-----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, UkJUMyWDdRt+tACm+qlhfRtv9DpPn5nAqlrKgqlS2bWvQYma2VoJ+woqzoGbctQg VD7jEVprMb8Hy3YTw8bG8w== 0000931763-99-000710.txt : 19990315 0000931763-99-000710.hdr.sgml : 19990315 ACCESSION NUMBER: 0000931763-99-000710 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990312 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: 99563759 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, 1998 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 CUSIP NUMBER: CLASS: 8 1/4% Senior 891027 AE 4 Debentures due 2009 7 7/8% Notes due 891027 AF 1 2023 7 3/8% Notes due 891027 AG 9 2013 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: $4,460,867,828 THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK, AS OF FEBRUARY 28, 1999: 134,667,708 DOCUMENTS INCORPORATED BY REFERENCE PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 29, 1999, PART III INDEX OF EXHIBITS (PAGES 81 THROUGH 84) TOTAL NUMBER OF PAGES INCLUDED ARE 90 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 1,829 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 1,222 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 2,370 Waddell & Reed Exclusive Agency Insurance Company and annuities. representatives; indepen- Birmingham, Alabama dent agents; 184 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 43,000 independent agents Independent Agency Insurance Company insurance including in the U.S., Puerto Rico and and Exclusive Agency McKinney, Texas Medicare Supplement Canada; 1,750 exclusive coverage and long-term care. agents in 67 branch offices.
Additional information concerning industry segments may be found in Management's Discussion and Analysis and in Note 18--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 -------------------------- ------------------------------ 1998 1997 1996 1998 1997 1996 -------- -------- -------- ---------- ---------- -------- Whole life: Traditional......... $115,154 $114,934 $112,817 $ 575,888 $ 551,047 $521,015 Interest-sensitive.. 17,131 14,981 16,638 162,046 163,058 167,912 Term................. 108,469 94,943 82,331 306,785 270,905 243,210 Other................ 3,713 5,521 2,955 17,928 22,369 14,388 -------- -------- -------- ---------- ---------- -------- $244,467 $230,379 $214,741 $1,062,647 $1,007,379 $946,525 ======== ======== ======== ========== ========== ========
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 -------------------------- ------------------------------ 1998 1997 1996 1998 1997 1996 -------- -------- -------- ---------- ---------- -------- Direct response...... $ 93,500 $ 79,412 $ 62,029 $ 260,320 $ 232,535 $202,370 Exclusive Agents: Liberty National.... 45,532 43,335 45,394 298,082 298,698 297,581 American Income..... 53,576 55,245 54,382 216,291 203,475 188,039 United Investors.... 15,386 10,261 10,715 99,775 88,842 84,495 United American..... 5,481 6,562 11,466 21,390 20,978 20,537 Independent Agents: Military............ 16,891 15,781 8,165 98,902 86,209 74,150 United American..... 9,401 15,225 18,182 41,078 42,725 40,130 Other............... 4,700 4,558 4,408 26,809 33,917 39,223 -------- -------- -------- ---------- ---------- -------- $244,467 $230,379 $214,741 $1,062,647 $1,007,379 $946,525 ======== ======== ======== ========== ========== ========
- -------- 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, 1998 was $234 million and the average interest rate earned on these loans was 6.7% in 1998. Interest income earned on policy loans was $15.3 million in 1998, $14.4 million in 1997, and $13.2 million in 1996. There were 198 thousand and 196 thousand policy loans outstanding at year-end 1998 and 1997, 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 1998, 16.5% in 1997, and 17.1% in 1996. The following table presents an analysis of changes to the Torchmark subsidiaries' life insurance business in force:
(Amounts in thousands) 1998 1997 1996 ---------------------- ---------------------- ---------------------- Number of Amount of Number of Amount of Number of Amount of policies Insurance policies Insurance policies Insurance --------- ------------ --------- ------------ --------- ------------ In force at January 1,.. 9,630 $ 91,869,995 9,392 $ 86,948,151 9,196 $ 80,391,376 New issues.............. 1,452 21,448,243 1,441 20,267,520 1,320 18,718,479 Business acquired....... -0- -0- -0- -0- 38 2,573,996 Other increases......... 1 75,849 1 96,788 1 104,490 Death benefits.......... (107) (323,393) (110) (307,752) (111) (289,687) Lapses.................. (1,006) (14,589,649) (895) (13,358,973) (880) (13,008,065) Surrenders.............. (151) (1,438,085) (149) (1,383,373) (140) (1,296,744) Other decreases......... (197) (703,901) (50) (392,366) (32) (245,694) ------ ------------ ----- ------------ ----- ------------ In force at December 31,.................... 9,622 $ 96,339,059 9,630 $ 91,869,995 9,392 $ 86,948,151 ====== ============ ===== ============ ===== ============ Average policy size (in dollar amounts): Direct response--Juve- nile.................. $ 6,688 $ 6,725 $ 6,776 Other.................. 11,411 10,689 10,246
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 Medicare sends directly to the Torchmark insurers. 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, 1998 by marketing method:
(Amounts in thousands) Annualized Annualized Premium Issued Premium in Force -------------------------- -------------------------- 1998 1997 1996 1998 1997 1996 -------- -------- -------- -------- -------- -------- Direct response........... $ 3,884 $ 3,001 $ 4,990 $ 9,617 $ 7,248 $ 5,141 Exclusive agents: Liberty National......... 11,124 11,541 11,258 143,668 138,179 122,305 American Income.......... 9,138 10,052 10,645 44,300 43,552 42,140 United American.......... 64,245 39,616 31,565 172,927 141,780 131,250 Independent agents: United American.......... 50,508 42,643 42,523 426,351 431,293 447,317 -------- -------- -------- -------- -------- -------- $138,899 $106,853 $100,981 $796,863 $762,052 $748,153 ======== ======== ======== ======== ======== ========
The following table presents supplemental health annualized premium information for the three years ended December 31, 1998 by product category: (Amounts in thousands)
Annualized Annualized Premium Issued Premium in Force -------------------------- -------------------------- 1998 1997 1996 1998 1997 1996 -------- -------- -------- -------- -------- -------- Medicare Supplement...... $102,421 $ 65,161 $ 65,767 $553,737 $522,054 $523,902 Cancer................... 10,248 10,757 10,676 144,900 137,640 119,428 Other health related policies................ 26,230 30,935 24,538 98,226 102,358 104,823 -------- -------- -------- -------- -------- -------- $138,899 $106,853 $100,981 $796,863 $762,052 $748,153 ======== ======== ======== ======== ======== ========
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) (Amounts in millions) Collections Deposit Balance For the year ended December 31, At December 31, -------------------------------- -------------------------- 1998 1997 1996 1998 1997 1996 ---------- ---------- ---------- -------- -------- -------- Fixed annuities......... $ 64,687 $ 76,930 $ 72,392 $ 647.3 $ 611.0 $ 571.9 Variable annuities...... 299,005 247,446 247,461 2,343.5 1,821.2 1,375.5 ---------- ---------- ---------- -------- -------- -------- $ 363,692 $324,376 $ 319,853 $2,990.8 $2,432.2 $1,947.4 ========== ========== ========== ======== ======== ========
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 91% of total investments at December 31, 1998. Approximately 13% 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. More than 70% 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--Investment Operations 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, 1998 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................................................ $1,410,967 24.5% AA................................................. 591,326 10.3 A.................................................. 2,540,294 44.1 BBB................................................ 849,481 14.7 BB................................................. 267,086 4.6 B.................................................. 293 0.0 Less than B........................................ 2,296 0.0 Not rated.......................................... 106,704 1.8 ---------- ----- $5,768,447 100.0% ========== =====
4 The following table presents the market value of fixed maturity investments of Torchmark's insurance subsidiaries at December 31, 1998 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*. $4,592,764 80.9% 2. High quality..... 807,433 14.3 3. Medium quality... 249,731 4.4 4. Low quality...... 25,500 0.4 5. Lower quality.... 2,405 0.0 6. In or near de- fault.............. 0 0.0 ---------- ----- $5,677,833 100.0% ========== =====
* Includes $701 million of exempt securities or 12.4% 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 $35,000 through age 40. 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 17--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 the addition of premiums to be received 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 1,829 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 1,222 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. The Waddell & Reed sales force, consisting of 2,370 sales representatives, markets the life insurance products, fixed annuities, and variable annuities of United Investors Life. This Agency also distributes health insurance products of United American. This sales force continues to market Torchmark's insurance products subsequent to the spin-off of Waddell & Reed under a general agents' contract. United American offers life and health insurance targeted to various special markets through approximately 1,750 United American exclusive agents in 67 branch offices throughout the United States. Independent Agents. Torchmark insurance companies offer a variety of life and health insurance policies through approximately 43,000 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 non-commissioned military officers who sell exclusively to commissioned and non-commissioned 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 effort. In addition to competition with other insurance companies, Torchmark also faces increasing competition from other financial services organizations. While there are a number of larger insurance companies competing with Torchmark that have greater resources and have considerable marketing forces, there is no individual company dominating 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 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, 1994; 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 1997 and 1996.
Usual Reported Company Ratio Name Range Value - --------- ---------------------------------------------- --------- -------- 1997: Liberty Investment in Affiliate to Capital and Surplus 0 to 100 199 American Income Non-admitted to Admitted Assets 10 11 1996: United American Change in Capital and Surplus 50 to -10 -15 American Income Non-admitted to Admitted Assets 10 11 Liberty Investment in Affiliate to Capital and Surplus 0 to 100 240 Liberty Change in Reserving Ratio 20 to -20 -20
Explanation of Ratios: 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 minus 10% and greater than 50% to be unusual. United American's ratios of minus 15% in 1996 was caused by the payment of dividends to Torchmark in excess of its statutory net income. This transaction did not affect the consolidated equity of Torchmark at December 31, 1996. Also, this transaction did not affect United American's ability to do business. Non-admitted 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 11% in 1997 and in 1996 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 fully recognized as assets in Torchmark's consolidated financial statements. 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 and 1996 is 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 8 shareholders. All intercompany investment is eliminated in consolidation, and the internal organizational structure has no bearing on consolidated financial condition or results. Furthermore, this intercompany investment does not affect Liberty's ability to do business. Change in Reserving Ratio--The change in reserving ratio represents the number of percentage points of difference between the reserving ratio for current and prior years. Liberty's ratio was slightly over the usual range in 1995, returning to the normal range in 1996, as a result of purchasing a block of business in late 1995. The assumption of this business caused an increase in 1995 year-end reserves. No allowance is made for special transactions such as this in the calculation of this ratio. 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. Year 2000 Compliance A full report of Torchmark's risks, project plan, state of readiness, contingency plans, and other matters concerning Year 2000 compliance is found in Management's Discussions and Analysis of Financial Condition and Results of Operations on page 34 of this report. Personnel At the end of 1998, Torchmark had 1,820 employees and 2,261 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. Liberty leases approximately 160,000 square feet of this building to unrelated tenants. Liberty also operates from 59 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). 9 Globe owns a 300,000 square foot office building at 204 North 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 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. All of the other Torchmark companies lease their office space in various cities in the U.S. A Torchmark subsidiary, Torchmark Development Corporation ("TDC"), as a part of a joint venture with unaffiliated entities, is developing 3,400 acres as a planned community development known as Liberty Park, which is located along Interstate 459 in Birmingham, Alabama. TMK Income Properties, L.P. ("TIP"), a partnership which is wholly-owned by Torchmark subsidiaries, owns seven office buildings. These properties include: 1.) a 330,000 square foot office building complex at 14000 Quail Springs Parkway Plaza Boulevard, Oklahoma City, which is 96% leased; 2.) six office buildings in Liberty Park in suburban Birmingham, Alabama containing approximately 675,000 square feet which are 95% leased. 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. As a practical matter, a jury's discretion regarding the amount of a punitive damage award is not limited by any clear, objective criteria under Alabama law. Accordingly, the likelihood or extent of a punitive damage award in any given case is virtually impossible to predict. As of December 31, 1998, Liberty was a party to approximately 125 active lawsuits (including 29 employment related cases and excluding interpleaders and stayed cases), more than 110 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 10 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. As previously reported, Liberty has been subject to 76 individual cancer policy lawsuits pending in Alabama and Mississippi, which were stayed or otherwise held in abeyance pending final resolution of Robertson v. Liberty National Life Insurance Company (Case No. CV-92-021). Liberty filed motions to dismiss these lawsuits based upon the U.S. Supreme Court opinion issued in Robertson in March 1997. Only two of these individual cancer policy lawsuits remain, the other such suits having been dismissed. As previously reported, Torchmark, its insurance subsidiaries Globe and United American, and certain Torchmark officers were named as defendants in purported class action litigation filed in the District Court of Oklahoma County, Oklahoma (Moore v. Torchmark Corporation, Case No. CJ-94-2784-65, subsequently amended and restyled Tabor v. Torchmark Corporation). This suit claims damages on behalf of individual health policyholders who are alleged to have been induced to terminate such policies and to purchase Medicare Supplement and/or other insurance coverages. On February 6, 1998, the defendants renewed their motion to dismiss the class claims for failure to prosecute. The District Court, in an order dated April 2, 1998, allowed bifurcation of Tabor into Medicare Supplement policy claims and non-Medicare Supplement policy claims. The non-Medicare Supplement claims were stayed pending disposition of a related case involving the same plaintiffs filed in Mississippi while discovery was allowed to proceed on plaintiffs' motion to certify a class of Medicare Supplement policyholders' claims. 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 does 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. 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 have 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. It has been previously reported that Liberty was a party to 53 individual cases filed in Chambers County, Alabama involving allegations that an interest-sensitive life insurance policy would become paid- 11 up or self-sustaining after a specified number of years. Only one of these cases remains pending with all others having been settled and dismissed by the Chambers County Circuit Court. Torchmark has previously reported the case of Lawson v. Liberty National Life Insurance Company (Case No. CV-96-01119), filed in the Circuit Court of Jefferson County, Alabama, where the plaintiffs sought to represent a class of interest-sensitive life insurance policyholders, including those allegedly induced to exchange life insurance policies or where the existing policy's cash value was allegedly depleted, in litigation alleging fraud, negligence and breach of contract in the sale or exchange of interest- sensitive policies by Liberty. Torchmark was subsequently added as a defendant. In May 1996, the Circuit Court entered an order conditionally certifying a plaintiffs class, which was subsequently redefined in March 1997. The Circuit Court's order allowed the parties to challenge the conditional certification based upon subsequent discovery in the case. In March 1998, the defendants challenged the conditional certification and a hearing on final certification was held in October 1998. On February 9, 1999, the Circuit Court entered an order decertifying the conditional class and denying all petitions to certify a class in Lawson. Purported class action litigation was filed on January 2, 1996 against Torchmark, Torch Energy Advisors Incorporated, and certain Torch Energy subsidiaries and affiliated limited partnerships in the Circuit Court of Pickens County, Alabama (Pearson v. Torchmark Corporation, Case No. CV-95- 140). Plaintiff alleges improper payment of royalties and overriding royalties on coalbed methane gas produced and sold from wells in Robinson's Bend Coal Degasification Field, seeks certification of a class and claims unspecified compensatory and punitive damages on behalf of such class. On April 11, 1996, Torchmark's motion to change venue was granted and the case has been transferred to the Circuit Court of Tuscaloosa County, Alabama. Torchmark's motion to dismiss remains pending while discovery is proceeding. On February 10, 1999, the plaintiffs filed a request for a class certification hearing and to set a trial date for the Pearson case. 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 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. It has been previously reported that in July 1998, a jury in U.S. District Court in the Middle District of Florida recommended an aggregate total verdict amounting to $21.6 million against Liberty in Hipp v. Liberty National Life Insurance Company (Case No. 95-1332-CIV-T-17A). This case, originally filed in 1995 in the Florida state court system, is a collective action under the Fair Labor Standards Act, alleging age discrimination by Liberty in violation of the Age Discrimination in Employment Act and the Florida Civil Rights Act. The plaintiffs, ten present or former Liberty district managers, sought damages for lost wages, loss of future earnings, lost health and retirement benefits and lost raises and expenses. Three of these plaintiffs, Florida residents, also sought compensatory and punitive damages allowable under Florida law. On November 20, 1998, the District Court remitted the $10 million punitive damage portion of the jury 12 verdict to $0, thus reducing the total verdict to $11 million (including an advisory verdict of $3.2 million in front pay awards). Additional revised front pay submissions were made by the plaintiffs to the District Court in December 1998 and Liberty responded thereto in January 1999. Liberty is awaiting the entry of a final judgment in the Hipp case and thereafter will pursue all available post trial and appellate relief. 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 1998. 13 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 6,738 shareholders of record on December 31, 1998, excluding shareholder accounts held in nominee form. On August 1, 1997, Torchmark paid a 100% stock dividend to its common shareholders of record on July 1, 1997. 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 100% stock dividend and 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 15--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:
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
1997 Market Price ------------ Dividends Quarter High Low Per Share ------- -------- -------- --------- 1 $26.7031 $21.5781 $ .1450 2 31.7031 22.6563 .1450 3 35.9375 30.0469 .1450 4 36.9531 30.3750 .1500
Year-end closing price.................$36.4219 14 Item 6. Selected Financial Data The following information should be read in conjunction with Torchmark's Consolidated Financial Statements and related notes reported elsewhere in this Form 10-K: (Amounts in thousands except per share and percentage data)
1998 1997 1996 1995 1994 Year ended December 31, ----------- ----------- ---------- ---------- ---------- Premium revenue: Life................... $ 959,766 $ 909,992 $ 854,897 $ 772,257 $ 601,633 Health................. 759,910 739,485 732,618 750,588 773,375 Other ................. 33,954 28,527 22,404 23,438 13,866 Total................. 1,753,630 1,678,004 1,609,919 1,546,283 1,388,874 Net investment income... 459,558 429,116 399,551 377,338 344,015 Realized investment gains (losses)......... (57,637) (36,979) 5,830 (14,323) (2,551) Total revenue........... 2,157,876 2,071,103 2,016,416 1,910,454 1,732,350 Net operating income(1). 324,315 273,730 240,637 219,864 216,994 Net income from continuing operations.. 255,776 260,429 252,815 217,958 215,873 Net income.............. 244,441 337,743 311,372 143,235 268,946 Net income available to common shareholders.... 244,441 337,743 311,372 143,235 268,142 Annualized premium issued: Life................... 244,467 230,379 214,741 217,988 149,833 Health................. 138,899 106,853 100,981 103,491 122,663 Total................. 383,366 337,232 315,722 321,479 272,496 Per common share: Basic earnings: Net income............ 1.75 2.43 2.19 1.00 1.86 Net operating income(1)............ 2.32 1.97 1.69 1.54 1.50 Net income from continuing operations........... 1.83 1.87 1.78 1.52 1.49 Diluted earnings: Net income............ 1.73 2.39 2.17 0.99 1.85 Net operating income(1)............ 2.29 1.94 1.67 1.52 1.49 Net income from continuing operations........... 1.81 1.84 1.76 1.51 1.48 Cash dividends paid.... 0.58 0.59 0.58 0.57 0.56 Return on average common equity, excluding effect of SFAS 115, Vesta earnings, and discontinued operations............. 15.1% 18.2% 18.4% 18.3% 19.5% Basic average shares outstanding............ 139,999 139,202 142,460 143,188 144,192 Diluted average shares outstanding............ 141,352 141,431 143,783 144,228 145,192 - ------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 As of December 31, ----------- ----------- ---------- ---------- ---------- Cash and invested assets................. $ 6,417,511 $ 6,473,096 $5,863,163 $5,724,180 $4,913,925 Total assets............ 11,249,028 11,127,648 9,893,964 9,445,623 8,144,002 Short-term debt......... 355,392 347,152 40,910 189,372 250,116 Long-term debt.......... 383,422 564,298 791,880 791,988 791,518 Shareholders' equity.... 2,259,528 1,932,736 1,629,343 1,588,952 1,242,603 Per common share (2)... 16.51 13.80 11.69 11.09 8.69 Per common share excluding effect of SFAS 115.............. 15.43 12.90 11.42 10.16 9.65 Annualized premium in force: Life................... 1,062,647(3) 1,007,379 946,525 869,366 796,955 Health................. 796,863 762,052 748,153 759,059 812,371 Total................. 1,859,510(3) 1,769,431 1,694,678 1,628,425 1,609,326
- ------------------------------------------------------------------------------- (1) Excludes realized investment gains (losses), the related adjustment to deferred acquisition costs, equity in Vesta earnings, and discontinued operations. (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. 15 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) Interest rate changes that adversely affect product sales and/or investment portfolio yield; 5) Increased pricing competition; 6) Adverse regulatory developments; 7) Adverse litigation results; 8) Adverse Year 2000 compliance results; 9) Developments involving Vesta Insurance Group, Inc., described more fully elsewhere in this document under the caption "Transactions involving Vesta Insurance Group" on page 34 of this report; 10) The inability of Torchmark to achieve the anticipated levels of administrative and operational efficiencies; 11) The customer response to new products and marketing initiatives; 12) Adverse levels of mortality, morbidity, and utilization of healthcare services relative to Torchmark's assumptions; and 13) The inability of Torchmark to obtain timely and appropriate premium rate increases. 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. 16 RESULTS OF OPERATIONS In the analysis and comparison of Torchmark's operating results with prior periods, 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 Asset Management Operations. 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. (See the discussion on Investments on page 27, Liquidity on page 31, and Capital Resources on page 31 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 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. 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 and $66 million for 1996, when Torchmark owned 100% of Waddell & Reed for the entire periods. 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 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. 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. 17 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) Torchmark's pro rata share of Vesta Insurance Group's ("Vesta's") adjustment to its equity as a result of the accounting irregularities and earnings restatement reported by Vesta in the second quarter of 1998, amounting to a $13 million loss after tax; 3) The $54 million nonrecurring expenses of the Asset Management Operations (Waddell & Reed) spin-off; 4) The nonrecurring loss on the disposal of energy operations in 1996 in the after-tax amount of $7 million; and 5) 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. 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 $2 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 adjustment and the disposal of energy operations is discussed on page 34 and the redemption of Torchmark debt is discussed under the caption "Capital Resources" on page 32 of this report. Net operating income is then further divided into three categories: continuing insurance operations, discontinued operations, and Torchmark's equity in the earnings of Vesta. Continuing insurance operations consists of the operations of Torchmark's insurance subsidiaries and corporate activities. The operations of this group is reflective of Torchmark's operations after the Waddell & Reed spin-off. Discontinued operations include the discontinued asset management activities of Waddell & Reed. A reconciliation of net operating income from continuing insurance operations to net income on a per diluted share basis is as follows: Reconciliation of Per Share Insurance Net Operating Income to Reported Net Income*
1998 1997 1996 ----- ----- ----- Insurance net operating income......................... $2.29 $1.94 $1.67 Discontinued Asset Management operations............... .34 .55 .46 Equity in Vesta earnings (losses)...................... (.03) .07 .06 ----- ----- ----- Net operating income--all operations................... 2.60 2.56 2.19 Realized investment gains (losses), net of tax......... (.36) (.17) .03 Vesta restatements, net of tax......................... (.09) -- -- Cost of spin-off--Asset Management..................... (.38) -- -- Loss on disposal of energy operations, net of tax...... -- -- (.05) Loss on redemption of debt, net of tax................. (.04) -- -- ----- ----- ----- Net income............................................ $1.73 $2.39 $2.17 ===== ===== =====
- -------- * Diluted share basis In accordance with accounting rules, 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 18 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, -------------------------- 1998 1997 1996 -------- -------- -------- Insurance net operating income: Amount.......................................... $324,315 $273,730 $240,637 Per Share: Basic........................................... 2.32 1.97 1.69 Diluted......................................... 2.29 1.94 1.67 Net operating income--all continuing and discontinued operations: Amount.......................................... 367,720 361,908 315,206 Per Share: Basic........................................... 2.63 2.60 2.21 Diluted......................................... 2.60 2.56 2.19 Net income: Amount.......................................... 244,441 337,743 311,372 Per Share: Basic........................................... 1.75 2.43 2.19 Diluted......................................... 1.73 2.39 2.17
Insurance Operations. Revenues in 1998 were $2.16 billion, growing 4% over 1997 revenues of $2.07 billion. Revenues rose 3% in 1997 over 1996 revenues of $2.02 million. After adjustment for realized investment gains and losses in each year, revenues gained 5% in 1998 from $2.11 billion in 1997 to $2.22 billion in 1998. They rose 5% in 1997 over the prior year. Total premium increased $76 million or 5% in 1998, accounting for 70% of the $107 million increase in total revenues excluding realized gains and losses. Life insurance premium increased $50 million, or 5% and health premium grew $20 million or 3% in 1998. Net investment income increased 7% in 1998 to $460 million. The $97 million or 5% growth in 1997 revenues excluding realized investment gains and losses resulted largely from the increase in life premium of $55 million or 6%. Investment income, which rose 7%, also contributed $29 million to 1997 revenue growth. Other operating expenses have declined in both 1998 and 1997 from the respective prior year. They declined from $120 million in 1997 to $117 million in 1998. In 1997, expenses declined $6 million or 5%, primarily due to a reduction in litigation expense. As a percentage of revenues, excluding realized gains and losses, other operating expenses declined in each period and were 5.3% in 1998, 5.6% in 1997, and 6.2% in 1996. 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 30 of this report. The effective tax rate for Torchmark was 34.5% in 1998, compared with 35.3% in 1997 and 35.8% in 1996. Excluding goodwill, the effective tax rates for insurance operations were 33.0%, 32.9%, and 33.5% in 1998, 1997 and 1996, respectively. The 1997 decline in the effective rate resulted from additional energy tax credits that were available as a part of the consideration from the 1996 disposition of the energy segment. The following table is a summary of Torchmark's continuing insurance net operating income. Net underwriting income is defined by Torchmark management as premium income less net policy obligations, commissions, acquisition expenses, and insurance administrative expenses. Excess investment income is defined as tax equivalent net investment income reduced by the interest credited to 19 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 Insurance Net Operating Income (Dollar amounts in thousands)
1998 1997 1996 ---------------- ---------------- ---------------- % of % of % of Amount Total Amount Total Amount Total --------- ----- --------- ----- --------- ----- Insurance underwriting income before other income and administra- tive expenses: Life................... $ 252,556 60.8% $ 241,038 60.0% $ 222,004 57.5% Health................. 139,445 33.6 141,540 35.3 148,097 38.4 Annuity................ 23,423 5.6 19,025 4.7 15,960 4.1 Other.................. 0 7 18 --------- --------- --------- Total .................. 415,424 100.0% 401,610 100.0% 386,079 100.0% ===== ===== ===== Other income............ 4,488 3,141 2,936 Administrative expenses. (102,559) (101,950) (108,020) --------- --------- --------- Insurance underwriting income excluding Family Service.......... 317,353 302,801 280,995 Insurance underwriting income--Family Service.. 1,393 3,685 4,200 Excess investment income. 206,119 143,476 118,872 Corporate expense........ (12,061) (13,953) (13,798) Goodwill amortization.... (12,075) (12,074) (12,074) Tax equivalency adjust- ment.................... (11,143) (9,951) (10,638) --------- --------- --------- Pretax insurance net op- erating income......... 489,586 413,984 367,557 Income tax............... (165,271) (140,254) (126,920) --------- --------- --------- Insurance net operating income.................. $ 324,315 $ 273,730 $ 240,637 ========= ========= ========= Insurance net operating income per diluted share................... $ 2.29 $ 1.94 $ 1.67 ========= ========= =========
Pretax insurance net operating income rose 18% in 1998 after a 13% increase in 1997 due to increases in both periods in insurance underwriting income and investment results and declines in financing costs. 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 discussion of each of Torchmark's segments follows. Life insurance. Life insurance is Torchmark's largest segment, with life premium representing 55% of total premium and life underwriting income before other income and administrative expense representing 61% of the total. Sales of this group of products continues to be emphasized because of its higher underwriting margins and larger asset base resulting from higher reserve levels. A larger asset base provides Torchmark the opportunity to increase investment income. Life insurance premium increased 5% in 1998 to $960 million from $910 million in 1997. Life premium rose 6% in 1997. Sales of life insurance, in terms of annualized premium, were $244 million in 1998, increasing 6% over 1997 sales of $230 million. This compares with 7% growth in 1997 sales over 1996. Annualized life premium in force was $1.06 billion at December 31, 1998, compared with $1.01 billion at 1997 year end, an increase of 5%. Annualized premium grew 6% in 1997 from $947 million at year-end 1996. 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. The sale of Family Service on June 1, 1998 caused some distortion in life insurance results for 1998. Excluding Family Service operations, life insurance premium income would have increased 6% to $957 million in 1998 and 7% to $901 million in 1997. Annualized life premium in force would have increased 6% in 1998 and 7% in 1997. 20 Life insurance products are marketed through a variety of distribution channels. The following table presents life insurance premium by distribution method excluding Family Service during each of the three years ended December 31, 1998. LIFE INSURANCE Premium by Distribution Method (Dollar amounts in thousands)
1998 1997 1996 -------------- -------------- -------------- % of % of % of Amount Total Amount Total Amount Total -------- ----- -------- ----- -------- ----- United American Independent Agency........................ $ 36,925 3.9% $ 36,810 4.1% $ 33,404 4.0% United American Exclusive Agency........................ 18,798 2.0 18,243 2.0 15,767 1.9 Direct Response................ 221,371 23.1 195,393 21.7 171,983 20.4 Liberty National Exclusive Agency........................ 281,145 29.4 280,519 31.1 279,637 33.2 American Income Exclusive Agency........................ 204,310 21.3 190,681 21.2 173,700 20.6 Military Independent Agency.... 92,204 9.6 79,631 8.8 71,223 8.4 United Investors Exclusive Agency........................ 81,620 8.5 77,986 8.7 73,836 8.8 Other.......................... 20,901 2.2 21,924 2.4 22,636 2.7 -------- ----- -------- ----- -------- ----- $957,274 100.0% $901,187 100.0% $842,186 100.0% ======== ===== ======== ===== ======== =====
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 primarily life products to juveniles and adults with face amounts of less than $10 thousand on average. The Direct Response operation is a profitable distribution channel for Torchmark characterized by lower acquisition costs than Torchmark's agency-based marketing systems. Direct Response life operations have grown rapidly since the early 1990's when new direct distribution media and target markets were added. Prior to that time, the primary product was a direct mail juvenile life product. In both 1997 and 1998, this distribution center had Torchmark's highest growth in life insurance premium in dollar amount and accounted for over 23% of Torchmark's life insurance premium during 1998. Direct Response premium was $221 million in 1998, increasing 13% over 1997 premium of $195 million. Direct Response life premium in 1997 grew 14% over 1996 premium of $172 million. Leading the other distribution channels, annualized premium sold by the Direct Response operation was $94 million in 1998, rising 18% over 1997 sales of $79 million. The 1997 sales increased 28% over 1996 sales of $62 million. Direct Response life annualized premium in force rose 12% to $260 million at December 31, 1998 from $233 million a year earlier. At December 31, 1998, 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 15% in 1997. 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 providing marketing support. Direct Response marketing support directly contributed to the increase in health sales by the United American Exclusive Agency and its resulting agent recruiting success. Methods to extend Direct Response marketing support to other Torchmark agent- based distribution channels are being explored. The Liberty National Exclusive Agency distribution system represented Torchmark's largest portion of life insurance premium income in each of the three years presented, with 1998 premium of $281 million representing 29% of total life premium. The annualized life premium in force of the Liberty Agency was $298 million at year-end 1998, compared with $299 million and $298 million at year-ends 1997 and 1996, respectively. Life premium sales, in terms of annualized premium issued, grew 5% during 1998 to $46 million. This 1998 growth in life insurance sales compares to a decline in life sales during 1997 of 5% to $43 million. The turnaround in sales growth in the Liberty Agency was largely attributable to growth in the number of agents from 1,750 agents at year-end 1997 to 1,829 agents at year-end 1998, an increase of 5%. The number of first-year agents climbed 7% in 1998 to 804, after having increased 20% in 1997. New agent recruitment programs were implemented in late 1996 resulting in the new agent growth. Additionally, training programs have been employed to improve the retention of newly recruited agents. 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 Liberty National Agency has completed the transition from a debit-style renewal premium collection system to a direct bill or bank draft collection system. As a result, less than 1% of premium was debit collected in 1998. Another of Torchmark's distribution channels for life insurance is a nationwide independent agency whose sales force is comprised of former commissioned and non-commissioned military officers who sell exclusively to commissioned and non-commissioned military officers and their families. This business is comprised of whole life products with term insurance riders. The quality of the business produced by this Military Agency is outstanding and is characterized by extremely low lapse rates. Life premium income from this distribution system grew 16% to $92 million in 1998, representing the largest percentage growth in life premium of any Torchmark distribution channel in 1998. Premium for this Agency rose 12% to $80 million in 1997. Annualized life premium in force for the Military distribution system grew 15% in 1998 to $99 million, after having increased 16% to $86 million in 1997. 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 1998 by this Agency was $17 million, an increase of 7% over sales of $16 million in 1997. Production almost doubled in 1997 from 1996 sales of $8 million. 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, 1998, premium from this system accounted for 21% of Torchmark's total life premium. American Income's premium increased 7% to $204 million in 1998, after having risen 10% in 1997 to $191 million. Annualized life premium in force was $216 million at year-end 1998, an increase of 6% over 1997 premium in force of $203 million. Annualized life premium in force rose 8% in 1997. Sales, in terms of annualized premium issued, were $54 million in 1998, $55 million in 1997, and $54 million in 1996. This Agency experienced a 12% decline in agents during 1998, contributing to the decline in sales. Management is currently implementing changes to American Income's marketing organization to focus on the recruitment and retention of agents. The United Investors Exclusive 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 9% of Torchmark's life premium in 1998. Premium income rose 5% in 1998 to $82 million, following a 6% increase in 1997 to $78 million. Sales growth in this Agency in terms of annualized premium issued was 50% in 1998, the highest life production of any Torchmark Agency in terms of percentage growth. Sales were $15 million in 1988, compared with $10 million in 1997. Annualized life premium in force increased 12% to $100 million at December 31, 1998, 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 from $5 million in 1997 to $18 million in 1998, almost a fourfold increase. 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. 22 The United American Independent and Exclusive Agencies represented about 6% of total life premium in 1998. On a combined basis, life premium rose 1% to $56 million in 1998. Premium for these agencies increased 12% in 1997 to $55 million. LIFE INSURANCE Summary of Results (Dollar amounts in thousands)
1998 1997 1996 ------------------ ------------------ ------------------ % of % of % of Amount Premium Amount Premium Amount Premium --------- ------- --------- ------- --------- ------- Premium and policy charges................ $ 957,274 100.0% $ 901,187 100.0% $ 842,186 100.0% Policy obligations...... 618,867 64.7 574,139 63.7 538,233 63.9 Required reserve interest............... (215,185) (22.5) (199,339) (22.1) (186,306) (22.1) --------- ----- --------- ----- --------- ----- Net policy obligations. 403,682 42.2 374,800 41.6 351,927 41.8 Amortization of acquisition costs...... 158,298 16.5 149,358 16.6 138,553 16.5 Commissions and premium taxes.................. 57,364 6.0 55,019 6.1 53,747 6.4 Required interest on deferred acquisition costs.................. 85,374 8.9 80,972 9.0 75,955 9.0 --------- ----- --------- ----- --------- ----- Total expense.......... 704,718 73.6 660,149 73.3 620,182 73.7 --------- ----- --------- ----- --------- ----- Insurance underwriting income before other income and administrative expense, excluding Family Service................ 252,556 26.4% 241,038 26.7% 222,004 26.3% ===== ===== ===== Family Service insurance underwriting income before other income and administrative expense. 2,187 5,650 5,689 --------- --------- --------- Insurance underwriting income before other income and administrative expense. $ 254,743 $ 246,688 $ 227,693 ========= ========= =========
Life insurance gross margins, as indicated by insurance underwriting income before other income and administrative expense as a percentage of premium, have remained at approximately 27% throughout the three-year period measured. The underwriting margin rose 3% in 1998 to $255 million, after having increased 8% to $247 million in 1997. Excluding Family Service, the underwriting margin increased 5% in 1998 to $253 million and 9% in 1997 to $241 million. Obligation ratios for life business rose slightly in 1998, caused by an increase in mortality. Fluctuations in mortality are normal in the life insurance industry and are not indicative of a trend. 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, 1998 by distribution method. HEALTH INSURANCE Premium by Distribution Method (Dollar amounts in thousands)
1998 1997 1996 -------------- -------------- -------------- % of % of % of Amount Total Amount Total Amount Total -------- ----- -------- ----- -------- ----- United American Independent Agency........................ $417,556 54.9% $428,775 58.0% $440,862 60.2% United American Exclusive Agen- cy............................ 150,602 19.8 132,426 17.9 124,037 16.9 Liberty National Exclusive Agency........................ 135,861 17.9 125,701 17.0 120,028 16.4 American Income Exclusive Agen- cy............................ 47,074 6.2 46,116 6.2 44,172 6.0 Direct Response................ 8,817 1.2 6,467 0.9 3,519 0.5 -------- ----- -------- ----- -------- ----- $759,910 100.0% $739,485 100.0% $732,618 100.0% ======== ===== ======== ===== ======== =====
23 Health insurance premium increased 3% to $760 million in 1998 over 1997 premium of $739 million. In 1997, health premium rose 1% over 1996 premium. However, 1997 was the first year since 1993 that Torchmark recorded a year- over-year increase in premium for this segment. Annualized health premium in force grew 5% to $797 million at December 31, 1998 over the previous year-end balance of $762 million. Health premium in force rose 2% during 1997. Sales of health premium, in terms of annualized premium issued, were $139 million in 1998, increasing 30% over 1997 sales of $107 million. Sales in 1997 grew 6% over the prior year. Sales of health insurance have accelerated greatly in the past two 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, 1998, Medicare Supplement accounted for 69%, cancer 18%, and other health products 13%. Medicare Supplement and cancer annualized premium in force was $554 million and $145 million, respectively, at December 31, 1998. Medicare Supplement insurance is sold primarily by the United American Exclusive Agency and the United American Independent Agency. While health sales in both Agencies have grown in the past three years, sales by the Exclusive Agency exceeded the health sales of the Independent Agency in 1998. This Agency sold $64 million in annualized health premium in 1998, a 62% gain over the prior year. Health sales of $40 million in 1997 rose 26% over 1996 sales. This Agency accounted for $18 million of the $20 million in health premium growth in 1998. It also was instrumental in health annualized premium growth in both 1998 and 1997, accounting for $31 million of the $35 million growth during 1998 in in-force premium and adding $11 million to annualized health premium in force in 1997. 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 $426 million of annualized health premium in force at December 31, 1998, of which $399 million was Medicare Supplement premium in force, was 54% of Torchmark's total health premium in force. Medicare Supplement sales by the United American Independent Agency were $38 million in 1998, a 47% increase over 1997. In spite of increased Medicare Supplement sales, Medicare Supplement annualized premium in force for the United American Independent Agency remained level at year-end 1998 compared with year-end 1997. This occurred because recent years' increases in sales resulting in additions to in force policies have been offset by normal lapses occurring in the large, aging block of in force Medicare Supplement policies. Medicare Supplement policies are highly regulated at both the federal and state levels with limits on 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 obtain 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, both targeted marketing support and increased agent recruiting have successfully 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 finance the Medicare program in 24 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. Cancer insurance premium in force grew 5% in 1998 to $145 million, compared with 15% growth in 1997. Sales of this product declined 5% from 1997 sales of $11 million to $10 million. Sales in 1996 were also $11 million. Growth in cancer annualized premium in force has been attributable in large part 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, 1998. Annualized premium in force for other health products declined 4% in 1998 to $98 million, after declining 2% in 1997. Other health sales declined 15% in 1998 to $26 million. Sales increased in 1997, however, with annualized premium issued rising 26% to $31 million. A large factor in the 1997 sales increase was the increased issue of a limited-benefit hospital-surgical product sold by the United American Independent Agency. With the resurgence of Medicare Supplement sales opportunities, the emphasis of the United American Independent Agency during 1998 returned to Medicare Supplement and less on other health products. As a result, sales and annualized premium in force by this agency of other health products declined as compared with 1997. HEALTH INSURANCE Summary of Results (Dollar amounts in thousands)
1998 1997 1996 ----------------- ----------------- ----------------- % of % of % of Amount Premium Amount Premium Amount Premium -------- ------- -------- ------- -------- ------- Premium.................. $759,910 100.0% $739,485 100.0% $732,618 100.0% Policy obligations....... 482,496 63.5 462,967 62.6 448,346 61.2 Required reserve inter- est..................... (20,440) (2.7) (21,644) (2.9) (26,137) (3.6) -------- ----- -------- ----- -------- ----- Net policy obligations... 462,056 60.8 441,323 59.7 422,209 57.6 Amortization of acquisi- tion costs.............. 59,208 7.8 58,473 7.9 63,150 8.6 Commissions and premium taxes................... 87,828 11.5 87,069 11.8 87,687 12.0 Required interest on de- ferred acquisition costs................... 11,373 1.5 11,080 1.5 11,475 1.6 -------- ----- -------- ----- -------- ----- Total expense........... 620,465 81.6 597,945 80.9 584,521 79.8 -------- ----- -------- ----- -------- ----- Insurance underwriting income before other income and administrative expense.. $139,445 18.4% $141,540 19.1% $148,097 20.2% ======== ===== ======== ===== ======== =====
Health insurance underwriting income before other income and administrative expense declined 1% in 1998 to $139 million, after having declined 4% in 1997. As a percentage of premium, underwriting income before other income and administrative expense declined 1% in the years 1998 and 1997 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. 25 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' Exclusive Agency. This agency consists of the Waddell & Reed sales force which markets United Investors' annuities and other products under a marketing agreement. In 1998, this agency collected $309 million of Torchmark's total $368 million in annuity collections. The United Investors Agency accounted for 97% of total annuity policy charges in 1998. 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) 1998 1997 1996 1998 1997 1996 -------- -------- -------- -------- -------- -------- Fixed..................... $ 647.3 $ 611.0 $ 571.9 $ 64,687 $ 76,930 $ 72,392 Variable.................. 2,343.5 1,821.2 1,375.5 299,005 247,446 247,461 -------- -------- -------- -------- -------- -------- Total.................... $2,990.8 $2,432.2 $1,947.4 $363,692 $324,376 $319,853 ======== ======== ======== ======== ======== ========
Collections of fixed annuity premium were $65 million in 1998, compared with $77 million in 1997, a decline of 16%. Management believes that the low- interest environment in 1997 and 1998 has been a factor in the reduced sales of fixed annuities, as variable annuities and alternative investments have grown more attractive. Fixed annuity collections were $72 million in 1996. The fixed annuity deposit balance increased 6% in 1998 to $647 million at year end. It rose 7% in the prior period from $572 million at year-end 1996 to $611 million at the end of 1997. During 1998, Torchmark sold Family Service, a wholly-owned provider of preneed annuities. While the sale of these preneed annuities had been discontinued in 1995, this block of annuities remained on deposit until Family was sold. At the date of sale, this deposit balance was approximately $396 million. Variable annuity collections rose 21% to $299 million in 1998. Variable collections were flat in 1997, compared with the prior year at $247 million. The strength in financial markets has had a positive influence on sales of variable annuities in both 1998 and 1997. 26 The variable account balance has experienced rapid growth in recent years, rising 31% in 1996 to $1.4 billion at December 31, 1996, 32% in 1997 to $1.8 billion at year-end 1997, and 29% to $2.3 billion at the end of 1998. 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. ANNUITIES Summary of Results (Dollar amounts in thousands)
1998 1997 1996 -------- -------- -------- Amount Amount Amount -------- -------- -------- Policy charges................................... $ 33,594 $ 27,426 $ 21,029 Policy obligations............................... 34,662 34,631 32,085 Required reserve interest........................ (42,171) (41,551) (38,972) -------- -------- -------- Net policy obligations......................... (7,509) (6,920) (6,887) Amortization of acquisition costs................ 11,561 9,660 7,280 Commissions and premium taxes.................... 510 710 423 Required interest on deferred acquisition costs.. 5,609 4,951 4,253 -------- -------- -------- Total expense.................................. 10,171 8,401 5,069 -------- -------- -------- Insurance underwriting income before other income and administrative expense, excluding Family Service......................................... 23,423 19,025 15,960 Family Service insurance underwriting income before other income and administrative expense......... 98 305 520 -------- -------- -------- Insurance underwriting income before other income and administrative expense...................... $ 23,521 $ 19,330 $ 16,480 ======== ======== ========
Annuity underwriting income before other income and administrative expense has grown steadily throughout each of the years 1996 through 1998, increasing 22% to $24 million in 1998 and 17% to $19 million in 1997 over the respective prior year. Policy charges have also grown in each period, rising 22% in 1998 to $34 million and 30% in 1997 to $27 million. 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)
1998 1997 1996 ---------- ---------- ---------- Net investment income.................. $ 459,558 $ 429,116 $ 399,551 Tax equivalency adjustment............. 11,143 9,951 10,638 ---------- ---------- ---------- Tax equivalent investment income...... 470,701 439,067 410,189 Required interest on net insurance policy liabilities: Interest on reserves.................. (296,696) (308,632) (298,408) Interest on deferred acquisition costs................................ 103,481 100,096 95,556 ---------- ---------- ---------- Net required........................ (193,215) (208,536) (202,852) Financing costs........................ (71,367) (87,055) (88,465) ---------- ---------- ---------- Excess investment income............... $ 206,119 $ 143,476 $ 118,872 ========== ========== ========== Mean invested assets (at amortized cost)................................. $6,353,279 $6,058,037 $5,626,803 Average net insurance policy liabilities........................... 3,261,982 3,468,702 3,312,575 Average debt (including MIPS).......... 1,000,063 1,062,543 1,076,673
27 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 over the rates applicable to Torchmark debt, growth in assets in relation to policy liabilities and debt, and the efficient use of capital resources and cash flow. Net investment income rose 7% to $460 million in 1998, compared with an increase of 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 also rose 7% in both 1998 and 1997. These increases in investment income resulted primarily from the growth in the invested asset base during each period. Mean invested assets increased 5% in 1998 and 8% in 1997. Asset growth in 1998 was caused primarily by the receipt of $481 million in proceeds from the Waddell & Reed offering in early 1998, offset somewhat by the sale of investments to repay debt and to buy Torchmark stock. The Family Service sale also negatively impacted 1998 net investment income due to the loss of approximately $778 million in invested assets at the date of the sale. Growth in 1997 excess investment income was due to the accumulation of the investments backing life reserves and the reinvestment of cash flow. The increases in excess investment income were greater than the growth in net investment income, however. In 1998, excess investment income increased 44% to $206 million. The $63 million increase in 1998 in excess investment income resulted primarily from the proceeds of the Waddell & Reed offering which provided Torchmark with $481 million in additional funds to invest or to apply to outstanding debt. There was also $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 lower-yielding investments sales, saving an average of 350 basis points in 1998 financing costs. The Family Services disposition had minimal impact on the change in excess investment income. The loss of Family's investment portfolio did result in a loss of net investment income, but this loss was offset by the reduction in required interest caused by the disposition of net policy obligations and the receipt of $140 million in proceeds from the sale which were added to investments. In 1997, the 21% growth in excess investment income resulted primarily from the greater growth in average invested assets relative to the growth in net policy liabilities. Also, financing costs declined 2% during the period as a result of debt paydowns. Torchmark's share repurchase program, which was renewed after the Waddell & Reed spin-off, had little impact on excess investment income in 1998 because purchases were made late in the year. However, in 1999, share purchases will negatively affect growth in excess investment income. While there is a cost of capital associated with share purchases, per share earnings could be improved. U. S. Treasury rates continued a downward trend in 1998. The rates on corporate and municipal securities did not decline to the same extent as treasuries, resulting in a "spread widening." For this reason, Torchmark was able to continue its fixed-maturity acquisition program relatively unchanged. Excluding Family Service, which was sold during 1998, acquisitions totaled $1.8 billion, compared with $1.7 billion for 1997. New fixed-maturity holdings were acquired at an average yield of 7.13% in 1998, compared with 7.29% for 1997 and 7.12% in 1996. The estimated average maturity of 1998 acquisitions was 20.7 years, compared with 13.3 years in 1997 and 7.8 years in 1996. Torchmark varies the maturities of its new investments based on a number of factors, including the level of rates and the slope of the prevailing yield curve in order to maximize investment value and return. With lower yields on acquisitions, the fixed maturity portfolio yield declined to 7.42% at December 31, 1998, slightly below the year earlier level of 7.49% and 7.54% at year-end 1996. The average life of the portfolio increased to 8.8 years, compared with 8.0 years at year-end 1997 and 7.8 years at year-end 1996. At year-end 1998, duration was 5.7 years, compared with 5.1 years in 1997 and 5.0 years in 1996. Emphasis continues to be on marketable, high quality investments. Over 93% of the portfolio is considered by Standard and Poor's to be investment grade, while 95% is considered investment grade by the NAIC. 28 Torchmark considers its entire portfolio available for sale. It is therefore valued at market which fluctuates as interest rate changes occur. The portfolio's year-end 1998 unrealized gain of $249 million compares with an unrealized gain of $213 million at year-end 1997 and $63 million at year-end 1996. With the high quality and liquidity of its portfolio, Torchmark is able to minimize its holdings in short-term investments, which totaled $76 million at year-end 1998 and $66 million at year-end 1997. A substantial portion of the portfolio is expected to repay during the next several years.
1998 1997 ----- ----- Short terms and under 1 year................................ 7.8% 5.4% 2-5 years................................................... 23.8 27.6 6-10 years.................................................. 31.8 43.8 11-15 years................................................. 9.0 11.2 16-20 years................................................. 3.8 3.7 Over 20 years............................................... 23.8 8.3 ----- ----- 100.0% 100.0% ===== =====
Fixed maturity investments continued to represent 91% of investment assets at year-end 1998, which causes the percentage holdings of other type investments to vary 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......................... $5,844,291 91.1% 74.8% Equities.................................... 9,843 .2 4.4 Mortgage loans.............................. 124,072 1.9 11.6 Real estate................................. 164,644 2.6 1.8 Policy loans................................ 233,765 3.6 5.8 Other invested assets....................... 35,976 .6 1.6 ---------- ----- ----- $6,412,591 100.0% 100.0% ========== ===== =====
- -------- (1) Latest data available from the American Council of Life Insurance. 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 securities' value could occur from a change in interest rates. This risk is significant to Torchmark's investment portfolio because its fixed-income holdings amount to 91% 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 from marking these investments 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 $3.3 billion at December 31, 1998, compared with fixed income investments of $5.5 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 63% matures within ten years. Also, the portfolio and market conditions are constantly evaluated for appropriate action. 29 No derivative instruments are used to manage Torchmark's exposure to market risk in the investment portfolio. A 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 Statement on page 63 of this report and in Capital Resources on page 32 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. 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. It has been determined from those procedures 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, 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.
Change in Interest Rates Market Value of (in Fixed-Maturity basis Portfolio points) ($ millions) -------- --------------- -200 $6,476 -100 6,108 0 5,768 100 5,450 200 5,147
30 FINANCIAL CONDITION Liquidity. Liquidity pertains to an institution's ability to meet on demand the cash commitments required by its business operations and financial obligations. Torchmark is highly liquid, 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 $398 million in 1998, compared with $410 million in 1997 and $327 million in 1996. In addition to operating cash flows, Torchmark received $474 million in investment maturities and repayments during 1998, adding to available cash flows. Such repayments were $513 million in 1997 and $346 million in 1996. 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 $81 million at December 31, 1998, compared with $77 million at year-end 1997. In addition to Torchmark's 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 $5.8 billion at December 31, 1998. Torchmark has in place a line of credit facility with a group of lenders which allows unsecured borrowings up to a specified maximum amount. The maximum amount was increased during 1996 to $600 million and was at this level on December 31, 1998. 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, 1998, $357 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, 1998, 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. 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, and 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 1999, a maximum amount of $258 million will be available to Torchmark from insurance subsidiaries without regulatory approval. Capital Resources. Torchmark's capital structure consists of long and short- term debt, MIPS, and shareholders' equity. Torchmark's debt consists primarily of its funded debt and its commercial paper facility. An analysis of Torchmark's funded debt outstanding at year-ends 1998 and 1997 on the basis of par value is as follows:
1998 1997 ------------- ------------- Principal Principal Year Amount Amount Instrument Due Rate ($ thousands) ($ thousands) ---------- ---- ----- ------------- ------------- Sinking Fund Debentures.............. 2017 8 5/8% $ -0- $ 180,000 Senior Notes......................... 1998 9 5/8 -0- 200,000 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.................... 399,450 779,450 Current maturity of long-term debt... -0- (208,000) Debt held by subsidiaries............ (10,828) -0- -------- --------- Long-term debt....................... $388,622 $ 571,450 ======== =========
31 The carrying value of the funded debt was $383 million at December 31, 1998, compared with $772 million a year earlier. 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 has also taken 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. Additionally, in October, 1998, Torchmark, through a subsidiary, acquired $10.8 million principal amount of its 7 7/8% notes due 2023 in the open market at a cost of $10.6 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. It also repaid $550 thousand principal amount of its Senior Debentures in 1996 under the terms of a put provision. 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 redeemable at Torchmark's option at any time after September 30, 1999. 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 to reduce financing costs. The swap expires in 2004. 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. Torchmark is at risk on this instrument for higher financing costs to the extent interest rates rise during the remaining term. This risk is limited, however, by a five-year interest-rate cap which Torchmark acquired in conjunction with the swap agreement that insures the variable rate cannot exceed 10.39%. The cap expires on September 30, 1999. At December 31, 1998, the variable rate was 7.02%. During 1998, Torchmark's after-tax dividend cost for the MIPS was $9.8 million, compared with $11.9 million that would have been incurred without the swap and cap transactions. Torchmark's after-tax cost in 1997 was $9.9 million and in 1996 was $9.7 million, saving $2.0 million and $2.2 million in each of those years, respectively. Torchmark reduced its shareholder cash dividend paid in the fourth quarter of 1998 to $.13 per share from $.15 paid in the previous four quarters. The fourth quarter 1998 dividend was paid prior to the spin-off of Waddell & Reed. Because the dividend Waddell & Reed pays on its shares represents approximately $.04 per Torchmark share, Torchmark's quarterly dividend is expected to be $.09 per share each quarter in 1999. Torchmark resumed its share buyback program in November, 1998 after completion of the Waddell & Reed spin-off. Purchases of 3.4 million shares were made on the open market during November and December of 1998 at a cost of $126 million. Funds for these purchases were derived primarily from the sale of investments. During 1997, Torchmark acquired 5.2 million shares at a cost of $183 million. Share purchases of 4.6 million shares were made in 1996 for $107 million. Torchmark will continue to make share purchases under its share repurchase program on the open market when prices are attractive. Share purchases have a favorable impact on earnings per share and return on equity, but negatively affect book value per share. Short-term debt consists primarily of Torchmark's commercial paper outstanding but also includes the current maturity of long-term debt. The commercial paper balance outstanding at December 31, 1998 was $355 million at carrying value, compared with a balance of $139 million a year earlier. As previously noted, Torchmark essentially refinanced $360 million face amount of funded debt with additional short-term borrowings. These borrowings were offset somewhat by the use of $82 million in Waddell & Reed offering 32 proceeds for repayment. The commercial paper borrowing balance fluctuates based on Torchmark's current cash needs. There was no current maturity of long-term debt at year-end 1998, compared with $208 million a year earlier. Shareholders' equity increased 17% to $2.26 billion at December 31, 1998, over December 31, 1997 shareholders' equity of $1.93 billion. Growth in shareholders' equity was greatly impacted by the Waddell & Reed offering and spin-off in 1998. 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 $16.51 at 1998 year end, compared with $13.80 at year-end 1997. After adjusting for the impact on shareholders' equity for security value fluctuations due to changes in interest rates in financial markets, book value per share was $15.43 at year-end 1998, an increase of 20% over $12.90 at year- end 1997. Return on common shareholders' equity was 15.1% in 1998, compared with 18.2% in 1997. 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 also exclude all discontinued operations, equity in earnings of Vesta, and realized investment gains and losses. Total debt as a percentage of total capitalization continues to decline and was 24% at December 31, 1998. 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 31% at year-end 1997 and 32% at year-end 1996. 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 also continues to improve and was 8.9 for 1998, compared with 6.5 in 1997 and 6.3 in 1996. Torchmark's interest expense declined 22% in 1998 from $72 million to $56 million. Interest expense was $74 million in 1996. 33 OTHER ITEMS Transactions Regarding Vesta. Since 1993, Torchmark has held a passive investment in 5.1 million shares of Vesta, a property insurance carrier, representing approximately 28% of the outstanding shares of Vesta. 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. Additionally, Vesta is now subject to numerous class action lawsuits in state and Federal courts filed subsequent to such announcements. During the fourth quarter of 1998, Torchmark announced it had entered into an agreement to sell approximately 1.8 million shares of Vesta common stock to an unaffiliated insurance carrier for $7.42 a share. In its fourth quarter Form 10Q, Torchmark reported its intent to sell its remaining Vesta shares and vacate the two Vesta board seats it occupied. In view of the pending transaction, Torchmark adjusted the carrying value of its holdings in Vesta to estimated net realizable value of $45 million, effective September 30, 1998. The adjustment produced an after-lax realized loss of $24 million or $.17 per Torchmark diluted share. Torchmark further reported that because of the agreement to sell the Vesta shares, the resulting writedown, and the vacating of the board seats, that Torchmark planned to discontinue equity-method accounting in accordance with accounting standards. As of December 31, 1998, the terms of the agreement were not met by the unaffiliated insurance carrier and the contract to sell the Vesta shares was terminated. In the meantime, on December 29, 1998, Torchmark sold 680 thousand Vesta shares to another unrelated institution at a price of $4.75 per share. Torchmark realized a $2 million after-tax loss on the sale. The sale reduced Torchmark's ownership of Vesta to 4.45 million shares or approximately 24% of Vesta at December 31, 1998. Because Torchmark's interest in Vesta exceeded 20% and the sale contract with the insurance carrier expired, Torchmark continued equity-method accounting for its holdings in Vesta. Torchmark's carrying value for Vesta continues to reflect the previously-taken writedown. Subsequent to Vesta's June, 1998 announcement involving the accounting irregularities and the financial restatements, Torchmark recorded its equity in Vesta's earnings in the quarter that Vesta reported those earnings. As a result, Torchmark's equity in Vesta's reported earnings during 1998, including the restatements, was a pretax loss of $27 million. Torchmark carried Vesta at a value of $32 million at December 31, 1998. Disposal of Energy Segment. On September 30, 1996, Torchmark completed the sale of its energy business segment including its energy asset management subsidiary, Torch Energy Advisors Incorporated ("TEAI"), and its Black Warrior coalbed methane investment. These operations, which were classified as discontinued operations in Torchmark's financial statements during the period prior to the sale, were sold to a TEAI management group. After the sale, Torchmark had no controlling ownership interest in any energy asset management organization. In addition to previously transferred securities, warrants, and Section 29 energy-related tax credits, which approximated $112 million at closing, Torchmark received subordinated debt and notes totaling $32.5 million along with $15.5 million in cash. After closing costs and retained liabilities, Torchmark recorded a pretax loss of $23 million and an after-tax loss of $7 million from the sale, or $.05 per share. Litigation. Torchmark and its subsidiaries continue to be named as parties to pending or threatened litigation, most of which involve punitive damage claims based upon allegations of agent misconduct at Liberty in Alabama. Such punitive damage claims are tried in Alabama state courts where any punitive damage litigation has 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 the amount of punitive damages in Alabama is left largely to the discretion of the jury in each case. It is thus difficult to predict with certainty the liability of Torchmark or its subsidiaries in any given case because of the unpredictable nature of this type of litigation. Year 2000 Compliance. The new millennium poses a significant concern to all businesses which use computer systems or electronic data in their operations. This concern arises because these 34 organizations have been processing computer systems and programs that cannot always identify a proper date. For many years, programs were written using a two digit code to represent a year. At the beginning of the year 2000, more digits are needed to accurately determine the date in these programs. Without addressing this issue, many computer programs could fail or produce erroneous results. Additionally, companies which are electronically engaged with other businesses or which rely on other businesses for services are exposed to risk of failure by the electronic devices and computer systems of those other entities to the extent they are not Year 2000 compliant. The potential of failure of these systems creates considerable uncertainty and could potentially adversely affect the ongoing operations and stability of a business. Torchmark is exposed to these risks should its computer systems fail due to date-related problems. Torchmark is also reliant on a number of third party businesses and governmental agencies with which it either interacts electronically or depends upon for services in the conduct of its business. These institutions include but are not limited to banks, financial institutions, telecommunication companies, utilities, mail delivery organizations, and a variety of governmental agencies. Should Torchmark's computer systems or the systems of its third-party business partners not be compliant, Torchmark may be exposed to considerable risks, including business interruption, loss of revenue, increased expense, loss of policyholders, and litigation. To reduce its business risk to an acceptable level, Torchmark has established a project plan to insure that the company's business-critical computer systems will be Year 2000 compliant. This plan also addresses third- party compliance issues. Under the direction of executive management, objectives and timetables have been set forth to achieve compliance in each geographic location where Torchmark operates. Progress toward achieving those objectives is constantly monitored. Torchmark currently expects the entire project, including all Year 2000 testing activities, to be completed during 1999. As of December 31, 1998, Torchmark remains on schedule to meet all of its Year 2000 compliance requirements. All known required software changes have been completed, and the related testing is in process with plans for completion in 1999. With regard to third party concerns, Torchmark has in process the following procedures: 1) Torchmark is confirming, with its software vendors, the Year 2000 readiness of its purchased software packages because Torchmark has purchased software packages on all of its computer platforms; 2) Torchmark is verifying the Year 2000 compliance status of its financial business partners' computer and data communications systems to insure readiness, including data interface testing with third parties; and 3) All of Torchmark's electronic operational systems (telephones, security, utility, environmental) are being evaluated for Year 2000 compliance. As an example of Torchmark's interface testing with selected third parties, Torchmark is utilizing electronic data from selected third parties in processing Medicare Supplement benefit data using Year 2000 test data. Torchmark is also arranging similar testing with a selected number of banks. While Torchmark is making every effort to verify the compliance of third parties, no assurances as to the compliance of their computer systems can be given. Torchmark has used primarily its own employees to complete its Year 2000 project. Other than completion of software testing, all significant Year 2000 project milestones for internal computer systems have been completed. Confirmation of third party compliance and electronic data interface testing with third parties is continuing with completion expected during 1999. Torchmark has spent $5 million on its Year 2000 project activities to date, including internal programming costs, outside contractors, and replacement costs. These costs have been expensed as incurred. Total project cost is expected to be approximately $6 million. Year 2000 contingency plans are being developed for critical risk areas. Management throughout the organization has established and documented a contingency plan for Torchmark's most critical systems and interfaces with business partners within each individual's responsibility. Such contingency plans include possible manual operation efforts, staff adjustments, outside services, and alternative procedures. These contingency plans will be maintained well into 2000. 35 NEW ACCOUNTING RULES Accounting for Derivative Instruments and Hedging Activities (FASB Statement No. 133) is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999, 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. Statement 133 will have minimal impact on Torchmark's financial statements. Torchmark has negligible investments in derivative instruments, which are currently valued at fair value in its financial statements. Torchmark's use of derivatives for hedging purposes is very limited. 36 Item 8. Financial Statements and Supplementary Data
Page ---- Independent Auditors' Report.............................................. 38 Consolidated Financial Statements: Consolidated Balance Sheet at December 31, 1998 and 1997................. 39 Consolidated Statement of Operations for each of the years in the three- year period ended December 31, 1998................................................. 40 Consolidated Statement of Comprehensive Income for each of the years in the three-year period ended December 31, 1998........................... 42 Consolidated Statement of Shareholders' Equity for each of the years in the three-year period ended December 31, 1998.......................................... 43 Consolidated Statement of Cash Flow for each of the years in the three- year period ended December 31, 1998................................................. 44 Notes to Consolidated Financial Statements............................... 46
37 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. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedules as listed in Item 14(a). 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 three- 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 PEAT MARWICK LLP Birmingham, Alabama January 29, 1999 except for Note 17 which is as of February 10, 1999 38 TORCHMARK CORPORATION CONSOLIDATED BALANCE SHEET (Dollar amounts in thousands except per share data)
December 31, -------------------------- 1998 1997 ------------ ------------ Assets: Investments: Fixed maturities--available for sale, at fair value (cost: 1998--$5,519,772; 1997--$5,628,924)............................... $ 5,768,447 $ 5,841,690 Equity securities, at fair value (cost: 1998-- $2,256; 1997--$3,284)........................... 9,843 12,404 Mortgage loans on real estate, at cost (estimated fair value: 1998--$124,191; 1997--$79,096).................................. 124,072 78,974 Investment real estate, at cost (less allowance for depreciation: 1998--$40,828; 1997--$46,329). 164,644 167,297 Policy loans..................................... 233,765 221,703 Other long-term investments...................... 35,976 74,433 Short-term investments........................... 75,844 65,510 ------------ ------------ Total investments............................... 6,412,591 6,462,011 Cash ............................................. 4,920 11,085 Investment in unconsolidated subsidiaries......... 31,510 102,305 Accrued investment income......................... 99,279 100,392 Other receivables................................. 130,279 116,506 Deferred acquisition costs........................ 1,502,511 1,371,131 Value of insurance purchased...................... 170,640 216,988 Property and equipment............................ 39,080 37,100 Goodwill.......................................... 414,658 426,732 Discontinued operations assets.................... -0- 387,910 Other assets...................................... 18,298 19,049 Separate account assets........................... 2,425,262 1,876,439 ------------ ------------ Total assets.................................... $ 11,249,028 $ 11,127,648 ============ ============ Liabilities: Future policy benefits............................ $ 4,595,567 $ 5,023,763 Unearned and advance premiums..................... 85,923 83,722 Policy claims and other benefits payable.......... 194,965 228,754 Other policyholders' funds........................ 81,568 82,224 ------------ ------------ Total policy liabilities......................... 4,958,023 5,418,463 Accrued income taxes.............................. 511,311 416,665 Other liabilities................................. 162,831 378,696 Short-term debt................................... 355,392 347,152 Long-term debt (estimated fair value: 1998-- $430,431; 1997--$600,319)........................ 383,422 564,298 Separate account liabilities...................... 2,425,262 1,876,439 ------------ ------------ Total liabilities................................ 8,796,241 9,001,713 Commitments and contingencies Monthly income preferred securities (estimated fair value: 1998--$205,040; 1997-- $210,500)......................................... 193,259 193,199 Shareholders' equity: Preferred stock, par value $1 per share-- Authorized 5,000,000 shares; outstanding: -0- in 1998 and in 1997................................. -0- -0- Common stock, par value $1 per share--Authorized 320,000,000 shares; outstanding: 147,800,908 issued less 10,951,933 held in treasury in 1998 and 147,848,908 issued less 7,808,468 shares held in treasury in 1997.............................. 147,801 147,849 Additional paid-in capital........................ 610,925 187,731 Accumulated other comprehensive income............ 144,501 136,926 Retained earnings................................. 1,707,933 1,694,781 Treasury stock.................................... (351,632) (234,551) ------------ ------------ Total shareholders' equity....................... 2,259,528 1,932,736 ------------ ------------ Total liabilities and shareholders' equity....... $ 11,249,028 $ 11,127,648 ============ ============
See accompanying Notes to Consolidated Financial Statements. 39 TORCHMARK CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (Amounts in thousands except per share data)
Year Ended December 31, ---------------------------------- 1998 1997 1996 ---------- ---------- ---------- Revenue: Life premium............................. $ 959,766 $ 909,992 $ 854,897 Health premium........................... 759,910 739,485 732,618 Other premium............................ 33,954 28,527 22,404 ---------- ---------- ---------- Total premium.......................... 1,753,630 1,678,004 1,609,919 Net investment income.................... 459,558 429,116 399,551 Realized investment gains (losses)....... (57,637) (36,979) 5,830 Other income............................. 2,325 962 1,116 ---------- ---------- ---------- Total revenue.......................... 2,157,876 2,071,103 2,016,416 Benefits and expenses: Life policyholder benefits............... 625,272 591,867 558,436 Health policyholder benefits............. 482,496 462,967 448,346 Other policyholder benefits.............. 42,508 54,066 51,302 ---------- ---------- ---------- Total policyholder benefits............ 1,150,276 1,108,900 1,058,084 Amortization of deferred acquisition costs................................... 231,024 224,738 218,826 Commissions and premium taxes............ 143,747 141,296 140,448 Other operating expense.................. 117,438 120,233 125,881 Amortization of goodwill................. 12,075 12,074 12,074 Interest expense......................... 56,325 71,863 73,611 ---------- ---------- ---------- Total benefits and expenses............ 1,710,885 1,679,104 1,628,924 Income from continuing operations before income taxes, equity in earnings of unconsolidated subsidiaries, discontinued operations and extraordinary item........ 446,991 391,999 387,492 Income taxes.............................. (154,338) (138,409) (138,676) Equity in earnings (or losses) of Vesta... (6,866) 16,714 13,654 Adjustment to carrying value of Vesta..... (20,234) -0- -0- Monthly income preferred securities dividend (net of tax).................... (9,777) (9,875) (9,655) ---------- ---------- ---------- Net income from continuing operations.. 255,776 260,429 252,815 Discontinued operations of energy segment: Loss on disposal (less applicable income tax benefit of: 1996--$15,813).......................... -0- -0- (7,137) Discontinued operations of Waddell & Reed: Income from operations (less applicable income tax expense of $42,932, $40,081, and $41,946 respectively)............... 47,868 77,314 65,694 Loss on disposal (including income tax of $49,840)................................ (54,241) -0- -0- ---------- ---------- ---------- Net income before extraordinary item...... 249,403 337,743 311,372 Loss on redemption of debt, (less applicable income tax benefit of $2,672). (4,962) -0- -0- ---------- ---------- ---------- Net income............................. $ 244,441 $ 337,743 $ 311,372 ========== ========== ==========
(Continued) See accompanying Notes to Consolidated Financial Statements. 40 TORCHMARK CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS--(Continued) (Amounts in thousands except per share data)
Year Ended December 31, ------------------ 1998 1997 1996 ----- ----- ----- Basic net income per share: Continuing operations...................................... $1.83 $1.87 $1.78 Discontinued operations of energy segment: Loss on disposal.......................................... -0- -0- (.05) Discontinued operations of Waddell & Reed: Net income from operations................................ .34 .56 .46 Loss on disposal.......................................... (.39) -0- -0- ----- ----- ----- Net income before extraordinary items...................... 1.78 2.43 2.19 Loss on redemption of debt................................. (.03) -0- -0- ----- ----- ----- Net income per share..................................... $1.75 $2.43 $2.19 ===== ===== ===== Diluted net income per share: Continuing operations...................................... $1.81 $1.84 $1.76 Discontinued operations of energy segment: Loss on disposal.......................................... -0- -0- (.05) Discontinued operations of Waddell & Reed: Net income from operations................................ .34 .55 .46 Loss on disposal.......................................... (.38) -0- -0- ----- ----- ----- Net income before extraordinary items...................... 1.77 2.39 2.17 Loss on redemption of debt................................. (.04) -0- -0- ----- ----- ----- Net income per share..................................... $1.73 $2.39 $2.17 ===== ===== =====
See accompanying Notes to Consolidated Financial Statements. 41 TORCHMARK CORPORATION CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Amounts in thousands)
Year Ended December 31, ---------------------------- 1998 1997 1996 -------- -------- -------- Net income....................................... $244,441 $337,743 $311,372 Other comprehensive income: Unrealized investment gains (losses): Unrealized gains (losses) on securities: Unrealized holding gains arising during period...................................... 54,217 125,820 (152,706) Reclassification adjustment for (gains) losses on securities included in net income. 8,519 29,967 (5,674) Reclassification adjustment for amortization of (discount) and premium................... (2,999) (2,751) (5,422) Foreign exchange adjustment on securities marked to market............................ 1,958 1,373 141 -------- -------- -------- 61,695 154,409 (163,661) Unrealized gains (losses) on other investments.................................. (7,552) (398) 1,894 Unrealized gains (losses) on deferred acquisition costs............................ (3,091) (13,324) 17,837 -------- -------- -------- Total unrealized investment gains (losses)... 51,052 140,687 (143,930) Applicable tax............................... (17,524) (49,447) 50,375 -------- -------- -------- Unrealized investment gains (losses), net of tax........................................... 33,528 91,240 (93,555) Foreign exchange translation adjustments, other than securities............................... (2,081) (1,585) (24) Applicable tax............................... -0- -0- -0- -------- -------- -------- Foreign exchange translation adjustments, net of tax........................................ (2,081) (1,585) (24) Unrealized gains (losses) on discontinued operations.................................... (12,100) 1,062 (274) Applicable tax............................... 4,235 (372) 96 -------- -------- -------- Unrealized gains (losses) on discontinued operations, net of tax........................ (7,865) 690 (178) -------- -------- -------- Other comprehensive income....................... 23,582 90,345 (93,757) -------- -------- -------- Comprehensive income......................... $268,023 $428,088 $217,615 ======== ======== ========
See accompanying Notes to Consolidated Financial Statements. 42 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 Earnings Stock Equity --------- -------- ---------- ------------- ---------- --------- ------------- Year Ended December 31, 1996 Balance at January 1, 1996..... $-0- $ 73,784 $139,754 $140,338 $1,325,534 $ (90,458) $1,588,952 Comprehensive income........... (93,757) 311,372 217,615 Common dividends declared ($0.58 a share)............... (82,320) (82,320) Acquisition of treasury stock-- common........................ (106,996) (106,996) Exercise of stock options...... 1,947 (5,195) 15,340 12,092 ---- -------- -------- -------- ---------- --------- ---------- Balance at December 31, 1996.. -0- 73,784 141,701 46,581 1,549,391 (182,114) 1,629,343 Year Ended December 31, 1997 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 ==== ======== ======== ======== ========== ========= ==========
See accompanying Notes to Consolidated Financial Statements. 43 TORCHMARK CORPORATION CONSOLIDATED STATEMENT OF CASH FLOW (Amounts in thousands)
Year ended December 31, ------------------------------- 1998 1997 1996 --------- --------- --------- Net income.................................... $ 244,441 $ 337,743 $ 311,372 Adjustments to reconcile net income to cash provided from operations: Increase in future policy benefits.......... 173,593 147,207 136,375 Increase (decrease) in other policy benefits................................... (30,593) 10,096 14,319 Deferral of policy acquisition costs........ (356,493) (328,086) (300,461) Amortization of deferred policy acquisition costs...................................... 231,024 224,738 218,826 Change in accrued income taxes.............. 86,670 87,590 31,370 Depreciation................................ 7,934 8,038 7,297 Realized (gains) losses on sale of investments, subsidiaries, and properties............... 57,637 36,979 (5,830) Change in accounts payable and other liabilities................................ 3,753 (6,119) (6,408) Change in receivables....................... (20,331) (14,368) (18,372) Change in payables and receivables of unconsolidated affiliates.................. 2,021 1,385 (5,660) Other accruals and adjustments.............. 25,631 (17,825) (12,595) Adjustment to carrying value of Vesta....... 20,234 -0- -0- Minority interest in income of Waddell & Reed....................................... 20,869 -0- -0- Loss on energy disposal..................... -0- -0- 22,950 Discontinued operations of Waddell & Reed... (68,737) (77,314) (65,694) --------- --------- --------- Cash provided from operations............... $ 397,653 $ 410,064 $ 327,489 ========= ========= =========
(Continued) See accompanying Notes to Consolidated Financial Statements 44 TORCHMARK CORPORATION CONSOLIDATED STATEMENT OF CASH FLOW--(Continued) (Amounts in thousands)
Year ended December 31, ------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Cash provided from operations........... $ 397,653 $ 410,064 $ 327,489 Cash used for investment activities: Investments sold or matured: Fixed maturities available for sale-- sold................................. 757,649 744,839 487,070 Fixed maturities available for sale-- matured, called, and repaid.......... 474,386 512,512 345,973 Equity securities..................... -0- 670 2,872 Mortgage loans........................ 8,589 3,300 7,113 Real estate........................... 12,220 7,341 5,780 Other long-term investments........... 51,903 28,082 12,347 ----------- ----------- ----------- Total investments sold or matured... 1,304,747 1,296,744 861,155 Acquisition of investments: Fixed maturities--available for sale.. (1,872,040) (1,668,301) (1,080,791) Mortgage loans........................ (52,921) (17,826) (18,360) Real estate........................... (35,944) (24,452) (9,008) Net increase in policy loans.......... (13,445) (14,744) (13,082) Other long-term investments........... (20,298) (6,082) (5,592) ----------- ----------- ----------- Total investments acquired.......... (1,994,648) (1,731,405) (1,126,833) Net (increase) decrease in short-term investments........................... (19,168) (18,067) 4,971 Funds borrowed from affiliates......... -0- 42,210 167,070 Repayment of loans to affiliates....... (1,390) -0- -0- Loans repaid by affiliates............. -0- -0- 12,000 Sale of Family Service................. 140,388 -0- -0- Sale of Vesta shares................... 3,056 -0- -0- Proceeds from sale of discontinued energy operations..................... -0- -0- 15,500 Dispositions of properties............. 1,033 1,407 1,769 Additions to properties................ (6,170) (6,204) (14,106) Dividends from Waddell & Reed.......... 16,814 52,977 10,000 ----------- ----------- ----------- Cash used for investment activities..... (555,338) (362,338) (68,474) Cash provided from (used for) financing activities: Issuance of common stock............... 3,957 93,973 10,145 Additions to debt...................... 216,429 98,185 -0- Cash dividends paid to shareholders.... (90,780) (107,097) (111,394) Repayments of debt..................... (390,917) (20,132) (149,144) Acquisition of treasury stock.......... (125,875) (182,903) (106,996) Proceeds from Waddell & Reed offering.. 516,138 -0- -0- Offering proceeds retained by Waddell & Reed................................ (35,251) -0- -0- Net receipts from deposit product operations............................ 57,819 78,817 94,513 ----------- ----------- ----------- Cash provided from (used for) financing activities............................. 151,520 (39,157) (262,876) Increase (decrease) in cash............ (6,165) 8,569 (3,861) Cash at beginning of year.............. 11,085 2,516 6,377 ----------- ----------- ----------- Cash at end of year.................... $ 4,920 $ 11,085 $ 2,516 =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements. 45 TORCHMARK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars amounts in thousands except per share data) Note 1--Significant Accounting Policies 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 shareholders' equity. 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 shareholders' equity. 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, 1998, 1997, and 1996 included $296.7 million, $308.6 million, and $298.4 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 $71.7 million, $72.3 million, and $72.8 million for the years ended December 31, 1998, 1997, and 1996, 46 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, 1998, 1997, and 1996 of $33.5 million, $28.2 million, and $22.4 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 two 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 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 its investment in Vesta Insurance Group ("Vesta"), as discussed in Note 19, there were no significant impairments in the three years ending 1998. 47 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. Reclassification: 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 excessive 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. All prior- year share and per share data have been restated to give effect for this split. Earnings Per Share: Torchmark adopted SFAS 128, "Earnings per share," effective year end 1997. This standard requires the dual presentation of basic and diluted earnings per share ("EPS") on the face of the income statement and a reconciliation of basic EPS to diluted EPS. As required by SFAS 128, all prior-period EPS data has been restated for comparability. 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: 1998--139,998,671, 1997-- 139,202,354, 1996--142,459,783. 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: 1998-- 141,351,912, 1997--141,431,156, 1996--143,783,218. 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. 48 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, -------------------------- --------------------- 1998 1997 1996 1998 1997 -------- -------- -------- ---------- ---------- Life insurance subsidiar- ies...................... $260,847 $369,446 $283,881 $640,034 $ 798,265
During 1998, Liberty National Life Insurance Company paid an extraordinary dividend to Torchmark in the amount of $213 million. 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, --------------------------------- 1998 1997 1996 ---------- ---------- --------- Statutory net income.................. $ 260,847 $ 369,446 $ 283,881 Deferral of acquisition costs......... 356,493 328,086 300,461 Amortization of acquisition costs..... (231,024) (224,738) (218,826) Differences in insurance policy lia- bilities............................. 96,412 44,117 39,762 Deferred income taxes................. (107,384) (47,541) (20,496) Income of noninsurance affiliates..... (100,758) (142,041) (108,257) Other................................. (30,145) 10,414 34,847 ---------- ---------- --------- GAAP net income....................... $ 244,441 $ 337,743 $ 311,372 ========== ========== ========= A reconciliation of Torchmark's insurance subsidiaries' statutory shareholders' equity to Torchmark's consolidated GAAP shareholders' equity is as follows: Year Ended December 31, ---------------------- 1998 1997 ---------- ---------- Statutory shareholders' equity........ $ 640,034 $ 798,265 Differences in insurance policy lia- bilities............................. 585,680 543,365 Deferred acquisition costs............ 1,502,511 1,371,131 Value of insurance purchased.......... 170,640 216,988 Deferred income taxes................. (467,023) (405,375) Debt of parent company................ (749,290) (911,159) Monthly income preferred securities... (193,259) (193,199) Asset valuation reserves.............. 68,674 101,057 Nonadmitted assets.................... 84,826 89,859 Goodwill.............................. 414,658 396,953 Market value adjustment on fixed matu- rities............................... 200,087 196,369 Other................................. 1,990 (271,518) ---------- ---------- GAAP shareholders' equity............. $2,259,528 $1,932,736 ========== ==========
49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 3--Investment Operations
Year Ended December 31, ----------------------------- 1998 1997 1996 -------- -------- --------- Investment income is summarized as fol- lows: Fixed maturities....................... $410,528 $396,489 $ 371,805 Equity securities...................... 301 367 373 Mortgage loans on real estate.......... 9,247 7,127 6,525 Investment real estate................. 8,332 3,379 12,947 Policy loans........................... 15,301 14,433 13,192 Other long-term investments............ 19,755 9,279 4,782 Short-term investments................. 6,089 5,762 4,669 -------- -------- --------- 469,553 436,836 414,293 Less investment expense................ (9,995) (7,720) (14,742) -------- -------- --------- Net investment income.................. $459,558 $429,116 $ 399,551 ======== ======== ========= An analysis of gains (losses) from investments is as follows: Realized investment gains (losses): Fixed maturities...................... $ (8,519) $(30,122) $ 3,761 Equity securities..................... -0- 155 1,913 Other................................. (49,118) (7,012) 156 -------- -------- --------- (57,637) (36,979) 5,830 Adjustment to deferred acquisition costs ................................ -0- (198) (749) -------- -------- --------- (57,637) (37,177) 5,081 Applicable tax......................... 20,173 13,012 (1,778) -------- -------- --------- Gains (losses) from investments, net of tax................................... $(37,464) $(24,165) $ 3,303 ======== ======== ========= An analysis of the net change in unrealized investment gains (losses) is as follows: Equity securities...................... $ (1,080) $ 4,061 $ (734) Fixed maturities available for sale.... 66,526 150,494 (163,224) Other long-term investments and foreign exchange translation adjustments...... (46,018) (1,054) 1,907 Adjustment to deferred acquisition costs................................. (3,091) (13,324) 17,837 -------- -------- --------- 16,337 140,177 (144,214) Applicable tax......................... (8,762) (49,832) 50,457 -------- -------- --------- Change in unrealized gains (losses), net of tax............................ $ 7,575 $ 90,345 $ (93,757) ======== ======== =========
50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 3--Investment Operations (continued) A summary of fixed maturities available for sale and equity securities by amortized cost and estimated market value at December 31, 1998 and 1997 is as follows:
Gross Gross Amount per % of Total Amortized Unrealized Unrealized Market the Balance Fixed Cost Gains Losses Value Sheet Maturities ---------- ---------- ---------- ---------- ----------- ---------- 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 ========== ======== ======== ========== ========== 1997: - ----- Fixed maturities available for sale: Bonds: U.S. Government direct obligations and agencies............. $ 189,708 $ 7,190 $ (46) $ 196,852 $ 196,852 3.4% GNMAs................. 788,585 46,824 (1,180) 834,229 834,229 14.3 Mortgage-backed securities, GNMA collateral........... 97,740 2,695 (13) 100,422 100,422 1.7 Other mortgage-backed securities........... 436,457 19,663 (2,054) 454,066 454,066 7.8 State, municipalities and political subdivisions......... 634,304 28,610 (1,163) 661,751 661,751 11.3 Foreign governments... 77,736 3,653 (2) 81,387 81,387 1.4 Public utilities...... 341,055 12,514 (511) 353,058 353,058 6.0 Industrial and miscellaneous........ 3,058,468 100,595 (4,516) 3,154,547 3,154,547 54.0 Redeemable preferred stocks................ 4,870 508 -0- 5,378 5,378 .1 ---------- -------- -------- ---------- ---------- ----- Total fixed maturities........... 5,628,923 222,252 (9,485) 5,841,690 5,841,690 100.0% Equity securities: Common stocks: Banks and insurance companies............ 2,014 8,703 (10) 10,707 10,706 Industrial and all others............... 242 2 (31) 213 213 Non-redeemable preferred stocks...... 1,028 456 -0- 1,484 1,485 ---------- -------- -------- ---------- ---------- Total equity securities........... 3,284 9,161 (41) 12,404 12,404 ---------- -------- -------- ---------- ---------- Total fixed maturities and equity securities........... $5,632,207 $231,413 $ (9,526) $5,854,094 $5,854,094 ========== ======== ======== ========== ==========
51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 3--Investment Operations (continued) A schedule of fixed maturities by contractual maturity at December 31, 1998 is shown below on an amortized cost basis and on a market value basis. Actual maturities could differ from contractual maturities due to call or prepayment provisions.
Amortized Market Cost Value ---------- ---------- Fixed maturities available for sale: Due in one year or less... $ 154,886 $ 155,961 Due from one to five years.................... 978,186 1,019,278 Due from five to ten years.................... 1,443,002 1,523,155 Due after ten years....... 1,888,194 1,973,823 ---------- ---------- 4,464,268 4,672,217 Redeemable preferred stocks................... 2,548 2,731 Mortgage-backed and asset- backed securities........ 1,052,956 1,093,499 ---------- ---------- $5,519,772 $5,768,447 ========== ==========
Proceeds from sales of fixed maturities available for sale were $758 million in 1998, $745 million in 1997, and $487 million in 1996. Gross gains realized on those sales were $6.1 million in 1998, $1.3 million in 1997, and $8.7 million in 1996. Gross losses were $20.1 million in 1998, $32.2 million in 1997, and $5.3 million in 1996. Torchmark had $24.7 million and $30.5 million in investment real estate at December 31, 1998 and 1997, respectively, which was nonincome producing during the previous twelve months. These properties included primarily construction in process and land. Torchmark had $124 thousand in non-income producing mortgages as of year end 1998. There were no fixed maturity investments, or other long-term investments which were nonincome producing at December 31, 1998. Derivative investments were immaterial to Torchmark at December 31, 1998. These investments consist of interest-only and principal-only collateralized mortgage obligations. Torchmark's total carrying value of these investments was $9.6 million and $26.4 million at December 31, 1998 and 1997, respectively. Torchmark has no off-balance sheet exposure in connection with these investments. Note 4--Property and Equipment A summary of property and equipment used in the business is as follows:
December 31, 1998 December 31, 1997 --------------------- --------------------- Accumulated Accumulated Cost Depreciation Cost Depreciation -------- ------------ -------- ------------ Company occupied real estate........ $ 59,417 $28,697 $ 55,780 $25,313 Data processing equipment........... 19,915 18,743 19,201 18,342 Transportation equipment............ 11,157 7,551 11,034 7,367 Furniture and office equipment...... 35,777 32,195 33,812 31,705 -------- ------- -------- ------- $126,266 $87,186 $119,827 $82,727 ======== ======= ======== =======
Depreciation expense on property used in the business was $4.2 million, $4.6 million, and $4.1 million, in each of the years 1998, 1997, and 1996, respectively. 52 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:
1998 1997 1996 ---------------------- ---------------------- ---------------------- 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................... $1,371,131 $216,988 $1,253,727 $244,368 $1,121,325 $277,297 Additions: Deferred during peri- od: Commissions........... 207,864 -0- 199,177 -0- 185,197 -0- Other expenses........ 148,629 -0- 128,909 -0- 115,264 -0- ---------- -------- ---------- -------- ---------- -------- Total deferred....... 356,493 -0- 328,086 -0- 300,461 -0- Deductions: Amortized during peri- od................... (210,287) (20,737) (197,160) (27,380) (185,148) (32,929) Adjustment attributable to unrealized investment (gains)/losses(1) ... (3,092) -0- (13,324) -0- 17,838 -0- Adjustment attributable to realized investment gains(1)............. -0- -0- (198) -0- (749) -0- Business disposed..... (11,734) (25,611) -0- -0- -0- -0- ---------- -------- ---------- -------- ---------- -------- Total deductions..... (225,113) (46,348) (210,682) (27,380) (168,059) (32,929) ---------- -------- ---------- -------- ---------- -------- Balance at end of year.. $1,502,511 $170,640 $1,371,131 $216,988 $1,253,727 $244,368 ========== ======== ========== ======== ========== ========
- -------- (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 $13.2 million, $16.6 million, and $18.9 million, for the years ended December 31, 1998, 1997, and 1996, respectively. The average interest rates used for the years ended December 31, 1998, 1997, and 1996 were 6.8%, 7.19%, and 7.26%, respectively. The estimated amount of the unamortized balance at December 31, 1998 to be amortized during each of the next five years is: 1999, $17.8 million; 2000, $15.8 million; 2001, $14.0 million; 2002, $12.5 million; and 2003, $11.2 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. 53 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--Disposal of Energy Segment On September 30, 1996, Torchmark completed the sale of its energy business segment including its energy asset management subsidiary, Torch Energy, and its Black Warrior coalbed methane investment. After the sale, Torchmark had no controlling ownership interest in any energy asset management organization. These operations were reclassified as discontinued operations in Torchmark's financial statements. Prior to the Sale, Torch Energy transferred to Torchmark marketable securities, warrants, and Section 29 energy-related tax credits, which approximated $112 million at closing. Torchmark received at closing subordinated debt and notes totaling $32.5 million along with $15.5 million in cash. After closing costs and retained liabilities, Torchmark recorded a pretax loss of $23 million and an after-tax loss of $7 million from the sale, or $.05 per share. In the first quarter of 1996, Torch Energy sold 1.5 million of its shares in Nuevo Energy common stock for proceeds of $35.6 million. These proceeds were transferred to Torchmark in the form of a dividend prior to the sale. Additionally, there were 1.3 million shares of Nuevo common stock included in the above mentioned transferred marketable securities which were sold in the fourth quarter of 1996 for proceeds of $57.6 million. Note 8--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. 54 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, 1998 is as follows: Individual Life Insurance Interest assumptions:
Percent of Years of Issue Interest Rates Liability -------------- --------------------- ---------- 1917-1998 3.00% 3% 1947-1954 3.25% 1 1927-1998 3.50% 1 1955-1961 3.75% 1 1925-1998 4.00% 12 1962-1969 4.50% graded to 4.00% 2 1970-1980 5.50% graded to 4.00% 4 1970-1998 5.50% 1 1929-1998 6.00% 14 1986-1994 7.00% graded to 6.00% 12 1954-1998 8.00% graded to 6.00% 12 1951-1985 8.50% graded to 6.00% 10 1980-1987 8.50% graded to 7.00% 1 1984-1998 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 -------------- --------------------- ---------- 1962-1998 3.00% 2% 1982-1998 4.50% 2 1993-1998 6.00% 19 1986-1992 7.00% graded to 6.00% 53 1955-1998 8.00% graded to 6.00% 15 1951-1986 8.50% graded to 6.00% 9 --- 100% ===
55 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 1998 was 6.2%. Note 10--Liability for Unpaid Health Claims Activity in the liability for unpaid health claims is summarized as follows:
Year ended December 31, --------------------------- 1998 1997 1996 -------- -------- -------- Balance at beginning of year:................. $178,989 $173,900 $170,566 Incurred related to: Current year................................. 518,993 503,948 495,642 Prior year................................... (2,670) 15,280 179 -------- -------- -------- Total incurred................................ 516,323 519,228 495,821 Paid related to: Current year................................. 342,084 349,815 340,310 Prior year................................... 207,426 164,324 152,177 -------- -------- -------- Total paid.................................... 549,510 514,139 492,487 -------- -------- -------- Balance at end of year........................ $145,802 $178,989 $173,900 ======== ======== ========
The liability for unpaid health claims is included with "Policy claims and other benefits payable" on the Balance Sheet. 56 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, ---------------------------- 1998 1997 1996 -------- -------- -------- Income from continuing operations............. $154,338 $138,409 $138,676 Discontinued operations....................... 92,772 40,081 26,133 Monthly income preferred securities dividend.. (5,265) (5,318) (5,199) Shareholders' equity: Unrealized gains (losses).................... 8,540 49,832 (50,457) Tax basis compensation expense (from the exercise of stock options) in excess of amounts recognized for financial reporting purposes.................................... (933) (44,011) (1,947) Other......................................... (1,964) 1,514 (898) -------- -------- -------- $247,488 $180,507 $106,308 ======== ======== ========
Income tax expense attributable to income from continuing operations consists of:
Year ended December 31, -------------------------- 1998 1997 1996 -------- -------- -------- Current income tax expense....................... $118,827 $ 92,989 $ 89,786 Deferred income tax expense...................... 35,511 45,420 48,890 -------- -------- -------- $154,338 $138,409 $138,676 ======== ======== ========
In 1998, 1997, and 1996, 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, ------------------------------------------- 1998 % 1997 % 1996 % -------- --- -------- --- -------- --- Expected income taxes............ $156,447 35% $137,200 35% $135,622 35% Increase (reduction) in income taxes resulting from: Tax-exempt investment income.... (7,111) (2) (6,165) (2) (6,766) (2) Equity in earnings of Vesta..... (9,485) (2) 5,850 1 4,779 1 Sale of Family Service.......... 13,460 3 -0- -0- Other........................... 1,027 1 1,524 1 5,041 2 -------- --- -------- --- -------- --- Income taxes..................... $154,338 35% $138,409 35% $138,676 36% ======== === ======== === ======== ===
57 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, ------------------ 1998 1997 -------- -------- Deferred tax assets: Investments, principally due to the use of market value in recording the cost of fixed maturities for financial reporting purposes but not for tax purposes (in the acquisition of a subsidiary)............................. $ -0- $ 2,376 Unconsolidated affiliates, principally due to the use of equity method accounting for financial reporting purposes but not for tax purposes................................. 2,648 -0- Present value of future policy surrender charges.......... 20,153 13,925 Other assets and other liabilities, principally due to the current nondeductibility of certain accrued expenses for tax purposes............................................. 30,605 38,987 -------- -------- Total gross deferred tax assets........................... 53,406 55,288 Less valuation allowance.................................. (2,111) (2,111) -------- -------- Net deferred tax assets................................... 51,295 53,177 Deferred tax liabilities: Investments, principally due to the accrual of discount for financial reporting purposes but not for tax purposes................................................. 1,972 -0- Unconsolidated affiliates, principally due to the use of equity method accounting for financial reporting purposes but not for tax purposes................................. -0- 19,208 Deferred acquisition costs................................ 381,415 363,077 Unrealized investment gains............................... 82,324 73,784 Future policy benefits, unearned and advance premiums, and policy claims............................................ 46,621 15,911 Other..................................................... 15,625 9,877 -------- -------- Total gross deferred tax liabilities...................... 527,957 481,857 -------- -------- Net deferred tax liability................................. $476,662 $428,680 ======== ========
The valuation allowance for deferred tax assets as of December 31, 1998 and 1997 was $2.1 million. Subsequently recognized tax benefits of $2.1 million relating to the December 31, 1998 valuation allowance will be allocated to goodwill. 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, 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. 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 12--Postretirement Benefits Pension Plans: Torchmark has retirement benefit plans and savings plans which cover substantially all employees. There is also a nonqualified excess benefit 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 ------------ ------------ ------- ------- 1998.................... $1,530 $2,875 $399 1997.................... 2,123 3,244 526 1996.................... 2,133 3,358 467
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. 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 $7.2 million and $5.0 million at December 31, 1998 and 1997, 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 and $5.4 million as of December 31, 1998 and 1997, respectively. Net periodic pension cost for the defined benefit plans by expense component was as follows:
Year Ended December 31, ---------------------------- 1998 1997 1996 -------- -------- -------- Service cost--benefits earned during the period.................................. $ 4,555 $ 4,732 $ 5,277 Interest cost on projected benefit obli- gation.................................. 7,595 7,389 7,145 Actual return on assets.................. (21,572) (17,014) (14,309) Net amortization and deferral............ 12,696 8,663 5,712 -------- -------- -------- Net periodic pension cost................ $ 3,274 $ 3,770 $ 3,825 ======== ======== ========
59 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, ------------------ 1998 1997 -------- -------- Changes in benefit obligation: Obligation at beginning of year..................... $ 98,078 $ 94,665 Service cost........................................ 4,555 4,732 Interest cost....................................... 7,595 7,389 Actuarial loss (gain)............................... 7,823 71 Benefits paid....................................... (8,331) (8,779) -------- -------- Obligation at end of year........................... 109,720 98,078 Changes in plan assets: Fair value at beginning of year..................... 108,942 99,803 Return on assets.................................... 21,572 17,014 Contributions....................................... 1,106 905 Benefits paid....................................... (8,331) (8,779) -------- -------- Fair value at end of year........................... 123,289 108,943 -------- -------- Funded status at year end........................... 13,569 10,865 Unrecognized amounts at year end: Unrecognized actuarial loss (gain).................. (25,016) (19,965) Unrecognized prior service cost..................... 851 907 Unrecognized transition obligation.................. (356) (596) -------- -------- Net amount recognized at year end................... $(10,952) $ (8,789) ======== ======== Amounts recognized consist of: Prepaid benefit cost................................ $ 212 $ 171 Accrued benefit liability........................... (12,083) (10,570) Intangible asset.................................... 919 1,610 -------- -------- Net amount recognized at year end................... $(10,952) $ (8,789) ======== ========
The weighted average assumed discount rates used in determining the actuarial benefit obligations was 7.0% in 1998 and 7.5% in 1997. The rate of assumed compensation increase was 4.0% in 1998 and 4.5% in 1997 while the expected long-term rate of return on plan assets was 9.22% in 1998 and 9.25% in 1997. 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. 60 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 other than pensions is as follows:
Year Ended December 31, ------------------- 1998 1997 1996 ----- ----- ----- Service cost....................................... $ 249 $ 248 $ 249 Interest cost on accumulated postretirement benefit obligation........................................ 493 490 546 Actual return on plan assets....................... -0- -0- -0- Net amortization and deferral...................... (281) (377) (233) ----- ----- ----- Net periodic postretirement benefit cost........... $ 461 $ 361 $ 562 ===== ===== =====
The following table presents a reconciliation of the benefit obligation and plan assets from the beginning to the end of the year, also reconciling the funded status to the accrued benefit liability.
Benefits Other Than Pensions For the year ended December 31, 1998 1997 --------------- --------------- Changes in benefit obligation: Obligation at beginning of year....... $ 6,431 $ 6,787 Service cost.......................... 249 249 Interest cost......................... 493 490 Amendments............................ (149) -0- Actuarial loss (gain)................. 435 (384) Benefits paid......................... (610) (711) --------------- --------------- Obligation at end of year............. 6,849 6,431 Changes in plan assets: Fair value at beginning of year....... -0- -0- Return on assets...................... -0- -0- Contributions......................... 610 711 Benefits paid......................... (610) (711) --------------- --------------- Fair value at end of year............. -0- -0- --------------- --------------- Funded status at year end............ (6,849) (6,431) Unrecognized amounts at year end: Unrecognized actuarial loss (gain).... (1,259) (1,769) Unrecognized prior service cost....... (506) (563) --------------- --------------- Net amount recognized at year end as accrued benefit liability........... $ ( 8,614) $ ( 8,763) =============== ===============
For measurement purposes, a 7.0% to 8.0% annual rate of increase in per capita cost of covered healthcare benefits was assumed for 1998. These rates grade to ranges of 4.5% to 5.5% by the year 2007. 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................ $ 79 $ (67) Benefit obligation.................................. 517 (453)
The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.38% in 1998 and 7.37% in 1997. 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 12--Postretirement Benefits (continued) For measurement purposes, a 7.0% to 8.0% annual rate of increase in per capita cost of covered healthcare benefits was assumed for 1998. These rates grade to ranges of 4.5% to 5.5% by the year 2007. 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................ $ 79 $ (67) Benefit obligation.................................. 517 (453)
The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.38% in 1998 and 7.37% in 1997. Note 13--Debt An analysis of debt at carrying value is as follows:
December 31, ----------------------------------------- 1998 1997 -------------------- -------------------- Short-term Long-term Short-term Long-term Debt Debt Debt Debt ---------- --------- ---------- --------- Sinking Fund Debentures............ $ 8,000 $170,354 Senior Notes, due 1998............. 199,898 Senior Debentures, due 2009........ $ 99,450 99,450 Notes, due 2023.................... 185,394 195,969 Notes, due 2013.................... 98,578 98,525 Commercial paper................... $355,242 138,963 Other notes and mortgages payable at various interest rates; collateralized by buildings ...... 150 291 -------- -------- -------- -------- $355,392 $383,422 $347,152 $564,298 ======== ======== ======== ========
The amount of debt that becomes due during each of the next five years is: 1999, $355,392, and 2000-2003, $0. 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. The 9 5/8% Senior Notes matured on May 1, 1998. The principal amount of $200 million with accrued interest was repaid from additional commercial paper borrowings. 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, which are not redeemable at the option of Torchmark prior to maturity, provided the holder with an option to require Torchmark to repurchase the debentures on August 15, 1996 at principal amount plus accrued interest. Pursuant to this option, $550 thousand debentures were repurchased in 1996. The Senior Debentures have equal priority with other Torchmark unsecured indebtedness. 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 13--Debt (continued) 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 October, 1998, $10.8 million principal amount were purchased in the open market at a cost of $10.6 million. 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%. 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 borrowings. At December 31, 1998 and December 31, 1997 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 $287 million during 1998, and were made at an average yield of 5.58%. At December 31, 1998, commercial paper was outstanding in the face amount of $357 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, 1998, and pays a facility fee based on size of the line. Interest in the amount of $2.4 million, $1.7 million, and $1.4 million was capitalized during 1998, 1997, and 1996, 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 are redeemable at Torchmark's option after 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 insures that the variable rate cannot exceed 10.39% through September 30, 1999. The interest rate was 7.02% at December 31, 1998 and 7.36% at December 31, 1997. Torchmark paid the final yearly fee of $860 thousand for the cap agreement on September 30, 1998. The market value of the swap agreement was a benefit of $24.7 million December 31, 1998 and $18.7 million at December 31, 1997. The market value of the cap agreement, net of the present value of future annual payments, was $0 at December 31, 1998 and $.8 million at December 31, 1997. Except as otherwise described in Note 3--Investments, Torchmark is a party to no other derivative instruments as defined by SFAS 119. 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 15--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 ------ -------- ----------- ----------- 1996: Balance at December 31, 1995........ -0- -0- 147,568,456 (4,234,182) Issuance of common stock due to exercise of stock options.......... 676,376 Other treasury stock acquired....... (4,618,700) --- --- ----------- ----------- Balance at December 31, 1996........ -0- -0- 147,568,456 (8,176,506) 1997: Issuance of common stock due to exercise of stock options.......... 280,452 5,539,596 Other treasury stock acquired....... (5,171,558) --- --- ----------- ----------- -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) --- --- ----------- ----------- -0- -0- 147,800,908 (10,951,933) === === =========== ===========
At December 31, 1998 At December 31, 1997 --------------------- --------------------- 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 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, and 4.6 million shares at a cost of $107 million in 1996. 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. 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 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 1999, $258 million will be available to Torchmark for dividends from insurance subsidiaries in compliance with statutory regulations without prior regulatory approval. 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 15--Shareholders' Equity (continued) Earnings Per Share: A reconciliation of basic and diluted weighted-average shares outstanding, in accordance with SFAS 128, is as follows:
1998 1997 1996 ----------- ----------- ----------- Basic weighted average shares outstanding.. 139,998,671 139,202,354 142,459,783 Weighted average dilutive options outstanding............................... 1,353,241 2,228,802 1,323,435 ----------- ----------- ----------- Diluted weighted average shares outstanding............................... 141,351,912 141,431,156 143,783,218 =========== =========== ===========
Weighted average options outstanding considered to be anti-dilutive under SFAS 128 totaled 0, 742,472, and 598,342 as of December 31, 1998, 1997 and 1996, 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 16--Employee Stock Options Certain employees and directors 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 Torchmark Corporation 1987 Stock Incentive Plan ("1987 Option Plan"). The options are exercisable during the period commencing from the date they vest until expiring ten years or ten years and two days after grant. Employee stock options granted under the 1987 Option Plan generally vest one-half in two years and one-half in three years. Director grants generally vest in six months. A grant in September, 1997 vested immediately. Deferred executive and director grants 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 ---------------------------------- 1998 1997 1996 ---------- ---------- ---------- Balance at January 1..................... 2,434,004 1,345,080 2,499,778 Amendment of 1987 Plan................... 4,800,000 1998 Stock Incentive Plan................ 14,000,000 Deferred and Director Grants............. (216,481) (633,672) Grant of restricted stock(1)............. (117,500) Expired.................................. 13,700 32,896 293,502 Closure of option plans(2)............... (2,113,723) Granted(3)............................... (807,494) (3,110,300) (1,448,200) ---------- ---------- ---------- Balance on December 31................... 13,192,506 2,434,004 1,345,080 ========== ========== ==========
- -------- (1) This stock grant was made from the 1987 Stock Incentive Plan. (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. (3) Granted from the 1998 Stock Incentive Plan. 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. 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 16--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 1998, 1997 and 1996:
1998 1997 1996 -------- -------- -------- Risk-free interest rate........................... 4.8% 6.1% 6.4% Dividend yield.................................... 1.1% 1.7% 3.7% Volatility factor................................. 22.8 23.7 22.8 Weighted average expected life (in years)......... 4.71 3.93 4.17
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):
1998 1997 1996 -------- -------- -------- Pro forma net income............................. $245,383 $318,671 $309,657 Pro forma basic net income per share............. 1.75 2.29 2.17 Pro forma diluted net income per share........... 1.74 2.25 2.15
On September 25, 1997, Torchmark executed a stock option exercise and "reload" program through which over 100 Torchmark directors and employees exercised vested stock options and received 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. As a result of the "reload" program, 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. 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. 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 16--Employee Stock Options (continued) A summary of Torchmark's stock option activity adjusted for the stock dividend, and related information for the years ended December 31, 1998, 1997, and 1996 follows:
1998 1997 1996 ---------------------------- ---------------------------- --------------------------- Weighted Average Weighted Average Weighted Average Options Exercise Price Options Exercise Price Options Exercise Price ---------- ---------------- ---------- ---------------- --------- ---------------- Outstanding-beginning of year................ 7,241,050 $29.76 9,350,022 $18.52 8,871,700 $17.31 Granted................. 1,023,975 34.97 3,743,972 36.70 1,448,200 24.55 Exercised............... (175,240) 22.58 (5,820,048) 16.17 (676,376) 15.00 Expired................. (13,700) 29.19 (32,896) 29.81 (293,502) 19.63 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. 7,228,400 27.04 7,241,050 29.76 9,350,022 18.52 ========== ========== ========= Exercisable at end of year................... 5,038,081 26.24 4,189,238 32.82 6,188,622 16.47
The weighted average fair value of options granted during the years ended December 31, 1998, 1997 and 1996 were $8.88, $8.43, and $5.08, respectively. 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 16--Employee Stock Options (continued) The following table summarizes information about stock options outstanding at December 31, 1998:
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 13.32138 January 15, 1991 14,699 14,699 January 17, 2001 13.91029 January 2, 1991 21,029 21,029 January 4, 2001 14.17778 January 25, 1990 21,029 21,029 January 27, 2000 14.55172-14.70181 December 16, 1994 179,899 179,899 December 18, 2004 14.55222-14.57135 December 7, 1992 9,390 9,390 December 9, 2002 14.55659-14.57236 December 14, 1993 20,337 20,337 December 16, 2003 14.57232-14.57573 October 1, 1993 6,552 6,552 October 3, 2003 14.7127-14.73215 December 12, 1991 31,364 31,364 December 14, 2001 14.92781 January 3, 1995 7,010 7,010 January 5, 2005 15.94885* December 18, 1996 60,000 12,000 December 18, 2007 16.42468 January 2, 1992 21,029 21,029 January 4, 2002 18.56413-18.5922 December 20, 1995 1,151,575 1,151,575 December 22, 2005 18.61765-18.63421 December 14, 1993 62,219 62,219 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 19.94133 October 1, 1993 2,536 2,536 October 3, 2003 21.29257-21.30859 December 16, 1996 1,040,887 520,444 December 18, 2006 21.50657-21.52056 January 2, 1997 142,003 8,827 January 4, 2007 22.14864-22.16202 January 31, 1997 466,015 329,347 January 31, 2008 22.25559-22.26895 December 7, 1992 96,411 96,411 December 9, 2002 24.7174-24.72794 January 4, 1993 19,010 19,010 January 6, 2003 33.27631-33.28237 December 24, 1997 340,361 0 December 26, 2007 33.4375 December 16, 1998 687,600 0 December 18, 2008 33.4375 December 16, 1998 119,894 0 December 16, 2009 33.4903-33.497 September 25, 1997 2,435,922 2,435,922 September 27, 2007 33.54382 January 9, 1998 12,984 0 January 9, 2009 34.75 December 30, 1998 39,659 0 December 30, 2009 35.63037 February 16, 1998 12,056 0 February 16, 2009 36.11175-36.11284 January 2, 1998 152,709 36,000 January 4, 2008 36.37928 February 10, 1998 11,357 0 February 10, 2009 36.43278 February 4, 1998 11,412 0 February 4, 2009 --------- --------- 7,228,400 5,038,081 ========= =========
- -------- * Issued when the market price was $24.8125. Option price at that time (prior to the Waddell & Reed spin-off adjustment) was $18.61. Note 17--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, 1998. Insurance ceded on life and accident and health products represents .8% of premium income for 1998. 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 2.5% of life insurance in force at December 31, 1998 and reinsurance assumed on life and accident and health products represents 1.8% of premium income for 1998. 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 17--Commitments and Contingencies (continued) 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 $3.2 million in each of the years 1998, 1997, and 1996. Future minimum rental commitments required under operating leases having remaining noncancelable lease terms in excess of one year at December 31, 1998 are as follows: 1999, $2.0 million; 2000, $1.3 million; 2001, $639 thousand; 2002, $397 thousand; 2003, $197 thousand; and in the aggregate, $4.5 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, 1998, the investment portfolio consisted of securities of the U.S. government or U.S. government-backed securities (12%); non government-guaranteed mortgage-backed securities (6%); short-term investments, which generally mature within one month (1%); securities of state and municipal governments (10%); securities of foreign governments (1%) and investment-grade corporate bonds (57%). The remainder of the portfolio was in real estate (3%), which is not considered a financial instrument according to GAAP; policy loans (4%), which are secured by the underlying insurance policy values; and equity securities, noninvestment grade securities, and other long-term investments (6%). 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, 1998, 1% or more of the portfolio was invested in the following industries: Financial services (19%); regulated utilities (7%); consumer goods (5%); chemicals and allied products (4%); manufacturing (4%); transportation (4%); services (4%); retailing (3%); machinery and equipment (3%); media/communications (3%); petroleum (3%); asset-backed securities (2%); and forestry, paper, and allied products (1%). Otherwise, no individual industry represented 1% or more of Torchmark's investments. At year-end 1998, 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 $294.7 million, amortized cost was $294.5 million, and market value was $295.3 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. 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. As a practical matter, a jury's discretion regarding the amount of a punitive damage award is not limited by any clear, objective criteria under Alabama law. Accordingly, the likelihood or extent of a punitive damage award in any given case is virtually impossible to predict. As of December 31, 1998, Liberty was a party to approximately 125 active lawsuits (including 29 employment related cases and excluding interpleaders and stayed cases), more than 110 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. 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 17--Commitments and Contingencies (continued) As previously reported, Liberty has been subject to 76 individual cancer policy lawsuits pending in Alabama and Mississippi, which were stayed or otherwise held in abeyance pending final resolution of Robertson v. Liberty National Life Insurance Company (Case No. CV-92-021). Liberty filed motions to dismiss these lawsuits based upon the U.S. Supreme Court opinion issued in Robertson in March 1997. Only two of these individual cancer policy lawsuits remain, the other such suits having been dismissed. It has been previously reported that Liberty was a party to 53 individual cases filed in Chambers County, Alabama involving allegations that an interest-sensitive life insurance policy would become paid-up or self- sustaining after a specified number of years. Only one of these cases remains pending with all others having been settled and dismissed by the Chambers County Circuit Court. As previously reported, Torchmark, its insurance subsidiaries Globe and United American, and certain Torchmark officers were named as defendants in purported class action litigation filed in the District Court of Oklahoma County, Oklahoma (Moore v. Torchmark Corporation, Case No. CJ-94-2784-65, subsequently amended and restyled Tabor v. Torchmark Corporation). This suit claims damages on behalf of individual health policyholders who are alleged to have been induced to terminate such policies and to purchase Medicare Supplement and/or other insurance coverages. On February 6, 1998, the defendants renewed their motion to dismiss the class claims for failure to prosecute. The District Court, in an order dated April 2, 1998, allowed bifurcation of Tabor into Medicare Supplement policy claims and non-Medicare Supplement policy claims. The non-Medicare Supplement claims were stayed pending disposition of a related case involving the same plaintiffs filed in Mississippi while discovery was allowed to proceed on plaintiffs' motion to certify a class of Medicare Supplement policyholders' claims. 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 does 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. 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 have 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. 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 17--Commitments and Contingencies (continued) Torchmark has previously reported the case of Lawson v. Liberty National Life Insurance Company (Case No. CV-96-01119), filed in the Circuit Court of Jefferson County, Alabama, where the plaintiffs sought to represent a class of interest-sensitive life insurance policyholders, including those allegedly induced to exchange life insurance policies or where the existing policy's cash value was allegedly depleted, in litigation alleging fraud, negligence and breach of contract in the sale or exchange of interest- sensitive policies by Liberty. Torchmark was subsequently added as a defendant. In May 1996, the Circuit Court entered an order conditionally certifying a plaintiffs class, which was subsequently redefined in March 1997. The Circuit Court's order allowed the parties to challenge the conditional certification based upon subsequent discovery in the case. In March 1998, the defendants challenged the conditional certification and a hearing on final certification was held in October 1998. On February 9, 1999, the Circuit Court entered an order decertifying the conditional class and denying all petitions to certify a class in Lawson. Purported class action litigation was filed on January 2, 1996 against Torchmark, Torch Energy Advisors Incorporated, and certain Torch Energy subsidiaries and affiliated limited partnerships in the Circuit Court of Pickens County, Alabama (Pearson v. Torchmark Corporation, Case No. CV-95- 140). Plaintiff alleges improper payment of royalties and overriding royalties on coalbed methane gas produced and sold from wells in Robinson's Bend Coal Degasification Field, seeks certification of a class and claims unspecified compensatory and punitive damages on behalf of such class. On April 11, 1996, Torchmark's motion to change venue was granted and the case has been transferred to the Circuit Court of Tuscaloosa County, Alabama. Torchmark's motion to dismiss remains pending while discovery is proceeding. On February 10, 1999, the plaintiffs filed a request for a class certification hearing and to set a trial date for the Pearson case. 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 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. It has been previously reported that in July 1998, a jury in U.S. District Court in the Middle District of Florida recommended an aggregate total verdict amounting to $21.6 million against Liberty in Hipp v. Liberty National Life Insurance Company (Case No. 95-1332-CIV-T-17A). This case, originally filed in 1995 in the Florida state court system, is a collective action under the Fair Labor Standards Act, alleging age discrimination by Liberty in violation of the Age Discrimination in Employment Act and the Florida Civil Rights Act. The plaintiffs, ten present or former Liberty district managers, sought damages for lost wages, loss of future earnings, lost health and retirement benefits and lost raises and expenses. Three of these plaintiffs, Florida residents, also sought compensatory and punitive damages allowable under Florida law. On November 20, 1998, the District Court remitted the $10 million punitive damage portion of the jury 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 17--Commitments and Contingencies (continued) verdict to $0, thus reducing the total verdict to $11 million (including an advisory verdict of $3.2 million in front pay awards). Additional revised front pay submissions were made by the plaintiffs to the District Court in December 1998 and Liberty responded thereto in January 1999. Liberty is awaiting the entry of a final judgment in the Hipp case and thereafter will pursue all available post trial and appellate relief. Note 18--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. 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. 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 1998 --------------------------------------------------------------- Life Health Annuity Total -------------- -------------- ------------- ---------------- % of % of % of % of Distribution Channel Amount Total Amount Total Amount Total Amount Total - -------------------- -------- ----- -------- ----- ------- ----- ---------- ----- Direct Response......... $221,371 23.1% $ 8,817 1.2% $ 230,188 13.1% Liberty National Exclusive.............. 281,145 29.3 135,861 17.9 $ 84 0.2% 417,090 23.8 American Income Exclusive.............. 204,310 21.3 47,074 6.2 251,384 14.3 United American Independent............ 36,925 3.8 417,556 54.9 445 1.3 454,926 25.9 United American Exclusive.............. 18,798 2.0 150,602 19.8 169,400 9.7 Military Independent.... 92,204 9.6 92,204 5.3 United Investors Exclusive.............. 81,620 8.5 33,065 97.4 114,685 6.5 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 - -------------------- -------- ----- -------- ----- ------- ----- ---------- ----- Direct Response......... $195,393 21.5% $ 6,467 0.9% $ 201,860 12.0% 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 United American Independent............ 36,810 4.0 428,775 58.0 333 1.2 465,918 27.8 United American Exclusive.............. 18,243 2.0 132,426 17.9 150,669 9.0 Military Independent.... 79,631 8.8 79,631 4.7 United Investors Exclusive.............. 77,986 8.6 27,009 94.7 104,995 6.3 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% ======== ===== ======== ===== ======= ===== ========== =====
72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 18--Business Segments (continued)
For the Year 1996 --------------------------------------------------------------- Life Health Annuity Total -------------- -------------- ------------- ---------------- % of % of % of % of Distribution Channel Amount Total Amount Total Amount Total Amount Total - -------------------- -------- ----- -------- ----- ------- ----- ---------- ----- Direct Response......... $171,983 20.1% $ 3,519 0.5% $ 175,502 10.9% Liberty National Exclusive.............. 279,637 32.7 120,028 16.4 $ 99 0.4% 399,764 24.8 American Income Exclusive.............. 173,700 20.3 44,172 6.0 217,872 13.5 United American Independent............ 33,404 3.9 440,862 60.2 249 1.1 474,515 29.5 United American Exclusive.............. 15,767 1.8 124,037 16.9 139,804 8.7 Military Independent.... 71,223 8.3 71,223 4.4 United Investors Exclusive.............. 73,836 8.6 20,681 92.3 94,517 5.9 Other................... 35,347 4.3 1,375 6.2 36,722 2.3 -------- ----- -------- ----- ------- ----- ---------- ----- $854,897 100.0% $732,618 100.0% $22,404 100.0% $1,609,919 100.0% ======== ===== ======== ===== ======= ===== ========== =====
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 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 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. 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 18--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. 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 18--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. 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 18--Business Segments (continued)
For the year 1996 ----------------------------------------------------------------------------------------------------- Family Service Underwriting Life Health Annuity Investment Other Corporate Income Adjustments Consolidated --------- -------- -------- ---------- --------- --------- ------------ ----------- ------------ Revenue: Premium............ $ 842,186 $732,618 $ 21,029 $14,086 $1,609,919 Net Investment income............ $410,189 $(10,638) 399,551 Other income....... $ 2,936 (1,820) 1,116 --------- -------- -------- -------- --------- -------- ------- -------- ---------- Total revenue.... 842,186 732,618 21,029 410,189 2,936 14,086 (12,458) 2,010,586 Expenses: Policy benefits.... 538,233 448,346 32,085 (18) 39,438 1,058,084 Required reserve interest.......... (186,306) (26,137) (38,972) 298,408 (46,993) -0- Amortization of acquisition costs. 138,553 63,150 7,280 10,937 (1,094) 218,826 Commissions and premium tax....... 53,747 87,687 423 622 (2,031) 140,448 Required interest on acquisition costs............. 75,955 11,475 4,253 (95,556) 3,873 -0- Financing costs*... 88,465 (14,854) 73,611 --------- -------- -------- -------- --------- -------- ------- -------- ---------- Total expenses... 620,182 584,521 5,069 291,317 (18) 7,877 (17,979) 1,490,969 --------- -------- -------- -------- --------- -------- ------- -------- ---------- Underwriting income before other income and administrative expense............ 222,004 148,097 15,960 18 6,209 392,288 Reclass of Family Service............ 5,689 520 (6,209) -0- --------- -------- -------- -------- --------- -------- ------- -------- ---------- Underwriting income before other income and administrative expense**.......... 227,693 148,097 16,480 18 392,288 Excess investment income............. 118,872 118,872 Subtotal adjustments........ 2,936 5,521 8,457 --------- -------- -------- -------- --------- -------- ------- -------- ---------- Subtotal......... 227,693 148,097 16,480 118,872 2,954 5,521 519,617 Administrative expense............ (110,029) (110,029) Parent expense...... $(13,959) (1,893) (15,852) Goodwill amortization....... (12,074) (12,074) Deferred acquisition cost adjustment for realized gains..... 749 749 --------- -------- -------- -------- --------- -------- ------- -------- ---------- Pretax operating income.......... $ 227,693 $148,097 $ 16,480 $118,872 $(107,075) $(26,033) $ -0- $ 4,377 382,411 ========= ======== ======== ======== ========= ======== ======= ======== Add realized investment gains and deferred acquisition cost adjustment.................................. 5,081 ---------- Pretax income........................................................................................ $ 387,492 ==========
- ------- * 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 18--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 financial statements.
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 ========== ======== ========== ========== ======== ======== ======== =========== At December 31, 1997 ------------------------------------------------------------------------------------- Life Health Annuity Investment Other Corporate Adjustments Consolidated ---------- -------- ---------- ---------- -------- --------- ----------- ------------ Cash and invested assets................. $6,575,401 $ 6,575,401 Accrued investment income................. 100,392 100,392 Deferred acquisition costs.................. $1,296,501 $178,903 $ 112,715 1,588,119 Goodwill................ $426,732 426,732 Separate account assets. 1,876,439 1,876,439 Other assets............ $172,655 172,655 Discontinued assets..... $387,910 387,910 ---------- -------- ---------- ---------- -------- -------- -------- ----------- Total assets............ $1,296,501 $178,903 $1,989,154 $6,675,793 $172,655 $426,732 $387,910 $11,127,648 ========== ======== ========== ========== ======== ======== ======== =========== At December 31, 1996 ------------------------------------------------------------------------------------- Life Health Annuity Investment Other Corporate Adjustments Consolidated ---------- -------- ---------- ---------- -------- --------- ----------- ------------ Cash and invested assets................. $5,951,214 $ 5,951,214 Accrued investment income................. 91,837 91,837 Deferred acquisition costs.................. $1,215,863 $175,498 $ 106,734 1,498,095 Goodwill................ $438,806 438,806 Separate account assets. 1,420,025 1,420,025 Other assets............ $159,966 159,966 Discontinued assets..... $334,021 334,021 ---------- -------- ---------- ---------- -------- -------- -------- ----------- Total assets............ $1,215,863 $175,498 $1,526,759 $6,043,051 $159,966 $438,806 $334,021 $ 9,893,964 ========== ======== ========== ========== ======== ======== ======== ===========
77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollar amounts in thousands except per share data) Note 19--Related Party Transactions Transactions Regarding Vesta. Since 1993, Torchmark has held a passive investment in 5.1 million shares of Vesta, a property insurance carrier, representing approximately 28% of the outstanding shares of Vesta. 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. Additionally, Vesta is now subject to numerous class action lawsuits in state and Federal courts filed subsequent to such announcements. During the fourth quarter of 1998, Torchmark announced it had entered into an agreement to sell approximately 1.8 million shares of Vesta common stock to an unaffiliated insurance carrier for $7.42 a share. In its fourth quarter Form 10Q, Torchmark reported its intent to sell its remaining Vesta shares and vacate the two Vesta board seats it occupied. In view of the pending transaction, Torchmark adjusted the carrying value of its holdings in Vesta to estimated net realizable value of $45 million, effective September 30, 1998. The adjustment produced an after-lax realized loss of $24 million or $.17 per Torchmark diluted share. As of December 31, 1998, the terms of the agreement were not met by the unaffiliated insurance carrier and the contract to sell the Vesta shares expired. In the meantime, on December 29, 1998, Torchmark sold 680 thousand Vesta shares to another unrelated institution at a price of $4.75 per share. Torchmark realized a $2 million after-tax loss on the sale. The sale reduced Torchmark's ownership of Vesta to 4.45 million shares or approximately 24% of Vesta at December 31, 1998. Subsequent to Vesta's June, 1998 announcement involving the accounting irregularities and the financial restatements, Torchmark recorded its equity in Vesta's earnings in the quarter that Vesta reported those earnings. As a result, Torchmark's equity in Vesta's reported earnings during 1998, including the restatements, was a pretax loss of $27 million. Torchmark carried Vesta at a value of $32 million at December 31, 1998, reflecting the previously taken writedown. Torchmark leases office space to Vesta. Total rental income received from Vesta was $857 thousand, $585 thousand, and $508 thousand, for the years ended December 31, 1998, 1997 and 1996, respectively. Note 20--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, ------------------------ 1998 1997 1996 -------- ------- ------- Paid-in capital from tax benefit for stock option exercises....................................... $ 933 $39,873 $ 1,598 Discounted/deferred option grants................ 582 2,020 -0- Non-cash assets received from sale of energy operations...................................... -0- -0- 79,289 Non-cash liabilities assumed from sale of energy operations...................................... -0- -0- 48,942 Distribution of Waddell & Reed stock............. 174,113 -0- -0-
The following table summarizes certain amounts paid during the period:
Year Ended December 31, ------------------------ 1998 1997 1996 -------- ------- ------- Interest paid...................................... $ 60,573 $73,537 $74,433 Income taxes paid.................................. $102,753 $31,422 $66,987
78 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, 1998. 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, --------- -------- ------------- ------------ 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 (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 Basic net income per common share from continuing operations excluding realized losses, related DPAC adjustment, and equity in earnings of Vesta.............. .55 .58 .58 .61 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 DPAC adjustment, and equity in earnings of Vesta.............. .55 .57 .58 .60 1997: - ----- Premium and policy charges...... $415,690 $419,887 $420,227 $422,200 Net investment income........... 102,537 105,728 109,504 111,347 Realized investment losses...... (10,831) (22,948) (390) (2,810) Total revenues.................. 507,597 503,116 529,442 530,948 Policy benefits................. 273,081 279,797 279,311 276,711 Amortization of acquisition expenses....................... 56,523 55,128 56,736 56,351 Pretax income from continuing operations..................... 89,940 82,368 110,551 109,140 Income from discontinued operations..................... 18,215 19,559 19,281 20,259 Net income ..................... 77,328 74,590 92,974 92,851 Basic net income per common share from continuing operations..................... .42 .40 .53 .52 Basic net income per common share.......................... .55 .54 .67 .66 Basic net income per common share from continuing operations excluding realized losses, related DPAC adjustment, and equity in earnings of Vesta.............. .46 .48 .51 .51 Diluted net income per common share from continuing operations..................... .42 .39 .52 .51 Diluted net income per common share.......................... .55 .53 .66 .66 Diluted net income per common share from continuing operations excluding realized losses, related DPAC adjustment, and equity in earnings of Vesta.............. .45 .48 .50 .51
79 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. 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, 1997 and the date of the independent accountants report for the consolidated financial statements of Torchmark for the three years ended December 31, 1998, 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. Torchmark's appointment of Deloitte & Touche will be submitted to shareholders for ratification at Torchmark's April, 1999 annual shareholders meeting. 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 29, 1999 (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. 80 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' Report.................................... 38 Consolidated Balance Sheet at December 31, 1998 and 1997........ 39 Consolidated Statement of Operations for each of the years in the three-year period ended December 31, 1998.................. 40 Consolidated Statement of Comprehensive Income for each of the years in the three-year period ended December 31, 1998......... 42 Consolidated Statement of Shareholders' Equity for each of the years in the three-year period ended December 31, 1998......... 43 Consolidated Statement of Cash Flow for each of the years in the three-year period ended December 31, 1998...................... 44 Notes to Consolidated Financial Statements...................... 46 Schedules Supporting Financial Statements for each of the years in the three-year period ended December 31, 1998: II.Condensed Financial Information of Registrant (Parent Compa- ny)............................................................. 86 IV.Reinsurance (Consolidated)................................... 89
Schedules not referred to have been omitted as inapplicable or not required by Regulation S-X. (b) Reports on Form 8-K. The following Forms 8-K were filed by the registrant during the fourth quarter of 1998: (1) Form 8-K dated October 19, 1998, announcing that on November 6, 1998, the registrant would spin-off its remaining stock interest in Waddell & Reed to Torchmark common shareholders; (2) Form 8-K dated October 28, 1998, reporting changes in the registrant's certifying accountant; and (3) Form 8-K/A dated November 20, 1998, reporting completion of the spin- off disposition of Waddell & Reed. No financial statements were required in either of the Forms 8-K. Torchmark Corporation Pro Forma Condensed Consolidated Financial Statements (Unaudited) were filed in Form 8-K/A dated November 20, 1998. (c) Exhibits 81 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) 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) (f) 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) (g) 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) (h) 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) (i) 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)
82
Page of this Report ------- (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 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) (k) 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) (l) 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) (m) 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) (n) The Torchmark Corporation 1998 Stock Incentive Plan (o) 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) (p) 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) (q) 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) (r) 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) (s) 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) (t) 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) (11) Statement re computation of per share earnings 85 (20) Proxy Statement for Annual Meeting of Stockholders to be held April 29, 1999 (21) Subsidiaries of the registrant 85 (23)(a) Consent of KPMG Peat Marwick LLP to incorporation by refer- ence of their audit report dated January 29, 1999, except for Note 17, which is as of February 10, 1999, into Form S-8 of The Torchmark Corporation Savings and Investment Plan (Registration No. 2-76378)
83
Page of this Report ------- (b) Consent of KPMG Peat Marwick LLP to incorporation by refer- ence of their audit report dated January 29, 1999, except for Note 17, which is as of February 10, 1999 into Form S-8 and the accompanying Form S-3 Prospectus of the Torchmark Corpo- ration 1996 Non-Employee Stock Option Plan (Registration No. 2-93760) (c) Consent of KPMG Peat Marwick LLP to incorporation by refer- ence of their audit report dated January 29, 1999, except for Note 17, which is as of February 10, 1999 into Form S-8 and the accompanying Form S-3 Prospectus of the Torchmark Corpo- ration 1987 Stock Incentive Plan (Registration No. 33-23580) (d) Consent of KPMG Peat Marwick LLP to incorporation by reference of their audit report dated January 29, 1999, except for Note 17, 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) (e) Consent of KPMG Peat Marwick LLP to incorporation by refer- ence of their audit report dated January 29, 1999, except for Note 17, which is as of February 10, 1999 into Form S-8 of the Liberty National Life Insurance Company 401(k) Plan (Reg- istration No. 33- 65507) (f) Consent of KPMG Peat Marwick LLP to incorporation by refer- ence of their audit report dated January 29, 1999, except for Note 17, 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 Option Plan (Reg- istration No. 333-27111) (24) Powers of attorney (27) Financial Data Schedule
84 Exhibit 11. Statement re computation of per share earnings TORCHMARK CORPORATION COMPUTATION OF EARNINGS PER SHARE
1998 1997 1996 ------------ ------------ ------------ Net income from continuing operations. $255,776,000 $260,429,000 $252,815,000 Discontinued operations of energy seg- ment: Loss on disposal..................... -0- -0- (7,137,000) Discontinued operations of Waddell & Reed: Net income from operations........... 47,868,000 77,314,000 65,694,000 Loss on disposal..................... (54,241,000) -0- -0- ------------ ------------ ------------ Net income before extraordinary items. 249,403,000 337,743,000 311,372,000 Loss on redemption of debt ........... (4,962,000) -0- -0- ------------ ------------ ------------ Net income............................ $244,441,000 $337,743,000 $311,372,000 ============ ============ ============ Basic weighted average shares out- standing............................. 139,998,671 139,202,354 142,459,783 Diluted weighted average shares out- standing............................. 141,351,912 141,431,156 143,783,218 Basic earnings per share: Net income from continuing operations. $ 1.83 $ 1.87 $ 1.78 Discontinued operations of energy seg- ment: Loss on disposal..................... -0- -0- (0.05) Discontinued operations of Waddell & Reed: Net income from operations........... 0.34 0.56 .46 Loss on disposal..................... (0.39) -0- -0- ------------ ------------ ------------ Net income before extraordinary items. 1.78 2.43 2.19 Loss on redemption of debt............ (0.03) -0- -0- ------------ ------------ ------------ Net income............................ $ 1.75 $ 2.43 $ 2.19 ============ ============ ============ Diluted earnings per share: Net income from continuing operations. $ 1.81 $ 1.84 $ 1.76 Discontinued operations of energy seg- ment: Loss on disposal..................... -0- -0- (0.05) Discontinued operations of Waddell & Reed: Net income from operations........... 0.34 0.55 0.46 Loss on disposal..................... (0.38) -0- -0- ------------ ------------ ------------ Net income before extraordinary items. 1.77 2.39 2.17 Loss on redemption of debt............ (0.04) -0- -0- ------------ ------------ ------------ Net income............................ $ 1.73 $ 2.39 $ 2.17 ============ ============ ============
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 81 through 84 of this report. Exhibits not referred to have been omitted as inapplicable or not required. 85 TORCHMARK CORPORATION (PARENT COMPANY) SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEET (Amounts in thousands)
December 31, ---------------------- 1998 1997 ---------- ---------- Assets: Investments: Long-term investments................................ $ 105,703 $ 23,917 Short-term investments............................... 1,714 336 ---------- ---------- Total investments..................................... 107,417 24,253 Cash.................................................. 7,724 7,272 Investment in affiliates.............................. 3,156,322 3,277,785 Due from affiliates................................... 53,207 114,440 Accrued investment income............................. 1,731 132 Discontinued operations assets........................ -0- 90,335 Other assets.......................................... 35,377 18,961 ---------- ---------- Total assets......................................... $3,361,778 $3,533,178 ========== ========== Liabilities and shareholders' equity: Liabilities: Short-term debt...................................... $ 355,242 $ 346,861 Long-term debt....................................... 394,048 564,298 Taxes payable........................................ 8,683 11,905 Due to affiliates.................................... 61,542 373,792 Other liabilities.................................... 89,476 110,387 ---------- ---------- Total liabilities.................................... 908,991 1,407,243 Monthly income preferred securities................... 193,259 193,199 Shareholders' equity: Preferred stock...................................... 299 -0- Common stock......................................... 147,801 147,849 Additional paid-in capital........................... 910,119 262,731 Accumulated other comprehensive income .............. 144,501 136,926 Retained earnings.................................... 1,707,933 1,694,781 Treasury stock....................................... (651,125) (309,551) ---------- ---------- Total shareholders' equity........................... 2,259,528 1,932,736 ---------- ---------- Total liabilities and shareholders' equity........... $3,361,778 $3,533,178 ========== ==========
See accompanying Independent Auditors' Report. 86 TORCHMARK CORPORATION (PARENT COMPANY) SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued) CONDENSED STATEMENT OF OPERATIONS (Amounts in thousands)
Year Ended December 31, ---------------------------- 1998 1997 1996 -------- -------- -------- Net investment income............................ $ 20,024 $ 5,275 $ 931 Realized investment losses....................... (54,855) (19,706) (5,738) Other income..................................... -0- -0- 1 -------- -------- -------- Total revenue.................................. (34,831) (14,431) (4,806) General operating expenses....................... 10,406 13,880 13,958 Reimbursements from affiliates................... (13,653) (13,956) (13,332) Interest expense................................. 65,871 96,402 88,916 -------- -------- -------- Total expenses................................. 62,624 96,326 89,542 -------- -------- -------- Operating loss before income taxes and equity in earnings of affiliates.......................... (97,455) (110,757) (94,348) Income taxes .................................... 44,132 38,189 23,102 -------- -------- -------- Net operating loss before equity in earnings of affiliates...................................... (53,323) (72,568) (71,246) Equity in earnings of affiliates................. 327,984 420,186 420,900 Adjustment to carrying value of Vesta............ (20,234) -0- -0- Monthly income preferred securities dividend (net of tax)......................................... (9,777) (9,875) (9,655) -------- -------- -------- Net income from continuing operations.......... 244,650 337,743 339,999 Discontinued operations of energy segment: Loss on disposal (net of tax)................... -0- -0- (28,627) Discontinued operations of Waddell & Reed: Income from operations.......................... 9,154 -0- -0- Loss on disposal................................ (4,401) -0- -0- -------- -------- -------- Net income before extraordinary item............. 249,403 337,743 311,372 Loss on redemption of debt (net of tax).......... (4,962) -0- -0- -------- -------- -------- Net income..................................... $244,441 $337,743 $311,372 ======== ======== ========
See accompanying Independent Auditors' Report. 87 TORCHMARK CORPORATION (PARENT COMPANY) SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(continued) CONDENSED STATEMENT OF CASH FLOW (Amounts in thousands)
Year Ended December 31, ------------------------------- 1998 1997 1996 --------- --------- --------- Cash provided from operations before dividends from subsidiaries............................ $ (46,825) $ (35,284) $ (77,291) Cash dividends from subsidiaries............. 462,267 370,032 265,688 --------- --------- --------- Cash provided from operations................. 415,442 334,748 188,397 Cash provided from (used for) investing activ- ities: Disposition of investments................... 217,323 -0- -0- Acquisition of investments................... (311,784) (2,150) (1,667) Investment in subsidiaries................... (710) (174,799) -0- Loans to subsidiaries........................ (48,723) (117,392) (12,508) Repayments on loans to subsidiaries.......... 120,079 28,242 -0- Net decrease (increase) in temporary invest- ments....................................... (1,378) 5,604 (4,946) Additions to properties...................... (48) (454) (49) Other........................................ -0- (7,460) -0- --------- --------- --------- Cash used for investing activities............ (25,241) (268,409) (19,170) Cash provided from (used for) financing activ- ities: Issuance of debt............................. 216,279 98,185 -0- Sale of Vesta shares......................... 3,056 -0- -0- Repayments of debt........................... (380,000) (20,000) (149,020) Issuance of stock............................ 3,957 93,973 10,145 Redemption of preferred stock................ -0- (2,767) -0- Acquisitions of treasury stock............... (125,875) (182,904) (106,996) Borrowed from subsidiaries................... -0- 133,880 153,959 Repayment on borrowings from subsidiaries.... -0- (93,060) 8,500 Payment of dividends......................... (107,166) (86,530) (85,659) --------- --------- --------- Cash provided from (used for) financing activ- ities........................................ (389,749) (59,223) (169,071) Net increase in cash.......................... 452 7,116 156 Cash balance at beginning of period........... 7,272 156 -0- --------- --------- --------- Cash balance at end of period................. $ 7,724 $ 7,272 $ 156 ========= ========= =========
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:
1998 1997 1996 -------- -------- -------- Consolidated subsidiaries..................... $462,267 $370,032 $265,688 ======== ======== ========
See accompanying Independent Auditors' Report. 88 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 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 % =========== ======== ========== =========== === For the Year Ended De- cember 31, 1996: - ---------------------- Life insurance in force. $84,360,821 $655,574 $2,587,330 $86,292,577 3.0 % =========== ======== ========== =========== === Premiums:* Life insurance......... $ 759,321 $ 3,472 $ 26,511 $ 782,360 3.4 % Health insurance....... 742,319 9,835 135 732,619 0 % ----------- -------- ---------- ----------- Total premiums........ $ 1,501,640 $ 13,307 $ 26,646 $ 1,514,979 1.8 % =========== ======== ========== =========== ===
- -------- * Excludes policy charges See accompanying Independent Auditors' Report. 89 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 (Principal Financial Officer) /s/ Gary L. Coleman By: ________________________________ Gary L. Coleman, Vice President and Chief Accounting Officer Date: March 10, 1999 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 Date: March 10, 1999 /s/ Gary L. Coleman *By: _______________________________ Gary L. Coleman Attorney-in-fact 90 EX-10.N 2 1998 STOCK INCENTIVE PLAN EXHIBIT 10.N TORCHMARK CORPORATION 1998 STOCK INCENTIVE PLAN SECTION 1. General Purpose of Plan; Definitions. The name of this plan is the Torchmark Corporation 1998 Stock Incentive Plan (the "Plan"). The purpose of the Plan is to enable Torchmark Corporation (the "Company") and its Subsidiaries to attract and retain employees, consultants and directors who contribute to the Company's success by their ability, ingenuity and industry, and to enable such employees, consultants and directors to participate in the long-term success and growth of the Company through an equity interest in the Company. This Plan replaces the Company's prior stock plans: The Restated Torchmark Corporation 1987 Stock Incentive Plan, The Torchmark Corporation 1996 Executive Deferred Compensation Stock Option Plan, and the 1996 Torchmark Corporation Non-Employee Director Stock Option Plan (the "Prior Plans"), which have been frozen as of the effective date of this Plan. Options, stock appreciation rights, restricted stock, or other stock rights granted under the Prior Plans before the effective date of this Plan shall continue to be governed by the terms of the Prior Plans, except to the extent specifically provided otherwise hereinafter, but no additional options, stock appreciation rights, restricted stock, or other stock rights shall be granted under the Prior Plans after the effective date of this Plan. For purposes of the Plan, the following terms shall be defined as set forth below: "Affiliate" means (i) any corporation (other than a Subsidiary), partnership, joint venture or any other entity in which the Company owns, directly or indirectly, at least a 10 percent beneficial ownership interest, and (ii) the Company's former Subsidiary, Waddell & Reed Financial, Inc., at such time as it ceases to be a Subsidiary. "Annual Bonus" means the annual cash bonus payable by the Company to an Eligible Executive for services to the Company or any of its affiliates, as such amount may be determined from year to year. "Annual Compensation" means the annual cash retainer and meeting fees payable by the Company to a Non-Employee Director for services as a director (and, if applicable, as the member or chairman of a committee of the Board) of the Company, as such amount may be changed from time to time. For purposes of an election to receive Options under the Plan in lieu of Annual Compensation, meeting fees will be deemed to be earned at the beginning of the year for all scheduled meetings during the year, whether or not the Optionee later attends such meetings. "Beneficiary" means any person or persons designated by a Participant, in accordance with procedures established by the Committee or Plan Administrator, to receive benefits hereunder in the event of the Participant's death. If any Participant shall fail to designate a Beneficiary or shall designate a Beneficiary who shall fail to survive the Participant, the Beneficiary shall be the Participant's surviving spouse, or, if none, the Participant's surviving descendants (who shall take per stirpes) and if there are no surviving descendants, the Beneficiary shall be the Participant's estate. "Board" means the Board of Directors of the Company. "Bonus Deferral Election Date" means the date established by the Plan as the date by which an Eligible Executive must submit a valid Primary Election Form for Bonus to the Plan Administrator in order to defer Annual Bonus under the Plan for a calendar year. For each calendar year, the Bonus Deferral Election Date is December 31 of the calendar year for which the Bonus is to be earned. 1 "Business Day" shall mean a day on which the New York Stock Exchange or any national securities exchange or over-the-counter market on which the Stock is traded is open for business. "Cause" means a Participant's willful misconduct or dishonesty, any of which is directly and materially harmful to the business or reputation of the Company or any Subsidiary or Affiliate. "Change in Control" means the happening of any of the following: (i) when any "person", as such term is used in Sections 13(d) and 14(d) of the Exchange Act) (other than the Company or a Subsidiary thereof or any Company employee benefit plan), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; (ii) the occurrence of any transaction or event relating to the Company that is required to be described pursuant to the requirements of Item 6(e) of Schedule 14A of Regulation 14A of the Securities and Exchange Commission under the Exchange Act; (iii) when, during any period of two consecutive years during the existence of the Plan, the individuals who, at the beginning of such period, constitute the Board, cease for any reason other than death to constitute at least a majority thereof, unless each director who was not a director at the beginning of such period was elected by, or on the recommendation of, at least two-thirds of the directors at the beginning of such period; or (iv) the occurrence of a transaction requiring stockholder approval for the acquisition of the Company by an entity other than the Company or a subsidiary thereof through the purchase of assets, by merger, or otherwise. "Code" means the Internal Revenue Code of 1986, as amended, or any successor thereto. "Commission" means the Securities and Exchange Commission. "Committee" means the Compensation Committee of the Board. If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan shall be exercised by the Board. "Company" means Torchmark Corporation, a corporation organized under the laws of the State of Delaware (or any successor corporation). "Covered Employee" means an individual who the Committee determines is, or is expected to be as of the relevant date for determining the Company's tax deduction, a covered employee as defined in Section 162(m)(3) of the Internal Revenue Code of 1986, as amended, with respect to the Company. "Deferred Stock" means an award made pursuant to Section 9 below of the right to receive Stock at the end of a specified deferral period. "Director Stock Option" means any option to purchase shares of Stock granted pursuant to Section 6 or 10. "Election Date" means the date by which a Non-Employee Director must submit a valid Primary Election Form to the Plan Administrator in order to participate under Section 10 of the Plan for a calendar year. For each calendar year, the Election Date is December 31 of the preceding calendar year; provided, however, that the Election Date for a newly eligible Participant shall be the 30th day following the date on which such individual becomes a Non-Employee Director. "Eligible Executive" means an executive officer of the Company or any of its Subsidiaries or Affiliates, as such officers may be selected by the Chairman of the Board of Directors or the Committee or its designee from year to year, to be eligible for Executive Deferred Compensation Stock Options pursuant to Section 10 below. 2 "Exchange Act" means the Securities Exchange Act of 1934, as amended, and any successor thereto. "Fair Market Value" means, as of any given date, the closing price of the Stock on such date on the New York Stock Exchange Composite Tape. "Incentive Stock Option" means any Stock Option intended to be and designated as an "incentive stock option" within the meaning of Section 422 of the Code. "Immediate Family" means the children, grandchildren or spouse of any Optionee. "Interest Account" means the Interest Account for Bonus and/or the Interest Account for Salary or the Interest Account for Annual Compensation, as the context requires. The maintenance of individual Interest Accounts is for bookkeeping purposes only. "Interest Account for Bonus" means the account established by the Company for each Eligible Executive for Annual Bonus deferred pursuant to the Plan and which shall be credited with interest on the last day of each calendar quarter (or such other day as determined by the Plan Administrator). "Interest Account for Annual Compensation" means the account established by the Company for each Non-Employee Director for Annual Compensation deferred pursuant to the Plan and which shall be credited with interest on the last day of each calendar quarter (or such other day as determined by Plan Administrator). "Interest Account for Salary" means the account established by the Company for each Eligible Executive for Salary deferred pursuant to the Plan and which shall be credited with interest on the last day of each calendar quarter (or such other day as determined by the Plan Administrator). "Non-Employee Director" means a director of the Company who is not an employee of the Company or of any Subsidiary or Affiliate (as determined by the Committee). "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option. "Normal Retirement" means retirement from active employment with the Company, any Subsidiary, and any Affiliate on or after the normal retirement date specified in the applicable tax-qualified company pension plan. "Option Grant Date" means the date upon which a Stock Option is granted to an Eligible Executive pursuant to Article 6. "Optionee" means a director, consultant, officer or key employee to whom a Stock Option has been granted or, in the event of such individual's death prior to the expiration of a Stock Option, such individual's Beneficiary. "Participant" means any director, consultant, officer or key employee who has been awarded a Stock Option, Restricted Stock, Stock Appreciation Right, or Deferred Stock Right under the Plan. "Plan" means this 1998 Stock Incentive Plan. "Plan Administrator" means one or more agents to whom the Committee shall have delegated administrative duties under the Plan. "Primary Election Form" means a Primary Election Form for Salary and/or a Primary Election Form for Bonus, or a form, substantially in the form attached hereto as Exhibit E, pursuant to which a Non-Employee Director elects to defer Annual Compensation under the Plan as the context requires. "Primary Election Form for Bonus" means a form, substantially in the form attached hereto as Exhibit B, pursuant to which an Eligible Executive elects to defer Bonus under the Plan. "Primary Election Form for Salary" means a form, substantially in the form attached hereto as Exhibit A, pursuant to which an Eligible Executive elects to defer Salary under the Plan. 3 "Restricted Stock" means an award of shares of Stock that are subject to restrictions under Section 8. "Salary" means the salary payable by the Company to an Eligible Executive for services to the Company, any of its Subsidiaries or any of its Affiliates, as such amount may be changed from time to time. "Salary Deferral Election Date" means the date established by the Plan as the date by which an Eligible Executive must submit a valid Primary Election Form for Salary to the Plan Administrator in order to defer Salary under the Plan for a calendar quarter. For each calendar quarter, the Salary Deferral Election Date is the last day of the preceding calendar quarter. "Secondary Election Form" means a Secondary Election Form for Salary and/or a Secondary Election Form for Bonus, or a form, substantially in the form attached hereto as Exhibit F, pursuant to which a Non-Employee Director elects to convert previously deferred compensation to Options pursuant to Section 10 of the Plan, as the context requires. "Secondary Election Form for Bonus" means a form, substantially in the form attached hereto as Exhibit D, pursuant to which an Eligible Executive elects to convert previously deferred Annual Bonus to Options pursuant to Section 10(m) of the Plan. "Secondary Election Form for Salary" means a form, substantially in the form attached hereto as Exhibit C, pursuant to which an Eligible Executive elects to convert previously deferred Salary to Options pursuant to Section 10(m) of the Plan. "Stock Option Award Notice" means a written award notice to an Eligible Executive or a Non-Employee Director from the Company evidencing an Option. "Stock" means the Common Stock of the Company. "Stock Appreciation Right" means a right granted under Section 7 below to surrender to the Company all or a portion of a Stock Option in exchange for an amount equal to the difference between (i) the Fair Market Value, as of the date such Stock Option or such portion thereof is surrendered, of the shares of Stock covered by such Stock Option or such portion thereof, and (ii) the aggregate exercise price of such Stock Option or such portion thereof. "Stock Option" or "Option" means any option to purchase shares of Stock granted pursuant to Section 5, 6 or 10. "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. SECTION 2. Administration. The Plan shall be administered by the Committee which shall at all times comply with the requirements of Rule 16b-3 of the Exchange Act. All members of the Committee shall also be "outside directors" within the meaning of Section 162(m) of the Code. The Committee shall have the power and authority to grant to eligible persons, pursuant to the terms of the Plan: (i) Stock Options; (ii) Stock Appreciation Rights; (iii) Restricted Stock or (iv) Deferred Stock. In particular, the Committee shall have the authority: (i) to select the consultants, officers and other key employees of the Company, its Subsidiaries, and its Affiliates to whom Stock Options, Stock Appreciation Rights, Restricted Stock or Deferred Stock awards or a combination of the foregoing from time to time will be granted hereunder; 4 (ii) to determine whether and to what extent Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock or Deferred Stock, or a combination of the foregoing, are to be granted hereunder; (iii) to determine the number of shares of Stock to be covered by each such award granted hereunder; (iv) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (other than Director Stock Options granted pursuant to Section 6(a)), including, but not limited to, any restriction on any Stock Option or other award and/or the shares of Stock relating thereto based on performance and/or such other factors as the Committee may determine, in its sole discretion, any vesting acceleration features based on performance and/or such other factors as the Committee may determine, in its sole discretion, reload features, transferability features, and other features not inconsistent with the Plan; (v) to determine whether, to what extent and under what circumstances Stock and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of a participant, including providing for and determining the amount (if any) of deemed earnings on any deferred amount during any deferral period. The Committee shall have the discretionary authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to construe and interpret the terms and provisions of the Plan and any award issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan. The Committee may delegate administrative duties under the Plan to one or more agents as it shall deem necessary or advisable. No member of the Committee or the Board or the Plan Administrator shall be personally liable for any action or determination made in good faith with respect to the Plan or any Option or to any settlement of any dispute between a Non-Employee Director and the Company. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Plan Participants. SECTION 3. Stock Subject to Plan. The total number of shares of Stock reserved and available for distribution under the Plan shall be 14,000,000, which may consist, in whole or in part, of authorized and unissued shares or treasury shares. In the event of any sale of assets, merger, reorganization, consolidation, recapitalization, Stock dividend, or other change in corporate structure affecting the Stock, an equitable substitution or adjustment shall be made in (i) the aggregate number of shares reserved for issuance under the Plan, (ii) the number and option price of shares subject to outstanding Stock Options granted under the Plan, (iii) the number of shares subject to Restricted Stock or Deferred Stock awards granted under the Plan, (iv) the aggregate number of shares available for issuance to any employee pursuant to Section 4(a), and (v) the number of Non-Employee Director Stock Options to be granted each year pursuant to Section 6, as may be determined to be appropriate by the Committee, in its sole discretion, provided that the number of shares subject to any award shall always be a whole number. Such adjusted option price shall also be used to determine the amount payable by the Company upon the exercise of any Stock Appreciation Right associated with any Stock Option. SECTION 4. Eligibility. (a) Officers, other key employees and consultants of the Company, its Subsidiaries or its Affiliates (but, except as provided in Sections 6 and 10, excluding members of the Committee and, any person who serves only as a director) who are responsible for or contribute to the management, growth and/or profitability of the business of the Company, its Subsidiaries, or its Affiliates are eligible to be granted Stock Options, Stock Appreciation Rights, Restricted Stock or Deferred Stock awards. 5 Except as provided in Section 6, the optionees and participants under the Plan shall be selected from time to time by the Committee, in its sole discretion, from among those eligible, and the Committee shall determine, in its sole discretion, the number of shares covered by each award or grant; provided, however, that no person shall be granted Stock Options and/or Stock Appreciation Rights on more than 800,000 shares in any calendar year. (b) Directors of the Company (other than directors who are also officers or employees of the Company, its Subsidiaries or its Affiliates) are eligible to receive Non-Employee Director Stock Options pursuant to Sections 6 and 10 of the Plan. (c) Consultants who provide services to the Company, a Subsidiary or an Affiliate are eligible to receive Non-Qualified Stock Options pursuant to Section 5 of the Plan. SECTION 5. Stock Options. Stock Options may be granted either alone or in addition to other awards granted under the Plan. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve, and the provisions of Stock Option awards need not be the same with respect to each optionee. The Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options. The Committee shall have the authority to grant any Optionee Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock Options (in each case with or without Stock Appreciation Rights) except that Incentive Stock Options shall only be granted to employees of the Company or a Subsidiary. To the extent that any Stock Option does not qualify as an Incentive Stock Option, it shall constitute a separate Non-Qualified Stock Option. Except as provided in Section 5(1), no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify either the Plan or any Incentive Stock Option under Section 422 of the Code. Notwithstanding the foregoing, in the event an optionee voluntarily disqualifies an option as an Incentive Stock Option within the meaning of Section 422 of the Code, the Committee may, but shall not be obligated to, make such additional grants, awards or bonuses as the Committee shall deem appropriate, to reflect the tax savings to the Company which results from such disqualification. Stock Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable: (a) Option Price. The option price per share of Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant but shall be not less than 100% of the Fair Market Value of the Stock on the date of the grant of the Stock Option. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Incentive Stock Option shall be exercisable more than ten years after the date such Incentive Stock Option is granted. (c) Exercisability. Subject to paragraph (l) of this Section 5 with respect to Incentive Stock Options, Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee, provided, however, that, except as provided in Section 5(f), 5(g), 5(h) or 14, no Stock Option shall be exercisable prior to six months from the date of the granting of the option. Notwithstanding the limitations set forth in the preceding sentence, the Committee may accelerate the exercisability of any Stock Option, at any time in whole or in part, based on performance and/or such other factors as the Committee may determine in its sole discretion. 6 (d) Method of Exercise. Stock Options may be exercised in whole or in part at any time during the option period, by giving written notice of exercise to the Company specifying the number of shares to be purchased, accompanied by payment in full of the purchase price, in cash, by check or such other instrument as may be acceptable to the Committee (including instruments providing for "cashless exercise"). As determined by the Committee, in its sole discretion, at or after grant, payment in full or in part may also be made in the form of unrestricted Stock already owned by the Optionee or, in the case of the exercise of a Non-Qualified Stock Option, Restricted Stock or Deferred Stock subject to an award hereunder (based, in each case, on the Fair Market Value of the Stock on the date the option is exercised, as determined by the Committee). If payment of the option exercise price of a Non-Qualified Stock Option is made in whole or in part in the form of Restricted Stock or Deferred Stock, the shares received upon the exercise of such Stock Option shall be restricted or deferred, as the case may be, in accordance with the original term of the Restricted Stock award or Deferred Stock award in question, except that the Committee may direct that such restrictions or deferral provisions shall apply to only the number of such shares equal to the number of shares of Restricted Stock or Deferred Stock surrendered upon the exercise of such Option. No shares of unrestricted Stock shall be issued until full payment therefor has been made. An Optionee shall have the rights to dividends or other rights of a stockholder with respect to shares subject to the Option when the Optionee has given written notice of exercise and has paid in full for such shares. (e) Transferability of Options. A Stock Option agreement may permit an optionee to transfer the Stock Option to members of his or her Immediate Family, to one or more trusts for the benefit of such Immediate Family members, or to one or more partnerships where such Immediate Family members are the only partners if (i) the agreement setting forth such Stock Option expressly provides that the Stock Option may be transferred only with the express written consent of the Committee, and (ii) the optionee does not receive any consideration in any form whatsoever for said transfer. Any Stock Option so transferred shall continue to be subject to the same terms and conditions in the hands of the transferee as were applicable to said Stock Option immediately prior to the transfer thereof. Any Stock Option not (i) granted pursuant to any agreement expressly allowing the transfer of said Stock Option or (ii) amended expressly to permit its transfer shall not be transferable by the Optionee otherwise than by will or by the laws of descent and distribution and such Stock Option thus shall be exercisable during the Optionee's lifetime only by the Optionee. (f) Termination by Death. Unless otherwise determined by the Committee, if an Optionee's employment with the Company, any Subsidiary, and any Affiliate terminates by reason of death (or if an Optionee dies following termination of employment by reason of Normal Retirement), any Stock Option shall become immediately exercisable and may thereafter be exercised by the legal representative of the estate or by the legatee of the Optionee under the will of the Optionee, during the period ending on the expiration of the stated term of such Stock Option or the first anniversary of the Optionee's death, whichever is later. (g) Termination by Reason of Normal Retirement. Unless otherwise determined by the Committee, if an Optionee's employment with the Company, any Subsidiary and any Affiliate terminates by reason of Normal Retirement, any Stock Option held by such Optionee shall become immediately exercisable. A Stock Option held by an Optionee whose employment has terminated by reason of Normal Retirement shall expire at the end of the stated term of such Stock Option, unless otherwise determined by the Committee. In the event of termination of employment by reason of Normal Retirement, if an Incentive Stock Option is exercised after the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (h) Termination for Cause. Notwithstanding Section 5(g), if the Optionee's employment or consulting relationship with the Company, any Subsidiary and any Affiliate is terminated for Cause, or the Committee determines that the Optionee has engaged in conduct that would be grounds for termination with Cause, the Stock Option shall immediately be forfeited to the Company upon the giving of notice of termination of employment or on the event constituting Cause. 7 (i) Committee Discretion. Notwithstanding the other provisions of this Section 5 to the contrary, upon the request of an Optionee whose employment has terminated or is expected to terminate in the near future, the Committee may, in its sole and absolute discretion, agree to allow the Optionee's Stock Option to terminate on a date following the date that it would otherwise terminate pursuant to the provisions of this Section 5. (j) Other Termination. If the Optionee's employment or consulting relationship with the Company, any Subsidiary and any Affiliate is terminated for any reason other than what is specified in Section 5(f), 5(g) or (5(h) (including, without limitation, early retirement, voluntary termination, termination without Cause, or for any other reason), the Stock Option shall immediately be forfeited to the Company upon such termination of employment. (k) Termination upon Change of Control. Notwithstanding the provisions of Section 5(j) or the stated term of the Stock Option, if the Optionee's employment with the Company, any Subsidiary and any Affiliate is involuntarily terminated by the Optionee's employer without Cause by reason of or within three months after a merger or other business combination resulting in a Change of Control, the Stock Option shall terminate upon the later of six months and one day after such merger or business combination or ten business days following the expiration of the period during which publication of financial results covering at least thirty days of post-merger combined operations has occurred. (l) Limit on Value of Incentive Stock Option First Exercisable Annually. The aggregate Fair Market Value (determined at the time of grant) of the Stock for which "incentive stock options" within the meaning of Section 422 of the Code are exercisable for the first time by an Optionee during any calendar year under the Plan (and/or any other stock option plans of the Company, any Subsidiary and any Affiliate) shall not exceed $100,000. Notwithstanding the preceding sentence, the exercisability of such Stock Options may be accelerated by the Committee and shall be accelerated as provided in Sections 5(f), 5(g), 5(h), and 14, in which case Stock Options which exceed such $100,000 limit shall be treated as Non-Qualified Stock Options. For this purpose, options granted earliest shall be applied first to the $100,000 limit. In the event that only a portion of the options granted at the same time can be applied to the $100,000 limit, the Company shall issue separate share certificates for such number of shares as does not exceed the $100,000 limit, and shall designate such shares as ISO stock in its share transfer records. SECTION 6. Non-Employee Director Stock Options. Non-Employee Director Stock Options granted under the Plan shall be Non- Qualified Stock Options. Such Non-Employee Director Stock Options may be granted pursuant to the pre-established formula contained herein or may, in the sole discretion of the entire Board of Directors, be granted as to such number of shares and upon such terms and conditions as shall be determined by said Board of Directors. Non-Employee Director Stock Options granted under the Plan shall be evidenced by a written agreement in such form as the Committee shall from time to time approve, which agreements shall comply with and be subject to the following terms and conditions: (a) Formula-based Director Stock Options. For each calendar year, 6,000 Non- Employee Director Stock Options shall be granted automatically on the first day of each calendar year on which Stock is publicly traded on the New York Stock Exchange to each member of the Board on that date who is not a Non- Employee Director. The option price per share of Stock purchasable under such Non-Employee Director Stock Option shall be 100% of the Fair Market Value of the Stock on the date of the grant of the Option. Except as provided in Section 14, said Non-Employee Director Stock Options shall become exercisable in full six months from the date of the grant of the Option and shall remain exercisable for a term of ten years and two days from the date such Non-Employee Director Stock Option is granted. 8 (b) Non-Formula Based Options. Within its sole discretion, the entire Board may award Non-Employee Director Stock Options on a non-formula basis to all or such individual Non-Employee Directors as it shall select. Such Non-Employee Stock Options may be awarded at such times and for such number of shares as the Board in its discretion determines. The price of such Non-Employee Stock Options may be fixed by the Board at a discount not to exceed 25% of the fair market value of the Stock on the date of grant or may be the fair market value of the Stock on the grant date. Such Non-Employee Director Stock Options shall become first exercisable and have an option term as determined by the Board in its discretion; provided however, that except as described in Section 14 and in paragraph (e) of this section, no such Option shall be first exercisable until six months from the date of grant. All other terms and conditions of such Non-Employee Director Stock Options shall be as established by the Board in its sole discretion. (c) Method of Exercise. Any Non-Employee Director Stock Option granted pursuant to the Plan may be exercised in whole or in part at any time during the option period, by giving written notice of exercise to the Company specifying the number of shares to be purchased, accompanied by payment in full of the purchase price, in cash, by check or such other instrument as may be acceptable to the Committee (including instruments providing for "cashless exercise"). Payment in full or in part may also be made in the form of unrestricted Stock already owned by the Optionee (based on the Fair Market Value of the Stock on the date the Option is exercised). No shares of unrestricted Stock shall be issued until full payment therefor has been made. An Optionee shall have the rights to dividends or other rights of a stockholder with respect to shares subject to the Option when the Optionee has given written notice of exercise and has paid in full for such shares. (d) Transferability of Options. No Non-Employee Director Stock Option shall be transferable by the Optionee otherwise than by will or by the laws of descent and distribution, and all Director Stock Options shall be exercisable, during the Optionee's lifetime, only by the Optionee; provided, however, that the Committee may (but need not) permit other transfers where the Committee concludes that such transferability (i) does not result in accelerated taxation, and (ii) is otherwise appropriate and desirable, taking into account any state or federal securities laws applicable to transferable options. (e) Termination of Service. Upon an Optionee's termination of status as a Non-Employee Director with the Company for any reason, any Director Stock Options held by such Optionee shall become immediately exercisable and may thereafter be exercised during the period ending on the expiration of the stated term of such Non-Employee Director Stock Options or the first anniversary of the Optionee's death, whichever is later. Notwithstanding the foregoing sentence, if the Optionee's status as an Non-Employee Director terminates by reason of or within three months after a merger or other business combination resulting in a "Change of Control" as defined in Section 14 of this Plan, the Non-Employee Director Stock Option shall terminate upon the latest of (i) six months and one day after the merger or business combination, (ii) ten business days following the expiration of the period during which publication of financial results covering at least thirty days of post-merger combined operations has occurred, and (iii) the expiration of the stated term of such Non-Employee Director Stock Option. (f) Deferred Compensation Stock Options. Non-Employee Directors are also eligible to elect Deferred Compensation Stock Options pursuant to Section 10 below. SECTION 7. Stock Appreciation Rights. (a) Grant and Exercise. Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option granted under the Plan. In the case of a Non-Qualified Stock Option, such rights may be granted either at or after the time of the grant of such Non-Qualified Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of the grant of such Incentive Stock Option. A Stock Appreciation Right or applicable portion thereof granted with respect to a given Stock Option shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option, except that, unless otherwise provided by the Committee at the time of grant, a Stock Appreciation Right granted with respect to less than the full number of shares covered by a related Stock Option shall only be reduced if and to the extent that the number of shares covered by the exercise or termination of the related Stock Option exceeds the number of shares not covered by the Stock Appreciation Right. 9 A Stock Appreciation Right may be exercised by an Optionee, in accordance with paragraph (b) of this Section 7, by surrendering the applicable portion of the related Stock Option. Upon such exercise and surrender, the Optionee shall be entitled to receive an amount determined in the manner prescribed in paragraph (b) of this Section 7. Stock Options which have been so surrendered, in whole or in part, shall no longer be exercisable to the extent the related Stock Appreciation Rights have been exercised. (b) Terms and Conditions. Stock Appreciation Rights shall be subject to such terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Committee, including the following: (i) Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Stock Options to which they relate shall be exercisable in accordance with the provisions of Section 5 and this Section 7 of the Plan; provided, however, that any Stock Appreciation Right granted subsequent to the grant of the related Stock Option shall not be exercisable during the first six months of the term of the Stock Appreciation Right, except that this additional limitation shall not apply in the event of death of the Optionee prior to the expiration of the six-month period. (ii) Upon the exercise of a Stock Appreciation Right, an Optionee shall be entitled to receive up to, but not more than, an amount in cash or shares of Stock equal in value to the excess of the Fair Market Value of one share of Stock over the option price per share specified in the related Stock Option multiplied by the number of shares in respect of which the Stock Appreciation Right shall have been exercised, with the Committee having the right to determine the form of payment. (iii) Stock Appreciation Rights shall be transferable only when and to the extent that the underlying Stock Option would be transferable under paragraph (e) of Section 5 of the Plan. (iv) Upon the exercise of a Stock Appreciation Right, the Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Section 3 of the Plan on the number of shares of Stock to be issued under the Plan. (v) A Stock Appreciation Right granted in connection with an Incentive Stock Option may be exercised only if and when the market price of the Stock subject to the Incentive Stock Option exceeds the exercise price of such Stock Option. (vi) In its sole discretion, the Committee may provide, at the time of grant of a Stock Appreciation Right under this Section 7, that such Stock Appreciation Right can be exercised only in the event of a "Change of Control" and/or a "Potential Change of Control" (as defined in Section 14 below). (vii) The Committee, in its sole discretion, may also provide that in the event of a "Change of Control" and/or a "Potential Change of Control" (as defined in Section 14 below) the amount to be paid upon the exercise of a Stock Appreciation Right shall be based on the "Change of Control Price" (as defined in Section 14 below). SECTION 8. Restricted Stock. (a) Administration. Shares of Restricted Stock may be issued either alone or in addition to other awards granted under the Plan. The Committee shall determine the officers and key employees of the Company and its Subsidiaries and Affiliates to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares to be awarded, the price, if any, to be paid by the recipient of Restricted Stock (subject to Section 8(b) hereof), the time or times within which such awards may be subject to forfeiture, and all other conditions of the awards. The Committee may also condition the grant and/or vesting of Restricted Stock upon the attainment of specified performance goals, or such other criteria as the Committee may determine, in its sole discretion. The provisions of Restricted Stock awards need not be the same with respect to each recipient. 10 (b) Awards and Certificates. The prospective recipient of an award of shares of Restricted Stock shall not have any rights with respect to such award, unless and until such recipient has executed an agreement evidencing the award (a "Restricted Stock Award Agreement"), has delivered a fully executed copy thereof to the Company, and has otherwise complied with the then applicable terms and conditions. Awards of Restricted Stock must be accepted within a period of 60 days (or such shorter period as the Committee may specify) after the award date by executing a Restricted Stock Award Agreement and paying the price specified in the Restricted Stock Award Agreement. Each Participant who is awarded Restricted Stock shall be issued a stock certificate registered in the name of the Participant in respect of such shares of Restricted Stock. The Committee shall specify that the certificate shall bear a legend, as provided in clause (i) below, and/or be held in custody by the Company, as provided in clause (ii) below. (i) The certificate shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such award, substantially in the following form: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the Torchmark Corporation 1998 Stock Incentive Plan and a Restricted Stock Award Agreement entered into between the registered owner and Torchmark Corporation. Copies of such Plan and Agreement are on file in the offices of Torchmark Corporation, 2001 Third Avenue South, Birmingham, Alabama 35233." (ii) The Committee shall require that the stock certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock award, the Participant shall have delivered a stock power, endorsed in blank, relating to the Stock covered by such award. (c) Restrictions and Conditions. The shares of Restricted Stock awarded pursuant to this Section 8 shall be subject to the following restrictions and conditions: (i) Subject to the provisions of this Plan and the Restricted Stock Award Agreements, during such period as may be set by the Committee commencing on the grant date (the "Restriction Period"), the Participant shall not be permitted to sell, transfer, pledge or assign shares of Restricted Stock awarded under the Plan. The Committee may, in its sole discretion, provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions in whole or in part, before or after the Participant's termination of employment, based on performance and/or such other factors as the Committee may determine, in its sole discretion. (ii) Except as provided in paragraph (c)(i) of this Section 8, the Participant shall have, with respect to the shares of Restricted Stock, all of the rights of a stockholder of the Company, including the right to receive any dividends. Dividends paid in stock of the Company or stock received in connection with a stock split with respect to Restricted Stock shall be subject to the same restrictions as on such Restricted Stock. Certificates for shares of unrestricted Stock shall be delivered to the Participant promptly after, and only after, the period of forfeiture shall expire without forfeiture in respect of such shares of Restricted Stock. (iii) Subject to the provisions of the Restricted Stock Award Agreement and this Section 8, upon termination of employment for any reason other than Normal Retirement or death during the Restriction Period, all shares still subject to restriction shall be forfeited by the Participant, and the Participant shall only receive the amount, if any, paid by the Participant for such forfeited Restricted Stock. SECTION 9. Deferred Stock Awards. (a) Administration. Deferred Stock may be awarded either alone or in addition to other awards granted under the Plan. The Committee shall determine the officers and key employees of the Company, its Subsidiaries and Affiliates to whom, and the time or times at which, Deferred Stock shall be awarded, the number of shares of Deferred Stock to be awarded to any Participant, the duration of the period (the "Deferral Period") during which, and the conditions under which, receipt of the Stock will be deferred, and the terms and conditions of the award in addition to those set forth in paragraph (b) of this Section 9. The Committee may also condition the grant and/or vesting of Deferred Stock upon the attainment of specified performance goals, or such other criteria as the Committee shall determine, in its sole discretion. The provisions of Deferred Stock awards need not be the same with respect to each recipient. 11 (b) Terms and Conditions. The shares of Deferred Stock awarded pursuant to this Section 9 shall be subject to the following terms and conditions: (i) Subject to the provisions of this Plan and the award agreement, Deferred Stock awards may not be sold, assigned, transferred, pledged or otherwise encumbered during the Deferral Period. At the expiration of the Deferral Period (or Elective Deferral Period, (as defined below) where applicable), share certificates shall be delivered to the Participant, or his legal representative, in a number equal to the shares covered by the Deferred Stock award. (ii) At the time of the award, the Committee may, in its sole discretion, determine that amounts equal to any dividends declared during the Deferral Period (or Elective Deferral Period) with respect to the number of shares covered by a Deferred Stock award will be: (a) paid to the Participant currently; (b) deferred and deemed to be reinvested; or (c) that such Participant has no rights with respect thereto. (iii) Subject to the provisions of the award agreement and this Section 9, upon termination of employment for any reason during the Deferral Period for a given award, the Deferred Stock in question shall be forfeited by the Participant. (iv) Based on performance and/or such other criteria as the Committee may determine, the Committee may, at or after grant (including after the Participant's termination of employment), accelerate the vesting of all or any part of any Deferred Stock award and/or waive the deferral limitations for all or any part of such award. (v) A Participant may elect to defer further receipt of the award for a specified period or until a specified event (the "Elective Deferral Period"), subject in each case to the Committee's approval and to such terms as are determined by the Committee, all in its sole discretion. Subject to any exceptions adopted by the Committee, such election must generally be made at least six months prior to completion of the Deferral Period for a Deferred Stock award (or for an installment of such an award). (vi) Each award shall be confirmed by, and subject to the terms of, a Deferred Stock award agreement executed by the Company and the Participant. SECTION 10. Executive and Non-Employee Director Deferred Compensation Stock Options. (a) Election to Participate. The Chairman of the Board or the Committee or its designee shall designate each year those executives who shall be Eligible Executives for the coming year. An Eligible Executive may participate under this Section 10 of the Plan by delivering to the Plan Administrator a properly completed and signed (i) Primary Election Form for Salary on or before the Salary Deferral Election Date, and/or (ii) Primary Election Form for Bonus on or before the Bonus Deferral Election Date. In addition, each Non-Employee Director is automatically eligible to participate under this Section 10 of the Plan. A Non-Employee Director may participate under this Section 10 of the Plan for a calendar year by delivering a properly completed and signed Primary Election Form to the Plan Administrator on or before the Election Date. The Non-Employee Director's participation in the Plan will be effective as of the first day of the calendar year beginning after the Plan Administrator receives the Non-Employee Director's Primary Election Form, or, in the case of a newly eligible Participant, on the first day of the calendar month beginning after the Plan Administrator receives such Non-Employee Director's Primary Election Form. An Eligible Executive's participation in the Plan will be effective (i) as of the first day of the calendar quarter beginning after the Plan Administrator receives the Eligible Executive's Primary Election Form for Salary, or (ii) as of the first day of the year for which an Annual Bonus is earned, in the case of an Eligible Executive's Primary Election Form for Bonus. A Participant shall not be entitled to any benefit hereunder unless such Participant has properly completed the appropriate type of Primary Election Form and deferred the receipt of his or her Annual Bonus and/or Salary, or Annual Compensation, in the case of a Non-Employee Director. (b) Irrevocable Election. A Participant may not revoke or change his or her Primary Election Form; provided, however, that a Participant may, by filing a Secondary Election Form with the Plan Administrator within the period provided in the Plan, subsequently elect to convert the balance in his or her Interest Account to Stock Options in accordance with Subsection (m) below. 12 (c) [Reserved] (d) Deferred Annual Bonus or Salary. An Eligible Executive may elect to defer up to 100% (in increments of 10% or $10,000) of his or her Annual Bonus and/or Salary to his or her Interest Account, and/or by conversion to Stock Options in accordance with the terms of the Plan. A Non-Employee Director may elect to defer up to 100% of his or her Annual Compensation (in 10% increments but not less than 50%) to his or her Interest Account and/or by conversion to Stock Options in accordance with the terms of the Plan. For bookkeeping purposes, the amount of the Annual Compensation, Annual Bonus and/or Salary which Participant elects to defer pursuant to the Plan shall be transferred to and held in individual Interest Accounts (in annual designations) pending distribution in cash or the conversion to Stock Options, if applicable, pursuant to subsection (m) below. (e) Time of Election of Deferral. An Eligible Executive who wishes to defer Salary for a calendar quarter must irrevocably elect to do so on or prior to the Salary Deferral Election Date for such calendar quarter, by delivering a valid Primary Election Form for Salary to the Plan Administrator. The Primary Election Form for Salary shall indicate: (1) the percentage or amount of Salary to be deferred, and (2) the form and timing of payout of deferred amounts; provided, however, that if a Participant elects to defer Salary for more than one quarter during a particular calendar year, the form and timing of payout for each quarter's deferral shall be identical. An Eligible Executive who wishes to defer Annual Bonus for a calendar year must irrevocably elect to do so on or prior to the Bonus Deferral Election Date for such calendar year, by delivering a valid Primary Election Form for Bonus to the Plan Administrator. The Primary Election Form for Bonus shall indicate: (1) the percentage of Annual Bonus to be deferred, and (2) the form and timing of payout of deferred amounts; provided, however, that if a Participant elects to defer both Salary and Annual Bonus for a particular calendar year, the form and timing of payout for each shall be identical. A Non-Employee Director who wishes to defer Annual Compensation for a calendar year must irrevocably elect to do so on or prior to the Election Date for such calendar year, by delivering a valid Primary Election Form to the Plan Administrator. The Primary Election Form shall indicate: (1) the percentage or amount of Annual Compensation to be deferred, and (2) the form and timing of payout of deferred amounts. (f) Interest Accounts. Amounts in a Participant's Interest Account will be credited with interest as of the last day of each calendar quarter (or such other day as determined by the Plan Administrator, which, in the case of amounts converted to Stock Options under the Plan, shall be the date of such conversion) at the rate set from time to time by the Committee to be applicable to the Interest Accounts of all Participants under the Plan. To the extent required for bookkeeping purposes, a Participant's Interest Accounts will be segregated to reflect deferred compensation on a year-by-year basis and on the basis of the type of compensation deferred. For example, a 1998 Interest Account for Bonus, a 1998 Interest Account for Salary, a 1999 Interest Account for Bonus, a 1999 Interest Account for Salary, and so on. Within a reasonable time after the end of each calendar year, the Plan Administrator shall report in writing to each Participant the amount held in his or her Interest Accounts at the end of the year. (g) Responsibility for Investment Choices. Each Participant is solely responsible for any decision to defer Annual Bonus and/or Salary or Annual Compensation into his or her Interest Account or convert Annual Bonus and/or Salary or Annual Compensation to Stock Options under the Plan and accepts all investment risks entailed by such decision, including the risk of loss and a decrease in the value of the amounts he or she elects to defer. (h) Form of Payment. (i) Payment Commencement Date. Payment of the balances in a Participant's Interest Accounts shall commence on the earliest to occur of (a) December 31 of the fifth year after the year with respect to which the deferral was made, (b) the first Business Day of the fourth month after the Participant's death, or (c) the Participant's termination as an employee or Non-Employee Director of the Company or any of its Subsidiaries or Affiliates, other than by reason of death. 13 (ii) Optional Forms of Payment. Distributions from a Participant's Interest Accounts may be paid to the Participant either in a lump sum or in a number of approximately equal monthly installments designated by the Participant on his or her Primary Election Form. Such monthly installments may be for any number of months up to 120 months; provided, however, that in the event of the Participant's death during the payout period, the remaining balance shall be payable to the Participant's Beneficiary in a lump sum on or about the first Business Day of the fourth month after the Participant's death. If a Participant elects to receive a distribution of his or her Interest Accounts in installments, the Plan Administrator may purchase an annuity from an insurance company which annuity will pay the Participant the desired annual installments. If the Plan Administrator purchases an annuity contract, the Participant will have no further rights to receive payments from the Company or the Plan with respect to the amounts subject to the annuity. If the Plan Administrator does not purchase an annuity contract, the value of the Interest Accounts remaining unpaid shall continue to receive allocations of return as provided in Subsection (f) above. If the Participant fails to designate a payment method in the Participant's Primary Election Form, the Participant's Account shall be distributed in a lump sum. (iii) Irrevocable Elections. A Participant may elect a different payment form for each year's compensation deferred under the Plan; provided, however, that if a Participant elects to defer Salary for more than one quarter during a particular calendar year, or if a Participant elects to defer Salary and Annual Bonus for a particular calendar year, the form and timing of payout for each such deferral shall be identical. The payment form elected or deemed elected on the Participant's Primary Election Form shall be irrevocable. (iv) Acceleration of Payment. If a Participant elects an installment distribution and the value of such installment payment elected by the Participant would result in a distribution of less than $3,000 per year, the Plan Administrator may accelerate payment of the Participant's benefits over a lesser number of whole years so that the annual amount distributed is at least $3,000. If payment of the Participant's benefits over a five year period will not provide annual distributions of at least $3,000, the Participant's Account shall be paid in a lump sum. (v) Effect of Competition. Notwithstanding the Primary Election Form or any provision set forth herein, the entire balance of a Participant's Interest Accounts shall be paid immediately to the Participant a lump sum in the event the Participant ceases to be an employee of the Company or any of its Subsidiaries or Affiliates and becomes a proprietor, officer, partner, employee or otherwise becomes affiliated with any business that is in competition with the Company or an affiliated company, or becomes employed by any governmental agency having jurisdiction over the activities of the Company or an affiliated company. (vi) Effect of Adverse Determination. Notwithstanding the Primary Election Form or any provision set forth herein, if the Internal Revenue Service determines, for any reason, that all or any portion of the amounts credited under this Plan is currently includable in the taxable income of any Participant, then the amounts so determined to be includable in income shall be distributed in a lump sum to such Participant as soon as practicable. (vii) Payment to Beneficiary. Upon the Participant's death, all unpaid amounts held in the Participant's Account shall be paid to the Participant's Beneficiary in a lump sum on or about the first Business Day of the fourth month following the Participant's death. (i) Financial Hardship. The Plan Administrator may, in its sole discretion, accelerate the making of payment to a Participant of an amount reasonably necessary to handle a severe financial hardship of a sudden and unexpected nature due to causes not within the control of the Participant. All financial hardship distributions shall be made in cash in a lump sum. Such payments will be made on a first-in, first-out basis so that the oldest compensation deferred under the Plan shall be deemed distributed first in a financial hardship. (j) Payment to Minors and Incapacitated Persons. In the event that any amount is payable to a minor or to any person who, in the judgment of the Plan Administrator, is incapable of making proper disposition thereof, such payment shall be made for the benefit of such minor or such person in any of the following ways as the Plan Administrator, in its sole discretion, shall determine: 14 (a) By payment to the legal representative of such minor or such person; (b) By payment directly to such minor or such person; (c) By payment in discharge of bills incurred by or for the benefit of such minor or such person. The Plan Administrator shall make such payments without the necessary intervention of any guardian or like fiduciary, and without any obligation to require bond or to see to the further application of such payment. Any payment so made shall be in complete discharge of the Plan's obligation to the Participant and his or her Beneficiaries. (k) Application for Benefits. The Plan Administrator may require a Participant or Beneficiary to complete and file certain forms as a condition precedent to receiving the payment of benefits. The Plan Administrator may rely upon all such information given to it, including the Participant's current mailing address. It is the responsibility of all persons interested in receiving a distribution pursuant to the Plan to keep the Plan Administrator informed of their current mailing addresses. (l) Designation of Beneficiary. Each Participant from time to time may designate any person or persons (who may be designated contingently or successively and who may be an entity other than a natural person) as his or her Beneficiary or Beneficiaries to whom the Participant's Account is to be paid if the Participant dies before receipt of all such benefits. Each Beneficiary designation shall be on the form prescribed by the Plan Administrator and will be effective only when filed with the Plan Administrator during the Participant's lifetime. Each Beneficiary designation filed with the Plan Administrator will cancel all Beneficiary designations previously filed with the Plan Administrator. The revocation of a Beneficiary designation, no matter how effected, shall not require the consent of any designated Beneficiary. (m) Election to Receive Stock Options. Each Eligible Executive or Non- Employee Director shall be granted Stock Options subject to the following terms and conditions: (i) Stock Options Converted from Deferred Salary. At any time, but only one time, during the twelve-month period following the end of a calendar year with respect to which a Participant deferred Salary into the Plan, the Participant shall have the right to convert some or all of his or her Interest Account for Salary for such previous year into Stock Options pursuant to this Article 10. To make such election, the Participant must file with the Plan Administrator a written irrevocable Secondary Election Form for Salary to receive Stock Options as of the date of the filing of such Secondary Election Form (the "Option Grant Date"). (ii) Stock Options Converted from Deferred Bonus. At any time, but only one time, during the twelve-month period following the end of a calendar year with respect to which a Participant deferred Annual Bonus into the Plan, the Participant shall have the right to convert some or all of his or her Interest Account for Bonus for such previous year into Stock Options pursuant to this Article 10. To make such election, the Participant must file with the Plan Administrator a written irrevocable Secondary Election Form for Bonus to receive Stock Options as of the date of the filing of such Secondary Election Form (the "Option Grant Date"). (iii) Stock Options Converted from Annual Compensation. At any time, but only one time, during the calendar year immediately following the filing of a Primary Election Form, a Non-Employee Director shall have the right to convert into Stock Options the then-current balance (as of the date of such election to receive Stock Options) in his or her Interest Account for the calendar year to which the Primary Election Form relates. For example, if a Primary Election Form is filed in December 1998 to defer Annual Compensation to be earned in 1999, the director may elect at any time in 1999 to convert such deferred amount to Options. To make such election, the Participant must file with the Plan Administrator a written irrevocable Secondary Election Form to receive Options as of the date of the election (the "Option Grant Date"). (iv) Exercise Price of Stock Options. The exercise price per Share under each Stock Option granted pursuant to this Article 10 shall, at the election of the Optionee as indicated on the Secondary Election Form, be either 100% of the Fair Market Value per Share on the Option Grant Date, or a lesser percentage (but not less than 75%) of the Fair Market Value per Share on the Option Grant Date, such lesser percentage to be determined by the Committee from time to time. Such Secondary Election Form shall indicate the percentage of such Stock Options to be granted at each Exercise Price, which choice may affect the number of Stock Options to be received pursuant to this Section 10(m). 15 (n) Number and Terms of Options. The number of Shares subject to a Stock Option granted pursuant to this Article 10 shall be the number of whole Shares equal to A divided by B, where: A = the dollar amount which the Eligible Executive has elected pursuant to Section 6.1 to convert to Stock Options; and B = the per share value of a Stock Option on the Option Grant Date, as determined by the Committee using any recognized option valuation model selected by the Committee in its discretion (such value to be expressed as a percentage of the Fair Market Value per Share on the Option Grant Date). In determining the number of Shares subject to a Stock Option, (i) the Committee may designate the assumptions to be used in the selected option valuation model, and (ii) any fraction of a Share will be rounded up to the next whole number of Shares. (o) Exercise of Stock Options. Each Stock Option shall be first exercisable, cumulatively, as to 10% commencing on the each of the first through tenth anniversaries of the Option Grant Date; provided, however, that any Stock Option held by a Covered Employee shall not be exercisable before the first day of the calendar year immediately following the year in which the Optionee ceased to be a Covered Employee. An Optionee's death, retirement or other termination of employment shall not shorten the term of any outstanding Stock Option. In no event shall the period of time over which the Stock Option may be exercised exceed the longer of (i) eleven years from the Option Grant Date, or (ii) the thirtieth (30th) day of the calendar year immediately following the year in which an Optionee ceased to be a Covered Employee. A Stock Option, or portion thereof, may be exercised in whole or in part only with respect to whole Shares. Shares shall be issued to the Optionee pursuant to the exercise of a Stock Option only upon receipt by the Company from the Optionee of payment in full in cash of the aggregate purchase price for the Shares subject to the Stock Option or portion thereof being exercised. (p) Accelerated Vesting. Notwithstanding the normal vesting schedule set forth in Section 6.3 hereof, any and all outstanding Options shall become immediately exercisable upon the first to occur of (i) the death of the Optionee, (ii) the Optionee obtaining Normal Retirement Age, (iii) the occurrence of a Change in Control, or (iv) the unanimous determination by the Committee that a particular Stock Option or Options shall become fully exercisable. Upon acceleration, an Option will remain exercisable for the remainder of its original term. (q) Stock Option Award Notice. Each Stock Option granted under this Section 10 shall be evidenced by a Stock Option Award Notice which shall be executed by an authorized officer of the Company. Such Award Notice shall contain provisions regarding (a) the number of Shares that may be issued upon exercise of the Stock Option, (b) the exercise price per Share of the Option and the means of payment therefor, (c) the term of the Stock Option, and (d) such other terms and conditions not inconsistent with the Plan as may be determined from time to time by the Committee. (r) Transferability of Options. No Stock Option granted under this Section 10 shall be assignable or transferable by the Optionee other than by will or the laws of descent and distribution; provided, however, that the Committee may (but need not) permit other transfers where the Committee concludes that such transferability (i) does not result in accelerated taxation, and (ii) is otherwise appropriate and desirable, taking into account any state or federal securities laws applicable to transferable Stock Options. SECTION 11. Loan Provisions. With the consent of the Committee, the Company may make, or arrange for, a loan or loans to an employee with respect to the exercise of any Stock Option granted under the Plan and/or with respect to the payment of the purchase price, if any, of any Restricted Stock awarded hereunder. The Committee shall have full authority to decide whether to make a loan or loans hereunder and to determine the amount, term and provisions of any such loan or loans, including the interest rate to be charged in respect of any such loan or loans, whether the loan or loans are to be with or without recourse against the borrower, the terms on which the loan is to be repaid and the conditions, if any, under which the loan or loans may be forgiven. 16 SECTION 12. Amendments and Termination. The Board may amend, alter, or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made which would impair the right of an Optionee or Participant under a Stock Option, Director Stock Option, Stock Appreciation Right, Restricted Stock or Deferred Stock award theretofore granted, without the Optionee's or Participant's consent. Amendments may be made without stockholder approval except as required to satisfy Rule 16b-3 under the Exchange Act, Section 162(m) of the Code, stock exchange listing requirements, or other regulatory requirements. The Committee may amend the terms of any award or option (other than Director Stock Options granted pursuant to Section 6(a)) theretofore granted, prospectively or retroactively, but no such amendment shall impair the rights of any holder without his consent. The Committee may also substitute new Stock Options for previously granted Stock Options including options granted under other plans applicable to the Participant and previously granted Stock Options having higher option prices. SECTION 13. Unfunded Status of Plan. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant or Optionee by the Company, nothing set forth herein shall give any such Participant or Optionee any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or payments in lieu of or with respect to awards hereunder, provided, however, that the existence of such trusts or other arrangements is consistent with the unfunded status of the Plan. SECTION 14. Change of Control. The following acceleration and valuation provisions shall apply in the event of a "Change of Control" or "Potential Change of Control," as defined in this Section: (a) In the event of a "Change of Control," unless otherwise determined by the Committee in writing at or after grant, but prior to the occurrence of such Change of Control, or, if and to the extent so determined by the Committee in writing at or after grant (subject to any right of approval expressly reserved by the Committee at the time of such determination) in the event of a "Potential Change of Control," as defined in paragraph (c) of this Section: (i) any Stock Appreciation Rights and any Stock Options awarded under the Plan not previously exercisable and vested shall become fully exercisable and vested; (ii) the restrictions and deferral limitations applicable to any Restricted Stock and Deferred Stock awards under the Plan shall lapse and such shares and awards shall be deemed fully vested; and (iii) the value of all outstanding Stock Options, Director Stock Options, Stock Appreciation Rights, Restricted Stock and Deferred Stock Awards, shall, to the extent determined by the Committee at or after grant, be settled on the basis of the "Change of Control Price" (as defined in paragraph (d) of this Section) as of the date the Change of Control occurs or Potential Change of Control is determined to have occurred, or such other date as the Committee may determine prior to the Change of Control or Potential Change of Control. In the sole discretion of the Committee, such settlements may be made in cash or in stock, as shall be necessary to effect the desired accounting treatment for the transaction resulting in the Change of Control. In addition, any Stock Option, Director Stock Option, and Stock Appreciation Right which has been outstanding for less than six months shall be settled solely in stock. 17 (b) [Reserved] (c) For purposes of paragraph (a) of this Section, a "Potential Change of Control" means the happening of any of the following: (i) the entering into an agreement by the Company, the consummation of which would result in a Change of Control of the Company as defined in paragraph (b) of this Section; or (ii) the acquisition of beneficial ownership, directly or indirectly, by any entity, person or group (other than the Company or a Subsidiary or any Company employee benefit plan) of securities of the Company representing 5 percent or more of the combined voting power of the Company's outstanding securities and the adoption by the Board of Directors of a resolution to the effect that a Potential Change of Control of the Company has occurred for purposes of this Plan. (d) For purposes of this Section, "Change of Control Price" means the highest price per share paid in any transaction reported on the New York Stock Exchange Composite Tape, or paid or offered in any transaction related to a potential or actual Change of Control of the Company at any time during the preceding sixty day period as determined by the Committee, except that (i) in the case of Incentive Stock Options and Stock Appreciation Rights relating to Incentive Stock Options, such price shall be based only on transactions reported for the date on which the Committee decides to cashout such options, and (ii) in the case of Director Stock Options, the sixty day period shall be the period immediately prior to the Change of Control. SECTION 15. Limitations on Payments. (a) Notwithstanding Section 14 above or any other provision of this Plan or any other agreement, arrangement or plan, in no event shall the Company pay or be obligated to pay any Plan Participant an amount which would be an Excess Parachute Payment except as provided in Section 15(f) below and except as the Committee specifically provides otherwise in the Participant's grant agreement. For purposes of this Plan, the term "Excess Parachute Payment" shall mean any payment or any portion thereof which would be an "excess parachute payment" within the meaning of Section 280G(b)(1) of the Code, and would result in the imposition of an excise tax under Section 4999 of the Code, in the opinion of tax counsel selected by the Company, ("Tax Counsel"). In the event it is determined that an Excess Parachute Payment would result if the full acceleration of vesting and exercisability provided in Section 14 above were made (when added to any other payments or benefits contingent on a change of control under any other agreement, arrangement or plan), the payments due under Section 14(a) shall be reduced to the minimum extent necessary to prevent an Excess Parachute Payment; then, if necessary to prevent an Excess Parachute Payment, benefits or payments under any other plan, agreement or arrangement shall be reduced. If it is established pursuant to a final determination of a court or an Internal Revenue Service administrative appeals proceeding that, notwithstanding the good faith of the Participant and the Company in applying the terms of this Section 15(a), a payment (or portion thereof) made is an Excess Parachute Payment, then, the Company shall pay to the Participant an additional amount in cash (a "Gross-Up Payment") equal to the amount necessary to cause the amount of the aggregate after-tax compensation and benefits received by the Participant hereunder (after payment of the excise tax under Section 4999 of the Code with respect to any Excess Parachute Payment, and any state and federal income taxes with respect to the Gross-Up Payment) to be equal to the aggregate after-tax compensation and benefits he or she would have received as if Sections 280G and 4999 of the Code had not been enacted. (b) Subject to the provisions of Section 15(c), the amount of any Gross-Up Payment and the assumptions to be utilized in arriving at such amount, shall be determined by a nationally recognized certified public accounting firm designated by the Company (the "Accounting Firm"). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to Section 15(a), shall be paid by the Company to the participant within five (5) days after the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and participant. 18 (c) Participant shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by Company of a Gross-Up Payment. Such notification shall be given no later than ten (10) business days after Participant is informed in writing of such claim and shall apprise the Company of the nature of the claim and the date of requested payment. Participant shall not pay the claim prior to the expiration of the thirty (30) day period following the date on which it gives notice to the Company. If the Company notifies Participant in writing prior to the expiration of the period that it desires to contest such claim, Participant shall: (i) give the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney selected by the Company and reasonably acceptable to participant; (iii) cooperate with the Company in good faith in order to effectively contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim. Without limitation on the foregoing provisions of this Section 15(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Participant to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Participant agrees to prosecute such contest to a determination before any administration tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Participant harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of the contest; provided, further, that if the Company directs Participant to pay any claim and sue for a refund, the Company shall advance the amount of the payment to Participant, on an interest-free basis, and shall indemnify and hold Participant harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to the advance or with respect to any imputed income with respect to the advance. (d) In the event that the Company exhausts its remedies pursuant to Section 15(c) and Participant thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Gross-Up Payment required and such payment shall be promptly paid by the Company to or for the benefit of Participant. (e) If, after the receipt of Participant of an amount advanced by the Company pursuant to Section 15(c), Participant becomes entitled to receive any refund with respect to such claim, Participant shall promptly after receiving such refund pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Participant of an amount advanced by the Company pursuant to Section 15(c), a determination is made that Participant shall not be entitled to any refund with respect to such claim and the Company does not notify Participant in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (f) Notwithstanding the foregoing, the limitation set forth in Section 15(a) shall not apply to a Participant if in the opinion of Tax Counsel or the Accounting Firm (i) the total amounts payable to the Participant hereunder and under any other agreement, arrangement or plan as a result of a change of control (calculated without regard to the limitation of Section 15(a)), reduced by the amount of excise tax imposed on the Participant under Code Section 4999 with respect to all such amounts and reduced by the state and federal income taxes on amounts paid in excess of the limitation set forth in Section 15(a), would exceed (ii) such total amounts payable after application of the limitation of Section 15(a). No Gross-Up Payment shall be made in such case. 19 SECTION 16. General Provisions. (a) All certificates for shares of Stock delivered under the Plan shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Commission, any stock exchange upon which the Stock is then listed, and any applicable Federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (b) Nothing set forth in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. The adoption of the Plan shall not confer upon any consultant, employee or director of the Company, any Subsidiary or any Affiliate, any right to continued employment (or, in the case of a consultant or director, continued retention as a consultant or director) with the Company, a Subsidiary or an Affiliate, as the case may be, nor shall it interfere in any way with the right of the Company, a Subsidiary or an Affiliate to terminate the employment of any of its employees at any time. (c) Each Participant shall, no later than the date as of which the value of an award first becomes includible in the gross income of the participant for Federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Committee, in its sole discretion, regarding payment of, any Federal, FICA, state, or local taxes of any kind required by law to be withheld with respect to the award. The obligations of the Company under the Plan shall be conditional on such payment or arrangements. The Committee may permit or require, in its sole discretion, Participants to elect to satisfy their Federal, and where applicable, FICA, state and local tax withholding obligations with respect to all awards other than Stock Options which have related Stock Appreciation Rights by the reduction, in an amount necessary to pay all said withholding tax obligations, of the number of shares of Stock or amount of cash otherwise issuable or payable to said Participants in respect of an award. The Company and, where applicable, its Subsidiaries and Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes owed hereunder by a Participant from any payment of any kind otherwise due to said Participant. (d) At the time of grant or purchase, the Committee may provide in connection with any grant or purchase made under this Plan that the shares of Stock received as a result of such grant or purchase shall be subject to a right of first refusal, pursuant to which the Participant shall be required to offer to the Company any shares that the Participant wishes to sell, with the price being the then Fair Market Value of the Stock, subject to the provisions of Section 14 hereof and to such other terms and conditions as the Committee may specify at the time of grant. (e) No member of the Board or the Committee, nor any officer or employee of the Company acting on behalf of the Board or the Committee, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Board or the Committee and each and any officer or employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination or interpretation. (f) In the event that any provision of the Plan or any related Stock Option Award Notice is held to be invalid, void or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of the Plan or any related Stock Option Award Notice. (g) The rights and obligations under the Plan and any related agreements shall inure to the benefit of, and shall be binding upon the Company, its successors and assigns, and the Non-Employee Directors and their beneficiaries. (h) Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of the Plan. 20 (i) The Plan shall be construed, governed and enforced in accordance with the law of Delaware, except as such laws are preempted by applicable federal law. SECTION 17. Effective Date of Plan. The Plan shall be effective on the date it is approved by a majority vote of the Company's stockholders. SECTION 18. Term of Plan. No Stock Option, Director Stock Option, Stock Appreciation Right, Restricted Stock award or Deferred Stock award shall be granted pursuant to the Plan on or after April 23, 2008, but awards theretofore granted may extend beyond that date. 21 EX-20 3 NOTICE AND PROXY STATEMENT EXHIBIT 20 [LOGO OF TORCHMARK CORPORATION APPEARS HERE] March 26, 1999 To the Stockholders of Torchmark Corporation: Torchmark's 1999 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 29, 1999. 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 1998. Sincerely, [Signature Appears Here] C.B. Hudson Chairman, President & Chief Executive Officer ---------------------------------------- NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 29, 1999 ---------------------------------------- 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 29, 1999 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 Thursday, March 5, 1999 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 & Secretary Birmingham, Alabama March 26, 1999 PROXY STATEMENT Solicitation of Proxies The Board of Directors of Torchmark Corporation solicits your proxy for use at the 1999 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 29, 1999. 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 5, 1999 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 5, 1999, there were 134,667,708 shares of common capital stock of the Company outstanding (not including 147,593,824 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, 1998.
Percent of Name and Address Number of Shares(1) Class ---------------- ------------------- ---------- AMVESCAP PLC 11,020,128 7.86% 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 Funds Group, Inc.), 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 July, 1998, Mark S. McAndrew was named by the Board of Directors to serve for the remainder of the term vacated by Keith A.Tucker. The Board of Directors proposes the election of Mark S. McAndrew and George J. Records 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 2001 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 2000 or until his successor is elected and qualified. Messrs. McAndrew, Records and Richey's current terms expire in 1999. The term of office of the other five directors continues until the close of the annual meeting of stockholders in the year shown in the biographical information below. 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 58) has been a director of the Company since April, 1996. His term expires in 2000. 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. (United States Senator from Oklahoma, 1979- 1994; Member, Senate Finance Committee). Joseph M. Farley (age 71) 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, Attorneys and Counselors, Birmingham, Alabama since November, 1992. Louis T. Hagopian (age 73) has been a director of the Company since 1988. His term expires in 2000. 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 53) has been a director since 1986. His term expires in 2001. He is a director of Vesta Insurance Group, Inc. Principal occupation: Chairman, President and Chief Executive Officer of the Company since March, 1998; Chairman of Liberty, United American and Globe since October, 1991 and Chief Executive Officer of Liberty since December, 1989, of United American since November, 1982 and of Globe since February, 1986. (Chairman of Insurance Operations of the Company, January, 1993-March, 1998; President of Liberty, January, 1993-December, 1994). 2 Joseph L. Lanier, Jr. (age 67) 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 45) has been a director of the Company since July, 1998. Principal occupation: President of United American and Globe since October, 1991. Harold T. McCormick (age 70) has been a director since April, 1992. His term expires in 2000. 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 64) has been a director of the Company since April, 1993. 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 72) has been a director of the Company since 1980. He is a director of Full House Resorts, Inc., Vesta Insurance Group, Inc., and Waddell & Reed Financial,Inc. and a Director Emeritus of the United Group of Mutual Funds (17 funds), Waddell & Reed Funds, Inc. (6 funds) and Target/United Funds, Inc. (10 funds). 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). - -------- (1) Liberty, Globe and United American as used in this proxy statement refer to Liberty National Life Insurance Company, Globe Life And Accident Insurance Company and United American 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, 1999 will be presented to the stockholders at the annual meeting. 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. Upon review, on October 21, 1998, the Audit Committee approved the engagement of Deloitte & Touche. Accordingly, the Audit Committee of the Board recommends the appointment of Deloitte & Touche as the Company's principal accountants for 1999. The reports of KPMG on the financial statements of Torchmark for the fiscal years ending December 31, 1996 and 1997 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. During such years and during the period between December 31, 1997 and the date of the independent accountants report on the consolidated financial statements of Torchmark for the three years ended December 31, 1998, 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 KPMG 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. Representatives of Deloitte & Touche are not expected to be present at the meeting. 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 during 1998, 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) ---- --- -------------------------- Bernard Rapoport............ 81 Chairman of the Board and Chief Executive Officer of American Income since 1975. (Chairman of the Board and Chief Executive Officer of American Income Holding, Inc. 1988-1995). Tony G. Brill............... 56 Vice President of Company since January, 1997. (Managing Partner, KPMG Peat Marwick LLP, Birmingham, Alabama 1969-December, 1996). Charles B. Cooper........... 60 President and Chief Operating Officer of American Income since January, 1977.
- -------- (1) American Income Life Insurance Company (American Income) is a wholly-owned subsidiary of the Company. 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, 1998.
Company Common Stock or Options Beneficially Owned as of December 31, 1998(1) ------------------------- Name Directly(2) Indirectly(3) ---- ----------- ------------- David L. Boren....................................... 11,300 0 Norman, OK Joseph M. Farley..................................... 129,810 4,800 Birmingham, AL Louis T. Hagopian.................................... 130,022 0 Darien, CT C. B. Hudson......................................... 1,859,684 24,051 Plano, TX Joseph L. Lanier, Jr. ............................... 127,475 18,912 Lanett, AL Mark S. McAndrew..................................... 204,100 5,489 McKinney, TX Harold T. McCormick ................................. 36,252 7,200 Panama City, FL George J. Records.................................... 41,690 0 Oklahoma City, OK R. K. Richey......................................... 617,982 2,377,176 Horseshoe Bay, TX Tony G. Brill........................................ 101,456 933 Frisco, TX Charles B. Cooper.................................... 111,200 0 Waco, TX Bernard Rapoport..................................... 118,200 0 Waco, TX All Directors, Nominees and Executive Officers as a group:(4)............................................ 3,489,171 2,438,561
- -------- (1) No directors, director nominees or executive officers other than R. K. Richey (2.1%) and C.B. Hudson (1.3%) beneficially own 1% or more of the common stock of the Company. (2) Includes: for David L. Boren, 10,000 shares; for Joseph Farley, 60,400 shares; for Louis Hagopian, 79,422 shares; for Joseph Lanier, 74,375 shares; for Mark McAndrew, 134,300 shares; for Harold McCormick, 36,252 shares; for George Records, 31,990 shares; for R. K. Richey, 617,982 shares; for C. B. Hudson, 900,304 shares; for Tony Brill, 58,412 shares; for Charles Cooper, 93,700 shares; for Bernard Rapoport, 111,500 shares and for all directors, executive officers and nominees as a group, 2,208,637 shares, that are subject to presently exercisable Company stock options. (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 12,051 shares, 5,489 shares, and 591 shares held in the accounts of Messrs. Hudson, McAndrew, and Brill, respectively, in the Company Savings and Investment Plan. Additionally, indirect beneficial ownership includes for Mr. Richey 627,962 shares subject to options held by Richey Capital Partner, Ltd., a family limited partnership. 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. 6 During 1998, the Board of Directors met five times. In 1998, 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, Hagopian and Records; 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 1998. 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 1998. 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 1998. The finance committee serves as the pricing committee in connection with capital financing by the Company. The finance committee met once in 1998. 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 did not meet in 1998. 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 ($)(2) ($)(3) ($)(4) ($)(5) (#)(6) ($)(7) ------------------ ---- ------------- --------- ------------ ---------------- ------------ ------------ C.B. Hudson 1998 800,000 0 0 259,740 5,772 Chairman, President 1997 800,000 400,000 0 557,181 5,806 and CEO from March 1998 1996 650,000 185,000 0 151,873 5,442 Bernard Rapoport 1998 570,000 0 11,800 0 20,000 9.600 Chairman and CEO 1997 525,000 100,000 10,351 0 44,178 9,600 of American Income 1996 480,000 115,000 9,405 0 104,144 9,000 Mark S. McAndrew 1998 525,000 150,000 1,687,500 62,500 4,800 President of United 1997 475,000 120,000 0 66,782 4,800 American and Globe 1996 425,000 100,000 0 65,090 4,500 Charles B. Cooper 1998 515,000 50,000 527,344 20,000 9,600 President of 1997 475,000 100,000 0 11,326 9,600 American Income 1996 435,000 100,000 0 78,108 9,000 Tony G. Brill(1) 1998 450,000 0 1,687,500 63,258 4,800 Vice President 1997 400,000 85,000 0 116,825 0 1996 R.K. Richey 1998 250,002 0 280,691 0 39,659 95,087 Chairman and CEO 1997 1,000,008 1,000,000 187,526 0 817,481 26,872 until March 1998 1996 1,166,688 0 315,592 0 260,360 25,058
- -------- (1) Mr. Brill was paid by Torchmark commencing January 1, 1997. Prior to that time, he was compensated by an unaffiliated certified public accounting firm. (2) Mr. Richey elected to defer his 1998 salary for service as Chairman and CEO into the Torchmark Corporation Restated Deferred Compensation Plan for Directors, Advisory Directors, Directors Emeritus and Officers, as amended (Deferred Compensation Plan). (3) Messrs. Richey and Hudson elected to defer $816,673 and $200,000, respectively, of their 1996 bonuses to the Torchmark Corporation 1996 Executive Deferred Compensation Stock Option Plan (TMK Executive Deferral Plan). Mr. Richey elected to defer $1,000,000 of his 1997 bonus to the Deferred Compensation Plan. Messrs. Hudson and Brill elected to defer $400,000 and $100,000, respectively, of their 1998 bonuses pursuant to the executive deferred compensation stock option provisions of the Torchmark Corporation 1998 Stock Incentive Plan (1998 Incentive Plan). (4) Includes perquisites for Mr. Richey--$121,102 in each of 1998, 1997 and 1996 as premium equivalent for group term life insurance; $57,728 in 1996 for 1996 and $57,728 in 1996 for 1997 as premiums for personal life insurance. Includes for Mr. Rapoport--$11,800, $10,351 and $9,405 paid to him from the American Income Life Insurance Company Exempt Employees 401K Profit Sharing Plan (American Income Profit Sharing Plan) in 1998, 1997 and 1996, respectively. Mr. Richey also received $375,012 in compensation for his services as an independent contractor in the capacity of Chairman of the Executive Committee of the Board of Directors of the Company following his March 1998 retirement as Chairman and CEO. This money was deferred into the Torchmark Corporation 1996 Non-Employee Director Stock Option Plan (1996 Non-Employee Director Plan). (5) At year end 1998, Messrs. McAndrew, Cooper and Brill held 40,000, 12,500, and 40,000 restricted shares, respectively, valued at $1,412,500, $441,406 and $1,412,500 (based on a year-end closing price of $35.3125 per share). Restricted stock (40,000 shares) awarded on January 1, 1998 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 (12,500 shares) awarded on January 1, 1998 to Mr. Cooper vests 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. Cash dividends on all restricted stock are paid directly to the 8 stockholder at the same rate as on unrestricted stock. Messrs. McAndrew, Cooper and Brill agreed as a condition of their restricted stock awards to waive receipt of any shares of Waddell & Reed Financial, Inc. (WDR) stock distributed by Torchmark to its common shareholders in the WDR spin-off on November 6, 1998. (6) In December 1998, Messrs. Hudson, Rapoport, McAndrew, Cooper and Brill received stock option grants of 100,000, 20,000, 62,500, 20,000 and 52,500 shares, respectively, pursuant to the 1998 Incentive Plan. Also, in December 1998, Messrs. Hudson and Brill elected to receive their 1997 bonuses of $400,000 and $100,000 in the form of stock options on 43,031 shares and 10,758 shares pursuant to the terms of the 1998 Incentive Plan. On December 30, 1998, Mr. Richey elected to convert all his 1998 compensation as Chairman of the Executive Committee of the Board of Directors plus accrued interest ($383,121.27) to options on 39,659 shares pursuant to the terms of the 1996 Non-Employee Director 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. Additionally, options granted in 1996 were previously adjusted to reflect the 100% stock dividend effected as a stock split in August 1997. On January 2, 1997, Mr Brill was granted options under the TMK Incentive Plan on 116,825 Torchmark shares. On January 31, 1997, Messrs. Hudson and Richey elected to convert all 1996 bonus amounts plus accrued interest of $1,151 and $4,703, respectively, held in the TMK Executive Deferral Plan, subject to subsequently obtained shareholder approval, to stock options of 89,881 and 314,162 Torchmark shares, respectively. In 1997, Messrs. Hudson, Rapoport, McAndrew, Cooper, and Richey 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, and 313,800 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. Mr. Rapoport also was awarded options pursuant to the TMK Incentive Plan on an additional 29,207 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. Mr. Richey transferred his January 31, 1997 Torchmark stock option for 314,162 Company shares and his 1997 Torchmark restoration option for 313,800 Company shares to a family limited partnership on September 29, 1998 and that family limited partnership received options on 94,705 and 94,814 WDR Class A shares as a November 6, 1998 spin-off adjustment. In 1996, Messrs. Hudson, Rapoport, McAndrew, Cooper and Richey received stock option grants in Company common stock pursuant to the Torchmark Corporation 1987 Stock Incentive Plan (TMK Incentive Plan) on 15,873, 80,000, 50,000, 60,000 and 200,000 Torchmark shares, respectively. Messrs. Rapoport, McAndrew, Cooper and Richey also received options on 24,144, 15,090, 18,108 and 60,360 WDR Class A shares as a November 6, 1998 spin-off adjustment to Torchmark stock options granted in 1996. (7) Includes Company contributions to Torchmark Corporation Savings and Investment Plan, a funded, qualified defined contribution plan, for each of Messrs. Hudson and Brill of $4,800 in 1998; for Messrs. Hudson and Richey of $4,800 in 1997 and of $4,500 in 1996. Includes in 1998, 1997 and 1996, interest only on prior contributions to the Torchmark Corporation Supplemental Savings and Investment Plan, an unfunded, non-qualified defined contribution plan, for Mr. Richey of $19,197.66, $21,951.86 and $20,557.75 and for Mr. Hudson of $972.11, $1,006.00 and $942.11, respectively. Includes in 1998 and 1997 for Mr. Richey interest on deferred compensation in the Deferred Compensation Plan of $75,889.15 and $120.00, 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 1998 and 1997 and $9,000.00 in 1996. 9
OPTION GRANTS IN LAST FISCAL YEAR - ---------------------------------------------------------------------------------------------------------- Potential realizable value at assumed annual rates of stock price appreciation Individual Grants for option term --------------------------------------------- ----------------------------------- % of Number of total options Exercise Securities granted to or underlying employees base options in price Expiration Name granted(#) fiscal year ($/share) Date 5% ($) 10% ($) (a) (b)(1) (c)(2) (d) (e) 0% ($) (f) (g) ---- ---------- ------------- --------- ---------- ------ ------------- ------------- All Company Common Shareholders (3) N/A N/A N/A N/A 0 3,039,122,149 7,701,725,430 C.B. Hudson 116,709 12.6 36.11175 1-4-08 0 2,650,520 6,716,931 43,031 4.7 33.4375 12-16-09 0 1,022,071 2,666,356 100,000 10.8 33.4375 12-18-08 0 2,102,868 5,329,075 CEO gain on 1998 grants as % of all Company Common Shareholders gain N/A N/A N/A N/A N/A 19% 19% Bernard Rapoport 20,000 2.2 33.4375 12-18-08 0 420,574 1,065,815 6,036 1.0 8.1553 12-18-04 0 30,958 78,453 12,072 2.0 10.4040 12-22-05 0 78,987 200,169 24,144 4.1 11.9331 12-18-06 0 181,193 459,177 3,471 0.6 18.7691 9-27-07 0 40,971 103,828 Mark S. McAndrew 62,500 6.8 33.4375 12-18-08 0 1,314,292 3,330,672 2,414 0.4 8.1553 12-18-04 0 12,381 31,376 15,090 2.6 10.4040 12-22-05 0 98,734 250,212 15,090 2.6 11.9331 12-18-06 0 113,245 286,986 15,482 2.6 18.7691 9-27-07 0 182,746 463,115 Charles B. Cooper 20,000 2.2 33.4375 12-18-08 0 420,574 1,065,815 4,527 0.8 8.1553 12-18-04 0 23,218 58,839 12,072 2.0 10.4040 12-22-05 0 78,987 200,169 18,108 3.1 11.9331 12-18-06 0 135,895 344,383 2,626 0.4 18.7691 9-27-07 0 30,997 78,552 Tony G. Brill 10,758 1.2 33.4375 12-16-09 0 255,227 573,302 52,500 5.7 33.4375 12-18-08 0 1,104,006 2,797,764 R.K. Richey 39,659 N/A 34.7500 12-30-09 0 978,954 2,553,874 14,481 2.5 12.4727 12-09-02 0 113,589 287,857 21,126 3.6 8.1553 12-18-04 0 108,352 274,584 90,540 15.3 10.4040 12-22-05 0 592,405 1,501,270 60,360 10.2 11.9331 12-18-06 .0 452,982 1,147,944
- -------- (1) Options expiring on 1-4-08 and 12-18-08 are non-qualified stock options granted in Torchmark common stock pursuant to the TMK Incentive Plan and 1998 Incentive Plan, respectively, 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. These options 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 12-16-09 and 12-30-09 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. The options expiring 12-16-09 were granted under the 1998 Incentive Plan and the options expiring 12-30-09 were granted pursuant to a conversion election for an interest- bearing deferred compensation account in the 1996 Non-Employee Director Plan. Options expiring 12-9-02, 12-18-04, 12-22-05, 12-18-06 and 9-27-07 are non- qualified stock options in WDR Class A common stock which were awarded on November 6, 1998 as a part of the adjustment process pursuant to the terms of each existing Torchmark option plan in connection with Torchmark's spin- off of WDR on November 6, 1998. These WDR options, which were granted under the Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan (WDR 1998 Plan), vest as to 50% of the WDR shares on the second anniversary of the original grant date of the Torchmark option being adjusted and as to the remaining 50% of the WDR shares on the third anniversary of the original grant date of the Torchmark option being adjusted. 10 (2) Percentages are shown separately for option grants in Torchmark stock under the TMK Incentive Plan and the 1998 Incentive Plan (expiration dates of 1-4-08, 12-18-08 and 12-16-09) and in WDR Class A stock under the WDR 1998 Plan (expiration dates of 12-09-02, 12-18-04, 12-22-05, 12-18-06 and 9-27-07 and with percentages for this plan calculated only against the total number of options on WDR Class A shares granted to Torchmark employees and Mr. Richey in connection with the WDR spin-off adjustment). The option with expiration date 12-30-09 was awarded under the 1996 Non- Employee Director Plan to Mr. Richey for deferrals made in his capacity as a non-employee director. (3) Calculated based upon 136,848,975 publicly-held Torchmark common shares outstanding as of December 31, 1998 (excluding treasury shares and stock held by subsidiaries which is treated as treasury stock) and the December 31, 1998 stock price of $35.3125. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
(d) (e) (b) (c) Number of Securities Value of unexercised (a) Shares acquired Value underlying unexercised in-the-money options Name on exercise (#) Realized ($) options at FY-end (#)(1) at FY-end ($)(2) ----- --------------- ------------ ------------------------- ------------------------- Exercisable Unexercisable Exercisable Unexercisable ----------- ------------- ----------- ------------- C.B. Hudson............. 0 0 891,316 416,687 $ 7,752,531 $2,397,912 Bernard Rapoport........ 0 0 145,151 101,279 $ 2,078,306 $ 799,096 Mark S. McAndrew........ 0 0 174,831 95,045 $ 1,848,740 $ 556,017 Charles B. Cooper....... 0 0 121,979 59,054 $ 1,766,385 $ 564,096 Tony G. Brill........... 0 0 58,412 121,671 $ 806,432 $ 925,055 R.K. Richey............. 0 0 804,489 39,659 $12,301,072 $ 22,308
- -------- (1) For Messrs. Hudson and Brill, all exercisable and unexercisable options are in Torchmark common stock. For Mr. Rapoport, the table reflects 111,500 exercisable Torchmark options, 33,651 exercisable WDR options, 89,207 unexercisable Torchmark options and 12,072 unexercisable WDR options. For Mr. McAndrew, the table reflects 134,300 exercisable Torchmark options, 40,531 exercisable WDR options, 87,500 unexercisable Torchmark options and 7,545 unexercisable WDR options. For Mr. Cooper, the table reflects 93,700 exercisable Torchmark options, 28,279 exercisable WDR options, 50,000 unexercisable Torchmark options and 9,054 unexercisable WDR options. For Mr. Richey, the table reflects 617,982 exercisable Torchmark options, 186,507 exercisable WDR options and 39,659 unexercisable Torchmark options. (2) For Messrs. Hudson and Brill, all dollar amounts shown reflect the value of Torchmark stock options. For Mr. Rapoport, the table reflects values of $1,665,224 for exercisable Torchmark options, $413,082 for exercisable WDR options, $657,196 for unexercisable Torchmark options and $141,899 for unexercisable WDR options. For Mr. McAndrew, the table reflects $1,445,964 for exercisable Torchmark options, $402,776 for exercisable WDR options, $467,330 for unexercisable Torchmark options and $88,687 for unexercisable WDR options. For Mr. Cooper, the table reflects $1,416,372 for exercisable Torchmark options, $350,013 for exercisable WDR options, $457,671 for unexercisable Torchmark options and $106,425 for unexercisable WDR options. For Mr. Richey, the table reflects $9,898,354 for exercisable Torchmark options, $2,402,718 for exercisable WDR options and $22,308 for unexercisable Torchmark options. Pension Plans Torchmark Corporation Pension Plan. This plan is a non-contributory pension plan which covers all eligible employees who are 21 years of age or older and have one or more years of credited service. The benefits at age 65 under the 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 11 Security offset and by other benefits from certain other plans of affiliates. Earnings for purposes of the Pension Plan include compensation paid by subsidiaries and affiliates, and do not include commissions, directors' fees, expense reimbursements, employer contributions to retirement plans, deferred compensation, or any amounts in excess of $160,000 (as adjusted). Benefits under the Pension Plan vest 100% at five years. Upon the participant's retirement, benefits under the plan are payable as an annuity or in a lump sum. In 1998, covered compensation was $160,000 for Messrs. Hudson, McAndrew, Brill and Richey under the Pension Plan. Vested benefits under the non-qualified Torchmark Supplemental Retirement Plan, in which Messrs. Hudson and Richey have participated, were frozen as of December 31, 1994 and no additional benefits accrue after that date pursuant to the supplementary retirement plan. Messrs. McAndrew and Brill do not participate in any supplementary pension plan. Messrs. Hudson, McAndrew and Brill have 24 years, 19 years and two years of credited service under the Pension Plan, respectively. Mr. Richey had 34 years of credited Service under the Pension Plan at the time of his retirement. Messrs. Rapoport and Cooper are not covered by any pension plan. The following table shows the estimated annual benefits payable under the Pension Plan along with its supplementary 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 Pension and Supplemental Retirement Plans 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. 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 1998 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, each of Messrs. Hudson and Richey have three years less of credited service under the Supplemental Retirement Plan than under the 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. 12 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 1998, Messrs. Hagopian, Lanier, McCormick, and Records chose to make such deferrals of 1998 compensation, which were converted into options on 10,319, 9,751, 11,114 and 9,721 shares, respectively, in 1998. (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 has retired as a director and who is not currently serving as an advisory director may receive 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. Other Transactions Robert Richey, Vice President of a Company subsidiary and son of R. K. Richey, received compensation and fringe benefits in 1998 of $126,291. In 1998, the Company paid Cavendish Services, Ltd. $60,000 for services relating to foreign currency trading and data services. Director Harold McCormick holds a limited partnership interest in Cavendish Services, Ltd. 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, 1998, 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 Mark E. Pape filed Form 3 after its due date and included a stock option inadvertently omitted on his Form 5; Rosemary Montgomery filed a late Form 4 to report the sale of Torchmark stock and included in Form 5 a Form 4 sale transaction not reported on a timely basis; James L. Sedgwick, who ceased to be an insider September 30, 1998, included in his Form 5 a Form 4 reportable option exercise not reported on a timely basis; C.B. Hudson amended his 1997 Form 5 to disclose an unreported stock option grant; 1998 Forms 5 for David L. Boren, Joseph M. Farley, Joseph L. Lanier, Jr., Louis T. Hagopian, Harold T. McCormick, George J. Records and R.K. Richey were filed two days late due to a mailing error; Robert L. Hechler, who ceased to be an insider March 4, 1998, included in Form 5 a Form 4 sale not reported on a timely basis and reported three sales on a Form 4 not filed on a timely basis; Henry J. Herrmann, who ceased to be an insider March 4, 1998, filed two late Forms 4 reporting a total of five sales; and Keith A. Tucker, who ceased to be an insider March 4, 1998, filed two late Forms 4 reporting a total of eight sales and included in his Form 5 one additional sale not reported on a timely basis. 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 1998 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 reports 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 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). 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 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. 14 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 1998 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 1998, for the five most highly compensated executive officers (excluding Mr. Richey, who received options only in his capacity as a director), the options granted were in proportion to current compensation adjusted by a subjective factor ranging from 3.5% to 32.5%. 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 receive from year to year 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 1998. However, Messrs. Hudson and Brill elected to receive all of their respective 1998 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. Since 1993, the market value of Torchmark has increased 71% to over $4.8 billion, and the number of outstanding shares has been reduced by 6%. The market price per share of Company stock has increased 82% since 1993. The market capitalization of the Company during the same period has compounded at 11.3%. The Compensation Committee gave consideration to these factors 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 1998 discretionary bonus of $400,000 from the pool by the Compensation Committee, 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. 15 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. R.K. Richey served as Chief Executive Officer of the Company for the months of January and February 1998 prior to his retirement. He received a salary of $250,002 based upon proration of his $1,000,000 annual approved salary. He did not receive a bonus for his 1998 service as Chief Executive Officer. 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. Rapoport has served for a number of years as the Chairman of the Board and Chief Executive Officer of American Income. Mr. Rapoport did not receive a bonus for 1998. Mr. McAndrew is the chief operating officer of the Company's subsidiaries United American and Globe, serving as President of those companies since 1991. 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 1998 which he chose to receive in cash. Mr. Brill is the Vice President in charge of insurance administration for Torchmark and all its insurance subsidiaries. He also shares primary responsibility for the Company's Year 2000 compliance efforts. The Compensation Committee awarded Mr. Brill a $100,000 discretionary bonus for 1998, which he elected to take in the form of Company stock options. Mr. Cooper has served as President and Chief Operating Officer of American Income since 1997. He shares primary responsibility for the Company's Year 2000 compliance efforts. For 1998, the Compensation Committee granted Mr. Cooper a $50,000 discretionary bonus, which he elected to be paid in cash. Compensation and Company Performance As indicated above, the annual aspect of executive compensation for holding company executives of Torchmark centers on increases in pre-tax operating income and for executives of the insurance subsidiaries on underwriting income. Over the last year pre-tax operating income has increased 18% from $426 million in 1997 to $502 million in 1998. Underwriting income comprised 64% of the Company's pre-tax operating income for 1998. Underwriting income has increased from $306 million to $319 million in 1998 over 1997. 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 16 that table other than Mr. Richey, who retired as Chairman and Chief Executive Officer in March 1998, decreased 14% in 1998 over 1997, because Messrs. Hudson and Brill elected to receive stock options rather than cash in payment of their bonuses and Mr. Rapoport did not receive a 1998 bonus. 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 51% and rose from $1.52 in 1995 to $2.29 in 1998. Joseph L. Lanier, Jr., Chairman Joseph M. Farley Louis T. Hagopian George J. Records 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 [PERFORMANCE GRAPH APPEARS HERE] COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* AMONG TORCHMARK CORPORATION, THE S&P 500 INDEX AND THE S&P INSURANCE (LIFE/HEALTH) INDEX Cumulative Total Return ----------------------------------- 12/93 12/94 12/95 12/96 12/97 12/98 ----- ----- ----- ----- ----- ----- TORCHMARK CORPORATION 100 80 106 122 208 176 S&P 500 100 101 139 171 229 294 S&P INSURANCE (LIFE/HEALTH) 100 83 119 146 182 192 * $100 INVESTED ON 12/31/93 IN STOCK OR INDEX - INCLUDING REINVESTMENT OF DIVIDENDS. FISCAL YEAR ENDING DECEMBER 31. 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 27, 1999. 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 9, 2000. 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 1998, 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, 1998 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 & Secretary March 26, 1999 19 EX-23.(A)(F) 4 CONSENT OF KPMG PEAT MARWICK LLP EXHIBITS 23(a)-(f) 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 three-year period ended December 31, 1998, which report appears in the December 31, 1998 Annual Report on Form 10-K of Torchmark Corporation. KPMG Peat Marwick LLP Birmingham, Alabama March 10, 1999 EX-24 5 POWERS OF ATTORNEY 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, 1998. 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: 3-3-99 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, 1998. 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: 3-2-99 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, 1998. 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: 3-2-99 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, 1998. 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 (Principal Financial Officer) Date: 3-4-99 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, 1998. 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: 3-2-99 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, 1998. 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: 3-4-99 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, 1998. 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: 3-2-99 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 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, 1998. 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: 3-2-99 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, 1998. 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: 3-2-99 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, 1998. 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, Vice President & Chief Accounting Officer Date: 3-4-99 EX-27 6 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 5,768,447 0 0 9,843 124,072 164,644 6,412,591 4,920 0 1,673,151 11,249,028 4,595,567 85,923 194,965 81,568 738,814 193,259 0 147,801 2,111,727 11,249,028 1,753,630 459,558 (57,637) 2,325 1,150,276 231,024 329,585 446,991 154,338 255,776 (6,373) (4,962) 0 244,441 1.75 1.73 0 0 0 0 0 0 0
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