<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Primary
Distribution Method Company Products Sales Force
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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.
</TABLE>
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:
<TABLE>
<CAPTION>
(Amounts in thousands)
Annualized Annualized
Premium Issued Premium in Force
-------------------------- ------------------------------
1998 1997 1996 1998 1997 1996
-------- -------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
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
======== ======== ======== ========== ========== ========
</TABLE>
1
<PAGE>
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:
<TABLE>
<CAPTION>
(Amounts in thousands)
Annualized Annualized
Premium Issued Premium in Force
-------------------------- ------------------------------
1998 1997 1996 1998 1997 1996
-------- -------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
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
======== ======== ======== ========== ========== ========
</TABLE>
- --------
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:
<TABLE>
<CAPTION>
(Amounts in thousands)
1998 1997 1996
---------------------- ---------------------- ----------------------
Number of Amount of Number of Amount of Number of Amount of
policies Insurance policies Insurance policies Insurance
--------- ------------ --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
2
<PAGE>
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:
<TABLE>
<CAPTION>
(Amounts in thousands)
Annualized Annualized
Premium Issued Premium in Force
-------------------------- --------------------------
1998 1997 1996 1998 1997 1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ======== ========
</TABLE>
The following table presents supplemental health annualized premium
information for the three years ended December 31, 1998 by product category:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(Amounts in thousands)
<CAPTION>
Annualized Annualized
Premium Issued Premium in Force
-------------------------- --------------------------
1998 1997 1996 1998 1997 1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ======== ========
</TABLE>
3
<PAGE>
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:
<TABLE>
<CAPTION>
(Amounts in thousands) (Amounts in millions)
Collections Deposit Balance
For the year ended December 31, At December 31,
-------------------------------- --------------------------
1998 1997 1996 1998 1997 1996
---------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
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
========== ========== ========== ======== ======== ========
</TABLE>
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.
<TABLE>
<CAPTION>
Amount
Rating (in thousands) %
------ -------------- -----
<S> <C> <C>
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%
========== =====
</TABLE>
4
<PAGE>
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.
<TABLE>
<CAPTION>
Amount
Rating (in thousands) %
-------------------- -------------- -----
<S> <C> <C>
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%
========== =====
</TABLE>
* 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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
A.M. Best
Company
---------------
<S> <C> <C>
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)
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Usual Reported
Company Ratio Name Range Value
- --------- ---------------------------------------------- --------- --------
<S> <C> <C> <C>
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
</TABLE>
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
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<PAGE>
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).
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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
<PAGE>
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-
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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
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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.
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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:
<TABLE>
<CAPTION>
1998
Market Price
------------
Dividends
Quarter High Low Per Share
------- -------- -------- ---------
<S> <C> <C> <C>
1 $41.2813 $33.0156 $ .1500
2 43.0000 34.5781 .1500
3 40.7344 30.5313 .1500
4 40.2500 27.4688 .1300
</TABLE>
Year-end closing
price.................$35.3125
<TABLE>
<CAPTION>
1997
Market Price
------------
Dividends
Quarter High Low Per Share
------- -------- -------- ---------
<S> <C> <C> <C>
1 $26.7031 $21.5781 $ .1450
2 31.7031 22.6563 .1450
3 35.9375 30.0469 .1450
4 36.9531 30.3750 .1500
</TABLE>
Year-end closing
price.................$36.4219
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<PAGE>
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)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
Year ended December 31, ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------
<CAPTION>
1998 1997 1996 1995 1994
As of December 31, ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
- -------------------------------------------------------------------------------
(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.
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<PAGE>
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
<PAGE>
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
<PAGE>
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*
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
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
===== ===== =====
</TABLE>
- --------
* 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
<PAGE>
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)
<TABLE>
<CAPTION>
For the Year Ended
December 31,
--------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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)
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------------
% of % of % of
Amount Total Amount Total Amount Total
--------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
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
========= ========= =========
</TABLE>
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
<PAGE>
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)
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
% of % of % of
Amount Total Amount Total Amount Total
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
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%
======== ===== ======== ===== ======== =====
</TABLE>
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
<PAGE>
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
<PAGE>
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)
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ ------------------
% of % of % of
Amount Premium Amount Premium Amount Premium
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
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
========= ========= =========
</TABLE>
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)
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
% of % of % of
Amount Total Amount Total Amount Total
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
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%
======== ===== ======== ===== ======== =====
</TABLE>
23
<PAGE>
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
<PAGE>
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)
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
% of % of % of
Amount Premium Amount Premium Amount Premium
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
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%
======== ===== ======== ===== ======== =====
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Annuity Deposit Balances Annuity Collections
-------------------------- --------------------------
(Dollar amounts in (Dollar amounts in
millions) thousands)
1998 1997 1996 1998 1997 1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ======== ========
</TABLE>
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
<PAGE>
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)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
Amount Amount Amount
-------- -------- --------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
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)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
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
</TABLE>
27
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
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%
===== =====
</TABLE>
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:
<TABLE>
<CAPTION>
Torchmark
--------------------
Amount Industry %
(in thousands) % (1)
-------------- ----- ----------
<S> <C> <C> <C>
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%
========== ===== =====
</TABLE>
- --------
(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
<PAGE>
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.
<TABLE>
<CAPTION>
Change
in
Interest
Rates Market Value of
(in Fixed-Maturity
basis Portfolio
points) ($ millions)
-------- ---------------
<S> <C>
-200 $6,476
-100 6,108
0 5,768
100 5,450
200 5,147
</TABLE>
30
<PAGE>
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 $258 million will be available to Torchmark from insurance
subsidiaries without regulatory approval.
Capital Resources. Torchmark's capital structure consists of long and short-
term debt, MIPS, and shareholders' equity. Torchmark's debt consists primarily
of its funded debt and its commercial paper facility. An analysis of
Torchmark's funded debt outstanding at year-ends 1998 and 1997 on the basis of
par value is as follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
Principal Principal
Year Amount Amount
Instrument Due Rate ($ thousands) ($ thousands)
---------- ---- ----- ------------- -------------
<S> <C> <C> <C> <C>
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
======== =========
</TABLE>
31
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
Item 8. Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
Page
----
<S> <C>
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
</TABLE>
37
<PAGE>
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
<PAGE>
TORCHMARK CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands except per share data)
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
39
<PAGE>
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
(Continued)
See accompanying Notes to Consolidated Financial Statements.
40
<PAGE>
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS--(Continued)
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
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
===== ===== =====
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
41
<PAGE>
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Amounts in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
42
<PAGE>
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Preferred Common Paid-in Comprehensive Retained Treasury Shareholders'
Stock Stock Capital Income Earnings Stock Equity
--------- -------- ---------- ------------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
==== ======== ======== ======== ========== ========= ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
43
<PAGE>
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW
(Amounts in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
(Continued)
See accompanying Notes to Consolidated Financial Statements
44
<PAGE>
TORCHMARK CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW--(Continued)
(Amounts in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
45
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Net Income Shareholders' Equity
Year Ended December 31, At December 31,
-------------------------- ---------------------
1998 1997 1996 1998 1997
-------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Life insurance subsidiar-
ies...................... $260,847 $369,446 $283,881 $640,034 $ 798,265
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
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:
<CAPTION>
Year Ended
December 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C> <C>
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
========== ==========
</TABLE>
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 3--Investment Operations
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
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)
======== ======== =========
</TABLE>
50
<PAGE>
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:
<TABLE>
<CAPTION>
Gross Gross Amount per % of Total
Amortized Unrealized Unrealized Market the Balance Fixed
Cost Gains Losses Value Sheet Maturities
---------- ---------- ---------- ---------- ----------- ----------
1998:
- -----
<S> <C> <C> <C> <C> <C> <C>
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
========== ======== ======== ========== ==========
<CAPTION>
1997:
- -----
<S> <C> <C> <C> <C> <C> <C>
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
========== ======== ======== ========== ==========
</TABLE>
51
<PAGE>
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.
<TABLE>
<CAPTION>
Amortized Market
Cost Value
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
--------------------- ---------------------
Accumulated Accumulated
Cost Depreciation Cost Depreciation
-------- ------------ -------- ------------
<S> <C> <C> <C> <C>
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
======== ======= ======== =======
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
Deferred Value of Deferred Value of Deferred Value of
Acquisition Insurance Acquisition Insurance Acquisition Insurance
Costs Purchased Costs Purchased Costs Purchased
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
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
========== ======== ========== ======== ========== ========
</TABLE>
- --------
(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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Percent of
Years of Issue Interest Rates Liability
-------------- --------------------- ----------
<S> <C> <C>
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%
===
</TABLE>
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:
<TABLE>
<CAPTION>
Percent of
Years of Issue Interest Rates Liability
-------------- --------------------- ----------
<S> <C> <C>
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%
===
</TABLE>
55
<PAGE>
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:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
The liability for unpaid health claims is included with "Policy claims and
other benefits payable" on the Balance Sheet.
56
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
Income tax expense attributable to income from continuing operations
consists of:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1998 % 1997 % 1996 %
-------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C>
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%
======== === ======== === ======== ===
</TABLE>
57
<PAGE>
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:
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Defined Excess
Defined Benefit Benefit
Year Ended Contribution Pension Pension
December 31, Plans Plans Plan
------------ ------------ ------- -------
<S> <C> <C> <C>
1998.................... $1,530 $2,875 $399
1997.................... 2,123 3,244 526
1996.................... 2,133 3,358 467
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
59
<PAGE>
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.
<TABLE>
<CAPTION>
Pension Benefits
For the year
ended
December 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
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)
======== ========
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
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
===== ===== =====
</TABLE>
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.
<TABLE>
<CAPTION>
Benefits Other Than Pensions
For the year ended December 31,
1998 1997
--------------- ---------------
<S> <C> <C>
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)
=============== ===============
</TABLE>
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:
<TABLE>
<CAPTION>
Change in Trend Rate
----------------------
1% 1%
Effect on: Increase Decrease
---------- ---------- ----------
<S> <C> <C>
Service and interest cost components................ $ 79 $ (67)
Benefit obligation.................................. 517 (453)
</TABLE>
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.38% in 1998 and 7.37% in 1997.
61
<PAGE>
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:
<TABLE>
<CAPTION>
Change in Trend Rate
----------------------
1% 1%
Effect on: Increase Decrease
---------- ---------- ----------
<S> <C> <C>
Service and interest cost components................ $ 79 $ (67)
Benefit obligation.................................. 517 (453)
</TABLE>
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:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1998 1997
-------------------- --------------------
Short-term Long-term Short-term Long-term
Debt Debt Debt Debt
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------- ------------------------
Treasury Treasury
Issued Stock Issued Stock
------ -------- ----------- -----------
<S> <C> <C> <C> <C>
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)
=== === =========== ===========
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1997
--------------------- ---------------------
Preferred Common Preferred Common
Stock Stock Stock Stock
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
Available for Grant
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
- --------
(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
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
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
</TABLE>
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):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ---------------------------- ---------------------------
Weighted Average Weighted Average Weighted Average
Options Exercise Price Options Exercise Price Options Exercise Price
---------- ---------------- ---------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Contract
Exercise Number Number Termination
Price Grant Date Outstanding Exercisable Date
-------- ---------- ----------- ----------- -----------
<C> <S> <C> <C> <C>
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
========= =========
</TABLE>
- --------
* 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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
For the Year 1998
---------------------------------------------------------------
Life Health Annuity Total
-------------- -------------- ------------- ----------------
% of % of % of % of
Distribution Channel Amount Total Amount Total Amount Total Amount Total
- -------------------- -------- ----- -------- ----- ------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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%
======== ===== ======== ===== ======= ===== ========== =====
<CAPTION>
For the Year 1997
---------------------------------------------------------------
Life Health Annuity Total
-------------- -------------- ------------- ----------------
% of % of % of % of
Distribution Channel Amount Total Amount Total Amount Total Amount Total
- -------------------- -------- ----- -------- ----- ------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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%
======== ===== ======== ===== ======= ===== ========== =====
</TABLE>
72
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 18--Business Segments (continued)
<TABLE>
<CAPTION>
For the Year 1996
---------------------------------------------------------------
Life Health Annuity Total
-------------- -------------- ------------- ----------------
% of % of % of % of
Distribution Channel Amount Total Amount Total Amount Total Amount Total
- -------------------- -------- ----- -------- ----- ------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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%
======== ===== ======== ===== ======= ===== ========== =====
</TABLE>
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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 18--Business Segments (continued)
<TABLE>
<CAPTION>
For the year 1998
------------------------------------------------------------------------------------------------------
Family
Service
Underwriting
Life Health Annuity Investment Other Corporate Income Adjustments Consolidated
--------- -------- -------- ---------- --------- --------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
==========
</TABLE>
- -------
* Investment segment includes MIPS dividend on a pretax basis.
** Insurance segments exclude Family Service.
74
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 18--Business Segments (continued)
<TABLE>
<CAPTION>
For the year 1997
------------------------------------------------------------------------------------------------------
Family
Service
Underwriting
Life Health Annuity Investment Other Corporate Income Adjustments Consolidated
--------- -------- -------- ---------- --------- --------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
==========
</TABLE>
- -------
* Investment segment includes MIPS dividend on a pretax basis.
** Insurance segments exclude Family Service.
75
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands except per share data)
Note 18--Business Segments (continued)
<TABLE>
<CAPTION>
For the year 1996
-----------------------------------------------------------------------------------------------------
Family
Service
Underwriting
Life Health Annuity Investment Other Corporate Income Adjustments Consolidated
--------- -------- -------- ---------- --------- --------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
==========
</TABLE>
- -------
* Investment segment includes MIPS dividend on a pretax basis.
** Insurance segments exclude Family Service.
76
<PAGE>
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.
<TABLE>
<CAPTION>
At December 31, 1998
-------------------------------------------------------------------------------------
Life Health Annuity Investment Other Corporate Adjustments Consolidated
---------- -------- ---------- ---------- -------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
========== ======== ========== ========== ======== ======== ======== ===========
<CAPTION>
At December 31, 1997
-------------------------------------------------------------------------------------
Life Health Annuity Investment Other Corporate Adjustments Consolidated
---------- -------- ---------- ---------- -------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
========== ======== ========== ========== ======== ======== ======== ===========
<CAPTION>
At December 31, 1996
-------------------------------------------------------------------------------------
Life Health Annuity Investment Other Corporate Adjustments Consolidated
---------- -------- ---------- ---------- -------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
========== ======== ========== ========== ======== ======== ======== ===========
</TABLE>
77
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
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-
</TABLE>
The following table summarizes certain amounts paid during the period:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Interest paid...................................... $ 60,573 $73,537 $74,433
Income taxes paid.................................. $102,753 $31,422 $66,987
</TABLE>
78
<PAGE>
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.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
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
</TABLE>
79
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Page of
this report
-----------
<S> <C>
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
</TABLE>
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
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
Page of
this
Report
-------
<C> <S> <C>
(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)
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
Page of
this
Report
-------
<C> <S> <C>
(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)
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
Page of
this
Report
-------
<C> <S> <C>
(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
</TABLE>
84
<PAGE>
Exhibit 11. Statement re computation of per share earnings
TORCHMARK CORPORATION COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
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
============ ============ ============
</TABLE>
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:
<TABLE>
<CAPTION>
State of Name Under Which
Company Incorporation Company Does Business
----------------------- ------------- ---------------------
<S> <C> <C>
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
</TABLE>
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
<PAGE>
TORCHMARK CORPORATION (PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
See accompanying Independent Auditors' Report.
86
<PAGE>
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
CONDENSED STATEMENT OF OPERATIONS
(Amounts in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
See accompanying Independent Auditors' Report.
87
<PAGE>
TORCHMARK CORPORATION
(PARENT COMPANY)
SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(continued)
CONDENSED STATEMENT OF CASH FLOW
(Amounts in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Consolidated subsidiaries..................... $462,267 $370,032 $265,688
======== ======== ========
</TABLE>
See accompanying Independent Auditors' Report.
88
<PAGE>
TORCHMARK CORPORATION
SCHEDULE IV. REINSURANCE (CONSOLIDATED)
(Amounts in thousands)
<TABLE>
<CAPTION>
Percentage
Ceded Assumed of Amount
Gross to Other from Other Net Assumed
Amount Companies Companies Amount to Net
----------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
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 %
=========== ======== ========== =========== ===
</TABLE>
- --------
* Excludes policy charges
See accompanying Independent Auditors' Report.
89
<PAGE>
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
<PAGE>
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
<PAGE>
"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.
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"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.
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"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;
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(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.
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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.
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(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.
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(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.
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(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.
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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.
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(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.
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(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.
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(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.
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(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:
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(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).
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(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.
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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.
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(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
<PAGE>
(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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
----------------------------------------
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
<PAGE>
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.
<TABLE>
<CAPTION>
Percent of
Name and Address Number of Shares(1) Class
---------------- ------------------- ----------
<S> <C> <C>
AMVESCAP PLC 11,020,128 7.86%
11 Devonshire Square
London EC2M 4YR
England
</TABLE>
- --------
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Principal Occupation
and Business Experience
Name Age for the Past Five Years(1)
---- --- --------------------------
<C> <C> <S>
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.
</TABLE>
- --------
(1) American Income Life Insurance Company (American Income) is a wholly-owned
subsidiary of the Company.
5
<PAGE>
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.
<TABLE>
<CAPTION>
Company Common Stock
or Options Beneficially
Owned as of
December 31, 1998(1)
-------------------------
Name Directly(2) Indirectly(3)
---- ----------- -------------
<S> <C> <C>
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
</TABLE>
- --------
(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
<PAGE>
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
<PAGE>
COMPENSATION AND OTHER TRANSACTIONS WITH
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
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)
------------------ ---- ------------- --------- ------------ ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
- --------
(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
<PAGE>
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
$9,000.00 in 1996.
9
<PAGE>
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
- ----------------------------------------------------------------------------------------------------------
Potential realizable
value at assumed annual rates
of stock price appreciation
Individual Grants for option term
--------------------------------------------- -----------------------------------
% of
Number of total options Exercise
Securities granted to or
underlying employees base
options in price Expiration
Name granted(#) fiscal year ($/share) Date 5% ($) 10% ($)
(a) (b)(1) (c)(2) (d) (e) 0% ($) (f) (g)
---- ---------- ------------- --------- ---------- ------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
- --------
(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
<PAGE>
(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 $35.3125.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
(d) (e)
(b) (c) Number of Securities Value of unexercised
(a) Shares acquired Value underlying unexercised in-the-money options
Name on exercise (#) Realized ($) options at FY-end (#)(1) at FY-end ($)(2)
----- --------------- ------------ ------------------------- -------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
- --------
(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
<PAGE>
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*
<TABLE>
<CAPTION>
Final Years of Credited Service
Average -----------------------------------------------------------------
Earnings 15 20 25 30 35
-------- ------- ------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$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
</TABLE>
- --------
* 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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
[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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 5,768,447
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 9,843
<MORTGAGE> 124,072
<REAL-ESTATE> 164,644
<TOTAL-INVEST> 6,412,591
<CASH> 4,920
<RECOVER-REINSURE> 0
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193,259
0
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1,753,630
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<DISCONTINUED> (6,373)
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</TABLE>
