Summary of Operations: Net income rose 28% or $112 million in 2010 to $517 million. In 2009, net income declined $47 million or 10% to $405 million from $452 million. On a diluted per share basis, 2010 net income increased 29% to $6.30. In 2009, per share net income declined 5% to $4.88. Included in 2010 results is the $35 million after tax loss on the disposal of United Investors, representing $.43 per diluted share.
While the fixed annuity account balance has increased each year over the prior year, policy charges and underwriting income have fluctuated only modestly. The stability in fixed annuity policy charges has resulted as the charges consist of surrender charges and are not based on account size. These charges have remained somewhat level in recent periods. A considerable portion of fixed annuity profitability is derived from the spread of investment income exceeding contractual interest requirements, which can result in negative net policy obligations. In both 2010 and 2009, the spreads for fixed annuities increased over the prior year as a result of credited rate reductions on the inforce annuities. Furthermore, spreads were increased by the introduction of a new annuity form on Liberty National paper in mid-2009. The amortization of deferred acquisition costs also rose as these costs are amortized in relation to gross profits.
(4) Uncertain tax positions do not include $40 thousand of accrued interest. See Note 9-Income Taxes in the Notes to Consolidated Financial Statements for more information.
Index to Financial Statements The fixed maturity portfolio contained $1.8 billion in net unrealized investment losses at year end 2008 ($1.1 billion after tax and the associated adjustment to deferred acquisition costs) including fixed maturities in the subsidiary sold in 2010. These unrealized losses are believed by management to have been brought on by widening credit spreads in financial markets, and were the primary factor in the decline in our shareholders’ equity in 2008. In 2009, as conditions in financial markets began to improve, unrealized losses declined $1.3 billion ($.9 billion after tax). As financial markets continued to improve in 2010, the $456 million of unrealized losses at year end 2009 in the fixed maturity portfolio turned into $107 million of unrealized gains, a positive change of $531 million after taking into account the adjustment of $32 million to deferred acquisition costs ($345 million after tax). Torchmark’s ratio of earnings before interest and taxes to interest requirements (times interest earned) was 11.3 times in 2010, compared with 9.3 times in 2009 and 10.9 times in 2008. This times-interest-earned ratio is computed by dividing interest expense into the sum of pre-tax income from continuing operations and interest expense. A discussion of our interest expense is included in the discussion of financing costs under the caption Investments in this report.
Defined benefit pension plans. We maintain funded defined benefit plans covering most full-time employees. We also have unfunded nonqualified defined benefit plans covering certain key and other employees. Our obligations under these plans are determined actuarially based on specified actuarial assumptions. In accordance with GAAP, an expense is recorded each year as these pension obligations grow due to the increase in the service period of employees and the interest cost associated with the passage of time. These obligations are offset, at least in part, by the growth in value of the assets in the funded plans. At December 31, 2010, our net liability under these plans was $286 million.
We have audited the accompanying consolidated balance sheets of Torchmark Corporation and subsidiaries (“Torchmark”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of Torchmark’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.
Additionally, as further described under the caption Low-Income Housing Tax Credit Interests below in this note, Torchmark holds passive interests in limited partnerships which provide investment returns through the provision of tax benefits (principally from the transfer of federal or state tax credits related to federal low-income housing). These interests are also considered to be VIEs. They are not consolidated because the Company has no power to control the activities that most significantly affect the economic performance of these entities and therefore the Company is not the primary beneficiary of any of these interests. Torchmark’s involvement is limited to its limited partnership interest in the entity. Torchmark has not provided any other financial support to the entities beyond its commitments to fund its limited partnership interests during 2008, 2009, or 2010, and there are no arrangements or agreements with any of the interests to provide other financial support. The maximum loss exposure relative to these interests is limited to their carrying value.
A summary of stock compensation activity for each of the years in the three years ended December 31, 2010 is presented below:
Torchmark’s reportable 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 reportable segments because of the common characteristics of products within these categories, comparability of margins, and the similarity in regulatory environment and management techniques. There is also an investment segment which manages the investment portfolio, debt, and cash flow for the insurance segments and the corporate function. Torchmark’s chief operating decision maker evaluates the overall performance of the operations of the Company in accordance with these segments.