Torchmark, through its subsidiaries, owns or leases buildings that are used in the normal course of business. Liberty owns a 487,000 square foot building at 2001 Third Avenue South, Birmingham, Alabama which currently serves as Liberty's, UILIC's, and Torchmark's home office. Approximately 160,000 square feet of this building is available for lease to unrelated tenants by Liberty. Liberty also operates from 55 company-owned district offices used for agency sales personnel.
usable floor space. American Income also owns a 43,000 square foot facility located at 1001 Jewell Drive in Waco, which houses a direct response operation.
During 1999, Torchmark sold the majority of its investment real estate holdings for total consideration of $123 million. These sold investments included its TMK Income Properties limited partnership and its joint venture investment in Liberty Park, a planned community in Birmingham, Alabama. As of December 31, 2001, Torchmark retained $14 million of investment real estate, which included $7 million of properties that were partially occupied by Torchmark subsidiaries and $6 million of undeveloped land in Liberty Park.
(1) Net income from continuing operations, excluding realized investment gains (losses), the related adjustment to deferred acquisition costs, equity in Vesta earnings for periods prior to 1999, a one-time gain on the sale of equipment, and the nonrecurring charge.(3) (2) Annualized life premium in force excludes $5.3 million representing the Family Service business sold in 1998. (3) The nonrecurring charge relates to a marketing agreement discussed more fully on page 24 of this report.
2) Regulatory developments, including changes in governmental regulations (particularly those impacting taxes and changes to the federal Medicare program that would affect Medicare Supplement insurance) and regulatory inquiries regarding industrial life insurance;
7) The inability of Torchmark to achieve the anticipated levels of administrative and operational efficiencies;
8) Levels of mortality, morbidity, and utilization of healthcare services that differ from Torchmark's assumptions;
9) The inability of Torchmark to obtain timely and appropriate premium rate increases for health insurance;
2) The nonrecurring loss from the redemption by Torchmark of its Monthly Income Preferred Securities (MIPS) and its debt in 2001 in the amount of $4.6 million net of tax and the gain from redemption of debt in 2000 of $.2 million net of tax;
3) A one-time gain on the sale of equipment (included in other income) in the after-tax amount of $3.3 million in 1999;
6) A one-time charge relating to discontinued energy operations in 2001 in the amount of $3.3 million; and
Additionally, in 1999, Torchmark entered into a life insurance marketing arrangement with a third party, discussed more fully under the caption Life Insurance on page 24 of this report. This agreement contained certain cash guarantees to the third party which were substantially determined to not be recoverable by Torchmark based on test marketing results. Accordingly, Torchmark recorded a nonrecurring after-tax operating charge of $13 million, or $.10 per diluted share in 1999. Because this was an unusual one-time operating charge, net operating income has been presented before the charge in order to maintain year to year operating comparability.
The redemption of Torchmark's debt and MIPS are discussed under the caption Capital Resources beginning on page 33 of this report. The changes in accounting principles are discussed in Note 15--Changes in Accounting Principles in the Notes to Consolidated Financial Statements on page 68 of this report.
Torchmark reports basic and diluted earnings per share. Basic earnings per share are based on the average shares outstanding during the period. Diluted earnings per share assume the exercise of Torchmark's employee stock options for which the exercise price was lower than the market price during the year and the impact that their exercise would have on shares outstanding. Diluted earnings per share differ from basic earnings per share in that they are influenced by changes in the market price of Torchmark stock and the number of options outstanding. Unless otherwise indicated, all references to per share data in this report are on the basis of diluted shares.
Total revenues were $2.71 billion in 2001, an 8% increase over 2000 revenues of $2.52 billion. Revenues rose 13% in 2000 over 1999 revenues of $2.23 billion. After adjustment for realized investment losses in each year, revenues grew 7% to $2.71 billion in 2001 from $2.52 billion in 2000. They increased 8% in 2000 over the prior year. Total premium rose $169 million, or 8%, to $2.22 billion in 2001. Total premium increased 9% in 2000 to $2.05 billion. Life insurance premium grew 6% in 2001 to $1.14 billion, an increase of $62 million. Health premium in 2001 rose 11% to $1.01 billion, an increase of $100 million. Net investment income increased $19 million, or 4%, in 2001 to $492 million. Life premium increased 6% to $1.08 billion and health premium grew 10% to $911 million in 2000. Net investment income rose 6% in 2000 to $472 million.
Other operating expenses, which consist of insurance administrative expenses and expenses of the parent company, were $129 million in 2001, compared with $121 million in 2000 and $115 million in 1999. Other operating expenses as a percentage of revenues, excluding realized losses, declined in each period and were 4.77% in 2001, 4.81% in 2000, and 4.93% in 1999. The components of Torchmark's revenues and operations are described in more detail in the discussion of Insurance and Investment segments found on pages 20 through 32 of this report.
The following table is a summary of Torchmark's net operating income. Insurance underwriting income is defined by Torchmark management as premium income less net policy obligations, commissions, acquisition expenses, and insurance administrative expenses plus other income. Excess investment income is defined as tax-equivalent net investment income reduced by the interest credited to net policy liabilities and financing costs. Financing costs include the interest on Torchmark's debt and the dividends on its MIPS and Trust Preferred Securities, less the reduction in financing costs effected by interest rate swaps on certain of these instruments.
On a per share basis, Torchmark's net operating income before nonrecurring charge grew 9% in 2001 and 12% in 2000. In dollar amounts, Torchmark's net operating income before nonrecurring charge rose 7% in both periods. Per share growth exceeded growth in the dollar amounts as a result of share buybacks in both periods. Contributing to the growth in net operating income were gains in insurance underwriting income and excess investment income. Insurance underwriting income grew 3% in 2001 to $368 million, after having increased 7% in 2000. Excess investment income also grew in both periods. The 13% increase in 2001 excess investment income was due primarily to the decrease in financing costs brought about by the lower interest rate environment in 2001 and debt refinancings during the year. The 2000 increase of 5% in excess investment income was a result of the 6% growth in net investment income. Refer to the discussion of Investments on page 29 and Capital Resources on page 33 of this report. Torchmark's core operations are segmented into insurance underwriting operations and investment operations. Insurance underwriting operations are further segmented into life insurance, health insurance, and annuity product groups. A detailed discussion of each of Torchmark's segments follows.
Life insurance premium rose 6% in 2001 to $1.14 billion from $1.08 billion in 2000. Life premium increased 6% in 2000 from $1.02 billion. Sales of life insurance, in terms of annualized premium, were $295 million in 2001, increasing 1% over 2000 sales of $291 million. This compares with 13% growth in 2000 sales over 1999 sales of $257 million. Annualized premium in force is often indicative of future premium income over the near term. Annualized life premium in force was $1.26 billion at December 31, 2001, compared with $1.20 billion at 2000 year end, an increase of 5%. Annualized premium in force grew 6% in 2000 from $1.13 billion at year-end 1999. Annualized premium in force and issued data includes amounts collected on certain interest-sensitive life products which are not recorded as premium income but excludes single-premium income and policy account charges.
Life insurance products are marketed through a variety of distribution channels. The following table presents life insurance premium by distribution method during each of the three years ended December 31, 2001.
Direct Response annualized life premium in force rose 7% to $326 million at December 31, 2001 from $306 million a year earlier. At December 31, 2001, Direct Response life annualized premium in force was 26% of Torchmark's total, the largest of any component distribution group. Direct Response life insurance annualized premium in force grew 8% in 2000.
Sales of life insurance in terms of annualized premium issued for the Direct Response group were $112 million in 2001. These sales represented a slight decline from $113 million in 2000. In early 2001, Torchmark discontinued certain products in the Direct Response market in order to focus on sales of more profitable business. The discontinuing of sales of these products resulted in the flattening of 2001 sales. Annualized premium sold in 2000 by the Direct Response operation increased 18% over 1999 sales of $96 million, due in part to a higher average premium per policy issued. The annualized life premium issued by the Direct Response group represented 38% of Torchmark's total life sales in 2001.
The Liberty National Exclusive Agency distribution system markets primarily to middle income markets in several southeastern states. It represented Torchmark's largest contribution to life insurance premium income in each of the three years presented, although its proportion of the total has declined in each successive year. Liberty's life premium rose 1% in 2001 to $297 million, representing 26% of Torchmark's total life premium. Life premium in 2000 was $294 million, an increase of 2% over the prior year. The annualized life premium in force of the Liberty Agency was $315 million at year-end 2001, compared with $312 million and $307 million at year-ends 2000 and 1999, respectively. Liberty's annualized life premium in force represented 25% of total life annualized premium in force at December 31, 2001. Life premium sales for this agency, in terms of annualized premium issued, grew 2% during 2001 to $55 million, compared with 4% growth in 2000. Sales growth in the Liberty Agency is largely attributable to growth in the number of agents. Liberty's agent count increased 7% from 1,902 at year-end 1999 to 2,032 at year-end 2000, and then further increased another 6% in 2001 to 2,162 agents. Ongoing agent recruitment efforts and training programs, which help to improve agent retention, have been responsible for the growth in this agency. Management believes that the continued recruiting of new agents and the retention of productive agents are critical to the continued growth of sales in controlled agency distribution systems.
The United American Independent and Branch Office Agencies together represented about 6% of Torchmark's total life premium in 2001. On a combined basis, life premium rose 8% to $67 million in 2001 after a 9% increase in 2000 from $57 million to $62 million. Annualized life premium issued in 2001 was $29 million, compared with $30 million in 2000. In 2000, these issues had increased 63% over 1999 issues of $19 million. Annualized life premium in force in 2001 was flat with the prior year at $75 million but rose 14% in 2000 from $65 million.
the Military business. Annualized premium sold during 2001 in the Other distribution category was $32 million, a decline from both 2000 and 1999 sales which were $37 million in each year.
In the third quarter of 1999, Reader's Digest Association and Torchmark entered into an agreement to market Torchmark life insurance products to certain Reader's Digest customers. These products were marketed through Torchmark's Direct Response operation, and required Torchmark to guarantee specified compensation to Reader's Digest, regardless of marketing success. Test marketing began in the fourth quarter of 1999. The less than favorable results from these tests indicated that it would be unlikely that Torchmark would recover the full amount of compensation guaranteed to Reader's Digest under the terms of the agreement. As a result, Torchmark recorded a nonrecurring operating charge of $21 million in 1999. This charge represented $13 million after tax or $.10 per diluted share. During 2001 and 2000, Torchmark maintained its relationship with Reader's Digest and continued to use its subscriber lists in selective marketing of Torchmark insurance products. However, Torchmark only incurred its normal solicitation costs on this business and had no further costs related to the guaranteed compensation. Torchmark terminated its relationship with Readers Digest in 2002.
Life insurance gross margins have been presented in the above table to remove the effect of the 1999 nonrecurring charge, which distort comparisons. Excluding this charge, gross margins, as indicated by insurance underwriting income before other income and administrative expense, increased 5% in 2001 to $283 million after having risen 3% in 2000 to $271 million. As a percentage of life insurance premium, life insurance gross margins were 25% in both 2001 and 2000, but declined from 26% in 1999. One factor in the decline in both 2001 and 2000 is the reduction in underwriting income margins for Direct Response. As a percentage of premium, Direct Response underwriting income was 24.9% in 2001, compared with 26.3% in 2000 and 27.9% in 1999. As previously discussed, efforts are underway to discontinue the marketing of lower-margin Direct Response business.
Medicare Supplement insurance is sold primarily by the United American Branch Office Agency and the United American Independent Agency. Health sales in both agencies grew significantly in 1999 and 2000, but declined in 2001. The Branch Office Agency sold $103 million in annualized health premium in 1999, $145 million in 2000, and $116 million in 2001. These sales represent a 60% increase in 1999 and a 41% increase in 2000, but a decline of 20% in 2001. The United American Independent Agency had health annualized premium issued of $68 million, $85 million, and $74 million in each of the years 1999, 2000, and 2001, respectively. These sales represented increases of 35% and 25% in 1999 and 2000, respectively, but a reduction of 14% in 2001 from the prior year. There are two major factors which contributed to these fluctuations in Medicare Supplement sales. First, sales in recent years have been positively affected by the involuntary terminations of Medicare Health Maintenance Organization (HMO)
members, causing these terminated members, or disenrollees, to seek Medicare Supplement coverage. In 2000, the number of disenrollees reached an unprecedented level. In 2001, however, these terminations were approximately half of those of the prior year. Second, Medicare Supplement sales faced increased premium rate pressure from competition in some markets as Torchmark implemented premium rate increases on its Medicare Supplement policies more timely than some competitors. Rate increases are required to offset health cost inflation. In addition to the increased competition, the number of producing agents at the United American Branch Office Agency declined in 2001 as agents in some markets left for easier sales at those competitors whose Medicare Supplement products were priced lower than Torchmark's. Prior to 2001, this agency had experienced rapid growth in appointed agents, which contributed greatly to the growth in sales in these periods. At the end of 2001, however, the number of producing agents was 1,644. Producing agents are those who have had a sale. Management believes that these competitive pressures will subside as competitors obtain rate increases; however, sales of Medicare Supplements during 2002 are expected to be somewhat less than for 2001 because new agents need to be recruited and trained, and fewer HMO disenrollees are expected.
Although sales declined in 2001, Medicare Supplement annualized premium in force at December 31, 2001 rose 4% to $761 million from $729 million at the end of 2000. Medicare Supplement annualized premium increased 16% in 2000.
Medicare Supplement policies are highly regulated at both the federal and state levels with standardized benefit plans, limits on first year agent compensation, and mandated minimum loss ratios. However, they remain a popular supplemental health policy with the country's large and growing group of Medicare beneficiaries. About 85% of all Medicare beneficiaries have Medicare Supplements to cover at least some of the deductibles and coinsurance for which the federal Medicare program does not pay. Because of loss ratio regulation, underwriting margins on Medicare Supplements are less than on Torchmark's life business. However, due to United American's low cost, service-oriented customer service and claims administration, as well as its economies of scale, it is a profitable line of business.
Annualized premium in force for other health products grew 6% in 2001 to $112 million, after rising 7% in 2000 to $106 million. Other health sales rose 7% in 2001 to $44 million, after having increased 38% in 2000.
for insurance risk, administration, and surrender, depending on the structure of the contract. Variable accounts are also charged an investment fee and a sales charge. Torchmark benefits to the extent these policy charges exceed actual costs and, on fixed annuity policies, to the extent actual investment income exceeds the investment income which is credited to the policy.
Excess investment income represents the profit margin attributable to investment operations and cash flow management. It is defined as net investment income on a tax-equivalent basis reduced by the interest cost credited to net policy liabilities and the interest cost associated with capital funding or "financing costs." Excess investment income is increased in a number of ways: an increase in investment yields over the rates credited to policyholders' liabilities or in relationship to the rates applicable to Torchmark debt, growth in invested assets in relation to policy liabilities and debt, and the efficient use of capital resources and cash flow.
During 1999, Torchmark entered into two transactions to dispose of the majority of its investment real estate. Torchmark had previously determined to divest itself of investment real estate operations because
One of the transactions involved sales to Elgin Development Company and other investors for total consideration of $97.4 million, of which $85 million was cash and the balance was in a ten-year 8% collateralized note. Torchmark's loss associated with this transaction was $10 million after tax. At the time of the transaction, the Chairman of the Executive Committee of Torchmark was a one-third investor in Elgin Development Company. His total investment in Elgin Development was approximately $1.5 million. The outstanding balance of the collateralized note with Elgin Development Company was $10.5 million at December 31, 2001. For more information on this matter refer to Transactions with Related Parties on page 37 of this report.
investment grade by the rating agencies. The National Association of Insurance Commissioners considers 93% of the portfolio investment grade. The fixed- maturity portfolio's value fluctuates with changes in interest rates, and the unrealized loss in the portfolio was $1.8 million at year-end 2001. This compares with an unrealized loss of $236 million at year-end 2000 and an unrealized loss of $275 million at the end of 1999. The distribution of maturities is as follows:
With a preference for bond investments over investments in equities, mortgages, or real estate holdings, the relative percentage of Torchmark's investments by type is inconsistent with industry data. The following table presents Torchmark's components of invested assets with the latest industry data:
The actual interest rate risk to Torchmark is reduced because the effect that changes in rates have on assets is offset by the effect they have on insurance liabilities and on debt. Interest assumptions are used to compute the majority of Torchmark's insurance liabilities. These insurance liabilities, net of deferred acquisition costs, were $3.6 billion and debt and preferred securities were $.9 billion at December 31, 2001, compared with fixed-maturity investments of $6.5 billion at amortized cost at the same date. Because of the long-term nature of insurance liabilities, temporary changes in value caused by rate fluctuations have little bearing on ultimate obligations. In accordance with generally accepted accounting principles, insurance liabilities and debt are not marked to market.
Market risk is managed in a manner consistent with Torchmark's investment objectives. Torchmark seeks to maintain a portfolio of high-quality fixed- maturity assets that may be sold in response to changing market conditions. A significant change in the level of interest rates, changes in credit quality of individual securities, or changes in the relative values of a security or asset sector are the primary factors that influence such sales. Sales are also influenced by tax regulations. Occasionally, the need to raise cash for various operating commitments may also necessitate the sale of a security. Volatility in the value of Torchmark's fixed-maturity holdings is reduced by maintaining a relatively short-term portfolio, 24% of which matures within five years and 71% of which matures within ten years. Also, the portfolio and market conditions are constantly evaluated for appropriate action.
No derivative instruments are used to manage Torchmark's exposure to market risk in the investment portfolio. Interest-rate swap instruments have been entered into by Torchmark in connection with its
preferred stock and certain debt issues as discussed in the Notes to the Consolidated Financial Statements on page 66 of this report and in Capital Resources beginning on page 33 of this report.
Liquidity. Torchmark's liquidity provides it with the ability to meet on demand the cash commitments required by its business operations and financial obligations. Torchmark's liquidity is evidenced by its three sources of liquidity: its positive cash flow from operations, its portfolio of marketable securities, and its line of credit facility.
Torchmark's cash and short-term investments were $138 million at year-end 2001 and $136 million at year-end 2000. In addition to these highly liquid assets, Torchmark has a portfolio of marketable fixed and equity securities, which are available for sale should the need arise. These securities had a value of $6.5 billion at December 31, 2001.
Torchmark entered into a line of credit facility with a group of lenders in November, 2001 which allows unsecured borrowings and stand-by letters of credit up to $625 million. The facility is split into two parts: a $325 million 364-day tranche maturing November 29, 2002 and a $300 million five- year tranche maturing November 30, 2006. The company has the ability to request up to $200 million in letters of credit to be issued against the $300 million five-year tranche. Under either tranche, interest is charged at variable rates. The line of credit is further designated as a back-up credit line for a commercial paper program not to exceed $600 million, whereby Torchmark may borrow from either the credit line or issue commercial paper at any time, with total commercial paper outstanding not to exceed $600 million. Commercial paper borrowings and letters of credit on a combined basis may not exceed $625 million. At December 31, 2001, $204 million face amount of commercial paper was outstanding, $168 million letters of credit were issued, and there were no borrowings under the line of credit. A facility fee is charged on the entire $625 million facility. The facility has no ratings-based acceleration triggers which would require early repayment. In accordance with the agreements, Torchmark is subject to certain covenants regarding capitalization and earnings. At December 31, 2001, Torchmark was in full compliance with these covenants.
Liquidity of the parent company is affected by the ability of the subsidiaries to pay dividends. Dividends are paid by subsidiaries to the parent in order to meet its dividend payments on common and preferred stock, interest and principal repayment requirements on parent-company debt, and operating expenses of the parent company. These requirements have declined in both 2000 and 1999 from the respective prior year. Dividends from insurance subsidiaries of Torchmark are limited to the greater of statutory net gain from operations, excluding capital gains and losses, on an annual noncumulative basis, or 10% of surplus, in the absence of special approval. Distributions are not permitted in excess of statutory net worth. Subsidiaries are also subject to certain minimum capital requirements. Although these restrictions exist, dividend availability from subsidiaries has been and is expected to be more than adequate for parent company operations. During the year 2002, a maximum amount of $299 million is expected to be available to Torchmark from insurance subsidiaries without regulatory approval.
Capital Resources. Torchmark's capital structure consists of long and short- term debt, preferred securities, and shareholders' equity. Torchmark's debt consists of its funded debt and its commercial paper facility. An analysis of Torchmark's funded debt outstanding at year-ends 2001 and 2000 on the basis of par value is as follows:
During 1999 and 2000, Torchmark acquired a portion of its funded debt in the open market through its insurance subsidiaries. In 1999, $7.5 million principal amount of its 7 7/8% Notes due 2023 was acquired at a cost of $7.9 million. Also in 1999, $4.0 million principal amount of its 7 3/8% Notes due 2013 was purchased for $4.1 million. Insurance company holdings in the funded debt reduce consolidated debt outstanding.
In November, 2001, Torchmark established two Capital Trusts which in turn sold trust preferred securities in a public offering. Capital Trust I sold 5 million shares and Capital Trust II sold 1 million shares. The trust preferreds sold in the two offerings have similar terms. Each offering consisted of 7 3/4% trust preferreds at a liquidation amount of $25 per security, resulting in an aggregate liquidation amount of $150 million. They are redeemable at Torchmark's option in part or whole at any time on or after November 2, 2006. They are subject to a mandatory redemption on November 1, 2041. Distributions are cumulative and are paid quarterly at an annual rate of 7 3/4%, or at a rate of $1.9375 per share. All payments by the Trusts regarding the trust preferreds are guaranteed by Torchmark. The Capital Trusts are wholly-owned consolidated subsidiaries of Torchmark.
In conjunction with the offering of the trust preferred securities, Torchmark entered into a ten-year swap agreement to replace the 7 3/4% fixed distribution obligation with a floating rate payment. The floating rate is based on the three-month LIBOR and resets each quarter when the distributions are made. At December 31, 2001, the variable rate was 4.10%. This swap derivative does not qualify as a hedge for accounting purposes and will be carried on the balance sheet at market value. At December 31, 2001, this swap had no value.
Effective January 1, 1999, Torchmark changed its method of accounting for the swap agreement on the MIPS to recognize changes in its fair value, net of tax, as realized investment gains or losses. This method of accounting for such instruments was believed to be preferable under the guidance established by Statement of Financial Accounting Standards No. 80, Accounting for Futures Contracts (SFAS 80) and the Securities and Exchange Commission. Previously, Torchmark accounted for the swap using hedge accounting under SFAS 80. The after-tax cumulative effect of the change at January 1, 1999 was a gain of $16.1 million (net of income taxes of $8.7 million). The effect of the change on the twelve months ended December 31, 1999 was to increase realized losses by $11.7 million ($.09 per diluted share), excluding the cumulative effect of the change in accounting principle. Market value of the swap, which is included as a component of Other Invested Assets, was $19.2 million and $14.3 million at December 31, 2001 and 2000, respectively.
Torchmark's major insurance subsidiaries are also rated for financial strength by Standard & Poors and A.M. Best. The following chart presents these ratings for Torchmark's five largest insurance subsidiaries at December 31, 2001.
The AA rating is assigned by Standard & Poor's Corporation to those companies who offer excellent financial security on an absolute and relative basis and whose capacity to meet policyholders obligations is overwhelming under a variety of economic and underwriting conditions.
Contractual Commitments. A schedule of Torchmark's scheduled contractual commitments at December 31, 2001 is as follows for the next five years.
Torchmark has entered into two loan agreements with First Command, a construction loan agreement and a collateral loan agreement. The construction loan was entered into in 2001 and had an outstanding balance of $6.1 million at December 31, 2001. The loan was made at a rate of 7.55% and is collateralized by the construction of a four-story building in Fort Worth, Texas to be completed in late 2002. In addition to the office building as collateral, in the event of default, Torchmark has the right of offset to any commission due First Command. The maximum amount of borrowing allowed on this loan is $22.5 million. Interest is added to the loan balance until the building is completed. The agreement calls for Torchmark to permanently finance the building with a fifteen-year mortgage at a rate of 2.25% over the ten year treasury rate at inception, but not less than 7%.
The collateral loan agreement was entered into in 1998 with an initial loan of $7 million. An additional $15 million was loaned in 2001. The loan bears interest at a rate of 7%. It is collateralized by a group of mutual funds in which the loan balance can never exceed 90% of the value of the collateral. The loan accumulated interest until December 31, 2001, after which it is to be repaid with a fixed payment amortizing the loan over fifteen years. The outstanding loan balance at December 31, 2001 was $22.9 million.
Real Estate. As discussed under the caption Investments on page 29 of this report, Torchmark decided to divest itself of its real estate operations because yields that could be obtained on alternative investments were significantly greater. During 1998 and early 1999, efforts were made to market these properties, and as a result, the majority of its properties were disposed of in two transactions in 1999. One of these transactions involved Elgin Development Company, of which R. K. Richey, the Chairman of the Executive Committee of Torchmark, was an investor. This transaction involved the sale of properties to an investor group of which Elgin Development Company was a 30% investor. Total consideration for the transaction was $97.4 million of which $85 million was cash and the balance was in a ten year collateralized 8% note from Elgin Development Company. Torchmark's loss associated with this
Business Combinations (Statement of Financial Accounting Standards (SFAS) No. 141) was effective on July 1, 2001. It requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is prohibited. To date, Torchmark has had no business combinations subject to SFAS No. 141.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Torchmark Corporation and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such 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.
Realized investment gains and losses and investment income attributable to separate accounts are credited to the separate accounts and have no effect on Torchmark's net income. Investment income attributable to all other insurance policies and products is included in Torchmark's net investment income. Net investment income for the years ended December 31, 2001, 2000, and 1999, included $321 million, $305 million, and $288 million, respectively, which was allocable to policyholder reserves or accounts. Realized investment gains and losses are not allocable to insurance policyholders' liabilities.
Determination of Fair Values of Financial Instruments: Fair value for cash, short-term investments, short-term debt, receivables and payables approximates carrying value. Fair values for investment securities are based on quoted market prices, where available. Otherwise, fair values are based on quoted market prices of comparable instruments. Mortgages are valued using discounted cash flows. Substantially all of Torchmark's long-term debt, along with the monthly income preferred securities and trust preferred securities, is valued based on quoted market prices.
Earnings Per Share: Torchmark presents basic and diluted earnings per share (EPS) on the face of the income statement and a reconciliation of basic EPS to diluted EPS. Basic EPS is computed by dividing income available to common stockholders by the weighted average common shares outstanding for the period. Weighted average common shares outstanding for each period are as follows: 2001--125,134,535, 2000--128,089,235, and 1999--133,197,023. Diluted EPS is calculated by adding to shares outstanding the additional net effect of potentially dilutive securities or contracts which could be exercised or converted into common shares. Weighted average diluted shares outstanding for each period are as follows: 2001--125,860,869, 2000--128,353,404, and 1999-- 133,985,943.
In 2001, Liberty National Life Insurance Company (Liberty) paid $40 million and in 1999, Liberty paid $61 million and Globe Life And Accident Insurance Company paid $34.5 million in extraordinary dividends to Torchmark. Extraordinary dividends require regulatory approval.
A summary of fixed maturities available for sale and equity securities by amortized cost and estimated fair value at December 31, 2001 and 2000 is as follows:
A schedule of fixed maturities by contractual maturity at December 31, 2001 is shown below on an amortized cost basis and on a fair value basis. Actual maturities could differ from contractual maturities due to call or prepayment provisions.
Torchmark had $9.0 million in investment real estate at December 31, 2001, which was nonincome producing during the previous twelve months. These properties consisted primarily of undeveloped land. Torchmark had $1.4 million in nonincome producing mortgages as of December 31, 2001. Torchmark had $1.9 million in nonincome producing fixed maturities at December 31, 2001. There were no other long-term investments which were nonincome producing at December 31, 2001.
Depreciation expense on property used in the business was $5.2 million, $6.3 million, and $5.6 million in each of the years 2001, 2000, and 1999, respectively.
The amount of interest accrued on the unamortized balance of value of insurance purchased was $7.7 million, $9.1 million, and $10.5 million, for the years ended December 31, 2001, 2000, and 1999, respectively. The average interest rates used for the years ended December 31, 2001, 2000, and 1999, were 6.2%, 6.4%, and 6.5%, respectively. The estimated amortization, net of interest accrued, on the unamortized balance at December 31, 2001 during each of the next five years is: 2002, $14.7 million; 2003, $12.1 million; 2004, $10.1 million; 2005, $8.7 million; and 2006, $7.5 million.
As a result of the differences between estimated and actual claim experience in prior years, the provision for claims increased $2.4 million, $6.4 million, and $8.3 million in each of the years 2001, 2000, and 1999, respectively.
The liability for unpaid health claims is included with "Policy claims and other benefits payable" on the Consolidated Balance Sheet.
In 2001, 2000, and 1999, deferred income tax expense was incurred because of certain differences between net income from continuing operations before income taxes as reported on the consolidated statement of operations and taxable income as reported on Torchmark's income tax returns. As explained in Note 1, these differences caused the financial statement book values of some assets and liabilities to be different from their respective tax bases.
Pension Plans: Torchmark has noncontributory retirement benefit plans and contributory savings plans which cover substantially all employees. There is also a nonqualified noncontributory excess benefit pension plan which covers certain employees. The total cost of these retirement plans charged to operations was as follows:
Cost for the defined benefit pension plans has been calculated on the projected unit credit actuarial cost method. Contributions are made to the pension plans subject to minimums required by regulation and maximums allowed for tax purposes. Accrued pension expense in excess of amounts contributed has been recorded as a liability in the financial statements and was $10.2 million and $9.5 million at December 31, 2001 and 2000, respectively. The plans covering the majority of employees are organized as trust funds whose assets consist primarily of investments in marketable long-term fixed maturities and equity securities which are valued at fair market value.
The weighted average assumed discount rates used in determining the actuarial benefit obligations were 7.25% and 7.50% in 2001 and 2000, respectively. The rate of assumed compensation increase was 4.50% in both 2001 and 2000 and the expected long-term rate of return on plan assets was 9.25% in both 2001 and 2000.
During 2001, Torchmark amended the terms of its post-retirement health benefit plan to revise the premium structure for participants. This amendment reduced the benefit liability by $5 million.
The Senior Debentures, remaining principal amount of $99 million, are due August 15, 2009. They bear interest at a rate of 8 1/4%, with interest payable on February 15 and August 15 of each year. The Senior Debentures are not redeemable at the option of Torchmark prior to maturity and have equal priority with other Torchmark unsecured indebtedness.
In November, 2001 Torchmark entered into a line of credit facility with a group of lenders, which allows unsecured borrowings and stand-by letters of credit up to $625 million. The facility includes a $325 million 364-day tranche, which matures November 29, 2002 and a $300 million five-year tranche that matures November 30, 2006. This facility replaces a revolving credit agreement which the Company previously had available to borrow up to $600 million on an unsecured basis. Interest is charged at
When the MIPS were originally issued in 1994, Torchmark entered into a ten- year swap agreement with an unrelated party which remains in effect. The agreement provides for Torchmark to pay a variable rate based on the one-month LIBOR plus 139 basis points, while collecting at a rate of 9.18% on a notional amount of $200 million. The swap does not expire until September 30, 2004. The rate resets each month. At December 31, 2001, the variable rate was 3.47%. The swap is accounted for as a free standing derivative and is marked to fair market value at the end of each accounting period. The fair market value of the swap agreement was a benefit of $19.2 million and $14.3 million at December 31, 2001 and 2000, respectively. Torchmark changed its method of accounting for this swap agreement during 1999. Refer to Note 15--Changes in Accounting Principles on page 68 for more information on this change in accounting principle.
Asset-Backed Securities. Torchmark adopted new accounting guidance Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets (EITF 99-20) effective April 1, 2001. EITF 99-20 changed the method of accounting for most of Torchmark's asset-backed securities, but it excluded U.S. government and government-guaranteed securities. It requires that interest income be accounted for using the prospective effective-yield method, whereby changes in future cash flow expectations are accounted for over the remaining life of the security. This is accomplished through recalculating a new yield-to-maturity at the end of each reporting period for interest accrued based on the current book value and revised cash flow expectations. Revised expectations result in revised interest recognition. This prospective method differs from the previously required retrospective effective-yield method whereby the effective yield was based on future expected and past actual cash flows, and the book value was restated using the newly calculated effective yield as if it had been in effect since purchase.
Effective January 1, 2001, Torchmark adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, and accounts for all derivative instruments in accordance with that Statement. At December 31, 2001, Torchmark had three swap contracts in place, which were carried at fair market value in the financial statements. Fluctuations in these values adjust realized investment gains and losses. If a derivative qualifies as a fair value hedge under SFAS No. 133, gains and losses in the derivative are substantially offset by changes in the underlying hedged instrument.
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 7.8 million shares at a cost of $303 million in 2001, 6.1 million shares at a cost of $147 million in 2000, and 6.7 million shares at a cost of $222 million in 1999.
Stock options to purchase 3,305,025, 7,497,546, and 5,013,990, as of December 31, 2001, 2000, and 1999, 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.
- -------- (1) This stock grant was made from the 1987 Stock Incentive Plan. The retirement of an employee during 1999 resulted in the lapse of unvested grants.
Torchmark accounts for its employee stock options in accordance with SFAS 123 Accounting for Stock-Based Compensation, which defines a "fair value method" of measuring and accounting for employee stock options. This standard also allows accounting for such options under the "intrinsic value method" in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations. If a company elects to use the intrinsic value method, then pro forma disclosures of earnings and earnings per share are required as if the fair value method of accounting was applied. The effects of applying SFAS 123 in the pro forma disclosures are not necessarily indicative of future amounts.
- -------- * Issued when the market price was $24.8125. Option price at that time (prior to the Waddell & Reed spin-off adjustment) was $18.61.
Reinsurance: Insurance affiliates of Torchmark reinsure that portion of insurance risk which is in excess of their retention limits. Retention limits for ordinary life insurance range up to $2.5 million per life. Life insurance ceded represents less than 1.0% of total life insurance in force at December 31, 2001. Insurance ceded on life and accident and health products represents .7% of premium income for 2001. 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. These leases contain various renewal options, purchase options, and escalation clauses. Rental expense for operating leases was $3.2 million in 2001, $3.3 million in 2000, and $3.4 million in 1999. Future minimum rental commitments required under operating leases having remaining noncancelable lease terms in excess of one year at December 31, 2001 are as follows: 2002, $2.0 million; 2003, $1.4 million; 2004, $850 thousand; 2005, $526 thousand; 2006, $370 thousand and in the aggregate, $6.2 million.
Investments in municipal governments and corporations are made throughout the U.S. with no concentration in any given state. Most of the investments in foreign government securities are in Canadian and Mexican government obligations. Corporate debt and equity investments are made in a wide range of industries. At December 31, 2001, 3% or more of the portfolio was invested in the following industries:
Otherwise, no individual industry represented 3% or more of Torchmark's investments. At year-end 2001, 7% of the carrying value of fixed maturities was rated below investment grade (BB or lower as rated by Standard & Poor's or the equivalent NAIC designation). Par value of these investments was $598
million, amortized cost was $559 million, and market value was $484 million. While these investments could be subject to additional credit risk, such risk should generally be reflected in market value.
Collateral Requirements: Torchmark requires collateral for investments in instruments where collateral is available and is typically required because of the nature of the investment. Since the majority of Torchmark's investments is in government, government-secured, or corporate securities, the requirement for collateral is rare. Torchmark's mortgages are secured by the underlying real estate.
Guarantees: In the fourth quarter of 1999, Torchmark issued a full financial guaranty of all obligations, receivables, and recovery of capital on behalf of its wholly-owned subsidiaries American Income and AILIC Receivables Corporation up to $100 million. The guarantee was made to an unaffiliated third party as agent for the purchasers of certain agent receivables of American Income.
Based upon information presently available, and in light of legal and other factual defenses available to Torchmark and its subsidiaries, contingent liabilities arising from threatened and pending litigation are not presently considered by management to be material. It should be noted, however, that large punitive damage awards bearing little or no relation to actual damages awarded by juries in jurisdictions in which Torchmark has substantial business, particularly Alabama and Mississippi, continue to occur, creating the potential for unpredictable material adverse judgments in any given punitive damage suit.
Previous reports have disclosed that in July 1998, a jury in the U.S. District Court in the Middle District of Florida recommended an aggregate total verdict amounting to $21.6 million against Liberty in Hipp v. Liberty National Life Insurance Company (Case No. 95-1332-CIV-17A). This case, originally filed in 1995 in the Florida court system, is a collective action under the Fair Labor Standards Act, alleging age discrimination by Liberty in violation of the Age Discrimination in Employment Act and the Florida Civil Rights Act. The plaintiffs, ten present or former Liberty district managers, sought damages for lost wages, loss of future earnings, lost health and retirement benefits and lost raises and expenses. Three of these plaintiffs, Florida residents, also sought compensatory and punitive damages allowable under Florida law. On November 20, 1998, the District Court remitted the $10 million punitive damage portion of the jury verdict to $0, thus reducing the total verdict to $11 million (including an advisory verdict of $3.2 million in front pay awards). Additional revised front pay submissions were made by the plaintiffs to the District Court in December 1998 and Liberty responded thereto in January 1999. On March 11, 1999, the District Court reduced the Hipp verdict to $7 million by denying the plaintiffs front pay damages and remitting the punitive damages awarded to the Florida resident plaintiffs to the $100,000 limit allowable under Florida law. Final judgment was entered by the District Court and Liberty filed its appeal with the Circuit Court of Appeals for the Eleventh Circuit on September 27, 1999. Oral arguments in this appeal were presented
before the Eleventh Circuit on September 18, 2000. On May 29, 2001, the Eleventh Circuit reversed and rendered the Hipp decision. Plaintiffs subsequently filed a petition for an en banc rehearing with the Eleventh Circuit, which was denied August 14, 2001. On February 19, 2002, the United States Supreme Court denied plaintiffs' motion for a writ of certiorari.
On December 8, 1999, purported class action litigation was filed against Liberty in the United States District Court for the Northern District of Alabama (Moore v. Liberty National Life Insurance Company, Case No. CV-99-BU- 3262-S), on behalf of all African-Americans who have or have had at the time of policy termination an ownership interest in certain life insurance policies ($25,000 face amount or less) marketed by Liberty and certain of its former subsidiaries. The alleged class period covers virtually the entire twentieth century. Plaintiffs allege racial discrimination in Liberty's premium rates in violation of 42 U.S.C. (S) 1981, breach of fiduciary duty in sales and administrative practices, receipt of excessive and unreasonable premium payments by Liberty, improper hiring, supervision, retention and failure to monitor actions of officers, agents and employees, breach of contract in dismantling the debit premium collection system, fraudulent inducement and negligent misrepresentation. Unspecified compensatory and punitive damages are sought together with a declaratory judgment and equitable and/or injunctive relief, including establishment of a constructive trust for the benefit of class members. Defendants filed a motion for
On July 3, 2000, the District Court issued an order in the Moore case granting in part and denying in part the plaintiffs' motions. The District Court ordered the Moore plaintiffs to file an amended complaint setting forth their claims under 28 U.S.C. (S)(S) 1981 and 1982 and, if such claims are timely, any state law claims for breach of contract related to the discontinuance of debit collections, and dismissed with prejudice all remaining state law claims of the plaintiffs as time-barred by the common law rule of repose. On July 14, 2000, plaintiffs filed their amended complaint with the District Court and Liberty filed a motion to alter or amend the District Court's July order or, in the alternative, requested that the District Court certify for purposes of appeal the issue whether the state law doctrine of repose should be applied to and bar plaintiffs' actions under (S)(S) 1981 and 1982. The District Court entered such an order on July 21, 2000 and stayed proceedings in Moore pending resolution of Liberty's petition to the U.S. Circuit Court of Appeals for the Eleventh Circuit. Liberty filed a petition on July 30, 2000 with the Eleventh Circuit seeking that Court's permission to appeal the portions of the District Court's July order in Moore granting the plaintiffs the right to file the amended complaint. The Eleventh Circuit Court granted Liberty's motion and agreed to consider Liberty's arguments regarding the applicability of the state law of repose to actions under (S)(S)1981 and 1982. Oral arguments were heard by the Eleventh Circuit Court on July 20, 2001. On September 28, 2001, the Eleventh Circuit Court ruled that the rule of repose was not a bar to the Moore claims in federal court and that there is no reverse pre-emption under the McCarrin Ferguson Act. Liberty has filed a petition seeking an en banc rehearing in the Eleventh Circuit Court, which was subsequently denied. Liberty filed a petition for a writ of certiorari with the U.S. Supreme Court on February 21, 2002. The District Court has scheduled the filing of motions for class certification in Moore for November 21, 2002.
Four individual cases with similar allegations to those in the Moore case which were filed against Liberty in various state Circuit Courts in Alabama remain pending and have been removed and/or transferred to the U.S. District Courts for either the Middle or Northern Districts of Alabama. The Moore case and those cases transferred to the Northern District of Alabama have been assigned to Judge U.W. Clemon, a noted former civil rights attorney. In the earliest filed of the individual state court actions, Walter Moore v. Liberty National Life Insurance Company (Circuit Court of Dallas County, CV 00-306) the Court entered an order granting summary judgment in favor of Liberty based upon the doctrine of repose and has subsequently denied a motion to reconsider its dismissal of this case.
Hudson v. Liberty National Life Insurance Company, one of the four individual cases referenced above, was filed in the Circuit Court of Bullock County, Alabama on February 28, 2001 (Case No. CV 2001-25) and contains similar allegations to those in Moore. After denials by the Bullock Circuit Court of Liberty's motion to dismiss and request that certain questions arising in the litigation be certified to the Alabama Supreme Court, Liberty sought a writ of mandamus on the certified questions issue from the Alabama Supreme Court. The Alabama Supreme Court agreed to hear Liberty's petition for writ of mandamus seeking to have the Supreme Court direct the trial court to grant Liberty's motion to dismiss or for a summary judgment or to certify for interlocutory appeal the Circuit Court's denial of such motion. On January 18, 2002, the Alabama Supreme Court denied Liberty's request for the writ of mandamus but noted that Liberty's motion for summary judgment based on the rule of repose remains pending in the trial court and is ripe for adjudication. Upon remand, plaintiff amended his complaint to add causes of action under Federal law and Liberty is seeking to remove this case to Federal court as discussed above.
In the fifth individual state court action, (Edwards v. Liberty National Life Insurance Company), Case No. CV 0005872), the trial court denied Liberty's motion seeking a summary judgment based upon the
On July 26, 2001, litigation was filed against Torchmark and three current members of Torchmark's Board of Directors in the United States District Court for the District of Kansas (Waddell & Reed Financial, Inc. v. Torchmark Corporation, Civil Action No. 01-2372-KHV). Plaintiffs assert that defendants engaged in a scheme to control and injure Waddell & Reed Financial after it was spun-off by Torchmark in November 1998, to interfere with the business relationship between a Waddell & Reed Financial subsidiary, Waddell & Reed, Inc. (W&R) and a Torchmark subsidiary, United Investors Life Insurance Company (UILIC), and to injure W&R Financial as well as asserting that one of the individual defendants sought to interfere with W&R Financial's relationship with the United Group of Mutual Funds. The litigation alleges RICO violations, breaches of fiduciary duty by the three individual defendants, knowing participation in such breaches of fiduciary duty by Torchmark and intentional interference with prospective business relations in connection with the relationship between W&R and UILIC. Plaintiffs seek actual, punitive and treble damages, interest, fees and costs under RICO of $29 million, $13.4 million plus punitive damages, interest and costs on the intentional interference allegations and a total of $58 million on the remaining two counts.
Defendants filed a motion to abstain or, in the alternative, to dismiss the Kansas District Court litigation on August 22, 2001, citing pending litigation filed in Alabama state circuit court by Torchmark and its subsidiary, UILIC against W&R Financial and W&R involving an alleged agreement dealing with existing in-force UILIC variable annuity business marketed by W&R as well as the prior dismissal by the Kansas District Court of litigation originally filed by W&R against UILIC in Kansas state court involving such variable annuity business. Defendant's motion was denied but the Kansas District Court ruled that a judgment in the prior Alabama litigation would likely be res judicata as to the claims against Torchmark and one of the individual defendants in the current Kansas litigation. Trial of the Alabama state court litigation began February 19, 2002.
On January 22, 2002, purported class action litigation was filed against Liberty and Torchmark 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 are no longer marketed regardless of whether such policies remain in force or have lapsed (Roberts v. Liberty National Life Insurance Company, Case No. CV-2002-009-B). Plaintiffs in this action purchased guaranteed renewable cancer policies wherein Liberty reserved the right to change premium rates. They allege that Liberty ceased marketing certain cancer policies-- "closed" the block of business, capping the potential pool of insureds and leading to increased premiums to the remaining insureds. They further allege that in instituting premium increases on cancer policies after the Robertson v. Liberty National Life Insurance Company class action settlement, Liberty misrepresented the reasons for such premium increases. This action asserts claims for breach of contract in implementing premium rate increases on a basis other than that set out in the policies, misrepresentation regarding the premium increases, fraud and suppression concerning the closed block of business and unjust enrichment. Unspecified compensatory and punitive damages, attorneys fees, costs and interest are sought by plaintiffs on behalf of the class.
Torchmark has previously reported the settlement and dismissal of Pearson v. Torchmark Corporation (Case No. CV-95-140) on January 10, 2001. The settlement fund of $6 million, to which Torchmark contributed pursuant to a litigation indemnity given at the time of its 1996 sale of Torch Energy Advisors Incorporated, was distributed in March 2001.
Torchmark's segments are based on the insurance product lines it markets and administers: life insurance, health insurance, and annuities. These major product lines are set out as segments because of the common characteristics of products within these categories, comparability of margins, and the similarity in regulatory environment and management techniques. There is also an investment segment which manages the investment portfolio, debt, and cash flow for the insurance segments and the
corporate function. Torchmark's management evaluates the overall performance of the operations of the company in accordance with these segments.
Life insurance products include traditional and interest-sensitive whole life insurance as well as term life insurance. Health products are generally guaranteed-renewable and include Medicare Supplement, cancer, accident, long- term care, and limited hospital and surgical coverages. Annuities include both fixed-benefit and variable contracts. Variable contracts allow policyholders to choose from a variety of mutual funds in which to direct their deposits.
The measure of profitability established by management for insurance segments is underwriting income before other income and administrative expenses, in accordance with the manner the segments
The measure of profitability for the investment segment is excess investment income, which represents the income earned on the investment portfolio in excess of net policy requirements and financing costs associated with debt and Torchmark's preferred securities. The investment segment is measured on a tax- equivalent basis, equating the return on tax-exempt investments to the pretax return on taxable investments. Other than the above-mentioned interest allocations, there are no other intersegment revenues or expenses. Expenses directly attributable to corporate operations are included in the "Corporate" category. All other unallocated revenues and expenses on a pretax basis, including insurance administrative expense, are included in the "Other" segment category. The table below sets forth a reconciliation of Torchmark's revenues and operations by segment to its major income statement line items.
- ------- * Investment segment includes preferred securities dividends on a pretax basis.
The collateral loan agreement was entered into in 1998 with an initial loan of $7 million. An additional $15 million was loaned in 2001. The loan bears interest at a rate of 7%. It is collateralized by a group of mutual funds in which the
Real Estate. In 1998, Torchmark decided to divest itself of its real estate operations because yields that could be obtained on alternative investments were significantly greater. During 1998 and early 1999, efforts were made to market these properties, and as a result, the majority of its properties were disposed of in two transactions in 1999 as discussed in Note 3, Investments beginning on page 54 of this report. One of these transactions involved Elgin Development Company, of which R. K. Richey, the Chairman of the Executive Committee of Torchmark, was an investor. This transaction involved the sale of properties to an investor group of which Elgin Development Company was a 30% investor. Total consideration for the transaction was $97.4 million of which $85 million was cash and the balance was in a ten year collateralized 8% note from Elgin Development Company. Torchmark's loss associated with this transaction was $10 million after tax. At the time of the transaction, Mr. Richey was a one-third investor in Elgin Development Company. His total investment in Elgin Development was approximately $1.5 million. The outstanding balance of the collateralized note with Elgin Development Company, which is included in fixed maturities, was $10.5 million at December 31, 2001.
MidFirst Bank. Torchmark has engaged MidFirst Bank as the servicing agent for a portion of Torchmark's subsidiaries' commercial mortgages portfolios. George J. Records is an officer, director, and 38.3% beneficial owner of Midland Financial Co., the parent corporation of MidFirst Bank. He is also a director of Torchmark. Fees paid for these services were $109 thousand in 2001, $106 thousand in 2000, and $72 thousand in 1999.
The following is a summary of quarterly results for the two years ended December 31, 2001. The information is unaudited but includes all adjustments (consisting of normal accruals) which management considers necessary for a fair presentation of the results of operations for these periods.