United American owns and is the sole occupant of a 140,000 square foot facility, located in McKinney, Texas (a north Dallas suburb).
The following information should be read in conjunction with Torchmark’s Consolidated Financial Statements and related notes reported elsewhere in this Form 10-K:
How Torchmark Views Its Operations: Torchmark is the holding company for a group of insurance companies which market primarily individual life and supplemental health insurance, and to a limited extent annuities, to middle income households throughout the United States. Torchmark views its operations by segments, which are the major insurance product lines of life, health and annuities, and the investment segment that supports the product lines. Segments are aligned based on their common characteristics, comparability of the profit margins, and management techniques used to operate each segment.
Investment Segment. The investment segment involves the management of Torchmark’s capital resources, including the investment of cash generated from operations in appropriate investments and the management of corporate debt and liquidity. Torchmark’s measure of profitability for the investment segment is excess investment income, which is income earned on the investment portfolio less the interest credited to net policy liabilities and less the Company’s financing costs.
The tables in Note 15-Business Segments demonstrate the measures of profitability. Those tables also reconcile Torchmark’s revenues and expenses by segment to its major income statement line items for each of the years in the three-year period ending December 31, 2004. Additionally, this Note provides a summary of the profitability measures that demonstrates year-to-year comparability and which reconciles to Torchmark’s net income. That summary is reproduced below from the Consolidated Financial Statements to present Torchmark’s overall operations in the manner that management uses to manage the business.
See the discussion of Realized Gains and Losses in this report.
Summary of Operations: Torchmark’s net income increased 9% or $38 million to $469 million in 2004, and 12% or $47 million to $430 million in 2003. The growth in earnings in both periods came primarily from the life insurance and investment segments, although health contributed in 2004, due to improvement in margins. The investment contribution was less in 2004 than in the prior year.
The life insurance segment added $28 million to the 2004 increase in earnings, and $26 million to the 2003 increase. Life insurance growth has been a result of increases in sales volumes, premium and improvements in margins in both 2004 and 2003, and is discussed further under the caption Life Insurance.
The investment segment’s pretax profitability increased $13 million in 2004 and $26 million in 2003. The decline in the increase in profitability is the result of the low and falling interest rate environment during the 2003-2004 period. The investment segment includes net investment income, offset by interest on insurance liabilities and financing costs. Yields on new investments averaging 6.3% have been lower than the portfolio yield of 7.1% since the first quarter of 2003. As a result, net investment income has
grown at a lower rate than the corresponding growth rate in invested assets. Additionally, proceeds from called or matured bonds totaling $1.04 billion in 2003-2004 were invested at yields lower than that of the replaced bonds. Lower interest rates credited to the insurance liabilities and benefits from the interest-rate swaps on Torchmark’s debt have somewhat mitigated the effect of lower interest rates on the investment segment, but the net effect has been detrimental. See the analysis of excess investment income and investment activities under the caption Investments for a more detailed discussion.
Total revenues rose 5% in 2004 to $3.07 billion, exceeding $3 billion for the first time in Torchmark’s history. In 2003, total revenues increased 6% to $2.93 billion from $2.76 billion in 2002. The life premium increase was the primary contributor to revenue growth in both periods, accounting for over half of the revenue growth each year. Net investment income added 14% of the revenue growth in 2004 and 23% in 2003.
During 2004, Torchmark received a refund of state income taxes in the amount of $3.0 million, after Federal tax. This refund resulted from the settlement of certain state tax issues concerning a discontinued operation in the mid-1990s and reduced income tax expense in the Consolidated Statement of Operations. In 2003, net income was impacted by two nonrecurring items. First, Torchmark sold an airplane and recognized a pretax loss of $.8 million. In the Consolidated Statements of Operations, this item was included as an administrative expense. Secondly, the settlement of a Federal tax issue resulted in interest due Torchmark in the pretax amount of $4.3 million. This item was included in investment income on the Consolidated Statements of Operations. Because the tax issue covered a period of many years, the interest income on the tax refund exceeded the refund itself. After expenses, the effect of the tax refund on earnings was immaterial. Significant gains or losses from non-investment property or significant interest income from non-investment sources are unusual for Torchmark.
flow, general market conditions, and other alternative uses. The majority of these purchases are made from excess operating cash flow when market prices are favorable. Additionally, when stock options are exercised, proceeds from these exercises are used to repurchase approximately the number of dilutive shares issued as a result of the option exercises. The following chart summarizes share purchase activity for each of the three years ended December 31, 2004.
Life insurance premium rose 6% to $1.4 billion in 2004 and 7% in 2003 to $1.3 billion. Life insurance products are marketed through several distribution channels. Premium by channel for each of the last three years is as follows.
The following table sets forth annualized life insurance premium in force information for each of the last three years by distribution method.
The American Income Exclusive Agency focuses on members of labor unions, credit unions, and other associations for its life insurance sales. It is a high profit margin business characterized by lower policy obligation ratios. This agency was Torchmark’s fastest growing life insurance agency during both 2003 and 2002 in terms of premium income and annualized premium in force, but growth slowed in 2004. Annualized life premium in force rose 9% to $377 million at year-end 2004, after having increased 15% in 2003, while premium income rose 11% in 2004 and 14% in 2003. Sales, in terms of first-year collected premium, grew 5% in 2004, after having risen 19% in 2003 and 35% in 2002. Growth in sales for this agency is driven by the growth in the number of its agents. American Income’s agent count was 1,768 at year end 2001, growing 12% to 1,975 at year end 2002 and 16% to 2,291 at year end 2003. In 2004, however, the agent count fell 9% to 2,090 at December 31. As in the case of all of Torchmark’s agency distribution systems, continued increases in sales are largely dependent on increases in agent count. American Income’s marketing organization has renewed its efforts to improve agent recruiting, retention, and productivity in order to increase the size of this agency. In particular, this agency began in the third quarter of 2004 to focus on updating its internet recruiting program in an effort to add new agents. In the fourth quarter of 2004, the agent count increased 2%, primarily as a result of these efforts.
Liberty’s life underwriting margins rose in the 2004 period over the prior-year period from 22% to 24% of premium. These margin improvements resulted primarily from the reductions in acquisition costs due to the revisions in agents’ compensation. Improved persistency resulting from a 2003 change in collection procedure was also a factor in the 2004 margin improvements.
Torchmark’s Military Agency consists of a nationwide independent agency whose sales force is comprised of former commissioned and noncommissioned military officers who sell exclusively to commissioned and noncommissioned military officers and their families. This business consists of whole- life products with term insurance riders and is characterized by low lapse rates. The Military Agency has steadily grown. In 2004, life premium was $187 million or 13% of Torchmark’s total life premium. Premium rose 12% in both 2004 and 2003. This agency continues to grow, as annualized premium in force rose 11% in 2004 to $199 million after an increase in 2003 of 13%. One key to the growth of premium income and premium in force in this agency is the high persistency of the business. Sales of this agency grew 13% in terms of first-year premium collected in 2004 to $27 million, after a 13% increase in 2003. Margins in the Military group were negatively affected by hostilities in the Middle East in 2004 and 2003, resulting in additional benefits paid of $4.0 million and $1.1 million, respectively.
The following table presents annualized health premium in force by distribution method for the last three years.
At December 31, 2004, Medicare Supplement accounted for 61% of Torchmark’s annualized health premium in force compared with 65% in 2003 and 69% in 2002. Medicare Supplement annualized premium in force declined as a percentage of total annualized health premium in force, reflective of the changes in product mix in sales of health products, as greater emphasis has been placed on sales of other limited-benefit plans. The Medicare Supplement market has become more difficult in recent periods due to regulatory pressures and increased competition, resulting in declines in sales and premium in force for this product. While Medicare Supplement still remains Torchmark’s dominant health product in terms of annualized premium, hospital-surgical products have been growing rapidly in their contribution to health premium. This product line has risen from 14% of annualized health premium in force in 2002 to 22% in 2004.
The following table indicates first-year collected premium by health product type for each of the last three years.
The United American Branch Office and Independent Agencies are the predominant distributors of Torchmark’s health products. These agencies accounted for $791 million or 75% of 2004 health premium income and $134 million or 81% of first-year collected premium. Historically, Medicare Supplement has been the primary product sold by these agencies. However, in recent periods, Medicare Supplement sales have not been emphasized by these two agencies as their focus has shifted to distributing limited-benefit hospital/surgical policies sold to customers under age 65. Medicare Supplement sales have been under pressure for the last several years from increased price competition and, as the average price of the most popular plans has increased rapidly in the past years, affordability has become an issue for some seniors. Both factors have increased the difficulty for agents making sales of Medicare Supplements. Accordingly, these agencies have expanded their product lines as increased consumer demand for under-age-65 supplemental health products has resulted from the growing unavailability of individual major medical plans and decreased coverage offered by employers. Not only did the price competition make sales more difficult, but, additionally, many of the United American Branch Office agents left Torchmark for competitors whose lower-priced
Medicare Supplement products were easier to sell. This trend of agent losses reversed in 2003, as this agency began to focus on other supplemental health products and as Torchmark’s Medicare Supplement premium rate increases have moderated. Producing agents at the United American Branch Office Agency declined to 1,280 at year end 2002 but then rose 18% in 2003 to 1,510. In 2004, this count rose 11% to 1,677 at year end. Medicare Supplement first-year collected premium fell 14% in 2004 to $55 million from $65 million in 2003. In 2003, Medicare Supplement first-year collections were down 29% from $92 million the prior year.
Even though price competition has been a negative factor, Torchmark intends to continue to market its Medicare Supplement product as a major health product offering. Medicare beneficiaries represent a large and growing group of potential customers. Even though margins in this product are limited due to heavy regulation, standardized benefit plans, compensation limitations to agents, and mandated loss ratios, it still remains a profitable product to Torchmark.
However, Medicare Supplements remain a popular supplemental health policy with the country’s large and growing group of Medicare beneficiaries. About 85% of all Medicare beneficiaries have Medicare Supplements to cover at least some portion of the deductibles and coinsurance that the Federal Medicare program does not pay. Because of minimum loss ratio regulation, underwriting margins on Medicare Supplements are lower than those on Torchmark’s life business. However, due to United American’s low cost, service-oriented customer assistance and claims administration, as well as its economies of scale, it is a profitable line of business. In 2003, Congress passed legislation that in 2006 will provide Medicare covered prescription drugs, a benefit not previously covered by Medicare. While this is a major addition to the Medicare program, it will have little effect on Torchmark’s Medicare supplement business because the legislation does not require Medicare supplements to cover the co-pays and deductibles that the Medicare drug program does not cover. Torchmark does not write any Medicare supplement plans that provide prescription drug coverage. At this time, it appears that there will continue to be an important role for private insurers such as Torchmark in helping senior citizens cover their healthcare costs. As a result, Medicare Supplements should continue as a popular product for senior-age consumers.
As discussed above, the United American Agencies have emphasized sales of other limited benefit health products for which demand has increased in recent years. Consumer interest in these products has increased as a result of growing unavailability of individual major-medical plans and decreased coverage offered by employers. Margins on these other supplemental health plans are generally higher than those of Medicare Supplement. However, the Medicare Supplement product has higher persistency rates. Both of the United American agencies offer these limited benefit plans. Most of the plans being written are limited-benefit hospital and surgical plans that are lower cost alternatives to individual major medical plans, or that are bought to supplement employer-sponsored group health plans. Because of the limits on maximum benefits and other limits, these type plans are relatively less subject to the high rate increases that have been experienced in major medical-type plans.
Sales of other limited-benefit health products, in terms of first-year collected premium, rose 35% in 2004 to $97 million over $72 million in 2003. Annualized premium in force for other health products grew 21% in 2004 to $237 million, after rising 36% in 2003 to $195 million.
Cancer business is primarily produced by the Liberty National Agency. Cancer annualized premium in force represented 17% of Torchmark’s total health premium in force at December 31, 2004. Annualized premium in force declined 2% in 2004 but rose 5% in 2003. Approximately one half of the total cancer annualized premium in force consists of a closed block of cancer business which arose from a class action settlement in the mid-nineties. Significant rate increases to offset deteriorating margins on this closed block of business have been a continuing factor affecting growth in cancer premium in force in prior periods. Cancer sales, in terms of first-year collected premium, were $12.2 million in 2004, 26% above $9.6 million sold in 2003. First-year collections in 2003 increased 11% over the prior year.
Annuities. Annuity products are marketed by Torchmark subsidiaries to service a variety of consumer needs, including retirement income and long-term, tax-deferred growth opportunities. Annuities are sold on both a fixed and variable basis. Annuities represented 1% of Torchmark’s 2004 premium revenue and less than 3% of insurance underwriting margin. While Torchmark continues to market annuity products, it does not emphasize this segment.
Administrative expenses. Torchmark’s operating expenses, as included in the Other and Corporate Segments, are classified in two categories: insurance administrative expenses and expenses of the parent company. Consider the following information for the three years ended December 31, 2004.
Revenues include realized gains of $22.2 million in 2004, and losses of $3.3 million in 2003 and $38.7 million in 2002. Revenues in 2003 also include a nonrecurring interest income benefit of $4.3 million related to interest received on a tax settlement. Because realized gains and losses and nonrecurring items bear no relationship to core operations, Torchmark management removes the effect of these items from revenue when evaluating expense ratios.
Insurance administrative expenses as a percentage of premium and total operating expenses as a percentage of total revenue rose slightly in 2004 but held steady in 2003 versus 2002. Litigation expense in 2004 increased $3.4 million, affecting the 2004 increase. Increases in 2003 were mainly a result of an increase in pension expense of $2.7 million and slightly higher litigation expense.
Investments. The following table summarizes Torchmark’s investment income and excess investment income.
The largest component of excess investment income is net investment income, which rose 3% to $577 million in 2004 and 7% to $558 million in 2003. Included in 2003 investment income was a nonrecurring interest income item resulting from a tax settlement of $4.3 million pretax. After excluding the nonrecurring item, as management views investment income, investment income rose 4% in 2004 and 7% in 2003, while mean invested assets at book value grew 7% in both periods. The decline in the growth rate of investment income is the result of falling investment interest rates for the period beginning with the second quarter of
2003 through 2004. As a result, the average yield on new investment acquisitions during that period was below the total portfolio yield. Further, calls on fixed maturity securities in the portfolio increased during the period, and the yield on the reinvestment of the proceeds was below that of the called securities. Given the sizable annual cash flow from Torchmark’s operations, management expects mean invested assets to continue to grow, but as long as the current low-interest rate environment continues, the rate of growth of investment income will be under pressure. More information about investment acquisitions follows under this caption.
Excess investment income has been positively affected by reduced crediting rates on certain policy liabilities in both periods. While interest credited increased 4% to $213 million in 2004, the 8% increase in average net policy liabilities in 2004 was partially offset by the decline in crediting rates from 5.46% to 5.23%. The 7% increase in interest credited in 2003 resulted from the 10% increase in average net liabilities, offset by a reduction in the average crediting rate to 5.46% from 5.64%. As discussed under the caption Annuities, the 10% growth in net policy liabilities in 2003 was primarily due to the annuity production from a new United American general agency and the transfers from United Investor variable policies to fixed annuities due to the deteriorating equity markets. The lower average crediting rates in both 2004 and 2003 resulted from reductions made by the Company in response to the low interest-rate environment.
Financing costs for the investment segment primarily consist of interest on Torchmark’s various debt instruments and are deducted from excess investment income. The table below reconciles interest expense per the Consolidated Statements of Operations to financing costs.
Financing costs rose 11% or $3 million in 2004. The 2004 increase primarily resulted from the expiration in September 2004 of a profitable interest-rate swap, on which Torchmark had earned over $3 million per quarter during the first three quarters of 2004. The interest-rate swaps are agreements between Torchmark and certain banks for which Torchmark receives from the banks fixed rate payments that match the coupons that it pays to its debt holders, and makes floating rate payments based on LIBOR rates to the banks. While new swaps were entered into in August of 2004, the spreads on the new swaps were not as great as the expired swap and accounted for slightly more than $1 million of reduced interest cost per quarter. Also affecting financing costs in 2004 were rising short-term rates in the latter part of the year. These rising rates reduced the positive effect of Torchmark’s other swaps and increased short-term borrowing costs. Financing costs declined 15% in 2003. The significant decline in short-term interest rates from those of 2002 was a factor in the decline as it reduced short-term borrowing costs in 2003 and it favorably impacted the benefit of Torchmark’s interest-rate swaps. A full description of these swaps is disclosed in Note 12-Debt in the Notes to the Consolidated Financial Statements.
The distribution of expected repayments at December 31 of the indicated year is as follows:
Credit Risk Sensitivity. Credit risk is the level of certainty that a security’s issuer will maintain its ability to honor the terms of that security until maturity. In weak economic periods, the securities of industry sectors affected by the economic downturn suffer increased credit risk. As a result, securities in these weakened sectors could be downgraded by credit-rating agencies to below-investment grade status. Thus, the likelihood the issuers will honor their securities’ terms is reduced and the securities’ market values can be negatively impacted. As Torchmark continues to invest in corporate bonds with relatively long maturities, credit risk is a concern. Torchmark mitigates this ongoing risk, in part, by acquiring investment-grade bonds, and by investigating the financial fundamentals of each prospective issuer. Torchmark continues to monitor the status of issuers on an ongoing basis. At December 31, 2004, approximately 94% of invested assets at fair value were held in fixed-maturity securities. The major rating agencies considered 92% of this portfolio to be investment grade. The average quality rating of the portfolio continues to be BBB+. The table below demonstrates the credit rankings of Torchmark’s fixed-maturity portfolio at fair value as of December 31, 2004.
Torchmark additionally reduces credit risk by maintaining investments in a wide range of industry sectors. The following table presents the industry sectors that exceeded 2% of the corporate fixed-maturity portfolio at fair value at December 31, 2004.
Realized Gains and Losses. As a group of life and health insurance carriers, Torchmark collects premium income from its policyholders for the eventual payment of policyholder benefits, sometimes paid many years or even decades in the future. In addition to the payment of these benefits, Torchmark also incurs acquisition costs, administrative expenses, and taxes as a part of its insurance operations. Because benefits are expected to be paid in future periods, premium receipts in excess of current expenses are invested to provide for these obligations. For this reason, Torchmark, as a part of its core insurance operations, holds a significant investment portfolio. This portfolio consists primarily of high-quality fixed maturities containing an adequate yield to provide for the cost of carrying these long-term insurance product obligations. As a result, fixed maturities are generally held for long periods to support the liabilities. Expected yields on these investments are taken into account when setting insurance premium rates and product profitability expectations.
Realized gains and losses can be significant in relation to the earnings from core insurance operations, however, and as a result, have a material positive or negative impact on net income. The significant fluctuations caused by gains and losses can cause period-to-period trends of net income to not be indicative of historical core operating results nor predictive of the future trends of core operations. Accordingly, they have no bearing on core insurance operations or segment results as management views its operations. For these reasons, Torchmark management removes the effects of realized gains and losses when evaluating its overall insurance operating results.
The reduction in interest cost from swapping fixed-rate obligations to floating rate.
In September, 2003, the Securities and Exchange Commission informally interpreted SFAS 133, the GAAP rules concerning the reporting of nonhedged derivatives. Their interpretation concluded that all income and expenses related to a nonhedged derivative must be recorded in the same line item on the income statement that the adjustment to fair value is recorded. This interpretation was effective immediately with prior periods reclassified accordingly for comparability. To comply with this interpretation, Torchmark combines the cash settlements in interest cost with the noncash unrealized fair value adjustment as a component of realized investment gains and losses. Therefore, Torchmark includes the cash settlements on all swap derivatives in realized investment gains and losses. Torchmark’s pretax interest cost reduction from these cash settlements included in realized investment gains was a positive $23 million in 2004, a positive $26 million in 2003, and a positive $23 million in 2002. Torchmark continues to reduce interest cost for this benefit in its segment analysis, because the segment analysis is required by GAAP to be as management evaluates the performance of the segment. Torchmark views the benefit from lower interest rates as a reduction in its financing costs in its investment segment.
Operating cash inflows significantly exceed cash outflows primarily because life insurers, such as Torchmark, expect to pay the majority of their policyholder benefits in future periods, sometimes many years later. A liability is actuarially computed and recorded for these future benefits which increases as insurance in force grows so that Torchmark can “save” for these future payments. Earnings are charged for the increase in this reserve each period, but there is no corresponding cash outlay. Therefore, cash provided from operations will generally significantly exceed net income in any given period. Cash flows are also generated by the maturities and scheduled repayments of Torchmark’s investment portfolio. Cash flows in excess of immediate requirements are invested to fund future requirements. Available cash flows are also used to repay debt, to buy back Torchmark shares, to pay shareholder dividends, and for other corporate uses. While Torchmark’s cash flows have historically been positive and very strong, a reduction in cash flow could negatively affect its liquidity.
Torchmark has in place a line of credit facility with a group of lenders which allows unsecured borrowings and stand-by letters of credit up to $600 million. For a detailed discussion of this line of credit facility, see the commercial paper section of Note 12-Debt in the Notes to Consolidated Financial Statements.
Liquidity of the parent company is affected by the ability of the subsidiaries to pay dividends. The parent receives dividends from subsidiaries in order to meet dividend payments on common and preferred stock, interest and principal repayment requirements on parent-company debt, and operating expenses of the parent company. For more information on the restrictions on the payment of dividends by subsidiaries, see the restrictions section of Note 13-Shareholders’ Equity in the Notes to Consolidated Financial Statements. Although these restrictions exist, dividend availability from subsidiaries historically has substantially exceeded the cash flow needs for parent company operations.
Pension obligations to Torchmark’s employees are obligations of trust fund entities which are not reflected on Torchmark’s balance sheet. The obligations of these trusts are calculated in accordance with the terms of the pension plans. These trust entities hold assets which are funded through periodic contributions by Torchmark in a manner which will provide for the settlement of the pension obligations as they become due.
The following table presents information about Torchmark’s contractual obligations for the selected periods as of December 31, 2004.
Pension obligations are liabilities in trust funds that are not reflected on Torchmark’s Consolidated Balance Sheet. At December 31, 2004, these pension obligations were $186 million, but there were also assets of $180 million in the pension entities to fund those obligations. The schedule of pension benefit payments is based on the same assumptions used to measure the pension obligations except there is no interest assumption, because the payments are undiscounted. Please refer to Note 11-Postretirement Benefits in the Notes to Consolidated Financial Statements for more information on pension obligations.
“Estimated contingent insurance obligations” consist of estimated policy benefits to be paid in the future on policies in force at December 31, 2004. Estimates are provided because the timing of the benefit payments is uncertain. For a policy benefit to be paid, the policy must be current as to premium payments, and a triggering event must have occurred. Triggering events primarily include death or policy surrender for life insurance contracts and incurred medical claims for health insurance. The estimated obligations reflect the Company’s current best estimate of future mortality, morbidity, and persistency experience. Amounts reported as “Estimated contingent insurance obligations” are not computed using the same assumptions and methods that are used to calculate the liability for “Future policy benefits” reported on the Consolidated Balance Sheets for which assumptions are described in Note 1-Significant Accounting Policies in the Notes to Consolidated Financial Statements.
Historically, premiums collected on Torchmark insurance policies have been more than sufficient to cover benefit payments and fund reserves for future payments, as well as, cover all policy acquisition and administrative expenses. In addition, the investment income earned on assets and operating cash flow is available in the unlikely event future premium revenue is insufficient to pay benefits.
The carrying value of Torchmark’s 6 1/4% Senior Notes and its 8 1/4% Notes are adjusted each period to reflect the change in fair value of swap instruments which hedge the value of the notes. The 6 1/4% Note Swap instrument increased the value of long-term debt by $5.7 million and $12.0 million at December 31, 2004 and December 31, 2003, respectively. The 8 1/4% Note Swap, which commenced in August, 2004, increased the value of long-term debt $2.4 million at December 31, 2004.
Torchmark’s ratio of earnings before interest and taxes to interest requirements (times interest earned) was 13.8 times in 2004, compared with 12.6 times in 2003, and 11.0 times in 2002. A discussion of Torchmark’s interest expense is included in the discussion of financing costs under the caption Investments in this report.
stock every year since 1986, except for 1995, the year following the acquisition of American Income. Since the beginning of 1998, Torchmark has repurchased 34.8 million shares at a total cost of $1.3 billion, and has acquired no fewer than 3.4 million shares in any one year. Management believes that Torchmark share purchases at favorable prices add incrementally to per share earnings, return on equity, and are an excellent way to increase total shareholder value. As noted earlier in this report, Torchmark acquired 5.2 million shares at a cost of $268 million in 2004, with excess cash flow. If the $268 million free cash flow used for the repurchase of Torchmark common stock had alternatively been invested in corporate bonds, an estimated $6.1 million of additional investment income, after tax, would have resulted and net income per diluted share would have increased 11% to $4.13. Because share purchases were made, actual net income per share was $4.19, an increase of 12%. Torchmark intends to continue the repurchase of its common shares when financial markets are favorable.
Credit Ratings. The credit quality of Torchmark’s debt instruments and capital securities are rated by various rating agencies. During 2003, Standard and Poor’s upgraded Torchmark’s funded debt rating from A to A+ and its preferred securities rating from BBB+ to A-. The chart below presents Torchmark’s credit ratings as of December 31, 2004.
In December 2004, the FASB revised Statement 123, Share-Based Payment (Statement 123R,) effective for Torchmark as of July 1, 2005. The provisions of this statement will require Torchmark to assign a hypothetical “fair value” to option grants and to recognize an expense in the financial statements for stock options based on this value, amortized over the period that the option vests. This expense will be deducted from earnings and earnings per share in addition to it already being reflected in the dilution computation described above.
The “fair value” method contrasts with the “intrinsic value” method currently permitted by GAAP and used by Torchmark, whereby a value is assigned to an option only if the grant price is less than the fair value of the stock at the date of grant. Because Torchmark’s options are generally granted at an exercise price equal to the fair value of Torchmark stock, Torchmark has historically incurred no option expense. GAAP rules currently require Torchmark to disclose in Note 1-Significant Accounting Policies in the Notes to Consolidated Financial Statements the impact on earnings on a pro forma basis as if the “fair value” method were in effect. The company does not expect the adoption of this Statement to materially alter its methodology of calculating option expense or the results of expensing options to vary materially from the pro forma prior-period disclosures.
involved in the determination of these assumptions, which must be made at the time of option grant. Variations in actual experience versus the assumptions can cause material differences in an option’s actual value when it is ultimately exercised versus its expense recorded in the financial statements. Additionally, popular pricing models do not take into account specific characteristics of employee option grants, such as vesting and transferability restrictions. They also ignore the concept of mean reversion, assigning a higher value to an option when the underlying stock price is historically higher, when in reality an option is more valuable when granted at a historically lower price. Torchmark plans to use the Black-Scholes pricing model as it has done for the pro forma disclosures, with assumptions most reflective of Torchmark’s experience.
The issuance by the FASB of Statement 123R, requiring the expensing of stock options, revises the method of computing dilutive shares. The revised method does not allow the treasury stock method which simulates cash flow, but instead limits cash receipts from the tax benefit and injects hypothetical concepts such as “unrecognized option expense” to the dilution model. As a result, diluted shares outstanding under the new Standard will bear no relationship to diluted shares outstanding under the historical model or to a pattern that the Company could actually replicate with its cash flow.
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 7-Future Policy Benefits Reserves in the Notes to the Consolidated Financial Statements.
Policy Claims and Other Benefits Payable. This liability consists of known benefits currently payable and an estimate of claims that have been incurred but not yet reported to the Company. The estimate of unreported claims is based on prior experience and is made after careful evaluation of all information available to the Company. However, the factors upon which these estimates are based can be subject to change from historical patterns. Factors involved include medical trend rates and medical cost inflation, the litigation environment, regulatory mandates, and the introduction of policy types for which claim patterns are not well established. Changes in these estimates, if any, are reflected in the earnings of the period in which the adjustment is made. Torchmark management believes that the estimates used to
The actuarial assumptions used in determining Torchmark’s obligations for pensions include employee mortality and turnover, retirement age, the expected return on plan assets, projected salary increases, and the discount rate at which future obligations could be settled. These assumptions have an important effect on the pension obligation. A decrease in the discount rate or rate of return on plan assets will cause an increase in Torchmark’s pension obligation. A decrease in projected salary increases will cause a decrease in this obligation. These assumptions are subjective in many cases and small changes in certain assumptions may cause material differences in reported results. While management has used its best efforts to determine the most reliable assumptions, given the information available from company experience, economic data, independent consultants and other sources, no assurance can be given that actual results will be the same as expected. The assumptions are reviewed annually and revised, if necessary, based on more current information available to the company. Torchmark’s discount rate, rate of return on assets, and projected salary increase assumptions are disclosed in Note 11-Postretirement Benefits in the Notes to Consolidated Financial Statements. This note also contains information about pension plan assets, investment policies, funded status, and other related data.
5) General economic, industry sector or individual debt issuers’ financial conditions that may affect the current market value of securities owned by Torchmark, or that may impair issuers ability to pay interest due Torchmark on those securities;
8) Levels of administrative and operational efficiencies that differ from Torchmark’s assumptions;
Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended December 31, 2004
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2004
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Torchmark’s internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 11, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of Torchmark’s internal control over financial reporting and an unqualified opinion on the effectiveness of Torchmark’s internal control over financial reporting.
In December 2003, the Financial Accounting Standards Board (FASB) revised its previously issued FASB Interpretation 46 (FIN46R) to clarify the definition of a variable interest and the instructions for consolidating variable interest entities (VIE’s). Primary beneficiaries only are required to consolidate VIE’s. Therefore, a company may have voting control of a VIE, but if it is not the primary beneficiary of the VIE in accordance with FIN46R, it is not permitted to consolidate the VIE. The trusts that are liable for Torchmark’s Trust Preferred Securities meet the definition of VIE’s. However, Torchmark is not the primary beneficiary because its interest is not variable. Therefore, Torchmark is not permitted to consolidate its interest in these trusts, even though it owns 100% of the voting equity of the Trusts. For this reason, Torchmark reports its 7¾% Junior Subordinated Debentures due to the Trusts as “Due to Affiliates” each period at its carrying value of $155 million.
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 accumulated other comprehensive income. Investments in equity securities, which include common and nonredeemable preferred stocks, are reported at fair value with unrealized gains and losses, net of deferred taxes, reflected directly in accumulated other comprehensive income. Policy loans are carried at unpaid principal balances. Mortgage loans are carried at amortized cost. Investments in real estate are reported at cost less allowances for depreciation, which are calculated on the straight line method. Short-term investments include investments in certificates of deposit and other interest-bearing time deposits with original maturities within twelve months.
This new accounting rule was to be effective for Torchmark beginning July 1, 2004. However, in the third quarter of 2004, the FASB deferred the effective date of certain portions of this rule until it could be further considered. The portions deferred relate to steps two and three in the impairment analysis above. The disclosures called for by EITF 03-1 were maintained, and appear in Note 3-Investments. At the present time, Torchmark evaluates securities for other-than-temporary impairment as described in Note 3. If a security is determined to be other-than-temporarily impaired, the cost basis of the security is written down to fair value and is treated as a realized loss. Investment income on other-than-temporarily impaired investments which is past due is not recorded until received.
During 2003, the Securities and Exchange Commission made known interpretative guidance concerning SFAS 133. They have concluded that all income and expenses related to a nonhedged derivative must be recorded in the same line item that the adjustment to fair value is recorded. This interpretation also requires prior periods to be reclassified accordingly for comparability. In order to comply with this interpretation, Torchmark no longer reduces its interest expense on the Statement of Operations for the reduction in interest cost for swapping its fixed rate for a variable rate on nonhedged derivatives. Instead, this benefit from cash settlements is reported as a component of realized investment gains (losses), the same line where the required fair value adjustment for nonhedged derivatives is reported. Torchmark has also reported the interest cost benefit on hedged derivatives as a component of realized gains (losses), in order to report these items on a consistent basis. In its segment disclosure, however, Torchmark continues to report the interest cost benefit from the swaps as a reduction in interest expense, as GAAP requires this disclosure to be presented as management views its business.
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 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 life and annuity products are also assessed an investment management fee and a sales charge. Life premium includes policy charges of $60.9 million, $64.7 million, and $69.0 million for the years ended December 31, 2004, 2003, and 2002, respectively. Other premium includes annuity policy charges for the years ended December 31, 2004, 2003, and 2002, of $27.5 million, $31.2 million, and $39.0 million, respectively. Profits are also earned to the extent that investment income exceeds policy liability 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.
Separate Accounts: Separate accounts have been established in connection with Torchmark’s variable life and annuity businesses. The investments held for the benefit of contractholders (stated at fair
value) are reported as “Separate Account Assets” and the corresponding deposit balance liabilities are reported as “Separate Account Liabilities.” The separate account investment portfolios and liabilities are segregated from Torchmark’s other assets and liabilities and these assets are invested in mutual funds of various unaffiliated mutual fund providers. Deposit collections, investment income, and realized and unrealized gains and losses on separate accounts accrue directly to the contractholders. Therefore, these items are added to the separate account balance and are not reflected in income. Fees are charged to the deposit balance for insurance risk, administration, and surrender. There is also a sales charge and an investment management fee. These fees and charges are included in premium revenues.
Guaranteed Minimum Policy Benefits: Torchmark’s variable annuity contracts generally provide contractual guarantees in the event of death of the contract holder to at least provide the return of the total deposits made to the contract, net of withdrawals. In some cases, they provide other additional minimum amounts.
Goodwill: The excess cost of businesses acquired over the fair value of their net assets is reported as goodwill. In accordance with SFAS 142, Goodwill and Other Intangible Assets, goodwill is subject to annual impairment testing based on the procedures outlined in the Statement. Amortization of goodwill is not permitted. Torchmark tested its goodwill annually in each of the years 2002 through 2004. As a result of the tests, Torchmark’s goodwill was not impaired in any of the periods. Therefore, Torchmark continues to carry its goodwill at the January 1, 2002 balance of $378 million.
In December 2004, the FASB revised Statement 123, Share-Based Payment (Statement 123R), effective for Torchmark as of July 1, 2005. The provisions of this document will require Torchmark to record an expense in the financial statements for stock options based on the “fair value method,” as presented in the pro forma disclosure above. While restatement of prior periods is permitted, the Statement also permits a “modified prospective” method of adoption, whereby the expense of all unvested options as of July 1, 2005 and options granted subsequent to July 1, 2005 are expensed in accordance with the Statement after that date. Torchmark will elect the modified prospective method of adoption. The Company does not expect the adoption of this Statement to materially alter its methodology of calculating stock option expense from the pro forma methods and results disclosed for prior periods.
Earnings Per Share: Torchmark presents basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing income available to common shareholders by the weighted average common shares outstanding for the period. Diluted EPS is calculated by adding to shares outstanding the additional net effect of potentially dilutive securities or contracts, such as stock options, which could be exercised or converted into common shares. For more information on earnings per share, see Note 13-Shareholders’ Equity.
Proceeds from sales of fixed maturities available for sale were $46.0 million in 2004, $92 million in 2003, and $424 million in 2002. Gross gains realized on those sales were $3.1 million in 2004, $3.7 million in 2003, and $25.4 million in 2002. Gross losses were $2.9 million in 2004, $13.5 million in 2003, and $14.7 million in 2002. Proceeds from sales of equity securities were $32.5 million and $5.3 million in 2004 and 2003, respectively. Gross gains realized on those sales were $4.7 million in 2004 and $1.5 million in 2003. Gross losses realized on those sales were $19 thousand and zero in 2004 and 2003, respectively. There were no sales of equity securities during 2002.
Torchmark maintains a “watchlist” of all securities upon which are reported those investments that have a fair value less than 80% of tax book value, have a NAIC designation of 5 or 6, or were previously impaired and written down. Securities on this list are reviewed and tested for impairment at least quarterly. At December 31, 2004, securities of nine issuers were on this list with a fair value of $65.6 million and a book value of $44.7 million. Securities of 5 issuers with a fair value of $58.5 million and a book value of $35.2 million were in this position for more than a year. The majority of these securities were previously written down due to impairment. During 2004, Torchmark held a security which met its criteria for other-than-temporary impairment and was written down $4.2 million pretax. As of December 31, 2004, Torchmark has no information available to cause it to believe that any of the investments on the watchlist are other-than-temporarily impaired.
During 2003, Torchmark recorded a reserve against its mortgage loans on the real estate portfolio as a result of impairments. The reserve resulted in a pretax loss of $5 million, or $3.3 million after tax. During 2004, Torchmark recorded an additional reserve against its mortgage loans on real estate portfolio. The 2004 reserve resulted in a loss of $1.3 million, or $845 thousand after tax. The remaining reserve at December 31, 2004 was $2.5 million.
During 2004, Torchmark decided to reduce its exposure to mortgage loans. As a result, it sold mortgages with a carrying value of $75.7 million for proceeds of $74.4 million, resulting in a small loss. The sale included mortgages previously written down. As more fully described in Note 17-Related Party Transactions, these mortgages were sold to MidFirst Bank, the Chairman of the Board of Directors of whose parent company is also a Torchmark director.
In 2003, $10.9 million in disputed commissions paid in prior years to Waddell & Reed were returned in settlement. This amount reduced deferred commissions.
The unlocking adjustment resulted from revisions to actuarial assumptions related to guaranteed minimum death benefits in Torchmark’s variable annuity business.
The liability for Torchmark’s guaranteed minimum death benefits is determined using actuarial methods and assumptions including mortality, lapses, and interest. At December 31, 2004, the liability was $4 million.
The overall average interest assumption for determining the liability for future life and health insurance benefits in 2004 was 6.0%.
Torchmark and its subsidiaries file a life-nonlife consolidated federal income tax return.
In 2004, 2003, and 2002, deferred income tax expense was incurred because of certain differences between net 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-Significant Accounting Policies, these differences caused the financial statement book values of some assets and liabilities to be different from their respective tax bases.
Cost for the defined benefit pension plans has been calculated on the projected unit credit actuarial cost method. All plan measurements for the defined benefit plans are as of December 31 of the respective year. The defined benefit pension plans covering the majority of employees are funded. Contributions are made to the pension plans subject to minimums required by regulation and maximums allowed for tax purposes. Defined benefit plan contributions were $10.7 million in 2004, $10.4 million in 2003, and $7.2 million in 2002. Torchmark estimates as of December 31, 2004 that it will contribute an amount not to exceed $15 million to these plans in 2005. The actual amount of contribution may be different from this estimate.
The increase in pension assets during 2004 resulted primarily from improved financial markets and a $9.9 million contribution during the period.
Portfolio risk is managed through quality standards, diversification, and continuous monitoring. Equities must be listed on major exchanges and adequate market liquidity is required. Fixed maturities must be rated investment grade at purchase by a major rating agency. Short-term investments in commercial paper must be rated at least A-2 by Standard & Poor’s with the issuer rated investment grade. Invested cash is limited to banks rated A or higher. Investments outside of the aforementioned list are not permitted, except by prior approval of the Plans’ Trustees. At December 31, 2004, there were no restricted investments contained in the portfolio.
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 Consolidated Balance Sheet.
Torchmark has estimated its expected pension benefits to be paid over the next ten years as of December 31, 2004. These amounts will be substantially funded by plan assets and not corporate assets. These estimates use the same assumptions that measure the benefit obligation at December 31, 2004, taking estimated future employee service into account. Those estimated benefits are as follows:
For retired employees over age sixty-five, Torchmark does not provide postretirement benefits other than pensions and the life insurance benefits described above. Torchmark does provide a portion of the cost for health insurance benefits for certain employees who retired before February 1, 1993 and for certain employees that retired 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. Because Torchmark does not offer postretirement health benefits to retired employees over age sixty-five, passage of the Medicare Prescription Drug Improvement and Modernization Act of 2003 had no effect on its benefit obligations.
Torchmark’s post-retirement defined benefit plans other than pensions are not funded. Liabilities for these plans are measured as of December 31 for the appropriate year.
For measurement purposes of the healthcare benefits, a range of 7-10% annual rate of increase in per capita cost of covered healthcare benefits was assumed for the years 2002 through 2004. Torchmark has assumed that the health care cost trend rate will remain stable at the 7-10% range in future periods. This trend rate assumption could have a significant effect on the amounts reported. However, because participants substantially pay the cost of this benefit, a 1% increase or decrease in the health care cost trend rate is not expected to have a significant effect in the service and interest cost components. The effect of a 1% increase in the health care cost trend rate on the plan’s benefit obligation is expected to be a $6 thousand increase while a 1% decrease is expected to be a $5 thousand decrease.
Effective July 1, 2003, Torchmark adopted FASB Statement 150-Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150). SFAS 150 required the reclassification of the trust preferreds in the financial statements as liabilities since they were issued with a mandatorily redeemable date. Upon adoption of SFAS 150, Torchmark reclassified its trust preferreds as a component of long-term debt as of July 1, 2003 in the Consolidated Balance Sheet. Also as a result of SFAS 150, Torchmark reclassified the trust preferred distributions as “interest expense” in the Consolidated Statement of Operations. Restatement of prior periods for comparability was prohibited by the Standard.
in which a company has voting control but is not the primary beneficiary. The trusts that are liable for Torchmark’s trust preferreds meet the definition of VIE’s. Under FIN46R, Torchmark has no variable interest in these trusts and can therefore not be the entity’s primary beneficiary. For this reason, Torchmark may no longer consolidate the trusts, even though Torchmark is the sole owner of the voting equity of these entities. FIN46R permits restatement of prior year financial statements for comparability.
The following table presents detailed information about the terms of Torchmark’s funded debt.
All securities other than “Due to affiliate” have equal priority with one another.
Quarterly payments on the second day of Feb., May, Aug., and Nov.
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 5.5 million shares at a cost of $285 million in 2004, 5.9 million shares at a cost of $225 million in 2003, and 4.8 million shares at a cost of $182 million in 2002.
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. 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 regulatory approval. Additionally, insurance company distributions are generally not permitted in excess of statutory surplus. Subsidiaries are also subject to certain minimum capital requirements. In 2004, subsidiaries of Torchmark paid $346 million in dividends to the parent company. During the year 2005, a maximum amount of $366 million is expected to be available to Torchmark from insurance subsidiaries without regulatory approval.
Stock options to purchase 946 thousand shares, 3.3 million shares, and 5.6 million shares as of December 31, 2004, 2003, and 2002, respectively, are considered to be anti-dilutive 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.
As previously stated in Note 1-Significant Accounting Policies, Torchmark accounts for its employee stock options in accordance with SFAS 123, Accounting for Stock-Based Compensation as amended by SFAS 148, and has elected to account for its stock options under the intrinsic value method as outlined in APB 25 and permitted by SFAS 123. The fair value method requires the use of an option valuation model to value employee stock options, upon which compensation expense is based. Torchmark uses the Black-Scholes valuation model. The estimated fair value of the options is then amortized to expense over the options’ vesting period. Option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Changes in the valuation assumptions can materially affect the fair value estimate of its employee stock options. Under the intrinsic value method, compensation expense for Torchmark’s option grants 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.
As required by SFAS 148, Accounting for Stock-Based Compensation-Transition and Disclosure, the pro forma earnings giving effect to the fair value method of option accounting has been reported in Note 1-Significant Accounting Policies. 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 2004, 2003, and 2002:
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 $2.0 million per life. Life insurance ceded represents 1.2% of total life insurance in force at December 31, 2004. Insurance ceded on life and accident and health products represents .5% of premium income for 2004. 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.
Leases: Torchmark leases office space and office equipment under a variety of operating lease arrangements. Rental expense for operating leases was $5.2 million in 2004, $4.7 million in 2003, and $3.4 million in 2002. Future minimum rental commitments required under operating leases having remaining noncancelable lease terms in excess of one year at December 31, 2004 are as follows: 2005, $3.4 million; 2006, $2.8 million; 2007, $2.0 million; 2008, $1.7 million; 2009, $1.3 million and in the aggregate, $15.5 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, 2004, the investment portfolio consisted of the following:
Guarantees: Torchmark has in place four guarantee agreements, all of which are 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, 2004, Torchmark had no liability with respect to these guarantees.
Equipment leases: Torchmark has guaranteed performance of two subsidiaries as lessees under leasing arrangements for aviation equipment. The leases commenced in 2003 for lease terms of approximately 10 years. Lessees have certain renewal and early termination options, however. At December 31, 2004, total remaining undiscounted payments under the leases were approximately $7.0 million. Torchmark (parent company) would be responsible for any subsidiary obligation in the event the subsidiary did not make payments or otherwise perform under the terms of the lease.
As previously reported in Form 10-K and Forms 10-Q, Liberty National Life Insurance Company and Torchmark Corporation were parties to purported class action litigation filed in the Circuit Court of Choctaw County, Alabama on behalf of all persons who currently or in the past were insured under Liberty cancer policies which were no longer being marketed, regardless of whether the policies remained in force or lapsed (Roberts v. Liberty National Life Insurance Company, Case No. CV-2002-009-B). These cases were based on allegations of breach of contract in the implementation of premium rate increases, misrepresentation regarding the premium rate increases, fraud and suppression concerning the closed block of business and unjust enrichment. On December 30, 2003 the Alabama Supreme Court issued an opinion granting Liberty’s and Torchmark’s petition for a writ of mandamus, concluding that the Choctaw Circuit Court did not have subject matter jurisdiction and ordering that Circuit Court to dismiss the action. The plaintiffs then filed their purported class action litigation against Liberty and Torchmark in the Circuit Court of Barbour County, Alabama on December 30, 2003 (Roberts v. Liberty National Life Insurance Company, Civil Action No. CV-03-0137). On April 16, 2004 the parties filed a written Stipulation of Agreement of Compromise and Settlement with the Barbour County, Alabama Circuit Court seeking potential settlement of the Roberts case. A fairness hearing on the potential settlement was held by the Barbour County Circuit Court on July 15, 2004. After receipt of briefs on certain issues and submission of materials relating to objections to the proposed settlement to the Court-appointed independent special master, the Court reconvened the previously-continued fairness hearing on September 23, 2004. After the September 23, 2004 hearing, the Court, after hearing from the objectors to the potential settlement, ordered the appointment of an independent actuary to advise and report back to the Court on certain issues. The report of the independent actuary was subsequently furnished to the special master and the Court on a timely basis.
insurance and/or are not covered by Medicare. The Court dismissed plaintiffs’ claims, released the defendants, enjoined Roberts subclass members from any further prosecution of released claims and retained continuing jurisdiction of all matters relating to the Roberts settlement. In an order issued February 1, 2005, the Court denied the objectors’ motion to alter, amend or vacate its earlier final judgment on class settlement and certification. The Companies are proceeding to implement the settlement terms.
United American filed a motion to dismiss this action, which was granted by the Circuit Court on July 14, 2003. The case was subsequently refiled by the plaintiff and United American filed another motion to dismiss the case, which was denied by the Circuit Court on October 22, 2003. United American filed appropriate responsive pleadings with the Circuit Court and on March 3, 2005, the Circuit Court issued an order denying certification of a plaintiffs class.
First Command. Lamar C. Smith, a director of Torchmark, is an officer and director of First Command Financial Services, Inc. (First Command), a corporation 100% owned by the First Command Employee Stock Ownership Plan (First Command ESOP). Mr. Smith is a beneficiary of the First Command ESOP although he has no ability to vote the stock of First Command that is held by the First Command ESOP. First Command, with 560 home office employees and 847 appointed agents worldwide,
As part of the consideration for the transaction, Torchmark accepted a ten-year collateralized 8% note from Elgin Development in the amount of $12.4 million. Elgin Development made all interest payments and paid down $2.3 million in principal through December 31, 2002. As of that date the outstanding balance of the collateralized note with Elgin Development Company was $10.1 million. In 2003, Elgin Development defaulted on the note. As a result, Torchmark foreclosed on the collateral which consisted of real estate with a value of $5.7 million. Torchmark recognized a realized loss on the transaction of $2.6 million after tax.
Additionally, Liberty loaned Mr. Baxley’s wife $883 thousand secured by a mortgage on a building sold to her in 1997. Interest is charged at a rate of 7.7%. Scheduled cash payments are made to amortize the loan over thirty years. However, there is a balloon payment due at the end of ten years (2007) in the amount of $712 thousand less a credit of $18 thousand if all payments are made timely. To date, all payments have been timely. During 2002, Liberty sold the loan to Torchmark. At December 31, 2004 and 2003, the outstanding balances of this loan were $772 thousand and $791 thousand, respectively.