a 330,000 sq. ft. office building complex at 14000 Quail Springs Parkway Plaza Boulevard, Oklahoma City, and a 110,000 sq. ft. office building at 120 Robert S. Kerr Avenue, Oklahoma City, which are available for lease to other tenants.
W&R owns and occupies a 116,000 sq. ft. office building located in United Investors Park, a commercial development at 6300 Lamar Avenue, Shawnee Mission, Kansas. In addition, W&R owns three other office buildings in this development, each containing approximately 48,000 sq. ft., which are leased or are available for lease.
Torchmark and its primary subsidiaries have significant automated information processing capabilities, supported by centralized computer systems. Torchmark also uses personal computers to support the user-specific information processing needs of its professional and administrative staff.
Torchmark's net income for 1993 was $298 million, increasing 12.2% over the $265 million reported in 1992. On a per share basis, net income was $4.01, rising 12% over 1992 net income per share of $3.58. Per share earnings for 1992 also rose 14% over the prior year from $3.13 per share. Excluding the after-tax effect of realized investment gains (and losses), per share earnings were $3.94 in 1993 compared to $3.59 in 1992, an increase of 9.7%. The 1992 increase in per share earnings excluding realized investment gains and losses was 16%.
Life Insurance. Life insurance premium, including policy charges, increased 2.1% to $556 million in 1993, after having risen 3.9% to $544 million in 1992. Annualized life premium in force was $613 million at December 31, 1993, gaining 4.2% over the prior year end amount of $588 million. In 1992, annualized life premium grew 4.5% from $563 million. Annualized premium in force data includes amounts collected on certain interest-sensitive life products which are not recorded as premium income but excludes single premium income and policy charges. Sales of life products, as measured by annualized premium issued, were $128 million in 1993, compared to $132 million in 1992 and $134 million in 1991.
Annuities: Torchmark's annuity products serve a wide range of markets, such as providing retirement income, funding prearranged funerals, and offering long-term tax deferred growth opportunities. Annuity products are sold on both a fixed and a variable basis. The premium is accounted for as a deposit and is not reflected in income. Amounts deposited for variable annuities are invested at the policyholder's direction into his choice among five W&R managed mutual funds which vary in degree of risk and return. These investments are reported as Separate Account Assets and the corresponding deposit balances for variable annuities are reported as Separate Account Liabilities.
Fixed annuity deposits are added to policy reserves and the funds collected are invested by Torchmark. Revenues on fixed and variable annuity products are derived from charges to the annuity account balances for insurance risk, administration, and surrender, depending on the contract's structure. Variable accounts are also charged an investment management fee and a sales charge. Torchmark profits to the extent these policy charges exceed actual costs and to the extent actual investment income exceeds the investment income which is credited to policyholders on fixed annuities. Since investment yields have decreased on fixed annuity funds, margins have also decreased.
Growth in the variable annuity collections has been a result of increased customer interest in these investment-type products, due, at least in part, to lower interest rates on fixed investments. Greater sales efforts were also made through compensation incentives and sales promotional activities. Sales of fixed annuities have declined in each year primarily because of the pattern of falling interest rates available in recent years and to the switch to variable annuities.
Property and Casualty: Torchmark sold a 73% interest in its property and casualty operations as of November 11, 1993. It reports its 27% remaining interest as equity in the earnings of affiliates after November 10. Property and casualty premium rose 25% in 1993 to $123 million even though 73% of Torchmark's property and casualty operations were sold in November, 1993. Property and casualty premium gained 62% in 1992 to $98.4 million. Additional writings in the reinsurance line accounted for most of the growth in both years. In 1993, reinsurance premium growth accounted for 80% of total premium growth, compared to 82% of total premium growth in 1992. Growth in reinsurance premium was a result of Liberty Fire's increased emphasis in sales of quota- share reinsurance business. Quota-share business is a higher quality and less volatile type of business. Loss ratios have remained stable on quota-share reinsurance and even declined from 51% in 1991 to 50% in both 1992 and 1993. Insurance underwriting income before excess investment income for property and casualty gained 58% to $12.8 million in 1993 and 61% to $8.1 million in 1992, primarily as a result of the increased reinsurance volume.
- -------- *Financial services revenue includes $26.2 million in 1993, $19.7 million in 1992, and $15.1 million in 1991 representing revenues from other Torchmark segments which are eliminated in consolidation.
Financial services: Total revenues for financial services operations grew 7% in 1993 to $167 million from the prior-year amount of $156 million, which reflected a 17% increase over 1991. Financial services revenue consists of commission revenue derived primarily from the sale of mutual funds, insurance, and variable and fixed annuity products by the W&R sales representatives. It is also comprised of asset management and service fees.
Commission revenue from sales of investment products, which include mutual funds and variable annuity products, represented 84% of total commission revenue. The remaining source of commission revenue is from insurance product sales, which are derived primarily from UILIC. Insurance and variable annuity product commissions are eliminated in consolidation. Investment product commissions rose 2% in 1993 to $66 million, after having increased 33% in 1992 to $65 million from $49 million. Investment product sales were $1.25 billion in 1993, climbing 9% over 1992 sales of $1.14 billion. Sales of these products rose 40% in 1992. Investment product sales for 1993 consisted of United Funds (75%), variable annuities (16%), Waddell & Reed Funds (8%), and other products (1%). Sales of the United Funds declined 5% to $939 million in 1993, while sales of the Waddell & Reed Funds, which were introduced in 1992 as a deferred-load product to give investors five new mutual funds as additional investment alternatives, almost tripled to $94 million. Sales of variable annuities grew 74% to $204 million. Growth in 1993 commission revenue for investment products has been less than the growth in sales because 1993 sales of the United Funds, for which commission revenue is earned at the point of sale, declined from 1992 while sales of the Waddell & Reed Funds, for which distribution revenues are earned subsequent to the point of sale, increased. Waddell & Reed Funds' distribution fees are derived from an annual asset-based charge. In addition, the maximum sales charge on the United Funds was reduced in August, 1993 to improve their competitive position partially offset by an increased annual fee. As of October 1, 1993, the United Fund instituted a Section 12b-(1) service fee to reimburse W & R for expenses it incurs in servicing shareholder accounts.
Energy operations: The energy operations of Torchmark include the management of proven producing oil and gas properties for both affiliates and unrelated parties by its subsidiary Torch Energy. Energy operations also include drilling of developmental wells, acquisition of properties and facilities, and marketing of oil and gas products by Torch Energy. A further discussion of the energy property investments of Torchmark's insurance subsidiaries, which are are not included in the above table, is included under "Investment operations."
Energy operations revenues rose $32 million or 43% in 1993 over the prior year to $106 million. Included in 1993 revenue was a one-time gain from the sale of a large offshore producing property in the amount of $22 million. Excluding this gain, the revenue increase was 13.5%. Revenues for 1992 were $74 million, increasing 35% over 1991. Profitability in energy operations improved in each of the periods considered, with recurring pretax income rising from $5.8 million in 1991 to $10.5 million in 1992 and $11.3 million in 1993, an increase of 81% in 1992 and 8% in 1993.
Production properties were another source of energy operation profits throughout the period 1991 through 1993. Torch Energy's participation as a working interest owner, in properties purchased for certain institutional clients as well as drilling and workover activities in directly-owned properties, contributed to the increases in production revenues for 1993 and 1992. These activities have generally been centered around offshore producing properties acquired from Placid Oil Company ("Placid") in 1991. These properties were sold in late 1993, resulting in the previously-mentioned $22 million gain. Higher interest rates associated with the refinancing of property-related debt resulted in approximately $2.2 million in additional interest expense in 1993 as compared to 1992 amounts. A general decline in interest rates during 1992 and principal payments resulted in the decrease in interest expense from 1992 to 1991.
- -------- (1) Estimated December 31, 1993 percentages provided by ACLI (2) Includes private label CMO's with GNMA collateral (3) Includes $183 million in short-term investments
Net investment income declined 2.7% in 1993 to $372 million, after having risen 5.1% in 1992 to $383 million. Several factors were involved in the 1993 decrease. Energy investment income accounted for $18.7 million of the total decline, caused primarily by completion of development of Torchmark's coalbed methane development discussed below for which earnings are derived primarily from tax credits. Also, lower energy prices were a factor. A second major factor in the decline was the lower rates available on new investments in 1993 when compared to prior years. Additionally, the increased GNMA prepayment activity resulted in substantial reinvestments at prevailing lower rates. The increased investments in tax-advantaged products also contributed to the lower investment income. On a tax-equivalent basis, net investment income actually increased 1.5%. At book value, average invested assets grew 9.9% in 1993, compared to an increase of 9.4% in 1992. With the continuing decline in interest rates during 1993, acquisition of new investments had an expected taxable equivalent yield of 6.68%, compared with 7.75% in 1992 and 8.60% in 1991.
Torchmark's holdings in energy investments declined 12% to $346 million at December 31, 1993, representing 6.4% of total investments, compared to $393 million or 8% of total investments at December 31, 1992. Energy investments were $335 million at year-end 1991. The 1992 increase was in large part a result of additional investment and capitalized development costs in the coalbed methane gas development in the Black Warrior Basin in Alabama. The decrease in 1993 primarily resulted from the sale of property to a royalty trust and the disposition of $13 million of Nuevo stock.
Torchmark's cash flow has been strong and more than adequate to meet current needs. Cash provided from operations, including cash provided from deposit- product operations, was $488 million in 1993, compared to $554 million in 1992, and $479 million in 1991. In addition, Torchmark received $1.16 billion in 1993, $808 million in 1992, and $392 million in 1991 from scheduled investment maturities as well as unscheduled GNMA and other principal repayments. Cash flow from operations and investment repayments in excess of debt service and shareholder dividends are generally invested to enhance return.
Cash and short-term investments were $237 million at December 31, 1993, compared to $139 million at December 31, 1992, an increase of 70%. These liquid assets represented over 3% of total assets at December 31, 1993, compared to 2% at the prior year end. In addition to Torchmark's liquid assets, Torchmark has marketable fixed and equity securities with a value of $4.6 billion at December 31, 1993 which are available for sale should the need arise.
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 on an annual noncumulative basis or 10% of surplus, not to exceed earned surplus, in the absence of special approval. Although these restrictions exist, dividend availability from subsidiaries has been and is expected to be more than adequate for parent-company operations. At December 31, 1993 a maximum amount of $388 million was available to Torchmark from insurance subsidiaries without regulatory approval.
Purchase of United Management Minority Interest. In February, 1993, Torchmark submitted a merger proposal to the United Management Board of Directors to acquire the approximately 17% of the nonvoting common stock of United Management then held by the public in exchange for a new issue of Torchmark convertible debentures, subject to an evaluation by a committee comprised of the independent members of the United Management Board (the "Special Committee") and to approval by a majority vote of the holders of the publicly-held nonvoting common shares. In May, 1993, Torchmark modified its proposal to provide that United Management shareholders would receive $31.25 per share in cash in exchange for their shares if the transaction were to be completed. In May, 1993, the Special Committee recommended proceeding with the merger to the United Management Board of Directors, who then approved the merger. Accordingly, United Management and Torchmark executed an Agreement and Plan of Merger which was to be completed on October 1, 1993. During the third quarter of 1993, Torchmark acquired 306 thousand United Management shares on the open market at an aggregate price of $9.4 million.
On October 1, 1993, United Management was merged into a wholly-owned subsidiary of Torchmark. As a result of the merger, Torchmark acquired the approximately 16% of United Management that it did not already own through the payment of $31.25 per share in cash for the remaining outstanding shares. Including the third quarter purchases, the total amount of consideration paid for the publicly held shares of the United Management shareholders was approximately $234 million.
Divestiture of Vesta Insurance Group. On July 23, 1993, Torchmark announced that it was considering a public offering of shares of common stock of its wholly-owned subsidiary, Vesta Insurance Group, Inc. ("Vesta"), which had been recently formed to be the holding company for Torchmark's property and casualty operations. On August 31, 1993, a Form S-1 registration statement was filed by Vesta with the Securities and Exchange Commission. On October 20, 1993, Vesta filed an amendment to this Form S-1 to offer for sale up to 9.9 million shares of its common stock at an estimated price of $24.50 to $26.50 per share, of which 2.2 million would be newly issued shares and the balance would be shares previously owned by Torchmark. On November 10, 1993, the Form S-1 registration statement became effective and on November 11, 1993, a total of 9 million shares of Vesta common stock was sold. Of the total number of Vesta shares sold, Torchmark sold 6.8 million shares for net proceeds of approximately
$161 million or $25 per share less expenses, resulting in a $57 million gain. After the transaction, Torchmark continued to own 3.4 million shares of Vesta outstanding common stock or approximately 27% of the company. Torchmark also loaned Vesta $28 million in December, 1993.
Accounting by Creditors for Impairment of a Loan (FASB Statement No. 114) for fiscal years beginning after December 15, 1994. This Statement addresses the accounting by creditors for impairment of certain loans. It essentially requires that impaired loans that are within the scope of this Statement be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The effect of adoption of this Standard will be immaterial to Torchmark.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Torchmark Corporation and subsidiaries at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993, 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.
Basis of Presentation: The accompanying financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP").
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 other policyholders is included in Torchmark's net investment income. Net investment income for the years ended December 31, 1993, 1992 and 1991 included $229.5 million, $221.2 million, and $209.5 million, respectively, which was allocable to policyholder reserves or accounts. Realized investment gains and losses are not allocable to policyholders.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) million for the years ended December 31, 1993, 1992 and 1991, respectively. Other premium includes annuity policy charges for the years ended December 31, 1993, 1992 and 1991 of $9.5 million, $8.8 million and $7.4 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.
Deferred Acquisition Costs: 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.
Effective January 1, 1993, Torchmark adopted Statement 109 and has reported the cumulative effect of that change in the method of accounting for income taxes in the 1993 consolidated statement of operations. Prior years' financial statements have not been restated to reflect Statement 109's provisions.
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 twelve years for equipment and five to forty years for buildings. Ordinary maintenance and repairs are charged to income as incurred.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Energy: Torchmark uses the successful-efforts method of accounting for its energy operations. All costs associated with property acquisitions and development of proved oil and gas reserves are capitalized. Capitalized costs are amortized by the unit-of-production method based on estimated proved oil and gas reserves. All costs relating to production activities are charged to income as incurred. Energy properties owned by Torchmark's energy subsidiaries are accounted for as "properties" and revenue therefrom is accounted for as "energy operations revenues." Investments in oil and gas properties by Torchmark's insurance subsidiaries are accounted for as "investments" and income therefrom is accounted for as "investment income."
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.
Stock Split: On August 19, 1992, Torchmark distributed one share for every two shares owned by shareholders on record as of August 5, 1992 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: Earnings available to holders of common stock are computed after deducting dividends on the Adjustable Rate Cumulative Preferred Stock. Primary earnings per share are then calculated by dividing the earnings available to holders of common stock by the weighted average number of common shares outstanding during the period. The weighted average numbers of common shares outstanding for each period are as follows: 1993--73,501,654, 1992-- 73,236,849, 1991--76,728,267
Torchmark had $22.0 million and $38.5 million in investment real estate at December 31, 1993 and 1992, respectively, which was nonincome producing during the previous twelve months. These properties included primarily construction in process and land. Fixed investments and mortgage loans which were nonincome producing during the previous twelve months were $.4 million at both December 31, 1993 and 1992.
Depreciation expense on property and equipment used in the business was $9.6 million, $10.4 million, and $10.3 million in each of the years 1993, 1992 and 1991. Depletion of energy properties was $22.4 million, $19.6 million, and $12.6 million in 1993, 1992 and 1991, respectively.
In July, 1993, Torchmark created a new company called Vesta Insurance Group, Inc. ("Vesta") for the purpose of becoming the new holding company of Torchmark's property and casualty insurance subsidiaries, principally Liberty Fire. In November, 1993, Torchmark sold approximately 73% of its ownership in Vesta through an initial public offering of common stock for net proceeds of $160.7 million or a pretax gain of $57.2 million. Torchmark maintained a 27% interest in Vesta and accounts for its investment on the equity method. In connection with the public offering, Torchmark loaned Vesta $28 million at an interest rate of 6.1% for a term of five years. Torchmark's remaining investment in Vesta was recorded as an investment in unconsolidated subsidiary.
A summary of the assumptions used in determining the liability for future policy benefits at December 31, 1993 is as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 8--FUTURE POLICY BENEFIT RESERVES (CONTINUED)
The overall average interest assumption for determining the liability for future life and health insurance benefits in 1993 was 6.1%.
Total income tax expense for the year ended December 31, 1993 was allocated as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 9--INCOME TAXES (CONTINUED)
The effective income tax rate differed from the expected 35% rate in 1993 and 34% rate in 1992 and 1991 as shown below:
For the years ended December 31, 1992 and 1991, deferred income tax expense (benefit) of $16,062 and ($3,672), respectively, resulted from timing differences in the recognition of revenue and expense for financial reporting and income tax purposes. The sources and tax effect of those timing differences are presented below:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 9-- INCOME TAXES (CONTINUED)
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 $58 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 10--NOTES PAYABLE (CONTINUED)
The amount of debt that becomes due during each of the next five years is: 1994, $107.1 million; 1995, $116 thousand; 1996, $123 thousand; 1997, $132 thousand; and 1998, $199 million. Additionally, during the thirty-day period beginning June 15, 1996, senior debenture debt holders have the option to require Torchmark to repay $100 million.
The Senior Notes, due May 1, 1998, are not redeemable prior to maturity. They were issued in May, 1988 in the principal amount of $200 million. Interest is payable on May 1 and November 1 of each year at a rate of 9 5/8%. These notes have equal priority with other Torchmark unsecured indebtedness.
Torchmark maintains a line of credit agreement which is unsecured and at December 31, 1993 and 1992 allowed borrowings up to $250 million from participating banks. The agreement terminates in December, 1994. The interest rate is determined at the option of Torchmark utilizing a formula based on either prime, Libor or secondary certificate of deposit rates and was 3.51% at December 31, 1993 and 4.21% at December 31, 1992. A commitment fee on the unused balance is charged for its availability. There was $107 million and $195 million in borrowings outstanding under the line of credit as of December 31, 1993 and December 31, 1992, respectively. Torchmark is subject to certain covenants regarding capitalization and earnings, for which Torchmark was in compliance at December 31, 1993.
At December 31, 1992 Torch Energy had another line of credit available up to $95 million, of which $81.7 million was outstanding at December 31, 1992. Interest was charged at a variable rate based on the prime or Libor rates, and was approximately 5.99% at December 31, 1992. It was repaid and
Interest in the amount of $10.5 million, $20.4 million, and $16.8 million was capitalized during 1993, 1992, and 1991, respectively.
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 $1.5 million and $1.1 million as of December 31, 1993 and 1992, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 11--POSTRETIREMENT BENEFITS (CONTINUED) The weighted average assumed discount rates used in determining the actuarial benefit obligations were 7.25% in 1993 and 8.5% in 1992. The rate of assumed compensation increase was 5.0% in 1993 and 5.5% in 1992 and the expected long-term rate of return on plan assets was 8.0% in 1993 and 8.5% in 1992.
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 reached 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 employees who did not retire before February 1, 1993. This plan is unfunded.
Net periodic postretirement benefit cost for 1993 included the following components:
The following table sets forth the plans' combined funded status with the amount shown in Torchmark's balance sheet at December 31, 1993:
For measurement purposes, a 12% to 14% annual rate of increase in a per capita cost of covered health care benefits was assumed for 1994; the rate was assumed to decrease gradually to 4.5% by the year 2008 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the health care cost trend by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1993 by $1.1 million and would increase the net periodic postretirement cost for the year ended December 31, 1993 by approximately $260 thousand.
The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.25%.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 12--SHAREHOLDERS' EQUITY (CONTINUED) January 1, 1989 through December 31, 1993 at a price of $103 per share, and thereafter at $100 per share. Torchmark has announced that it will redeem all of the outstanding preferred stock on March 31, 1994. The price will be $100 a share plus accrued dividends. The preferred shareholders have preference and priority over common shareholders in the event of liquidation equal to $100 per share plus accrued and unpaid dividends.
During the first quarter of 1990, Torchmark acquired 131 thousand shares of this preferred stock, redemption value $13.1 million, at a purchase price of $11 million. In 1991, an additional 61 thousand shares or $6.1 million redemption value were acquired at a price of $5.3 million. Torchmark acquired an additional 338 thousand shares in 1992 at a cost of $31.5 million, representing a redemption value of $33.7 million. These shares are reported as treasury stock and have a total cost basis of $47.8 million and a total redemption value of $52.9 million. Additional shares may be acquired from time to time at favorable prices.
Acquisition of Common Shares: Torchmark commenced a program in 1986 to purchase shares of its common stock from time to time. Under this program, Torchmark purchased 1.3 million shares in 1991 at a cost of $44 million, 4.2 million shares in 1992 at a cost of $157.7 million and 850 thousand shares in 1993 at a cost of $41.9 million. The other common treasury stock acquired was primarily received by Torchmark from employees for the exercise proceeds and payment of taxes for stock options. In October, 1993, Torchmark implemented a policy to issue shares in conjunction with the exercise of stock options out of treasury stock.
Stock Options: Under the provisions of the 1984 Torchmark Corporation Stock Option Plan ("1984 Option Plan") and the Torchmark Corporation 1987 Stock Incentive Plan ("1987 Option Plan"), certain employees and directors have been granted options to buy shares of Torchmark stock at the market value of the stock on the date of grant. In conjunction with the buyback of the minority interest of United Management, the United Investors Management Company 1986 Employee Stock Incentive Plan was amended to allow the granting of Torchmark stock options. The options are exercisable during the period commencing from three months to three years after grant until expiring ten years or ten years and two days after grant.
(1) Options to purchase 1,098,090 shares previously granted December 31, 1989 at $37.13 per share, 521,100 shares previously granted January 25, 1990 at $33.13 per share, and 389,870 shares originally granted August 1, 1990 at $33.88 per share were allowed by recipients to expire voluntarily and were reissued October 11, 1990 along with 675,200 additional shares at $25.63 per share. (2) Includes 173,650 shares granted under the United Investors Management Company 1986 Employee Stock Incentive Plan. (3) Issued from the United Investors Management Company 1986 Employee Stock incentive plan.
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 from operations 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 1994, $388 million will be available to Torchmark for dividends from insurance subsidiaries in compliance with statutory regulations without prior regulatory approval.
Insurance affiliates also assume insurance risks of other companies. Life reinsurance assumed represents less than 0.1% of life insurance in force at December 31, 1993 and reinsurance assumed on life and accident and health products represents less than 0.1% of premium income for 1993.
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 $7.6 million, $8.2 million, and $7.6 million for 1993, 1992, and 1991, respectively. Future minimum rental commitments required under operating leases having remaining noncancelable lease terms in excess of one year at December 31, 1993 are as follows: 1994, $5.6 million; 1995, $4.1 million; 1996, $3.1 million; 1997, $2.5 million; 1998, $1.4 million; and in the aggregate, $16.7 million.
Restrictions on cash: A portion of the cash held in financial service subsidiaries that function as broker-dealers has been segregated for the benefit of customers in compliance with security regulations. This amount was $18.2 million at December 31, 1993 and $13.2 million at December 31, 1992.
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, 1993, the investment portfolio consisted of securities of the U.S. government or U.S. government-backed securities (50%); short-term investments, which generally mature within one month (3%); securities of state and municipal governments (12%); securities of foreign governments (1%); and investment-grade corporate bonds (21%). The remainder of the portfolio was in oil and gas investments (6%) and real estate (2%), which are not considered financial instruments according to GAAP; equity securities (1%); policy loans (3%), which are secured by the underlying insurance policy values; and mortgages, noninvestment grade corporate securities and other long-term investments (1%). Investments in municipal governments and corporations are made throughout the U.S. with no concentration in any given state. All investments in foreign government securities are in Canadian government issues. Corporate equity and debt investments are made in a wide range of industries. At December 31, 1993, approximately 6% of the portfolio was invested in regulated utilities; 4% was invested in financial institutions; 3% was invested in finance companies; 2% was invested in oil and gas companies; 1% was invested in the transportation industry, and 1% was invested in retail companies. Otherwise, no individual industry represented more than 1% of Torchmark's investments. Of Torchmark's investments at year-end 1993, less than 1% of the carrying value of securities was rated below investment grade (Ba or lower as rated by Moody's serivce or the equivalent NAIC designation). Par value of these investments was $14.9 million, amortized cost was $13.7 million, and market value was $14.4 million. While these investments could be subject to additional credit risk, such risk should generally be reflected in market value.
Litigation: Torchmark and Torchmark's subsidiaries are continuously parties to pending or threatened legal proceedings. These suits 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. Most of these lawsuits include claims for punitive damages in addition to other specified relief.
The Robertson litigation was tentatively settled pending a fairness determination by the Barbour County Court after a hearing. The fairness hearing took place on January 20, 1994. Class members were previously mailed notice of the hearing and the proposed settlement. On February 4, 1994, the court ruled that with a $16 million increase in the value of the proposed Robertson settlement from approximately $39 million to $55 million, the settlement would be fair and would be approved, provided that the parties to the litigation accepted the amended settlement within fourteen days of the issuance of the ruling. On February 17, 1994, the Barbour County Court extended for two weeks the period for filing objections to or accepting the Court's order conditionally approving the class action settlement. On February 22, 1994, the Court entered an order in the Robertson litigation which delayed any final decision on the proposed class action settlement and various motions to modify it (including motions to delete Torchmark from the settlement release), pending certain specified discovery to be completed within 90 days from the date the order was entered. In the order, the Barbour County Court directed limited additional discovery regarding whether Torchmark had any active involvement in the cancer policy exchange. Pending completion of limited additional discovery, the Barbour County Court has reversed jurisdiction and extended the deadline for acceptance or rejection of the modifications set forth in the February 4, 1994 order.
In June, 1993, a purported class action alleging fraud in the replacement of certain hospital intensive care policies with policies alleged to have less value with lower benefits was filed seeking unspecified compensatory and punitive damages against Liberty and Torchmark in the state court system of Alabama (Smith v. Liberty National Life Insurance Company). A second purported class action (Maples v. Liberty National Life Insurance Company) with substantially the same allegations as in the Smith litigation was also filed in state court in December, 1993. Three other separate lawsuits based upon the replacement of certain hospital intensive care policies have also been filed. The Smith litigation has been settled, while a class has not yet been certified and discovery is proceeding in the Maples case.
Two purported class action lawsuits were filed in December, 1993, against Liberty in the state court system of Alabama asserting fraud and misrepresentation in connection with exclusionary provisions of accident and hospital accident policies sold to persons holding multiple accident-type policies. One of the cases has been settled. In the other case, no class has been certified although discovery is proceeding.
In 1978, the United States District Court for the Northern District of Alabama entered a final judgement in Battle v. Liberty National Insurance Company, et al., (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 judgement 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. It remains in effect to date. A motion was filed to challenge the final judgement under Federal Rule of Civil Procedure 60(b) in February of 1990, but the final judgement was upheld and the Rule 60(b) challenge was rejected by both the District Court and the Eleventh Circuit Court of Appeals.
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 judgement. The relief sought is unclear, but includes a request that the District Court rule that the final judgement no longer has prospective application. Liberty has filed discovery requests seeking the identity of the funeral directors involved in the petition and information and materials necessary to evaluate the funeral directors' allegations and to clarify the relief sought.
Based upon information presently available, and in light of legal and other defenses available to Torchmark and its subsidiaries, contingent liabilities arising from threatened and pending litigation are not considered material. It should be noted, however, that the frequency of large punitive damage awards bearing little or no relation to actual damages awarded by juries in jurisdictions in which Torchmark has substantial business, particularly Alabama, continues to increase.
Investment in Related Parties: Other long-term investments include investment by Torchmark subsidiaries in the United Group of Mutual Funds and certain other funds for which Waddell & Reed, Inc., a wholly-owned subsidiary of United Management, is sole advisor. These investments were $26.2 million and $18.8 million at December 31, 1993 and 1992, respectively. Investment income derived from these investments is included in net investment income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 16--INDUSTRY SEGMENTS
Torchmark operates primarily in two industry segments, insurance and asset management. Operations in the insurance industry involve the sale and administration of individual life, individual health, annuities, and property and casualty insurance. It also includes investment operations related to insurance segment investments. Operations in the asset management industry include the management, distribution, and servicing of various mutual funds, the management of energy properties, the direct ownership of energy properties, and other energy related activities.
Total revenues by segment include revenues from other segments in addition to unaffiliated parties. Intersegment revenues include commission revenue and investment income which eliminate in consolidation. Pre-tax income for operating segments is total revenue less operating costs and expenses for the segment. Corporate pre-tax income includes transactions which are non- operating in nature such as parent company interest expense, goodwill amortization, and similar items not related to the activities of a segment.