Torchmark, through its subsidiaries, owns or leases buildings that are used in the normal course of business. Liberty owns a 487,000 sq. ft. building at 2001 Third Avenue South, Birmingham, Alabama, which currently serves as Liberty's, UILIC's, and Torchmark's home office. Liberty leases approximately 143,000 sq. ft. of this building to unrelated tenants and has another 15,000 sq. ft. available for lease. Liberty also operates from 69 company-owned district office buildings used for agency sales personnel.
Globe owns a 300,000 sq. ft. office building at 204 North Robinson, Oklahoma City, Oklahoma, of which it occupies 85,647 sq. ft. as its home office and the balance is available for lease. Globe also owns
A Torchmark subsidiary has completed a 185,000 sq. ft. office building as the initial phase of a 100-acre commercial development at Liberty Park along I-459 in Birmingham, Alabama of which a total of approximately 180,000 sq. ft. is currently leased. It also owns and manages a 70,000 sq. ft. office and retail complex adjacent to Liberty Park, of which 30,000 sq. ft. are leased to Liberty Fire. As a part of a joint venture with unaffiliated entities, it is also developing 2,200 contiguous acres.
(1) The increase in individual life insurance in force is adjusted by $55 million, and the increase in individual life annualized premium in force is adjusted by $2.7 million, representing the business acquired in the acquisition of Sentinel American Life Insurance Company. (2) The increase in individual life insurance in force is adjusted by $337 million, and the increase in individual life annualized premium in force is adjusted by $28.1 million, representing the business acquired in the Family Service Life Insurance Company acquisition. (3) Includes accrued investment income. (4) Computed after deduction of preferred shareholders' equity.
In a comparison of 1993 results with those of 1992, several nonrecurring items should be considered. In November, 1993 Torchmark sold 73% of its interest in Vesta, which was Torchmark's wholly-owned property and casualty subsidiary prior to the sale, retaining an approximate 27% interest. Such interest was sold for proceeds of $161 million and a $57 million pretax gain from the sale was recognized. Results for 1993 include an $82 million pretax charge for nonoperating expenses, compared to $5.7 million for 1992. This charge relates to legal and litigation expenses, guaranty assessments, and directors' and officers' liability. Two new accounting standards which dealt with postretirement benefits and accounting for income taxes were implemented, increasing 1993 earnings to $18.4 million. Enactment of the Administration's tax reform package, which increased corporate tax rates in 1993 from 34% to 35%, resulted in an additional charge to 1993 earnings of $13.7 million. Of this charge, $4.3 million related to 1993 earnings and $9.4 million was the effect of a one-time adjustment to the deferred tax liability relating to prior years. Adjusting for these nonrecurring items, Torchmark's 1993 per share earnings after realized capital gains and losses would have been $4.04, compared to $3.64 for 1992, an increase of 11%.
Revenues climbed 6.4% in 1993 to $2.18 billion, up from $2.05 billion for the previous year. After adjusting for the above-mentioned gain on the sale of Vesta, the increase in revenues for 1993 would have been 3.6%. Revenues for 1992 increased 7.3% over 1991 revenues of $1.91 billion. Premium income for 1993 grew 2.7% or $39 million, largely accounted for by the $25 million growth in premium at Vesta. Financial services revenues rose 3% in 1993 and 17% in 1992 as a result of strong financial markets and increased investor demand. The lower rate of growth in 1993 was attributable to decreased front-end load mutual funds and the increase in the sale of funds with deferred sales charges. Lower investment yields available on new investments and the increased use of tax advantaged investments have had a negative effect on growth in net investment income in recent periods. Net investment income grew 5% in 1992 and declined 2.7% in 1993. On a tax equivalent basis, investment income increased 1.5%. Energy operations experienced strong growth in both periods, rising 43% in 1993 after gaining 35% in 1992. A more in-depth discussion of each of Torchmark's segments and investment operations is found on pages 18 through 25 of this report.
Other operating expenses increased 3% in 1993, after excluding the above- mentioned nonoperating expense charges in both 1993 and 1992. As a percentage of total revenues, adjusting for the previously-mentioned gain from the Vesta sale, adjusted operating expenses were 8.2% of revenues in 1993, compared to 8.3% in both 1992 and 1991. Interest expense rose 21% in 1993 to $67.3 million, primarily as a result of $300 million in new debt issues in 1993, which also caused average indebtedness to rise in 1993. These new issues were used mainly to fund the 1993 acquisition of the remaining 18% of United Management which Torchmark did not own. These debt issuances and the United Management transaction are discussed further as a part of the capital resources discussion found on pages 26 through 27 of this report. Average indebtedness also rose in 1992, resulting in increased interest expense of 11% or $55.7 million. The increase in 1992 debt was primarily the result of borrowings to fund common and preferred share purchases through line-of-credit borrowings. Capitalized interest deducted from interest expense was $.9 million in 1993, $4.3 million in 1992, and $9.1 million in 1991.
Profitability in the life product line has increased in each of the years considered, as evidenced by the growth in insurance operating income as a percentage of premium. This percentage grew from 26.3% in 1991 to 27.9% in 1992 to 29.4% in 1993. The primary reason for the improvement in both years was improved persistency. Persistency improvements have resulted, at least in part, from revisions in agents' compensation formulas to encourage persistency. Lower lapses have also been attributable to a large portion of agent-collected home service business having been converted to bank draft premium, which has higher persistency. The proportion of bank draft premium to total home service premium increased from 61% in 1991 to 69% in 1992 to 78% in 1993.
One factor in the 1992 increase in the policy obligations to premium ratio was increased mortality over the prior period. Fluctuations in mortality are normal and such an increase is not indicative of a pattern. Other expense margins have improved in each of the years considered, which have had the effect of further improving margins.
Health Insurance: Torchmark's health products include Medicare Supplement insurance, cancer insurance, and other under-age 65 medical and hospitalization products. As a percentage of annualized health premium in force at December 31, 1993, Medicare Supplement accounted for 73%, cancer accounted for 13%, and other products accounted for 14%.
Total health premium was $800 million in 1993, compared to $798 million in 1992, after having grown 3.6% over 1991 premium of $770 million. Annualized health premium in force stood at $823 million at December 31, 1993, declining 1.1% over the 1992 amount of $832 million. The 1992 annualized health premium in force rose 4.3% over the December 31, 1991 amount of $798 million. Sales of health products in terms of annualized premium issued declined 22% to $176 million in 1993 after having increased 3.7% in 1992 to $225 million from $217 million in 1991. The decline in 1993 sales was affected by the uncertainty surrounding the Administration's and other health care reform proposals during the year. Medicare Supplement sales were also impacted by competition which offered products with a premium that increases with age as well as medical costs, while Torchmark's premium is increased with medical costs only. This resulted in Torchmark's product being initially more expensive while the competing products would have substantially larger premium increases in the future.
Cancer insurance annualized premium in force declined 3.4% to $106 million at December 31, 1993 from $109 million at December 31, 1992. Cancer annualized premium in force grew 5.9% in 1992. Sales of this product in 1992 of $18 million were level, compared with the prior year but declined 45% in 1993 to $10 million. Under age 65 health insurance annualized premium in force declined 19% in 1993 to $113 million after having declined 17% in 1992 to $141 million. Sales of a number of these products were discontinued in 1992 because of poor margins, causing the premium in force to decline in both years.
Margins have improved in each of the years considered. As a percentage of premium, insurance operating income for individual health grew from 9.9% in 1991 to 11.2% in 1992 to 13.2% in 1993, representing an increase of 13% in 1992 and 18% in 1993. There were two primary reasons for this improvement. First, improved persistency has contributed to the decline in amortization of acquisition costs. One reason for the improvement in persistency is that many states now require levelized commissions on Medicare Supplement products. This has encouraged persistency through the payment of a higher renewal commission. In addition, the payment of a lower first-year commission discourages replacement. Also, net policy obligations for individual health products as a percentage of premium were stable in each of the years 1991 and 1992, but declined .9% in 1993. This decline was a result of the decline in lower margin non-Medicare business in 1993.
Growth in the annuity account balance in each year is illustrated below:
Annuity collections on a combined basis for both fixed and variable annuities have grown in each of the last three years and were as follows:
Annuity policy charges, which are included in other premium in the financial statements, rose 8% in 1993 to $9.5 million after having grown 19% in 1992 to $8.8 million. Allocated investment income, or investment income earned in excess of policy requirements, was $8.4 million in 1993, a slight decline. Allocated investment income gained 5% in 1992 to $8.9 million over $8.5 million in 1991. Because of the difference in structure in the various annuity contracts, whereby certain policy charges relate to account value and others relate to annuity collections, the policy charges and allocated investment income remained relatively stable in 1993. Charges relating to the growth in the policy account value were offset somewhat in 1993 by the decline in charges based on fixed annuity sales.
Insurance operating income for the annuity line has grown in each of the years 1991 through 1993, increasing 25% to $10 million in 1992 and 19% to $11.9 million in 1993. Profitability margins as measured by the mean reserve were stable in 1992 as compared to 1991 but declined slightly in 1993. The primary factor in this decline was the reduction in allocated investment income assigned to fixed products, even though the fixed annuity reserve grew 3.6%. The 1993 decline was offset by a decline in acquisition expense.
PROPERTY AND CASUALTY INSURANCE Summary of Results (DOLLAR AMOUNTS IN THOUSANDS)
Asset management fees increased 14% in 1993 to $64 million, after an increase of 16% in 1992 to $56 million. Growth in management fees in both periods was caused by the increase in average mutual fund and institutional assets under management. The increase in assets under management resulted from the stronger financial markets experienced in 1993 and 1992 over the prior periods, and from additional product sales. Assets under management were $14.5 billion at December 31, 1993, $12.1 billion at December 31, 1992, and $10.7 billion at December 31, 1991. Service fees grew 7% to $21.2 million in 1993. Service fees were $19.9 million in 1992, increasing 6% over 1991 fees of $18.8 million. The number of accounts serviced was 1.09 million at December 31, 1993, compared to 1.03 million a year earlier.
Commissions and selling expenses as a percentage of commission revenue were stable at 91% in both 1993 and 1992, after having declined from 93% in 1991. The 1992 decline was a result of the fixed nature of a large portion of these expenses which remained constant while commission revenues grew in 1992. Margin improvement in 1993 was mainly caused by the increase in proportion of asset management fees to total revenues, which have a significantly higher margin than commission revenues.
All phases of energy operations have grown consistently in each of the years 1991 through 1993. The largest percentage growth in revenues in 1993 was derived from product-marketing activities, which grew by 29% in 1993 after having more than doubled in 1992. Product marketing was also the major contributor to recurring energy profit margins in 1993. This activity involves selling certain energy products, which were acquired through purchase agreements with affiliated and unaffiliated parties. Net product revenues are computed after deducting the costs of the production sold from the gross marketing revenues.
Investment operations: Torchmark's investment strategy continues to emphasize high-quality fixed income securities. Attractive investment opportunities in the municipal sector of the bond market in 1993 resulted in significant purchases of insured municipal bonds during the year, complementing purchases of government-guaranteed GNMA securities and high- quality corporate bonds, the traditional backbone of the Torchmark investment program. Fixed income acquisitions for insurance companies totalled $1.7 billion, evenly divided between mortgage-backed securities, municipals and corporates. With its emphasis on fixed-income assets, the distribution of Torchmark investments varies substantially with the industry, as evidenced by the latest information provided by the ACLI:
At 1993 year end, government or government-guaranteed securities and invested cash totalled $2.9 billion, 61% of the bond and short-term portfolio. Investment-grade holdings represented 99.7% of fixed income portfolio and 68.7% were rated "AAA" by Moody's or Standard & Poor's. Investments in noninvestment-grade bonds, which continue to decline, totalled only $13.7 million at year end with a market value of $14.4 million.
The considerable volatility in GNMA prepayments experienced over the past several years continued throughout 1993. As a result, emphasis was placed on the acquisition of noncallable medium-term fixed income investments. With the continued decline in long-term rates, the slightly longer average life of newly acquired investments generally offset the shortening of GNMA holdings. The estimated average life of the total fixed income portfolio has remained stable at 6.0, 6.1, and 5.9 years for December 31, 1993, 1992, and 1991, respectively.
The emphasis on medium-term maturities has impacted the estimated repayment of the portfolio only slightly. The following table presents an estimated maturity schedule as of December 31, 1993, incorporating unscheduled repayments on mortgage-backed securities:
In 1992, Torchmark designated approximately 26% of its total bond portfolio as "available for sale." In order to preserve total flexibility, it was decided to designate the entire fixed income portfolio as "available for sale." These securities, with a book value of $4.4 billion and a market value of $4.6 billion, will be available for active investment management in the future.
Wells in the Black Warrior Basin produce methane gas from coal seam formations. This production increases as wells are dewatered and for a period thereafter, after which time gas production declines. Prior to 1993, all the wells were being dewatered and development costs including interest were capitalized. During 1993, production increased and the capitalization of interest was phased out. Gas production from wells in the Black Warrior Basin qualify for a Federal income tax credit which is estimated to be $.97 per thousand cubic feet of gas produced for 1993 and will continue through 2003. The credit phases out if the price of crude oil exceeds $43.58 per barrel, which was substantially higher than the price of crude oil at December 31, 1993. Credits were recognized as a reduction in taxes in the amount of $6.5 million in 1993, $2.9 million in 1992 and $.4 million in 1991. An additional $4.4 million in tax credits were recognized in 1993 on other energy investments.
Capital Resources: Torchmark's long-term debt stood at $792 million at December 30, 1993, compared to $498 million at December 31, 1992. Two new major debt issuances in 1993 accounted for this increase. In May, 1993, Torchmark issued $200 million principal amount 7 7/8% Notes due 2023 for net proceeds of $196 million after issue costs. This issue was registered in a 1992 shelf registration. In July, 1993, Torchmark issued notes with a principal amount of $100 million due in the year 2013 which bear interest at a rate of 7 3/8%. Proceeds of this issue, net of issue costs, were $98.3 million. A substantial portion of the proceeds from these new debt issuances was used to acquire the remaining interest in United Management.
In addition to these new issues outstanding at December 31, 1993, Torchmark had three other major debt issues outstanding at both year-end 1993 and 1992. These issues consisted of: (1) 8 5/8% Sinking Fund Debentures due 2017, $200 million principal amount; (2) 9 5/8% Senior Notes due 1998, $200 million principal amount; and (3) 8 1/4% Senior Debentures due 2009, $100 million principal amount. All major debt issues, including the newly-issued 1993 Notes, were carried at a balance of $790 million at December 31, 1993, after deducting the unamortized discount, compared to $496 million at December 31, 1992.
During 1993, Torchmark's short-term debt declined from $277 million at year- end 1992 to $107 million at December 31, 1993. Torchmark paid down $88 million on its line of credit facility, net of borrowings. Additionally, energy subsidiaries repaid $82 million of debt related to previously-acquired energy properties which has been repaid in full.
In 1993, Torchmark acquired 850 thousand shares of its common stock on the open market at an aggregate cost of $42 million. While Torchmark is not actively acquiring shares of its common stock at the current time, it may do so from time to time at favorable prices. Torchmark acquired 4.2 million shares at a cost of $158 million in 1992 and 1.3 million shares at a cost of $44 million in 1991.
In early 1992, Torchmark acquired $33.7 million face amount of its adjustable-rate preferred stock at a cost of $31.5 million. In 1991, Torchmark also acquired $6.1 million face value at a cost of $5.3 million, and in 1990, $13.1 million face value of the preferred stock was acquired at a price of $11 million. This stock is reported in the financial statements as treasury stock at a cost of $47.8 million. No preferred shares were acquired in 1993. Torchmark has announced it will acquire the balance of its adjustable-rate preferred stock outstanding at face amount plus accrued dividends of $1.13 per share on March 31, 1994.
In January, 1994, Torchmark filed with the Securities and Exchange Commission a Form S-3 registering up to $200 million in securities in the form of preferred stock, depository shares, or some combination thereof. The net proceeds from the sale of these securities will be used for general corporate purposes, which may include repayment of bank debt, additional capitalization of insurance subsidiaries, the repurchase of shares of Torchmark's adjustable- rate preferred stock and common stock, and possible acquisitions.
Shareholders' equity was $1.42 billion at December 31, 1993, an increase of 27% over the $1.12 billion at December 31, 1992. Approximately 10% of this increase was due to Torchmark's election to classify all fixed maturities as available for sale. Book value per share was $18.80 at December 31, 1993, compared to $14.54 at December 31, 1992. Return on common shareholders' equity was 24.2% in 1993, compared to 26.4% in 1992. Long-term debt as a percentage of equity was 56% at December 31, 1993, compared to 45% at December 31, 1992, as a result of the new debt issuances. Total debt as a percentage of total capitalization was 39% at December 31, 1993 versus 41% at year-end 1992. The multiple of earnings before interest and taxes to interest requirements was 7.5 for 1993, compared to 8.0 for 1992 and 7.4 for 1991.
As discussed in Notes 1 and 9 to the consolidated financial statements, Torchmark changed its method of accounting for income taxes to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards (Statement) No. 109, Accounting for Income Taxes, in 1993. As discussed in Note 3, Torchmark adopted the provisions of the Financial Accounting Standards Board's Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities at December 31, 1993. Also, as discussed in Note 11, Torchmark adopted the provisions of the Financial Accounting Standards Board's Statement No. 106, Employers' Accounting for Postretirement Benefits Other than Pensions, in 1993.
Principles of Consolidation: The financial statements include the results of Torchmark Corporation ("Torchmark") and its wholly-owned subsidiaries and United Investors Management Company ("United Management"). United Management was approximately 83% owned through October 1, 1993 at which time Torchmark acquired all of the publicly held shares. Torchmark deducts the interests of minority shareholders from its shareholders' equity and operating results. Subsidiaries which are not majority-owned are reported on the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation.
Recognition of Premium Revenue and Related Expenses: Premiums for insurance contracts which are not defined as universal life-type according to SFAS 97 are recognized as revenue over the premium-paying period of the policy. Profits for limited-payment life insurance contracts as defined by SFAS 97 are recognized over the contract period. Premiums for universal life-type and annuity contracts are added to the policy account value, and revenues for such products are recognized as charges to the policy account value for mortality, administration, and surrenders (retrospective deposit method). Life premium includes policy charges of $76.2 million, $79.8 million, and $83.4
Deferred acquisition costs, including the value of life insurance purchased, for policies other than universal life-type policies according to SFAS 97 are amortized with interest over an estimate of the premium-paying period of the policies in a manner which charges each year's operations in proportion to the receipt of premium income. For universal life-type policies, acquisition costs are amortized with interest in proportion to estimated gross profits. The assumptions used as to interest, persistency, morbidity and mortality are consistent with those used in computing the liability for future policy benefits and expenses. If it is determined that future experience will probably differ significantly from that previously assumed, the estimates are revised. Deferred acquisition costs are adjusted to reflect the amounts associated with unrealized investment gains and losses pertaining to universal life-type products.
Income Taxes: In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Statement 109 requires a change from the deferred method of accounting for income taxes of APB Opinion 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Pursuant to the deferred method under APB Opinion 11, which was applied in 1992 and prior years, deferred income taxes were recognized for revenue and expense items that were reported in different years for financial reporting purposes and income tax purposes using the tax rate applicable for the year of the calculation. Under the deferred method, deferred taxes were not adjusted for subsequent changes in tax rates.
A reconciliation of Torchmark's insurance subsidiaries' statutory shareholders' equity to Torchmark's consolidated GAAP shareholders' equity is as follows:
In May, 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Statement 115 requires that investments be classified in three categories and accounted for as follows: (i) Debt securities which are purchased with the positive intent and ability to hold to maturity should be classified as held-to-maturity and should be reported at amortized cost; (ii) Debt and equity securities which are bought and held principally for the purpose of selling them in the near term should be classified as trading securities and should be reported at fair value, with unrealized gains and losses included in earnings; and (iii) Debt and equity securities which are not classified as either held-to-maturity or trading securities should be classified as available for sale and should be reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity.
A schedule of fixed maturities by contractual maturity at December 31, 1993 is shown below on an amortized cost basis and on a market value basis. Actual maturities could differ from contractual maturities due to call or prepayment provisions.
Proceeds from sales of fixed investments held to maturity were $63 million in 1993, $403 million in 1992, and $631 million in 1991. Gross gains realized on those sales were $2.6 million in 1993, $8.6 million in 1992, and $12.7 million in 1991. Gross losses on those sales were $138 thousand in 1993, $1.7 million in 1992, and $6.4 million in 1991. The 1993 sales of fixed investments held to maturity were made for various reasons including changes in regulatory requirements, credit deterioration, and sales within 90 days of maturity. Proceeds from sales of fixed maturities available for sale were $241 million in 1993. Gross gains realized on those sales were $8.3 million and gross losses were $176 thousand.
The amount of interest accrued on the unamortized balance of value of insurance purchased was $10.8 million, $12.7 million, and $14.1 million for the years ended December 31, 1993, 1992 and 1991, respectively. The average interest accrual rates used for the years ended December 31, 1993, 1992 and 1991 were 7.57%, 7.81% and 7.92%, respectively. The estimated amount of the unamortized balance of the value of business purchased balance at December 31, 1993 to be amortized during each of the next five years is: 1994, $15.8 million; 1995, $15.0 million; 1996, $12.7 million; 1997, $11.0 million; and 1998, $9.3 million.
On October 1, 1993, the United Management public shareholders approved Torchmark's offer to acquire the remaining approximately 17% of United Management which it did not already own for cash consideration of $31.25 per share. The transaction was completed for a total purchase price of $234 million resulting in goodwill of $130.7 million which will be amortized over approximately 28 years, which is the period remaining for the amortization of the goodwill originated in the 1981 acquisition of United Management. All other purchase accounting adjustments were immaterial.
Torchmark and its eligible subsidiaries file a life-nonlife consolidated federal income tax return. Famlico and Sentinel file a separate federal income tax return and will not be eligible to join the consolidated return group until 1996 and 1997, respectively.
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1993 are presented below:
The Sinking Fund Debentures, due March 1, 2017, are carried at $200 million principal amount less unamortized issue expenses and bear interest at 8 5/8%, payable on March 1 and September 1. A sinking fund provides for mandatory repayment at par of not less than $8 million principal amount per year from March 1, 1998 through March 1, 2016. At Torchmark's option, an additional $12 million principal amount per year may be redeemed at par according to the same schedule. The option to make such additional repayments is not cumulative and if not availed of in any year will terminate. Furthermore, Torchmark may, at its option, redeem the entire issue at prices ranging from 107.9% to 100.0% of par, subject to certain restrictions. The Sinking Fund Debentures have equal priority with other Torchmark unsecured indebtedness.
The Senior Debentures, principal amount of $100 million, are due August 15, 2009. They were issued in August, 1989, bearing interest at the rate of 8 1/4%, with interest payable on February 15 and August 15 of each year. The Senior Debentures, which are not redeemable at the option of Torchmark prior to maturity, provide the holder with an option to require Torchmark to repurchase the debentures on August 15, 1996 at principal amount plus accrued interest. The Senior Debentures have equal priority with other Torchmark unsecured indebtedness.
Torch Energy Advisors Incorporated ("Torch Energy"), a wholly-owned subsidiary of Torchmark, also maintains a line of credit agreement which at December 31, 1993 allowed borrowings up to $30 million. The interest rate is charged at variable rates and is based on the prime or Libor rates, and a commitment fee is charged for the unused balance. The agreement terminates in September, 1994 and is secured by any acquired assets and by the approximately 1.5 million shares of Nuevo common stock owned by Torch Energy. There were no borrowings outstanding on this line of credit at December 31, 1993.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 10--NOTES PAYABLE (CONTINUED) terminated on January 31, 1993, with $15 million financed by another energy credit facility. The note was collateralized by properties and was guaranteed up to $54.1 million by United Management.
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 $10.1 million and $11.0 million at December 31, 1993 and 1992, respectively. The plans are organized as trust funds whose assets consist primarily of investments in marketable long-term fixed maturities and equity securities which are valued at market.
Post Retirement Benefit Plans Other Than Pensions; Torchmark provides postretirement life insurance benefits for most retired employees, and also provides additional postretirement life insurance benefits for certain key employees. The majority of the life insurance benefits are accrued over the working lives of active employees.
Torchmark adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," in 1993. This statement requires that the expected cost of providing future benefits to employees be accrued during the employees' service period until each employee reaches full eligibility. Two options for recognizing the accumulated benefit obligation are provided upon adoption of Statement 106 for participants. The employer can either recognize the transition obligation immediately as the effect of an accounting change, or it can recognize the obligation in the financial statements on a delayed basis, amortizing the obligation on a straight-line basis over the greater of the participants' future service period or twenty years. Torchmark elected to recognize the effect of the obligation immediately as a change in accounting principle. The cumulative effect of this change in accounting resulted in a $7.7 million after-tax charge to net income. It was reported as part of the cumulative effect of changes in accounting principles. In accordance with the provisions of SFAS 106, prior years' financial statements have not been restated to apply the provisions of this statement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 12--SHAREHOLDERS' EQUITY (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 13--COMMITMENTS AND CONTINGENCIES
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 million per life. Life insurance ceded represents 1% of total life insurance in force at December 31, 1993. Insurance ceded on life and accident and health products represents 1.5% of premium income for 1993. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 13--COMMITMENTS AND CONTINGENCIES (CONTINUED)
A class action lawsuit has been filed against Liberty (Robertson v. Liberty National Life Insurance Company) in the Circuit Court of Barbour County, Alabama alleging fraud in the exchange of certain cancer insurance policies. It seeks substantial equitable and injunctive relief together with compensatory and punitive damages. Also, a number of separate lawsuits as well as additional class action suits have been filed which are based upon substantially the same allegations.
On October 25, 1993, a jury in the Circuit Court of Mobile County, Alabama rendered a one million dollar verdict against Liberty, one of twenty-five suits involving cancer policy exchanges which were filed prior to class certification. Liberty has filed appropriate post-judgment motions and, if necessary, will appeal the verdict. Previously, another judge in the same state court system had granted a summary judgment in favor of Liberty in another substantially similar suit which is on appeal.
Torchmark has provided for the $55 million proposed amended settlement charge in its 1993 financial reports, although it believes that it is highly likely that intervenors will pursue an appeal of the ruling to the Supreme Court of Alabama. In the event a settlement is not agreed to and approved, Torchmark and Liberty intend to aggressively defend the various cases.
Ownership of Nuevo Stock: Torchmark, through United Management, made open market purchases of the outstanding common stock of Nuevo Energy Company ("Nuevo") during the period from October, 1990 to July, 1991. Nuevo is a public company formed by energy subsidiaries during 1990 for the purpose of gaining operating efficiencies, enhancing liquidity for investors, and providing greater investment opportunity and diversification. Purchases of 230 thousand shares at a cost of $2 million were made during 1990 and purchases of 419 thousand shares at a cost of $4 million were made during 1991. In 1993, Torchmark sold 1.3 million shares of Nuevo stock in the open market resulting in a net gain of $14.3 million. Torchmark, through its subsidiaries, owned approximately 14% and 32% of the outstanding Nuevo stock at December 31, 1993 and 1992, respectively. Torchmark's investment in Nuevo is recorded as an investment in unconsolidated subsidiaries.
Certain insurance company investments are managed by the asset management segment. Included in these investments are energy investments in the amount of $346 million and $393 million at December 31, 1993 and 1992, respectively. Additionally, the asset management segment markets certain insurance products for the insurance segment and manages the mutual funds for the insurance segment's variable products.