Liberty’s life underwriting margins have improved steadily over the past three years. As a percentage of life premium, margins rose from 22% in 2003 to 24% in 2004 and then to 26% in 2005. These margin improvements resulted primarily from the reductions in acquisition costs due to the above-mentioned revisions in agents’ compensation. Improved persistency resulting from a 2003 change in collection procedure was also a factor.
Direct Response, primarily a life operation, also produces health insurance, which is predominantly Medicare Supplements sold directly to employer or union sponsored groups. In 2005, net health sales of $6 million, which comprises only 5% of Direct Response’s total life and health net sales, declined 12% compared with 2004 net health sales of $7 million. The 2004 net health sales had declined 46% from 2003 net sales of $13 million. Health premium in 2005 was $38 million, a 9% increase compared with $35 million in 2004. The 2004 premium rose 22% over $28 million of premium in 2003.
Torchmark’s current investment policy is to acquire only investment-grade obligations. Thus, any increases in below investment-grade issues are a result of ratings downgrades of existing holdings.
Future Policy Benefits. Because of the long-term nature of insurance contracts, Torchmark’s insurance companies are liable for policy benefit payments that will be made in the future. The liability for future policy benefits is determined by standard actuarial procedures common to the life insurance industry. The accounting policies for determining this liability are disclosed in Note 1-Significant Accounting Policies in the Notes to the Consolidated Financial Statements. While management and company actuaries have used their best judgment in determining the assumptions and in calculating the liability for future policy benefits, there is no assurance that the estimate of the liabilities reflected in the financial statements represents Torchmark’s ultimate obligation. Additionally, because of the size of this liability, significantly different assumptions could result in materially different reported amounts. A list of the significant assumptions used to calculate the liability for future policy benefits is reported in Note 5-Future Policy Benefit Reserves in the Notes to the Consolidated Financial Statements.
Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 2005
Securities Lending: Torchmark has entered into a securities lending agreement whereby certain securities from its portfolio are loaned to other institutions. Cash collateral obtained from the borrower, equal to 102% of the market value of the loaned securities plus accrued interest, is deposited with a lending agent and invested by that agent in accordance with the Company’s guidelines to generate
additional income. Torchmark shares this income with the lending agent. Torchmark maintains full ownership rights to the securities loaned and continues to earn interest on them. Accordingly, the loaned securities are included in invested assets. The securities lending collateral is recognized as an asset with a corresponding liability for the obligations to return the collateral.
The investment portfolio is to be well diversified to avoid undue exposure to a single sector, industry, business, or security. The equity and fixed-maturity portfolios are not permitted to invest in any single issuer that would exceed 10% of total plan assets at the time of purchase. Torchmark does not employ any other special risk management techniques, such as derivatives, in managing the pension investment portfolio.
On an aggregate basis, the post-retirement benefit obligation for the post-retirement plans other than pensions was $13.7 million and $13.0 million at December 31, 2005 and 2004, respectively. The table below presents the assumptions used to determine the liabilities and costs of Torchmark’s post-retirement benefit plans other than pensions.
the total $600 million facility, there is a usage fee of 7.5 basis points. During 2005, Torchmark’s usage of the facility was below this threshold and no usage fee was required. Torchmark is subject to certain covenants for the agreements regarding capitalization and earnings, with which it was in compliance at December 31, 2005. Borrowings on this facility are reported as short-term debt on the Consolidated Balance Sheets.
Guarantees: At December 31, 2005, Torchmark had in place five guarantee agreements, four of which were either parent company guarantees of subsidiary obligations to a third party, or parent company guarantees of obligations between wholly-owned subsidiaries. As of December 31, 2005, Torchmark had no liability with respect to these guarantees. The fifth guarantee related to third party performance.