairment shall be determined and measured. It also requires that long- lived assets and intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. Except for Torchmark's writedown of real estate in 1999, as discussed in Note 3--Investments on page 53 of this report, and Torchmark's writedown of its investment in Vesta Insurance Group ("Vesta") in 1998, as discussed in Note 20--Related Party Transactions on page 79 of this report, there were no significant impairments in the three years ending 1999. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 1--Significant Accounting Policies (continued) Goodwill: The excess cost of businesses acquired over the fair value of their net assets is reported as goodwill and is amortized on a straight-line basis over a period not exceeding 40 years. Torchmark's unamortized goodwill is periodically reviewed to ensure that conditions are present to indicate the recorded amount of goodwill is recoverable from the estimated future profitability of the related business. If events or changes in circumstances indicate that future profits will not be sufficient to support the carrying amount of goodwill, goodwill would be written down to the recoverable amount and amortized over the original remaining period or a reduced period if appropriate. 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. Reclassifications: Certain amounts in the 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 during the periods involved. Litigation: Torchmark and its subsidiaries continue to be named as parties to legal proceedings. Because much of Torchmark's litigation is brought in Alabama, a jurisdiction known for large punitive damage verdicts bearing little or no relationship to actual damages, the ultimate outcome of any particular action cannot be predicted. It is reasonably possible that changes in the expected outcome of these matters could occur in the near term, but such changes should not be material to Torchmark's reported results or financial condition. Stock Split: On August 1, 1997, Torchmark distributed one share for every one share owned by shareholders of record as of July 1, 1997 in the form of a stock dividend. The dividend was accounted for as a stock split. Earnings Per Share: Torchmark presents basic and diluted earnings per share ("EPS") on the face of the income statement and a reconciliation of basic EPS to diluted EPS. Basic EPS is computed by dividing income available to common stockholders by the weighted average common shares outstanding for the period. Weighted average common shares outstanding for each period are as follows: 1999--133,197,023, 1998--139,998,671, 1997--139,202,354. Diluted EPS is calculated by adding to shares outstanding the additional net effect of potentially dilutive securities or contracts which could be exercised or converted into common shares. Weighted average diluted shares outstanding for each period are as follows: 1999--133,985,943, 1998--141,351,912, 1997-- 141,431,156. Comprehensive Income: Torchmark adopted SFAS 130, Reporting Comprehensive Income, effective January 1, 1998. This standard defines comprehensive income as the change in equity of a business enterprise during a period from transactions from all nonowner sources. It requires the company to display comprehensive income for the period, consisting of net income and other comprehensive income. In compliance with SFAS 130, a Consolidated Statement of Comprehensive Income is included as an integral part of the financial statements. 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 2--Statutory Accounting 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 on a statutory basis for the insurance subsidiaries were as follows:
Net Income Shareholders' Equity Year Ended December 31, At December 31, -------------------------- --------------------- 1999 1998 1997 1999 1998 -------- -------- -------- ---------- ---------- Life insurance subsidiar- ies...................... $193,253 $260,847 $369,446 $667,168 $640,034
During 1998, Liberty National Life Insurance Company paid an extraordinary dividend to Torchmark in the amount of $213 million. In 1999, Liberty paid $61 million and Globe Life And Accident Insurance Company paid $34.5 million in extraordinary dividends. 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. A reconciliation of Torchmark's insurance subsidiaries' statutory net income to Torchmark's consolidated GAAP net income is as follows:
Year Ended December 31, ------------------------------- 1999 1998 1997 --------- --------- --------- Statutory net income.................... $ 193,253 $ 260,847 $ 369,446 Deferral of acquisition costs........... 419,590 356,493 328,086 Amortization of acquisition costs....... (247,800) (231,024) (224,738) Differences in insurance policy liabili- ties................................... 80,088 96,412 44,117 Deferred income taxes................... (63,576) (107,384) (47,541) Income of noninsurance affiliates....... (62,711) (100,758) (142,041) Other................................... (44,888) (30,145) 10,414 --------- --------- --------- GAAP net income....................... $ 273,956 $ 244,441 $ 337,743 ========= ========= =========
A reconciliation of Torchmark's insurance subsidiaries' statutory shareholders' equity to Torchmark's consolidated GAAP shareholders' equity is as follows:
Year Ended December 31, ---------------------- 1999 1998 ---------- ---------- Statutory shareholders' equity.................... $ 667,168 $ 640,034 Differences in insurance policy liabilities....... 587,619 585,680 Deferred acquisition costs........................ 1,741,570 1,502,511 Value of insurance purchased...................... 151,752 170,640 Deferred income taxes............................. (367,994) (467,023) Debt of parent company............................ (789,949) (749,290) Monthly income preferred securities............... (193,324) (193,259) Asset valuation reserves.......................... 53,364 68,674 Nonadmitted assets................................ 15,983 84,826 Goodwill.......................................... 402,584 414,658 Market value adjustment on fixed maturities....... (268,598) 200,087 Other............................................. (6,838) 1,990 ---------- ---------- GAAP shareholders' equity........................ $1,993,337 $2,259,528 ========== ==========
50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 3--Investments
Year Ended December 31, ----------------------------- 1999 1998 1997 --------- -------- -------- Investment income is summarized as fol- lows: Fixed maturities....................... $ 409,695 $410,528 $396,489 Equity securities...................... 488 301 367 Mortgage loans on real estate.......... 7,720 9,247 7,127 Investment real estate................. 7,889 8,332 3,379 Policy loans........................... 16,308 15,301 14,433 Other long-term investments............ 11,245 19,755 9,279 Short-term investments................. 4,066 6,089 5,762 --------- -------- -------- 457,411 469,553 436,836 Less investment expense................ (10,074) (9,995) (7,720) --------- -------- -------- Net investment income.................. $ 447,337 $459,558 $429,116 ========= ======== ======== An analysis of gains (losses) from investments is as follows: Realized investment gains (losses): Fixed maturities...................... $ (30,145) $ (8,519) $(30,122) Equity securities..................... 215 -0- 155 Other................................. (81,041) (49,118) (7,012) --------- -------- -------- (110,971) (57,637) (36,979) Adjustment to deferred acquisition costs ................................ -0- -0- (198) --------- -------- -------- (110,971) (57,637) (37,177) Applicable tax......................... 38,840 20,173 13,012 --------- -------- -------- Gains (losses) from investments, net of tax................................... $ (72,131) $(37,464) $(24,165) ========= ======== ======== An analysis of the net change in unrealized investment gains (losses) is as follows: Equity securities...................... $ (15,519) $ (1,080) $ 4,061 Fixed maturities available for sale.... (525,374) 66,526 150,494 Other long-term investments and foreign exchange translation adjustments...... 2,028 (46,018) (1,054) Adjustment to deferred acquisition costs................................. 48,382 (3,091) (13,324) --------- -------- -------- (490,483) 16,337 140,177 Applicable tax......................... 171,760 (8,762) (49,832) --------- -------- -------- Change in unrealized gains (losses), net of tax............................ $(318,723) $ 7,575 $ 90,345 ========= ======== ========
51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 3--Investments (continued) A summary of fixed maturities available for sale and equity securities by amortized cost and estimated market value at December 31, 1999 and 1998 is as follows:
Cost or Gross Gross Amount per % of Total Amortized Unrealized Unrealized Fair the Balance Fixed Cost Gains Losses Value Sheet Maturities ---------- ---------- ---------- ---------- ----------- ---------- 1999: - ----- Fixed maturities available for sale: Bonds: U.S. Government direct obligations and agencies............. $ 82,550 $ 228 $ (1,885) $ 80,893 $ 80,893 1.4% GNMAs................. 371,374 13,325 (4,027) 380,672 380,672 6.7 Mortgage-backed securities, GNMA collateral........... 20,617 99 (41) 20,675 20,675 0.4 Other mortgage-backed securities........... 322,092 1,773 (6,320) 317,545 317,545 5.6 State, municipalities and political subdivisions......... 557,250 8,947 (4,972) 561,225 561,225 9.9 Foreign governments... 57,495 1,338 (317) 58,516 58,516 1.0 Public utilities...... 613,494 1,421 (31,828) 583,087 583,087 10.3 Industrial and miscellaneous........ 3,927,294 6,633 (259,339) 3,674,588 3,674,588 64.7 Redeemable preferred stocks................ 2,531 63 -0- 2,594 2,594 0.0 ---------- -------- --------- ---------- ---------- ----- Total fixed maturities........... 5,954,697 33,827 (308,729) 5,679,795 5,679,795 100.0% Equity securities: Common stocks: Banks and insurance companies............ 36,879 7,289 (15,042) 29,126 29,126 Industrial and all others............... 242 -0- (179) 63 63 Non-redeemable preferred stocks...... -0- -0- -0- -0- -0- ---------- -------- --------- ---------- ---------- Total equity securities........... 37,121 7,289 (15,221) 29,189 29,189 ---------- -------- --------- ---------- ---------- Total fixed maturities and equity securities........... $5,991,818 $ 41,116 $(323,950) $5,708,984 $5,708,984 ========== ======== ========= ========== ========== 1998: - ----- Fixed maturities avail- able for sale: Bonds: U.S. Government direct obligations and agencies............. $ 145,902 $ 9,527 $ (13) $ 155,416 $ 155,416 2.7% GNMAs................. 494,859 29,205 (481) 523,583 523,583 9.1 Mortgage-backed securities, GNMA collateral........... 60,724 566 (15) 61,275 61,275 1.1 Other mortgage-backed securities........... 355,419 14,968 (837) 369,550 369,550 6.4 State, municipalities and political subdivisions......... 615,125 36,730 (233) 651,622 651,622 11.3 Foreign governments... 50,882 2,744 (296) 53,330 53,330 .9 Public utilities...... 411,624 24,972 (11) 436,585 436,585 7.6 Industrial and miscellaneous........ 3,382,689 152,510 (20,844) 3,514,355 3,514,355 60.9 Redeemable preferred stocks................ 2,548 183 -0- 2,731 2,731 -0- ---------- -------- --------- ---------- ---------- ----- Total fixed maturities ..................... 5,519,772 271,405 (22,730) 5,768,447 5,768,447 100% Equity securities: Common stocks: Banks and insurance companies............ 2,013 7,756 (8) 9,761 9,761 Industrial and all others............... 243 -0- (161) 82 82 ---------- -------- --------- ---------- ---------- Total equity securities........... 2,256 7,756 (169) 9,843 9,843 ---------- -------- --------- ---------- ---------- Total fixed maturities and equity securities........... $5,522,028 $279,161 $ (22,899) $5,778,290 $5,778,290 ========== ======== ========= ========== ==========
52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 3--Investments (continued) A schedule of fixed maturities by contractual maturity at December 31, 1999 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 Fair Cost Value ----------- ----------- Fixed maturities avail- able for sale: Due in one year or less. $ 64,588 $ 65,172 Due from one to five years.................. 618,342 622,551 Due from five to ten years.................. 1,998,061 1,947,724 Due after ten years..... 2,391,480 2,179,271 ----------- ----------- 5,072,471 4,814,718 Redeemable preferred stocks................. 2,530 2,594 Mortgage-backed and asset- backed securities...... 879,696 862,483 ----------- ----------- $ 5,954,697 $ 5,679,795 =========== ===========
Proceeds from sales of fixed maturities available for sale were $1.24 billion in 1999, $758 million in 1998, and $745 million in 1997. Gross gains realized on those sales were $4.3 million in 1999, $6.1 million in 1998, and $1.3 million in 1997. Gross losses were $36.5 million in 1999, $20.1 million in 1998, and $32.2 million in 1997. Torchmark had $7.0 million and $24.7 million in investment real estate at December 31, 1999 and 1998, respectively, which was nonincome producing during the previous twelve months. These properties included primarily construction in process and land. Torchmark had $118 thousand in nonincome producing mortgages as of year end 1999. There were no fixed maturity investments, or other long-term investments which were nonincome producing at December 31, 1999. During 1999, Torchmark determined to dispose of most of its investment real estate. In the second quarter of 1999, efforts to dispose of these properties revealed that the carrying value of the real estate exceeded its estimated realizable value. For this reason Torchmark wrote down its investment real estate portfolio to its estimated realizable value as of June 30, 1999. This write down resulted in a pretax loss of $64 million, or $41 million after tax. The majority of the investment real estate was sold in two transactions in the latter half of 1999 for total consideration of $123 million, of which $111 million was in cash and the remainder in a ten-year collaterized note. After the sales, Torchmark retained $16 million in investment real estate, of which $8 million was included with properties partially occupied by Torchmark subsidiaries. Note 4--Property and Equipment A summary of property and equipment used in the business is as follows:
December 31, 1999 December 31, 1998 --------------------- --------------------- Accumulated Accumulated Cost Depreciation Cost Depreciation -------- ------------ -------- ------------ Company occupied real estate........ $ 58,042 $28,440 $ 59,417 $28,697 Data processing equipment........... 20,823 19,185 19,915 18,743 Transportation equipment............ 7,128 2,525 11,157 7,551 Furniture and office equipment...... 17,083 14,165 35,777 32,195 -------- ------- -------- ------- $103,076 $64,315 $126,266 $87,186 ======== ======= ======== =======
Depreciation expense on property used in the business was $5.6 million, $4.2 million, and $4.6 million in each of the years 1999, 1998, and 1997, respectively. 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 5--Deferred Acquisition Costs and Value of Insurance Purchased An analysis of deferred acquisition costs and the value of insurance purchased is as follows:
1999 1998 1997 ---------------------- ---------------------- ---------------------- Deferred Value of Deferred Value of Deferred Value of Acquisition Insurance Acquisition Insurance Acquisition Insurance Costs Purchased Costs Purchased Costs Purchased ----------- --------- ----------- --------- ----------- --------- Balance at beginning of year................... $1,502,512 $170,640 $1,371,131 $216,988 $1,253,727 $244,368 Additions: Deferred during peri- od: Commissions........... 246,174 -0- 207,864 -0- 199,177 -0- Other expenses........ 173,416 -0- 148,629 -0- 128,909 -0- ---------- -------- ---------- -------- ---------- -------- Total deferred....... 419,590 -0- 356,493 -0- 328,086 -0- Adjustment attributable to unrealized invest- ment losses(1)........ 48,380 -0- -0- -0- -0- -0- ---------- -------- ---------- -------- ---------- -------- Total additions...... 467,970 -0- 356,493 -0- 328,086 -0- Deductions: Amortized during peri- od................... (228,912) (18,888) (210,287) (20,737) (197,160) (27,380) Adjustment attributable to unrealized investment gains(1)............. -0- -0- (3,092) -0- (13,324) -0- Adjustment attributable to realized investment gains(1)............. -0- -0- -0- -0- (198) -0- Business disposed..... -0- -0- (11,734) (25,611) -0- -0- ---------- -------- ---------- -------- ---------- -------- Total deductions..... (228,912) (18,888) (225,113) (46,348) (210,682) (27,380) ---------- -------- ---------- -------- ---------- -------- Balance at end of year.. $1,741,570 $151,752 $1,502,511 $170,640 $1,371,131 $216,988 ========== ======== ========== ======== ========== ========
- -------- (1) Represents amounts pertaining to investments relating to universal life- type products. The amount of interest accrued on the unamortized balance of value of insurance purchased was $10.5 million, $13.2 million, and $16.6 million, for the years ended December 31, 1999, 1998, and 1997, respectively. The average interest rates used for the years ended December 31, 1999, 1998, and 1997 were 6.5%, 6.8%, and 7.19%, respectively. The estimated amortization, net of interest accrued, on the unamortized balance at December 31, 1999 during each of the next five years is: 2000, $16.7 million; 2001, $14.1 million; 2002, $12.5 million; 2003, $11.0 million; and 2004, $9.7 million. In the event of lapses or early withdrawals in excess of those assumed, deferred acquisition costs and the value of insurance purchased may not be recoverable. Note 6--Initial Public Offering and Divestiture of Asset Management Segment Divestiture of Waddell & Reed. Waddell & Reed, Torchmark's asset management subsidiary, completed an initial public offering in March, 1998 of approximately 24 million shares of its common stock. The offering represented approximately 36% of Waddell & Reed's shares. Net proceeds from the offering were approximately $516 million after underwriters' fees and expenses. Waddell & Reed used $481 million of the proceeds to repay existing notes owed to Torchmark and other Torchmark subsidiaries and retained the remaining $35 million. Torchmark's $481 million proceeds from the note repayments were invested or used to pay down debt. The initial public offering resulted in a $426 million gain which was added to Torchmark's additional paid-in capital in accordance with Staff Accounting Bulletin 51. Torchmark retained the remaining 64% of the Waddell & Reed stock. 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 6--Initial Public Offering and Divestiture of Asset Management Segment (continued) On November 6, 1998, Torchmark distributed the remaining 64% investment in Waddell & Reed through a tax-free spin-off to Torchmark shareholders. Each Torchmark shareholder of record on October 23, 1998 received a total of .3018 Waddell & Reed shares per Torchmark share. After the spin-off, Torchmark retained no further ownership interest in Waddell & Reed. As a result of the transaction, Torchmark incurred $54 million in expense related to the spin- off, the majority of which was $50 million of corporate Federal income tax resulting from the distribution of a portion of the policyholder surplus account of a Torchmark life subsidiary. Torchmark has accounted for the spin-off of Waddell & Reed as a disposal of a segment. Accordingly, Torchmark's financial statements for 1998 and all prior periods have been modified to present the net assets and operating results of Waddell & Reed as discontinued operations of the disposed segment. The $54 million expense of the spin-off is included in discontinued operations under the caption "Loss on Disposal." The distribution of the Waddell & Reed shares resulted in a reduction in Torchmark's shareholders' equity in the approximate amount of $174 million, consisting of the equity in Waddell & Reed net of the 36% minority Interest. Note 7--Sale of Family Service On June 1, 1998, Torchmark sold Family Service to an unaffiliated insurance carrier. Family Service, which was acquired in 1990, is a preneed funeral insurer but has not issued any new policies since 1995. Consideration for the sale was $140 million in cash. Torchmark recorded a pretax realized loss on the sale of approximately $14 million, but incurred a tax expense on the transaction of $9 million. In connection with the sale, Torchmark will continue to service the policies in force of Family Service for the next five years for a fee of $2 million per year plus certain variable processing costs. During 1997, Family Service accounted for $57 million in revenues and $7.7 million in pretax income. Through May, 1998, Family Service contributed $25 million in revenues and $5.8 million in pretax income. Invested assets were $778 million and total assets were $828 million at the date of the sale. Note 8--Supplemental Disclosures for Cash Flow Statement The following table summarizes Torchmark's noncash transactions, which are not reflected on the Statement of Cash Flow:
Year Ended December 31, ----------------------- 1999 1998 1997 ------ -------- ------- Paid-in capital from tax benefit for stock option exercises........................................ $9,750 $ 933 $39,873 Discounted/deferred option grants................. 482 582 2,020 Distribution of Waddell & Reed stock.............. -0- 174,113 -0-
The following table summarizes certain amounts paid during the period:
Year Ended December 31, ------------------------- 1999 1998 1997 -------- -------- ------- Interest paid..................................... $ 52,704 $ 66,911 $73,537 Income taxes paid................................. 148,223 102,753 31,422
55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 9--Future Policy Benefit Reserves A summary of the assumptions used in determining the liability for future policy benefits at December 31, 1999 is as follows: Individual Life Insurance Interest assumptions:
Percent of Years of Issue Interest Rates Liability -------------- --------------------- ---------- 1917-1999 3.00% 3% 1947-1954 3.25% 1 1927-1989 3.50% 1 1955-1961 3.75% 1 1925-1999 4.00% 11 1962-1969 4.50% graded to 4.00% 2 1970-1980 5.50% graded to 4.00% 3 1970-1999 5.50% 1 1929-1999 6.00% 17 1986-1994 7.00% graded to 6.00% 12 1954-1999 8.00% graded to 6.00% 12 1951-1985 8.50% graded to 6.00% 9 1980-1987 8.50% graded to 7.00% 1 1984-1999 Interest Sensitive 26 --- 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:
Percent of Years of Issue Interest Rates Liability -------------- --------------------- ---------- 1962-1999 3.00% 2% 1982-1999 4.50% 3 1993-1999 6.00% 23 1986-1992 7.00% graded to 6.00% 47 1955-1999 8.00% graded to 6.00% 18 1951-1986 8.50% graded to 6.00% 7 --- 100% ===
56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 9--Future Policy Benefit Reserves (continued) 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 1999 was 6.1%. Note 10--Liability for Unpaid Health Claims Activity in the liability for unpaid health claims is summarized as follows:
Year ended December 31, --------------------------- 1999 1998 1997 -------- -------- -------- Balance at beginning of year:................. $145,802 $178,989 $173,900 Incurred related to: Current year................................. 555,595 518,993 503,948 Prior year................................... 8,297 (2,670) 15,280 -------- -------- -------- Total incurred................................ 563,892 516,323 519,228 Paid related to: Current year................................. 364,623 342,084 349,815 Prior year................................... 182,934 207,426 164,324 -------- -------- -------- Total paid.................................... 547,557 549,510 514,139 -------- -------- -------- Balance at end of year........................ $162,137 $145,802 $178,989 ======== ======== ========
The liability for unpaid health claims is included with "Policy claims and other benefits payable" on the Balance Sheet. 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 11--Income Taxes Torchmark and most of its subsidiaries file a life-nonlife consolidated federal income tax return. American Income files its own consolidated federal income tax return and will not be eligible to join Torchmark's consolidated return group until 2000. Total income taxes were allocated as follows:
Year Ended December 31, ----------------------------- 1999 1998 1997 --------- -------- -------- Income from continuing operations............ $ 134,320 $154,338 $138,409 Discontinued operations...................... (571) 92,772 40,081 Monthly income preferred securities dividend. (4,932) (5,265) (5,318) Shareholders' equity: Unrealized gains (losses)................... (171,757) 8,540 49,832 Tax basis compensation expense (from the exercise of stock options) in excess of amounts recognized for financial reporting purposes................................... (9,751) (933) (44,011) Other........................................ (1,274) (1,964) 1,514 --------- -------- -------- $ (53,965) $247,488 $180,507 ========= ======== ========
Income tax expense attributable to income from continuing operations consists of:
Year ended December 31, -------------------------- 1999 1998 1997 -------- -------- -------- Current income tax expense....................... $ 85,917 $118,827 $ 92,989 Deferred income tax expense...................... 48,403 35,511 45,420 -------- -------- -------- $134,320 $154,338 $138,409 ======== ======== ========
In 1999, 1998, and 1997, deferred income tax expense was incurred because of certain differences between net operating income before income taxes as reported on the consolidated statement of operations and taxable income as reported on Torchmark's income tax returns. As explained in Note 1, 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, ------------------------------------------- 1999 % 1998 % 1997 % -------- --- -------- --- -------- --- Expected income taxes............ $140,843 35% $156,447 35% $137,200 35% Increase (reduction) in income taxes resulting from: Tax-exempt investment income.... (8,798) (2) (7,111) (2) (6,165) (2) Equity in earnings of Vesta..... -0- (9,485) (2) 5,850 1 Sale of Family Service.......... -0- 13,460 3 -0- Other........................... 2,275 1 1,027 1 1,524 1 -------- --- -------- --- -------- --- Income taxes..................... $134,320 34% $154,338 35% $138,409 35% ======== === ======== === ======== ===
58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 11--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, ----------------- 1999 1998 -------- -------- Deferred tax assets: Unrealized investment losses................................ $ 89,433 $ -0- Present value of future policy surrender charges............ 28,534 20,153 Carryover of nonlife net operating losses and life-nonlife capital losses............................................. 18,044 8,364 Other assets and other liabilities, principally due to the current nondeductibility of certain accrued expenses for tax purposes............................................... 42,458 22,241 -------- -------- Total gross deferred tax assets............................. 178,469 50,758 Deferred tax liabilities: Deferred acquisition costs.................................. 445,266 381,415 Unrealized investment gains................................. -0- 82,324 Future policy benefits, unearned and advance premiums, and policy claims.............................................. 69,314 46,621 Other....................................................... 12,553 17,060 -------- -------- Total gross deferred tax liabilities........................ 527,133 527,420 -------- -------- Net deferred tax liability................................... $348,664 $476,662 ======== ========
Torchmark has not recognized a deferred tax liability for the undistributed earnings of its wholly-owned subsidiaries because such earnings are remitted to Torchmark on a tax-free basis. A deferred tax liability will be recognized in the future if the remittance of such earnings becomes taxable to Torchmark. In addition, Torchmark has not recognized a deferred tax liability of approximately $10 million that arose prior to 1984 on temporary differences related to the policyholders' surplus accounts in the life insurance subsidiaries. A current tax expense will be recognized in the future if and when these amounts are distributed. As more fully discussed in Note 6, Torchmark completed the spin-off of its asset management segment in 1998, which resulted in a distribution of the policyholder surplus account of a Torchmark life insurance subsidiary. This caused a current tax expense of $50 million. 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 12--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:
Defined Excess Defined Benefit Benefit Year Ended Contribution Pension Pension December 31, Plans Plans Plan ------------ ------------ ------- ------- 1999.................... $2,775 $2,889 $480 1998.................... 1,530 2,875 399 1997.................... 2,123 3,244 526
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. Contributions are made to the pension plans subject to minimums required by regulation and maximums allowed for tax purposes. Accrued pension expense in excess of amounts contributed has been recorded as a liability in the financial statements and was $7.5 million and $7.2 million at December 31, 1999 and 1998, respectively. The plans covering the majority of employees are organized as trust funds whose assets consist primarily of investments in marketable long-term fixed maturities and equity securities which are valued at market. 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. Although this plan is unfunded, pension cost is determined in a similar manner as for the funded plans. Liability for the excess benefit plan was $4.7 million at both December 31, 1999 and 1998. Net periodic pension cost for the defined benefit plans by expense component was as follows:
Year Ended December 31, ---------------------------- 1999 1998 1997 -------- -------- -------- Service cost--benefits earned during the period................................... $ 5,133 $ 4,555 $ 4,732 Interest cost on projected benefit obliga- tion..................................... 8,260 7,595 7,389 Actual return on assets................... (20,381) (21,572) (17,014) Net amortization and deferral............. 10,357 12,696 8,663 -------- -------- -------- Net periodic pension cost................ $ 3,369 $ 3,274 $ 3,770 ======== ======== ========
60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 12--Postretirement Benefits (continued) Torchmark adopted FASB Statement No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, effective for year-end 1998 with comparative periods restated. In accordance with this Standard, 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 balance sheet.
Pension Benefits For the year ended December 31, ------------------ 1999 1998 -------- -------- Changes in benefit obligation: Obligation at beginning of year..................... $109,720 $ 98,078 Service cost........................................ 5,133 4,555 Interest cost....................................... 8,260 7,595 Amendments.......................................... 74 -0- Actuarial loss (gain)............................... (5,430) 7,823 Benefits paid....................................... (13,176) (8,331) -------- -------- Obligation at end of year........................... 104,581 109,720 Changes in plan assets: Fair value at beginning of year..................... 123,289 108,942 Return on assets.................................... 20,381 21,572 Contributions....................................... 2,285 1,106 Benefits paid....................................... (13,176) (8,331) -------- -------- Fair value at end of year........................... 132,779 123,289 -------- -------- Funded status at year end........................... 28,198 13,569 Unrecognized amounts at year end: Unrecognized actuarial loss (gain).................. (40,764) (25,016) Unrecognized prior service cost..................... 865 851 Unrecognized transition obligation.................. (115) (356) -------- -------- Net amount recognized at year end................... $(11,816) $(10,952) ======== ======== Amounts recognized consist of: Prepaid benefit cost................................ $ 243 $ 212 Accrued benefit liability........................... (12,418) (12,083) Intangible asset.................................... 359 919 -------- -------- Net amount recognized at year end................... $(11,816) $(10,952) ======== ========
The weighted average assumed discount rates used in determining the actuarial benefit obligations were 7.5% in 1999 and 7.0% in 1998. The rate of assumed compensation increase was 4.5% in 1999 and 4.0% in 1998 while the expected long-term rate of return on plan assets was 9.2% in both 1999 and 1998. Postretirement Benefit Plans Other Than Pensions: Torchmark provides postretirement life insurance benefits 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. Torchmark does provide a portion of the cost for health insurance benefits for employees who retired before February 1, 1993 and 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. This plan is unfunded. 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 12--Postretirement Benefits (continued) The components of net periodic postretirement benefit cost for plans other than pensions are as follows:
Year Ended December 31, ------------------- 1999 1998 1997 ----- ----- ----- Service cost....................................... $ 239 $ 249 $ 248 Interest cost on accumulated postretirement benefit obligation........................................ 380 493 490 Actual return on plan assets....................... -0- -0- -0- Net amortization and deferral...................... (450) (281) (377) ----- ----- ----- Net periodic postretirement benefit cost........... $ 169 $ 461 $ 361 ===== ===== =====
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, 1999 1998 --------------- --------------- Changes in benefit obligation: Obligation at beginning of year....... $ 6,849 $ 6,431 Service cost.......................... 239 249 Interest cost......................... 380 493 Amendments............................ -0- (149) Actuarial loss (gain)................. (1,324) 435 Benefits paid......................... (529) (610) --------------- --------------- Obligation at end of year............. 5,615 6,849 Changes in plan assets: Fair value at beginning of year....... -0- -0- Return on assets...................... -0- -0- Contributions......................... 529 610 Benefits paid......................... (529) (610) --------------- --------------- Fair value at end of year............. -0- -0- --------------- --------------- Funded status at year end............ (5,615) (6,849) Unrecognized amounts at year end: Unrecognized actuarial loss (gain).... (2,349) (1,259) Unrecognized prior service cost....... (290) (506) --------------- --------------- Net amount recognized at year end as accrued benefit liability........... $ (8,254) $ (8,614) =============== ===============
For measurement purposes, an 8.0% annual rate of increase in per capita cost of covered healthcare benefits was assumed for 1999. These rates grade to ranges of 4.5% to 5.5% by the year 2010. The health care cost trend rate assumption has a significant effect on the amounts reported, as illustrated in the following table which presents the effect of a one percentage point increase and decrease on the service and interest cost components and the benefit obligation:
Change in Trend Rate ----------------------- 1% 1% Effect on: Increase Decrease ---------- ---------- ---------- Service and interest cost components............... $ 62 $ 54 Benefit obligation................................. 431 386
The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.15% in 1999 and 7.38% in 1998. 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 13--Debt An analysis of debt at carrying value is as follows:
December 31, ----------------------------------------- 1999 1998 -------------------- -------------------- Short-term Long-term Short-term Long-term Debt Debt Debt Debt ---------- --------- ---------- --------- Senior Debentures, due 2009........ $ 99,450 $ 99,450 Notes, due 2023.................... 177,540 185,394 Notes, due 2013.................... 94,565 98,578 Commercial paper................... $418,394 $355,242 Other notes and mortgages payable at various interest rates; collateralized by buildings ...... 150 -------- -------- -------- -------- $418,394 $371,555 $355,392 $383,422 ======== ======== ======== ========
The amount of debt that becomes due during each of the next five years is: 2000, $418,394, and 2001-2004, $0. The Senior Debentures, remaining principal amount of $99 million, are due August 15, 2009. They bear interest at a rate of 8 1/4%, with interest payable on February 15 and August 15 of each year. The Senior Debentures are not redeemable at the option of Torchmark prior to maturity and have equal priority with other Torchmark unsecured indebtedness. The Notes, due May 15, 2023, were issued in May, 1993 in the principal amount of $200 million. Proceeds of the issue, net of issue costs, were $196 million. Interest is payable on May 15 and November 15 of each year at a rate of 7 7/8%. In 1998 and 1999, $10.8 million and $7.5 million principal amount were purchased in the open market at a cost of $10.6 million and $7.9 million respectively. These notes are not redeemable prior to maturity and have equal priority with other Torchmark unsecured indebtedness. The Notes, due August 1, 2013, were issued in July, 1993 in the principal amount of $100 million for net proceeds of $98 million. Interest is payable on February 1 and August 1 of each year at a rate of 7 3/8%. In March, 1999, $4.0 million principal amount were purchased in the open market at a cost of $4.1 million. These notes are not redeemable prior to maturity and have equal priority with other Torchmark unsecured indebtedness. Torchmark has entered into a revolving credit agreement with a group of lenders under which it may borrow on an unsecured basis up to $600 million. The commitment matures October 22, 2002. Borrowings are at interest rates selected by Torchmark based on either the corporate base rate or the Eurodollar rate at the time of borrowing. At December 31, 1999 and December 31, 1998 there were no borrowings under the revolving credit agreement. The revolving credit agreement is also designed to back up a commercial paper program. The short-term borrowings under the revolving credit agreements and in the commercial paper market averaged $411 million during 1999, and were made at an average yield of 5.43%. At December 31, 1999, commercial paper was outstanding in the face amount of $420 million. Torchmark is subject to certain covenants for the revolving credit agreements regarding capitalization and earnings, for which it was in compliance at December 31, 1999, and pays a facility fee based on size of the line. Including fees, the average borrowing cost during 1999 was 5.61%. In the first quarter of 1998, Torchmark repaid $20 million principal amount of its 8 5/8% Sinking Fund Debentures due March 1, 2017, through a sinking fund payment of which $8 million was mandatory and $12 million was elective under the terms of the issue. An identical payment was made in the third quarter of 1997. The remaining $160 million principal amount was called on April 1, 1998, at a prevailing call price of 103.76, or $166 million. An after-tax loss on the redemption of debt of $5 million was recorded in the second quarter of 1998. These payments were made from additional commercial paper borrowings. 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 13--Debt (continued) The 9 5/8% Senior Notes Torchmark previously had outstanding matured on May 1, 1998. The principal amount of $200 million with accrued interest was repaid from additional commercial paper borrowings. Interest in the amount of $284 thousand, $2.4 million, and $1.7 million was capitalized during 1999, 1998, and 1997, respectively. Note 14--Monthly Income Preferred Securities In October, 1994, Torchmark, through its wholly-owned finance subsidiary, Torchmark Capital L.L.C., completed a public offering of eight million shares of 9.18% MIPS at a face amount of $200 million. The securities are subject to a mandatory redemption in full at September 30, 2024, although Torchmark may elect to extend the MIPS for up to an additional 20 years if certain conditions are met. They have been redeemable at Torchmark's option since September 30, 1999. Torchmark subsequently entered into a ten-year swap agreement with an unaffiliated party whereby Torchmark agreed to pay a variable rate on the $200 million face amount in exchange for payment of the fixed dividend. In a related transaction, Torchmark purchased a five-year cap on the swap agreement that expired on September 30, 1999. The interest rate was 7.00% at December 31, 1999 and 6.44% at December 31, 1998. The market value of the swap agreement was a benefit of $6.7 million at December 31, 1999 and $24.7 million at December 31, 1998. Torchmark changed its method of accounting for this swap agreement during 1999. Refer to Note 15--Change in Accounting Principle below for more information on this change in accounting principle. Note 15--Change in Accounting Principle Torchmark has in place a swap agreement with an unaffiliated party whereby Torchmark pays a variable dividend rate on its $200 million face amount outstanding MIPS in exchange for payment of a 9.18% fixed dividend. Effective January 1, 1999, Torchmark changed its method of accounting for this swap agreement to recognize changes in its fair value, net of tax, as realized investment gains or losses. This method of accounting for such instruments is believed to be preferable under the guidance established by Statement of Financial Accounting Standards No. 80, "Accounting for Futures Contracts ("SFAS 80") and the Securities and Exchange Commission. Previously, Torchmark accounted for the swap using hedge accounting under SFAS 80. The after-tax cumulative effect of the change at January 1, 1999 of $16.1 million (net of income taxes of $8.7 million) is included in income for the twelve months ended December 31, 1999. The effect of the change on the twelve months ended December 31, 1999 was to increase realized losses by $11.7 million ($.09 per diluted share) excluding the cumulative effect of the change in accounting principle. The pro forma effect of the retroactive application of the new accounting method to the twelve month period ended December 31, 1998 would be to increase net income by $4.4 million ($.03 per diluted share). 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 16--Shareholders' Equity Share Data: A summary of preferred and common share activity which has been restated to give effect for the two-for-one stock split in the form of a dividend is as follows:
Preferred Stock Common Stock --------------- ------------------------ Treasury Treasury Issued Stock Issued Stock ------ -------- ----------- ----------- 1997: Balance at January 1, 1997.......... -0- -0- 147,568,456 (8,176,506) Issuance of common stock due to exercise of stock options.......... 280,452 5,539,596 Other treasury stock acquired....... (5,171,558) --- --- ----------- ----------- Balance at December 31, 1997........ -0- -0- 147,848,908 (7,808,468) 1998: Issuance of common stock due to exercise of stock options.......... 175,240 Issuance of common stock due to restricted stock grant............. 117,500 Other treasury stock acquired....... (3,436,205) Restricted shares converted to Waddell & Reed shares.............. (48,000) --- --- ----------- ----------- Balance at December 31, 1998........ -0- -0- 147,800,908 (10,951,933) 1999: Issuance of common stock due to exercise of stock options.......... 1,898,524 Other treasury stock acquired....... (6,742,606) Lapse of unvested stock grant....... (8,625) --- --- ----------- ----------- Balance at December 31, 1999........ -0- -0- 147,800,908 (15,804,640) === === =========== ===========
At December 31, 1999 At December 31, 1998 --------------------- --------------------- Preferred Common Preferred Common Stock Stock Stock Stock --------- ----------- --------- ----------- Par value per share................ $1.00 $1.00 $1.00 $1.00 Authorized shares.................. 5,000,000 320,000,000 5,000,000 320,000,000
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 funds and for future employee stock option exercises. Share repurchases under this program were 6.7 million shares at a cost of $222 million in 1999, 3.4 million shares at a cost of $126 million in 1998, and 5.2 million shares at a cost of $183 million in 1997. Grant of Restricted Stock: On January 1, 1998, 117,500 shares were granted to four executive officers of Torchmark or its subsidiaries. These shares vest over eight years in accordance with the following schedule: 16% on the first anniversary, with the vesting percentage declining one percent each year thereafter until the eighth anniversary. The market value of Torchmark stock was $42.1875 per share on the grant date. In the fourth quarter of 1999, 8,625 restricted shares lapsed under the terms of the grant and were returned to the company. 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. These restrictions generally limit the payment of dividends by insurance subsidiaries to statutory net gain from operations before realized capital gains or losses on an annual noncumulative basis in the absence of special approval. Additionally, insurance companies are not permitted to distribute the excess of shareholders' equity as determined on a GAAP basis over that determined on a statutory basis. In 2000, 192 million will be available to Torchmark for dividends from insurance subsidiaries in compliance with statutory regulations without prior regulatory approval. 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 16--Shareholders' Equity (continued) Earnings Per Share: A reconciliation of basic and diluted weighted-average shares outstanding is as follows:
1999 1998 1997 ----------- ----------- ----------- Basic weighted average shares outstanding.. 133,197,023 139,998,671 139,202,354 Weighted average dilutive options outstanding............................... 788,920 1,353,241 2,228,802 ----------- ----------- ----------- Diluted weighted average shares outstanding............................... 133,985,943 141,351,912 141,431,156 =========== =========== ===========
Options outstanding considered to be anti-dilutive totaled 5,013,990, 0, and 0 as of December 31, 1999, 1998 and 1997, respectively, 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 17--Employee 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 ten years and two days or eleven years after grant. 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. Grants in September, 1997 and November, 1999 vested immediately. Stock options awarded in connection with compensation deferrals by certain directors and executives vest over ten years. Torchmark generally issues shares for the exercise of stock options out of treasury stock. An analysis of shares available for grant in terms of shares adjusted for the stock dividend is as follows:
Available for Grant ---------------------------------- 1999 1998 1997 ---------- ---------- ---------- Balance at January 1.................... 13,192,506 2,434,004 1,345,080 Amendment of 1987 Plan.................. 4,800,000 1998 Stock Incentive Plan............... 14,000,000 Approval of Executive Deferred and Director Plan grants................... (216,481) (633,672) Grant of restricted stock(1)............ (117,500) Lapse of restricted stock grants(1)..... 8,625 Expired................................. 70,760 13,700 32,896 Closure of option plans(2).............. (2,113,723) Other grants............................ (2,402,671) (807,494) (3,110,300) ---------- ---------- ---------- Balance at December 31.................. 10,869,220 13,192,506 2,434,004 ========== ========== ==========
- -------- (1) This stock grant was made from the 1987 Stock Incentive Plan. The retirement of an employee during 1999 resulted in the lapse of unvested grants. (2) The 1987 Stock Incentive Plan, the 1998 Directors' Stock Option Plan, and the 1998 Executive Deferred Compensation Stock Option Plan were closed in 1998. Torchmark accounts for its employee stock options in accordance with SFAS 123 Accounting for Stock-Based Compensation, which defines a "fair value method" of measuring and accounting for employee stock options. It 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. The effects of applying SFAS 123 in the pro forma disclosures are not necessarily indicative of future amounts. 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 17--Employee Stock Options (continued) Torchmark has elected to account for its stock options under the intrinsic value method as outlined in APB 25. The fair value method requires the use of an option valuation model, such as the Black-Scholes option valuation model, to value employee stock options, upon which a compensation expense is based. The Black-Scholes option valuation model was not developed for use in valuing employee stock options. Instead, this model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because Torchmark's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, it is management's opinion that the existing models do not provide a reliable measure of the fair value of its employee stock options. Under the intrinsic value method, compensation expense 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. 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 1999, 1998, and 1997:
1999 1998 1997 -------- -------- -------- Risk-free interest rate........................... 6.0% 4.8% 6.1% Dividend yield.................................... 1.2% 1.1% 1.7% Volatility factor................................. 25.6 22.8 23.7 Weighted average expected life (in years)......... 4.66 4.71 3.93
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Torchmark's pro forma information follows (in thousands except for earnings per share information):
1999 1998 1997 -------- -------- -------- Pro forma net income............................. $262,433 $245,383 $318,671 Pro forma basic net income per share............. 1.97 1.75 2.29 Pro forma diluted net income per share........... 1.96 1.74 2.25
On September 25, 1997, Torchmark executed a stock option exercise and restoration program through which over 100 Torchmark directors and employees exercised vested stock options and received a reduced number of replacement options at current market price. This program resulted in the issuance of 4.8 million shares, of which over 3 million shares were immediately sold by the directors and employees through the open market to cover the cost of the purchased shares and related taxes. Another restoration program was effected on November 15, 1999. The 1999 program involved 80 directors and employees who exercised vested options for 1.8 million shares, resulting in the net issuance to employees of 523 thousand shares and 1.2 million replacement options for the shares sold by the employee to pay the exercise price and minimum withholding taxes. As a result of these restoration programs, management's ownership interest increased, and Torchmark received a significant current tax benefit from the exercise of the options. On November 6, 1998, in connection with its spin-off of Waddell & Reed, Torchmark adjusted the number and exercise price of its employee stock options so that the options' value after the spin would be equivalent to its value before the spin. Additionally, every eligible optionee was given the opportunity to elect to convert a portion of their Torchmark options into equivalent Waddell & Reed options in accordance with the same spin ratio that was applicable to all Torchmark shareholders. Also, employees of Waddell & Reed and directors were allowed to convert all of their Torchmark options into equivalent Waddell & Reed options. In every case, the employee or director maintained the same value after the spin-off as was held prior to the transaction. 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 17--Employee Stock Options (continued) As a result of the adjustment and conversion of these options, 7.2 million outstanding Torchmark options with an aggregate exercise price of $219 million on November 6, 1998 were replaced with 6.4 million adjusted Torchmark options with an aggregate exercise price of $167 million. Also 3.7 million Waddell & Reed options were granted with an aggregate exercise price of $51.6 million. A summary of Torchmark's stock option activity and related information for the years ended December 31, 1999, 1998, and 1997 follows:
1999 1998 1997 ---------------------------- ---------------------------- ---------------------------- Weighted Average Weighted Average Weighted Average Options Exercise Price Options Exercise Price Options Exercise Price ---------- ---------------- ---------- ---------------- ---------- ---------------- Outstanding-beginning of year................ 7,228,400 $27.04 7,241,050 $29.76 9,350,022 $18.52 Granted................. 2,402,671 31.36 1,023,975 34.97 3,743,972 36.70 Exercised............... (1,898,524) 19.80 (175,240) 22.58 (5,820,048) 16.17 Expired................. (70,760) 32.98 (13,700) 29.19 (32,896) 29.81 Reduction due to Waddell & Reed spinoff......... (7,249,129) 30.20 Addition due to Waddell & Reed spinoff......... 6,401,444 26.16 ---------- ---------- ---------- Outstanding-end of year. 7,661,787 30.14 7,228,400 27.04 7,241,050 29.76 ========== ========== ========== Exercisable at end of year................... 4,243,254 29.37 5,038,081 26.24 4,189,238 32.82
The weighted average fair value of options granted during the years ended December 31, 1999, 1998, and 1997 were $9.29, $8.88, and $8.43, respectively. 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 17--Employee Stock Options (continued) The following table summarizes information about stock options outstanding at December 31, 1999:
Contract Exercise Number Number Termination Price Grant Date Outstanding Exercisable Date -------- ---------- ----------- ----------- ----------- 4.86419 October 1, 1993 6,416 6,416 October 3, 2003 5.63977 October 1, 1993 5,016 5,016 October 3, 2003 13.91029 January 2, 1991 21,029 21,029 January 4, 2001 14.17778 January 25, 1990 21,029 21,029 January 27, 2000 14.55172-14.58579 December 16, 1994 65,969 65,969 December 18, 2004 14.55222 December 7, 1992 1,694 1,694 December 9, 2002 14.55659-14.57130 December 14, 1993 6,337 6,337 December 16, 2003 14.57232-14.57573 October 1, 1993 6,552 6,552 October 3, 2003 14.7127 December 12, 1991 13,802 13,802 December 14, 2001 14.92781 January 3, 1995 7,010 7,010 January 5, 2005 15.94885* December 18, 1996 48,000 6,000 December 18, 2007 16.42468 January 2, 1992 21,029 21,029 January 4, 2002 18.56413-18.5922 December 20, 1995 394,519 394,519 December 22, 2005 18.61765-18.618 December 14, 1993 56,427 56,427 December 16, 2003 19.26091 January 2, 1996 7,010 7,010 January 4, 2006 19.26091-19.276 January 3, 1994 13,010 13,010 January 5, 2004 21.29257-21.30859 December 16, 1996 528,913 528,913 December 18, 2006 21.50657-21.52056 January 2, 1997 79,956 7,010 January 4, 2007 22.14864-22.16198 January 31, 1997 140,927 19,444 January 31, 2008 22.25559-22.25570 December 7, 1992 48,429 48,429 December 9, 2002 24.7174-24.72794 January 4, 1993 19,010 19,010 January 6, 2003 27.8125 December 21, 1999 1,135,713 0 December 23, 2009 33.27631-33.28237 December 24, 1997 315,243 158,241 December 26, 2007 33.4375 December 16, 1998 648,800 500 December 18, 2008 33.4375 December 16, 1998 115,590 11,559 December 16, 2009 33.4903-33.497 September 25, 1997 2,427,422 2,427,422 September 27, 2007 33.54382 January 9, 1998 12,984 1,298 January 9, 2009 33.9375 January 11, 1999 51,025 0 January 11, 2010 34.50 November 15, 1999 1,173,733 283,130 November 17, 2009 34.75 December 30, 1998 39,659 3,966 December 30, 2009 35.63037 February 16, 1998 12,056 1,206 February 16, 2009 36.11175-36.11284 January 2, 1998 152,709 36,000 January 4, 2008 36.37928 February 10, 1998 11,357 1,136 February 10, 2009 36.43278 February 4, 1998 11,412 1,141 February 4, 2009 36.50 January 4, 1999 42,000 42,000 January 4, 2010 --------- --------- 7,661,787 4,243,254 ========= =========
- -------- * Issued when the market price was $24.8125. Option price at that time (prior to the Waddell & Reed spin-off adjustment) was $18.61. 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 18--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 $2.5 million per life. Life insurance ceded represents less than 1.0% of total life insurance in force at December 31, 1999. Insurance ceded on life and accident and health products represents .7% of premium income for 1999. 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 2.3% of life insurance in force at December 31, 1999 and reinsurance assumed on life and accident and health products represents 1.9% of premium income for 1999. Leases: Torchmark leases office space and office equipment under a variety of operating lease arrangements. These leases contain various renewal options, purchase options, and escalation clauses. Rental expense for operating leases was $3.4 million in 1999 and $3.2 million in 1998 and 1997. Future minimum rental commitments required under operating leases having remaining noncancelable lease terms in excess of one year at December 31, 1999 are as follows: 2000, $2.0 million; 2001, $1.2 million; 2002, $845 thousand; 2003, $438 thousand; 2004, $189 thousand and in the aggregate, $4.9 million. 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, 1999, the investment portfolio consisted of the following:
Percent of Type of Investment Portfolio ------------------ ---------- Investment-grade corporate bonds 64% Securities of state and municipal governments 9 Securities of the U.S. government or U.S. government-backed securities 8 Nongovernment-guaranteed mortgage-backed securities 5 Noninvestment-grade securities 5 Policy loans, which are secured by the underlying insurance policy values 4 Short-term investments, which generally mature within one month 2 Mortgages 1 Securities of foreign governments 1 Equity securities, real estate, and other long-term investments 1
Investments in municipal governments and corporations are made throughout the U.S. with no concentration in any given state. Most of the investments in foreign government securities are in Canadian government obligations. Corporate debt and equity investments are made in a wide range of industries. At December 31, 1999, 4% or more of the portfolio was invested in the following industries:
Percent of Industry Portfolio -------- ---------- Depository institutions 10% Electric, gas, and sanitary services 10 Insurance carriers 5 Chemicals and allied products 4 Communications 4 Food and kindred products 4 Nondepository credit institutions 4
Otherwise, no individual industry represented 4% or more of Torchmark's investments. At year-end 1999, 5% of the carrying value of fixed maturities was rated below investment grade (BB or lower as rated by Standard & Poor's or the equivalent NAIC designation). Par value of these investments was $313 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 18--Commitments and Contingencies (continued) million, amortized cost was $314 million, and market value was $295 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 collateral. Guarantees: In the fourth quarter of 1999, Torchmark issued a full financial guaranty of all obligations, receivables, and recovery of capital on behalf of its subsidiaries American Income and AILIC Receivable Corporation up to $100 million. The guarantee was made to an unaffiliated third party as agent for the purchasers of certain agent receivables of American Income. Litigation: Torchmark and its subsidiaries continue to be named as parties to pending or threatened legal proceedings. These lawsuits involve 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. Many of these lawsuits involve claims for punitive damages in state courts of Alabama, a jurisdiction particularly recognized for its large punitive damage verdicts. A number of such actions involving Liberty also name Torchmark as a defendant. In 1999, Alabama enacted legislation limiting punitive damages in non-physical injury cases to the greater of $500,000 or three times compensatory damages. Since this legislation has not undergone scrutiny by appellate courts regarding its constitutionality and a jury's discretion regarding the amount of compensatory damages (including mental anguish) awarded in any given case is not precisely defined, the effect of this legislation on Torchmark's litigation remains unclear. Thus, the likelihood or extent of a punitive damage award in any given case is currently impossible to predict. As of December 31, 1999, Liberty was a party to approximately 135 active lawsuits (including 17 employment related cases and excluding interpleaders and stayed cases), 126 of which were Alabama proceedings in which punitive damages were sought. Liberty faces trial settings in these cases on an on-going basis. Based upon information presently available, and in light of legal and other factual defenses available to Torchmark and its subsidiaries, contingent liabilities arising from threatened and pending litigation are not presently considered by management to be material. It should be noted, however, that large punitive damage awards bearing little or no relation to actual damages awarded by juries in jurisdictions in which Torchmark has substantial business, particularly in Alabama, continue to occur, creating the potential for unpredictable material adverse judgments in any given punitive damage suit. On August 25, 1995, a purported class action was filed against Torchmark, Globe, United American and certain officers of these companies in the United States District Court for the Western District of Missouri on behalf of all former agents of Globe (Smith v. Torchmark Corporation, Case No. :95-3304-CV- S-4). This action alleges that the defendants breached independent agent contracts with the plaintiffs by treating them as captive agents and engaged in a pattern of racketeering activity wrongfully denying income and renewal commissions to the agents, restricting insurance sales, mandating the purchase of worthless leads, terminating agents without cause and inducing the execution of independent agent contracts based on misrepresentations of fact. Monetary damages in an unspecified amount are sought. A plaintiff class was certified by the District Court on February 26, 1996, although the certification did not go to the merit of the allegations in the complaint. On December 31, 1996, the plaintiffs filed an amended complaint in Smith to allege violations of various provisions of the Employment Retirement Income Security Act of 1974. Extensive discovery was then conducted. In October 1998, defendants filed a motion to decertify the presently defined class in Smith. On March 23, 1999, the District Court granted defendants' motion to decertify the Smith class in part and decertified all but the ERISA claims of a more narrowly defined Smith class. In May 1999, the defendants filed motions to dismiss the claims certified by the Court's March 23, 1999 order. On December 14, 1999, the District Court granted defendants' motion for summary judgment. That Court denied a motion for reconsideration on January 21, 2000. It has been previously reported that Torchmark, its subsidiaries United American and Globe and certain individual corporate officers are parties to purported class action litigation filed in April, 1996 in 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 18--Commitments and Contingencies (continued) the U.S. District Court for the Northern District of Georgia (Crichlow v. Torchmark Corporation, Case No. 4:96-CV-0086-HLM) involving certain hospital and surgical insurance policies issued by Globe and United American. In September 1997, the U.S. District Court entered an order granting summary judgment against the plaintiffs on certain issues and denying national class certification, although indicating that plaintiffs could move for the certification of a state class of Georgia policyholders. Discovery then proceeded on the remaining claims for breach of contract and the duty of good faith arising from closure of the block of business and certain post-claim matters as well as fraud and conspiracy relating to pricing and delay in implementing rate increases. On June 17, 1998, the U.S. District Court entered an order which denied the plaintiffs' motion to certify a Georgia policyholders class, denied reconsideration of the previously entered motion for summary judgment on certain issues, denied reconsideration of the denial of national certification of a class of policyholders and severed and transferred claims of Mississippi policyholders to the U.S. District Court for the Northern District of Mississippi (Greco v. Torchmark Corporation, Case No. 1:98CV196-D-D). The U.S. District Court granted defendants' motion for summary judgment on all remaining issues in Crichlow on February 4, 1999. Plaintiffs in Greco then moved to certify a class of persons purchasing Globe hospital and surgical insurance policies in Mississippi. On February 1, 1999, defendants filed a motion for summary judgment in Greco. Defendants' motion for summary judgment on all remaining issues in Crichlow was granted by the District Court on February 4, 1999. The Crichlow plaintiffs have appealed and Crichlow defendants have cross-appealed various orders of the District Court to the United States Court of Appeals for the Eleventh Circuit. On October 29, 1999, the District Court dismissed all of the plaintiffs' claims in Greco in their entirety and entered a final judgment dismissing Greco with prejudice. This October 29, 1999 order in Greco has been appealed by plaintiffs to the Fifth Circuit Court of Appeals. As previously reported, Liberty has been a party to two lawsuits alleging that a class of persons were insured under Liberty policies when Liberty knew that such persons were not entitled to retain any benefits under these policies, one of which was filed in 1996 in the Circuit Court of Jefferson County, Alabama (Harris v. Liberty National Life Insurance Company, Case No. CV-96-01836) and the other in the Circuit Court of St. Clair County, Alabama (Gentry v. Liberty National Life Insurance Company, Case No. CV-97-61). The Gentry case was dismissed by the St. Clair County Circuit Court on June 16, 1998 and subsequently the Harris case was amended to add former plaintiff Gentry as an additional class representative in that case. On December 28, 1999, the Jefferson County Circuit Court entered an order in Harris granting summary judgment for Liberty on all plaintiffs' claims except unjust enrichment. The only remaining claim in the Harris plaintiffs' motion for class certification, one of unjust enrichment, was denied by the Circuit Court in an order denying the motion for class certification entered February 10, 2000. In 1978, the United States District Court for the Northern District of Alabama entered a final judgment in Battle v. Liberty National Life Insurance Company, et al (Case No. CV-70-H-752-S), class action litigation involving Liberty, a class composed of all owners of funeral homes in Alabama and a class composed of all insureds (Alabama residents only) under burial or vault policies issued, assumed or reinsured by Liberty. The final judgment fixed the rights and obligations of Liberty and the funeral directors authorized to handle Liberty burial and vault policies as well as reforming the benefits available to the policyholders under the policies. Although class actions are inherently subject to subsequent collateral attack by absent class members, the Battle decree remains in effect to date. A motion filed in February 1990 to challenge the final judgment under Federal Rule of Civil Procedure 60(b) was rejected by both the District Court in 1991 and the Eleventh Circuit Court of Appeals in 1992 and a Writ of Certiorari was denied by the U.S. Supreme Court in 1993. In November 1993, an attorney (purporting to represent the funeral director class) filed a petition in the District Court seeking "alternative relief" under the final judgment. This petition was voluntarily withdrawn on November 8, 1995 by petitioners. On February 23, 1996, Liberty filed a petition with the 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 18--Commitments and Contingencies (continued) District Court requesting that it order certain contract funeral directors to comply with their obligations under the Final Judgment in Battle and their funeral service contracts. A petition was filed on April 8, 1996 on behalf of a group of funeral directors seeking to modify the 1978 decree in Battle in light of changed economic circumstances. All parties made extensive submissions to the District Court and a hearing on the opposing petitions was held by the District Court on February 9, 1999. On March 8, 1999, the District Court entered an order granting Liberty's petition to enforce the obligations of contract funeral directors under their funeral service contracts and denying the funeral directors' petition for review of the Battle Final Judgment and alternative relief. On July 29, 1999, the funeral director class filed an appeal with the U.S. Court of Appeals of the Eleventh Circuit seeking to have the March 8, 1999 order vacated on the merits. Liberty filed a joint motion in the Eleventh Circuit Court seeking remand to the District Court for purposes of appointment of class counsel for burial policyholders, who are currently not formally represented in these proceedings. The Circuit Court issued an order denying Liberty's joint motion on September 15, 1999 and the funeral director class' appeal remains pending. On January 24, 2000, Liberty and the funeral director class filed a joint motion for remand in order to allow the District Court to evaluate a proposed settlement of the funeral directors' appeal. On October 28, 1999, Liberty was served with a subpoena from the Florida Department of Insurance in connection with that Department's investigation into Liberty's sales practices and disclosures in the State of Florida regarding industrial life insurance and low value life insurance policies. Subsequently, on December 8, 1999, purported class action litigation was filed against Liberty in the United States District Court for the Northern District of Alabama (Moore v. Liberty National Life Insurance Company, Case No. CV-99- BU-3262-S), on behalf of all African-Americans who have or have had at the time of policy termination an ownership interest in certain life insurance policies ($25,000 face amount or less) marketed by Liberty and certain of its former subsidiaries. Plaintiffs allege racial discrimination in Liberty's premium rates in violation of 42 U.S.C (S)1981, breach of fiduciary duty in sales and administrative practices, receipt of excessive and unreasonable premium payments by Liberty, improper hiring, supervision, retention and failure to monitor actions of officers, agents and employees, breach of contract in dismantling the debit premium collection system, fraudulent inducement and negligent misrepresentation. Unspecified compensatory and punitive damages are sought together with a declaratory judgment and equitable and/or injunctive relief, including establishment of a constructive trust for the benefit of class members. Defendants filed a motion for judgment on the pleadings or in the alternative for summary judgment on January 27, 2000. Note 19--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 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. 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 19--Business Segments (continued) Torchmark markets its insurance products through a number of distribution channels, each of which sells the products of one or more of Torchmark's insurance segments. The tables below present segment premium revenue by each of Torchmark's marketing groups.
For the Year 1999 ----------------------------------------------------------------- Life Health Annuity Total ---------------- -------------- ------------- ---------------- % of % of % of % of Distribution Channel Amount Total Amount Total Amount Total Amount Total - -------------------- ---------- ----- -------- ----- ------- ----- ---------- ----- United American Independent............ $ 37,375 3.7% $427,023 51.8% $ 508 1.2% $ 464,906 24.7% Liberty National Exclusive.............. 288,330 28.3 143,857 17.4 60 0.2 432,247 22.9 American Income Exclusive.............. 217,367 21.3 47,564 5.8 264,931 14.1 Direct Response......... 245,824 24.1 11,778 1.4 257,602 13.7 United American Exclusive.............. 19,318 1.9 194,594 23.6 213,912 11.4 United Investors Exclusive.............. 84,098 8.3 40,401 98.6 124,499 6.6 Military Independent.... 104,590 10.3 104,590 5.5 Other................... 21,399 2.1 21,399 1.1 ---------- ----- -------- ----- ------- ----- ---------- ----- $1,018,301 100.0% $824,816 100.0% $40,969 100.0% $1,884,086 100.0% ========== ===== ======== ===== ======= ===== ========== ===== For the Year 1998 ----------------------------------------------------------------- Life Health Annuity Total ---------------- -------------- ------------- ---------------- % of % of % of % of Distribution Channel Amount Total Amount Total Amount Total Amount Total - -------------------- ---------- ----- -------- ----- ------- ----- ---------- ----- United American Independent............ $ 36,925 3.8% $417,556 54.9% $ 445 1.3% $ 454,926 25.9% Liberty National Exclusive.............. 282,389 29.4 135,861 17.9 $ 84 0.2 418,334 23.9 American Income Exclusive.............. 204,310 21.3 47,074 6.2 251,384 14.3 Direct Response......... 221,371 23.1 8,817 1.2 230,188 13.1 United American Exclusive.............. 18,798 2.0 150,602 19.8 169,400 9.7 United Investors Exclusive.............. 80,376 8.4 33,065 97.4 113,441 6.4 Military Independent.... 92,204 9.6 92,204 5.3 Other................... 23,393 2.4 360 1.1 23,753 1.4 ---------- ----- -------- ----- ------- ----- ---------- ----- $ 959,766 100.0% $759,910 100.0% $33,954 100.0% $1,753,630 100.0% ========== ===== ======== ===== ======= ===== ========== ===== For the Year 1997 ----------------------------------------------------------------- Life Health Annuity Total ---------------- -------------- ------------- ---------------- % of % of % of % of Distribution Channel Amount Total Amount Total Amount Total Amount Total - -------------------- ---------- ----- -------- ----- ------- ----- ---------- ----- United American Independent............ $ 36,810 4.0% $428,775 58.0% $ 333 1.2% $ 465,918 27.8% Liberty National Exclusive.............. 280,519 30.8 125,701 17.0 84 0.3 406,304 24.2 American Income Exclusive.............. 190,681 20.9 46,116 6.2 236,797 14.1 Direct Response......... 195,393 21.5 6,467 0.9 201,860 12.0 United American Exclusive.............. 18,243 2.0 132,426 17.9 150,669 9.0 United Investors Exclusive.............. 77,986 8.6 27,009 94.7 104,995 6.3 Military Independent.... 79,631 8.8 79,631 4.7 Other................... 30,729 3.4 1,101 3.8 31,830 1.9 ---------- ----- -------- ----- ------- ----- ---------- ----- $ 909,992 100.0% $739,485 100.0% $28,527 100.0% $1,678,004 100.0% ========== ===== ======== ===== ======= ===== ========== =====
Because of the nature of the 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 income 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. It differs from GAAP pretax operating income before other income and administrative expense for two primary reasons. First, there is a reduction to policy obligations for interest credited by 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 19--Business Segments (continued) contract to policyholders because this interest is earned and credited by the investment segment. Second, interest is also added to acquisition expense which represents the implied interest cost of deferred acquisition costs, which is funded by and is attributed to the investment segment. 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 debt and Torchmark's MIPS. The investment segment is measured on a tax-equivalent basis, equating the return on tax-exempt investments to the pretax return on taxable investments. 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 table below sets forth a reconciliation of Torchmark's revenues and operations by segment to its major income statement line items.
For the year 1999 ----------------------------------------------------------------------------------------- Life Health Annuity Investment Other Corporate Adjustments Consolidated ---------- -------- -------- ---------- --------- --------- ----------- ------------ Revenue: Premium................ $1,018,301 $824,816 $ 40,969 $1,884,086 Net Investment income.. $458,824 $(11,487) 447,337 Other income........... $ 3,348 (2,008) 1,340 ---------- -------- -------- -------- --------- -------- -------- ---------- Total revenue........ 1,018,301 824,816 40,969 458,824 3,348 (13,495) 2,332,763 Expenses: Policy benefits........ 666,122 535,901 34,524 1,236,547 Required reserve interest.............. (229,287) (17,383) (40,991) 287,661 -0- Amortization of acquisition costs..... 170,444 64,046 13,310 247,800 Commissions and premium tax................... 56,341 84,913 759 18,642 160,655 Required interest on acquisition costs..... 91,412 12,707 6,536 (110,655) -0- Financing costs*....... 66,431 (14,090) 52,341 ---------- -------- -------- -------- --------- -------- -------- ---------- Total expenses....... 755,032 680,184 14,138 243,437 4,552 1,697,343 ---------- -------- -------- -------- --------- -------- -------- ---------- Underwriting income before other income and administrative expense and nonrecurring charge................. 263,269 144,632 26,831 434,732 Nonrecurring charge..... (20,650) 20,650 -0- ---------- -------- -------- -------- --------- -------- -------- ---------- Underwriting income before other income and administrative expense**............. 242,619 144,632 26,831 20,650 434,732 Excess investment income................. 215,387 215,387 Subtotal adjustments.... 3,348 (18,047) (14,699) ---------- -------- -------- -------- --------- -------- -------- ---------- Subtotal............. 242,619 144,632 26,831 215,387 3,348 2,603 635,420 Administrative expense.. (104,903) (104,903) Parent expense.......... $(10,166) (10,166) Goodwill amortization... (12,075) (12,075) ---------- -------- -------- -------- --------- -------- -------- ---------- Pretax operating income.............. $ 242,619 $144,632 $ 26,831 $215,387 $(101,555) $(22,241) $ 2,603 508,276 ========== ======== ======== ======== ========= ======== ======== Deduct realized investment losses, deferred acquisition cost adjustment, and gain on sale of equipment...................................................................................... (105,868) ---------- Pretax income................................................................................ $ 402,408 ==========
- -------- * Investment segment includes MIPS dividend on a pretax basis. ** Insurance segments exclude Family Service. 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 19--Business Segments (continued)
For the year 1998 ------------------------------------------------------------------------------------------------------ Family Service Underwriting Life Health Annuity Investment Other Corporate Income Adjustments Consolidated --------- -------- -------- ---------- --------- --------- ------------ ----------- ------------ Revenue: Premium........... $ 957,274 $759,910 $ 33,594 $ 2,852 $1,753,630 Net investment income........... $ 470,701 $(11,143) 459,558 Other income...... $ 4,488 (2,163) 2,325 --------- -------- -------- --------- --------- -------- -------- -------- ---------- Total revenue... 957,274 759,910 33,594 470,701 4,488 2,852 (13,306) 2,215,513 Expenses: Policy benefits... 618,867 482,496 34,662 14,251 1,150,276 Required reserve interest......... (215,185) (20,440) (42,171) 296,696 (18,900) -0- Amortization of acquisition costs............ 158,298 59,208 11,561 3,883 (1,926) 231,024 Commissions and premium tax...... 57,364 87,828 510 208 (2,163) 143,747 Required interest on acquisition costs............ 85,374 11,373 5,609 (103,481) 1,125 -0- Financing costs*.. 71,367 (15,042) 56,325 --------- -------- -------- --------- --------- -------- -------- -------- ---------- Total expenses.. 704,718 620,465 10,171 264,582 567 (19,131) 1,581,372 --------- -------- -------- --------- --------- -------- -------- -------- ---------- Underwriting income before other income and administrative expense**......... 252,556 139,445 23,423 2,285 417,709 Reclass of Family Service........... 2,187 98 (2,285) -0- --------- -------- -------- --------- --------- -------- -------- -------- ---------- Underwriting income before other income and administrative expense........... 254,743 139,445 23,521 417,709 Excess investment income............ 206,119 206,119 Subtotal adjustments....... 4,488 5,825 10,313 --------- -------- -------- --------- --------- -------- -------- -------- ---------- Subtotal........ 254,743 139,445 23,521 206,119 4,488 5,825 634,141 Administrative expense........... (103,451) (103,451) Parent expense..... $(10,406) (3,581) (13,987) Goodwill amortization...... (12,075) (12,075) --------- -------- -------- --------- --------- -------- -------- -------- ---------- Pretax operating income......... $ 254,743 $139,445 $ 23,521 $ 206,119 $ (98,963) $(22,481) $ -0- $ 2,244 504,628 ========= ======== ======== ========= ========= ======== ======== ======== Deduct realized investment losses and deferred acquisition cost adjustment............................. (57,637) ---------- Pretax income....................................................................................... $ 446,991 ==========
- ------- * Investment segment includes MIPS dividend on a pretax basis. ** Insurance segments exclude Family Service. 76 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 19--Business Segments (continued)
For the year 1997 ------------------------------------------------------------------------------------------------------ Family Service Underwriting Life Health Annuity Investment Other Corporate Income Adjustments Consolidated --------- -------- -------- ---------- --------- --------- ------------ ----------- ------------ Revenue: Premium........... $ 901,187 $739,485 $ 27,426 $ 9,906 $1,678,004 Net investment income........... $ 439,067 $(9,951) 429,116 Other income...... $ 3,141 (2,179) 962 --------- -------- -------- --------- --------- -------- ------- ------- ---------- Total revenue... 901,187 739,485 27,426 439,067 3,141 9,906 (12,130) 2,108,082 Expenses: Policy benefits... 574,139 462,967 34,631 (7) 37,170 1,108,900 Required reserve interest......... (199,339) (21,644) (41,551) 308,632 (46,098) -0- Amortization of acquisition costs............ 149,358 58,473 9,660 9,105 (1,858) 224,738 Commissions and premium tax...... 55,019 87,069 710 681 (2,183) 141,296 Required interest on acquisition costs............ 80,972 11,080 4,951 (100,096) 3,093 -0- Financing costs*.. 87,055 (15,192) 71,863 --------- -------- -------- --------- --------- -------- ------- ------- ---------- Total expenses.. 660,149 597,945 8,401 295,591 (7) 3,951 (19,233) 1,546,797 --------- -------- -------- --------- --------- -------- ------- ------- ---------- Underwriting income before other income and administrative expense**......... 241,038 141,540 19,025 7 5,955 407,565 Reclass of Family Service........... 5,650 305 (5,955) -0- --------- -------- -------- --------- --------- -------- ------- ------- ---------- Underwriting income before other income and administrative expense........... 246,688 141,540 19,330 7 407,565 Excess investment income............ 143,476 143,476 Subtotal adjustments....... 3,141 7,103 10,244 --------- -------- -------- --------- --------- -------- ------- ------- ---------- Subtotal........... 246,688 141,540 19,330 143,476 3,148 7,103 561,285 Administrative expense........... (104,220) (104,220) Parent expense..... $(13,879) (2,134) (16,013) Goodwill amortization...... (12,074) (12,074) Deferred acquisition cost adjustment for realized gains.... 198 198 --------- -------- -------- --------- --------- -------- ------- ------- ---------- Pretax operating income............ $ 246,688 $141,540 $ 19,330 $ 143,476 $(101,072) $(25,953) $ 0 $ 5,167 429,176 ========= ======== ======== ========= ========= ======== ======= ======= Deduct realized investment losses and deferred acquisition cost adjustment............................. (37,177) ---------- Pretax income.......................................................................................... $ 391,999 ==========
- ------- * Investment segment includes MIPS dividend on a pretax basis. ** Insurance segments exclude Family Service. 77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 19--Business Segments (continued) 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 corporate operations. 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.
At December 31, 1999 ------------------------------------------------------------------------------------- Life Health Annuity Investment Other Corporate Adjustments Consolidated ---------- -------- ---------- ---------- -------- --------- ----------- ------------ Cash and invested assets................. $6,202,251 $ 6,202,251 Accrued investment income................. 112,475 112,475 Deferred acquisition costs.................. $1,547,934 $225,637 $ 119,751 1,893,322 Goodwill................ $402,584 402,584 Separate account assets. 3,413,675 3,413,675 Other assets............ $107,357 107,357 ---------- -------- ---------- ---------- -------- -------- ----------- Total assets............ $1,547,934 $225,637 $3,533,426 $6,314,726 $107,357 $402,584 $12,131,664 ========== ======== ========== ========== ======== ======== =========== At December 31, 1998 ------------------------------------------------------------------------------------- Life Health Annuity Investment Other Corporate Adjustments Consolidated ---------- -------- ---------- ---------- -------- --------- ----------- ------------ Cash and invested assets................. $6,449,021 $ 6,449,021 Accrued investment income................. 99,279 99,279 Deferred acquisition costs.................. $1,390,030 $190,285 $ 92,836 1,673,151 Goodwill................ $414,658 414,658 Separate account assets. 2,425,262 2,425,262 Other assets............ $187,657 187,657 ---------- -------- ---------- ---------- -------- -------- ----------- Total assets............ $1,390,030 $190,285 $2,518,098 $6,548,300 $187,657 $414,658 $11,249,028 ========== ======== ========== ========== ======== ======== ===========
78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 20--Related Party Transactions Transactions Regarding Vesta: Since 1993, Torchmark has held a passive investment in Vesta, a property insurance carrier. Torchmark held 5.1 million shares of Vesta stock, or approximately 28% of the outstanding shares of Vesta, until December, 1998. Torchmark carried its investment in Vesta during this period on the equity method of accounting. In June, 1998, Vesta announced that (a) an investigation of accounting irregularities that occurred during the fourth quarter of 1997 and the first quarter of 1998 would result in an aggregate $14 million net after-tax reduction in previously reported net income, and, in addition, that (b) it would restate its historical financial statements for the period of 1993 through the first quarter of 1998, reflecting reductions in reported net after-tax earnings of $49 million for the period of 1993 through 1997 and $10 million for the first quarter of 1998. To reflect its pro rata share of Vesta's cumulative reported financial corrections, Torchmark recorded a pre-tax charge of $20 million ($13 million after tax) or $.09 per diluted share in the second quarter of 1998. As a result of the announcements relating to Vesta and the decline in value of Vesta stock, Vesta is currently subject to numerous class action lawsuits in state and Federal courts filed subsequent to such announcements. In the fourth quarter of 1998, Torchmark announced its intention to dispose of its holdings in Vesta and to sell Vesta shares under satisfactory terms. In December, 1998, Torchmark sold 680 thousand Vesta shares at a price of $4.75 per share, recording a loss of $3 million after tax. In 1999, Vesta filed a registration statement with the Securities and Exchange Commission for the public offering of its shares held by Torchmark. To facilitate the registration of Vesta shares, Torchmark reacquired the previously sold 680 thousand shares at a price of $5 per share. On November 5, 1999, the registration statement was filed by Vesta to offer all of Torchmark's holdings in Vesta. Because of its intention to dispose of Vesta, Torchmark wrote its carrying value of Vesta down to net realizable amount effective September 30, 1998. The adjustment produced an after-tax realized loss of $24 million, or $.17 per diluted Torchmark share. Net realizable value was $32 million at December 31, 1998. During 1998, Torchmark recorded a pretax loss of $27 million ($18 million after tax or $.13 per diluted share) on Vesta operations, including its pro rata share of Vesta's cumulative accounting corrections. During the first quarter of 1999, the two Torchmark directors who occupied seats on the Vesta Board of Directors resigned from those Vesta seats. Due to the vacating of the Vesta board seats and the absence of significant influence regarding Vesta, Torchmark discontinued the equity method of accounting for Vesta and has included Vesta in equity securities at market value subsequent to December 31, 1998. Torchmark carried Vesta at a value of $20 million at December 31, 1999. Transactions with Directors and Officers: Lamar C. Smith, elected a director of Torchmark in October 1999, is an officer, director and 15% owner of Independent Research Agency for Life Insurance, Inc. (IRA), which receives commissions as the Military Agency distribution system for selling certain life insurance products offered by Torchmark's insurance subsidiaries. On October 1, 1999, Torchmark sold the majority of its investment real estate in two transactions. One transaction involved sales to Elgin Development Company and other investors for total consideration of $97.4 million. The Chairman of the Executive Committee of Torchmark is a one- third investor in Elgin Development Company. His investment in Elgin Development was approximately $1.5 million. 79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 21--Selected Quarterly Data (Unaudited) The following is a summary of quarterly results for the two years ended December 31, 1999. 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, --------- -------- ------------- ------------ 1999: - ----- Premium and policy charges...... $462,764 $470,010 $471,850 $479,462 Net investment income........... 111,396 110,538 111,758 113,645 Realized investment losses...... (7,116) (78,803) (18,128) (6,924) Total revenues.................. 567,510 507,228 565,779 586,378 Policy benefits................. 303,446 308,718 309,113 315,270 Amortization of acquisition expenses....................... 59,570 62,082 62,921 63,227 Pretax income from continuing operations..................... 125,042 57,171 113,688 106,507 Income (Loss) from discontinued operations..................... -0- (1,060) -0- -0- Net income...................... 96,434 35,246 73,312 68,964 Basic net income per common share from continuing operations..................... .59 .27 .55 .52 Basic net income per common share.......................... .71 .26 .55 .52 Diluted net income per common share from continuing operations..................... .59 .27 .55 .52 Diluted net income per common share.......................... .71 .26 .55 .52 Diluted net income per common share from continuing operations excluding realized losses, related acquisition cost adjustment, and equity in earnings of Vesta.............. .62 .63 .64 .56 1998: - ----- Premium and policy charges...... $433,017 $439,364 $437,964 $443,285 Net investment income........... 119,800 117,881 112,165 109,712 Realized investment losses...... (3,173) (1,854) (39,750) (12,860) Total revenues.................. 550,032 556,048 511,271 540,525 Policy benefits................. 287,024 291,826 285,217 286,209 Amortization of acquisition expenses....................... 57,334 57,755 57,248 58,687 Pretax income from continuing operations..................... 117,799 123,856 87,054 118,282 Income (Loss) from discontinued operations..................... 14,766 15,222 (38,607) 2,246 Net income...................... 92,918 63,142 14,546 73,835 Basic net income per common share from continuing operations..................... .56 .34 .38 .51 Basic net income per common share.......................... .66 .45 .10 .53 Diluted net income per common share from continuing operations..................... .55 .34 .38 .51 Diluted net income per common share.......................... .66 .45 .10 .53 Diluted net income per common share from continuing operations excluding realized losses, related acquisition cost adjustment, and equity in earnings of Vesta.............. .55 .57 .58 .60
80 Item 9. Disagreements on Accounting and Financial Disclosure On October 21, 1998, with the approval of the Audit Committee of the Board of Directors of Torchmark, Torchmark engaged Deloitte & Touche LLP as its principal accountants as of January 1, 1999, effective upon the issuance of KPMG Peat Marwick LLP's ("KPMG") reports on the consolidated financial statements of Torchmark and subsidiaries and the separately issued financial statements of Torchmark's subsidiaries, unit investment trust accounts and benefit plans as of and for the year ending December 31, 1998. (KPMG completed its engagement as Torchmark's principal accountants on October 14, 1999, the date upon which the last of the audit reports as of and for the year ended December 31, 1998 for the entities noted above were issued.) The reports of KPMG on the financial statements of Torchmark for either of the two most recent fiscal years did not contain any adverse opinion or disclaimer of opinion. Such reports were not qualified or modified as to uncertainty, audit scope or accounting principles. During such years and during the period between December 31, 1998 and the date of the completion of KPMG's engagement, there was no disagreement between KPMG and Torchmark on any matter of accounting principals or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG, would have caused that firm to make reference to the subject matter of such disagreement in connection with its report on Torchmark's financial statements. 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" 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, 2000 (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) 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. (b) Security ownership of management: Information required by this item is incorporated by reference from the section entitled "Stock Ownership" in the Proxy Statement. (c) 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. 81 PART IV Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K (a) Index of documents filed as a part of this report:
Page of this report ----------- Financial Statements: Torchmark Corporation and Subsidiaries: Independent Auditors' Reports................................... 38 Consolidated Balance Sheet at December 31, 1999 and 1998........ 40 Consolidated Statement of Operations for each of the years in the three-year period ended December 31, 1999.................. 41 Consolidated Statement of Comprehensive Income for each of the years in the three-year period ended December 31, 1999......... 43 Consolidated Statement of Shareholders' Equity for each of the years in the three-year period ended December 31, 1999......... 44 Consolidated Statement of Cash Flow for each of the years in the three-year period ended December 31, 1999...................... 45 Notes to Consolidated Financial Statements...................... 47 Schedules Supporting Financial Statements for each of the years in the three-year period ended December 31, 1999: II.Condensed Financial Information of Registrant (Parent Compa- ny)............................................................. 88 IV.Reinsurance (Consolidated)................................... 91
Schedules not referred to have been omitted as inapplicable or not required by Regulation S-X. (b) Reports on Form 8-K. The following Form 8-K was filed by the registrant during the fourth quarter of 1999: (1) Form 8-K dated October 21, 1999, reporting completion of the change of Registrant's certifying accountant. No financial statements were required in the Form 8-K. (c) Exhibits 82 EXHIBITS
Page of this Report ------- (3)(i) Restated Certificate of Incorporation of Torchmark Corpora- tion, as amended (incorporated by reference from Exhibit 3(i) to Form 10-K for the fiscal year ended December 31, 1998) (ii) By-Laws of Torchmark Corporation, as amended (incorporated by reference from Exhibit 3(b) to Form 10-K for the fiscal year ended December 31, 1989) (4)(a) Specimen Common Stock Certificate (incorporated by reference from Exhibit 4(a) to Form 10-K for the fiscal year ended De- cember 31, 1989) (b) 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)) (10)(a) 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) (b) Capital Accumulation and Bonus Plan of Torchmark Corpora- tion, as amended, (incorporated by reference from Exhibit 10(c) to Form 10-K for the fiscal year ended December 31, 1988) (c) Torchmark Corporation Supplementary Retirement Plan (incor- porated by reference from Exhibit 10(c) to Form 10-K for the fiscal year ended December 31, 1992) (d) Certified Copies of Resolutions Establishing Retirement Pol- icy for Officers and Directors of Torchmark Corporation and Providing Retirement Benefits for Directors (incorporated by reference from Exhibit 10(d) to Form 10-K for the fiscal year ended December 31, 1998) (e) Certified Copy of Resolution Regarding Director Retirement Benefit Program (f) 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) (g) The Torchmark Corporation 1987 Stock Incentive Plan (incor- porated by reference from Exhibit 10(f) to Form 10-K for the fiscal year ended December 31, 1998) (h) General Agency Contract between Liberty National Life Insur- ance Company and Independent Research Agency For Life Insur- ance, Inc. (incorporated by reference from Exhibit 10(i) to Form 10-K for the fiscal year ended December 31, 1990) (i) Form of Marketing and Administrative Services Agreement be- tween Liberty National Fire Insurance Company, Liberty Na- tional Insurance Corporation and Liberty National Life In- surance Company (incorporated by reference from Exhibit 10.2 to Form S-1 Registration Statement No. 33-68114) (j) 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)
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Page of this Report ------- (k) 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 (in- corporated by reference from Exhibit 10(l) to Form 10-K for the fiscal year ended December 31, 1991) (l) 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) (m) Service Agreement, dated as of January 1, 1991, between Torchmark Corporation and Liberty National Life Insurance Company (prototype for agreements between Torchmark Corpora- tion and other principal operating subsidiaries) (incorpo- rated by reference from Exhibit 10(n) to Form 10-K for the fiscal year ended December 31, 1992) (n) The Torchmark Corporation Pension Plan (incorporated by ref- erence from Exhibit 10(o) to Form 10-K for the fiscal year ended December 31, 1992) (o) The Torchmark Corporation 1998 Stock Incentive Plan (incor- porated by reference from Exhibit 10(n) to Form 10-K for the fiscal year ended December 31, 1998) (p) The Torchmark Corporation Savings and Investment Plan (in- corporated by reference from Exhibit 10(s) to Form 10-K for the fiscal year ended December 31, 1992) (q) Credit Agreements dated as of October 24, 1996 among Torchmark Corporation, the Lenders and The First National Bank of Chicago, as Agent (364 Day and Five Year) (incorpo- rated by reference from Exhibit 10(t) to Form 10-K for the fiscal year ended December 31, 1996) (r) 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) (s) 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) (t) Torchmark Corporation 1996 Non-Employee Director Stock Op- tion Plan (incorporated by reference from Exhibit 10(w) to Form 10-K for the fiscal year ended December 31, 1996) (u) 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) (v) The Liberty National Life Insurance Company Pension Plan for Non-Commissioned Employees (x) Receivables Purchase Agreement dated as of December 21, 1999 among AILIC Receivables Corporation, American Income Life Insurance Company, Preferred Receivables Funding Corporation and BankOne, NA (11) Statement re computation of per share earnings 86 (20) Proxy Statement for Annual Meeting of Stockholders to be held April 27, 2000 (21) Subsidiaries of the registrant 87 (23)(a) Consent of Deloitte & Touche LLP to incorporation by refer- ence of their audit report dated January 28, 2000, into Form S-8 of The Torchmark Corporation Savings and Investment Plan (Registration No. 2-76378)
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Page of this Report ------- (b) Consent of Deloitte & Touche LLP to incorporation by reference of their audit report dated January 28, 2000, 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 report dated January 28, 2000, 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 report dated January 28, 2000, 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 report dated January 28, 2000, 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 report dated January 28, 2000, 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 KPMG LLP to incorporation by reference of their audit report dated January 29, 1999, except for Note 18, which is as of February 10, 1999, into Form S-8 and The Torchmark Corporation Savings and Investment Plan (Registration No. 2-76378) (h) Consent of KPMG LLP to incorporation by reference of their audit report dated January 29, 1999, except for Note 18, which is as of February 10, 1999, into Form S-8 and the accompanying Form S-3 Prospectus of the Torchmark Corporation 1996 Non-Employee Stock Option Plan (Registration No. 2- 93760) (i) Consent of KPMG LLP to incorporation by reference of their audit report dated January 29, 1999, except for Note 18, which is as of February 10, 1999, into Form S-8 and the accompanying Form S-3 Prospectus of the Torchmark Corporation 1987 Stock Incentive Plan (Registration No. 33-23580) (j) Consent of KPMG LLP to incorporation by reference of their audit report dated January 29, 1999, except for Note 18, which is as of February 10, 1999, 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) (k) Consent of KPMG LLP to incorporation by reference of their audit report dated January 29, 1999, except for Note 18, which is as of February 10, 1999, into Form S-8 and the Liberty National Life Insurance Company 401(k) Plan (Registration No. 33-65507) (l) Consent of KPMG LLP to incorporation by reference of their audit report dated January 29, 1999, except for Note 18, which is as of February 10, 1999, into Form S-8 and accompanying Form S-3 Prospectus of the Torchmark Corporation 1996 Executive Deferred Compensation Stock Plan (Registration No. 333-27111) (24) Powers of attorney (27) Financial Data Schedule
85 Exhibit 11. Statement re computation of per share earnings TORCHMARK CORPORATION COMPUTATION OF EARNINGS PER SHARE
Twelve months ended December 31, ---------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Net income from continuing operations. $258,930,000 $255,776,000 $260,429,000 Discontinued operations of Waddell & Reed: Net income from operations........... -0- 47,868,000 77,314,000 Loss on disposal..................... (1,060,000) (54,241,000) -0- ------------ ------------ ------------ Net income before extraordinary item and cumulative effect of change in accounting principle................. 257,870,000 249,403,000 337,743,000 Loss on redemption of debt ........... -0- (4,962,000) -0- ------------ ------------ ------------ Net income before cumulative effect of change in accounting principle....... 257,870,000 244,441,000 337,743,000 Cumulative effect of change in ac- counting principle................... 16,086,000 -0- -0- ------------ ------------ ------------ Net income............................ $273,956,000 $244,441,000 $337,743,000 ============ ============ ============ Basic weighted average shares out- standing............................. 133,197,023 139,998,671 139,202,354 Diluted weighted average shares out- standing............................. 133,985,943 141,351,912 141,431,156 Basic earnings per share: Net income from continuing operations. $ 1.95 $ 1.83 $ 1.87 Discontinued operations of Waddell & Reed: Net income from operations........... -0- .34 .56 Loss on disposal..................... (.01) (.39) -0- ------------ ------------ ------------ Net income before extraordinary item and cumulative effect of change in accounting principle................. 1.94 1.78 2.43 Loss on redemption of debt............ -0- (.03) -0- ------------ ------------ ------------ Net income before cumulative effect of change in accounting principle....... 1.94 1.75 2.43 Cumulative effect of change in ac- counting principle................... .12 -0- -0- ------------ ------------ ------------ Net income............................ $ 2.06 $ 1.75 $ 2.43 ============ ============ ============ Diluted earnings per share: Net income from continuing operations. $ 1.93 $ 1.81 $ 1.84 Discontinued operations of Waddell & Reed: Net income from operations........... -0- .34 .55 Loss on disposal..................... (.01) (.38) -0- ------------ ------------ ------------ Net income before extraordinary item and cumulative effect of change in accounting principle................. 1.92 1.77 2.39 Loss on redemption of debt............ -0- (.04) -0- ------------ ------------ ------------ Net income before cumulative effect of change in accounting principle....... 1.92 1.73 2.39 Cumulative effect of change in ac- counting principle................... .12 -0- -0- ------------ ------------ ------------ Net income............................ $ 2.04 $ 1.73 $ 2.39 ============ ============ ============
86 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:
State of Name Under Which Company Incorporation Company Does Business ----------------------- ------------- --------------------- American Income Life American Income Life Insurance Company Indiana Insurance Company Globe Life And Accident Globe Life And Accident Insurance Company Delaware Insurance Company Liberty National Life Liberty National Life Insurance Company Alabama Insurance Company United American United American Insurance Company Delaware Insurance Company United Investors Life United Investors Life Insurance Company Missouri 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 83 through 85 of this report. Exhibits not referred to have been omitted as inapplicable or not required. 87 TORCHMARK CORPORATION (PARENT COMPANY) SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEET (Amounts in thousands)
December 31, ---------------------- 1999 1998 ---------- ---------- Assets: Investments: Long-term investments................................ $ 200,843 $ 105,703 Short-term investments............................... 2,899 1,714 ---------- ---------- Total investments..................................... 203,742 107,417 Cash.................................................. 1,059 7,724 Investment in affiliates.............................. 2,851,913 3,156,322 Due from affiliates................................... -0- 53,207 Accrued investment income............................. 2,360 1,731 Other assets.......................................... 44,404 35,377 ---------- ---------- Total assets........................................ $3,103,478 $3,361,778 ========== ========== Liabilities and shareholders' equity: Liabilities: Short-term debt...................................... $ 418,394 $ 355,242 Long-term debt....................................... 394,160 394,048 Taxes payable........................................ -0- 8,683 Due to affiliates.................................... 51,724 61,542 Other liabilities.................................... 52,539 89,476 ---------- ---------- Total liabilities.................................... 916,817 908,991 Monthly income preferred securities................... 193,324 193,259 Shareholders' equity: Preferred stock...................................... 279 299 Common stock......................................... 147,801 147,801 Additional paid-in capital........................... 901,532 910,119 Accumulated other comprehensive income .............. (174,222) 144,501 Retained earnings.................................... 1,910,487 1,707,933 Treasury stock....................................... (792,540) (651,125) ---------- ---------- Total shareholders' equity........................... 1,993,337 2,259,528 ---------- ---------- Total liabilities and shareholders' equity........... $3,103,478 $3,361,778 ========== ==========
See accompanying Independent Auditors' Report. 88 TORCHMARK CORPORATION (PARENT COMPANY) SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued) CONDENSED STATEMENT OF OPERATIONS (Amounts in thousands)
Year Ended December 31, ---------------------------- 1999 1998 1997 -------- -------- -------- Net investment income............................ $ 17,747 $ 20,024 $ 5,275 Realized investment losses....................... (24,179) (54,855) (19,706) -------- -------- -------- Total revenue.................................. (6,432) (34,831) (14,431) General operating expenses....................... 10,169 10,406 13,880 Reimbursements from affiliates................... (10,800) (13,653) (13,956) Interest expense................................. 58,119 65,871 96,402 -------- -------- -------- Total expenses................................. 57,488 62,624 96,326 -------- -------- -------- Operating loss before income taxes and equity in earnings of affiliates.......................... (63,920) (97,455) (110,757) Income taxes .................................... 22,834 44,132 38,189 -------- -------- -------- Net operating loss before equity in earnings of affiliates...................................... (41,086) (53,323) (72,568) Equity in earnings of affiliates................. 308,114 327,984 420,186 Adjustment to carrying value of Vesta............ -0- (20,234) -0- Monthly income preferred securities dividend (net of tax)......................................... (9,158) (9,777) (9,875) -------- -------- -------- Net income from continuing operations.......... 257,870 244,650 337,743 Discontinued operations of Waddell & Reed: Income from operations.......................... -0- 9,154 -0- Loss on disposal................................ -0- (4,401) -0- -------- -------- -------- Net income before extraordinary item and cumulative effect of change in accounting principle....................................... 257,870 249,403 337,743 Loss on redemption of debt (net of tax).......... -0- (4,962) -0- -------- -------- -------- Net income before cumulative effect of change in accounting principle............................ 257,870 244,441 337,743 Cumulative effect of change in accounting princi- ple............................................. 16,086 -0- -0- -------- -------- -------- Net Income..................................... $273,956 $244,441 $337,743 ======== ======== ========
See accompanying Independent Auditors' Report. 89 TORCHMARK CORPORATION (PARENT COMPANY) SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(continued) CONDENSED STATEMENT OF CASH FLOW (Amounts in thousands)
Year Ended December 31, ------------------------------- 1999 1998 1997 --------- --------- --------- Cash provided from operations before dividends from subsidiaries............................ $ (60,364) $ (46,825) $ (35,284) Cash dividends from subsidiaries............. 284,881 462,267 370,032 --------- --------- --------- Cash provided from operations................. 224,517 415,442 334,748 Cash provided from (used for) investing activ- ities: Disposition of investments................... 43,436 217,323 -0- Acquisition of investments................... (49,260) (311,784) (2,150) Investment in subsidiaries................... (172) (710) (174,799) Loans to subsidiaries........................ (77,476) (48,723) (117,392) Repayments on loans to subsidiaries.......... 75,400 120,079 28,242 Net decrease (increase) in temporary invest- ments....................................... (1,185) (1,378) 5,604 Additions to properties...................... (1,298) (48) (454) Other........................................ 13 -0- (7,460) --------- --------- --------- Cash used for investing activities............ (10,542) (25,241) (268,409) Cash provided from (used for) financing activ- ities: Issuance of debt............................. 63,152 216,279 98,185 Sale of Vesta shares......................... -0- 3,056 -0- Repayments of debt........................... -0- (380,000) (20,000) Issuance of stock............................ 37,163 3,957 93,973 Redemption of preferred stock................ (20,000) -0- (2,767) Acquisitions of treasury stock............... (221,878) (125,875) (182,904) Borrowed from subsidiaries................... 138,800 -0- 133,880 Repayment on borrowings from subsidiaries.... (150,885) -0- (93,060) Payment of dividends......................... (66,992) (107,166) (86,530) --------- --------- --------- Cash provided from (used for) financing activ- ities........................................ (220,640) (389,749) (59,223) Net increase in cash.......................... (6,665) 452 7,116 Cash balance at beginning of period........... 7,724 7,272 156 --------- --------- --------- Cash balance at end of period................. $ 1,059 $ 7,724 $ 7,272 ========= ========= =========
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:
1999 1998 1997 -------- -------- -------- Consolidated subsidiaries..................... $284,881 $462,267 $370,032 ======== ======== ========
See accompanying Independent Auditors' Report. 90 TORCHMARK CORPORATION SCHEDULE IV. REINSURANCE (CONSOLIDATED) (Amounts in thousands)
Percentage Ceded Assumed of Amount Gross to Other from Other Net Assumed Amount Companies Companies Amount to Net ----------- --------- ---------- ------------ ---------- For the Year Ended December 31, 1999: - ------------------- Life insurance in force. $99,741,126 $872,720 $2,377,705 $101,246,111 2.3 % =========== ======== ========== ============ === Premiums:* Life insurance......... $ 919,779 $ 5,622 $ 32,713 $ 946,870 3.5 % Health insurance....... 831,984 7,180 12 824,816 0 % ----------- -------- ---------- ------------ Total premiums........ $ 1,751,763 $ 12,802 $ 32,725 $ 1,771,686 1.8 % =========== ======== ========== ============ === For the Year Ended De- cember 31, 1998: - ---------------------- Life insurance in force. $93,904,622 $718,777 $2,434,438 $ 95,620,283 2.5 % =========== ======== ========== ============ === Premiums:* Life insurance......... $ 862,101 $ 5,090 $ 31,503 $ 888,514 3.5 % Health insurance....... 768,874 7,873 (1,092) 759,909 (.1)% ----------- -------- ---------- ------------ Total premiums........ $ 1,630,975 $ 12,963 $ 30,411 $ 1,648,423 1.8 % =========== ======== ========== ============ === For the Year Ended De- cember 31, 1997: - ---------------------- Life insurance in force. $89,372,206 $728,843 $2,497,790 $ 91,141,153 2.7 % =========== ======== ========== ============ === Premiums:* Life insurance......... $ 813,918 $ 4,232 $ 28,363 $ 838,049 3.4 % Health insurance....... 748,375 8,889 -0- 739,486 0 % ----------- -------- ---------- ------------ Total premiums........ $ 1,562,293 $ 13,121 $ 28,363 $ 1,577,535 1.8 % =========== ======== ========== ============ ===
- -------- * Excludes policy charges See accompanying Independent Auditors' Report. 91 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 /s/ C.B. Hudson By: ________________________________ C.B. Hudson, Chairman, President, Chief Executive Officer and Director /s/ Gary L. Coleman By: ________________________________ Gary L. Coleman, Executive Vice President and Chief Financial Officer (Principal Accounting Officer) Date: March 9, 2000 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. /s/ David L. Boren * /s/ Mark S. McAndrew * By: ________________________________ By: ________________________________ David L. Boren Director Mark S. McAndrew Director /s/ Joseph M. Farley * By: ________________________________ /s/ Harold T. McCormick * Joseph M. Farley Director By: ________________________________ Harold T. McCormick Director /s/ Louis T. Hagopian * By: ________________________________ /s/ George J. Records * Louis T. Hagopian Director By: ________________________________ George J. Records Director /s/ Joseph L. Lanier, Jr. * By: ________________________________ /s/ R.K. Richey * Joseph L. Lanier, Jr. Director By: ________________________________ R.K. Richey Director /s/ Lamar C. Smith * By: ________________________________ Lamar C. Smith Director Date: March 9, 2000 /s/ Gary L. Coleman *By: _______________________________ Gary L. Coleman Attorney-in-fact 92 EX-10.E 2 DIRECTOR RETIREMENT BENEFIT PROGRAM EXHIBIT 10.E CERTIFIED COPY OF RESOLUTION THE BOARD OF DIRECTORS OF TORCHMARK CORPORATION The undersigned Secretary of Torchmark Corporation (the "Company"), hereby certifies that the following resolution was duly adopted by the Board of Directors of the Company on February 29, 2000: RESOLVED, that the director retirement benefit program be discontinued effective February 29, 2000 and directors with accrued but unpaid benefits under such program be allowed the opportunity to convert the present value of their expected retirement benefit thereunder to options in Company common stock; provided, however, that retired directors and advisory directors receiving payments pursuant to such program on February 29, 2000 shall continue to receive such retirement benefit payments in cash. The foregoing action of the Board of Directors of the Company is still in full force and effect this 6/th/ day of March, 2000. /s/ Carol A. McCoy ---------------------------------- Carol A. McCoy Secretary EX-10.V 3 LIBERTY NATIONAL LIFE INSURANCE CO. PENSION PLAN EXHIBIT 10.V THE LIBERTY NATIONAL LIFE INSURANCE COMPANY PENSION PLAN FOR NON-COMMISSIONED EMPLOYEES (Amended and Restated as of January 1, 1989) (Including Amendments Effective as of January 1, 1991, January 1, 1993 and January 1, 1994) (Conformed Copy Including all Amendments Through Amendment Four) BACKGROUND ---------- Effective as of January 1, 1986, The Liberty National Life Insurance Company (the "Company") established a defined benefit pension plan ("Plan") intended to be qualified pursuant to the provisions of the Internal Revenue Code of 1986, as amended. The Plan is intended to provide eligible non-commissioned employees of the Company, and those of any affiliate which adopts the Plan, with a supplemental source of retirement income. Effective as of January 1, l989, the Plan was amended and restated to comply with the Tax Reform Act of l986. The Plan was further amended effective January 1, 1991, January 1, 1993 and January 1, 1994. The benefit under the Plan of any participant who terminates employment or becomes disabled shall be determined in accordance with the provisions of the Plan as in effect on the date of such termination of employment or disability. -i- TABLE OF CONTENTS -----------------
Page ---- BACKGROUND.............................................................. i TABLE OF CONTENTS....................................................... ii ARTICLE I: DEFINITIONS................................................. I-1 "Accrued Retirement Benefit"....................................... I-1 "Actuarial Equivalent"............................................. I-1 "Administrative Committee"......................................... I-1 "Administrator".................................................... I-1 "Affiliate"........................................................ I-1 "Beneficiary"...................................................... I-2 "Benefit Commencement Date"........................................ I-2 "Board of Directors" or "Board".................................... I-2 "Code"............................................................. I-2 "Company".......................................................... I-2 "Comparable Plan".................................................. I-2 "Compensation"..................................................... I-2 "Covered Compensation"............................................. I-2 "Credited Service"................................................. I-3 "Deferred Retirement".............................................. I-3 "Defined Benefit Plan"............................................. I-3 "Defined Contribution Plan"........................................ I-3 "Disability"....................................................... I-3 "Early Retirement"................................................. I-3 "Effective Date"................................................... I-3 "Eligible Employee"................................................ I-3 "Employee"......................................................... I-3 "Employer"......................................................... I-3 "Employment"....................................................... I-4 "Employment Commencement Date"..................................... I-4 "Entry Date"....................................................... I-4 "ERISA"............................................................ I-4 "Final Average Compensation"....................................... I-4 "Hour of Service".................................................. I-4 "Investment Manager"............................................... I-5 "Non-Vested Separation"............................................ I-5 "Normal Retirement"................................................ I-5 "Normal Retirement Age"............................................ I-6 "Normal Retirement Date"........................................... I-6 "One Year Break in Service"........................................ I-6 "Participant"...................................................... I-6 "Participating Affiliates"......................................... I-6 "Plan"............................................................. I-6 "Plan Year"........................................................ I-6
Page ---- "Profit Sharing and Retirement Plan Annuity".................... I-6 "Qualified Joint and Survivor Annuity".......................... I-7 "Qualified Plan"................................................ I-7 "Qualified Pre-Retirement Survivor Annuity"..................... I-7 "Retirement Benefit"............................................ I-7 "Social Security Offset Percentage"............................. I-7 "Social Security Retirement Age"................................ I-8 "Special Average Earnings"...................................... I-8 "Spouse"........................................................ I-8 "Surviving Spouse".............................................. I-8 "Trust" or "Trust Fund"......................................... I-8 "Trust Agreement"............................................... I-8 "Trustee"....................................................... I-8 "Vested Separation"............................................. I-8 "Vesting Service"............................................... I-9 "Year of Service"............................................... I-9 ARTICLE II: PARTICIPATION........................................... II-1 2.1 Admission as a Participant............................ II-1 2.2 Reemployment.......................................... II-1 2.3 Termination of Participation.......................... II-1 ARTICLE III: RETIREMENT BENEFIT..................................... III-1 3.1 Retirement Benefit Formula............................ III-1 3.2 Rules for Determining Years of Credited Service....... III-2 3.3 Limitation on Benefits................................ III-3 ARTICLE IV: VESTING................................................. IV-1 4.1 Determination of Vesting.............................. IV-1 4.2 Rules for Crediting Vesting Service................... IV-1 4.3 Retirement Benefit Forfeitures........................ IV-2 4.4 Vesta Insurance Group, Inc............................ IV-2
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Page ---- ARTICLE V: AMOUNT AND COMMENCEMENT OF RETIREMENT BENEFITS................ VI-1 5.1 Determination of Amount of Retirement Benefits.............. V-1 5.2 Suspension of Payments on Resumption of Employment.......... V-3 5.3 Limitation on Commencement of Benefits...................... V-3 ARTICLE VI: FORMS OF PAYMENT OF RETIREMENT BENEFIT........................ VI-1 6.1 Methods of Distribution..................................... VI-1 6.2 Election of Optional Forms.................................. VI-2 6.3 Direct Rollovers............................................ VI-3 ARTICLE VII: DEATH BENEFITS............................................... VII-1 7.1 Eligibility for Pre-Retirement Death Benefit................ VII-1 7.2 Form of Pre-Retirement Death Benefit........................ VII-2 7.3 Election to Waive........................................... VII-2 7.4 Beneficiaries............................................... VII-3 7.5 After-Death Distribution Rules.............................. VII-3 ARTICLE VIII: CONTRIBUTIONS AND FORFEITURES............................... VIII-1 8.1 Contribution by the Company................................. VIII-1 8.2 Contributions by Employees.................................. VIII-1 8.3 Forfeitures................................................. VIII-1 8.4 Return of Employer Contributions under Special Circumstances............................................... VIII-1 ARTICLE IX: FIDUCIARIES................................................... IX-1 9.1 Named Fiduciaries........................................... IX-1 9.2 Employment of Advisers...................................... IX-1 9.3 Multiple Fiduciary Capacities............................... IX-1 9.4 Reliance.................................................... IX-1 9.5 Scope of Authority and Responsibility....................... IX-2 ARTICLE X: TRUSTEE........................................................ X-1
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Page ---- 10.1 Trust Agreement............................................. X-1 10.2 Assets in Trust............................................. X-1 ARTICLE XI: ADMINISTRATIVE COMMITTEE...................................... XI-1 11.1 Appointment and Removal of Administrative Committee......... XI-1 11.2 Officers of Administrative Committee........................ XI-1 11.3 Action by Administrative Committee.......................... XI-1 11.4 Rules and Regulations....................................... XI-1 11.5 Powers...................................................... XI-1 11.6 Information from Participants............................... XI-2 11.7 Reports..................................................... XI-2 11.8 Authority to Act............................................ XI-2 11.9 Liability for Acts.......................................... XI-3 11.10 Compensation and Expenses................................... XI-3 11.11 Indemnity................................................... XI-3 11.12 Denied Claims............................................... XI-3 ARTICLE XII: PLAN AMENDMENT OR TERMINATION................................ XII-1 12.1 Plan Amendment.............................................. XII-1 12.2 Limitations on Plan Amendment............................... XII-1 12.3 Right of the Employer to Terminate Plan..................... XII-1 12.4 Effect of Partial or Complete Termination................... XII-1 12.5 Allocation of Assets........................................ XII-2 12.6 Residual Assets............................................. XII-2 12.7 Limitations Applicable to Certain Highly Paid Participants.. XII-3 ARTICLE XIII: MISCELLANEOUS PROVISIONS.................................... XIII-1 13.1 Exclusive Benefit of Participants........................... XIII-1 13.2 Plan Not a Contract of Employment........................... XIII-1 13.3 Source of Benefits.......................................... XIII-1 13.4 Benefits Not Assignable..................................... XIII-1 13.5 Domestic Relations Orders................................... XIII-1 13.6 Benefits Payable to Minors, Incompetents and Others......... XIII-2 13.7 Merger or Transfer of Assets................................ XIII-2 13.8 Participation in the Plan by an Affiliate................... XIII-2 13.9 Action by Employer.......................................... XIII-3 13.10 Provision of Information.................................... XIII-3 13.11 Controlling Law............................................. XIII-3 13.12 Conditional Restatement..................................... XIII-3
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Page ---- 13.13 Rules of Construction....................................... XIII-3
APPENDIX A - TOP-HEAVY PROVISIONS -vi- ARTICLE I DEFINITIONS ----------- Each of the following terms shall have the meaning set forth in this Article I for purposes of this Plan: Accrued Retirement Benefit: As of any date, the Retirement Benefit of -------------------------- a Participant calculated pursuant to the provisions of Article III as if the Participant's Employment terminated on such date, but in no event less than the Accrued Retirement Benefit to which the Participant would have been entitled had he terminated employment on December 31, 1988 under the provisions of the Plan as then in effect. Actuarial Equivalent: An amount or a benefit of equivalent current -------------------- value to the Retirement Benefit which would otherwise be provided a Participant, determined on the basis of the following actuarial assumptions: (a) Mortality - for both sexes, the male 1971 Individual Annuity Mortality Table, with an age set back of one year. (b) Interest - the applicable interest rate utilized by the Pension Benefit Guaranty Corporation to value immediate and deferred annuities, whichever is applicable, at the time the payment of such benefit commences or such amount is distributed. Administrative Committee: The committee appointed by the Board ------------------------ pursuant to, and having the responsibilities specified in, Article XI of the Plan. Administrator: The Company or Committee appointed by the Board of ------------- Directors pursuant to, and having the responsibilities specified in, Article XI of the Plan. Affiliate: Any corporation or unincorporated trade or business (other --------- than the Company) while it is: (a) a member of a "controlled group of corporations" (within the meaning of Code (S) 414(b)) of which the Company is a member; (b) a trade or business under "common control" (within the meaning of Code (S) 414(c)) with the Company; (c) a member of an "affiliated service group" (within the meaning of Code (S) 414(m)) which includes the Company; or (d) any other entity required to be aggregated with the Company under Code (S) 4l4(o). I-1 Beneficiary: A person other than a Participant entitled to receive ----------- any payment of benefits pursuant to the terms of this Plan. Benefit Commencement Date: The date, determined under Article V, as ------------------------- of which a Participant or a Beneficiary receives or begins to receive, as the case may be, payment of his benefits under the Plan. Board of Directors or Board: The Board of Directors of the Company. --------------------------- Code: The Internal Revenue Code of 1986, as now in effect or as ---- amended from time to time. A reference to a specific provision of the Code shall include such provision and any applicable regulation pertaining thereto. Company: Liberty National Life Insurance Company, or any successor ------- thereto by consolidation, merger, transfer of assets or otherwise. Comparable Plan: A plan of the same type as described in Treasury --------------- Regulation (S) 1.381(c)(11)-1(d)(4). Compensation: The total cash compensation paid to an Employee during ------------ a calendar year by his Employer, including salary, wages, bonuses, any amounts not paid directly and currently in cash to an Employee but paid for the benefit of an Employee through a "salary reduction" agreement in conjunction with one or more welfare plans of the Employer and the total amount deferred pursuant to an Employee's election under a "cash or deferred arrangement" in conjunction with one or more qualified retirement plans of the Employer, but excluding: 1) any reimbursement of or allowances for expenses; 2) Employer contributions to any form of employee retirement, pension, profit sharing or thrift plan; 3) director's fees; 4) annual service awards; 5) deferred compensation accrued under any nonqualified deferred compensation agreement or contract or any amendment or replacement thereof; 6) commissions; and 7) payments made to any Employee after such Employee's separation from service, in the form of severance benefits. The determination of Compensation will be in accordance with records maintained by the Employer and shall be conclusive. Anything in this definition to the contrary notwithstanding, the Compensation taken into account for a Participant for Plan purposes for any Plan Year beginning after December 31, 1993 shall not exceed $150,000 (or such adjusted amount as may be prescribed for such Plan Year pursuant to Code (S) 401(a)(17)). Covered Compensation: The average of the annual contribution and -------------------- benefits base I-2 under Section 230 of the Social Security Act for each year for the thirty-five year period ending in the year the Participant reaches Social Security Retirement Age (SSRA), except for a Participant who separates before attainment of SSRA the base for the year of separation will be assumed to be the base for all future years to SSRA without increases or adjustments. Credited Service: The Years of Service for computation of the amount ---------------- of a Participant's Retirement Benefit as defined in Article III. Deferred Retirement: Termination of Employment of a Participant after ------------------- his Normal Retirement Date. Defined Benefit Plan: A plan of the type defined in Code (S) 414(j) -------------------- maintained by the Company or an Affiliate, as applicable. Defined Contribution Plan: A plan of the type defined in Code (S) ------------------------- 414(i) maintained by the Company or an Affiliate, as applicable. Disability: Total and permanent disability for a period of at least ---------- six months as defined by the group disability benefit plan maintained by the Participant's Employer. Early Retirement: Termination of Employment, other than by reason of ---------------- Disability or death, of a Participant prior to Normal Retirement Age who has completed at least 15 full years of Vesting Service and has attained the age of 55. Effective Date: The Effective Date of this Amended and Restated Plan -------------- shall be January 1, 1989. The original effective date of the Plan was January 1, 1986. Eligible Employee: All Employees of an Employer other than (a) any ----------------- individual whose duties include selling products of the Company or an Affiliate on a commissioned basis; (b) Employees included in a unit of employees covered by a collective bargaining agreement between the Employer and the employee representatives in the negotiation of which retirement benefits were the subject of good faith bargaining, unless such bargaining agreement provides for participation in the Plan; and (c) leased employees within the meaning of Code (S) 414(n)(2); and (d) any Employee of the Company whose Employment Commencement Date occurred on or after January 1, 1995. Employee: Any individual who, under the usual common law rules -------- applicable in determining the employer-employee relationship, has the status of an employee of the Company or an Affiliate including leased employees within the meaning of Code (S) 414(n)(2). Notwithstanding the foregoing, if such leased employees do not constitute more than twenty percent of the Employer's nonhighly compensated work force within the meaning of Code (S) 414(n)(5)(C)(ii), the term "Employee" shall not include those leased employees covered by a plan described in Code (S) 414(n)(5) unless otherwise provided by the terms of this Plan. I-3 Employer: The Company and each Affiliate participating in the Plan -------- pursuant to Section 13.8. Employment: An Employee's employment with the Company or an Affiliate ---------- or, to the extent determined by the Administrator, any predecessor of any of them. Employment Commencement Date: The date on which an Employee was first ---------------------------- credited with an Hour of Service. Entry Date: The first day of the payroll period following the date ---------- the Eligible Employee has satisfied the requirements of Section 2.1.1. ERISA: The Employee Retirement Income Security Act of 1974, as ----- amended from time to time. Reference to a specific provision of ERISA shall include such provision and any applicable regulation pertaining thereto. Final Average Compensation: The highest average of the Participant's -------------------------- annual Compensation for any five consecutive full calendar years of Employment during the 10 consecutive calendar years of Employment immediately preceding the Participant's termination of Employment, provided that any service credited for a period of Disability shall be disregarded in determining such 10 consecutive years. In the event the Participant does not have at least five full calendar years of Employment, Final Average Compensation shall mean the average annual Compensation for the Participant's total number of full years of Employment. A Participant's annual Compensation, without annualization, during the part of the calendar year immediately preceding his termination of Employment will be treated as his annual Compensation for a full calendar year for the purpose of this Section if that produces a higher average. If a Participant is rehired and is entitled to the reinstatement of prior Credited Service and Vesting Service and does not have at least five full consecutive years of annual Compensation after he is rehired, then his Final Average Compensation shall mean the average of the annual Compensation for the Participant's last five complete calendar years of Employment. Hour of Service: --------------- (a) Each hour for which an Employee is paid, or entitled to payment, for the performance of duties for an Employer (or an Affiliate in the case of an Employee who has transferred his Employment to the Employer from such Affiliate) during the applicable computation period. (b) Each hour for which an Employee is paid, or entitled to payment, by an Employer (or an Affiliate in the case of an Employee who has transferred his Employment to the Employer from such Affiliate) on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including Disability), lay-off, jury duty, military duty or leave of absence. An hour for which an Employee is directly or indirectly I-4 paid or entitled to payment on account of a period during which no duties are performed is not credited to the Employee if such payment is made or due under a plan maintained solely for the purpose of providing severance benefits or complying with the applicable unemployment compensation laws. Hours of Service are not credited for a payment which solely reimburses an Employee for medical or medically related expenses incurred by the Employee. (c) Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by an Employer (or an Affiliate in the case of an Employee who has transferred his Employment to the Employer from such Affiliate). The same Hours of Service shall not be credited both under paragraph (a) or paragraph (b), as the case may be, and under this paragraph (c). (d) If, in accordance with standard personnel policies applied in a non-discriminatory manner to all Employees similarly situated, an Employer determines in writing that an Employee's approved, unpaid leave of absence furthers the interest of the Employer, each hour for which the Employee on the approved unpaid leave of absence would normally have received credit under this Plan if he had been working in his regular employment for the Employer (or an Affiliate in the case of an Employee who has transferred his Employment to the Employer from such Affiliate). (e) An Employee of the Employer (or an Affiliate in the case of an Employee who has transferred his Employment to the Employer from such Affiliate) who is regularly employed by such Employer (or Affiliate) for at least 35 hours a week shall be credited with forty-five Hours of Service if under this Plan he would be credited with at least one Hour of Service during the week. (f) An Employee of the Employer (or an Affiliate in the case of an Employee who has transferred his Employment to the Employer from such Affiliate) who is not regularly employed by such Employer (or Affiliate) for at least 35 hours a week shall be credited with the actual Hours of Service for which he is paid or entitled to credit under this Plan. (g) Hours of Service shall be calculated and credited pursuant to section 2530-200b-2 of the Department of Labor Regulations which are incorporated herein by this reference. Investment Manager: Any person appointed pursuant to Section 9.1 ------------------ having the power to direct the investment of assets in accordance with that Section. Non-Vested Separation: Termination of Employment (other than by --------------------- reason of death or Disability) of a Participant whose vested percentage in his Retirement Benefit is zero percent. I-5 Normal Retirement: Termination of Employment of a Participant at ----------------- Normal Retirement Age. Normal Retirement Age: Age sixty-five. --------------------- Normal Retirement Date: The last day of the payroll period of the ---------------------- Employer coinciding with or next following the date on which the Participant attains age 65. One Year Break in Service: Any period of twelve consecutive months, ------------------------- beginning with the date of an Employee's Employment or any anniversary of the date of such Employment, during which the Employee has not completed more than 500 Hours of Service; except that effective January 1, 1985, for absences beginning on or after January 1, 1985, a Participant who is absent from work due to such Participant's pregnancy, the birth of the Participant's child or by reason of the adoption of a minor child by the Participant for the purpose of caring for such child immediately following its birth or adoption and who provides timely information establishing to the satisfaction of the Administrator the reasons for the absence and the number of days of such absence will be treated as performing a normal schedule (or eight hours per day) up to a maximum of 501 Hours of Service in either the year in which the absence begins or the year immediately following the year in which the absence begins as necessary to prevent such Participant from incurring a One Year Break in Service in either (but not both) the year in which the absence begins or the year immediately following the year in which the absence begins. Participant: An Employee who has commenced, but not terminated, ----------- participation in the Plan as provided in Article II. Participating Affiliates: Any Affiliate which in accordance with ------------------------ Section 13.8 by duly authorized action has adopted the Plan and not withdrawn therefrom. Plan: The Liberty National Life Insurance Company Pension Plan for ---- Non-Commissioned Employees. Plan Year: Each twelve consecutive month period ending on December --------- 31, during any part of which the Plan is in effect. Profit Sharing and Retirement Plan Annuity: The annual single life ------------------------------------------ annuity, without death benefit, which can be provided by that portion of the Participant's account under the Profit Sharing and Retirement Plan attributable to Company contributions and earnings thereon. In determining the amount attributable to Company contributions and earnings thereon for this purpose no deduction shall be made for the amount of any loans outstanding. There shall be added to the amount attributable to Company contributions and earnings thereon: (1) the amount of any withdrawal(s) by, and prior distribution(s) to, the Participant to the extent such withdrawals and prior distributions exceed the amount of the Participant's contributions and earnings thereon and I-6 (2) the amount of the earnings of the Plan which would have been allocated to the amount(s) described in the preceding paragraph from the date of such withdrawals or distributions. A Participant's Profit Sharing and Retirement Plan Annuity shall be calculated as of his termination of Employment, based upon the Participant's attained age and the Company's rate basis for annuities purchasable under the Profit Sharing and Retirement Plan on such date. A Participant's Profit Sharing and Retirement Plan Annuity may be calculated on either an immediate or deferred basis as indicated in the context of this Plan, but, in any case, one shall be the Actuarial Equivalent of the other. Qualified Joint and Survivor Annuity: An annuity for the life of the ------------------------------------ Participant with a survivor annuity continuing after the Participant's death to the Participant's Surviving Spouse for the Surviving Spouse's life in an amount which is equal to fifty percent of the amount payable during the joint lives of the Participant and such Surviving Spouse and which is the Actuarial Equivalent of the Participant's Retirement Benefit. Qualified Plan: A Defined Contribution Plan or a Defined Benefit Plan -------------- which is qualified under Code (S) 401(a). Qualified Pre-Retirement Survivor Annuity: The pre-retirement death ----------------------------------------- benefit provided for in Section 7.1.1(2). Retirement Benefit: The retirement benefit of a Participant ------------------ calculated under Article III in the form of a single life annuity payable monthly commencing on Normal Retirement Date for the life of the Participant. Social Security Offset Percentage: The percentage factor utilized in --------------------------------- determining the social security offset for a Participant. This offset percentage is based on the Participant's Social Security Retirement Age and the age at which the Participant's benefits commence. The appropriate offset percentages are as follows: Benefit Social Security Retirement Age Commencement ------------------------------ Age Age 65 Age 66 Age 67 ------- ------ ------ ------ (Interpolate for months) 55 0.750% 0.688% 0.632% 56 0.750% 0.703% 0.645% 57 0.750% 0.706% 0.662% 58 0.750% 0.708% 0.667% 59 0.750% 0.711% 0.671% 60 0.750% 0.712% 0.675% 61 0.750% 0.682% 0.648% I-7 62 0.750% 0.688% 0.625% 63 0.750% 0.692% 0.635% 64 0.750% 0.696% 0.643% 65 0.750% 0.700% 0.650% 66 0.750% 0.750% 0.700% 67 0.750% 0.750% 0.750% Social Security Retirement Age: The earliest age at which a ------------------------------ Participant is entitled to receive his full benefit under the Social Security Act. The appropriate Social Security Retirement Ages are as follows: Calendar Year Age of Social Security of Birth Retirement Age ------------- ------------------ 1937 and Before Age 65 1938 to 1954 Age 66 1955 and after Age 67 Special Average Earnings: The average of the Participant's annual ------------------------ Compensation for the three completed consecutive calendar year periods during his last five complete consecutive calendar years of Employment which yields the highest average, or if employed less than three complete consecutive calendar years the amount obtained by converting his compensation for the most recent period of Employment to an annual rate, where compensation considered for any year cannot exceed the Social Security contribution and benefits base under Section 230 of the Social Security Act for that year. Notwithstanding the above, Special Average Earnings will not exceed the Participant's Covered Compensation. Spouse: The person lawfully married to a Participant. ------ Surviving Spouse: The Spouse of a Participant on the earlier of: ---------------- (a) the date of the Participant's death; or (b) the Participant's Benefit Commencement Date. Trust or Trust Fund: The trust established under the Plan in which ------------------- Plan assets are held. Trust Agreement: The agreement between the Company and the Trustee --------------- with respect to the Trust fund. Trustee: The trustee appointed pursuant to Article X, and any ------- successor trustee. I-8 Vested Separation: Termination of Employment of a Participant for any ----------------- reason other than Disability before he is eligible for Early Retirement, with a vested percentage in his Retirement Benefit. Vesting Service: The Years of Service credited to a Participant under --------------- Section 4.2 for purposes of determining the Participant's vested percentage in his Retirement Benefit. Year of Service: --------------- (a) For purposes of determining eligibility to participate under Article II and for purposes of determining Vesting Service: (i) for Employment, or return to Employment after a One Year Break in Service, beginning in 1975 or later years, a period of twelve consecutive months beginning with the date of Employment or return to Employment during which an Employee has not less than 1000 Hours of Service for an Employer (or an Affiliate in the case of an Employee who has transferred his Employment to the Employer from such Affiliate); (ii) for Employment which began before 1975, with respect to periods before the 1975 anniversary of such Employment, an aggregate of fifty-two weeks during each of which an Employee was employed on a permanent basis for at least 35 hours a week by an Employer (or by an Affiliate in the case of an Employee who has transferred his Employment to the Employer from such Affiliate); (iii) for Employment which began before 1975, with respect to periods after the 1975 anniversary of such Employment, a period of twelve consecutive months beginning with the date of such anniversary in 1975 or later years during which an Employee has not less than 1000 Hours of Service for an Employer (or an Affiliate in the case of an Employee who has transferred his Employment to the Employer from such Affiliate); and (iv) for Employees who are former employees of Peninsular Life Insurance Company and whose employment with Liberty National Life Insurance Company began on May 20, 1985 as a result of the acquisition by Liberty National Life Insurance Company of the Home Service Division of Peninsular Life Insurance Company, a period of twelve consecutive months beginning with the date of employment or return to employment with Peninsular Life Insurance Company during which such individuals had not less than 1,000 Hours of Service with either or both Peninsular Life Insurance Company and Liberty National Life Insurance Company. I-9 (b) For purposes of determining Credited Service: (i) for Employment, or return to Employment after a One Year Break in Service, beginning in 1975 or later years, a period of twelve consecutive months beginning with the date of Employment or return to Employment during which an Employee has not less than 2000 Hours of Service for an Employer in Employment covered by the Plan (or for an Affiliate in employment covered by such Affiliate's Comparable Plan in the case of an Employee who has transferred his Employment to the Employer from such Affiliate); (ii) for Employment which began before 1975, with respect to periods before the 1975 anniversary of such Employment, an aggregate of fifty-two weeks during each of which an Employee was employed in Employment covered by the Plan on a permanent basis for at least 35 hours a week by an Employer (or by an Affiliate in employment covered by such Affiliate's Comparable Plan in the case of an Employee who has transferred his Employment to the Employer from such Affiliate); (iii) for Employment which began before 1975 with respect to periods after the 1975 anniversary of such Employment, a period of twelve consecutive months beginning with the date of such anniversary in 1975 or later years during which an Employee has not less than 2000 Hours of Service in Employment covered by the Plan for an Employer (or for an Affiliate in employment covered by such Affiliate's Comparable Plan in the case of an Employee who has transferred his Employment to the Employer from such Affiliate); (iv) for Employees who are former employees of Peninsular Life Insurance Company and whose Employment with Liberty National Life Insurance Company began on May 20, 1985 as a result of the acquisition by Liberty National Life Insurance Company of the Home Service Division of Peninsular Life Insurance Company and who are employed by Liberty National Life Insurance Company for the period beginning on May 20, 1985 and ending on a date which is no earlier than May 20, 1988, a period of twelve consecutive months beginning with the date of employment or return to employment with Peninsular Life Insurance Company during which such individuals had not less than 2,000 Hours of Service with either or both Peninsular Life Insurance Company and Liberty National Life Insurance Company; and (v) For purposes of (i) and (iii) of this subparagraph (b), an Employee who completes at least 1,000 Hours of Service but less than 2,000 Hours of Service in a computation period shall be credited with a fraction of a I-10 Year of Service for such period, determined by dividing his Hours of Service in such period by 2,000. I-11 ARTICLE II ---------- PARTICIPATION ------------- 2.1 Admission as a Participant -------------------------- 2.1.1 An Eligible Employee shall become a Participant on the first day of the payroll period next following the later of his completion of one Year of Service or his attainment of age 21. 2.1.2 An Employee who did not become a Participant on the Entry Date next following the date on which he met the eligibility requirements of Section 2.1.1 because he was not then an Eligible Employee shall become a Participant as of the first day on which he becomes an Eligible Employee. 2.1.3 If an Employee has not completed 1,000 Hours of Service for the Employer by the anniversary of his Employment, the next twelve-month period for determining a Year of Service shall begin on the January 1 next following his date of Employment and thereafter any subsequent twelve-month period shall begin on the anniversary of his Employment. 2.2 Reemployment ------------ An individual who has ceased to be a Participant and who again becomes an Eligible Employee shall become a Participant as of the first date on which he again becomes an Eligible Employee, unless he has had a One Year Break in Service. If an individual again becomes an Eligible Employee after a One Year Break in Service, he shall become a Participant upon completion of one Year of Service retroactive to a date which is not later than the date he again became an Eligible Employee. 2.3 Termination of Participation ---------------------------- A Participant shall cease to be such: (a) upon the payment to him of all nonforfeitable benefits due to him under the Plan at a time when he is no longer eligible for any future benefit accrual; (b) upon his Non-Vested Separation; (c) upon his death; or (d) upon the transfer of his Accrued Benefit to another Qualified Plan. II-1 ARTICLE III RETIREMENT BENEFIT ------------------ 3.1 Retirement Benefit Formula -------------------------- 3.1.1 A Participant's monthly Retirement Benefit shall be an amount equal to 1/12 of the excess of (a) over the sum of (b), (c) and (d) below, where: (a) is 2% of the Participant's Final Average Compensation for each year of Credited Service up to 30 years plus 1% of the Participant's Final Average Compensation for each year of Credited Service in excess of 30 years (not exceeding 10%); (b) is the social security offset which is equal to the smaller of: (1) 50% of the basic benefit calculated above in Section 3.1.1(a), but substituting Special Average Earnings for Final Average Compensation in the formula; or (2) the Social Security Offset Percentage times the Participant's Special Average Earnings times each year of Credited Service not to exceed 35 years; (c) is the Participant's Profit Sharing and Retirement Plan Annuity; and (d) is the Participant's annual retirement income (expressed in the form of a single life annuity commencing at Normal Retirement Date) under the Comparable Plan or Plans of the Company or any affiliate of the Company or any other corporation merged into the Company, or whose assets were acquired by the Company. 3.1.2 Notwithstanding Section 3.1.1, for Participants who were participating in the Liberty National Life Insurance Company Pension Plan on April 5, 1982, the monthly Retirement Benefit of any such Participant retiring after April 5, 1982, shall not be less than 1/12 of (a) or (b) below, whichever is greater, where: (a) is (i) plus (ii) less (iii), where: (i) applies only to Participants with less than 30 years of Credited Service on the anniversary of employment preceding April 5, 1982, and is 1/12 of 2% times the Final Average Compensation times the number of complete months of service for benefit accrual purposes from March 6, 1982, through the earlier of the 30th year of Credited Service or the date of termination of Employment; and, (ii) is 1/12 of 1% times the Final Average Compensation times the number of complete months of service for benefit accrual purposes from March 6, 1982, or from the 30th year of Credited Service, if later, through the earlier of the date of termination of Employment or the 40th year of Credited Service for benefit accrual III-1 purposes; and (iii) applies only to Participants with less than 35 years of Credited Service on the anniversary of employment immediately preceding April 5, 1982, and is the lesser of (x) 1/12 of the Social Security Offset Percentage times the Participant's Special Average Earnings times the number of complete months of service for benefit accrual purposes from March 6, 1982, through the earlier of the 35th year of Credited Service for benefit accrual purposes, or the date of termination of Employment or (y) 50% of the sum of the amounts in (a)(i) plus (a)(ii) but substituting Special Average Earnings for Final Average Compensation in those formulas. (b) is (i) plus (ii) less (iii), where: (i) is 1/12 of 2% times the Final Average Compensation times the number of complete months of service for benefit accrual purposes from April 5, 1982, through the earlier of April 4, 1987 or the date of termination of Employment; and (ii) is 1/12 of 1.5% times the Final Average Compensation times the number of complete months of service for benefit accrual purposes from April 5, 1987, through the earlier of April 4, 1992 or the date of termination of Employment; and (iii) is the amount calculated in Section 3.1.2(a)(iii), above. Any benefit provided under this Section shall be based solely on Credited Service for benefit accrual purposes for an Employer participating in this Plan. 3.1.3 The amount of Retirement Benefit calculated under this section shall be subject to actuarial adjustment if it is payable in any other form of payment authorized by this Plan. 3.1.4 The Retirement Benefit of a Participant who terminated Employment or incurred a Disability prior to the Effective Date shall be determined in accordance with the provisions of the Plan as in effect on the date of termination of Employment or Disability. 3.2 Rules for Determining Years of Credited Service ----------------------------------------------- 3.2.1 Subject to Sections 3.2.2 through 3.2.7 below, Credited Service shall mean the sum of a Participant's Years of Service, expressed in full years and fractions thereof, except for the following: (a) Any period of Employment prior to the first anniversary of the Participant's Employment following his 20th birthday (or 24th birthday for years prior to January 1, 1985); and (b) Any period of Employment in a classification in which the Participant does not qualify as an Eligible Employee. 3.2.2 If an Employee is on an authorized unpaid leave of absence granted by his III-2 Employer, his period of absence shall be counted as Credited Service upon his return to active Employment only if his Employer determines in writing, in accordance with standard personnel policies applied in a non-discriminatory manner to all Employees similarly situated, that such absence furthers the interest of the Employer. 3.2.3 If an Employee is on an authorized military leave while his reemployment rights are protected by law and provided that he directly entered military service from his Employer's service and shall not have voluntarily reenlisted after the date of first entering active military service, his period of absence shall be counted as Credited Service upon his return to active Employment. 3.2.4 If an Employee is on an authorized leave of absence on account of Disability, he shall continue to receive Credited Service from the date of Disability until the earlier of: (i) his Early Retirement Date; (ii) his Normal Retirement Date; or (iii) his recovery from Disability. 3.2.5 An Employee who terminates Employment with no vested percentage in his Retirement Benefit shall, if he returns to Employment, have no credit for Credited Service prior to such termination of Employment if (i) for years prior to January 1, 1985, the total of his consecutive One Year Breaks in Service immediately preceding his reemployment exceed his aggregate years of Vesting Service (whether or not consecutive, but excluding Vesting Service previously disregarded under Section 4.2.4) prior to the termination; or (ii) for years on or after January 1, 1985, the total of his consecutive One Year Breaks in Service immediately preceding his reemployment exceed the greater of five years or his aggregate years of Vesting Service (whether or not consecutive, but excluding Vesting Service previously disregarded under Section 4.2.4) prior to the termination. A Participant who had a Vested Termination and returns to Employment will retain credit for his prior years of Credited Service unless he received a distribution of his Accrued Retirement Benefit at the time of such Vested Termination. 3.2.6 No Participant shall receive Credited Service during a period when such Participant is accruing benefits under another defined benefit plan of the Employer or an Affiliate unless the Retirement Benefit under this Plan is reduced or offset by the full amount of benefits accrued by such Participant under such other defined benefit plan. 3.2.7 By appropriate corporate action exercised in a uniform and nondiscriminatory manner and, where applicable consented to by the Company, each Employer may grant Credited Service for any Employment with such Employer prior to the time it became an Employer. III-3 3.3 Limitation on Benefits ---------------------- Notwithstanding any other provisions of the Plan, a Participant's Accrued Retirement Benefit shall not exceed the limitations of Code (S) 415 which are hereby incorporated by reference. In the event that the limitations of Code (S) 415(e) would otherwise be violated, a Participant's benefits and/or annual additions under plans of the Company or an Affiliate will be reduced as necessary in the following order: (i) the accrued benefit under any defined benefit plan (pro rata with respect to two or more such plans); (ii) unmatched employee contributions under any defined contribution plan; (iii) matched employee contributions under any defined contribution plan; (iv) matching Employer contributions under any defined contribution plan; and (v) Employer contributions to the Profit-Sharing and Retirement Plan of Liberty National Life Insurance Company. III-4 ARTICLE IV VESTING PROVISIONS ------------------ 4.1 Determination of Vesting ------------------------ In the case of a Participant who performs at least one Hour of Service on or after January 1, 1989, he shall have a vested percentage of 100% in his Retirement Benefit upon: (i) termination of Employment due to death or Disability or upon or after attaining Normal Retirement Age; or (ii) completion of five years of Vesting Service. 4.2 Rules for Crediting Vesting Service ----------------------------------- 4.2.1 Subject to Sections 4.2.2 through 4.2.4 below, a Participant's Vesting Service shall mean the sum of a Participant's Years of Service under the Plan, except for Years of Service before the Participant attained age 18 (or age 22 in the case of Participants who do not complete at least one Hour of Service on or after January 1, 1985). 4.2.2 If an Employee is on an authorized unpaid leave of absence granted by his Employer in accordance with standard personnel policies of such Employer applied in a non-discriminatory manner to all Employees similarly situated, his period of absence shall not be considered a Break in Service and shall be counted as Vesting Service upon his return to active Employment. 4.2.3 If an Employee is on an authorized military leave while his reemployment rights are protected by law and provided that he directly entered military service from his Employer's service and shall not have voluntarily reenlisted after the date of first entering active military service, his period of absence shall not be considered a Break in Service and shall be counted as Vesting Service upon his return to active Employment. 4.2.4 An Employee who terminates Employment with no vested percentage in his Retirement Benefit shall, if he returns to Employment, have no credit for Vesting Service prior to such termination of Employment if (i) for years prior to January 1, 1985, the total of his consecutive One Year Breaks in Service immediately preceding his reemployment exceed his aggregate years of Vesting Service (whether or not consecutive, but excluding Vesting Service previously disregarded under this rule) prior to such termination; or (ii) for years on or after January 1, 1985, the total of his consecutive One Year Breaks in Service immediately preceding his reemployment exceed the greater of five years or his aggregate years of Vesting Service (whether or not consecutive, but excluding Vesting Service previously disregarded under this rule) prior to the termination. A Participant who had a Vested Separation and returns to Employment will retain credit for his prior years of Vesting Service. IV-1 4.3 Retirement Benefit Forfeitures ------------------------------ The unvested portion of the Retirement Benefit of a Participant who has terminated Employment shall be forfeited as of the earliest date on which such Participant's Vesting Service may be disregarded pursuant to Section 4.2.4. Any forfeitures shall be applied to reduce the Employer actuarial liability under the Plan. 4.4 Vesta Insurance Group, Inc. --------------------------- A Participant who terminated employment with the Company on November 12, 1993, and who became - as of that same date - an employee of Vesta Insurance Group, Inc., became fully vested in his Retirement Benefit as of such date. IV-2 ARTICLE V AMOUNT AND COMMENCEMENT OF RETIREMENT BENEFITS ---------------------------------------------- 5.1 Determination of Amount of Retirement Benefits ---------------------------------------------- 5.1.1 Normal Retirement Benefits. A Participant's benefits upon Normal -------------------------- Retirement shall be equal to his Retirement Benefit as of his Normal Retirement Date. The Participant's Benefit Commencement Date shall be the last day of the payroll period coincident with or next following his termination of Employment. The Participant shall not be entitled to any benefits under this Paragraph unless he shall survive until his Benefit Commencement Date. 5.1.2 Deferred Retirement Benefits. A Participant's benefits upon ---------------------------- Deferred Retirement shall be equal to his Retirement Benefit determined as of his Deferred Retirement Date (without actuarial increase for deferred commencement). The Participant's Benefit Commencement Date shall be the last day of the payroll period coincident with or next following his termination of Employment. The Participant shall not be entitled to any benefits under this Paragraph unless he shall survive until his Benefit Commencement Date. 5.1.3 Early Retirement Benefits. A Participant's benefits upon Early ------------------------- Retirement shall be equal to his Retirement Benefit calculated as of the date of Early Retirement. The Participant's Benefit Commencement Date shall be his Normal Retirement Date; however if he so elects, the Benefit Commencement Date shall be the last day of the payroll period coincident with or next following his Early Retirement, or the last day of any payroll period thereafter which is prior to his Normal Retirement Date. If the Participant elects a Benefit Commencement Date preceding his Normal Retirement Date, his benefit shall equal the excess of (i) over (ii) below, where: (i) is his Retirement Benefit, without reduction for his Profit Sharing and Retirement Plan Annuity, multiplied by the early retirement factor shown below: V-1 Years by Which the Date of the Participant's Early Retirement First Benefit Payment Factor to Be Applied Precedes His Normal to Accrued Retirement Retirement Date Benefit ---------------------- ------------------- (Interpolate for Months) 10 .500 9 .533 8 .567 7 .600 6 .633 5 .667 4 .733 3 .800 2 .867 1 .933 0 1.000 and (ii) is his Profit Sharing and Retirement Plan Annuity. A Participant shall not be entitled to any benefits under this Paragraph unless he shall survive until his Benefit Commencement Date. 5.1.4 Vested Separation Benefits. A Participant's benefits upon Vested -------------------------- Separation shall be equal to his Retirement Benefit calculated as of the date of Vested Separation multiplied by his vesting percentage. The Participant's Benefit Commencement Date shall be his Normal Retirement Date; provided, however, that, such a Participant may elect to commence receiving his benefits on or after the earliest date that he could have been eligible for Early Retirement. If the Participant elects a Benefit Commencement Date preceding his Normal Retirement Date, his benefit shall be equal to (a) times (b) minus (c), where: (a) is the Retirement Benefit which would have been payable to him commencing on his Normal Retirement Date determined without reduction for his Profit Sharing and Retirement Plan Annuity; (b) is the appropriate early retirement factor shown in section 5.1.3; and (c) is his Profit Sharing and Retirement Plan Annuity. A Participant shall not be entitled to any benefits under this Paragraph unless he shall survive until his Benefit Commencement Date. 5.1.5 Non-Vested Separation. A Participant shall not be entitled to any --------------------- Retirement Benefit upon his Non-Vested Separation. In addition, if a Participant who is zero percent vested in his Accrued Retirement Benefit terminates Employment, he shall be deemed to have received a distribution of his Accrued Retirement Benefit. V-2 5.2 Suspension of Payments on Resumption of Employment -------------------------------------------------- 5.2.1 If an Employee continues in Employment after his Normal Retirement Date or if a former Employee is receiving monthly payment of his Retirement Benefit, payment of his Retirement Benefit shall be suspended for each calendar month during which such Employee or former Employee continues in (or resumes) Employment and performs more than 40 Hours of Service per calendar month considered as service under ERISA (S) 203(a)(3)(B). 5.2.2 No payment shall be withheld by the Plan pursuant to this Section unless the Plan notifies the Employee by personal delivery or first class mail during the first calendar month or payroll period in which the Plan withholds payments that his benefits are suspended. Such notifications shall contain a description of the specific reasons why benefit payments are being suspended, a description of the Plan provision relating to the suspension of payments, a copy of such provisions, and a statement to the effect that applicable Department of Labor regulations may be found in Title 29 of the Code of Federal Regulations (S) 2530.203-3. In addition, the notice shall inform the Employee of the Plan's procedures for affording a review of the suspension of benefits. Requests for such reviews shall be considered in accordance with the claims procedure adopted by the Administrator. 5.2.3 If benefit payments have been suspended, payments shall resume no later than the first day of the third calendar month after the calendar month in which the Employee ceases to be employed in ERISA (S) 203(a)(3)(B) service. The initial payment upon resumption shall include the payment scheduled to occur in the calendar month when payments resume and any amounts withheld during the period between the cessation of ERISA (S) 203(a)(3)(B) service and the resumption of payments. 5.2.4 The Retirement Benefit payable upon resumption of benefit payment shall be equal to the Participant's Retirement Benefit as of the date of his subsequent termination of Employment reduced by the Actuarial Equivalent of payments previously made to him; provided, however, that such Retirement Benefit may not be less than the Retirement Benefit previously payable. 5.3 Limitation on Commencement of Benefits -------------------------------------- 5.3.1 Unless otherwise elected by a Participant, the Participant's Benefit Commencement Date shall in no event be later than the 60th day after the close of the Plan Year in which the latest of the following events occurs: (a) the attainment by the Participant of his Normal Retirement Age; (b) the tenth anniversary of the year in which the Participant commenced participation in the Plan; or (c) the Participant's termination of Employment. V-3 5.3.2 If the amount of benefits payable cannot be determined within such 60-day period, or if it is not possible to pay such benefits within such period because the Administrator has been unable to locate the Participant after making reasonable efforts to do so, then a payment, retroactive to such 60th day, shall be made no later than 60 days after the earliest date on which the amount of such benefits can be determined or the Participant can be located, as the case may be. 5.3.3 Any other provision of this Article V to the contrary notwithstanding, the Benefit Commencement Date of a Participant must be no later than the first day of April following the calendar year in which the Participant attains age 70-1/2 even if he continues in Employment after that date. Notwithstanding the foregoing, if a Participant who is not a "5 percent owner" (as defined in Code (S) 401(a)(9)) attained age 70-1/2 before January 1, 1988, the Benefit Commencement Date must be no later than the first day of April following the calendar year in which the Participant terminates Employment. 5.3.4 If the Actuarial Equivalent value of a Participant's Retirement Benefit exceeds $3,500, the Participant (and, if applicable, his Spouse) must consent, in writing filed with the Administrator, to any distribution from the Plan before the Participant's attainment of Normal Retirement Age. V-4 ARTICLE VI FORMS OF PAYMENT OF RETIREMENT BENEFIT -------------------------------------- 6.1 Methods of Distribution ----------------------- 6.1.1 A Participant's benefits shall be payable in the normal form of a Qualified Joint and Survivor Annuity if the Participant is married on his Benefit Commencement Date and in the normal form of an annuity for the life of the Participant with Actuarially Equivalent payments guaranteed for 120 months if the Participant is not married on that date, provided that, and subject to Sections 6.1.2, 6.1.3 and 6.1.4, a Participant may within the 90-day period prior to the Benefit Commencement Date elect, in accordance with Section 6.2, any of the following optional forms of benefit payment instead of the normal form: (a) A Single Life Annuity, under which monthly payments calculated --------------------- in accordance with Section 3.1.1 are made to the Participant during his lifetime with no further payments from the Plan on his behalf after his death. (b) A Joint and 50%, 66-2/3%, or 100% Survivor Annuity, under which -------------------------------------------------- Actuarially Equivalent monthly payments are made to the Participant for the joint lives of the Participant and his Beneficiary with payments continuing for the life of the survivor in an amount equal to 50%, 66-2/3% or 100% of the joint life payments (whichever is elected by the Participant). A Participant may elect to add a period certain of 10 years in which event no reduction in payments will be made for the longer of the 10 year period or the period during which both the Participant and Beneficiary remain alive. (c) A 120 Months Certain and Life Income Annuity, an optional form -------------------------------------------- of payment for a married Participant, under which reduced Actuarially Equivalent payments are made to the Participant during the Participant's lifetime, with the provision that if the Participant's death occurs before he had received 120 monthly payments the value of the remaining number of such payments shall be paid to his Beneficiary. (d) Lump Sum, under which the Actuarially Equivalent value of the -------- Participant's Retirement Benefit is paid in one sum. 6.1.2 Anything in Section 6.1.1 to the contrary notwithstanding, if the Actuarial Equivalent value of a Participant's Retirement Benefit is $3,500 or less, his benefit shall be paid in the form of a lump sum distribution and no optional form of benefit payment shall be available. 6.1.3 Payment in any form may only be made over one of the following periods (or a combination thereof): (a) the life of the Participant, (b) the life of the Participant and a designated Beneficiary, (c) a period certain not extending beyond the life expectancy of the Participant, or (d) a period certain not extending beyond the joint and last survivor VI-1 expectancy of the Participant and a designated Beneficiary. 6.1.4 If the Participant's Spouse is not his designated Beneficiary, the method of distribution must assure that at least fifty percent of the present value of the Participant's Retirement Benefit is paid within the life expectancy of the Participant. 6.2 Election of Optional Forms -------------------------- 6.2.1 By notice to the Administrator within the 90-day period prior to a Participant's Benefit Commencement Date, the Participant may elect, in writing and subject to the spousal consent rules as set forth in Section 6.2.4, not to receive the normal form of benefit payment otherwise applicable and to receive instead an optional form of benefit payment provided for in Section 6.1.1. 6.2.2 Within a reasonable period, but in no event later than 30 days before nor earlier than 90 days before a Participant's Benefit Commencement Date, the Administrator shall provide to each Participant a written explanation of: (a) the terms and conditions of the Participant's normal form of benefit payment; (b) the Participant's right to make, and the effect of, an election to waive the normal form of benefit payment; (c) the rights of the Participant's Spouse under Section 6.2.4; and (d) the right to make, and the effect of, a revocation of a previous election to waive the normal form of benefit payment. The Administrator may, on a uniform and nondiscriminatory basis, provide for such other notices, information or election periods or take such other action as the Administrator considers necessary or appropriate in order to comply with Code (S)(S) 401(a)(11) and 417. 6.2.3 A Participant may revoke his election to take an optional form of benefit at any time prior to the Participant's Benefit Commencement Date, without the consent of his Spouse. 6.2.4 The election of an optional form of benefit by a married Participant must be in the form of a waiver of a Qualified Joint and Survivor Annuity. The election must be in writing and consented to by the Participant's Spouse. The Spouse's consent to the waiver must specify the form of benefit being elected and the non-Spouse Beneficiary, if any, and must be witnessed by the Administrator or a notary public. Notwithstanding this consent requirement, if the Participant establishes to the satisfaction of the Administrator that such written consent may not be obtained because there is no Spouse or the Spouse cannot be located, the Participant's election will be deemed effective. Any consent necessary under this provision will be valid only with respect to the Spouse who signs the consent, or in the event of a deemed effective election, the designated Spouse. 6.2.5 The election of an optional form of benefit which contemplates the payment of an VI-2 annuity shall not be given effect if any person who would receive benefits under the annuity dies before the Benefit Commencement Date. 6.3 Direct Rollovers ---------------- 6.3.1 Effective with respect to distributions made on or after January 1, 1993, a Participant or Spouse may elect to have all or a portion of any amount payable to him or her from the Plan which is an "eligible rollover distribution" (as defined in Section 6.3.2 below) transferred directly to an "eligible retirement plan" (as defined in Section 6.3.2 below). Any such election shall be made in accordance with such uniform rules and procedures as the Administrative Committee may prescribe from time to time as to the timing and manner of the election in accordance with Code (S) 401(a)(31). 6.3.2 For purposes of this Section and Section 7.2.4: (a) "Eligible rollover distribution" shall mean any distribution of all or any portion of the balance to the credit of the distributee other than: (1) any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary; (2) any distribution for a specified period of ten (10) years or more; (3) any distribution to the extent such distribution is required under Code (S) 401(a)(9); or (4) the portion of any distribution that is not includable in gross income. (b) "Eligible retirement plan" shall mean, with respect to a Participant, an individual retirement account or annuity described in Code (S) 408(a) or 408(b) ("IRA"); an annuity plan described in Code (S) 403(a); or a qualified plan described in Code (S) 401(a), that accepts the distributee's eligible rollover distribution and, with respect to a Spouse, shall mean an IRA. VI-3 ARTICLE VII DEATH BENEFITS -------------- 7.1 Eligibility for Pre-Retirement Death Benefit -------------------------------------------- 7.1.1 A pre-retirement death benefit shall be payable under the Plan in the event of the death of a Participant prior to his Benefit Commencement Date who, on the date of death, was either: (a) actively employed by the Employer; (b) Disabled; or (c) terminated but eligible for Early Retirement. The death benefit payable under this Section 7.1.1 shall be the larger of: (1) the lump sum Actuarial Equivalent, as of the day before the death of the Participant, of the Accrued Retirement Benefit that would have been payable upon Normal Retirement of the Participant; or (2) the lump sum Actuarial Equivalent, as of the day before the Participant's death, of the monthly benefit which would have been payable to the Participant's Spouse in the form of an immediate Qualified Joint and Survivor Annuity under the Plan if (i) in the case of a Participant who dies after having attained the earliest retirement age under the Plan, the Participant had retired on the day before his death, and (ii) in the case of a Participant who dies before having attained the earliest retirement age under the Plan, the Participant had separated from service as of his date of death, survived until his earliest retirement age under the Plan, retired on the day after attainment of his earliest retirement age under the Plan, and died immediately thereafter. 7.1.2 A pre-retirement death benefit shall also be payable under the Plan in the event of the death of a married Participant prior to his or her Benefit Commencement Date who had a Vested Separation prior to eligibility for Early Retirement. The death benefit payable under this Section 7.1.2 shall be equal to the benefit calculated under paragraph (2) of Section 7.1.1. VII-1 7.2 Form of Pre-Retirement Death Benefit ------------------------------------ 7.2.1 The pre-retirement death benefit payable under Section 7.1.1 shall be payable to the Surviving Spouse of such Participant in the form of an Actuarially Equivalent single life annuity commencing on the date of death unless the Participant has no Surviving Spouse or the Participant has made an election under Section 7.3, with the Spouse's consent, not to have the benefit paid in such form. If the Participant has no Surviving Spouse or has made an effective election under Section 7.3, such benefit shall be paid to the Participant's Beneficiary in the Actuarially Equivalent form elected by the Participant commencing on the date elected, or if there is no designated Beneficiary, to the Participant's estate in a single lump sum. The Surviving Spouse or other Beneficiary may elect any other Actuarially Equivalent form of payment permitted under Section 6.1.1, by an instrument in writing filed with the Administrator within 60 days after the Participant's death. 7.2.2 The pre-retirement death benefit payable under Section 7.1.2 shall be payable to the Surviving Spouse of such Participant in the form of an Actuarially Equivalent single life annuity commencing on the date the Participant would have attained earliest retirement age, unless the Surviving Spouse shall elect another Actuarially Equivalent form of payment permitted by Section 6.1.1, by an instrument in writing filed with the Administrator within 60 days after the Participant's death. No benefit shall be payable under Section 7.1.2 unless the Spouse is alive on such Benefit Commencement Date. 7.2.3 Notwithstanding the provisions of Sections 7.2.1 and 7.2.2, if the present value of the pre-retirement death benefit payable under Section 7.1.1 or 7.1.2 is $3,500 or less, such benefit shall be distributed in a single lump sum as soon as practicable following the death of the Participant. 7.2.4 Any lump sum payment payable to a Spouse pursuant to this Section 7.2 shall be eligible for a direct rollover in accordance with Section 6.3. 7.3 Election to Waive ----------------- 7.3.1 An election by a married Participant under Section 7.2.1 must be in the form of an election to waive the Qualified Pre-Retirement Survivor Annuity. In order for any waiver pursuant to this Section 7.3.1 to be effective, the Participant's Spouse must consent in writing to such election, and such consent must acknowledge the effect of the election and must be witnessed by the Administrator or a notary public. Such spousal consent shall be effective only with respect to the Spouse giving this consent and, once given, such consent shall be irrevocable. The Participant shall have the right to revoke his waiver at any time prior to the earlier of the Participant's Benefit Commencement Date or death. VII-2 7.4 Beneficiaries ------------- 7.4.1 With respect to any death benefit payable pursuant to Section 7.1.1, a Participant's Beneficiary shall be his Surviving Spouse or, subject to the Spousal consent rules in Section 7.3, other Beneficiary or Beneficiaries designated by the Participant in accordance with rules established by the Administrator. With respect to any death benefit payable pursuant to Section 7.1.2, a Participant's Beneficiary shall be his Surviving Spouse. 7.4.2 With respect to any form of payment of a Retirement Benefit pursuant to Article V providing for payments after the death of the Participant, a Participant shall designate, in accordance with the election procedure under Article VI, one or more Beneficiaries to whom amounts due after his death shall be paid, and the rights of such Beneficiary shall be governed by the terms of the form of payment so elected. 7.4.3 No Spouse or other Beneficiary shall have any right to benefits under the Plan unless he shall survive the Participant. If a Beneficiary fails to survive a Participant for at least 30 days, it shall be presumed that the Participant survived the Beneficiary. 7.5 After-Death Distribution Rules ------------------------------ 7.5.1 Notwithstanding any Plan provision to the contrary, if a Participant dies after distribution of his benefits has commenced, the remaining portion of such benefits will continue to be distributed at least as rapidly as under the method of distribution being used prior to the Participant's death. 7.5.2 Notwithstanding any Plan provision to the contrary, if a Participant dies before distribution of his benefits has commenced, the Participant's entire interest will be distributed no later than 5 years after the Participant's death; provided, however, that, if any portion of the Participant's interest is payable to his Beneficiary, distributions may be made in substantially equal installments over the life or life expectancy of the Beneficiary, commencing (i) in the case of a Beneficiary other than a Surviving Spouse, no later than one year after the Participant's death; and (ii) in the case of a Surviving Spouse, no later than the later of one year after the Participant's death or the date on which the Participant would have attained age 70 1/2. If the Spouse dies before payments to such Spouse begin, subsequent distributions shall be made as if the Spouse had been the Participant. VII-3 ARTICLE VIII CONTRIBUTIONS AND FORFEITURES ----------------------------- 8.1 Contribution by the Company --------------------------- The Company and each Participating Affiliate will make contributions to the Trust at such times and in such amounts as the Company may determine. 8.2 Contributions by Employees -------------------------- Employees are not required or permitted to make contributions under the Plan. 8.3 Forfeitures ----------- Forfeitures under the Plan will be applied to reduce the Company's contributions and will not be applied to increase the benefits of any person hereunder prior to the termination of the Plan or complete discontinuance of contributions by the Company. 8.4 Return of Employer Contributions under Special Circumstances ------------------------------------------------------------ Notwithstanding any provision of this Plan to the contrary, upon timely written demand by an Employer to the Trustee: (a) Any contribution made by the Employer to the Plan under a mistake of fact shall be returned to the Employer by the Trustee within one year after the payment of the contribution; (b) Any contribution made by the Employer incident to the determination by the Commissioner of Internal Revenue that the Plan is initially a Qualified Plan shall be returned to the Employer by the Trustee within one year after notification from the Internal Revenue Service that the Plan is not initially a Qualified Plan; and (c) Any contribution made by the Employer conditioned upon the deductibility of the contribution under Code (S) 404 shall be returned to the Employer within one year after a deduction for the contribution under Code (S) 404 is disallowed by the Internal Revenue Service, but only to the extent disallowed. Each contribution by an Employer shall be conditioned upon the deductibility of the contribution under Code (S) 404 unless the Employer elects otherwise. VIII-1 ARTICLE IX FIDUCIARIES ----------- 9.1 Named Fiduciaries ----------------- The Named Fiduciaries, who shall have authority to control and manage the operation and administration of the Plan, are as follows: (a) the Company, which shall have the sole right to (i) appoint and remove from office the members of the Administrative Committee, the Trustee and any investment manager; (ii) establish a funding policy relating to, and the method for achieving the objectives of, the Plan; and (iii) amend or terminate the Plan; (b) the Administrative Committee, which shall have the authority and duties specified in Article XI hereof; (c) the Trustee, which shall have the authority and duties specified in Article X hereof and the Trust Agreement; and, in addition, the authority and duties of the Administrative Committee, in the event that no such Committee shall be appointed or constituted by the Company; and (d) any investment manager or managers selected by the Company who renders investment advice with respect to Plan assets. 9.2 Employment of Advisers ---------------------- A "named fiduciary" with respect to the Plan (as defined in ERISA (S) 402(a)(2)) and any "fiduciary" (as defined in ERISA (S) 3(21)) appointed by such a "named fiduciary", may employ one or more persons to render advice with regard to any responsibility of such "named fiduciary" or "fiduciary" under the Plan. 9.3 Multiple Fiduciary Capacities ----------------------------- Any "named fiduciary" with respect to the Plan (as defined in ERISA (S) 402(a)(2)) and any other "fiduciary" (as defined in ERISA (S) 3(21)) with respect to the Plan may serve in more than one fiduciary capacity. 9.4 Reliance -------- Any fiduciary with respect to the Plan may rely upon any direction, information or action of any other fiduciary, acting within the scope of its responsibilities under the Plan, as being proper under the Plan. IX-1 9.5 Scope of Authority and Responsibility ------------------------------------- The responsibilities of the Administrative Committee and the Trustee for the operation and administration of the Plan are allocated between them in accordance with the provisions of the Plan and the Trust Agreement wherein their respective duties are specified. Each fiduciary shall have only the authority and duties as are specifically given to it under this Plan, shall be responsible for the proper exercise of its own authorities and duties, and shall not be responsible for any act or failure to act of any other fiduciary. IX-2 ARTICLE X TRUSTEE ------- 10.1 Trust Agreement --------------- The Company shall enter into one or more Trust Agreements with the Trustee or Trustees selected by it in its sole discretion, and the Trustee shall receive the contributions to the Trust Fund made by the Employer pursuant to the Plan and shall hold, invest, reinvest, and distribute such fund, as applicable, in accordance with the terms and provisions of the Trust Agreement. The Company will determine the form and terms of such Trust Agreement and may modify such Trust Agreement from time to time to accomplish the purposes of this Plan and may, in its sole discretion, remove any Trustee and select any successor Trustee. 10.2 Assets in Trust --------------- Except as otherwise permitted under the Plan, all assets of the Plan shall be held in trust by the Trustee who upon acceptance of such office shall have such authority as is set forth in the Trust Agreement. X-1 ARTICLE XI ADMINISTRATIVE COMMITTEE ------------------------ 11.1 Appointment and Removal of Administrative Committee --------------------------------------------------- The administration of the Plan shall be vested in an Administrative Committee of at least three (3) persons who shall be appointed by the Board, and may include persons who are not Participants in the Plan. A person appointed a member of the Committee shall signify his acceptance in writing. The Board may remove or replace any member of the Committee at any time in its sole discretion, and any Committee member may resign by delivering his written resignation to the Board, which resignation shall become effective upon its delivery or at any later date specified therein. If at any time there shall be a vacancy in the membership of the Committee, the remaining member or members of the Committee shall continue to act until such vacancy is filled by action of the Board. 11.2 Officers of Administrative Committee ------------------------------------ The Committee shall appoint from among its members a chairman, and shall appoint as secretary a person who may be, but need not be, a member of the Committee or a Participant in the Plan. 11.3 Action by Administrative Committee ---------------------------------- The Committee shall hold meetings upon such notice, at such place or places, and at such times as its members may from time to time determine. A majority of its members at the time in office shall constitute a quorum for the transaction of business. All action taken by the Committee at any meeting shall be by vote of the majority of its members present at such meeting, except that the Committee also may act without a meeting by a consent signed by a majority of its members. Any member of the Committee who is a Participant in the Plan shall not vote on any question relating exclusively to himself. 11.4 Rules and Regulations --------------------- Subject to the terms of the Plan, the Committee may from time to time adopt such rules and regulations as it shall deem appropriate for the administration of the Plan and for the conduct and transaction of its business and affairs. 11.5 Powers ------ The Committee shall have such powers as may be necessary to discharge its duties under the Plan, including the power: (a) to interpret and construe the Plan in its discretion, to determine all questions with regard to employment, eligibility, Credited Service, Compensation, Retirement XI-1 Benefits, and such factual matters as date of birth and marital status, and similarly related matters for the purpose of the Plan. The Committee's determination of all questions arising under the Plan shall be conclusive upon all Participants, the Board, the Company, Employers, the Trustee, and other interested parties; (b) to prescribe procedures to be followed by Participants and Beneficiaries filing application for benefits; (c) to prepare and distribute to Participants information explaining the Plan; (d) to appoint or employ individuals to assist in the administration of the Plan and any other agents it deems advisable, including legal, accounting and actuarial counsel; (e) to instruct the Trustee to make benefit payments pursuant to the Plan; (f) to appoint an enrolled actuary and to receive and review the periodic valuation of the Plan made by such actuary; (g) to receive and review reports of disbursements from the Trust Fund made by the Trustees; and (h) to receive and review the periodic audit of the Plan made by a certified public accountant appointed by the Company. 11.6 Information from Participants ----------------------------- Each Participant shall be required to furnish to the Committee, in the form prescribed by it, such personal data, affidavits, authorizations to obtain information, and other information as the Committee may deem appropriate for the proper administration of the Plan. 11.7 Reports ------- The Committee shall prepare, or cause to be prepared, such periodic reports to the U.S. Labor Department, the Internal Revenue Service and the Pension Benefit Guaranty Corporation as may be required pursuant to the Code or ERISA. 11.8 Authority to Act ---------------- The Committee may authorize one or more of its members, officers, or agents to sign on its behalf any of its instructions, directions, notifications, or communications to the Trustee, and the Trustee may conclusively rely thereon and on the information contained therein. XI-2 11.9 Liability for Acts ------------------ The members of the Committee shall be entitled to rely upon all valuations, certificates and reports furnished by the Plan actuary or accountant and upon all opinions given by any legal counsel selected by the Committee, and the members of the Committee shall be fully protected with respect to any action taken or suffered by their having relied in good faith upon such actuary, accountant or counsel and all action so taken or suffered shall be conclusive upon each of them and upon all Participants and their Beneficiaries. No member of the Committee shall incur any liability for anything done or omitted by him except only liability for his own willful misconduct. 11.10 Compensation and Expenses ------------------------- Unless authorized by the Board, a member or officer of the Committee shall not be compensated for his service in such capacity, but shall be reimbursed for reasonable expenses incident to the performance of such duty. 11.11 Indemnity --------- The Company shall indemnify the members of the Committee and any of their agents acting in behalf of the Plan against any and all liabilities or expenses, including all legal fees related thereto, to which they may be subjected as members of the Committee by reason of any act or failure to act which constitutes a breach or an alleged breach of fiduciary responsibility under ERISA or otherwise, except that due to a person's own willful misconduct. 11.12 Denied Claims ------------- If any application for payment of a benefit under the Plan shall be denied, the Committee shall with the denial write the claimant setting forth the specific reasons for the denial and explaining the Plan's claim review procedure. If a claimant whose claim has been denied wishes further consideration of his claim, he may request the Committee to review his claim in a written statement of the claimant's position filed with the Committee no later than 60 days after the claimant receives such denial. The Committee shall make a full review of the claim and the denial, giving the claimant written notice of its decision within the next 60 days. Due to special circumstances, if no decision has been made within the first 60 days and notice of the need for additional time has been furnished within such period, the decision may be made within the following 60 days. A claimant shall be required to exhaust the administrative remedies provided by this Section 11.12 prior to seeking any other form of relief. XI-3 ARTICLE XII PLAN AMENDMENT OR TERMINATION ----------------------------- 12.1 Plan Amendment -------------- The Company shall have the right at any time to amend the Plan, which amendment shall be evidenced by an instrument in writing signed by an authorized officer of the Company, effective retroactively or otherwise. No such amendment shall have any of the effects specified in Section 12.2. 12.2 Limitations on Plan Amendment ----------------------------- No Plan amendment shall: (a) authorize any part of the Trust to be used for, or diverted to, purposes other than for the exclusive benefit of Participants or their Beneficiaries; (b) decrease the accrued benefits of any Participant or his Beneficiary under the Plan (except to the extent permitted under Code (S) 412(c)(8)); or (c) change the vesting schedule, either directly or indirectly, unless each Participant having not less than three years of Vesting Service is permitted to elect, within a reasonable period specified by the Administrator after the adoption of such amendment, to have his vested percentage computed without regard to such amendment. The period during which the election may be made shall commence with the date the amendment is adopted and shall end as the later of: (i) sixty days after the amendment is adopted; (ii) sixty days after the amendment becomes effective; or (iii) sixty days after the Participant is issued written notice by the Administrator. 12.3 Right of the Employer to Terminate Plan --------------------------------------- The Company intends and expects that from year to year it will be able to and will deem it advisable to continue this Plan in effect and to make contributions as herein provided. The Company reserves the right, however, to terminate the Plan at any time which termination shall be evidenced by an instrument in writing signed by an authorized officer of the Company delivered to the Administrator and the Trustee. XII-1 12.4 Effect of Partial or Complete Termination ----------------------------------------- 12.4.1 Determination of Date of Complete or Partial Termination. The -------------------------------------------------------- date of complete or partial termination shall be established by the Administrator in accordance with the directions of the Company in accordance with applicable law. 12.4.2 Effect of Termination. --------------------- (a) As of the date of a partial termination of the Plan: (i) the accrued benefit of each affected Participant who is then an Employee, to the extent funded, shall become nonforfeitable; (ii) no affected Participant shall be granted Credited Service based on Years of Service after such date; and (iii) Compensation paid to affected Participants after such date shall not be taken into account. (b) As of the date of the complete termination of the Plan: (i) the accrued benefit of each Participant who is then an Employee, to the extent funded, shall become non-forfeitable; (ii) no Participant shall be granted Credited Service based on Years of Service after such date; (iii) Compensation paid after such date shall not be taken into account; (iv) no Eligible Employee shall become a Participant after such date; and (v) except as may otherwise be required by applicable law, all Employer obligations to fund the Plan shall terminate. 12.5 Allocation of Assets -------------------- At any time as the Company determines to distribute the Trust, the Trust shall be applied to the payment of or provision for benefits in accordance with the priority classes established by ERISA (S) 4044. The respective amounts allocated to such priority classes shall be distributed to or set aside for the benefit of the persons entitled thereto in such manner as is determined by the Administrator. XII-2 12.6 Residual Assets --------------- Any amounts remaining in the Trust after the satisfaction of all liabilities of the Trust with respect to all Participants and their Beneficiaries shall revert to the Employer. 12.7 Limitations Applicable to Certain Highly Paid Participants ---------------------------------------------------------- Notwithstanding any provision in the Plan to the contrary, in any Plan Year the annual payments to a Participant who is among the 25 "highly compensated employees" (as defined in Code Section 414(q)) with the greatest Compensation for the Plan Year shall not exceed the amount which would be payable to such Participant in the form of a single life annuity which is the actuarial equivalent of the sum of the Participant's Accrued Benefit and other Plan benefits, unless: (a) after payment of all Plan benefits to such Participant, the value of the Plan's assets equals or exceeds 110 percent of the value of the Plan's "current liabilities" (as defined in Code Section 412(l)(7)), or (b) the value of such Participant's Plan benefits is less than 1 percent of the value of the Plan's current liabilities. XII-3 ARTICLE XIII MISCELLANEOUS PROVISIONS ------------------------ 13.1 Exclusive Benefit of Participants --------------------------------- The Trust shall be held for the benefit of all persons who shall be entitled to receive payments under the Plan. It shall be prohibited at any time for any part of the Trust (other than such part as is required to pay expenses) to be used for, or diverted to, purposes other than for the exclusive benefit of Participants or their Beneficiaries. 13.2 Plan Not a Contract of Employment --------------------------------- The Plan is not a contract of Employment, and the terms of Employment of any Employee shall not be affected in any way by the Plan or related instruments except as specifically provided therein. 13.3 Source of Benefits ------------------ Benefits under the Plan shall be paid or provided for solely from the Trust, and neither the Company, an Employer, the Administrator, Trustee or Investment Manager shall assume any liability therefor. 13.4 Benefits Not Assignable ----------------------- Benefits provided under the Plan may not be assigned or alienated, either voluntarily or involuntarily. The preceding sentence shall also apply to the creation, assignment or recognition of a right to any benefit payable with respect to a Participant pursuant to a "domestic relations order" (as defined in Code (S) 414(p)) unless such order is determined by the Administrator to be a "qualified domestic relations order" (as defined in Code (S) 414(p)) or, in the case of a "domestic relations order" entered before January 1, 1985, if either payment of benefits pursuant to the order has commenced as of that date or the Administrator decides to treat such order as a "qualified domestic relations order" within the meaning of Code (S) 414(p) even if it does not otherwise qualify as such. 13.5 Domestic Relations Orders ------------------------- Any other provision of the Plan to the contrary notwithstanding, the Administrator shall have all powers necessary with respect to the Plan for the proper operation of Code (S) 414(p) with respect to "qualified domestic relations orders" (or "domestic relations orders" treated as such) referred to in Section 13.4, including, but not limited to, the power to establish all necessary or appropriate procedures, to authorize the establishment of new accounts with such assets and subject to such restrictions as the Administrator may deem appropriate, and the Administrator may decide upon and direct appropriate distributions therefrom. XIII-1 13.6 Benefits Payable to Minors, Incompetents and Others --------------------------------------------------- In the event any benefit is payable to a minor or an incompetent or to a person otherwise under a legal disability, or who, in the sole discretion of the Administrator, is by reason of advanced age, illness or other physical or mental incapacity incapable of handling and disposing of his property, or otherwise is in such position or condition that the Administrator believes that he could not utilize the benefit for his support or welfare, the Administrator shall have discretion to apply the whole or any part of such benefit directly to the care, comfort, maintenance, support, education or use of such person, or pay the whole or any part of such benefit to the parent of such person, the guardian, committee, conservator or other legal representative, wherever appointed, of such person, the person with whom such person is residing, or to any other person having the care and control of such person. The receipt by any such person to whom any such payment on behalf of any Participant or Beneficiary is made shall be a sufficient discharge therefor. 13.7 Merger or Transfer of Assets ---------------------------- 13.7.1 The merger or consolidation of the Company with any other person, or the transfer of the assets of the Company to any other person, shall not constitute a termination of the Plan, if provision is made for the continuation of the Plan. 13.7.2 The Plan may not merge or consolidate with, or transfer any assets or liabilities to, any other plan, unless each Participant would (if the Plan then terminated) receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation or transfer (if the Plan had then terminated). 13.8 Participation in the Plan by an Affiliate ----------------------------------------- 13.8.1 By duly authorized action, an Affiliate may adopt the Plan. Such Affiliate by duly authorized action, also may determine the classes of its Employees who shall be Eligible Employees. Such Affiliate shall make such contributions to the Plan on behalf of such Employees as is determined by the Company. If no such action is taken, the Eligible Employees and the amount of Retirement Benefit shall be determined in accordance with the Plan provisions applicable to an Employer. 13.8.2 By duly authorized action, any other Employer may terminate its participation in the Plan or withdraw from the Plan and the Trust. 13.8.3 An Employer other than the Company shall have no power with respect to the Plan except as specifically provided by this Section 13.8. XIII-2 13.9 Action by Employer ------------------ Any action required to be taken by an Employer pursuant to the terms of the Plan shall be taken by the board of directors of the Employer or any person or persons duly empowered to exercise the powers of the Employer with respect to the Plan. 13.10 Provision of Information ------------------------ For purposes of the Plan, each Employee shall execute such forms as may be reasonably required by the Administrator and the Employee shall make available to the Administrator and the Trustee any information they may reasonably request in this regard. 13.11 Controlling Law --------------- The Plan is intended to qualify under Code (S) 401(a) and to comply with ERISA, and its terms shall be interpreted accordingly. Otherwise, to the extent not preempted by ERISA, the laws of the State of Alabama shall control the interpretation and performance of the terms of the Plan. 13.12 Conditional Restatement ----------------------- Anything in the foregoing to the contrary notwithstanding, the Plan has been restated on the express condition that it will be considered by the Internal Revenue Service as qualifying under the provisions of Code (S) 401(a) and the Trust qualifying for exemption from taxation under Code (S) 501(a). If the Internal Revenue Service determines that the Plan or Trust does not so qualify, the Plan shall be amended or terminated as decided by the Company. 13.13 Rules of Construction --------------------- Masculine pronouns used herein shall refer to men or women or both and nouns and pronouns when stated in the singular shall include the plural and when stated in the plural shall include the singular, unless qualified by the context. Titles of Articles and Sections of the Plan are for convenience of reference only and are to be disregarded in applying the provisions of the Plan. Any reference in this Plan to an Article or Section is to the Article or Section so specified of the Plan. XIII-3 IN WITNESS WHEREOF, LIBERTY NATIONAL LIFE INSURANCE COMPANY has caused this Plan to be restated, effective as of January 1, 1989. LIBERTY NATIONAL LIFE INSURANCE COMPANY By: /s/ Anthony L. McWhorter ------------------------- XIII-4 APPENDIX A TOP-HEAVY PROVISIONS -------------------- A. As used in this Appendix A, each of the following terms shall have the meanings for that term set forth below: (a) Defined Benefit Plan means, a plan of the type defined in Code -------------------- (S) 414(j) maintained by the Company or an Affiliate, as applicable. (b) Defined Contribution Plan means, a plan of the type defined in ------------------------- Code (S) 414(i) maintained by the Company or an Affiliate, as applicable. (c) Determination Date means, for any Plan Year subsequent to the ------------------ first Plan Year, the last day of the preceding Plan Year. For the first Plan Year of the Plan, Determination Date means the last day of that year. (d) Determination Period means the Plan Year containing the -------------------- Determination Date and the four preceding Plan Years. (e) Key Employee means any Employee or former Employee (and the ------------ Beneficiaries of such Employee) who at any time during the Determination Period was: (i) an officer of an Employer having Limitation Compensation greater than 50% of the dollar limitation under Code (S) 415(b)(1)(A) for any Plan Year within the Determination Period, (ii) an owner (or individual considered an owner under Code (S) 318) of one of the ten largest interests in an Employer if such individual's Limitation Compensation exceeds 100% of the dollar limitation in effect under Code (S) 415(c)(1)(A), (iii) a "5-percent owner" (as defined in Code (S) 416(i)) of an Employer, or (iv) a "1-percent owner" (as defined in Code (S) 416(i)) of an Employer who has Limitation Compensation of more than $150,000. (f) Limitation Compensation means, for an Employee, the Employee's ----------------------- earned income, wages, salaries, fees for professional services and other amounts received for personal services actually rendered in the course of Employment (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips and bonuses); amounts described in Code (S)(S) 104(a)(3), 105(a) and 105(h) to the extent includable in the Employee's gross income; amounts described in Code (S) 105(d) whether or not excludable from the Employee's gross income; reimbursed non-deductible moving A-1 expenses; the value of nonqualified stock options to the extent includable in the Employee's gross income in the year of grant; the amount includable in the Employee's gross income pursuant to an election under Code (S) 83(b); distributions from an unfunded, non-qualified plan of deferred compensation; and excluding the following: (i) contributions to a plan of deferred compensation which are not includable in the Employee's gross income for the taxable year in which contributed, or contributions under a "simplified employee pension" (within the meaning of Code (S) 408(k)) to the extent such contributions are deductible by the Employee, or any distributions from a plan of deferred compensation (other than an unfunded non-qualified plan); (ii) amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or other property) held by the Employee either becomes freely "transferable" or is no longer subject to a "substantial risk of forfeiture" (both quoted terms within the meaning of Code (S) 83(a)); (iii) amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (iv) other amounts which received special tax benefits, or contributions made (whether or not under a salary reduction agreement) towards the purchase of an annuity described in Code (S) 403(b) (whether or not the amounts are actually excludable from the gross income of the Employee). (g) Non-Key Employee means any Employee who is not a Key Employee. ---------------- (h) Permissive Aggregation Group means the Required Aggregation ---------------------------- Group of plans plus any other plan or plans of the Company or an Affiliate which, when considered as a group with the Required Aggregation Group, would continue to satisfy the requirements of Code (S)(S) 401(a)(4) and 410. (i) Required Aggregation Group means (i) each Qualified Plan of an -------------------------- Employer in which at least one Key Employee participates, and (ii) any other Qualified Plan of an Employer which enables a plan described in (i) to meet the requirements of Code (S)(S) 401(a)(4) and 410. (j) Super Top-Heavy Plan means, for any Plan Year beginning after -------------------- December 31, 1983, the Plan, if any Top-Heavy Ratio as determined under the definition of Top-Heavy Plan exceeds 90%. (k) Top-Heavy Plan means, for any Plan Year beginning after December -------------- 31, 1983, the Plan, if any of the following conditions exists: (i) If the Top-Heavy Ratio for the Plan exceeds sixty percent and the Plan is not part of any Required Aggregation Group or Permissive Aggregation Group A-2 of plans. (ii) If the Plan is a part of a Required Aggregation Group of plans but not part of a Permissive Aggregation Group and the Top-Heavy Ratio for the Required Aggregation Group of plans exceeds sixty percent. (iii) If the Plan is a part of a Required Aggregation Group and part of a Permissive Aggregation Group of plans and the Top-Heavy Ratio for the Permissive Aggregation Group exceeds sixty percent. (l) Top-Heavy Ratio means, --------------- (i) If the Company or an Affiliate maintains one or more Defined Benefit Plans and the Company or an Affiliate has never maintained any Defined Contribution Plan (including any "simplified employee pension" within the meaning of Code (S) 408(k)) which during the 5-year period ending on the Determination Date has or has had account balances, the Top- Heavy Ratio for the Plan alone or for the Required or Permissive Aggregation Group, as appropriate, is a fraction, the numerator of which is the sum of the present values of accrued benefits under the aggregated Defined Benefit Plans of all Key Employees as of the respective Determination Date for each plan (including any part of any accrued benefit distributed in the 5-year period ending on the Determination Date), and the denominator of which is the sum of the present values of all accrued benefits under the aggregated Defined Benefit Plans as of the respective Determination Date for each plan (including any part of any accrued benefit distributed in the 5-year period ending on the Determination Date) determined in accordance with Code (S) 416. (ii) If the Company or an Affiliate maintains one or more Defined Benefit Plans and the Company or an Affiliate maintains or has maintained one or more Defined Contribution Plans (including any "simplified employee pension" within the meaning of Code (S) 408(k)) which during the 5-year period ending on the Determination Date has or has had any account balances, the Top-Heavy Ratio for any Required or Permissive Aggregation Group, as appropriate, is a fraction, the numerator of which is the sum of the present value of accrued benefits under the aggregated Defined Benefit Plans for all Key Employees, determined in accordance with (i) above, plus the sum of account balances under the aggregated Defined Contribution Plans for all Key Employees as of the respective Determination Date for each plan, and the denominator of which is the sum of the present value of all accrued benefits under the aggregated Defined Benefit Plans, determined in accordance with (i) above, plus the sum of all account balances under the aggregated Defined Contribution Plans for all Participants as of the respective Determination Date for each plan, all determined in accordance with Code (S) 416. The account balances under a Defined Contribution Plan in both the numerator and denominator of the Top-Heavy Ratio are adjusted for any distribution of any account balance made in the 5-year period ending on the Determination Date. A-3 (iii) For purposes of (i) and (ii) above, the value of account balances and the present value of accrued benefits will be determined as of the most recent Valuation Date that falls within or ends with the 12- month period ending on the Determination Date, except as provided in Code (S) 416 for the first and second plan year of a Defined Benefit Plan. The account balances and accrued benefits of a Participant (A) who is a Non- Key Employee but who was a Key Employee in a prior year, or (B) who has not been credited with at least one Hour of Service with any Employer at any time during the 5-year period ending on the Determination Date will be disregarded. The calculation of the Top-Heavy Ratio, and the extent to which distributions, rollovers, and transfers are taken into account will be made in accordance with Code (S) 416. Deductible employee contributions will not be taken into account for purposes of computing the Top-Heavy Ratio. When aggregating plans, the value of account balances and accrued benefits will be calculated with reference to the respective Determination Dates for the aggregated plans that fall within the same calendar year. (iv) Solely for the purpose of determining if the Plan, or any other plan included in a Required Aggregation Group of which this Plan is a part, is Top-Heavy (within the meaning of Code (S) 416(g)) such determination shall be made under (A) the method, if any, that uniformly applies for accrual purposes under all plans maintained by the Employer, or (B) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional accrual rate of Code (S) 411(b)(l)(C). (m) Valuation Date means, the date as of which account balances, or -------------- accrued benefits are valued for purposes of calculating the Top-Heavy Ratio. B. If the Plan is determined to be a Top-Heavy Plan or a Super Top-Heavy Plan as of any Determination Date, then it shall be subject to the rules set forth in this Appendix A, beginning with the first Plan Year commencing after such Determination Date. Even if, as of a subsequent Determination Date, the Plan is determined to no longer be a Top-Heavy Plan or a Super Top-Heavy Plan, the rules set forth in these Sections will continue to apply. C. For each Plan Year beginning before January 1, 1989 in which the Plan is a Top-Heavy Plan or Super Top-Heavy Plan, Compensation for the purpose of this Plan shall be limited to the first $200,000 (or such larger amount as may be prescribed for the Plan Year involved pursuant to Code (S) 416(d)(2)) of the amount that would otherwise have been Compensation. D. (a) Except as provided in subparagraphs (b) and (c) below, for any Plan Year in or after which the Plan is a Top-Heavy Plan, each Participant who is a Non-Key Employee and has completed one Year of Service will accrue a Retirement Benefit (to be provided solely by Employer contributions) and expressed as a single life annuity commencing at normal retirement age (within the meaning of Code (S) 411(a)(8)) of not less than 2% of his or her average Limitation Compensation for the 5 consecutive years for which the Participant had the highest Limitation A-4 Compensation. The aggregate Limitation Compensation for the years during such five-year period in which the Participant was credited with one Year of Service will be divided by the number of such years in order to determine average Limitation Compensation. The minimum accrual is determined without regard to any Social Security contribution. The minimum accrual applies even though under other Plan provisions the Participant would not otherwise be entitled to receive an accrual, or would have received a lesser accrual for the Plan Year. The suspension of benefits provisions of this Plan shall not apply to the minimum benefits hereunder. (b) No additional benefit accruals shall be provided pursuant to (a) above to the extent that the total accruals on behalf of the Participant attributable to Employer contributions will provide a Retirement Benefit expressed as a single life annuity commencing at normal retirement age (within the meaning of Code (S) 411(a)(8)) that equals or exceeds 20% of the Participant's highest average Limitation Compensation for the 5 consecutive years for which the Participant had the highest Limitation Compensation. All accruals of Employer derived benefits, whether or not attributable to years for which the Plan is a Top-Heavy Plan, may be used in computing whether the minimum accrual requirement of the preceding sentence is satisfied. (c) The provision in (a) above shall not apply to any Participant to the extent that the Participant is covered under any other plan or plans of an Employer and the Employer has provided in that plan that the minimum allocation or benefit requirement applicable to this Top-Heavy Plan will be met in the other plan or plans. E. If the Plan is a Top-Heavy Plan for any Plan Year, then the maximum benefit which can be provided under Code (S) 415 shall be determined by substituting "1.00" for "1.25" in Code (S) 415(e)(2)(B) and (3)(B), unless the Plan meets the requirements of Code (S) 416(h)(2)(B) and the Administrator increases the minimum rate of benefit accrual provided in Section D by one percent. F. Beginning with the Plan Year in which this Plan is Top-Heavy, the following vesting schedule will apply: Completed Years of Vested Vesting Service Percentage ------------------ ---------- 2 20% 3 40% 4 60% 5 100% G. In the event that any provision of this Appendix A is no longer required to qualify the Plan under the Code, then such provision shall thereupon be void without the necessity of further amendment of the Plan. A-5 EX-10.X 4 RECEIVABLES PURCHASE AGREEMENT DATED 12/21/99 EXHIBIT 10.X RECEIVABLES PURCHASE AGREEMENT dated as of December 21, 1999 Among AILIC RECEIVABLES CORPORATION, as Seller, AMERICAN INCOME LIFE INSURANCE COMPANY, as Servicer, PREFERRED RECEIVABLES FUNDING CORPORATION, as Purchaser and BANK ONE, NA, as a Financial Institution and Agent 1 TABLE OF CONTENTS ----------------- PRELIMINARY STATEMENTS -1- ARTICLE I PURCHASE ARRANGEMENTS -1- Section 1.1 Purchase Facility -1- ----------------- Section 1.2 Increases -1- --------- Section 1.3 Decreases -2- --------- Section 1.4 Payment Requirements -2- -------------------- ARTICLE II PAYMENTS AND COLLECTIONS -5- Section 2.1 Payments -5- -------- Section 2.2 Collections Prior to Amortization -5- --------------------------------- Section 2.3 Collections Following Amortization -6- ---------------------------------- Section 2.4 Application of Collections -6- -------------------------- Section 2.5 Payment Recision -7- ---------------- Section 2.6 Aggregate Purchaser Interest -7- ---------------------------- ARTICLE III PREFCO FUNDING -7- Section 3.1 CP Costs -7- -------- Section 3.2 CP Costs Payments -8- ----------------- Section 3.3 Calculation of CP Costs -8- ----------------------- ARTICLE IV FINANCIAL INSTITUTION FUNDING -8- Section 4.1 Financial Institution Funding -8- ----------------------------- Section 4.2 Yield Payments -8- -------------- Section 4.3 Selection and Continuation of Tranche Periods -8- --------------------------------------------- Section 4.4 Financial Institution Discount Rates -8- ------------------------------------ Section 4.5 Suspension of the LIBO Rate -9- --------------------------- ARTICLE V REPRESENTATIONS AND WARRANTIES -9- Section 5.1 Representations and Warranties of Seller Parties -9- ------------------------------------------------ Section 5.2 Financial Institution Representations and Warranties -14- ---------------------------------------------------- ARTICLE VI CONDITIONS OF PURCHASES -14-
i Section 6.1 Conditions Precedent to Initial Purchase -14- ---------------------------------------- Section 6.2 Conditions Precedent to All Purchases and Reinvestments -15- ------------------------------------------------------- ARTICLE VII COVENANTS -15- Section 7.1 Affirmative Covenants of the Seller Parties -15- ------------------------------------------- Section 7.2 Negative Covenants of the Seller Parties -24- ---------------------------------------- ARTICLE VIII ADMINISTRATION AND COLLECTION -26- Section 8.1 Designation of Servicer -26- ----------------------- Section 8.2 Duties of Servicer -26- ------------------ Section 8.3 Collection Rights -27- ----------------- Section 8.4 Responsibilities of Seller -28- -------------------------- Section 8.5 Reports -28- ------- Section 8.6 Servicing Fees -28- -------------- ARTICLE IX AMORTIZATION EVENTS -28- Section 9.1 Amortization Events -28- ------------------- Section 9.2 Remedies -31- -------- ARTICLE X INDEMNIFICATION -32- Section 10.1 Indemnities by the Seller Parties -32- --------------------------------- Section 10.2 Increased Cost and Reduced Return -35- --------------------------------- Section 10.3 Other Costs and Expenses -35- ------------------------ Section 10.4 Allocations -36- ----------- ARTICLE XI THE AGENT -36- Section 11.1 Authorization and Action -36- ------------------------ Section 11.2 Delegation of Duties -37- -------------------- Section 11.3 Exculpatory Provisions -37- ---------------------- Section 11.4 Reliance by Agent -37- ----------------- Section 11.5 Non-Reliance on Agent and Other Purchasers -38- ------------------------------------------ Section 11.6 Reimbursement and Indemnification -38- --------------------------------- Section 11.7 Agent in its Individual Capacity -38- -------------------------------- Section 11.8 Successor Agent -38- --------------- ARTICLE XII ASSIGNMENTS; PARTICIPATIONS -39- Section 12.1 Assignments -39- ----------- Section 12.2 Participations -40- --------------
ii ARTICLE XIII LIQUIDITY FACILITY -40- Section 13.1 Transfer to Financial Institutions -40- ---------------------------------- Section 13.2 Transfer Price Reduction Yield -40- ------------------------------ Section 13.3 Payments to PREFCO -40- ------------------ Section 13.4 Limitation on Commitment to Purchase from PREFCO -41- ------------------------------------------------ Section 13.5 Defaulting Financial Institutions -41- --------------------------------- ARTICLE XIV MISCELLANEOUS -42- Section 14.1 Waivers and Amendments -42- ---------------------- Section 14.2 Notices -43- ------- Section 14.3 Ratable Payments -43- ---------------- Section 14.4 Protection of Ownership Interests of the Purchasers -43- --------------------------------------------------- Section 14.5 Confidentiality -44- --------------- Section 14.6 Bankruptcy Petition -45- ------------------- Section 14.7 Limitation of Liability -45- ----------------------- Section 14.8 CHOICE OF LAW -46- ------------- Section 14.9 CONSENT TO JURISDICTION -46- ----------------------- Section 14.10 WAIVER OF JURY TRIAL -46- -------------------- Section 14.11 Integration; Binding Effect; Survival of Terms -46- ---------------------------------------------- Section 14.12 Counterparts; Severability; Section References -47- ---------------------------------------------- Section 14.13 Bank One Roles -47- -------------- Section 14.14 Characterization -47- ---------------- EXHIBIT I DEFINITIONS -51- EXHIBIT II FORM OF PURCHASE NOTICE -71- EXHIBIT III PLACES OF BUSINESS OF THE SELLER PARTIES; LOCATIONS OF RECORDS; FEDERAL EMPLOYER IDENTIFICATION NUMBER(S) -73-
iii EXHIBIT IV FORM OF COMPLIANCE CERTIFICATE -74- EXHIBIT V FORM OF ASSIGNMENT AGREEMENT -77- EXHIBIT VI CREDIT AND COLLECTION POLICY -84- EXHIBIT VII FORM OF CONTRACT(S) -85- EXHIBIT VIII FORM OF MONTHLY REPORT -86- SCHEDULE A COMMITMENTS OF FINANCIAL INSTITUTIONS -90- SCHEDULE B LIST OF CLOSING DOCUMENTS -91-
iv RECEIVABLES PURCHASE AGREEMENT This Receivables Purchase Agreement dated as of December 21, 1999 is among AILIC RECEIVABLES CORPORATION, a Delaware corporation ("Seller"), AMERICAN ------ INCOME LIFE INSURANCE COMPANY, an insurance company organized under the laws of Indiana ("AIL"), as the initial Servicer (the Servicer together with the Seller, --- the "Seller Parties" and each a "Seller Party"), the funding entities listed on -------------- ------------ Schedule A to this Agreement (together with their respective successors and - ---------- assigns hereunder, the "Financial Institutions"), PREFERRED RECEIVABLES FUNDING ---------------------- CORPORATION ("PREFCO"), and BANK ONE, NA (with headquarters in Chicago, ------ Illinois), as agent for the Purchasers hereunder or any successor agent hereunder (together with its successors and assigns hereunder, the "Agent"). ----- Unless defined elsewhere herein, capitalized terms used in this Agreement shall have the meanings assigned to such terms in Exhibit I. --------- PRELIMINARY STATEMENTS Seller desires to transfer and assign Purchaser Interests to the Purchasers from time to time. PREFCO may, in its absolute and sole discretion, purchase Purchaser Interests from Seller from time to time. In the event that PREFCO declines to make any purchase, the Financial Institutions shall, at the request of Seller, purchase Purchaser Interests from time to time. In addition, the Financial Institutions have agreed to provide a liquidity facility to PREFCO in accordance with the terms hereof. Bank One, NA has been requested and is willing to act as Agent on behalf of PREFCO and the Financial Institutions in accordance with the terms hereof. ARTICLE I PURCHASE ARRANGEMENTS Section 1.1 Purchase Facility. Upon the terms and subject to the ----------------- conditions hereof, Seller may, at its option, sell and assign Purchaser Interests to the Agent for the benefit of one or more of the Purchasers. In accordance with the terms and conditions set forth herein, PREFCO may, at its option, instruct the Agent to purchase on behalf of PREFCO, or if PREFCO shall decline to purchase, the Agent shall purchase, on behalf of the Financial Institutions, Purchaser Interests from time to time in an aggregate amount not to exceed the Purchase Limit during the period from the date hereof to but not including the earlier to occur of the Amortization Date and the Liquidity Termination Date. Section 1.2 Increases. Seller shall provide the Agent with at --------- least two Business Days' prior written notice of each Incremental Purchase. Such notice (a "Purchase -------- 1 Notice") shall be in the form set forth as Exhibit II hereto. Each Purchase - ------ ---------- Notice shall be subject to Section 6.2 hereof and, except as set forth below, ----------- shall be irrevocable and shall specify the requested Purchase Price (which amount shall not be less than $500,000, or an increment of $100,000 in excess thereof) and shall not be greater than the Commitment Availability as of the date of the proposed purchase), the date of purchase (which shall be a Settlement Date) and, in the case of an Incremental Purchase to be funded by the Financial Institutions, the requested Discount Rate and Tranche Period. Following receipt of a Purchase Notice, the Agent will determine whether PREFCO agrees to make the purchase. If PREFCO declines to make a proposed purchase, Seller may cancel the Purchase Notice or, in the absence of such a cancellation, the Incremental Purchase of the Purchaser Interest will be made by the Financial Institutions. On the date of each Incremental Purchase, upon satisfaction of the applicable conditions precedent set forth in Article VI, PREFCO or the Financial ---------- Institutions, as applicable, shall deposit to the Facility Account, in immediately available funds, no later than 12:00 noon (Chicago time), an amount equal to (i) in the case of PREFCO, the aggregate Purchase Price of the Purchaser Interests PREFCO is then purchasing or (ii) in the case of a Financial Institution, such Financial Institutions' Pro Rata Share of the aggregate Purchase Price of the Purchaser Interests the Financial Institutions are purchasing. Section 1.3 Decreases. Seller shall provide the Agent with prior --------- written notice in conformity with the Required Notice Period of any reduction from Collections requested by Seller of Capital (a "Reduction Notice"). Such ---------------- Reduction Notice shall designate (i) the date (the "Proposed Reduction Date") ----------------------- upon which any such reduction of Capital shall occur (which date shall give effect to the applicable Required Notice Period), and (ii) the aggregate amount of Capital to be reduced which shall be applied ratably to the Purchaser Interests of PREFCO and the Financial Institutions in accordance with the amount of Capital (if any) owing to PREFCO, on the one hand, and the amount of Capital (if any) owing to the Financial Institutions (ratably, based on their respective Pro Rata Shares), on the other hand (the "Aggregate Reduction"). Only one (1) ------------------- Reduction Notice shall be outstanding at any time. Notwithstanding the foregoing, the Aggregate Reduction will not be made if the Amortization Date shall have occurred for any reason on or prior to the Proposed Reduction Date. Section 1.4 Payment Requirements. All amounts to be paid or -------------------- deposited by any Seller Party pursuant to any provision of this Agreement shall be paid or deposited in accordance with the terms hereof no later than 11:00 a.m. (Chicago time) on the day when due in immediately available funds, and if not received before 11:00 a.m. (Chicago time) shall be deemed to be received on the next succeeding Business Day. If such amounts are payable to a Purchaser they shall be paid to the Agent, for the account of such Purchaser, at Bank One, NA, 1 Bank One Plaza, Mail Suite IL1-0596, Chicago, Illinois 60670 (ABA No. 071000013; FMSD Clearing Account No. 7521-7683; Reference: AILIC Receivables Corporation) until otherwise notified by the Agent. Upon notice to Seller, the Agent may debit the Facility Account for all amounts due and payable hereunder. All computations of Yield, per annum fees calculated as part of any CP Costs, per annum fees hereunder and under the Fee Letter shall be made on the basis of a year of 360 days for the actual number of days elapsed. If any amount hereunder shall be payable on a day which is not a Business Day, such amount shall be payable on the next succeeding Business Day. 2 ARTICLE II PAYMENTS AND COLLECTIONS Section 2.1 Payments. Notwithstanding any limitation on recourse -------- contained in this Agreement, Seller shall immediately pay to the Agent when due, for the account of the relevant Purchaser or Purchasers on a full recourse basis, (i) such fees as set forth in the Fee Letter (which fees shall be sufficient to pay all fees owing to the Financial Institutions), (ii) all CP Costs, (iii) all amounts payable as Yield, (iv) all amounts payable as Deemed Collections (which shall be applied to reduce outstanding Capital hereunder in accordance with Sections 2.2 and 2.3 hereof), (v) all amounts payable pursuant ------------ --- to Section 2.6, (vi) all amounts payable pursuant to Article X, if any, (vii) ----------- --------- all Servicer costs and expenses in connection with servicing, administering and collecting the Receivables, (viii) all Broken Funding Costs and (ix) all Default Fees (collectively, the "Obligations"). If any Person fails to pay any of the ----------- Obligations when due, such Person agrees to pay, on demand, the Default Fee in respect thereof until paid. Notwithstanding the foregoing, no provision of this Agreement or the Fee Letter shall require the payment or permit the collection of any amounts hereunder in excess of the maximum permitted by applicable law. If at any time Seller receives any Collections or is deemed to receive any Collections, Seller shall immediately pay such Collections or Deemed Collections to the Servicer for application toward the purchase of new Receivables or for handling as otherwise provided herein and, at all times prior to such payment, such Collections shall be held in trust by Seller for the exclusive benefit of the Purchasers and the Agent. Section 2.2 Collections Prior to Amortization. Prior to the --------------------------------- Amortization Date, any Collections and/or Deemed Collections received by the Servicer (after the initial purchase of a Purchaser Interest hereunder and on or prior to the Amortization Date of such Purchaser Interest) shall be set aside and held in trust by the Servicer for the payment of any accrued and unpaid Aggregate Unpaids up to the amount necessary to fund such Aggregate Unpaids. If at any time any Collections and/or Deemed Collections are received by the Servicer prior to the Amortization Date, Seller hereby requests and the Purchasers hereby agree to make, simultaneously with such receipt, a reinvestment (each a "Reinvestment") with that portion of each and every ------------ Collection received by the Servicer that is part of any Purchaser Interest, such that after giving effect to such Reinvestment, the amount of Capital of such Purchaser Interest immediately after such receipt and corresponding Reinvestment shall be equal to the amount of Capital immediately prior to such receipt. On each Settlement Date prior to the occurrence of the Amortization Date, the Servicer shall remit to the Agent's account the amounts set aside during the preceding Settlement Period and apply such amounts (if not previously paid in accordance with Section 2.1) to reduce unpaid CP Costs, Yield and other ----------- Obligations. If such CP Costs, Yield and other Obligations shall be reduced to zero, any additional Collections and/or Deemed Collections received by the Servicer shall (i) if applicable, be remitted to the Agent's account no later than 11:00 a.m. (Chicago time) to the extent required to fund any Aggregate Reduction on such Settlement Date and (ii) thereafter be remitted from the Servicer to Seller on such Settlement Date. 3 Section 2.3 Collections Following Amortization. On the Amortization ---------------------------------- Date and on each day thereafter, the Servicer shall set aside and hold in trust, for the holder of each Purchaser Interest, all Collections and Deemed Collections received on such day (together with all Collections and Deemed Collections then held in trust pursuant to Section 2.2 or this Section 2.3). ----------- ------------ On and after the Amortization Date, the Servicer shall, at any time upon the request from time to time by (or pursuant to standing instructions from) the Agent (i) remit to the Agent's account the amounts set aside pursuant to the preceding sentence, and (ii) apply such amounts to reduce the Capital associated with each such Purchaser Interest and any other Aggregate Unpaids until such time as the Aggregate Unpaids are reduced to zero. Section 2.4 Application of Collections. If there shall be -------------------------- insufficient funds on deposit for the Servicer to distribute funds in payment in full of the aforementioned amounts pursuant to Section 2.2 or 2.3 (as ----------- --- applicable), the Servicer shall distribute funds: first, (i) if AIL or one of its Affiliates is then the Servicer and ----- no Amortization Event or Potential Amortization Event shall have occurred and then be continuing, to the payment of the accrued and unpaid Servicing Fee, and (ii) if neither AIL nor any of its Affiliates is then the Servicer, to the payment of the Servicer's reasonable out-of-pocket costs and expenses in connection with servicing, administering and collecting the Receivables, second, to the reimbursement of the Agent's costs of collection and ------ enforcement of this Agreement, third, to the ratable payment of all accrued and unpaid (i) fees under ----- the Fee Letter, (ii) CP Costs, (iii) Yield and (iv) amounts payable under Article X, --------- fourth, to the ratable payment of all other unpaid Obligations, ------ provided that to the extent such Obligations relate to the payment of -------- Servicer costs and expenses when Seller or one of its Affiliates is acting as the Servicer, such costs and expenses will not be paid until after the payment in full of all other Obligations, fifth, (if applicable) in reduction of Capital of the Purchaser ----- Interests, sixth, to the payment of any accrued and unpaid Servicing Fee (unless ----- such fee shall have been paid in accordance with first above), and ----- seventh, after the Aggregate Unpaids have been indefeasibly reduced ------- to zero, to Seller. Collections applied to the payment of Aggregate Unpaids shall be distributed in accordance with the aforementioned provisions, and, giving effect to each of the priorities set forth in Section 2.4 above, shall be shared ----------- ratably (within each priority) among the Agent and the Purchasers in accordance with the amount of such Aggregate Unpaids owing to each of them in respect of each such priority. 4 Section 2.5 Payment Rescission. No payment of any of the Aggregate ------------------ Unpaids shall be considered paid or applied hereunder to the extent that, at any time, all or any portion of such payment or application is rescinded by application of law or judicial authority, or must otherwise be returned or refunded for any reason. Seller shall remain obligated for the amount of any payment or application so rescinded, returned or refunded, and shall promptly pay to the Agent (for application to the Person or Persons who suffered such rescission, return or refund) the full amount thereof, plus the Default Fee from the date of any such rescission, return or refunding. Section 2.6 Aggregate Purchaser Interest. Seller shall ensure that ---------------------------- the Purchaser Interests of the Purchaser shall at no time exceed in the aggregate 100%. If the aggregate of the Purchaser Interests of the Purchasers exceeds 100%, Seller shall immediately pay to the Agent an amount to be applied to reduce the Capital of the Purchaser Interests (as allocated by the Agent), such that after giving effect to such payment the aggregate of the Purchaser Interests equals or is less than 100%. ARTICLE III PREFCO FUNDING Section 3.1 CP Costs. Seller shall pay CP Costs with respect to -------- the Capital associated with each Purchaser Interest of PREFCO for each day that any Capital in respect of such Purchaser Interest is outstanding. Each Purchaser Interest funded substantially with Pooled Commercial Paper will accrue CP Costs each day on a pro rata basis, based upon the percentage share the Capital in respect of such Purchaser Interest represents in relation to all assets held by PREFCO and funded substantially with Pooled Commercial Paper. Section 3.2 CP Costs Payments. On each Settlement Date, Seller ----------------- shall pay to the Agent (for the benefit of PREFCO) an aggregate amount equal to all accrued and unpaid CP Costs in respect of the Capital associated with all Purchaser Interests of PREFCO for the Accrual Period then most recently ended in accordance with Article II. ---------- 5 Section 3.3 Calculation of CP Costs. On the 13th day of each month ----------------------- (or, if such day is not a Business Day, the next following Business Day), PREFCO shall calculate the aggregate amount of CP Costs for the applicable Accrual Period and shall notify the Seller of such aggregate amount. ARTICLE IV FINANCIAL INSTITUTION FUNDING Section 4.1 Financial Institution Funding. Each Purchaser Interest ----------------------------- of the Financial Institutions shall accrue Yield for each day during its Tranche Period at either the LIBO Rate or the Base Rate in accordance with the terms and conditions hereof. Until Seller gives notice to the Agent of another Discount Rate in accordance with Section 4.4, the initial Discount Rate for any Purchaser ----------- Interest transferred to the Financial Institutions pursuant to the terms and conditions hereof shall be the Base Rate. If the Financial Institutions acquire by assignment from PREFCO any Purchaser Interest pursuant to Article XIII, each ------------ Purchaser Interest so assigned shall each be deemed to have a new Tranche Period commencing on the date of any such assignment. Section 4.2 Yield Payments. On the Settlement Date for each -------------- Purchaser Interest of the Financial Institutions, Seller shall pay to the Agent (for the benefit of the Financial Institutions) an aggregate amount equal to the accrued and unpaid Yield for the entire Tranche Period of each such Purchaser Interest in accordance with Article II. ---------- Section 4.3 Selection and Continuation of Tranche Periods. (a) --------------------------------------------- With consultation from (and approval by) the Agent, Seller shall from time to time request Tranche Periods for the Purchaser Interests of the Financial Institutions, provided that, if at any time the Financial Institutions shall have a Purchaser Interest, Seller shall always request Tranche Periods such that at least one Tranche Period shall end on each Settlement Date. (b) Seller or the Agent may, effective on the last day of a Tranche Period (the "Terminating Tranche") for any Purchaser Interest, divide ------------------- any such Purchaser Interest into multiple Purchaser Interests or combine any such Purchaser Interest with one or more other Purchaser Interests which either have a Terminating Tranche ending on such day or are newly created on such day, provided, in no event may a Purchaser Interest of PREFCO be combined with a - -------- Purchaser Interest of the Financial Institutions. Section 4.4 Financial Institution Discount Rates. Seller may select ------------------------------------ the LIBO Rate or the Base Rate for each Purchaser Interest of the Financial Institutions. Seller shall by 11:00 a.m. (Chicago time): (i) at least three (3) Business Days prior to the expiration of any Terminating Tranche with respect to which the LIBO Rate is being requested as a new Discount Rate and (ii) at least one (1) Business Day prior to the expiration of any Terminating Tranche with respect to which the Base Rate is being requested as a new Discount Rate, give the Agent irrevocable notice of the new Discount Rate for the Purchaser Interest associated with such Terminating Tranche. 6 Section 4.5 Suspension of the LIBO Rate. If any Financial --------------------------- Institution notifies the Agent that it has determined that funding its Pro Rata Share of the Purchaser Interests of the Financial Institutions at a LIBO Rate would violate any applicable law, rule, regulation, or directive of any governmental or regulatory authority, whether or not having the force of law, or that (i) deposits of a type and maturity appropriate to match fund its Purchaser Interests at such LIBO Rate are not available or (ii) such LIBO Rate does not accurately reflect the cost of acquiring or maintaining a Purchaser Interest at such LIBO Rate, then the Agent shall suspend the availability of such LIBO Rate and require Seller to select the Base Rate for any Purchaser Interest accruing Yield at such LIBO Rate. ARTICLE V REPRESENTATIONS AND WARRANTIES Section 5.1 Representations and Warranties of Seller Parties. Each ------------------------------------------------ Seller Party hereby represents and warrants to the Agent and the Purchasers that: (a) Corporate Existence and Power. Each Torchmark Entity ---------------------------- is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation. Each Torchmark Entity is duly qualified to do business and is in good standing as a foreign corporation, and has and holds all corporate power and all governmental licenses, authorizations, consents and approvals required to carry on its business in each jurisdiction in which its business is conducted, except where the failure to so qualify would not have a Material Adverse Effect. AIL is duly qualified and licensed as an insurance company in each state in which Receivables are originated. (b) Power and Authority; Due Authorization Execution and ---------------------------------------------------- Delivery. The execution and delivery by each Torchmark Entity of this - -------- Agreement and each other Transaction Document to which it is a party, and the performance of its obligations hereunder and thereunder and, in the case of Seller, Seller's use of the proceeds of purchases made hereunder, are within its respective corporate powers and authority and have been duly authorized by all necessary corporate action on its part. This Agreement and each other Transaction Document to which each Torchmark Entity is a party has been duly executed and delivered by such Torchmark Entity. (c) No Conflict. The execution and delivery by each ----------- Torchmark Entity of this Agreement and each other Transaction Document to which it is a party, and the performance of its obligations hereunder and thereunder do not contravene or violate (i) its certificate or articles of incorporation or by-laws, (ii) any law, rule or regulation applicable to it, (iii) any restrictions under any material agreement, contract or instrument to which it is a party or by which it or any of its property is bound, or (iv) any order, writ, judgment, award, injunction or decree binding on or affecting it or its property, and do not result in the creation or imposition of any Adverse Claim on assets of such Torchmark Entity or its Subsidiaries (except as created hereunder) and no transaction contemplated hereby requires compliance with any bulk sales act or similar law. 7 (d) Governmental Authorization. Other than the filing of the -------------------------- financing statements required hereunder, no authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution and delivery by any Torchmark Entity of this Agreement or any other Transaction Document to which it is a party or the performance of its obligations hereunder and thereunder. (e) Actions, Suits. There are no actions, suits or proceedings -------------- pending, or to the best of such Seller Party's knowledge, threatened, against or affecting any Torchmark Entity, or any of its properties, in or before any court, arbitrator or other body, that could reasonably be expected to have a Material Adverse Effect. No Torchmark Entity is in default with respect to any order of any court, arbitrator or governmental body. (f) Binding Effect. This Agreement and each other Transaction -------------- Document to which any Torchmark Entity is a party constitute the legal, valid and binding obligations of such Torchmark Entity enforceable against such Torchmark Entity in accordance with their respective terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws relating to or limiting creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law). (g) Accuracy of Information. All information heretofore furnished by ----------------------- any Torchmark Entity or any of its Affiliates to the Agent or the Purchasers for purposes of or in connection with this Agreement, any of the other Transaction Documents or any transaction contemplated hereby or thereby is, and all such information hereafter furnished by such Torchmark Entity or any of its Affiliates to the Agent or the Purchasers will be, true and accurate in every material respect on the date such information is stated or certified and does not and will not contain any material misstatement of fact or omit to state a material fact or any fact necessary to make the statements contained therein not misleading. (h) Use of Proceeds. No proceeds of any purchase hereunder will be --------------- used (i) to purchase "margin stock" as defined in, or otherwise for a purpose that violates or would be inconsistent with, Regulation T, U or X promulgated by the Board of Governors of the Federal Reserve System from time to time or (ii) to acquire any security in any transaction which is subject to Section 13 or 14 of the Securities Exchange Act of 1934, as amended. (i) Good Title. Immediately prior to each purchase hereunder, Seller ---------- shall be the legal and beneficial owner of the Receivables and Related Security with respect thereto, free and clear of any Adverse Claim, except as created by the Transaction Documents. There have been duly filed all financing statements or other similar instruments or documents necessary under the UCC (or any comparable law) of all appropriate jurisdictions to perfect Seller's ownership interest in each Receivable, its Collections and the Related Security. (j) Perfection. This Agreement, together with the filing of the ---------- financing statements contemplated hereby, is effective to, and shall, upon each purchase hereunder, transfer to the Agent for the benefit of the relevant Purchaser or Purchasers (and the 8 Agent for the benefit of such Purchaser or Purchasers shall acquire from Seller) a valid and perfected first priority undivided percentage ownership interest in each Receivable existing or hereafter arising and in the Related Security and Collections with respect thereto, free and clear of any Adverse Claim, except as created by the Transactions Documents. There have been duly filed all financing statements or other similar instruments or documents necessary under the UCC (or any comparable law) of all appropriate jurisdictions to perfect the Agent's (on behalf of the Purchasers) ownership interest in the Receivables, the Related Security and the Collections. (k) Places of Business. The principal places of business and chief ------------------ executive offices of each Torchmark Entity and the offices where it keeps all of its Records are located at the respective address(es) listed on Exhibit III or ----------- such other locations of which the Agent has been notified in accordance with Section 7.2(a) in jurisdictions where all action required by Section 14.4(a) has - -------------- --------------- been taken and completed. Each Torchmark Entity's Federal Employer Identification Number is correctly set forth on Exhibit III. ----------- (l) Collections. The conditions and requirements set forth in Section ----------- ------- 7.1(j) and in subsections (b), (c) and (e) of Section 8.2 have at all times been - ------ --------------- --- --- ----------- satisfied and duly performed. (m) Material Adverse Effect. (i) The initial Servicer represents and ----------------------- warrants that since September 30, 1999 no event has occurred that would have a material adverse effect on the financial condition or operations of the initial Servicer and its Subsidiaries or the ability of the initial Servicer to perform its obligations under this Agreement, (ii) Seller represents and warrants that since the date of this Agreement, no event has occurred that would have a material adverse effect on (A) the financial condition or operations of Seller, (B) the ability of Seller to perform its obligations under this Agreement, or (C) the collectibility of the Receivables or Related Security generally or of any material portion of the Receivables or Related Security and (iii) each Seller Party represents and warrants that since September 30, 1999 no event has occurred that would have a material adverse effect on the financial condition or operation of the Performance Guarantor or AIL or the ability of the Performance Guarantor or AIL to perform its obligations under the Transaction Documents. (n) Names. In the past five (5) years, (i) Seller has not used any ----- corporate names, trade names or assumed names other than the name in which it has executed this Agreement and (ii) AIL has not used any corporate names, trade names or assumed names other than as disclosed on Exhibit III hereto. ----------- (o) Ownership of Torchmark Entities. Torchmark owns, directly or ------------------------------- indirectly, 100% of the issued and outstanding capital stock of each of AIL and Seller, in each case, free and clear of any Adverse Claim. AIL owns directly 100% of the issued and outstanding capital stock of Seller, free and clear of any Adverse Claim. Such capital stock in each case is validly issued, fully paid and nonassessable, and there are no options, warrants or other rights to acquire securities of Seller. 9 (p) Not a Holding Company or an Investment Company. No Torchmark ---------------------------------------------- Entity is (i) a "holding company" or a "subsidiary holding company" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended, or any successor statute or (ii) an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or any successor statute. (q) Compliance with Law. Each Torchmark Entity has complied in all ------------------- material respects with all applicable laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject. Each Receivable, together with the Contract related thereto, does not contravene any laws, rules or regulations applicable thereto (including, without limitation, --------- ------------------ laws, rules and regulations relating to truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy), and no part of such Contract is in violation of any such law, rule or regulation with respect to which any noncompliance, separately or in the aggregate, is reasonably likely to have a Material Adverse Effect. (r) Compliance with Credit and Collection Policy. AIL and Seller have -------------------------------------------- complied in all material respects with the Credit and Collection Policy with regard to each Receivable and the related Contract, and neither AIL nor Seller has made any change to the Credit and Collection Policy, except such material change as to which the Agent has been notified in accordance with Section ------- 7.1(a)(vii). - ----------- (s) Payments to AIL. With respect to each Receivable transferred to --------------- Seller under the Receivables Sale Agreement, Seller has given reasonably equivalent value to AIL in consideration therefor and such transfer was not made for or on account of an antecedent debt. No transfer by AIL of any Receivable under the Receivables Sale Agreement is or may be voidable under any section of the Bankruptcy Reform Act of 1978 (11 U.S.C. (S)(S) 101 et seq.), as amended. ------- (t) Enforceability of Contracts. Each Contract with respect to each --------------------------- Receivable is effective to create, and has created, a legal, valid and binding obligation of the related Obligor (including each Obligor, whether a member of an Agent-Hierarchy or otherwise, which is a guarantor of such Receivable) to pay the Outstanding Balance of the Receivable created thereunder and any accrued interest thereon, enforceable against such Obligor in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws relating to or limiting creditors' rights generally and by general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law). (u) Eligible Receivables. Each Receivable included in the Net -------------------- Receivables Balance as an Eligible Receivable on the date of its purchase under the Receivables Sale Agreement was an Eligible Receivable on such purchase date. 10 (v) Net Receivables Balance. The Seller has determined that, ----------------------- immediately after giving effect to each purchase hereunder, the Net Receivables Balance is at least equal to the aggregate Capital of all the Purchaser Interests. (w) Year 2000. Such Seller Party (i) has reviewed the areas --------- within its business and operations which could be adversely affected by the Year 2000 Problem, (ii) has developed what it deems as a reasonable Year 2000 Plan to address the Year 2000 Problem on a timely basis, (iii) is taking all actions it deems reasonably necessary to meet the schedule and goals of the Year 2000 Plan and (iv) has established adequate reserves to implement the Year 2000 Plan. Such Seller Party does not reasonably anticipate that the Year 2000 Problem could have a Material Adverse Effect. (x) Accounting. The manner in which each Torchmark Entity ---------- accounts for the transactions contemplated by this Agreement and the Receivables Sale Agreement does not jeopardize the true sale analysis. (y) Compliance with Underwriting Guidelines. AIL has complied --------------------------------------- in all material respects with its underwriting guidelines in issuing or agreeing to issue each Insurance Product in connection with which a Receivable shall have arisen, and in electing to extend the credit represented by such Receivable to the applicable Obligor, and AIL has not made any material change to such underwriting guidelines except such change as to which the Agent has been notified in accordance with Section 7.1(a)(vii). ------------------- (z) Compliance with Representations. On and as of the date of ------------------------------- each purchase of a Purchaser Interest hereunder and the date of each Reinvestment hereunder, each Seller Party hereby represents and warrants that all of the other representations and warranties made by it set forth in this Section 5.1 are true and correct on and as of the date of such purchase or - ----------- Reinvestment (and after giving effect to such purchase or Reinvestment) as though made on and as of each such date. Section 5.2 Financial Institution Representations and Warranties. Each ---------------------------------------------------- Financial Institution hereby represents and warrants to the Agent and PREFCO that: (a) Existence and Power. Such Financial Institution is a ------------------- corporation or a banking association duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization, and has all corporate power to perform its obligations hereunder. (b) No Conflict. The execution and delivery by such Financial ----------- Institution of this Agreement and the performance of its obligations hereunder are within its corporate powers, have been duly authorized by all necessary corporate action, do not contravene or violate (i) its certificate or articles of incorporation or association or by-laws, (ii) any law, rule or regulation applicable to it, (iii) any restrictions under any agreement, contract or instrument to which it is a party or any of its property is bound, or (iv) any order, writ, judgment, award, injunction or decree binding on or affecting it or its property, and do not result in the creation or 11 imposition of any Adverse Claim on its assets. This Agreement has been duly authorized, executed and delivered by such Financial Institution. (c) Governmental Authorization. No authorization or approval or -------------------------- other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution and delivery by such Financial Institution of this Agreement and the performance of its obligations hereunder. (d) Binding Effect. This Agreement constitutes the legal, valid -------------- and binding obligation of such Financial Institution enforceable against such Financial Institution in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws relating to or limiting creditors' rights generally and by general principles of equity (regardless of whether such enforcement is sought in a proceeding in equity or at law). ARTICLE VI CONDITIONS OF PURCHASES Section 6.1 Conditions Precedent to Initial Purchase. The initial ---------------------------------------- purchase of a Purchaser Interest under this Agreement is subject to the conditions precedent that (a) the Agent shall have received on or before the date of such purchase those documents listed on Schedule B and (b) the Agent ---------- shall have received all fees and expenses required to be paid on such date pursuant to the terms of this Agreement and the Fee Letter. Section 6.2 Conditions Precedent to All Purchases and Reinvestments. Each ------------------------------------------------------- purchase of a Purchaser Interest (other than pursuant to Section 13.1) and each ------------ Reinvestment shall be subject to the further conditions precedent that (a) in the case of each such purchase or Reinvestment: (i) the Servicer shall have delivered to the Agent on or prior to the date of such purchase, in form and substance satisfactory to the Agent, all Monthly Reports as and when due under Section 8.5 and (ii) upon the Agent's request, the Servicer shall have delivered - ----------- to the Agent at least three (3) days prior to such purchase or Reinvestment an interim Monthly Report showing the amount of Eligible Receivables; (b) neither the Amortization Date nor the Liquidity Termination Date shall have occurred; (c) on the date of each such purchase or Reinvestment, the following statements shall be true (and acceptance of the proceeds of such purchase or Reinvestment shall be deemed a representation and warranty by Seller that such statements are then true): (i) the representations and warranties set forth in Section 5.1 are true ----------- and correct on and as of the date of such purchase or Reinvestment as though made on and as of such date; (ii) no event has occurred, or would result from such purchase or Reinvestment, that would constitute an Amortization Event or a Potential Amortization Event; and 12 (iii) the aggregate Capital of all Purchaser Interests does not exceed the Purchase Limit; and (d) the Agent shall have received such other approvals, opinions or documents as it may reasonably request. It is expressly understood that each Reinvestment shall, unless otherwise directed by the Agent or any Purchaser, occur automatically on each day that the Servicer shall receive any Collections without the requirement that any further action be taken on the part of any Person and notwithstanding the failure of Seller to satisfy any of the foregoing conditions precedent in respect of such Reinvestment. The failure of Seller to satisfy any of the foregoing conditions precedent in respect of any Reinvestment shall give rise to a right of the Agent and the Purchasers, which right may be exercised at any time on demand of the Agent, to rescind the related purchase and direct Seller to pay to the Agent for the benefit of the Purchasers an amount equal to the Collections that shall have been applied to the affected Reinvestment. ARTICLE VII COVENANTS Section 7.1 Affirmative Covenants of the Seller Parties. Until the ------------------------------------------- date on which the Aggregate Unpaids have been indefeasibly paid in full and this Agreement terminates in accordance with its terms, each Seller Party hereby covenants, as to itself, as set forth below: (a) Financial Reporting. Such Seller Party will maintain, ------------------- for itself and each of its Subsidiaries, a system of accounting established and administered in accordance with generally accepted accounting principles, and furnish to the Agent: (i) Annual Reporting. Within --------------- (A) 90 days after the close of each fiscal year of the Performance Guarantor, audited unqualified financial statements (which shall include consolidated balance sheets, statements of income and retained earnings and a statement of cash flows) for the Performance Guarantor for such fiscal year, certified by nationally recognized independent public accountants; (B) 120 days after the close of each fiscal year of AIL, audited, unqualified financial statements (which shall include balance sheets, statements of income and retained earnings and a statement of cash flows) for AIL for such fiscal year certified by nationally recognized independent public accountants; (C) 90 days after the close of each fiscal year of Seller, unaudited financial statements (which shall include balance sheets, statements of income and retained earnings and a statement of cash flows) for Seller for such fiscal year, certified by an Authorized Officer; and 13 (D) 90 days after the close of each fiscal year of AIL, an annual statement of the conditions and affairs of AIL prepared in accordance with NAIC annual statement instructions and accounting practices and procedures for, and as filed with, the Insurance Department of its respective state of organization, all certified by an Authorized Officer thereof. (ii) Quarterly Reporting. Within 45 days after the close of ------------------- the first three (3) quarterly periods of each of the Servicer's fiscal years, (A) in respect of each of the Performance Guarantor, AIL and Seller, balance sheets of each such Person as at the close of each such period and statements of income and retained earnings and a statement of cash flows for each such Person for the period from the beginning of such fiscal year to the end of such quarter, all certified by an Authorized Officer thereof; and (B) in respect of AIL, a quarterly statement of the conditions and affairs of AIL prepared in accordance with NAIC quarterly statement instructions and accounting practices and procedures for, and as filed with, the Insurance Department of its respective state of organization, all certified by an Authorized Officer thereof. (iii) Compliance Certificate. Together with the financial ---------------------- statements required hereunder, a compliance certificate in substantially the form of Exhibit IV signed by an Authorized Officer ---------- of each of the Performance Guarantor, AIL and Seller, and dated the date of such annual financial statement or such quarterly financial statement, as the case may be. (iv) Shareholders Statements and Reports. Promptly upon the ----------------------------------- furnishing thereof to the shareholders of any Torchmark Entity copies of all financial statements, reports and proxy statements so furnished. (v) S.E.C. Filings. Promptly upon the filing thereof, -------------- copies of all registration statements and annual, quarterly, monthly or other regular reports which any Torchmark Entity or any of its Subsidiaries files with the Securities and Exchange Commission. (vi) Copies of Notices. Promptly upon its receipt of any ----------------- notice, request for consent, financial statements, certification, report or other communication under or in connection with any Transaction Document from any Person other than the Agent or PREFCO, copies of the same. (vii) Change in Credit and Collection Policy or Underwriting ------------------------------------------------------ Guidelines. At least thirty (30) days prior to the effectiveness of ---------- any material change in or amendment to the (A) Credit and Collection Policy, a copy of the 14 Credit and Collection Policy then in effect and a notice indicating such change or amendment or (B) underwriting guidelines of AIL, a copy of the underwriting guidelines of AIL then in effect and a notice indicating such change or amendment. (viii) Other Information. Promptly, from time to time, such ----------------- other information, documents, records or reports relating to the Receivables or the condition or operations, financial or otherwise, of such Seller Party or any Torchmark Entity as the Agent may from time to time reasonably request in order to protect the interests of the Agent and the Purchasers under or as contemplated by this Agreement. (b) Notices. Such Seller Party will notify the Agent in writing ------- of any of the following promptly upon learning of the occurrence thereof, describing the same and, if applicable, the steps being taken with respect thereto: (i) Amortization Events or Potential Amortization Events. ---------------------------------------------------- The occurrence of each Amortization Event and each Potential Amortization Event, by a statement of an Authorized Officer of such Seller Party. (ii) Judgment and Proceedings. (A) The entry of any ------------------------ judgment or decree against (1) Torchmark or any of its respective Subsidiaries, if the aggregate amount of all judgments and decrees then outstanding against Torchmark and its Subsidiaries exceeds $50,000,000, (2) AIL or any of its respective Subsidiaries, if the aggregate amount of all judgments and decrees then outstanding against AIL and its Subsidiaries exceeds $5,000,000 or (3) Seller; or (B) the institution of any litigation, arbitration proceeding or governmental proceeding against any Torchmark Entity which may have a Material Adverse Effect. (iii) Material Adverse Effect. The occurrence of any event ----------------------- or condition that has, or could reasonably be expected to have, a Material Adverse Effect. (iv) Amortization Date. The occurrence of the "Amortization ----------------- ------------ Date" under the Receivables Sale Agreement. ---- (v) Defaults Under Other Agreements. The occurrence of a ------------------------------- default or an event of default under any other material financing arrangement pursuant to which any Torchmark Entity is a debtor or an obligor. (vi) Downgrade of Torchmark Entities. Any downgrade in the ------------------------------- claims-paying ability or the rating of any Indebtedness of any Torchmark Entity by Standard and Poor's Ratings Group or by Moody's Investors Service, Inc., setting forth the nature of such change. 15 (vii) Company Action Level Event. With respect to AIL, the -------------------------- occurrence of a Company Action Level Event. (c) Compliance with Laws and Preservation of Corporate Existence. ------------------------------------------------------------ Such Seller Party will comply in all respects with all applicable laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject except, in the case of the Servicer, where noncompliance would not be reasonably likely to have a Material Adverse Effect. Such Seller Party will preserve and maintain its corporate existence, rights, franchises and privileges in the jurisdiction of its incorporation, and qualify and remain qualified in good standing as a foreign corporation in each jurisdiction where its business is conducted except, in the case of the Servicer, where the failure to so qualify would not be reasonably likely to have a Material Adverse Effect. Such Seller Party shall cause AIL to remain at all times duly qualified and licensed as an insurance company in each state in which Receivables are originated. (d) Audits. Such Seller Party will furnish to the Agent from time to ------ time such information with respect to it and the Receivables as the Agent may reasonably request. Such Seller Party will, from time to time during regular business hours as requested by the Agent upon reasonable notice, permit the Agent, or its agents or representatives, (i) to examine and make copies of and abstracts from all Records in the possession or under the control of such Person relating to the Receivables and the Related Security, including, without limitation, the related Contracts, and (ii) to visit the offices and properties of such Person for the purpose of examining such materials described in clause (i) above, and to discuss matters relating to such Person's financial condition or the Receivables and the Related Security or any Person's performance under any of the Transaction Documents or any Person's performance under the Contracts and, in each case, with any of the officers or employees of Seller or the Servicer having knowledge of such matters. (e) Keeping and Marking of Records and Books. ---------------------------------------- (i) The Servicer will maintain and implement administrative and operating procedures (including, without limitation, an ability to recreate records evidencing Receivables in the event of the destruction of the originals thereof), and keep and maintain all documents, books, records and other information reasonably necessary or advisable for the collection of all Receivables (including, without limitation, records adequate to permit the immediate identification of each new Receivable and all Collections of and adjustments to each existing Receivable). The Servicer will give the Agent notice of any material change in the administrative and operating procedures referred to in the previous sentence. (ii) Such Seller Party will (A) on or prior to the date hereof, mark its general ledger and master data processing records and other books and records relating to the Purchaser Interests with a legend, acceptable to the Agent, describing the Purchaser Interests and (B) upon the request of the Agent (x) mark 16 each Contract with a legend describing the Purchaser Interests and (y) deliver to the Agent all Contracts (including, without limitation, all multiple originals of any such Contract) relating to the Receivables. (f) Compliance with Contracts and Credit and Collection Policy. Such ---------------------------------------------------------- Seller Party will timely and fully (i) perform and comply with all provisions, covenants and other promises required to be observed by it under the Contracts related to the Receivables, and (ii) comply in all respects with the Credit and Collection Policy in regard to each Receivable and the related Contract. Seller will pay when due any taxes payable in connection with the Receivables, exclusive of taxes on or measured by income or gross receipts of PREFCO, the Agent or any Financial Institution. (g) Performance and Enforcement of Receivables Sale Agreement. Seller --------------------------------------------------------- shall perform its obligations and undertakings under and pursuant to the Receivables Sale Agreement, shall purchase Receivables thereunder in strict compliance with the terms thereof and shall vigorously enforce the rights and remedies accorded to Seller under the Receivables Sale Agreement. Seller shall take all actions to protect, perfect and enforce its rights and interests (and the rights and interests of the Agent and the Purchasers as assignees of Seller) under the Receivables Sale Agreement as the Agent may from time to time reasonably request, including, without limitation, making claims to which it may --------- ------------------ be entitled under any indemnity, reimbursement or similar provision contained in the Receivables Sale Agreement and requesting such information or such audits as may be permitted under the Receivables Sale Agreement. (h) Ownership. Seller shall take all necessary action to (i) vest --------- legal and equitable title to the Receivables, the Related Security and the Collections purchased under the Receivables Sale Agreement irrevocably in Seller, free and clear of any Adverse Claims other than Adverse Claims in favor of the Agent and the Purchasers (including, without limitation, the filing of --------- ------------------ all financing statements or other similar instruments or documents necessary under the UCC (or any comparable law) of all appropriate jurisdictions, and the giving of notice to each Obligor and to each Policy Holder owing premiums in respect of which Receivables shall have arisen, to perfect Seller's ownership interest in such Receivables, Related Security and Collections, and such other action to perfect, protect or more fully evidence the interest of Seller therein as the Agent may reasonably request), and (ii) establish and maintain, in favor of the Agent, for the benefit of the Purchasers, a valid and perfected first priority undivided percentage ownership interest (and/or a valid and perfected first priority security interest) in all Receivables, Related Security and Collections to the full extent contemplated herein, free and clear of any Adverse Claims other than Adverse Claims in favor of the Agent for the benefit of the Purchasers (including, without limitation, the filing of all financing --------- ------------------ statements or other similar instruments or documents necessary under the UCC (or any comparable law) of all appropriate jurisdictions to perfect the Agent's (for the benefit of the Purchasers) interest in such Receivables, Related Security and Collections and such other action to perfect, protect or more fully evidence the interest of the Agent for the benefit of the Purchasers as the Agent may reasonably request). Seller shall, by not later than January 20, 2000, give or cause AIL to give to each Obligor in respect of any Receivable then outstanding notice as to the transfers of the interests in the Receivables contemplated in the Transaction Documents, and at all times thereafter give or cause AIL to give to each Obligor in respect of each Receivable then or thereafter arising notice as to such interests for the purpose of perfecting such interests in favor of Seller and the Agent. If at any time Seller shall fail to take any actions required to be taken hereunder, or any additional actions as may have been reasonably requested by the Agent (including, without limitation, the giving of notice to each Obligor of the interests created under the Transaction Documents in the Receivables), the Agent may, but shall not be required to, take any such action. (i) Purchasers' Reliance. Seller acknowledges that the Purchasers -------------------- are entering into the transactions contemplated by this Agreement in reliance upon Seller's identity as a legal entity that is separate from the other Torchmark Entities. Therefore, from and after the date of execution and delivery of this Agreement, Seller shall take all reasonable steps, including, without limitation, all steps that the Agent or any Purchaser may from time to time reasonably request, to maintain Seller's identity as a separate legal entity and to make it manifest to third parties that Seller is an entity with assets and liabilities distinct from those of the other Torchmark Entities and any Affiliates thereof and not just a division of any other Torchmark Entity. Without limiting the generality of the foregoing and in addition to the other covenants set forth herein, Seller shall: (A) conduct its own business in its own name and require that all full-time employees of Seller, if any, identify themselves as such and not as employees of any other Torchmark Entity (including, without limitation, by means of providing appropriate employees with business or identification cards identifying such employees as Seller's employees); (B) compensate all employees, consultants and agents directly, from Seller's bank accounts, for services provided to Seller by such employees, consultants and agents and, to the extent any employee, consultant or agent of Seller is also an employee, consultant or agent of another Torchmark Entity, allocate the compensation of such employee, consultant or agent between Seller and such Torchmark Entity on a basis that reflects the services rendered to Seller and such Torchmark Entity; (C) clearly identify its offices (by signage or otherwise) as its offices and, if such office is located in the offices of any Torchmark Entity, Seller shall lease such office at a fair market rent; (D) have a separate telephone number, which will be answered only in its name and separate stationery, invoices and checks in its own name; (E) conduct all transactions with each other Torchmark Entity strictly on an arm's-length basis, allocate all overhead expenses (including, without limitation, telephone and other utility charges) for items shared between Seller and each other Torchmark Entity on the basis of actual use to the extent practicable and, to the extent such allocation is not practicable, on a basis reasonably related to actual use; 18 (F) at all times have a Board of Directors consisting of three or more members, at least one of which is an Independent Director; (G) observe all corporate formalities as a distinct entity, and ensure that all corporate actions relating to (A) the selection, maintenance or replacement of the Independent Director on its board of directors, (B) the dissolution or liquidation of Seller or (C) the initiation of, participation in, acquiescence in or consent to any bankruptcy, insolvency, reorganization or similar proceeding involving Seller, are duly authorized by unanimous vote of its Board of Directors (including the Independent Director); (H) maintain Seller's books and records separate from those of each other Torchmark Entity and otherwise readily identifiable as its own assets rather than assets of any other Torchmark Entity; (I) prepare its financial statements separately from those of each other Torchmark Entity and insure that any consolidated financial statements of the Torchmark Entities that include Seller and that are filed with the Securities and Exchange Commission or any other governmental agency have notes clearly stating that Seller is a separate corporate entity and that its assets will be available first and foremost to satisfy the claims of the creditors of Seller; (J) except as herein specifically otherwise provided, maintain the funds or other assets of Seller separate from, and not commingled with, those of any other Torchmark Entity and only maintain bank accounts or other depository accounts to which the Seller alone is the account party, into which the Seller alone makes deposits and from which the Seller alone (or the Agent hereunder) has the power to make withdrawals; (K) pay all of Seller's operating expenses from the Seller's own assets (except for certain payments by another Torchmark Entity or other Persons pursuant to allocation arrangements that comply with the requirements of this Section 7.1(i)); -------------- (L) operate its business and activities such that: it does not engage in any business or activity of any kind, or enter into any transaction or indenture, mortgage, instrument, agreement, contract, lease or other undertaking, other than the transactions contemplated and authorized by this Agreement and the Receivables Sale Agreement; and does not create, incur, guarantee, assume or suffer to exist any indebtedness or other liabilities, whether direct or contingent, other than (1) as a result of the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business, (2) the incurrence of obligations under this Agreement, (3) the incurrence of obligations, as expressly contemplated in the Receivables Sale Agreement, to make payment to AIL thereunder for the purchase of Receivables from 19 AIL under the Receivables Sale Agreement, and (4) the incurrence of operating expenses in the ordinary course of business of the type otherwise contemplated by this Agreement; (M) maintain its corporate charter and other organizational documents in conformity with this Agreement, such that it does not amend, restate, supplement or otherwise modify its Certificate of Incorporation or By-laws in any respect that would impair its ability to comply with the terms or provisions of any of the Transaction Documents, including, without limitation, Section 7.1(i) of this Agreement; -------------- (N) maintain the effectiveness of, and continue to perform under the Receivables Sale Agreement and each of the other Transaction Documents to which it is party, such that it does not amend, restate, supplement, cancel, terminate or otherwise modify the Receivables Sale Agreement or any other Transaction Document (whether or not Seller is party thereto), or give or permit any consent, waiver, directive or approval thereunder or in respect thereof or waive any default, action, omission or breach under the Receivables Sale Agreement or any other Transaction Document or otherwise grant any indulgence thereunder or in respect thereof, without (in each case) the prior written consent of the Agent; (O) maintain its corporate separateness such that it does not merge or consolidate with or into, or convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions, and except as otherwise contemplated herein) all or substantially all of its assets (whether now owned or hereafter acquired) to, or acquire all or substantially all of the assets of, any Person, nor at any time create, have, acquire, maintain or hold any interest in any Subsidiary; (P) maintain at all times the Required Capital Amount (as defined in the Receivables Sale Agreement) and refrain from making any dividend, distribution, redemption of capital stock or payment of any subordinated indebtedness which would cause the Required Capital Amount to cease to be so maintained; and (Q) take such other actions as are necessary on its part to ensure that the facts and assumptions set forth in the opinion issued by Maynard, Cooper & Gale, P.C., as counsel for Seller, in connection with the closing and the initial purchase under this Agreement and relating to substantive consolidation issues, and in the certificates accompanying such opinion, remain true and correct in all material respects at all times. (j) Collections. Such Seller Party shall direct each applicable ----------- Torchmark Entity to remit all Collections received by such Torchmark Entity directly to the Servicer for the benefit of the Agent and the Purchasers. Immediately upon receipt by any Torchmark Entity of any premium payable by or on behalf of the Policy Holder or any other Person in respect of the Insurance Product that shall have given rise to any Receivable, such Torchmark Entity shall be required to remit to the Servicer an amount calculated in reference thereto that, in the ordinary course of business and in accordance 20 with its customary practice, is then payable as a commission in respect of such Insurance Product to the Obligor on such Receivable and which but for the existence of such Receivable would be remitted to such Obligor. In the event any payments relating to Receivables are remitted directly to Seller or any Affiliate of Seller, Seller shall remit (or shall cause all such payments to be remitted) directly to the Servicer, and at all times prior to such remittance, Seller shall itself hold or, if applicable, shall cause such payments to be held in trust for the exclusive benefit of the Agent and the Purchasers. Seller shall maintain exclusive ownership, dominion and control (subject to the terms of this Agreement) of each deposit account in which any Collections are held and shall not grant the right to take dominion and control of any such account except to the Agent on the demand of the Agent. At any time following the occurrence of an Amortization Event, the Agent may, at Seller's sole cost and expense, direct Seller to notify, or to cause AIL to notify, the Obligors (including Obligors that are guarantors) of Receivables and all Policy Holders owing premiums in respect of which any Receivables shall have arisen of the ownership interests of the Agent and the Purchasers under this Agreement and may also direct that payments of all amounts due or that become due under any or all Receivables or Related Security be made directly to the Agent (or its respective designee) or to a lockbox or collection account designated by the Agent. (k) Taxes. Such Seller Party shall file all tax returns and ----- reports required by law to be filed by it and shall promptly pay all taxes and governmental charges at any time due and payable; provided that in the -------- case of the Servicer, the Servicer shall not be required to pay any such taxes which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with generally accepted accounting principles shall have been set aside on its books. (l) Net Worth. Seller shall at all times maintain net --------- worth in an amount not less than $3,000,000. Section 7.2 Negative Covenants of the Seller Parties . Until the ---------------------------------------- date on which the Aggregate Unpaids have been indefeasibly paid in full and this Agreement terminates in accordance with its terms, each Seller Party hereby covenants, that: (a) Name Change, Offices and Records. Such Seller Party -------------------------------- will not (and will not permit AIL to) change its name, identity or corporate structure (within the meaning of Section 9-402(7) of any applicable enactment of the UCC) or relocate its chief executive office or any office where Records are kept unless it shall have: (i) given the Agent at least forty-five (45) days' prior written notice thereof and (ii) delivered to the Agent all financing statements, instruments and other documents requested by the Agent in connection with such change or relocation. (b) Change in Payment Instructions to Obligors. Such Seller ------------------------------------------ Party will not make (or permit AIL to make) any change in the instructions to Obligors regarding payments to be made on any Receivable without the prior written consent of the Agent. 21 (c) Modifications to Contracts and Credit and Collection Policy. ----------------------------------------------------------- Such Seller Party will not make (or permit AIL to make) any change to the Credit and Collection Policy that could adversely affect the collectibility of the Receivables or decrease the credit quality of any newly created Receivables. Except as provided in Section 8.2(d), the Servicer will not, and will not -------------- extend, amend or otherwise modify the terms of any Receivable or any Contract related thereto other than in accordance with the Credit and Collection Policy. (d) Sales, Liens. Seller shall not sell, assign (by operation ------------ of law or otherwise) or otherwise dispose of, or grant any option with respect to, or create or suffer to exist any Adverse Claim upon (including, without limitation, the filing of any financing statement) or with respect to, any Receivable, Related Security or Collections, or upon or with respect to any Contract under which any Receivable arises, or any deposit account in which Collections may be held, or assign any right to receive income with respect thereto (other than, in each case, the creation of the interests therein in favor of the Agent and the Purchasers provided for herein), and Seller shall defend the right, title and interest of the Agent and the Purchasers in, to and under any of the foregoing property, against all claims of third parties claiming through or under Seller or AIL. (e) Net Receivables Balance. At no time prior to the Amortization ----------------------- Date shall Seller permit the Net Receivables Balance to be less than the aggregate Capital of all the Purchaser Interests at such time. (f) Amortization Date Determination. Seller shall not designate ------------------------------- or permit the designation of an Amortization Date (as defined in the Receivables Sale Agreement), or send any written notice to AIL in respect thereof, without the prior written consent of the Agent, except with respect to the occurrence of such Amortization Date arising pursuant to Section 5.1(d) of the Receivables Sale Agreement. (g) Change in Subordinated Note. Seller shall not amend, modify --------------------------- (by course of conduct or otherwise) or terminate the Subordinated Note without the prior written consent of the Agent. ARTICLE VIII ADMINISTRATION AND COLLECTION Section 8.1 Designation of Servicer. (a) The servicing, administration ----------------------- and collection of the Receivables shall be conducted by such Person (the "Servicer") so designated from time to time in accordance with this -------- Section 8.1. AIL is hereby designated as, and hereby agrees to perform the - ----------- duties and obligations of, the Servicer pursuant to the terms of this Agreement. The Agent may, at any time following the occurrence of an Amortization Event, designate as Servicer any Person to succeed AIL or any successor Servicer. (b) Without the prior written consent of the Agent and the Required Financial Institutions, AIL shall not be permitted to delegate any of its duties or responsibilities as Servicer to any Person other than, with respect to certain Charged-Off Receivables, outside 22 collection agencies in accordance with its customary practices. If at any time the Agent shall designate as Servicer any Person other than AIL, all duties and responsibilities theretofore delegated by AIL to a subservicer may, at the discretion of the Agent, be terminated forthwith on notice given by the Agent to AIL and to Seller. (c) Notwithstanding the foregoing subsection (b), (i) AIL shall be and remain primarily liable to the Agent and the Purchasers for the full and prompt performance of all duties and responsibilities of the Servicer hereunder and (ii) the Agent and the Purchasers shall be entitled to deal exclusively with AIL in matters relating to the discharge by the Servicer of its duties and responsibilities hereunder. The Agent and the Purchasers shall not be required to give notice, demand or other communication to any Person other than AIL in order for communication to the Servicer and its sub-servicer or other delegate with respect thereto to be accomplished. AIL, at all times that it is the Servicer, shall be responsible for providing any sub-servicer or other delegate of the Servicer with any notice given to the Servicer under this Agreement. Section 8.2 Duties of Servicer. (a) The Servicer shall take or ------------------ cause to be taken all such actions as may be necessary or advisable to collect each Receivable from time to time, all in accordance with applicable laws, rules and regulations, with reasonable care and diligence, and in accordance with the Credit and Collection Policy. (b) The Servicer will handle all Collections in a manner consistent with the terms hereof and as the Agent may otherwise reasonably request. The Servicer shall, if requested by the Agent at any time following the occurrence of an Amortization Event, (i) establish such accounts as the Agent may reasonably request for the remittance of Collections and the remittance of premiums on Insurance Products in respect of which a Receivable shall have arisen as an advance on the commissions payable in connection with such Insurance Product, and (ii) thereafter instruct each Obligor to make payments on Receivables directly to such accounts. (c) The Servicer shall administer the Collections in accordance with the procedures described herein and in Article II. The Servicer shall set ---------- aside and hold in trust for the account of Seller and the Purchasers their respective shares of the Collections of Receivables in accordance with Article ------- II. The Servicer shall, upon the request of the Agent at any time, segregate, in - -- a manner acceptable to the Agent, all cash, checks and other instruments received by it from time to time constituting Collections from the general funds of the Servicer or Seller prior to the remittance thereof in accordance with Article II. If the Servicer shall be required to segregate Collections pursuant - ------- to the preceding sentence, the Servicer shall segregate and deposit with a bank designated by the Agent such allocable share of Collections of Receivables set aside for the Purchasers on the first Business Day following receipt by the Servicer of such Collections, duly endorsed or with duly executed instruments of transfer. (d) The Servicer shall not extend the maturity of any Receivable or adjust the Outstanding Balance of any Receivable other than in accordance with the Credit and Collection Policy. The Servicer shall have the absolute and unlimited right to commence or 23 settle any legal action with respect to any Receivable or to foreclose upon or repossess any Related Security. (e) The Servicer shall hold in trust for Seller and the Purchasers all Records that (i) evidence or relate to the Receivables, the related Contracts and Related Security or (ii) are otherwise necessary or desirable to collect the Receivables and shall, as soon as practicable upon demand of the Agent at any time, deliver or make available to the Agent all such Records, at a place selected by the Agent. The Servicer shall, as soon as practicable following receipt thereof turn over to Seller any cash collections or other cash proceeds received with respect to Indebtedness not constituting Receivables. The Servicer shall, from time to time at the reasonable request of the Agent, furnish to the Agent (as promptly as possible after any such request) a calculation of the amounts set aside for the Purchasers pursuant to Article ------- II. - -- (f) Any payment (i) by an Obligor in respect of any indebtedness owed by it to AIL or Seller or (ii) constituting a premium on an Insurance Product in respect of which an advance giving rise to a Receivable shall have been made in anticipation of the receipt of such premium, shall, except as otherwise specified by such Obligor or Policy Holder or as otherwise required by contract or law, and unless otherwise instructed by the Agent, be applied as a Collection of any Receivable of the related Obligor (starting with the oldest such Receivable) to the extent of any amounts then due and payable thereunder before being applied to any other receivable or other obligation. Section 8.3 Collection Rights. Seller hereby authorizes the Agent, ----------------- and agrees that the Agent shall be entitled to (i) endorse Seller's name on checks and other instruments representing Collections, (ii) enforce the Receivables, the related Contracts and the Related Security and (iii) take such action as shall be necessary or desirable to cause all cash, checks and other instruments constituting Collections of Receivables to come into the possession of the Agent rather than Seller. Section 8.4 Responsibilities of Seller. Anything herein to the -------------------------- contrary notwithstanding, the exercise by the Agent and the Purchasers of their rights hereunder shall not release the Servicer, AIL or Seller from any of their duties or obligations with respect to any Receivables or under the related Contracts. The Purchasers shall have no obligation or liability with respect to any Receivables or related Contracts, nor shall any of them be obligated to perform the obligations of Seller. Section 8.5 Reports. The Servicer shall prepare and forward to the ------- Agent (i) on the 10th day of each month (or, if such day is not a Business Day, the next following day that is a Business Day) and at such other times as the Agent shall reasonably request, a Monthly Report, which Monthly Report shall set forth the relevant information in respect of the calendar month then most recently ended, and (ii) at such times as the Agent shall reasonably request, a listing by Obligor of all Receivables. Section 8.6 Servicing Fees. In consideration of AIL's agreement to -------------- act as Servicer hereunder, Seller hereby agrees that, so long as AIL shall continue to perform as 24 Servicer hereunder, Seller shall pay AIL a fee (the "Servicing Fee") equal to ------------- 1/2 of 1% per annum of the average aggregate amount of outstanding Capital as compensation for its servicing activities, which fee shall be payable monthly, in arrears, on each Settlement Date in respect of the calendar month then most recently ended. From and after the replacement of AIL as Servicer hereunder, Seller shall pay all reasonable fees and expenses of the Person then acting as Servicer hereunder, such fees and expenses to be paid on each Settlement Date or at such other times as shall be acceptable to the Agent. ARTICLE IX AMORTIZATION EVENTS Section 9.1 Amortization Events. The occurrence of any one or more ------------------- of the following events shall constitute an Amortization Event: (a) Any of the following shall occur: (i) any Seller Party shall fail to make any payment or deposit required hereunder when due; or (ii) the Servicer shall fail to perform or observe any term, covenant or agreement hereunder (other than as referred to in clause (i) above) and such failure shall continue for five (5) consecutive Business Days; or (iii) Seller shall fail to perform or observe any term, covenant or agreement set forth in Section 7.1(b)(i), Section 7.1(h), Section ----------------- -------------- ------- 7.1(i)(L), (M) or (P), Section 7.1(l) or Section 7.2 and such failure --------- --- --- -------------- ----------- shall continue for three (3) consecutive Business Days; or (iv) Seller shall fail to perform or observe any term, covenant or agreement hereunder (other than as referred to in any of the foregoing clauses) and such failure shall continue for fifteen (15) consecutive days. (b) Any representation, warranty, certification or statement made by any Torchmark Entity in this Agreement, any other Transaction Document or in any other document delivered pursuant hereto or thereto shall prove to have been incorrect in any material respect when made or deemed made. (c) Any of the following shall occur: (i) the failure of Seller to pay any Indebtedness when due; or the default by Seller in the performance of any term, provision or conditions contained in any agreement under which any Indebtedness was created or is governed, or any other event shall occur or condition exist, the effect of which is to cause, or to permit the holder or holders of such Indebtedness to cause, such Indebtedness to become due prior to its stated maturity; or any Indebtedness of Seller shall be declared to 25 be due and payable or required to be prepaid (other than by a regularly scheduled payment) prior to the stated maturity thereof; or (ii) the failure of Torchmark or any of its Subsidiaries (including AIL) to pay when due any Indebtedness in excess of, singly or in the aggregate for all such Subsidiaries, $10,000,000; or the default by Torchmark or any of such Subsidiaries in the performance of any term, provision or conditions contained in any agreement under which any such Indebtedness was created or is governed, or any other event shall occur or condition exist, the effect of which is to cause, or to permit the holder or holders of such Indebtedness to cause, such Indebtedness to become due prior to its stated maturity; or any such Indebtedness of Torchmark or any such Subsidiary shall be declared to be due and payable or required to be prepaid (other than by a regularly scheduled payment) prior to the stated maturity thereof; or (iii) any event or condition shall have occurred or exist which would constitute a default under the Torchmark Credit Agreement (the terms of which are incorporated herein by this reference thereto, and shall remain in effect for purposes of this Agreement at all times during the term of this Agreement without regard to whether the Torchmark Credit Agreement shall then be in effect). (d) (i) Any Torchmark Entity shall generally not pay its debts as such debts become due or shall admit in writing its inability to pay its debts generally or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against any Torchmark Entity seeking to adjudicate it bankrupt or insolvent, or seeking liquidation, winding up, reorganization, receivership, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or any substantial part of its property or (ii) any Torchmark Entity shall take any corporate action to authorize any of the actions set forth in clause (i) above in this subsection (d). (e) The aggregate Purchaser Interests shall exceed 100% and shall continue as such until the earliest to occur of (i) five (5) Business Days following the date any Seller Party has actual knowledge thereof, (ii) two (2) Business Days after demand in respect thereof shall have been made under the Performance Guaranty and (iii) the next Settlement Date. (f) A Change of Control shall occur. (g) One or more final judgments for the payment of money shall be entered against (i) Seller, (ii) AIL, in excess of $10,000,000 singly or in the aggregate, or (iii) Torchmark, in excess of $25,000,000 singly or in the aggregate, in each case on claims not covered by insurance or as to which the insurance carrier has denied its responsibility, and such judgment shall continue unsatisfied and in effect for fifteen (15) consecutive days without being 26 stayed on appeal or otherwise being appropriately contested in good faith by such Torchmark Entity. (h) An "Amortization Event" shall for any reason occur under and as ------------------ defined in the Receivables Sale Agreement, or AIL shall for any reason cease to transfer, or cease to have the legal capacity to transfer, or otherwise be incapable of transferring Receivables under the Receivables Sale Agreement. (i) Any Transaction Document shall terminate in whole or in part (except in accordance with its terms), or shall cease to be effective or to be the legally valid, binding and enforceable obligation of Seller, AIL, Torchmark or the Servicer, as applicable; or any Torchmark Entity, or Obligors in respect of more than 10% of the Net Receivables Balance, shall directly or indirectly contest in any manner such effectiveness, validity, binding nature or enforceability; or the Agent for the benefit of the Purchasers shall cease to have a valid and perfected first priority security interest in the Receivables, the Related Security and the Collections with respect thereto. (j) At any time, with respect to AIL, a Regulatory Action Level Event shall occur. (k) At any time, with respect to AIL, a Regulatory Control Event shall occur. (l) AIL shall assert the invalidity or unenforceability of any term or provision relating to the subordination in right of payment of any indebtedness owing to AIL by Seller to the indebtedness and obligations owing to the Purchasers and the Agent by Seller. (m) Torchmark shall assert the invalidity or unenforceability of any term or provision of the Performance Guaranty, or shall at any time default in the payment or performance of any of its obligations thereunder. Section 9.2 Remedies. Upon the occurrence and during the -------- continuation of an Amortization Event, the Agent may, or upon the direction of the Required Financial Institutions shall, take any of the following actions: (i) replace the Person then acting as Servicer, (ii) declare the Amortization Date to have occurred, whereupon the Amortization Date shall forthwith occur, without demand, protest or further notice of any kind, all of which are hereby expressly waived by each Seller Party; provided, however, that upon the -------- occurrence of an Amortization Event described in Section 9.1(d), or of an actual -------------- or deemed entry of an order for relief with respect to any Seller Party under the Federal Bankruptcy Code, the Amortization Date shall automatically occur, without demand, protest or any notice of any kind, all of which are hereby expressly waived by each Seller Party, and (iii) to the fullest extent permitted by applicable law, declare that the Default Fee shall accrue with respect to any of the Aggregate Unpaids outstanding at such time. The aforementioned rights and remedies shall be in addition to all other rights and remedies of the Agent and the Purchasers available under this Agreement, by operation of law, at equity or otherwise, all of which are hereby expressly reserved, including, without limitation, all rights and remedies provided under the UCC, all of which rights shall be cumulative. 27 ARTICLE X INDEMNIFICATION Section 10.1 Indemnities by the Seller Parties. Without limiting --------------------------------- any other rights that the Agent or any Purchaser may have hereunder or under applicable law, (A) Seller hereby agrees to indemnify the Agent and each Purchaser and their respective assigns, officers, directors, agents and employees (each an "Indemnified Party") from and against any and all damages, ----------------- losses, claims, taxes, liabilities, costs, expenses and for all other amounts payable, including reasonable attorneys' fees (which attorneys may be employees of the Agent or such Purchaser) and disbursements (all of the foregoing being collectively referred to as "Indemnified Amounts") awarded against or incurred ------------------- by any of them arising out of or as a result of this Agreement or the acquisition, either directly or indirectly, by a Purchaser of an interest in the Receivables, and (B) the Servicer hereby agrees to indemnify each Indemnified Party for Indemnified Amounts awarded against or incurred by any of them arising out of the Servicer's activities as Servicer hereunder excluding, however, in all of the foregoing instances under the preceding clauses (A) and (B): (i) Indemnified Amounts to the extent a final judgment of a court of competent jurisdiction holds that such Indemnified Amounts resulted from gross negligence or willful misconduct on the part of the Indemnified Party seeking indemnification; (ii) Indemnified Amounts to the extent the same includes losses in respect of Receivables that are uncollectible on account of the insolvency, bankruptcy or lack of creditworthiness of the related Obligor; or (iii) taxes imposed by the jurisdiction in which such Indemnified Party's principal executive office is located, on or measured by the overall net income of such Indemnified Party to the extent that the computation of such taxes is consistent with the characterization for income tax purposes of the acquisition by the Purchasers of Purchaser Interests as a loan or loans by the Purchasers to Seller secured by the Receivables, the Related Security and the Collections; provided, however, that nothing contained in this sentence shall limit the - --------- -------- liability of any Seller Party or limit the recourse of the Purchasers to any Seller Party for amounts otherwise specifically provided to be paid by such Seller Party under the terms of this Agreement. Without limiting the generality of the foregoing indemnification, Seller shall indemnify the Agent and the Purchasers for Indemnified Amounts (including, without limitation, losses in respect of uncollectible receivables for matters specifically described below, regardless of whether reimbursement therefor would constitute recourse to Seller or the Servicer) relating to or resulting from: (i) any representation or warranty made by any Torchmark Entity (or any officers of any such Person) under or in connection with this Agreement, any other 28 Transaction Document or any other information or report delivered by any such Person pursuant hereto or thereto, which shall have been false or incorrect when made or deemed made; (ii) the failure by any Torchmark Entity to comply with any applicable law, rule, regulation, agreement (including any confidentiality agreement), order, writ, judgment, injunction, decree or award, including with respect to any Receivable or Contract related thereto, or the nonconformity of any Receivable or Contract included therein with any such applicable law, rule or regulation or any failure of any Torchmark Entity to keep or perform any of its obligations, express or implied, with respect to any Contract; (iii) any failure of any Torchmark Entity to perform its duties, covenants or other obligations in accordance with the provisions of this Agreement or any other Transaction Document; (iv) any products liability or similar claim arising out of or in connection with merchandise, insurance or services that are the subject of any Contract; (v) any dispute, claim, offset or defense (other than discharge in bankruptcy of the Obligor) of the Obligor to the payment of any Receivable (including, without limitation, a defense based on such Receivable or the related Contract not being a legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms), or any other claim resulting from the sale of the merchandise or service related to such Receivable or the furnishing or failure to furnish such merchandise or services; (vi) the commingling of Collections of Receivables at any time with other funds; (vii) any investigation, litigation or proceeding related to or arising from this Agreement or any other Transaction Document, the transactions contemplated hereby, the use of the proceeds of a purchase, the ownership of the Purchaser Interests or any other investigation, litigation or proceeding relating to any Torchmark Entity in which any Indemnified Party becomes involved as a result of any of the transactions contemplated hereby; (viii) any inability to litigate any claim against any Obligor in respect of any Receivable as a result of such Obligor being immune from civil and commercial law and suit on the grounds of sovereignty or otherwise from any legal action, suit or proceeding; (ix) any Amortization Event described in Section 9.1(d); --------------- 29 (x) any failure of Seller to acquire and maintain legal and equitable title to, and ownership of any Receivable and the Related Security and Collections with respect thereto, free and clear of any Adverse Claim (other than as created hereunder); or any failure of Seller to give reasonably equivalent value to AIL under the Receivables Sale Agreement in consideration of the transfer by AIL of any Receivable, or any attempt by any Person to void such transfer under statutory provisions or common law or equitable action; (xi) any failure to vest and maintain vested in the Agent and the Purchasers, or to transfer to the Agent and the Purchasers, legal and equitable title to, and ownership of, a first priority undivided percentage ownership (to the extent of the Purchaser Interests contemplated hereunder) in the Receivables, the Related Security and the Collections, free and clear of any Adverse Claim; (xii) the failure to have filed, or any delay in filing, financing statements or other similar instruments or documents under the UCC of any applicable jurisdiction or other applicable laws with respect to any Receivable, the Related Security and Collections with respect thereto, and the proceeds of any thereof, whether at the time of any Incremental Purchase or Reinvestment or at any subsequent time; (xiii) any action or omission by any Torchmark Entity which reduces or impairs the rights of the Agent or the Purchasers with respect to any Receivable or the value of any such Receivable; (xiv) any action or omission by any Insurance Agent or any member of an Agent-Hierarchy which (A) reduces or impairs the rights of the Agent or the Purchasers with respect to any Receivable or the value of any such Receivable and (B) does not entail the commencement by such Insurance Agent or member of any bankruptcy or insolvency proceeding or any other action or omission (including any failure to pay) by reason of the lack of creditworthiness or ability to pay on the part of such Insurance Agent or Agent-Hierarchy; (xv) any attempt by any Person to void any Incremental Purchase or Reinvestment hereunder under statutory provisions or common law or equitable action; and (xvi) the Year 2000 Problem. Section 10.2 Increased Cost and Reduced Return. If after the date --------------------------------- hereof, any Funding Source shall be charged any fee, expense or increased cost on account of the adoption of any applicable law, rule or regulation (including any applicable law, rule or regulation regarding capital adequacy) or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency: (i) that subjects any Funding Source to any charge or withholding on or with respect to any Funding Agreement or a Funding Source's obligations under a Funding Agreement, or on or with respect to the Receivables, or changes the basis of taxation of payments to any Funding Source of any 30 amounts payable under any Funding Agreement (except for changes in the rate of tax on the overall net income of a Funding Source) or (ii) that imposes, modifies or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of a Funding Source, or credit extended by a Funding Source pursuant to a Funding Agreement or (iii) that imposes any other condition the result of which is to increase the cost to a Funding Source of performing its obligations under a Funding Agreement, or to reduce the rate of return on a Funding Source's capital as a consequence of its obligations under a Funding Agreement, or to reduce the amount of any sum received or receivable by a Funding Source under a Funding Agreement or to require any payment calculated by reference to the amount of interests or loans held or interest received by it, then, upon demand by the Agent, Seller shall pay to the Agent, for the benefit of the relevant Funding Source, such amounts charged to such Funding Source or compensate such Funding Source for such reduction. Section 10.3 Other Costs and Expenses. (a) Seller shall pay to the ------------------------ Agent and PREFCO on demand all costs and out-of-pocket expenses in connection with the preparation, execution, delivery and administration of the Transaction Documents, the transactions contemplated hereby and the other documents to be delivered hereunder, including without limitation, the cost (subject to Section ------- 10.3(b) below) of PREFCO's auditors auditing the books, records and procedures - ------- of Seller, reasonable fees and out-of-pocket expenses of legal counsel for PREFCO and the Agent (which such counsel may be employees of PREFCO or the Agent) with respect thereto and with respect to advising PREFCO and the Agent as to their respective rights and remedies under this Agreement. Seller shall pay to the Agent on demand any and all costs and expenses of the Agent and the Purchasers, if any, including reasonable counsel fees and expenses in connection with the enforcement of this Agreement and the other documents delivered hereunder and in connection with any restructuring or workout of this Agreement or such documents, or the administration of this Agreement following an Amortization Event. Seller shall reimburse PREFCO on demand for all other costs and expenses incurred by PREFCO ("Other Costs"), including, without limitation, ----------- the cost of auditing PREFCO's books by certified public accountants, the cost of rating the Commercial Paper by independent financial rating agencies, and the reasonable fees and out-of-pocket expenses of counsel for PREFCO or any counsel for any shareholder of PREFCO with respect to advising PREFCO or such shareholder as to matters relating to PREFCO's operations. (b) The cost and expense of an outside auditor at any time engaged by the Agent or PREFCO to conduct an audit of the books, records and procedures of Seller and the Torchmark Entities, whether pursuant to Section 7.1(d) hereof or -------------- otherwise, shall be borne by Seller, and Seller shall promptly reimburse the Agent therefor upon demand of the Agent. Section 10.4 Allocations. PREFCO shall allocate the liability for ----------- Other Costs among Seller and other Persons with whom PREFCO has entered into agreements to purchase interests in receivables ("Other Sellers"). If any Other ------------- Costs are attributable to Seller and not attributable to any Other Seller, Seller shall be solely liable for such Other Costs. However, if Other Costs are attributable to Other Sellers and not attributable to Seller, such Other Sellers shall be solely liable for such Other Costs. All allocations to be made pursuant to the foregoing 31 provisions of this Article X shall be made by PREFCO in its sole discretion and ------ shall be binding on Seller and the Servicer. ARTICLE XI THE AGENT Section 11.1 Authorization and Action. Each Purchaser hereby ------------------------ designates and appoints Bank One to act as its agent hereunder and under each other Transaction Document, and authorizes the Agent to take such actions as agent on its behalf and to exercise such powers as are delegated to the Agent by the terms of this Agreement and the other Transaction Documents together with such powers as are reasonably incidental thereto. The Agent shall not have any duties or responsibilities, except those expressly set forth herein or in any other Transaction Document, or any fiduciary relationship with any Purchaser, and no implied covenants, functions, responsibilities, duties, obligations or liabilities on the part of the Agent shall be read into this Agreement or any other Transaction Document or otherwise exist for the Agent. In performing its functions and duties hereunder and under the other Transaction Documents, the Agent shall act solely as agent for the Purchasers and does not assume nor shall be deemed to have assumed any obligation or relationship of trust or agency with or for any Torchmark Entity or any of such Torchmark Entity's successors or assigns. The Agent shall not be required to take any action that exposes the Agent to personal liability or that is contrary to this Agreement, any other Transaction Document or applicable law. The appointment and authority of the Agent hereunder shall terminate upon the indefeasible payment in full of all Aggregate Unpaids. Each Purchaser hereby authorizes the Agent to execute each of the Uniform Commercial Code financing statements on behalf of such Purchaser (the terms of which shall be binding on such Purchaser). Section 11.2 Delegation of Duties. The Agent may execute any of -------------------- its duties under this Agreement and each other Transaction Document by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. Section 11.3 Exculpatory Provisions. Neither the Agent nor any of ---------------------- its directors, officers, agents or employees shall be (i) liable for any action lawfully taken or omitted to be taken by it or them under or in connection with this Agreement or any other Transaction Document (except for its, their or such Person's own gross negligence or willful misconduct), or (ii) responsible in any manner to any of the Purchasers for any recitals, statements, representations or warranties made by any Torchmark Entity contained in this Agreement, any other Transaction Document or any certificate, report, statement or other document referred to or provided for in, or received under or in connection with, this Agreement, or any other Transaction Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, or any other Transaction Document or any other document furnished in connection herewith or therewith, or for any failure of any Torchmark Entity to perform its obligations hereunder or thereunder, or for the satisfaction of any condition specified in Article VI, or for the perfection, priority, condition, value or ---------- sufficiency of any collateral 32 pledged in connection herewith. The Agent shall not be under any obligation to any Purchaser to ascertain or to inquire as to the observance or performance of any of the agreements or covenants contained in, or conditions of, this Agreement or any other Transaction Document, or to inspect the properties, books or records of the Torchmark Entities. The Agent shall not be deemed to have knowledge of any Amortization Event or Potential Amortization Event unless the Agent has received notice from Seller or a Purchaser. Section 11.4 Reliance by Agent. The Agent shall in all cases be ----------------- entitled to rely, and shall be fully protected in relying, upon any document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel, independent accountants and other experts selected by the Agent. The Agent shall in all cases be fully justified in failing or refusing to take any action under this Agreement or any other Transaction Document unless it shall first receive such advice or concurrence of PREFCO or the Required Financial Institutions or all of the Purchasers, as applicable, as it deems appropriate and it shall first be indemnified to its satisfaction by the Purchasers, provided that unless and until the Agent shall have received such -------- advice, the Agent may take or refrain from taking any action, as the Agent shall deem advisable and in the best interests of the Purchasers. The Agent shall in all cases be fully protected in acting, or in refraining from acting, in accordance with a request of PREFCO or the Required Financial Institutions or all of the Purchasers, as applicable, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Purchasers. Section 11.5 Non-Reliance on Agent and Other Purchasers. Each ------------------------------------------ Purchaser expressly acknowledges that neither the Agent, nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates has made any representations or warranties to it and that no act by the Agent hereafter taken, including, without limitation, any review of the affairs of any Seller Party, shall be deemed to constitute any representation or warranty by the Agent. Each Purchaser represents and warrants to the Agent that it has and will, independently and without reliance upon the Agent or any other Purchaser and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, prospects, financial and other conditions and creditworthiness of Seller and made its own decision to enter into this Agreement, the other Transaction Documents and all other documents related hereto or thereto. Section 11.6 Reimbursement and Indemnification. The Financial --------------------------------- Institutions agree to reimburse and indemnify the Agent and its officers, directors, employees, representatives and agents ratably according to their Pro Rata Shares, to the extent not paid or reimbursed by the Seller Parties (i) for any amounts for which the Agent, acting in its capacity as Agent, is entitled to reimbursement by the Seller Parties hereunder and (ii) for any other expenses incurred by the Agent, in its capacity as Agent and acting on behalf of the Purchasers, in connection with the administration and enforcement of this Agreement and the other Transaction Documents. Section 11.7 Agent in its Individual Capacity. The Agent and its -------------------------------- Affiliates may make loans to, accept deposits from and generally engage in any kind of business with any 33 Torchmark Entity or any Affiliate thereof as though the Agent were not the Agent hereunder. With respect to the acquisition of Purchaser Interests pursuant to this Agreement, the Agent shall have the same rights and powers under this Agreement in its individual capacity as any Purchaser and may exercise the same as though it were not the Agent, and the terms "Financial Institution," --------------------- "Purchaser," "Financial Institutions" and "Purchasers" shall include the Agent ---------- ---------------------- ---------- in its individual capacity. Section 11.8 Successor Agent. The Agent may, upon five days' --------------- notice to Seller and the Purchasers, and the Agent will, upon the direction of all of the Purchasers (other than the Agent, in its individual capacity) resign as Agent. If the Agent shall resign, then the Required Financial Institutions during such five-day period shall appoint from among the Purchasers a successor agent. If for any reason no successor Agent is appointed by the Required Financial Institutions during such five-day period, then effective upon the termination of such five day period, the Purchasers shall perform all of the duties of the Agent hereunder and under the other Transaction Documents and Seller and the Servicer (as applicable) shall make all payments in respect of the Aggregate Unpaids directly to the applicable Purchasers and for all purposes shall deal directly with the Purchasers. After the effectiveness of any retiring Agent's resignation hereunder as Agent, the retiring Agent shall be discharged from its duties and obligations hereunder and under the other Transaction Documents and the provisions of this Article XI and Article X shall ---------- --------- continue in effect for its benefit with respect to any actions taken or omitted to be taken by it while it was Agent under this Agreement and under the other Transaction Documents. ARTICLE XII ASSIGNMENTS; PARTICIPATIONS Section 12.1 Assignments. (a) Seller and each Financial Institution ----------- hereby agree and consent to the complete or partial assignment by PREFCO of all or any portion of its rights under, interest in, title to and obligations under this Agreement to the Financial Institutions pursuant to Section 13.1 or to any ------------ other Person, and upon such assignment, PREFCO shall be released from its obligations so assigned. Further, Seller and each Financial Institution hereby agree that any assignee of PREFCO of this Agreement or all or any of the Purchaser Interests of PREFCO shall have all of the rights and benefits under this Agreement as if the term "PREFCO" explicitly referred to such party, and no ------ such assignment shall in any way impair the rights and benefits of PREFCO hereunder. Neither the Seller nor the Servicer shall have the right to assign its rights or obligations under this Agreement. (b) Any Financial Institution may at any time and from time to time assign to one or more Persons ("Purchasing Financial Institutions") all or --------------------------------- any part of its rights and obligations under this Agreement pursuant to an assignment agreement, substantially in the form set forth in Exhibit V hereto --------- (the "Assignment Agreement") executed by such Purchasing Financial Institution -------------------- and such selling Financial Institution. The consent of PREFCO shall be required prior to the effectiveness of any such assignment. Each assignee of a Financial Institution must have a short-term debt rating of A-1 or better by Standard & Poor's Ratings Group and P-1 by Moody's Investor Service, Inc. and must agree to deliver to the Agent, promptly following any request therefor by the Agent or PREFCO, an enforceability opinion in 34 form and substance satisfactory to the Agent and PREFCO. Upon delivery of the executed Assignment Agreement to the Agent, such selling Financial Institution shall be released from its obligations hereunder to the extent of such assignment. Thereafter the Purchasing Financial Institution shall for all purposes be a Financial Institution party to this Agreement and shall have all the rights and obligations of a Financial Institution under this Agreement to the same extent as if it were an original party hereto and no further consent or action by Seller, the Purchasers or the Agent shall be required. (c) Each of the Financial Institutions agrees that in the event that it shall cease to have a short-term debt rating of A-1 or better by Standard & Poor's Ratings Group and P-1 by Moody's Investor Service, Inc. (an "Affected -------- Financial Institution"), such Affected Financial Institution shall be obliged, - --------------------- at the request of PREFCO or the Agent, to assign all of its rights and obligations hereunder to (x) another Financial Institution or (y) another funding entity nominated by the Agent and acceptable to PREFCO, and willing to participate in this Agreement through the Liquidity Termination Date in the place of such Affected Financial Institution; provided that the Affected -------- Financial Institution receives payment in full, pursuant to an Assignment Agreement, of an amount equal to such Financial Institution's Pro Rata Share of the Capital and Yield owing to the Financial Institutions and all accrued but unpaid fees and other costs and expenses payable in respect of its Pro Rata Share of the Purchaser Interests of the Financial Institutions. Section 12.2 Participations. Any Financial Institution may, in the -------------- ordinary course of its business at any time sell to one or more Persons (each a "Participant") participating interests in its Pro Rata Share of the Purchaser ----------- Interests of the Financial Institutions, its obligation to pay PREFCO its Acquisition Amounts or any other interest of such Financial Institution hereunder. Notwithstanding any such sale by a Financial Institution of a participating interest to a Participant, such Financial Institution's rights and obligations under this Agreement shall remain unchanged, such Financial Institution shall remain solely responsible for the performance of its obligations hereunder, and Seller, PREFCO and the Agent shall continue to deal solely and directly with such Financial Institution in connection with such Financial Institution's rights and obligations under this Agreement. Each Financial Institution agrees that any agreement between such Financial Institution and any such Participant in respect of such participating interest shall not restrict such Financial Institution's right to agree to any amendment, supplement, waiver or modification to this Agreement, except for any amendment, supplement, waiver or modification described in Section 14.1(b)(i). ------------------ ARTICLE XIII LIQUIDITY FACILITY Section 13.1 Transfer to Financial Institutions. Each Financial ---------------------------------- Institution hereby agrees, subject to Section 13.4, that immediately upon ------------ written notice from PREFCO delivered on or prior to the Liquidity Termination Date, it shall acquire by assignment from PREFCO, without recourse or warranty, its Pro Rata Share of one or more of the Purchaser Interests of PREFCO as specified by PREFCO. Each such assignment by PREFCO shall be made pro rata among the Financial Institutions, provided, however, that PREFCO may at any -------- ------- 35 time and from time to time, in its sole and absolute discretion, make any such assignment to any Affected Financial Institution on a non-pro rata basis. Each Financial Institution shall, no later than 1:00 p.m. (Chicago time) on the date of such assignment, pay in immediately available funds to the Agent at an account designated by the Agent, for the benefit of PREFCO, its Acquisition Amount. Unless a Financial Institution has notified the Agent that it does not intend to pay its Acquisition Amount, the Agent may assume that such payment has been made and may, but shall not be obligated to, make the amount of such payment available to PREFCO in reliance upon such assumption. PREFCO hereby sells and assigns to the Agent for the ratable benefit of the Financial Institutions, and the Agent hereby purchases and assumes from PREFCO, effective upon the receipt by PREFCO of the PREFCO Transfer Price, the Purchaser Interests of PREFCO which are the subject of any transfer pursuant to this Article XIII. ------------ Section 13.2 Transfer Price Reduction Yield. If the Adjusted ------------------------------ Liquidity Price is included in the calculation of the PREFCO Transfer Price for any Purchaser Interest, each Financial Institution agrees that the Agent shall pay to PREFCO the Reduction Percentage of any Yield received by the Agent with respect to such Purchaser Interest. Section 13.3 Payments to PREFCO. In consideration for the reduction ------------------ of the PREFCO Transfer Prices by the PREFCO Transfer Price Reductions, effective only at such time as the aggregate amount of the Capital of the Purchaser Interests of the Financial Institutions equals the PREFCO Residual, each Financial Institution hereby agrees that the Agent shall not distribute to the Financial Institutions and shall immediately remit to PREFCO any Yield, Collections or other payments received by it to be applied pursuant to the terms hereof or otherwise to reduce the Capital of the Purchaser Interests of the Financial Institutions. Section 13.4 Limitation on Commitment to Purchase from PREFCO. ------------------------------------------------ Notwithstanding anything to the contrary in this Agreement, no Financial Institution shall have any obligation to purchase any Purchaser Interest from PREFCO, pursuant to Section 13.1 or otherwise, if: ------------ (i) PREFCO shall have voluntarily commenced any proceeding or filed any petition under any bankruptcy, insolvency or similar law seeking the dissolution, liquidation or reorganization of PREFCO or taken any corporate action for the purpose of effectuating any of the foregoing; or (ii) involuntary proceedings or an involuntary petition shall have been commenced or filed against PREFCO by any Person under any bankruptcy, insolvency or similar law seeking the dissolution, liquidation or reorganization of PREFCO and such proceeding or petition shall have not been dismissed. Section 13.5 Defaulting Financial Institutions. If one or more --------------------------------- Financial Institutions defaults in its obligation to pay its Acquisition Amount pursuant to Section 13.1 (each such Financial Institution shall be called a ------------ "Defaulting Financial Institution" and the aggregate amount of such defaulted - --------------------------------- obligations being herein called the "PREFCO Transfer Price Deficit"), then upon ----------------------------- notice from the Agent, each Financial Institution other than the Defaulting 36 Financial Institutions (a "Non-Defaulting Financial Institution") shall promptly ------------------------------------ pay to the Agent, in immediately available funds, an amount equal to the lesser of (x) such Non-Defaulting Financial Institution's proportionate share (based upon the relative Commitments of the Non-Defaulting Financial Institutions) of the PREFCO Transfer Price Deficit and (y) the unused portion of such Non- Defaulting Financial Institution's Commitment. A Defaulting Financial Institution shall forthwith upon demand pay to the Agent for the account of the Non-Defaulting Financial Institutions all amounts paid by each Non-Defaulting Financial Institution on behalf of such Defaulting Financial Institution, together with interest thereon, for each day from the date a payment was made by a Non-Defaulting Financial Institution until the date such Non-Defaulting Financial Institution has been paid such amounts in full, at a rate per annum equal to the Federal Funds Effective Rate plus two percent (2%). In addition, without prejudice to any other rights that PREFCO may have under applicable law, each Defaulting Financial Institution shall pay to PREFCO forthwith upon demand, the difference between such Defaulting Financial Institution's unpaid Acquisition Amount and the amount paid with respect thereto by the Non- Defaulting Financial Institutions, together with interest thereon, for each day from the date of the Agent's request for such Defaulting Financial Institution's Acquisition Amount pursuant to Section 13.1 until the date the requisite amount ------------ is paid to PREFCO in full, at a rate per annum equal to the Federal Funds Effective Rate plus two percent (2%). ARTICLE XIV MISCELLANEOUS Section 14.1 Waivers and Amendments. (a) No failure or delay on ---------------------- the part of the Agent or any Purchaser in exercising any power, right or remedy under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or remedy preclude any other further exercise thereof or the exercise of any other power, right or remedy. The rights and remedies herein provided shall be cumulative and nonexclusive of any rights or remedies provided by law. Any waiver of this Agreement shall be effective only in the specific instance and for the specific purpose for which given. (b) No provision of this Agreement may be amended, supplemented, modified or waived except in writing in accordance with the provisions of this Section 14.1(b). PREFCO, Seller, the Servicer and the Agent, --------------- at the direction of the Required Financial Institutions, may enter into written modifications or waivers of any provisions of this Agreement, provided, however, -------- ------- that no such modification or waiver shall: (i) without the consent of each affected Purchaser, (A) extend the Liquidity Termination Date or the date of any payment or deposit of Collections by Seller or the Servicer, (B) reduce the rate or extend the time of payment of Yield (or any component thereof), (C) reduce any fee payable to the Agent for the benefit of the Purchasers, (D) except pursuant to Article XII hereof, change the amount of the ----------- Capital of any Purchaser, any Financial Institution's Pro Rata Share (except pursuant to Sections 13.1 or 13.5) or any Financial ------------- ---- Institution's Commitment, (E) amend, modify or waive any provision of the definition of Required Financial Institutions or this Section ------- 14.1(b), (F) consent to or permit ------- 37 the assignment or transfer by Seller of any of its rights and obligations under this Agreement, (G) change the definition of "Eligible Receivable,"or (H) amend or modify any defined term (or any ------------------- defined term used directly or indirectly in such defined term) used in clauses (A) through (G) above in a manner that would circumvent the intention of the restrictions set forth in such clauses; or (ii) without the written consent of the then Agent, amend, modify or waive any provision of this Agreement if the effect thereof is to affect the rights or duties of such Agent; or (iii) without the written consent of the Servicer, amend, modify or waive any provision of this Agreement if the effect thereof is to affect the rights or duties of the Servicer. Notwithstanding the foregoing, without the consent of the Financial Institutions, the Agent may, with the consent of Seller, amend this Agreement solely to add additional Persons as Financial Institutions hereunder. Any modification or waiver made in accordance with this Section 14.1 shall apply to ------------ each of the Purchasers equally and shall be binding upon Seller, the Purchasers, the Servicer and the Agent. Section 14.2 Notices. Except as provided below, all communications ------- and notices provided for hereunder shall be in writing (including bank wire, telecopy or electronic facsimile transmission or similar writing) and shall be given to the other parties hereto at their respective addresses or telecopy numbers set forth on the signature pages hereof or at such other address or telecopy number as such Person may hereafter specify for the purpose of notice to each of the other parties hereto. Each such notice or other communication shall be effective (i) if given by telecopy, upon the receipt thereof, (ii) if given by mail, three (3) Business Days after the time such communication is deposited in the mail with first class postage prepaid or (iii) if given by any other means, when received at the address specified in this Section 14.2. ------------ Seller hereby authorizes the Agent to effect purchases and Tranche Period and Discount Rate selections based on telephonic notices made by any Person whom the Agent in good faith believes to be acting on behalf of Seller. Seller agrees to deliver promptly to the Agent a written confirmation of each telephonic notice signed by an authorized officer of Seller; however, the absence of such confirmation shall not affect the validity of such notice. If the written confirmation differs from the action taken by the Agent, the records of the Agent shall govern absent manifest error. Section 14.3 Ratable Payments. If any Purchaser, whether by setoff ---------------- or otherwise, has payment made to it with respect to any portion of the Aggregate Unpaids owing to such Purchaser (other than payments received pursuant to Section 10.2 or 10.3) in a greater proportion than that received by any other ------------ ---- Purchaser entitled to receive a ratable share of such Aggregate Unpaids, such Purchaser agrees, promptly upon demand, to purchase for cash without recourse or warranty a portion of such Aggregate Unpaids held by the other Purchasers so that after such purchase each Purchaser will hold its ratable proportion of such Aggregate Unpaids; provided that if all or any portion of such excess amount is thereafter recovered from such 38 Purchaser, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. Section 14.4 Protection of Ownership Interests of the Purchasers. --------------------------------------------------- (a) Seller agrees that from time to time, at its expense, it will promptly execute and deliver all instruments and documents, and take all actions, that may be reasonably necessary or desirable, or that the Agent may request, to perfect, protect or more fully evidence the Purchaser Interests, or to enable the Agent or the Purchasers to exercise and enforce their rights and remedies hereunder. At any time, the Agent may, or the Agent may direct Seller or the Servicer to, notify the Obligors (including Obligors that are guarantors) of Receivables, at Seller's expense, of the ownership interests of the Purchasers under this Agreement and may also direct that payments of all amounts due or that become due under any or all Receivables be made directly to the Agent or its designee. Seller or the Servicer (as applicable) shall, at any Purchaser's request, withhold the identity of such Purchaser in any such notification. (b) If any Seller Party fails to perform any of its obligations hereunder, the Agent or any Purchaser may (but shall not be required to) perform, or cause performance of, such obligation, and the Agent's or such Purchaser's costs and expenses incurred in connection therewith shall be payable by Seller as provided in Section 10.3. Each Seller Party irrevocably authorizes ------------ the Agent at any time and from time to time in the sole discretion of the Agent, and appoints the Agent as its attorney-in-fact, to act on behalf of such Seller Party (i) to execute on behalf of Seller as debtor and to file financing statements necessary or desirable in the Agent's sole discretion to perfect and to maintain the perfection and priority of the interest of the Purchasers in the Receivables and (ii) to file a carbon, photographic or other reproduction of this Agreement or any financing statement with respect to the Receivables as a financing statement in such offices as the Agent in its sole discretion deems necessary or desirable to perfect and to maintain the perfection and priority of the interests of the Purchasers in the Receivables. This appointment is coupled with an interest and is irrevocable. Section 14.5 Confidentiality. (a) Each Seller Party and each --------------- Purchaser shall maintain and shall cause each of its employees and officers to maintain the confidentiality of this Agreement and the other confidential proprietary information with respect to Seller, the Servicer and its Affiliates, the Agent and PREFCO and their respective businesses obtained by it or them in connection with the structuring, negotiating and execution of the transactions contemplated herein, except that such Seller Party and such Purchaser and its officers and employees may disclose (i) such information to such Seller Party's and such Purchaser's external accountants and attorneys and as required by any applicable law or order of any judicial or administrative proceeding, and (ii) such information as relates to the off-balance sheet accounting treatment intended by the transactions contemplated in the Transaction Documents to any rating agency rating any Indebtedness or the claims-paying ability of any Torchmark Entity. In the event any rating agency that is rating any Indebtedness or the claims-paying ability of any Torchmark Entity shall request any additional information of the type the disclosure of which is restricted by this Section 14.5(a), Seller may with the consent of the Agent (which consent --------------- shall not be unreasonably withheld) disclose such information to such rating agency. 39 (b) Anything herein to the contrary notwithstanding, each Seller Party hereby consents to the disclosure of any nonpublic information with respect to it (i) to the Agent, the Financial Institutions or PREFCO by each other, (ii) by the Agent or the Purchasers to any prospective or actual assignee or participant of any of them, (iii) by the Agent to any rating agency, Commercial Paper dealer or provider of a surety, guaranty or credit or liquidity enhancement to PREFCO or any entity organized for the purpose of purchasing, or making loans secured by, financial assets for which Bank One acts as the administrative agent and to any officers, directors, employees, outside accountants and attorneys of any of the foregoing, (iv) to the extent the same becomes available to the Agent or any Purchaser on a non-confidential basis from a source other than another party hereto, or (v) to the extent necessary in connection with any legal proceeding relating to the enforcement of any right of the Agent or the Purchasers under the Transaction Documents. In addition, the Purchasers and the Agent may disclose any such nonpublic information pursuant to any law, rule, regulation, direction, subpoena, request or order of any judicial, administrative or regulatory authority or proceedings (whether or not having the force or effect of law). Section 14.6 Bankruptcy Petition. Seller, the Servicer, the Agent ------------------- and each Financial Institution hereby covenants and agrees that, prior to the date that is one year and one day after the payment in full of all outstanding senior Indebtedness of PREFCO, it will not institute against, or join any other Person in instituting against, PREFCO any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or other similar proceeding under the laws of the United States or any state of the United States. Section 14.7 Limitation of Liability. Except with respect to any ----------------------- claim arising out of the willful misconduct or gross negligence of PREFCO, the Agent or any Financial Institution, no claim may be made by any Seller Party or any other Person against PREFCO, the Agent or any Financial Institution or their respective Affiliates, directors, officers, employees, attorneys or agents for any special, indirect, consequential or punitive damages in respect of any claim for breach of contract or any other theory of liability arising out of or related to the transactions contemplated by this Agreement, or any act, omission or event occurring in connection therewith; and each Seller Party hereby waives, releases, and agrees not to sue upon any claim for any such damages, whether or not accrued and whether or not known or suspected to exist in its favor. Section 14.8 CHOICE OF LAW. THIS AGREEMENT SHALL BE GOVERNED AND ------------- CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF ILLINOIS. Section 14.9 CONSENT TO JURISDICTION. EACH SELLER PARTY HEREBY ----------------------- IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR ILLINOIS STATE COURT SITTING IN CHICAGO, ILLINOIS IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY DOCUMENT EXECUTED BY SUCH PERSON PURSUANT TO THIS AGREEMENT AND EACH SELLER PARTY HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE 40 HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE AGENT OR ANY PURCHASER TO BRING PROCEEDINGS AGAINST ANY SELLER PARTY IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY ANY SELLER PARTY AGAINST THE AGENT OR ANY PURCHASER OR ANY AFFILIATE OF THE AGENT OR A PURCHASER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS AGREEMENT OR ANY DOCUMENT EXECUTED BY SUCH SELLER PARTY PURSUANT TO THIS AGREEMENT SHALL BE BROUGHT ONLY IN A COURT IN CHICAGO, ILLINOIS. Section 14.10 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES -------------------- TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS AGREEMENT, ANY DOCUMENT EXECUTED BY THE SELLER PURSUANT TO THIS AGREEMENT OR THE RELATIONSHIP ESTABLISHED HEREUNDER OR THEREUNDER. Section 14.11 Integration; Binding Effect; Survival of Terms. ---------------------------------------------- (a) This Agreement and the Fee Letter contain the final and complete integration of all prior expressions by the parties hereto with respect to the subject matter hereof and shall constitute the entire agreement among the parties hereto with respect to the subject matter hereof superseding all prior oral or written understandings. (b) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns (including any trustee in bankruptcy). This Agreement shall create and constitute the continuing obligations of the parties hereto in accordance with its terms and shall remain in full force and effect until terminated in accordance with its terms; provided, however, that the rights and remedies with -------- ------- respect to (i) any breach of any representation and warranty made by any Seller Party pursuant to Article V, (ii) the indemnification and payment provisions of --------- Article X, and Sections 14.5 and 14.6 shall be continuing and shall survive any - --------- ------------- ---- termination of this Agreement. Section 14.12 Counterparts; Severability; Section References. This ---------------------------------------------- Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same Agreement. Any provisions of this Agreement which are prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 41 Unless otherwise expressly indicated, all references herein to "Article," "Section," "Schedule" or "Exhibit" shall mean articles and sections of, and schedules and exhibits to, this Agreement. Section 14.13 Bank One Roles. Each of the Financial Institutions -------------- acknowledges that Bank One acts, or may in the future act, (i) as administrative agent for PREFCO, (ii) as issuing and paying agent for the Commercial Paper, (iii) to provide credit or liquidity enhancement for the timely payment for the Commercial Paper and (iv) to provide other services from time to time for PREFCO (collectively, the "Bank One Roles"). Without limiting the generality of this -------------- Section 14.13, each Financial Institution hereby acknowledges and consents to - ------------- any and all Bank One Roles and agrees that in connection with any Bank One Role, Bank One may take, or refrain from taking, any action that it, in its discretion, deems appropriate, including, without limitation, in its role as administrative agent for PREFCO, and the giving of notice to the Agent of a mandatory purchase pursuant to Section 13.1. ------------ Section 14.14 Characterization. (a) It is the intention of the ---------------- parties hereto that each purchase of a Purchaser Interest hereunder shall constitute and be treated as an absolute and irrevocable sale, which purchase shall provide the applicable Purchaser with the full benefits of ownership of the applicable Purchaser Interest. Except as specifically provided in this Agreement, each sale of a Purchaser Interest hereunder is made without recourse to Seller; provided, however, that (i) Seller shall be liable to each Purchaser and the Agent for all representations, warranties and covenants made by Seller pursuant to the terms of this Agreement, and (ii) such sale does not constitute and is not intended to result in an assumption by any Purchaser or the Agent or any assignee thereof of any obligation of Seller, AIL or any other person arising in connection with the Receivables, the Related Security, or the related Contracts, or any other obligations of Seller or AIL. (b) In addition to any ownership interest which the Agent may from time to time acquire pursuant hereto, the Seller hereby grants to the Agent for the ratable benefit of the Purchasers a valid and perfected security interest in all of Seller's right, title and interest in, to and under all Receivables now existing or hereafter arising, the Collections, all Related Security, all other rights and payments relating to such Receivables, all of Seller's rights under the Receivables Sale Agreement and all proceeds of any of the foregoing prior to all other liens on and security interests therein to secure the prompt and complete payment of the Aggregate Unpaids. After an Amortization Event, the Agent and the Purchasers shall have, in addition to the rights and remedies that they may have under this Agreement, all other rights and remedies provided to a secured creditor after default under the UCC and other applicable law, which rights and remedies shall be cumulative. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 42 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their duly authorized officers as of the date hereof. AILIC RECEIVABLES CORPORATION By: ________________________________ Name: Title: Address: 3700 South Stonebridge Drive McKinney, Texas 75070 FAX: (972) 569-3282 Attention: Danny Almond AMERICAN INCOME LIFE INSURANCE COMPANY, as Servicer By: ________________________________ Name: Title: Address: 1200 Wooded Acres Waco, Texas 76710 FAX: (205) 325-4157 Attention: Michael J. Klyce Vice President and Treasurer Signature Page to Receivables Purchase Agreement 43 PREFERRED RECEIVABLES FUNDING CORPORATION By: ________________________________ Name: Title: Authorized Signatory Address: c/o Bank One, NA, as Agent Asset Backed Finance Suite IL1-0079, 1-19 1 Bank One Plaza Chicago, Illinois 60670-0019 Fax: (312) 732-1844 BANK ONE, NA, as a Financial Institution and as Agent By: ________________________________ Name: Title: Address: Bank One, NA Asset Backed Finance Suite IL1-0079, 1-19 1 Bank One Plaza Chicago, Illinois 60670-0019 Fax: (312) 732-4487 44 Signature Page to Receivables Purchase Agreement 45 EXHIBIT I DEFINITIONS As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Accrual Period" means a period commencing on and including the 10th day of -------------- a calendar month and ending but excluding the 10th day of the following calendar month; provided that (i) the initial Accrual Period hereunder shall be the -------- period from and including the date of the initial purchase hereunder to but excluding the next date that is the 10th day of a calendar month and (ii) the final Accrual Period hereunder shall end on the date the Aggregate Unpaids shall be reduced to zero. "Acquisition Amount" means, on the date of any purchase from PREFCO of ------------------ Purchaser Interests pursuant to Section 13.1, (i) with respect to each Financial ------------ Institution other than Bank One, the lesser of (a) such Financial Institution's Pro Rata Share of the PREFCO Transfer Price and (b) such Financial Institution's unused Commitment and (ii) with respect to Bank One, the difference between (a) the PREFCO Transfer Price and (b) the aggregate amount payable by all other Financial Institutions on such date pursuant to clause (i) above. "Adjusted Liquidity Price" means, in determining the PREFCO Transfer Price ------------------------ for any Purchaser Interest, an amount equal to RI x [(i) DC + (ii) NDR ] ----- 1.025 where: RI = the undivided percentage interest evidenced by such Purchaser Interest. DC = the Deemed Collections. NDR = the Outstanding Balance of all Receivables other than Charged-Off Receivables. Each of the foregoing shall be determined from the most recent Monthly Report received from the Servicer. "Adverse Claim" means a lien, security interest, charge or encumbrance, or ------------- other right or claim in, of or on any Person's assets or properties in favor of any other Person. 46 "Affected Financial Institution" has the meaning specified in Section ------------------------------ ------- 12.1(c). - ------- "Affiliate" means, with respect to any Person, any other Person directly or --------- indirectly controlling, controlled by, or under direct or indirect common control with, such Person or any Subsidiary of such Person. A Person shall be deemed to control another Person if the controlling Person owns 10% or more of any class of voting securities of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of stock, by contract or otherwise. "Agent" has the meaning set forth in the preamble to this Agreement. ----- "Agent-Hierarchy" means, in reference to any Insurance Agent, such --------------- Insurance Agent together with all other Persons (including the SGA thereof and all managing general agents, general agents, supervisory agents, Insurance Agents and similar professional relations) which, under existing arrangements with such Insurance Agent, share directly or indirectly (i) in the proceeds of any commissions payable to such Insurance Agent by AIL, including any amounts paid or advanced that give rise to any Receivable, and (ii) in the obligations and liabilities relating to any Receivable arising in connection with the cancellation or termination of the underlying Insurance Product. "Aggregate Reduction" has the meaning specified in Section 1.3. ------------------- ----------- "Aggregate Unpaids" means, at any time, an amount equal to the sum of all ----------------- accrued and unpaid fees under the Fee Letter, CP Costs, Yield, Capital and all other unpaid Obligations (whether due or accrued) at such time. "Agreement" means this Receivables Purchase Agreement, as it may be amended --------- or modified and in effect from time to time. "AIL" has the meaning set forth in the preamble to this Agreement. --- "Amortization Date" means the earliest to occur of (i) the day on which any ----------------- of the conditions precedent set forth in Section 6.2 are not satisfied, (ii) the ----------- Business Day immediately prior to the occurrence of an Amortization Event set forth in Section 9.1(d), (iii) the Business Day specified in a written notice -------------- from the Agent following the occurrence of any other Amortization Event, (iv) the date which is 30 Business Days after the Agent's receipt of written notice from Seller that it wishes to terminate the facility evidenced by this Agreement and (v) March 31, 2000. "Amortization Event" has the meaning specified in Article IX. ------------------ ---------- "Assignment Agreement" has the meaning set forth in Section 12.1(b). -------------------- -------------- 47 "Authorized Control Level Risk Based Capital" means the authorized control ------------------------------------------- level risk-based capital as determined in accordance with the risk-based capital instructions adopted by the NAIC, as such instructions may be amended, modified, supplemented or restated from time to time. For reference purposes only, such term is also defined in Section 27-1-36-4 of the Indiana Code. "Authorized Officer" shall mean, with respect to any Seller Party, its ------------------ respective president, corporate controller or chief financial officer. "Bank One" means Bank One, NA, a national banking association having its -------- principal offices in Chicago, Illinois, in its individual capacity and its successors. "Base Rate" means a rate per annum equal to the corporate base rate, prime --------- rate or base rate of interest, as applicable, announced by the Reference Bank from time to time, changing when and as such rate changes. "Broken Funding Costs" means for any Purchaser Interest which: (i) has its -------------------- Capital reduced without compliance by the Seller with the notice requirements hereunder or (ii) does not become subject to an Aggregate Reduction following the delivery of any Reduction Notice or (iii) is assigned under Article XIII or ------------ terminated prior to the date on which it was originally scheduled to end; an amount equal to the excess, if any, of (A) the CP Costs or Yield (as applicable) that would have accrued during the remainder of the Tranche Periods or the tranche periods for Commercial Paper determined by the Agent to relate to such Purchaser Interest (as applicable) subsequent to the date of such reduction or termination (or in respect of clause (ii) above, the date such Aggregate Reduction was designated to occur pursuant to the Reduction Notice) of the Capital of such Purchaser Interest if such reduction, assignment or termination had not occurred or such Reduction Notice had not been delivered, over (B) the sum of (x) to the extent all or a portion of such Capital is allocated to another Purchaser Interest, the amount of CP Costs or Yield actually accrued during the remainder of such period on such Capital for the new Purchaser Interest, and (y) to the extent such Capital is not allocated to another Purchaser Interest, the income, if any, actually received during the remainder of such period by the holder of such Purchaser Interest from investing the portion of such Capital not so allocated. In the event that the amount referred to in clause (B) exceeds the amount referred to in clause (A), the relevant Purchaser or Purchasers agree to pay to Seller the amount of such excess. All Broken Funding Costs shall be due and payable hereunder upon demand. "Business Day" means any day on which banks are not authorized or required ------------ to close in New York, New York or Chicago, Illinois and The Depository Trust Company of New York is open for business, and, if the applicable Business Day relates to any computation or payment to be made with respect to the LIBO Rate, any day on which dealings in dollar deposits are carried on in the London interbank market. "Capital" of any Purchaser Interest means, at any time, (A) the Purchase ------- Price of such Purchaser Interest, minus (B) the sum of the aggregate amount of Collections and other payments received by the Agent which in each case are applied to reduce such Capital in accordance with the terms and conditions of this Agreement; provided that such Capital shall be restored (in -------- 48 accordance with Section 2.5) in the amount of any Collections or other payments ----------- so received and applied if at any time the distribution of such Collections or payments are rescinded, returned or refunded for any reason. "Change of Control" means (i) the acquisition by any Person, or two or more ----------------- Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 20% or more of the outstanding shares of voting stock of the Performance Guarantor or (ii) the Performance Guarantor shall at any time cease to own directly or indirectly 100% of the issued and outstanding capital stock of each of AIL and Seller. "Charged-Off Receivable" means a Receivable: (i) as to which the Obligor ---------------------- thereof has taken any action, or suffered any event to occur, of the type described in Section 9.1(d) (as if references to Torchmark Entity therein refer -------------- to such Obligor); (ii) which, consistent with the Credit and Collection Policy, would be written off Seller's books as uncollectible , or (iii) which has been identified by Seller as uncollectible. "Charge-Off Ratio" means, as of the last day of any month, a fraction ---------------- (expressed as a percentage) equal to (i) the aggregate Outstanding Balance of all Receivables that became Charged-Off Receivables at any time during such month, divided by (ii) the Outstanding Balance of all Receivables on such date. "Collections" means, with respect to any Receivable, all cash collections ----------- and other cash proceeds in respect of such Receivable, including, without limitation, (i) all yield, finance charges or other related amounts accruing in respect thereof, (ii) all cash proceeds of Related Security with respect to such Receivable, (iii) all payments by any guarantor in respect of such Receivable and (iv) upon the payment to AIL of any premium, the funds then available for payment to the applicable Obligor as commission or related fees and which, consistent with the Credit and Collection Policy, would be retained by AIL for application against any Receivable. "Commercial Paper" means promissory notes of PREFCO issued by PREFCO in the ---------------- commercial paper market. "Commitment" means, for each Financial Institution, the commitment of such ---------- Financial Institution to purchase its Pro Rata Share of Purchaser Interests from (i) Seller and (ii) PREFCO, such Pro Rata Share not to exceed, in the aggregate, the amount set forth opposite such Financial Institution's name on Schedule A to ---------- this Agreement, as such amount may be modified in accordance with the terms hereof. "Commitment Availability" means at any time the positive difference (if ----------------------- any) between (a) an amount equal to the aggregate amount of the Commitments minus (b) an amount equal to 2% of such aggregate Commitments at such time minus - ----- ----- (c) the aggregate Capital at such time. "Company Action Level Event" means a "company-action-level-event" as such -------------------------- term is defined in Section 27-1-36-29 of the Indiana Code, or any successor statute, as the same may be 49 amended, modified, recodified or reenacted, in whole or in part, including all rules and regulations promulgated thereunder. "Concentration Limit" means, at any time, for any Obligor, for Training ------------------- Advance Receivables as a group or for Miscellaneous Receivables as a group, such percentage of the aggregate Capital of the Purchaser Interests as may from time to time be designated in a written notice by the Agent to Seller in respect of such Obligor, the Training Advance Receivables or the Miscellaneous Receivables. In the event the Agent shall at any time specify a Concentration Limit in respect of any Obligor, the Concentration Limit shall be calculated as if such Obligor and all of its Affiliates are one Obligor. "Contingent Obligation" of a Person means any agreement, undertaking or --------------------- arrangement by which such Person assumes, guarantees, endorses, contingently agrees to purchase or provide funds for the payment of, or otherwise becomes or is contingently liable upon, the obligation or liability of any other Person, or agrees to maintain the net worth or working capital or other financial condition of any other Person, or otherwise assures any creditor of such other Person against loss, including, without limitation, any comfort letter, operating agreement, take-or-pay contract or application for a letter of credit. "Contract" means, with respect to any Receivable, any and all instruments, -------- agreements (including loan agreements, notes, agent agreements, general agent agreements, supervisory agent agreements, regional director agreements, broker- dealer agreements and indemnity agreements), statements or other writings pursuant to which (i) such Receivable arises or which evidence such Receivable or (ii) the applicable Obligor shall have agreed to guaranty directly or indirectly all or a portion of the payment obligations of the primary Obligor on such Receivable. "CP Costs" means, for each day, the sum of (i) discount accrued on Pooled -------- Commercial Paper on such day, plus (ii) any and all accrued commissions in respect of placement agents and Commercial Paper dealers, and issuing and paying agent fees incurred, in respect of such Pooled Commercial Paper for such day, plus (iii) other costs associated with funding small or odd-lot amounts with respect to all receivable purchase facilities which are funded by Pooled Commercial Paper for such day, minus (iv) any accrual of income net of expenses received on such day from investment of collections received under all receivable purchase facilities funded substantially with Pooled Commercial Paper, minus (v) any payment received on such day net of expenses in respect of Broken Funding Costs related to the prepayment of any receivables interest of PREFCO pursuant to the terms of any receivable purchase facilities funded substantially with Pooled Commercial Paper. In addition to the foregoing costs, if Seller shall request any Incremental Purchase during any period of time determined by the Agent in its sole discretion to result in incrementally higher CP Costs applicable to such Incremental Purchase, the Capital associated with any such Incremental Purchase shall, during such period, be deemed to be funded by PREFCO in a special pool (which may include capital associated with other receivable purchase facilities) for purposes of determining such additional CP Costs applicable only to such special pool and charged each day during such period against such Capital. 50 "Credit and Collection Policy" means , in respect of any Receivable, the ---------------------------- credit and collection policies and practices of AIL relating to Contracts and Receivables, as in effect on the date hereof and summarized in Exhibit VI ---------- hereto, and as modified from time to time in accordance with this Agreement. "Deemed Collections" means the aggregate of all amounts Seller shall have ------------------ been deemed to have received as a Collection of a Receivable. Seller shall be deemed to have received a Collection in full of a Receivable if at any time: (i) the Outstanding Balance of any such Receivable is either (x) reduced as a result of any dispute involving any of the Policy Holder, the Insurance Agent or any other Obligor or AIL in respect of such Receivable and relating to any aspect of the transaction giving rise to such Receivable, (y) reduced as a result of any discount or any adjustment or otherwise by any Torchmark Entity (other than cash Collections on account of the Receivables) or (z) reduced or canceled as a result of a setoff in respect of any claim by any Person (whether such claim arises out of the same or a related transaction or an unrelated transaction and including, without limitation, any setoff occurring by reason of the application of the proceeds of any subsequent advance or prepayment made by AIL to the applicable Insurance Agent or other Obligor in respect of any Insurance Product issued or scheduled to be issued after the date such Receivable shall have arisen), or (ii) the applicable Policy Holder (or any other authorized Person) shall for any reason at any time decline, cancel, fail to accept or otherwise terminate the Insurance Product, the issuance or proposed issuance of which shall have led to the creation of such Receivable, or AIL shall at any time for any reason refuse to or fail to issue, or shall terminate, any such Insurance Product, or (iii) any of the representations or warranties in Article V are not --------- true on the initial date an interest in such Receivable shall be transferred to the Purchasers hereunder or such Receivable shall not constitute an Eligible Receivable on any date the Outstanding Balance of such Receivable is included in the calculation of Net Receivables Balance, or (iv) the applicable Policy Holder dies or ceases for any reason to make any or all payments due as premiums or otherwise in respect of the Insurance Product that shall have given rise to such Receivable during the period that such Receivable shall remain outstanding, or (v) the applicable Obligor directly or indirectly contests in any manner the effectiveness, validity, binding nature or enforceability of the related Contract or this Agreement. Seller hereby agrees to pay all Deemed Collections immediately to the Servicer for application in accordance with the terms and conditions hereof. 51 "Default Fee" means with respect to any amount due and payable by Seller in ----------- respect of any Aggregate Unpaids, an amount equal to the greater of (i) $1000 and (ii) interest on any such unpaid Aggregate Unpaids at a rate per annum equal to 2% above the Base Rate. "Designated Obligor" means an Obligor identified as such by the Agent to ------------------ Seller in writing based upon the reasonable credit judgment of the Agent. In the case of any Obligor that is a member of an Agent Hierarchy, identification of such Obligor as being a Designated Obligor shall relate solely to such Obligor and shall not automatically cause any other member of such Agent Hierarchy to constitute a Designated Obligor. "Discount Rate" means, the LIBO Rate or the Base Rate, as applicable, with ------------- respect to each Purchaser Interest of the Financial Institutions. "Eligible Receivable" means, at any time, a Receivable: ------------------- (i) each Obligor in respect of which (a) if a natural person, is a resident of the United States, (b) if a corporation or other business organization, is organized under the laws of the United States or any political subdivision thereof and has its chief executive office in the United States; (c) is not, and the Policy Holder in respect of the Insurance Product that gave rise to such Receivable is not, an Affiliate of any of the parties hereto; (d) is not a Designated Obligor; (e) is not, and the Policy Holder in respect of the Insurance Product that gave rise to such Receivable is not, a government or a governmental subdivision or agency; and (f) in the case of an Insurance Agent, is a qualified, licensed agent in good standing of AIL, (ii) the Obligor of which is not the Obligor of any Charged-Off Receivable, (iii) which is not (a) an Unsupported Receivable, (b) a Charged-Off Receivable or (c) a Receivable as to which any payment or part thereof remains unpaid on the date occurring fourteen months after the date of the creation of such Receivable, (iv) which (a) by its terms is due and payable within one year or less of the date of its creation, with payments thereon commencing within 30 days of the original billing date and becoming due monthly thereafter, (b) has not had its payment terms extended, and (c) relates solely to the premium on the applicable Insurance Product that is scheduled to be paid within the first year of such Insurance Product's coming into existence and not to any premium scheduled to be paid in any subsequent period, (v) which is an "account" or "general intangible" within the meaning of Section 9-106 of the UCC of all applicable jurisdictions, and is not an "instrument" within the meaning of Section 9-105 of the UCC of any applicable jurisdiction, (vi) which is denominated and payable only in United States dollars in the United States, 52 (vii) which arises under a Contract in substantially the form of one of the form contracts set forth on Exhibit VII hereto or otherwise approved ----------- by the Agent in writing, which, together with such Receivable, is in full force and effect and constitutes the legal, valid and binding obligation of each related Obligor (including, in the event the applicable Insurance Agent shall be a member of an Agent-Hierarchy, each other member of such Agent-Hierarchy as a guarantor of such Receivable) enforceable against such Obligor in accordance with its terms subject to no offset, counterclaim or other defense, (viii) which arises under a Contract which (A) does not require any Obligor under such Contract, any member of the applicable Agent-Hierarchy or any other Person to consent to the transfer, sale or assignment of the rights and duties of Seller under such Contract and (B) does not contain a confidentiality provision that purports to restrict the ability of any Purchaser to exercise its rights under this Agreement, including, without limitation, its right to review the Contract, (ix) which, together with the Contract related thereto, does not contravene any law, rule or regulation applicable thereto (including, without limitation, any law, rule and regulation relating to truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy) and with respect to which no part of the Contract related thereto is in violation of any such law, rule or regulation, (x) which satisfies all applicable requirements of the Credit and Collection Policy and in respect of which all representations and warranties set forth in Section 5.1 and relating to Receivables shall be ----------- true and correct, (xi) which was generated in the ordinary course of AIL's business, under a duly authorized Contract, (xii) which either (A) represents monies advanced or prepaid to the applicable Insurance Agent, as commissions for a new Insurance Product, by AIL (and not by any other Person in whole or in part) and was advanced to such Insurance Agent based exclusively upon (and does not exceed the commissions payable in respect of) the first year's premium for such new Insurance Product without regard to any premiums (or 53 commissions thereon) for any subsequent periods, (B) constitutes a Miscellaneous Receivable representing a loan or an advance made to an SGA (and not any other type of Obligor), which Miscellaneous Receivable has been created in accordance with the applicable requirements for such loan and advances to SGAs, and does not exceed the limits for such loans and advances, set forth in the Credit and Collection Policy, or (C) constitutes a Training Advance Receivable representing an advance to a new Insurance Agent then becoming part of an existing Agent-Hierarchy, which Training Advance Receivable has been created in accordance with the applicable requirements for advances to new Insurance Agents, and does not exceed the limits for such advances, set forth in the Credit and Collection Policy; provided that in no event shall any Miscellaneous Receivable or Training -------- Advance Receivable have an Outstanding Balance in excess of $10,000 (xiii) if the primary Obligor thereon is an Insurance Agent that is a member of an Agent-Hierarchy, 100% of the payment obligation on such Receivable is guaranteed jointly or severally by the members of such Agent- Hierarchy, and (xiv) in the event the Obligor thereon shall have died or been terminated as an agent of AIL, all obligations relating to such Receivable shall have been assumed by the Agent-Hierarchy in respect of such Obligor; provided that such Receivable shall cease to be an Eligible Receivable if -------- at any time the members of the Agent-Hierarchy shall cease to exist or be terminated as agents of AIL or such members shall assert the invalidity or unenforceability of their obligations in respect of the Receivable. Notwithstanding the foregoing, a Receivable that otherwise satisfies the criteria set forth above but for the fact that (A) the Obligor thereon is a resident of Canada or New Zealand and (B) such Receivable is denominated in the lawful currency of Canada or New Zealand rather than United States Dollars may constitute an "Eligible Receivable" for purposes of this Agreement. "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended from time to time. "Facility Account" means the account of Seller at Bank One, Account ---------------- No. 10-36987. "Federal Funds Effective Rate" means, for any period, a fluctuating ---------------------------- interest rate per annum equal for each day during such period equal to (a) the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the preceding Business Day) by the Federal Reserve Bank of New York in the Composite Closing Quotations for U.S. Government Securities; or (b) if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10:30 a.m. (Chicago time) for such day on such transactions received by the Reference Bank from three federal funds brokers of recognized standing selected by it. 54 "Fee Letter" means that certain letter agreement dated as of the date ---------- hereof among the Agent, PREFCO and Seller, and acknowledged by Torchmark, as it may be amended or modified and in effect from time to time. "Finance Charges" means, with respect to a Contract, any finance, --------------- interest, late payment charges, fees, chargebacks or similar charges owing by an Obligor pursuant to such Contract. "Financial Institutions" has the meaning set forth in the preamble in ---------------------- this Agreement. "Funding Agreement" means this Agreement and any agreement or ----------------- instrument executed by any Funding Source with or for the benefit of PREFCO. "Funding Source" means (i) any Financial Institution or (ii) any -------------- insurance company, bank or other funding entity providing liquidity, credit enhancement or back-up purchase support or facilities to PREFCO. "Incremental Purchase" means a purchase of one or more Purchaser -------------------- Interests which increases the total outstanding Capital hereunder. "Indebtedness" of a Person means such Person's (i) obligations for ------------ borrowed money, (ii) obligations representing the deferred purchase price of property or services (other than accounts payable arising in the ordinary course of such Person's business payable on terms customary in the trade), (iii) obligations, whether or not assumed, secured by liens or payable out of the proceeds or production from property now or hereafter owned or acquired by such Person, (iv) obligations which are evidenced by notes, acceptances, or other instruments, (v) capitalized lease obligations, (vi) net liabilities under interest rate swap, exchange or cap agreements, (vii) Contingent Obligations and (viii) liabilities in respect of unfunded vested benefits under plans covered by Title IV of ERISA. "Independent Director" shall mean a member of the Board of Directors -------------------- of Seller who is not at such time, and has not been at any time during the preceding five (5) years, (A) a director, officer, employee or affiliate of any Torchmark Entity or any of their respective Subsidiaries or Affiliates, or (B) the beneficial owner (at the time of such individual's appointment as an Independent Director or at any time thereafter while serving as an Independent Director) of any of the outstanding capital stock of any Torchmark Entity or any of their respective Subsidiaries or Affiliates. "Insurance Agent" means, in respect of any Receivable, the insurance --------------- broker or agent that shall have arranged the issuance or the proposed issuance of an Insurance Product in connection with which such Receivable shall have arisen. 55 "Insurance Product" means any life insurance policy (whether term ----------------- life, whole life or other life insurance policy of any type or kind), supplemental health insurance policy or any annuity, rider, other policy or similar contract. "Lapse Ratio" means, at any time, the average of the Monthly Lapse ----------- Ratios for the three calendar months then most recently ended. "LIBO Rate" means the rate per annum equal to the sum of (i) (a) the --------- rate at which deposits in U.S. Dollars are offered by the Reference Bank to first-class banks in the London interbank market at approximately 11:00 a.m. (London time) two Business Days prior to the first day of the relevant Tranche Period, such deposits being in the approximate amount of the Capital of the Purchaser Interest to be funded or maintained, divided by (b) one minus the maximum aggregate reserve requirement (including all basic, supplemental, marginal or other reserves) which is imposed against the Reference Bank in respect of Eurocurrency liabilities, as defined in Regulation D of the Board of Governors of the Federal Reserve System as in effect from time to time (expressed as a decimal), applicable to such Tranche Period plus (ii) 0.75% per annum. The LIBO Rate shall be rounded, if necessary, to the next higher 1/16 of 1%. "Liquidity Termination Date" means December 19, 2000. -------------------------- "Material Adverse Effect" means a material adverse effect on (i) the ----------------------- financial condition or operations of any Seller Party and its Subsidiaries, (ii) the ability of any Seller Party to perform its obligations under this Agreement or the ability of the Performance Guarantor to perform its obligations under the Performance Guaranty, (iii) the legality, validity or enforceability of this Agreement or any other Transaction Document, (iv) any Purchaser's interest in the Receivables generally or in any significant portion of the Receivables, the Related Security or the Collections with respect thereto, or (v) the collectibility of the Receivables generally or of any material portion of the Receivables. "Minimum SGA Net Worth" means, with respect to any SGA at any time of --------------------- determination, a ratio (expressed as a percentage) of (i) the present value of all future commissions then payable to such SGA or to any member of its Agent-Hierarchy in respect of Insurance Products that have been arranged by such Agent-Hierarchy, as determined in accordance with the Credit and Collection Policy, divided by (ii) the aggregate Outstanding ------- Balance of all Receivables then owing by such SGA or any member of its Agent-Hierarchy, which ratio shall not be less than 100% at such time. "Miscellaneous Receivable" means the indebtedness arising in ------------------------ connection with the extension by AIL to an Obligor or a loan of an advance, whether for working capital purposes or otherwise, in accordance with the Credit and Collection Policy, which loan or advance (i) has not been advanced in connection with the issuance of a specific Insurance Product, and the anticipated receipt of a commission thereon, and (ii) does not constitute a Training Advance Receivable therewith. 56 "Monthly Lapse Ratio" means, at any time, a percentage equal to (i) ------------------- the number of Insurance Products issued by AIL that lapsed or were terminated during the calendar month then most recently ended divided by (ii) the average number of Insurance Products issued by AIL that were in force during such calendar month. "Monthly Report" means a report, in substantially the form of Exhibit -------------- ------- VIII hereto (appropriately completed), furnished by the Servicer to the ---- Agent pursuant to Section 8.5. ----------- "NAIC" means the National Association of Insurance Commissioners. ---- "Net Receivables Balance" means, at any time, (i) the aggregate ----------------------- Outstanding Balance of all Eligible Receivables at such time, minus (ii) ----- the aggregate amount by which the Outstanding Balance of all Eligible Receivables of each Obligor and its Affiliates exceeds the Concentration Limit (if any) for such Obligor, minus (iii) the aggregate amount by which ----- the aggregate Outstanding Balance of all Eligible Receivables comprising Training Advance Receivables exceeds the Concentration Limit (if any) for Training Advance Receivables, minus (iv) the aggregate amount by which the ----- aggregate Outstanding Balance of all Eligible Receivables comprising Miscellaneous Receivables exceeds the Concentration Limit (if any) for Miscellaneous Receivables. "Obligations" shall have the meaning set forth in Section 2.1. ----------- ----------- "Obligor" means a Person (including any guarantor) obligated to make ------- payments pursuant to a Contract or by reason of the arrangements existing within an Agent-Hierarchy. "Outstanding Balance" of any Receivable at any time means the then ------------------- outstanding principal balance thereof. "Performance Guarantor" means Torchmark, in its capacity as guarantor --------------------- under the Performance Guaranty. "Performance Guaranty" means that certain Performance Guaranty dated -------------------- as of the date hereof made by Torchmark, as guarantor, in respect of the obligations of AIL and Seller and certain other liabilities specified therein, as the same may from time to time be amended, restated, supplemented or otherwise modified. "Person" means an individual, partnership, corporation (including a ------ business trust), joint stock company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof. "Policy Holder" means, in respect of any Receivable, the Person that ------------- shall have requested the issuance of the Insurance Product, which request shall have led to the creation of such Receivable, and/or the Person or Persons that shall have the obligation to make payments of the premium and related charges for such Insurance Product. 57 "Pooled Commercial Paper" means Commercial Paper notes of PREFCO ----------------------- subject to any particular pooling arrangement by PREFCO, but excluding Commercial Paper issued by PREFCO for a tenor and in an amount specifically requested by any Person in connection with any agreement effected by PREFCO. "Potential Amortization Event" means an event which, with the passage ---------------------------- of time or the giving of notice, or both, would constitute an Amortization Event. "PREFCO" has the meaning set forth in the preamble to this Agreement. ------ "PREFCO Residual" means the sum of the PREFCO Transfer Price --------------- Reductions. "PREFCO Transfer Price" means, with respect to the assignment by --------------------- PREFCO of one or more Purchaser Interests to the Agent for the benefit of the Financial Institutions pursuant to Section 13.1, the sum of (i) the ------------ Capital of each Purchaser Interest (the "Capital Component") and (ii) all ----------------- accrued and unpaid Yield for such Purchaser Interest; provided that if at -------- any time the senior long-term unsecured debt rating of Torchmark shall be below BB from Standard & Poor's Ratings Group or below Ba2 from Moody's Investor Services, Inc., the Capital Component at such time shall be equal to the lesser of (a) the Capital of each Purchaser Interest and (b) the Adjusted Liquidity Price of each Purchaser Interest. "PREFCO Transfer Price Reduction" means in connection with the ------------------------------- assignment of a Purchaser Interest by PREFCO to the Agent for the benefit of the Financial Institutions, in the event the Adjusted Liquidity Price shall have been used in the determination of the PREFCO Transfer Price therefor, the positive difference between (i) the Capital of such Purchaser Interest and (ii) the Adjusted Liquidity Price for such Purchaser Interest. "Proposed Reduction Date" has the meaning set forth in Section 1.3. ----------------------- ----------- "Pro Rata Share" means, for each Financial Institution, the Commitment -------------- of such Financial Institution divided by the Purchase Limit, adjusted as necessary to give effect to the application of the terms of Sections 13.1 ------------- or 13.5. ---- "Purchase Limit" means $100,000,000. -------------- "Purchase Notice" has the meaning set forth in Section 1.2. --------------- ----------- "Purchase Price" means, with respect to any Incremental Purchase of a -------------- Purchaser Interest, the amount paid to Seller for such Purchaser Interest which shall not exceed the least of (i) the amount requested by Seller in the applicable Purchase Notice, (ii) the unused portion of the Purchase Limit on the applicable purchase date, (iii) the Commitment Availability on the applicable purchase date and (iv) the excess, if any, of the Net Receivables Balance on the applicable purchase date over the aggregate outstanding amount of Capital without taking into account such proposed Incremental Purchase. 58 "Purchaser" means PREFCO or a Financial Institution, as applicable. --------- "Purchaser Interest" means, at any time, an undivided percentage ------------------ ownership interest (computed as set forth below) associated with a designated amount of Capital, selected pursuant to the terms and conditions hereof in (i) each Receivable arising prior to the time of the most recent computation or recomputation of such undivided interest, (ii) all Related Security with respect to each such Receivable, and (iii) all Collections with respect to, and other proceeds of, each such Receivable. Each such undivided percentage interest shall equal: C --- NRB where: C = the Capital of such Purchaser Interest. NRB = the Net Receivables Balance. Such undivided percentage ownership interest shall be initially computed on its date of purchase. Thereafter, until its Amortization Date, each Purchaser Interest shall be automatically recomputed (or deemed to be recomputed) on each day prior to its Amortization Date. The variable percentage represented by any Purchaser Interest as computed ( or deemed recomputed) as of the close of the business day immediately preceding its Amortization Date shall remain constant at all times after such Amortization Date. "Receivable" means the indebtedness and other obligations owed by an ---------- Obligor to AIL (but for giving effect to any transfer or conveyance under the Receivables Sale Agreement or this Agreement), whether constituting an account, chattel paper, instrument or general intangible, whether arising prior to, contemporaneous with or subsequent to the execution of this Agreement, and existing in connection with any Insurance Product issued by AIL (or an Affiliate thereof), the extension of credit by AIL to an Obligor (whether constituting an advance against anticipated premiums, a working capital advance or an extension of credit for any other purpose) or the rendering of any services by AIL to an Obligor. "Receivable" shall include, without limitation, (i) any "debit balance," "agent debit balance" or "actual debit balance," or any similar or successor concept thereto, owing at any time by an Obligor to AIL, (ii) any amounts advanced to an Obligor by AIL, such as an annualized payment, commission advance, regular advance, special advance, loan, indebtedness, obligation for repayment, or any other advance of any type, whether with respect to commissions (whether annualized, renewal, override or any other type or kind), earnings, compensation, payments, service fees, bonuses, incentives, credits, monies due, sums due or other amounts earned or expected to be earned by such Obligor and (iii) the obligation of such Obligor to pay any Finance Charges with respect to any of the foregoing. Indebtedness and other rights and obligations arising from any one transaction, notwithstanding the joint or several 59 obligation of more than one Obligor thereon, shall constitute a single Receivable separate from a Receivable consisting of the indebtedness and other rights and obligations arising from any other transaction. "Receivables Sale Agreement" means the Receivables Sale Agreement of -------------------------- even date herewith between AIL, as seller, and Seller, as buyer, as the same may from time to time be amended, restated, supplemented or otherwise modified. "Records" means, with respect to any Receivable, all Contracts and ------- other documents, books, records and other information (including, without limitation, computer programs, tapes, disks, punch cards, data processing software and related property and rights) relating to such Receivable, any Related Security therefor and the related Obligor(s). "Reduction Notice" has the meaning set forth in Section 1.3. ---------------- ----------- "Reduction Percentage" means, for any Purchaser Interest acquired by -------------------- the Financial Institutions from PREFCO for less than the Capital of such Purchaser Interest, a percentage equal to a fraction the numerator of which is the PREFCO Transfer Price Reduction for such Purchaser Interest and the denominator of which is the Capital of such Purchaser Interest. "Reference Bank" means Bank One or such other bank as the Agent shall -------------- designate with the consent of Seller. "Regulatory Action Level Event" means a "regulatory-action-level- ----------------------------- event" as such term is defined in Section 27-1-36-35 of the Indiana Code, as the same may be amended, modified, recodified or reenacted, in whole or in part, including all rules and regulations promulgated thereunder. "Regulatory Control Event" means any event that causes the applicable ------------------------ entity to be placed under supervision or any other regulatory control pursuant to Article 27-9 of the Indiana Code or any parallel provision in any other state law, or any successor provisions, as any of the foregoing may be amended, modified, recodified or reenacted, in whole or in part, including all rules and regulations promulgated thereunder. "Reinvestment" has the meaning set forth in Section 2.2. ------------ ----------- "Related Security" means, with respect to any Receivable: ---------------- (i) all of Seller's interest (including any assignment or pledge in favor of the Seller or any offset rights held by Seller) in or to (A) any and all commissions, annualized commissions, renewal commissions, override commissions, earnings, compensation, payments, service fees, bonuses, incentives, credits, monies due, sums due or other amounts, whether earned or unearned or that may at any time be or become payable to the related Obligor, whether existing in connection with any Receivable or 60 otherwise, by AIL or any Affiliate thereof and (B) any and all premiums and related payments due from Policy Holders in respect of any Insurance Product the issuance or proposed issuance of which shall have given rise to such Receivable, to the extent such premiums and related payments are allocable to the commissions payable by AIL to the applicable Obligor in respect of such Insurance Product; (ii) all of Seller's interest (including any assignment or pledge in favor of the Seller or any offset rights held by the Seller) in any other assets or interests in property of the applicable Insurance Agent or Agent-Hierarchy, (iii) all other security interests or liens and property subject thereto from time to time, if any, purporting to secure payment of such Receivable, whether pursuant to a Contract related to such Receivable or otherwise, together with all financing statements and security agreements describing any such arrangements securing such Receivable, (iv) all guaranties, contracts of suretyship, insurance and other agreements or arrangements of whatever character from time to time supporting or securing payment of such Receivable whether pursuant to a Contract related to such Receivable or otherwise, (v) all Records related to such Receivable, (vi) all of Seller's right, title and interest in, to and under the Receivables Sale Agreement, and (vii) all proceeds of any of the foregoing. "Required Financial Institutions" means, at any time, Financial ------------------------------- Institutions with Commitments in excess of 66-2/3% of the Purchase Limit. "Required Notice Period" means a period of two Business Days. ---------------------- "Seller" has the meaning set forth in the preamble to this Agreement. ------ "Seller Interest" means, at any time, an undivided percentage --------------- ownership interest of Seller in the Receivables, Related Security and all Collections with respect thereto equal to (i) one, minus (ii) the aggregate of the Purchaser Interests. "Seller Parties" has the meaning set forth in the preamble to this -------------- Agreement. "Servicer" means at any time the Person (which may be the Agent) then -------- authorized pursuant to Article VIII to service, administer and collect ------------ Receivables. "Servicing Fee" has the meaning set forth in Section 8.6. ------------- ----------- 61 "Settlement Date" means (A) the 15th day of each month, and (B) the --------------- last day of the relevant Tranche Period in respect of each Purchaser Interest of the Financial Institutions. "Settlement Period" means (A) in respect of each Purchaser Interest ----------------- of PREFCO, the calendar month then most recently ended, and (B) in respect of each Purchaser Interest of the Financial Institutions, the entire Tranche Period of such Purchaser Interest. "SGA" means a Person that (i) has been engaged by AIL as a "state --- general agent", (ii) serves as the senior manager of an Agent-Hierarchy and (iii) has guaranteed to AIL the repayment in full of all Receivables owing by any member of such Agent-Hierarchy. "Subordinated Note" means the Subordinated Note issued under and in ----------------- connection with the Receivables Sale Agreement, as the same may be amended, restated, supplemented or otherwise modified from time to time. "Subsidiary" of a Person means (i) any corporation more than 50% of ---------- the outstanding securities having ordinary voting power of which shall at the time be owned or controlled, directly or indirectly, by such Person or by one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries, or (ii) any partnership, association, joint venture or similar business organization more than 50% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. Unless otherwise expressly provided, all references herein to a "Subsidiary" shall mean a Subsidiary of Seller. "Terminating Tranche" has the meaning set forth in Section 4.3(b). ------------------- -------------- "Torchmark" means Torchmark Corporation, a Delaware corporation, and --------- its successors. "Torchmark Credit Agreement" means that certain Credit Agreement dated -------------------------- as of October 22, 1997 among Torchmark, certain lenders parties thereto from time to time and Bank One (formerly known as The First National Bank of Chicago), as such Credit Agreement is in effect on the date hereof and without giving effect to any amendment, restatement, supplement, termination, release or other modification of all or any term or provision of such Credit Agreement after the date hereof. "Torchmark Entities" means, collectively, Torchmark, AIL and Seller. ------------------ "Total Adjusted Capital" means the total adjusted capital as ---------------------- determined in accordance with the risk-based capital instructions adopted by the NAIC, as such instructions may be amended, modified, supplemented or restated from time to time. For reference purposes only, such term is also defined in Section 27-1-36-24 of the Indiana Code. 62 "Training Advance Receivable" means a Receivable representing an --------------------------- advance made to any Person at the time of the commencement of such Person's engagement as an Insurance Agent for AIL. "Tranche Period" means, with respect to any Purchaser Interest held by -------------- a Financial Institution: (a) if Yield for such Purchaser Interest is calculated on the basis of the LIBO Rate, a period of one, two, three or six months, or such other period as may be selected by Seller with consultation from (and approval by) the Agent, commencing on a Business Day selected by Seller or the Agent pursuant to this Agreement. Such Tranche Period shall end on the day in the applicable succeeding calendar month which corresponds numerically to the beginning day of such Tranche Period, provided, however, that if there -------- is no such numerically corresponding day in such succeeding month, such Tranche Period shall end on the last Business Day of such succeeding month; or (b) if Yield for such Purchaser Interest is calculated on the basis of the Base Rate, a period commencing on a Business Day selected by Seller and agreed to by the Agent, provided no such period shall exceed one month. -------- If any Tranche Period would end on a day which is not a Business Day, such Tranche Period shall end on the next succeeding Business Day, provided, -------- however, that in the case of Tranche Periods corresponding to the LIBO Rate, if such next succeeding Business Day falls in a new month, such Tranche Period shall end on the immediately preceding Business Day. In the case of any Tranche Period for any Purchaser Interest of which commences before the Amortization Date and would otherwise end on a date occurring after the Amortization Date, such Tranche Period shall end on the Amortization Date. The duration of each Tranche Period which commences after the Amortization Date shall be of such duration as selected by the Agent. "Transaction Documents" means, collectively, this Agreement, each --------------------- Purchase Notice, the Receivables Sale Agreement, the Subordinated Note, the Performance Guaranty, the Fee Letter and all other instruments, documents and agreements executed and delivered in connection herewith. "UCC" means the Uniform Commercial Code as from time to time in effect --- in the specified jurisdiction. "Unsupported Receivable" means any Receivable which as of January 31, ---------------------- 2000 (i) is subject to a Purchaser Interest, (ii) is owing by a member of an Agent-Hierarchy the SGA in respect of which shall then fail to have the Minimum SGA Net Worth for such SGA and (iii) such SGA shall have been an SGA for longer than twelve (12) months. 63 "Year 2000 Plan" means a plan to prevent the Year 2000 Problem from -------------- having an adverse effect upon the business, financial condition, operations, property or prospects of a Person. "Year 2000 Problem" means, with respect to any Person, the risk that ----------------- computer applications directly used by that Person cannot or will not: (a) handle date information involving any and all dates before, during and/or after January 1, 2000, including accepting input, providing output and performing date calculations in whole or in part; (b) operate accurately without interruption on and in respect of any and all dates before, during and/or after January 1, 2000; and (c) store and provide date input information without creating any ambiguity as to the century. "Yield" means for each respective Tranche Period relating to Purchaser ----- Interests of the Financial Institutions, an amount equal to the product of the applicable Discount Rate for such Purchaser Interest multiplied by the Capital of such Purchaser Interest for each day elapsed during such Tranche Period, annualized on a 360 day basis. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles. All terms used in Article 9 of the UCC in the State of Illinois, and not specifically defined herein, are used herein as defined in such Article 9. 64 EXHIBIT II FORM OF PURCHASE NOTICE [Date] Bank One, NA, as Agent for the Purchasers parties to the Receivables Purchase Agreement referred to below Suite IL1-0079, 1-21 1 Bank One Plaza Chicago, Illinois 60670 Attention: Asset Backed Finance Re: Purchase Notice --------------- Ladies and Gentlemen: The undersigned refers to the Receivables Purchase Agreement, dated as of December 21, 1999 (the "Receivables Purchase Agreement," the terms defined therein being used herein as therein defined), among the undersigned, as Seller and American Income Life Insurance Company, as initial Servicer, Preferred Receivables Funding Corporation ("PREFCO"), certain Financial Institutions parties thereto and Bank One, NA, as Agent for PREFCO and such Financial Institutions, and hereby gives you notice, irrevocably, pursuant to Section 1.2 of the Receivables Purchase Agreement, that the undersigned hereby requests an Incremental Purchase under the Receivables Purchase Agreement, and in that connection sets forth below the information relating to such Incremental Purchase (the "Proposed Purchase") as required by Section 1.2 of the Receivables Purchase Agreement: (i) The Business Day of the Proposed Purchase is [insert purchase date], which date is at least three (3) Business Days after the date hereof and is a Settlement Date. (ii) The requested Purchase Price in respect of the Proposed Purchase is $__________. (iii) The requested Discount Rate is [LIBO Rate] [Base Rate] [Pooled Commercial Paper rate] [having a Tranche Period of ___________________]. 65 The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Purchase (before and after giving effect to the Proposed Purchase): (i) the representations and warranties of the undersigned set forth in Section 5.1 of the Receivables Purchase Agreement are true and correct on and as of the date of such Proposed Purchase as though made on and as of such date; (ii) no event has occurred and is continuing, or would result from such Proposed Purchase, that will constitute an Amortization Event or a Potential Amortization Event; and (iii) neither the Liquidity Termination Date nor the Amortization Date shall have occurred, the aggregate Capital of all Purchaser Interests shall not exceed the Purchase Limit and the aggregate Purchaser Interests shall not exceed 100%. Very truly yours, AILIC RECEIVABLES CORPORATION By: ________________________________ Name: Title: Signature Page to Purchase Notice 66 EXHIBIT III PLACES OF BUSINESS OF THE SELLER PARTIES; LOCATIONS OF RECORDS; FEDERAL EMPLOYER IDENTIFICATION NUMBER(S) AILIC RECEIVABLES CORPORATION Principal Place of Business - --------------------------- None, except: 3700 South Stonebridge Drive McKinney, Texas 75070 Location(s) of Records - ---------------------- None, except: 3700 South Stonebridge Drive McKinney, Texas 75070 Federal Employer Identification Number(s) - ----------------------------------------- None, except: Corporate, Partnership Trade and Assumed Names - ---------------------------------------------- None. AMERICAN INCOME LIFE INSURANCE COMPANY Principal Place of Business - --------------------------- None, except: 1200 Wooded Acres Waco, Texas 76710 67 Location(s) of Records - ---------------------- None, except: 1200 Wooded Acres Waco, Texas 76710 3700 South Stonebridge Drive McKinney, Texas 75070 Federal Employer Identification Number(s) - ----------------------------------------- None, except: 74-1365939 Corporate, Partnership Trade and Assumed Names - ---------------------------------------------- None. 68 EXHIBIT IV FORM OF COMPLIANCE CERTIFICATE To: Bank One, NA, as Agent This Compliance Certificate is furnished pursuant to that certain Receivables Purchase Agreement dated as of December 21, 1999 among AILIC Receivables Corporation (the "Seller"), American Income Life Insurance Company ------ (the "Servicer"), the Purchasers party thereto and Bank One, NA, as agent for -------- such Purchasers (the "Agreement"). Terms used herein and not otherwise defined --------- herein shall have the meanings assigned under the Agreement. THE UNDERSIGNED HEREBY CERTIFIES THAT: 1. I am the duly elected _____________________ of [the Performance Guarantor][AIL][Seller]. 2. I have reviewed the terms of the Agreement and I have made, or have caused to be made under my supervision, a detailed review of the transactions and conditions of [the Performance Guarantor][AIL][Seller] and its Subsidiaries during the accounting period covered by the attached financial statements. 3. The examinations described in paragraph 2 did not disclose, and I have no knowledge of, the existence of any condition or event which (i) constitutes an Amortization Event or Potential Amortization Event, as each such term is defined under the Agreement, during or at the end of the accounting period covered by the attached financial statements or as of the date of this Certificate, except as set forth in paragraph 5 below, or (ii) which has had or is reasonably likely to have a Material Adverse Effect. 4. Schedule I attached hereto sets forth financial data and computations evidencing the compliance with certain covenants of the Agreement, all of which data and computations are true, complete and correct. [Schedule I attached hereto further sets forth financial data and computations evidencing the compliance with the covenants of, and the absence of default under, the Torchmark Credit Agreement, all of which data and computations are true, complete and accurate.]/1/ 5. Described below are the exceptions, if any, to paragraph 3 by listing, in detail, the nature of the condition or event, the period during which it has existed and the action which Seller has taken, is taking, or proposes to take with respect to each such condition or event: __________________ /1/To be included in the Compliance Certificate to be issued by the Performance Guarantor. 69 It is understood and acknowledged that the undersigned is executing this Certificate not in an individual capacity but solely in his or her capacity as an officer of the Seller and is without any personal liability as to the matters contained in this certificate. The foregoing certifications, together with the computations set forth in Schedule I hereto and the financial statements delivered with this Certificate - ---------- in support hereof, are made and delivered this ____ day of ______________, ____________. ________________________________ Name: Title: 70 Signature Page to Compliance Certificate 71 SCHEDULE I TO COMPLIANCE CERTIFICATE A. Unless otherwise defined herein, the terms used in this Compliance Certificate have the meanings ascribed thereto in the Agreement. This schedule relates to the month ended:___________ 72 EXHIBIT V FORM OF ASSIGNMENT AGREEMENT THIS ASSIGNMENT AGREEMENT is entered into as of the ___ day of ____________, ____, by and between _____________________ ("Seller") and ------ __________________ ("Purchaser"). --------- PRELIMINARY STATEMENTS - ---------------------- A. This Assignment Agreement is being executed and delivered in accordance with Section 12.1(b) of that certain Receivables Purchase Agreement dated as of December 21], 1999 by and among AILIC Receivables Corporation, American Income Life Insurance Company, as "Servicer", Preferred Receivables Funding Corporation, Bank One, NA, as Agent, and the Seller and certain other Financial Institutions party thereto (as amended, modified or restated from time to time, the "Purchase Agreement"). ------------------ Capitalized terms used and not otherwise defined herein are used with the meanings set forth or incorporated by reference in the Purchase Agreement. B. The Seller is a Financial Institution party to the Purchase Agreement, and the Purchaser wishes to become a Financial Institution thereunder; and C. The Seller is selling and assigning to the Purchaser an undivided ____________% (the "Transferred Percentage") interest in all of Seller's ---------------------- rights and obligations under the Purchase Agreement and the Transaction Documents, including, without limitation, the Seller's Commitment and (if applicable) the Capital of the Seller's Purchaser Interests as set forth herein; The parties hereto hereby agree as follows: 1. This sale, transfer and assignment effected by this Assignment Agreement shall become effective (the "Effective Date") two (2) Business -------------- Days (or such other date selected by the Agent in its sole discretion) following the date on which a notice substantially in the form of Schedule II to this Assignment Agreement ("Effective Notice") is delivered by the ---------------- Agent to PREFCO, the Seller and the Purchaser. From and after the Effective Date, the Purchaser shall be a Financial Institution party to the Purchase Agreement for all purposes thereof as if the Purchaser were an original party thereto and the Purchaser agrees to be bound by all of the terms and provisions contained therein. 2. If the Seller has no outstanding Capital under the Purchase Agreement, on the Effective Date, Seller shall be deemed to have hereby transferred and assigned to the Purchaser, without recourse, representation or warranty (except as provided in paragraph 6 below), and the Purchaser shall be deemed to have hereby irrevocably taken, received and assumed from the Seller, the Transferred Percentage of the Seller's Commitment and all rights and obligations associated therewith under the terms of the Purchase Agreement, including, without limitation, the Transferred Percentage of the Seller's future funding obligations under Section 4.1 of the Purchase ----------- Agreement. 73 3. If the Seller has any outstanding Capital under the Purchase Agreement, at or before 12:00 noon, local time of the Seller, on the Effective Date the Purchaser shall pay to the Seller, in immediately available funds, an amount equal to the sum of (i) the Transferred Percentage of the outstanding Capital of the Seller's Purchaser Interests (such amount, being hereinafter referred to as the "Purchaser's Capital"); ------------------- (ii) all accrued but unpaid (whether or not then due) Yield attributable to the Purchaser's Capital; and (iii) accruing but unpaid fees and other costs and expenses payable in respect of the Purchaser's Capital for the period commencing upon each date such unpaid amounts commence accruing, to and including the Effective Date (the "Purchaser's Acquisition Cost"); ---------------------------- whereupon, the Seller shall be deemed to have sold, transferred and assigned to the Purchaser, without recourse, representation or warranty (except as provided in paragraph 6 below), and the Purchaser shall be deemed to have hereby irrevocably taken, received and assumed from the Seller, the Transferred Percentage of the Seller's Commitment and the Capital of the Seller's Purchaser Interests (if applicable) and all related rights and obligations under the Purchase Agreement and the Transaction Documents, including, without limitation, the Transferred Percentage of the Seller's future funding obligations under Section 4.1 of the Purchase Agreement. 4. Concurrently with the execution and delivery hereof, the Seller will provide to the Purchaser copies of all documents requested by the Purchaser which were delivered to such Seller pursuant to the Purchase Agreement. 5. Each of the parties to this Assignment Agreement agrees that at any time and from time to time upon the written request of any other party, it will execute and deliver such further documents and do such further acts and things as such other party may reasonably request in order to effect the purposes of this Assignment Agreement. 6. By executing and delivering this Assignment Agreement, the Seller and the Purchaser confirm to and agree with each other, the Agent and the Financial Institutions as follows: (a) other than the representation and warranty that it has not created any Adverse Claim upon any interest being transferred hereunder, the Seller makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made by any other Person in or in connection with the Purchase Agreement or the Transaction Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Purchaser, the Purchase Agreement or any other instrument or document furnished pursuant thereto or the perfection, priority, condition, value or sufficiency of any collateral; (b) the Seller makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Seller, any Obligor, any Seller Affiliate or the performance or observance by the Seller, any Obligor, any Seller Affiliate of any of their respective obligations under the Transaction Documents or any other instrument or document furnished pursuant thereto or in connection therewith; (c) the Purchaser confirms that it has received a copy of the Transaction Documents, together with such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment Agreement; (d) the Purchaser will, independently and without reliance upon the Agent, PREFCO, the Seller or any 74 other Financial Institution or Purchaser and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Purchase Agreement and the Transaction Documents; (e) the Purchaser appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Transaction Documents as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (f) the Purchaser appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Transaction Documents as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto; and (g) the Purchaser agrees that it will perform in accordance with their terms all of the obligations which, by the terms of the Purchase Agreement and the Transaction Documents, are required to be performed by it as a Financial Institution or, when applicable, as a Purchaser. 7. Each party hereto represents and warrants to and agrees with the Agent that it is aware of and will comply with the provisions of the Purchase Agreement, including, without limitation, Sections 4.1, 13.1 and 14.6 thereof. 8. Schedule I hereto sets forth the revised Commitment of the Seller and the Commitment of the Purchaser, as well as administrative information with respect to the Purchaser. 9. THIS ASSIGNMENT AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS. 10. The Purchaser hereby covenants and agrees that, prior to the date which is one year and one day after the payment in full of all senior indebtedness for borrowed money of PREFCO, it will not institute against, or join any other Person in instituting against, PREFCO any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or other similar proceeding under the laws of the United States or any state of the United States. 75 IN WITNESS WHEREOF, the parties hereto have caused this Assignment Agreement to be executed by their respective duly authorized officers as of the date hereof. [SELLER] By: Title: [Purchaser] By: Title: 76 SCHEDULE I TO ASSIGNMENT AGREEMENT ---------------------------------- LIST OF LENDING OFFICES, ADDRESSES FOR NOTICES AND COMMITMENT AMOUNTS ---------------------------------- Date: _______________, ____ Transferred Percentage: ________% - ---------------------- A-1 A-2 B-1 B-2 --- --- --- --- Outstanding Commitment Commitment Capital Ratable Seller [existing] [revised] (if any) Share - ------ ---------- --------- -------- ----- A-1 B-1 B-2 --- --- --- Outstanding Commitment Capital Ratable Seller [initial] (if any) Share - ------ ---------- -------- ----- Address for Notices - ------------------- Attention: Phone: Fax: 77 SCHEDULE II TO ASSIGNMENT AGREEMENT ----------------------------------- EFFECTIVE NOTICE TO:________________________, Seller ________________________ ________________________ ________________________ TO:________________________, Purchaser ________________________ ________________________ ________________________ The undersigned, as Agent under the Receivables Purchase Agreement dated as of December 21, 1999 by and among AILIC Receivables Corporation, American Income Life Insurance Company, as "Servicer", Preferred Receivables Funding Corporation, Bank One, NA, as Agent, and the Financial Institutions party thereto, hereby acknowledges receipt of executed counterparts of a completed Assignment Agreement dated as of ____________, ____ between __________________, as Seller, and __________________, as Purchaser. Terms defined in such Assignment Agreement are used herein as therein defined. 1. Pursuant to such Assignment Agreement, you are advised that the Effective Date will be ______________, ____. 2. PREFCO hereby consents to the Assignment Agreement as required by Section 12.1(b) of the Purchase Agreement. [3. Pursuant to such Assignment Agreement, the Purchaser is required to pay $____________ to the Seller at or before 12:00 noon (local time of the Seller) on the Effective Date in immediately available funds.] Very truly yours, BANK ONE, NA, individually and as Agent By:__________________________ Title:_______________________ 78 PREFERRED RECEIVABLES FUNDING CORPORATION By: ____________________________ Authorized Signatory 79 EXHIBIT VI CREDIT AND COLLECTION POLICY (Attached) 80 EXHIBIT VII FORM OF CONTRACT(S) (Attached) 81 EXHIBIT VIII FORM OF MONTHLY REPORT (Attached) [In addition to such other information as may be included on this exhibit, each Monthly Report should set forth the following with respect to the related Calculation Period (as defined in the Receivables Sale Agreement): (i) the aggregate Outstanding Balance of Receivables created and conveyed by AIL to Seller in purchases pursuant to the Receivables Sale Agreement during such Calculation Period, as well as the Net Receivables Balance included therein, (ii) the aggregate purchase price payable to AIL in respect of such purchases, specifying the Discount Factor (as defined in the Receivables Sale Agreement) in effect for such Calculation Period and the aggregate Purchase Price Credits (as defined in the Receivables Sale Agreement) deducted in calculating such aggregate purchase price, (iii) the aggregate amount of funds received by the Servicer during such Calculation Period which are to be applied as Reinvestments, (iv) the increase or decrease in the amount outstanding under the Subordinated Note as of the end of such Calculation Period after giving effect to the application of funds toward the aggregate purchase price and the restrictions on Subordinated Loans (as defined in the Receivables Sale Agreement) set forth in Section 1.2(a)(ii) of the Receivables Sale Agreement, and (v) the amount of any capital contribution made by AIL to Seller as of the end of such Calculation Period pursuant to Section 1.2(b) of the Receivables Sale Agreement.] [In the event Seller elects to have any Monthly Report serve as a Purchase Notice, the following shall be appended to such Monthly Report as the last page thereof: Seller gives you notice, irrevocably, pursuant to Section 1.2 of the Receivables Purchase Agreement, that the undersigned hereby requests an Incremental Purchase under the Receivables Purchase Agreement, and in that connection sets forth below the information relating to such Incremental Purchase (the "Proposed Purchase") as required by Section 1.2 of the Receivables Purchase Agreement: (i) The Business Day of the Proposed Purchase is [insert purchase date], which date is at least three (3) Business Days after the date hereof and is a Settlement Date. (ii) The requested Purchase Price in respect of the Proposed Purchase is $__________. (iii) The requested Discount Rate is [LIBO Rate] [Base Rate] [Pooled Commercial Paper rate] [having a Tranche Period of ___________________]. The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Purchase (before and after giving effect to the Proposed Purchase): 82 (i) the representations and warranties of the undersigned set forth in Section 5.1 of the Receivables Purchase Agreement are true and correct on and as of the date of such Proposed Purchase as though made on and as of such date; (ii) no event has occurred and is continuing, or would result from such Proposed Purchase, that will constitute an Amortization Event or a Potential Amortization Event; and (iii) neither the Liquidity Termination Date nor the Amortization Date shall have occurred, the aggregate Capital of all Purchaser Interests shall not exceed the Purchase Limit and the aggregate Purchaser Interests shall not exceed 100%. Very truly yours, AILIC RECEIVABLES CORPORATION By: ________________________________ Name: Title: ] 83 SCHEDULE A COMMITMENTS OF FINANCIAL INSTITUTIONS - ---------------------------------------- -------------------------------------- Financial Institution Commitment --------------------- ---------- - ---------------------------------------- -------------------------------------- BANK ONE, NA $102,040,816.00 - ---------------------------------------- -------------------------------------- 84 SCHEDULE B DOCUMENTS TO BE DELIVERED TO THE AGENT ON OR PRIOR TO THE INITIAL PURCHASE (Attached) 85 ::ODMA\PCDOCS\CHICAGO4\1004451\9 December 23, 1999 (2:59PM) 86 EX-20 5 PROXY STATEMENT FOR ANNUAL MEETING EXHIBIT 20 [LOGO OF TORCHMARK CORPORATION APPEARS HERE] March 23, 2000 To the Stockholders of Torchmark Corporation: Torchmark's 2000 annual meeting of stockholders will be held in the auditorium at the executive offices of the Company, 2001 Third Avenue South, Birmingham, Alabama at 10:00 a.m., Central Daylight Time, on Thursday, April 27, 2000. 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 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 1999. Sincerely, /s/ C.B. Hudson --------------------------- C.B. Hudson Chairman, President & Chief Executive Officer --------------------------------- Notice of Annual Meeting of Stockholders to be held April 27, 2000 --------------------------------- To the Holders of Common Stock of Torchmark Corporation The annual meeting of stockholders of Torchmark Corporation will be held at the executive offices of the Company, 2001 Third Avenue South, Birmingham, Alabama 35233 on Thursday, April 27, 2000 at 10:00 a.m., Central Daylight Time. 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 the appointment of Deloitte & Touche LLP as independent auditors. (3) 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 Wednesday, March 1, 2000 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 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 /s/ Carol A. McCoy Carol A. McCoy Associate Counsel & Corporate Secretary Birmingham, Alabama March 23, 2000 PROXY STATEMENT Solicitation of Proxies The Board of Directors of Torchmark Corporation solicits your proxy for use at the 2000 annual meeting of stockholders and at any adjournment of the meeting. The annual meeting will be held at the executive offices of the Company, 2001 Third Avenue South, Birmingham, Alabama 35233 at 10:00 a.m., Central Daylight Time on Thursday, April 27, 2000. C.B. Hudson 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 such proposals. 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 each of the Torchmark Corporation Savings and Investment Plan, the Waddell & Reed Financial, Inc. 401-K and Savings and Investment Plan, the Liberty National Life Insurance Company 401(k) Plan and the Profit-Sharing and Retirement Plan of Liberty National Life Insurance Company 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 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 1, 2000 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 1, 2000, there were 129,858,697 shares of common capital stock of the Company outstanding (not including 152,385,585 shares held by the Company and its subsidiaries which are non-voting while so held). There is no cumulative voting of the common stock. Principal Stockholders The table below 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, 1999.
Name and Address Number of Shares(1) Percent of Class ---------------- ------------------- ---------------- AMVESCAP PLC 7,496,502 5.70% 11 Devonshire Square London EC2M 4YR England
- -------- (1) All stock reported is held by holding companies (AVZ, Inc., AIM Management Group, Inc., AMVESCAP Group Services, Inc., INVESCO, Inc. and INVESCO North American Holdings, Inc.) and investment advisers (INVESCO Capital Management, Inc. and INVESCO Asset Management Limited), which are subsidiaries of AMVESCAP PLC. These entities share the voting and the dispositive power over the shares and have disclaimed beneficial ownership of such stock. 1 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. In October, 1999, the number of directors was increased to ten persons and Lamar C. Smith was elected to the newly created directorship. The Board of Directors proposes the election of David L. Boren, Louis T. Hagopian and Harold T. McCormick 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 2003 or until their successors are elected and qualified and of R.K. Richey as a director, to hold office for a term of one year, expiring at the close of the annual stockholders meeting in 2001 or until his successor is elected and qualified. Messrs. Boren, Hagopian, McCormick and Richey's current terms expire in 2000. The term of office of the other six directors continues until the close of the annual meeting of stockholders in the year shown in the biographical information below. Non-officer directors retire from the Board of Directors at the annual meeting of stockholders which immediately follows their 75th birthday. Directors who are officers of the Company retire from active service as directors at the annual stockholders meeting immediately following their 65th birthday, except that these directors may be elected annually to additional one year terms not to continue beyond the annual meeting of stockholders following the director's 75th birthday. The Chairman of the Executive Committee serves at the pleasure of the Board on an annual basis until the annual meeting following his 75th 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/) David L. Boren (age 59) has been a director of the Company since April, 1996. He is a director of Waddell & Reed Financial, Inc., Phillips Petroleum Corporation, AMR Corporation and Texas Instruments, Inc. Principal occupation: President of The University of Oklahoma, Norman, Oklahoma since November, 1994. Joseph M. Farley (age 72) has been a director of the Company since 1980. His term expires in 2001. He is a director of Waddell & Reed Financial, Inc. Principal occupation: Of Counsel at Balch & Bingham LLP, Attorneys and Counselors, Birmingham, Alabama since November, 1992. Louis T. Hagopian (age 74) has been a director of the Company since 1988. He is a director of Waddell & Reed Financial, Inc. Principal occupation: Owner of Meadowbrook Enterprises, Darien, Connecticut, an advertising and marketing consultancy, since January, 1990. Vice Chairman, Partnership for a Drug-Free America, New York, New York. C. B. Hudson (age 54) has been a director since 1986. His term expires in 2001. Principal occupation: Chairman, President and Chief Executive Officer of the Company since March, 1998. (Chairman of Insurance Operations of the Company, January, 1993-March, 1998; Chairman of Liberty, United American and Globe October, 1991-September, 1999 and Chief Executive Officer of Liberty December, 1989-September, 1999, of United American November, 1982-September, 1999 and of Globe February, 1986-September, 1999). 2 Joseph L. Lanier, Jr. (age 68) has been a director of the Company since 1980. His term expires in 2001. He is a director of Waddell & Reed Financial, Inc., Dan River Incorporated, Flowers Industries, Inc., Dimon Inc. and SunTrust Banks, Inc. Principal occupation: Chairman of the Board and Chief Executive Officer of Dan River Incorporated, Danville, Virginia, a textile manufacturer, since November, 1989. Mark S. McAndrew (age 46) has been a director of the Company since July, 1998. His term expires in 2002. Principal occupation: Chairman and Chief Executive Officer of United American, Globe and American Income since September, 1999; President of United American and Globe since October, 1991 and of American Income since September, 1999; Executive Vice President of the Company since September, 1999. (Vice President of the Company, April- September, 1999). Harold T. McCormick (age 71) has been a director since April, 1992. He is a director of Waddell & Reed Financial, Inc. Principal occupation: Chairman and Chief Executive Officer of Bay Point Yacht & Country Club, Panama City, Florida, since March, 1988; Chairman, First Ireland Spirits Co., Ltd., Abbeyleix, Ireland, since February, 1996. George J. Records (age 65) has been a director of the Company since April, 1993. His term expires in 2002. He is a director of Waddell & Reed Financial, Inc. Principal occupation: Chairman of Midland Financial Co., Oklahoma City, Oklahoma, a bank and financial holding company for retail banking and mortgage operations, since 1982. R. K. Richey (age 73) has been a director of the Company since 1980. He is a director of Full House Resorts, Inc. and Waddell & Reed Financial, Inc. and a Director Emeritus of the United Group of Mutual Funds, Waddell & Reed Funds, Inc. and Target/United Funds, Inc. Principal occupation: Chairman of the Executive Committee of the Board of Directors of the Company since March, 1998. (Chairman of the Company, August, 1986-March, 1998 and Chief Executive Officer of the Company, December, 1984-March, 1998). Lamar C. Smith (age 52) has been a director of the Company since October, 1999. His term expires in 2002. He is a director of Millers American Group, Inc. Principal Occupation: Chairman since 1992 and Chief Executive Officer since 1990 of United Services Planning Association, Inc., Independent Research Agency for Life Insurance, Inc. and First Command Bank. - -------- (1) Liberty, Globe, United American and American Income as used in this proxy statement refer to Liberty National Life Insurance Company, Globe Life And Accident Insurance Company, United American Insurance Company and American Income Life Insurance Company, subsidiaries of the Company. 3 PROPOSAL NUMBER 2 Approval of Auditors A proposal to approve 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, 2000 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, 1999. The Audit Committee of the Board recommends the appointment of Deloitte & Touche as the Company's principal accountants for 2000. KPMG Peat Marwick LLP served as the principal independent accountants of Torchmark, auditing the financial statements of the Company and its subsidiaries from 1981 through the fiscal year ended December 31, 1998. In 1998, senior management of the Company conducted extensive interviews with several independent accounting firms and held discussions regarding the selection of principal independent accountants with the members of the Audit Committee of the Board. After deliberation, senior management recommended to the Audit Committee that Deloitte & Touche be engaged as the Company's principal accountants as of January 1, 1999, effective upon the issuance of KPMG's reports on the consolidated financial statements of Torchmark and its subsidiaries and the separately issued financial statements of Torchmark's subsidiaries, unit investment trusts and benefit plans as of and for the year ending December 31, 1998. (KPMG completed its engagement as Torchmark's independent auditor on October 14, 1999, the date upon which the last of the audit reports as of and for the year ended December 31, 1998 for the entities noted above were issued.) Upon review, on October 21, 1998, the Audit Committee approved the engagement of Deloitte & Touche. The reports of KPMG on the financial statements of Torchmark for the fiscal years ending December 31, 1997 and 1998 did not contain any adverse opinion or disclaimer of opinion. KPMG's reports were not qualified or modified as to uncertainty, audit scope or accounting principles except as follows: KPMG's Auditor's Report on the Consolidated Financial Statements of Torchmark as of and for the year ended December 31, 1997 refers to a change in accounting principles to adopt the provisions of Statement of Financial Accounting Standards Board's Statement of Financial Accounting Standard 121 "Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed Of". During such years and during the period between December 31, 1998 and the date of completion of KPMG's engagement, there was no disagreement between KPMG and Torchmark on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG, would have caused that firm to make reference to the subject matter of such disagreement in connection with its report on the Company's financial statements. 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 approve the appointment of Deloitte & Touche LLP, the selection of independent auditors will be reconsidered by the Board of Directors. The Board recommends that stockholders vote FOR 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, C.B. Hudson and Larry M. Hutchison will vote in accordance with their judgment on these matters. 4 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.
Principal Occupation and Business Experience Name Age for the Past Five Years(1) ---- --- -------------------------- Tony G. Brill............... 57 Executive Vice President and Chief Administrative Officer of Company since September, 1999. (Vice President of Company, January, 1997-September, 1999; Managing Partner, KPMG Peat Marwick LLP, Birmingham, Alabama 1969-December, 1996). Gary L. Coleman............. 47 Executive Vice President and Chief Financial Officer of Company since September, 1999. (Vice President and Chief Accounting Officer of Company, July, 1994-September, 1999). Larry M. Hutchison.......... 46 Executive Vice President and General Counsel of Company since September, 1999; Vice President, Secretary and General Counsel of United American since May, 1994. (Vice President and General Counsel of Company, April, 1997-September, 1999). Anthony L. McWhorter........ 50 Chairman and Chief Executive Officer of Liberty and UILIC since September, 1999; President of Liberty since December, 1994 and of UILIC since September, 1998; Executive Vice President of Company since September, 1999. Rosemary J. Montgomery...... 50 Executive Vice President and Chief Actuary of Company, United American and Globe since September, 1999. (Senior Vice President and Chief Actuary of United American, October, 1991-September, 1999 and of Globe, May, 1992- September, 1999).
5 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, 1999.
Company Common Stock or Options Beneficially Owned as of December 31, 1999(1) ------------------------- Name Directly(2) Indirectly(3) ---- ----------- ------------- David L. Boren....................................... 15,980 0 Norman, OK Joseph M. Farley..................................... 135,810 4,800 Birmingham, AL Louis T. Hagopian.................................... 137,218 0 Darien, CT C. B. Hudson......................................... 2,018,328 40,755 Plano, TX Joseph L. Lanier, Jr. ............................... 134,064 18,912 Lanett, AL Mark S. McAndrew..................................... 172,380 6,053 McKinney, TX Harold T. McCormick ................................. 42,253 7,200 Panama City, FL George J. Records.................................... 48,942 0 Oklahoma City, OK R. K. Richey......................................... 439,601 1,862,856 Horseshoe Bay, TX Lamar C. Smith....................................... 0 0 Fort Worth, TX Tony G. Brill........................................ 115,972 1,383 Frisco, TX Gary L. Coleman...................................... 181,059 12,421 Richardson, TX Larry M. Hutchinson.................................. 69,597 7,860 Duncanville, TX Anthony L. McWhorter................................. 114,576 10,230 Birmingham, AL Rosemary J. Montgomery............................... 151,950 1,531 Frisco, TX All Directors, Nominees and Executive Officers as a group:(4)............................................ 3,777,730 1,974,001
- -------- (1) No directors, director nominees or executive officers other than R. K. Richey (1.7%) and C.B. Hudson (1.5%) beneficially own 1% or more of the common stock of the Company. (2) Includes: for David L. Boren, 14,000 shares; for Joseph Farley, 66,400 shares; for Louis Hagopian, 85,325 shares; for Joseph Lanier, 80,195 shares; for Mark McAndrew, 76,300 shares; for Harold McCormick, 40,215 shares; for George Records, 35,784 shares; for R. K. Richey, 13,099 shares; for C. B. Hudson, 1,047,948 shares; for Tony Brill, 59,488 shares; for Anthony McWhorter, 57,778 shares; for Gary Coleman, 96,218 shares; for Larry Hutchison, 47,979 shares; for Rosemary Montgomery, 85,139 shares and for all directors, executive officers and nominees as a group, 1,805,868 shares, that are subject to presently exercisable Company stock options. Lamar Smith holds options on 11,594 shares. None of such options are presently exercisable prior to July 3, 2000. (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 6 12,755 shares, 6,053 shares, 786 shares, 8,466 shares, 12,421 shares, 7,860 shares and 531 shares calculated based upon conversion of stock unit balances held in the accounts of Messrs. Hudson, McAndrew, Brill, McWhorter, Coleman and Hutchison and Ms. Montgomery, respectively, in the Company Savings and Investment Plan to shares. Additionally, indirect beneficial ownership includes for Mr. Richey 313,800 shares subject to options held by Richey Capital Partners, Ltd., a family limited partnership. Indirect ownership for Mr. McWhorter also includes approximately 1,764 shares calculated based upon conversion of stock unit balance in the Profit Sharing & Retirement Plan of Liberty (PS&R Plan) to shares. Mr. Lanier disclaims beneficial ownership of 16,512 shares owned by his spouse and 2,400 shares owned by his children. Mr. Farley disclaims 4,800 shares held as trustee of a church endowment fund. (4) All directors, nominees and executive officers as a group, beneficially own 4.3% of the common stock of the Company. During 1999, the Board of Directors met five times. In 1999, all of the directors attended more than 75% of the meetings of the Board and the committees on which they served. Committees of the Board of Directors The Board of Directors has the following committees: Audit-Messrs. Farley, Hagopian, and McCormick; Compensation -- Messrs. Farley, Lanier and Hagopian; Executive -- Messrs. Boren, Farley, Hagopian, Hudson, Lanier, McCormick, Records and Richey; Finance -- Messrs. Farley, Lanier, McCormick and Records and Nominating -- Messrs. Boren, Farley, Hagopian, Lanier, McCormick and Records. The audit committee recommends the independent auditors to be selected by the Board; discusses the scope of the proposed audit with the independent auditors and considers the audit reports; discusses the implementation of the auditors' recommendations with management; reviews the fees of the independent auditors for audit and non-audit services; reviews the adequacy of the Company's system of internal accounting controls; reviews, before publication or issuance, the annual financial statement and any annual reports to be filed with the Securities and Exchange Commission and periodically reviews pending litigation. Additionally, the audit committee meets with the Company's independent accountants and internal auditors both with and without management being present. The audit committee met twice in 1999. The compensation committee determines the compensation of senior management of the Company and its subsidiaries and affiliates. Additionally, the compensation committee administers the stock incentive plans of the Company. The compensation committee met three times in 1999. The executive committee exercises all the powers of the Board of Directors in the interim between Board meetings. The executive committee did not meet in 1999. The finance committee serves as the pricing committee in connection with capital financing by the Company. The finance committee did not meet in 1999. The nominating committee reviews the qualifications of potential candidates for the Board of Directors from whatever source received, reports its findings to the Board and proposes nominations for Board membership for approval by the Board of Directors and for submission to the stockholders for approval. Recommendations of potential Board candidates may be directed to the nominating committee in care of the Corporate Secretary of the Company at the address stated herein. The nominating committee met once in 1999. 7 COMPENSATION AND OTHER TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS
Summary Compensation Table - --------------------------------------------------------------------------------------------------------- Annual Compensation Long Term Compensation ------------------------------------ ----------------------------- Awards ----------------------------- (g) (e) (f) Securities (i) (a) (d) Other Annual Restricted Stock underlying All other Name and (b) (c) Bonus Compensation Award(s) Options/SARs Compensation Principal Position Year Salary ($) ($)(1) ($)(2) ($) (#)(4) ($)(5) ------------------ ---- ---------- ------- ------------ ---------------- ------------ ------------ C.B. Hudson 1999 800,000 0 0 151,734 5,910 Chairman, President 1998 800,000 0 0 259,740 5,772 and CEO 1997 800,000 400,000 0 557,181 5,806 Mark S. McAndrew 1999 575,000 150,000 0 153,198 4,800 Chairman, President 1998 525,000 150,000 1,687,500(3) 62,500 4,800 and CEO of United 1997 475,000 120,000 0 66,782 4,800 American, Globe and American Income Tony G. Brill 1999 500,016 100,000 0 115,813 4,800 Executive Vice President 1998 450,000 0 1,687,500(3) 63,258 4,800 and Chief 1997 400,000 85,000 0 116,825 0 Administrative Officer Anthony L. McWhorter 1999 350,120 120,000 0 108,374 4,800 Chairman, President 1998 300,722 27,000 1,054,688(3) 47,505 4,800 and Chief Executive 1997 245,024 100,000 0 42,758 4,800 Officer of Liberty and UILIC Gary L. Coleman 1999 300,000 30,000 0 89,303 4,800 Executive Vice 1998 275,000 30,000 0 30,379 4,800 President and Chief 1997 250,000 60,000 0 91,007 4,800 Financial Officer Charles B. Cooper 1999 515,000 0 0 0 265,595 President of 1998 515,000 50,000 527,344(3) 20,000 9,600 American Income until 1997 475,000 100,000 0 11,326 9,600 September 1999 Bernard Rapoport 1999 427,500 0 13,305 0 101,518 118,088 Chairman and CEO 1998 570,000 0 11,800 0 20,000 9.600 of American Income 1997 525,000 100,000 10,351 0 44,178 9,600 until September 1999
- -------- (1) Messrs. Hudson and Coleman elected to defer $400,000 and $50,000, respectively, of their 1999 bonuses and received therefor Company stock options under the provisions of the Torchmark Corporation 1998 Stock Incentive Plan (1998 Incentive Plan). Messrs. Hudson, Brill, McWhorter and Coleman elected to defer $400,000, $100,000, $93,000 and $50,000, respectively, of their 1998 bonuses pursuant to the executive deferred compensation stock option provisions of the 1998 Incentive Plan. (2) Includes for Mr. Rapoport--$13,305, $11,800 and $10,351 required to be paid to him from the American Income Life Insurance Company Exempt Employees 401K Profit Sharing Plan (American Income Profit Sharing Plan) in 1999, 1998, and 1997, respectively, because of his continued active employment and participation in such plan after age 70. (3) At year end 1999, Messrs. McAndrew, McWhorter, Brill and Cooper held 33,600, 21,000, 33,600 and 1,875 restricted shares, respectively, valued at $976,500, $610,313, $976,500 and $54,492 (based on a year-end closing price of $29.0625 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; 1-1-05 4,000 shares; and 1-1-06 3,600 shares. Restricted stock (25,000 shares) awarded on January 1, 1998 at $42.1875 per share to Mr. McWhorter vests as follows: 1-1-99 4,000 shares; 1-1-00 3,750 shares; 1-1-01 8 3,500 shares; 1-1-02 3,250 shares; 1-1-03 3,000 shares; 1-1-04 2,750 shares; 1-1-05 2,500 shares. Restricted stock (12,500 shares) awarded on January 1, 1998 at $42.1875 per share to Mr. Cooper was scheduled to vest as follows: 1-1-99 2,000 shares; 1-1-00 1,875 shares; 1-1-01 1,750 shares; 1-1-02 1,625 shares; 1-1-03 1,500 shares; 1-1-04 1,375 shares; 1-1-05 1,250 shares; and 1-1-06 1,125 shares. Such shares scheduled to vest on 1- 1-01 and thereafter were forfeited to the Company by Mr. Cooper upon his retirement. Cash dividends on all restricted stock are paid directly to the stockholder at the same rate as on unrestricted stock. Messrs. McAndrew, McWhorter, Brill and Cooper 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. (4) In November 1999, Messrs. McAndrew, Brill, McWhorter, Coleman and Rapoport elected to participate in a program under the TMK Incentive Plan whereby they exercised existing Torchmark stock options and received restoration options for 53,198, 40,813, 33,374, 22,836 and 91,518 Torchmark shares, respectively. On December 21, 1999, Messrs. Hudson, McAndrew, Brill, McWhorter, Coleman and Rapoport received stock option grants pursuant to the TMK Incentive Plan on 100,000, 100,000, 75,000, 75,000, 60,000 and 10,000 Torchmark shares, respectively. Also, on that same date, Messrs. Hudson and Coleman elected to receive 1999 bonus amounts of $400,000 and $50,000, respectively, in the form of Torchmark stock options on 51,734 shares and 6,467 shares, respectively. In December 1998, Messrs. Hudson, Rapoport, McAndrew, Cooper, McWhorter, Coleman and Brill received stock option grants of 100,000, 20,000, 62,500, 20,000, 37,500, 25,000 and 52,500 shares, respectively, pursuant to the 1998 Incentive Plan. Also, in December 1998, Messrs. Hudson, Brill, McWhorter and Coleman elected to receive 1998 bonus amounts of $400,000, $93,000, $50,000 and $100,000 in the form of stock options on 43,031 shares, 10,005 shares, 5,379 shares and 10,758 shares pursuant to the terms of the 1998 Incentive Plan. On November 6, 1998, pursuant to the terms of each existing option plan, adjustments were made to all outstanding stock options granted prior to that date to reflect the WDR spin-off based upon each optionee's election to receive either Adjusted Torchmark Options or a combination of Adjusted Torchmark Options and WDR Conversion Options granted in WDR Class A common stock. Accordingly, all shares reflected as underlying options granted prior to November 6, 1998 have been so adjusted. On January 2, 1997, Mr Brill was granted options under the TMK Incentive Plan on 116,825 Torchmark shares. On January 31, 1997, Mr. Hudson elected to convert all his 1996 bonus amounts plus accrued interest of $1,151 held in the TMK Executive Deferral Plan, subject to subsequently obtained shareholder approval, to stock options on 89,881 Torchmark shares. In 1997, Messrs. Hudson, Rapoport, McAndrew, Cooper, McWhorter and Coleman elected to participate in a program under the TMK Incentive Plan whereby they exercised existing Torchmark stock options and received restoration options for 467,183, 11,500, 51,300, 8,700, 42,758 and 76,988 Torchmark shares, respectively. Messrs. Rapoport, McAndrew and Cooper received options on 3,471, 15,482 and 2,626 WDR Class A shares as a November 6, 1998 spin-off adjustment to their Torchmark restoration options. Messrs. Coleman and Rapoport also were awarded options pursuant to the TMK Incentive Plan on 14,019 and 29,207 additional Torchmark shares in 1997. Mr. Hudson was also granted options under the TMK Incentive Plan on 117 additional Torchmark shares in 1997 and on 116,709 Torchmark shares on January 2, 1998. (5) Includes Company contributions to Torchmark Corporation Savings and Investment Plan, a funded, qualified defined contribution plan, for each of Messrs. Hudson, McAndrew, Brill, McWhorter and Coleman of $4,800 in 1999, 1998 and 1997; 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 $1,110.31, $972.11, and $1,006.00, respectively. Includes for Messrs. Rapoport and Cooper, employer company contributions to the American Income Profit Sharing Plan, a funded, qualified defined contribution plan, of $9,600.00 in 1999, 1998 and 1997. Includes for Mr. Cooper, $167,805 as payment for accrued but unused vacation at the time of his retirement. Includes for Messrs. Cooper and Rapoport, to close their American Income Profit Sharing Plan accounts, $88,190 and $108,488 paid upon their respective retirements. 9
OPTION GRANTS IN LAST FISCAL YEAR - --------------------------------------------------------------------------------------------------- Potential realizable value at assumed annual rates of stock price appreciation Individual Grants for option term --------------------------------------------- ------------------------------- % of Number of total options Exercise Securities granted to or underlying employees base options in price Expiration Name granted(#) fiscal year ($/share) Date 5% ($) 10% ($) (a)(1) (b)(1) (c)(2) (d) (e) 0% ($) (f) (g) ------ ---------- ------------- --------- ---------- ------------------- ----------- C.B. Hudson 51,734 3.1 27.8125 12-21-10 0 1,022,073 2,666,361 100,000 6.0 27.8125 12-23-09 0 1,749,114 4,432,595 Mark S. McAndrew 53,198 3.2 34.5000 11-17-09 0 1,154,230 2,925,044 100,000 6.0 27.8125 12-23-09 0 1,749,114 4,432,595 Tony G. Brill 40,813 2.4 34.5000 11-17-09 0 885,515 2,244,066 75,000 4.5 27.8125 12-23-09 0 1,311,836 3,324,446 Anthony L. McWhorter 33,374 2.0 34.5000 11-17-09 0 724,112 1,835,039 75,000 4.5 27.8125 12-23-09 0 1,311,836 3,324,446 Gary L. Coleman 22,836 1.4 34.5000 11-17-09 0 495,470 1,255,617 60,000 3.6 27.8128 12-23-09 0 1,049,469 2,659,557 6,467 0.4 27.8125 12-21-10 0 127,764 333,308 Bernard Rapoport 91,518 5.5 34.5000 11-17-09 0 1,985,655 5,032,035 10,000 0.6 27.8125 12-23-09 0 174,911 443,259
- -------- (1) Charles B. Cooper retired September 30, 1999 and was not awarded any stock options in 1999. (2) Options expiring on 11-17-09 and 12-23-09 are non-qualified stock options granted in Torchmark common stock pursuant to the 1998 Incentive Plan with a ten year and two day term at an exercise price equal to the closing price of the Company's common stock on the grant date. Options expiring on 12-23-09 are not exercisable during the first two years after the grant date and vest on 50% of the shares two years after the grant date and on the remaining 50% of the shares three years after the grant date. Options expiring on 11-17-09 are first exercisable six months from the grant date by persons subject to the SEC's Section 16 reporting requirements and are exercisable at a grant by persons not subject to Section 16 reporting requirements. Options expiring on 12-21-10 are non-qualified stock options granted in Torchmark stock with an eleven year term, an exercise price equal to the closing price of the Company's common stock on the grant date and are fully vested upon issuance, but only first exercisable as to 1/10 per year commencing on the first anniversary of the grant date. 10 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
(d) (e) (b) (c) Number of Securities Value of unexercised (a) Shares acquired Value underlying unexercised in-the-money options Name on exercise (#)(1) Realized ($) options at FY-end (#) at FY-end ($) ----- ------------------ ------------ ------------------------- ------------------------- Exercisable Unexercisable Exercisable Unexercisable ----------- ------------- ----------- ------------- C.B. Hudson............. 0 0 980,605 479,132 $4,902,568 $ 686,802 Mark S. McAndrew........ 83,000 1,285,221 76,300 215,698 $ 193,893 $ 125,000 Tony G. Brill........... 58,413 758,985 30,282 207,201 $ 220,678 $ 314,428 Anthony L. McWhorter.... 51,403 818,402 57,778 154,878 $ 108,927 $ 93,750 Gary L. Coleman......... 35,048 526,644 96,218 126,153 $ 90,768 $ 83,084 Charles B. Cooper....... 0 0 123,700 0 $1,101,970 $ 0 Bernard Rapoport........ 140,000 2,090,787 152,225 10,000 $ 0 $ 12,500
- -------- (1) Of the shares shown as acquired on exercise, Messrs. McAndrew, Brill, McWhorter, Coleman and Rapoport retained 26,280, 12,969, 13,598, 8,999 and 35,725 shares, respectively, after cashless option exercises. Pension Plans Torchmark Corporation Pension Plan; Liberty National Life Insurance Company Pension Plan for Non-Commissioned Employees. These plans are non-contributory pension plans which cover 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 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. Benefits at age 65 under the LNL 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 2% for each of the participant's first 30 years of credited service plus 1% for each year of credited service in excess of 30 years (up to a maximum of 10 years) and then reducing that result by a Social Security offset and by other benefits from certain other plans of affiliates. Earnings for purposes of both pension plans 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 $160,000 (as adjusted). Benefits under both pension plans 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 1999, covered compensation was $160,000 for Messrs. Hudson, McAndrew, Brill and Coleman under the TMK Pension Plan and for Mr. McWhorter under the LNL Pension Plan. Vested benefits under the non-qualified Torchmark Supplemental Retirement Plan, in which Messrs. Hudson, McAndrew, McWhorter and Coleman have participated, were frozen as of December 31, 1994 and no additional benefits accrue after that date pursuant to the supplementary retirement plan. Messrs. Hudson, McAndrew, McWhorter and Coleman participate in the Torchmark Supplementary Pension Plan. Mr. Brill does not participate in any supplementary pension plan. Messrs. Hudson, McAndrew, Brill and Coleman have 25 years, 20 years, three years and 18 years of credited service under the TMK Pension Plan, respectively. Mr. McWhorter has 25 years of credited service under the LNL Pension Plan. Messrs. Rapoport and Cooper were not covered by any pension plan prior to their retirements. The following tables show the estimated annual benefits payable under the TMK Pension Plan or LNL 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. Primarily because of the termination of the Supplemental Retirement Plan, the benefits shown below as payable pursuant to the TMK Pension or LNL Pension Plans and the TMK Supplemental Retirement Plan may in most cases exceed the actual amounts paid. 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. 11 Torchmark Pension and Supplemental Retirement Plans*
Final Years of Credited Service Average --------------------------------------------------------------- Earnings 15 20 25 30 35 ---------- ------- ------- --------- --------- --------- $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 1,400,000 630,000 840,000 910,000 980,000 1,050,000 1,600,000 720,000 960,000 1,040,000 1,120,000 1,200,000
- -------- * Benefits paid under a qualified defined benefit plan are limited by law in 1999 to $130,000 per year. The 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 and Coleman have five years less of credited service under the Supplemental Retirement Plan than under the TMK Pension Plan. LNL Pension and TMK Supplemental Retirement Plans*
Final Years of Credited Service Average --------------------------------------------------------------------------- Earnings 15 20 25 30 35 -------- ------- ------- ------- ------- ------- $100,000 30,000 40,000 50,000 60,000 65,000 200,000 60,000 80,000 100,000 120,000 130,000 300,000 90,000 120,000 150,000 180,000 195,000 400,000 120,000 160,000 200,000 240,000 260,000 500,000 150,000 200,000 250,000 300,000 325,000
- -------- * Benefits paid under a qualified defined benefit plan are limited by law in 1999 to $130,000 per year. The 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, Mr. McWhorter has five years less of credited service under the Supplemental Retirement Plan than under the LNL Pension 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 $1,000 for each attended Board meeting, a fee of $500 for each attended Board committee meeting, and an annual retainer of $40,000, 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 an allowance 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 may be fixed by the Board at a discount not to exceed 25% of the fair market value on the grant date or at the fair market value of the stock on the grant date. Commencing with 1997 retainer and meeting and committee fees (assuming attendance at all scheduled meetings), Outside Directors may annually elect to make deferrals of such compensation for the following year into the interest-bearing account of the Non-Employee Director Plan (for amounts earned prior to 1999) and pursuant to the deferred compensation stock option provisions of the 1998 Incentive Plan (for amounts earned in 1999 and in subsequent years). They may subsequently elect to convert such balances to stock options with either fair market value or discounted exercise prices. In December 1998, Messrs. Hagopian, Lanier, McCormick, and Records chose to make such deferrals of 1999 compensation, which were converted into options on 5,044, 4,938, 4,885 and 4,832 shares, respectively, in 1999. 12 (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. 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) Compensation paid to the director serving as Chairman of the Executive Committee is determined annually by the Compensation Committee in their discretion. Each person who served as a 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 will be offered the opportunity to convert the present value of such retirement benefits on that date to options in Company common stock. Other Transactions Robert Richey, Vice President of a Company subsidiary and son of R.K. Richey, received compensation and fringe benefits from that Company subsidiary in 1999 of $133,261. In 1999, the Company paid MidFirst Bank $76,922 in fees as the servicing agent for portions of the Company subsidiaries' commercial real estate portfolios. George J. Records is an officer, director and 45.57% beneficial owner of Midland Financial Co., the parent corporation of MidFirst Bank. Lamar C. Smith is an officer, director and 15% owner of Independent Research Agency for Life Insurance, Inc. (IRA), a life insurance general agency which sells certain insurance products offered by Torchmark subsidiaries pursuant to agency agreements. In 1999, that company, IRA, received commission payments of $39,208,000 for sales of life insurance on behalf of Torchmark subsidiaries, which comprised approximately 28% of IRA's 1999 revenues. R.K. Richey is a 33 1/3% owner of Elgin Development Company, LLC (Elgin Development). On October 1, 1999, Elgin Development and other investors purchased certain investment real estate from Torchmark and its subsidiaries for $ 97,400,000. Mr. Richey's financial interest in the purchase by the Elgin Development group was $1.5 million. 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, 1999, 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 that R.K. Richey amended his 1998 Form 5 to disclose an inadvertently omitted gift of shares to a family member; Louis T. Hagopian filed a late Form 4 reporting a cashless option exercise transaction; Anthony L. McWhorter filed a late Form 4 reporting a cashless option exercise transaction and one additional sale; and Rosemary J. Montgomery amended her 1999 Form 5 to report a change from direct to indirect holdings to reflect a gift of stock to her spouse. 13 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 directors, 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 pursuant to the 1998 Stock Incentive Plan and to determine senior executives eligible to participate in the executive deferred compensation stock option program under the 1998 Incentive Plan. In 1993, the Compensation Committee employed an unaffiliated executive compensation consulting firm, Towers Perrin, to assist it in reviewing executive compensation policies and the payment of bonuses to executives. In 1997, the Compensation Committee utilized an unaffiliated executive compensation consultant from KPMG Peat Marwick LLP to review certain of its executive compensation policies and practices. The Compensation Committee met on several occasions in 1999 with the Chairman to discuss the salaries and bonuses of the five most highly compensated executives, including the Chairman. Also, the Compensation Committee received written materials discussing compensation of persons reporting to the five most highly compensated executives, including the Chairman. 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 focus on a number of factors, including but not limited to, growth in earnings per share, return on equity and pre-tax operating income for holding company executives and on insurance operating income, underwriting income and premium growth for the executives of the Company's insurance subsidiaries. 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 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. 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 Company's Chairman, President and Chief Executive Officer calculates a proposed pool to fund current year bonuses and subsequent year salaries for all executives whose combined cash compensation exceeds $150,000 per year. The proposed salary/bonus pool is determined based upon a formula within a range of approximately 5% that takes into account prior year salaries and bonuses paid, estimated and adjusted earnings per share and estimated return on equity, adjusted for certain minimum tax-effected earnings per share and minimum return on equity. The amount of the proposed pool is submitted to the Compensation Committee for its review and approval. The Compensation Committee, in consultation with the Company's Chairman, President and 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 14 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. 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 1999 was adopted in April 1998. It has as its stated purpose attracting and retaining employees who contribute to the Company's success and enabling those persons to participate in that long-term success and growth through an equity interest in the Company. To this end, the Compensation Committee, as administrator of the 1998 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. In 1999, for the five most highly compensated executive officers (excluding Messrs. Cooper and Rapoport), the options granted were in proportion to current compensation adjusted by a subjective factor ranging from .083% to .160%. 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 stock options 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. Deferred Compensation Option Program The Company's 1998 Incentive Plan, adopted in April, 1998, contains provisions permitting designated executives to receive deferred compensation stock options. The plan permits eligible executives to defer salary and/or bonus on an annual basis into an interest-bearing account and subsequently on a one time basis within a limited time period to elect to convert all or a portion of their deferred compensation into Company stock options granted at market value or at a discount not to exceed 25%. The Compensation Committee did not designate any Company executives to participate in this program in 1999. However, Messrs. Hudson and Coleman elected to receive all or a portion of their respective 1999 bonuses in the form of stock options under the regular provisions of the 1998 Incentive Plan. Compensation of Chief Executive Officer C. B. Hudson joined the Company subsidiary Globe in 1974 as its Chief Actuary and 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. In the three-year period 1997-1999, which is covered by the Summary Compensation Table on page 8, Torchmark's diluted earnings per share (excluding a non-recurring charge in the fourth quarter of 1999) grew from $1.67 per share to $2.55 per share. Return on equity increased to 16.2% in 1999 from 15.1% in 1998, after declining from 18.2% in 1997 as a result of Torchmark's receipt of the proceeds of the initial public offering of 15 its former asset management subsidiary. Torchmark repurchased 10.9 million shares in the 1997-1999 period, 7.8% of the outstanding shares at the beginning of that period. The Compensation Committee gave consideration to the factors discussed on page 14 in the compensation principles section as well as to Mr. Hudson's ability and determination and his vision and leadership in continuing to enhance the long term value of the Company. Mr. Hudson was awarded a 1999 discretionary bonus of $400,000 from the pool by the Compensation Committee, all of which he chose to receive in the form of Company stock options. Mr. Hudson's base salary and any stock options awarded to him are not directly tied to any one or a group of specific measures of corporate performance. His base salary is determined by the Compensation Committee considering his tenure of service with the Company and its subsidiaries and affiliates, his current job responsibilities, the progression of responsibilities and positions he has assumed in the Company over the course of his career and a comparison of salaries paid at peer companies. Any stock options awarded to Mr. Hudson are also not directly related to specific measures of corporate performance. Such award is generally based on his current compensation. Compensation of Other Executives The other executive officers listed in the Summary Compensation Table in the Proxy Statement are compensated by salary and a discretionary bonus which may be impacted by a number of factors, including but not limited to, growth in earnings per share and return on equity at the Company and growth in insurance operating income, underwriting income and premium of the various Company subsidiaries, affiliates or areas of operation for which each is responsible. 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 bonus award to such an executive is then recommended by the Chairman, President and Chief Executive Officer in his discretion based upon an evaluation of a number of factors, including those listed above, to the Compensation Committee for its decision. Mr. McAndrew serves as the chief operating officer of the Company's subsidiaries United American, Globe and American Income, holding the titles Chairman, President and Chief Executive Officer in those companies. He is responsible for the Company's direct response insurance marketing. Mr. McAndrew was awarded a $150,000 discretionary bonus by the Compensation Committee for 1999, which he chose to receive in cash. Mr. Brill is the Executive Vice President and Chief Administrative Officer in charge of insurance administration for Torchmark and all its insurance subsidiaries. He is primarily responsible for the Company's Year 2000 compliance efforts. The Compensation Committee awarded Mr. Brill a $100,000 discretionary bonus for 1999, which he elected to take in cash. Mr. McWhorter is the Chairman, President and Chief Executive Officer of Liberty and UILIC, serving as the Chief Operating Officer of Liberty since 1994 and of UILIC since 1998. Mr. McWhorter was awarded a $120,000 discretionary bonus by the Compensation Committee for 1999, which he elected to be 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 an $80,000 bonus, $50,000 of which he chose to take in Torchmark stock options and $30,000 of which he was paid in cash. Mr. Rapoport served for a number of years prior to his September 1999 retirement as the Chairman of the Board and Chief Executive Officer of American Income. Mr. Cooper served as President and Chief Operating Officer of American Income from 1977 until his retirement on September 30, 1999. Because of their retirements, neither Mr. Rapoport nor Mr. Cooper received a bonus for 1999. 16 Compensation and Company Performance As indicated above, the annual aspect of executive compensation for holding company executives of Torchmark centers on growth in the 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. Over the last year, pre-tax operating income has increased 1% from $490 million in 1998 to $494 million in 1999. Excluding a non-recurring charge, pre-tax operating income increased 5% to $515 million in 1999. Diluted earnings per share excluding the non-recurring charge grew from $2.29 per share in 1998 to $2.55 per share in 1999, an 11% change. Return on equity increased 7% from 15.1% in 1998 to 16.2% in 1999. Premium income, which made up 85% of the company's total revenues, rose to $4.88 billion in 1999 from $1.75 billion in 1998. Underwriting income comprised 63% of the Company's pre- tax operating income for 1999. Underwriting income has decreased from $317 million to $313 million in 1999 over 1998. The above performance resulted in compensation increases to certain of the Company's executives as a group shown in the Summary Compensation Table on page 8. Cash compensation paid persons who are listed in that table other than Messrs. Cooper and Rapoport, who retired as executive officers of a Company subsidiary in September 1999, increased 14% in 1999 over 1998, because Messrs. McAndrew, Brill and McWhorter elected to be paid all of their bonuses in cash and Mr. Coleman elected to receive stock options for only a portion of his bonus, taking the balance as a cash payment. 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 earnings per share from continuing operations excluding realized investment gains, the related acquisition cost adjustment, and the equity in Vesta earnings have increased 53% and rose from $1.67 in 1996 to $2.55 in 1999. Louis T. Hagopian, Chairman Joseph M. Farley Joseph L. Lanier, Jr. 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. 17 COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN AMONG TORCHMARK CORPORATION S&P 500 INDEX AND THE S&P INSURANCE (LIFE/HEALTH) INDEX [LINE GRAPH] 12/94 12/95 12/96 12/97 12/98 12/99 ----- ----- ----- ----- ----- ----- TORCHMARK CORP $100 $133 $152 $259 $255 $212 S & P 500 $100 $138 $169 $226 $290 $351 S & P INSURANCE (LIFE & HEALTH) $100 $144 $175 $219 $232 $199 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 Insurance (Life/Health) Index (S&P Insurance (Life/Health)). Torchmark is one of the companies whose stock is included within both the S&P 500 and the S&P Insurance (Life/Health). Information for graph produced by Research Data Group, Inc. 18 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 2000, the proposal must be received by the Company at its home office, 2001 Third Avenue South, Birmingham, Alabama 35233, on or before November 25, 2000. 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 10, 2001. 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 1999, 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, 1999 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 /s/ Carol A. McCoy ----------------------------- Carol A. McCoy Associate Counsel & Corporate Secretary March 23, 2000 19 EX-23.(A)(F) 6 CONSENT OF DELOITTE & TOUCHE LLP Exhibit 23(a)-(f) INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements (Nos. 2-76378, 2-93760, 33-23580, 33-1032 and 33-65507) on Forms S-8 of our report dated January 28, 2000, appearing in this Annual Report on Form 10-K of Torchmark Corporation for the year ended December 31, 1999. DELOITTE & TOUCHE LLP Dallas, Texas March 23, 2000 EX-23.(G)(L) 7 CONSENT OF KPMG LLP EXHIBITS 23(g)-(l) CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Torchmark Corporation: We consent to incorporation by reference in the Registration Statements (Nos. 2-76378, 2-93760, 33-23580, 33-1032, 33-65507 and 333-27111) on Forms S-8 of our report dated January 29, 1999, except for note 17 which is as of February 10, 1999 relating to the consolidated balance sheet of Torchmark Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, comprehensive income, shareholders' equity, and cash flows and related schedules for each of the years in the two-year period ended December 31, 1998, which appears in the December 31, 1999 Annual Report on Form 10-K of Torchmark Corporation. KPMG LLP Birmingham, Alabama March 23, 2000 EX-24 8 POWERS 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, 1999. 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:___________________________ 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, 1999. 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:__________________________ 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, 1999. 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/ Louis T. Hagopian -------------------------------- Louis T. Hagopian, Director Date:___________________________ 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, 1999. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form 10-K, 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/ C. B. Hudson ------------------------------------------- C. B. Hudson, Chairman, President, Chief Executive Officer and Director Date:______________________________________ 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, 1999. 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:__________________________________ 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, 1999. 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, Director Date:________________________________ 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, 1999. 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:___________________________________ 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, 1999. Without limiting the generality of the foregoing, the powers granted include the power and authority to execute and file the Form-10, 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/ R.K. Richey ---------------------------------- R. K. Richey, Director Date:_____________________________ 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, 1999. 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/ George J. Records ------------------------------------ George J. Records, Director Date:_______________________________ 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, 1999. 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:_____________________________ 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, 1999. 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:______________________________________ EX-27 9 FINANCIAL DATA SCHEDULE
7 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 5,679,795 0 0 29,189 94,599 16,379 6,187,810 14,441 0 1,893,322 12,131,664 4,869,241 85,344 215,923 81,919 789,949 193,324 0 147,801 1,845,536 12,131,664 1,884,086 447,337 (110,971) 6,443 1,236,547 247,800 340,140 402,408 (134,320) 258,930 (1,060) 0 16,086 273,956 2.06 2.04 0 0 0 0 0 0 0
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